UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW

Bar Operations 2008

COMMERCIAL LAW

Bar Operations Head Academics Head Subject Head

│ Arianne Reyes │ Henry Aguda │ Henry Aguda
Tere Licaros Ryan Balisacan

Subject Committee │ Information Management │ Committee

Lynn Ramos * Johaira Wahab Ruby Alberto * Dianne Capco Chino Baybay [Head * !imoun !alinas [Deputy * Rania Joya [Design " Lay#out * Ludee $ulido [Documentations * Linus %adamba * Des %ayoralgo * Jillian De Dumo * %i&e 'campo * Abel %aglan(ue * )dan %arri R* Ca+ete * Carmie Rome Cargo

Commercial Law

TABL

O! CO"T "TS

C#IMI"AL LA$ I

TABL
I% II% III% I+% +% +I% +II%

O! CO"T "TS
& '' ()*

Corporation Law "egotiable Instruments Law Insurance Code Transportation Law ),& Code of Commerce )** Ban-ing Law ).* Intellectual /ropert0 Law &).

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CORPORATION LAW
a.
THE CORPORATION CODE OF THE PHILIPPINES (BATAS PAMBANSA BLG. 68)

)as the powers, attributes and properties expressly authorized by law or incident to its existence as it is a $ere creature of the law, it can exercise only such powers as the law $ay choose to grant it, either expressly or i$pliedly

.-..A).a#ta%e$ !( the C!rp!rate Or%a#"/at"!#$ !) 'eparate "uridical personality + personality separate and distinct fro$ individual stoc%holders and $e$bers 2) ,i$ited liability to investors + stoc%holders are liable only to the extent of their contribution • -eneral rule .here a corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still $aintain their separate corporate entities, one will not answer for the debts of the other. /0ell v 1acific 2ar$s (!3 'C4A 5!3), 0ov. 2*, !6738 • 9xceptions o :f there is an express assu$ption of liabilities; o &here is a consolidation or $erger; o :f the purchase was in fraud of creditors; o :f the purchaser beco$es a continuation of the seller; o :f there are unpaid subscriptions (stoc%holder is liable for the unpaid balance). *) 2ree transferability of units of ownership + stoc%holders hold their shares as personal property with rights to dispose, assign or encu$ber the$ as they $ay desire (!"#) 5) Centralized <anage$ent + all corporate powers are exercised by the board of directors (!$#) .0 Part#er$h"p .$. C!rp!rat"!# !. 9xtent of ,iability=partners are personally liable for the debts of the partnership; stoc%holders cannot be $ade to personally answer to corporate creditors Creation=$ere agree$ent of the parties, w#c can be co$posed of "ust 2 persons, gives rise to the "uridical personality of the partnership, whether or not registered w# the '9C (Art. !>7?, 0CC); a corp., w# a $ini$u$ of 3 incorporators, derives its "uridical personality fro$ the certificate issued by the '9C (!%&) <anage$ent=:n $ost cases, all the owners in a partnership actively participate in $anage$ent, w# capacity to bind it by any usual contract (Art. !?!?, 0CC); in a corp., $anage$ent is centralized in the board of directors w#c has exclusive power to bind the corp. (!$#) 0ature of 4elationship=partnership is based on $utual trust and confidence (delectus personae) so that its existence is precarious because of the facility w# which it can be dissolved (i.e. through the death or unilateral act of a partner); a corp. has $ore stability as it en"oys the right of $age 3 o0 355

Chapter I INTRODUCTION . The C!rp!rat"!# a$ a Le%a& C!#'ept
. C!rp!rat"!# De("#e)

A Corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. (§2) A corporation is a creature of: • • A general enabling statute (requirements of the law must be complied with); and The agreement of individuals who seek to incorporate (internal contractual arrangements: articles of incorporation and by-laws)

.* F!+r attr",+te$ !( a '!rp!rat"!# An artificial being !. a "uridical person capable of having rights and obligations, w# a personality separate and distinct fro$ its $e$bers or stoc%holders hence, stoc%holders are not personally liable for corp. obligations and cannot be held liable to third persons who have clai$s against the corp. beyond their agreed contribution to the corporate capital (paidup capital and unpaid subscriptions) &his is %nown as the doctrine of li$ited liability.

2.

Created by operation of law !. $ere consent of the parties to for$ a corp. is not sufficient the 'tate $ust give its consent either through a special law (in the case of a gov(t corp.) or a general law (for a private corp.) the general law under w#c a private corp. $ay be for$ed or organized is the Corporation Code

2.

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)as the right of succession !. its continued existence during the ter$ stated in its articles of incorp. cannot be affected by any change in the $e$bers or stoc%holders nor is it affected by the transfer of shares by a stoc%holder to a *rd person

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succession and is not affected by the death or insolvency of a stoc%holder; also, dissolution before a corp.(s ter$ re@uires a 2#*rds vote of the stoc% ('ecs. !!? and !!6, Corp. Code), always sub"ect to '9C intervention 1owers=a corporation has only such powers as are expressly granted to it and such as are necessary to the exercise of the powers so granted or fro the acco$plish$ent of its purpose(sec.2, *7 (!!), and 53); :n a partnership, as long as the parties have agreed to it, the partnership can perfor$ any act as long as it does not violate any law or right of others. %

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4evices or schemes employed by) or any act of) the 9:4) business associates) officers or partners) amounting to fraud or misrepresentation which may be detrimental to the interest of the public and;or of the stockholders) partners or members of any corporation) partnership) or association; 0ontroversies arising out of intracorporate) partnership) or association relations) between and among stockholders) members or associates; and between) any or all of them and the corporation) partnership) or association of which they are stockholders) members or associates) respectively; 0ontroversies in the election or appointment of directors) trustees) officers) or managers of corporations) partnerships) or associations; 4erivative suits; and 6nspection of corporate books M!rat! . CA (*660) 1etitioners, stoc%holders of &2 Eentures, :nc., filed a petition with the '9C against private respondents for the declaration of nullity of stoc%holders( and directors( $eetings and da$ages. &hey assail the validity of the notice and stoc%holders( $eeting of &2 Eentures, :nc. and the organizational $eeting of the $e$bers of the AFD. &he petition was referred to the 'ecurities :nvestigation and Clearing Depart$ent (':CD) of the '9C for investigation and resolution. <eanwhile, one of the private respondents (<atsura, Chair$an of the AFD), wrote a letter to the 9xa$iners and Appraisers Dept of the '9C, re@uesting for an exa$ination of the basis for the capital increase of &.2. Eentures, :nc. fro$ 1!B,BBB,BBB to 1!BB,BBB,BBB, alleging the co$$ission of devices, sche$es and cri$inal acts. &he letter was forwarded by the '9C to the 1rosecution and 9nforce$ent Dept (19D). 1etitioners contended that with the filing of the letterGpetition with the 19D, <atsura resorted to forum shopping </=4: 7atsura is not guilty of forum shopping There is no identity of causes of action or identity of rights asserted by the parties in both cases 6n this case) '/0 0ase is pending before the '604) which has e>clusive 2urisdiction to investigate and resolve intra-corporate disputes The respondent1s letter-petition) on the other hand) was referred by the '/0 to the 3/4 and is pending before the 3rosecution and /nforcement 4epartment of the '/0 'ection + of 3 4 provides: -o &5$-A) as amended)

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.1 G!.er#2e#t Re%+&at"!# !( C!rp!rat"!#$ Ay the ,egislature Aasis police power of the state (0orthern 4y Co. v. 'tate of .ashington, *BB C.'. !35) and the fact that corporations owe their existence to the state <anner by a$ending or repealing the Corp. Code or any part thereof

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NDC . Ph"& 3etera#$ Ba#4 ( 556) 1D !>!> ordered the rehabilitation of the Agrix -roup of Co$panies to be ad$inistered by 0DC. 'ec 5(!) provides that all $ortgages and liens presently attached be extinguished, and that all accrued obligations shall not bear interest. A$ong those ordered extinguished was a lien in favor of 1hil Eeterans Aan% over prop in ,A. 0DC filed to foreclose the $ortgage. )9,D 0ew Agrix was created by special decree even if !6>* Consti $andates that Aatasang 1a$bansa, cannot, except by general law, provide for for$ation, organization and regulation of private corps, unless for -FCCs. 0DC was only $andated to extend loan and to $anage co$pany. 0ew Agrix was entirely private and should have been organized under Corp ,aw.

Ay the '9C Aasis 'ec. *, 1D 6B2GA and 'ec ( %(a)) *A+,&&. &he Co$$ission shall have absolute "urisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of pri$ary franchises and#or licenses or per$its granted by the govern$ent, to operate in the 1hilippines; xxx

-ote: .nder 'ec ( $ of *A+,&&) '/01s 2urisdiction over all cases enumerated under 'ec () 34 &5$-A was transferred to the *egional Trial 0ourt which has 2urisdiction over the principal office of the corporation) partnership or association concerned

According to the 6nterim *ules of 3rocedure for 6ntra-0orporate 0ontroversies (A 7 -o 5%-$-58'0)) which took effect on April %) $55%) the *egional Trial 0ourt has 2urisdiction over cases involving the following:

'/0T6:- + The 3rosecution and /nforcement Depart$ent shall have, sub"ect to the Co$$ission(s control and supervision, the exclusive authority to investigate, on co$plaint or motu propio, any act or o$ission of the Aoard of Directors#&rustees of corporations, or of partnerships, or other associations, or of their stoc%holders, officers or partners, including any fraudulent devices, sche$es or representations, in violation of any law or rules and regulations ad$inistered and - . . / $age 4 o0 355

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enforced by the Co$$ission; to file and prosecute in accordance with law and rules and regulations issued by the Co$$ission and in appropriate cases, the corresponding cri$inal or civil case before the Co$$ission or the proper court or body upon prima facie finding of violation of any laws or rules and regulations ad$inistered and enforced by the Co$$ission; and to perfor$ such other powers and functions as $ay be provided by law or duly delegated to it by the Co$$ission. 1rosecution under this Decree or any Act, ,aw, 4ules and 4egulations enforced and ad$inistered by the Co$$ission shall be without pre"udice to any liability for violation of any provision of the 4evised 1enal Code. Cnder the said provision, the '9C, through the 19D, is vested with authority to investigate, either motu proprio or upon co$plaint, any act or o$ission, fraudulent sche$es, devices or $isrepresentations in violation of any law, rules or regulations, ad$inistered and enforced by the '9C, and to file and prosecute appropriate civil or cri$inal cases upon a prima facie finding of violation of such laws, rules or regulations. &he petitioners, in the '9C case, sought the nullification of the 0otice for the Annual 'toc%holders( <eeting, the stoc%holders( $eeting and organizational $eeting held on 'epte$ber 22, !66>, on their clai$ that the holding of the sa$e was in violation of the Corporation Code and the AyG,aws of the petitioner corporation. :n his answer to the petition, the respondent asserted the validity of the said $eeting and prayed, by way of counterclai$, for the nullification of the Fctober 2B, !66> $eeting of the petitioners, and for da$ages. :n contrast, the respondent alleged in his letterG petition in the 19D case that the petitioners were engaged in fraudulent sche$es, devices or $isrepresentations in violation of the law, and '9C rules and regulations. &he co$plainant <atsuura as%ed the 19D to investigate the co$plaint and file the corresponding ad$inistrative, civil or cri$inal cases before the '9C, the proper court or body, for violation of the laws, rules or regulations ad$inistered and enforced by the '9C. &he fact that the ':CD has not yet resolved the '9C case does not constitute a bar to the resolution of the 19D case. &he proceedings in the said cases are independent and separate of each other and $ay thus proceed separately. 0ote that while this case was pending in the 'C, 4A ?>66, 'ecurities 4egulation Code, too% effect on August ?, 2BBB. 'ection 3.2 of the law provides that '9C(s "urisdiction over all cases under 'ec 3 of 1D 6B2GA is transferred to the 4&Cs. A$ong the powers and functions of the '9C which were transferred to the 4&C include the following (a) "urisdiction and supervision over all corporations, partnerships or associations who are the grantees of pri$ary franchises and#or a license or per$it issued by the -overn$ent; (b) the approval, re"ection, suspension, revocation or re@uire$ent for registration state$ents, and registration and licensing applications; (c) the regulation, investigation or supervision of the activities of persons to ensure co$pliance; (d) the 100% UP L AW , $

supervision, $onitoring, suspension or ta%e over the activities of exchanges, clearing agencies and other '4Fs; (e) the i$position of sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; (f) the issuance of ceaseGandGdesist orders to prevent fraud or in"ury to the investing public; (g) the co$pulsion of the officers of any registered corporation or association to call $eetings of stoc%holders or $e$bers thereof under its supervision; and, (h) the exercise of such other powers as $ay be provided by law as well as those which $ay be i$plied fro$, or which are necessary or incidental to the carrying out of, the express powers granted the Co$$ission to achieve the ob"ectives and purposes of these laws. )owever, 'ection ? of 1.D. 0o. 6B2GA, as a$ended, has already been repealed, as provided for in 'ection >7 of 4A ?>66. &hus, under the new law, the 19D ceased to exist. )owever, the '9C retains "urisdiction to continue with its investigation of the letterGpetition of respondent <atsuura. .hen 4A ?>66 too% effect, the '9C case had not yet been sub$itted for decision by the '9C. )ence, the said case should be transferred to the 4&C of <a%ati City, to be raffled to the appropriate branch thereof assigned to try such cases. Despite the repeal of 'ection ? of 1.D. 0o. 6B2GA and the abolition of the 19D, the '9C $ay continue with its investigation of the letterGpetition of respondent <atsuura. • •

The 'andiganbayan has 2urisdiction over presidents) directors or trustees) or managers of government-owned or controlled corporations organi?ed and incorporated under the 0orporation 0ode for purposes of the provisions of *A #5%&) otherwise known as the Anti-@raft and 0orrupt 3ractices Act 9asis: 'ec 8) *A +$8& (3eople v 'andiganbayan) $55() U#"!# Ba#4 .. Da#"&! C!#'ep'"!# GR N!. 667*7 8+#e *69 *667 9HCF -roup of Co$panies filed a petition for suspension of pay$ent, appoint$ent of receiver#co$$ittee and approval of rehabilitation plan with alternative prayer for li@uidation and dissolution of corporations. 'uspension was granted by the '9C )earing 1anel. Cnion Aan% beca$e part of the <anCo$ which represented the creditor ban%s but later on bro%e away without notifying the group. :t filed a slew of cases with the <a%ati 4&C and applied for preli$inary attach$ent. Cnion Aan% filed a $otion to dis$iss the case pending with the '9C, and when the '9C issued an order appointing regular $e$bers of the <anCo$, Cnion Aan% filed a petition for certiorari with the CA see%ing the nullification of the '9C Frder and again assailing the "urisdiction of the '9C. :t alleged that the "urisdiction over a basic petition for suspension of pay$ents was with the 4&C under Act 0o. !637 (:nsolvency ,aw). &he CA and later on the 'C ruled that the "urisdiction is with the '9C pursuant to 1D 6B2GA. &he proceeding in the 4&C was thus suspended. Concepcion was later appointed as li@uidator by the '9C en banc and he filed a $otion to intervene and set aside order of attach$ent in the said 4&C case. &he '9C en - . . / $age 5 o0 355

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banc approved of the li@uidation plan that Concepcion sub$itted but his $otion to intervene with the 4&C was denied for lac% of standing. &he 4&C also declared 9HCF in default in the said case, proceeded to receive evidence ex parte and later rendered partial "udg$ent ordering 9HCF to pay 15BB< to Cnion Aan%. Concepcion appealed the decision and was sustained by the CA, which $odified the partial "udg$ent of the 4&C. Cnion Aan% now co$es to the 'C assailing the CA(s order. )9,D Denied. CA Frder A22:4<9D. .hat is being assailed is the validity of the appoint$ent of Concepcion as li@uidator and his standing to intervene in the 4&C case. Albeit "urisdiction over a petition to declare a corporation in a state of insolvency strictly lies with regular courts, the '9C possessed, during the period $aterial, a$ple power under 1.D. 0o. 6B2GA as a$ended, to declare a corporation insolvent as an incident of and in continuation of its already ac@uired "urisdiction over the petition to be declared in the state of suspension of pay$ents in the two instances provided in 'ection 3(d) thereof. 'aid 'ection 3(d) vests the '9C with exclusive and original "urisdiction over petitions for suspension of pay$ents which $ay either be (a) a si$ple petition for suspension of pay$ents based on the provisions of the :nsolvency ,aw, i e ) the petitioning corporation has sufficient assets to cover all its debts, but foresees the i$possibility of $eeting the obligations as they fall due, or (b) a si$ilar petition filed by an insolvent corporation acco$panied by a prayer for the creation of a $anage$ent co$$ittee and#or rehabilitation receiver based on the provisions of 1.D. 0o. 6B2GA, as a$ended by 1.D. 0o. !>3?. &he petition of 9HCF in this case was a $ix of both situations. 9HCF(s petition for suspension for pay$ent was, for all intents and purposes, still pending with the '9C as of Iune *B, 2BBB. Accordingly, the '9C(s "urisdiction thereon, by the express ter$s of 4.A. 0o. ?666, still subsists Auntil Bthe suspension of payment case and its incidents areC finally disposed.D

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cannot be fully e@uated to due process in its strict "urisprudential sense. :t is the administrative order, #!t the preliminary report, which is the basis of any further re$edies the losing party in an ad$inistrative case $ay pursue. &hus, petitioner has no right to be notified of the preli$inary report by the 2inancial Analysis and Audit Division of the '9C. 1etitioner(s clai$ that the '9C(s referral of the petition for rehabilitation to the said division violated its right to due process deserves no consideration. 1etitioner(s right to ad$inistrative due process only entitles it to an opportunity to be heard and to a decision based on substantial evidence. 0o $ore, no less.

Chapter II CLASSIFICATION OF PRI3ATE CORPORATIONS

. Ge#era& C&a$$"("'at"!# +#)er ;-<
. • St!'4 '!rp!rat"!# Fne which has a capital stoc% divided into shares and is authorized to distribute to the holders of such shares dividends or allot$ents of the surplus profits (i.e., retained earnings on the basis of the shares held (§*) :t is organized for profit. &he governing body of a stoc% corporation is usually the Aoard of Directors (9xcept in certain instances for close corporations) N!#=$t!'4 '!rp!rat"!# • • All other corporations are nonGstoc% corporations (§*) Fne where no part of the inco$e is distributable as dividends to its $e$bers, trustees, or officers, sub"ect to the provisions of the Code on dissolution. 1rovided that any profit which a nonGstoc% corporation $ay obtain as an incident to its operation shall whenever necessary or proper be used for the furtherance of the purpose or purposes for which the corporation was organized. (§?>) 0ot organized for profit. :ts governing body is usually the Aoard of &rustees.

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3".a F!!t:ear .. SEC GR N!. 6-*-1 Apr"& *79 *667 1etitioner Eiva 2ootwear <anufacturing Corporation is a do$estic corporation engaged in the $anufacture of rubber footwear. 4espondents 1hilippine 0ational Aan% (10A) and 1hilippine Aan% of Co$$unications (1ACo$) are two of petitioner(s creditors. &he '9C, upon petition by Eiva, declared the latter to be in a state of suspension of pay$ents. &he petition for rehabilitation was eventually dis$issed because it was not viable to do so as it was not financially sound. Eiva now clai$s that its right to due process was violated when the '9C referred the rehabilitation plan to the 2inancial Analysis and Audit Division without notice to petitioner. )9,D 0F <94:&. D:'<:''9D. :n ad$inistrative proceedings, due process si$ply $eans an opportunity to see% a reconsideration of the order co$plained of; it 100% UP L AW , $

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CIR .$. C&+, F"&"p"#!9 I#' )e Ce,+ ( 56*) Club 2ilipino is a civic corporation organized to develop and cultivate sport of all class and deno$ination for the healthful recreation and entertain$ent of its ') and $e$bers. :ts AF: and byGlaws are silent as to dividends and their distribution but it was provided that upon its dissolution, the Club(s re$aining assets after paying debts shall be donated to a charitable 1hil. :nstitution. - . . / $age 6 o0 355

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7. )9,D Club 2ilipino is a nonGstoc% corporation. According to 'ection * of the Corporation Code, there are two ele$ents for a stoc% corporation to exist !) capital stoc% divided into shares, and 2) an authority to distribute to the holders of such shares, dividends or allot$ents of the surplus profits on the basis of shares held. 0owhere in Club 2ilipino(s AF: or A, could be found an authority for the distribution of its dividends or surplus profits.

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/leemosynary corporation + Fne organized for a charitable purpose >. 4omestic corporation + A do$estic corporation is one for$ed, organized, or existing under the laws of the 1hilippines ?. Foreign corporation + Fne for$ed, organized or existing under any laws other than those of the 1hilippines and whose law allows 2ilipino citizens and corporations to do business in its own country and state. (§!2*) 6. 0orporation created by special laws or charter (§5) • Corporations which are governed pri$arily by the provisions of the special law or charter creating the$ (;5) • Corporation Code is suppletory in so far as they are applicable (:bid) !B. 'ubsidiary corporation + one in which control, usually in the for$ of ownership of $a"ority of its shares, is in another corporation (the parent corporation) !!. 3arent corporation + its control lies in its power to elect the subsidiary(s directors thus controlling its $anage$ent policies

*. Other 4"#)$ !( '!rp!rat"!#$
!. 2. *. 1ublic corporation - :ne formed or organi?ed for the government or a particular state 6ts purpose is for the general good and welfare 1rivate corporation - :ne formed for some private purpose) benefit) aim or end Close corporation (!&") E :ne whose Articles of 6ncorporation provide that: a) all of the corporation(s issued stoc% of all classes, exclusive of treasury shares, shall be held of record by not $ore that a specified nu$ber of persons, not exceeding 2B b) all of the issued stoc% of all classes shall be sub"ect to one or $ore specified restrictions on transfer per$itted by the Code c) the corporation shall not list in any stoc% exchange or $a%e any public offering of any of its stoc% of any class d) at least 2#* of its voting stoc% $ust not be owned or controlled by another corporation which is not a close e) $ust not be a $ining or oil co$pany, stoc% exchange, ban%, insurance co$pany, public utility, educational institution or corporation vested with public interest /ducational corporation (;!B7) G &hose corporations which are organized for educational purposes. &his type of corporation is governed by 'ection !B7 of the Corporation Code *eligious sole and aggregate (;!!B, !!! (2), !2*) • A corporation sole is one for$ed for the purpose of ad$inistering and $anaging, as trustee, the affairs, property and te$poralities of any religious deno$ination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious deno$ination, sect or church. (;!!B) • &he corporation sole is an exception to the general rule that at least five (3) $e$bers are re@uired for a corporation to exist. )ere, there is only one (!) incorporator. &his is applicable to religious co$$unities the regulations of which provide that the co$$unity(s properties are to be placed in the na$e of the head and ad$inistered by hi$. (;!!!(2)) • A corporation aggregate is a religious corporation incorporated by $ore than one person.

Chapter III FORMATION AND ORGANI>ATION OF CORPORATION . Wh! Ma? F!r2 a C!rp!rat"!#
. I#'!rp!rat!r$

5.

Any nu$ber of natural persons not less than five (3) but not $ore than fifteen (!3), all of legal age and a $a"ority of who$ are residents of the 1hilippines, $ay for$ a private corporation for any lawful purpose or purposes. 9ach of the incorporators of a stoc% corporation $ust own or be a subscriber to at least one (!) share of capital stoc% of the corporation. (§!B) !) 0atural persons  Corporations and partnerships cannot be incorporators, but $ay be stoc%holders. &his prevents JlayeringK which $ay harbour cri$inals and will $a%e the corporation a tool for defrauding the public.  :ncorporators are those stoc%holders or $e$bers $entioned in the articles as originally for$ing and co$posing the corporation and who are signatories thereof.  Corporators are stoc%holders or $e$bers who "oin the corporation after its incorporation.  Friginal subscribers are persons whose na$es are $entioned in the Articles, but not as incorporators. &hey do not sign the Articles. 2) At least five incorporators but not $ore than fifteen  &hey $ust sign the articles of incorporation.  -90C:09 :0&949'& 9ach incorporator $ust own or subscribe to at least one share of stoc% of the corporation.

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*) <a"ority of the incorporators $ust be residents of the 1hilippines • @eneral rule: need not be a citi?en • />ceptions: public utilities (Art G66) 'ec %% 0onsti)) schools (Art G6H) 'ec 8($)) 0onsti)) banks (@eneral 9anking Act)) retail trade (*A %%+5)) savings and loan associations (*A #,&&)) investment houses ('ec () 34 %$&)) and other areas of investment as congress may by law provide (Art G66) 'ec %5) 0onsti) • 9ven though there are no legal restrictions as to alien ownership, where L 5BM of the outstanding capital stoc% will be owned and controlled by aliens, $ust get written authorization fro$ AF: before it can register with '9C. (purpose is to enable AF: to deter$ine whether such corporation wherein aliens own a substantial nu$ber of shares would contribute to the sound and balanced develop$ent of the national econo$y) 5) :ncorporators $ust be of legal age 

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&he Jpro$oterK brings together persons interested in the business enterprise and sets in $otion the $achinery that leads to the for$ation of the corporation. J1ro$oterK is a person who, acting alone or with others, ta%es initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. ! OF ARTICLES OF

-.*. DRAFTING INCORPORATION

&hese constitute the charter of the corporation !. CF41F4A&9 0A<9 • 0o corporate na$e $ay be allowed by the '9C if the proposed na$e is identical or deceptively or confusingly si$ilar to that of any existing corporation or to any other na$e already protected by law or is patently deceptive, confusing or contrary to existing laws. (§!?) • A corporate name is essential to the corporation1s acquisition of 2uridical personality • Change of corporate na$e shall re@uire the approval of the '9C. '9C will issue a$ended certificate of incorporation under the a$ended na$e (:bid) • A change in corporate name involves an amendment of the Articles) which requires a ma2ority vote of the board and the vote or written assent of stockholders holding $;# of the outstanding capital stock (!%") 0ote Does not include the nonGvoting stoc%. • 6t is the sole means of identifying the corporation from its members or stockholders) and from other entities and corporations • Amendment in a corp1s A:6 changing its corporate name does not e>tinguish the personality of the original corporation The corp upon such change of its name) is in no sense a new entity) nor the successor of the original corp it is the same corp with a different name) and its character is not changed 0onsequently) the AnewD corp is still liable for the debts and obligations of the AoldD corp (*epublic 3lanters 9ank v 0A) %&&$) • &his is essential because through it, corporation can sue and be sued • '9C $ay allow incorporators to reserve the na$e for a particular period • &o distinguish fro$ partnerships and other business orgs, the law re@uires corporations to append the word JCorporationK or J:ncK to its chosen na$e • A corporation should transact business only through its chosen na$e

*. C!#)"t"!#$ Pre'e)e#t (!r I#'!rp!rat"!#
*. C!#$e#t !r a%ree2e#t !( at &ea$t 1 #at+ra& per$!#$ :"th re$pe't t!< % $ # 0ompliance with the 0orp 0ode; 0ontribution;pooling of resources E delivered to and held in trust by a designated trustee; @overnance of: • 0ontributions; • 4istribution of contributions; • 4ivision of profits;sharing of losses; • 3ursuit of purpose;ob2ectives; • 0orporate combination; and • Transactions with third parties; and 0ontinuity or termination of e>istence

8

*.* Ma#)at!r? Re@+"re2e#t$ !( the C!)e< • % />ecution of constitutive documents (A:6) 9y-laws); $ 3ayment;delivery of contributions E delivered to and held in trust by a designated trustee; # 'ubmission of constitutive documents to '/0 for review or evaluation; and 8 '/0 action E issuance of certificate of registration -ote that once contributions are made before incorporation) such subscriptions are irrevocable for a period of " months (general rule) • />ceptions: % Ihen all of the other subscribers consent to the revocation; or $ Ihen the incorporation fails to materiali?e ('ec "%)

Ph"&"p$ EAp!rt B3 (PEB3) . CA ( 55*) 19AE is a foreign corp under the law of 0etherlands, although not engaged in business in the 1hils. :t is the registered owner of the 1hilips
1

-. Step$ "# '!rp!rat"!#
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the

(!r2at"!#

!(

a

PROMOTION

Sec. 3.10, The Securitie Re!u"#ti$% C$&e 'RA ()**+

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trade$ar%, and owns two local co$panies with the na$e 1hilips also. 19AE as%ed the cancellation of the word 1hilips fro$ 'tandard 1hilips, a local $anufacturer, alleging infringe$ent of its exclusive right to use the sa$e. '9C and CA ruled for 'td 1hilips, saying there was no confusion (unli%e in Converse case). )eld Corp(s right to use its corp and trade na$e is a property right, a right in re$. -eneral 4ule Corp $ust have a na$e by which it is to sue and be sued and do all legal acts. Accdg to Corp Code, no corp na$e $ay be allowed !) if co$plainant corp ac@uired a prior right over na$e and 2) proposed na$e is a) identical or b) deceptively or confusingly si$ilar or c) patently deceptive, confusing or contrary to existing law 19AE(s local co$panies were incorporated 27 yrs before 'td 1hilips. &9'& F2 CF02C':0- ':<:,A4:&H :0 CF41 0A<9' .hether si$ilarity is such as to $islead a person using ordinary care and discri$ination 1hilips is the do$inant word. 0o need to prove that there was actual confusion, as long as probable or li%ely to occur. 'td 1hilips( purpose, as per its articles of incorp also includes sale and $anufacture of electrical products, which is 19AE(s line of business. 9ven if '9C guidelines $andate that a corp could add 2 other words to proposed na$e, only one word J'tdK was added. JCorpK not counted. 0ote A prior user can consent to the use of its na$e 2. 1C41F'9 C,AC'9 • .here a corporation has $ore than ! purpose, the AF: shall state which is the pri$ary purpose and which is secondary (§!5(2)) • A nonGstoc% corporation $ay not include those which contradict or change its nature (:bid) • '9C can re"ect or disapprove the AF: if the stated purpose is patently unconstitutional, illegal, i$$oral, contrary to govern$ent rules and regulations.(§!> (2)) • 1urpose clause confers as well as li$its the powers which a corporation $ay exercise • A corporation only has such powers as are expressly granted to it by law and by its AF:, those which $ay be incidental to such conferred powers (§53), those reasonably necessary to acco$plish its purposes ('ection *7 (!!), and those which $ay be incident to its existence (§2). • 4easons for purpose clause o so that a stoc%holder conte$plating an invest$ent will %now what lines of business his $oney is to be ris%ed • o

COMM #CIAL LA$
so that $anage$ent will %now what lines of business it is authorized to act o so that anyone who transacts with the corporation $ay ascertain whether a transaction he is entering is one with the general authority of the $anage$ent Cnder 'ec !5(2) a corporation can have as $any purposes as it wants provided o AF: specify the corporation(s pri$ary and secondary purposes which need not be related to each other o Corporation for which special provisions are $ade can only have the purpose peculiar to the$ o 1urposes $ust be lawful :f purpose is lawful, '9C is not authorized to in@uire whether corporation has hidden $otives and $anda$us will lie to co$pel it to issue certificate 1D 6B2GA, 'ec "(h) gives '9C, after consultation with AF:, 09DA, or other appropriate govern$ent agency, the power to refuse or deny the application for registration of any corporation if its establish$ent, organization, operation will not be consistent with the declared national econo$ic policies A corporation may not be formed for the purpose of practicing a profession

• *.

14:0C:1A, F22:C9 • <ust be within the 1hilippines (§!5 (*)) • AF: $ust specify both province or city or town where it is located • :$portant in (!) deter$ining venue in an action by or against the corporation (2) deter$ining the province where a chattel $ortgage of shares should be registered (Chua -an v 'a$ahang <agsasa%a) • &he state$ent of the principal office establishes the residence of the corporation &94< F2 9N:'&90C9 • .hen a corporation is organized, the $axi$u$ life that can be stipulated in the AF: is 3B years. Aut during the life of the corporation, the life or ter$ can be extended to another 3B years at any one instance (§!!) • Aut such extension of the life a corporation cannot be $ade earlier than 3 years before the end of its original ter$. 9xception where there are "ustifiable reasons for an earlier extension as $ay be deter$ined by the '9C. (:bid) • 9xception Condo$iniu$ corporations can be organized for a period of 2BB years • />tension involves an amendment of the A:6 Thus) the requisites under !%" must be complied with Any dissenting stockholder may e>ercise his appraisal right (!#,)

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3. :0CF41F4A&F4' A0D D:49C&F4'; 0C<A94 A0D OCA,:2:CA&:F0' • JDirectorsK is used for stoc% corporations, while JtrusteesK is used for stoc% corporations. • -9094A, 4C,9 not less than 3 but not $ore than !3 9NC91&:F0' i) 0onGstoc% corporations + articles or byGlaws $ay provide for $ore than !3 trustees (§62). • />ception: /ducational nonstock corporations E trustees may not e>ceed %( <owever) the number of trustees shall be in multiples of ( (!%5+) ii) <erger of ban%s + new board is allowed to have such nu$ber of directors as is e@uivalent to the total nu$ber of directors of the $erging ban%s, though it $ay exceed fifteen (@eneral 9anking Act) as amended). • :ncorporators and directors of a stoc% corporation $ust own at least one share of stoc% of the corporation. :n a nonGstoc% corporation, a trustee $ust be a $e$ber thereof. • :n nationalized industries, aliens $ay be directors of a corporation only in such nu$ber as $ay be proportional to their allowable ownership of shares, 2 e.g. if the articles provide for !B directors, and alien ownership is li$ited to 5BM of the capital, then aliens $ay occupy a $axi$u$ of 5 board seats. CA1:&A, 1AH<90& '&FCP; 'CA'C4:1&:F0;

COMM #CIAL LA$
divided, and the par value of each par value shares (§!5(?), §!3(>)) 'toc% corporations are not re@uired to have any $ini$u$ authorized capital stoc% except when special laws provide otherwise (§!2)

o

'ubscribed capital stock o 6t is the amount of the capital stock subscribed whether fully paid or not 6t connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (§7B,7!) o At least 23M of authorized capital stoc% $ust be subscribed (§!*) o 'ubscription + $utual agree$ent of the subscribers to ta%e and pay for the stoc% of a corporation o 1reGincorporation subscription + a$ount which each incorporator or stoc%holder agrees to contribute to a proposed corporation :utstanding capital stock o 6t is the portion of the capital stock which is issued and held by persons other than the corporation itself .nder §%#,) it is the total shares of stock issued under the binding subscription agreements to subscribers or stockholders) whether or not fully or partially paid) e>cept treasury shares 6t is thus broader than AsubscribedD capital stock o The terms Asubscribed capital stockD and AissuedD or AoutstandingD capital stock are used synonymously since subscribed capital stock) as distinguished from the certificate of stock) can be issued even if not fully paid 9ut while every subscribed share (assuming there is a binding subscription agreement) is Aoutstanding)D an issued share may not have the status of outstanding share (as in the case of treasury shares) 3aid-up capital o 23M of subscribed capital stoc% $ust be paidGup for the purpose of incorporation, but in no case shall be less than 1 3BBB (§!*) o 1ortion of the authorized capital stoc% which has been subscribed and paid. 0ot all funds or assets received by the corporation can be considered paidGup capital, for this ter$ has a technical signification in corporation law. 'uch $ust fro$ part of the authorized capital stoc% of the corporation, subscribed and then actually paidGup. /<'C:G0ACC':1 ,ocal Chapter v. 0ational .ages and 1roductivity Co$$ission8 o <ust be in the for$ of (a) cash deposited in a ban% or (b) property which $ay be used or actually needed by the corporation in its operations o Capital can(t consist or be invested in $oney $ar%et place$ent o Corporations with $ore stringent capital re@uire$ents

7.

0apital stock o 0apital stock is the amount fi>ed in the A:6) to be subscribed and paid in or secured to be paid in by the shareholders of a corporation) either in money or property) labor or services) at the organi?ation of the corporation or afterwards and upon which is to conduct its operation (Fletcher) o The capital stock limits the ma>imum amount or number of shares that may be issued by the corporation without formal amendment of the A:6 6t remains the same even though the actual value of the shares as determined by the assets of the corporation is diminished or increased Authori?ed capital stock o A0' is synonymous with capital stock where the shares of the corporation have par value 6f the shares of stock have no par value) the corporation has no A0') but it has capital stock the amount of which is not specified in the A:6 as it cannot be determined until all the shares have been issued 6n this case) the two terms are not synonymous (4e =eon) o 'tate the authorized capital stoc% in lawful $oney of the 1hilippines, the nu$ber of shares into which the AC' is
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Sec. ,-A, CA 10( 'A%ti-.u//0 L#1+ # #/e%&e& 20 P. )13.

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 :nsurance corporations + $ust have paidGup capital stoc% of at least 1 3 < (6nsurance 0ode) 'ec %++) Aan%s + $onetary board fixes $ini$u$ paidGup capital re@uire$ents for the different classes of ban%s (0entral 9ank Act and @eneral 9anking Act).

COMM #CIAL LA$

-.-. FILING OF ARTICLES AND PABMENT OF FEES • Corporations governed by special laws have to sub$it a reco$$endation fro$ the appropriate govern$ent agency to the effect that such articles are in accordance with law. a) ban%s, ban%ing and @uasiGban%ing institutions, b) building and loan associations, c) trust co$panies and other financial inter$ediaries, d) insurance co$panies, e) public utilities, f) educational institutions, and g) other corporations governed by special laws (!%,) 0onGstoc% corporations that intend to solicit gifts, donations, and contributions fro$ the public at large for the benefit of an indefinite nu$ber of persons $ust secure a Certificate of 4egistration fro$ the :nsurance Co$$issioner. 2ailure to file AF: will prevent due incorporation of the proposed corporation and will not give rise to its "uridical personality (§!6). :t will not even be a de facto corporation (§2B) !. Cnless the certificate of incorporation has been issued, there can be no de facto corporation (<all vs 3iccio) %&(5) 2. Ca$pos=this state$ent should not be ta%en as an absolute principle, but in the light of the circu$stances before the court. BB SECD

.nissued capital stock o 6t is that portion of the capital stock that is not issued or subscribed 6t does not vote and draws no dividends =egal capital o 6t is the amount equal to the aggregate par vale and;or issued value of the outstanding capital stock Ihen par value shares are issued above par) the premium or e>cess is not to be considered as part of the legal capital (0f!8#) 6n the case of no par value shares) the entire consideration received forms part of legal capital and shall not be available for distribution of dividends (!") par #) 0apital o 6t is used broadly to indicate the entire property or assets of the corporation 6t includes the amount invested by the stockholders plus the undistributed earnings less losses and e>penses o 6n the strict sense) it refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them) which is utili?ed for the prosecution of the business of the corporation (4e =eon) >. &49A'C494G:0 &4C'& &he person elected by the subscribers as &reasurer of the corporation at the ti$e of the incorporation, who is na$ed as such in the AF: and who has been authorized to receive for and in the na$e and for the benefit of the corporation, all subscriptions, fees, contributions or donations paid or given by the subscribers or $e$bers &49A'C494(' A22:DAE:& &he sworn state$ent of the &reasurer elected by the subscribers stating at least 23M of the authorized capital stoc% of the corporation has been subscribed and that at least 23M of the total subscription has been fully paid to hi$ in actual cash and#or property, the fair valuation of which is e@ual to at least 23M of the said subscription, such paidGup capital being not less than 3,BBB.BB (§!5) F&)94 <A&&94' • Classes of shares, as well as the preferences or restrictions on any such class (§7) • Denial or restriction of preGe$ptive right (§*6) • 1rohibition against transfer of stoc% which would reduce stoc% ownership to less than the re@uired $ini$u$ in the case of a nationalized business or activity (§!3(!!)) , $ B A R ' $ !

-.0 ECAMINATION OF ARTICLES APPRO3AL OR RE8ECTION • •

&he '9C $ay re"ect any AF: thereto if the sa$e is not in co$pliance with the re@uire$ents of this Code (§!>) &he '9C shall give the incorporators a reasonable ti$e within which to correct or $odify the ob"ectionable portions of the articles or a$end$ent. (! %,)

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0. Gr!+#)$ (!r )"$appr!."#% art"'&e$ !( "#'!rp!rat"!# (; 7)
a) AF: does not substantially the for$ prescribed b) 1urpose is patently unconstitutional, illegal, i$$oral, contrary to govern$ent rules and regulations c) &reasurer(s Affidavit concerning the a$ount of capital subscribed and or paid is false d) 1ercentage re@uire$ent of ownership of 2ilipino citizens as re@uired by the Constitution not co$plied with. • After consulting with AF:, 09DA, appropriate govern$ent agency, '9C $ay deny registration of any corporation if its establish$ent will not be consistent with declared national policies • Certificate of authority re@uired of the following - . . / $age 11 o0 355

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a) :nsurance Co$paniesG :nsurance Co$$ission b) Aan%s, Auilding and ,oan Associations, 2inance Co$paniesG <onetary Aoard c) 9ducational :nstitutionsG 'ecretary of 9ducation d) 1ublic CtilitiesG Aoard of 1ower, Aoard of &ransportation, 0ational &eleco$$unication Co$$ission, etc.. 4e$edy in case of re"ection of AF: by petition for review in accordance with the 4ules of Court (§7, last par., 1D 6B2GA)

COMM #CIAL LA$
that a warrant for its creation can be found in so$e other valid law or in the recognition of its potential existence in the general constitution of the state. &he $ere fact that Aalabagan was organized before the statute was invalidated cannot $a%e it a de facto corporation because, independently of the Ad$inistrative Code, there is no other valid statute to give color of authority to its creation. &his doesn(t $ean that the acts done by Aalabagan in the exercise of its corporate powers are a nullity. &he existence of 9F *?7 is an Joperative fact which cannot be "ustly ignored.K

:''CA0C9 F2 C94&:2:CA&9 F2 :0CF41F4A&:F0 • A private corporation for$ed or organized under this Code co$$ences to have corporate existence and "uridical personality and is dee$ed incorporated fro$ the date the 'ecurities and 9xchange Co$$ission issues a certificate of incorporation under its official seal (§!6) &hereupon the incorporators, stoc%holders#$e$bers and their successors shall constitute a body politic and corporate under the na$e stated in the articles of incorporation for the period of ti$e $entioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (:bid) :f incorporators are found guilty of fraud in procuring Certificate of :ncorporation, '9C $ay revo%e the sa$e after proper notice and hearing (§7(:), 1D 6B2GA)

1. De(e't".e Atte2pt$ t! I#'!rp!rate
1. DE FACTO CORPORATIONS E a '!rp!rat"!# :here there eA"$t$ a (&a: "# "t$ "#'!rp!rat"!# *equisites of a de facto corporation (9allantine as cited in 0ampos) a) Halid statute + there is an apparently valid statue under which the corporation with its purposes $ay be for$ed. &here can be no de facto corporation under a statue subse@uently declared unconstitutional M+#"'"pa&"t? !( Ma&a,a#% .$. Be#"t! ( 565) &he $unicipality of Aalabagan was created by 9F *?7 of 1resident -arcia out of barrios and sitios of <alabang. &he petitioners see% to nullify the 9F. &hey rely on the 3elae? ruling that the 1resident(s power to create $unicipalities under 'ec. 7? of the Ad$inistrative Code is unconstitutional. 4espondents argue that the 3elae? ruling is inapplicable because Aalabagan is a de facto corporation. )9,D &he <unicipality of Aalabagan was not a de facto corporation. &he color of authority re@uisite to a de facto $unicipal corporation $ay be an unconstitutional law, valid on its face, which has either a. Aeen upheld for a ti$e by the courts; or b. 0ot yet been declared void; provided

b) .ser of corporate powers + there has been so$e user of corporate powers, the transaction of business in so$e way as if it were a corporation • not necessary that dealings between the parties should have been on a corporate basis • election of directors and officers would not be user of corporate powers since these acts are "ust indicative of a $ere association • ta%ing subscriptions to and issuing shares of stoc%, buying lot, constructing, and leasing a building on it will constitute sufficient user of corporate powers to constitute a de facto corporation c) 'ubstantial or 0olorable compliance G there has been colorable co$pliance with legal re@uire$ents in -FFD 2A:&) • while the corporation is still in the process of incorporation, it is @uite clear that there can be no substantial or colorable co$pliance and therefore it cannot be at such a stage a de facto corporation • A corporation which has not yet been issued a certificate of incorporation cannot clai$ Jin good faithK to be a corporation. &hus, it cannot be a de facto corporation /)all v. 1iccio ?7 1hil 7B*8 Co$pliance with the above conditions would $a%e the corporation de facto whose incorporation cannot be attac%ed collaterally. :t $ay only be attac%ed directly by the 'tate in a @uo warranto proceeding • Co$pliance with the above conditions would $a%e the corporation de facto whose incorporation cannot be attac%ed collaterally. :t $ay only be attac%ed directly by the 'tate in a @uo warranto proceeding (§2B) • De facto doctrine grew out of the necessity to pro$ote the security of business transactions and to eli$inate @uibbling over irregularities • The de facto doctrine is the e>ception to the general rule that when there is no corp entity to talk about) it is the natural persons who are liable • .here corporations are neither de "ure or de facto, associates $ay be held liable as partners unless estoppel applies (! $%) • 0o articles and no byGlaws no de facto corp. &here(s no colorable co$pliance at all - . . / $age 12 o0 355

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• • De facto corp is li%e a de "ure corp, has all the powers and liabilities of de facto corp &)9 F0,H D:22 its incorporation can be attac%ed by 'tate in @uo warranto action 4atio Fnly 'tate can give it legal existence, so only the 'tate is wronged

COMM #CIAL LA$
L!/a#! .$. )e&!$ Sa#t!$ ( 557) &his case involved two incorporated drivers( associations that decided to unite and elect one set of officers to be given authority to collect the daily dues of the drivers who are $e$bers of the consolidated association. )9,D Doctrine of estoppel applies when persons assu$e to for$ a corporation and exercise corporate functions and enter into business relations with third persons. .here there are no third persons involved and the conflict arises only a$ong those assu$ing to for$ a corporation, who therefore %now that it has not been registered, there is no corporation by estoppel. I#ter#at"!#a& EApre$$ Tra.e& .. CA (*666) &he doctrine of corporation by estoppel $ay apply to o a third party G a * rd party who had dealt with an unincorporated association as a corporation $ay be precluded fro$ denying its corporate existence on a suit brought by the alleged corporation on the contract even if he did not %now of the defective incorporation. *rd party is considered to have ad$itted the existence of a corporation by the fact that he dealt with it as a corporation o the alleged corporation G when a third person has entered into a contract with an association which represented itself to be a corporation, the association is estopped fro$ denying its corporate capacity in a suit against it by such *rd person. :t cannot allege lac% of personality to be sued to evade responsibility on a contract it has entered into and by virtue of which it has received advantages and benefits o associates as partners G when business associates fraudulently $isrepresents the existence of a corporation and the *rd party contacts with the association as a corporation without %nowing the serious defects in its incorporation, such * rd party $ay sue associates as general partners. .here both the associates and the *rd party were ignorant of the defective incoroporation, * rd party cant hold the associates liable since they were in good faith. :f *rd party %new of defects in incorporation and still dealt with the corporation, he $ust be dee$ed to have chosen to deal with the corporation as such and should be li$ited in his recovery to the corporate assets.

1.* CORPORATION BB ESTOPPEL • :t is a status ac@uired by persons who assu$e to act as a corporation %nowing it to be without authority. 'uch persons shall be liable as general partners for all debts, liabilities and da$ages incurred or arising as a result thereof. (§2!) .hen such ostensible corporation is sued on any transaction entered by it as a corporation or any tort co$$itted by it as such, it shall not be allowed to use as a defense as lac% of corporate personality (§2!) Fne who assu$es an obligation to an ostensible corporation as such, cannot resist perfor$ance thereof on the ground that there was in fact no corporation (§2!) -ote that an unincorporated corporation is not barred from transacting business before the commencement of corporate e>istence =imit: personal liability 0omplication: when the corporation did not come about Against whom will estoppel lieJ Iho committed the active misrepresentationJ Ihere a person convinces other parties to invest money for the formation of a corporation) but which has never duly incorporated) there can be no resulting partnership among them) and the mere passive investors cannot be held liable to share in the losses suffered by the business enterprise (3ioneer 'urety v 0A) %&+&) Ihen applicable: % 3ersons assuming to act as corp are liable as gen partners; $ #rd party who had dealt with an unincorporated association as a corp may be precluded from denying its corporate e>istence on a suit brought by the alleged corp E person deemed to have admitted the e>istence of the corp # alleged corp that has entered into a contract by virtue of which it has received advantages and benefits <owever) if business associates fraudulently misrepresent the e>istence of a corp) #rd party can sue them as gen partners #rd party is not estopped from asserting their liability because he had recogni?ed the corporation1s e>istence *atio: They cannot profit by their own misrepresentation <ence) if associates did not know of thee defective incorp) they can1t be personally held liable by innocent #rd party (0f 'alvaierra v @arlitos) %&(+) 9ut if #rd party knew of defects of incorp) he is estopped from recovering from individual associates) but must recover only from corp assets

• •

6. I#ter#a& Or%a#"/at"!# !( the C!rp!rat"!#
6. APPRO3AL OF BB=LAWS !. Definition of by-laws • &hese are regulations, ordinances, rules or laws adopted by an association or corporation or the li%e for its internal governance. AyG laws define the rights and obligations of various officers, persons or groups within the corporate structure and provide rules for routine $atters such as calling $eetings.

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• 9very corporation under this code shall have the power and capacity to adopt byGlaws not contrary to law, $orals, or public policy, and to a$end or repeal the sa$e in accordance with this code (§*7 (3)) These are subordinate to the A:6) 0orp 0ode) and other statutes (2leischer vs. 0olasco(!623)) • •

COMM #CIAL LA$
Cannot bind stoc%holders or corporation pending approval 9y-laws or any amendment thereto of any bank) banking institution) building and loan association) trust company) insurance company) public utility) educational institution or other special corporations governed by special laws must be accompanied by a certificate of the appropriate gov1t agency to the effect that such by-laws are in accordance with law AyGlaws, li%e AF: are contracts of adhesion. &hey will bind the corporation and stoc%holders including those who vote against as well as those who beca$e $e$bers after approval Contracts entered into without strict co$pliance with byGlaws $ay be binding on the corporation due to long ac@uiescence and usage (9oard of =iquidators vs Kalaw (%&",)) AyGlaws are $ere internal rules a$ong stoc%holders and cannot affect or pre"udice *rd persons who deal with the corporation unless they have %nowledge of the sa$e (0hina 9anking 0orp v 0A) %&&,)

2.

.hen to adopt byGlaws (§57) • 9very corporation for$ed under this code $ust within ! $onth after receipt of official notice of the issuance of its certificate of incorporation by the '9C adopt a code of byGlaws for its govern$ent not inconsistent with this code. • <ay be adopted and filed prior to incorporation, in such case, shall be approved and signed by all incorporators sub$itted to '9C together with AF:

2ailure to file AyGlaws on ti$e

L!?!&a Gra#) 3"&&a$ H!2e!:#er$ A$$# .. CA ( 557) &he 'upre$e Court held that although the Corporation Code re@uires the filing of byGlaws within one $onth after the issuance of the Certificate of :ncorporation, it does not expressly provide for the conse@uences of nonGfiling within the said period. 2ailure to file the byGlaws within that period does not i$ply the Qde$iseQ of the corporation. AyGlaws $ay be re@uired by law for an orderly governance and $anage$ent of corporations but they are not essential to corporate birth. &herefore, failure to file the$ within the period re@uired by law by no $eans tolls the auto$atic dissolution of a corporation. *. )ow filed (§57) • <ust be approved by the affir$ative vote of the stoc%holders representing the $a"ority of the outstanding capital stoc% or $a"ority of $e$bers (if filed prior to incorporation) must be approved and signed by all incorporators) • <ust be signed by the stoc%holders or $e$bers voting for it • <ust be filed with the '9C certified by the $a"ority of directors#trustees and countersigned by the secretary of the corporation which shall be attached to original AF: .here %ept (§57) • <ust be %ept in the principal office of the corporation; sub"ect to inspection of stoc%holder or $e$ber during office hours (0f !,8) 9ffectivity of byGlaws • :n all cases, the byGlaws shall be effective only fro$ the issuance of '9C of certification that bylaws are not inconsistent with the Code

7.

5.

3.

Contents (§5>) • 'ub"ect to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation $ay provide in its byGlaws for a) &he ti$e, place and $anner of calling and conducting regular or special $eetings of the directors or trustees; b) &he ti$e and $anner of calling and conducting regular or special $eetings of the stoc%holders or $e$bers; c) &he re@uired @uoru$ in $eetings of stoc%holders or $e$bers and the $anner of voting therein; d) &he for$ for proxies of stoc%holders and $e$bers and the $anner of voting the$; Ay laws $ay not prohibit the use of proxiesG 1eoples( )o$e 'avings Aan% vs. 'uperior Court, cited in Ca$pos e) &he @ualifications, duties and co$pensation of directors or trustees, officers and e$ployees; f) &he ti$e for holding the annual election of directors of trustees and the $ode or $anner of giving notice thereof; g) &he $anner of election or appoint$ent and the ter$ of office of all officers other than directors or trustees; h) &he penalties for violation of the byGlaws; i) :n the case of stoc% corporations, the $anner of issuing stoc% certificates; and ") 'uch other $atters as $ay be necessary for the proper or convenient transaction of its corporate business and affairs.

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• The contents may be subdivided into two ma2or headings: a) <anage$ent and control of the corporate entity; and b) *ights and obligations of stockholders

COMM #CIAL LA$

,

Amendment or repeal (!8+) • 7a2ority vote of the members of the 9oard and ma2ority vote of the outstanding capital stock or ma2ority of members) in a meeting duly called for the purpose; or • $;# of the outstanding capital stock or members may delegate to the 9:4 the power to amend or repeal any by-laws or adopt new by-laws (such power may be revoked by ma2ority vote only) • 6n all other respects) the procedure for adopting the original by-laws shall be the same in amending or repealing bylaws or adoption of a new set of bylaws

6.* ELECTION OF DIRECTORS E )"$'+$$e) "# Chapter 3II 6.- COMMENCEMENT OF BUSINESS

Chapter I3

THE CORPORATE ENTITY
. D!'tr"#e !( $eparate G+r")"'a& per$!#a&"t?
• A corporation has a personality separate and distinct fro$ that of its stoc%holders and $e$bers and is not affected by the personal rights, obligations, and transactions of the latter. 'ince corporate property is owned by the corporation as a "uridical person, the stoc%holders have no clai$ on it as owners, but have $erely an expectancy or inchoate right to the sa$e should any of it re$ain upon dissolution of the corporation after all corporate creditors have been paid. 'uch right is li$ited only to their e@uity interest (doctrine of limited liability). Although stockholder1s interest in the corp may be attached by his personal creditor) corp property cannot be used to satisfy his claim (Iise L 0o vs 7an 'un =ung) %&85) @eneral *ule 'eparate personality is vested to a corporate entity when it is issued the certificate of incorporation by the '9C. &he e>ceptions are a. de facto corporation b. corporation by estoppel As a separate 2uridical personality) a corporation can be held liable for torts committed by its officers for corporate purpose (3-9 v 0A) %&,+) 6t can1t be held criminally liable for a crime committed by its officers (3eople v Tan 9oon Kong) %&#5) 0orporate entities are entitled to the following constitutional rights: due process) equal protection) and protection against unreasonable searches and sei?ures <owever) a corp is not entitled to the privilege against self-incrimination (9ataan 'hipyard L /ng1g 0o v 30@@) %&+,) A corporation is not entitled to moral damages (=90 />press) 6nc v 0A)

7. E((e't$ !( #!#=+$e !( 'harterF'!#t"#+!+$ "#!perat"!# (§ 22)
!. 0onGuser for 2 years (nonGuse of charter)G when the corporation does not for$ally organize and co$$ence the transaction of its business or the construction of its wor%s within 2 years fro$ the date of its incorporation, its corporate powers cease and the corporation shall be dee$ed dissolved (auto$atic) • 2or$al organization + $ay consist in the election of new board of directors or trustees and corporate officer • Co$$ence$ent of business + $ay ta%e the for$ of contracting for lease or sale of properties to be used as business site of the corporation and other preparatory acts geared towards fulfill$ent of the purpose for which the corporation was established 0onGuser for 3 years (continuous inoperation)G when the corporation has co$$enced the transaction of its business but subse@uently beco$es continuously inoperative for a period of at least 3 years. &he sa$e shall be a ground for the suspension or revocation of its corporate franchise or Certificate of :ncorporation (not auto$atic). 0otice and hearing before '9C is re@uired. 9xception cause or nonGuse or operation was due to causes beyond the control of the corporation as deter$ined by '9C (ex. <ineral lands to be developed by the corporation as per its purpose are the ob"ect of court litigation and a court in"unction against the corporate activities has been issued)

2.

• •

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• Muridical personality of the corporation ends when liquidation ends (payment of debts and distribution of assets) and inchoate rights or e>pectancies of stockholders are reali?ed .ntil such conveyance is made) title over the assets remains with the corporation

COMM #CIAL LA$
considered as a $eans of evading such thus the need for the piercing. • :n applying the doctrine, deter$ine !. the rights and obligations of the parties. 2. the possibility of nonGenforce$ent of such rights and obligations because of the shield or veil. *. loo% into the circu$stances and underlying purpose of putting up the corporation

*. P"er'"#% the .e"& !( '!rp!rate ("'t"!#
*. Nat+re !( the p"er'"#% )!'tr"#e • 1iercing the veil of corporate entity re@uires the court to see through the protective shroud which exe$pts its stoc%holders fro$ liabilities that ordinarily they could be sub"ect to, or distinguishes one corporation fro$ a see$ingly separate one, were it not for the existing corporate fiction /=im v 0A) $555C. Aut to do this, the court $ust be sure that the corporate fiction was $isused, to such an extent that in"ustice, fraud or cri$e was co$$itted upon another, disregarding, their, his, her or its rights. :t is the protection of the interests of innocent third persons dealing with the corporate entity which the law see%s to protect by this doctrine. /Traders *oyal 9ank v 0A) %&&,8 • .hether the existence of the corporation should be pierced depends on @uestions of facts, appropriately pleaded. <ere allegation that a corporation is the alter ego of the individual stoc%holders is insufficient. &he presu$ption is that the stoc%holders or officers are distinct entities. &he burden of proving otherwise is on the party see%ing to have the court pierce the veil of corporate entity. /*amoso v HA) $5558 • 1iercing the veil of corporate entity is $erely an e@uitable re$edy, and $ay be awarded only in cases when the corporate fiction is used to defeat public convenience, "ustify wrong, protect fraud or defend cri$e or where the corporation is a $ere alter ego or business conduit of a person. • Ihen it comes to applying the doctrine) the first point to consider is the liability of obligation of the individual (the one who is being sought to be liable) Iithout such liability) everything would have been in compliance with statutes (C.' vs. <ilwau%ee, !6B3; C$ali vs. CA, !66B) • 6n case of wholly-owned corporations) corporations with common stockholders) or corporations having a parent-subsidiary relationship) the following are the Ainevitable consequencesD: a) 0ontrol and management of the corporation; b) 6nterlocking directors; c) 0ommon access to the use of resources) services) and #rd-party providers; and d) 6ntra-corporate dealings :n the above conse@uences, there is no necessity for applying the doctrine of piercing the corporate veil unless there is a particular act by the corporation, stoc%holder, or AFD that gives rise to a liability. :f there(s a liability to spea% of, such conse@uences $ay be 100% UP L AW , $

*.* EAte#t !( the &e%a& e((e't$ !( p"er'"#% • &he application of the piercing doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. /Koppel 3hil 6nc v Natco8 (%&8") 1iercing is not allowed unless the re$edy sought is to $a%e the officer or another corporation pecuniarily liable for corporate debts

*.- I&&+$trat".e Ca$e$ :here p"er'"#% the .e"& "$ a&&!:e) • • • • • :f done to defraud the govern$ent of taxes due it :f done to evade pay$ent of civil liability :f done by a corporation which is $erely a conduit or alter ego of another corporation :f done to evade co$pliance with contractual obligations :f done to evade financial obligation to its e$ployees

*.0 Pare#t=$+,$")"ar? re&at"!#$h"p • &he $ere fact that a corporation owns all or substantially all of the stoc%s of another corporation is not sufficient to "ustify their being treated as one entity. :f used to perfor$ legiti$ate functions, the subsidiary(s separate existence $ay be respected. )owever, to prevent abuses of the separate entity privilege, the court will pierce the veil of corporate entity and regard the two corporations as one. Circu$stances which if present in the proper co$bination renders the subsidiary an instru$entality a) &he parent corporation owns all or $ost of the subsidiary(s capital stoc% b) &he parent and subsidiary corporations have co$$on directors or officers c) &he parent corporation finances the subsidiary d) &he parent corporation subscribes to all the capital stoc% of the subsidiary or otherwise causes its incorporation e) &he subsidiary has grossly inade@uate capital f) &he parent corporation pays the salaries and other expenses or losses of the subsidiary

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g) &he subsidiary has substantially no business except with parent corporation or no assets except those conveyed to or by the parent corporation h) :n the papers of the parent corporation or in the state$ents of its officers, the subsidiary is described as a depart$ent or division of the parent corporation or its business or financial responsibility is referred to as the parent corporation(s own i) &he parent corporation uses the property of the subsidiary as its own ") &he directors or executives of the subsidiary do not act independently in the interest of the subsidiary but ta%e their orders fro$ the parent corporation in the latter(s interest %) &he for$al ledger re@uire$ents of the subsidiary are not observed (3-9 v *itratto @roup) $55%). &he subsidiary cannot be considered a $ere instru$entality of the parent corporation "ust by the co$bination of the !! signs listed above. 2or the veil of corporate entity of the subsidiary to be pierced so that it is considered "ust an instru$entality, the act @uestioned $ust have an illegal or unfair purpose which results to pre"udice to third persons who $ay see% redress fro$ the corporate entity De Le!# .$. NLRC (*66 ) 2AC&' 2:': contracted with 2&C for security services. 'ubse@uently, the stoc%holders of 2:': sold all their participation in the corporation to a new set of stoc%holders which rena$ed the corporation <:':. Afterwards, 2&C preter$inated its contract of security services with <:': causing petitioner security guards to lose their e$ploy$ent and file C,1 case against 2&C, 2:': and <:':. )9,D &here was 94G99 relationship between 2&C and petitioners. :t was shown that 2:': was a $ere ad"unct of 2&C. 4ecords show that 2:': and 2&C have the sa$e owners and business address, and 2:': provided security services only to 2&C. &he purported sale of the shares of the for$er stoc%holders to a new set of stoc%holders who changed the na$e of the corporation to <:': appears to be part of a sche$e to ter$inate the services of 2:':Rs security guards posted at the pre$ises of 2&C and bust their newlyGorganized union which was then beginning to beco$e active in de$anding the co$panyRs co$pliance with ,abor 'tandards laws. Cnder these circu$stances, the Court cannot allow 2&C to use its separate corporate personality to shield itself fro$ liability for illegal acts co$$itted against its e$ployees. Fra#'"$'! .$. MeG"a (*66 ) .ith specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the conse@uences of his acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good faith. :n such cases, the officerRs acts are properly attributed to the corporation. )owever, if it is proven that the officer has used the corporate fiction to defraud a third party, or that he has acted negligently, $aliciously or in bad faith, then the 100% UP L AW , $

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corporate veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved.

-. Nat"!#a&"t? !( the C!rp!rat"!#
-. The place of incorporation test. • &he corporation is a national of the country under whose laws it is organized or incorporated(!%$#) Do$estic corporations + organized and governed under and by 1hilippine laws • 2oreign corporations + organized under laws other than those of the 1hilippines an can operate only in the territory of the state under whose laws it was for$ed. )owever, they $ay be licensed to do business here.

-.* Nat"!#a&"t? !( the C!rp!rat"!# a$ )eter2"#e) ,? the HControl TestI • 9xploitation of 0atural 4esources G 'ection 2, Art. N:: CF0'&. Jonly 2ilipino Citizens or Corporations whose capital stoc% are at least 7BM owed by 2ilipinos can @ualify to exploit natural resources.K • 1ublic Ctilities G 'ec. !!, Art N::, CF0'&. Jxxx no franchise, certificate or any other for$ of authorization for the operation of a public utility shall be granted except to citizens of the 1hilippines or to corporations or associations organized under the laws of the 1hilippines at least 7BM of whose capital is owned by such citizens. J • .arGti$e &est G :f the controlling stoc%holders are ene$ies, then the nationality of the corporation will be base on the citizenship of the $a"ority stoc%holders in ti$es of war (Filipinas 0ompania de 'eguros v 0hristian <uenfeld) %&(%) . • :nvest$ent &est G 'ec. *(a) and (b), 2oreign :nvest$ents Act of !66! (4A>B52). :t considers for purpose of invest$ent a J1hilippine 0ationalK as a corporation organized under the laws of the 1hilippines of which at least 7BM of the capital stoc% outstanding and entitled to vote is owned and held by citizens of the 1hilippines, or a trustee of the funds for pension or other e$ployee retire$ent or separation benefits, where the trustee is a 1hilippine national and at least 7BM of the fund will accrue to the benefit of 1hilippine nationals.

-.- Gra#)(ather r+&e Csed to deter$ine the nationality of a corporation by which the percentage of 2ilipino e@uity in corporations engaged in nationalized and#or partly nationalized areas of activities, provided for under the constitution and other nationalization laws, is co$puted, in cases where corporate shareholders are present in the situation, by attributing the nationality of the second or even subse@uent tier of ownership to deter$ine the nationality of the corporate stoc%holder. (Hillanueva) $55#) • '/0 formula '9C ,etter Fpinion $age 17 o0 355

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J'hares belonging to corporations or partnerships at least 7BM of the capital of which is owned by 2ilipino citizens shall be considered as of 1hilippine nationality, but if the percentage of 2ilipino ownership in the corporation or partnership is less than 7BM only the nu$ber of shares corresponding to such percentage shall be considered as of 1hilippine nationality.K

COMM #CIAL LA$
Corp. is not bound by the contract + 'ince the corp. did not yet exist at the ti$e of the contract, it could not have had an agent who could legally bind it. -.* EA'ept"!#< Corp. $ay be bound by the contract if it $a%es the contract its own )owS a. Adoption or ratification • Ay express resolution • :$plied fro$ the acts of responsible officers of the corp. T &he corp. cannot adopt only the part of the contract which $ay be beneficial to it U then discard the part that is burdenso$e. T &he contract to be capable of adoption or ratification, $ust be one within the powers of the corp. to enter. Acceptance of benefits under the contract with %nowledge of the ter$s thereof

b.

0. Per$!#a& L"a,"&"t? !( Pr!2!ter !# Pre=I#'!rp!rat"!# C!#tra't$
&here are three possible situations intended by the pro$oter and the other party in preGincorp. contracts 1* 1ro$oter ta%es a continuing F2294 on behalf of the corp, which if accepted by the corp. beco$es a contract  1ro$oter does not assu$e any personal liability, whether or not the offer is accepted by the corp. 1ro$oter $a%es a contract at the ti$e binding hi$self with the C0D94'&A0D:0- that if the corp., once for$ed, accepts or adopts the contract, the pro$oter will be relieved of all responsibilities 1ro$oter binds hi$self 194'F0A,,H U assu$es the responsibility of loo%ing to the proposed corp. for rei$burse$ent

Chapter 3 PROMOTERSJ CONTRACTS PRIOR TO INCORPORATION . F+#'t"!#$ !( Pr!2!ter$
• • • • • • :rgani?e and establish corporation 'olicit or pool capital contributions />ercise;identify;consummate opportunities 7ake available capital contributions;investments (underwrite) 7anage;control -ote: may be done prior or after incorporation 0omplications arise if performed prior to incorporation For whom was the promoter acting in behalf ofJ (no 2uridical entity yet)

2.

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*.What are Pr!2!terJ$ C!#tra't$K
• • 0ontracts prior to e>istence of corporation thus the corporation could not have been a party to it <owever) the corporation may make the contracts its own and may become bound on such contracts if after incorporation) it adopts or ratifies the same) or accepts its benefits with knowledge of the terms thereof Adoption or ratification need not be by e>press resolution of the board and may be implied from the acts of responsible officers of the corporation

:n the absence of any express or i$plied agree$ent to the contrary, the *rd situation will be presu$ed and the pro$oter will be considered personally liable for the contracts. &hus, the corp.(s adoption or ratification of the contract will not release the pro$oter fro$ personal liability unless a novation was intended. (.ells vs. 2ay U 9gan Co., !5* -a. >*2, ?> '.9 ?>*, !6!3) />ception: Ouaker v <ill case 6n this case) Ouaker looked to the uincorporated entity when making the contract Thus) the promoter was not liable (Ouaker <ill 6nc vs 3arr) %8+ 0olo 8() #"8 3 $d %5(") %&"%)

1. C!2pe#$at"!# !( Pr!2!ter$
@en rule + the corporation is not liable to pay co$pensation because this would be an i$position on innocent investors. (Aallantine) />ceptions • if after it is for$ed, corporation expressly pro$ises to do so (Aallantine; :ndianapolis Alue 1rint U <anufacturing Co. v. Pennedy et. al., 2!3 :nd. 5B6, !6 0.9 2d 335, !6*6) • 'ervices done partly before and partly after incorporation and the corporation ta%es the benefits thereof - . . / $age 18 o0 355

-. L"a,"&"t? !( C!rp!rat"!# Pr!2!terJ$ C!#tra't$

(!r

4ules on the liability of the corp. on pro$oters( contracts -. Ge#era& R+&e

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&o establish pension, retire$ent, and other plans for the benefit of its directors, trustees, officers and e$ployees; and &o exercise such other powers as $ay be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (in the purpose clause) 'ources of express power (Hillanueva) o 'ection *7 (0orp 0ode and other applicable statutes) o 1urpose clause (A:6) supplemented by bylaws) 'ec *? par !! grants such power as are essential or necessary to carry out its purpose or purposes as stated in the AF:. A corporation is presu$ed to act within its powers and when a contract is not on its face necessarily beyond its authority, it will, in the absence of proof to the contrary, presu$ed valid The general powers are to be e>ercised by the 9:4 <owever) the power to amend A:6 is to be e>ercised by the stockholders or members 2 general restrictions on the power of the corporation to ac@uire and hold properties o that the property $ust be reasonably and necessarily re@uired by the transactions of its lawful business o that the power shall be sub"ect to the li$itations prescribed by other special laws and the constitution (corporation $ay not ac@uire $ore than *BM of voting stoc%s of a ban%; corporations are restricted fro$ ac@uiring public lands except by lease of not $ore than !BBB hectares)

&he Corp. Code does not contain any provision as to the co$pensation of pro$oters. Aut the 'ecurities Act authorizes a pro$otion fee :2 it is provided for in the registration state$ent of the securities involved.

6. F")+'"ar? Re&at"!#$h"p ,et:ee# C!rp!rat"!# L Pr!2!ter
&he pro$oters, being responsible for the financing U organization of the corp., are under duty to exercise good faith U fairness in all their acts U transactions. 9xa$ple 1ro$oters often have to ta%e options or title to property in their na$e but for the benefit of the corp. :n such cases, they should not $a%e secret profits in passing title to the corp. :f they do, they would have to account for all such profits to the corp. when for$ed. (Fld Do$inion <ining and '$elting Corp., 2B* <ass. !36, ?6 0.9 !6*, !6B6)

• •

Chapter 3I CORPORATE POWERS . Ge#era& p!:er$ !( '!rp!rat"!#$ (§*7)
a. b. c. d. e. f. &o sue and be sued in its corporate na$e; 'uccession by its corporate na$e for the period of ti$e stated in the articles of incorporation and the certificate of incorporation; &o adopt and use a corporate seal; &o a$end its articles of incorporation in accordance with the provisions of this Code; &o adopt byGlaws, not contrary to law, $orals, or public policy, and to a$end or repeal the sa$e in accordance with this Code; :n case of stoc% corporations, to issue or sell stoc%s to subscribers and to sell stoc%s to subscribers and to sell treasury stoc%s in accordance with the provisions of this Code; and to ad$it $e$bers to the corporation if it be a nonGstoc% corporation; &o purchase, receive, ta%e or grant, hold, convey, sell, lease, pledge, $ortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation $ay reasonably and necessarily re@uire, sub"ect to the li$itations prescribed by law and the Constitution; &o enter into $erger or consolidation with other corporations as provided in this Code; &o $a%e reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or si$ilar purposes 1rovided, &hat no corporation, do$estic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;

*. Spe'"("' P!:er$ = TCB PDA IDM (DIP CAB MDT)
• • • • • • • • • 9xtend or shorten the corporate Ter$ (! #,) :ncrease or decrease Capital stoc% (! #+) :ncur, create or increase Bonded indebtedness (! #+) Deny Pree$ptive right (! #&) 'ell or otherwise Dispose of substantially all its assets Ac@uire its own shares (! 8%) Invest in another corporation or business ( ! 8$) Declare dividends (! 8#) Enter into <anage$ent contracts (! 88)

-. I2p&"e) P!:er$
&hese i$plied powers are dee$ed to exist because of the following provisions !. except such as are necessary or incidental to the exercise of the powers so conferred (§*7) 2. such powers as are essential or necessary to carry out its purpose or purposes as stated in the AF: + catch-all phrase (§53) 4e$e$ber (Cole$an vs. )otel de 2rance Co., 26 1hil. *2*, !6!3) !. A corporation is presu$ed to act within its powers. 2. .hen a contract, entered into by the corporation, is not on its face necessarily beyond its authority, it will be presu$ed valid.

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h. i.

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considered within the corporation(s charter powers. 'tevedoring services are incidental and indispensable to unload the coal ship$ents.

0. The U&tra D!'tr"#e (;01)

3"re$

4efinition + &hese are acts which a corporation is not e$powered to do or perfor$ because they are not based on the powers conferred by its AF: or by the Corporation Code on corporations in general, or because they are not necessary or incidental to the exercise of the powers so conferred. *ule + 0o Corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. An ultra vires act, if not illegal, can be re$edied (by ratification)

Rep+,&"' !( the Ph"&"pp"#e$ .$. A'!Ge M"#"#% C!. ( 56-) Aco"e <ining re@uested the Director of 1osts to open a post office in its $ining ca$p for the benefit of its e$ployee and their fa$ilies. :n a resolution, Aco"e agreed to be directly responsible for the Jdishonesty, carelessness, or negligence of the e$ployee it assignsK. Aco"e(s e$ployee, 'anchez, was designated as the post$aster but he later disappeared with !*P of post office funds. Aco"e denied liability on the ground that the resolution was ultra viresGAFD had no authority to act on the $atter. )9,D &he co$pany is estopped fro$ denying liability on the ground that the board resolution is ultra vires. Assu$ing arguendo that the resolution is an ultra vires act, the sa$e is not void for it was approved not in contravention of law, custo$s, public order and public policy. &he ter$ ultra vires should be distinguished fro$ an illegal act for the for$er is $erely voidable which $ay be enforced while the latter is void and cannot be validated. P"r!.a#! . De &a Ra2a Stea2$h"p ( 510) 'toc%s are owned by Don de la 4a$a, his 2 daughters, and their 99s with no$inal shares. Fne of the daughters was $arried to the co$pany president, 9nrico 1irovano. .hile the business grew, the father distributed his stoc%s a$ong his 3 daughters and his wife. 0DC was also represented in the AoD because the corp had a debt to it. &o secure the debt, all assets were $ortgaged to 0DC. Debt was later converted to stoc%, such that 0DC now held 5 of 6 seats in AoD. 'uch conversion released the $ortgaged assets. 9nrico 1irovano died, so the AFD passed a resolution converting insurance proceeds on his life to stoc%s for each of his $inor children. Approved by ')s. )owever, the other ')s realized that they would actually be donating !.55 <. instead of the 5BBP they intended (since the value of the stoc%s increased), and that <rs. 1irovano would now have 2x voting power as her sisters. AFD later changed donation into cash, but would be retained by the co$pany as a loan, and the interest payable to the children, both a$ounts to be paid to the children after debt to 0DC paid, and later, when co$pany is in position to $eet obligations. <rs. 1irovano for$ally accepted the donation. AFD later approved release of so$e funds held in trust for <rs. 1irovano to buy house in 0H. ')s for$ally ratified the donation. '9C later gave opinion that donation was void bec it was beyond the scope of the corp(s powers. ')s later voted to revo%e the - . . / $age 20 o0 355

Atr"+2 .. CA (*66 ) Atriu$ <anage$ent Corporation filed with 4&C an action for collection of the 5 postdated chec%s issued by the )iGce$ent Corporation, though its signatories de ,eon, treasurer, and delas Alas, chair$an of the corporation to a certain 9& )enry, and Co, which the latter endorsed to Atriu$ for rediscounting. )9,D &he act of issuing was well within the a$bit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. An ultra vires act is distinguished fro$ illegal act, the for$er being voidable which $ay be enforced by perfor$ance, ratification, or estoppel, while the latter is void and cannot be validated. 'C however, held de ,eon negligent. NAPOCOR . 3era ( 585) 0A1FCF4 has a pier at its coal plant in Aatangas. :t did not renew its stevedoring contract at the plant, but instead, too% over the services itself. 4&C Iudge issued preli$inary in"unction against 0A1FCF4, saying that it was not e$powered by its Charter to engage in stevedoring and arrastre services. )eld Cnder its Charter, 0A1FCF4 can exercise powers as $ay be reasonably necessary to carry out its business of constructing, operating and $aintaining power plants, or which, fro$ ti$e to ti$e, $ay be declared by the Aoard to be necessary, useful, incidental or auxiliary to acco$plish said purpose. :f act is lawful, and not prohibited, and for the purpose of serving corporate ends, and reasonably contributes to the pro$otion of those ends in a substantial sense, it $ay be

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donation to the 1irovano children. )eld !) Donation was re$unerativeG for services rendered by 9nrico 1irovano. 2) Donation was already perfected. 4atified by ')s, and agreed to by 0DC, the only creditor. *) Donation is within scope of the AF:. :t is provided that corp can invest and deal with $oneys not i$$ediately re@uired, in such $anner as fro$ ti$e to ti$e $ay be deter$ined, and that corp can aid in any other $anner any person of which any obligation or in which any interest is held by this corp, or in the affairs of prosperity of which this corp has a lawful interest. Corp has given donations to 99s in the past, and to political ca$paigns. Assu$ing donation was ultra vires, donation was ratified, $a%ing the act valid and enforceable. Cltra vires act outside scope of powers granted to it by its articles of incorp. 0ot necessarily illegal, because ultra vires acts can beco$e valid by ratification and estoppel. @eneral consequences of ultra vires acts !. Fn corporation itselfGCorporation <ay be dissolved under a @uo warranto proceeding but in $ost cases, the court $erely en"oins the corporation fro$ co$$ission of the ultra vires acts (Ca$pos) GCertificate of 4egistration $ay be suspended or revo%ed by '9C 2. Fn i$$ediate partiesG 1arties to the ultra vires contract, if executory on both sides, neither party can as% for specific perfor$ance. .ill be left as they are if the contract has been fully executed on both sides. :f one party has perfor$ed his part, the contract will be enforced provided it is not illegal G Contract proceeding fro$ an ultra vires act is voidable (4epublic v. Aco"e <ining Co., -4 ,G!?B72, 2eb. 2?, !67*; > 'C4A *7!) ) *. Fn the rights of stoc%holdersG Any stoc%holder $ay bring either an individual or derivative suit to en"oin a threatened ultra vires act or contract. :f act or contract has already been perfor$ed, a derivative suit for da$ages $ay be filed against the directors, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into contracts. .hen based on tort, cannot setGup the defense of ultra vires against in"ured party who had no %nowledge that such was ultra vires <ay beco$e binding by the ratification of all stoc%holders unless third parties are pre"udiced thereby or unless the acts are illegal (1irovano v. de la 4a$a 'tea$ship Co. 67 1hil. **3; !635)

COMM #CIAL LA$

. A&&!'at"!# !( p!:er a#) '!#tr!& (Ca2p!$)
* levels of control in the corporate hierarchy !. the Aoard of Directors or &rustees responsible for corporate policies and the general $anage$ent of the business and affairs of the corporation 2. the Ffficers in theory, execute the policies laid down by the board in practice, often have wide latitude in deter$ining the course of business operations *. &he stoc%holders or $e$bers have residual power corporate changes of funda$ental

0F&9 AFD can delegate its function to the officers and also to co$$ittees appointed by it (9xecutive Co$$ittee, ! *3)

*. Wh! EAer'"$e$ C!rp!rate P!:er$
*. BOARD OF DIRECTORS %) Authority; repository of corporate powers • &he board of directors or trustees are responsible for corporate policies and general $anage$ent of the business affairs of the corporation • 4irectors have a fiduciary duty to the corp and to the '<s • @eneral *ule: once elected) '<s have no right to interfere with the 9:4 />ceptions: removal of director (!$+)) amendments of A:6 (!%")) fundamental changes (!")) declaration of stock dividends (!8#)) entering into management contracts (!88)) fi>ing of consideration of no-par shares (!"$)) and fi>ing of compensation of directors (!#5) • Cnless otherwise provided in the Corp Code, the Aoard of Directors control and exercise o the corporate powers of corporation o all business conducted, o all property of such corporation (§2*) • &he board exercises al$ost all corporate powers, lays down all business policies and is responsible for the efficiency of $anage$ent. &he stoc%holders have no right to interfere with the board(s exercise of its powers and functions except where the law expressly gives the$ the final say, li%e in cases of re$oval of a director, a$end$ent of articles of incorporation, and other $a"or changes ( 0f !") 8$) 8#). • =imitations on the 9:41s authority or powers: % Action by '<s in order to elect a 9:4

Chapter 3II CONTROL AND MANAGEMENT OF CORPORATIONS

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$ • 0ertain act of the corp that require 2oint action of the '<s and 9:4 &heir resolutions on $atters other than the exceptions are legally not effective nor binding and $ay be treated as $erely advisory or $ay be totally disregarded. (4a$irez v. Frientalist Co. et. al., *? 1hil. 7*5; !6!?); .olfson v. <anila 'toc% 9xchange, >2 1hil. 562; !65!) JCnless Ftherwise 1rovidedK + $ay pertain to instances where a $anage$ent contract is entered hence corporate powers are exercised by the $anaging co$pany and not the board Authority of 9:4 can be delegated to agents; officers; committees (A:6) statutes) by-laws) resolutions) (N. 0huck v Kong =i 3o) 8" 3hil "5+) 4elegation may be e>plicit) implicit) or based on e>igencies of the business (cf 9oard of =iquidators v Kalaw) The 9:4 may delegate its corporate powers to either an e>ecutive committee or officials or contracted managers The delegation) e>cept for the e>ecutive committee) must be for specific purposes The delegation makes the officers agents of the corporation For such officers to be deemed fully clothed by the corporation to e>ercise a power of the 9:4) the latter must specially authori?e them to do so (A9'-09- 9roadcasting 0orp v 0A) %&&&) &he directors or trustees shall not act individually nor separately but as a body in a lawful $eeting. Contracts entered into without a for$al board resolution does not bind the corporation except when $a"ority of the board has %nowledge of the contract and the contract benefited the corporation. (ratification) Directors owe their duties to corporation as a whole rather than to individual shareholders of classes of shareholders 9usiness Mudgment *ule - 'ec $# embodies the essence of the Abusiness 2udgment rule)D that unless otherwise provided in the 0ode) all corp powers and prerogatives are vested directly in the 9:4 0onsequently) the rule has two consequences: • The resolution) contracts and transactions of the 9:4) cannot be overturned or set aside by the '<s or members and not even by the courts under the principle that the business of the corp has been left to the hands of the 9:4; and • 4irectors and duly authori?ed officers cannot be held personally liable for acts or contracts done with the e>ercise of their business 2udgment />ceptions: o Ihen the 0orp 0ode e>pressly provides otherwise; o Ihen the directors or officers acted with fraud) gross negligence or in bad faith; and , $

COMM #CIAL LA$
o Ihen directors or officers act against the corp in conflict-ofinterest situation %) *equirements • Oualifying share (§2*)G 9very director $ust own at least one (!) share of the capital stoc% of the corporation of which he is a director, which share shall stand in his na$e on the boo%s of the corporation. Any director who ceases to be the owner of at least one (!) share of the capital stoc% of the corporation of which he is a director shall thereby cease to be a director. Lee .$. CA ( 55*) 'u$$ons was served upon ,ee and ,acdao, president and vice president of A,2A. &he two, however contended that they are no longer corporate officers of the corporation because of the voting trust agree$ent executed to DA1, hence, not authorized to receive su$$ons. 'u$$ons $ust be served upon DA1 )9,D 9xecution of a voting trust creates a dichoto$y between e@uitable or beneficial ownership of the corporate shares of a stoc%holder and legal title thereto. &he change fro$ the old code to the new code with respect to @ualifying shares of directors is the o$ission of the phrase Jin his own rightK pertaining to beneficial ownership of shares. :n the new corpo code, persons $ay be directors if they are stoc%holders although not Jin their own rightK hence includes trustees. &here is clear indication that to be a director, what is $aterial is legal title and not beneficial ownership. .ith the execution of the voting trust agree$ent, ,ee and ,acdao were divested of their legal title to their shares hence can no longer be directors and are no longer corporate officers. Aecause of this, they are not authorized to receive su$$ons • 4e@uire$ents#Dis@ualifications o 4esidence (§2*) G a $a"ority of the directors or trustees of all corporations organized under this Code $ust be residents of the 1hilippines o 0ationality + no re@uire$ent for citizenship of a director or trustee so even an alien $ay be elected as such excepts in business activities totally closed to aliens o Dis@ualification of directors, trustees or officers (§2>)  Convicted by final "udg$ent of an offense punishable by i$prison$ent for a period exceeding six (7) years, or  Eiolation of this Code co$$itted within five (3) years prior to the date of his election or appoint$ent  AyGlaws $ay provide for additional @ualifications#dis@ualifications as long as such additional @ualifications#dis@ualifications shall not $odify re@uire$ents as prescribed in the corporation $age 22 o0 355

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code or be in conflict with such prescribed re@uire$ents (!8,(()) -ote: To sit on the 9:4 is not a vested right :wnership of shares does not automatically equate to a seat in the 9:4 6n widely-held corporations) '/0 mandates the presence of at least $ or $5P of its board si?e) whichever is lesser) independent directors ('ecurities *egulation 0ode) !#+ and @uidelines on the -omination and /lection of 6ndependent 4irectors) 7emo 0irc -o %") $55$)

COMM #CIAL LA$
corporation $ultiplied by the whole nu$ber of directors to be elected o -ives the $inority an opportunity to elect a representative to the AFD. Cannot itself give the $inority control of corporate affairs but $ay affect and li$it the extent of $a"ority(s control o Theoretically) this allows the minority block to dominate the election of 9:4 <owever) the minority still needs the ma2ority in order to constitute a quorum o AyGlaws cannot provide against cu$ulative voting since this right is $andated in §25 (mandatory in a stock corporation E statutory right of '<s) o 6n determining how many shares are needed to vote for the desired Q of directors (necessary when one campaigns for pro>ies)) the following formula may be followed: B (outstanding shares) > (desired Q of directors) R % C ; B (total Q of directors) R % C $ Cnless otherwise provided in the AF: or in the byGlaws, $e$bers of corporations which have no capital stoc% $ay cast as $any votes as there are trustees to be elected but $ay not cast $ore than one vote for one candidate. Candidates receiving the highest nu$ber of votes shall be declared elected. Any $eeting of the stoc%holders or $e$bers called for an election $ay ad"ourn fro$ day to day or fro$ ti$e to ti$e but not sine die or indefinitely if $ 2or any reason, no election is held, or $ :f there are ')s not present or represented by proxy at the $eeting, the owners of a $a"ority of the outstanding capital stoc%, or if there be no capital stoc%, a $a"ority of the $e$ber entitled to vote. 'ince the provision re@uires presence, $eeting of stoc%holders is re@uired

o

o

&er$ Directors shall hold office for ! year. )owever, incu$bent directors shall continue to be directors#trustees until their successors have been elected and @ualified (§2*)

2) <ow elected (§25) • <anner of election o &here $ust be present in person or by representative $a"ority of the outstanding capital stoc% # $e$ber o :n any for$; or $ust be by ballot when re@uested by any voting stoc% holder or $e$ber o Eoting $ay be in person or by proxy • At all elections of directors or trustees, there $ust be present owners of a $a"ority of the outstanding capital stoc%, or if there be no capital stoc%, a $a"ority of the $e$bers entitled to vote. • 9very stoc%holder entitled to vote shall have the right to vote the nu$ber of shares of stoc% outstanding, at the ti$e fixed in the byGlaws, in his own na$e on the stoc% boo%s of the corporation, or where the byGlaws are silent, at the ti$e of the election • &i$e to deter$ine voting right o As per share standing in one(s na$e at the ti$e fixed by the AyG ,aws o .here AyGlaws silent, at ti$e of election • Cu$ulative voting + A syste$ of voting designed to increase the voting power of $inority stoc%holders in the election of corporate directors when $ore than one director is to be elected. o A stoc%holder shall have as $any votes as he has nu$ber of shares ti$es the nu$ber of directors up for election o Cu$ulative voting is allowed for election of $e$bers of the Aoard in a stoc% corporation. <e$bers of the Aoard in a 0onGstoc% Corporation shall not be voted cu$ulatively unless specifically provided for in the AyGlaws. o &he total nu$ber of votes cast by a stoc%holder shall not exceed the nu$ber of shares owned by hi$ as shown in the boo%s of the

• •

*) <ow *emoved (§2?) • Any director or trustee of a corporation $ay be re$oved fro$ office by a vote of the stoc%holders holding or representing 2#* of the outstanding capital stoc%, or if the corporation be a 0onGstoc% Corporation, by a vote of 2#* of the $e$bers entitled to vote (with or without cause). • 0ote 'uch re$oval shall ta%e place either at a regular $eeting or at a special $eeting called for the purpose of re$oval of Directors or &rustees, with previous notice of the ti$e and place of such $eeting, as well as the intention to propose such re$oval. :f the officers refuse to call a $eeting to consider the re$oval of the Director, it $ay be called at the instance of any

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stoc%holder or $e$ber, but with due notice. 4e$oval without cause $ay not be used to deprive $inority stoc%holders or $e$bers of the right of representation to which they $ay be entitled to under 'ection 25 &he board cannot re$ove a director or trustee as $e$ber of the board R!Aa$ . De&a R!$a ( 5*6) Ainalbagan 9state :nc is engaged in the $fg of raw sugar fro$ canes. 1ossessors of $a"ority of shares for$ed a voting trust co$posed of * trustees. &rustees now controlled *,BBB out of 3,3BB shares. Eoting trust was able to opposition fro$ $inority. vote AFD, without

COMM #CIAL LA$
result of an a$end$ent of the articles authorizing such increase 3) 0ompensation (§*B) • :n the absence of any provision in the AyGlaws fixing their co$pensation, the directors shall not receive any co$pensation, except for reasonable per die$s. • Any such co$pensation (other than per die$s) $ay be granted to the directors by the vote of the stoc%holders representing at least a $a"ority of the outstanding capital stoc% at a regular or special stoc%holder(s $eeting. • ,i$it :n no case shall the total yearly co$pensation of directors, as such directors, exceed !BM of the net inco$e before inco$e tax of the corporation during the preceding year. • We$ter# I#$t"t+te !( Te'h#!&!%? . Sa&a$ ( 557) :n a $eeting of the Aoard of &rustees of .estern :nstitute of &echnology, a resolution was passed granting $onthly co$pensation to officers respondents who are $e$bers of the Aoard. &he resolution is valid. &he prohibition with respect to granting co$pensation to corporate directors#trustees under 'ection *B of the Corporation Code is not violated since the co$pensation is being given to private respondents in their capacity as officers of .:& and not as board $e$bers. 7) <ow corporate powers e>ercised + Aoard $ust act as a body in a $eeting 4e@uisites of board $eetings • <eeting of the Aoard duly asse$bled • 9xistence of @uoru$ • Decision of the $a"ority of the @uoru$ duly asse$bled (9NC91&:F0 9lection of directors + re@uires a vote of $a"ority of all the $e$bers of the board) .)90S (§3*) • 4egular $eetings of directors or trustees shall be held $onthly, unless the byGlaws provide otherwise. • 'pecial $eetings of the board of directors or trustees $ay be held at any ti$e upon the call of the president or as provided in the byGlaws. .)949S (§3*) <eetings of directors or trustees of corporations $ay be held anywhere in or outside of the 1hilippines, unless the byG laws provide otherwise. .)F <AH A&&90DS &he $e$bers of the Aoard the$selves; directors in Aoard $eetings cannot be represented or voted by proxies. .)F 149':D9'S (§35)

&rustees soon wanted to re$ove the directors they had elected, even if their ter$s had not yet expired. Eoting trust caused '9C to issue notice for a special gen $tg to elect a new AFD. )eld Cnder the law, directors can only be re$oved by vote of ')s representing at least 2#* of the subscribed capital stoc% entitled to vote. .hen the purpose is to re$ove directors, it $ust be stated in call for $eeting. Aut vacancies in AFD can be filled by $ere $a"ority vote. &rust does not have clear 2#* $a"ority. Eoting trust should have stated in notice that purpose was to re$ove present AFD. <eeting called by trustees en"oined. :n this case, re$oval was sought to be done by replacing directors AC& can(t re$ove thru election of new officers bec directors have fixed ter$ of office

-ote: !$+ need not be resorted to in all instances 6f removal is for cause (mismanagement or abuse of powers) the remedy of '<s shall be: a) *eceivership; b) 6n2unction if the act has not yet been done; c) 4issolution if abuse amounts to a ground for quo warranto but 'ol @en refuses to act; d) 4erivative suit or complaint filed with the *T0; e) 0riminal action 5) Hacancies (§26) Eacancies in the Aoard of Directors or &rustees <AH be filled by a vote of at least a $a"ority of the re$aining directors or trustees; if still constituting a @uoru$ :n the following cases, the stoc%holders or $e$bers shall fill the vacancy (*/AO) a. .hen the re$aining directors or trustees do not constitute a @uoru$; b. :f the vacancy is caused by the re$oval of a director or trustee c. :f the vacancy is caused by the expiration of ter$; and d. :n case of increase in the nu$ber of directors or trustees as a

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&he president shall preside at all $eetings of the directors or trustee, unless the byG laws provide otherwise. 0F&:C9 49OC:49<90&' (§3*) • 0otice of regular or special $eetings stating the date, ti$e and place of the $eeting $ust be sent to every director or trustee at least one (!) day prior to the scheduled $eeting, unless otherwise provided by the byG laws. • A director or trustee $ay waive this re@uire$ent, either expressly or i$pliedly OCF4C< 49OC:49<90&' (§23) Cnless the articles of incorporation or the byGlaws provide for a greater $a"ority, a $a"ority of the nu$ber of directors or trustees as fixed in the articles of incorporation shall constitute a @uoru$ for the transaction of corporate business, and every decision of at least a $a"ority of the directors or trustees present at a $eeting at which there is a @uoru$ shall be valid as a corporate act, except for the election of officers which shall re@uire the vote of a $a"ority of all the $e$bers of the board. a. b.

COMM #CIAL LA$
A president, who shall be a director A treasurer who $ay or $ay not be a director ('9C opinion that the treasurer $ust be a resident and citizen of the 1hil.) c. A secretary who shall be a resident and citizen of the 1hilippines, and d. 'uch other officers as $ay be provided for in the AyGlaws Any two (2) or $ore positions $ay be held concurrently by the sa$e person, except that no one shall act as president and secretary or as president and treasurer at the sa$e ti$e. Additional qualifications of officers may be provided for in the by-laws (!8,(()) O#%4"#%'! .. NLRC ( 557) .here the AyGlaws of the condo$iniu$ corporation specifically includes the position of J'uperintendent#Ad$inistratorK in a roster of corporate officers, then such position is clearly a corporate officer position and issues of reinstate$ent would be within the "urisdiction of the '9C and not the 0,4C. Ta,a+% .. NLRC ( 557) .hen the AyGlaws of the corporation provide that one of the powers of the Aoard of &rustees is Jto appoint a <edical Director, Co$ptroller#Ad$inistration, Chief of 'ervices, and such other officers as it $ay dee$ necessary and prescribe their powers and dutiesK then such specifically designated positions should be considered Jcorporate officersK positionsV. 2. 4isqualifications (§2>) 0o person convicted by final "udg$ent of an offense punishable by i$prison$ent for a period exceeding six (7) years, or a violation of this Code co$$itted within five (3) years prior to the date of his election or appoint$ent, shall @ualify as a director, trustee or officer of any corporation. Authority of corporate officers • &he authority of corporate officers to bind the corporation is usually not considered inherent in their office but is derived fro$ law, the corporate byG laws or by delegation fro$ the AFD either expressly or i$pliedly by habit, custo$, or ac@uiescence in the general course of business • @en rule A person dealing with a corporate officer is put on in@uiry as to the scope of the latter(s authority but an innocent person cannot be pre"udiced if he had the right to presu$e under the circu$stances the authority of the acting officers.

Filipinas Port Services Inc., represented b stoc!"olders, #liodoro $. $r%& v. 'ictoriano S. (o, et al. () *o. 161886 +arc" 16, 2007 Cru23 a stoc&holder o0 the corporation3 0iled a deri4ati4e suit against the members o0 the board (uestioning the creation o0 certain positions* Cru2 thus prayed that the respondent members o0 the board o0 directors be made to pay 5ilport3 6ointly and se4erally3 the sums o0 money 4ariedly representing the damages incurred as a result o0 the creation o0 the o00ices7positions complained o0 and the aggregate amount o0 the (uestioned increased salaries* H)LD8 The board9s creation o0 the positions o0 Assistant :ice $residents 0or Corporate $lanning3 'perations3 5inance and Administration3 and those o0 the !pecial Assistants to the $resident and the Board Chairman3 ;as in accordance ;ith the regular business operations o0 5ilport as it is authori2ed to do so by the corporation9s by#la;s3 pursuant to the Corporation Code* Besides3 the determination o0 the necessity 0or additional o00ices and7or positions in a corporation is a management prerogati4e ;hich courts are not ;ont to re4ie; in the absence o0 any proo0 that such prerogati4e ;as e<ercised in bad 0aith or ;ith malice* *.* CORPORATE AGENTS
!.

#

OFFICERS

AND

Pe!p&eJ$ A"r'ar%! .$. CA ( 558) Corporate 1resident 1unsalan solicited a proposal fro$ respondent 'ano for the preparation of a feasibility study. 'ano prepared feasibility study and was paid for it. Another proposal for the preparation of operations $anual was solicited fro$ 'ano and was accepted by 1unsalan. <anual was - . . / $age 25 o0 355

7inimum set of officers and Oualification (§23) • :$$ediately after their election, the directors of a corporation $ust for$ally organize the election of , $

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prepared and approved by Co$$issioner of Aureau of Custo$s, se$inarGwor%shops conducted but pay$ent was not $ade )9,D Corporation is liable to 'ano for services rendered. -eneral rule is that absent the authority fro$ the Aoard of Directors, no person, not even its officers, can bind the corporation. )owever, acts of person in behalf of the corporation $ay be ratified. .hen corporation previously allowed 2irst Contract, it gave president apparent authority to execute in its behalf the other contract, and is estopped fro$ denying such authority. Corporation accepted operations $anual and the se$inars and have already benefited fro$ the contract. &his ratifies the act of the president and $a%es it binding upon the corporation. 1resident is presu$ed to have authority to act within the do$ain of the general ob"ectives of the corporation R+ra& Ba#4 !( M"&a!r .$. O'(e2"a (*666) .hen a ban%, by its acts and failure to act, has clearly clothed its $anager with apparent authority to sell an ac@uired asset in the nor$al course of business, it is legally obliged to confir$ the transaction by issuing a board resolution to enable the buyers to register the property in their na$es. :t has a duty to perfor$ necessary and lawful acts to enable the other parties to en"oy all benefits of the contract which it had authorized.

COMM #CIAL LA$
board, it is not sufficient to give the$ effect. 'toc%holders or $e$bers approval expressed in a $eeting duly called and held for the purpose is still necessary. 9xception • Corporations $ay be bound by unani$ous agree$ent of its stoc%holders although expressed elsewhere than at a $eeting 7) Requirements of stoc !ol"ers# or mem$ers meetin% &notice an" quorum) .)90S (§3B) 4egular $eetings of stoc%holders or $e$bers shall be held annually on a date fixed in the byGlaws, or if not so fixed, on any date in April of every year as deter$ined by the board of directors or trustees. .)949S • 'toc%holderRs or $e$berRs $eetings, whether regular or special, shall be held in the city or $unicipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation 1rovided, &hat <etro <anila shall, for purposes of this section, be considered a city or $unicipality. (§3!) • <e$bers of nonGstoc% corporations $ay provide in byGlaws that $eetings $ay be held any place even outside the place where the principal office is located provided proper notice is sent and that it is within the 1hilippines (§6*) .)F <AH A&&90D A0D EF&9S 'toc%holders $ay attend and vote in person, or by proxy. a. 1ledgors, $ortagors, executors, receivers and ad$inistrators (§33) • :n case of pledged or $ortgaged shares in stoc% corporations, the pledgor or $ortgagor shall have the right to attend and vote at $eetings of stoc%holders o C0,9'', the pledgee or $ortgagee is expressly given by the pledgor or $ortgagor such right in writing which is recorded on the appropriate corporate boo%s. • 9xecutors, ad$inistrators, receivers, and other legal representatives duly appointed by the court $ay attend and vote in behalf of the stoc%holders or $e$bers without need of any written proxy. b. Ioint owner of stoc%s (§37) &he consent of all the coGowners shall be necessary in order to vote, C 0,9'' there is a written proxy, signed by all the coGowners, authorizing one or so$e of the$ or any other person to vote such share or shares 14FE:D9D, &hat when the shares are owned in an Qand#orQ capacity by the holders thereof, any one of the "oint owners can vote said shares or appoint a proxy therefor. - . . / $age 26 o0 355

*.- BOARD COMMITTEES
('9C opinionGre@uirin all $e$bers $ust be $e$bers of the board) • &he byGlaws of a corporation $ay create an executive co$$ittee, co$posed of not less than three $e$bers of the board, to be appointed by the board. (§*3) • 'aid co$$ittee $ay act, by $a"ority vote of all its $e$bers, on such specific $atters within the co$petence of the board, as $ay be delegated to it in the byG laws or on a $a"ority vote of the board, except with respect to o Approval of any action for which shareholdersR approval is also re@uired; o &he filling of vacancies in the board; o &he a$end$ent or repeal of byGlaws or the adoption of new byGlaws; o &he a$end$ent or repeal of any resolution of the board which by its express ter$s is not so a$endable or repealable; and o A distribution of cash dividends to the shareholders. • Cannot go as far as to render the AFD powerless and free fro$ all responsibilities i$posed on it by law (Ca$pos) • <ust be provided in the byGlaws and $ust be co$posed of not less than * $e$bers of the board • 9ssential the executive co$$ittee acts by $a"ority vote of all the $e$bers

*.0 STOCMHOLDERS OR MEMBERS
'toc%holders action is needed in $a"or changes(!") in the corporation which would affect their contract with the corporation and although such action is usually initiated by the 100% UP L AW , $ B A R ' $ !

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c. &reasury shares (0f !8%) (, "+) • Definition (§6) &hese are shares of stoc% which have been issued and fully paid for but subse@uently reGac@uired by the issuing corporation by purchase, rede$ption, donation or through so$e other lawful $eans. 'uch shares $ay again be disposed of for a reasonable price fixed by the AFD. • &reasury shares shall have no voting rights as long as such shares re$ain in the &reasury. (§3>)

COMM #CIAL LA$
a $a"ority of the outstanding capital stoc% or a $a"ority of the $e$bers in the case of nonGstoc% corporations. AyGlaws $ay provide for a greater or lesser @uoru$ (!8,(#)) .here @uoru$ is present at the start of a lawful $eeting, stoc%holders present cannot without "ustifiable cause brea% the @uoru$ by wal%ing out fro$ said $eeting so as to defeat the validity of any act proposed and approved by the $a"ority (Mohnston v Mohnston) %&"( 0A decision)

• •

.)F 149':D9'S • &he president shall preside at all $eetings of of the stoc%holders or $e$bers, unless the byGlaws provide otherwise. (§ 35) • .hen there is no person authorized to call a $eeting, the '9C, upon petition of a stoc%holder or $e$ber on a showing of good cause therefor, $ay issue an order to the petitioning stoc%holder or $e$ber directing hi$ to call a $eeting of the corporation by giving proper notice re@uired by this Code or by the byGlaws. (§ 3B) • &he petitioning stoc%holder or $e$ber shall preside thereat until at least a $a"ority of the stoc%holders or $e$bers present have been chosen one of their nu$ber as presiding officer. (§3B) 0F&:C9 49OC:49<90&' (§3B) • .ritten notice of regular $eetings shall be sent to all stoc%holders or $e$bers of record at least two (2) wee%s prior to the $eeting, unless a different period is re@uired by the byG laws • .ritten notice of special $eetings shall be sent at least one (!) wee% prior to the $eeting, unless otherwise provided in the byGlaws. • 0otice of any $eeting $ay be waived, expressly or i$pliedly, by any stoc%holder or $e$ber • 2ailure to give notice would render a $eeting voidable at the instance of an absent stoc%holder, who was not notified of the $eeting (Aoard v. &an, !B3 1hil. 527(!636). • Attendance to a $eeting despite want of notice will be dee$ed i$plied waiver. (Ca$pos) • All proceedings had and any business transacted at any $eeting of the stoc%holders or $e$bers, if within the powers or authority of the corporation, shall be valid even if the $eeting be i$properly held or called, provided all the stoc%holders or $e$bers of the corporation are present or duly represented at the $eeting. (§3!) OCF4C< 49OC:49<90&' (§32) • Cnless otherwise provided for in the Code or in the byGlaws, a @uoru$ shall consist of the stoc%holders representing 100% UP L AW , $ B A R ' $ !

.)H A&&90D <99&:0-'S • To make substantial changes • To e>ercise control • To be apprised of events • To elect 9:4 • To confirm actions requiring confirmation ?) Corporate Acts Requirin% Appro'al of A(( )toc !ol"ers (including nonGvoting shares) a. A<90D<90& F2 A4&:C,9' F2 :0CF41F4A&:F0 + discussed in Chapter N:E b. 9N&90D F4 ')F4&90 CF41F4A&9 &94< + discussed in Chapter N:E c. :0C49A'9 F4 D9C49A'9 F2 CA1:&A, '&FCP + discussed in Chapter N:E d. :0CC44:0-, C49A&:0- F4 :0C49A':0AF0D9D :0D9A&9D09'' + discussed in Chapter N: e. 'A,9, ,9A'9, <F4&-A-9 F4 F&)94 D:'1F':&:F0 F2 'CA'&A0&:A,,H A,, CF41F4A&9 A''9&' + discussed in Chapter NE:: f. :0E9'&<90& F2 2C0D' :0 A0F&)94 CF41F4A&:F0 F4 AC':09'' (§52) • A private corporation $ay invest its funds in any other corporation or business or for any purpose other than the pri$ary purpose for which it was organized • Approval, voting and notice re@uire$ent !) <a"ority of the board of directors or trustees and 2) 4atified by the stoc%holders representing at least twoGthirds (2#*) of the outstanding capital stoc%, or by at least two thirds (2#*) of the $e$bers in the case of nonGstoc% corporations, at a stoc%holderRs or $e$berRs $eeting duly called for the purpose. *) .ritten notice of the proposed invest$ent and the ti$e and place of the $eeting shall be addressed to each stoc%holder or $e$ber at his place of residence as shown on the boo%s of the corporation and deposited to the addressee in - . . / $age 27 o0 355

CO#/O#ATIO" LA$
the post office with postage prepaid, or served personally Appraisal right G any dissenting stoc%holder shall have appraisal right .hen ') approval not necessaryG where the invest$ent by the corporation is reasonably necessary to acco$plish its pri$ary purpose as stated in the AF:. 4ules in case a corporation will invest its funds in another corporation $ :f it is the sa$e purpose or incidental or related to its pri$ary purpose, the board can invest the corporate fund without the consent of the stoc%holders. .hat is re@uired is only the vote of the $a"ority of the AFD. 0o appraisal right $ :f the invest$ent is in another corporation of different business or purpose, the affir$ative vote of $a"ority of the board consented by 2#* F' capital stoc% is re@uired $ Apparent conflict: !#"(,) limits corp powers to those reasonably and necessarily required 9ut !8$ implies that can invest in another business as long as there1s $;# vote 0ampos says that §52 should be sub"ect to §*7. $ Accdg to 0ampos) if articles of incorp provide that can invest in another business) only $;# vote needed :therwise) should amend articles first •

COMM #CIAL LA$
.henever any a$end$ent or new byGlaws are adopted, such a$end$ent or new byGlaws shall be attached to the original byGlaws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a $a"ority of the directors or trustees, shall be filed with the '9C the sa$e to be attached to the original articles of incorporation and original byGlaws. &he a$ended or new byGlaws shall only be effective upon the issuance by the 'ecurities and 9xchange Co$$ission of a certification that the sa$e are not inconsistent with this Code. +

• •

*. 5. 3.

<94-94 A0D CF0'F,:DA&:F0 discussed in Chapter NE::

D:''F,C&:F0 F2 &)9 CF41F4A&:F0 + discussed in Chapter NE:

Ot!er instances requirin% stoc !ol"ers# action (voting shares only) a. D9C ,A4A&:F0 F2 '&FCP D:E:D90D' + discussed in Chapter N::: <A 0A-9<90& CF0&4AC&' (§55) + any contract whereby a corporation underta%es to $anage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agree$ents or otherwise Approval and Hoting *equirement: (§55) • Approval by the board of directors, and • Approval by stoc%holders owning at least the $a"ority of the outstanding capital stoc%, or by at least a $a"ority of the $e$bers of both the $anaging and the $anaged corporation (at $eeting duly called) • 2#* vote re@uired of the $anaged corporation when $ .here a stoc%holder or stoc%holders representing the sa$e interest of both the $anaging and the $anaged corporations own or control $ore than oneGthird (!#*) of the total outstanding capital stoc% entitled to vote of the $anaging corporation; or $ .here a $a"ority of the $e$bers of the AFD of the $anaging corporation also constitute a $a"ority of the $e$bers of the AFD of the $anaged corporation Term of management contract: not longer than five years c. 0CF0':D94A&:F0 F2 2:N: 0FG1A4

b.

2.

ADF1&:F0, A<90D<90& A0D 4919A, F2 AHG,A.' (§5?) • Eoting 4e@uire$ent AFD or AF& by a $a"ority vote and the owners of at least a $a"ority of the outstanding capital stoc%, or $a"ority of the $e$bers of a nonG stoc% corporation, at a regular or special $eeting duly called for the purpose, $ay a$end or repeal any byGlaws or adopt new byGlaws • Delegation of power to a$end the AFD &he owners of twoGthirds (2#*) of the outstanding capital stoc% or twoGthirds (2#*) of the $e$bers in a nonGstoc% corporation $ay delegate to the board of directors or trustees the power to a$end or repeal any byG laws or adopt new byGlaws • 4evocation of the delegation of power to a$end Any power delegated to the board of directors or trustees to a$end or repeal any byGlaws or adopt new byGlaws shall be considered as revo%ed whenever stoc%holders owning or representing a $a"ority of the outstanding capital stoc% or a $a"ority of the $e$bers in nonG stoc% corporations, shall so vote at a regular or special $eeting , $ B A R ' $ !

100% UP L AW

- . . /

$age 28 o0 355

CO#/O#ATIO" LA$
')A49' (§72) + &he issued price of noG par value shares $ay be fixed in the AF: or by the AFD pursuant to authority conferred upon it by the AF: or the byGlaws, or in the absence thereof, by the stoc%holders at a $eeting duly called for the purpose representing at least a $a"ority of the outstanding capital stoc%. d. 2:N: 0- CF<190'A&:F0 F2 D:49C&F4' (§*B) + Any such co$pensation (other than per die$s) $ay be granted to the directors by the vote of the stoc%holders representing at least a $a"ority of the outstanding capital stoc% at a regular or special stoc%holder(s $eeting. • • •

COMM #CIAL LA$
shall pay the fair value thereof as of the day prior to the date on which the vote was ta%en, excluding any appreciation or depreciation in anticipation of such corporate action (provided that the proposed corp action is implemented or affected). :f within a period of sixty (7B) days fro$ the date the corporate action was approved by the stoc%holders, the withdrawing stoc%holder and the corporation cannot agree on the fair value of the shares, it shall be deter$ined and appraised by three (*) disinterested persons o Fne of who$ shall be na$ed by the stoc%holder, another by the corporation, and the third by the two thus chosen &he findings of the $a"ority of the appraisers shall be final &he award shall be paid by the corporation within thirty (*B) days after such award is $ade 0o pay$ent shall be $ade to any dissenting stoc%holder unless the corporation has unrestricted retained earnings in its boo%s to cover such pay$ent (0f !8%) *atio: to protect the creditors and the remaining '<s Cpon pay$ent by the corporation of the agreed or awarded price, the stoc%holder shall forthwith transfer his shares to the corporation.

6. Appraisal ri%!t Fne of the ways to get out of the corporation. :t is an exception to the trust fund doctrine. &he other way is to sell the shares of stoc%. a. Definition (§?!) &his is a re$edy available to a stoc%holder who dissented and voted against certain extraordinary $atters to withdraw or get out of the corporation by de$anding pay$ent of the value of his shares, as provided in the code. :nstances of appraisal right (§?!) a) :n case any a$end$ent to the articles of incorporation which has the effect of (cf !%") G changing or restricting the rights of any stoc%holder or class of shares, or G authorizing preferences in any respect superior to those of outstanding shares of any class, or G extending or shortening the ter$ of corporate existence (cf !#,) b) :n case of sale, lease, exchange, transfer, $ortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code (cf !85); and c) :n case of $erger or consolidation d) :n case of invest$ent of corporate funds in another corporation or business or for any other purpose (§52) .hat are the re@uire$ents for the successful exercise of appraisal rightS ('ection ?2 and ?7) • Ay $a%ing a written de$and on the corporation within thirty (*B) days after the date on which the vote was ta%en for pay$ent of the fair value of his shares o 2ailure to $a%e the de$and within such period shall be dee$ed a waiver of the appraisal right. • Ay surrendering the certificate or certificates of stoc%, the corporation , $ B A R ' $ ! - . . /

b.

d.

9ffect of de$and and ter$ination of right (§?*) 2ro$ the ti$e of de$and for pay$ent of the fair value of a stoc%holderRs shares until either (!) the abandon$ent of the corporate action involved or (2) the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended, 9NC91& the right of such stoc%holder to receive pay$ent of the fair value thereof, 14FE:D9D, if the dissenting stoc%holder is not paid the value of his shares within *B days after the award, his voting and dividend rights shall i$$ediately be restored. .hen right to pay$ent of fair value of the shares ceases (§?5) • • 0o de$and for pay$ent $ay be withdrawn unless the corporation consents thereto. :nstances when right to pay$ent ceases !) :f such de$and for pay$ent is withdrawn with the consent of the corporation 2) :f the proposed corporate action is abandoned or rescinded by the corporation *) :f the proposed corporate action disapproved by the '9C

e.

c.

100% UP L AW

$age 29 o0 355

CO#/O#ATIO" LA$
where such approval is necessary, 5) :f the '9C deter$ines that such stoc%holder is not entitled to the appraisal right :n such instances, his status as a stoc%holder shall be restored, and all dividend distributions which would have accrued on his shares shall be paid to hi$. b.

COMM #CIAL LA$
'igned by the stoc%holder or $e$ber c. 2iled before the scheduled $eeting with the corporate secretary 9y-laws can also impose additional requirements (e> 7ust be notari?ed) Cnless otherwise provided in the proxy, it shall be valid only for the $eeting for which it is intended. 0o proxy shall be valid and effective for a period longer than five (3) years at any one ti$e (continuing proxy). *ight of pro>y can be waived only for close corporations (!+&) 'enses of pro>y a. 1erson duly authorized by stoc%holder or $e$ber to vote in his behalf in a ')s( or $e$bers( $eeting. 1roxy is an agent for a special purpose thus the general rules of agency would nor$ally apply to the relationship created by proxy b. 2or$al authority given by the holder of the stoc% who has the right to vote it to another to exercise the voting rights of the for$er. :nstru$ent or docu$ent which evidences the authority of the agent. 2ailure to co$ply with re@uire$ents will render proxy void and ineffective. To what e>tent does the pro>y holder e>ercise his discretionJ />tent of authority given by the '< 1roxy is revocable even when it is expressly provided to be irrevocable unless it is coupled with an interest. &he 'upre$e Court has held that a proxy in favor of the pledge of the shares sub"ect of the proxy as sufficient interest to render such proxy irrevocable. (Ale2andrino vs 4e =eon) %&8#) 4evocation $ay be $ade orally, in writing or i$plied a. Appearance of the stoc%holder at the $eeting will ter$inate the proxy b. Death of the stoc%holder will also ter$inate the proxy

• •

f.

.ho bears costs of appraisal (§?3) • -enerally, it shall be borne by the corporation • 9xception by the '), when the fair value ascertained by the appraisers is approxi$ately the sa$e as the price which the corporation $ay have offered to pay the '), • :n the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the ') to receive pay$ent was un"ustified. 0otation on certificates; rights of transferee (§?7) • .ithin ten (!B) days after de$anding pay$ent for his shares, a dissenting ') shall sub$it the certificates of stoc% representing his shares to the corporation for notation thereon that such shares are dissenting shares. • )is failure to do so shall, at the option of the corporation, ter$inate his rights. • 9ffect of transfer of certificates bearing notation !) &he rights of the transferor as a dissenting stoc%holder shall cease; 2) &he transferee shall have all the rights of a regular stoc%holder; and *) All dividend distributions which would have accrued on such shares shall be paid to the transferee.

• •

g.

• • •

-ote: right to vote is lost only if stock becomes delinquent (!,%)

-. De."'e$ A((e't"#% C!#tr!&
-eneral 4ule 9xtent of control is proportional to the nu$ber of shares owned by the ') 9xceptions proxy device, voting trust agree$ents, pooling and voting agree$ents, cu$ulative voting, classification of shares, restriction on transfer of shares, additional @ualifications for directors, founder(s shares, $anage$ent contracts, and unusual @uoru$ and voting re@uire$ents -. PROCB (;189 cf §2*+ )ec Re%ulation Co"e) • 'toc%holders and $e$bers $ay vote in person or by proxy in all $eetings of stoc%holders or $e$bers. • 4e@uire$ents of proxies a. :n writing (oral proxies are not valid) , $

-.* 3OTING TRUST AGREEMENT(;15) • Definition An arrange$ent created by one or $ore stoc%holders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (3) years at any ti$e (Eillanueva). &he arrange$ent is e$bodied in a docu$ent called a voting trust agree$ent (E&A) • A voting trust, which is specifically re@uired as a condition in a loan agree$ent, $ay be for a period exceeding five (3) years but shall auto$atically expire upon full pay$ent of the loan • /ssence: separation of real ownership and voting rights • 4e@uire$ents of a E&A a. :n writing b. 0otarized c. 'hall specify the ter$s and conditions thereof d. Certified copy of such agree$ent shall be filed with the corporation and with the '9C o F&)94.:'9, said agree$ent is ineffective and unenforceable - . . / $age 30 o0 355

100% UP L AW

B A R ' $ !

CO#/O#ATIO" LA$
• 1rocedure &he certificate or certificates of stoc% covered by the voting trust agree$ent shall be cancelled and new ones shall be issued in the na$e of the trustee or trustees stating that they are issued pursuant to said agree$ent. b. :n the boo%s of the corporation, it shall be noted that the transfer in the na$e of the trustee or trustees is $ade pursuant to said voting trust agree$ent. c. &he trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the sa$e $anner and with the sa$e effect as certificates of stoc%. 4ight to inspect E&A &he voting trust agree$ent filed with the corporation shall be sub"ect to exa$ination by any stoc%holder in the sa$e $anner as any other corporate boo% or record. &he transferor and the trustee or trustees $ay exercise the right of inspection of all corporate boo%s and records in accordance with the provisions of this Code. Any other stoc%holder $ay transfer his shares to the sa$e trustee or trustees upon the ter$s and conditions stated in the voting trust agree$ent, and thereupon shall be bound by all the provisions of said agree$ent. 4estriction 0o E&A shall be entered into for the purpose of circu$venting the law against $onopolies and illegal co$binations in restraint of trade or used for purposes of fraud. Auto$atic expiration of rights under the E&A Cnless expressly renewed, all rights granted in a voting trust agree$ent shall auto$atically expire at the end of the agreed period. &he voting trust certificates as well as the certificates of stoc% in the na$e of the trustee or trustees shall thereby be dee$ed cancelled and new certificates of stoc% shall be reissued in the na$e of the transferors. &he voting trustee or trustees $ay vote by proxy unless the agree$ent provides otherwise. 1urpose + to $a%e possible a unified control of the affairs of the corporation and consistent policy; to $a%e possible for a $a"ority group of shareholders to dispose of a beneficial interest in a large proportion of their shares and still retain control of the corporation through the voting trustee Cnder the prevailing view, a voting trust should have a legiti$ate business purpose to pro$ote the best interests of the corporation, or even to protect the legiti$ate interests of others in the corporation (9allantine) cited in 0ampos) -o principal-agent relationship The trustee has unlimited authority The only limitation is that he should act for the benefit of the '< (fiduciary obligation) Hoting trust certificates E issued by the trustees (not the corp) These certificates confirm (%) that a trustee has been constituted) ($) the e>tent of shares) and (#) the participation of the '< in the HTA a. , $ • • •

COMM #CIAL LA$
The trustee can1t dispose of the block of shares; receive dividends 0an only vote The '< can revoke the HTA on the ground of breach of fiduciary obligations 'tatus of transferee and transferor a. Eoting trustee is only a share owner vested with apparent legal title for the sole purpose of voting upon stoc%s that he does not own b. &ransferring stoc%holder retains the right of inspection of corporate boo%s which he can exercise concurrently with the voting trustee 1owers and rights of voting trustees 4ight to vote and other rights pertaining to the shares in their na$es sub"ect to ter$s and conditions of and for the period specified in the agree$ent Eote in person or by proxy unless agree$ent provides otherwise 4ights of inspection of corporate boo%s and records ,egal title holder + @ualified to be a director &he clear intent is that in order to be eligible as director, what is $aterial is the legal title to, not the beneficial ownership of, the stoc% as a/appearing on the boo%s of a corporation. &herefore, a director who executes a voting trust agree$ent over all his shares, re$ains only a beneficial owner, and therefore is auto$atically dis@ualified fro$ his directorship. (,ee v. CA, !662) ,i$itations on voting trust agree$ents should not exceed 3 years except if a condition in a loan agree$ent, shall auto$atically expire upon full pay$ent of the loan $ust not be for purposes of circu$venting the law against $onopolies and illegal co$binations in restraint of trade $ust not be used for purposes of fraud $ust be in writing, notarized, specify the ter$s and conditions thereof certified copy $ust be filed with corporation and '9C otherwise unenforceable agree$ent is sub"ect to exa$ination by stoc%holder shall auto$atically expire at the end of the agreed period vote in person or by proxy unless agree$ent provides otherwise rights of inspection of corporate boo%s and records

• a.

b. c. d.

• a.

b.

• •

c. d. e. f. g. h. i.

• • •

4istinction between pro>y and voting trust
Le%a& t"t&e Re.!'a,"&"t?

Pr!A? 0o legal title 4evocable unless coupled with interest

3TA Ac@uires legal title :rrevocable if validly executed AC& ') can revo%e if there(s a breach of fiduciary

100% UP L AW

B A R ' $ !

- . . /

$age 31 o0 355

CO#/O#ATIO" LA$
Pr!A?
EAte#t !( p!:er

COMM #CIAL LA$
3TA obligation 0ot li$ited to any particular $eeting

Whe# t! .!te Capacit, to $e a "irector

Can only act at a specified stoc%holder(s or $e$ber(s $eeting Absence of the owner 0an1t be voted as a director) unless he is also a '< of record (owns other shares) Hoting rights Csually shorter but can(t exceed 3 years

)u$-ect .atter D+rat"!#

9ven when owner is present 0an be voted as a director 0onsidered as the '< of record in the books of the corp 'hares R voting rights Csually longer but can(t exceed 3 years except in loan agree$ents

• • •

Nat& I#.e$t2e#t L De.Jt C!rp . A@+"#! ( 588) Aat"a%, a 2ilGA$ corp, owed $oney to 10A. :ts oil $ills were also $ortgaged to other ban%s. &hey further borrowed $oney fro$ 0:DC, a wholly owned subsidiary of 10A, to pay off the $ortgages. :n return, 0:DC got preferred shares, convertible into co$$on shares. Aat"a% executed a !st $ortgage on all its properties to 10A in exchange for a credit facility etc. 0ext, a Eoting &rust Agree$ent was executed in favor of 0:DC by ')s representing 7BM of Aat"a%. 1eriod of 3 years, irrevocable. During this ti$e, all dividends to be paid to ')s. .hen Aat"a% beca$e insolvent, 10A foreclosed the $ortgaged properties. .hen Aat"a% failed to redee$, it transferred ownership to 0:DC. Aat"a% later sued 0:DC, as%ing for the turnGover of all the assets and in the alternative, as%ed for receivership. )eld T4eceiver is appointed if applicant has interest in property. Aut title of properties is now with 0:DC. TAat"a% did not i$pugn validity of the foreclosure sales. Also, no evidence that prop is in danger of loss, re$oval or $aterial in"ury if receiver not appointed. .hat was assigned to 0:DC was only power to vote shares of stoc% of Aat"a%. 'uch power includes authority to execute any agree$ent or doc necessary to express consent or assent to any $atter by ')s. Eoting trust did not provide for transfer of assets. .hat was stipulated to be returned were only certifs of stoc%. Eoting trust transfers only voting or other rights pertaining to shares or control over the stoc%. -.- POOLING AND 3OTING AGREEEMENTS • Agree$ent between 2 or $ore stoc%holders to vote their shares in the sa$e way • There must be a valuable consideration for each party • Csually relate to election of directors • 1arties often provide for arbitration in case of disagree$ent. -ote: arbitrator is not like a trustee The former has no voting rights • Ealid as long as they do not li$it the discretion of the AFD in the $anage$ent of corporate affairs or wor% any fraud 100% UP L AW , $

against stoc%holders not party to the contract. Thus) it is void if it provides that directors) once elected) should vote for certain persons as officers (7cOuade v 'toneham) $"# -N #$# (%&#8)) /G0/3T6:-: 0lose corps may provide that a HTA can interfere with discretion of the 9:4 Does not involve a transfer of stoc%s but is $erely a private agree$ent -o transfer of ownership and voting rights Agree$ents by stoc%holders in close corporations (§!BB) o Agree$ents by and a$ong stoc%holders executed before the for$ation and organization of a close corporation, signed by all stoc%holders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and a$ong such stoc%holders, if such be their intent, to the extent that such agree$ents are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agree$ents are contained, except those re@uired by this &itle to be e$bodied in said articles of incorporation. o An agree$ent between two or $ore stoc%holders, if in writing and signed by the parties thereto, $ay provide that in exercising any voting rights, the shares held by the$ shall be voted as therein provided, or as they $ay agree, or as deter$ined in accordance with a procedure agreed upon by the$. o 0o provision in any written agree$ent signed by the stoc%holders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to $a%e the$ partners a$ong the$selves. o A written agree$ent a$ong so$e or all of the stoc%holders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors 1rovided, &hat such agree$ent shall i$pose on the stoc%holders who are parties thereto the liabilities for $anagerial acts i$posed by this Code on directors. o &o the extent that the stoc%holders are actively engaged in the $anage$ent or operation of the business and affairs of a close corporation, the stoc%holders shall be held to strict fiduciary duties to each other and a$ong the$selves. 'aid stoc%holders shall be personally liable for corporate torts unless the corporation has obtained reasonably ade@uate liability insurance. TRUSTEE POOLING AND 3OTING AGREEMENTS

PROCB

B A R ' $ !

- . . /

$age 32 o0 355

CO#/O#ATIO" LA$
1rincipal agent + &rusteeG beneficiary &he only li$it to his authority $ust be for benefit of trustee (fiduciary obligation) <ust be writing notarized in and Consensual <erely an agree$ent to vote in the sa$e way

COMM #CIAL LA$
Chapter 3III DUTIES OF DIRECTORS AND CONTROLLING STOCMHOLDERS . D+t"e$ a#) L"a,"&"t"e$ !( D"re't!r$
!.! D+t"e$ I# Ge#era& 0o for$alities re@uired <erely a contract between ')s Duty Fbedience Eiolation under §*! G .illfully and %nowingly vote for or assent to patently unlawful acts of the corporation G -uilty of gross negligence or bad faith in directing the affairs of the corporation G Ac@uire any personal or pecuniary interest in conflict with their duty as such directors or trustees

1roxy can(t exceed delegated authority

<ust be in writing Copy be with sec $ust filed corp

Copy $ust be filed with '9C

Diligence

&ransfer of legal title to trustee 4egular voting rights Another person exercises voting rights only for a specific $tg (unless otherwise provided) 1roxy cannot director be Absolute voting rights, sub" only to fiduciary duty Another person exercises voting rights continuously Fwner still exercises voting rights •

,oyalty

&rustee can be director • :rrevocable, long as $isconduct fraud as no or 4evocable by consent or $utual ter$ination. :f unilateral ter$ination, liable for da$ages

4evocable at will, in any $anner 9NC if coupled with an interest <ax of yrs at ti$e 3 a

9xtent of liability Directors or trustees shall be liable "ointly and severally for all da$ages resulting therefro$ suffered by the corporation, its stoc%holders, or $e$bers and other persons 4irectors act as a body in formulating corp policies and e>ercise all powers of management <ence) they are fiduciaries of the corp 6t does not matter who elected them :nce elected) they must represent the interests of all '<s and of the corp as a whole 4irectors must act only within the corp powers 6f not) they will be liable for damages) unless they acted in @F and with due diligence

<ax of 3 yrs at a ti$e (unless coter$inus with loan)

'9C can pass on validity

!.2 Duty of diligence • .hat are re@uired and expected of directors o &o possess at least ordinary %nowledge and s%ill to enable the$ to $a%e sound business decision o &o attend directors $eetings with reasonable regularity o &o exercise reasonable care in the $anage$ent of the corporation o &o %eep the$selves sufficiently infor$ed about the general condition of the business • &he degree of care and diligence re@uired is usually that which $en pro$pted by selfG interest, generally exercise in their own affairs. :n deter$ining whether reasonable diligence has been exercised, the particular circu$stances of each case $ust be considered. &he nature of the business is an i$portant factor. 9usiness 2udgment rule -90 4C,9 Directors cannot be held liable for $ista%es or errors in the exercise of their business "udg$ent if they acted in good faith, with due care U prudence. Contracts intra vires entered into by the board of directors are binding upon the corp. U courts will not interfere.

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CO#/O#ATIO" LA$
9NC91&:F0 :f the contracts are so unconscionable U oppressive as to a$ount to a wanton destruction of the rights of the $inority. Aoard of Directors has authority to $odify the proposed ter$s of the contracts of the corporation for the purpose of $a%ing the ter$s $ore acceptable to the other contracting partiesV&he test to be applied is whether the act in @uestion is the direct and i$$ediate furtherance of the corporation(s business, fairly incidental to the express powers and reasonably necessary to their exercise. :f so, the corporation has the power to do it; otherwise not. /<ontelibano v. Aacolod <urcia <illing Co. (!672)8 Ste"#,er% .$. 3e&a$'! 'teinberg is the receiver of 'ibugay &rading. Eelasco (1res) and other directors, approved and authorized unlawful purchases of co$pany(s stoc% fro$ -anzon et al. Accdg to 'teinberg, this diverted funds supposed to be paid to creditors. -anzon et al resigned as directors before the AoD approved the purchase of stoc%s fro$ the$, worth *,*BB. At that ti$e, corp owed !*P. &he corp also declared dividends in favor of ')s, to be paid in install$ents so as Jnot to affect financial condition of the corp.K A#4(s which appeared on boo%s were worthless, because receiver could not collect the$. )9,D :f directors dispose of corp prop or pay away its $oney without authority, they will be re@uired to $a%e good the loss out of their private estates. Directors are not liable for loss to corp fro$ want of %nowledge, or for $ista%es of "udg$ent, provided they were honest and fairly within the scope of the powers and discretion confided to $gt. Aut acceptance of office of director i$plies a co$petent %nowledge of the duties assu$ed, and directors cannot excuse i$prudence bec of their ignorance or inexperience. :f they co$$it error of "udg$ent through $ere rec%lessness or want of ordinary prudence or s%ill, they $ay be held liable for conse@uences. Creditors of corp have right to assu$e that so long as there are outstanding debts and liabilities, AoD will not use assets of corp to purchase its own stoc%, and that it will not declare dividends to ')s when corp is insolvent. Directors held liable. • • • 'toc% purchases and dividends were funded out of re$aining assets. Aut assets W liabilities. -anzon et al were favored bec they were able to get $oney ahead of creditors 4ecipients of dividends can be held liable by receiver. 4atio ')s are accessories. 4e$e$ber, they were the ones who chose directors.

COMM #CIAL LA$

!.* D+t? !( &!?a&t? &he deter$ination as to whether, in a given case, the duty of loyalty has been violated has ulti$ately to be decided by the court on the case(s own $erits. &he ff. are $ore co$$on situations involving such conflict of interests a. 'elf-dealing director (§*2) • A contract of the corporation with one or $ore of its directors or trustees is voidable, at the option of such corporation, unless all the following conditions are present o &hat the presence of such director or trustee in the board $eeting in which the contract was approved was not necessary to constitute a @uoru$ for such $eeting; o &hat the vote of such director or trustee was not necessary for the approval of the contract; o &hat the contract is fair and reasonable under the circu$stances; and o &hat in case of an officer, the contract has been previously authorized by the board of directors. • .here any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract $ay be ratified by the vote of the stoc%holders representing at least twoG thirds (2#*) of the outstanding capital stoc% or of at least twoGthirds (2#*) of the $e$bers in a $eeting called for the purpose • 2ull disclosure of the adverse interest of the directors or trustees involved $ust be $ade at such $eeting provided, however, that the contract is fair and reasonable under the circu$stances • &he contract is voidable whether the corporation suffered da$ages or not • &he burden of proving fairness is on the director

Fi>ing compensation of directors and officers (§*B) • @eneral rule: 4irectors are only entitled to per diems) which are reasonable • />ception: Ihen A:6) by-laws) or an advance contract provides for compensation • Assuming compensation is intended) only '<s can fi> the amount 6n fact) the '<s should approve the granting of compensation because this entails a reduction of the amount that could be distributed to them as dividends '<1s resolution to grant compensation can only refer to future services ( Aarreto v ,a 1revisora 2ilipina (!6*2)) •

b.

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CO#/O#ATIO" LA$
We$ter# I#$t"t+te !( Te'h#!&!%? .. Sa&a$ ( 557) &he position of being chair$an and EiceGChair$an, li%e that of treasurer and secretary, are not considered directorship positions but officership positions that would entitle the occupants to co$pensation. ,i%ewise, the li$itation placed under 'ect. *B of the Corporation Code that directors cannot receive co$pensation exceeding !BM of the net inco$e of the corporation would not apply to the co$pensation given to such positions since it is being given in their capacity as officers of the corporation and not a board $e$bers. Barret! . La Pre."$!ra F"&"p"#a ( 5-*) Aarreto, et al. are directors of ,a 1revisora 2ilipina, a $utual building and loan assoc. AyGlaws provide co$pensation of !M of profits to each director. Co$pensation to apply retroactively. )eld AyGlaws do not create a legal obl to pay life gratuity or pension out of its net profits XL beyond powers of $utual bldg and loan assoc. Corp ,aw authorizes co$pensation only for future services, and cannot authorize continuous co$pensation to particular directors after their e$ploy$ent has ter$inated for past services rendered gratuitously by the$ to the corp. Auilding and loan associations are founded on strict $utuality and e@uality of benefits and obligations. Any contract or byGlaw in contravention of a statute is ultra vires and void. &here is an i$plied contract with $e$bers that it shall not divert funds or powers to purposes other than for which it was created. All $e$bers $ust participate e@ually in profits and bear losses. Any diversion of funds to unauthorized purposes violates principle of $utuality between $e$bers. Also, there was no valid consideration bec the past services were rendered gratuitously. c. 6nterlocking directors (§**) • A contract between two or $ore corporations having interloc%ing directors shall not be invalidated on that ground alone, except cases of fraud. • &he contract is fair and reasonable under the circu$stances. • :f the interest of the interloc%ing director in one corporation is substantial and his interest in the other corporation or corporations is $erely no$inal, he shall be sub"ect to the provisions of the preceding section (§*2) insofar as the latter corporation or corporations are concerned. • 'toc%holdings exceeding twenty (2BM) percent of the outstanding capital stoc% shall be considered substantial for purposes of interloc%ing directors. • 4e@uisites of a valid contract between the corporation and one or $ore of its directors, trustees or officers (§*2) 1. &hat the presence of such director or trustee in the Aoard $eeting in which the contract was approved

COMM #CIAL LA$
was not necessary to constitute a @uoru$ for such $eeting &hat the vote of such director or trustee was not necessary for the approval of the contract &hat the contract is fair and reasonable under the circu$stances &hat in case of an officer, the contract with the officer has been previously authorized by the Aoard of Directors

2.

3. 4.

d.

'ei?ing corporate opportunity; 4isloyalty (§*5) • .here a director, by virtue of his office, ac@uires for hi$self a business opportunity which should belong to the corporation, thereby obtaining profits to the pre"udice of such corporation, he $ust account to the latter for all such profits by refunding the sa$e (§*5) C0,9'' his act has been ratified by a vote of the stoc%holders owning or representing at least twoGthirds (2#*) of the outstanding capital stoc%. $ <ence) a ma2ority '< can actually compete with the corporation if he owns $;# of the :0' $ &his provision shall be applicable, notwithstanding the fact that the director ris%ed his own funds in the venture. $ *equires pre2udice 6f there1s no pre2udice to the corporation) the director or officer can still be held liable under !#% $ !#8 covers only directors <owever) according to 0ampos) officers can be held liable under !#% ($nd par ) SA.hen a director, trustee or officer atte$pts to ac@uire or ac@uires, in violation of his duty, any interest adverse to the corporation in respect of any $atter which has been reposed in hi$ in confidence, as to which e@uity i$poses a liability upon hi$ to deal in his own behalf, he shall be liable as a trustee for the corporation and $ust account for the profits which otherwise would have accrued to the corporation.K • &he last paragraph of 'ection *! and 'ection *5 contain the doctrine of corporate opportunity. :n case of such conflict of interests, and the director acts against the good of the corporation, he shall be accountable for the profits he obtained, even if he had ris%ed his own funds. • 0orporate right ) opportunity or e>pectancy arises only when: (a) directors were negotiating on behalf of the corporation; (b) the corporation was in need of the particular business opportunity to the knowledge of the directors) or (c) the business opportunity was sei?ed and developed at the e>pense and with the facilities of the corporation (=itwin v Allen) .sing inside information (0f !# +) $# $) $,) "%) ,% $) 'ecurities *egulation 0ode)

e

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CO#/O#ATIO" LA$ •
&he fiduciary position of insiders *, directors, and officers prohibits the$ fro$ using confidential infor$ation relating to the business of the corporation to benefit the$selves or any co$petitor corporation in which they $ay have a $ere substantial interest. &he liability of a director or officer guilty of using inside infor$ation is to the corporation and not to any individual stoc%holder 'ince loss and pre"udice to the corporation is not a re@uire$ent for liability, the corporation has a cause of action as long as there is unfair use of inside infor$ation :t is inside infor$ation if it is not generally available to others and is ac@uired because of the close relationship of the director or officer of the corporation -eneral rule (<a"ority view) Directors owe no fiduciary duty to stoc%holders but they $ay deal with the$ at ar$(s length. 0o duty to disclose facts %nown to the director or officer )pecial facts "octrine &)tron% ' Repi"e+ /0*0) + Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circu$stances o facts are present which $a%e it ine@uitable for the director to withhold infor$ation fro$ the stoc%holder, the duty to disclose arises and conceal$ent is fraud.

COMM #CIAL LA$
corporate treasury or otherwise i$properly benefit the$selves. :t is fraudulent for a stoc%holder to buy fro$ another stoc%holder without disclosing his identity 1rincipal stoc%holders are li%ewise prohibited fro$ using inside infor$ation in the purchase and sale of e@uity security

• •

0. Re2e)"e$ !( $t!'4h!&)er "# 'a$e !( 2"$2a#a%e2e#t !r a,+$e !( p!:er$
• • • • 4eceivership :n"unction if the act has not been done Dissolution if the abuse a$ounts to a ground for @uo warranto but the 'olicitr -eneral refuses to act Derivative suit a co$plaint filed with the 4&C U"'h"'!9 et a&. .$. NLRC ( 557) &he petitioners, who are officers and directors of Crispa, :nc., assailed the decision of the 0,4C holding the$ solidarily liable with Crispa for the pay$ent of separation pay and bac%wages to the private respondents. :t was the contention of the petitioners that the award of separation pay and bac%wages is a corporate obligation and $ust therefore be assu$ed by Crispa alone. )9,D .hile the general rule is that obligations incurred by a corporation, acting through its directors, officers and e$ployees, are its sole liabilities, there are ti$es when solidary liabilities $ay be incurred such as in this case where it is undisputed that petitioners had a direct hand in the illegal dis$issal of respondent e$ployees. &hey were the ones, who as highGran%ing officers and directors of Crispa, signed he Aoard resolution retrenching the private respondents on the feigned ground of serious business losses that had no basis apart fro$ an unsigned and unaudited profit and loss state$ent which had no evidentiary value whatsoever. &his is indicative of bad faith on the part of petitioners for which they can be held "ointly and severally liable with Crispa for all the $oney clai$s of the illegally ter$inated respondent e$ployees. Tra2at Mer'a#t"&e9 I#'. .$. CA ( 550) 1ersonal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation $ay so validly attach, as a rule, only when $ )e assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in da$ages to the corporation, its stoc%holders or other persons; $ )e consents to the issuance of watered stoc%s or who, having %nowledge thereof, does not forthwith file with the corporate secretary his written ob"ection thereto; $ )e agrees to hold hi$self personally and soidarily liable with the corporation; or $ )e is $ade, by a specific provision of law, to personally answer for his corporate

*. D+t"e$ a#) L"a,"&"t"e$ !( O(("'er$
&he provisions on seizing corporate opportunity and disloyalty (§*!Y! and §*5) shall also apply to corporate officers -ote: 7embers of the 9:4 who are also officers are held to a more stringent liability because they are in-charge of day-to-day activities (0ampos)

-. D+t? !( '!#tr!&&"#% "#tere$t
• A $a"ority stoc%holder is sub"ect to the duty of good faith when he acts by voting at a stoc%holders( $eeting with respect to a $atter in which he has a personal interest Controlling stoc%holders $ay dispose of their shares at any ti$e and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are %nown as intending to raid the

3

4I% i&er5 /e#% 6 '#+ the i uer7 '2+ # &irect$r $r $88icer '$r 9er $% 9er8$r/i%! i/i"#r 8u%cti$% + $8, $r # 9er $% c$%tr$""i%! the i uer7 'c+ # 9er $% 1h$ e re"#ti$% hi9 $r 8$r/er re"#ti$% hi9 t$ the i uer !i:e $r !#:e hi/ #cce t$ /#teri#" i%8$r/#ti$% #2$ut the i uer $r the ecurit0 th#t i %$t !e%er#""0 #:#i"#2"e t$ the 9u2"ic7 '&+ # !$:er%/e%t e/9"$0ee, $r &irect$r, $r $88icer $8 #% e;ch#%!e, c"e#ri%! #!e%c0 #%&<$r e"8-re!u"#t$r0 $r!#%i=#ti$% 1h$ h# #cce t$ /#teri#" i%8$r/#ti$% #2$ut #% i uer $r # ecurit0 th#t i %$t !e%er#""0 #:#i"#2"e t$ the 9u2"ic7 $r 'e+ # 9er $% 1h$ "e#r% uch i%8$r/#ti$% 20 # c$//u%ic#ti$% 8r$/ #%0 $8 the 8$re!$i%! i% i&er '>3.(, Sec Re!u"#ti$% C$&e+ 100% UP L AW , $

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CO#/O#ATIO" LA$
action 4eiterated in Atriu$ <anage$ent Corp. v. CA, 2BB! $

COMM #CIAL LA$
A stoc% corporation is not precluded fro$ perfor$ing or $a%ing transfer of its own stoc%s, in which case all the rules and regulations i$posed on stoc% transfer agents, except the pay$ent of a license fee herein provided, shall be applicable.

Chapter IC THE RIGHT OF INSPECTION . Ba$"$ !( r"%ht
4eason of the law for granting stoc%holders the right to inspect the records of the corporation As the beneficial owners of the business, the stoc%holders have the right to %now !. 2. &he financial condition of the corporation; and )ow the corporate affairs are being $anaged by their elected directors.

1C41F'9 'o that if they find the conditions unsatisfactory, they $ay be able to ta%e necessary $easures to protect their invest$ent. &he right of inspection is !. 3reventive + to a li$ited extent $ay serve as a deterrent to an illGintentioned $anage$ent to %now that its acts $ay be scrutinized *emedial + a dissatisfied stoc%holder $ay resort to the right of inspection as a preli$inary step to see%ing $ore direct re$edies against abuses co$$itted by $anage$ent (removal of directors or a derivative suit).

2inancial state$ents (§>3) $ .ithin ten (!B) days fro$ receipt of a written re@uest of any stoc%holder or $e$ber, the corporation shall furnish to hi$ its $ost recent financial state$ent, which shall include a balance sheet as of the end of the last taxable year and a profit or loss state$ent for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations $ At the regular $eeting of stoc%holders or $e$bers, the AFD or AF& shall present to such stoc%holders or $e$bers a financial report of the operations of the corporation for the preceding year, which shall include financial state$ents, duly signed and certified by an independent certified public accountant. $ )owever, if the paidGup capital of the corporation is less than 13B,BBB.BB, the financial state$ents $ay be certified under oath by the treasurer or any responsible officer of the corporation.

T!rre$ et a& . CA ( 557) :t is the corporate secretaryRs duty and obligation to register valid transfers of stoc%s and if said corporate officer refuses to co$ply, the transferorG stoc%holder $ay rightfully bring suit to co$pel perfor$ance.

2.

The right of inspection goes hand-in-hand with the right to vote Through the former) the '< can gather information on how to vote

-. EAte#t !( a#) &"2"tat"!#$ !# r"%ht
-. L"2"tat"!#$ a$ t! t"2e a#) p&a'e a. Fnly at reasonable hours on business days  AyGlaws cannot li$it inspection to $erely a few days during the year chosen by the directors /1ardo vs. )ercules ,u$ber$, !6258  AyGlaws cannot provide that the inspection shall only be upon authority of the 1resident of the corporation previously obtained in each case (Eeraguth v. :sabela 'ugar Co., !6*2)  )owever, inspection should be $ade in such a $anner as not to i$pede the efficient operations of the corporation (Duff v. <utual Arewing Co., 0H,I, Fct. *, !?62)  9y-laws can adopt policies with respect to right to inspect (!8,(%5)-'uch other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs)

*. What re'!r)$ '!.ere)D re'!r)$ re@+"re) t! ,e 4ept ,? '!rp!rat"!# (§>5)
• • • • Aoo%s that record all business transactions of the corporation which shall include contract, $e$oranda, "ournals, ledgers, etc; <inute boo% for $eetings of the ')s#$e$bers; <inute boo% for $eetings of the board#trustees; 'toc% and transfer boo%.

7inutes of meetings without the signature of the corporate secretary have no probative value (-AT. v 'ec of =abor) %&+%) Ihat is a stock transfer agentJ $ A stoc% transfer agent is one engaged principally in the business of registering transfers of stoc%s in behalf of a stoc% corporation. 0o stoc% transfer agent shall be allowed to operate in the 1hilippines unless he secures a license fro$ the '9C and pays a fee as $ay be fixed by the Co$$ission, which shall be renewable annually

b. :nspection shall be done in the place where the corporation %eep all its records, which, as en"oined by law, is in the principal office

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CO#/O#ATIO" LA$
 'toc%holder cannot de$and that he be allowed to ta%e the corporate boo%s outs of the corporation(s principal office for the purpose of inspecting the$ (Eeraguth, 'upra)

COMM #CIAL LA$
<owever) the '< of the parent corp can look at the books of the latter with respect to its investments to the subsidiary :f they are practically one and the sa$e in so far as $anage$ent and control is concerned, and inspection is de$anded because of gross $is$anage$ent of subsidiary by the parent(s directors who are also directors of subsidiary, who are also directors of the subsidiary, then the latter will be treated as a $ere agent or instru$entality of the respondent parent corporation and the latter $ay be co$pelled to open the subsidiary(s boo%s to its stoc%holders (-o%ongwei v. '9C, 'upra)

o

-.* L"2"tat"!# a$ t! p+rp!$e :s the stoc%holder(s purpose $aterialS + H9'. &here is however a presu$ption that his purpose is a proper one and the corporation cannot refuse to grant hi$ the right on its $ere belief that his $otive is i$proper.  Ftherwise, such refusal $ay open its guilty officers or directors to liability for da$ages, C0,9'' they can successfully prove in their defense o that the stoc%holder was not acting in good faith o that he i$properly used the infor$ation obtained in the past o that he used the infor$ation for an illegiti$ate purpose G!#/a&e$ .. PNB ( 58-) 'ection >5 of the Corporation Code has been interpreted by the 'upre$e Court as no longer allowing the un@ualified right of inspection of stoc%holder of corporate records and that the person $a%ing the de$and has to show that he is acting in good faith and for a legiti$ate purpose. Aurden of proving that the purpose is i$proper or illegal is on corporation and its officers.  @ood purposes: to investigate acts of management; to investigate financial conditions; fi> value of shares; mailing list for pro>ies; information for litigation  -ot good and honest purposes: obtain corporate secrets (e g ) formula); nuisance suit; to embarrass the company &9'& to deter$ine whether the purpose as proved by the corporation or as ad$itted by the stoc%holder is a legiti$ate one or notS + A legiti$ate purpose is one which is ger$ane to the interests of the stoc%holder as such and not contrary to the interests of the corporation (-o%ongwei v. '9C, !6>6). 

1. Re2e)"e$ a.a"&a,&e "( "#$pe't"!# re(+$e)
• <anda$us o &he writ should be directed against the corporation, but the secretary thereof $ay be "oined as party defendant since he is custo$arily charged with the custody of all corporate records and is presu$ably the parson against who$ the order of the court will be $ade affective in case $anda$us is granted. o And even the president of the corp. $ay be $ade respondent if necessary to the effectuation of the court(s order (1hilpotts v. 1hil. <anufacturing Co., !6!6) :n"unction Action for da$ages + any officer or agent of the corporation who shall refuse to allow any director, trustees, stoc%holder or $e$ber of the corporation to exa$ine and copy excerpts fro$ its records or $inutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stoc%holder or $e$ber for da$ages 2ile an action to i$pose a penal offense by fine and#or i$prison$ent o Any officer or agent of the corporation who shall refuse to allow any director, trustees, stoc%holder or $e$ber of the corporation to exa$ine and copy excerpts fro$ its records or $inutes, in accordance with the provisions of this Code x x x and in addition, shall be guilty of an offense which shall be punishable under 'ection !55 of the Corporation Code o :f such refusal is $ade pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be i$posed upon the directors or trustees who voted for such refusal o :t shall be a defense to any action that the person de$anding to exa$ine and copy has i$properly used any infor$ation secured through any prior exa$ination of the records, or is not acting in good faith or for a legiti$ate purpose in $a%ing his de$and (§>5, par *) o :ther valid grounds for denying access to books or records: immediately prior to the annual '<s1 meeting; holder of books is unavailable; the books are being audited; on-going inventory count;

• •

0. Wh! 2a? eAer'"$e r"%ht
• Director, trustee, stoc%holder, $e$ber, personally or through an agent o The right to inspect corporate books may be done with the assistance of technical men (e g ) lawyers and accountants) and it may be delegated The right includes the right to copy or to take notes (I @ 3hilpotts v 3hililppine 7fg 0o ) %&%&) &he transferor of shares and the voting trustee, in accordance with 'ection 36 'toc%holders of a parent corporation with respect to subsidiary o :f two are legally separate and independent entity, no right of inspection. , $ B A R ' $ !

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CO#/O#ATIO" LA$
computeri?ation; moving out or change of business address 3.

COMM #CIAL LA$
the lifeti$e of the ') (Denison v. Aerderger, !65!) Any benefit recovered by the stoc%holder or $e$ber as a result of bringing the derivative suit, whether by final "udg$ent, by "udicial co$pro$ise or by extraG"udicial settle$ent, $ust be accounted for to the corporation, who is the real party in interest :f the suit is successful, the plaintiff is entitled to rei$burse$ent fro$ the corporation for the reasonable expenses of litigation, including attorney(s fees B"t!#% . CA ( 558) :n the absence of a special authority fro$ the board of directors to institute a derivative suit for and in its behalf, the $anaging officer is dis@ualified by law to sue in her own na$e. &he power to sue and be sued in any court by a corporation even as a stoc%holder is lodged in the AFD that exercises its corporate powers and not in the president or officer thereof. Aut where corporate directors are guilty of a breach of trust, not of $ere error of "udg$ent or abuse of discretion, and intraGcorporate re$edy is futile or useless, a ') $ay institute a derivative suit in behalf of hi$self and other ')s and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stoc%holders.

Chapter C DERI3ATI3E SUITS . Nat+re a#) De("#"t"!# !( a Der".at".e S+"t
De("#"t"!# 4erivative suit + suits of stoc%holders based on wrongful or fraudulent acts of directors or other persons Nat+re $+"t$ • • • a#) ,a$"$F)"$t"#%+"$h (r!2 !ther

?.

:0D:E:DCA, suit if wrong done is personal to ') C,A'' suit if wrong done is to a group of ') D94:EA&:E9 suit if wrong done is to the corporation itself $ :n a derivative suit, the cause of action belongs to the corporation and not the stoc%holders but since the directors who are charged with $is$anage$ent are the ones who will be sued or $ay not be willing to sue, then the corporation is left without redress, hence, ') is given the right to sue on behalf of the corporation

*. Re@+"re2e#t$ re&at"#% t! )er".at".e $+"t
1. &he stoc%holder or $e$ber bringing the suit $ust have exhausted his re$edies within the corporation (Angeles v. 'antos, !6*>) ( e> <e has made a demand on the directors or trustees and they have failed or refused to act on such demand -ote: demand is not necessary if it will be futile) &he stoc%holder or $e$ber $ust have been one at the ti$e the transaction or act co$plained of too% place, or in the case of a stoc%holder, the shares $ust have devolved upon hi$ since by operation of law, unless such transaction or act continues and is in"urious to the stoc%holder (1ascual v. Frozco, !6!!) Aonafide ownership by stoc%holder of stoc% in his own right suffices to invest hi$ with standing to bring a derivative action for the benefit of the corporation. &he nu$ber of shares owned by the ') is i$$aterial since he is not suing in his own behalf or for the protection or vindication of his own particular right or the redress of a wrong co$$itted against hi$ individually but in behalf and for the benefit of the corp. ('an <iguel Corp. v. Phan, !6?6) )eirs of a ') can bring a derivative suit provided that the transaction too% place during

L"2 .$. L"2=B+ (*66 ) &he suit of respondent cannot be characterized as derivative, because she was co$plaining only of the violation of her pree$ptive right under 'ection *6 of the Corporation Code. 'he was $erely praying that she be allowed to subscribe to the additional issuances of stoc%s in proportion to her shareholdings to enable her to preserve her percentage of ownership in the corporation. 'he was therefore not acting for the benefit of the corporation. Ouite the contrary, she was suing on her own behalf, out of a desire to protect and preserve her pree$ptive rights F"&"p"#a$ P!rt Ser."'e$ I#'.9 repre$e#te) ,? $t!'4h!&)er$9 E&"!)!r! C. Cr+/ .. 3"'t!r"a#! S. G!9 et a&. GR N!. 6 886 Mar'h 69 *667 Cruz, a stoc%holder of the corporation, filed a derivative suit against the $e$bers of the board @uestioning the creation of certain positions. Cruz thus prayed that the respondent $e$bers of the board of directors be $ade to pay 2ilport, "ointly and severally, the su$s of $oney variedly representing the da$ages incurred as a result of the creation of the offices#positions co$plained of and the aggregate a$ount of the @uestioned increased salaries. &he 4&C found in his favor initially but the CA later dis$issed the derivative suit. )9,D & his is a valid derivative suit instituted by Cruz. the action below is principally for da$ages resulting fro$ alleged $is$anage$ent of the affairs of 2ilport by its directors#officers, it being alleged that the acts of $is$anage$ent are detri$ental to the interests of 2ilport. &hus, the in"ury co$plained of pri$arily pertains to the - . . / $age 39 o0 355

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corporation so that the suit for relief should be by the corporation. Aesides, the re@uisites before a derivative suit can be filed by a stoc%holder are present in this case, to wit a) the party bringing suit should be a shareholder as of the ti$e of the act or transaction co$plained of, the nu$ber of his shares not being $aterial; b) he has tried to exhaust intraGcorporate re$edies, i.e., has $ade a de$and on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) the cause of action actually devolves on the corporation, the wrongdoing or har$ having been, or being caused to the corporation and not to the particular stoc%holder bringing the suit. -. Re@+"re2e#t$ +#)er the I#ter"2 R+&e$ !( Pr!'e)+re (!r I#tra=C!rp!rate C!#tr!.er$"e$ (R+&e 8) % $ <e was a stockholder or member at the time the acts or transactions sub2ect of the action occurred and the time the action was filed; <e e>erted all reasonable efforts) and alleges the same with particularity in the complaint) to e>haust all remedies available under the A:6) by-laws) laws or rules governing the corporation or partnership to obtain the relief he desires -o appraisal rights are available for the act(s) complained of; and The suit is not a nuisance or harassment suit • •

COMM #CIAL LA$
&here shall always be a class#series of shares which have a CF<1,9&9 EF&:04:-)&' 9AC) ')A49 ')A,, A9 9OCA, :0 A,, 49'19C&' &F 9E94H F&)94 ')A49, except as otherwise provided in the AF: and as stated in the certificate of stoc% C!22!# • A stoc%holder, owner of at least one co$$on share, has the following rights o right to vote at $eetings o right to dividends o right to exa$ine corporate boo%s • <ost co$$only issued • 9ntitles owner to e@ual proGrata division of profits after preference

*.

# 8

4erivative suits are within the 2urisdiction of the *T0 (!( $) 'ecurities *egulation 0ode)

Chapter CI FINANCING THE CORPORATION9 CAPITAL STRUCTURE

. S!+r'e$ !( F"#a#'"#%
* $ain sources !. Contributions by stoc%holders (9@uity) 2. ,oans or advances fro$ creditors (Aorrrowing) *. 1rofits that the business $ay earn

*. C&a$$"("'at"!# !( Share$ (§7)
• • • 'hares of stoc% of stoc% corporations $ay be divided into classes or series of shares or both 9ach class or series of shares $ay have rights, privileges, restrictions, stated in the AF: 0o share $ay be deprived of voting rights, except o 1referred or o 4edee$able shares, o unless otherwise provided by the Code

*.* Pre(erre) • 'toc%s which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of li@uidation or such other preferences as $ay be stated in the AF: which are not violative of the Corporation Code. (§7) • ,i$itations on preferred shares $ 1referred shares can only be issued with par value $ 1referred shares $ust be a. 'tated in the Articles of :ncorporation and in the certificate of stoc% or b. <ay be fixed by the AFD where authorized by the AF:, provided such ter$s and conditions shall be effective upon filing of a certificate thereof with the '9C. • 9ntitles holder to so$e preferences in dividends, distribution of assets upon li@uidation or both $ preference as to dividends + dividends are payable only when profits are earned and as a general rule, even if there are existing profits, AFD has discretion to declare dividends or not a. 1articipating + after getting their fixed dividend preference ahead of C', they share with the C' the rest of the dividends C0,9'' expressly provided, they are nonGparticipating b. Cu$ulative + dividends in arrears accrue, $ust be paid first before co$$on stoc% dividends are paid. c. 0on cu$ulative + contract $a%es dividends depend upon existence of profits for the year $ as to voting rights + usually does not have voting rights; but unless clearly withheld, 1' would have right to vote -ote: even if deprived of voting rights) 3' holders are entitled to vote on the matters enumerated under !" $ preference upon li@uidation + in the absence of provision, participate pro rata with co$$on stoc% $ not a creditor; there(s no assurance that you will get bac% invest$ents but if the corporation profits, you participate in the profits - . . / $age 40 o0 355

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COMM #CIAL LA$
unrestricted retained earnings in the boo%s of the corporation and upon such ter$s and conditions stated in the AF: and in the certificate of stoc% (§?) *edemption is repurchase) a reacquisition of stock by a corporation which issued the stock in e>change for property) whether or not the acquired stock is cancelled) retired or held in the treasury /ssentially) the corporation gets back some of its stock) distributes cash or property to the shareholder in payment for the stock) and continues in business as before The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends (06* v 0A) %&&&) Ihile redeemable shares may be redeemed regardless of the e>istence of unrestricted retained earnings) this is sub2ect to the condition that the corporation has) after such redemption) assets in its books to cover debts and liabilities inclusive of capital stock *edemption) therefore) may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature (*epublic 3lanters 9ank v Agana) %&&,)

*.- Par .a&+e • &hese are shares with a stated value set out in the AF:. &his re$ains the sa$e regardless of the profitability of the corporation. &his gives rise to financial stability and is the reason why ban%s, trust corporations, insurance co$panies and building and loan associations $ust always be organized with par value shares. • Fne in the certificate of stoc% of which appears an a$ount in pesos as the no$inal value of the shares • Can(t be issued at less than par value. :therwise) it would become a watered stock (!"() discussed in 0hapter G66) • 1ar value is $ini$u$ issue price of such share in the AF: which $ust be stated in the certificate *.0 N!=par .a&+e • &hese are shares without a stated value. &he Corporation upon their issuance will set their value, which shall not be less than 13. • 'hall be dee$ed fully paid and nonG assessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto (§7) • 9ntire consideration received by the corporation for its noGpar value shares shall be treated as capital and shall not be available for distribution as dividends (:bid) • Cannot be issued as 1referred 'hares (:bid) • AF: $ust state the fact that corp issues noGpar shares and the nu$ber of shares • &hree ways of deter$ining value of no par value shares (§72) o Ay $a"ority vote of the outstanding shares (issued shares) in a $eeting called for the purpose o Ay AFD pursuant to authority conferred upon it by the AF: o Ay a$end$ent of the AF: • Corporations which cannot issue noGpar value shares (§7) o Aan%s o :nsurance Co$panies o &rust Co$panies o Auilding and ,oan Associations o 1ublic utilities *.1 F!+#)erN$ (;7) • &hose shares, classified as such in the AF:, which are given certain rights and privileges not en"oyed by the owners of other stoc%s. (§>) • .here exclusive right to vote and be voted for in the election of directors is granted, such right $ust be for a li$ited period not to exceed 3 years sub"ect to approval by '9C. 3 year period shall co$$ence fro$ date of approval by '9C. (:bid) *.6 Re)ee2a,&e • &hose shares, expressly so provided in the AF:, which $ay be purchased or ta%en up by the corporation upon the expiration of a fixed period regardless of the existence of 100% UP L AW , $ B A R ' $ !

*.7 Trea$+r? • &hese are shares of stoc% which have been issued and fully paid for, but subse@uently reGac@uired by the issuing corporation by purchase, rede$ption, donation or through so$e other lawful $eans. 'uch shares $ay again be disposed of for a reasonable price fixed by the AFD. (§6) • -ote: delinquent stocks) which are stocks that have not been fully paid) may become treasury stocks upon bid of the corporation in absence of other bidders (!"+) • <ay be sold at less than par, regarded as corporate property • :n this $anner, stoc%s can be retired gradually, even those which aren(t redee$able • 0o li$it as to how $any shares can be retired *.8 C!#.ert",&e A type of preferred stoc% that the holder can exchange for a predeter$ined nu$ber of the corporation(s co$$on shares at a specified ti$e *.5 N!#=.!t"#% $hare$ (;6) • 'hares which have, generally, no voting rights; except in the following circu$stances o A$end$ent of the AF: o Adoption and a$end$ent of byGlaws o 'ale, lease, exchange, other disposition of all or substantially all of the corporate property o :ncurring, creating or increasing bonded indebtedness o :ncrease or decrease of capital stoc% o <erger and consolidation $age 41 o0 355

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CO#/O#ATIO" LA$
o o :nvest$ent of corporate funds another corporation or business Dissolution of the corporation in />ception: (!"")

COMM #CIAL LA$
if required by the by-laws

C,A''9' F2 ')A49' A. 0oGpar Co$$on 1ar 'ingle par value

<ultiple par value A. ,i@uidation
Cu$ulative#nonGcu$ulative

1referred Dividends
1articipating#nonG participating

-.* Pre="#'!rp!rat"!# $+,$'r"pt"!# (;6 ) • 1reGincorporation subscription is a subscription for shares of stoc% of a corporation still to be for$ed. • :t shall be irrevocable for a period of at least six (7) $onths fro$ the date of subscription. • :t can only be revo%ed, when o when all of the other subscribers consent to the revocation, or o when the incorporation of the corporation fails to $aterialize within six (7) $onths or within a longer period as $y be stipulated in the contract of subscription. • After the sub$ission of the AF: to the '9C, no preGincorporation subscription $ay be revo%ed.

C.

4edee$able

0. Pre=e2pt".e R"%ht t! Share$ &Cf §10+ /*2)
0. De("#"t"!# !( pre2empti'e ri%!ts + option privilege of an existing stoc%holder to subscribe to a proportionate part of shares subse@uently issued by the corp before the sa$e can be disposed of in favor of the others; includes all issues and disposition of shares of any class • All stoc%holders of a stoc% corporation shall en"oy preGe$ptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the AF: or an a$end$ent thereto • &his is to prevent dilution in shareholding • :ncludes not only new shares in pursuance of an increase of capital stoc% but would cover the issue of previously unissued shares which for$ part of the existing capital stoc% as well as treasury shares • .here the shares are issued in exchange for property needed for corporate purposes or for debt previously granted, ') cannot de$and his preGe$ptive right for right $ay pre"udice corporate interest (§*6) 0.* L"2"tat"!# t! eAer'"$e !( pre=e2pt".e r"%ht (;-5)< a. 'uch preGe$ptive right shall not extend to shares to be issued in co$pliance with laws re@uiring stoc% offerings or $ini$u$ stoc% ownership by the public; b. 0ot extend to shares to be issued in good faith with the approval of the stoc%holders representing twoGthirds (2#*) of the outstanding capital stoc%, in exchange for property needed for corporate purposes or in pay$ent of a previously contracted debt c. 'hall not ta%e effect if denied in the AF: or an a$end$ent thereto. 0.- Re2e)"e$ "# 'a$e !( +#:arra#te) )e#"a&< a. :n"unction b. <anda$us • in any case, the suit should be individual and not derivative because the - . . / $age 42 o0 355

.ith floating coupon rate D. Convertibles 9. Co$bo of AZCZD 2. 2ounder(s shares -. &reasury 'hares

.ith guaranteed coupon rate

-. Nat+re !( S+,$'r"pt"!# C!#tra't

-.

S+,$'r"pt"!# C!#tra't • Any contract for the ac@uisition of unissued stoc% in an existing or a corporation still to be for$ed shall be dee$ed a subscription contract, notwithstanding the fact that the parties $ay refer to it as a purchase or so$e other contract. (§7B) &ransfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of fully paid shares by a stoc%holder to a third person is a sale. Aut it see$s that assign$ent by a subscriber of his unpaid subscription would re@uire that the re@uisites for valid release fro$ subscription $ust be co$plied with 'hareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of co$pensation or setGoff has no application 0ot necessarily re@uired to be in writing :nce subscription contract is perfected) '< becomes the debtor of the corporation <e is liable to pay any unpaid portion of the subscription <e can also be made personally liable to the creditors of the corporation to the e>tent of his unpaid subscription @eneral *ule: '< is not liable to pay interest on his unpaid subscription

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wrong done is to the stoc%holders individually '9C can cancel shares if the third party is not innocent
CA1:&A, CF0&4:AC&:F0' (<oney Z 1roprietary rights) Z ,FA0 ACCF<<FDA&:F0'

COMM #CIAL LA$
Chapter CII CONSIDERATION FOR ISSUANCE OF SHARES . F!r2 !( '!#$")erat"!# (;6*)
• • 'toc%s shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stoc% $ay be any or a co$bination of any two or $ore of the following a) Actual cash paid to the corporation; b) 1roperty, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation e@ual to the par or issued value of the stoc% issued o Ealuation of consideration other than actual cash, or consists of intangible property such as patents of copyrights + initially be deter$ined by the incorporators or the board of directors, sub"ect to approval by the '9C. o -ote: 3roperty should not be encumbered :therwise) it would impair the consideration c) ,abor perfor$ed for or services actually rendered to the corporation (must be capable of being valuated); d) 1reviously incurred indebtedness of the corporation; e) A$ounts transferred fro$ unrestricted retained earnings to stated capital (declaration of stock dividends); and f) Futstanding shares exchanged for stoc%s in the event of reclassification or conversion. 1rohibited consideration 'hares of stoc% shall not be issued in exchange for pro$issory notes or future service (because reali?ation is uncertain) Future service may be used as consideration provided that certificates of stock will be issued only after the performance of such services 'a$e consideration applies for the issuance of bonds by the corporation. 2ixing of issued price of noGpar value shares &he issued price of noGpar value shares $ay be fixed a) in the AF: or b) by the AFD pursuant to authority conferred upon it by the AF: or the byGlaws, or c) in the absence thereof, by the ')s representing at least a $a"ority of the outstanding capital stoc% at a $eeting duly called for the purpose. &he value of the consideration received $ust be e@ual to the issue price of the shares of stoc%s which in no case shall be less than par

c.

CF41F4A&:F0

A #
14F194&H#A''9&'

,:AA:,:&H

Fbligation to pay • • • 1rincipal Z :nterest 'ecurity :nterest over 1roperty and Assets 1references visG[Gvis ') A # •

• • • 9OC:&H :0&949'& ('hares of 'toc%, :nchoate 4ights) 4eturn of 9@uity :nterest • • • Dividends 1roceeds realized fro$ sale of shares ,i@uidity dividends •

*. L"a,"&"t? !# :atere) $t!'4$
CF0&4F, 9CF0 A9092:&' C,A'':2:CA&:F0 F2 ')A49'

Iatered stock + shares issued as fully paidGup when in fact the consideration agreed to and accepted by the directors of the corporation was so$ething %nown to be $uch less than the par value or issued value of the shares.

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CO#/O#ATIO" LA$
.ater in stoc% refers to the difference between the fair $ar%et value at the ti$e of the issuance and the par or issued value of said stoc%. 'ubse@uent increase in the value of the property used in paying the stoc% does not do away with the water in the stoc%. &he existence of such water is deter$ined at the ti$e of issuance of the stoc%. • /vils: deprives corp of needed capital; dilutes proportionate interest of e>isting and future '<; in2ures present and future creditors because it reduces value of corp assets Any director or officer of a corporation consenting to the issuance of stoc%s or who, having %nowledge thereof, does not forthwith express his ob"ection in writing and file the sa$e with the corporate secretary (§73) o for a consideration less than its par or issued value or o for a consideration in any for$ other than cash, valued in excess of its fair value, shall be solidarily liable with the stoc%holder concerned to the corporation and its creditors for the difference between the fair value received at the ti$e of issuance of the stoc% and the par or issued value of the sa$e.

COMM #CIAL LA$
by registered $ail. At this point, there is no need for publication. :f the stoc%holder does not pay the a$ount on the date designated in the notice, the Aoard shall issue, by resolution, a Qnotice of delin@uency.Q 0otice of delin@uency shall be served on the nonGpaying subscriber either personally or by registered $ail, 1,C' publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a wee% for two (2) consecutive wee%s. &he notice shall state the a$ount due on each subscription plus accrued interest, and the date, ti$e and place of the sale which shall not be less than *B days nor $ore than 7B days fro$ the date the stoc%s beco$e delin@uent. &he a$ount due in the notice $ust include all expenses publication, legal, etc. o 0ote the notices are "urisdictional. :n the public auction, the highest bidder is one who is willing to pay the balance of the subscription for the least nu$ber of shares. &he corporation will give the highest bidder the certificate of stoc% in the nu$ber of his bid; the re$aining nu$ber will be issued a certificate of stoc% in favor of the subscriber as fully paid. :f there are no bidders, the corporation $ust bid for the whole nu$ber of shares regardless of how $uch the ') has paid. 'uch stoc%s will pertain to the corporation as fully paid treasury stoc%s.

-. H!: Pa?2e#t !( Share$ E#(!r'e)
-. a. De&"#@+e#'? $a&e <o w do shares become delinquent (§7>) • 1ay$ent of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be $ade on the date specified in the contract of subscription or on the date stated in the call $ade by the board. • 2ailure to pay on such date shall render the entire balance due and payable and shall $a%e the stoc%holder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the byGlaws, co$puted fro$ such date until full pay$ent. • :f within thirty (*B) days fro$ the said date no pay$ent is $ade, all stoc%s covered by said subscription shall thereupon beco$e delin@uent and shall be sub"ect to sale as hereinafter provided, unless the AFD orders otherwise. • Despite the fact that the subscription is partially paid, the entire subscription beco$es delin@uent • 'ubscriber is not barred fro$ paying the balance plus the expenses incurred by the corp before the date of the delin@uency sale (§7?). 3rocedure for delinquency sale (§7?) • &he AFD $ust $a%e a call by resolution de$anding the pay$ent of the balance of the subscription (Qnotice of callQ). • &he notice of call shall be served on each stoc%holder either personally or

c Ihen sale may be questioned (§76) • 0o action to recover delin@uent stoc% sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delin@uent stoc%, unless the party see%ing to $aintain such action first pays or tenders to the party holding the stoc% the su$ for which the sa$e was sold, with interest fro$ the date of sale at the legal rate; and 0o such action shall be $aintained unless it is co$$enced by the filing of a co$plaint within six (7) $onths fro$ the date of sale.

:ssuance of Certificate + Fnce full pay$ent for the stoc%s have been tendered to the corporation in any of the valid for$s of consideration for the issuance of stoc%s, the purchaser or the subscribers entitled to be issued the corresponding certificate of stoc% which evidences their ownership of shares in a particular corporation (§75) Ap!'a)a . NLRC

b.

Apocada was e$ployed in :ntans 1hil wherein he subscribed to !3BB shares. )e subse@uently resigned and instituted a co$plaint with 0,4C against corporation for pay$ent of unpaid wages, CF,A, balance of gasoline and representation - . . / $age 44 o0 355

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expenses, bonus. Corporation applied what is due to Apocada the balance of his unpaid subscription. )9,D 'etGoff is not proper. Cnpaid subscriptions are not yet due and payable. &hey beco$e due and payable when a call is $ade by the corporation. &here is no such call yet. 'etGoff against wages is not valid under labor code. -.* C!+rt A't"!# (;76) -en. 4ule A valid call is a prere@uisite to liability where court action is the re$edy chosen (Da 'ilva v. Aboitiz, !62*). 9xceptions !. the subscription contract specifies a date of pay$ent -* the corp. has beco$e insolvent  all unpaid subscriptions are i$$ediately recoverable in a court action by the assignee in insolvency /Eelasco vs. 1oizat, !6!?8 As a defense to a court action, the ') $ay contend that the subscription was induced by fraudulent $isrepresentation, provided he is not barred by ratification, or guilty of laches. 'toc%holders cannot escape liability on their unpaid subscription on the ground that these were induced by an unfulfilled co$$it$ent of the 1resident of the 1hil. that the 1hil. govern$ent would invest 16.BB for every peso subscribed (10A v. Aitulo% 'aw$ill :nc., !67?)
• •

COMM #CIAL LA$
'ubscribers for stoc% shall pay to the corporation :0&949'& on all unpaid subscriptions fro$ the date of subscription, if so re@uired by, and at the rate of interest fixed in the byGlaws. :f no rate of interest is fixed in the byGlaws, such rate shall be dee$ed to be the legal rate. (§77) @eneral rule: unpaid subscriptions can not be charged with interest />ception: when required by the by-laws 0o certificate of stoc% shall be issued to a subscriber until the full a$ount of his subscription, together with the interest and expenses (in case of delin@uent shares) if any is due, has been paid. (§75) 0o shares of stoc% against which the corporation holds any unpaid clai$ shall be transferable in the boo%s of the corporation (§7*). Attributes of a subscription contract: unconditional (obligation to pay must not be sub2ect to any contingencies) and indivisible (as to the amount and transferabilitySFua 0un v 'ummers) %&$#)

6. I$$+a#'e !( Cert"("'ate
A certificate of stoc% is the best evidence of the rights and status of a ') (although not a condition precedent to the ac@uisition of such rights), and is convenient for the purposes of transfer (Ca$pos). Contents of a certificate certifies that the person na$ed is a holder or owner of a stated nu$ber of shares %ind of shares issued date of issuance par value, if par value shares signed by the proper officer of the corp. (usually the pres., and the sec.) bears the corporate seal

0. E((e't !( De&"#@+e#'?
a) Any cash dividends due on delin@uent stoc% shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stoc% dividends shall be withheld fro$ the delin@uent stoc%holder until his unpaid subscription is fully paid. (§5*) b) 0o delin@uent stoc% shall be o voted for or o be entitled to vote or to o representation at any stoc%holderRs $eeting, o nor shall the holder thereof be entitled to any of the rights of a stoc%holder (§>!)  9xcept the right to dividends in accordance with the provisions of this Code,  until and unless he pays the a$ount due on his subscription with accrued interest, and the costs and expenses of advertise$ent, if any.  0ote that the provision on dividends pertain to delin@uent stoc% hence a call $ust have been $ade  'toc% dividends on delin@uent shares are not applied but are included in delin@uency sale wherein it is li@uidated

-

FverGissue of shares occurs when certificates are issued for $ore than the nu$ber of shares authorized by the articles. Any share certificate w#c represents an overGissue would be void. 0o rights or liabilities can arise therefro$ in favor or against the holders and bona fide purchasers would have the right to da$ages for $isrepresentation against the corp. but can(t ac@uire the rights of stoc%holders. @eneral rule: entire subscription must be paid first before the certificates of stock can be issued 3artial payments are to be applied pro rata to each share of stock subscribed (-ava v 3eers 7ktg 0orp and Fua 0un v 'ummers)

/>ception: in the 9alta?ar v =ingayen @ulf /lectric 3ower 0o case) it was the practice of the corp to issue certificates of stock to its individual '<s for unpaid shares of stock and to give full voting power to shares fully paid

1. R"%ht$ a#) O,&"%at"!#$ !( H!&)er$ !( U#pa") B+t N!#=De&"#@+e#t St!'4

7. L!$t !r De$tr!?e) Cert"("'ate (§>*)
3rocedure for re-issuance in case of loss) stolen or destroyed certificates: !. &he registered owner of certificates of stoc% or his legal representative shall file with the - . . / $age 45 o0 355

)olders of subscribed shares not fully paid which are not delin@uent shall have A,, the rights of a stoc%holder. (§>2)

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corporation an affidvit setting forth as far as possible a) the circu$stances as to how the certificates were lost, stolen or destroyed; b) the nu$ber of shares represented by each certificate, the serial nu$bers of the certificates; c) the na$e of the corp which issued the sa$e; d) such other infor$ation and evidence which he $ay dee$ necessary. 2. &he corp shall publish a notice in a newspaper of general circulation published in the place where the corp has its principal office, once a wee% for * consecutive wee%s at the expense of the owner of the certificate of stoc%, which has been lost, stolen or destroyed. *. After the expiration of one (!) year fro$ the date of the last publication and if no contest has been presented, the corp shall cancel in its boo%s the certificate of stoc% and issue in lieu thereof new certificates of stoc%. &he right to $a%e such contest shall be barred after the expiration of the oneGyear period. 5. 9ven before the one year period expires, the new certificates $ay be issued if the registered owner files a bond or other security, running for a period of one (!) year for a su$ and in such for$ and with such sureties as $ay be satisfactory to the AFD. 1rovided, that if there is a pending contest regarding the ownership of said certificates, the issuance of new certificates shall be suspended until the final decision of the court regarding the ownership of the certificate of stoc%. o 0ote 9xcept in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action $ay be brought against the corp which shall have issued certificates of stoc% in lieu of those lost, stolen or destroyed pursuant to the above procedure. $

COMM #CIAL LA$
there $ust be unissued shares of the corporation. 6f there are none) there must be an increase in capital stock first) which requires an amendment of the A:6 $ there $ust be unrestricted retained earnings $ cannot be issued to nonG stoc%holders even for services rendered (0ielson v. ,epanto Consolidated <ines, !67?) .- PROPERTB + Although the corp. $ay have a big a$ount of earnings available for dividends, they $ay not all be in cash.

*. S!+r'e !( D".")e#)$ (;0-)
JCnrestricted retained earningsK (C49) (definition by the '9C) the undistributed earnings of the corp. w#c have not been allocated for any $anagerial, contractual or legal purposes and which are free for distribution to the ')s as dividends.  &he only fund out of w#c dividends can be legally paid.  'hould there be any capital deficit, subse@uent profits, if any, during succeeding periods $ust ! st be applied to cover the deficit, and only the profits re$aining after eli$inating the deficit, can be considered as C49. 4ividends can not be declared out of increase in valuation of e>isting assets This is sub2ect to fluctuation and is not yet reali?ed

-. De'&arat"!# !( D".")e#)$
-. H!: D".")e#)$ are )e'&are)

Chapter CIII DI3IDENDS AND PURCHASE OF CORPORATION OF ITS OWN SHARES . F!r2 !( D".")e#)$ (;0-)
. CASH + $ost co$$on for$. .* STOCM + a distribution to the stoc%holders of the co$pany(s own stoc%. &he corporate profits are transferred to capital stoc% and shares of stoc% representing the increase in capitalization are distributed. These do not represent income on the part of the '< 6nvestment and proportional interest in the corp remain the same L"#'!&# Ph"&. L"(e . CA ( 558) 'toc% dividends are in the nature of shares of stoc%, the consideration for which is the a$ount of unrestricted retained earnings converted into e@uity in the corporation(s boo%s. JA stoc% dividend of a corporation is a dividend paid in shares of stoc% instead of cash, and is properly only out of surplus profits. 'o, a stoc% dividend is actually two things (!) a dividend and (2) the enforced use of the dividend $oney to purchase additional shares of stoc% at par.K

Approval U voting re@uire$ent a) Approval of AFD b) :n case of stoc% dividend $ust be approved by ')s representing not less than twoGthirds (2#*) of the outstanding capital stoc% at a regular or special $eeting duly called for the purpose. -.* D".")e#) De'&arat"!# D"$'ret"!#ar? :"th the B!ar) -en. 4ule .F0 there should be a distribution of dividends to the ')s in any given year U the for$ of such dividends are $atters addressed to the business "udg$ent of the AFD 9xceptions !. .hen the decision is tainted w# bad faith, fraud or gross negligence 2. :f the court finds, upon co$plaint of a '), that a surplus was unreasonably accu$ulated (profits accu$ulated in excess of !BBM of the corp(s paidGin capital stoc%), it $ay order the corp. to distribute dividends />ceptions to the e>ception (§5*): a. when "ustified by definite corporate expansion pro"ects or progra$s approved by the board of directors; or b. when the corporation is prohibited under any loan agree$ent with any financial institution or creditor, whether local or foreign, fro$ declaring dividends without its#his consent, and such consent has not yet been secured; or

,i$itation on the issue of stoc% dividends , $

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c. when it can be clearly shown that such retention is necessary under special circu$stances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

COMM #CIAL LA$
a) &o eli$inate fractional shares arising out of stoc% dividends; b) &o collect or co$pro$ise an indebtedness to the corporation, arising out of unpaid subscription, in a delin@uency sale, and to purchase delin@uent shares sold during said sale; and c) &o pay dissenting or withdrawing stoc%holders entitled to pay$ent for their shares under the provisions of this Code (appraisal right, Cf §?!). • 6mproper purpose includes: raising of price of stock by making it appear that it is being actively traded (prohibited under 'ec $8 of the 'ecurities *egulations 0ode) and preferring some '<s to the pre2udice of other '<s and creditors (may be viewed as early liquidation of the investment of some of the '<s) • *emedies in case of improper purchase: a) Creditors pre"udiced by the repurchase can go after the selling ')s to recover what was paid to the$ b) Directors who were negligent or in A2 for approving the repurchase can also be held personally responsible c) 1re"udiced ') can also go after AFD who approved purchase (when their dividends are reduced, re$aining assets can(t cover debts, etc) • A corporation $ust have unrestricted retained earnings in ac@uiring own shares except a) shares are ac@uired in the rede$ption of redee$able shares (§?) b) shares are reGac@uired to effect a decrease in capital stoc% approved by the '9C (§*?) shares are reac@uired by a close corporation pursuant to the order of the '9C acting to arbitrate a deadloc% (§!B5)

-.- Whe# R"%ht t! D".")e#)$ 3e$t$ • @eneral rule as soon as the sa$e have been lawfully declared by the AFD, beco$es a debt owing to the '). 0o revocation can be $ade />ceptions $ not yet announced or co$$unicated to the public, revocable before announce$ent to ')s $ when stoc% dividends are declared since these are not distributions but $erely represent changes in the capital structure, $ay be revo%ed prior to actual issuance 4ights of transferee to dividends + 4ight to dividends vests upon declaration so whoever owns the stoc% at ti$e or stoc%holders of record also owns the dividend. 'ubse@uent transfer of stoc% would not carry with it right to dividends .-=/'' agreed upon by the parties

-.0 L"a,"&"t? (!r I&&e%a& D".")e#)$ Directors not personally liable  if unintentionally declare illegal dividends, such as when the directors, in declaring dividends rely on financial state$ents prepared by a dishonest 99 who$ they had no reason to suspect rely on advice of legal counsel that certain proceeds or profits are available for dividends Directors liable under §*!  if found negligent or in bad faith to the (!) corp; or (2) its creditors, if insolvent

0. P+r'ha$e ,? the C!rp!rat"!# !( "t$ O:# Share$ (§5!)
• A stoc% corporation shall have the power to purchase or ac@uire its own shares for a legiti$ate corporate purpose or purposes (treasury shares) provided, that the corporation has unrestricted retained earnings in its boo%s to cover the shares to be purchased or ac@uired Treasury shares are shares of stocks which have been issued and fully paid for) but subsequently reacquired by the issuing corporation by purchase) redemption) donation or through some other lawful means (§6) Treasury shares have no voting rights as long as such shares remain in the treasury (§3>) 7ay be issued as property dividends provided that the retained earnings has not been subsequently impaired by losses ATrust Fund doctrineD + the re@uire$ent of unrestricted retained earnings is because subscription to the capital of a corporation constitute a fund to which creditors have a right to loo% for the satisfaction of their clai$s (1hil. &rust Co. v. 4ivera, !62*) ,egiti$ate purpose includes , $

Chapter CI3 AMENDMENTS OF CHARTER . A2e#)2e#t !( the Art"'&e$ !( I#'!rp!rat"!#9 Ge#era&&?

• • •

!.! 1rocedure for a$end$ent of articles of incorporation (§!7) a) &he a$end$ent $ust be for a legiti$ate purpose; and $ust be approved by a $a"ority vote of the Aoard; and vote (in a $eeting) or $ere written assent (no $eeting) of 2#* of the - . . / $age 47 o0 355

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outstanding stoc%, or in case of a nonGstoc% corporation, by the $e$bers of the corporation. • Fnce the a$end$ent is approved, dissenting stoc%holders $ay exercise their rights of appraisal if it involved di$inishing of substantial rights previously granted or creating a new set of shares with priority rights. b) &he original and a$ended articles together shall contain all provisions re@uired by law to be set out in the articles of incorporation. 'uch articles, as a$ended shall be indicated by underscoring the change or changes $ade c) A copy thereof duly certified under oath by the corporate secretary and a $a"ority of the directors or trustees stating the fact that said a$end$ent or a$end$ents have been duly approved by the re@uired vote of the stoc%holders or $e$bers, shall be sub$itted to the 'ecurities and 9xchange Co$$ission. d) &he a$end$ent of the Articles of :ncorporation will be effective only upon approval of the '9C; but should no action be ta%en by the '9C within 7 $onths fro$ the date of filing, then auto$atically, the a$end$ent is dee$ed effective, provided that delay is not attributable to the corporation.

COMM #CIAL LA$
chair$an and the secretary of the stoc%holdersR $eeting, setting forth a) &hat the re@uire$ents of voting and notice have been co$plied with; b) &he a$ount of the increase or di$inution of the capital stoc%; c) :f an increase of the capital stoc%, the a$ount of capital stoc% or nu$ber of shares of noGpar stoc% thereof actually subscribed, the na$es, nationalities and residences of the persons subscribing, the a$ount of capital stoc% or nu$ber of noGpar stoc% subscribed by each, and the a$ount paid by each on his subscription in cash or property, or the a$ount of capital stoc% or nu$ber of shares of noGpar stoc% allotted to each stoc%Gholder if such increase is for the purpose of $a%ing effective stoc% dividend therefor authorized; d) &he a$ount of stoc% represented at the $eeting; and e) &he vote authorizing the increase or di$inution of the capital stoc% Fne of the duplicate certificates shall be %ept on file in the office of the corporation and the other shall be filed with the 'ecurities and 9xchange Co$$ission and attached to the original articles of incorporation.

!.2 -rounds for disapproving a$end$ent (§!>) • • &he '9C $ay disapprove any a$end$ent thereto if the sa$e is not in co$pliance with the re@uire$ents of this Code &he '9C shall give the incorporators a reasonable ti$e within which to correct or $odify the ob"ectionable portions of the articles or a$end$ent. &he following are grounds for such disapproval a) A$end$ent is not substantially with the for$ prescribed b) 1urpose or purposes is#are patently unconstitutional, illegal, i$$oral, contrary to govern$ent rules and regulations c) &reasurer(s Affidavit concerning the a$ount of capital stoc% subscribed and#or paid is false d) 1ercentage re@uire$ent of ownership by 2ilipino citizens as re@uired by the Constitution not co$plied with

Approval of '/0 • Any increase or decrease in the capital shall re@uire prior approval of the 'ecurities and 9xchange Co$$ission. • Decrease of capital stoc% 0o decrease of the capital stoc% shall be approved by the Co$$ission if its effect shall pre"udice the rights of corporate creditors /ffectivity 2ro$ and after approval by the 'ecurities and 9xchange Co$$ission and the issuance by the Co$$ission of its certificate of filing, the capital stoc% shall stand increased or decreased Treasurer1s Affidavit: &he 'ecurities and 9xchange Co$$ission shall not accept for filing any certificate of increase of capital stoc% unless acco$panied by the sworn state$ent of the treasurer of the corporation lawfully holding office at the ti$e of the filing of the certificate, showing that at least twentyGfive (23M) percent of such increased capital stoc% (should be understood as proposed increaseGCa$pos) has been subscribed and that at least twentyGfive (23M) percent of the a$ount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is e@ual to twentyGfive (23M) percent of the subscription Appraisal right (§?!Y!) Appraisal right $ay be exercised where the increase in capital stoc% results in the creation of shares with preferences superior to those of existing ones.

*. Spe'"a& A2e#)2e#t$
*. I#'rea$e !r )e'rea$e !( 'ap"ta& $t!'4 (;-8) Approval and Hoting *equirement a) Approved by a $a"ority vote of the board of directors b) &woGthirds (2#*) of the outstanding capital stoc% shall favor the increase or di$inution of the capital stoc% at a $eeting duly called for the purpose 0ertificate of Filing • A certificate in duplicate $ust be signed by a $a"ority of the directors of the corporation and countersigned by the

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-ote: 3roposing amendments is a way of easing out the minority stockholders because it compels them to e>ercise their appraisal rights *.* Re)+'t"!# !( 'ap"t a& $t!'4 Although the re@uire$ents in 'ection *? have been $et, no reduction of capital stoc% will be approved by the '9C if it will pre"udice the rights of corporate creditors. &here can be no reduction of capital stoc% which will in effect release the stoc%holders fro$ the pay$ent of the balance of their subscription if it will adversely affect the right of he creditors in collecting their clai$s (3hil Trust 0o vs *ivera (%&$#) Appraisal 4ight=Although 'ection *? does not grant the appraisal right in case of reduction of capital stoc%, when it has the effect of altering the rights of any stoc%holder or class of stoc%holders, the appraisal right $ay be exercised under section ?! (!) (Ca$pos) 9xcept by decrease of capital stoc% and as otherwise allowed by this Coded, no corporation shall distribute any of he assets or property except upon lawful dissolution and after pay$ent of all its debts and liabilities. (§!22) o Ca$pos=:t see$s that under the exception, a reduction surplus $ay be distributed as dividends to the stoc%holders, as long as '9C approval has been obtained and the rights of creditors is not pre"udiced. b)

COMM #CIAL LA$
indorsed by the owner or his attorneyGinGfact or other person legally authorized to $a%e the transfer R+ra& Ba#4 !( Sa&"#a$ . CA Cle$ente, 1resident of 4ural Aan% of 'alinas and owner of shares in said corporation executed a 'pecial 1ower of Attorney to his wife <elania giving her full power to sell or otherwise dispose of shares of stoc% of the Aan%. Aefore death of Cle$ente, <elania, pursuant to said '1A, executed deed of Assign$ent of for$er(s shares. After death of Cle$ente, <elania presented to ban% deed of assign$ent for registration which the ban% refused. <anda$us filed by <elania to co$pel ban% to register the transfer. )9,D &ransfer before death valid, stoc% not yet part of estate. 'hares of stoc% are personal property and $ay be transferred by delivery. 4egistration in corporate boo%s is not necessary. &he transfer effected in this case is valid. &he corporation $ay not i$pose any restriction on such transfer. &he right of transferee#assignee to have stoc%s transferred to his na$e is inherent right, duty of the corporation to register the transfer is $inisterial. R+ra& Ba#4 !( L"pa .. CA (*66 ) 2or the valid transfer of stoc%s, there $ust be strict co$pliance with the $ode of transfer prescribed by law, which are a) there $ust be delivery of the stoc% certificate; b) the certificate $ust be endorsed by the owner or his attorneyGinGfact or other persons legally authorized to $a%e the transfer; and c) to be valid against third parties, the transfer $ust be recorded in the boo%s of the corporation. Ra/!# . IAC Chudian was issued !,3BB shares at 9 4azon :nc with the corresponding stoc% certificate no *. 'aid stoc% certificates were delivered to 9nri@ue 4azon allegedly because it was the latter who paid for all the subscription on the shares of stoc% in defendant corporation with the understanding that has was the owner of said shares of stoc% and was to have possession until such ti$e as he was paid by other no$inal incorporators#stoc%holders. ,ater on, parties delivered it for deposit with ban% under the "oint custody of the parties. Ad$inistrator of the estate of Chudian filed a co$plaint against 9nri@ue 4azon et al praying that the said stoc% certificates be delivered to estate of Chudian along with all cash and stoc% dividends and preGe$ptive rights accruing thereto. )9,D Chudian is still owner a) 'hares of stoc% is transferred by delivery and endorse$ent of the stoc% certificate b) 'uch $ode of transfer is not co$plied with in this case c) :n the boo%s of the corporation, Chudian is still the owner of the stoc%s. )e was even elected $e$ber of the board which proves that he is a stoc%holder d) Fne who clai$s ownership should show that the sa$e was transferred to hi$ in accord with the valid $ode of transfer.

-

-

-

*.- Cha#%e "# '!rp!rate ter2 (;-7) Approval and Hoting *equirement a) Approved by a $a"ority vote of the board of directors or trustees and b) 4atified at a $eeting by the stoc%holders representing at least twoGthirds (2#*) of the outstanding capital stoc% or by at least twoGthirds (2#*) of the $e$bers in case of nonGstoc% corporations. 0onflict in the availability of appraisal right H9' only for extension of corporate ter$ (§*>) H9' for both shortening and extension (§?!)

Chapter C3 TRANSFER OF SHARES 1. Ma##er !( Tra#$(er

a#)

E((e't"."t?

.* I#)!r$e2e#t a#) )e&".er? 'hares of stoc% $ay be transferred as follows (§7*) a) delivery of the certificate or certificates and

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&his petitioner failed to show 9ndorse$ent is a $andatory re@uire$ent of law for an effective transfer Ta# . SEC ( 55*) Alfonso &an is owner of 5BB shares in Eisayan 9ducational 'upply Corp evidenced by certificate 0o. 2. Alfonso transferred 3B shares to Angel. Certificate 0o. 2 was cancelled and Certificate 0o. 7 was issued to Angel and Certificate 0o. ? was issued to Alfonso. )owever, Alfonso did not $a%e the proper endorse$ent and did not $a%e delivery of certificate no. 2. ,ater on, Alfonso &an elected to withdraw fro$ the corporation. :n exchange for his shares, he received stoc%s in trade. Certificate 0o. ? was later on cancelled due to above. After several years, Alfonso &an filed a case with Cebu '9C @uestioning the cancellation of his stoc% certificates despite nonGendorse$ent and lac% of delivery )9,D Delivery and endorse$ent under 'ection 7* of the corporation code is not $andatory because of the use of the word $ay. Delivery is not essential where it appears that the persons sought to be held as stoc%holders are officers of the corporation and have custody of the stoc% boo% as in this case. &o hold that cancellation of certificate of stoc% of Alfonso is null and void because of lac% of delivery and endorse$ent of $other certificate of stoc% no. 2 which was deliberately withheld is to prescribe restrictions on the transfer of stoc% in violation of corporation law .* Re%"$trat"!# • 1urpose of registration #+ enable the transferee to exercise all the rights of a stoc%holder 2+ to infor$ the corporation of any change in share ownership so that it can ascertain the persons (a) entitled to the rights (b) sub"ect to the liabilities of a ') c+ until registration is acco$plished, the transfer, though valid between the parties, cannot be effective against the corporation • 9ffect of lac% of registration a) transferee cannot vote b) transferee cannot be voted for c) transferee cannot prevail over rights of a subse@uent attaching creditor (Cson v. Dioso$ito, !6*3) d) transferee not entitled to dividends e) stoc%holder on record has the right to participate in $eetings. -o registration of transfer of unpaid shares • :f there is any unpaid balance on the stoc%holder(s subscription there can be no stoc% certificate on which indorse$ent can be $ade. &he shares are thus not transferable on the corporate boo%s. (§7*) )owever, the stoc%holder can still transfer his interest in the corporation by way of a deed of assign$ent.

COMM #CIAL LA$
S+#$et 3"e: C!#)!2"#"+2 C!rp . Ca2p!$ 'unset Eiew Condo$iniu$ corporation filed suit against AguilarGAernares 4ealty and ,i$ 'iu ,eng for collection of assess$ents levied on their respective condo$iniu$ units which they bought on install$ents and had not yet fully paid )9,D 4espondents not shareholders of condo$iniu$ corporation because they are not yet fully paid a) 'ec 3 Condo$iniu$ Act + shareholding in a condo$iniu$ corporation will be conveyed only in a proper case b) 'ec 5 of Condo$iniu$ Act leaves to <aster Deed the deter$ination of when shareholding will be transferred to purchaser of a unit c) <aster Deed provides that only owner of unit is a shareholder and that ownership of unit is ac@uired by purchaser sub"ect to conditions and ter$s of the instru$ent conveying the unit to such purchaser. d) Deed of Conveyance provide that ownership is conveyed only upon full pay$ent of purchase price e) 'ec !B Condo$iniu$ Act + <e$bership in Condo$iniu$ corporation shall not be transferable separately fro$ condo$iniu$ unit of which it is an appurtenance *emedy if registration refused + &ransferee $ay petition the court for a writ of $anda$us to co$pel the corporation to do so (1rice v. 'ulu Develop$ent Corp., !6**) R".era . F&!re#)! ( 586) 4ivera is the registered owner of 5?66 shares of stoc% of 2u"iya$a )otel U 4estaurant :nc. :t is alleged that one A%asa%o is the real owner of the 5?66 shares under 4ivera(s na$e, and as such owner he sold 233B shares to <ilagros. 4ivera refused to indorse the certificates to <ilagros despite the assurance he gave to <ilagros before the sale was consu$$ated. &he other incorporators also sold their shares to <ilagros and one Iureidini. As regards these transfers, the certificates were properly indorsed by their respective owners. <ilagros and Iureidini atte$pted to have all the certificates registered in their na$es but the corporation refused to do so. )9,D <anda$us will not lie where the shares of stoc% are not even indorsed by the registered owner 4ivera who is specifically resisting the registration thereof in the boo%s of the corp. 9ven the shares of stoc% sold by the other incorporators cannot be also the sub"ect of $anda$us on the strength of the $ere indorse$ent of the supposed owners of said shares in the absence of express instructions fro$ the$. &he right of the parties will have to be threshed out in an ordinary action.

*. Re$tr"'t"!#$ !# Tra#$(erD C&!$e C!rp!rat"!#$
*. Ge#era& $hare$ R+&e< Free tra#$(era,"&"t? !(

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'hares are personal property + 'hares of stoc% so issued are personal property and $ay be transferred (§7*) *.* EA'ept"!#< I# '&!$e '!rp!rat"!#$ Considering the special circu$stances attending a close corporation (e.g. for$ed by persons who %now each other well, thus they would want to choose the persons who will be allowed in their group), it is "ustifiable and even i$perative for its stoc%holders to protect the$selves fro$ future conflicts by placing restrictions on the right of each one of the$ to transfer his shares to an outsider (§6> U 6?).

COMM #CIAL LA$
cancellation ()odges v. ,eza$a, !673). :t is the duty of the purchaser to deter$ine that the indorse$ent was genuine. Aut with respect to a subse@uent purchaser in good faith and for value, the corporation is estopped fro$ denying the validity of the newly issued certificate because by issuing such, it has represented that the person na$ed therein is a stoc%holder of the corporation. 9xcept where recognition of the original and new subscriber will result to an overissue of shares. &he new ') would now have right to da$ages against the corporation and the latter against those who $ade false representation.

0. C!&&atera& Tra#$(er$
• 'ub"ect to collateral transfers 'hares of stoc% being personal property, $ay be the sub"ect $atter of a. pledge or b. chattel $ortgage. 4egistration in corporate boo%s not necessary 'uch collateral transfers are not covered by 'ec. 7* of the Code since such provision applies only to absolute transfer (<onserrat v. Ceron, !6**). &hus, the registration in the corporate boo%s of pledges and chattel $ortgages of shares CA00F& have any legal effect.

Halidity of restrictions on transfer of shares (§6?) • 4estrictions on the right to transfer shares $ust appear in the articles of incorporation and in the byGlaws as well as in the certificate of stoc%; otherwise, the sa$e shall not be binding on any purchaser thereof in good faith. 4estrictions shall not be $ore onerous than granting the existing stoc%holders or the corporation the option to purchase the shares of the transferring stoc%holder with such reasonable ter$s, conditions or period stated therein. :f upon the expiration of said period, the existing stoc%holders or the corporation fails to exercise the option to purchase, the transferring stoc%holder $ay sell his shares to any third person. 1resu$ptions a. :f the stoc% certificate CF0'1:CCFC',H shows the restriction, the purchaser or transferee is conclusively presu$ed to have notice of the restriction, provided this appears in the AF:. )e cannot prove that he acted in good faith. .here a conclusive presu$ption of notice arises, the corporation $ay, at its option, refuse to register the transfer, unless (!) all the stoc%holders have consented to the transfer, or (2) the AF: have been properly a$ended to re$ove the restriction. :f it appears in the certificate, but 0F& CF0'1:CCFC',H, then although he $ay be presu$ed to have notice of the restriction, he can prove the contrary.

• L"2 Ta? . CA ( 558) 'y -uio% and 'y ,i$ pledged their shares in -o 2ay and Co to ,i$ &ay. &hey endorsed their respective share in blan% and delivered the sa$e to ,i$ &ay. 'y -uio% and 'y ,i$ failed to pay hence ,i$ &ay went to the corporate secretary to as% the registration of the shares in his na$e. Corporate secretary refused. ,i$ &ay instituted an action for $anda$us at '9C to co$pel corporate secretary to register. )9,D Corporate(s secretary cannot be co$pelled to record transfer. &he duty of a corporate secretary to record transfers of stoc%s is $inisterial. )owever, he cannot be co$pelled to do so when the transferees title to said shares has no pri$a facie validity or is uncertain. <anda$us will not issue to establish a right but only to enforce one already established. ,i$ &ay failed to establish a legal right to have the shares registered in his na$e. ,i$ &ay failed to establish a legal right. )e is not owner of the shares without foreclosure and purchase at auction. )e is $erely a pledgee. Attach$ent of shares Gar'"a .$. 8!2!+a)9 (*666) 2AC&' Dico lost a collection case and the 1roprietary Fwnership Certificate (1FC) in the Cebu Country Club in his na$e was levied on and scheduled for public auction. -arcia clai$ed ownership over the certificate and filed the action for in"unction to en"oin the auction. Dico had executed a Deed of &ransfer in favor of petitioner which was furnished to &he Club but the transfer was not recorded in the boo%s of the Club because petitioner failed to present proof of pay$ent of the re@uisite capital gains tax. )9,D &he transfer of the sub"ect certificate $ade - . . / $age 51 o0 355

b.

-. U#a+th!r"/e) Tra#$(er$
-. 'ert"("'ate$ "#)!r$e) "# ,&a#4 + where the stoc%holder indorses his certificate in blan% in such a $anner as to clothe whoever $ay be in possession of it with apparent authority to deal with the shares as the latter(s own, he will be estopped fro$ clai$ing the shares as against a bonafide purchaser. &his is called the theory of @uasiGnegotiability ('anta$aria v. )ong%ong U 'hanghai Aan%, !63!) -.* (!r%e) tra#$(er$ + if the corporation should issue a new certificate pursuant to a forged transfer, it incurs no liability to the person in whose favor it issued it and $ay de$and its return for 100% UP L AW , $

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by Dico to petitioner was not valid as to the "udg$ent creditors, as the sa$e still stood in the na$e of Dico, the "udg$ent debtor, at the ti$e of the levy on execution. :n addition, as correctly ruled by the CA, the entry in the $inutes of the $eeting of the ClubRs board of directors noting the resignation of Dico as proprietary $e$ber thereof does not constitute co$pliance with 'ection 7* of the Corporation Code. 'aid provision of law strictly re@uires the recording of the transfer in the boo%s of the corporation, and not elsewhere, to be valid as against third parties. •

COMM #CIAL LA$
&he 'ecurities and 9xchange Co$$ission shall thereupon issue the certificate of dissolution. &hus, except for the expiration of its ter$ , no dissolution can be effective without so$e act of the state (Daguhoy 9nterprises v. 1once, !635)

Chapter C3I DISSOLUTION . Ca+$e$ !( D"$$!&+t"!#
. EAp"rat"!# !( !r"%"#a&9 eAte#)e) !r $h!rte#e) ter2 • &he ter$ within which the corporation is to exist (which cannot be $ore than 3B years) $ust be stated in its AF:. Fnce such period expires, the corporation is auto$atically dissolved without any other proceeding and it cannot thereafter be considered a de facto corporation. • A voluntary dissolution $ay be effected by a$ending the articles of incorporation to shorten the corporate ter$ pursuant to the provisions of the Code. Cpon approval of the a$ended articles of incorporation or the expiration of the shortened ter$, as the case $ay be, the corporation shall be dee$ed dissolved without any further proceedings (§!2B) .* 3!&+#tar? )"$$!&+t"!# :he# #! 're)"t!r$ are a((e'te) (; 8) • Dissolution $ay be effected by $a"ority vote of the board of directors or trustees, and by a resolution duly adopted by the affir$ative vote of the stoc%holders owning at least twoGthirds (2#*) of the outstanding capital stoc% or of at least twoGthirds (2#*) of the $e$bers. • <eeting to be held upon call of the directors or trustees after publication of the notice of ti$e, place and ob"ect of the $eeting for three (*) consecutive wee%s in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the 1hilippines, after sending such notice to each stoc%holder or $e$ber either by registered $ail or by personal delivery at least thirty (*B) days prior to said $eeting. • A copy of the resolution authorizing the dissolution shall be certified by a $a"ority of the board of directors or trustees and countersigned by the secretary of the corporation. 100% UP L AW , $ B A R ' $ !

.- 3!&+#tar? )"$$!&+t"!# :he# 're)"t!r$ are a((e'te) (; 5) • 1etition for dissolution shall be filed with the 'ecurities and 9xchange Co$$ission. • &he petition shall be signed by a $a"ority of its board of directors or trustees or other officers having the $anage$ent of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all clai$s and de$ands against it, and that its dissolution was resolved upon by the affir$ative vote of the stoc%holders representing at least twoGthirds (2#*) of the outstanding capital stoc% or by at least twoGthirds (2#*) of the $e$bers at a $eeting of its stoc%holders or $e$bers called for that purpose. • :f the petition is sufficient in for$ and substance, the Co$$ission shall, by an order reciting the purpose of the petition, fix a date on or before which ob"ections thereto $ay be filed by any person, which date shall not be less than thirty (*B) days nor $ore than sixty (7B) days after the entry of the order. Aefore such date, a copy of the order shall be published at least once a wee% for three (*) consecutive wee%s in a newspaper of general circulation published in the $unicipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the 1hilippines, and a si$ilar copy shall be posted for three (*) consecutive wee%s in three (*) public places in such $unicipality or city. • Cpon five (3) dayRs notice, given after the date on which the right to file ob"ections as fixed in the order has expired, the Co$$ission shall proceed to hear the petition and try any issue $ade by the ob"ections filed; and if no such ob"ection is sufficient, and the $aterial allegations of the petition are true, it shall render "udg$ent dissolving the corporation and directing such disposition of its assets as "ustice re@uires, and $ay appoint a receiver to collect such assets and pay the debts of the corporation • :n this $ethod of dissolution, '9C $ay direct the $anner in which the li@uidation of the corporate assets should be $ade by assigning this tas% to the corporation itself, or if it dee$s proper, to a receiver appointed by it (Ca$pos). - . . / $age 52 o0 355

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2ailure to file re@uired reports in appropriate for$s as deter$ined by the Co$$ission within the prescribed period Fther grounds 'ec. !55 A1 7? + Eiolation by the corporation of any provision of the Corporation Code 'ec. !B5 A1 7? + :n case of a deadloc% in a close corporation, and the '9C dee$s it proper to order the dissolution of the corporation as the only practical solution to the dispute

.0 D"$$!&+t"!# ,? 2"#!r"t? "# '&!$e '!rp!rat"!#$ 3!&+#tar? )"$$!&+t"!# :he# 're)"t!r$ are a((e'te) (; 61) Any stoc%holder of a close corporation $ay, by written petition to the 'ecurities and 9xchange Co$$issions, co$pel the dissolution of such corporation whenever any of the acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly pre"udicial to the corporation or any stoc%holder or whenever corporate assets are being $isapplied or wasted. .1 Fa"&+re t! !r%a#"/e a#) '!22e#'e ,+$"#e$$D 'e$$at"!# !( ,+$"#e$$ (!r 1 ?ear$ (;**) • 2ailure to for$ally organize and co$$ence the transaction of its business or construction of its wor%s within two years→ its corporate powers shall cease and the corporation is dee$ed dissolved $ &ransacting business + i$plies a continuity of acts or dealings in the acco$plish$ent of the purpose for which the corporation was for$ed (<entholatu$ v. <angali$an, !657) $ 2or$ally organize includes not only the adoption of the byGlaws but also the establish$ent of the body which will ad$inister the affairs of the corporation and exercise its powers • Co$$ence d transaction of its business but subse@uently beco$es continuously inoperative for a period of at least five years→ ground for suspension or revocation of its corporate franchise or certificate of incorporation .6 I#.!&+#tar? )"$$!&+t"!# *evocation of certificate of registration by the '/0 (§!2!) • A corporation $ay be dissolved by the 'ecurities and 9xchange Co$$ission upon filing of a verified co$plaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations • -rounds for revocation ('ec. 7, par i, 1D 6B2GA) o 2raud in procuring its certificate of registration o 'erious $isrepresentation as to what the corporation can or is doing to the great pre"udice of or da$age to the general public o 4efusal to co$ply or defiance of any lawful order of the Co$$ission restraining co$$ission of acts which would a$ount to a grave violation of its franchise o Continuous inoperation for a period of at least five years o 2ailure to file byGlaws within the re@uired period

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Ouo Iarranto 3roceedings ('ec. 2, 4ule 77 4FC) • .hen it has offended against a provision of an Act for its creation and renewal • .hen it has forfeited its privileges and franchises by nonuser • .hen it has co$$itted or o$itted an act which a$ounts to a surrender of its corporate rights, privileges or franchise • .hen it has $isused a right, privilege, or franchise conferred upon it by law or when it has exercised a right, privilege or franchise in contravention of law •

*. E((e't$ !( D"$$!&+t"!#D W"#)"#%=Up a#) L"@+")at"!#
*. L!$$ !( G+r")"'a& per$!#a&"t? • Corporation loses its "uridical personality and can no longer lawfully continue its business except for the purpose of winding up. 2or this purpose, it $ay sue and be sued, although upon the expiration of three years, all pending actions by or against the dissolved corporation abate (-ational Abaca 0orp vs 3ore) %&"%) • cannot even be a de facto corporation, hence sub"ect to collateral attac% (9uenaflor vs 0amarines 'ur 6ndustry 0orp ) %&"5) • cannot enter into new contracts which would have the effect of continuing the business ( 0ebu 3ort =abor .nion vs 'tates 7arine 0o) %&(,)

*.* EAe'+t!r? '!#tra't$ • 0o right or re$edy in favor of or against any corporation, its stoc%holders, $e$bers, directors, trustees, or officers, nor any liability incurred by any such corporation, stoc%holders, $e$bers, directors, trustees, or officers, shall be re$oved or i$paired either by the subse@uent dissolution of said corporation or by any subse@uent a$end$ent or repeal of this Code or of any part thereof. (§!53) • &he prevailing view is that executory contracts are not extinguished. )owever, so$e - . . / $age 53 o0 355

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authorities $a%e an exception of contracts for personal services such as e$ploy$ent contracts of officers and e$ployees where the dissolution is involuntary or the result of $erger or consolidation in which case the contracts are dee$ed ter$inated. *.- W"#)"#%=Up a#) L"@+")at"!# • Definition &he winding up and turning assets of corporation into cash for distribution • A li@uidation proceeding is a proceeding in rem so that all other interested persons whether %nown to the parties or not $ay be bound by such proceedings (0hua vs -=*0) %&&5) • 2or how long $ay the li@uidation of a corporation be underta%enS o 9very corporation whose charter expires by its own li$itation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is ter$inated in any other $anner, shall nevertheless be continued as a body corporate for three (*) years after the ti$e when it would have been so dissolved o )owever, in case the corporate assets are conveyed to a trustee or a receiver appointed by the '9C, the three year li$itation will not apply ('u$era v. Ealencia, !6*6) o Although the three year period $ay have expired, it does not necessarily follow that a creditor who was unable to collect his clai$ before three years would lose is rights. :t is still possible for hi$ to sue the trustee, if there be one, or if the circu$stances so warrant, to follow the assets in the hands of the stoc%holders who nay have received the sa$e as li@uidating dividends (&an &iong Aio v. Co$$. of :nt. 4ev., !672) Ge&a#! .. CA ( 58 ) 9ven if no trustee is appointed or designated during the *Gyear period of the li@uidation of the corporation, a suit pending prior to the expiration of the period $ay still be prosecuted with the counsel of record being considered as the JtrusteeK re@uired by law. Debtors of the corporation $ay not ta%e advantage of the failure of the corporation to transfer its assets to a trustee; otherwise, it would constitute undue enrich$ent to dis$iss the case as against the defendant. • .hat could and should be done during the period of li@uidationS o 2or the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. o 9xcept by decrease of capital stoc% and as otherwise allowed by this , $ B A R ' $ ! - . . / •

COMM #CIAL LA$
Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after pay$ent of all its debts and liabilities. .hat happens if an asset cannot be distributed to the person entitled to itS o Cpon the winding up of the corporate affairs, any asset distributable to any creditor or stoc%holder or $e$ber who is un%nown or cannot be found shall be escheated to the city or $unicipality where such assets are located. .ho $ay underta%e the li@uidation of a corporate (<ethods of ,i@uidation)S $ Ay the corporation itself through the board of directors + the board of directors serve as trustees $ Conveyance of all corporate assets to trustees who will ta%e charge of the li@uidation. 2ro$ and after any such conveyance by the corporation of its property in trust for the benefit of its stoc%holders, $e$bers, creditors and others in interest, all interest which the corporation had in the property ter$inates, the legal interest vests in the trustees, and the beneficial interest in the stoc%holders, $e$bers, creditors or other persons in interest. $ ,i@uidation by a receiver who $ay have been appointed by the '9C upon its decreeing the dissolution of the corporation (§!!6). *Gyear period does not apply because the corporation is substituted by the receiver ('u$era v. Ealencia, 'upra). )owever, the $ere appoint$ent of a receiver, without anything $ore does not result in the dissolution of the corporation nor bar it fro$ the existence of its corporate rights (,eyte Asphalt U <ineral Fil Co. ,td., v. Aloc% Iohnston U Areenbrawn, !62?) A corporation cannot distribute any of its assets or property except upon lawful dissolution and only after pay$ent of all its debts and liabilities, after which the re$aining assets $ust be distributed to the stoc%holders in proportion to their interest in the corporation. 9xceptions  decrease in c#s resulting in a surplus which can then be distributed to stoc%holders provided no creditors are pre"udiced  as otherwise allowed by the code o Appraisal right o Deadloc% in a close corporation o ') of a close corporation $ay co$pel corporation to buy his shares at fair value o Corporation repurchases shares for any legiti$ate corporate purpose o Corporation validly distributes dividend $age 54 o0 355

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continuance of corporate life and activities in an effort to restore and reinstate the corporation to its for$er position of successful operation and solvency. :t is crystal clear that the concept of li@uidation is dia$etrically opposed or contrary to the concept of rehabilitation, such that both cannot be underta%en at the sa$e ti$e. &o allow the li@uidation proceedings to continue would seriously hinder the rehabilitation of the sub"ect ban%.

CLEMENTE9 ET. AL. .. CA ( 551)<

&he ter$ination of the life of a "uridical entity does not by itself cause the extinction or di$inution of the rights and liabilities of such entity, nor those of its owners and creditors. :f the threeGyear extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustees) itself, $ay be per$itted to so continue as QtrusteesQ by legal i$plication to co$plete the corporate li@uidation. 'till in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but li%ewise the creditors of the corporation, acting for and in its behalf, $ight $a%e proper representation with the 'ecurities and 9xchange Co$$ission, which has pri$ary and sufficiently broad "urisdiction in $atters of this nature, for wor%ing out a final settle$ent of the corporate concerns. Dissolved corporation(s capacity to sue Re,+r"a#! .$. CA9 GR 6*5619 8a# * 9 555

Chapter C3II CORPORATE COMBINATION . Mer%er a#) C!#$!&")at"!#

.

What "$ a 2er%er F '!#$!&")at"!#K • $ Mer%er Fne of the constituent corporations re$ains as an existing "uridical person, whereas the other corporation shall cease to exist. <erger is the disappearance of one of the corporations with the other corporation ac@uiring all the assets, rights of action, and assu$ing all the liabilities of the disappearing corporation. Ff course, there is an arrange$ent as to the shares of stoc%s that will be issued to the for$er stoc%holders of the two (2) corporations which were $erged. 'aid stoc%holders are now stoc%holders of the corporation which survives. &he proportion between the two (2) corporations will be the basis of the shares of stoc%s that will be issued to the stoc%holders under the surviving corporation. C!#$!&")at"!# :f there is consolidation, there will be disappearance of both the constituent corporations with the e$ergence of a new corporate entity, called the consolidated corporation, which shall obtain all the assets of the disappearing corporations, and li%ewise shall assu$e all their liabilities. Also, the nu$ber of shares that will be issued to each of the stoc%holders under the new corporation is deter$ined by the ration between the assets of the two (2) corporations.

Corporation a$ended its Ao: to shorten its corporate existence while the case was pending in court. '9C approved the a$end$ent but the trial court was not notified. After the trial court rendered "udg$ent against corporation, it filed $otion to @uash writ of execution because the corporation lac%ed "uridical personality to sue or be sued. 'C held that it was erroneous to contend that a dissolved and nonGexisting corporation could no longer be represented by a lawyer and conco$itantly a lawyer could not appear as counsel for a nonGexisting "udicial person. A corporation that has a pending action and which cannot be ter$inated within the threeGyear period after its dissolution is authorized under 'ec. >? /now §!228 of the Corporation ,aw to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the threeG year period. Although private respondent did not appoint any trustee, yet the counsel who prosecuted and defended the interest of the corporation in the instant case and who in fact appeared in behalf of the corporation $ay be considered a trustee of the corporation at least with respect to the $atter in litigation only. ,i@uidation v. 4ehabilitation Ph"&. 3etera#$ Ba#4 .. E2p&!?ee$ U#"!# (*66 ) ,i@uidation, in corporation law, connotes a winding up or setting with creditors and debtors. :t is the winding up of a corporation so that assets are distributed to those entitled to receive the$. :t is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. Fn the opposite end of the spectru$ is rehabilitation which connotes a reopening or reorganization. 4ehabilitation conte$plates a 100% UP L AW , $ B A R ' $ !

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.* What "$ a H'!#$t"t+e#t '!rp!rat"!#IK A H'!#$!&")ate) '!rp!rat"!#IK (;76) &wo or $ore corporations $ay $erge into a single corporation which shall be one of the constituent corporations or $ay consolidate into a new single corporation which shall be the consolidated corporation.

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.What '!rp!rate appr!.a&$ are re@+"re)K (;77) !. Approval by $a"ority vote of each of the board of directors or trustees of the constituent corporations of the plan of $erger or consolidation. 2. Approval by the stoc%holders or $e$bers of each of such corporations in separate $eetings. &he affir$ative vote of stoc%holders representing at least twoGthirds (2#*) of the outstanding capital stoc% of each corporation in the case of stoc% corporations or at least twoGthirds (2#*) of the $e$bers in the case of nonG stoc% corporations shall be necessary for the approval of such plan *. 0otice of such $eetings shall be given to all stoc%holders or $e$bers of the respective corporations, at least two (2) wee%s prior to the date of the $eeting, either personally or by registered $ail. 'aid notice shall state the purpose of the $eeting and shall include a copy or a su$$ary of the plan of $erger or consolidation. 5. Any dissenting stoc%holder in stoc% corporations $ay exercise his appraisal right in accordance with the Code. 1rovided, that if after the approval by the stoc%holders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. 3. A$end$ent to the plan of $erger or consolidation $ay be $ade by approved of the $a"ority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affir$ative vote of stoc%holders representing at least twoGthirds (2#*) of the outstanding capital stoc% or of twoGthirds (2#*) of the $e$bers of each of the constituent corporations. 'uch plan, together with any a$end$ent, shall be considered as the agree$ent of $erger or consolidation. .0 What "$ a p&a# !( 2er%er !r '!#$!&")at"!#K (;76) &he board of directors or trustees of each corporation, party to the $erger or consolidation, shall approve a plan of $erger or consolidation setting forth the following • &he na$es of the corporations proposing to $erge or consolidate, hereinafter referred to as the constituent corporations; • &he ter$s of the $erger or consolidation and the $ode of carrying the sa$e into effect; • A state$ent of the changes, if any, in the articles of incorporation of the surviving corporation in case of $erger; and, with respect to the consolidated corporation in case of consolidation, all the state$ents re@uired to be set forth in the articles of incorporation for corporations organized under this Code; and •

COMM #CIAL LA$
'uch other provisions with respect to the proposed $erger or consolidation as are dee$ed necessary or desirable.

.1 What are art"'&e$ !( 2er%er !r '!#$!&")at"!#K (;78) • After the approval by the stoc%holders or $e$bers, articles of $erger or articles of consolidation shall be executed by each of the constituent corporations !) to be signed by the president or viceGpresident and 2) certified by the secretary or assistant secretary of each corporation • &he articles of $erger or consolidation shall set forth !) &he plan of the $erger or the plan of consolidation; 2) As to stoc% corporations, the nu$ber of shares outstanding, or in the case of nonGstoc% corporations, the nu$ber of $e$bers; and *) As to each corporation, the nu$ber of shares or $e$bers voting for and against such plan, respectively. .6 Whe# "$ the e((e't"."t? !( 2er%er !r '!#$!&")at"!#K (;75) • 9ffectivity Cpon issuance by the '9C of the certificate of $erger and consolidation • :f the Co$$ission is satisfied that the $erger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of $erger or of consolidation, at which ti$e the $erger or consolidation shall be effective. • &he articles of $erger or of consolidation shall be sub$itted to the 'ecurities and 9xchange Co$$ission in @uadruplicate for its approval. • :n the case of $erger or consolidation of ban%s or ban%ing institutions, building and loan associations, trust co$panies, insurance co$panies, public utilities, educational institutions and other special corporations governed by special laws, the favorable reco$$endation of the appropriate govern$ent agency shall first be obtained. • :f, upon investigation, the 'ecurities and 9xchange Co$$ission has reason to believe that the proposed $erger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. .ritten notice of the date, ti$e and place of hearing shall be given to each constituent corporation at least two (2) wee%s before said hearing. &he Co$$ission shall thereafter proceed as provided in this Code. .7 What are the e((e't$ !( a 2er%er !r '!#$!&")at"!#K (;86)

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!) &he constituent corporations shall beco$e a single corporation which • :n case of $erger, shall be the surviving corporation designated in the plan of $erger; and • :n case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2) &he separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; *) &he surviving or the consolidated corporation shall possess all the rights, privileges, i$$unities and powers and shall be sub"ect to all the duties and liabilities of a corporation organized under this Code; 5) &he surviving or the consolidated corporation shall thereupon and thereafter possess • all the rights, privileges, i$$unities and franchises of each of the constituent corporations; and • all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation • these shall be dee$ed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 3) &he surviving or consolidated corporation shall • be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the sa$e $anner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and • any pending clai$, action or proceeding brought by or against any of such constituent corporations $ay be prosecuted by or against the surviving or consolidated corporation. • &he rights of creditors or liens upon the property of any of such constituent corporations shall not be i$paired by such $erger or consolidation

COMM #CIAL LA$
Frdinarily, in the $erger of two or $ore existing corporations, one of the co$bining corporations survives and continues the co$bined business, while the rest are dissolved and all their rights, properties and liabilities are ac@uired by the surviving corporation. Although there is dissolution of the absorbed corporations, there is no winding up of their affairs or li@uidation of their assets, because the surviving corporation auto$atically ac@uires all their rights, privileges and powers, as well as their liabilities. .8 Pr!'e)+re (!r Mer%er !r C!#$!&")at"!# (3"&&a#+e.a) !) Aoard of each corporation shall draw up a plan of $erger or consolidation, setting forth • na$es of corporations involved (constituent corporations) • ter$s and $ode of carrying it out • state$ent of changes, if any, in the present articles of surviving corporation; or the articles of the new corporation to be for$ed in case of consolidation. 2) 1lan for $erger or consolidation shall be approved by $a"ority vote of each board of the concerned corporations at separate $eetings. *) &he sa$e shall be sub$itted for approval by the stoc%holders or $e$bers of each such corporation at separate corporate $eetings duly called for the purpose. 0otice should be given to all stoc%holders or $e$bers at least two (2) wee%s prior to date of $eeting, either personally or by registered $ail. 5) Affir$ative vote of 2#* of the outstanding capital stoc% in case of stoc% corporations, or 2#* of the $e$bers of a nonGstoc% corporation shall be re@uired. 3) Dissenting stoc%holders $ay exercise the right of appraisal. Aut if Aoard abandons the plan to $erge or consolidate, such right is extinguished. 7) Any a$end$ent to the plan $ust be approved by the sa$e votes of the board $e$bers of trustees and stoc%holders or $e$bers re@uired for the original plan. >) After such approval, Articles of <erger or Articles of Consolidation shall be executed by each of the constituent corporations, signed by president or E1 and certified by secretary or assistant secretary, setting forth • plan of $erger or consolidation • in stoc% corporation, the nu$ber of shares outstanding; in nonGstoc%, the nu$ber of $e$bers • as to each corporation, nu$ber of shares or $e$bers voting for and against such plan, respectively ?) 2our copies of the Articles of <erger or Consolidation shall be sub$itted to the '9C for approval. 'pecial corporations li%e ban%s, insurance co$panies, building and loan associations, etc., need the prior approval of the

Ba,$t .. CA (*66 )

:t is settled that in the $erger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are ac@uired by the surviving corporation.

ASSOCIATED BANM .. CA ( 558)

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respective govern$ent agency concerned. 6) :f '9C is satisfied that the $erger or consolidation is legal, it shall issue the Certificate of <erger or the Certificate of :ncorporation, as the case $ay be. !B) :f the '9C is not satisfied, it shall set a hearing, giving due notice to all the corporations concerned. (§>7G>6) .5 L"2"tat"!# !# the r"%ht t! 2er%e F '!#$!&")ate !) 'hould not create $onopolies 2) 'hould not eli$inate free and healhty co$petition *) Act *3!? 'ec 2B inhibits illegal co$binations . 6 Appra"$a& r"%ht + any dissenting stoc%holder $ay exercise his appraisal right under the conditions provided in the Code

COMM #CIAL LA$
assets be appropriated for the conduct of its re$aining business. :n nonGstoc% corporations where there are no $e$bers with voting rights G the vote of at least a $a"ority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.

$

*.0 Appra"$a& r"%ht: any dissenting stoc%holder $ay exercise his appraisal right under the conditions provided in the Code *.1 A,a#)!#2e#t !( the $a&e9 &ea$e T G After such authorization or approval by the stoc%holders or $e$bers, the board of directors or trustees $ay, nevertheless, in its discretion, abandon such sale, lease, exchange, $ortgage, pledge or other disposition of property and assets, sub"ect to the rights of third parties under any contract relating thereto, without further action or approval by the stoc%holders or $e$bers. *.6 C!2pare) t! 2er%er a#) '!#$!&")at"!# Advantage of $erger and consolidation over sale furnish a short cut to the acco$plish$ent of various transactions $ay avoid the difficulty, delay and expense which usually acco$pany dissolution, winding up and distribution of assets to its ') by a selling corp auto$atic assu$ption of liabilities of the absorbed corp (in sale, there $ust be sufficient funds reserved by the absorbed corp to pay its liabilities, otherwise the sale $ay be attac%ed by 0ompared the creditors as a fraudulent conveyance) transfer or exchange of shares is exe$pt fro$ registration under 'ecurities Act (in sale, registration with '9C re@uired) Advantage of sale of substantially all assets .here the absorbing corp foresees proble$s in securing stoc%holders( approval and in granting the appraisal right of dissenters, it $ay decide that its purchase of the assets of the absorbed corp would be $ore convenient and practical than $erger

*. Sa&e !( $+,$ta#t"a&&? a&& a$$et$ (;06)
*. Re$tr"'t"!#$: 'ub"ect to the provisions of existing laws on illegal co$binations and $onopolies *.* S'!pe !( p!:er: &o sell, lease, exchange, $ortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such ter$s and conditions and for such consideration, which $ay be $oney, stoc%s, bonds or other instru$ents for the pay$ent of $oney or other property or consideration, as its board of directors or trustees $ay dee$ expedient • <eaning of disposition of substantially all of the corporate property and assetsG if thereby the corporation would be rendered incapable of continuing the business or acco$plishing the purpose for which it was incorporated. *.Appr!.a&9 .!t"#% a#) #!t"'e re@+"re2e#t< • <a"ority vote of its board of directors or trustees, • Authorized by the vote of the stoc%holders representing at least twoG thirds (2#*) of the outstanding capital stoc%, or in case of nonGstoc% corporation, by the vote of at least to twoGthirds (2#*) of the $e$bers, in a stoc%holderRs or $e$berRs $eeting duly called for the purpose. • .ritten notice of the proposed action and of the ti$e and place of the $eeting shall be addressed to each stoc%holder or $e$ber at his place of residence as shown on the boo%s of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally $ .hen ') approval not necessary G :f disposition is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and 100% UP L AW , $ B A R ' $ !

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sa$e processed by another entity in the 1hil. Collecting infor$ation in the 1hil. 1erfor$ing services auxiliary to an existing contract or sale, which are not on a continuing basis

Chapter C3III FOREIGN CORPORATIONS . De("#"t"!# (; *-)
2oreign corporation is one for$ed, organized or existing under any laws other than those of the 1hilippines and whose laws allow 2ilipino citizens and corporations to do business in its own country or state.

• •

Me#th!&at+2 C!.9 I#'.9 .. Ma#%a&"2a# ( 50 ) 0o general rule or governing principle can be laid down as to what constitutes JdoingK or JengagingK in or \transactingK business. :ndeed, each case $ust be "udged in the light of its peculiar environ$ental circu$stances. &he true test, however, see$s to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized, or whether it has substantially retired fro$ it and turned it over to another. &he ter$ i$plies a continuity of co$$ercial dealings and arrange$ents, and conte$plates to that extent the perfor$ance of acts or wor%s or the exercise of the functions nor$ally incident to and in the progressive prosecution of the purpose and ob"ect of its organization. 0ecessity of obtaining a license to do business &he reason for the license is to sub"ect the foreign corporation doing business in the 1hilippines to the "urisdiction of the courts, otherwise a foreign corporation illegally doing business here $ay successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby i$pugn the "urisdiction of the local courts.

*. HD!"#% ,+$"#e$$I (Se'. -()) RA 760*9 F!re"%# I#.e$t2e#t$ A't !( 55 )
• • • 'oliciting orders 'ervice contracts Appointing representatives or distributors do$iciled in the 1hilippines or who in any calendar year stay in the country for a period or periods totaling !?B days or $ore Fpening offices, whether called liason offices or branches 9stablishing a factory, wor%shop or processing plant Cnderta%ing building construction or erection pro"ects Fpening a store, whether wholesale or retail without pre"udice to the provisions of the 4etail &rade Act <aintaining or operating a warehouse for business purposes including the storage, display or delivery of its own products 1articipating in the $anage$ent, supervision or control of any do$estic business, fir$, entity or corporation in the 1hilippines Any other act or acts that i$ply a continuity of co$$ercial dealings or arrange$ents, and conte$plate to that extent, perfor$ance nor$ally incident to , and in progressive prosecution of, co$$ercial gain or of the purpose and ob"ect of the business organization :t shall not include • <ere invest$ent as a shareholder by a foreign entity in do$estic corporations duly registered to do business and#or the exercise of such rights as such investor • )aving a no$inee director or officer to represent its interests in such corporations • Appointing a representative or distributor do$iciled in the 1hilippines which transacts business in its own na$e and for its own account &he following acts by the$selves shall not be dee$ed doing business in the 1hil • &he publication of a general advertise$ent through newspapers, brochures or other publication $edia or through radio or television • <aintaining the stoc% of goods in the 1hil solely for the purpose of having the , $

• • • • •

, 'an -%iden ,ros. .td. '. (/'. +an%0act%rin1 () *o. 147905 +a 28, 2007 =uiden3 a 0oreign corporation not licensed to do business in the $hilippines3 0iled a complaint 0or sum o0 money ;ith the RTC o0 $arana(ue against >T:L* The latter 0iled a motion to dismiss on the ground that petitioner has no legal capacity to sue and this ;as granted* The CA sustained the RTC ruling that the transactions ;ere not isolated hence not 0alling ;ithin the e<ception* ?t relied on Eriks Pte. Ltd. V. CA ;here it held that ;hat is material are the proponents to the transaction3 as ;ell as the parties to be bene0ited and obligated by the transaction* H)LD8 To be doing or @transacting business in the $hilippinesA 0or purposes o0 !ection 1BB o0 the Corporation Code3 the 0oreign corporation must actually transact business in the Philippines3 that is3 per0orm speci0ic business transactions ;ithin the $hilippine territory on a continuing basis in its o;n name and 0or its o;n account* An essential condition to be considered as @doing businessA in the $hilippines is the actual per0ormance o0 speci0ic commercial acts ;ithin the territory o0 the $hilippines 0or the plain reason that the $hilippines has no 6urisdiction o4er commercial acts per0ormed in 0oreign territories* Here3 there is no sho;ing that petitioner per0ormed ;ithin the $hilippine territory the speci0ic acts o0 doing business mentioned in !ection BCdD o0 RA
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E.F-* $etitioner did not also open an o00ice here in the $hilippines3 appoint a representati4e or distributor3 or manage3 super4ise or control a local business* While petitioner and respondent entered into a series o0 transactions implying a continuity o0 commercial dealings3 the per0ection and consummation o0 these transactions ;ere done outside the $hilippines* The series o0 transactions bet;een petitioner and respondent transpired and ;ere consummated in Hong Gong* The !C 0ound no single acti4ity ;hich petitioner per0ormed here in the $hilippines pursuant to its purpose and ob6ect as a business organi2ation* %oreo4er3 petitioner9s desire to do business ;ithin the $hilippines is not discernible 0rom the allegations o0 the complaint or 0rom its attachments* There0ore3 there is no basis 0or ruling that petitioner is doing business in the $hilippines* The !C categorically stated its disagreement ;ith the Court o0 Appeals9 ruling that the proponents to the transaction determine ;hether a 0oreign corporation is doing business in the $hilippines3 regardless o0 the place o0 deli4ery or place ;here the transaction too& place* To accede to such theory ma&es it possible to classi0y3 0or instance3 a series o0 transactions bet;een a 5ilipino in the ,nited !tates and an American company based in the ,nited !tates as @doing business in the $hilippines3A e4en ;hen these transactions are negotiated and consummated only ;ithin the ,nited !tates -. Re@+"re2e#t$ (!r the "$$+a#'e !( a &"'e#$e
-. . D!'+2e#tar? re@+"re2e#t$ (; *1) • A foreign corporation applying for a license to transact business in the 1hilippines shall sub$it to the '9C o Copy of its articles of incorporation and byGlaws, certified in accordance with law o &heir translation to an official language of the 1hilippines, if necessary. • &he application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following o &he date and ter$ of incorporation; o &he address, including the street nu$ber, of the principal office of the corporation in the country or state of incorporation; o &he na$e and address of its resident agent authorized to accept su$$ons and process in all legal proceedings and, pending the establish$ent of a local office, all notices affecting the corporation; o &he place in the 1hilippines where the corporation intends to operate; o &he specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the 1hilippines 1rovided, &hat said purpose or purposes are those specifically 100% UP L AW , $ B A R ' $ ! •

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stated in the certificate of authority issued by the appropriate govern$ent agency; o &he na$es and addresses of the present directors and officers of the corporation; o A state$ent of its authorized capital stoc% and the aggregate nu$ber of shares which the corporation has authority to issue, ite$ized by classes, par value of shares, shares without par value, and series, if any; o A state$ent of its outstanding capital stoc% and the aggregate nu$ber of shares which the corporation has issued, ite$ized by classes, par value of shares, shares without par value, and series, if any; o A state$ent of the a$ount actually paid in; and o 'uch additional infor$ation as $ay be necessary or appropriate in order to enable the 'ecurities and 9xchange Co$$ission to deter$ine whether such corporation is entitled to a license to transact business in the 1hilippines, and to deter$ine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the "urisdiction of its incorporation, attesting to the fact that o &he laws of the country or state of the applicant allow 2ilipino citizens and corporations to do business therein o &he applicant is an existing corporation in good standing. :f such certificate is in a foreign language, a translation thereof in 9nglish under oath of the translator shall be attached thereto. &he application shall li%ewise be acco$panied by a state$ent under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the '9C and other govern$ental agency in the proper cases that the o Applicant is solvent and in sound financial condition, and o 'etting forth the assets and liabilities of the corporation as of the date not exceeding one (!) year i$$ediately prior to the filing of the application. 2oreign ban%ing, financial and insurance corporations shall, in addition to the above re@uire$ents, co$ply with the provisions of existing laws applicable to the$. :n the case of all other foreign corporations, no application for license to transact business in the 1hilippines shall be accepted by the '9C without previous authority fro$ the appropriate govern$ent agency, whenever re@uired by law.

-.* Dep!$"t re@+"re2e#t$ (; *6) - . . / $age 60 o0 355

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• Cpon issuance of the license, such foreign corporation $ay co$$ence to transact business in the 1hilippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revo%ed, suspended or annulled in accordance with this Code or other special laws. .ithin sixty (7B) days after the issuance of the license to transact business in the 1hilippines, the license, except foreign ban%ing or insurance corporation, shall deposit with the '9C for the benefit of present and future creditors of the licensee in the 1hilippines, securities satisfactory to the '9C, consisting of o Aonds or other evidence of indebtedness of the -overn$ent of the 1hilippines, its political subdivisions and instru$entalities, or of govern$entGowned or controlled corporations and entities, o 'hares of stoc% in Qregistered enterprisesQ as this ter$ is defined in 4epublic Act 0o. 3!?7, o 'hares of stoc% in do$estic corporations registered in the stoc% exchange, or o 'hares of stoc% in do$estic insurance co$panies and ban%s, or o Any co$bination of these %inds of securities, .ith an actual $ar%et value of at least one hundred thousand (1!BB,BBB.) pesos; 1rovided, however, &hat within six (7) $onths after each fiscal year of the licensee, the '9C shall re@uire the licensee to deposit additional securities e@uivalent in actual $ar%et value to two (2M) percent of the a$ount by which the licenseeRs gross inco$e for that fiscal year exceeds five $illion (13,BBB,BBB.BB) pesos. &he '9C shall also re@uire deposit of additional securities if the actual $ar%et value of the securities on deposit has decreased by at least ten (!BM) percent of their actual $ar%et value at the ti$e they were deposited. &he '9C $ay at its discretion release part of the additional securities deposited with it if the gross inco$e of the licensee has decreased, or if the actual $ar%et value of the total securities on deposit has increased, by $ore than ten (!BM) percent of the actual $ar%et value of the securities at the ti$e they were deposited. &he '9C $ay, fro$ ti$e to ti$e, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. 'uch licensee shall be entitled to collect the interest or dividends on the securities deposited. :n the event the licensee ceases to do business in the 1hilippines, the securities deposited as aforesaid shall , $ B A R ' $ !

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be returned, upon the licenseeRs application therefor and upon proof to the satisfaction of the '9C that the licensee has no liability to 1hilippine residents, including the -overn$ent of the 4epublic of the 1hilippines. -.- App!"#t2e#t !( re$")e#t a%e#t (; *8) • A resident agent $ay be either an (§ !2>) o :ndividual residing in the 1hilippines of good $oral character and of sound financial standing o Do$estic corporation lawfully transacting business in the 1hilippines • &he '9C shall re@uire as a condition precedent to the issuance of the license to transact business in the 1hilippines by any foreign corporation that such corporation file with the '9C a written power of attorney o Designating so$e person who $ust be a resident of the 1hilippines, on who$ any su$$ons and other legal processes $ay be served in all actions or other legal proceedings against such corporation, and o Consenting that service upon such resident agent shall be ad$itted and held as valid as if served upon the duly authorized officers of the foreign corporation at its ho$e office. • Any such foreign corporation shall li%ewise execute and file with the '9C an agree$ent or stipulation, executed by the proper authorities of said corporation, in for$ and substance as follows o Q&he (na$e of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the 'ecurities and 9xchange Co$$ission a license to transact business in the 1hilippines, that if at any ti$e said corporation shall cease to transact business in the 1hilippines, or shall be without any resident agent in the 1hilippines on who$ any su$$ons or other legal processes $ay be served, then in any action or proceeding arising out of any business or transaction which occurred in the 1hilippines, service of any su$$ons or other legal process $ay be $ade upon the '9C and that such service shall have the sa$e force and effect as if $ade upon the dulyGauthorized officers of the corporation at its ho$e office.Q • .henever such service of su$$ons or other process shall be $ade upon the '9C, the Co$$ission shall, within ten (!B) days thereafter, trans$it by $ail a copy of such su$$ons or other legal process to the corporation at its ho$e or principal office. • &he sending of such copy by the Co$$ission shall be necessary part of and shall co$plete such service. All - . . / $age 61 o0 355

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expenses incurred by the Co$$ission for such service shall be paid in advance by the party at whose instance the service is $ade. • :n case of a change of address of the resident agent, it shall be his or its duty to i$$ediately notify in writing the '9C of the new address.

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1. What are the '!#$e@+e#'e !( )!"#% ,+$"#e$$ "# the Ph"&"pp"#e$ :"th!+t a &"'e#$eK (; --)
• 0o foreign corporation transacting business in the 1hilippines without a license, or its successors or assigns, shall be per$itted to $aintain or intervene in any action, suit or proceeding in any court or ad$inistrative agency of the 1hilippines; 'uch corporation $ay be sued or proceeded against before 1hilippine courts or ad$inistrative tribunals on any valid cause of action recognized under 1hilippine laws. :n addition, 'ec. !*5 $a%es it a ground for revocation of license when a foreign corporation transacts business in the 1hilippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the 1hilippines. 'tatus of Contracts entered into without the re@uisite license o &he failure to obtain a license by a foreign corporation doing business in the 1hilippines does not affect the validity of contracts entered into by such foreign corporation, but $erely re$oves its legal standing to sue in local tribunals. )owever, the defect $ay be cured by subse@uent registration by the foreign corporation to obtain the necessary license to do business in the 1hilippines. /)o$e :nsurance Co. v. 9astern 'hipping ,ines, !2* 'C4A 525 (!6?*)8 o Although the law does not declare as void or invalid the contracts entered into by a foreign corporation with a local corporation without the for$er first securing a license or certificate to do business in the 1hilippines, the parties in this case cannot obtain relief on the contracts entered into because they are charged with the %nowledge of the existing law at the ti$e they entered into such contract and at the ti$e it is to be operative. /&opG.eld <fg. v. 9C9D, '.A., !*? 'C4A !!? (!6?3)8 o )owever, in the case of <errill ,ynch 2utures, :nc. v. CA, 2!! 'C4A ?25 (!662), the 'C held that although the foreign corporation has engaged in business in the 1hilippines without a license, the dis$issal of the suit would not be proper on the ground that if the local investors %new that the foreign corporation had no license to do business, then they are estopped fro$ using the lac% of license to avoid their obligations. ,egal standing of foreign corporations to sue on their corporate na$es, trade na$es, and trade$ar%s o A foreign corporation although not doing business in the 1hilippines has a personality to sue to oppose the registration of a trade$ar% when it is shown that its products using such trade$ar% are being i$ported and sold $age 62 o0 355

-.0 S+22ar?< Re@+"$"te$ (!r the I$$+a#'e !( L"'e#$e • &he '9C will issue a license to the foreign corporation to do business in the 1hilippines, provided the following conditions are $et o Appoint$ent of a 4esident Agent  9ither a 2ilipino or do$estic corporation; and  1ower of Attorney to '9C to receive process o <ust prove that the foreign corporationRs country grants reciprocal rights to 2ilipinos and 1hilippine corporation. o 9stablish an office in the 1hilippines o Aring in its assets o Cnderta%ing that 2ilipino creditors will be preferred in the event of insolvency o 0otice of six (7) $onths should there be desire to ter$inate operations o 2ranchise and patents $ust re$ain in the 1hilippine, if this is possible o <ust file a bond of 1!BB,BBB which $ay be in the following for$  surety bond  govern$ent securities  securities of political subdivisions  shares of stoc% of registered enterprises with the '9C  shares of stoc% of any corporation being sold at the stoc% exchange o 1rovided, that within six (7) $onths after each fiscal year, the '9C shall re@uire the deposit of additional securities e@uivalent to 2M of the a$ount in excess of 13BB,BBB of the gross inco$e. /'ec. !23, !27, Corporation Code8

0. What &a:$ are app&"'a,&e t! (!re"%# '!rp!rat"!#$ &"'e#$e) t! tra#$a't ,+$"#e$$ "# the Ph"&"pp"#e$K (; *5)

Any foreign corporation lawfully doing business in the 1hilippines shall be bound by all laws, rules and regulations applicable to do$estic corporations of the sa$e class, 9NC91& such only as provide for the o Creation, for$ation, organization or dissolution of corporations or o &hose which fix the relations, liabilities, responsibilities, or duties of stoc%holders, $e$bers, or officers of corporations to each other or to the corporation. , $ B A R ' $ !

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in the 1hilippines, pursuant to the ter$s of 4A !77. /-eneral -ar$ents v. Director of 1atents, 5! 'C4A 3B (!6>!)8 A foreign corporation has a right to $aintain an action in 1hilippine courts even if it is not licensed to do business and is not actually doing business on its own therein to protect its corporate and trade na$es, since it is a property right in re$, which it $ay assert to protect against all the world, in any of the courts of the worldGGeven in "urisdiction where it does not transact businessGG "ust the sa$e as it $ay protect its tangible property, against trespass or conversion. &his is in consonance with the Convention of the Cnion of 1aris for the 1rotection of :ndustrial 1roperty to which the 1hils. is a party. Article ? thereof provides, QA trade na$e shall be protected in all the countries of the Cnion without the obligation of filing or registration, whether or not it for$s part of the trade$ar%.Q &he $andate is contained in 4A !77, or the &rade$ar% ,aw. /Converse 4ubber Corp. v. Cniversal 4ubber 1roducts, !5> 'C4A !35 (!6?>)8

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appropriate govern$ent proper cases. agency in the

o

5. Mer%er !r '!#$!&")at"!# "#.!&."#% a (!re"%# '!rp!rat"!# &"'e#$e) "# the Ph"&"pp"#e$ (; -*)
• Fne or $ore foreign corporations authorized to transact business in the 1hilippines $ay $erge or consolidate with any do$estic corporation or corporations if o 'uch is per$itted under 1hilippine laws and by the law of its incorporation o &he re@uire$ents on $erger or consolidation as provided in this Code are followed .henever a foreign corporation authorized to transact business in the 1hilippines shall be a party to a $erger or consolidation in its ho$e country or state as per$itted by the law of its incorporation, such foreign corporation shall, within sixty (7B) days after such $erger or consolidation beco$es effective, file with the '9C, and in govern$ent agency, a copy of the articles of $erger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which $erger or consolidation was effected 1rovided, however, that if the absorbed corporation is the foreign corporation doing business in the 1hilippines, the latter shall at the sa$e ti$e file a petition for withdrawal of its license.

6. App&"'at"!# t! eA"$t"#% (!re"%# '!rp!rat"!#$ (; 08)
• 9very foreign corporation which on the date of the effectivity of the Code is authorized to do business in the 1hilippines under a license issued to it, shall continue to have such authority under the ter$s and condition of its license, sub"ect to the provisions of this Code and other special laws.

6. Re.!'at"!# !( &"'e#$e (; -0)
• .ithout pre"udice to other grounds provided by special laws, the license of a foreign corporation to transact business in the 1hilippines $ay be revo%ed or suspended by the '9C upon any of the following grounds o 2ailure to file its annual report or pay any fees as re@uired by this Code; o 2ailure to appoint and $aintain a resident agent in the 1hilippines as re@uired by this &itle; o 2ailure, after change of its resident agent or of his address, to sub$it to the 'ecurities and 9xchange Co$$ission a state$ent of such change as re@uired by this &itle; o 2ailure to sub$it to the 'ecurities and 9xchange Co$$ission an authenticated copy of any a$end$ent to its articles of incorporation or byG laws or of any articles of $erger or consolidation within the ti$e prescribed by this &itle; o A $isrepresentation of any $aterial $atter in any application, report, affidavit or other docu$ent sub$itted by such corporation pursuant to this &itle; o 2ailure to pay any and all taxes, i$posts, assess$ents or penalties, if any, lawfully due to the 1hilippine -overn$ent or any of its agencies or political subdivisions;

7. A2e#)2e#t$ t! art"'&e$ !( "#'!rp!rat"!# !r ,?=&a:$ !( (!re"%# '!rp!rat"!#$ (; -6)
• .ithin sixty (7B) days after the a$end$ent beco$es effective, file with the '9C, and in the proper cases with the appropriate govern$ent agency, a duly authenticated copy of the articles of incorporation or byGlaws, as a$ended, indicating clearly in capital letters or by underscoring the change or changes $ade, duly certified by the authorized official or officials of the country or state of incorporation. &he filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the 1hilippines.

8. A2e#)e) &"'e#$e (; - )
• A foreign corporation authorized to transact business in the 1hilippines shall obtain an a$ended license in the event it o Changes its corporate na$e, or o Desires to pursue in the 1hilippines other or additional purposes Ay sub$itting an application therefor to the '9C, favorably endorsed by the

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o &ransacting business in the 1hilippines outside of the purpose or purposes for which such corporation is authorized under its license; &ransacting business in the 1hilippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the 1hilippines; or Any other ground as would render it unfit to transact business in the 1hilippines. (n)

COMM #CIAL LA$
principle will be applied to prevent a person contracting with a foreign corporation fro$ later ta%ing advantage of its nonco$pliance with the statutes chiefly in cases where such person has received the benefits of the contract. MR H!&)"#%$9 Lt) .$. BaGar9( *66*) &he @uestion whether or not a foreign corporation is doing business is dependent principally upon the facts and circu$stances of each particular case, considered in the light of the purposes and language of the pertinent statute or statutes involved and of the general principles governing the "urisdictional authority of the state over such corporations CAA, the CA categorized as Jdoing businessK petitioner(s participation under the JAssign$ent Agree$entK and the JDeed of Assign$ent.K &his is si$ply untenable. &he expression Jdoing businessK should not be given such a strict and literal construction as to $a%e it apply to any corporate dealing. At this early stage and with petitioner(s acts or transactions li$ited to the assign$ent contracts, it cannot be said that it had perfor$ed acts intended to continue the business for which it was organized. :t $ay not be a$iss to point out that the purpose or business for which petitioner was organized is not discernible in the records. 0o effort was exerted by the CA to establish the nexus between petitioner(s business and the acts supposed to constitute Jdoing business.K &hus, whether the assign$ent contracts were incidental to petitioner(s business or were continuation thereof is beyond deter$ination.

o

o

. I$$+a#'e !( 'ert"("'ate !( re.!'at"!# (; -1)
• Cpon the revocation of any such license to transact business in the 1hilippines, the 'ecurities and 9xchange Co$$ission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate govern$ent agency in the proper cases. &he 'ecurities and 9xchange Co$$ission shall also $ail to the corporation at its registered office in the 1hilippines a notice of such revocation acco$panied by a copy of the certificate of revocation.

*. W"th)ra:a& ,? a (!re"%# '!rp!rat"!# (Se't"!# -6)
• :f a foreign corporation duly licensed to do business desires to withdraw, it $ust file a petition for withdrawal, and $ust $eet the following re@uire$ents o All clai$s accrued in the 1hilippines $ust be settled o All taxes $ust be paid o 1etition $ust be published once a wee% for three (*) consecutive wee%s. (§!*7)

Chapter CIC SPECIAL CORPORATIONS . C&!$e C!rp!rat"!#$

Doing business in the 1hilippines without a license C!22+#"'at"!#$ Mater"a&$ .$. CA9 ( 556) :n deter$ining whether a corporation does business in the 1hilippines or not, aside fro$ their activities within the foru$, reference $ay be $ade to the contractual agree$ents entered into by it with other entities in the country. A scrutiny of the different contracts and agree$ents entered into with various business contacts in the country indicate convincingly a purpose to convey to custo$ers and the general public that they are dealing directly with the foreign corporation, and that foreign corporation is actively engaging in business in the country. &hese agree$ents also contain provisions which are highly restrictive in nature, reducing the local signatory to be a $ere extension or instru$ent of the foreign corporation. )ence, the foreign corporation is dee$ed to be doing business in the 1hilippines without a license. 0onetheless, petitioner is estopped fro$ raising this fact to bar the foreign corporation fro$ suing. Fne who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity. And the doctrine of estoppel to deny corporate existence applies to a foreign as well as to do$estic corporations. &he 100% UP L AW , $ B A R ' $ !

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What "$ a '&!$e '!rp!rat"!#K (;56) • A close corporation is one whose articles of incorporation provide that o All the corporationRs issued stoc% of all classes, exclusive of treasury shares, shall be held of record by not $ore than a specified nu$ber of persons, not exceeding twenty (2B); o All the issued stoc% of all classes shall be sub"ect to one or $ore specified restrictions on transfer per$itted by this &itle; and o &he corporation shall not list in any stoc% exchange or $a%e any public offering of any of its stoc% of any class. A corporation shall not be dee$ed a close corporation when at least twoG thirds (2#*) of its voting stoc% or voting rights is owned or controlled by another

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corporation which corporation. is not a close o

COMM #CIAL LA$
:f the issuance or transfer of stoc% to any person would cause the stoc% to be held by $ore than such nu$ber of persons. :f a stoc% certificate of any close corporation conspicuously shows a restriction on transfer of stoc% of the corporation, the transferee of the stoc% is conclusively presu$ed to have notice of the fact that he has ac@uired stoc% in violation of the restriction, if such ac@uisition violates the restriction. .henever any person to who$ stoc% of a close corporation has been issued or transferred has, or is conclusively presu$ed under this section to have, notice either o &hat he is a person not eligible to be a holder of stoc% of the corporation, or o &hat transfer of stoc% to hi$ would cause the stoc% of the corporation to be held by $ore than the nu$ber of persons per$itted by its articles of incorporation to hold stoc% of the corporation, or o &hat the transfer of stoc% is in violation of a restriction on transfer of stoc%, the corporation $ay, at its option, refuse to register the transfer of stoc% in the na$e of the transferee. &he provisions of subsection (5) shall not be applicable if the transfer of stoc%, though contrary to subsections (!), (2) or (*), has been consented to by all the stoc%holders of the close corporation, or if the close corporation has a$ended its articles of incorporation in accordance with this &itle. &he ter$ QtransferQ, as used in this section, is not li$ited to a transfer for value. &he provisions of this section shall not i$pair any right which the transferee $ay have to rescind the transfer or to recover under any applicable warranty, express or i$plied.

.* What e#t"t"e$ 2a? #!t ,e !r%a#"/e) a$ '&!$e) '!rp!rat"!#$K • Any corporation $ay be incorporated as a close corporation, except o <ining o Fil co$panies o 'toc% exchanges o Aan%s o :nsurance co$panies o 1ublic utilities o 9ducational institutions o Corporations declared to be vested with public interest in accordance with the provisions of this Code.

.- 3a&")"t? !( re$tr"'t"!#$ !# tra#$(er !( $hare$ (;58) • 4estrictions on the right to transfer shares $ust appear in the o Articles of incorporation o AyGlaws o Certificate of stoc% F&)94.:'9, the sa$e shall not be binding on any purchaser in good faith. 'aid restrictions shall not be $ore onerous than granting the existing stoc%holders or the corporation the option to purchase the shares of the transferring stoc%holder with such reasonable ter$s, conditions or period stated therein. :f upon the expiration of said period, the existing stoc%holders or the corporation fails to exercise the option to purchase, the transferring stoc%holder $ay sell his shares to any third person.

• •

• •

.0 E((e't$ !( "$$+a#'e !r tra#$(er !( $t!'4 "# ,rea'h !( @+a&"(?"#% '!#)"t"!#$ (;55) • A person is conclusively presu$ed to have notice of the fact of ineligibility to be a stoc%holder o :f stoc% of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stoc%, and o :f the certificate for such stoc% conspicuously shows the @ualifications of the persons entitled to be holders of record thereof A person to who$ stoc% is issued or transferred is conclusively presu$ed to have notice of these facts o :f the articles of incorporation of a close corporation states the nu$ber of persons, not exceeding twenty (2B), who are entitled to be holders of record of its stoc%, and o :f the certificate for such stoc% conspicuously states such nu$ber, and

.1 A%ree2e#t$ ,? $t!'4h!&)er$ (Se't"!# 66) !. Agree$ents by and a$ong stoc%holders • 9xecuted before the for$ation and organization of a close corporation, • 'igned by all stoc%holders • 'hall survive the incorporation of such corporation and shall continue to be valid and binding between and a$ong such stoc%holders, if such be their intent, • &o the extent that such agree$ents are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agree$ents are contained, except those re@uired by this &itle to be e$bodied in said articles of incorporation. An agree$ent between two or $ore stoc%holders, if in writing and signed by $age 65 o0 355

2.

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the parties thereto, $ay provide that in exercising any voting rights, the shares held by the$ shall be voted as therein provided, or as they $ay agree, or as deter$ined in accordance with a procedure agreed upon by the$. 0o provision in any written agree$ent signed by the stoc%holders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to $a%e the$ partners a$ong the$selves. A written agree$ent a$ong so$e or all of the stoc%holders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors • 1rovided, &hat such agree$ent shall i$pose on the stoc%holders who are parties thereto the liabilities for $anagerial acts i$posed by this Code on directors. &o the extent that the stoc%holders are actively engaged in the $anage$ent or operation of the business and affairs of a close corporation, the stoc%holders shall be held to strict fiduciary duties to each other and a$ong the$selves. 'aid stoc%holders shall be personally liable for corporate torts unless the corporation has obtained reasonably ade@uate liability insurance. •

COMM #CIAL LA$
&he conse@uence is that business and affairs of corporation can no longer conducted to the advantage of stoc%holders generally the the be the

*.

2.

5.

3.

.6 A2e#)2e#t !( art"'&e$ !( "#'!rp!rat"!# (; 6-) Any a$end$ent to the articles of incorporation which see%s to delete or re$ove any provision re@uired by this &itle to be contained in the articles of incorporation or to reduce a @uoru$ or voting re@uire$ent stated in said articles of incorporation shall not be valid or effective unless approved by the affir$ative vote of at least twoGthirds (2#*) of the outstanding capital stoc%, whether with or without voting rights, or of such greater proportion of shares as $ay be specifically provided in the articles of incorporation for a$ending, deleting or re$oving any of the aforesaid provisions, at a $eeting duly called for the purpose.

4esolution of deadloc%s • &he '9C, upon written petition by any stoc%holder, shall have the power to arbitrate the dispute. • :n the exercise of such power, the Co$$ission shall have authority to $a%e such order as it dee$s appropriate, including an order o Cancelling or altering any provision contained in the articles of incorporation, byG laws, or any stoc%holderRs agree$ent; o Cancelling, altering or en"oining any resolution or act of the corporation or its board of directors, stoc%holders, or officers; o Directing or prohibiting any act of the corporation or its board of directors, stoc%holders, officers, or other persons part to the action; o 4e@uiring the purchase at their fair value of shares of any stoc%holder, either by the corporation regardless of the availability of unrestricted retained earnings in its boo%s, or by the other stoc%holders; o Appointing a provisional director; o Dissolving the corporation; or o -ranting such other relief as the circu$stances $ay warrant. 1rovisional Director • An i$partial person who is neither a stoc%holder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further @ualifications, if any, $ay be deter$ined by the Co$$ission. • A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. • A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at $eetings of directors, until such ti$e as he shall be re$oved by order of the Co$$ission or by all the stoc%holders. • )is co$pensation shall be deter$ined by agree$ent between hi$ and the corporation sub"ect to approval of the Co$$ission, which $ay fix his co$pensation in the absence of agree$ent or in the event of disagree$ent between the

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.7 Dea)&!'4$ !. 4eadlocks, Defined • -otwithstanding any contrary provisions in the articles of incorporation or by-laws or agreement of stockholders of a close corporation &he directors or stoc%holders are so divided respecting the $anage$ent of the corporationRs business and affairs &he votes re@uired for any corporate action cannot be obtained

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provisional corporation. director and the

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Sa# 8+a# Str+'t+ra& a#) Stee& Fa,r"'at"!r$ .$. CA ( 558) <otorich entered into agree$ent with 'an Iuan for the transfer of a parcel of ,and to latter. 'an Iuan already paid downpay$ent. .hen 'an Iuan was ready to pay the balance, <otorich refused to sell. <otorich contend that 0enita -ruenberg(s, treasurer of <otorich, signature is not sufficient to bind <otorich, and that the signature of 4eynaldo -ruenberg, president of <otorich is re@uired. 0enita -ruenberg is the spouse of 4eynaldo -ruenberg and both owns 66.?77M of the shares of stoc% of the corporation. )9,D <otorich is not a close corporation. &he $ere ownership by a single stoc%holder or by another corporation of all or nearly all of the capital stoc% of a corporation is not of itself sufficient ground for disregarding their separate personalities. A narrow distribution of ownership does not of itself $a%e a close corporation. &here are exceptional cases where an action by a director who is singly is the controlling stoc%holder $ay be considered as a binding corporate act and a board action is a $ere for$ality. )owever, 0enita is not the sole controlling stoc%holder.

CLOSE CORPORATIONS !. • Ma#a%e2e#t F B!ar) A+th!r"t? &here can be classification of directors into one or $ore classes, each of who$ $ay be voted for and elected solely by a particular class of stoc%; and &he articles of incorporation of a close corporation $ay provide that the business of the corporation shall be $anaged by the stoc%holders of the corporation rather than by a board of directors. 'o long as this provision continues in effect !. 2. 0o $eeting of stoc%holders need be called to elect directors Cnless the context clearly re@uires otherwise, the stoc%holders of the corporation shall be dee$ed to be directors for the purpose of applying the provisions of this Code &he stoc%holders of the corporation shall be sub"ect to all liabilities of directors. •

REGULAR CORPORATIONS

&here are no classification of board of directors

Corporate 1owers devolved upon board of directors whose powers are executed by officers. Cannot provide that it be $anaged by stoc%holders

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Aoard of directors $ust stoc%holders $eeting

be

elected

in

a

'toc%holders of a corporation are separate and distinct fro$ directors

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&he articles of incorporation $ay li%ewise provide that all officers or e$ployees or that specified officers or e$ployees shall be elected or appointed by the stoc%holders, instead of by the board of directors. Meet"#%$ Cnless the byGlaws provide otherwise, any action by the directors of a close corporation without a $eeting shall nevertheless be dee$ed valid if !. Aefore or after such action is ta%en, written consent thereto is signed by all the directors; or , $ B A R ' $ ! •

Ffficers $ust Directors

be

elected by the

Aoard

of

2. •

&he directors or trustees shall not act individually nor separately but as a body in a lawful $eeting. &hey will act only after discussion and deliberation of $atters before the$. Contracts entered into without a for$al board resolution does not bind the corporation except when ratified or when $a"ority of the board has %nowledge of the contract and the contract benefited the corporation.

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CLOSE CORPORATIONS 2. All the stoc%holders have actual or i$plied %nowledge of the action and $a%e no pro$pt ob"ection thereto in writing; or &he directors are accusto$ed to ta%e infor$al action with the express or i$plied ac@uiescence of all the stoc%holders; or All the directors have express or i$plied %nowledge of the action in @uestion and none of the$ $a%es pro$pt ob"ection thereto in writing. •

COMM #CIAL LA$
REGULAR CORPORATIONS Absence of a pro$pt ob"ection in writing does not ratify acts done by directors without a valid $eeting. &here $ust be express or i$plied ratification. 9xpress ratification $ay consist of a Aoard 4esolution to that effect :$plied ratification $ay consist of acceptance of benefits fro$ said unauthorized act while having %nowledge of said act 2ailure to give notice would render a $eeting voidable. Attendance to a $eeting despite want of notice will be dee$ed i$plied waiver All proceedings had and any business transacted at any $eeting of the stoc%holders or $e$bers, if within the powers or authority of the corporation, shall be valid even if the $eeting be i$properly held or called, provided all the stoc%holders or $e$bers of the corporation are present or duly represented at the $eeting. (§3!) 0o share $ay be deprived of voting rights, except 1referred or 4edee$able shares, unless otherwise provided by the Code &here shall always be a class#series of shares which have a CF<1,9&9 EF&:0- 4:-)&' 9AC) ')A49 ')A,, A9 9OCA, :0 A,, 49'19C&' &F 9E94H F&)94 ')A49, except as otherwise provided in the AF: 2or Aoard of directors, the byGlaws or AF: can provide for a greater $a"ority in @uoru$ 2or stoc%holders, the AF: can provide for a different percentage in @uoru$

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5.

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:f a directorRs $eeting is held without proper call or notice, an action ta%en therein within the corporate powers is dee$ed ratified by a director who failed to attend, unless he pro$ptly files his written ob"ection with the secretary of the corporation after having %nowledge thereof.

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3!t"#% F O+!r+2 &he AF: $ay provide for a classification of directors into one or $ore classes, each of which $ay be voted for and elected solely by a particular class of stoc%.

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&he AF: $ay provide for a greater @uoru$ or voting re@uire$ents in $eetings of stoc%holders or directors than those provided in this Code.

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5. •

Pre=e2pt".e R"%ht &he preGe$ptive right of stoc%holders in close corporations shall extend to all stoc% to be issued, including reissuance of treasury shares, whether for $oney, property or personal services, or in pay$ent of corporate debts, unless the articles of incorporation provide otherwise.

,i$itations on the exercise of preGe$ptive right

a. 'uch preGe$ptive right shall not extend to shares to be issued in co$pliance with laws re@uiring stoc% offerings or $ini$u$ stoc% ownership by the public; b. 0ot extend to shares to be issued in good faith with the approval of the stoc%holders representing twoGthirds (2#*) of the outstanding capital stoc%, in exchange for property needed for corporate purposes or in pay$ent of a previously contracted debt c. 'hall not ta%e effect if denied in the Articles of :ncorporation or an a$end$ent thereto.

3. •

Tra#$(era,"&"t? 4estrictions on the right to transfer shares $ust appear in the A: and in the byGlaws as well as in the certificate of stoc% otherwise the sa$e shall not be binding on any purchaser thereof in good faith • 4estrictions on the right to transfer not allowed

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CLOSE CORPORATIONS 7. • W"th)ra:a& R"%ht Any stoc%holder of a close corporation $ay, for any reason, co$pel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its boo%s to cover its debts and liabilities exclusive of capital stoc% Any stoc%holder of a close corporation $ay, by written petition to the '9C, co$pel the dissolution of such corporation whenever Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly pre"udicial to the corporation or any stoc%holder, or Corporate assets are being $isapplied or wasted. •

COMM #CIAL LA$
REGULAR CORPORATIONS

'toc%holders $ay re@uire the corporation to buyGbac% their shares at fair value when the Corporation has unrestricted 4etained 9arnings a. :n case any a$end$ent to the articles of incorporation which has the effect of • changing or restricting the rights of any stoc%holder or class of shares, or • authorizing preferences in any respect superior to those of outstanding shares of any class, or • extending or shortening the ter$ of corporate existence b. :n case of sale, lease, exchange, transfer, $ortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and c. :n case of $erger or consolidation d. 9xtension or shortening of the ter$ of the corporation (§*>) e. Diversion of funds of corporation fro$ pri$ary purpose to secondary purpose (§5!) &he corporation $ay buyGbac% shares of stoc%holders sub"ect to the following li$itations (&reasury shares) a. &here $ust be unrestricted retained earnings b. <ust be for a legiti$ate purpose

*. E)+'at"!#a& C!rp!rat"!#$
*. I#'!rp!rat"!# ,aws and the

b. 'toc%=&he nu$ber and er$ of directors shall be governed by the provisions on stoc% corporations.

a. -overning ,aws 'pecial Corporation Code (§!B7)

-. Re&"%"!+$ C!rp!rat"!#$
-. C&a$$e$ !( Re&"%"!+$ C!rp!rat"!#$ (; 65)

b. 1reGre@uisites to :ncorporation 9xcept upon favorable reco$$endation of the (<inistry of 9ducation and Culture), the '9C shall not accept or approve the articles of incorporation and byG laws of any educational institution (§!B>) *.* B!ar) !( Tr+$tee$ (; 68) a. 0onGstoc% !. Co$position=not less than 3 nor $ore than !3 trustees, but always in $ultiples of five. Cnless otherwise provided in the articles of incorporation or the byGlaws, the board or trustees of incorporated schools, colleges, or other institutions of learning shall a. 'o classify the$selves that the ter$ of office of oneGfifth (!#3) of their nu$bers shall expire every year. b. &rustees thereafter elected to fill vacancies, occurring before the expiration of a particular ter$ shall hold office only for the unexpired period c. &rustees elected thereafter to fill vacancies caused by expiration of ter$ shall hold office for five (3) years 2. Ouoru$=<a"ority of the trustees 1owers and Authority of trustees shall be defined in the byGlaws 100% UP L AW , $ B A R ' $ !

a. Corporation 'ole b. 4eligious Corporations=governed by the Corporation Code and the general provisions on nonGstoc% corporations insofar as thye $ay be applicable. -.* C!rp!rat"!# S!&e (; 6)

a. .ho $ay for$=&he chief archbishop, bishop, priest, $inister, rabbi or other presiding elder of such religious deno$ination, sect or church. (§!!B) b. 2illing of Eacancies (§!!5) !. &he successors in office concerned shall beco$e the corporation sole on their accession to office and shall be per$itted to transact business as such on the filing with the 'ecurities and 9xchange Co$$ission of a copy of their co$$ission, certificate of election, or letters of appoint$ent, duly certified by any notary public.

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2. During any vacancy in the office, the person or persons authorized and e$powered by the rules, regulations or discipline of the religious deno$ination, sect or church represented by the corporation sole to ad$inister the te$poralities and $anage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. c. 1urposeGG 2or the purpose of ad$inistering and $anaging, as trustee, the affairs, property and te$poralities of any religious deno$ination, sect or church. (§!!B) d. &he Articles of :ncorporation $ust set forth that (§!!!) !. &he presiding elder of such religious deno$ination, sect or church is the chief archbishop, bishop, priest, $inister, rabbi or presiding elder of his religious deno$ination, sect or church and that he desires to beco$e a corporation sole; 2. &he rules, regulations and discipline of his religious deno$ination, sect or church are not inconsistent with his beco$ing a corporation sole and do not forbid it; *. As such chief archbishop, bishop, priest, $inister, rabbi or presiding elder, he is charged with the ad$inistration of the te$poralities and the $anage$ent of the affairs, estate and properties of his religious deno$ination, sect or church within his territorial "urisdiction, describing such territorial "urisdiction; 5. &he $anner in which any vacancy occurring in the office of chief archbishop, bishop, priest, $inister, rabbi of presiding elder is re@uired to be filled, according to the rules, regulations or discipline of the religious deno$ination, sect or church to which he belongs; and 3. &he place where the principal office of the corporation sole is to be established and located, which place $ust be within the 1hilippines. &he articles of incorporation $ay include any other provision not contrary to law for the regulation of the affairs of the corporation. e. 2iling#sub$ission :ncorporation (§!!2) of the Articles of

COMM #CIAL LA$
rabbi or presiding elder, duly certified to be correct by any notary public. f. 9ffect of the 2iling of the Articles (§!!2) !. 'uch chief archbishop, bishop, priest, $inister, rabbi or presiding elder shall beco$e a corporation sole. 2. All te$poralities, estate and properties of the religious deno$ination, sect or church theretofore ad$inistered or $anaged by hi$ as such chief archbishop, bishop, priest, $inister, rabbi or presiding elder shall be held in trust by hi$ as a corporation sole, for the use, purpose, behalf and sole benefit of his religious deno$ination, sect or church, including hospitals, schools, colleges, orphan asylu$s, parsonages and ce$eteries thereof.

g. Ac@uisition and Alienation of 1roperty (§!!*) !. 1urpose for holding and purchasing the real and personal property, or receiving gifts and be@uests=2or its church, charitable, benevolent or educational purposes. 2. Conditions for sale or $ortgage of real property held by it i. Ay obtaining an order for that purpose fro$ the Court of 2irst :nstance of the province where the property is situated upon proof $ade to the satisfaction of the court that Tnotice of the application for leave to sell or $ortgage has been given by publication or otherwise in such $anner and for such ti$e as said court $ay have directed, and Tthat it is to the interest of the corporation that leave to sell or $ortgage should be granted. ii. &he application for leave to sell or $ortgage $ust be $ade by petition, duly verified, by the chief archbishop, bishop, priest, $inister, rabbi or presiding elder acting as corporation sole, and $ay be opposed by any $e$ber of the religious deno$ination, sect or church represented by the corporation sole *. .hen the :ntervention of the Courts shall not be necessary=:n cases where the rules, regulations and discipline of the religious deno$ination, sect or church, religious society or order concerned represented by such corporation sole regulate the $ethod of ac@uiring, holding, selling and $ortgaging real estate and personal property, such rules, regulations and discipline shall control. h. Dissolution (§!!3)

!. Eerification before filing, by affidavit or affir$ation of the chief archbishop, bishop, priest, $inister, rabbi or presiding elder, as the case $ay be, 2. Acco$panied by a copy of the co$$ission, certificate of election or letter of appoint$ent of such chief archbishop, bishop, priest, $inister,

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!. A corporation sole $ay be dissolved and its affairs settled voluntarily by sub$itting to the 'ecurities and 9xchange Co$$ission a verified declaration of dissolution. 2. &he declaration of dissolution shall set forth a. &he na$e of the corporation; b. &he reason for dissolution and winding up; c. &he authorization for the dissolution of the corporation by the particular religious deno$ination, sect or church; d. &he na$es and addresses of the persons who are to supervise the winding up of the affairs of the corporation. *. 9ffect of approval of declaration of dissolution by the 'ecurities and 9xchange Co$$ission=the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. -.- Re&"%"!+$ S!'"et"e$ (; 6)

COMM #CIAL LA$
b. &hat at least twoGthirds (2#*) of its $e$bership have given their written consent or have voted to incorporate, at a duly convened $eeting of the body; c. &hat the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by co$petent authority or by the constitution, rules, regulations or discipline of the religious deno$ination, sect, or church of which it for$s a part; d. &hat the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the ad$inistration of its affairs, properties and estate; e. &he place where the principal office of the corporation is to be established and located, which place $ust be within the 1hilippines; and f. &he na$es, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as $ay be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (3) nor $ore than fifteen (!3). d. 1urpose of incorporation

a. .ho $ay for$ a 4eligious 'ociety Any religious society or religious order, or any diocese, synod, or district organization of any religious deno$ination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious deno$ination, sect or church of which it is a part, or by co$petent authority. b. :nternal 4e@uire$ent Cpon written consent and#or by an affir$ative vote at a $eeting called for the purpose of at least twoGthirds (2#*) of its $e$bership, c. '9C 4e@uire$ent !. 2iling with the 'ecurities and 9xchange Co$$ission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or cler% or other $e$ber of such religious society or religious order, or diocese, synod, or district organization of the religious deno$ination, sect or church. 2. &he Articles $ust set forth the ff a. &hat the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious deno$ination, sect or church;

2or the ad$inistration of its te$poralities or for the $anage$ent of its affairs, properties and estate.

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,. THE SECURITIES REGULATION CODE (RA 8755)
Chapter I O3ER3IEW< THE FINANCIAL MARMETS . Cap"ta& Mar4et$
&he places to go if you want to raise new $oney . E@+"t? Cap"ta& + for the investor, the stoc% $ar%et provides a variable return a. 'toc% <ar%et + 'ecurity + eg, shares of stoc% .* De,t Cap"ta& + for the lender, the $oney or bond $ar%et provides a fixed return b. <oney <ar%et + for short ter$ debts, ie, those nor$ally $aturing within ! year fro$ date of issuance + 'ecurity + co$$ercial paper (an unsecured :FC of a co$pany, issued on a discount basis, pro$ising to pay the holder the full face value thereof upon rede$ption) c. Aond <ar%et + for long ter$ debts, ie, those nor$ally $aturing after a year fro$ date of issuance 'ecurity + "un% bonds (high yield bonds having high interest rates and are issued by lower credit rated co$panies or co$panies with no credit rating)

by the contract in a prearranged, deliverable grade at a specific date in the future at a specified price.

*.* F!re"%# EA'ha#%e Mar4et + &his $ar%et is an overGtheGcounter $ar%et conducted by international ban%s and does not have a central location 'ecurity + a forward exchange contract

*.- Opt"!#$ Mar4et + :t enables an investor to purchase an option giving hi$ the right to buy or sell a specific nu$ber of shares at a future date, at a specific price. 2or this right, the investor either pays or receives $oney but ("ust li%e in a co$$odity $ar%et) the $oney involved is only a fraction of the $ar%et value of the shares concerned. 'ecurity + call or put options

C!apter II O3ER3IE4 O5 THE (A4

. State P!&"'? (Se'.*)
&he 'tate shall establish a socially conscious, free $ar%et that regulates itself, encourages the widest participation of ownership in enterprises, enhances the de$ocratization of wealth, pro$otes the develop$ent of the capital $ar%et, protect investors, ensures full and fair disclosure about securities, $ini$izes if not totally eli$inates insider trading and other fraudulent or $anipulative devices and practices which create distortions in the free $ar%et. PSE .$. C!+rt !( Appea&$ ( 557) &he 'ecurities Act is designed not only to provide investors with ade@uate infor$ation upon which to base their decision to buy and sell securities, but also to protect legiti$ate business see%ing o obtain capital through honest representation against co$petition fro$ croo%ed pro$oters and prevent fraud in sale of securities. &he intended effects of the 'ecurities Act are chiefly the following a. 1revention of excesses and fraudulent transactions, $erely by re@uire$ent that their details be revealed; b. 1lacing the $ar%et during the early stages of the offering of security a body of infor$ation, which operating indirectly through invest$ent services and expert investors, will intend to produce a $ore accurate appraisal of a security. &he Code is selfGexecutory, and failure of '9C to issue rules and regulations shall not in any $anner affect its selfGexecutroy nature ('ec. >2.!) - . . / $age 72 o0 355

*. N!#=Cap"ta& Mar4et$
&he places to go if you want to hedge or $itigate the ris%s attached to holding capital assets *. C!22!)"t? Mar4et + &he instru$ents traded in this $ar%et are not present assets li%e shares of stoc%, co$$ercial papers or bonds but future contracts calling for delivery of an asset ; for this reason, a co$$odity $ar%et is usually referred to as a futures $ar%et. (eg, agricultural products, $etals and financial instru$ents) 'ecurity + a futures contract (one which entitles the holder to buy or sell a specific a$ount of the underlying co$$odity represented 100% UP L AW , $ B A R ' $ !

CO#/O#ATIO" LA$

COMM #CIAL LA$
should be resolved within ! year fro$ the enact$ent of this Code. &he Co$$ission shall retain "urisdiction over pending suspension of pay$ents#rehabilitation cases filed as of *B Iune 2BBB until finally disposed.

*. P!:er$ a#) F+#'t"!#$ !( the SEC (Se'. 1)

!.

)ave "urisdiction and supervision over all

2.

*.

5. 3. 7. >.

?.

6. !B. !!. !2.

!*.

!5.

corporations, partnerships or associations who are the grantees of pri$ary franchises and#or a license or per$it issued by the -overn$ent; 2or$ulate policies and reco$$endations on issues concerning the securities $ar%et, advise Congress and other govern$ent agencies on all aspects of the securities $ar%et Approve, re"ect, suspend, revo%e or re@uire a$end$ents to registration state$ents, and registration and licensing applications; 4egulate, investigate or supervise the activities of persons to ensure co$pliance; 'upervise, $onitor, suspend or ta%e over the activities of exchanges, clearing agencies and other '4Fs; :$pose sanctions for the violation of laws, rules, regulations and orders issued pursuant thereto; 1repare, approve, a$end or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise co$pliance with such rules, regulations and orders; 9nlist the aid and support of and#or deputize any and all enforce$ent agencies of the -overn$ent civil or $ilitary as well as any private institution, corporation, fir$, association or person; :ssue cease and desist orders to prevent fraud or in"ury to the investing public; 1unish for conte$pt of the Co$$ission, both direct and indirect; Co$pel the officers of any registered corporation or association to call $eetings of stoc%holders or $e$bers; :ssue subpoena duces tecum and su$$on witnesses to appear, order the exa$ination, search and seizure of all docu$ents, papers, files and records, tax returns, and boo%s of accounts of any entity or person under investigation, sub"ect to the provisions of existing laws; 'uspend, or revo%e after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; 'uch other powers as $ay be provided by law as well as those which $ay be i$plied fro$, or which are necessary or incidental to powers which are expressly granted to the Co$$ission.

-. De("#"t"!# !( Ter2$
-. Se'+r"t"e$ = are shares, participation or interests in a corporation or in a co$$ercial enterprise or profitG$a%ing venture and evidenced by a certificate, contract, instru$ent, whether written or electronic in character. :t includes (a) 'hares of stoc%, bonds, debentures, notes, evidences of indebtedness, assetGbac%ed securities; (b) :nvest$ent contracts, certificates of interest or participation in a profit sharing agree$ent, certificates of deposit for a future subscription; (c) 2ractional undivided interests in oil, gas or other $ineral rights; (d) Derivatives li%e option and warrants; (e) Certificates of assign$ents, certificates of participation, trust certificates, voting trust certificates or si$ilar instru$ents; (f) 1roprietary or non proprietary $e$bership certificates incorporations; and (g) Fther instru$ents as $ay in the future be deter$ined by the Co$$ission. -.* I$$+er = the originator, $a%er, obligor, or creator of the security. -.- Br!4er = a person engaged in the business of buying and selling securities for the account of others. -.0 Dea&er = any person who buys and sells securities for his#her own account in the ordinary course of business. -.1 A$$!'"ate) per$!# !( a ,r!4er !r )ea&er G an e$ployee thereof who, directly exercises control of supervisory authority, but does not include a sales$an, or an agent or a person whose functions are solely clerical or $inisterial. -.6 C&ear"#% A%e#'? G any person who acts as inter$ediary in $a%ing deliveries upon pay$ent to effect settle$ent in securities transactions. -.7 EA'ha#%e = an organized $ar%etplace or facility that brings together buyers and sellers and executes trades of securities and#or co$$odities. -.8 I#$")er E (a) the issuer; (b) a director or officer (or person perfor$ing si$ilar functions) of, or a person controlling the issuer; (c) a person whose relationship or for$er relationship to the issuer gives or - . . / $age 73 o0 355

&he Co$$ission(s "urisdiction over all cases enu$erated under 'ec 3 of 1D 6B2GA is hereby transferred to the Courts of general "urisdiction or the appropriate 4egional &rial Court. &he Co$$ission shall retain "urisdiction over pending cases involving intraGcorporate disputes sub$itted for final resolution which 100% UP L AW , $ B A R ' $ !

CO#/O#ATIO" LA$
gave hi$ access to $aterial infor$ation about the issuer or the security that is not generally available to the public; (d) a govern$ent e$ployee, or director, or officer of an exchange, clearing agency and#or selfGregulatory organization who has access to $aterial infor$ation about an issuer or a security that is not generally available to the public; or (e) a person who learns such infor$ation by a co$$unication fro$ any of the foregoing insiders. -.5 Pre=#ee) p&a#$ E are contracts which provide for the perfor$ance of future services or the pay$ent of future $onetary consideration at the ti$e of actual need, for which planholders pay in cash or install$ent at stated prices, with or without interest or insurance coverage and includes life, pension, education, inter$ent, and other plans which the Co$$ission $ay fro$ ti$e to ti$e approve. -. 6 Pr!2!ter = a person who, acting alone or with others, ta%es initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. -. Re%"$trat"!# $tate2e#t = is the application for the registration of securities re@uired to be filed with the Co$$ission . -. * Sa&e$2a# = a natural person, e$ployed as such or as an agent, by a dealer, issuer or bro%er to buy and sell securities. -. - U#'ert"("e) Se'+r"t? E a security evidenced by electronic or si$ilar records. -. 0 U#)er:r"ter = a person who guarantees on a fir$ co$$it$ent and#or declared best effort basis the distribution and sale of securities of any %ind by another co$pany.

COMM #CIAL LA$
the issuer, to be deter$ined by the '9C. Conse@uently, the absolute reliance on the full disclosure $ethod is the registration of securities is, therefore, untenable. Pr!'e)+re (Se'. *) 0. F"&"#% !( Re%"$trat"!# State2e#t All securities shall be registered through the filing by the issuer in the $ain office of the Co$$ission, of a sworn registration state$ent. &he registration state$ent shall include any prospectus re@uired or per$itted to be delivered. &he infor$ation re@uired for registration shall include, a$ong others the effect of the securities issue on ownership, on the $ix of ownership, especially foreign and local ownership. &he registration state$ent shall be signed by • the issuer(s executive officer • principal operating officer • principal financial officer • co$ptroller • principal accounting officer • corporate secretary or • persons perfor$ing si$ilar functions Acco$panied Ay a duly verified resolution of the board of directors of the issuer coporation. &he written consent of the expert na$ed as having certified any part of the registration state$ent or any docu$ent used in connection therewith shall also be filed. .here the registration state$ent includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration state$ent contributed to by such selling shareholders shall also be filed. 0.* Pa?2e#t !( Fee &he issuer shall pay to the Co$$ission a fee of not $ore than !#!B of !M of the $axi$u$ aggregate price at which such securities are proposed to be offered. &he Co$$ission shall prescribe by rule di$inishing fees in inverse proportion to the value of the aggregate price of the offering. 0.- N!t"'e !( F"&"#% 0otice of filing shall be i$$ediately published by the issuer in 2 newspapers of general circulation in the 1hilippines, once a wee% for 2 consecutive wee%s, or in such other $anner as the Co$$ission shall prescribe, reciting that • a registration state$ent for the sale of such security has been filed, $age 74 o0 355

0. Re%"$trat"!# !( Se'+r"t"e$
'ecurities shall not be sold or offered for sale or distribution within the 1hilippines, without a registration state$ent duly filed with and approved by the Co$$ission. ('ec. ?) PSE .$. C!+rt !( Appea&$ ( 557) Cnder the policy of Kfull $aterial disclosure,K all co$panies, listed or applying for listing, are re@uired to divulge truthfully and accurately, all $aterial infor$ation about the$selves, and the securities they sell, for the protection of the investing public, and under the pain of ad$inistrative, cri$inal and civil sanctions. A fact is dee$ed $aterial if it tends to induce or otherwise effect the sale or purchase or its securities. A reading of the grounds give for re"ection or registration reveals the intention of Congress to $a%e the registration and issuance of securities dependent, to a certain extent, on he $erits of the securities the$selves, and of 100% UP L AW , $ B A R ' $ !

- . . /

CO#/O#ATIO" LA$
• • the registration state$ent, as well as the papers attached thereto are open to inspection, copies shall be furnished to interested parties at such reasonable charge as the Co$$ission $ay prescribe.

COMM #CIAL LA$
registration of the security thereunder after due notice and hearing if it finds that • &he issuer o )as been "udicially declared insolvent; o )as violated any of the provisions of this Code, the rules pro$ulgated pursuant thereto, or any order of the Co$$ission in connection with the offering for which a registration state$ent has been filed; o )as been or is engaged or is about to engage in fraudulent transactions; o )as $ade any false or $isleading representation of $aterial facts in any prospectus concerning the issuer or its securities; o )as failed to co$ply with any re@uire$ent that the Co$$ission $ay i$pose as a condition for registration &he registration state$ent is on its face inco$plete or inaccurate in any $aterial respect or includes any untrue state$ent of a $aterial fact or o$its to state a $aterial fact re@uired to be stated therein or necessary to $a%e the state$ents therein not $isleading; or &he issuer, any officer, director or controlling person of the issuer, or person perfor$ing si$ilar functions, or any underwriter has been convicted, by a co$petent "udicial or ad$inistrative body, upon plea of guilty, or otherwise, of an offense involving $oral turpitude and#or fraud or is en"oined or restrained by the Co$$ission or other co$petent "udicial or ad$inistrative body for violations of securities, co$$odities, and other related laws. :f any issuer shall refuse to per$it an exa$ination to be $ade by the Co$$ission, its refusal shall be ground for the refusal or revocation of the registration of its securities.

0.0 W"th)ra:a& !( Re%"$trat"!# State2e#t A registration state$ent $ay be withdrawn by the issuer only with the consent of the Co$$ission. ('ec. !*) 0.1 A2e#)2e#t$ t! Re%"$trat"!# State2e#t (Se'. -) :f a registration state$ent is on its face inco$plete or inaccurate in any $aterial respect, the Co$$ission shall issue an order directing the a$end$ent of the registration state$ent. Cpon co$pliance with such order, the a$ended registration state$ent shall beco$e effective upon co$pliance with the procedure in 'ection !2.7. An a$end$ent filed pr"!r t! the e((e't".e )ate of the registration state$ent shall reco$$ence the 53 day period within which the Co$$ission shall act on a registration state$ent. An a$end$ent filed a(ter the e((e't".e )ate of the registration state$ent shall beco$e effective only upon such date as deter$ined by the Co$$ission. :f any change occurs in the facts set forth in a registration state$ent, the issuer shall file an a$end$ent thereto setting forth the change. 0.6 A''epta#'e !r ReGe't"!# ,? SEC .ithin 53 days after the date of filing of the registration state$ent, or by such later date to which the issuer has consented, the Co$$ission shall declare the registration state$ent effective or re"ected, unless the applicant is allowed to a$end the registration state$ent. a) A''epta#'e &he Co$$ission shall declare the registration state$ent to be effective if it finds that the registration state$ent together with all the other papers and docu$ents attached thereto, is on its face co$plete and that the re@uire$ents have been co$plied with. b) ReGe't"!# F Re.!'at"!# (Se'. -) •

PSE .$. C!+rt !( Appea&$ ( 557) &he '9C has no power o overturn the decision of the 1'9 Aoard to deny listing of securities. Ouestions of policy and $anage$ent are left to the honest decision of officers an directors of a corporation, and courts are without authority o substitute their "udg$ent for "udg$ent of the Aoard of Directors. &he Aoad is the business $anger of the corporation, and as long as it acts in good faith, its orders are not reviewable by he courts. Also, as the pri$ary $ar%et for securities, the 1'9 has established its na$e and goodwill, and it has the right to protect such goodwill by $aintaining a reasonable standard of propriety in the entities who choose to transact through its facilities. :t was reasonable for 1'9, therefore, to exercise its "udg$ent in the $anner it dee$s appropriate for its business identity, as long as no rights - . . / $age 75 o0 355

&he Co$$ission $ay re"ect a registration state$ent and refuse registration of the security, or revo%e the effectivity of a registration state$ent and the 100% UP L AW , $ B A R ' $ !

CO#/O#ATIO" LA$
are tra$pled upon and public welfare is safeguarded.

COMM #CIAL LA$
Cpon the issuance of the suspension order, further offer or sale of such security shall $ade until the sa$e is lifted or set aside the Co$$ission. Ftherwise, such sale shall void. no be by be

0.7 Oath !( I$$+er Cpon effectivity of the registration state$ent, the issuer shall state under oath in every prospectus that all registration re@uire$ents have been $et and that all infor$ation are true and correct as represented by the issuer or the one $a%ing the state$ent. Any untrue state$ent of fact or o$ission to state a $aterial fact re@uired to be stated or necessary to $a%e the state$ent therein not $isleading shall constitute fraud.

0otice of issuance of such order shall be given to the issuer and every dealer and bro%er who shall have notified the Co$$ission of an intention to sell such security.

6. Se'+r"t"e$ a#) Tra#$a't"!#$ (r!2 Re%"$trat"!#
6. EAe2pt Se'+r"t"e$ (Se'. 5) (a) Any security issued or guaranteed by the -overn$ent of the 1hilippines, or by any political subdivision or agency thereof, or by any person acting as an instru$entality of said -overn$ent. (b) Any security issued or guaranteed by the govern$ent of any country with which the 1hilippines $aintains diplo$atic relations, or by any state, province or political subdivision thereof on the basis of reciprocity. (c) Certificates issued by a receiver or by a trustee in ban%ruptcy duly approved by the proper ad"udicatory body. (d) Any security or its derivatives the sale or transfer of which is under the supervision and regulation of the Fffice of the :nsurance Co$$ission, )ousing and ,and Cse 4egulatory Aoard, or the Aureau of :nternal 4evenue. (e) Any security issued by a ban% except its own shares of stoc%. U#"!# Ba#4 .$. SEC (*66 ) Although the shares of stoc% of ban%ing institutions are exe$pt fro$ registration re@uire$ents, a ban% whose shares are listed in the stoc% $ar%et is covered by the 4'A and the i$ple$enting rule on the reportorial re@uire$ents of listed co$panies. &he 4'A exe$pts fro$ registration the securities issued by ban%ing or financial institutions, but nowhere does its state or even i$ply that ban% as a listed corporation is exe$pt fro$ co$plying with reports re@uired by the 4' :44s. &he Co$$ission $ay, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforce$ent of this Code with respect to such securities is not necessary in the public interest and for the protection of investors. 6.* EAe2pt Tra#$a't"!#$ (Se'. 6)

1. S+$pe#$"!# !( O((er a#) Sa&e (Se'. -)
• :f the Co$$ission dee$s it necessary, it $ay issue an order suspending the offer and sale of the securities pending any investigation. &he order shall state the grounds for ta%ing such actions, but such order of suspension although binding upon persons notified thereof, shall be dee$ed confidential, and shall not be published. :f, at any ti$e, the Co$$ission finds that a registration state$ent contains any false state$ent or o$its to state any fact re@uired to be stated therein or necessary to $a%e the state$ents therein not $isleading, the Co$$ission $ay conduct an exa$ination, and, after due notice and hearing, issue an Frder suspending the effectivity of the registration state$ent. ('ec. !5) 2ailure of the issuer, underwriter, or any other person to cooperate, or his obstruction or refusal to undergo an exa$ination, shall be a ground for the issuance of a suspension order. ('ec. !5) :f, at any ti$e, the infor$ation contained in the registration state$ent filed is or has beco$e $isleading, incorrect, inade@uate or inco$plete in any $aterial respect, or the sale or offering for sale of the security registered thereunder $ay wor% or tend to wor% a fraud, the Co$$ission $ay re@uire fro$ the issuer such further infor$ation necessary to enable the Co$$ission to ascertain whether the registration of such security should be revo%ed. &he Co$$ission $ay also suspend the right to sell and offer for sale such security pending further investigation. ('ec. !3) &he refusal to furnish infor$ation re@uired by the Co$$ission $ay be a ground for the issuance of an order of suspension. ('ec. !3)

&he order shall be dee$ed confidential, and shall not be published.

(a) At any "udicial sale, or sale by an executor, ad$inistrator, guardian or receiver or trustee in insolvency or ban%ruptcy. (b) Ay or for the account of a pledge holder, or $ortgagee or si$ilar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of - . . / $age 76 o0 355

100% UP L AW

, $

B A R ' $ !

CO#/O#ATIO" LA$
avoiding the provisions of this Code, to li@uidate a bona fide debt, a security pledged in good faith as security for such debt. An isolated transaction in which any security is sold, offered for sale, subscription or delivery is not being $ade in the course of repeated and successive transactions by the owner or his representative and such owner or representative not being the underwriter of such security. &he distribution by a corporation to its stoc%holders or other security holders as a stoc% dividend or other distribution out of surplus. &he sale of capital stoc% of a corporation to its own stoc%holders exclusively, where no co$$ission or other re$uneration is paid or given directly or indirectly in connection with the ale of such capital stoc%. &he issuance of bonds or notes secured by $ortgage upon real estate or tangible personal property, where the entire $ortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. &he issue and delivery of any security in exchange for any other security of the sa$e issuer pursuant to a right of conversion 1rovided, &hat the security surrendered has been registered under this Code or was, when sold, exe$pt, and that the security delivered in exchange, if sold at the conversion price, would at the ti$e of such conversion fall within the class of securities entitled to registration under this Code. Cpon such conversion the par value of the security surrendered in such exchange shall be dee$ed the price at which the securities issued and delivered in such exchange are sold. Aro%er(s transactions, executed upon custo$er(s orders, on any registered 9xchange or other trading $ar%et. 'ubscriptions for shares of the capital stoc% of a corporation prior to incorporation or in pursuance of an increase in its authorized capital stoc%, when no expense is incurred, or no co$$ission, co$pensation or re$uneration is paid or given, and only when the purpose for soliciting, giving or ta%ing of such subscriptions is to co$ply with the re@uire$ents of such law as to the percentage of the capital stoc% which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.

COMM #CIAL LA$
issuances of shares fro$ already authorized but still unissued capital stoc%. (") &he exchange of securities by the issuer with its existing security holders exclusively, where no co$$ission or other re$uneration is paid. (%) &he sale of securities by an issuer to fewer than 2B persons in the 1hilippines during any twelveG$onth period. (l) &he sale of securities to any of the following @ualified buyers • Aan%; • 4egistered invest$ent house; • :nsurance co$pany; • 1ension fund or retire$ent plan $aintained by the -overn$ent or any political subdivision or $anaged by a ban% or other persons authorized by the Aang%o 'entral to engage in trust functions; • :nvest$ent co$pany; or • 'uch other person as the Co$$ission deter$ine as @ualified buyers, on the basis of such factors as financial sophistication, net worth, %nowledge, and experience in financial and business $atters, or a$ount of assets under $anage$ent. &he Co$$ission $ay exe$pt other transactions, if it finds that the re@uire$ent of registration is not necessary in the public interest or for the protection of the investors such as by reason of the s$all a$ount involved or the li$ited character of the public offering. Any person applying for an exe$ption of a tra#$a't"!# shall file with the Co$$ission a notice identifying the exe$ption relied upon on such for$ and at such ti$e as the Co$$ission by rule $ay prescribe and with such notice shall pay to the Co$$ission a fee e@uivalent to !#!B of !M of the $axi$u$ aggregate price or issued value of the securities.

(c)

(d)

(e)

(f)

(g)

(h) (i)

7. Te#)er O((er a#) Pr!A? S!&"'"tat"!#
7. Te#)er O((er$ (Se'. 5)

Part"e$ Re@+"re) t! 2a4e Te#)er O((er (a) Any person or group of persons acting in concert who intends to ac@uire at least !3M of any class of any e@uity security of a listed corporation or of any class of any e@uity security of a corporation with assets of at least 13B,BBB,BBB and having 2BB or $ore stoc%holders with at least !BB shares each or (b) who intends to ac@uire at least *BM of such e@uity over a period - . . / $age 77 o0 355

Ne$t&e Ph"&"pp"#e$ .$. C!+rt !( Appea&$ ( 55 ) &he language of the 4'A exe$pting fro$ registration Jissuance o additional capital stoc%,K $ust be interpreted to cover only issuance of shares of stoc% as part of and in the course of increasing he authorized capital stoc% of a corporation. :t does not cover 100% UP L AW , $ B A R ' $ !

CO#/O#ATIO" LA$
of !2 $onths shall $a%e a tender offer to stoc%holders by filing with the Co$$ission a declaration to that effect; and furnish the issuer a state$ent containing such of the infor$ation as the Co$$ission $ay prescribe.

COMM #CIAL LA$

Cnless otherwise provided in the proxy, it shall be valid only for the $eeting for which it is intended. 0o proxy shall be valid and effective for a period longer than 3 years at one ti$e. 0o bro%er or dealer shall give any proxy, consent or authorization to a person other than the custo$er, without the express written authorization of such custo$er. A bro%er or dealer who holds or ac@uires the proxy for at least !BM or such percentage as the Co$$ission $ay prescribe of the outstanding share of the issuer, shall sub$it a report identifying the beneficial owner within !B days after such ac@uisition, for its own account or custo$er, to the issuer of the security, to the 9xchange where the security is traded and to the Co$$ission. 7.- Fee$ (!r Te#)er O((er$ a#) Certa"# Pr!A? S!&"'"tat"!#$ (Se'. * ) At the ti$e of filing with the Co$$ission of any state$ent re@uired for any tender offer or for proxy or consent solicitation, the Co$$ission $ay re@uire that the person $a%ing such filing pay a fee of not $ore than !#!B of !M of • &he proposed aggregate purchase price in the case of a transaction under 'ections 2B or >2.2; or • &he proposed pay$ent in cash, and the value of any securities or property to be transferred in the ac@uisition, $erger or consolidation, or the cash and value of any securities proposed to be received upon the sale or disposition of such assets in the case of a solicitation under 'ection 2B.

W"th)ra:a& !( te#)er O((er 'ecurities deposited pursuant to a tender offer or re@uest or invitation for tenders $ay be withdrawn by or on behalf of the depositor at any ti$e throughout the period that the tender offer re$ains open and if the securities deposited have not been previously accepted for pay$ent, and at any ti$e after 7B days fro$ the date of the original tender offer or re@uest or invitation, except as the Co$$ission $ay otherwise prescribe.

Se'+r"t"e$ !((ere) eA'ee) re@+"re) @+a#t"t? .here the securities offered exceed that which a person or group of persons is bound or willing to ta%e up and pay for, the securities that are sub"ect of the tender offer shall be ta%en up as nearly as $ay be pro rata, disregarding fractions, according to the nu$ber of securities deposited by each depositor. &he provisions of this subsection shall also apply to securities deposited within !B days after notice of an increase in the consideration offered to security holders is first published or sent or given to security holders. 3ar"at"!#$ !( Te#)er O((er .here any person varies the ter$s of a tender offer or re@uest or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are ta%en up and paid for whether or not such securities have been ta%en up by such person before the variation of the tender offer or re@uest or invitation. 7.* Pr!A? S!&"'"tat"!#$ (Se'. *6) 1roxies $ust be • in writing • signed by the stoc%holder or his duly authorized representative and • filed before the scheduled $eeting with the corporate secretary. 1eriod of Ealidity 100% UP L AW , $ B A R ' $ !

8. Re%+&at"!# !( Tra#$a't"!#$ !( D"re't!r$ F O(("'er$ F Pr"#'"pa& St!'4h!&)er$ (Se'. *-)
8. F"&"#% !( State2e#t • 9very person who is directly or indirectly the beneficial owner of $ore than !BM of any class of any e@uity security or • who is a director or an officer of the issuer of such security, shall file, at the ti$e either such re@uire$ent is first satisfied or within ten days after he beco$es such a beneficial owner, director, or officer, a state$ent with the Co$$ission and, if such security is listed for trading on an 9xchange, also with the 9xchange, of the a$ount of all e@uity securities of such issuer of which he is the beneficial owner, and within ten (!B) days after the close of each calendar $onth thereafter, if there has been a change in such ownership during such $onth, shall also file a state$ent indicating his ownership at the close of the calendar $onth and such changes as have occurred during such calendar $onth.

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$age 78 o0 355

CO#/O#ATIO" LA$
8.* Re'!.er? !( Da2a%e$ (!r U#(a"r U$e !( I#(!r2at"!# a. 2or the purpose of preventing the unfair use of infor$ation which $ay have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer • any profit realized by hi$ fro$ any purchase and sale, or any sale and purchase, of any e@uity security of such issuer within any period of less than six (7) $onths, o unless such security was ac@uired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period exceeding 7 $onths.

COMM #CIAL LA$
:t shall be unlawful for any person acting for hi$self or through a dealer or bro%er, directly or indirectly (a) &o create a false or $isleading appearance of active trading in any listed security traded in an 9xchange or any other trading $ar%et • Ay effecting any transaction in such security which involves no change in the beneficial ownership thereof; Ay entering an order or orders for the purchase or sale of such security with the %nowledge that a si$ultaneous order or orders of substantially the sa$e size, ti$e and price, for the sale or purchase of any such security, has or will be entered by or for the sa$e or different parties; or Ay perfor$ing si$ilar act where there is no change in beneficial ownership.

b. 'uit to recover such profit $ay be instituted before the 4&C by the issuer, or by the owner of any security of the issuer in the na$e and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within 7B days after re@uest or shall fail diligently to prosecute the sa$e thereafter. Aut; 0o such suit shall be brought $ore than t2 years after the date such profit was realized. :t shall be unlawful for any beneficial owner, director, or officer to sell any e@uity security of such issuer if the person selling the security or his principal (a) Does not own the security sold; or (b) :f owning the security, does not deliver it against such sale within 2B days thereafter, or does not within 3 days after such sale deposit it in the $ails or other usual channels of transportation; Aut no person shall be dee$ed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to $a%e such delivery or deposit within such ti$e, or that to do so would cause undue inconvenience or expense. &he provisions of 'ubsection 2*. 2 shall not apply to any purchase and sale, or sale and purchase and the provisions of 'ubsection 2*.* shall not apply to any sale, of an e@uity security not then or thereafter held by hi$ in an invest$ent account, by a dealer in the ordinary course of his business and incident to the establish$ent or $aintenance by hi$ of a pri$ary or secondary $ar%et, otherwise than on an 9xchange, for such security.

(b) &o effect, alone or with others, a series of transactions in securities that • • • 4aises their price to induce the purchase of a security; Depresses their price to induce the sale of a security; or Creates active trading to induce such a purchase or sale through $anipulative devices such as $ar%ing the close, painting the tape, s@ueezing the float, hype and du$p, boiler roo$ operations and such other si$ilar devices.

(c) &o circulate or disse$inate infor$ation that the price of any security listed in an 9xchange will or is li%ely to rise or fall because of $anipulative $ar%et operations of any one or $ore persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security. (d) &o $a%e false or $isleading state$ent with respect to any $aterial fact, which he %new or had reasonable ground to believe was so false or $isleading, for the purpose of inducing the purchase or sale of any security listed or traded in an 9xchange. (e) &o effect any series of transactions for the purchase and#or sale of any security traded in an 9xchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of the Co$$ission. 5.* I#$")er Tra)"#%

5. Pr!h","t"!#$
5. Ma#"p+&at"!# !( Se'+r"t? Pr"'e$

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Part"e$ '!.ere) < • :nsider • insider(s spouse or relatives by affinity or consanguinity within the second degree, legiti$ate or co$$onGlaw, :t shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of $aterial infor$ation with respect to the issuer or the security that is not generally available to the public, unless ('ec. 2>) (a) &he insider proves that the infor$ation was not gained fro$ such relationship; or (b) :f the other party selling to or buying fro$ the insider (or his agent) is identified, the insider proves • that he disclosed the infor$ation to the other party, or • that he had reason to believe that the other party otherwise is also in possession of the infor$ation. Pre$+2pt"!# A purchase or sale of a security of the issuer shall be presu$ed to have been effected while in possession of $aterial nonGpublic infor$ation if transacted after such infor$ation ca$e into existence but prior to disse$ination of such infor$ation to the public and the lapse of a reasonable ti$e for the $ar%et to absorb such infor$ation &his presu$ption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the $aterial nonG public infor$ation at the ti$e of the purchase or sale. Mater"a& #!#=p+,&"' "#(!r2at"!#< (a) :t has not been generally disclosed to the public and would li%ely affect the $ar%et price of the security after being disse$inated to the public and the lapse of a reasonable ti$e for the $ar%et to absorb the infor$ation; or (b) would be considered by a reasonable person i$portant under the circu$stances in deter$ining his course of action whether to buy, sell or hold a security. C!22+#"'at"!# !( the I#(!r2at"!# :t shall be unlawful for any insider to co$$unicate $aterial nonGpublic infor$ation about the issuer or the security to any person who, by virtue of the co$$unication, beco$es an insider, where the insider co$$unicating the infor$ation %nows or has reason to believe that such person will li%ely buy or sell a security of the issuer while in possession of such infor$ation.

COMM #CIAL LA$
I#$")er Tra)"#% "# Re&at"!# t! Te#)er O((er$ a.) :t shall be unlawful where a tender offer has co$$enced or is about to co$$ence for • Any person (other than the tender offeror) who is in possession of $aterial nonGpublic infor$ation relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person %nows or has reason to believe that o the infor$ation is nonG public and o has been ac@uired directly or indirectly fro$ the tender offeror, those acting on its behalf, the issuer of the securities, or any insider of such issuer; and • Any tender offeror, those acting on its behalf, the issuer of the securities, and any insider to co$$unicate $aterial nonGpublic infor$ation relating to the tender offer to any other person where such co$$unication is li%ely to result in a violation of subsection 2>.5.

6. Re%+&at"!# !( Mar4et Pr!(e$$"!#a&$ a#) Other E#t"t"e$
6. Re%"$trat"!# !( Br!4er$9 Dea&er$9 Sa&e$2e# a#) A$$!'"ate) Per$!#$ -eneral 4ule o 0o person shall engage in the business of buying or selling securities in the 1hilippines as a bro%er or dealer, or act as a sales$an, or an associated person of any bro%er or dealer unless registered as such with the Co$$ission. o 0o registered bro%er or dealer shall e$ploy any sales$an or any associated person, and no issuer shall e$ploy any sales$an, who is not registered as such with the Co$$ission. o N"'!&a$ .$ CA ( 558) &he futility of petitionerRs action beca$e $ore pronounced by the fact that he traded securities for the account of others without the necessary license fro$ the '9C. Clearly, such o$ission was in violation of 'ection !6 of the 4evised 'ecurities Act. &he purpose of the statute re@uiring the registration of bro%ers selling securities and the filing of data regarding securities which they propose to sell, is to protect the public and strengthen the securities $echanis$. - . . / $age 80 o0 355

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COMM #CIAL LA$
proficiency and %nowledge in the area of activity for which registration (b) :n the case of a bro%er or dealer, the applicant satisfy a $ini$u$ net capital and provide a bond or other security as the Co$$ission $ay prescribe (c) :f located outside of the 1hilippines, the applicant files a written consent to service of process upon the Co$$ission pursuant to 'ec. 73 hereof. 6.- SEC A't"!# (Se'. *8.8) a. .ithin *B days after the filing of any application, the Co$$ission shall by order (a) -rant registration if it deter$ines that the re@uire$ents of this 'ection and the @ualifications for registration have been satisfied; or (b) Deny said registration. b. &he na$es and addresses of all persons approved for registration and all orders of the Co$$ission with respect thereto shall be recorded in a 4egister of 'ecurities <ar%et 1rofessionals %ept in the office of the Co$$ission which shall be open to public inspection. 6.0 C!#t"#+"#% Re@+"re2e#t$ o 9very person registered shall file with the Co$$ission infor$ation necessary to %eep the application for registration current and accurate,. 9very person registered shall pay to the Co$$ission an annual fee. Cpon notice by the Co$$ission that such annual fee has not been paid as re@uired, the registration of such person shall be suspended until pay$ent has been $ade. !(

A$erican "urisprudence e$phasizes the principle that Qan unlicensed person $ay not recover co$pensation for services as a bro%er where a statute or ordinance re@uiring a license is applicable and such statute or ordinance is of a regulatory nature, was enacted in the exercise of the police power for the purpose of protecting the public, re@uires a license as evidence of @ualification and fitness, and expressly precludes an unlicensed person fro$ recovering co$pensation by suit, or at least $anifests an intent to prohibit and render unlawful the transaction of business by an unlicensed person.Q .e see no reason not to apply the sa$e rule in our "urisdiction. 'toc% $ar%et trading, a technical and highly specialized institution in the 1hilippines, $ust be entrusted to individuals with proven integrity, co$petence and %nowledge, who have due regard to the re@uire$ents of the law. 9xception &he Co$$ission $ay conditionally or unconditionally exe$pt any bro%er, dealer, sales$an, associated person of any bro%er or dealer, or any class of the foregoing, fro$ registration as it dee$s consistent with the public interest and the protection of investors. ('ec. 2?.*) Pr!'e)+re (Se'. *8.1)< o A ,r!4er !r )ea&er $ay apply for registration by filing with the Co$$ission a written application. 4egistration of a $a&e$2a# !r !( a# a$$!'"ate) per$!# !( a re%"$tere) ,r!4er !r )ea&er $ay be $ade upon written application filed with the Co$$ission by such sales$an or associated person. 2or purposes of this action, sales$an shall not include any e$ployee of an issuer whose co$pensation is not deter$ined directly or indirectly on sales of securities of the issuer. !( Mar4et

o

o

6.1 Ter2"#at"!# !( Re%"$trat"!# Sa&e$2a# !r A$$!'"ate) Per$!#

6.* O+a&"("'at"!#$ Pr!(e$$"!#a&$ (Se'. *8.0)

&he registration of a sales$an or associated person shall be auto$atically ter$inated upon the cessation of his affiliation with said registered bro%er or dealer, or with an issuer in the case of a sales$an e$ployed, appointed or authorized by such issuer. &he registered bro%er or dealer, or issuer, as the case $ay be, shall file with the Co$$ission a notice of separation of such sales$an or associated person. 6.6 Re.!'at"!#9 Re(+$a& !r S+$pe#$"!# !( Re%"$trat"!# !( Br!4er$9 Dea&er$9 Sa&e$2e# a#) A$$!'"ate) Per$!#$ (Se'. *5)

&he Co$$ission shall pro$ulgate rules and regulations prescribing the @ualifications for registration of each category of applicant, which shall, a$ong other things, re@uire as a condition for registration that (a) :f a natural person, the applicant satisfactorily pass a written exa$ination as to his 100% UP L AW , $ B A R ' $ !

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:f, after due notice and hearing, the Co$$ission deter$ines the applicant or registrant (a) )as willfully violated any provision of this Code, any rule, regulation or order $ade hereunder, or any other law ad$inistered by the Co$$ission, or in the case of a registered bro%er, dealer or associated person has failed to supervise, with a view to preventing such violation, another person who co$$its such violation; (b) )as willfully $ade or caused to be $ade a $aterially false or $isleading state$ent in any application for registration or report filed with the Co$$ission or a selfGregulatory organization, or has willfully o$itted to state any $aterial fact that is re@uired to be stated therein; (c) )as failed to satisfy the @ualifications or re@uire$ents for registration and the rules and regulations; (d) )as been convicted by a co$petent "udicial or ad$inistrative authority of an offense involving $oral turpitude, fraud, e$bezzle$ent, counterfeiting, theft, estafa, $isappropriation, forgery, bribery, false oath, or per"ury, or of a violation of securities, co$$odities, ban%ing, real estate or insurance laws; (e) :s en"oined or restrained by a co$petent "udicial or ad$inistrative body fro$ engaging in securities, co$$odities, ban%ing, real estate or insurance activities or fro$ willfully violating laws governing such activities; (f) :s sub"ect to an order of a co$petent "udicial or ad$inistrative body refusing, revo%ing or suspending any registration, license or other per$it under this Code, the rules and regulations pro$ulgated thereunder, any other law ad$inistered by the Co$$ission; (g) :s sub"ect to an order of a selfG regulatory organization suspending or expelling hi$ fro$ $e$bership or participation therein or fro$ association with a $e$ber or participation thereof; (h) )as been found by a co$petent "udicial or ad$inistrative authority, to have willfully violated any provisions of securities, co$$odities, ban%ing, real estate or insurance laws, or has willfully aided, abetted, counseled, co$$anded, induced or procured such violation; or 100% UP L AW , $ B A R ' $ !

COMM #CIAL LA$
(i) )as been insolvent. "udicially declared

26.5. :t shall be sufficient cause for refusal, revocation or suspension of a bro%erRs or dealer(s registration, if any associated person thereof or any "uridical entity controlled by such associated person has co$$itted any act or o$ission or is sub"ect to any disability enu$erated earlier. &ransactions and 4esponsibility of Aro%ers and Dealers ('ec. *B) a. 1rohibition against dealing or otherwise selling or buying, for its account of custo$ers, securities listed on an 9xchange issued by any corporation where any stoc%holder, director, associated person or sales$an, or authorized cler% of said bro%er or dealer and all the relatives of the foregoing within the fourth civil degree o consanguinity or affinity, is at the ti$e holding office in said issuer corporation as a director, president, viceG president, $anager, treasurer, co$ptroller, secretary or any office or trust and responsibility, or is a controlling person of the issuer. b. 1rohibition against effecting any transaction in securities or induce or atte$pt to induce the purchase or sale of any security except in co$pliance with such rules and regulations as the Co$$ission shall prescribe to ensure fair and honest dealings in securities and provide financial safeguards an other standards for the operation o bro%ers and dealers.

. Re%+&at"!# !( EA'ha#%e$
. Nat+re !( St!'4 EA'ha#%e$

L!pe/9 et. a& .$. C!+rt !( Appea&$ ( 588) An exchange is a voluntary association or corporation organized for the purpose of furnishing to its $e$bers a convenient and suitable place to transact their business of pro$oting unifor$ity in the custo$s and usages of $erchants, of inculcating principles of "ustice and e@uity in trade, of facilitating the speedy ad"ust$ent of business disputes, of ac@uiring and disse$ination valuable co$$ercial and econo$ic infor$ation and generally of securing to its $e$bers the benefits of coGoperation in the furtherance of their legiti$ate pursuits. Car!&"#a I#)+$tr"e$ .$. CMS St!'4 Br!4era%e ( 586) &he rules and regulations of the 9xchange for$ part of the contract covering securities transacted within the facilities of 9xchange.

)ec Opinion 6// &2**1)

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$age 82 o0 355

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:t is i$portant to stress that the 'ecurities 4egulation Code ('4C) treats exchanges as a special specie of corporation and sub"ects the$ to rules not otherwise applicable to regular corporations. &he stoc% exchange perfor$s a function vital to the national econo$y, a function vested with public interest. :t is said that the econo$y $oves on the basis of the rise and fall of the stoc%s traded and thus, the integrity of the exchange overseeing these transactions can never be over e$phasized. :t is for this reason that the '4C provides for stricter rules on exchange regulation. &he '4C devotes a whole chapter on exchanges and other securities trading $ar%ets, and it is replete with provisions designed to professionalize the exchange, encourage greater public participation, ensure increased transparency, greater responsibility and i$prove corporate governance. &hese provisions are not found in the Corporation Code and are $eant as additional legal re@uire$ents applicable only to exchanges. :t is thus incorrect to argue that the provisions of the Corporation Code alone govern the operation of exchanges. .hile the Corporation Code applies to corporations in general, the '4C is a special law that pri$arily governs the regulation of exchanges. As between a specific statute and a general statute, the for$er $ust prevail since it evinces the legislative intent $ore clearly than a general statute does. &hus the '9C has the power of supervision over exchanges. 'upervision entails overseeing or the power or authority to see that subordinate sub"ect perfor$s its duties. :f the latter fails or neglects to fulfill the$ the for$er $ay ta%e such action or step as prescribed by law to $a%e the$ perfor$ its duties. :n this specific instance, the '9C can even ta%e over the $anage$ent of the exchange as authorized by the '4C. .* Re%"$trat"!# Pr!'e)+re (Se'. --) Any 9xchange $ay be registered as such with the Co$$ission by filing an application for registration in such for$ and containing such infor$ation and supporting docu$ents as the Co$$ission by rule shall prescribe, including the following (a) An underta%ing to co$ply and enforce co$pliance by its $e$bers with the provisions of this Code, its i$ple$enting rules or regulations and the rules of the 9xchange; (b) &he organizational charts of the 9xchange, rules of procedure, and a list of its officers and $e$bers;

COMM #CIAL LA$
(c) Copies of the rules of the 9xchange; and (d) An underta%ing that in the event a $e$ber fir$ beco$es insolvent or when the 9xchange shall have found that the financial condition of its $e$ber fir$ has so deteriorated that it cannot readily $eet the de$ands of its custo$ers for the delivery of securities and#or pay$ent of sales proceeds, the 9xchange shall ta%e over the operation of the insolvent $e$ber fir$ and i$$ediately proceed to settle the $e$ber fir$(s liabilities to its custo$ers. 4egistration of an 9xchange shall be granted upon co$pliance with the following provisions (a) &hat the applicant is organized as a stoc% corporation; (b) &hat the applicant is engaged solely in the business of operating an exchange 1rovided, however, &hat the Co$$ission $ay, upon application, exe$pti an 9xchange organized as a stoc% corporation and owned and controlled by another "uridical person fro$ this restriction; (c) .here the 9xchange is organized as a stoc% corporation, that no person $ay beneficially own or control, directly or indirectly, $ore than 3M of the voting rights of the 9xchange and no industry or business group $ay beneficially own or control $ore than 2BM of the voting rights of the 9xchange 1rovided, however, &hat the Co$$ission $ay adopt rules, regulations or issue an order, upon application, exe$pting an applicant fro$ this prohibition where it finds that such ownership or control will not negatively i$pact on the exchange(s ability to effectively operate in the public interest; (d) &he expulsion, suspension, or disciplining of a $e$ber and persons associated with a $e$ber for conduct or proceeding inconsistent with "ust and e@uitable principles of fair trade, and for violations of provisions of this Code or the rules of the 9xchange; (e) A fair procedure for the disciplining of $e$bers and persons associated with $e$bers, the denial of $e$bership to any person see%ing to be a $e$ber, the barring of any person fro$ association with a $e$ber, and the prohibition or li$itation of any person fro$ access to services offered by the 9xchange; (f) &hat the bro%ers in the board of the 9xchange shall co$prise of not $ore than 56M of such board and shall proportionately represent the 9xchange $e$bership in ter$s of volu$e#value of trade and paid up capital, and that any natural person associated with a "uridical entity - . . / $age 83 o0 355

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that is a $e$ber shall hi$self be dee$ed to be a $e$ber for this purpose; (g) 2or the board of the 9xchange to include in its co$position (i) the president of the 9xchange, and (ii) no less than 3!M of the re$aining $e$bers of the board to be co$prised of * independent directors and persons who represent the interests of issuers, investors, and other $ar%et participants, who are not associated with any bro%er or dealer or $e$ber of the 9xchange for a period of 2 years prior to his#her appoint$ent. 0o officer or e$ployee of a $e$ber, its subsidiaries or affiliates or related interests shall beco$e an independent director 1rovided, however, &hat the Co$$ission $ay by rule, regulation, or order upon application, per$it the exchange organized as a stoc% corporation to use a different governance structure 1rovided, further, &hat the Co$$ission is satisfied that the 9xchange is acting in the public interest and is able to effectively operate as a selfGregulatory organization under this Code. (h) &he president and other $anage$ent of the 9xchange to consist only of persons who are not $e$bers and are not associated in any capacity, directly or indirectly with any bro%er or dealer or $e$ber or listed co$pany of the 9xchange 1rovided, &hat the 9xchange $ay only appoint, and a person $ay only serve, as an officer of the exchange if such person has not been a $e$ber or affiliated with any bro%er, dealer, or $e$ber of the 9xchange for a period of at least 2 years prior to such appoint$ent; (i) &he transparency of transactions on the 9xchange; (") &he e@uitable allocation of reasonable dues, fees, and other charges a$ong $e$bers and issuers and other persons using any facility or syste$ which the 9xchange operates or controls; (%) 1revention of fraudulent and $anipulative acts and practices, pro$otion of "ust and e@uitable principles of trade, and, in general, protection of investors and the public interest; and (l) &he transparent, pro$pt and accurate clearance and settle$ent of transactions effected on the 9xchange.

COMM #CIAL LA$
.- Se%re%at"!# a#) L"2"tat"!# !( F+#'t"!#$ !( Me2,er$9 Br!4er$ a#) Dea&er$ (Se'. -0) :t shall be unlawful for any $e$berG bro%er of an 9xchange to effect any transaction on such 9xchange for • • • its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises invest$ent discretion

1rovided, however, &hat this section shall not $a%e unlawful + (a) Any transaction by a $e$berGbro%er acting in the capacity of a $ar%et $a%er; (b) Any transaction reasonably necessary to carry on an oddGlot transactions; (c) Any transaction to offset a transaction $ade in error; and (d) Any other transaction of a si$ilar nature as $ay be defined by the Co$$ission. Se' Op"#"!# P (*66-) &he aboveG@uoted 'ec. **.2. of the '4C is not found in the old 4evised 'ecurities Act, nor in the Corporation Code. :te$s (c), (f) and (g) thereof are all intended to encourage greater public participation, ensure increased transparency, greater responsibility and i$prove corporate governance. 'ubsection (c) $andates that the ownership of the stoc%s of the exchange be broadened and de$ocratized, thereby ensuring greater public participation. Fn the other hand, 'ubsections (f) and (g) $andate a board co$position where no $ore than 56M of the seats shall be occupied by bro%ers, and no less than 3!M to be co$prised of (*) independent directors and persons representing other sectors of the $ar%et. .ith respect to independent directors, their election in the Aoard is intended to ensure that the Aoard will faithfully discharge its fiduciary responsibilities to its stoc%holders. &hese provisions ai$ for a $ore representative, de$ocratic, independent Aoard of Directors that is autono$ous fro$ the control of any sector of the $ar%et.

*. I#)epe#)e#t D"re't!r$
Any corporation with • • a class of e@uity securities listed for trading on an 9xchange or with assets in excess of 13B,BBB,BBB.BB and having 2BB or $ore holders, at least of 2BB of which are holding at least !BB shares of a class of its e@uity securities or which has sold a class of e@uity securities

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to the public pursuant to an effective registration state$ent 'hall have at least 2 independent directors or such independent directors shall constitute at least 2BM of the $e$bers of such board, whichever is the lesser. An Jindependent directorK shall $ean a person other than an officer or e$ployee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent "udg$ent in carrying out the responsibilities of a director.

COMM #CIAL LA$
Corporation Code to provide that • • the contrary,

-. Se&(=Re%+&at!r? Or%a#"/at"!#$
-. S'!pe F De("#"t"!# (Se'. -5) &he Co$$ission shall have the power to register as a selfGregulatory organization organizations whose operations are related to or connected with the securities $ar%et such as but not li$ited to • • • • • • • • • • associations of bro%ers and dealers, transfer agents, custodians, fiscal and paying agents, co$puter services, news disse$inating services, proxy solicitors, statistical agencies, securities rating agencies, and securities infor$ation processors

.hich are engaged in the business of (a) Collecting, processing, or preparing for distribution or publication, or assisting, participating in, or coordinating the distribution or publication of, infor$ation with respect to transactions in or @uotations for any security; or (b) Distributing or publishing on a current and continuing basis, infor$ation with respect to such transactions or @uotations. -.* Re%"$trat"!# An association of bro%ers and dealers $ay be registered as a securities association by filing with the Co$$ission an application for registration. 'uch association shall not be registered unless the Co$$ission deter$ines that (a) &he association is so organized and has the capacity to be able to carry out the purposes of this Code and to co$ply with, and to enforce co$pliance by its $e$bers and persons associated with its $e$bers with the provisions of this Code. (b) &he rules of the association, notwithstanding anything in the

Any registered bro%er or dealer $ay beco$e a $e$ber of the association; &here exist a fair representation of its $e$bers to serve on the Aoard of Directors of the association and in the ad$inistration of its affairs, and that any natural person associated with a "uridical entity that is a $e$ber shall hi$self be dee$ed to be a $e$ber for this purpose; &he Aoard of Directors of the association includes in its co$position (a) &he president of the association and (b) 1ersons who represent the interests of issuers and public investors and are not associated with any bro%er or dealer or $e$ber of the association; that the president and other $anage$ent of the association not be a $e$ber or associated with any bro%er, dealer or $e$ber of the association; 2or the e@uitable allocation of reasonable dues, fees, and other charges a$ong $e$bers and issuers and other persons using any facility or syste$ which the association operates or controls; 2or the prevention of fraudulent and $anipulative acts and practices, the pro$otion of "ust and e@uitable principles of trade, and the protection of investors and the public interest; &hat its $e$bers and persons associated with its $e$bers, be appropriately disciplined for violation of any provision of this Code; &hat a fair procedure for the disciplining of $e$bers, and the denial of $e$bership to any person see%ing $e$bership therein, the barring of any person fro$ beco$ing associated with a $e$ber thereof, and the prohibition or li$itation by the association of any person with respect to access to services offered by the association or a $e$ber thereof.

-.- De#"a& !( Me2,er$h"p F E2p&!?2e#t (Se'. -5.0) (a) A registered securities association shall deny $e$bership to any person who is not a registered bro%er or dealer. $age 85 o0 355

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(b) A registered securities association $ay deny $e$bership to, or condition the $e$bership of, a registered bro%er or dealer if such bro%er or dealer • Does not $eet the standards of financial responsibility, operational capability, training, experience, or co$petence that are prescribed by the rules of the association; or • )as engaged, and there is a reasonable li%elihood it will again engage, in acts or practices inconsistent with "ust and e@uitable principles of fair trade. (c) A registered securities association $ay deny $e$bership to a registered bro%er or dealer not engaged in a type of business in which the rules of the association re@uire $e$bers to be engaged 1rovided, however, &hat no registered securities association $ay deny $e$bership to a registered bro%er or dealer by reason of the a$ount of business done by the bro%er or dealer. (d) A registered securities association $ay bar a sales$an or person associated with a bro%er or dealer fro$ being e$ployed by a $e$ber or set conditions for the e$ploy$ent of a sales$an or associated if such person • Does not $eet the standards of training, experience, or co$petence that are prescribed by the rules of the association; or • )as engaged, and there is a reasonable li%elihood he will again engage, in acts or practices inconsistent with "ust and e@uitable principles of fair trade.

COMM #CIAL LA$
*7 calendar $onths, but not $ore than >3M of the current $ar%et price. 0.* Pr!h","te) Cre)"t Arra#%e2e#t$ (Se'. 08.*) 0o $e$ber of an 9xchange or bro%er or dealer shall, directly or indirectly, extend or $aintain credit or arrange for the extension or $aintenance of credit to or for any custo$er (a) Fn any security unless such credit is extended and $aintained in accordance with the rules and regulations which the Co$$ission shall prescribe; (b) .ithout collateral or on any collateral other than securities, except • to $aintain a credit initially extended in confor$ity with the rules and regulations of the Co$$ission; and • in cases where the extension or $aintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circu$venting the provisions of par (a) of this subsection. 0.Re$tr"'t"!#$ !# B!rr!:"#%$ Me2,er$9 Br!4er$9 a#) Dea&er$ (Se'. 05) ,?

:t shall be unlawful for any registered bro%er or dealer, or $e$ber of an 9xchange, directly or indirectly • &o per$it in the ordinary course of business his aggregate indebtedness including custo$ers( credit balances, to exceed such percentage of the net capital (exclusive of fixed assets and value of 9xchange $e$bership) e$ployed in the business, but not exceeding in any case 2,BBBM, as the Co$$ission $ay prescribe. &o pledge, $ortgage, or otherwise encu$ber any security carried for the account of any custo$er under circu$stances o &hat will per$it the co$$ingling of his securities, without his written consent, with the securities of any custo$er; o &hat will per$it such securities to be co$$ingled with the securities of any person other than a bona fide custo$er; or o &hat will per$it such securities to be pledged, $ortgaged or encu$bered, or sub"ected to any lien or clai$ of the pledgee, for a su$ in excess of the aggregate indebtedness of such custo$ers in respect of such securities. &o lend or arrange for the lending of any security carried for the account of any custo$er without the written consent of such custo$er or in contravention of such rules and $age 86 o0 355

0 Mar%"# Tra)"#%
0. Mar%"# Re@+"re2e#t$ (Se'. 08) 2or the purpose of preventing the excessive use of credit for the purchase or carrying of securities, the Co$$ission, shall prescribe rules and regulations with respect to the a$ount of credit that $ay be extended on any security. 2or the extension of credit, such rules and regulations shall be based upon the following standard An a$ount not greater than whichever is the higher of + (a) 73M of the current $ar%et price of the security; or (b) !BBM)of the lowest $ar%et price of the security during the preceding 100% UP L AW , $ B A R ' $ ! •

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regulations as the Co$$ission shall prescribe. 0.0 E#(!r'e2e#t !( Mar%"# Re@+"re2e#t$ a#) Re$tr"'t"!#$ !# B!rr!:"#% (Se'. 16) &o prevent indirect violations of the $argin re@uire$ents, the bro%er or dealer shall re@uire the custo$er in nonG $argin transactions to pay the price of the security within such period as the Co$$ission $ay prescribe, which shall in no case exceed the prescribed settle$ent date. Ftherwise, the bro%er shall sell the security purchased starting on the next trading day but not beyond !B trading days following the last day for the custo$er to pay such purchase price, unless such sale cannot be effected within said period for "ustifiable reasons. &he sale shall be without pre"udice to the right of the bro%er or dealer to recover any deficiency fro$ the custo$er. &o prevent indirect violation of restrictions on borrowings under 'ection 56, the bro%er shall, unless otherwise directed by the custo$er, pay the net sales price of the securities sold for a custo$er within the sa$e period as above prescribed by the Co$$ission 1rovided, &hat the custo$er shall be re@uired to deliver the instru$ents evidencing the securities as a condition for such pay$ent upon de$and by the bro%er.

COMM #CIAL LA$
(e) Any person has refused to per$it any lawful exa$inations into its affairs, &he i$position of ad$inistrative sanctions shall be without pre"udice to the filing of cri$inal charges. 1.* Sett&e2e#t O((er$ (Se'. 11) At any ti$e, during an investigation or proceeding under this Code, parties being investigated and#or charged $ay propose in writing an offer of settle$ent with the Co$$ission. &he Co$$ission $ay consider the offer based on ti$ing, the nature of the investigation or proceeding, and the public interest. &he Co$$ission $ay only agree to a settle$ent offer based on its findings that such settle$ent is in the public interest. Any agree$ent to settle shall have no legal effect until publicly disclosed. 'uch decision $ay be $ade without a deter$ination of guilt on the part of the person $a%ing the offer.

6. C"."& L"a,"&"t"e$ (Se'. 16)
6. O# A''!+#t State2e#t !( Fa&$e Re%"$trat"!#

Wh! 2a? $+eK Any person • ac@uiring a security, the registration state$ent of which or any part thereof contains on its effectivity an untrue state$ent of a $aterial fact or o$its to state a $aterial fact re@uired to be stated therein or necessary to $a%e such state$ents not $isleading, and • who suffers da$age :f the person who ac@uired the security did so after the issuer has $ade generally available to its security holders an inco$e state$ent covering a period of at least !2 $onths, then the right of recovery shall be conditioned on proof that such person ac@uired the security relying upon such untrue state$ent.

1. A)2"#"$trat".e Sett&e2e#t O((er$
1.

Sa#'t"!#$

a#)

A)2"#"$trat".e Sa#'t"!#$ (Se'. 10) :f, after due notice and hearing, the Co$$ission finds that (a) &here is a violation of this Code, its rules, or its orders; (b) Any registered bro%er or dealer, associated person thereof has failed reasonably to supervise another person sub"ect to supervision, who co$$its any such violation; (c) Any registrant or other person has, in a registration state$ent or in other reports, applications, accounts, records or docu$ents $ade any untrue state$ent of a $aterial fact, or o$itted to state any $aterial fact re@uired to be stated therein or necessary to $a%e the state$ents therein not $isleading; (d) or, in the case of an underwriter, has failed to conduct an in@uiry with reasonable diligence to insure that a registration state$ent is accurate and co$plete in all $aterial respects; or

Wh! 2a? ,e $+e)K (a) &he issuer and every person who signed the registration state$ent; (b) 9very person who was a director or a partner in the issuer at the ti$e of the filing of the registration state$ent or any part, supple$ent or a$end$ent thereof; (c) 9very person who is na$ed in the registration state$ent as being or about to beco$e a director or a partner; (d) 9very auditor or auditing fir$ na$ed as having certified any financial state$ents used in connection with - . . / $age 87 o0 355

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the registration state$ent or prospectus. (e) 9very person who, with his written consent has been na$ed as having prepared or certified any part of the registration state$ent, or as having prepared or certified any report or valuation which is used in connection with the registration state$ent. (f) 9very selling shareholder who contributed to and certified as to the accuracy of a portion of the registration state$ent. (g) 9very underwriter with respect to such security. P!$$",&e De(e#$e < 'uch person $ay allege that at the ti$e of such ac@uisition he %new of no such untrue state$ent or o$ission 6.* O# A''!+#t !( I#$")er Tra)"#% (Se'. 6 ) Wh! 2a? ,e $+e)K Any insider who violates 'ubsection 2>.! and any person in the case of a tender offer who violates 'ubsection 2>.5 (a) (i), or any rule or regulation thereunder, by purchasing or selling a security while in possession of $aterial infor$ation not generally available to the public, shall be liable in a suit brought by any investor who, conte$poraneously with the purchase or sale of securities that is the sub"ect of the violation, purchased or sold securities of the sa$e class unless such insider, or such person in the case of a tender offer, proves that such investor %new the infor$ation or would have purchased or sold at the sa$e price regardless of disclosure of the infor$ation to hi$. An insider who co$$unicates $aterial nonGpublic infor$ation, shall be "ointly and severally liable with and to the sa$e extent as, the insider, or person in the case of a tender offer.

COMM #CIAL LA$
co$$unications, reports) $ore than 3 years after the $a&e. 0o action shall be $aintained to enforce any liability created under any other provision of this Code unless brought • • within 2 years after the )"$'!.er? of the facts constituting the cause of action and within 3 years after such 'a+$e !( a't"!# a''r+e).

8. Da2a%e$ t! ,e A:ar)e) (Se'. 6-)
8. A2!+#t$ F M"#)$ !( Da2a%e$ All suits to recover da$ages pursuant to 'ections 37 (false registration state$ent), 3> (false prospectus, co$$unications, reports), 3? (fraud in connection with securities transactions), 36 ($anipulation of prices), 7B (co$$odity futures contracts and preGneed plans) and 7! (insider trading) shall be brought before the 4&C, which shall have exclusive "urisdiction to hear and decide such suits. &he Court is hereby authorized to award da$ages in an a$ount not exceeding triple the a$ount of the transaction plus actual da$ages. 9xe$plary da$ages $ay also be awarded in cases of bad faith, fraud, $alevolence or wantonness in the violation of this Code, and rules and regulations pro$ulgated hereunder. &he Court is also authorized to award attorney(s fees not exceeding *BM of the award. 8.* Per$!#$ &"a,&e t! pa? &he persons specified in 'ections 37, 3>, 3?, 36, 7B and 7! hereof shall be "ointly and severally liable fo he pay$ent of da$ages. )owever, any person who beco$es liable for the pay$ent of such da$ages $ay recover contribution fro$ any other person who, if sued separately, would have been liable to $a%e the sa$e pay$ent, unless the for$er was guilty of fraudulent representation and the latter was not. All persons, including the issuer, held liable under the provisions of 'ections 37, 3>, 3?, 36, 7B and 7! shall contribute e@ually to the total liability ad"udged herein. :n no case shall the principal stoc%holders, directors and other officers, recover their contribution to the liability fro$ the issuer. )owever, the right of the issuer to recover fro$ the guilty parties the a$ount it has contributed shall not be pre"udiced.

7. L"2"tat"!# !( A't"!#$ (Se'. 6*)
0o action shall be $aintained to enforce any liability created under 'ection 37 (false registration state$ent) or 3> (false prospectus. Co$$unications, reports) unless brought within 2 years after the )"$'!.er? of the untrue state$ent or the o$ission. :f the action is to enforce a liability created under 'ubsection 3>.!(a) (registration of securities), unless brought within 2 years after the ."!&at"!# upon which it is based. :n no event shall any such action be brought to enforce a liability created under 'ection 37 or 'ubsection 3>.! (a) $ore than 3 years after the security was bona fide !((ere) t! the p+,&"', or under 'ubsection 3>.! (b) (sale based on false prospectus,

5. N!#=:a".er !( Pr!."$"!#$
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Any condition, stipulation, provision binding any person to waive co$pliance with any provision of this Code or of any rule of an 9xchange as well as the waiver itself, shal be void.

*6. Pe#a&t"e$
Any person who violates any of the provisions of this Code or any person who, in a registration state$ent $a%es any untrue state$ent of a $aterial fact or o$its to state any $aterial fact re@uired to be stated therein or necessary to $a%e the state$ents therein not $isleading, shall, upon conviction, suffer • • • a fine of not less than 13B,BBB.BB nor $ore than 13,BBB,BBB.BB or i$prison$ent of not less than > years nor $ore than 2! years, or both in the discretion of the court.

:f the offender is a corporation, partnership or association or other "uridical entity, the penalty $ay be i$posed upon such "uridical entity and upon the officer or officers of the corporation, partnership, association or entity responsible for the violation. :f such officer is an alien, he shall in addition to the penalties prescribed, be deported.

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COMM #CIAL LA$
haphazardly or lightly. 0or should it be brushed aside in order to $eet the necessities in a single case -. L"(e !( a Ne%!t"a,&e I#$tr+2e#t

"egotiable Instruments Law 3Act "o% ),&(4
C5apter I% I"T#O62CTIO"
. The Ne%!t"a,&e I#$tr+2e#t • .ritten contract for the pay$ent of $oney, by its for$ intended as substitute for $oney and intended to pass fro$ hand to hand to give the )DC the right to hold the sa$e and collect the su$ due. :nstru$ents are negotiable when they confor$ to all the re@uire$ents prescribed by the 0:, (Act $5#%) 5# February %&%%). Although considered as $ediu$ for pay$ent of obligations, negotiable instru$ents are not legal tender ('ec "5) -ew 0entral 9ank Act) * A ,"(#); 0egotiable instru$ents shall produce the effect of pay$ent only when they have been encashed or when through the fault of the creditor they have been i$paired. (Art %$8&) 00) AC& a C)9CP which has been cleared and credited to the account of the creditor shall be e@uivalent to a delivery to the creditor of cash. Ne%!t"a,&e Contains all the re@uisites of 'ec. ! of the 0:, &ransferred by negotiation )DC $ay have better rights than transferor 1rior parties warrant pay$ent &ransferee has right of recourse against inter$ediate parties N!#=#e%!t"a,&e Does not contain all the re@uisites of 'ec. ! of the 0:, &ransferred by assign$ent &ransferee ac@uires rights only of his transferor 1rior parties $erely warrant legality of title &ransferee has no right of recourse

!. 2. *. 5. 3. 7. >. ?. 6. !B.

issue negotiation present$ent for acceptance in certain bills acceptance dishonor by or acceptance present$ent for pay$ent dishonor by nonpay$ent notice of dishonor protest in certain cases discharge

0. M"#)$ !( Ne%!t"a,&e I#$tr+2e#t$ 0. . Pr!2"$$!r? #!te G a promise to pay $oney • unconditional pro$ise in writing $ade by one person to another signed by the $a%er • engaging to pay on de$and, or at a fixed or deter$inable future ti$e a su$ certain in $oney to order or to bearer • where a note is drawn to the $a%er(s own order, not co$plete until indorsed by hi$ ('ec %+8) -6=). 0.*. B"&& !( eA'ha#%e G an order $ade by one person to another to pay $oney to a third person. • unconditional order in writing addressed by one person to another signed by the person giving it • re@uiring the person to who$ it is addressed to pay on de$and or at a fixed or deter$inable future ti$e a su$ certain in $oney to order or to bearer ('ec %$") -6=). → Che'4 bill of exchange drawn on a bank payable on de$and. Pr!2"$$!r? N!te Cnconditional pro$ise :nvolves 2 parties <a%er pri$arily liable Fnly ! present$ent G for pay$ent B"&& !( EA'ha#%e Cnconditional order :nvolves * parties Drawer only secondarily liable -enerally 2 present$ents G for acceptance and for pay$ent

• •

*. Ne%!t"a,&e I#$tr+2e#t$ La: o &he 0:, applies only to instru$ents which confor$ with the re@uisites laid down by 'ec! of the law. 'hould any of said re@uisites be absent, the instru$ent would not be negotiable and would therefore not be governed by the 0:, but by the general law on contracts. TIP :t is advised that one $e$orizes the two $ost i$portant provisions of the 0:, 'ec. ! (Forms of negotiable instruments) and 'ec. 32 (Ihat constitutes a holder in due course) MICHAEL A. OSMEQA .. CITIBANM (*660) &he 0egotiable :nstru$ents ,aw was enacted for the purpose of facilitating, not hindering or ha$pering transactions in co$$ercial paper. &hus, the said statute should not be ta$pered with 100% UP L AW , $ 1. Part"e$

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1. . A$ re%ar)$ promissor, note< !. 1ro$issor#$a%er 2. 1ayee G person to who$ the pro$ise to pay is $ade. 1.*. A$ re%ar)$ $ill of e7c!an%e< !. Drawer G person who gives the order to pay. 2. Drawee G addressee of the order. *. 1ayee G person to who$ the pay$ent is to be $ade.

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COMM #CIAL LA$
UNCONDITIONAL< <ere indication of the particular fund out of which rei$burse$ent is to be $ade, or an indication of a particular account to be debited with the a$ount AA statement of the transaction which gives rise to the instrument • UNCONDITIONAL< <ere recital of the transaction or consideration for which the instru$ent was issued • )owever, the fact that the condition appearing on the instru$ent has been fulfilled will not convert it into a negotiable one. 9ut an order or promise to pay out of a particular fund is not unconditional • CONDITIONAL< when reference to the fund clearly indicates an intention that such fund alone should be the source of pay$ent .ETROPO(ITAN ;AN< '8 CA &/00/) The treasury warrants in question are not -6s They are payable from a particular fund) to wit) Fund (5% The indication of Fund (5% as the source of the payment to be made on the treasury warrants makes the order or promise to pay Unot unconditionalU and the warrants themselves nonnegotiable .-. S+2 Pa?a,&e 2+$t ,e Certa"# 1. Se'. *9 NIL< &he su$ payable is a su$ certain, even if a. .ith interest; b. Ay stated install$ents; c. Ay stated install$ents with acceleration clause; d. .ith exchange, whether at a fixed rate or at the current rate; or e. .ith costs of collection or attorneyRs fee. ,. A su$ is certain if fro$ the face of the instru$ent it can be $athe$atically co$puted. 3. A stipulation to pay a higher rate of interest if the note is not paid or a lower rate if it is paid on or before $aturity does not render the instru$ent nonGnegotiable. .0. M+$t ,e Pa?a,&e "# M!#e? 1. Capable of being transfor$ed into $oney. ,. 0F0 09-F&:AA,9 an instru$ent which contains an order or pro$ise to do an act in a""ition to the pay$ent of $oney 3. AC& :f the order or pro$ise gives the !ol"er an election to re@uire so$ething to be done in lieu of pay$ent of $oney, an instru$ent otherwise negotiable would not be affected thereby. ()ec8 =+ NI() → Aut if the option is with the maker or person primaril, lia$le, instru$ent is 0F& negotiable. ?. Pind of current $oney does not affect negotiability. 'ince the value of the note can by a si$ple - . . / $age 91 o0 355

I#)!r$er G the payee of an instru$ent who transfers it to another by signing it at the bac% thereof I#)!r$ee G person to who$ the indorser negotiates the instru$ent, who, by such negotiation, beco$es the holder of the instru$ent.

C5apter II% " 1OTIABILIT7
Re@+"$"te$ !( Ne%!t"a,"&"t?0

. . M+$t ,e "# Wr"t"#% a#) S"%#e) ,? the Ma4er 1. 0o person liable on the instru$ent whose signature does not appear thereon. ,. Fne who signs in a tra"e or assume" name liable to sa$e extent as if he had signed in his own na$e. ()ec8 /9+ NI() 3. 'ignature of party $ay be $ade by duly authorized agent; no particular for$ of appoint$ent necessary. ()ec8 /0+ NI() ?. Q:n writingQ G includes print; written or typed @. )i%nature, binding so long it is intended or adopted as the signature of the signer or $ade with his authority. .*. M+$t '!#ta"# a# U#'!#)"t"!#a& Or)er !r Pr!2"$e t! Pa? !. JF4D94 F4 14F<:'9 &F 1AHK #. PROMISSORB NOTE< i. 14F<:'9 &F 1AH should be express on the face of the instru$ent ii. .ord Qpro$iseQ is not absolutely necessary. Any expression e@uivalent to a pro$ise is sufficient. iii. .ere ac no:le"%ment of a "e$t insufficient 2. BILLS OF ECCHANGE i. Or)er G co$$and or i$perative direction; the instru$ent, by its nature, "eman"in% a ri%!t. ii. .ords which are e@uivalent to an order are sufficient. iii. A mere request or aut!orit, to pa, does not constitute an order. iv. Although the $ere use of polite words li%e QpleaseQ does not of itself deprive the instru$ent of its characteristics as an order, its language $ust clearly indicate a de$and upon the drawee to pay. 2. JC0CF0D:&:F0A,K #. &he promise or or"er to pa, , to be unconditional, $ust be +#@+a&"("e). 2. Se'. -9 NIL< AAn unqualified order or promise to pay is unconditionalTthough coupled with: AAn indication of a particular fund out of which reimbursement is to be made) or a particular account to be debited with the amount
?

Su!!e te& A%e/$%ic 6 UP A#SC$TBS P#WN6 U%c$%&iti$%#" $r&er #%& Pr$/i e, 9#0#2"e i% A$%e0, Si!%e& 20 /#Cer, Cert#i%t0 # t$ Ti/e, Su/ #%& P#rtie , i% Writi%!, i%c"u&e 1$r& $8 Ne!$ti#2i"it0.
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COMM #CIAL LA$
:f option can be exercised only after the happening of a specified event#act over which he has no control (con"itional), still 09-F&:AA,9.  :f option is uncon"itional, ti$e of pay$ent is rendered uncertain, NOT negotiable. Fther instances where instru$ent still NE?OTIA;(E  .hen option given to the holder to accelerate the $aturity of an install$ent note upon failure of the $a%er to pay any install$ent when due.  Acceleration , auto$atic upon default.  Acceleration by operation of law.

@.

$athe$atical co$putation be expressed in the value of the lawful $oney of the latter country (6ncitti v Ferrante) %&##) .' Mur) Fbligations in foreign currency $ay be discharged in 1hilippine currency based on the prevailing rate at the ti$e of pay$ent, pursuant to 4A ?!?* (Asia .orld 4ecruit$ent v 0,4C, !666). o

.1. T"2e !( Pa?2e#t 2+$t ,e Certa"# • 3urpose :nfor$ing the holder of the instru$ent of the date when he $ay enforce pay$ent thereof. • An instru$ent $ay be payable
1.

!# )e2a#) ('ec , -6=) !.) 9xpressed to be payable on de$and, or at sight, or on presentation; 2.) 0o ti$e for pay$ent is expressed; *.) .here an instru$ent is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on de$and. De2a#) "#$tr+2e#t$ )older $ay call for pay$ent any ti$e; $a%er has an option to pay at any ti$e, and the refusal of the holder to accept pay$ent will ter$inate the running of interest, if any, but the obligation to pay the note re$ains.

@.

,.

at a ("Ae) t"2e o Fnly on the stipulated date, and not before, $ay the holder de$and its pay$ent. o 'hould he fail to de$and pay$ent, the instru$ent beco$es overdue but re$ains valid and negotiable. :t is $erely converted to a de$and instru$ent. at a )eter2"#a,&e (+t+re t"2e o Deter2"#a,&e (+t+re t"2e, if expressed to be payable ()ec8 >+ NI() !.) At a fixed period after date of sight; 2.) Fn or before a fixed or deter$inable future ti$e specified therein; *.) Fn or at a fixed period after the occurrence of a specified event which is certain to happen, though the ti$e of happening be uncertain. o :f payable upon a contingency, both negotiable, and the happening of the event does not cure the defect.

1rovisions eAte#)"#% t"2e !( pa?2e#t o Ge#era& r+&e 0egotiability not affected. 9ffect is si$ilar with that of an acceleration clause at the option of the 2a4er.  0egotiability not affected, even if the h!&)er is given the option to extend ti$e of pay$ent $, mere inaction or in"ul%ence for an indefinite ti$e depending on his will, because with or without this provision, the holder $ay always choose to be indulgent. o EA'ept"!#< .here a note with a fixed $aturity provides that the $a%er has the option to extend ti$e of pay$ent until the happening of contin%enc,, instru$ent NOT ne%otia$le. &he ti$e for pay$ent $ay never co$e at all.

3.

.6. M+$t ,e Pa?a,&e t! Or)er !r t! BearerF <ust contain W!r)$ !( Ne%!t"a,"&"t? • :!r)$ !( #e%!t"a,"&"t? G serve as an e7pression of consent that the instrument ma, $e transferre". o Aut the instru$ent nee" not follo: t!e lan%ua%e of t!e la:; any ter$ which clearl, in"icates an intention to conform with the legal re@uire$ents is sufficient. CALTEC 3. CA ( 55*) The negotiability or non-negotiability of an instrument is determined from the face of the instrument itself The duty of the court in such case is to ascertain) not what the parties may have secretly intended but what is the meaning of the words they have used TRADERS ROBAL BANM 3. CA ( 557) &he language of negotiability which characterize a negotiable paper as a credit instru$ent is its freedo$ to circulate as a substitute for $oney. )ence, freedo$ of negotiability is the touchtone relating to the protection of holders in due course, and the freedo$ of negotiability is the foundation for the protection which the law throws around a holder in due course.

?.

9ffect of a''e&erat"!# pr!."$"!#$ o :f option (absolute or conditional) to accelerate $aturity is on the 2a4er, still 09-F&:AA,9.  <a%er $ay pay earlier than the date fixed but this option, if exercised, would be a pa,ment in a"'ance of a legal liability to pay. :t is still payable on the date fixed, an" !ol"er !as no ri%!t to enforce pa,ment a%ainst t!e ma er $efore suc! "ate. o :f option to accelerate is on the h!&)er , $

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P!$ta& 2!#e? !r)er, not ne%otia$le, because it does not contain words of negotiability. .here words @or $earer@ printed on a c!ec are cancelle" $, t!e "ra:er, instru$ent not ne%otia$le. Bearer "#$tr+2e#t $ay be negotiated by $ere delivery. o .hen instru$ent is payable t! ,earer ()ec8 0+ NI() a. 9xpressed to be so payable G ex Q: pro$ise to pay the bearer the su$V.Q b. 1ayable to a person na$ed therein or bearer + ex. Q1ay to A or bearer.Q c. 1ayable to the order of a fictitious person or nonGexisting person, and such fact was %nown to the person $a%ing it so payable G ex Q1ay to Iohn Doe or order.Q d. 0a$e of payee does not purport to be the na$e of any person G ex Q1ay to cash;Q Q1ay to sundries.Q e. Fnly or last indorse$ent is an indorse$ent in blan%. ANG TEM LIAN .. CA ( 516)

* Pr!."$"!#$ N!t A((e't"#% Ne%!t"a,"&"t?9 (Se'. 1)1

1. Authorizes sale of collateral securities; ,. Authorizes confession of "udg$ent if instru$ent
not paid at $aturity;

3. .aives the benefit of any law intended for the
advantage or protection of the obligor; or

?. -ives holder election to re@uire so$ething to

be done in lieu of pay$ent of $oney. (if in addition to $oney + not 0:) • Ne%otia$ilit, affecte", when instru$ent contains a promise or or"er to "o an, act in a""ition to t!e pa,ment of mone,. PNB .. MANILA OIL REFINING ( 5**)

:n this case, the note contains a provision that in case that it would not be paid at $aturity, the Q$a%er authorizes any attorney to appear and confess "udg$ent thereon.Q &he Court ruled that said "udg$ent note is illegal and inoperative as such is against public policy. :t noted that it is in derogation of the constitutional safeguards (a day in court). 'uch "udg$ent note can only be valid if given express legislative sanction. :n common law, two %inds of "udg$ent by confession  Iudg$ent by '!%#!."t a't"!#e2  Confession re&"'ta .er"("'at"!#e -. O2"$$"!#$ N!t A((e't"#% Ne%!t"a,"&"t? (Se'. 6) 0onGdating of the instru$ent 0onGspecification of value given, or that any value had been given C. 0onGspecification of place where it is drawn or place where it is payable D. Aears a seal 9. Designation of particular %ind of currency in which pay$ent is to be $ade
A. A.

A chec% drawn payable to the order of cash is a chec% payable to bearer, and the ban% $ay pay it to the person presenting it for pay$ent without the drawerRs indorse$ent. A chec% payable to bearer is authority for pay$ent to the holder. .here the chec% is in the ordinary for$ and is payable to bearer, so that no indorse$ent is re@uired, a ban%, to which it is presented for pay$ent, need not have the holder identified, and is not negligent in failing to do so. • Or)er I#$tr+2e#t, negotiation re@uires delivery and indorse$ent of the transferor. o .hen instru$ent is payable t! !r)er< Drawn payable to the order of a specified person or to hi$ or his order ()ec8 9+ NI(). o .ithout the words Qto orderQ or Qto the order of,Q the instru$ent is payable only to the person designated therein and is therefore nonGnegotiable. (Ca$pos, as cited in Consolidated 1lywood :ndustries v :2C ,easing, !6?>)

0. R+&e$ !( C!#$tr+'t"!# (Se'. 7) A. 'u$ expressed in words ta%es precedence over su$ in nu$bers; AC& where words are so a$biguous or uncertain, reference to the figures should be $ade A. .here interest is stipulated, without specification of the starting date, the interest runs fro$ the date of the instru$ent, and if undated, fro$ the issue thereof C. An undated instru$ent is considered dated as of ti$e issued. D. .ritten provisions prevail over printed provisions 9. .here the instru$ent is a$biguous as to whether it is a note or a bill, the holder $ay treat it as either at his election
@

.7. Part"e$ 2+$t ,e )e$"%#ate) :"th Certa"#t? a. Ma4er a#) )ra:er • 'ign the instru$ent at the lo:er ri%!t2!an" corner. b. Pa?ee • .hen negotiating, sign at the $ac ; sa$e with indorsers. a. Dra:ee • 0a$e usually at the lo:er left2!an" corner, or across t!e top. • :f instrument a""resse" to "ra:ee, he $ust be name" or in"icate" :it! reasona$le certaint,. • :f it is not clear in what capacity the person signed, said person is considered an indorser 100% UP L AW , $

Su!!e te& A%e/$%ic6 WED0 S6 W#i:e , !i:e h$"&er E"ecti$%, c$%8e i$% $8 Du&!/e%t, S#"e $8 Securitie
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*. Ne%!t"at"!#

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.hen the capacity of signatory is not clear, he is to be dee$ed an indorser -. J: pro$ise to payK when signed by two or $ore persons is dee$ed to be "ointly and severally signed E3ANGELISTA 3. MERCATOR FINANCE (*66-) .here two pro$issory notes, both e$ploying the ter$s J: pro$ise to payK, were each signed by two or $ore persons, a solidary ("oint and several) liability on each note is created on the part of the signors.

• •

.hen an instru$ent is transferred fro$ one person to another as to constitute the transferee the holder thereof. :f payable to A9A494, negotiated by delivery; if payable to F4D94, negotiated by indorse$ent of holder Z delivery ()ec81*+ NI() SESBREQO .. CA ( 55-) A 0: $ay, instead of being negotiated, A,'F be assigned or transferred. A nonG0: $ay not be negotiated; but it $ay be assigned or transferred, absent an express prohibition against assign$ent or transfer written in the face of the instru$ent.

C5apter III% T#A"S! #
. De&".er? a#) I$$+a#'e A. De&".er? $eans transfer of possession of instru$ent by the $a%er or drawer, with "#te#t t! tra#$(er title to the payee and recognize hi$ as holder thereof. ( "e la 3ictoria '8 ;ur%os) A. 0: inco$plete and revocable until delivery for the p+rp!$e !( %"."#% e((e't thereto as between ()ec8 /A+ NI() !. i$$ediate parties 2. a re$ote party !ther tha# holder in due course C. delivery, to be effectual, $ust be $ade by or under the authority of the party $a%ing # drawing # accepting#indorsing D. delivery $ay be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instru$ent 9. 149'C<1&:F0 F2 D9,:E94H !. .here the instru$ent is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by hi$ is presu$ed until the contrary is proved 2. if it is in the hands of a )DC, the presu$ption is conclusive *. Ca$poses 'hould an undelivered instru$ent co$e into the hands of a holder in due course, the $a%er is liable to hi$ regardless of any proof of the lac% of valid delivery. 2. 149'C<1&:F0 A' &F DA&9 !. Date is not an essential ele$ent of negotiability 2. An undated instru$ent is considered to be dated as of the ti$e it was issued

-. I#)!r$e2e#t

&he indorse$ent $ust be written on the instru$ent itself or on a paper attached thereto (allonge). &he signature of the indorser, without additional words, is sufficient indorse$ent. ()ec81/+ NI() :ndorser generally enters into two contracts (:$plied contracts by :ndorser) !. sale or transfer of instru$ent 2. to pay instru$ent in case of default of $a%er :ndorse$ent $ust be of entire instru$ent (can(t be indorse$ent of only part of a$ount payable, nor can it be to two or $ore indorsees severally. Aut o%ay to indorse residue of partially paid instru$ent) ()ec8 12+ NI()

-. . M"#)$ !( I#)!r$e2e#t$ (Se'. --) !. as to $anner of future negotiation('ec #() -6=) a. $ethod of

b. GEMPESAW . CA ( 55-) 9very contract on a negotiable instru$ent is inco$plete and revocable until delivery of the instru$ent to the payee for the purpose of giving effect thereto. &he first delivery of the instru$ent, co$plete in for$, to the payee who ta%es it as a holder, is called issuance of the instru$ent. .ithout the initial delivery of the instru$ent fro$ the drawer of the chec% to the payee, there can be no valid and binding contract and no liability on the instru$ent.

$pe'"a& + specifies the person to who$#to whose order the instru$ent is to be payable; indorse$ent of such indorsee is necessary to further negotiation. • A special indorser is liable to all subse@uent holders, unless the instru$ent is an originally bearer instru$ent, in which case he is liable only to those who ta%e title through his indorse$ent ('ec 5B, 0:,) ,&a#4 + specifies no indorsee, instru$ent so indorsed is payable to bearer, and $ay be negotiated by delivery • a person who negotiates by $ere delivery is liable only to his i$$ediate transferee. • the holder $ay convert a blan% indorse$ent into a special indorse$ent by writing over the signature of the indorser in blan% any contract consistent with the character of the indorse$ent An order instru$ent $ay be converted into a bearer instru$ent by $eans of a blan% indorse$ent.

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$ay disregard the condition, and $a%e pay$ent to the indorsee or his transferee, whether condition has been fulfilled or not Any person to who$ an instru$ent so indorsed is negotiated will hold the sa$e#proceeds sub"ect to rights of person indorsing conditionally

Aut a bearer instru$ent re$ains as such whether it has been indorsed specially or in blan%. :t is the liability of the indorser which is affected.

o

2.

as to %ind of title transferred a. restrictive + such indorse$ent either !) prohibits further negotiation of instru$ent, o 6n this kind of restrictive indorsement) the prohibition to transfer or negotiate must be :ritten in e7press :or"s at t!e $ac of t!e instrument) so that any subsequent party may be forewarned that ceases to be negotiable <owever) the restrictive indorsee acquires the right to receive payment and bring any action thereon as any indorser) but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authori?e him to do so (@empesaw v 0A %&&#) 2)

b. 3.

unconditional

other classifications a. Absolute + Fne by which the indorser binds hi$self to pay, upon no other condition than the failure of prior parties to do so, and of due notice to hi$ of such failure Ioint G .here instru$ent payable to the order of two or $ore payees or indorsees not partners, all $ust indorse, unless the one indorsing has authority to endorse for the others ('ec 8%) -6=) :rregular G .here a person, not otherwise a party to the instru$ent, places thereon his signature in blan% before delivery, he is liable as indorser

b.

c.

constitutes indorsee as agent of indorser, or *) vests title in indorsee in trust for another o rights of indorsee in restrictive ind. a) receive pay$ent of inst. b) Aring any action thereon that indorser could bring c) &ransfer his rights as such indorsee, but all subse@uent indorsees ac@uire only title of first indorsee under restrictive indorse$ent b. nonGrestrictive *. as to %ind of liability assu$ed by indorser a. @ualified • constitutes indorser as $ere assignor of title (eg. Jwithout recourseK) ( 'ec #+) -6=). • Aut this does not $ean that the transferee only has the rights of an assignee. &ransfer re$ains a negotiation and transferee can still be a holder capable of ac@uiring a title free fro$ defenses of prior parties. • :t relieves the @ualified indorser of his liability to pay the instru$ent should the $a%er be unable to pay at $aturity. b. un@ualified as to presence#absence of express li$itations put by indorser upon pri$ary obligor(s privileges of paying the holder a. conditional + additional condition annexed to indorser(s liability. ()ec8 10+ NI()

-.*. Other R+&e$ !# I#)!r$e2e#t !. I#)!r$e2e#t ,? C!&&e't"#% Ba#4 = holder deposits chec% with a ban% other than the drawee, would in effect be negotiating the chec% to such ban%, since he would have to indorse the chec% before the ban% will accept it for deposit. :n $ost cases, the ban% is acting as a $ere collecting agent. Ne%!t"at"!# ,? 8!"#t !r A&ter#at".e Pa?ee$ !r I#)!r$ee$ = all $ust indorse, unless the one indorsing has authority to endorse for the others U#"#)!r$e) "#$tr+2e#t$ E Se' 059 NIL .here holder of instru$ent transfers for value without indorsing, transfer vests in transferee a. such title as transferor had therein, sub"ect to defenses and e@uities available to prior parties o ex transferee can sue the transferor, though he does not thereby auto$atically beco$e a )DC ( 5ur$ee '8 5ur$ee+ /01A) right to have indorse$ent of transferor, after which, he beco$es a holder or possibly a )DC o 2or purposes of deter$ining whether or not the transferee beco$es a )DC after securing the transferor(s indorse$ent, note that 'ec. 32 $ust be $et at the ti$e of the negotiation, i.e., when indorse$ent is actually $ade. BPI .$ CA (*667) &he transaction /in 'ec. 56, 0:,8 is an e@uitable assign$ent and the transferee ac@uires the instru$ent sub"ect to defenses and e@uities available a$ong prior parties. &hus, if the transferor had legal title, the transferee ac@uires such title and, in addition, the right to have the - . . / $age 95 o0 355

2.

*.

b.

5.

o

.here an indorse$ent is conditional, a party re@uired to pay the instru$ent , $

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indorse$ent of the transferor and also the right, as holder of the legal title, to $aintain legal action against the $a%er or acceptor or other party liable to the transferor. &he underlying pre$ise of this provision, however, is that a valid transfer of ownership of the negotiable instru$ent in @uestion has ta%en place. &ransferees in this situation do not en"oy the presu$ption of ownership in favor of holders since they are neither payees nor indorsees of such instru$entsV &hus, so$ething $ore than $ere possession by persons who are not payees or indorsers of the instru$ent is necessary to authorize pay$ent to the$ in the absence of any other facts fro$ which the authority to receive pay$ent $ay be inferred. 5. Ca#'e&&at"!# !( I#)!r$e2e#t$ = )older $ay stri%e out indorse$ents not necessary to his title. &he endorser whose endorse$ent was struc% out, and all endorsers subse@uent to hi$, are relieved fro$ liability on the instru$ent ()ec8 >9+ NI() I#)!r$e2e#t ,? A%e#t = agent should $a%e it plain that he is signing in behalf of a principal otherwise he $ay be $ade personally liable ()ec 2*+ NI() o &he 0egotiable :nstru$ents ,aw provides that where any person is under obligation to indorse in a representative capacity, he $ay indorse in such ter$s as to negative personal liability. An agent, when so signing, should indicate that he is $erely signing in behalf of the principal and $ust disclose the na$e of his principal; otherwise he shall be held personally liable. (FRANCISCO . CA9 556)

C5apter I+% HOL6 # I" 62 CO2#S
. H!&)er (Se'. 5 )

• •

Definition 1ayee or indorsee of a bill or note who is in possession of it, or the bearer thereof. RIGHTS OF HOLDER ()ec8 =/+ NI() !. sue thereon in his own na$e 2. pay$ent to hi$ in due course discharges instru$ent

*. Three M"#)$ !( DUE COURSE H!&)"#%
#. 2.

3.

c.

)DC under 'ec 32 )DC under 'ec 3? < A holder who derives title to the instru$ent through a )DC has all the rights of the latter even though he hi$self satisfies none of the re@uire$ents of due course holding (Ca$pos U Ca$pos) )DC under 'ec 36 (presu$ption) every holder is dee$ed pri$a facie to be a holder in due course

-. Re@+"$"te$ t! ,e'!2e a h!&)er "# )+e '!+r$e (Se'.1*)7

SALAS .. CA ( 556)

7.

Pre$+2pt"!# a$ t! I#)!r$e2e#t o &i$e ()ec8>=+ NI() G 9very negotiation dee$ed pri$a facie effected before instru$ent was overdue, except where indorse$ent bears date after $aturity of the instru$ent. o 1lace ()ec8>A+ NI() G 9very indorse$ent is presu$ed pri$a facie $ade at place where instru$ent is dated o .here instru$ent drawn or indorsed to person as cashier ()ec8>2+ NI() G dee$ed pri$a facie to be payable to the ban% or corporation of which he is such officer; $ay be negotiated by either the indorse$ent (!) of the ban% or corporation or (2) of the officer. C!#t"#+at"!# !( Ne%!t"a,&e Chara'ter = An 0:, although overdue, retains its negotiability unless it has been paid or restrictively indorsed to prevent further negotiation ()ec8 >7+ NI() I#)!r$e2e#t !( ,earer "#$t. o .here an instru$ent payable to bearer is indorsed specially, it $ay nevertheless be further negotiated by delivery o 1erson indorsing specially liable as indorser to only such holders as $a%e title through his indorse$ent

&he indorsee was a )DC, having ta%en the instru$ent under the following conditions (!) it is co$plete and regular upon its face; (2) it beca$e the holder thereof before it was overdue; (*) it too% the sa$e in good faith and for value; and (5) when it was negotiated to the indorsee, the latter had no notice of any infir$ity in the instru$ent or defect in the title of the previous indorser.

)DC is one who has ta%en the instru$ent under the following conditions

>.

-. . That "t "$ '!2p&ete a#) re%+&ar +p!# "t$ (a'e
1.

?.

CF<1,9&9 o An instru$ent is co$plete if it contains all the re@uisites for $a%ing it a negotiable one, even if it $ay have blan%s as to nonGessentials. o :t is inco$plete when it is wanting in any $aterial particular or particular proper to be inserted in a 0: without w#c the sa$e will not be co$plete.

3

u!!e te& /%e/$%ic 6 GROIN6 G$$& 8#ith #%& :#"ue, c$/9"ete #%& Re!u"#r, %$t O:er&ue, %$ %$tice $8 I%8ir/it0 #t ti/e $8 Ne!$ti#ti$%7 $r GROCI6 G$$& 8#ith #%& :#"ue, Re!u"#r, %$t O:er&ue, C$/9"ete, %$ I%8ir/it0,
- . . / $age 96 o0 355

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the title thereto as of the date of delivery. ()ec8/2+ NI() -.-. That he t!!4 "t "# %!!) (a"th AND (!r .a&+e< !. HOLDER FOR 3ALUE = (a) .here value has at any time been given for the instru$ent, the holder is dee$ed a )2E in respect to all parties who beco$e such prior to that ti$e ()ec82A+ NI() and (,) .here the holder has a lien on the instru$ent, he is dee$ed a )2E to the extent of his lien ()ec827+ NI(). #. PRESUMPTION + 9very 0: is dee$ed pri$a facie issued for valuable consideration; and every person whose signature appears thereon to have beco$e a party thereto for value ()ec8 2>+ NI() i. :n actions based upon a negotiable instru$ent, it is unnecessary to aver or prove consideration, for consideration is i$ported and presu$ed fro$ the fact that it is a negotiable instru$ent. &he presu$ption exists whether the words Qvalue receivedQ appear on the instru$ent or not (Fng v 1eople, 2BBB) BABANI 3S. PEOPLE (*660)

3.

<aterial 1articulars o .hat are $aterial particularsS A change in the ff. is considered a 2ater"a& alteration ()ec8 /2=+ NI() i. &he date; ii. &he su$ payable, either for principal or interest; iii. &he ti$e or place of pay$ent; iv. &he nu$ber or the relations of the parties; v. &he $ediu$ or currency in which pay$ent is to be $ade; vi. Fr which adds a place of pay$ent where no place of pay$ent is specified, 4ights of )DC of instru$ent that has been $aterially altered o enforce pay$ent thereof according to its original tenor :2 not a party to the alteration. ()ec8 /2>+ NI()

-.*. That he ,e'a2e the h!&)er !( "t ,e(!re "t :a$ !.er)+e a#) :"th!+t #!t"'e that "t ha) ,ee# pre."!+$&? )"$h!#!re)9 "( $+'h :a$ the (a't !. JFE94DC9K a. &he ff. cannot be )DCs ( )ec8 =1+ NI() i. A holder who beca$e such after the date of $aturity of the instru$ent (instru$ent is overdue); ii. :n case of de$and instru$ents, a holder who negotiates it after an unreasonable length of ti$e after its issue b. :nstru$ents with fixed $aturity but sub"ect to acceleration ulti$ate date of $aturity is the date of $aturity for the purpose of deter$ining whether a purchaser is a )DC c. Cndated instru$ents 1ri$a facie presu$ption that it was negotiated before it was overdue ('ec 53) d -:T/: An overdue instrument is still negotiable) but it is sub2ect to the defense e>isting at the time of the transfer D:')F0F4 a. 0onGacceptance i. Fccurs when drawee refuses to accept the order of the drawer as stated in the bill ii. Applicable only to bills of exchange iii. <ay occur before the date of $aturity of the bill b. 0onGpay$ent i. Fccurs when the party pri$arily liable fails to pay at the date of $aturity ii. Date of <aturity !) Jpayable after sightK=date of present$ent 2) 1ayable on the occurrence of a specified event=date is fixed by happening of event An instru$ent is not invalid for the reason only that it is A0&9GDA&9D F4 1F'&G DA&9D provided not done for an illegal or fraudulent purpose. &he person to who$ an instru$ent so dated is delivered ac@uires

Cnder 'ection 2? of the 0egotiable :nstru$ents ,aw (0:,), absence or failure of consideration is a $atter of defense only as against any person not a holder in due course.

<oreover, 'ection 25 of the 0:, provides the presu$ption of consideration. 'uch presu$ption cannot be overco$e by the petitioner(s bare denial of receipt of the /consideration8.
!)

Fnly evidence of the clearest and $ost convincing %ind will suffice for that purpose. (&ravelGFn :nc v CA, !662)

2.

2.

3ALUE = any consideration sufficient to support a si$ple contract. An antecedent or preGexisting debt constitutes value, whether the instru$ent is payable on de$and or at a future ti$e. ()ec82=+ NI()

MERCHANTSJ NATIONAL BANM OF ST. PAUL .. STA. MARIA SUGAR CO. ( 5 0) &he $ere discounting of the note and placing the a$ount of said discount to the credit of the )2E would not then have constituted a transfer for value. Aut if the su$ had subse@uently been chec%ed out, then value would have passed. &he general rule as to the application of pay$ents, there being no special facts to interfere, is that the first pay$ents apply to the oldest debts. &he first debits are to be charged against the first credits. :t follows therefore, upon the facts as found, that the ban% was a bona fide )2E without notice, and, in accordance with the stipulation, "udg$ent should - . . / $age 97 o0 355

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plaintiff upon the note.

COMM #CIAL LA$
notwithstanding the 'C'1:C:FC' C:4CC<'&A0C9', it ac@uired the chec% in actual good faith. (Be Ocampo C Co8 '8 ?atc!alian) 1urchase of an instru$ent at a DISCOUNT does not, of itself, constitute bad faith. )owever, if the instru$ent is pruchased at a heavy discount, this fact together with other facts, $ay be ta%en into account in deciding the issue of purchase in good faith. (Ham '8 .eritt)

be entered for the Iudg$ent reversed. XX

Aan% credit as value G .hen the holder of a chec% deposits it with his ban% (assu$ing it is not the drawee ban%) and the ban% credits it to his account, is the ban% at this stage a )2ES o <a"ority Eiew  first $oney in is presu$ed to be the first $oney paid out o <inority Eiew  as long as the balance in the depositor(s account e@uals or exceeds the a$ount of the instru$ent deposited, the latter cannot be considered as withdrawn for the purpose of treating the ban% as a )2E. o ('o far) there has been no decision by the '0 on this issue.) *. GOOD FAITH a. )older $ust have ta%en the instru$ent in good faith and that at the ti$e it was negotiated to hi$ he had no notice of any infir$ity in the instru$ent or defect in the title of the person negotiating it. b. 0F& a )older in -FFD 2A:&) i. )older acted in bad faith ii. )older had 0F&:C9 F2 D929C& !) AC&CA, P0F.,9D-9  '9C 37. .)A& CF0'&:&C&9' 0F&:C9 F2 D929C&=&o constitute notice of an infir$ity in the instru$ent or defect in the title of the person negotiating the sa$e, the person to who$ it is negotiated $ust have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith  :t is therefore sufficient that the buyer of a note had notice or %nowledge that the note was in so$e way tainted with fraud. :t is not necessary that he should %now the particulars of the fraud. 2) 'C'1:C:FC' C:4CC<'&A0C9' #. BAD FAITH = does not re@uire actual %nowledge of the exact fraud that was practiced; %nowledge that there was so$ething wrong about the assignor(s ac@uisition of title is sufficient. 2. &he burden is upon the defendant to show that 100% UP L AW , $

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3ICENTE R. DE OCAMPO L CO. .. GATCHALIAN9 ET. AL. ( 56 ) :n order to show that the defendant had %nowledge of such facts that his action in ta%ing the instru$ent a$ounted to bad faith, it is not necessary to prove that the defendant %new the exact fraud that was practiced upon the plaintiff by the defendant(s assignor, "t ,e"#% $+(("'"e#t t! $h!: that the )e(e#)a#t ha) #!t"'e that there :a$ $!2eth"#% :r!#% a,!+t the a$$"%#!rJ$ a'@+"$"t"!# !( t"t&e, although he did not have notice of the particular wrong that was co$$itted. V&he fact is that it ac@uired possession of the instru$ent under circu$stances that should have put it to in@uiry as to the title of the holder who negotiated the chec% to it. &he burden was, therefore, placed upon it to show that notwithstanding the suspicious circu$stances, it ac@uired the chec% in actual good faith. Fne line of cases had adopted the test of the reasonably prudent $an and the other that of actual good faith. :t would see$ that it was the intent of the 0egotiable :nstru$ents Act to har$onize this disagree$ent by adopting the latter test. -egligence on the part of the plaintiff) or suspicious circumstances sufficient to put a prudent man on inquiry) will not of themselves prevent a recovery) but are to be considered merely as evidence bearing on the question of bad faith STATE IN3ESTMENT HOUSE .. IAC ( 585) A chec% with 2 parallel lines in the upper left hand corner $eans that it could only be deposited and $ay not be converted to cash. Conse@uently, such circu$stance should put the payee on in@uiry and upon hi$ devolves the duty to ascertain the holders( title to the chec% or the nature of his possession. 2ailing in this respect, the payee is declared guilty of gross negligence a$ounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the chec% is not a holder in good faith. BANG .. CA (*66-) .here <r. A obtained by fraud fro$ <r. A crossed chec%s payable to <r. C, which <r. C innocently receives fro$ <r. A for value, <r. C is still a holder - . . / $age 98 o0 355

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0F&9 &he instru$ent in this case was nonG negotiable, so the Jactive participationK discussion was $erely obiter.

in good faith despite the fact that the chec%s were crossed. &he crossing of a chec% does not i$pair the negotiability of an instru$ent nor necessarily preclude its holder fro$ being a holder in due course. &he crossing of a chec% only $eans that it could only be deposited and $ay not be converted into cash. &hus, such should put the holder on in@uiry and upon hi$ devolves the duty to ascertain the holder(s title to the chec% or nature of his possession. &he effects are that !. &he chec% $ay not be encashed but only deposited in the ban%. 2. &he chec% $ay be negotiated only once + to one who has an account with a ban%. *. &he act of crossing serves as a warning to the holder that the chec% was issued for a definite purpose so that he $ust in@uire if he has received the chec% pursuant to that purpose. Ftherwise, he would not be a holder in due course. .here the holder <r. C, as in this case, did not have %nowledge of <r. A(s fraudulent actions on <r. A, and the fact that he was the payee in said chec%, he was legally warranted to deposit the instru$ent in his account with the drawee ban%. <r. C was a holder in good faith. iii. 2:0A0C:0- CF<1A0H

SALAS .. C!+rt !( Appea&$ ( 556)

'alas defaulted in pay$ents for $otor vehicle, the purchase of which was financed by 2ilinvest. Fn de$and, his defense was that the purchase was invested with fraud on the seller(s part. 2ilinvest (the financing co$pany) was held to be a holder in good faith, despite privity to the allegedly fraudulent sale. 'alas( defenses were good only against the sellerGindorser, and where the note was negotiable and validly negotiated to 2ilinvest, the latter was a holder in good faith, and $ay recover fro$ 'alas.

0ote &his is the Jless protectiveK doctrine + not so $uch favorable to dealers but as co$pared to Consolidated, the rule here was actually in the ratio decidendi and not $ere obiter. -.0. That at t"2e "t :a$ #e%!t"ate) t! h"29 he ha) #! #!t"'e !( < any infir$ity in instru$ent any defect in title of person negotiating; title DEFECTI3E when ()ec8 ==+ NI() a. instru$ent # signature obtained by fraud, duress, force or fear or other unlawful $eans F4 for an illegal consideration; or b. instru$ent is negotiated in breach of faith, or fraudulent circu$stances
o o

:n install$ent sales, the buyer usually issues a note payable to the seller to cover the purchase price.

1.

<any ti$es, pursuant to a previous arrange$ent with the seller, a finance co$pany pays the full price of the property sold and the note is indorsed to it by the seller, subrogating it to the right to collect the price fro$ the buyer.

,.

4C,9  :n such cases, the tendency of the courts is to protect the buyer against the finance co$pany in the event that the goods sold turn out to be defective. &he finance co$pany will be sub"ect to the defense of failure of consideration and cannot recover the purchase price fro$ the buyer.

CONSOLIDATED PLBWOOD .. IFC ( 587)

A FINANCING COMPANB that is the indorsee of a note issued by a buyer payable to the seller of goods is NOT a h!&)er "# %!!) (a"th as to the buyer. :n case the goods sold turn out to be defective, it cannot recover the purchase price of the goods fro$ the buyer. &he &9'& F2 14FN:<:&H to the transaction was applied in this case. .here the financing co$pany was privy to the initial transaction, it was bound with notice of the warranties attaching to the transaction. :t AC&:E9,H 1A4&:C:1A&9D in the transaction, thus it cannot be a holder in good faith. &his is the Jprotective doctrineK + favoring the interests of individual dealers over those of financing co$panies.

NOTICE of infir$ity or defect + a. actual %nowledge of the infir$ity or defect F4 %nowledge of such facts that his action in ta%ing the instru$ent a$ounted to bad faith ()ec8=A+ NI() b. 0otice to an AGENT is chargeable against the principal. c. :0'C22:C:90& 0F&:C9 i. CONSTRUCTI3E NOTICE (ex. notice of defenses disclosed by public records, doctrine of lis pendens) is insufficient to charge a purchaser of a 0: with notice.  Iust as a purchaser of a negotiable instru$ent is not put on in@uiry, neither is he charged with notice of defenses or e@uities disclosed by public records, nor is he affected by the doctrine of lis pendens. )owever, notice to an agent is chargeable against the principal. ii. 0otice of an ACCOMODATION PARTB is not notice of a defect.  &hus, an acco$odation party (one who has signed the instru$ent as $a%er, drawer, acceptor or endorser, without receiveing value therefor, and for the purpose of $age 99 o0 355

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2a? e#(!r'e pa?2e#t of instru$ent for full a$ount, against all parties liable ()ec8=7+ NI()

lending his na$e to so$e other person) is liable on the instru$ent, notwithstanding the fact that the holder %new hi$ to be an acco$odation party. d. 4:-)& of a transferee who receives NOTICE of any infir$ity or defect BEFORE he has PAID THE FULL a$ount for the instru$ent i. )e will be dee$ed a )DC only to the extent of the a$ount therefore paid by hi$ ()ec8=>+ NI()

6.*. 8UR BPI .. ALFRED BERWIN L CO. O#&? a HDC 2a? e#(!r'e pa?2e#t !# the PN. :n CAA, it is not clear whether A (the payee) is still the )DC since D (the $a%er) believed that A $ay have negotiated it. &hus, to co$pel D to pay would expose hi$ to pay a second ti$e to the )DC (in case A was no longer one). :n short, the drawee $ay be co$pelled to pay only to a )F,D94 of the instru$ent.

0. E((e't !( O+a&"("e)9 C!#)"t"!#a& a#) Re$tr"'t".e I#)!r$e2e#t$ A. &he status of a holder as a )DC is not affected by his ta%ing under a @+a&"("e) indorse$ent. A '!#)"t"!#a& indorse$ent does not deprive the conditional indorsee or subse@uent holder of the rights of a )DC. :f he fulfills all the re@uisites in 'ec. 32 then he is i$$une fro$ all the personal defense. A re$tr"'t".e indorse$ent which prohibits further negotiation will not prevent the indorsee fro$ being a )DC. AC&, if he further indorses the instru$ent, then the subse@uent indorsee will not be a due course holder.

6.-. DISAD3ANTAGE !( ,e"#% a NON HDC< o &he 0egotiable :nstru$ents ,aw does not provide that a holder not in due course can not recover on the instru$ent. &he disadvantage of V not being a holder in due course is that the negotiable instru$ent is sub"ect to defenses as if it were nonGnegotiable. Fne such defense is absence or failure of consideration. (Atriu$ <gt v de ,eon, 2BB!)

B.

C.

7. R"%ht$ !( P+r'ha$er (r!2 H!&)er "# D+e C!+r$e (Se'.18)

1. Wh! "$ Dee2e) HDC (,+r)e# !( pr!!() (Se'.15)
A. E.

C.

Ge#era& R+&e< 1ri$a facie presu$ption in favor of holder EA'ept"!#< Aurden is reversed (burden on holder to prove that he or so$e person under who$ he clai$s ac@uired title as )DC) when it is shown that the title of any person who has negotiated instru$ent was defective EA'ept"!# t! eA'ept"!#< &here will be no reversal if the party being $ade liable beca$e bound prior to the ac@uisition of such defective title (i.e., where defense is not his own) + presu$ption in favor of holder

7. . Ge#era& R+&e< :n the hands of any holder other than a )DC, 0: is sub"ect to sa$e defenses as if it were nonGnegotiable.

7.*. EA'ept"!#< A holder who derives title through a )DC and who is 0F& hi$self A 1A4&H &F A0H 24ACD or illegality has all rights of such for$er holder in respect to all parties prior to the latter 9E90 though he hi$self does not satisfy 'ec.32

8. Pre$+2pt"!# "# Fa.!r !( D+e C!+r$e H!&)"#%

6. R"%ht$ !( H!&)er "# D+e C!+r$e
A.

6. . U#)er the NIL7
1. ,.

3. ?.

to $+e on the instru$ent in his own na$e ()ec8 =/+ NI() to re'e".e pa?2e#t on the instru$ent + discharges the instru$ent ()ec8 =/+ NI() holds instru$ent (ree !( a#? )e(e't of title of prior parties ()ec8 =7+ NI() (ree (r!2 )e(e#$e$ available to prior parties a$ong the$selves ()ec8=7+ NI()
E.

)

Su!!e te& A%e/$%ic 6 REFS6 Recei:e #%& E%8$rce 9#0/e%t, Free 8r$/ #%0 &e8ect $8 tit"e #%& &e8e% e , Sue
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9very holder is dee$ed pri$a facie to be a holder in due course; !. AC4D90 '):2&' when it is shown that the title of any person who has negotiated the instru$ent was defective. )older <C'& 14FE9 that he or so$e person under who$ he clai$s ac@uired the title as a holder in due course. 2. Aut the last $entioned rule does not apply in favor of a party who beca$e bound on the instru$ent prior to the ac@uisition of such defective title. ()ec8=08+ NI() )owever, this presu$ption arises only in favor of a person who is a holder as defined in 'ection !6! of the 0egotiable :nstru$ents ,aw, $eaning a Jpayee or indorsee of a bill or note, who is in $age 100 o0 355

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b. 14:<A 2AC:9 presu$ption of a valid delivery + where the instru$ent is no longer in the possession of a party whose sig appears thereon ()ec8 /A+ NI()

possession of it, or the bearer thereof.K (Hang v CA, 2BB*)

-.*. I#'!2p&ete9 De&".ere) ($e'. 0)

C5apter +% 6 ! "S S 8 92ITI S
. De(e#$e$ "# Ge#era& . . REAL )e(e#$e + attaches to instru$ent on the principle that there was no contract at all; available against A,, holders including holders in due course. &hey are those which attach to the instru$ent itself and generally, disclose an absence of one of the essential ele$ents of a contract. .*. PERSONAL )e(e#$e + grows out of the agree$ent or conduct of a particular person in regard to the instru$ent which renders it ine@uitable 2F4 ):<, though holding the legal title, to enforce it against the party sought to be $ade liable; not available against a )DC.can be raised only against holders not on due course. )ere, the true contract appears , but for so$e reason , the defendant is excused fro$ the obligation to perfor$. .-. E@+"t"e$ !r C&a"2$ !( O:#er$h"p are !( * M"#)$ !. 2. Le%a& + one who has legal title to the instru$ent $ay recover possession thereof even fro$ holder in due course E@+"ta,&e + $ay only recover fro$ a holder not in due course

&his is a personal defense only because provision states that if any instru$ent so co$pleted is negotiated to a holder in due course, it is valid and effectual for all purposes 2. 2 Pinds of .ritings i. .here instru$ent is :a#t"#% "# a#? 2ater"a& part"'+&ar person in possession has pri$a facie authority to co$plete it by filing up blan%s therein ii* S"%#at+re !# ,&a#4 paper delivered by person $a%ing the signature :0 F4D94 that the paper $ay be CF0E94&9D into a 0:  operates as pri$a facie authority to fill up as such for any a$ount *. &he authority to fill up is li$ited by the following #. .hen co$pleted, it $ay be enforced upon the parties thereto only if it was filled strictly in accordance with the authority given 2. &he filling up $ust be within a reasonable ti$e
!.

*. Rea& De(e#$e$ *. . I#'apa'"t?< 49A, defense but available only to the incapacitated party (ex. $inor or corporation); the indorse$ent or assign$ent of the instru$ent by a corp. or by an infant passes the property therein, notwithstanding that fro$ want of capacity, the corp. or infant $ay incur no liability thereon. ()ec822+ NI()
5.

-:T/: 6f the signature on a paper is given only for autograph purposes and the same is converted into a -6) this will amount to forgery) constituting thus a valid defense even against a <40 &his provision conte$plates delivered instru$ents, so the person in possesion cannot be a thief or a finder but a person in lawful possessionG one to who$ the instru$ent has been delivered. :n order that any such instru$ent, when co$pleted, $ay be enforced against any person who beca$e a party thereto prior to its co$pletion α. $ust be filled up strictly in accordance w# AC&)F4:&H given β. within a 49A'F0AA,9 &:<9 + in deter$ining what is reasonable ti$e, regard is to be had to the (!) nature of the instru$ent, (2) usage of trade or business (if any) with respect to such instru$ents, and *) the facts of the particular case AC& if negotiated to )DC, $ay enforce it as if it had been filled up properly Ihat details may be filled upJ #. Amount) as to a signed blank paper 2. 4ate ('ec %# AT The insertion of a wrong date does not void the instrument in the hands of a subsequent holder in due courseTD) c. 3lace of payment &. -ame of payee

3.

*.*. I#'!2p&ete9 U#)e&".ere) I#$tr+2e#t !. :nstru$ent will not, if co$pleted and negotiated without authority, be a valid contract in the hands of A0H holder, as against any person whose signature was placed thereon before delivery. ()ec8 /=+ NI() Iho may be estopped from raising the real defense under 'ec %(J A drawee ban% whose negligent custody of the chec%s, after partial execution, contributed to its escape

2.

7. >.

-. Per$!#a& De(e#$e$ -. . C!2p&ete9 U#)e&".ere) I#$tr+2e#t a. CF0C,C':E9 presu$ption of a valid delivery + where the instru$ent is in the hands of a )DC

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0o subse@uent party can ac@uire the right against any party thereto (prior to the forgery) to i. 4etain the instru$ent ii. -ive a discharge there for iii. 9nforce pay$ent thereof

-.-. La'4 !( C!#$")erat"!#(Se'. *8) !. AA'90C9 or failure of consideration is a $atter of defense as against any person not a )DC. 2. 1A4&:A, 2A:,C49 of consideration is a defense pro tanto whether the failure is an ascertained and li@uidated a$ount or otherwise . -.0. I&&e%a&"t? !. :n general, a 194'F0A, defense even if CC!5B6 provides that a contract with an illegal cause is void. 2. 49A, when the law expressly provides for illegality as a real defense ('tatutory declaration of illegality RODRIGUE> . MARTINE> ( 561)

2.

194'F0A, if the party against who$ it is sought to enforce such right is 149C,CD9D fro$ setting up forgery#want of authority;
#.

<a%er cannot be relieved fro$ the obligation of paying the holder the a$ount of the note alleged to have been executed for an unlawful consideration. (:llegality is personal, so defense only against a holder not in due course) &he holder paid the value of the note to its for$er holder. )e did so without being aware of the fact that the note had an unlawful origin. )e accepted note in good faith, believing the note was valid and absolutely good. &he $a%er even assured the holder before the purchase that the note was good and that he would pay it at a discount . -.1. D+re$$ !. :n general, 194'F0A, defense. 2. 49A, if duress so serious as to give rise to a real defense for lac% of contractual intent *. CA<1F' &here $ay be cases where the duress e$ployed is so serious that it will give rise to a real defense because of the lac% of contractual intent . Although the signer $ay %now what he is signing, there $ay be wanting the intent or willingness to be bound. &hen it beco$es a real defense.

.ho are PRECLUDEDK i. parties who $a%e certain warranties, li%e a general indorser or acceptor after forgery ('ec "$) -6=) ii. estopped # negligent parties iii. parties who ratify (AC& there are conflicting views whether JprecludedK includes ratification) Fne view holds that a forged signature cannot be ratified because ratification involves the relation of agency and a forger does not assu$e to act for another.

2.

*.

ACC91&A0C9 A0D 1AH<90& of a forged instru$ent Ihen there is acceptance and payment of a forged instrument) the rights and liabilities of the parties depend on whether the forgery pertains to the "ra:erDma er#s si%nature or merely of an in"orsement #. Drawer#<a%er(s signature i. 14:C9 v 09A,, &he drawee who had paid an accepted bill as well as a nonGaccepted bill, each of which was forged, could 0F& recover the $oney paid out on the bill. &he neglect was on the part of the drawee. PNB . OUIMPO ( 588)

0. S!2et"2e$ Rea&9 S!2et"2e$ Per$!#a&

A ban% is bound to %now the signatures of its depositors. :f ban% pays a forged chec% it $ust be considered as $a%ing the pay$ent out of its own funds and cannot charge the account of the depositor whose signature was forged. SAMSUNG CONSTRUCTION CO.9 INC. 3S. FAR EAST BANM AND TRUST CO. AND CA (*660) Conse@uently, if a ban% pays a forged chec%, it $ust be considered as paying out of its funds and cannot charge the a$ount so paid to the account of the depositor. A ban% is liable, irrespective of its good faith, in paying a forged chec%.
ii.

0. . F!r%er? (Se'. *-) $ade without authority of person whose signature it purports to be

. I# %e#era&9 a REAL )e(e#$e< R E((e't
#. 2.

signature is wholly inoperative no right to retain instru$ent, or give discharge, or enforce pay$ent against any party thereto, can be ac@uired through or under such signature (unless forged signature unnecessary to holder(s title)

/>tensions :f The 3rice v -eal 4octrine: The bar to recovery (3rice v -eal doctrine) is e>tended to overdrafts and stop payment orders

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%) O'er"raft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank RE(EF The drawee who pays the holder of the bill cannot recover from the holder what he paid under mistake $) )top Pa,ment Or"er is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check RE(EF The drawee bank is bound to follow the order) provided it is received prior to its certification or payment of the check #) ':7/ /G0/3T6:-': o :f the pay$ent to holder is a legiti$ate debt of the drawer which the holder in due course could have recovered fro$ the drawer anyway. o :f the stop order co$es after the ban% has certified or accepted the chec%, the ban% is under the legal duty to pay the holder and will not be liable to the drawer for doing so.

COMM #CIAL LA$
forgery, due to his own negligence in entrusting to his secretary his credit cards and chec%boo% including the verification of his state$ents of account. SAMSUNG CONSTRUCTION CO.9 INC. 3S. FAR EAST BANM AND TRUST CO. AND CA (*660) &he %eneral rule re$ains that the drawee who has paid upon the forged signature bears the loss. &he e7ception to t!is rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the co$parative negligence between the drawer and the drawee to deter$ine who should bear the burden of loss. 'till, even if the ban% perfor$ed with ut$ost diligence, the drawer whose signature was forged $ay still recover fro$ the ban% as long as he or she is not precluded fro$ setting up the defense of forgery. After all, 'ection 2* of the 0egotiable :nstru$ents ,aw plainly states that no right to enforce the pay$ent of a chec% can arise out of a forged signature. 'ince the drawer, 'a$sung Construction, is not precluded by negligence fro$ setting up the forgery, the general rule should apply.
2.

iii.

/ffect :f -egligence :f 4epositor - 6f pro>imate cause of loss) the bank (drawee) is not liable

!) :t

is the duty of the depositor#drawer to carefully exa$ine ban%(s state$ents, cancelled chec%s, his chec% stubs, and other pertinent records within a reasonable ti$e and to report any errors without unreasonable delay. 2) :f a drawer#depositor(s negligence and delay should cause a ban% to honor a forged chec%, drawer cannot later co$plain should ban% refuse to recredit his account. ILUSORIO .$ CA (*66*) &rue, it is a rule that when a signature is forged or $ade without the authority of the person whose signature it purports to be, the chec% is wholly inoperative. )owever, the rule does provide for an exception, na$ely J+#&e$$ the part? a%a"#$t :h!2 "t "$ $!+%ht t! e#(!r'e $+'h r"%ht "$ pre'&+)e) (r!2 $ett"#% +p the (!r%er? !r :a#t !( a+th!r"t?.K :n the instant case, it is the exception that applies. 1etitioner is precluded fro$ setting up the forgery, assu$ing there is 100% UP L AW , $ B A R ' $ !

:ndorse$ent i. .hen it is the $"%#at+re !( the "#)!r$er that is forged, the drawee and drawer CA0 recover vs holder !) &he drawee can recover the a$ount paid by hi$ in cases where only an indorse$ent has been forged . &his is because drawee $a%es no warranty as to the genuineness of any indorse$ent. 2) -enerally, the drawee $ay only recover fro$ the holder. 'hould he fail to do so(for instance due to insolvency) he cannot recoup his loss by charging it to the drawer(s account *) Although a depositor#drawer owes a duty to his drawee ban% to exa$ine his cancelled chec%s, he has no si$ilar duty as to forged indorse$ents. 5) &he drawer, as soon as he co$es to %now of the a forged indorse$ent should pro$ptly notify the drawee ban% REPUBLIC . EBRADA

Drawee can recover. :t is not supposed to be the duty of the drawee to ascertain whether the signatures of the payee or indorsers are genuine or not.
ii.

Whe# )ra:ee 2a? re'!.er (r!2 DRAWER

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!) .here the instru$ent is originally a bearer instru$ent, because the indorse$ent can be disregarded as being unnecessary to the holder(s title 2) :ndorse$ent forged by an e$ployee or agent of the drawer *) :f due to the drawer(s negligence#delay, the forgery is not discovered until it is too late for the ban% to recover fro$ the holder or the forger GEMPESAW . CA9 PBC

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*) :n presenting the chec%s for clearing the collecting agent, $ade an express guarantee on the validity of Jall the prior endorse$entsK. ( ADF v 9@uitable ban%) 5) &he drawee ban% is not si$ilarly situated as the collecting ban% because the for$er $a%es no warranty as to the genuineness of any indorse$ent. &he drawee ban%(s duty is but to verify the genuineness of the drawer(s signature and not of the indorse$ent because the drawer is its client. 3) .here the negligence of the drawee ban% is the proxi$ate cause of the collecting ban%(s pay$ent of a chec% with a forged indorse$ent, the drawee ban% $ay be held liable to the collecting ban% . 7) .hen both are guilty of negligence, the degree of negligence of each will be weighed in considering the a$ount of loss which each should bear. (refer to 936 v 0A) %&&$) GREAT EASTERN LIFE . HONGMONG L SHANGHAI BANM ( 5**) J.here a chec% is drawn payable to the order of one person and is presented to a ban% by another and purports upon its face to have been duly indorsed by the payee of the chec% , it is the duty of the ban% to %now that the chec% was duly indorsed by the original payee and where the ban% pays the a$ount of the chec% to a * rd person , who has forged the signature of the payee , the loss falls upon the ban% who cashed the chec% , and its re$edy is against the person to who$ it paid the $oney.K BPI . CA ( 55*) 'ection 2* of the 0:, has 2 parts. &he first part states the general rule that a forged signature is wholly inoperative and pay$ent $ade through or under such signature is ineffectual. &he second part ad$its of exception. :n this "urisdiction, the negligence of the party invo%ing the forgery is an exception to the general rule. B!th )ra:ee a#) '!&&e't"#% ,a#4 :ere #e%&"%e#t in the selection and supervision of their e$ployees resulting in the encash$ent of the chec%s by the i$postor. Aoth ban%s were not able to overco$e the presu$ption of negligence in the selection and supervision of their e$ployees Considering the co$parative negligence of the parties, the de$ands of substantive "ustice are satisfied by allocating the loss and the costs on a 7BG5B ratio. ASSOCIATED BANM . CA ( 556)

.hile there is no duty resting on the drawer to loo% for forged indorse$ents on his cancelled chec%s, a )ep!$"t!r "$ +#)er a )+t? t! $et +p a# a''!+#t"#% $?$te2 a#) ,+$"#e$$ pr!'e)+re a$ are rea$!#a,&? 'a&'+&ate) t! pre.e#t !r re#)er the (!r%er? !( "#)!r$e2e#t$ )"(("'+&t , particularly by the depositor(s own e$ployees. As a rule the drawee ban% who has paid the chec% with forged indorse$ent, cannot charge the drawer(s account for the a$ount of the said chec%. An exception to this rule is where the drawer is guilty of such negligence which causes the ban% to honor the chec%.
iii.

Whe# )ra:ee 2a? re'!.er (r!2 h!&)er

#!t

!) .here the instru$ent is originally a bearer instru$ent , because the indorse$ent can be disregarded as being unnecessary to the holder(s title 2) :f drawee fails to act pro$ptly , if he delays in infor$ing the holder who$ he paid
iv.

Bet:ee# Dra:ee Ba#4 a#) C!&&e't"#% Ba#4 !) Collecting ban% only liable for forged indorse$ents and not forgeries of the drawer or $a%er(s signature. (10A v CA, !67?) 2) &he collecting ban% or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorse$ents considering that the act of presenting the chec% for pay$ent to the drawee is an assertion that the party $a%ing the present$ent had done its duty to ascertain the genuineness of the indorse$ents. (A1: v CA, !662)

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ii.

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A $aterial alteration is one which changes the ite$s which are re@uired to be stated under 'ection ! of the 0egotiable :nstru$ents ,aw. (<etroban% v Cabilzo, 2BB7)

Ay reason of the statutory warranty of a general indorser in 'ection 77 of the 0egotiable :nstru$ents ,aw, a collecting ban% which indorses a chec% bearing a forged indorse$ent and presents it to the drawee ban% guarantees all prior indorse$ents, including the forged indorse$ent. :t warrants that the instru$ent is genuine, and that it is valid and subsisting at the ti$e of his indorse$ent. Aecause the indorse$ent is a forgery, the collecting ban% co$$its a breach of this warranty and will be accountable to the drawee ban%. &his liability sche$e operates without regard to fault on the part of the collecting#presenting ban%. 9ven if the latter ban% was not negligent, it would still be liable to the drawee ban% because of its indorse$ent. PCIB .. CA (*66 ) V A ban% which cashes a chec% drawn upon another ban%, without re@uiring proof as to the identity of persons presenting it, or $a%ing in@uiries with regard to the$, cannot hold the proceeds against the drawee when the proceeds of the chec%s were afterwards diverted to the hands of a third party. :n such cases the drawee ban% has a right to believe that the cashing ban% (or the collecting ban%) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the chec%s. &hus, one who encashed a chec% which had been forged or diverted and in turn received pay$ent thereon fro$ the drawee, is guilty of negligence which proxi$ately contributed to the success of the fraud practiced on the drawee ban%.

*.

0.*. Mater"a& A&terat"!# (Se'. *0) !. As a D9290'9 #. 194'F0A, defense when used to deny liability according to the tenor of the instru$ent 2. 49A, defense when relied on to deny liability according to the altered ter$s. .hat constitutes $aterial alterationS #. 'tatutory 4eview Se'. *19 NIL i. change date ii. su$ payable, either for principal or interest iii. ti$e or place of pay$ent iv. nu$ber#relations of parties v. $ediu$#currency of pay$ent, vi. adds place of pay$ent where none specified, vii. other change#addition altering effect of viii. instru$ent in any respect
2.

:<<A&94:A, A,&94A&:F0 #. Ca$pos Any other alteration would be nonG$aterial and would not affect the liability of any prior party . 0ote that ]> is a catchGall provision such that sec !23 $ay still have broad applicability. 2. Alterations of the serial nu$bers do not constitute $aterial alterations on the chec%s... /:t8 is not an essential re@uisite for negotiability under 'ection ! of the 0egotiable :nstru$ents ,aw. &he afore$entioned alteration did not change the relations between the parties. &he na$e of the drawer and the drawee were not altered. &he intended payee was the sa$e. &he su$ of $oney due to the payee re$ained the sa$e. (10A v CA, !667; :nt(l Corporate Aan% v CA, 2BB7) c. 9229C& an innocent alteration (generally, changes on ite$s other than those re@uired to be stated under 'ec. !, 0. :. ,.) and spoliation (alterations done by a stranger) :"&& #!t a.!") the "#$tr+2e#t, but the holder $ay enforce it only according to its original tenor. (10A v CA, citing I. Eitug) 9229C& F2 <A&94:A, A,&94A&:F0
#.

5.

2.

2.

Iurispridence i. An alteration is said to be $aterial if it changes the effect of the instru$ent. :t $eans that an unauthorized change in an instru$ent that purports to $odify in any respect the obligation of a party or an unauthorized addition of words or nu$bers or other change to an inco$plete instru$ent relating to the obligation of a party. (10A v CA, !667) , $ B A R ' $ ! - . . /

Ge#era& R+&e .here 0: $aterially altered w#o the assent of all parties liable thereon it is AEF:D9D, eA'ept as against i. party who has hi$self $ade, authorized or assented to alteration ii. subse@uent indorser because by indorse$ent he warrants that the instru$ent is in all respects what it purports to be and that it was valid and subsisting at the ti$e of his indorse$ent (Se'$. 61 a#) 669 NIL) As to a )F,D94 in DC9 CFC4'9 i. .hen an instru$ent that has been $aterially altered is in the hands of a )DC not a party to the alteration, )DC $ay enforce pay$ent thereof according to orig. tenor ii. Alteration $ust 0F& be apparent on the face of the instru$ent for the holder then would not be a holder in due course iii. .here the interest rate is altered , the holder in due course can recover the principal $age 105 o0 355

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su$ with the original rate of interest .hen alteration is of the a$ount or the interest rate is altered, the holder can recover the ORIGINAL AMOUNT#interest rate.

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a drawee ban% $ay return a spurious chec% but if holder is guilty of negligence which proxi$ately contributed to the erroneous pay$ent by drawee, holder liable (1C:A v CA, 2BB!)

c.

b.

3.

D4A.94(' 09-,:-90C9 #. &he general rule is that the drawee cannot charge against the drawer(s account the a$ount of an altered chec%. 2. AC&, the drawer(s negligence, before or after the alteration, $ay estop hi$ fro$ setting up alteration as a defense. c. )owever, the drawer is not bound to so prepare the chec% that nobody else can successfully ta$per with it (ex. a drawer cannot be expected to foresee that his cler% will use acid to alter his chec%s, Cr"tte# .. Che2"'a& Nat& Ba#4) &. .here the negligence of the drawer consists in failing to discover alterations previously $ade which he could have discovered by a co$parison of the cancelled chec%s and chec% stubs or by diligent observation of his records and could thus have prevented the drawee ban% fro$ subse@uently cashing other altered chec%s , the drawee can charge the subse@uent chec% against the negligent drawer(s account. 9229C& F2 D4A.99(' ACC91&A0C9 F2 A,&949D C)9CP' a. .here the interest rate is altered, the )DC can recover the principal su$ with the original rate of interest. i. 9NC91& A subse@uent indorser, because by the indorse$ent he warrants that the instru$ent is in all respects what it purports to be and that it was valid and subsisting at the ti$e of his indorse$ent ('ec 73 and 77) b. 49CFE94H after acceptance or pay$ent by the drawee ban% i. 24F< )F,D94 !) 1revailing view G Hes, bec. of (!) pay$ent under $ista%e, (2) 'ec. !25 and (*) 'ec.72 in relation to 'ec. !*2 2) <inority view + 0o, bec. of (!) estoppel, (2) stability of transactions and (*) ban% is in a better position to shoulder the loss. *) 'C a. adopted the $inority view but on a different basis =the Central Aan% Circular regulating clearing of chec%s and li$iting the period within which , $

MONTINOLA . PNB ( 51 ) &he insertion of the words JAgent 1hilippine 0ational Aan%K converted the ban% fro$ a $ere drawee to a drawer and therefore changes its liability, constitutes $aterial alteration of the instru$ent without consent of the parties liable thereon and so discharges the instru$ent. Drawee ban% is not liable. HONGMONG L SHANGHAI BANM . PEOPLES BANM ( 576)8 &he failure of the drawee ban% to call the attention of the collecting ban% as to such alteration until after the lapse of 2> days would negate whatever right it $ight have had. &he re$edy of the drawee ban% is against the party responsible for the forgery or alteration. REPUBLIC BANM . CA ( 55 ) &he collecting ban% is protected by the25Ghour clearing house rule fro$ the liability to refund the a$ount paid by the drawee ban%. SN!te< A $uch recent Circular changed the point of rec%oning for the return of the altered chec% fro$ within 25 hours fro$ the clearing to within 25 hours fro$ the discovery of the alteration8 ASSOCIATED BANM . CA ( 556) &he rule $andates that the chec%s be returned within twentyGfour hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. &he rationale of the rule is to give the collecting ban% (which indorsed the chec%) ade@uate opportunity to proceed against the forger. :f pro$pt notice is not given, the collecting ban%$aybe pre"udiced and lose the opportunity to go after its depositor. ii. 24F< D4A.94 drawee has no right to see% rei$burse$ent fro$ drawer for its erroneous pay$ent

7.

METROBANM . CABIL>O (*666) :n addition, the ban% on which the chec% is drawn, %nown as the drawee ban%, is under strict liability to pay to the order of the payee in accordance with the drawer(s instructions as reflected on the face and by the ter$s of the chec%. 1ay$ent $ade under $aterially altered instru$ent is not pay$ent done in accordance with the instruction of the drawer. .hen the drawee ban% pays a $aterially altered chec%, it violates the ter$s of the chec%, as well as its duty to charge its client(s account only for bona
8

Affir$ed the $inority view that drawee cannot recover

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legal nature of the paper he is e>ecuting

fide disburse$ents he had $ade. 'ince the drawee ban%, in the instant case, did not pay according to the original tenor of the instru$ent, as directed by the drawer, then it has no right to clai$ rei$burse$ent fro$ the drawer, $uch less, the right to deduct the erroneous pay$ent it $ade fro$ the drawer(s account which it was expected to treat with ut$ost fidelity. BPI . BUENA3ENTURA (*661) V:t /the ban%8 should be able to detect alterations, erasures, superi$positions or intercalations thereon, for these instru$ents are prepared, printed and issued by itself, it has control of the drawerRs account, and it is supposed to be fa$iliar with the drawerRs signature . It s!oul" possess appropriate "etectin% "e'ices for unco'erin% for%eries an"Dor alterations on these instru$entsV &here is nothing ine@uitable in such a rule for if in the regular course of business the chec% co$es to the drawee ban% which, having the opportunity to ascertain its character, pronounces it to be valid and pays it, as in this case, it is not only a @uestion of pay$ent under $ista%e, but pay$ent in neglect of duty which the co$$ercial law places upon it, and the result of its negligence $ust rest upon it. c. 49<9DH Cnless a forgery or alteration is attributable to the fault or negligence of the drawer hi$self, the re$edy of the drawee ban% that negligently clears a forged and#or altered chec% for pay$ent is against the party responsible for the forgery or alteration, otherwise, it bears the loss. (A1: v Auenaventura, 2BB3)

C5apter +I% LIABILIT7 O! /A#TI S
. I# Ge#era& . . Part"e$ pr"2ar"&? &"a,&e< !. person who by the ter$s of the instru$ent is absolutely re@uired to pay the sa$e. #. Ma4er of pro$issory note 2. A''ept!r of bill of exchange unconditionally liable; duty bound to pay the holder at date of $aturity, .F0 holder de$ands pay$ent fro$ hi$, and he is not relieved fro$ liability even if the instru$ent should beco$e overdue due to failure of holder to $a%e such de$and.

2.

.*. Part"e$ $e'!#)ar"&? &"a,&e< !. '9CF0DA4H 1A4&:9' :ndorsers, both note and bill Drawer of bill 2. Conditionally liable; not bound to pay unless the following has been fulfilled
#. 2.

a. Due present$ent or de$and fro$ pri$ary party for pay$ent or acceptance; b. Dishonor by such party; and
c.

0.-. Fra+)

&a%ing of proceedings re@uired by law after dishonor.

!.

2.

49A, D9290'9 a. fraud in eAe'+t"!# # fraud in factu$ did not %now that paper was a 0: when it was signed b. not liable to A0H holder 194'F0A, D9290'9 a. 2raud in induce$ent %nows it is 0: but deceived as to value#ter$s i. Available as a defense against nonG)DC b. 2raud in factu$ acco$panied by 09-,:-90C9 of $a%er or signer i. .here the signor does not %now the nature of the instru$ent he signs, but where, by the exercise of ordinary care, he could have discovered it. ii. &hree factors are typically used in deter$ining the existence of negligence %) legal character of the instrument which the signer thinks he is signing $) the physical condition of the signer and his ability to read #) whether the signer had the opportunity at the time of signing) to ascertain the , $

*. Pr"2ar? Part"e$ *. . PABMENT< Pre$e#t2e#t a#) Te#)er !. Pre$e#t2e#t (!r pa?2e#t not necessary to charge pri$ary party 2. if the instru$ent is, by its ter$s, payable at a special place, and he is able and willing to pay it there at $aturity, such ability and willingness are e@uivalent to a tender of pay$ent upon his part. ()ec8 7*+ NI() *.*. L"a,"&"t? !( MAMER !. 1ro$ises to pay it according to its tenor 2. Ad$its existence of payee and his then capacity to indorse. a. &herefore, 149C,CD9D fro$ setting up the following defenses i. the payee is a fictitious person ii. the payee was insane, a $inor, or a corporation acting ultra vires

*.-. DRAWEE a#) ACCEPTOR !. Drawee a. A person on who$ a bill of exchange or chec% is drawn and who is ordered to pay it b. ,iability of D4A.99 to - . . / $age 107 o0 355

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Civil Code for any da$ages she incurred resulting therefro$. )'AA0P(s actions, or lac% thereof, prevented Catalan fro$ see%ing further redress with &ho$son for the recovery of her clai$ while the latter was alive.

2. )older !) N!t &"a,&e on the instru$ent until he accepts it and even a holder in due course cannot sue hi$ on the instru$ent before his acceptance 2) A ,"&&F'he'4 of itself does not operate as an assign$ent of the funds in the hands of the drawee#ban% (Se' 859 NIL), and the drawee#ban% is NOT LIABLE on the bill unless and C0&:, he#it ACC91&' (or certifies) the sa$e. ()ec8 /27+ NI() *. Drawer !) 1ay$ent despite 'top 1ay$ent Frder a) Aefore pay$ent or certification by the ban%, the drawer $ay counter$and the order, and pay$ent thereafter to the payee by the ban% is wrongful. b) 'ince a chec% is not an assign$ent of the drawer(s fund, the ban% is liable for paying it in disregard of the counter$and. c) <oreover, drawee can no longer recover what it voluntarily paid to the holder of the uncertified and unaccepted instru$ent. 2) 4efusal to Accept a) Cnder so$e circu$stances, the drawee who refuses to accept $ay be $ade liable for breach of contract or for da$ages based on a tort either to the drawer (refer to Araneta v. Aan% of A$erica) or to the holder (refer to )'AC v. Catalan) ARANETA 3. BANM OF AMERICA( 57 )

*.

Acceptor ,iability a. ()ec8A2+ NI() Drawee is not liable unless he accepts the bill and in doing so, he engages to pay the bill according to the tenor of his acceptance, and ad$its the following i. existence of drawer ii. genuineness of his signature iii. his capacity and authority to draw the instru$ent iv. existence of payee and his then capacity to endorse b. <eaning of @accor"in% to t!e tenor of !is acceptance@ i. .a-orit, an" pre'ailin% 'ie: .here alteration consists in raising the a$ount payable, acceptor liable to )DC only as to its original a$ount; if the alteration of payeeRs na$e, paying ban%s cannot charge drawerRs account with the a$ount of the chec% because its duty is to pay only Jaccording to the order of the drawer.K ii. Common la: rule Acceptor of altered chec% not liable to innocent holder except for the original a$ount

*.0. A''epta#'e . IN GENERAL< a. Definition i. QAcceptanceQ $eans an acceptance co$pleted by delivery or notification ()ec8 /0+ NI() ii. &he signification by the drawee of his assent to the order of the drawer ()ec /12+ NI() b. 49OC:':&9' for a valid acceptance ()ec /12+ NI() i. :t $ust be in :r"t"#% and $"%#e) by the drawee; !) &hus there is no valid or i$plied acceptance except as provided by 'ec. !*> relating to constructive acceptance ii. :t $ust not express that the drawee will perfor$ his pro$ise by any other $eans than the pa?2e#t !( 2!#e?. iii. does not change the i$plied pro$ise of acceptor to pay only in $oney c. <A0094 of acceptance i. 0ampos: Csually $ade by writing the word JacceptedK and signing i$$ediately below !) 9.T) drawee(s signature alone is sufficient (0ampos citing =awless v Temple) ii. Se' --9 NIL< &he holder of a bill presenting the sa$e for acceptance $ay re@uire that the acceptance be written on the bill and if such

&his was an action by a depositor against a ban% for da$ages resulting fro$ the wrongful dishonor of the depositorRs chec%s. )9,D AranetaRs clai$ for te$perate da$ages is legally "ustified because of the adverse reflection on the financial credit of a business$an, a prized and valuable asset, w#c constitutes $aterial loss.

HSBC 3S. CATALAN (*660)

)'AC is not being sued on the value of the chec% itself but for how it acted in relation to Catalan(s clai$ for pay$ent despite the repeated directives of the drawer &ho$son to recognize the chec% the latter issued. )er allegations in the co$plaint that the gross inaction of )'AC on &ho$son(s instructions, as well as its evident failure to infor$ Catalan of the reason for its continued inaction and nonGpay$ent of the chec%s, s$ac% of insouciance on its part, are sufficient state$ents of clear abuse of right for which it $ay be held liable under Article !6 of the 100% UP L AW , $ B A R ' $ !

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expressly accepting or refusing it; two views i. Constitutes constructive notice ii. Constitutes dishonor because 'ec.!*>, 0:, uses the word QrefusesQ d. Acceptance, if given, will retroact to date of presentation. SUMCAD .. PRO3INCE OF SAMAR ( 516) &here was i$plied acceptance in view of the circu$stances of the case (furnishing of photostatic copies, present$ent for certification) by voluntary assu$ing the obligation of holding so $uch deposit as would be sufficient to cover the a$ount of the chec%. -. ACCEPTANCE ON A SEPARATE INSTRUMENT e. EAtr"#$"' a''epta#'e G acceptance is written on a paper !ther tha# the ,"&& itself; doesn(t bind the acceptor except in favor of a person to who$ it is shown and who, on the faith thereof, receives the bill for value. (Se'. -09 NIL); acceptance of an existing bill 3"rt+a& a''epta#'e G unconditional pro$ise in writing to a''ept a ,"&& ,e(!re "t "$ )ra:#D dee$ed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. (Se'. -19 NIL); acceptance of future bill :n both cases, the a''epta#'e 2+$t '&ear&? a#) +#e@+".!'a&&? ")e#t"(? the ,"&& to which the acceptance refers.

d.

re@uest is denied, $ay treat the bill as dishonored !) 9ffect holder $ay go against the party(s secondarily liable= the drawer and the indorsers iii. Acceptance of an :0CF<1,9&9 bill &)ec /19+ NI() !) A bill $ay be accepted a) before it has been signed by the drawer, or b) while otherwise inco$plete, or c) when it is overdue, or d) after it has been dishonored by a previous refusal to accept, or by non pay$ent 2) Aut when a bill payable after sight is dishonored by nonG acceptance and drawee subse@uently accepts it, the holder, in the absence of diff agree$ent, is entitled to have bill accepted as of date of the !st present$ent. a) Se'. -89 NIL allows a''epta#'e to be $ade while the ,"&& "$ "#'!2p&ete. b) &he bill $ay be accepted even after it is overdue or dishonored, since an instru$ent DF9' 0F& ,F'9 :&' 09-F&:AA:,:&H by the $ere fact that its $aturity date has passed or the drawee(s refusal to accept or pay it. 194:FD within which to accept i. &he drawee is allowed 25 hours after present$ent to decide .F0 he will accept the bill; the acceptance, if given, dates as of the day of presentation. ('ec %#") -6=) ii. 9ffect of nonGacceptance within the prescribed period !) .here bill is duly presented and is not accepted within prescribed ti$e, the person presenting it $ust treat the bill as dishonored by nonG acceptance or he loses right of recourse against the drawer and indorsers. ('ec %(5) -6=)

f.

g.

*. CONSTRUCTI3E ACCEPTANCE< occurs in the following circu$stances a. '9C !*>, 0:, .here the drawee i. destroys the bill, or ii. refuses within 25hrs or such other period as the holder $ay allow, to return the bill accepted or nonG accepted to the holder b. Cnder the clearing house rules, the drawee ban%(s failure to return within the prescribed ti$e will be dee$ed pay$ent or acceptance of the chec%. c. :f there is not de$and for the return of the bill and the drawee %eeps it until after the expiration of said period without

0. MINDS OF ACCEPTANCE< A# a''epta#'e "$ e"ther ( ) %e#era& !r (*) @+a&"("e). a. GENERAL = assents without @ualification to the order of the drawer. ()ec8/10+ NI(); :ncludes acceptance to pay at a particular place; unless expressly states that bill is to be paid there only and not elsewhere. ()ec8 />*+ NI() b. OUALIFIED = in express ter$s varies the effect of the bill as drawn. ('ec. !*6, 0:,) i. C!#)"t"!#a&; pay$ent by the acceptor dependent on the fulfill$ent of a condition therein stated; ii. Part"a&; to pay part only of the a$ount for which the bill is drawn; iii. L!'a&; to pay only at a particular place; iv. Oualified a$ t! t"2e; v. &he acceptance of so$e, one or $ore of the )ra:ee$ but not of all. ()ec8 />/+ NI() !) &he holder $ay re(+$e t! ta4e a @ualified acceptance; $ay treat the bill as dishonored by nonGacceptance. 2) .here a @ualified acceptance is ta%en, the drawer and indorsers are )"$'har%e) fro$ liability on the bill +#&e$$ they have a+th!r"/e) the holder to ta%e - . . / $age 109 o0 355

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a @ualified acceptance, or subse@uently a$$e#t thereto. *) .hen the drawer or an indorser receives notice of a @ualified acceptance, he $ust, within a reasonable ti$e, express his )"$$e#t to the holder or he will be dee$ed to have assented thereto. ()ec8 />2+ NI() TRADE G a draft or bill of exchange with a definite $aturity, drawn by a seller on a buyer for the purchase price of goods, bearing across its face the acceptance of the buyer; always states upon its face the transaction fro$ which it arose. BANMERTS a''epta#'e G a negotiable ti$e draft or bill of exchange drawn on and accepted by a co$$ercial ban%.

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De2a#) )ra(t$ have not been presented either for acceptance or for pay$ent, thus the ban% never had any chance of accepting or re"ecting the$; as such, these cannot be sub"ect of escheat. Ca$h"erT$ 'he'4 is the substantial e@uivalent of a certified chec% and is thus sub"ect to escheat. Te&e%raph"' tra#$(er$ are li%ewise sub"ect to escheat because upon $a%ing pay$ent co$plete the transaction insofar as he is concerned, though insofar as the re$itting ban% is concerned, the contract is executory until the credit is established. PAL 3. CA ( 556)

c.

d.

*.1. CHECMS < a''epta#'e a#) 'ert"("'at"!# !. Definition A chec% is an instru$ent in the for$ and nature of a A9, but an unli%e an ordinary bill, always payable on de$and and always drawn on a ban%. 2. Pinds a. Ca$h"erT$ !r 2a#a%erT$ G drawn by a ban% on itself and its issuance has the effect of acceptance; since the drawer and drawee are the sa$e, the holder $ay treat it is either a A9 or 10. ,. Me2!ra#)+2 'he'4 G where the word Q$e$orandu$Q or Q$e$oQ is written across its face, signifying that the drawer will pay the holder absolutely, without need of present$ent. '. Tra.e&erT$ 'he'4 G upon which the holderRs signature $ust appear twice GG first when it is issued, and again when it is cashed. ). Cr!$$e) + when the na$e of a particular ban%er or a co$pany is written between the parallel lines drawn. STATE IN3ESTMENT HOUSE 3. IAC Crossed chec% should put the payee on in@uiry to ascertain the holders( title to the chec% or the nature of his possession. 2ailing this, the payee is declared guilty of gross negligence to the effect that the holder of the chec% is not a holder in good faith. 9ffects of a crossed chec% '#+ the chec% $ay not be encashed but only deposited in the ban%; '2+ the chec% $ay be negotiated only once + to one who has an account with the ban%; and 'c+ the act serves as a warning to the holder that the chec% has been issued for a definite purpose so that he $ust in@uire if he has received the chec% pursuant to that purpose, otherwise, he is not a )DC. BATAAN CIGAR L CIGARETTE FACTORB9 INC. .. CA &he negotiability of a chec% is not affected by its being crossed, whether specially or generally. :t $ay legally be negotiated as long as the one who encashes the chec% with the drawee ban% is another ban%, or if it is especially crossed, by the ban% $entioned between the parallel lines. RP .. PNB ( 56 )

A chec%, whether a $anagerRs chec% or ordinary chec%, and an offer of a chec% in pay$ent of a debt is #!t a .a&") te#)er !( pa?2e#t and $ay be refused receipt by the obligee or creditor. &he issuance of the chec% to a person authorized to receive it operates to release the "udg$ent debtor fro$ any further obligations on the "udg$ent.

INTERNATIONAL CORPORATE BANM . GUECO (*66 ) A $anager(s chec% is one drawn by the ban%(s $anager upon the ban% itself. :t is si$ilar to a cashier(s chec% both as to effect and use. A cashier(s chec% is a chec% of the ban%(s cashier on his own or another chec%. :n effect, it is a bill of exchange drawn by the cashier of a ban% upon the ban% itself, and a''epte) in advance by the act of its issuance. :t is really the ban%(s own chec% and $ay be treated as a pro$issory note with the ban% as a $a%er. &he chec% beco$es the pri$ary obligation of the ban% which issues it and constitutes its written pro$ise to pay upon de$and. The 2ere "$$+a#'e !( "t "$ '!#$")ere) a# a''epta#'e there!(. :f treated as pro$issory note, the drawer would be the $a%er and in which case the holder need not prove present$ent for pay$ent or present the bill to the drawee for acceptance EPCIB . ONG (*666) A $anager(s chec% is an order of the ban% to pay, drawn upon itself, co$$itting in effect its total resources, integrity and honor behind its issuance. Ay its peculiar character and general use in co$$erce, a 2a#a%erJ$ 'he'4 is regarded substantially to be a$ %!!) a$ the 2!#e? "t repre$e#t$. *. Clearing a. C&ear"#% G chec% collection process ,. C&ear"#% h!+$e G where representatives of different ban%s $eet every afternoon of every business day to receive the envelopes containing chec%s drawn against the ban% he represents for exa$ination and clearance. 5. Certification a.Definition

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the rule enunciated under 'ection 7*6 of the Central Aan% Act to the effect Jthat a chec% which has been cleared and credited to the account of the creditor shall be e@uivalent to a delivery to the creditor in cash in an a$ount e@ual to the a$ount credited to his accountK shall apply in this case x x x.

an agree$ent by which a ban% pro$ises to pay the chec% at any ti$e it is presented for pay$ent ii. .hen chec% certified by ban% on which it is drawn, e@uivalent to acceptance b. 4e@uisites for a Ealid Certification i. <ust be in writing ii. <ade on the chec% or another instru$ent iii. Chec% $ust be payable !) Chec%s cannot be certified before payable c. ,iability i. Aan% which certifies !) Aeco$es liable as an acceptor 2) 492C'A, to certify a chec% doesn(t constitute dishonor; the holder at that stage cannot exercise his right of recourse against the drawer and the indorsers ii. :f procure$ent by !))older a) &he ban% beco$es the solidary debtor, and b) &he drawer and all indorsers discharged fro$ all liability (versus ordinary bill of exchange + not discharged) 2) Drawer a) secondary parties not released ROMAN CATHOLIC BISHOP 3. IAC ( 556)

3.

'urrender of Chec% a. &he $+rre#)er of the chec% by the holder to the drawee ban% upon its pay$ent is #!t #e%!t"at"!#. Ay paying the chec%, the drawee ban% extinguishes it as a negotiable instru$ent and converts it into a $ere voucher. b. Distinction between surrender of chec% upon pay$ent thereof and negotiation i. &he delivery of the chec% by the holder to the drawee ban% upon its pay$ent is not negotiation. Ay paying the chec%, the drawee ban% extinguishes it as a negotiable instru$ent and converts it into a $ere voucher. ii. :n the case of a deposit of a chec% by the holder thereof in a ban% other than the drawee ban%, the signature at the bac% of the chec% would constitute an indorse$ent, unless otherwise indicated. &he holder in negotiating the chec% to the depositary ban%, which in turn will collect on the chec% fro$ the drawee ban%, through the clearinghouse. BPI .$ CA (*666)

A certified personal chec% is not legal tender nor is it the currency stipulated, and therefore cannot constitute valid tender of pay$ent.

NEW PACIFIC TIMBER .. SENERIS ( 586) (as cited in /3069 v :ng) 'ept $55")

/'8ince the said chec% had been certified by the drawee ban%, by the certification, the funds represented by the chec% are transferred fro$ the credit of the $a%er to that of the payee or holder, and for all intents and purposes, the latter beco$es the depositor of the drawee ban%, with rights and duties of one in such situation. .here a chec% is certified by the ban% on which it is drawn, the certification is e@uivalent to acceptance. 'aid certification Ji$plies that the chec% is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the chec% is presented for pay$ent. :t is an understanding that the chec% is good then, and shall continue good, and this agree$ent is as binding on the ban% as its notes circulation, a certificate of deposit payable to the order of depositor, or any other obligation it can assu$e. The !,Ge't !( 'ert"(?"#% a 'he'49 a$ re%ar)$ ,!th part"e$9 is to ena$le t!e !ol"er to use it as mone,8G .hen the holder procures the chec% to be certified, Jthe 'he'4 !perate$ a$ a# a$$"%#2e#t !( a part !( the (+#)$ t! the 're)"t!r$.K )ence, the exception to

:n depositing the chec% in his na$e, private respondent did not beco$e the outright owner of the a$ount stated therein. )e was $erely designating petitioner as the collecting ban%. &his is in consonance with the rule that a negotiable instru$ent, such as a chec%, whether a $anager(s chec% or ordinary chec%, is not legal tender. As such, after receiving the deposit, under its own rules, petitioner shall credit the a$ount in private respondent(s account or infuse value thereon only after the drawee ban% shall have paid the a$ount of the chec% or the chec% has been cleared for deposit. Again, this is in accordance with ordinary ban%ing practices and with this Court(s pronounce$ent that Qthe collecting ban% or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorse$ents considering that the act of presenting the chec% for pay$ent to the drawee is an assertion that the party $a%ing the present$ent has done its duty to ascertain the genuineness of the endorse$ents.Q &he rule finds $ore $eaning in this case where the chec% involved is drawn on a foreign ban% and
*

4SEC. 33. Legal character . F ChecC re9re e%ti%! &e9$ it /$%e0 &$ %$t h#:e "e!#" te%&er 9$1er #%& their #cce9t#%ce i% the 9#0/e%t $8 &e2t , 2$th 9u2"ic #%& 9ri:#te, i #t the $9ti$% $8 the cre&it$r6 Pr$:i&e&, h$1e:er, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.

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clearing with the drawee ban%, contrary to nor$al ban%ing practice. )9,D Drawer (e$bassy) not liable. AA is guilty of negligence in giving A special treat$ent as a privileged client, in disregard of ele$entary principles of prudence that should attend ban%ing transactions. )ence, it should suffer the loss. AA could not have been a )DC. -:T/: The 0amposes note that the drawer was not held liable because the decision was based on !$# on forgery instead of !%$8 on material alteration 6f 9A had been a <40) the /mbassy could have been held liable for the original amount of the checks *. C4:<:0A, ,:AA:,:&H 2F4 AFC0C:0C)9CP a. Cnder A1 22 PEOPLE . NITAFAN( 55*) ,i$ issued a $e$orandu$ chec% which was subse@uently dishonored for insufficiency of funds. A $e$orandu$ chec% has the sa$e effect as an ordinary chec% and within the a$bit of BP **. .hat the law punishes is the issuance itself of a bouncing chec% U not the purpose for which it was issued nor the ter$s U conditions relating to its issuance. b. 9stafa under the 41C PACHECO . CA ( 555) &he essential ele$ents in order to sustain a conviction under the above paragraph are !. that the offender postdated or issued a chec% in pay$ent of an obligation contracted at the ti$e the chec% was issued; 2. that such postdating or issuing a chec% was done when the offender had no funds in the ban%, or his funds deposited therein were not sufficient to cover the a$ount of the chec%; *. deceit or da$age to the payee thereof. PEOPLE . REBES (*661) &here is no estafa through bouncing chec%s when it is shown that private co$plainant %new that the drawer did not have sufficient funds in the ban% at the ti$e the chec% was issued to hi$. 'uch %nowledge negates the ele$ent of deceit and constitutes a defense in estafa through bouncing chec%s. -.*. L"a,"&"t? !( INDORSERS< !. :ndorser a. Se'. 6-9 NIL< A person placing his signature upon an instru$ent other than as a $a%er, drawer, or acceptor unless he indicates by appropriate words his intention to be bound in so$e other capacity i SAPIERA .$ CA ( 555). It is undisputed that the four (5) chec%s issued by de -uz$an were signed by petitioner at the bac% without any indication as to how she should be bound thereby and, therefore, she is dee$ed to be an indorser thereof.

therefore collection is $ore difficult than when the drawee ban% is a local one even though the chec% in @uestion is a $anager(s chec%

-. Se'!#)ar? Part"e$ -. . L"a,"&"t? !( DRAWER % 'ec "%) -6= a. Ad$its existence of payee and his then capacity to endorse b. 9ngages that on due present$ent instru$ent will be accepted, or paid, or both, according to its tenor c. &hat if it be dishonored Z necessary proceedings on dishonor duly ta%en, will pay the a$ount thereof to the holder or to a subse@uent indorser who $ay be co$pelled to pay it 2. ,i$iting ,iability drawer $ay insert in the instru$ent an express stipulation negativing # li$iting his own liability to holder PNB .. PICORNELL ( 5**) 1icornell obtained $oney fro$ 10A Cebu to purchase tobacco to be shipped to <anila. 1icornell then drew a bill of exchange drawn against his principal, )ynd$an, &avera U Eentura ()&E), in favor of 10A or his order. Cpon presentation of the bill, )&E accepted it. )owever, )&E subse@uently refused to pay the bill because so$e of the tobacco shipped were da$aged. )9,D A. ,iability of Acceptor ()&E)  10A is a holder in due course and the partial want of consideration does not exist with respect to the ban% who paid full value for the bill of exchange.  &he want of consideration between the acceptor and drawer does not affect the rights of the payee who is a re$ote party. &he payee or holder gives value to the drawer, and if he is ignorant of the e@uities between the drawer and acceptor, his is in the position of a bona fide indorsee. A. ,iability of Drawer (1icornell)  As drawer of the bill, he warranted that it would be accepted upon proper present$ent U paid in due course. As it was not paid, he beca$e liable to the pay$ent of its value to 10A.  &he fact that 1icornell was an agent of )&E in the purchase of the tobacco does not necessarily $a%e hi$ an agent of )&E in drawing the bill of exchange. &hese are 2 different contracts. )e cannot clai$ exe$ption fro$ liability by invo%ing the existence of agency.  Drawer received notice of protest in fulfill$ent of the condition set by law for his liability to arise.  DrawerRs liability is only secondary as the liability of the acceptor is pri$ary. BANCO ATLANTICO . AUDITOR GENERAL ( 578) A fraudulently altered chec%s payable to her drawn by the 9$bassy by increasing the a$ounts. A negotiated these chec%s by indorse$ent to AA w#c paid the full a$ount of the chec%s without first 100% UP L AW , $

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After an instru$ent is dishonored by nonpay$ent, indorsers cease to be $erely secondarily liable; they beco$e principal debtors whose liability beco$es identical to that of the original obligor. &he holder of a negotiable instru$ent need not even proceed against the $a%er before suing the indorser.

,. Se'. 679 NIL< A person, who places his signature on an instru$ent negotiable by delivery, incurs all the liabilities of an indorser. Se' 609 NIL< Irre%+&ar I#)!r$er .hen a person not otherwise a party to an instru$ent, places thereon his signature in blan% before delivery, he is liable as an indorser, in accordance w# these rules !) :nstru$ent payable to order of *rd person liable to payee and to all subse@uent parties 2) :nstru$ent payable to the order of $a%er#drawer, or payable to bearer liable to all parties subse@uent to $a%er#drawer *) 'igns for acco$$odation of payee, liable to all parties subse@uent to payee 2. .A44A0&:9' i a. 9very person negotiating an instru$ent by delivery or by a @ualified indorse$ent warrants ()ec8 A=+ NI() :nstru$ent genuine, in all respects what it purports to be iii )e has good title to it iv All prior parties had capacity to contract v )e has no %nowledge of any fact w#c would i$pair validity of instru$ent or render it valueless vi in case of negotiation by delivery only, warranty only extends in favor of i$$ediate transferee ,. Ge#era& !r U#@+a&"("e) I#)!r$er< 9very person who indorses without qualification, warrants to all subse@uent )DCs ()ec8 AA+ NI() i. instru$ent genuine, good title, capacity of prior parties ii. instru$ent is at ti$e of indorse$ent valid and subsisting iii. eon due present$ent, it shall be accepted or paid, or both, according to tenor iv. if it is dishonored, and necessary proceedings on dishonor be duly ta%en, he will pay the a$t. &o holder, or to any subse@uent indorser who $ay be co$pelled to pay it *. Frder of ,iability a$ong :ndorsers ('ec "+) -6=) a. a$ong the$selves liable pri$a facie in the order they indorse, but proof of another agree$ent ad$issible b. but holder $ay sue any of the indorsers, regardless of order of indorse$ent c. "oint payees#indorsees dee$ed to indorse "ointly and severally ii '.

-.-. A''!2!)at"!# Part? !. Acco$odation 1arty one who signed instru$ent as $a%er#drawer#acceptor# indorser w#o receiving value thereof, for the purpose of lending his na$e to so$e other person 2. ,iability ,iable on the instru$ent to )2E even if holder %new he was only an A1 MAULINI .. SERRANO ( 5 0) :n acco$$odation indorse$ent, the indorser $a%es the indorse$ent for the acco$$odation of the $a%er. 'uch an indorse$ent is generally for the purpose of better securing the pay$ent of the note, i.e. he lends his na$e to the $a%er not to the holder. An acco$$odation note is one which the acco$$odation party has put his na$e, without consideration, for the purpose of acco$$odation so$e other party who is to use it and is expected to pay it. -ote: 0ampos disagrees with this ruling) referring to the case of @oodman v @aul where an accommodation indorsement may be made for the accommodation of the payee or holder ANG TIONG .. TING ( 568) :t is not a valid defense that the acco$$odation party did not receive any valuable consideration when he executed the instru$ent. 0or is it correct to say that the holder for value is not a holder in due course $erely because at the ti$e he ac@uired the instru$ent, he %new that the indorser was only an acco$$odation party. &he fact that the acco$$odation party stands only as a surety in relation to the $a%er is a $atter of concern exclusively between acco$$odation indorser U acco$$odated party. :t is i$$aterial to the clai$ of a holder for value. &he liability of the acco$$odation party re$ains pri$ary U unconditional.

SADABA .. SE3ILLA ( 567) &he solidary acco$$odation $a%er who $ade pay$ent has the right of contribution fro$ his coG acco$$odation $a%er. &his right springs fro$ an i$plied pro$ise between the acco$$odation $a%ers to share e@ually the burdens that $ay ensue fro$ their having consented to sta$p their signatures on the pro$issory note. &he following are the rules on rei$burse$ent !. A solidary acco$$odation $a%er of a note $ay de$and fro$ the principal debtor rei$burse$ent for the a$ount he paid to the payee; and 2. A solidary acco$$odation $a%er who pays on the note $ay directly de$and rei$burse$ent fro$ his coGacco$$odation $a%er without first directing his action against the principal debtor provided that - . . / $age 113 o0 355

TUA>ON . RAMOS (*661)

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behalf of a principal, not liable if he was duly authorized b. .)90 ,:AA,9 i. $ere addition of words describing hi$ as an agent without disclosing his principal ii. .here a bro%er or agent negotiates an instru$ent without indorse$ent, he incurs all liabilities in 'ec. 73, unless he discloses na$e of principal and fact that he(s only acting as agent. ()ec8 A0+ NI() INSULAR DRUG .. PNB &he right of an agent to indorse co$$ercial paper will not be lightly inferred. A sales$an with authority to collect $oney does not have the i$plied authority to indorse chec%s received in pay$ent. Any person ta%ing chec%s $ade payable to a corporation does so at his peril U $ust abide by the conse@uences if the agent who indorses the sa$e is without authority. PBC . ARUEGO ( 58 ) Aruego obtained a credit acco$$odation fro$ 1AC. 2or every printing of the publication, the printer collected the cost of printing by drawing a draft against 1AC, which will later be sent to Aruego for acceptance. 1AC see%s recovery on these drafts. Aruego invo%es the defense that he signed the docu$ent in his capacity as 1resident of the 1hil. 9ducation 2oundation U only as an acco$$odation party. )9,D Aruego is personally liable because nowhere in the draft did he disclose that he was signing as a representative of the 1hil 9ducation 2oundation. 0either did he disclose his principal. As an acco$$odation party, Aruego is liable on the instru$ent to a holder for value, notwithstanding such holder, at the ti$e of the ta%ing of the instru$ent %new hi$ to be only an acco$$odation party. Aruego signed as a drawee#acceptor. As drawee, he is pri$arily liable for the drafts.

(a) he $ade the pay$ent by virtue of a "udicial de$and or (b) the principal debtor is insolvent. TRA3EL=ON9 INC. .. CA Travel-:n was entitled to the benefit of the statutory presumption that it was a <40) that the checks were supported by valuable consideration The only evidence private respondent offered was his own testimony that he had issued the checks to Travel-:n as payee to UaccommodateU its @eneral 7anager; this claim was in fact a claim that the checks were merely simulated) that private respondent did not intend to bind himself thereon Fnly evidence of the clearest and $ost convincing %ind will suffice for that purpose. CRISOLOGO=8OSE .. CA. 'ection $& of the -6= does not apply to corporations which are accommodation parties because the issue or indorsement of negotiable paper by a corporation without consideration is ultra vires <ence) one who has taken the instrument with knowledge of the accommodation cannot recover against a corporation accommodation party /G0/3T if the officer or agent of the corp was specifically authori?ed to e>ecute or indorse the paper for the accommodation of a third person 0orporate officers) such as the president and vicepresident) have no power to e>ecute for mere accommodation a -6 of the corporation for their individual debts or transactions in which the corporation has no legitimate concern 6t is the signatories thereof that shall be personally liable therefor AGRO CONGLOMERATES . CA (*666) An acco$$odation party is a person who has signed the instru$ent as $a%er, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his na$e to so$e other person and is liable on the instru$ent to a holder for value, notwithstanding such holder at the ti$e of ta%ing the instru$ent %new (the signatory) to be an acco$$odation party. )e has the right, after paying the holder, to obtain rei$burse$ent fro$ the party acco$$odated, since the re&at"!# ,et:ee# the2 ha$ "# e((e't ,e'!2e !#e !( pr"#'"pa& a#) $+ret?, the acco$$odation party being the surety.

0. Pre$e#t2e#t

0. . De("#"t"!#< !. 2. the production of a A9 to the drawee for his ACC91&A0C9, or to the drawer or acceptor for 1AH<90&; or the production of a 10 to the party liable for pay$ent

-.0. L"a,"&"t? !( a# AGENT !. A-90CH a. 'ignature of any party $ay be $ade by duly authorized agent, established as in ordinary agency b. 'ignature per procuration operates as notice that the agent has li$ited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual li$its of his authority 2. ,:AA:,:&H a. -90 4C,9 .here person adds to his signature words indicating that he signs on 100% UP L AW , $ B A R ' $ !

0.*. Pre$e#t2e#t (!r A''epta#'e !. .hen necessary ('ec %8#) -6=) a. b. c. bill payable after sight, or in other cases where present$ent for acceptance necessary to fix $aturity where bill expressly stipulates that it shall be presented for acceptance where bill is drawn payable elsewhere than at residence # place of business of drawee

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D"$h!#!r by nonacceptance i .hen duly presented for acceptance + acceptance is refused or can not be obtained; or ii .hen present$ent for acceptance is excused + bill is not accepted. &)ec8 />0+ NI() 0F0 ACC91&A0C9 of the bill i D+t? !( h!&)er $ust treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. &)ec8 /=*+ NI() ii R"%ht !( h!&)er i$$ediate right of recourse against the drawer and indorsers and no present$ent for pay$ent is necessary. &)ec8 /=/+ NI() 0F&:C9 F2 D:')F0F4 i Re'"p"e#tG &)ec890+ NI() 9xcept as herein otherwise provided, !) to the drawer and 2) to each indorser, ii E((e't !( !2"$$"!# t! %".e #!t"'e of nonGacceptance !) any drawer or indorser to who$ such notice is not given is discharged 2) does not pre"udice the rights of a )DC subse@uent to the o$ission. ()ec8 //7+ NI()

6n no other case is presentment for acceptance necessary in order to render any party to the bill liable.

2. 9ffect of nonGpresent$ent /w#in reasonable ti$e8 ()ec8 />>+ NI() 2 discharges the drawer and all indorsers. a. 4easonable &i$e considerations nature of instru$ent usage of trade or business with respect to instru$ent iii facts of each case )ow $ade ('ec %8() -6=) a. AH or F0 A9)A,2 of the holder b. A& a reasonable hour, c. F0 a business day and before the bill is overdue, d. &F the drawee or so$e person authorized to accept or refuse acceptance on his behalf; and i bill addressed to drawees not partners, <C'& be $ade to the$ all unless one has authority to accept or refuse acceptance for all; ii drawee is dead, <AH be $ade to his personal representative; iii drawee has been ad"udged a ban%rupt or an insolvent or has $ade an assign$ent for the benefit of creditors, <AH be $ade !) to hi$ or 2) to his trustee or assignee. Whe# 2a)e ()ec8 />A+ NI() on any day on which 0:s $ay be presented for pay$ent under a. )ec8 72+ NI( + at a reasonable hour on a business day i :nstru$ents falling due or beco$ing payable on 'aturday G next succeeding business day ii 9NC91& instru$ents payable on de$and /at the option of the holder8 + before twelve oRcloc% noon on 'aturday .)90 that entire day is not a holiday. b. )ec8 9=+ NI( + i at the ti$e fixed therein without grace. c. .here the holder has no ti$e, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for pay$ent, delay is excused and doesn(t discharge the drawers and indorsers. ()ec8 />7+ NI() Whe# EA'+$e) ()ec8 />9+ NI() Aill $ay be treated as dishonored by nonG acceptance a. .here the drawee is (!) dead, (2) absconded, (*) fictitious, (5) does not have capacity to contract by bill. b. .here, after the exercise of reasonable diligence, present$ent can not be $ade. c. .here, although present$ent has been irregular, acceptance has been refused on so$e other ground. i ii

b.

*.

c.

0.-. Pre$e#t2e#t (!r Pa?2e#t . IN GENERAL

5.

a. NECESSARB in order to charge the drawer and indorsers()ec8 7*+ NI() ,. NOT #e'e$$ar? i. to charge the person pri$arily liable on the instru$ent ()ec8 7*+ NI() ii. to charge the )ra:er where he has no right to expect or re@uire that the drawee or acceptor will pay the instru$ent. ()ec8 70+ NI() iii. to charge an "#)!r$er where the instru$ent was $ade or accepted for his acco$$odation and he has no reason to expect that the instru$ent will be paid if presented. ()ec8 9*+ NI() iv. 9xcused .here, after the exercise of reasonable diligence, present$ent cannot be $ade; 2) .here the drawee is a fictitious person; 3) Ay waiver of present$ent, express or i$plied. v. when a bill is dishonored by nonacceptance + i$$ediate right to recourse accrues to holder ('ec. !3!, 0:,) 1) vi. in case of waiver of protest, whether in the case of a foreign bill of exchange or other 0: + dee$ed to be a waiver not only of a for$al protest but also of present$ent and notice of dishonor. ()ec8 ///+ NI()

3.

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PAPA . A.U. 3ALENCIA ( 558)

*. Date a#) t"2e !( pre$e#t2e#t a. ,ear"#% ("Ae) 2at+r"t? F #!t pa?a,&e !# )e2a#) + on the day it falls due if day of $aturity falls on 'unday or a holiday, the instru$ents falling due or beco$ing payable on 'aturday are to be presented for pay$ent on the next succeeding business day ('ec +() -6=) ,. pa?a,&e !# )e2a#) + within a reasonable ti$e after its issue, at the option of the holder, $ay be presented for pay$ent before twelve oRcloc% noon on 'aturday when that entire day is not a holiday ('ec +() -6=) '. )e2a#) ,"&& !( eA'ha#%e + within a reasonable ti$e after the last negotiation. ('ec ,%) -6=) (-:T/: though reasonable time from last negotiation) it may be unreasonable time from issuance thus holder may not be <40 under sec ,% ) ). Che'4 G $ust be presented for pay$ent within reasonable ti$e after its issue or drawer will be discharged fro$ liability thereon to extent of loss caused by delay ".H!: t"2e '!2p+te). = .hen payable at a (!) fixed period after date, (2) after sight, or (*) after that happening of a specified event, exclude day fro$ which the ti$e is to begin to run, include date of pay$ent. ()ec8 9A+ NI() ii..here the day, or the last day for pay$ent falls on a 'unday or on a holiday + $ay be done on the next succeeding secular or business day. ()ec8 /0>+ NI() iv iii

-ranting that petitioner had never encashed the chec%, his failure to do so for $ore than ten (!B) years undoubtedly resulted in the i$pair$ent of the chec% through his unreasonable and unexplained delay. .hile it is true that the delivery of a chec% produces the effect of pay$ent only when it is cashed, the rule is otherwise if the debtor is pre"udiced by the creditor(s unreasonable delay in present$ent. &he acceptance of a chec% i$plies an underta%ing of due diligence in presenting it for pay$ent, and if he fro$ who$ it is received sustains loss by want of such diligence, it will be held to operate as actual pay$ent of the debt or obligation for which it was given. :t has, li%ewise, been held that if no present$ent is $ade at all, the drawer cannot be held liable irrespective of loss or in"ury unless present$ent is otherwise excused. &his is in har$ony with Article !256 of the Civil Code under which pay$ent by way of chec% or other negotiable instru$ent is conditioned on its being cashed, except when through the fault of the creditor, the instru$ent is i$paired. &he payee of a chec% would be a creditor under this provision and if its nonG pay$ent is caused by his negligence, pay$ent will be dee$ed effected and the obligation for which the chec% was given as conditional pay$ent will be discharged. -. Where DELAB eA'+$e) = when the delay is caused by circu$stances beyond the control of the holder and not i$putable to his default, $isconduct, or negligence; when the cause of delay ceases to operate, present$ent $ust be $ade with reasonable diligence ()ec8 9/+NI()

0. Ma##er !( Pre$e#t2e#t

PNB .. SEETO ( 51*) Fn !* <arch, 'eeto indorsed to 10AG'urigao a bearer chec% dated !B <arch drawn against 1ACG Cebu. 10AG'urigao $ailed the chec% to its Cebu branch on 2B <arch U was presented to the drawee ban% on B6 April. &he chec% was dishonored for insufficient funds because the delay in present$ent cause the exhaustion of the drawerRs funds. :ndorser 'eeto as%ed that the suit be deferred while he $ade in@uiries. )e assured 10A that he would refund the value in case of dishonor. )9,D &he indorser is discharged fro$ liability by reason of the delay in the present$ent for pay$ent, under §?5. Drawer had enough funds when he issued the chec% because his subse@uent chec%s drawn against the sa$e ban% had been encashed. &he assurances of refund by the indorser are the ordinary obligation of an indorser which are discharged by the unreasonable delay in presentation of the chec%. -:T/: 0amposes note that the discharge of the indorser should have been based on !! "" L ,% on presentment as a condition to the indorserVs liability L presentment for payment of a demand bill made within a reasonable time from its last negotiation

a. &he instru$ent $ust be exhibited; when paid, $ust be delivered up to the party paying it. ()ec8 7>+ NI() b. .hat constitutes a $+(("'"e#t pre$e#t2e#t. ()ec8 72+ NI() i.AH .)F< the holder, or by so$e person authorized to receive pay$ent on his behalf;

CHAN WAN .. TAN MIM( 566) &an Pi$ drew specially crossed chec%s payable to bearer. Chan .an presented the chec%s for pay$ent to the drawee ban% but they were dishonored due to insufficient funds. Chan .an see%s recovery on these chec%s. )9,D Chec%s crossed specially to China Aan%ing should have been presented for pay$ent by that ban%, not by Chan .an. :nas$uch as Chan .an presented the$ for pay$ent hi$self, there was no proper present$ent U the liability did not attach to the drawer. Aut there was due present$ent as clearance endorse$ents by China Aan% can be found at the bac% of the chec%s. )owever, so$e of the chec%s were sta$ped account closed. As Chan .an failed to indicate how the chec%s reached his hands, the court held hi$ not to be a holder in due course who can still recover on the - . . / $age 116 o0 355

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reasonable diligence ()ec8 7A+ NI() *) where persons pri$arily liable are part#er$ and no place of pay$ent is specified, present$ent for G to any one of the$, even though there has been a dissolution of the fir$. ()ec8 77+ NI() 5) G!"#t )e,t!r$ and no place of pay$ent is specified G to the$ all ()ec8 79+ NI() iv. &F .)F< (!) person pri$arily liable on the instru$ent, or if he is absent or inaccessible, (2) to any person found at the place where the present$ent is $ade.

chec%s but sub"ect to personal defenses, such as lac% of consideration. -:T/: 0amposes note that despite the addition of the words Unon-negotiableU on the specially crossed checks) the 0ourt considered the checks as negotiable instruments A check on its face normally has all the requisites of negotiability) and the addition of the above words should not change its character as a negotiable instrument ASSOCIATED BANM .. CA L REBES ( 55*) Different depart$ent stores issued crossed chec%s bearing Qfor payeeRs account onlyQ payable to <elissaRs 4&.. 'ayson, acting without authority, deposited U encashed the chec%s with Associated Aan%. )9,D Citing 'tate :nvt )ouse v :AC, the effects of crossing a chec% are !. chec% $ay not be encashed but only deposited in the ban%; 2. chec% $ay be negotiated only one GG to one who has an account with a ban%; and *. the act of crossing the chec% serves as a warning to the holder that the chec% has been issued for a definite purpose so that he $ust in@uire if he has received the chec% pursuant to that purpose. &he effects of crossing a chec% relate to the $ode of present$ent for pay$ent. &he law i$poses a duty of diligence on the collecting ban% to scrutinize chec%s deposited with it, for the purpose of deter$ining their genuineness U regularity. ii. &:<9 reasonable hour on a business day; !) where instru$ent payable at ban%. = $ust be $ade during ban%ing hours, C0,9'' the person to $a%e pay$ent has no funds there to $eet it at any ti$e during the day, in which case present$ent at any hour before the ban% is closed on that day is sufficient ()ec8 7=+ NI() iii. 1,AC9 proper place as herein defined ()ec8 71+ NI() !) place of pay$ent specified + at place of pay$ent; 2) no place of pay$ent specified but address of the person to $a%e pay$ent is given in the instru$ent + at the address given; *) no place of pay$ent and no address is given + at the usual place of business or residence of the person to $a%e pay$ent; !) in any other case + wherever person to $a%e pay$ent can be (!) found, or if presented (2) at his last %nown place of business or residence 2) where principal debtor is )ea) and no place of pay$ent is specified + to his personal representative, :2 any A0D :2 he can be found with the exercise of 100% UP L AW , $

1. D"$h!#!r ,? N!#pa?2e#t a. Se' 8-9 NIL &he instru$ent when i. duly presented for pay$ent and pay$ent refused or cannot be obtained; or ii. present$ent is excused and the instru$ent is overdue and unpaid. b. 9ffect /sub"ect to 0:, provs8 an i$$ediate right of recourse to all parties secondarily liable accrues to the holder. ()ec8 9>+ NI() i. Dishonor is a condition precedent to the enforce$ent of the liability of secondary parties. ii. &his is conditioned upon the giving of due notice of dishonor iii. An indorser whose liability has beco$e fixed by de$and and notice is, as to holder, a principal debtor.

1. N!t"'e !( D"$h!#!r

1. .De("#"t"!# !. &o bring either verbally or by writing, to the %nowledge of the drawer or indorser of an instru$ent, the fact that a specified 0:, upon proper proceedings ta%en, has not been accepted or has not been paid, and that the party notified is expected to pay it Ge#era& r+&e MUST be given to drawer and to each indorser, and any drawer or indorser to who$ such notice is not given is discharged

2.

1.*. Whe# #e'e$$ar? . Se' 859 NIL 9xcept as herein provided, :!en a ne%otia$le instrument !as $een "is!onore" $, non2acceptance or non2 pa,ment, notice of dishonor $ust be given to the )ra:er and to each "#)!r$erV 2. 1arties entitled to notice a. Drawer b. :ndorser c. Acco$odation :ndorsers

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!. 0otice $ay be given as soon as the instru$ent is dishonored and :"th"# the t"2e ("Ae) by 0:,, unless delay excused ()ec8 /*2+ NI() 2. 0F&:C9 to 'CA'9OC90& 1A4&H 9ach party who receives a notice is given the sa$e period of ti$e within which to notify prior indorsers that the last holder had. ('ec %5,) *. &:<9 2:N9D AH &)9 0:, a. .here parties reside in sa$e place ()ec8 /*1+ NI() <ust be given w#in the ff. ti$es :f given at the place of business of the person to receive notice G before the close of business hours on the day following iii :f given at his residence G before the usual hours of rest on the day following iv :f sent by $ail G deposited in the post office in ti$e to reach hi$ in usual course on the day following. b. .here parties reside in different places ()ec8 /*>+ NI(). i. :f sent by $ail G deposited in the post office in ti$e to go by $ail the day following the day of dishonor, or if there be no $ail at a convenient hour on last day, by the next $ail thereafter ii. Convenient hour depends on the usual hours of opening of business houses and the postGoffice iii. :f given otherwise G within the ti$e that notice would have been received in due course of $ail, if it had been deposited in the post office within the ti$e specified above ii

*.

Ioint $a%er excluded if not an indorser Acceleration Clause a. :f clause is optional on holder i &he bringing of an action against the $a%er and indorsers constitutes a valid exercise of option and a .a&") #!t"'e !( )"$h!#!r b. Clause is auto$atic i 0otice of dishonor $ust be give$ at once ii 0ot sufficient to give it upon co$$ence$ent of action GULLAS .. PNB ( 5-1)

A notice of dishonor is necessary to charge an indorser U that the right of action against hi$ does not accrue until the notice is given. As a general rule, a ban% has a right of set off of the deposits in its hands for the pay$ent of any indebtedness to it on the part of a depositor. )owever, prior to the $ailing of notice of dishonor U without awaiting any action by -ullas, the ban% $ade use of the $oney standing in his account to $a%e good for the treasury warrant. -ullas was $erely an indorser U notice should actually have been given to hi$ in order that he $ight protect his interests.

1.-. F!r2 a#) C!#te#t$ (Se' 56) . F!r2 !( N!t"'e a. $ay either be in writing, or oral b. Ca$pos $ust be in a language that will infor$ the addressed party that the instru$ent has been duly presented *. C!#te#t$ + $ust contain any ter$s which sufficiently a.identify the instru$ent, and b. indicate that it has been dishonored by nonGacceptance or nonGpay$ent; *.<ode of delivery a. 1ersonal service i. &here $ust be actual personal service, or ii. An ordinary intelligent and diligent effort to $a%e personal service b. &hrough the $ails Ca$pos &hrough the telephone i 1arty to be notified $ust be fully identified as the party at the receiving end of the line 5.&he ff. notice still sufficient ()ec8 0=+ NI() a. a written notice, not signed b. insufficient written notice, supple$ented and validated by verbal co$$unication c. instru$ent suffering fro$ $isdescription C0,9'' the party to who$ the notice is given is in fact $isled thereby. c.

c. Delay (Se'.

-9 NIL)

i. 9xcused when the delay is caused by circu$stances beyond the control of the holder and not i$putable to his default, $isconduct, or negligence ii. Aut, when the cause of delay ceases to operate, notice $ust be given with reasonable diligence.

5. 'ender )ee2e) to have given due notice ()ec8 /*=+ NI() a. .here notice of dishonor is duly addressed and deposited in the post office, i. J)ep!$"t in post officeK = when deposited in any branch post office or in any letter box under the control of the postGoffice depart$ent. ()ec8 /*A+ NI() b. notwithstanding any $iscarriage in the $ails

5.

1.0.T"2e a#) P&a'e

P&a'e :here notice $ust be sent ()ec8 /*9+ NI() a. to the address, if any, added by the party to his signature; if address not given $age 118 o0 355

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!. when given by#on behalf of holder inures to benefit of ()ec8 02+ NI() a. all subse@uent holders and b. all prior parties who have a right of recourse vs. the party to who$ it(s given 2. where notice given by#on behalf of a party entitled to give notice inures for benefit ()ec8 01+ NI() a. holder b. all parties subse@uent to party to who$ notice given

b.

to the postGoffice nearest to his place of residence or where he is accusto$ed to receive his letters; or ii :f he lives in one place and has his place of business in another, to either place; or iii :f he is so"ourning in another place, to the place where he is so so"ourning. 0otice sent to place not in accord with 0:,, still 'C22:C:90& i .here the notice is actually received by the party within the ti$e specified in this Act,

1.1. B? Wh!2 G".e# . Se'. 569 NIL a. Ay or on behalf of the holder or b. any party to the instru$ent who $ay be co$pelled to pay it to the holder, and who, upon ta%ing it up, would have a right to rei$burse$ent fro$ the party to who$ the notice is given *. A%e#t a. 0otice of dishonor $ay be given by an agent either in his own na$e or in the na$e of any party entitled to give notice, whether that party be his principal or not ()ec8 0/+ NI() b. .here instru$ent has been dishonored in hands of agent, he $ay either hi$self give notice to the part"e$ liable thereon, or he $ay give notice to his pr"#'"pa& (within the sa$e ti$e as if agent were holder) ()ec8 0>+ NI()

1.8. Whe# r+&e re@+"r"#% #!t"'e #!t app&"e) !. :n general a. 'ec !!2 notice of dishonor is dispensed with when after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged b. 4easonable diligence depends upon the circu$stance of the case 2. .hen notice of nonGacceptance is already given a. 'ec !!7 .here due notice of dishonor by nonGacceptance has been given, notice of a subse@uent debtor by nonGpay$ent is not necessary, unless in the $eanti$e the instru$ent has been accepted b. 4atio for the rule dishonor by nonG acceptance confers upon the holder an i$$ediate right against all secondary parties -. Wa".er a. .aiver of notice $ay be $ade either

1.6. T! :h!2 #!t"'e MAB ,e %".e#
!.

2.

*.

5.

3.

7.

:f given by an agent a. to his principal, in case of an instru$ent dishonored in the hands of an agent ('ec. 65, 0:,), or b. to the parties liable thereon c. ex collecting ban% :0 -9094A, ('ec &,) a. 1arty hi$self b. Fr his agent in that behalf :f party is dead and death %nown to the party giving notice ()ec8 09+ NI() a. <C'& be given to a personal representative, if there be one, and if with reasonable diligence, he can be found; b. :f no personal representative + <AH be sent to the last residence or last place of business of the deceased. &o partners to any one partner, even though there has been a dissolution. ( )ec8 00+ NI() &o "oint parties()ec8 /**+ NI() a. to each of the party b. unless one of the$ has authority to receive such notice for the others. to ban%rupt ()ec8 /*/+ NI() a. to the party hi$self or b. to his trustee or assignee

before the ti$e of giving notice has arrived or ii after the o$ission to give due notice; $ay be expressed or i$plied. ()ec8 /*0+ NI() b. 1arties affected by waiver i. Dependent upon where the waiver is written ii. .here the waiver is e$bodied in the instru$ent itself G binding upon all parties; iii. where written above the signature of an indorser G binds hi$ only. ()ec8 //*+ NI()

i

1.5. Whe# N!t"'e N!t Ne'e$$ar? .Whe# #!t #e'e$$ar? t! 'har%e )ra:er ()ec8 //>+ NI() a. drawer#drawee sa$e person b. drawee fictitious, incapacitated c. drawer is person to who$ instru$ent is presented for pay$ent d. drawer has no right to expect#re@uire that drawee#acceptor will honor instru$ent e. drawer counter$anded pay$ent

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9NC91& bill drawn payable at the place of business or residence of person other than the drawee has been dishonored by nonacceptance, a. it $ust be protested for nonGpay$ent at the place where it is expressed to be payable, and b. no further present$ent for pay$ent to, or de$and on, the drawee is necessary. ()ec8 /=A+ NI() ). Pr!te$t (!r ,etter $e'+r"t? against the drawer and indorsers = where the acceptor has been ad"udged a ban%rupt or an insolvent or has $ade an assign$ent for the benefit of creditors before the bill $atures ()ec8 /=9+ NI() :. De&a? eA'+$e) . Re@+"$"te$< a. when caused by circu$stances beyond the control of the holder, and b. not i$putable to his default, $isconduct, or negligence. 2. .hen the cause of delay ceases to operate, the bill $ust be noted or protested with reasonable diligence.; I. .hen pr!te$t )"$pe#$e) with G by any circu$stances which would dispense with notice of dishonor. ()ec8 /=0+ NI() P. Wa".er !( pr!te$t< dee$ed to be a waiver not only of a for$al protest but also of present$ent and notice of dishonor. ( Se'. 9 NIL) TAN LEONCO . GO INOUI( 567)

STATE IN3ESTMENT HOUSE . CA ( 55-) <oulic issued 2 chec%s to Eictoriano as security for pieces of "ewelry to be sold on co$$ission. Eictoriano negotiated these chec%s to 'tate :nvest$ent. As <oulic failed to sell the "ewelry, she returned the$ to Eictoriano. )owever, she failed to retrieve her chec%s. <oulic withdrew her funds fro$ the drawee ban%. Cpon present$ent, the chec%s were dishonored. )9,D 'tate :nvest$ent is a holder in due course U is not sub"ect to the personal defense of lac% of consideration. There "$ #! #ee) t! $er.e the )ra:er a #!t"'e !( )"$h!#!r ,e'a+$e $he :a$ re$p!#$",&e (!r the )"$h!#!r !( her 'he'4$. After withdrawing her funds, she could not have expected her chec%s to be honored. *. Where #!t #e'e$$ar? t! 'har%e "#)!r$er ()ec8 //=+ NI() a. drawee fictitious, incapacitated, and indorser aware of the fact at ti$e of indorse$ent b. indorser is person to who$ instru$ent presented for pay$ent c. instru$ent $ade#accepted for his acco$$odation

7. Pr!te$t

A. De("#"t"!#< testi$ony of so$e proper person that the regular legal steps to fix the liability of drawer and indorsers have been ta%en B. Whe# #e'e$$ar?< !. :n case of a 2F49:-0 A:,, appearing on its face to be such; 2. protest for nonGacceptance if dishonored by nonacceptance U *. protest for nonpay$ent if not previously dishonored by nonpay$ent. 5. 9ffect of failure to protest the drawer and indorsers are discharged. ()ec8 /=2+ NI() C. F!r2 !. annexed to the bill or $ust contain a copy thereof, and 2. $ust be under the hand and seal of the notary $a%ing it; D. C!#te#t$ !. &he ti$e and place of present$ent; 2. &he fact that present$ent was $ade and the $anner thereof; *. &he cause or reason for protesting the bill; 5. &he de$and $ade and the answer given, if any, or the fact that the drawee or acceptor could not be found. ()ec8 /=1+ NI(). 9. B? :h!2 !. A notary public; or 2. any respectable resident of the place where the bill is dishonored, in the presence of two or $ore credible witnesses. ()ec8 /=>+ NI() 2. T"2e !. on the day of its dishonor unless delay is excused; 2. when duly noted, the protest $ay be subse@uently extended as of the date of the noting. ()ec8 /==+ NI(); -. P&a'e !. at the place where it is dishonored, 100% UP L AW , $

:n exchange for the abaca fro$ &an ,eoncoRs plantations, -o :n@ui drew a bill of exchange against ,i$ Cyco. Cpon present$ent of the draft, it was refused pay$ent due to a stop order fro$ the drawer. &he bill was not protested. )9,D &he action is not brought upon the bill of exchange which was used only as evidence of the indebtedness. Cnder these conditions, protest U notice of nonpay$ent are unnecessary in order to render the drawer liable. -:T/: The ruling of the 0ourt on protest is merely obiter dictum 8. A''epta#'e !r Pa?2e#t (!r H!#!r

A. A''epta#'e !. 1ractice of accepting for honor is !,$!&ete -* .hen bill $ay be a''epte) (!r h!#!r. = .hen a A9 has been (!) protested for dishonor by nonGacceptance or protested for better security and (2) is not overdue  any person not being a party already liable $ay, with the CF0'90& of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. *. &he acceptance for honor $ay be for part only of the su$ for which the bill is drawn; 5. where there has been an acceptance for honor for one party, there $ay be a further acceptance by a different person for the honor of another party. ()ec8 /A/+ NI()

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A''epta#'e G $ay be written on any part and it $ust be written on one part only. :f the drawee accepts $ore than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. ( )ec8 /9/+ NI() Pa?2e#t G .hen the acceptor of a bill drawn in a set pays it without re@uiring the part bearing his acceptance to be delivered up to hi$, and the part at $aturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. ()ec8 /92+ NI() 9ffect of )"$'har%"#% one of a set. = 9xcept as herein otherwise provided, the whole bill is discharged. ()ec8 /91+ NI()

Re(eree "# 'a$e !( #ee) = person whose na$e is inserted by the drawer of a bill and any indorser to who$ the holder $ay resort in case bill is dishonored by nonG acceptance or nonGpay$ent; option of the holder to resort to the referee ( )ec8 /1/+ NI() A. PABMENT FOR HONOR = any person $ay intervene and pay bill protested for nonG pay$ent supra protest ()ec8 /7/+ NI() 6.- INSTRUMENTS PABABLE AT BANM 'ec ?> .here the instru$ent is $ade payable at a ban%, it is e@uivalent to an order to the ban% ton pay the sa$e for the account of the principal debtor therein BINGHAMPTON PHARMACB . FIRST NATIONAL BANM ( 5 1) &here is a distinction between the drawer of a chec% U the $a%er of a note payable at a ban% 0ote payable at Chec% ban% $a%er of a note drawer of a chec% is pri$arily liable is only liable after on the dishonor instru$ent ,aw excuses re@uires present$ent of present$ent within the instru$ent a reasonable ti$e at the peril of discharging the drawer obligation of the Areach of the duty $a%er of a note of the holder of a is not a chec% to present conditional for pay$ent at the pro$ise to pay place where it is only at a special payable at a place, but is a reasonable ti$e pro$ise to pay discharges the generally, even drawer fro$ though a place of liability to the pay$ent extent he is da$aged by the breach.

F.

G.

C5apter +II 6ISCHA#1
. De("#"t"!#< D"$'har%e &he release of all parties, whether pri$ary or secondary, fro$ the obligation on the instru$ent; renders the instru$ent nonGnegotiable

*. D"$'har%e !( the INSTRUMENT *. . H!: )"$'har%e)< (Se' !. 5)
6

5. B"&&$ "# Set

A.

E. C.

..

co$posed of various parts being nu$bered, and containing a reference to the other parts, all of which parts constitute one bill of lading Aills in set constitute one bill. ()ec8 /79+ NI() R"%ht !( HDC$ where different parts are negotiated. = the holder whose title first accrues is the true owner of the bill. Aut nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to hi$. ()ec8 /708+ NI() L"a,"&"t? !( h!&)er who indorses two or $ore parts of a set to different persons. = liable on every such part, and every indorser subse@uent to hi$ is liable on the part he has hi$self indorsed, as if such parts were separate bills. ()ec8 /9*+ NI()

Ay 1ay$ent in due course a. 'ec. ?? 1ay$ent is $ade in due course when it is $ade i at or after the $aturity of the pay$ent o if payment is made before maturity and the note is negotiated to a <40) the latter may recover on the instrument ii to the holder thereof o payment to one of several payees or indorsees in the alternative discharges the instrument) o but payment to one of several 2oint payees or 2oint indorsers is not a discharge The party receiving payment must have been authori?ed by others to receive payment iii in good faith and without notice that his title is defective b. Ay who$ $ade i pay$ent in due course by or on behalf of principal debtor ii pay$ent in due course by party acco$$odated where party is $ade# accepted for acco$$odation c. .hen chec% dee$ed paid by drawee ban% i Fnce the holder receives the cash ii :f the ban% credits the a$t of the chec% to the depositor(s account

10

Su!!e te& A%e/$%ic 6 PICC ROA.6 P#0/e%t i% &ue c$ur e, I%te%ti$%#" C#%ce""#ti$%, Re%u%ci#ti$%, #%0 Other Act, .e2t$r 2ec$/e h$"&er.
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where instru$ent is paid by party secondarily liable, it(s not discharged, but a. the party so paying it is re$itted to his for$er rights as regard to all prior parties b. and he $ay stri%e out his own and all subse@uent indorse$ents, and again negotiate instru$ent, except i where it(s payable to order of *rd party and has been paid by drawer ii where it(s $ade#accepted for acco$$odation and has been paid by party acco$$odated

.here the drawee ban% charges the chec% to the account, indicating intention to honor the chec% 2. intentional cancellation by holder a. if unintentional or under $ista%e or without authority of holder, inoperative; b. where instru$ent or signature appears to have been cancelled, burden of proof on party which alleges it was unintentional, etc. ()ec8 /21+ NI() *. any other act which discharges a si$ple contract for pay$ent of $oney a. ex. issuance of a renewal note= novation b. 4efer to Art !2*! of the Civil Code 5. principal debtor beco$es holder of instru$ent at or after $aturity in his own right 3. renunciation of holder ()ec8 /22+ NI() a. holder $ay expressly renounce his rights vs. any party to the instru$ent, before or after its $aturity b. absolute and unconditional renunciation of his rights against 14:0C:1A, D9A&F4 $ade at or after $aturity discharges the instru$ent c. renunciation does not affect rights of )DC w#o notice. d. 4enunciation $ust be in writing unless instru$ent delivered up to person pri$arily liable thereon $aterial alteration + review 'ec. !23, 0:, what constitutes $aterial alteration ('ec. !25, 0:, $aterial alteration w#o assent of all parties liable avoids instru$ent except as against party to alteration and subse@uent indorsers)

C5apter +III OTH # !O#MS O! COMM #CIAL /A/ #
. I# Ge#era& . . C!22er'"a& paper$ + !. also 0egotiable instru$ents; 2. $erely special for$s of either 10s or A9s; *. also governed by the 0:, .*. O+a$"=#e%!t"a,&e includes co$$ercial paper which though not governed by the 0:,, have certain attributes of negotiability. *. B!#)$ a#) De,e#t+re$ *. . B!#)$ !. 2. *. evidences of indebtedness, in the nature of a 10s usually acco$panied by a $ortgage of the property of the issuer issued by the govern$ent ($unicipal U other public corporations) U private corporations; a. though not to $ature for a long ti$e, assure so$e regular inco$e to bondholders in the for$ of interestT, usually payable annually b. bonds and interest coupons (evidences interest obligations)T  $ay be negotiable in for$, therefore governed by 0:, ('ec 73);  both are actually pro$issory notes c. they run for long periods of ti$e, and are often sold to the public in general d. funds generated by such bonds are used to finance corporate pro"ects and public wor%s; e. there is no warranty on the part of such indorser or negotiator that prior parties had capacity to contract. &he @ualified indorser U negotiator by delivery of a bond do not warrant therefore that the corporation which issued the bonds has any "udicial capacity to act. A general indorser thereof however would be liable for such want of capacity.

-. OF SECONDARB /2*+ NI() A. A. C. D. 9.

PARTIES

()ec8

by discharge of instru$ent intentional cancellation of signature by holder discharge of prior party valid tender of pay$ent by prior party release of principal debtor, unless holder(s right of recourse vs. 2ndary party reserved 2. any agree$ent binding upon holder to extend ti$e of pay$ent, or to postpone holder(s right to enforce instru$ent, C0,9'' !. $ade with assent of party secondarily liable, or 2. right of recourse reserved. -. 2ailure to $a%e due present$ent ('ecs. >B, !55, 0:,) ). failure to give notice of dishonor :. certification of chec% at instance of holder I. reac@uisition by prior party !. where instru$ent negotiated bac% to a prior party, such party $ay reissue and further negotiate, but not entitled to enforce pay$ent vs. any intervening party to who$ he was personally liable

11

Su!!e te& A%e/$%ic 6 CuPI. CRRAFFT6 i%te%ti$%#" C#%ce""#ti$%, Pri$r P#rt0 #%& I% tru/e%t .i ch#r!e, Certi8ic#ti$%, Re"e# e, Re#cGui iti$%, #%0 A!ree/e%t, F#i"ure t$ /#Ce &ue 9re e%t/e%t, F#i"ure t$ !i:e %$tice $8 &i h$%$r, :#"i& Te%&er $8 9#0/e%t.
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*.*. De,e#t+re$
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of the goods, or any other person who$soever. b. &he independent nature of the letter of credit $ay be (a) independence in toto where the credit is independent fro$ the "ustification aspect and is a separate obligation fro$ the underlying agree$ent li%e for instance a typical standby; or (b) independence $ay be only as to the "ustification aspect li%e in a co$$ercial letter of credit or repay$ent standby, which is identical with the sa$e obligations under the underlying agree$ent. :n both cases the pay$ent $ay be en"oined if in the light of the purpose of the credit the pay$ent of the credit would constitute fraudulent abuse of the credit. (&ransfield vs. ,uzon )ydro) 1ertinent C!)e !( C!22er'e provisions a. Art 167. ,etters of credit G issued by one $erchant to another for the purpose of attending to a co$$ercial transaction. b. Art 168. &he essential conditions of letter of credit shall be i issued in favor of a definite person, and not to order. ii li$ited to a fixed and specified a$ount, or to one or $ore undeter$ined a$ount, but all within a $axi$u$ the li$it of which has to be stated exactly. -ote: Those which do not have any of these last circumstances shall be considered as mere letters of recommendation c. Art 165. &he drawer of a letter of credit shall be liable to the person on who$ it was issued, for the a$ount paid by virtue thereof, within the $axi$u$ fixed therein. ,etters of credit $ay not be protested even if not be paid; bearer cannot ac@uire any right of action by reason of nonGpay$ent against the person who issued it. &he person paying has right to de$and the proof of the identity of the person in whose favor the letter of credit was issued. d. Art 176. &he drawer of a letter of credit $ay annul it, infor$ing the bearer and the person to who$ it is addressed e. Art 17 . &he bearer of a letter or credit shall pay the a$ount received to the drawer without delay. 'hould he not do so, an action involving execution $ay be brought to recover it, with legal interest and the current exchange in the place where it is repaid. f. Art 17*. :f the bearer of a letter of credit does not $a%e use thereof within the (!) period agreed upon with the drawer, or in default of a period fixed, (2) within 7 $onths, counted fro$ its date, in any point in the 1hilippines, and within !2 $onths anywhere outside thereof, it shall be void in fact and in law. BPI .. DE RENB FABRIC ( 576)

2.

si$ilar to bonds except that they are usually for a shorter te$ and $ay or $ay not be acco$panied by a $ortgage. they are often issued on the general credit of the issuer corporation Dra(t$ a#) Letter$ !( Cre)"t

-.

-. . Dra(t$ a#) Letter$ !( Cre)"t G &he draft and the letter of credit are generally used together to effect pay$ent in international transactions. -.*. Dra(t a for$ of A9 generally used to facilitate the transactions between persons physically re$ote fro$ each other. -.-. Letter$ !( Cre)"t !. one person re@uests so$e other person to advance $oney or give credit to a third person, and pro$ises that he will repay the sa$e to the person $a%ing the advance$ent, or accept bills drawn upon hi$self for the li%e a$ount. 2. $ust be issued in favor of a definite person, and not to order. *. under our law, a letter of credit cannot be a negotiable instru$ent because (a) it $ay not contain the words of negotiability; (b) $ay be issued for an undeter$ined a$ount. 'ee Art 37? Code of Co$$erce. 5. J:0D9190D90C9 14:0C:1,9K Credits, by their nature, are separate transactions fro$ the sales or other contract(s) on which they $ay be based and ban%s are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Conse@uently, the underta%ing of a ban% to pay, accept and pay draft(s) or negotiate and#or fulfill any other obligation under the credit is not sub"ect to clai$s or defenses by the applicant resulting fro$ his relationships with the issuing ban% or the beneficiary. A beneficiary can in no case avail hi$self of the contractual relationships existing between the ban%s or between the applicant and the issuing ban%. a. &hus, the engage$ent of the issuing ban% is to pay the seller or beneficiary of the credit once the draft and the re@uired docu$ents are presented to it. &his principle assures the seller or the beneficiary of pro$pt pay$ent independent of any breach of the $ain contract and precludes the issuing ban% fro$ deter$ining whether the $ain contract is actually acco$plished or not. Cnder this principle, ban%s assu$e no liability or responsibility for the for$, sufficiency, accuracy, genuineness, falsification or legal effect of any docu$ents, or for the general and#or particular conditions stipulated in the docu$ents or superi$posed thereon, nor do they assu$e any liability or responsibility for the description, @uantity, weight, @uality, condition, pac%ing, delivery, value or existence of the goods represented by any docu$ents, or for the good faith or acts and#or o$issions, solvency, perfor$ance or standing of the consignor, the carriers, or the insurers 100% UP L AW , $ B A R ' $ !

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A. or $hare 'ert"("'ate is the custo$ary and convenient evidence of the holder(s interest in the corporation which issues it. A. not a 0:, but is included in the ter$ JsecuritiesK bec does not contain any pro$ise or order to pay $oney; C. described as Huasi2Ne%otia$le bec oftenti$es, by application of the principles of estoppel, and to effectuate the ends of "ustice and the intention of the parties, the courts decree a better title to the transferee than actually existed in his transferor, and is the sa$e as would be reached if the certificate were negotiable. D. .hen the shareholder signs the bac% of certificates of stoc% without filling in the blan%s (for the na$e of the transferee and attorneyG inGfact) and the certificate is delivered to another, the latter appears to be the owner thereof. A bona fide purchaser of value without notice, will be protected in his ac@uisition, although such third person has diverted the certificate fro$ the purpose for which he was entrusted therewith. (1rinciple of E$t!ppe&) 9. &he sa$e rule is applicable if the certificate is in bearer for$. 2. &he rule is applicable where the certificate is lost or stolen while signed in blan%. 9ven a purchaser in good faith cannot ac@uire title as against the true owner. (S) -. At co$$on law, stoc% certificates are given the attributes of negotiability only where the owner thereof has entrusted the wrongdoer with the possession of such certificate and clothed hi$ with apparent ownership thereof. SANTAMARIA . HONGMONG L SHANGHAI BANM ( 51 ) 1laintiff, in failing to ta%e the necessary precaution upon delivering the certificate of stoc% to her bro%er, was chargeable with negligence in the transaction which resulted to her own pre"udice, and as such, she is estopped fro$ asserting title to it as against the defendant ban%. A certificate of stoc%, indorsed in blan%, is dee$ed @uasiGnegotiable, and as such the transferee thereof is "ustified in believing that it belongs to the holder and transferor. DE LOS SANTOS9 M'GRATH ( 511) Although a stoc% certificate is so$eti$es regarded as @uasiGnegotiable, in the sense that it $ay be transferred by endorse$ent, coupled with delivery it is well settled that the instru$ent is nonG negotiable, because the holder thereof ta%es it without pre"udice to such rights or defense as the registered owner or credit $ay have under the law, except in so far as such rights or defenses are sub"ect tot eh li$itations i$posed by the principles governing estoppel. CAPCO .. MACASAET ( 556) Certificates of stoc%s are considered as @uasiG negotiable instru$ents. .hen the owner or shareholder signs the printed for$ of sale or assign$ent at the bac% of every stoc% certificates without filling in the blan%s provided for the na$e of the transferee as well as for the na$e of the attorneyGinGfact, the said owner or shareholder, in effect, confers on another all the indicia of ownership of the said stoc% certificates. - . . / $age 124 o0 355

&he co$pany and its officers cannot shift the burden of loss to the ban% because of the ter$s of their Co$$ercial ,etter of Credit Agree$ent with the ban% provides that latter shall not be responsible for the any difference in character or condition of the property. 2urther$ore, the ban% was able to prove the existence of a custo$ in international ban%ing and financing circles negating any duty of the ban% to verify whether what has been described in letters of credits or drafts or shipping docu$ents actually tallies with what was loaded aboard ship. Aan%s, in providing financing in international business transactions do not deal with the property to be exported or shipped to the i$porter, but deal only with docu$ents. LEE . CA (*66*) <odern letters of credit are usually not $ade between natural persons. &hey involve ban% to ban% transactions. )istorically, the letter of credit was developed to facilitate the sale of goods between, distant and unfa$iliar buyers and sellers. :t was an arrange$ent under which a ban%, whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that certain docu$ents are presented such as bills of lading acco$panied the corresponding drafts. 9xpansion in the use of letters of credit was a natural develop$ent in co$$ercial ban%ing. 1arties to a co$$ercial letter of credit include (a) the buyer or the i$porter, (b) the seller, also referred to as beneficiary, (c) the opening ban% which is usually the buyer(s ban% which actually issues the letter of credit, (d) the notifying ban% which is the correspondent ban% of the opening ban% through which it advises the beneficiary of the letter of credit, (e) negotiating ban% which is usually any ban% in the city of the beneficiary. &he services of the notifying ban% $ust always be utilized if the letter of credit is to be advised to the beneficiary through cable, (f) the paying ban% which buys or discounts the drafts conte$plated by the letter of credit, if such draft is to be drawn on the opening ban% or on another designated ban% not in the city of the beneficiary. As a rule, whenever the facilities of the opening ban% are used, the beneficiary is supposed to present his drafts to the notifying ban% for negotiation and (g) the confir$ing ban% which, upon the re@uest of the beneficiary, confir$s the letter of credit issued by the opening ban%. TRANSFIELD 3S. LU>ON HBDRO (*660) Can the beneficiary invo%e the independence principleS Hes. &o say that the independence principle $ay only be invo%ed by the issuing ban%s would render nugatory the purpose for which the letters of credit are used in co$$ercial transactions. As it is, the independence doctrine wor%s to the benefit of both the issuing ban% and the beneficiary. Cert"("'ate !( St!'4

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person, then it should be indorsed by such person, either specially or in blan%. *. :f the goods are deliverable to bearer, or the docu$ent has been indorsed in blan%, then negotiation $ay be by $ere delivery. 1.0. R"%ht$ !( a H!&)er . Whe# (ree (r!2 per$!#a& )e(e#$e a. Cnder Art /=/9 Ci'il Co"e, a holder of a negotiable docu$ent of title in good faith, for value and without notice is placed on the sa$e level as a )DC of a negotiable instru$ent + i.e., personal defenses enu$erated in said article are not available against hi$. 1ersonal defenses include negotiation was a breach of duty on the part of the person $a%ing the negotiation, owner of the docu$ent was deprived of the possession of the sa$e by loss, theft, fraud, accident, $ista%e, duress or conversion. b. 0ote Art !3!?(s conflict with Art !3!2. (see p 6!3) *. What t"t&e a'@+"re) (0F&9 see Arts !3!*, !3!5 and !3!6 Civil Code) a. A person to who$ a negotiable docu$ent of title has been duly negotiated ac@uires the t"t&e of the person 09-F&:A&:0- it as well as the title of the F4:-:0A, AA:,F4 or depositor of the goods. ex. if the original bailor had no authority fro$ such owner to deposit the goods, then the holder of the negotiable docu$ent, even if the negotiation to hi$ was valid, cannot ac@uire title to the goods; A0D even if the original bailor had authority, if the negotiation to the present holder(s transferor was not valid, such holder, even if in good faith and for value, does not ac@uire any right to the goods.  the holder(s re$edy if any, is against his transferor and#or the guilty party. i &hus, if the original bailor or depositor of the goods was not the owner thereof or had no authority fro$ such owner to deposit the goods, then the holder of the negotiable docu$ent, even if the negotiation to hi$ was valid, cannot ac@uire title to the goods. ii Fn the other hand, even if the original bailor or depositor was the owner or had authority fro$ the owner, if the negotiation to the present holder(s transferor was not valid, such holder, even if in good faith and for value, does not ac@uire any right to the goods. iii :n both cases, the holder(s re$edy if any, is against his transferor and#or the guilty party. b. &he person to who$ the docu$ent has been negotiated ac@uires the !,&"%at"!# of the ,a"&ee t! 2a4e )e&".er? to hi$, as if they had contracted directly with each other. i Ay issuing a negotiable docu$ent of title, such bailee had given in advance his consent to hold the goods for any person to who$ such docu$ent is negotiated. - . . / $age 125 o0 355

0.

Ne%!t"a,&e D!'+2e#t$ !( T"t&e

1. . I# Ge#era& !. as distinguished fro$ negotiable instru$ents, refer to goods and not to $oney; the sale of goods covered is effected by the transfer of said docu$ent 2. not governed by the 0:, but by the Civil Code. *. includes any bill of lading, doc% warrant, J@uedanK, or warehouse receipt or order for the delivery of goods, or any other docu$ent used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the docu$ent to transfer or receive, either by indorse$ent or by delivery, goods represented by such docu$ent. 5. Docu$ents of title negotiable when goods represented thereby are deliverable to a specified person , to order or to bearer. 3. valuable in co$$erce because it facilitates the sale and delivery of goods. 1.*. M"#)$ !. Wareh!+$e re'e"pt$ an agree$ent by a warehouse$an to store goods and deliver the$ to a na$ed person or his order or to bearer. 2. B"&& !( La)"#% a si$ilar contract by a carrier to ship goods and deliver the$ to the person na$ed therein or his order or to bearer; negotiable bill of lading is useful not only as evidence of the receipt of the goods by the carrier but as evidencing title to goods covered by it. :t also facilitates the purchase of goods by one person fro$ another who is physically re$ote and probably un%nown to hi$. a. JstraightK bill where the goods are to be delivered to a specified person, it is not negotiable and is called a JstraightK bill. Ftherwise, it is referred to as an JorderK bill. *. Certificate of Deposita receipt of a ban% for certain su$ of $oney received upon deposit; generally fra$ed in such 2F4< as to constitute a pro$issory note, payable to the depositor, or to the depositor or order, or to bearer. a. it is ta%en when depositor does not need his $oney for so$e extended period of ti$e and wants it to earn interest; $ore of an invest$ent paper than a co$$ercial paper because it is not attendant to a co$$ercial transaction the way a chec% or a pro$issory note is. b. it is negotiable if it $eets all the re@uire$ents of 'ec ! 0:,

1.-. Ne%!t"at"!# = sa$e as those used in 0:s; to orderXdelivery Z indorse$ent, to bearer X delivery !. &he $eans of negotiating a docu$ent of title are the sa$e as those used in negotiable instru$ents. 2. :f by the ter$s of the docu$ent, the goods are deliverable to the order of a specified

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:f docu$ent nonGnegotiable, notice of any transfer should be given to the bailee otherwise bailee or any other person other than the transferor not bound &hus, the transferee(s rights $ay be defeated by a levy of attach$ent on the goods or by a notification to the bailee of a sale of the goods to another purchaser. A sale of the goods without the docu$ent will not pre"udice a subse@uent purchaser who ta%es the docu$ent in good faith and for value. &he bailee(s delivery to the legal holder of the docu$ent would relieve hi$ of any further responsibility for the goods.

COMM #CIAL LA$

iii

iv

v

1.1. L"a,"&"t? !( I#)!r$er !. &he indorse$ent of a negotiable docu$ent of title carries with it certain i$plied warranties by the indorser. 2. As to the )!'+2e#t, his warranty covers its genuineness, his legal right to negotiate it and his lac% of %nowledge of any fact which would i$pair its validity. *. As to the %!!)$, he warrants that he has the right to transfer title thereto and that they are $erchantable. 5. )owever, unli%e the indorser of a 0: who is liable if the pri$ary party fails to pay, the indorser of a negotiable docu$ent of title is not liable for the failure of the bailee to fulfill his obligation to deliver the goods. ROMAN . ASIA BANMING CORP. ( 5**) A warehouse receipt $ust be interpreted according to its evident intent and it is obvious that the deposit evidenced by the receipt in this case was intended to be $ade sub"ect to the order of the depositor and therefore negotiable. &he indorse$ent in blan% of the receipt with its delivery which too% place on the date of the issuance of the receipt de$onstrate the intent to $a%e the receipt negotiable. 2urther$ore, the receipt was not $ar%ed JnonGnegotiable.K SIB CONG BIENG .. HSBC :f the owner of the goods per$its another to have the possession or custody of negotiable warehouse receipts running to the order of the latter, or to bearer, it is a representation of title upon which bona fide purchasers for value are entitled to reply, despite breaches of trust or violations of agree$ent on the part of the apparent owner.

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Insurance Code 3/6 (:;,4
C5apter I% I"T#O62CTIO"

Ger'"! .$. S+#&"(e Fa't$< Fn Ianuary !6!B, the 'un ,ife assurance Co., of Canada issued a 2BGyear endow$ent policy on the life of )ilario -ercio. &he insurance co$pany agreed to insure the life of -ercio for 12, BBB, to be paid to hi$ on 2ebruary !, !6*B, or if the insured should die before said date, then to his wife, should she survive hi$; otherwise, to the executors, ad$inistrators, or assigns of the insured. &he policy did not include any provision reserving to the insured the right too change the beneficiary. .hen the policy was issued, Andrea ^ialcita was the lawful wife of )ilario. :n !6!6, she was convicted of adultery. :n !62B, a decree of divorce was issued in a civil case co$pletely dissolving the bonds of $atri$ony between -ercio and ^ialcita. :n !622, 2ercio for$ally notified 'un ,ife that he had revo%ed his donation in favor of ^ialcita, and that he had designated in her stead his present wife, Adela -arcia de -ercio, as the beneficiary of the policy. -ercio re@uested 'un ,ife to eli$inate ^ialcita as beneficiary. &his the insurance co$pany has refuse to do and still refuses to do. He&)< &he Code of Co$$erce, the Civil Code or the :nsurance Act does not contain any provision either per$itting or prohibiting the insured to change the beneficiary. .e $ust perforce conclude that whether the case be considered in the light of the Code of Co$$erce, the Civil Code, or the :nsurance Act, the deficiencies in the law will have to be supple$ented by the general principles prevailing on the sub"ect. &o that end, we have gathered the rules which follow fro$ the best considered A$erican authorities. :n adopting these rules, we do so with the purpose of having the 1hilippine ,aw of :nsurance confor$ as nearly as possible to the $odern ,aw of :nsurance as found in the Cnited 'tates. &he beneficiary has an absolute vested interest in the policy fro$ the date of its issuance and delivery. 'o when a policy of life insurance is ta%en out by the husband in which the wife is na$ed the beneficiary, she has a subsisting interest in the policy. • .hen 4A *?7, otherwise %nown as the Civil Code of the 1hilippines, too% effect on August *B, !63B, those provisions of the old Civil Code on insurance were also expressly repealed. 1residential Decree ] 7!2, as a$ended, which ordained and instituted the :nsurance Code of the 1hilippines, was pro$ulgated on Dece$ber !?, !6>5 during the period of $artial law. :t repealed Act ] 252>, as a$ended. Aefore 1residential Decree 7!2, a$end$ents to the Act were $ade by 1Ds ] 7*, !2*, *!>. 1residential Decree ] !57B, consolidated all insurance laws into a single code %nown as the :nsurance Code of !6>?. Aasically, it reenacted 1residential Decree ] 7!2, as a$ended. :t has been a$ended by 1residential Decree ] !?!5 and Aatas 1a$bansa Alg. ?>5.

. La:$ !# I#$+ra#'e . . S!+r'e$ !( I#$+ra#'e La: "# the Ph"&"pp"#e$
• During the 'panish period, all the provisions concerning insurance in the 1hilippines were found in &itle > of Aoo% 2 and 'ection * of &itle * of Aoo% * of the Code of Co$$erce, and in Chapters 2 and 5 of &itle !2 of Aoo% 5 of the old Civil Code of !??6. .hen Act ] 252>, enacted on Dece$ber !!, !6!5, otherwise %nown as the :nsurance Act, too% effect on Iuly ! !6!3 during the A$erican 4egi$e, the provisions of the Code of Co$$erce on insurance were expressly repealed. A#% G"!4 .$. Spr"#%("e&)$ Fa't$< Ang -io% insured the contents of his warehouse with three insurance co$panies for 7BP. &he warehouse and its contents were destroyed by fire while the policies were in force. &he plaintiff instituted action in the C2: of <anila against one of the insurers to recover a proportional part of the loss co$ing to 1?, !>B. 36. 2our special defenses were interposed by the insurer, one being planted on a violation of warranty 2 fixing the a$ount of hazardous goods which $ight be stored in the insured building. 'ecurely pasted on the left hand $argin of the policy reading in part as follows J:t is agreed that during the currency of this policy no hazardous goods be stored in the buildingV exceeding in all * percent of the total value of the whole $erchandise contained in said warehouse.K He&)< &he rider or slip containing said warranty 2 attached to the policy in @uestion and referred to therein as $a%ing part of the two for$s provided in said 'ection 73 of the :nsurance ,aw. &he law says that every express warranty $ust be Jcontained in the policy itself.K &he word Jcontained,K according to the dictionaries, $eans included, enclosed, e$braced, co$prehended etc. .hen therefore, the courts spea% of a rider attached to the policy, and thus e$bodied therein, or of a warranty incorporated into the policy, it is believed that the phrase Kcontained in the policy itselfK $ust necessarily include such ride and warranty. As to the alternative relating to Janother instru$entK as here used could not $ean a $ere slip of paper li%e a rider, but so$ething a%in to the policy itself. &he word instru$ent has a well defined definition in California, and as used in the Codes invariably $eans so$e written paper or instru$ent signed and delivered by one person to another, transferring the title to, or giving a lien, on property, or giving a right to debt or duty. &he rider, warranty 2, is contained in the policy itself, because by the contract agreed to by the parties is $ade to for$ part of the sa$e, but is not another instru$ent signed by the insured and referred to in the policy as for$ing a part of it. &he rider is therefore valid and binding. 100% UP L AW , $

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:nsurance Code of !6>? &he law on insurance is contained now in the :nsurance Code of !6>? (1D ] !57B, as a$ended) and special laws and partly, in the pertinent provisions of the Civil Code. &he :nsurance Code pri$arily governs the different types of insurance contracts and those engaged in insurance business in the 1hilippines. :t too% effect on Iune !!, !6>?, the date of its pro$ulgation Jwithout pre"udice, however, to the effectivity dates of various laws, decrees and executive orders which have so far a$ended the provisions of the :nsurance Code of the 1hilippines (1D 7!2)K Civil Code &he provisions of the Civil Code dealing on insurance are found in articles >*6 and 2B!2 (void donations), Article 2B!! (applicability of the Civil Code), Articles 2B2!G2B2> (life annuity contracts), Article 2!?7 (co$pulsory $otor vehicle liability insurance), and Article 22B> (right of subrogation). 'pecial laws » &he :nsurance Code of !6>? (1D !57B) » &he 4evised -overn$ent 'ervice :nsurance Act of !6>> (1D !!57, as a$ended), with respect to insurance of govern$ent e$ployees » &he 'ocial 'ecurity Act of !635 (4A !!7!, as a$ended) with respect to insurance of e$ployees in private e$ploy$ent Fthers + insofar as the Civil Code is concerned, the Code of Co$$erce is considered a special law » 4A 737 (as a$ended by 1D 253), %nown as the J1roperty :nsurance ,aw,K dealing with govern$ent property » 4A 5?6? (as a$ended by 4A 3>37) providing life, disability and accident insurance coverage to barangay officials » 9F 23B (Iuly 23, !6?>) increases, integrates and rationalizes the insurance benefits of barangay official sunder 4A 5?6? and $e$bers of 'angguniang 1anlalawigan, 'angguniang 1anlungsod, and 'angguniang Aayan under 1D !!5>. &he insurance benefits are extended by the -':'. » 4A *36! (as a$ended) establishes the 1hilippine Deposit :nsurance Corporation which insures the deposits of all ban%s which are entitled to the benefits of insurance under this Act

. De("#"t"!#$ . . Se't"!# *9 I#$+ra#'e C!)e
'ec. 2. .henever used in this Code, the following ter$s shall have the respective $eanings hereinafter set forth or indicated, unless the context otherwise re@uires (!) A Qcontract of insuranceQ is an agree$ent whereby one underta%es for a consideration to inde$nify another against loss, da$age or liability arising fro$ an un%nown or contingent event. A contract of suretyship shall be dee$ed to be an insurance contract, within the $eaning of this Code, only if $ade by a surety who or which, as such, is doing an insurance business as hereinafter provided. (2) &he ter$ Qdoing an insurance businessQ or Qtransacting an insurance businessQ, within the $eaning of this Code, shall include (a) $a%ing or proposing to $a%e, as insurer, any insurance contract; (b) $a%ing or proposing to $a%e, as surety, any contract of suretyship as a vocation and not as $erely incidental to any other legiti$ate business or activity of the surety; (c) doing any %ind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the $eaning of this Code; (d) doing or proposing to do any business in substance e@uivalent to any of the foregoing in a $anner designed to evade the provisions of this Code. :n the application of the provisions of this Code the fact that no profit is derived fro$ the $a%ing of insurance contracts, agree$ents or transactions or that no separate or direct consideration is received therefore, shall not be dee$ed conclusive to show that the $a%ing thereof does not constitute the doing or transacting of an insurance business. (*) As used in this code, the ter$ QCo$$issionerQ $eans the Q:nsurance Co$$issionerQ.

.*. HC!#tra't !( I#$+ra#'eI
• An agree$ent by which one party (insurer) for a consideration (pre$iu$) paid by the other party (insured), pro$ises to pay $oney or its e@uivalent or to do so$e act valuable to the latter (or his no$inee), upon the happening of a loss, da$age, liability, or disability arising fro$ an un%nown or contingent event.

Wh"te G!&) Mar"#e Ser."'e$ .$. P"!#eer (*661) An insurance contract is a contract is a contract of inde$nity wherein one underta%es for a consideration to inde$nify another against loss, da$age, or liability arising fro$ an un%nown or contingent event. 4egulation by the state through a license or certification of authority is necessary since a contract of insurance involves public interest.

C5apter II TH CO"T#ACT O! I"S2#A"C
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@eneral *ule: An insurance business consists of underta%ing, for a consideration, to inde$nify - . . / $age 128 o0 355

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insurance, $ay be re@uired by law in certain circu$stances such as for $otor vehicles, or e$ployees (,abor Code Art. !7?G!?5) or as a condition to granting a license to conduct a business or calling affecting public safety or welfare 'ocial insurance for $e$bers of -':' and for e$ployees of the private sector covered by the ''' is also established by law

another against loss, da$age or liability arising fro$ an un%nown or contingent event 'upplementary *ule: &he fact that an establish$ent is not for$ally designated as one of insurance does not preclude its being dee$ed to be engaged in an insurance business if it underta%es any of the following (even if not for profit or for any independent consideration) • <a%ing or proposing to $a%e, as insurer, any insurance contract • <a%ing or proposing to $a%e, as surety, any contract of surety ship as a vocation • Doing any %ing of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business with the $eaning of this Code • Doing or proposing to do any business in substance e@uivalent to any of the foregoing in a $anner designed to evade the provisions of the :nsurance Code

»

-.-. A&eat!r?
Art. 2B!B. Ay an aleatory contract, one of the parties or both reciprocally bind the$selves to give or to do so$ething in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeter$inate ti$e. • • :t depends upon so$e contingent event 0ot a contract of chance although the event against the occurrence of which it is intended to provide $ay never occur :t $eans one of the parties or both reciprocally bind the$selves to give or to do so$ething in consideration of what the other shall give or do upon the happening of the event which is uncertain, or which is to occur at an indefinite ti$e 9ach party $ust ta%e a ris% » :nsurer G being co$pelled upon the happening of the contingency, to pay the entire su$ agreed upon » :nsured + parting with the a$ount re@uired as pre$iu$ without receiving anything in case the contingency does not happen except what is ordinarily ter$ed JprotectionK which is itself is a valuable consideration

*. E&e2e#t$ *. . I#$+ra,&e "#tere$t

&he insured has an insurable interest in the thing or the life of the insured

*.*. R"$4 !( L!$$ !r Da2a%e F De$"%#ate) Per"& a$ Ca+$e
• &he happening of the designated events, either un%nown or contingent, past or future, will sub"ect such interest to so$e loss, whether in the for$ of in"ury, da$age, or liability

*.-. C!#$")erat"!#< Pre2"+2
• &he insurer underta%es to assu$e the ris% of such a loss for a consideration called the pre$iu$ to be paid by the insured

*.0. R"$4 D"$tr",+t"#% S'he2e
• &his assu$ption of ris% is part of a general sche$e to distribute the loss a$ong a large nu$ber of persons exposed to si$ilar ris%s

-.0. EAe'+t!r? ("#$+rer) a#) eAe'+te) ("#$+re))
• • 9xecutory on the part of the insurer in the sense that it is not executed until pay$ent for a loss :t is executed as to the insured after pay$ent of the pre$iu$ :t is a unilateral contract i$posing legal duties only on the insurer who pro$ises to inde$nify in case of loss

-. Chara'ter"$t"'$FNat+re I#$+ra#'e C!#tra't$ -. . C!#$e#$+a&
• •

!(

1erfected by the $eeting of the $inds of the parties :f an application for insurance has not been either accepted or re"ected, there is no contract as yet

-.1. C!#)"t"!#a&
• • :t is sub"ect to conditions the principal one of which is the happening of the event insured against &he contract usually includes $any other conditions, such as pay$ent of pre$iu$ or perfor$ance of so$e other act, which $ust be co$plied with as precedent to the right of the insured to clai$ benefit under it

-.*. 3!&+#tar?
• :t is not co$pulsory and the parties $ay incorporate such ter$s and conditions as they $ay dee$ convenient which will be binding provided they do not contravene any provision of law and are not opposed to public policy » &hough generally a voluntary contract, the carrying of insurance, particularly liability , $

-.6. A '!#tra't !( "#)e2#"t? (eA'ept &"(e a#) a''")e#t "#$+ra#'e :here the re$+&t "$ )eath)
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interest not the property that is being rei$bursed ,ife insurance + -9094A,,H A'':-0AA,9 as they are in the nature of property and do not represent a personal agree$ent between insured and insurer

• •

&he pro$ise of the insurer is to $a%e good only the loss of the insured Any contract that conte$plates a possible gain to the insured by the happening of any event upon which the liability of the insurer beco$es fixed is contrary to the nature of insurance 0o person $ay secure insurance upon property in which he has no interest. :f the insured has no insurable interest, the contract is void and unenforceable as being contrary to public policy because it affords a te$ptation to the insured to wish or bring about the happening of the loss

»

-.5. A '!#tra't !( a)he$"!#
• • 1olicy is presented to the insured already in its printed for$ J&a%e it or leave itK

»

-. 6. O( h"%he$t )e%ree !( %!!) (a"th
• • • 9ach party is en"oined by law to deal with each other in good faith Disclosure or the duty to disclose Eiolation of the duty gives the other party the right to rescind the contract

-.7. A# "#.e$t2e#t (&"(e "#$+ra#'e)
• • • <easure of econo$ic security for the insured during life, and beneficiary after death 2inancial assistance during financial crisis ,iability of insurer is face value of the policy and not the earning capacity of the insured at the ti$e of death

-.

. It "$ pr!pert? "# &e%a& '!#te2p&at"!#

-.8. A per$!#a& '!#tra't
• • 9ach party having in view the credit, character and conduct of another As a rule, the insured cannot assign, before the happening of the loss, his rights under a property policy without the consent of the insurer. &he obligation of the insurer to pay does not attach or run with the property whether it be real property or personal » :f a person whose property is insured sells it to another, the buyer cannot be his successor in the contract of insurance unless, of course, the sale is with the consent of the insurer or unless by express stipulation of the parties, the contract is $ade to run with the property of the transferee » .here the insurance is Jon account of the ownerK or Jfor who$ it $ay concernK or where Jthe loss is payable to bearer,K the subse@uent transferees or owners beco$e by the ter$s of the contract, the real parties to the contract of insurance. All insurance contracts share a co$$on trait of JpersonalGnessK » 1ersonal insurance (includes life, health, accident, and disability insurance) + applies only to a particular individual, and it is not possible, for exa$ple, for the insured unilaterally declaring that his health insurance policy shall now be dee$ed to cover the health of so$eone else » ,iability insurance + each person purchases coverage for his own (or a group of related persons) potential liability to others. &he insurer prices the coverage depending on the characteristics and traits of the particular insured » 1roperty insurance G the insurance is on the insured(s interest in the property, not on the property itself. :t is the da$age to the personal

0. Re@+"$"te$ !( a .a&") '!#tra't !( "#$+ra#'e
• • A sub"ect $atter in which the insurer has an "#$+ra,&e "#tere$t E.e#t !r per"& insured against which $ay be any (future) contingent or un%nown event, past or future ('ec. *), and a duration for the ris% thereof A pr!2"$e t! pa? !r "#)e2#"(? in a fixed or ascertainable a$ount A '!#$")erat"!# for the pro$ise %nown as a Jpre$iu$K A 2eet"#% !( the 2"#)$ of the parties upon all of the foregoing essentials &he parties $ust be '!2pete#t to enter into the contract Cnder 'ec. 227, Jno policy of insurance shall be issued or delivered within the 1hilippines unless in the (!r2 previously approved by the :nsurance Co$$issionerK &he p+rp!$e $ust not be contrary to law or public policy

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Court upheld the Attorney -eneral(s contention and issued an in"unction holding that the contract had all the ele$ents of an insurance contract. .hether this clause in the contract is ancillary to defendant(s chief business or is $ainly for advertising ends was held irrelevant in view of the prohibition against the $a%ing of insurance contracts by co$panies not authorized by law. :t would see$, however, that the purpose of the stipulation, ta%en with its effects in case of the death of the buyer, did not warrant a holding that the furniture co$pany should first secure a license to engage in the insurance business. Although all the ele$ents of an insurance contract $ay see$ to be present, yet the furniture buyer and#or his heirs did not, under the circu$stances, need the protection which the law ai$s to give the insuring public by the re@uire$ent of a prior license. 2irst of all, when the buyer purchased the furniture, he $ust have seen and exa$ined it and $ust have believed that it was worth the a$ount he agreed to pay for it. 'econdly, the furniture was delivered to hi$ at the ti$e of the contract and used by hi$ thereafter. Cpon his death, his heirs continued en"oying the use of the furniture. &herefore, the buyer and#or his heirs stood to lose nothing by the @uestioned stipulation, and if at all, stood to gain by it.

1. C!#tra't$ (!r C!#t"#%e#t Ser."'e$D Pre= #ee) P&a#$ a#) S"2"&ar Arra#%e2e#t$
1. . C!#tra't$ (!r C!#t"#%e#t Per$!#a& Ser."'e$ • :t does not necessarily follow that a contract containing the above$entioned ele$ents would be an insurance contact • &he pri$ary purpose of the parties $a%ing the contract $ay negate the existence of an insurance contract » A law fir$ which enters into contracts with clients in consideration of periodical pay$ents, where it pro$ises to represent such clients in all suits for or against the$, is not engaged in an insurance business. :ts contracts are si$ply for the purpose of rendering personal services » A contract by which a consideration of a stipulated a$ount, agrees at its own expense to defend a physician against all suits for da$ages for $alpractice is one of insurance, and the corporation will be dee$ed as engaged in the business of insurance » Cnli%e the lawyer(s retainer contract, the essential purpose of such a contract is not to render personal services, but to inde$nify against loss or da$age resulting fro$ the defense of actions for $alpractice. » A corporation which enters into contracts with car owners and agrees to engage and pay for the services of a lawyer to handle any da$age case arising fro$ collision of their cars, is engaged in the insurance business and $ust therefore co$ply with the laws relative to the transaction of insurance business and should be licensed as such before it can lawfully transact such business » 'uch contracts do not provide for the pay$ent of any su$ directly to the contractee, but it does provide for the relief of the contractee fro$ the expenses of e$ploying an attorney » :t would be i$$aterial that the contract states on its face that it is not a contract of insurance, for the nature of the contract cannot be changed by such a declaration 1.*. C!#tra't$ :"th C!#t"#%e#t I#'")e#ta& Be#e("t :n the case of Attorney @eneral e> rel 7onk vs 0 / :sgood 0o , the defendant co$pany was engaged in the business of selling household furniture on the install$ent plan. Cnder the contracts with its custo$ers, although delivery would be $ade at the ti$e of the contract, title to the furniture would not pass until all pay$ents have been co$pleted. 'aid contracts also provided that should the buyer die before full pay$ent of the agreed price, the unpaid balance would be re$itted to the extent of _3BB. &he :nsurance Co$$issioner, through the Atty. -en., clai$ing that this last provision $ade it an insurance contract brought suit to restrain the defendant fro$ pursuing its business without first securing the proper license. &he 100% UP L AW , $

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Ph"&a2'are Hea&th S?$te2$ .$. CA Rat"!< 'ection * of the :nsurance Code states that any contingent or un%nown event, whether past or future, which $ay da$nify a person having an insurable interest against hi$, $ay be insured against. 9very person has an insurable interest in the life and health of hi$self. 'ection !B provides 9very person has an insurable interest in the life and health (!) for hi$self, of his spouse and of his children; (2) of any person on who$ he depends wholly or in part for education or support, or in who$ he has a pecuniary interest; (*) of any person under a legal obligation to hi$ for the pay$ent of the $oney, respecting property or service, of which death or illness $ight delay or prevent the perfor$ance; and (5) of any person upon whose life any estate or interest vested in hi$ depends. :n the case at bar, the insurable interest of respondent(s husband in obtaining the health care agree$ent was on his own health. &he health care agree$ent was in the nature of nonGlife insurance, which is pri$arily a contract of inde$nity. Fnce the $e$ber incurs hospital, $edical or any other expense arising fro$ sic%ness, in"ury or other stipulated contingent, the health care provider $ust pay for the sa$e to the extent agreed upon under the contracts.

6. C&a$$"("'at"!# +#)er the C!)e
6. . L"(e G defined as a $utual agree$ent by which a party agrees to pay a given su$ on the happening of a particular event contingent on the duration of hu$an life, in consideration of the pay$ent of a s$aller su$ i$$ediately, or in periodical pay$ents by the other party - . . / $age 131 o0 355

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&he suicide is co$$itted after the policy has been in force for a period of 2 years fro$ date of its issue or of its reinstate$ent;  &he suicide is co$$itted after a shorter period provided in the policy although within the 2Gyear period;  &he suicide is co$$itted in the state of insanity regardless of the date of co$$ission, unless suicide is an excepted ris%. T0ote that the policy cannot provide a period longer than 2 years. 'o, if the policy provides for a *Gyear period and suicide is co$$itted within the period but after 2 years, insurer is liable. » .hen not liable  'uicide is not by reason of insanity and is co$$itted within the 2Gyear period.  'uicide is by reason of insanity but is not a$ong the ris%s assu$ed by the insurer regardless of the date of co$$ission.  :nsurer can show that the policy was obtained with the intention to co$$it suicide even in the absence of any suicide exclusion in the policy. b) -roup life 'ec. 3B. &he policy shall be in printed for$ which $ay contain blan% spaces; and any word, phrase, clause, $ar%, sign, sy$bol, signature, nu$ber, or word necessary to co$plete the contract of insurance shall be written on the blan% spaces provided therein. Any rider, clause, warranty or endorse$ent purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or na$e of the rider, clause, warranty or endorse$ent is also $entioned and written on the blan% spaces provided in the policy. Cnless applied for by the insured or owner, any rider, clause, warranty or endorse$ent issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be ta%en as his agree$ent to the contents of such rider, clause, warranty or endorse$ent. -roup insurance and group annuity policies, however, $ay be typewritten and need not be in printed for$. • • <ay be typewritten and need not be in printed for$ <e$bers usually a cohesive group » 1ay a unifor$ pre$iu$ » Csually no $edical exa$ination » 0or$ally re@uires a specified nu$ber of persons insured before policy is issued

a) :ndividual life 'ec. !>6. ,ife insurance is insurance on hu$an lives and insurance appertaining thereto or connected therewith. 'ec. !?B. An insurance upon life $ay be $ade payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life. 9very contract or pledge for the pay$ent of endow$ents or annuities shall be considered a life insurance contract for purpose of this Code :n the absence of a "udicial guardian, the father, or in the latterRs absence or incapacity, the $other, or any $inor, who is an insured or a beneficiary under a contract of life, health or accident insurance, $ay exercise, in behalf of said $inor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest of the $inor in the particular act involved does not exceed twenty thousand pesos. 'uch right $ay include, but shall not be li$ited to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the policy, and giving the $inorRs consent to any transaction on the policy. 'ec. !?BGA. &he insurer in a life insurance contract shall be liable in case of suicides only when it is co$$itted after the policy has been in force for a period of two years fro$ the date of its issue or of its last reinstate$ent, unless the policy provides a shorter period 1rovided, however, &hat suicide co$$itted in the state of insanity shall be co$pensable regardless of the date of co$$ission. (As a$ended by Aatasang 1a$bansa Alg. ?>5) 'ec. !?!. A policy of insurance upon life or health $ay pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person $ay recover upon it whatever the insured $ight have recovered. 'ec. !?2. 0otice to an insurer of a transfer or be@uest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly re@uired. 'ec. !?*. Cnless the interest of a person insured is susceptible of exact pecuniary $easure$ent, the $easure of inde$nity under a policy of insurance upon life or health is the su$ fixed in the policy. • • :nsurance on hu$an lives and insurance appertaining thereto or connected therewith <ade payable on the death of a person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life one insures one(s life or that of another against death or sic%ness 9ffect of suicide of insured ,iability of insurer in case of suicide » .hen liable , $ B A R ' $ !

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c) :ndustrial life 'ec. 226. &he ter$ Qindustrial life insuranceQ as used in this Code shall $ean that for$ of life insurance under which the pre$iu$s are payable either $onthly or oftener, if the face a$ount of insurance provided in any policy is not $ore than five hundred ti$es that of the current statutory $ini$u$ daily wage in the City of <anila, and if the words Qindustrial policyQ are printed upon the policy as part of the descriptive $atter. An industrial life policy shall not lapse for nonG pay$ent of pre$iu$ if such nonGpay$ent was due to the failure of the co$pany to send its representative or agent to the insured at the residence of the insured or at so$e other place indicated by hi$ for the purpose of collecting such pre$iu$; 1rovided, &hat the provisions of this paragraph shall not apply when the pre$iu$ on the policy re$ains unpaid for a period of three $onths or twelve wee%s after the grace period has expired. • • 2or$ of life insurance under which the pre$iu$s are payable either $onthly or oftener 2ace a$ount of insurance provided in any policy is not $ore than five hundred ti$es that of the current statutory $ini$u$ daily wage in the City of <anila 'hall not lapse for nonGpay$ent of pre$iu$ if such nonGpay$ent was due to the failure of the co$pany to send its representative or agent to the insured at the residence of the insured or at so$e other place indicated by hi$ for the purpose of collecting such pre$iu$ » &his shall not apply when the pre$iu$ on the policy re$ains unpaid for a period of three $onths or twelve wee%s after the grace period has expired.

a) <arine 'ec. 66. <arine :nsurance includes (!) :nsurance against loss of or da$age to (a) Eessels, craft, aircraft, vehicles, goods, freights, cargoes, $erchandise, effects, disburse$ents, profits, $oneys, securities, choses in action, evidences of debts, valuable papers, botto$ry, and respondentia interests and all other %inds of property and interests therein, in respect to, appertaining to or in connection with any and all ris%s or perils of navigation, transit or transportation, or while being asse$bled, pac%ed, crated, baled, co$pressed or si$ilarly prepared for ship$ent or while awaiting ship$ent, or during any delays, storage, tranship$ent, or reship$ent incident thereto, including war ris%s, $arine builderRs ris%s, and all personal property floater ris%s; (b) 1erson or property in connection with or appertaining to a $arine, inland $arine, transit or transportation insurance, including liability for loss of or da$age arising out of or in connection with the construction, repair, operation, $aintenance or use of the sub"ect $atter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily in"ury to any person arising out of ownership, $aintenance, or use of auto$obiles); (c) 1recious stones, "ewels, "ewelry, precious $etals, whether in course of transportation or otherwise; (d) Aridges, tunnels and other instru$entalities of transportation and co$$unication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, doc%s and slips, and other aids to navigation and transportation, including dry doc%s and $arine railways, da$s and appurtenant facilities for the control of waterways. (2) Q<arine protection and inde$nity insurance,Q $eaning insurance against, or against legal liability of the insured for loss, da$age, or expense incident to ownership, operation, chartering, $aintenance, use, repair, or construction of any vessel, craft or instru$entality in use of ocean or inland waterways, including liability of the insured for personal in"ury, illness or death or for loss of or da$age to the property of another person. • Fcean $arine insurance + an insurance against ris% connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in $ovable property, $ay be exposed during a certain voyage or a fixed period of ti$e :nland $arine insurance + it is of co$paratively recent origin and covers pri$arily the land or over the land transportation perils of property shipped by railroads, $otor truc%s, airplanes, and other $eans of transportation. :t also covers ris%s of la%e, river, or other inland waterway transportation and other waterborne perils outside of those ris%s that fall definitely within the ocean $arine category

6.*. N!#=&"(e + include policies covering ris%s to which property $ay be exposed, as well as those which cover the ris% of liability to third persons. :t covers a specified period of ti$e (not $ore than ! year) and has a definite period of coverage.

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&he ter$s of which the pre$iu$s are payable only during a li$ited period of years, usually ten, fifteen, or twenty • .hen the specified nu$ber of pre$iu$ pay$ents have been $ade, the insurance is fully paid for • :t is li%e whole life policies in that it is payable only at the death of the insured • :f the insured should die within the specified period, his beneficiary is entitled to all the proceeds of the policy without any liability for the unpaid pre$iu$s • Aecause of the li$ited nu$ber of pay$ents to be $ade by the insured, the pre$iu$s are proportionately higher c) &er$ plan • Fne which provides coverage only of the insured dies during a li$ited period • :t is an insurance for a fixed or a specific ter$, such as two, five, or ten years • :f the insured dies within the period specified, the policy is paid to the beneficiary • :f he survives the period, the contract ter$inates • &he pre$iu$ paid is levied during the specified ter$s and increases with each renewal ter$ or the a$ount of the coverage declines, and this is because as a person ages, the ris% of death increases • &he pre$iu$ is lower than in the case of whole life policies because of the possibility that the insurer $ay not be obliged to pay anything in proceeds whatsoever if the insured survives the ter$ d) 1ure endow$ent plan • :nsured pays pre$iu$ for a specified period and should he survive the period, the insurance co$pany pays hi$ the face value of the policy • :f he should die within the period the insurance co$pany is released fro$ any liability and unless provided in the contract, need not rei$burse any part of the pre$iu$s paid e) 9ndow$ent plan • &he ter$s of which the insurer binds hi$self to pay a fixed su$ to the insured if he survives for a specified period ($aturity date stated in the policy), or if he dies within such period, to so$e other person indicated • &he pre$iu$ is higher because the cash values of the policy grow $ore rapidly. • &his %ind of policy differs fro$ the li$ited pay$ent life policy in that in the case of the latter, the policy is paid only upon the death of the insured • &he insured stands a chance of being paid the proceeds of the policy while still alive • &he proceeds on $aturity can be paid either in a lu$p su$ or as an annuity

b) 2ire 'ec. !7>. As used in this Code, the ter$ Qfire insuranceQ shall include insurance against loss by fire, lightning, windstor$, tornado or earth@ua%e and other allied ris%s, when such ris%s are covered by extension to fire insurance policies or under separate policies. c) Casualty or ,iability :nsurance 'ec. !>5. Casualty insurance is insurance covering loss or liability arising fro$ accident or $ishap, excluding certain types of loss which by law or custo$ are considered as falling exclusively within the scope of other types of insurance such as fire or $arine. :t includes, but is not li$ited to, e$ployerRs liability insurance, $otor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by nonGlife insurance co$panies, and other substantially si$ilar %inds of insurance.

d) 'uretyship 'ec. !>3. A contract of suretyship is an agree$ent whereby a party called the surety guarantees the perfor$ance by another party called the principal or obligor of an obligation or underta%ing in favor of a third party called the obligee. :t includes official recognizances, stipulations, bonds or underta%ings issued by any co$pany by virtue of and under the provisions of Act 0o. 3*7, as a$ended by Act 0o. 22B7. 'ec. !>7. &he liability of the surety or sureties shall be "oint and several with the obligor and shall be li$ited to the a$ount of the bond. :t is deter$ined strictly by the ter$s of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (As a$ended by 1residential Decree 0o. !533)

'ec. !>?. 1ertinent provisions of the Civil Code of the 1hilippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship. • A contract of suretyship shall be dee$ed to be an insurance contract, only if $ade by a surety who or which is doing an insurance business

6.-. 3ar"at"!#$ "# L"(e I#$+ra#'e C!#tra't$ a) .hole life plan • &he ter$s of which the insured is re@uired to pay a certain fixed pre$iu$ annually or at $ore fre@uent intervals throughout life and the beneficiary is entitled to receive pay$ent under the policy only after the death of the insured • &he ulti$ate pay$ent of the insurance proceeds is as certain as death itself b) ,i$ited pay$ent plan 100% UP L AW , $

7. C!#$tr+'t"!# F I#$+ra#'e C!#tra't$

I#terpretat"!#

!(

7. . Where there "$ A2,"%+"t? !r D!+,t • As a general rule, contracts of insurance are to be construed liberally in favor of the insured and strictly against the insurer, resolving all a$biguities against the latter, so as to effect its do$inant purpose of - . . / $age 134 o0 355

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T? .$. F"r$t Nat"!#a& Fa't$< &y was a $echanic fore$an in the Aroadway Cotton 2actory. A fire bro%e out which totally destroyed the factory. As &y was fighting his way out of the factory, he in"ured his left hand, causing te$porary total disability due to fractures o his index, $iddle, and fourth fingers. )e filed a notice of accident and clai$ to recover inde$nity fro$ 2irst 0ational 'urety _ assurance Co. :nc., pursuant to his insurance policy which provides JVthe loss of a hand shall $ean the loss by a$putation through the bones of the wristVK &he insurance co$pany re"ected &y(s clai$ saying that since there was no severance by a$putation of the hand, the disability suffered by hi$ was not covered under the policy. He&)< &he insurance co$pany is not liable to inde$nify &y. .e cannot go beyond the clear and express conditions of the insurance policies, all of which define partial disability as loss of either hand by Ja$putation through the bones of the wristK &here was no a$putation in this case. &he agree$ent contained in the insurance policies is the law between the parties. An interpretation that would include the $ere fracture or other te$porary disability not covered by the policies would certainly be unwarranted. M"$a2"$ L+2,er .$. Cap"ta& I#'. Fa't$< <isa$is ,u$ber Corporation, insured its $otor car for the a$ount of 1!5,BBB. &he insured car, passed over a water whole which the driver did not see because an onco$ing car did not di$ its lights. &he car was later towed and repaired by <orosi <otors at a total cost of 1*B2.2>. Capital :nsurance refused to pay for the total cost of towage and repairs. He&)< &he insurance co$pany is not liable for the pay$ent of the repairs in excess of 1!3B. &he insurance policy stipulated in paragraph 5 that if the insured authorizes the repair, the liability of the insurer is li$ited to 1!3B. &he literal $eaning of this stipulation $ust control, it being the actual contract, expressly and plainly provided for in the policy. &he policy is also drew out not only the li$its of the insurer(s liability but also the $echanics that the insured had to follow to be entitled to full inde$nity of repairs. &he option to underta%e the repairs is accorded to the insurance co$pany per paragraph 2. &he said co$pany was deprived of the option because the insured too% it upon itself to have the repairs $ade, and only notified the insurer when the repairs were done. As a conse@uence, paragraph 5, which li$its the co$pany(s liability to 1!3B applies. S+# I#$+ra#'e .$. CA Fa't$< &an too% fro$ 'un :nsurance a property insurance worth *BBP to insure his interest in the electrical supply store of his brother housed in a building in :loilo City. 2our days after, the building was burned down including the insured store. .hen &an filed a clai$ with the insurance co$pany, the sa$e was denied, after which he as%ed for reconsideration which was again denied. :t is stipulated in the insurance policy that any action should be filed with the :nsurance Co$$ission or any court of co$petent "urisdiction within !2 $onths after receipt by the insured of a re"ection of his clai$ and failure to - . . / $age 135 o0 355

inde$nity or pay$ent to the insured, especially were a forfeiture is involved An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract which is to insure against ris% of loss, da$age or liability on the part of the insured &he insurer is under the duty to $a%e its $eaning clear if it desires to li$it or restrict the operation of the general provisions of its contract by special proviso, exception or exe$ption A policy of insurance which contains exceptions or conditions tending to wor% a forfeiture of the policy shall be interpreted $ost favorably toward those against who$ they are intended to operate and $ost strictly against the insurance co$pany or the party for whose benefit they are inserted .here restrictive provisions are open to two interpretations, that which is $ost favorable to the insured is adopted. ,i$itations of liability $ust be construed in such a way as to preclude the insurer fro$ non co$pliance with its obligations

7.*. Where Ter2$ are C&ear • &he cardinal principle of insurance law of interpreting insurance contracts favorably to the insured is applicable only in cases of doubt, not when the intention of the policy is clear or the language is sufficiently clear to convey the $eaning of the parties • &he court is bound to adhere to the insurance contract as the authentic expression of the intention of the parties, and it $ust be construed and enforced according to the sense and $eaning of the ter$s which the parties the$selves have used. • :f such ter$s are clear and certain, they $ust be ta%en in their plain and ordinary sense • Fbligations arising fro$ contracts have the force of law between the contracting parties and should be co$plied with in good faith 7.-. L"tera& !r Str"'t I#terpretat"!# F"r$t O+e/!# C"t? I#$+ra#'e .$. CA Fa't$< Del 4osario fell off a De Dios <ari%ina &ransportation Co. :nc. bus. Del 4osario was brought to the hospital and stayed there for 5B days. &he cost for the hospitalization a$ounted to 176,555 while unearned salary due to confine$ent a$ounted to 1>,3BB. Del 4osario filed a co$plaint against D<&C and its insurance co$pany, 2irst Ouezon City :nsurance Co$pany. He&)< &he insurance co$pany(s liability should be li$ited to 1!2,BBB only. &he insurance policy clearly placed the $axi$u$ li$it of 2irst Ouezon City(s liability for da$ages arising fro$ death or bodily at 1!2,BBB per passenger and its $axi$u$ liability per accident at 13B,BBB. &his $eans that the insurer(s $axi$u$ liability for any single accident will not exceed 3BP regardless of the nu$ber of the passengers %illed or in"ured.

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stand. Also, except for the fact that the victi$s were not fareGpaying passengers, their status as beneficiaries under the policy is recognized. 9ven assu$ing there was an a$biguity, a$biguities or obscurities $ust be strictly interpreted against the party that caused the$. &his rigid application of the rule of a$biguities has beco$e necessary in view of current business practices. Ma&a?a# I#$. .$. CA Fa't$< &PC <ar%eting Corp. was the owner#consignee of so$e *,!?6.!>! $etric tons of soya bean $eal which was loaded on board the ship <E Al Pazie$ah. 'aid cargo was insured against the ris% of loss by <alayan :nsurance Corporation. .hile the vessel was doc%ed in 'outh Africa on 'epte$ber !6?6 enroute to <anila, the civil authorities arrested and detained it because of a lawsuit on a @uestion of ownership and possession. &PC notified the insurance co$pany of the arrest of the vessel and $ade a for$al clai$ for the a$ount of C'_6!7,??7.77. <alayan replied that the arrest of the vessel by civil authority was not a peril covered by the policies. He&)< <alayan insurance should be held liable for the pay$ent of the insurance clai$. 'ince what was also excluded in the deleted 2.C. U '. Clause was QarrestQ occasioned by ordinary "udicial process, logically, such QarrestQ would now beco$e a covered ris% under subsection !.! of 'ection ! of the :nstitute .ar Clauses, regardless of whether or not said QarrestQ by civil authorities occurred in a state of war. :t has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd conclusion or to render the policy nonsensical, should, by all $eans, be avoided. ,i%ewise, it $ust be borne in $ind that such contracts are invariably prepared by the co$panies and $ust be accepted by the insured in the for$ in which they are written. 9xceptions to the general coverage are construed $ost strongly against the co$pany. 9ven an express exception in a policy is to be construed against the underwriters by who$ the policy is fra$ed, and for whose benefit the exception is introduced. We$ter# G+ara#t? .$. CA Fa't$< De Dios &ransportation :nc. 2igured in an accident when it struc% 4odriguez who was crossing the pedestrian lane on Airport 4oad. &he driver ignored the stop signal given by a traffic enforcer. 4odriguez was thrown to the ground and hit her head and resulted to her face getting per$anently disfigured. De Dios &ransportation filed a co$plaint against .estern -uaranty since they were insured by .estern under a <aster 1olicy which provided protection against third party liability. He&)< .estern -uaranty is liable to pay for the da$age caused to the victi$ including loss of earnings, $oral da$ages and attorney(s fees. &he 'chedule of :nde$nities does not purport to li$it or exhaustively enu$erate the species of bodily in"ury to the list found in the 'chedule of :nde$nities since an accident $ay result to an in"ury to internal organs not necessarily to a loss of li$b (a$putation of the leg, ar$, finger, hand) but such in"uries are certainly covered by the <aster 1lan since they constituted bodily in"uries. - . . / $age 136 o0 355

do so would constitute abandon$ent of clai$ and can no longer be recoverable. He&)< &he !2G$onth prescriptive period co$$enced upon receipt by &an of the re"ection#denial of his clai$ by 'un :nsurance and does not stop upon filing of the $otion for reconsideration. &he words of the provisions in the insurance policy is clear and free fro$ any doubt or a$biguity whatsoever and thus $ust be ta%en and understood in its plain, ordinary and popular sense. F!rt+#e I#$+ra#'e .$. CA Fa't$< An ar$ored car of 1roducers Aan%, while in the process of transferring cash in the su$ of >23P, was robbed of the said cash. After an investigation by police authorities, the driver and the guard were charged with Eiolation of 1D 3*2, the AntiG)ighway 4obbery ,aw. De$ands were $ade by the ban% upon the insurance co$pany to pay the a$ount of >23P, but the latter refused to pay as the loss is excluded fro$ the coverage of the insurance policy which reads J &he co$pany shall not be liable under this policy in respect of . . . any loss caused by any dishonest, fraudulent or cri$inal act of the insured or any officer, e$ployee, partner, director, trustee or authorized representative of the insured whether acting alone or in con"unction with othersVK He&)< &he insurance co$pany is not liable. :t is clear that insofar as 2ortune is concerned, it was its intention to exclude and exe$pt fro$ protection and coverage losses arising fro$ dishonest, fraudulent, or cri$inal acts of persons granted or having unrestricted access to the ban%(s $oney or payroll. .hen it used the ter$ Je$ployee,K it $ust have in $ind any person who @ualifies as such as generally and e@uivocally understood, or "urisprudentially established in light of the deter$ination of the 94G99 relationship. :t is settled that the ter$s of the policy constitute the $easure of the insurer(s liability. :n the absence of statutory prohibition to the contrary, insurance co$panies have the sa$e rights as individuals to li$it their liability and to i$pose whatever conditions they dee$ best upon their obligations not inconsistent with public policy

7.0. L",era& I#terpretat"!#D Rea$!#a,&e EApe'tat"!#$
F"e&)2a#J$ I#'. .$. 3)a. De S!#%'! Fa't$< 'ongco owned a private "eepney. )e was induced by an agent of 2ield$en(s :nsurance to apply for a Co$$on Carrier(s :nsurance 1olicy, which is applicable to public utility vehicles. &he policy provides Jthe co$pany will, sub"ect to the li$its of liability and under ter$s of this policy, inde$nify the insured in the event of accident caused by or arising out of the use of $otor vehicle against all su$s which will beco$e liable to pay in respect of death or bodily in"ury to any fareGpaying passenger.K During the effectivity of the policy, the insured vehicle collided with another car %illing 'ongco(s son and wounding his wife. He&)< Doctrine of estoppel applies. After leading 'ongco to believe that he could @ualify under the co$$on carrier policy and to enter into the contract of insurance paying the pre$iu$s due, 2ield$en(s cannot be per$itted to change its 100% UP L AW , $ B A R ' $ !

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respondent, Country Aan%ers :nsurance Corporation. &he policy contained the following condition JV*. &he insured shall give notice to the Co$pany of any insurance or insurances already effected, or which $ay subse@uently be effected, covering any of the property or properties consisting of stoc%s in tradeVK 2ire of accidental origin bro%e out at the public $ar%et of 'an 2rancisco, Agusan del 'ur. -eagonia(s insured stoc%sGinGtrade were co$pletely destroyed pro$pting hi$ to file with CA:C a clai$ under the policy. &he co$pany denied the clai$ and the basis of which was the petitionerRs alleged violation of Condition * of the policy. He&)< -eagonia is not precluded fro$ recovering fro$ Country Aan%ers. Condition * of the policy is a condition which is not proscribed by law. :ts incorporation in the policy is allowed by 'ection >3 of the :nsurance Code which provides that Q/a8 policy $ay declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an i$$aterial provision does not avoid the policy.Q :ts violation would thus avoid the policy. )owever, in order to constitute a violation, the other insurance $ust be upon the sa$e sub"ect $atter, the sa$e interest therein, and the sa$e ris%. As to a $ortgaged property, the $ortgagor and the $ortgagee have each an independent insurable interest therein and both interests $ay be covered by one policy, or each $ay ta%e out a separate policy covering his interest, either at the sa$e or at separate ti$es. . :t is a cardinal principle of law that forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the person clai$ing, will be avoided, if it is possible to construe the policy in a $anner which would per$it recovery, as, for exa$ple, by finding a waiver for such forfeiture. 1rovisions, conditions or exceptions in policies which tend to wor% a forfeiture of insurance policies should be construed $ost strictly against those for whose benefits they are inserted, and $ost favorably toward those against who$ they are intended to operate. S+# I#$+ra#'e .$. CA Fa't$< 'un :nsurance issued a 1ersonal Accident 1olicy to ,i$ with a face value of 2BBP. &wo $onths later he was dead with a bullet wound on his head. ,i$(s death was caused when he was playing with his handgun which accidentally fired. )is wife sought pay$ent on the policy but her clai$ was re"ected. &he contention of 'un :nsurance was that ,i$ willfully exposed hi$self to needless peril and thus re$oved hi$self fro$ the coverage of the insurance policy. Cnder the exceptions clause of the policy, the insurance co$pany shall not be liable when the insured person atte$pting to co$$it suicide or willfully exposing hi$self to needless peril except in an atte$pt to save hu$an life. He&)< &he cause of ,i$(s death was an accident within the li$its set forth in the policy and therefore not exe$pt fro$ the liability of the insurer. &he definition of an accident is Jan event which happens without any hu$an agency or, if happening through hu$an agency, an event which under the circu$stances, is unusual to and not expected by the person to who$ it happensVK Contrary to the contention of 'un :nsurance, ,i$ did not intentionally expose - . . / $age 137 o0 355

Also, the 'chedule of :nde$nities also does not purport to restrict the %ind of da$ages that $ay be paid by the insurer once liability has arisen, under the ,iability to &hird 1arty clause, and does not say that the li$it is sub"ect to the list indicated in the 'chedule of :nde$nities. All other types of da$ages $ay be awarded against the insurer once liability is shown to have arisen. A contract of insurance is a contract of adhesion and $ust be construed strictly against the party which prepared the contract. O+a Chee Ga# .$. La: U#"!# Fa't$< &his case involved a clai$ on a fire insurance policy which contained a provision as to the installation of fire hydrants the nu$ber of which depended on the height of the external wall peri$eter of the bodega that was insured. .hen it was deter$ined that the bodega should have eleven fire hydrants in the co$pund as re@uired by the ter$s of the policy, instead of only two that it had, the clai$ under the policy was resisted on that ground. He&)< &he said deviation fro$ the ter$s of the policy did not prevent the clai$ under the sa$e. .e are in agree$ent with the trial Court that the appellant is barred by waiver (or rather estoppel) to clai$ violation of the so called fire hydrants warranty, for the reason that %nowing fully that the nu$ber of hydrants de$anded therein never existed fro$ the very beginning, the appellant nevertheless issued the policies in @uestion sub"ect to such warranty, and received the corresponding pre$iu$s. :t would be perilously received the corresponding pre$iu$s. :t would be perilously close to conniving at fraud upon the insured to allow the appellant to clai$ now as void ab initio the policies that it had issue to the plaintiff without warning of their fatal defect, of which it was infor$ed, and after it had $isled the defendant into believing that the policies were effective. .hen the policy contains a condition which renders it voidable at its inception, and this result is %nown to the insurer, it will be presu$ed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thin%ing he is insured when in fact he is not, and to have ta%en his $oney without consideration. &he insurance co$pany is liable on the insurance contract. De& R!$ar"! .$. E@+"ta,&e I#$+ra#'e Fa't$< &he insurer has bound itself under the policy to pay 1!,BBBG*,BBB as inde$nity for the death of the insured for bodily in"ury, the policy containing specific a$ounts that $ay be recovered. &he policy, however, does not positively state any definitive a$ount that $ay be recoverable in case of death by drowning, although it is a ground for recovery apart fro$ death for bodily in"ury. He&)< &here is an a$biguity in this respect in the policy, which a$biguity $ust be interpreted in favor of the insured and strictly against the insurer to allow a greater inde$nity, that is, 1*,BBB. Gea%!#"a .$. CA Fa't$< -eagonia is the owner of 0or$anRs <art located in the public $ar%et of 'an 2rancisco, Agusan del 'ur. )e obtained fro$ the private 100% UP L AW , $ B A R ' $ !

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hi$self to danger, as testified by his secretary, he re$oved the $agazine of the gun to ensure that it would not fire and pointed it to his te$ple in the belief that it is safe to do so. R"/a& S+ret? .$. CA Fa't$< 4izal 'urety issued a fire insurance policy for &ransworld Pnitting <ills. A fire bro%e out in the co$pound of &ransworld, razing the $iddle portion of the fourGspan building and partly gutting the left and right sections. :t also destroyed the twoGstorey annex building where fun and a$use$ent $achines and spare parts were stored. &ransworld filed insurance clai$ with 4izal but to no avail. 4izal(s contention is that the policy covered only the contents of the fourGspan building which was only partly burned and not the da$age caused to the twoGstorey annex building. He&)< &he annex building and the contents are covered under the policy. &he so called JannexK for$ed an integral and inseparable part of the fourGspan building. :t was a /per$anent structure which ad"oined the 5Gstorey building described in the policy and conse@uently, the things stored therein were covered by the insurer. Considering that the annex was already existing when the insurance policy was contracted, 4izal should have specifically excluded it fro$ the coverage of the fire insurance if it wanted to but it did not. Doubt should be resolved against 4izal who drafted the insurance policy contract. &his is because the insured usually has no voice in the selection or arrange$ent of the words e$ployed and that the language of the contract is selected with great care and deliberation by experts and legal advisers e$ployed by, and acting exclusively in the interest of the insurance co$panies. G+&( Re$!rt$ .$ Ph"&"pp"#e Charter I#$+ra#'e C!rp!rat"!# (*661) :ntention of parties is shown by provisions of contracts and the a$ount of pre$iu$ paid since pre$iu$ is the consideration paid for the ris% underta%en by the insurer. .hen there is an apparent change of the wording of an insurance contract but no corresponding change in the a$ount of pre$iu$ paid, it will be interpreted to $ean that there was no intended change at all. An assu$ption of additional ris% is presu$ed to cause a co$$ensurate additional pre$iu$ because the pre$iu$, not the $ere wording of the policy, is a $ore accurate indication of such an assu$ption of additional ris%.

i. Delay in Acceptance; &ort &heory • 'ituation where applicant sub$its application for insurance, but due to negligence of co$pany, w#c ta%es an unreasonably long ti$e before processing the application, the applicant dies before the application is processed, thus, the contract is not perfected. • 49<9DH :nsurer liable for )a2a%e$ (&ort &heory) in the a$ount of the face value of the policy, w#c is given to the estate of the deceased applicant. (not to beneficiary because contract not perfected. Also, no contractual liability also bec. no contact) • Wh? T!rt The!r? G because :nsurance business is affected w# public interest. :t is thus, the duty of insurer, w#c derives its authority to act as such fro$ the 'tate (when it applies to get license to be in the insurance business), to act w# reasonable pro$ptness in either re"ecting or accepting the application. :n case of unreasonable delay and applicant dies, applicant would have been deprived of opportunity to secure insurance fro$ another source. ii. Delivery of the 1olicy • De&".er? + the act of putting the insurance policy + the physical docu$ent + into the possession of the insured. • :ndividual life insurance contracts usually stipulate that » 1re$iu$ be paid and » 1olicy be delivered to the insured while he is alive and in good health. Concurrence of both is necessary. (see 1erez v CA case) • Actual delivery of the policy is not essential unless the parties have so agreed in clear language. Constructive delivery $ay be sufficient. ('ee Eda. De 'indayen case) • .o0 policy was delivered after its issuance depends not upon $anual possession by the insured but rather upon the intention of the parties as $anifested in their acts or agree$ents. • .F0 Delivery to agent is delivery to insured is a @uestion over w#c there has been $any conflicting opinions. • 9ffect of Delivery » .here delivery is conditional + 0onGperfor$ance of Condition precedent prevents contract fro$ ta%ing effect » .here delivery is unconditional + if corresponding ter$s of application, ordinarily consu$$ates the contract and policy as delivered beco$es final contract between the parties. .here parties so intend, insurance beco$es effective at the sa$e ti$e as delivery » .here pre$iu$ still unpaid after unconditional delivery + 1olicy will lapse if pre$iu$ unpaid at ti$e and $anner specified in the policy, in the absence of any clear - . . / $age 138 o0 355

8. Per(e't"!# !( the C!#tra't !( I#$+ra#'e
8. . O((er a#) A''epta#'eD '!#$e#$+a&"t? • Applicant usually $a%es the offer to the insurer. • 'ub$ission of application, even w# pay$ent is a $ere offer on the part of the applicant, it does not bind the insurer. • Approval of the application by the insurer is necessary to perfect contract. :f $ade G w# pay$ent of pre$iu$ + policy beco$es effective G w#o pay$ent + effective upon pay$ent of pre$iu$ 100% UP L AW , $ B A R ' $ !

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He&)< 0F. Cnder the CC, Consent is shown by concurrence of offer and acceptance. acceptance shall not bind the person $a%ing offer except fro$ the ti$e it ca$e to %nowledge. 8.*. Pre2"+2 Pa?2e#t 'ec. >> U>?; 75 Se'. 7712 An :nsurer is entitled to pay$ent of the pre$iu$ as soon as the thing insured is exposed to the peril insured against. 0otwithstanding any agree$ent to the contrary, no policy or contract of insurance issued by an insurance co$pany is valid and binding unless and until the pre$iu$ thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. • Pre2"+2 + the agreed price for assu$ing and carrying the ris%, that is, the consideration paid an insurer for underta%ing to inde$nify the insured against the specified peril. G if only one pre$iu$ is paid for several things not separately valued or separately insured, the contract is indivisible or entire, not divisible or severable, as to ite$s insured. ':4 .F4'& '9C&:F0 of the :nsurance Code. &his is the 'a$h=a#)='arr? provision (see below for explanation why) .hy it raises several @uestions (Ca$pos) GG:s it intended to apply to all classes of insurance, or does the word JthingK li$it it to property insuranceS As to exception, it only applies to life policies w#in the grace period w#c does not support the theory that it applies only to property insurance. G As to grace period, grace period in life insurance applies only to pre$iu$s subse@uent to the first, therefore, how can this be an exception to the ruleS G .ith respect to nonGlife policies, the first sentence gives the insurer the right to de$and the pay$ent of the pre$iu$ as soon as the Jthing insured is exposed to peril insured againstK &his assu$es the contract is binding even before the pay$ent of the pre$iu$ $eaning the contract is perfected when the applicant(s offer is accepted by the insurer. &his assu$ption is inconsistent w# the next sentence w#c says that no policy can be binding w#o pre$iu$ pay$ent. G Also, 'ec. >> and >? see$ contradictory. G )owever, 'ir says above does not apply to life insurance because ,ife :nsurance lapses upon nonGpay$ent. 1resent provision ca$e fro$ 'ec >2 of the old :nsurance Code. )owever, 'ec. >> has o$itted the portion of 'ec. >2 w#c per$itted credit extension of the pre$iu$ due ($eaning, extension of period to pay the pre$iu$). Apparently, the intention is to put the contract of insurance on a H'a$h=a#)= 'arr? ,a$"$I $eaning the pre$iu$ $ust be paid in cash as a condition precedent for a nonGlife insurance policy to be valid and binding, and an agree$ent to grant the the An the his

agree$ent that insurer will extend credit. :nsurer cannot be presu$ed to have extended credit fro$ the $ere fact of unconditional delivery of the policy w#o prepay$ent of pre$iu$, and even if such presu$ption $ay be inferred, there $ust be a clear and express acceptance by insured of the insurer(s offer to extend credit. Pere/ . CA Fa't$ 1erez, already previously insured with A2 ,ife$an :nsurance Co. applied for additional coverage. )e paid pre$iu$ and was issued a receipt by the agent of A2 ,ife$an. )owever, he died before his application papers were trans$itted to the head office of A2 ,ife$an. I$$+e< .F0 the insurance policy was perfected He&)< 0o. &here was no acceptance of the offer. &he perfection of the contract was conditioned upon co$pliance with the provision in the application for$ w#c stated that perfection only lies when the applicant pays and the pre$iu$ and receives and accepts the policy while still in good health. &hus, the assent of A2 ,ife was not given when it $erely received the application for$ of 1erez in its provincial office. Also, delivery to 1erez would be i$possible as he is already dead. 'o long as an application for insurance has not been accepted or re"ected by the insurer, it is $erely an offer or proposal to $a%e a contract. &he contract to be binding fro$ date of application $ust have been a co$pleted contract that leaves nothing to be done, passed upon or deter$ined, before it shall ta%e effect.. 3)a. De S"#)a?e# . I#$+&ar L"(e A$$+ra#'e C!. 2AC&' Dec. !6*2 Arturo 'indayen had partially paid his agent the first pre$iu$ for a life insurance policy. Agent and 'indayen agreed that policy, when and if issued, should be delivered to 'indayen(s aunt who will co$plete the pay$ent of the first annual pre$iu$. Ian. !7, !6** + agent received approved policy and delivered it to 'indayen(s aunt on Ian. !?. )owever, before the policy was given to Arturo hi$self, he died on Ian. !6. :''C9 .F0 :nsular ,ife assu$ed the ris% covered by 'indayen(s policy )9,D H9'. Delivery to the insured in person is not necessary, and $ay be $ade by $ail or duly constituted agent (in this case, 'indayen(s aunt). :nsurance co$pany is bound by the acts of its agent. :n this case, the agent is not a $ere auto$aton and is vested w# so$e discretion in deciding .F0 the condition as to the health of the applicant has been co$plied with. Fnce he decides that it has and delivers the policy, then, in the absence of fraud, the insurance co$pany is estopped fro$ clai$ing the policy has no effect. E#r"@+e/ . S+# L"(e A$$+ra#'e C!. Fa't$< )errer applied for insurance and paid the pre$iu$, however, he died before he received the notice of acceptance (of his application) sent by 'un ,ife fro$ its <ontreal head office. I$$+e< .F0 the insurance contract was perfected w#o the notice of acceptance co$ing to the %nowledge of the applicant

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a deter$ination by the Co$$issioner that the continuation of the policy would violate or would place the insurer in violation of this Code

insured credit extension of the pre$iu$ is void. )owever, 7akati Tuscany v 0A and the second .039 case says otherwise. )ence, credit extension agree$ents $ay be valid. • 9NC91&:F0' to 'ec. >> :n the case of a life or an industrial policy whenever the grace period provision applies ('ec. >>) » Article >? (see below) » Agree$ent to grant the insured credit extension for the pay$ent of the pre$iu$ » .hen there is an agree$ent allowing the insured to pay pre$iu$ in install$ent and partial pay$ent has been $ade at the ti$e of the loss ('ee 7akati Tuscany v 0A) »

BPI .$. P!$a)a$9 16 Ph"&. * 1 :f the pre$iu$s are paid out of the con"ugal funds, the proceeds are considered con"ugal. :f the beneficiary is other than the insured(s estate, the source of pre$iu$s would not be relevant. Ph"&"pp"#e Pr?'e A$$+ra#'e C!rp. .$. CA9 *-6 SCRA 60 ( 550) -enerally, pre$iu$ is also necessary in order for the contract of suretyship or bond to be binding. )owever, where the oblige has accepted the bond, it is binding even if the pre$iu$ has not been paid sub"ect to the right of the insurer to recover the pre$iu$ fro$ its principal. Se'. 78 An ac%nowledg$ent in a policy or contract of insurance of receipt of pre$iu$ is conclusive evidence of its pay$ent, so far as to $a%e the policy binding, notwithstanding any stipulation therein that it shall not be binding until the pre$iu$ is actually paid • 9ffect of ac%nowledg$ent of receipt of pre$iu$ in property + :nsurer cannot deny the truth of the receipt of the pre$iu$ even if it is unpaid. • ,aw established a legal fiction of pay$ent (prima facie evidence of pay$ent). &hus insurer presu$ed to have waived the condition of prepay$ent. • 'C has decided that above is an exception to 'ec. >> Se'. 60 0o policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or $ore of the following (a) nonGpay$ent of pre$iu$; (b) conviction of a cri$e arising out of acts increasing the hazard insured against; (c) discovery of fraud or $aterial $isrepresentation (d) discovery of willful or rec%less acts or o$issions increasing the hazard insured against; (e) physical changes in the property insured which result in the property beco$ing uninsurable; or

• Cancellation + right to rescind, abandon or cancel a contract of insurance, ter$ination of policy before its expiration. • 1re$iu$ referred to in 75(a) refers to pay$ent Jafter effective date of the policyK because 'ec. >> ordains that insurance policy is valid and binding unless and until pre$iu$ has been paid. • Conditions under w#c above exercised » 1rior notice of cancellation to insured » 0otice $ust be based on the occurrence, after the effective date of the policy) of one or $ore of the grounds $entioned » :t $ust be in writing, $ailed or delivered to the na$ed insured at the address shown in the policy. :n this regard, proof of actual receipt of the notice is necessary for it to ta%e effect; $ere proof that the insurer $ailed the notice is not sufficient to effect the cancellation. » :t $ust state w#c of the ground set forth is relied upon. » :t is the duty of the insurer upon written re@uest of the insured to furnish the facts in which the cancellation is based. • :f there was no pre$iu$ paid at all, the action appropriate would be a declaration of nullity, based on 'ection >> which provides that Jno policy or contract of insurance issued by an insurance co$pany is valid and binding unless and until the pre$iu$ thereof has been paidK` T",a? . CA Fa't$< 2ortune ,ife issued a fire insurance policy in favor of &ibay on a bldg in <a%ati, together w# all their personal effects therein. Eioleta paid part of the total pre$iu$. 2 $os. Afer, a fire co$pletely destroyed the bldg. 2 days after the fire, &ibay paid the balance of the pre$iu$. 2ortune denied &ibay(s clai$ for violation of 'ec>> of :nsurance Code. I$$+e< .F0 a fire insurance policy is already valid, binding and enforceable upon $ere partial pay$ent of pre$iu$ He&)< 0F 'ec. >> applies. 'ince acceptance of partial pay$ent is not $entioned a$ong the exceptions provided in 'ec >> and >? of the :nsurance Code, no policy of insurance can ever pretend to be efficacious until pre$iu$ has been fully paid. G &he policy contained a condition w#c said that J&he policy including any renewal thereof is not in force until the pre$iu$ has been fully paid x x xK Clearly, the 1olicy provides for pay$ent of pre$iu$ in full. BissentF (673T) &he insurance coverage should beco$e effective fro$ the day that the partial pay$ent is accepted by the insurer, any stipulation in the policy to the contrary notwithstanding. 1artial pay$ent is enough to establish the "uridical relation between the two parties. &he law does not re@uire a specific a$ount of pre$iu$ pay$ent in order to create the "uridical tie. - . . / $age 140 o0 355

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that the fire too% place before the tender of pre$iu$ pay$ent under the renewed policy. (0ote &his is a $otion for reconsideration fro$ previous 'C decision declaring that there was no renewal of the policy and that CC1A not liable) I$$+e< .F0 'ec >> of the :nsurance Code $ust be strictly applied despite its practice of granting a 7BG6B day credit ter$ for pay$ent of pre$iu$ He&)< 0F &here are exceptions to 'ec >> a.) &he first is provided by 'ec. >> itself and that is, in case of a life or industrial life policy whenever the grace period applies b.) 'ec >? An ac%nowledg$ent in a policy or contract of insurance of the receipt of pre$iu$ is conclusive evidence of its pay$ent, so far as to $a%e the policy binding, notwithstanding any stipulation therein that it shall not be binding until pre$iu$ is actually paid. c.) 'ec. >>$ay not apply if the parties have agreed to the pay$ent in install$ents of the pre$iu$ and partial pay$ent has been $ade at the ti$e of the loss. d.) &he insurer $ay grant credit extension for the pay$ent of the pre$iu$ e.) :t would be un"ust and ine@uitable if recovery on the policy would not be per$itted against CC1A, w#c consistently granted the 7BG6B day credit ter$ for the pay$ent of the pre$iu$s despite its full awareness of 'ec. >>. 9stoppel bars it fro$ ta%ing refuge under the action, since <asagana relied on good faith on such a practice Bissent (Hitug): G9stoppel cannot create a contract of insurance neither can it be invo%ed to create a 14:<A4H ,:AA:,:&H. 'o essential is the pre$iu$ pay$ent to the creation of the vinculu$ "uris that it would be doubtful to have that pay$ent validly excused even for a fortuitous event Bissent (3ardo): G <asagana tried to pay the overdue pre$iu$s before giving written notice that a fire has razed the property. &his shows the fraudulent character of the clai$. 2ailure to give notice is was a $aterial $isrepresentation affecting the ris% insured against. G 9stoppel cannot give validity to an act that is prohibited by law or against public policy. Actual pay$ent of pre$iu$s is a condition precedent to the validity of an insurance contract other than the insurance policy. Any agree$ent to the contrary is EF:D as against the law and public policy.

G :f the contract is auto$atically cancelled upon the nonGpay$ent in full by the insured, then the efficacy of the contract will be fully dependent on his will. &his violates the principle of $utuality of contracts.

Ma4at" T+$'a#? . CA Fa't$< A$erican )o$e Assurance (A)AC) issued in favor or <a%ati &uscany an insurance policy on the latter(s bldg for ! year. :t was renewed over the course of * years. :n !6?2, the total pre$iu$s were paid in four install$ents but in !6?*, &uscany paid only 2 install$ents and refused to pay the re$aining balance. 4eason for discontinuation policy contained a reservation wherein JAcceptance of pay$ent by A)AC will not waive any of the co$pany rights to deny liability on any clai$ under the policy arising before such pay$ents or after the expiration of the credit clause of the policy, and 'ub"ect to no loss prior to pre$iu$ pay$ent. :f there be any loss, such is not covered.K A)AC filed a suit to recover the re$aining balance. <a%ati &uscany filed counterclai$ for the total a$ount of pre$iu$s it had paid during the previous years. I$$+e< .F0 pay$ent by install$ent of pre$iu$s due on an insurance policy invalidates the contract of insurance He&)< 0F &he policies are valid even if the pre$iu$s paid in install$ents because the records clearly show that the two parties intended the policies to be binding and effective notwithstanding the staggered pay$ent of the pre$iu$s. &e acceptance of the install$ent pay$ents over the period of * years spea% loudly of intention of insurer to honor the policies it issued to <a%ati &uscany. G 'ec >> $erely prohibits the parties fro$ stipulating that the policy is valid even if pre$iu$s were not paid, but it does not expressly prohibit an agree$ent granting credit extensions. 'ec. >? also allows the insurer to waive the condition of full pay$ent by ac%nowledging in the policy that there has been receipt of pre$iu$ despite the fact that pre$iu$ is actually unpaid. :f the Code allows a waiver when no actual pay$ent has been $ade, then a waiver should also be allowed in this case where the insurer has already ac%nowledged receipt of partial pay$ent. 0F&9 4ifference with Tibay case: 6n Tibay) there was an e>press stipulation w;c said that payment shall be made in full 6n this case) the policy was binding because of the prior agreement to allow installment payments) hence full payment under 'ec ,, deemed waived UCPB Ge#. I#$. . Ma$a%a#a Te&e2art Fa't$< <asagan &ele$art obtained insurance policies on its properties fro$ CC1A. &he policies had the effectivity ter$ of <ay !66! + <ay !662. Fn Iune !662, <asagan(s properties were razed by a fire. Fn the sa$e day, <asagana tenedered, and CC1A accepted renewal pre$iu$ pay$ents. &he next day, <asagana filed a clai$ for the burned insured bldgs. CC1A re"ected the clai$s on the ground that the polices exprired on <ay !662 and were not renewed for another ter$ and 100% UP L AW , $ B A R ' $ !

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0ash 'urrender Halue &he a$ount the insured, in case of default, after the pay$ent of at least * full annual pre$iu$s, is entitled to receive if he surrenders the policy and releases his clai$s upon it. :t is the portion of reserve on a life policy.  0ature of C'E 1re$iu$ is unifor$ throughout lifeti$e of policy, so during the earlier years of the policy, the pre$iu$ charges will be $ore than the actual cost of the protection against the ris% in order to $eet the higher cost of ris% during the latter years of the policy when the insured is older. 4eserve Ealue G 'urrender Charge X Cash 'urrender Ealue  &he $ore pre$iu$s he has paid, the greater will be the C'E but the value is always a lesser su$ than the total a$t of pre$iu$s paid.  C'E is the a$ount co$pany holds in trust for insured deliverable upon de$and. 'o long as the policy re$ains in force, the co$pany has practically no beneficial interest in it except as its custodian; this is the practical, though not the legal, relation of the co$pany to this fund.  9229C& 'urrender policy; ter$inates the contract of insurance />tende d 6nsuran ce  9229C& 1olicy continues in force fro$ date of default, for a per"!) either stated or e@ual to the a$ount of the cash surrender value, ta%en as a single pre$iu$, will purchase; the insured is given the right, upon default, after the pay$ent of at least three full annual pre$iu$s to have the policy continued in force fro$ the date of default for a ti$e either stated or e@ual to the a$ount as the net value !( the policy ta%en as a single pre$iu$, will purchase Also called Jter$ insuranceK, Jte$porary insuranceK or JpaidGup extended insuranceK  Depends on availability of C'E.  During extended period :f insured dies, beneficiary can recover face a$ount of policy. :nsured can also reinstate the policy w#in this period.  Aeyond extended period :f he survives 0o benefits. )e cannot even reinstate the policy by paying past pre$iu$s; has to purchase new policy  Aetter option if insured not in good health or geriatric 3aid-up 6nsurance  A2!+#t !( I#$+ra#'e that the C'E, applied as a single pre$iu$, can purchase.  9229C& 1olicy continues in force fro$ date of default for the whole period and under the sa$e conditions of the original contract w#o further pay$ent of pre$iu$s. )owever, in case of death of insured, he $ay recover only the JpaidGupK value of the policy w#c is $uch less than the original a$ount agreed upon. (:n other  $age 142 o0 355

8.-. Pre2"+2 )e(a+&t "# &"(e "#$+ra#'e (Se' **79 h L G)D !pt"!#$D &ap$e) p!&"'? Se'. **7 :n the case of individual life or endow$ent insurance, the policy shall contain in substance the following conditions x x x (h) A table showing in figures cash surrender values and paidGup options available under the policy each year upon default in pre$iu$ pay$ents, during at least twenty years of the policy beginning with the year in which the values and options first beco$e available, together with a provision that in the event of the failure of the policyGholder to elect one of the said options within the ti$e specified in the policy, one of the said options shall auto$atically ta%e effect and no policyholder shall ever forfeit his right to sa$e by reason of his failure to so elect. x x x x x x x x x x x x (")A provision that the policy shall be entitled to have the policy reinstated at any ti$e within * years fro$ the date of default of pre$iu$ pay$ent unless tha cash surrender value has been duly paid, or the extension period has expired, upon production of evidence of insurablility satisfactory to the co$pany and upon pay$ent of all overdue pre$iu$s and any indebtedness to the co$pany upon said policy, with interest rate not exceeding that which would have been applicable to said pre$iu$s and indebtedness in athe policy years prior to reinstate$ent x x x NON=LIFE • (4efer to 'ec.>>) 'ee$s to say that policy is in effect as soon as the thing is exposed to ris% even if the pre$iu$ has not been paid yet. • .here contract covers a period of ! year, there would nor$ally be only one pre$iu$ pay$ent for the period. • :f parties agreed to pay in install$ents, and there is a failure to pay any install$ent when it falls due insurer $ay cancel policy after due notice co$pel the pay$ent of install$ents LIFE • :ntended to be in force for a period longer than a year; involves several periodical pre$iu$ pay$ents (annual, se$iGannual, etc) • Contract not binding until first periodical pre$iu$ pay$ent. After first pay$ent, insured under no legal obligation to pay subse@uent pre$iu$. • :nsurance Code grants grace period within which to pay subse@uent pre$iu$s. :f policy beco$es a clai$ during the grace period but before overdue pre$iu$ is paid, overdue $ay be deducted fro$ proceeds of policy • 2ailure to pay w#in grace period X auto$atic lapse • 9xception :nsured has paid three full annual pre$iu$s. 9ntitled to the following Opt"!#$ +p!# )e(a+&t 100% UP L AW , $ B A R ' $ !

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words, naGreduce yung original insurance contract to one with a lower value)  Aetter option if insured is still young and in good health because unli%e extended insurance, he $ay later reinstate policy if he wishes. Automatic 3remium =oan  Cpon default, "#$+rer &e#)$Fa).a#'e$ t! the "#$+re) without any need of application on his part, a2!+#t #e'e$$ar? t! pa? !.er)+e pre2"+2 , but not to exceed the C'E of the policy.  Fnly applies if re@uested in writing by the insured either in the application or at any ti$e before the expiration of the grace period.  9229C& :nsurance continues in force for period covered by the pay$ent. After period, if insured still does not resu$e paying his pre$iu$s, policy lapses, unless there re$ains C'E.  :f there is still C'E, auto pre$iu$ loan continues until it is exhausted.  Advantageous to the insured because it helps to continue the contract and all its features in full force and effect.  :nsured under no legal obligation to repay JloanK *einstatem ent ('ec ")  9229C& Does not create a new contract, $erely 49E:E9' the old policy. &hus, insurer cannot re@uire higher pre$iu$ than a$ount stipulated in the contract.  4e@uired by :nsurance Code for every individual and industrial life policy  0ot re@uired that * annual pre$iu$s have been paid  49OC:':&9' • exercised :F"# - ?ear$ fro$ default • insured $ust pre$e#t e.")e#'e !( "#$+ra,"&"t? satisfactory to the co$pany • pa? a&& ,a'4 pre2"+2$ a#) a&& h"$ "#)e,te)#e$$ to the insurance co$pany • CS3 ha$ #!t ,ee# )+&? pa") #!r the eAte#$"!# per"!) eAp"re) :nsurability + does not $ean that insured is in good health. Fther factors affect insurability li%e nature of wor%, age, etc. Application for reinstate$ent $ust be filed during the insured(s lifeti$e.

Se'. 05 &he written instru$ent in which a contract of insurance is set forth is called a policy insurance. Se'. 16 &he policy shall be in printed for$ which $ay contain blan% spaces; and any word, phrase, clause, $ar%, sign, sy$bol, signature, nu$ber, or word necessary to co$plete the contract of insurance shall be written on the blan% spaces provided therein. Any rider, clause, warranty, or endorse$ent purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or na$e of the rider, clause, warranty, or endorse$ent is also $entioned and written on the blac% spaces provided in the policy. Cnless applied for by the insured or owner, any rider, clause, warranty or endorse$ent issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be ta%en as his agree$ent to the contents of such rider, clause, warranty, or endorse$ent. -roup insurance and group annuity policies, however, $ay be typewritten and need not be in printed for$. Se' 1 . A policy of insurance $ust specify (a) &he part"e$ between who$ the contract is $ade; (b) &he a2!+#t to be insured except in the cases of open or running policies; (c) &he pre2"+2, or if the insurance is of a character where the exact pre$iu$ is only deter$inable upon the ter$ination of the contract, a state$ent of the basis and rates upon which the final pre$iu$ is to be deter$ined; (d) &he pr!pert? !r &"(e "#$+re); (e) &he "#tere$t of the insured in property insured, if he is not he absolute owner thereof; (f) &he r"$4$ insured against; and (g) &he per"!) during which the insurance is to continue • &he :nsurance Code does not re@uire a particular for$ for the validity of the contract. )owever, the policy $ust contain the enu$eration in Art. 3! (see above) &he policy is different fro$ the contract itself. P!&"'? G written instru$ent e$bodying the ter$s and stipulations of a contract of insurance. 0ot essential to the validity of the contract as long as all the essential ele$ents for the existence of contract are present. (Consent, ob"ect, consideration, co$petent parties) Fther stipulations not re@uired by law $ay be included as long as they are not prohibited or inconsistent with the law. <issing provisions re@uired does not void policy. <issing provisions will be read into the policy and will substitute those w#c are in conflict w# the law. 'tipulations not in the exact ter$s of the statute, if $ore favorable to the insured, will be enforced. ':4 (on oral contracts) :n so$e "urisdictions of the C', oral contract is - . . / $age 143 o0 355

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Fther 9ffect » Forfeiture + Absolute forfeiture of all insured rights. -enerally not favored. Due to liberal spirit in the conduct of life insurance, insurers instead, give the insurer the benefit of the reserve value of the policy. 8.0. F!r2 a#) '!#te#t$ !( p!&"'? 100% UP L AW , $ B A R ' $ !

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:n case of conflict between rider and printed stipulation, the rider prevails as being a $ore deliberate expression of the agree$ent of the contracting parties. Warra#t? + inserted or attached to a policy to eli$inate specific potential increases of hazard during the policy ter$ owing to !) actions of the insured or 2) condition of the property. C&a+$e + an agree$ent between the insurer and the insured on certain $atters relating to the liability of the insurer in case of loss. E#)!r$e2e#t + any provision added to an insurance contract altering its scope or application. 9x. 9ndorse$ents extending the perils covered. <ost ti$es, they are $erely typewritten additions to the contract, changing its a$ount, rate, or ter$.

valid, provided that all the ter$s are agreed upon. :n our :nsurance Code, although written for$ not re@uired for validity, so$e provisions say that a 14:0&9D 1F,:CH is best evidence of contract. 'C has not ruled categorically on this $atter. &he following are re@uired to appear in insurance policies » &he p!&"'?, which $ust be in printed for$ (except group insurance policies which $ay be typewritten), $ay contain blan% spaces; any word, phrase, clause, $ar%, sign, sy$bol, signature, nu$ber, or word necessary to co$plete the contract of insurance shall be written on the blan% spaces provided. » Any r")er9 '&a+$e9 :arra#t?9 !r e#)!r$e2e#t $ay only be dee$ed part of the insurance policy if, after having been attached to the policy itself, its descriptive title or na$e is also $entioned and written in the blan% spaces in the policy. » 4e@uired clauses in the policy  &he part"e$ between who$ the contract is $ade;  &he a2!+#t t! ,e "#$+re) except in the cases of open or running policies;  &he pre2"+2, or if the insurance is of a character where the exact pre$iu$ is only deter$inable upon the ter$ination of the contract, a state$ent of the basis and rates upon which the final pre$iu$ is to be deter$ined;  &he pr!pert? !r &"(e "#$+re);  &he "#tere$t !( the "#$+re) in property insured, if he is not the absolute owner thereof;  &he r"$4$ "#$+re) a%a"#$t; and  &he per"!) during which the insurance is to continue. » 9xpress warranties $ust also be contained in the policy, or in another instru$ent signed by the insured and referred to in the policy as $a%ing a part of it.

ii. Cover 0otes or binding receipts Se' 1*. Cover notes $ay be issued to bind insurance te$porarily pending the issuance of the policy. .ithin sixty days after issue of a cover note, a policy shall be issued in lieu thereof, including within its ter$s the identical insurance bound under the cover note and the pre$iu$ therefore. Cover notes $ay be extended or renewed beyond such sixty days with the written approval of the Co$$issioner if he deter$ines that such extension is not contrary to and is not for the purpose of violating any provisions of this Code. &he Co$$issioner $ay pro$ulgate rules and regulations governing such violation and $ay be such rules and regulations dispense with the re@uire$ent of written approval by hi$ in the case of extension in co$pliance with such rules and regulations (n) • Cover notes#Ainders + a written $e$orandu$ of the $ost i$portant ite$s of a preli$inary ocntract intended to give te$porary protection (to insured) pending the investigation of the ris% by the insurer, or until the issue of the for$al policy, provided it is later deter$ined that the applicant was insurable at the ti$e it was given. :t is a binding contract and has full force and effect during its duration. :nsurer not obliged to give cover notes but $any do so in order to gain goodwill. Csually contain only the bare essentials of an insurance contract i.e. the na$e of the parties, ris% insured against, a$ount of insurance, pre$iu$, property#life insured. :ssuance of cover notes is ordinarily a conclusive evidence of $a%ing a contract &he issuance and effectivity of cover notes are governed by the following rules !) Ma? ,e "$$+e) te2p!rar"&?, pending issuance of policy 2) Dee2e) a '!#tra't !( "#$+ra#'e within $eaning of §!/!8

i. 4iders, clauses, endorse$ents • :f parties wish to include special stipulations, $ay attach riders, endorse$ents, warranties. • R")er + a printed or typed stipulation contained on a slip of paper attached to the policy and for$ing an integral part of the policy. • &o be binding G<ust be attached#pasted to the policy G Descriptive title or na$e of the rider, clause, warranty, or endorse$ent is $entioned and written on the blan% spaces provided in the policy. • Countersignature by insured Ge#era& R+&e< 0ot necessary if rider attached to the policy when issued. EA'ept"!#< 0ecessary when added A2&94 policy is issued. 49A'F0 &o prevent an insurer fro$ adding or inserting provisions w#o the consent of the insured. 100% UP L AW , $

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2) Ealue of the thing insured G :n the absence of fraud or $ista%e, the agreed value of the thing insured will be paid in case of total loss of the property, unless the insurance is for a lower a$ount G :n case of loss, parties $ay clai$ that value of insured property is $ore or less than agreed upon. G &he liability of the insurer in a life policy is $easured by the face value of the policy (because the value of a hu$an life cannot be $easured in actual $onetary ter$s). • R+##"#% P!&"'? G :ntended to provide inde$nity for property w#c cannot well be covered by a valued policy because of its fre@uent change of location and @uantity, or for property of such a nature as not to ad$it of a gross valuation. Also denotes insurance over a class of property rather than any particular thing. 9x. :nsurance over constantly changing stoc% of goods G :n reality, these are open policies. G Conte$plates successive insurances. G Advantages of a running policy !) Ne"ther +#)er"#$+re) #!r !.er"#$+re) at any ti$e, pre$iu$ being based on $onthly values reported; 2) A.!")$ 'a#'e&&at"!#$ otherwise necessary to %eep insurance ad"usted to the thing(s value at each location and for which cancellations the inured would be charged the expensive short rate; *) Sa.e$ tr!+,&e !( :at'h"#% the "#$+ra#'e a#) )a#%er !( ,e"#% +#)er"#$+re) in spite of care, through oversight or $ista%e; 5) Rate "$ a)G+$te) t! 66U "#$+ra#'e , whereas valued policies re@uiring insurance only up to, say ?BM of value, give either a s$all, if any, reduction for a$ounts of insurance above this figure.

*) 0o cover note $ay be issued or renewed unless in the Code(s previously pre$'r",e) (!r2 5) Cover notes are .a&") a#) ,"#)"#% (!r a per"!) #!t !.er 66 )a?$ (r!2 )ate !( "$$+a#'e, whether or not pre$iu$ therefor has been paid, but it $ay only be cancelled by either party upon at least > days notice to other party 3) I( "t "$ #!t 'a#'e&&e)9 p!&"'? $ha&&9 :"th"# 66 )a?$ a(ter "$$+a#'e !( '!.er #!te9 ,e "$$+e) in lieu thereof. 1olicy will include within its ter$s the identical insurance bond under the cover note and the pre$iu$ therefor 7) Cover note 2a? ,e eAte#)e) !r re#e:e) ,e?!#) the 66=)a? per"!) :"th the :r"tte# appr!.a& !( the I#$+ra#'e C!22"$$"!#, provided that the written approval $ay be dispensed with upon the certificate of the 1res, E1, or general $anager of the co$pany that the ris%s involved, the values of such ris%s and#or pre$iu$s therefor have not as yet been deter$ined or established and that such extension or renewal is not contrary to and is not for the purpose of violating any provisions of the :nsurance Code, or of any of the rulings, instructions, circulars, orders or decisions of the :nsurance Co$$issioner >) Co$panies $ay i$pose on cover notes a )ep!$"t pre2"+2 e@+".a&e#t t! at &ea$t *1U !( the e$t"2ate) pre2"+2 of the intended insurance coverage but never less than 3BB pesos. iii. Fpen and Ealued 1olicies (nonGlife) Se' 15. A policy is either open, valued or running. Se' 66. An open policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss. Se' 6 . A valued policy is one which expresses on its face an agree$ent that the thing insured shall be valued at a specified su$. Se'. 6*. A running policy is one which conte$plates successive insurances, and which provides that the ob"ect of the policy $ay be fro$ ti$e to ti$e defined, especially as to the sub"ects of insurance, by additional state$ents or indorse$ents. 8.1. M"#)$ !( "#$+ra#'e p!&"'"e$< • Ope# or U#.a&+e) P!&"'? G Fne in which a certain agree su$ is written on the face of the policy not as the value of the property insured, but as the $axi$u$ li$it of the insurer(s liability (i.e. face value) in case of destruction by the peril insured against. G :nsurer only pays the actual cash value of the property as deter$ined at the ti$e of loss. • 3a&+e) P!&"'? G Fne in which the parties expressly agree on the value of the sub"ect $atter of the insurance. G&wo values !) 2ace value of the policy w#c is the $ax a$t insurer pays in case of loss 100% UP L AW , $

5. Part"e$
9ssential 4e@uisites for a person to be a party in an insurance contract » <ust be COMPETENT to enter (has capacity) » <ust possess INSURABLE INTEREST » <ust NOT ,e a PUBLIC ENEMB13 5. . I#$+rer Se'. 6. 9very person, partnership, association, or corporation duly authorized to transact insurance business as elsewhere provided in this Code, $ay be an insurer. (a) Se' 80 2or purposes of this Code, the ter$ JinsurerK or Jinsurance co$panyK shall include all individuals, partnerships, associations, or corporations, including govern$entGowned or controlled corporations or entities, engaged as principals in the insurance business, excepting $utual benefit associations. Cnless the context otherwise re@uires, the ter$ shall also include professional reinsurers, defined in 'ection 2?B. JDo$estic co$panyK shall include co$panies
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Art. 6 (Fa2"&? C!)e) &he spouses retain the ownership, possession, ad$inistration and en"oy$ent of their exclusive properties. 9ither spouse $ay, during the $arriage, transfer the ad$inistration of his or her exclusive property to the other by $eans of a public instru$ent, which shall be recorded in the registry of property of the place the property is located. (!*>a, !7?a, !76a) Art. (Fa2"&? C!)e) A spouse of age $ay $ortgage, encu$ber, alienate or otherwise dispose of his or her exclusive property, without the consent of the other spouse, and appear alone in court to litigate with regard to the sa$e. (n) Art. -56 (C"."& C!)e). &he following contracts are voidable or annullable, even though there $ay have been no da$age to the contracting parties (!) &hose where one of the parties is incapable of giving consent to a contract; (2) &hose where the consent is vitiated by $ista%e, violence, inti$idation, undue influence or fraud. &hese contracts are binding, unless they are annulled by a proper action in court. &hey are susceptible of ratification. • I#$+re) + the party in whose favor the contract is operative and who is inde$nified against, or is to receive a certain su$ upon the happening of a specified contingency or event. )e is the person whose loss is the occasion for the pay$ent of the proceeds by the insurer; Aut the proceeds need not go to hi$ but the designated beneficiary or so$eone the insured assigns the proceeds to. As in all other contracts, only persons who have the capacity to enter into a contract $ay be insured. 1olicy $ust specify the parties between who$ the contract is $ade. ('ec. 3!) P+,&"' e#e2? + citizen or sub"ect of a nation at war with the 1hilippines. Does not include robbers, thieves, cri$inals. a private corporation $ay be dee$ed an ene$y corporation if controlled by ene$y aliens.

for$ed, organized or existing under the laws of the 1hilippines. J2oreign co$panyK when used without li$itation shall include co$panies for$ed, organized, or existing under any laws other than those in the 1hilippines. Se' 81 Corporations for$ed or organized to save any person or persons or other corporations har$less fro$ loss, da$age, or liability arising fro$ any un%nown or future or contingent event, or to inde$nify or to co$pensate any person or persons or other corporations for any such loss, da$age, or liability, or to guarantee the perfor$ance of or co$pliance with contractual obligations or the pay$ent of debts or others shall be %nown as Jinsurance corporationsK &he provisions of the Corporation ,aw (A1 Alg 7?) shall apply to all insurance corporations now or hereafter engaged in business in the 1hilippines insofar as they do not conflict with the provisions of this Chapter. • I#$+rer + party who assu$es or accepts the ris% of loss and underta%es for a consideration to inde$nify the insured or to pay hi$ a certain su$ on the happening of a specified contingency or event; &his can be an individual, a corporation, an association, even the 'tate, as long as it is authorized to engage in a business of insurance. 'u$$ary of !?5 and !?3 !?5 .hat ter$ JinsurerK includes !?3 .hat J:nsurance CorporationsK are regulated by the 'tate &o engage in the business of insurance, re@uired to get certificate of authority fro$ the :nsurance Co$$issioner, and $ust possess sufficient capital assets. (.ill not include other re@uire$ents, $edyo technical. .e only need to %now defn of insurer and insurance corporations); Aan%ing institutions are not allowed to engage in insurance business (-eneral Aan%ing Act !>*)

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5.*. I#$+re) Se'. 7 Anyone except a public ene$y $ust be insured Se'. 16 .hen the description of the insured in a policy is so general that it $ay co$prehend any person or any class of persons, only he who can show that it was intended to include hi$ can clai$ the benefit under the policy. RA 6865 G ,owered the age of 9<A0C:1A&:F0 A0D A-9 F2 <AIF4:&H Art. *-0. 9$ancipation ta%es place by the attain$ent of $a"ority. Cnless otherwise provided, $a"ority co$$ences at the age of eighteen years. (as a$ended by 4A 7?B6) Art. *-6. 9$ancipation for any cause shall ter$inate parental authority over the person and property of the child who shall then be @ualified and responsible for all acts of civil life, save the exceptions established by existing laws in special cases. x x x (as a$ended by 4A 7?B6)

5.-. Be#e("'"ar"e$ Se' &he insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. • 4efers to the person who designated in a contract of life, health or accident insurance as the one who is to receive the benefits which beco$e payable, according to the ter$s of the contract, upon the death of the insured. .ords used in designating the beneficiaries of a life policy will not be given their technical significance but will be construed broadly. Chosen exclusively by insured who $ay designate anyone (irrespective of lac% of insurable interest) so long as s#he not dis@ualified by law. - . . / $age 146 o0 355

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would not have intended to extend such provision of funds to the heirs# assignees of the beneficiary. » :n designating the beneficiaries, words used will not be given their technical significance but will be broadly construed so that the benefit shall be received by those intended by the insured as the ob"ect of his bounty. &he interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, acco$plice, or accessory in willfully bringing about the death of the insured. :n this case, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise dis@ualified &he right to receive the proceeds of life insurance policies shall follow the order of intestate succession in the Civil Code in default of any specific designation in the policy a. ,egiti$ate children; b. 2ather and $other, if living; c. -randfather and grand$other; or ascendants nearest in degree, if living; d. :llegiti$ate children; e. 'urviving spouse; and f. Collateral relatives, to wit f.a. brothers and sisters of the full blood; f.b. brothers and sisters of the halfG blood; and f.c. nephews and nieces g. :n default of above, 'tate is entitled to receive the proceeds » Ge#era& R+&e< &he person designated in the policy as the insured or the beneficiary shall be the only one entitled to recover the proceeds of the policy. EA'ept"!#< A third person $ay recover fro$ the policy as against the insured if there has been a prior contract of express or i$plied trust between the insured and the third person. A third person $ay recover fro$ the policy as against the insurer only if such person has been specifically given the right of recovery in the insurance policy.

1roceeds of life insurance policy beco$e the exclusive property of the beneficiary upon the death of the insured. Ce$t+" @+e ."e = 1erson on whose life the policy was ta%en. = <ust be a ris% acceptable to the insurer Pinds of beneficiaries + either insured hi$self or his personal representatives or so$eone other than the insured. :f others are recipients, their relations to the insured $ay be » :nsured hi$self + one who bought the policy and paid the pre$iu$s. 'uch is an i$$ediate party to the contract and is usually called the assured (creditor insures debtor(s life). &hird person who paid a consideration G as when insured too% up the policy for the benefit of the creditor or to secure so$e other obligation; or &hird person through $ere bounty of insured + no consideration paid but $ade beneficiary ($ay be the insured(s estate or a third party).

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:n the 2nd and *rd cases, beneficiary is not a party to the contract. :n all * cases, proceeds of a life insurance policy beco$e the exclusive property of the beneficiary upon insured(s death. 'o if insured was "udicially insolvent before he died, proceeds to go to the beneficiary and not to the assignee in insolvency. • 4ules governing beneficiaries » 'election of the beneficiary $ust be in good faith and without intent to $a%e the transaction a cover for a forbidden wagering contract. Ge#era& R+&e< &he insured $ay change the designated beneficiary without the consent of the latter and retain the right to receive the cash value of the policy, to ta%e out loans against the cash value, to assign the policy or to surrender it without the beneficiary(s consent. )owever, this right belongs only personally to the insured and cannot be exercised by his representatives or assignees upon his death. EA'ept"!#< :f there has been an express waiver of the right to change the beneficiary without the latter(s consent, the beneficiary ac@uires an absolute vested interest to all benefits under the policy. A new beneficiary cannot be added to the original one#s because such would a$ount to the di$inution of the original benefits. &he insured also loses the power to destroy the policy because the beneficiary can pay the pre$iu$s hi$self to ensure the continued effectivity of the contract. » D9 ,9F0 is inclined to believe that, in case the beneficiary dies before the insured, the proceeds shall go to the estate of the insured, rather than to the estate of the beneficiary. )e believes that the purpose of the insured in ta%ing out the policy is to provide a fund for the benefit of those he is accusto$ed to supporting. )e , $

i. 'tatutory ,i$itations on life insurance Art. *6 * (C"."& C!)e) Any person who is forbidden fro$ receiving any donation under Article >*6 cannot be na$ed beneficiary of a life insurance policy by the person who cannot $a%e any donation to hi$, according to said article. (n) Art. 7-5 (C"."& C!)e) &he following donations shall be void (!) &hose $ade between persons who were guilty of adultery or concubinage at the ti$e of the donation;

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(2) &hose $ade between persons found guilty of the sa$e cri$inal offense, in consideration thereof; (*) &hose $ade to a public officer or his wife, descedants and ascendants, by reason of his office. :n the case referred to in declaration of nullity $ay be of the donor or donee; and and donee $ay be proved evidence in the sa$e action. • • • 0o. !, the action for brought by the spouse the guilt of the donor by preponderance of (n)

2AC&' 1laintiff and Defendant are siblings. 1rior to their father(s death, he too% out a life insurance policy and $ade the Def the sole beneficiary. :''C9 .F0 the insurance proceeds belong exclusively to the D92 who was the sole beneficiary )9,D H9' &he proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured, and that such proceeds are the separate and individual property of the beneficiary. 5.0. Other part"e$ t! a# "#$+ra#'e '!#tra't ` Assignee of the thing insured GGGGG Ge#era& R+&e< :f the thing insured is assigned to another, the policy is not dee$ed transferred with the thing. &he policy is instead dee$ed suspended until the assignee also beco$es the owner of the policy. &he assignor, on the other hand, cannot recover on the policy after the transfer since he has already lost insurable interest over the thing. EA'ept"!#$< &he general rule on suspension of policy is not applicable in the following cases a. :n &"(e9 hea&th a#) a''")e#t "#$+ra#'e (§2B) b. A 'ha#%e !( "#tere$t in the thing insured a(ter a# "#G+r? occurs resulting in a loss (§2!); c. A 'ha#%e !( "#tere$t "# !#e !r 2!re !( $e.era& th"#%$9 $eparate&? "#$+re) by one policy (§22); d. A 'ha#%e !( "#tere$t ,? :"&& !r $+''e$$"!# on the death of the insured (§2*); e. A tra#$(er !( "#tere$t by one of several persons, "oint owners or owners in co$$on, "ointly insured, to the others (§25); f. Whe# a p!&"'? :"&& "#+re t! the ,e#e("t !( the !#e :h! 2a? ,e'!2e the #e: !:#er !( the "#tere$t insured during the continuance of the ris% (§3>); and g. .hen there is an eApre$$ pr!h","t"!# a%a"#$t a&"e#at"!# in the policy, alienation will cause the contract to be avoided, not suspended (Article !*B7, §25, Civil Code) ` Agent or trustee GGGGG :f an agent or trustee ta%es out an insurance policy for the benefit of his principal or beneficiary, he shall state that the latter is the real party in interest by designating hi$self as an agent or trustee in the insurance policy itself. )e can also signify his designation by so$e other general words in the policy. 3a&e#/+e&a .$ CA ( 556) &he general rule that the principal reserves the right to ter$inate the agentGprincipal relationship at its will ad$its of an exception when the agency has been given not only for the interests of the principal but of *rd persons or for the $utual interest of agent and principal. Also, an insurance agent can(t be held liable for all uncollected pre$iu$s under his account because the re$edy for nonGpay$ent of pre$iu$s is the ter$ination of any insurance policy. ` 1artner or coGowner GGGGG

:n the first case (adultery# concubinage), no need of cri$inal conviction to void policy. 9nough if there is a preponderance of evidence. :n the second case however, the CC uses the words Jfound guiltyK hence cri$inal conviction necessary. 1ublic 9ne$ies also dis@ualified fro$ being beneficiary. I#$+&ar L"(e A$$+ra#'e C! . E,ra)! 2AC&' 9brado too% out a life insurance policy and na$ed his co$$onGlaw partner, Carponia, his beneficiary. Cpon his death, his lawful wife also filed a clai$ w# :nsular ,ife as the widow. 4&C dis@ualified Carponia fro$ clai$ing benefits under the policy :''C9 .F0 Carponia dis@ualified fro$ clai$ing insurance proceeds because of her illicit relation with the insured. )9,D H9'. ('C applied CC) 'ince the :nsurance Code does not contain any specific provision on rules respecting who $ay be na$ed beneficiary, the CC will apply. Art 2B!2 states that Jany person forbidden fro$ receiving donations under Art >*6 cannot be na$ed beneficiary of a life insurance policyK Art. >*6 declares void donations $ade between persons who are guilty of adultery or concubinage at the ti$e of the donation. )ence, Carponia is dis@ualified fro$ being na$ed a beneficiary. 3)a. )e C!#$+e%ra . GSIS 2AC&' Iose Consuegra contracted two $arriages, to Diaz and Aerdin. After his death, the proceeds of his life insurance w# the -':' went to Aerdin. )owever, he was also entitled to retire$ent benefits to which he did not designate any beneficiary. :''C9 .F0 Aerdin should be considered the sole beneficiary of the retire$ent benefits being the beneficiary of the life insurance policy )9,D 0F. ,ife :nsurance and retire$ent insurance are separate and distinct funds. ,ife :nsurance is paid to whoever is na$ed the beneficiary and $ay not necessarily be the heir of the insured. 4etire$ent benefits on the other hand, are pri$arily intended for the benefit of the ee + to provide for his old age, incapacity, etc. :f the ee reaches the age retire$ent, he gets the benefits even to the exclusion of the beneficiary na$ed in the policy. &he beneficiary of the retire$ent insurance can only clai$ the proceeds of the retire$ent insurance if the ee dies before retire$ent. :2 there is no beneficiary designated in the policy, benefits will accrue to the estate, hence Diaz is also entitled to the retire$ent benefits. De& 3a& . De& 3a&

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subrogation to the insurer to the extent of the insurance $oney paid. c. Change of creditor + pay$ent of the insurance to the $ortgagee due to loss does not extinguish the principal obligation but only changes the creditor. &he $ortgagee can(t clai$ both the insurance and the debt. :nsurance ta%en out by $ortgagor a. 2or his own benefit, as owner + proceeds won(t go to the $ortgagee who has no greater right than unsecured creditors. b. 2or the $ortgagee(s benefit + loss is payable to the $ortgagee (usual practice), to the extent of the credit. Cpon pay$ent of the proceeds to the extent of the credit, the debt is extinguished. &he $ortgagee can be $ade the beneficial payee by !. Aeco$ing the assignee of the policy with insurer(s consent; 2. Aeco$ing the $ere pledge without such consent; *. A rider (§3B), $a%ing the policy payable to the <ortgagee Jas his interest $ay appearK , $ay be attached; 5. A Jstandard $ortgage clauseK containing a collateral independent contract between the two parties $ay be attached; or 3. &he policy, though by its ter$s payable to the $ortgagor, $ay have been procured by a $ortgagor under a contract duty to insure for the $ortgagee(s benefit, where the latter ac@uires an e@uitable line upon the proceeds.

:nsurable interest in the property of a partnership exists in both the partnership and the partners and a partner has an insurable interest in the fir$ property which will support the policy ta%en out thereon for his own benefit. Aut a partner who ta%es out the policy in own na$e li$its the coverage to his individual share unless the ter$s clearly show the policy was $eant to cover all the shares. ` <ortgagor# $ortgagee GGGGG Ge#era& R+&e< .hen a $ortgagor ta%es out an insurance policy on his own na$e but stipulates that the proceeds shall be payable to the $ortgagee, or assigns the said policy to the $ortgagee, the insurance shall be dee$ed to be upon the insurable interest of the $ortgagor. Conse@uently, three rules apply (!) any act of the $ortgagor prior to the loss, which would otherwise avoid the insurance, shall have the sa$e effect even if the property insured is in the hands of the $ortgagee (2) any act which would have to be perfor$ed by the $ortgagor $ay be perfor$ed by the $ortgagee, with the sa$e effect as if it were perfor$ed by the for$er (*) if an insurer assents to the transfer of an insurance fro$ a $ortgagor to a $ortgagee, and, at the ti$e of his assent, i$poses further obligation on the assignee, $a%ing a new contract with hi$, the act of the $ortgagor cannot affect the rights of said assignee. SUPPLEMENTARB RULES< Fn the insurable interest $ortgagee of $ortgagor and

a. 'eparate insurable interests + each has his own insurable interest in the $ortgaged property which is %ept separate fro$ each other. &he benefits of such belongs to the insured alone and if the two insure the sa$e property or ta%e out a policy covering their respective interests, this is not double insurance. b. 9xtent of insurable interest of $ortgagor + the ownerG$ortgagor has an interest to the extent of the property(s value even if the $ortgage debt e@uals it since the loss or destruction of the insured property will not extinguish his debt. c. 9xtent of insurable interest of $ortgagee + he or his assignee has an interest to the extent of the debt secured, the property used as security. )is interest is pri$a facie the value $ortgaged, only as to the a$ount owed, not exceeding the value of the property. d. 9xtent of a$ount of recovery + <ortgagor only up to full a$ount of loss; <ortgagee up to the a$ount of credit at the ti$e of the loss or the value of the property. :nsurance by $ortgagee of his own interest a. 4ight in case of loss + the $ortgagee is entitled to proceeds if loss happens before pay$ent of $ortgage. b. 'ubrogation of insurer to the right of the $ortgagee + $ortgagee(s clai$ passes by

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&he insured has an interest in the destruction rather than the preservation of a sub"ect $atter.  :t te$pts or induces the insured, with nothing to lose and everything to gain, to bring about the event upon the happening of which the policy beco$es payable. » As a $easure of li$it of recovery + in contracts to pay inde$nity, the insurable interest will be the $easure of the upper li$it of his provable loss under the contract. &he policy should not provide the insured with the $eans of $a%ing a net profit fro$ the happening of the event insured against. 4ifference between life and non-life insurance (pertaining to interest) LIFE G basically a contract of :0E9'&<90&; can only recover face a$ount of the policy NON=LIFE + based on principle of :0D9<0:&H for exact pecuniary value; can only recover on the policy the value of the actual loss

C5apter III I"S2#ABL I"T # ST 14
*. I#$+ra,&e I#tere$t "# &"(eFhea&th
Se' 6 9very person has an insurable interest in the life and health

. De("#"t"!# a#) P+rp!$e
Se' * A change on interest in a thing insured, after the occurrence of an in"ury which results in a loss does not affect the right of the insured to inde$nity for the loss. Se' *1 9very stipulation in a policy of insurances for the pay$ent of loss whether the person insured has or has not any interest n the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaining or wagering, is void. I#$+ra,&e "#tere$t + interest which the law re@uires policy owner to have in the person or thing insured. G A person is said to have an insurable interest in the sub"ect $atter insured where he has a relation or connection with, or concern in it that he will derive pecuniary benefit or advantage fro$ its preservation and will suffer pecuniary loss or da$age fro$ its destruction, ter$ination, or in"ury by the happening of the event insured against. • 9ssential ele$ent of an insurance contract. • 0ot legally possible to waive re@uire$ent • 4ationale for re@uiring insurable interest » As deterrence to the insured + public policy holds wager policies invalid for being against public interest and de$oralizing in that

a) b)

children;

Ff hi$self, of his spouse and of his

c)

d) • • •

Fn any person on who$ he depends wholly or in part for education or support, or in who$ he has a pecuniary interest; Ff any person under a legal obligation to hi$ for the pay$ent of $oney, or respecting property or services of which death or illness $ight delay or prevent the perfor$ance, and Ff any person upon whose life any estate or interest vested in hi$ depends. 1erson $ay ta%e out insurance on own life or so$eone else(s life provided insurable interest exists. Ce$t+" @+e ."e $ust consent. 'ec. !B provides the test of presence of insurable interest. 'aid section does not re@uire the consent of the person being insured for the policy to be effective. &he policy is valid as long as the presence of insurable interest can be ade@uately shown.

*. . I# !#eJ$ !:# &"(eFhea&th Se' &he insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. Se' * &he interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, acco$plice, or accessory in willfully bringing about the death of the insured, in which event, the nearest relative of

1?

Thi t$9ic c#/e $ut i% ,00,, ,001, ,000, 1**), 1**3, 1**?, 1*(?, 1*(3, 1*(,, 1*(0, 1*)* #%& 1*)). N$te the &i88ere%ce 2et1ee% i% ur#2"e i%tere t i% 9r$9ert0 :er u i% ur#2"e i%tere t i% "i8e i% ur#%ce7 i% ur#2"e i%tere t i% 2#%C &e9$ it 7 #%& e;i ti%! i%tere t i% 9r$9ert0 i% ur#%ce.
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both the owner and beneficiary $ust have an insurable interest in the life of the cestui @ue vie. :f the insurable interest re@uire$ent is satisfied, a life policy is assignable regardless of whether the assignee has an insurable interest in the life of the cestui @ue vie. :n our law, insurable interest in another(s life $ust be one of those $entioned in §!B. Aeing engaged with one another is not such interest. CLOSE RELATI3ES • 'pouse and children ($inor or not, $arried or un$arried dependent or not) G ,aw presu$es natural affection existing between spouses, parents and children. &hus, ,aw recognizes a parent(s insurable interest in child(s life but is silent as to whether or not a child has insurable interest in the parent(s life. G Child entitled to support re@uired by law, whether or not he#she is financially independent  sufficient to constitute pecuniary interest. • :ther close relatives (brothers and sisters) not expressly covered by law (but loo% at Art !63, 2C) • Alood relationship or relationship by affinity is :<<A&94:A, when relative is source of support (where no legal obligation exists) &here is insurable interest both ways OTHER RELATI3ES a#) STRANGERS • <ust prove that he has so$e pecuniary interest in the life of the cestui @ue vie otherwise policy is void • <ere relationship will not suffice • &he re@uire$ents of insurable interest cannot be circu$vented by an agree$ent between the insured (cestui @ue vie) and a * rd person who has no interest, whereby the latter, having induced the insured to ta%e out a policy, pro$ises to pay of pre$iu$s if the policy is assigned to hi$. » &he intention to ta%e out policy is clearly not to insure life but rather to circu$vent the re@uire$ent » :s different fro$ ta%ing a policy out on self and then later assigning it to so$eone who has no insurable interest, because law allows policy to transfer whether or not there is insurable interest Se' 8 A policy of insurance upon life or health $ay pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person $ay recover upon it whatever the insured $ight have recovered. Se' 8* 0otice to an insurer of a transfer or be@uest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly re@uired. • :nsurable interest of assignee in life insurance not re@uired G since it is not a contract of inde$nity. ,ife insurance is one of the best recognized for$s of invest$ent and selfGco$pelled savings. 'o far as reasonable safety per$its, it is desirable to $age 151 o0 355

the insured shall receive the proceeds of said insurance if not otherwise dis@ualified. I#$+re) "$ the 'e$t+" @+e ."e • As a rule, each has unli$ited insurable interest in his own life, whether the insurance is for the benefit of hi$self or another • :n insuring one(s own life for another(s benefit, insurable interest is only needed as evidence of good faith of the parties; it is contrary to hu$an experience that a person will insure his own life for the benefit of another for the purpose of speculation, to ta%e his own life to secure pay$ent to another, or designate as a beneficiary, a person interested in the destruction, not the continuance of the insured(s life. • &he nearest relative of the insured shall receive the proceeds of said insurance if not otherwise dis@ualified • -9094A, 4C,9 Aeneficiary is the choice of the insured regardless of .o0 beneficiary has an insurable interest in insured(s life Assu$ption :nsured would not designate as his beneficiary a person who$ he would not trust with his own life • 9NC91&:F0' » .aiver » :rrevocable beneficiary (right to proceed vests) *.*. I# the &"(eFhea&th !( !ther$ Art 51 (Fa2"&? C!)e). 'ub"ect to the provisions of the succeeding articles, the following are obliged to support each other to the whole extent set forth in the preceding article (!) &he spouses; (2) ,egiti$ate ascendants and descendants; (*) 1arents and their legiti$ate children and the legiti$ate and illegiti$ate children of the latter; (5) 1arents and their illegiti$ate children and the legiti$ate and illegiti$ate children of the latter; and (3) ,egiti$ate brothers and sisters, whether of full or halfGblood (26!a) I#$+re) "$ #!t the 'e$t+" @+e ."e ,+t "$ the ,e#e("'"ar? • .hen person na$es hi$self the beneficiary in a policy ta%en out on the life of another, he $ust have insurable interest in the life of the other person (his interest $ust show so$e pecuniary interest and it exists whenever the relation between the assured and the insured, whether by blood, $arriage or co$$ercial intercourse) • <ere love and affection 0F& insurable interest CESTUI OUE 3IE< person upon whose life insurance is ta%en out on • <ust agree to the ta%ing out of insurance • 0o law saying you don(t need his consent public policy de$ands consent be obtained • 9xception 1arent ta%ing policy out on $inor child • 0o a$ount of consent can $a%e up for lac% on surable interest • .hen the owner of the policy insures the life of another=the cestui @ue vie=and designates a third party as beneficiary, 100% UP L AW , $

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»

COMM #CIAL LA$
1olicy not inde$nifying loss but rather giving financial security to insured or to beneficiaries » ,aw gives insured the right to convert policy into cash by selling it to a * rd person who doesn(t have any insurable interest in his life. » 1olicy is an invest$ent EA'ept"!#$< (cases where interest of the insured is capable of exact pecuniary benefit) » Creditor who ta%es insurance out on life of debtor to secure debt  Fnce debt has been paid insurable interest disappears  0o liability to pay proceeds because there is not longer anything to inde$nify  :f debt already been paid should be denied recovery on the policy  Debtor should have the right to ta%e over the policy fro$ creditor after the ter$ination of relationship prevent the pre$iu$ paid fro$ going to waste. » Co$pany ta%es out insurance on life of e$ployee  9$ployee leaves co$pany  1olicy is to inde$nify e$ployee for losses upon death of e$ployee not resigning  Co$pany cannot recover on life of e$ployee who has already left#resigned + there is nothing to inde$nify  4elationship slightly different because no esact pecuniary value dan be given. AC& sa$e principle holds that the cannot recover.

give life policies the ordinary characteristics of property. &o re@uire insurable interest in assignee is to di$inish the invest$ent value of the contract to the owner. 0o insurable interest is re@uired where policy is procured by the person whose life is insured on his own initiative. 'ince anyone can be na$ed beneficiary, an assign$ent would not be invalidated by the lac% of insurable interest of the assignee. Assign$ent is distinguished fro$ a change in the designated beneficiary.

COMMERCIAL !r CONTRACT RELATIONS • Creditor $ay ta%e out insurance on life of his debtor » &he extent of the creditor(s interest is only as to the a$ount of debt and cost of carrying the insurance on debtor(s life. &he total value $ust not $a%e the policy a wagering or speculative one. &his %ind of policy is not ta%en out for the benefit of the debtor. &he debtor cannot clai$ the proceeds because the creditor does not act as an agent of the for$er.

Se' 8- Cnless the interest of a person insured is susceptible of exact pecuniary $easure$ent, the $easure of inde$nity under a policy of insurance upon life or health is the su$ fixed in the policy. • Debtor $ay insure self and na$e creditor as beneficiary » Creditor is entitled to full proceeds of policy "ust as any other beneficiary when debtor dies even if his credit is $uch less. Debtor assigns policy to creditor as collateral security » Creditor can only recover a$ount of his credit » Aalance will go to designated beneficiary

-. I#$+ra,&e I#tere$t I# pr!pert?
-. . De("#"t"!# Se' - 9very interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a conte$plated peril $ight directly da$nify the insured, is an insurable interest. C!#tra't !( "#)e2#"t? G $easure of insurable interest in property is the extent to which the insured $ight be inde$nified by loss or in"ury. -.*. I# :hat "t 2a? '!#$"$t !( Se' 0 An insurable interest in property $ay consist in a) an existing interest; b) An inchoate interest founded on an existing interest; or c) An expectancy, coupled with an existing interest in that out of which the expectancy arises Se' 6 A $ere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable.

EMPLOBERFBUSINESS ASSOCIATE • <ay ta%e out policy on life of business partner » :nterest exists death of partner results in interruption of operations which can lead to financial losses. • 2ir$ $ay ta%e out policy on officers#e$ployees » 'ervices are valuable to the business » 1roceeds of policy not taxable inco$e because it serves as inde$nity to the e$ployee for the loss the business suffers upon the death of the valued officer of e$ployee. *.-. T"2e :he# "t $h!+&) eA"$t Se' 5 An interest in property insured $ust exist when the insurance ta%es effect, and when the loss occurs, but need not exist in the $eanti$e( and interest in the life or health of a person insured $ust exist when the insurance ta%es effect, but need not exist thereafter or when the loss occurs. • Ge#era& R+&e< insurable interest $ust exist only at inception , $

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G :nterest does not rise to the dignity of a title yet he stands in such a relation to such corporate property to vest hi$ with an inchoate right to dividends in case of profits and to share in the assets upon li@uidation G :nterest not $easured by value of what is destroyed G :nterest is to share in the distribution of the proceeds only after pay$ent of corporation(s debts G <ust prove actual in"ury, otherwise cannot recover $ore than no$inal da$ages  -9094A, C49D:&F4 • 0o insurable interest in the property of the debtor • 0o right to posses, no lien, no relation that would cause hi$ direct da$age • Cannot ta%e out policy on debtor(s property • Cannot recover as appointee or beneficiary on policy ta%en out by debtor ICD-9<90& C49D:&F4 • 'ufficient interest in debtor(s property because given right to levy (general lien) • :n order to recover $ust show debtor has no other property with which to satisfy debt • <ay insure debtor(s property due to pecuniary interest <F4&-A-9 C49D:&F4 • )as insurable interest (general lien) • Direct pre"udice if there is loss • 4ecognized by insurance Code ('9C?)

:nsurable interest dee$ed to exist as long as such interest, relation or liability is of such nature that a conte$plated part $ight directly da$nifty the insured 9ven without legal or e@uitable title as long as it can be shown that the insured will be benefited by property(s continued existence or will suffer pecuniary loss by its destruction. 2F4<' F4 :0'C4AA,9 :0&949'& » :0&949'& in the property itself, whether such property be real or personal ex. Fwnership of or a lien on property » any 49,A&:F0 to such property ex. interest of a co$$ission agent on goods he is selling » ,:AA:,:&H in respect thereof ex. interest of carrier on cargo which he ought to carry safely to destination 0A&C49 F2 :0'C4AA,9 :0&949'& » An eA"$t"#% interest  $ay arise fro$ legal title (ex. $ortgagor of the property $ortgaged; lessor of the property leased; assignee of property for the benefit of creditors, etc.); clearly definably based on so$e legal title  $ay also be fro$ e@uitable title (ex. 1urchaser of property before delivery; builders in the building under construction or upon co$pletion of building) » An "#'h!ate interest founded on an existing interest  $ust be founded on an existing contract but not yet clearly defined or identified (9x. A stoc%holder has an inchoate interest in the property of the corporation w#c is founded on an existing interest arising fro$ his ownership shares)  A partner has an insurable interest in the fir$(s property which will support a separate policy for his benefit » An eApe'ta#'?, coupled with an existing interest in that out of which the expectancy arises  such $ust be coupled with an existing interest in that our of which such expectancy arises. (9x. 2ar$er insuring future crops if it be grown on land owned by hi$ at the ti$e of the issuance of the policy)

-.0. Whe# "t $h!+&) eA"$t Se' 5 An interest in property insured $ust exist when the insurance ta%es effect, and when the loss occurs, but need not exist in the $eanti$e; and interest in the life or health of a person insured $ust exist when the insurance ta%es effect, but need not exist thereafter or when the loss occurs. Ge#era& R+&e< :nterest $ust exist at inception and at ti$e of loss, but not in the $eanti$e  14F194&H $ust exist when the insurance ta%es effect and when the loss occurs but not exist in the $eanti$e.  0ature of contract as inde$nity  <ere transfer of thing does not carry transfer of policy  Doesn(t own it any$ore cannot recover  0ew owner not a party to contract cannot recover  Can recover if valid assign$ent to buyer $ade, notation of contract  &ransfer suspends the contract until sa$e person owns thing and policy EA'ept"!#<  (2!) A C)A0-9 :0 :0&949'& :0 A &):0:0'C49D. After occurrence of an in"ury which results in a loss does not affect the right of the insured to inde$nify for the loss

-.-. Mea$+re !( "#tere$t "# pr!pert? Se' 1 A carrier or depository of any %ind has an insurable interest in a thing held by hi$ as such, to the extent of his liability but not to exceed the value thereof. Se' 7 A $ere contingent or expectant interest in anything, not founded on an actual right to the thing, not upon any valid contract for it, is not insurable. Other I#tere$t$ • '&FCP)F,D94#1A4&094 to 2:4< G )as sufficient interest in property of corporation 100% UP L AW , $

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,enders generally do not li%e open $ortgages because the early payGoff reduces the interest they earn • Acts of $ortgagor invalidates the insurance b) U#"!# M!rt%a%e + standard $ortgage clause • <ortgagee $ay perfor$ the acts of $ortgagor • Clause included wherein the insurance interest of $ortgagee shall not be invalidated by any act of the $ortgagor or owner of property at the ti$e. • 1rotects $ortgagee(s interest fro$ invalidation due to $ortgagor(s acts -.6. Cha#%e !( "#tere$tD a+t!2at"' tra#$(er !( "#tere$t "#$ta#'e$ !(

 insured of the policy, after fire $ay sell re$ains of property without pre"udicing his right to recovery  (22) A change of interest :0 F09 F4 <F49 '9E94A, D:'&:0C& &):0-', '91A4A&9,H :0'C49D by one policy does not avoid the insurance as to the others.  'ingle fire policy covers several pieces of furniture and appliances, insurance value of each on indicated, sale of one ite$ will not prevent insured fro$ recovering on ite$s he did not sell  (2*) A change on interest by .:,, or 'CC9'':F0 on the death of the insured, does not avoid an insurance and his interest in the insurance passes to the person ta%ing his interest in the thing insured  2ire insurance on building owned by father, father dies, son inherits building and the fire insurance  (25) A transfer of interest by one of '9E94A, 1A4&094', IF:0& F.094', or F.094' :0 CF<<F0 .)F A49 IF:0&,H :0'C49D to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured  Ac@uiring coGowner has the sa$e interest, interest $erely increases upon ac@uiring other coGowners interest  Although there $ay be a stipulation that insurance ceases upon alienation  ,aw allows policy to be fra$ed in such a way that it will inure to the benefit of who$ever during the continuance of the ris% $ay beco$e owner of the interest insured.  'ale of property will not suspend the policy or render it ineffective. -.1. Spe'"a& Pr!."$"!#$ !# 2!rt%a%!r a#) 2!rt%a%ee Se' 8 Cnless the policy otherwise provides, where a $ortgagor of property effects insurance in his own na$e providing that the loss shall be payable to the $ortgagee, or assigns a policy of insurance to a $ortgagee, the insurance is dee$ed to be upon the interest of the $ortgagor, who does not cease to be a party to the original contract, and any of his , prior to the loss which would otherwise avoid the insurance, will have the sa$e effect, although the property is in the hands of the $ortgagee, but any act which , under the contract of insurance, is to be perfor$ed by the $ortgagor, $ay be perfor$ed by the $ortgagee therein na$ed, with the sa$e effect as it had bee perfor$ed by the $ortgagee. Se' 5 :f an insurer assents to the transfer of an insurance fro$ a $ortgagor to a $ortgagee, and at the ti$e of this assent i$poses further obligations on the assignee, $a%ing a new contract with hi$, the acts of the $ortgagor cannot affect the rights of said assignee. • • 'ee part 6H-0

Se' * A change on interest in a thing insured, after the occurrence of an in"ury which results in a loss does not affect the right of the insured to inde$nity for the loss. Se' ** A change of interest in one or $ore of several distinct things, separately insured by one policy, does not affect the right of the insured to inde$nity for the loss. Se' *- A change of interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person ta%ing his interest in the thing insured.

Se' *0 A transfer of interest by one of several partners, "oint owners, or owners in co$$on, who are "ointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured. Se' 1- &he insurance proceeds shall be applied exclusively to the proper interest of the person in whose na$e or for whose benefit it is $ade unless otherwise specified in the policy. Se' 17 A policy $ay be so fra$ed that it will insure to the benefit of who$ever, during the continuance of the ris%, $ay beco$e the owner of the interest insured. • Ge#era& R+&e< :f the thing insured is assigned to another, the policy is not dee$ed transferred with the thing. &he policy is instead dee$ed suspended until the assignee also beco$es the owner of the policy. &he assignor, on the other hand, cannot recover on the policy after the transfer since he has already lost insurable interest over the thing. .hen there has been a change of interest in a property $age 154 o0 355

JFpen $ortgage clauseK and Junion $ortgageK a) Ope# M!rt%a%e ('ec ?) + $ortgage that can be paidGoff to $aturity w#o penalty; $ortgagee is the beneficiary for insurance ta%en by $ortgagor 100% UP L AW , $ B A R ' $ !

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2. *. 5. 3. •

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&wo or $ore insurers insuring separately 'a$e sub"ect $atter 'a$e interest insured 'a$e 4is% or peril insured

insured collectively with others in one policy and paid for with a gross pre$iu$, the policy is suspended. :f, however, the change of interest affects only one property insured together with others under a divisible contract of insurance, the suspension ta%es effect only with regard to the property affected. EA'ept"!#$< &he general rule on suspension of policy is not applicable in the following cases 'ecs. 2B to 25, 3>, Art !*B7, §25, Civil Code -.7. Se.era& "#tere$t$D )!+,&e "#$+ra#'e ('(. !.er "#$+ra#'e) Se' 5- A double insurance exists where the sa$e person is insured by several insurers separately in respect in the sa$e sub"ect and interest. • 1rohibition against additional insurance + .hen a policy contains a prohibition against additional insurance on the property insured without the insurer(s consent, such provision being valid and reasonable, a violation thereof by the insured avoids the policy. ('ta. Ana vs. Co$$ercial Cnion Assurance Co. 33 1hil *26). Se' 50 .here this insured is over insured by double insurance (a) &he insured, unless the policy otherwise provides, $ay clai$ pay$ent fro$ the insurers in such order as he $ay select, up to the a$ount for which the insurers are severally liable under their respective contracts; (b) .here the policy under which the insured clai$s is a valued is a valued policy, the insured $ust give credit as against, the valuation for any su$ received by hi$ under any other policy without regard to the actual value of the sub"ect $atter insured. (c) .here the policy under which the insured clai$s is an unvalued policy he $ust give credit , as against the full insurable value, for any su$ received by hi$ under any other policy. (d) .here the insured receives any su$ in excess of the valuation in the case of valued policies, and the insurable value in the case of unvalued policies, and the insurable value in the case of unvalued policies, he $ust hold such su$ in trust for the insurers, according to their right of contribution a$ong the$selves. (e) 9ach insurer is bound, as between hi$self and the other insurers, to contribute ratably to the loss in proportion to the a$ount for which he is liable under the contract. • DFCA,9 :0'C4A0C9 + when one gets several policies to cover against the sa$e danger#peril G exists where the sa$e person is insured by several insurers separately in respect to the sa$e sub"ect and interestG $ay recover fro$ insurer, insurer who pays $ay collect fro$ other insurers G a coGinsurance by two or $ore insurers. JDouble insurance,K Jadditional insuranceK and Jother insuranceK are so$eti$es used interchangeably, although there is a technical difference in their $eaning. G 4e@uisites of double insurance !. 'a$e person insured , $

FE94 :0'C4A0C9 + when a$ount insured is over the value of the property the insured is over insured by double insurance  &he insured $ay clai$ pay$ent fro$ the insurers in such order as he $ay select, up to the a$ount for which the insurers are severally liable under their respective contracts.  Ealued policy + the insured $ust give credit as against the valuation for any su$ received by hi$ under any other policy without regard to the actual value of the sub"ect $atter insured.  Cnvalued policy + he $ust give credit, as against the full insurable value, for any su$ received by hi$ under any policy  :nsured receives any su$ in excess + he $ust hold such su$ in trust for the insurers, according to their right of contribution a$ong the$selves.  9ach insurer is bound as between hi$self and the other insurers, to contribute 4A&AA,H to the loss in proportion to the a$ount for which he is liable under the contract.  Cannot get above value of property $inus that of proceeds fro$ other policies  Cannot be $ore than loss because that would be wagering

D!+,&e "#$+ra#'e A$ount of the insurance is beyond the value of the insured(s insurable interest

O.er="#$+ra#'e &here $ay be no overGinsurance as when the su$ total of the a$ounts of the policies issued does not exceed the insurable interest of the insured. &here are always several insurers

&here $ay be only one insurer involved

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*. DE3ICES FOR ASCERTAINING AND CONTROLLING RISM AND LOSS
*. . CONCEALMENT L REPRESENTATION  Developed for the purpose of enabling the insurer to secure the sa$e infor$ation with respect to the ris% that was possessed by the applicant for insurance so that he $ay be e@ually capable of for$ing a "ust esti$ate of its @uality. *.*. AFFIRMATI3E WARRANTIES L CONDITIONS  Deals with conditions existing at the inception of the contract, and operates to $a%e $ore definite and certain the general words used to describe the ris% the insurer undertoo% to bear.  :t involve facts the existence of which shows the ris% to be greater than that intended to be assu$ed and operates to create in the insurer the power to extinguish, if he so desires, the legal relations already created.  9x.. .here an insured is re@uired to warrant so$ething and when found guilty of conceal$ent or $isrepresentation, operates to void the contract. *.-. ECCEPTIONS  <a%es $ore definite the coverage indicated by the general description of the ris% by excluding certain specified ris%s that otherwise could have been included under the general language describing the ris% assu$ed. *.0. ECECUTORB WARRANTIES L CONDITIONS  Are used to enable the insurer to rescind the contract in case subse@uent events increased the ris% to such an extent that he is no longer willing to bear. &hat is, underta%ings that certain conditions should or should not exist in the future. *.1. CONDITIONS PRECEDENT  Csed by the insurer to protect hi$self against fraudulent clai$s of loss; these are conditions re@uiring i$$ediate notice of loss or in"ury and detailed proofs of loss within a li$ited period.

C5apter I+ CO"C ALM "T< MIS# /# S "TATIO" 8 B# ACH O! $A##A"TI S (*
A contract of insurance is E;ERRI.AE 5IBAE G A contract of ut$ost good faith

. PRIMARB CONCERNS OF PARTIES TO AN INSURANCE CONTRACT
&he following are affected by an act of conceal$ent !. Correct esti$ation of the ris% which enables the insurer to decide whether he is willing to assu$e it, and if so at what rate of pre$iu$ 2. &he precise deli$itation of the ris% which deter$ines the extent of the contingent duty to pay underta%en by the insurer *. Control of the ris% after it is assu$ed as will enable the insurer to guard against the increase of the ris% because of change in conditions 5. Deter$ining whether a lost occurred and if so, the a$ount of such loss.

-. CONCEALMENT
-. . De("#"t"!# 'ec. 27. A neglect to co$$unicate that which a party %nows and ought to co$$unicate, is called a conceal$ent.

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-.*. Re@+"$"te$ !( '!#'ea&2e#t< !. A party 4#!:$ the (a't :h"'h he #e%&e't$ t! '!22+#"'ate !r )"$'&!$e to the other 2. the (a't '!#'ea&e) "$ 2ater"a& to the ris% *. such party is )+t? ,!+#) t! )"$'&!$e such fact to the other 5. the !ther part? ha$ #!t the 2ea#$ !( a$'erta"#"#% the (a't concealed 3. such part? 2a4e$ #! :arra#t? !( the (a't '!#'ea&e). (6f a warranty is made of - . . / $age 156 o0 355

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'ec. *B. 0either party to a contract of insurance is bound to co$$unicate infor$ation of the $attes following, except in answer to the in@uiries of the others (a) &hose which the other %nows; (b) &hose which, in the exercise of ordinary care, the other ought to %now, and of which the for$er has no reason to suppose hi$ ignorant; (c) &hose of which the other waives co$$unication; (d) &hose which prove or tend to prove the existence of a ris% excluded by a warranty, and which are not otherwise $aterial; and (e) &hose which relate to a ris% excepted fro$ the policy, and which are not otherwise $aterial. 'ec. *2. 9ach party to a contract of insurance is bound to %now all the general causes which are open to his in@uiry, e@ually with that of the other, and which $ay affect the political or $aterial perils conte$plated; and all general usages of trade. 'ec. **. &he right to infor$ation of $aterial facts $ay be waived, either by the ter$s of insurance or by neglect to $a%e in@uiries as to such facts where they are distinctly i$plied in other facts of which infor$ation is co$$unicated. 'ec. *5. :nfor$ation of the nature or a$ount of the interest of one insured need not be co$$unicated unless in answer to an in@uiry, except as prescribed by section 3!. 'ec. *3. 0either party to a contract of insurance is bound to co$$unicate, even upon in@uiry, infor$ation of his own "udg$ent upon the $atters in @uestion. • • 'ections *B, *2 + *3 pertains to $atters which need not be disclosed 9xception found in 'ec. *B last phrase of first sentence Jexcept in answer to the in@uiries of the otherK

the fact concealed) the non-disclosure of such fact is not concealment but constitutes a violation of the warranty) 'ec. 2>. A conceal$ent whether intentional or unintentional, entitles the in"ured party to rescind a contract of insurance. (As a$ended by A1 Alg. ?>5) • • • &he effect of conceal$ent on the part of the insured $a%es the contract EF:DAA,9 at the insurer(s option :nsurer 099D 0F& 14FE9 24ACD in order to rescind a contract on the grounds of conceal$ent. &he duty of co$$unication is independent of the intention and is violated by the $ere fact of conceal$ent even when there is no design to deceive. 'ection 2> $ust be read in relation to 'ection 26.

'ec. 2? 9ach party to a contract of insurance $ust co$$unicate to the other, in good faith, all facts within his %nowledge which are $aterial to the contract, and which the other has not the $eans of ascertaining, and as to which he $a%es no warranty -.-. Matter$ that M+$t Be C!22+#"'ate) E.e# "# the A,$e#'e !( I#@+"r?< !. <atters 2ater"al to the contract 2. <atters which the other has #!t the 2ea#$ !( a$'erta"#"#% the said facts *. <atters as to which the party with the duty to co$$unicate $a%es #! :arra#t?. TEST< 6f the applicant is aware of the e>istence of some circumstance which he knows would influence the insurer in acting upon his application) good faith requires him to disclose that circumstance) though unasked -.0. Fra+)+&e#t I#te#t 'ec. 26. An intentional and fraudulent o$ission, on the part of one insured, to co$$unicate infor$ation of $atters proving or tending to prove the falsity of a warranty, entitles the insured to rescind.

Whe# Fra+)+&e#t I#te#t Ne'e$$ar?< • • Cnder section 26, conceal$ent relates to the falsity of a warranty. 2or the section to operate it is necessary that the nondisclosure be intentional and fraudulent before the contract $ay be rescinded. &he conceal$ent refers to $atters proving or tending to prove the falsity of the warranty. WHICH NEED NOT BE

-.1. MATTERS DISCLOSED

Matter$ Wh"'h Nee) N!t Be D"$'&!$e) !. <attes a&rea)? 4#!:# to the insurer 2. <atters of which the "#$+rer :a".e$ '!22+#"'at"!# + he is in estoppel. *. <atters that '!#'er# !#&? r"$4$ eA'epte), either expressly or by warranty, fro$ the liability assu$ed under the policy. TT:$portant 0ote &he undisclosed fact $ust 0F& A9 <A&94:A, otherwise the insured is still bound to $a%e disclosure. 5. I#(!r2at"!# !( the #at+re !r a2!+#t !( the "#tere$t !( !#e "#$+re) except if in@uired upon by the insurer. 3. <atters each party are ,!+#) t! 4#!: such as public events, general infor$ation etc. 7. &he r"%ht t! "#(!r2at"!# !( 2ater"a& (a't 2a? ,e :a".e) either expressly, by the ter$s of insurance or i$pliedly by neglecting to $a%e in@uiry as to the facts already co$$unicated.

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&he duty of disclosure ends with the co$pletion and effectivity of the contract. S+#&"(e A$$+ra#'e .$ CA9 *01 SCRA *68 ( 551) :nsured need not die of the disease he had failed to disclose to the insurer. :t is sufficient that his nondisclosure $isled the insurer in for$ing his esti$ates of the ris%s of the proposed policy or in $a%ing in@uiries.

?.

I( the "#tere$t of the insured to the property being insured "$ a,$!&+te the# there "$ #! #e'e$$"t? t! )"$'&!$e the extent of his interest, if not then he is re@uired to disclose under 'ection 3! <atters of !p"#"!#.

-.6. MATERIALITB

'ec. *!. <ateriality is to be deter$ined not by the event, but solely by the probable and reasonable influence of the fact upon the party to who$ the co$$unication is due, in for$ing his esti$ate of the disadvantages of the proposed contract, or in $a%ing his in@uiries. Te$t !( Mater"a&"t?< The effect which the knowledge of the fact in question would have on the making of the contract To be material) a fact need not increase the risk or contribute to any loss or damage suffered 6T 6' '.FF606/-T 6F T</ K-:I=/4/ :F 6T I:.=4 6-F=./-0/ T</ 3A*TN 6- 7AK6-@ T</ 0:-T*A0T • <ateriality is to be deter$ined not by the event, but solely by the probable and reasonable influence of the facts upon the party to who$ the co$$unication is due, in for$ing his estimate of the disadvantages of the proposed contract, or in making his inquiries. )F.9E94, $atters that $ay be dee$ed i$$aterial in other respects will be dee$ed $aterial if $ade the sub"ect of an in@uiry. &he DC&H &F CF<<C0:CA&9 is to the extent that, in good faith, all facts within the %nowledge of either party which are $aterial to the contract and as to which he $a%es no warranty, and which the other has not the $eans of ascertaining, $ust be co$$unicated. &he 9NC91&:F0 to this rule is that both parties are charged with the %nowledge of the general causes which are open to his in@uiry, e@ually with that of the other, and which $ay affect the political or $aterial perils conte$plated; and all general usages of trade. &he :nsurance Code exe$pts a party fro$ the duty to co$$unicate with regard to $atters which are dee$ed of public %nowledge and which a prudent $an engaged in the insurance business ought to %now. -9094A,,H, the right to infor$ation of $aterial facts $ay be waived, either by the ter$s of the insurance or by neglect to $a%e in@uiry as to such facts, 14FE:D9D they are distinctly i$plied in other facts of which infor$ation is co$$unicated. Conceal$ent $ust ta%e place at the ti$e the contract is entered into in order that the policy $ay be avoided. :nfor$ation obtained after the perfection of the contract is no longer necessary to be disclosed by the insured, even if the policy has not been issued (TT9xception is when the contract is to be effective only upon the issuance of the policy + the insured is still duty bound to disclose to the insurer any $aterial fact which co$es to his %nowledge.)

0. MI SREPRES EN TA TI ON
0. . De("#"t"!# 'ec. *7. A representation $ay be oral or written 0.*. Repre$e#tat"!# .$. M"$repre$e#tat"!# Repre$e#tat"!#< • factual state$ents $ade by the insured at the ti$e of, or prior to, the issuance of the policy to give infor$ation to the insurer and otherwise induce hi$ to enter into the insurance contract. &hey $ay also be $ade by the insurer but cases nearly always refer to representations $ade by the insured. M"$repre$e#tat"!#< • a state$ent (a) as a fact of so$ething which is untrue; (b) which the insured stated with %nowledge that it is untrue and with an intent to deceive, or which he states positively as true without %nowing it to be true and which has a tendency to $islead; (c) where such fact in either case is $aterial to the ris%

0.-. D"$t"#%+"$he) (r!2 C!#'ea&2e#t • :n conceal$ent, the insured $aintains silence when he ought to spea%, while in $isrepresentation, the insured $a%es a state$ent of fact which is not true + acti'e form of concealment8

'ec. *>. A representation $ay be $ade at the ti$e of, or before, issuance of the policy (a) 'ec. *?. &he language of a representation is to be interpreted by the sa$e rules as the language of contracts in general. 0.0. C!#$tr+'t"!# !( Repre$e#tat"!#$< o Construed liberally in favor of the insured and are re@uired to be only substantially true. 'ec. *6. A representation as to the future is to be dee$ed a pro$ise, unless it appears that : was $erely a state$ent of belief or expectation. 0.1. M"#)$ !( Repre$e#tat"!#< !. Fral or .ritten ('ec. *7)

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withdrawn before the contract actually ta%es effect but not afterwards since the insurer has already been led by the representation in assu$ing the ris% conte$plated. 'ec. 52. A representation $ust be presu$ed to refer to the date on which the contract goes in effect. NO FALSE REPRESENTATION IF< • :f it is true at the ti$e the contract ta%es effect although false at the ti$e it was $ade#represented. THERE IS FALSE REPRESENTATION IF< • :f it is true at the ti$e it was $ade#represented but false at the ti$e the contract ta%es effect. 'ec. 5*. .hen a person insured has no personal %nowledge of a fact, he $ay nevertheless repeat infor$ation which he has upon the sub"ect, and which he believes to be true, with the explanation that he does so on the infor$ation of others; or he $ay sub$it the infor$ation, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds fro$ an agent of the insured, whose duty is to give the infor$ation. Art. 55. A representation is to be dee$ed false when the facts fail to correspond with its assertions or stipulations. • • 'ec. 55 defines $isrepresentation 4epresentations are not re@uired to be literally true (unli%e warranties); they need only be 'CA'&A0&:A,,H &4C9

<ade at the ti$e of issuing the policy or before ('ec. *>) *. Affir$ative or pro$issory ('ec. *6 U 52)

A(("r2at".e Repre$e#tat"!# • :s any allegation as to the existence or nonGexistence of a fact when the contract begins. Pr!2"$$!r? Repre$e#tat"!# • :s any pro$ise to be fulfilled after the contract has co$e into existence or any state$ent concerning what is to happen during the existence of the insurance. A pro$ise representation is substantially a condition or warranty. 0.6. Whe# Repre$e#tat"!# Dee2e) a Mere EApre$$"!# !( Op"#"!#< Ge#era& R+&e< a representation of the expectation, belief, opinion, or "udg$ent of the insured, although false, will not avoid the policy, even if such was $aterial to the ris%. EA'ept"!#< 'uch representation will avoid the policy if there is a concurrence of $ateriality and fraudulence or intent to deceive. )owever, if the representation is one of fact, the insurer need only prove the $ateriality of the representation, because in such cases the intent to deceive is presu$ed. :,,C'&4A&:F0 &he state$ent J: a$ an intelligent studentK will produce the following effects a. 9ven if intelligence is $aterial, if there was no intent to deceive and the insured was $erely relying on his own assess$ent of his abilities, the policy will not be avoided. :f intelligence is $aterial and it was proven that there was intent on the part of the insured to $islead the insurer as to his intelligence, the policy will be avoided. :f the state$ent was actually a state$ent of fact and not $ere "udg$ent, the policy will be avoided, as when the insured was not even a student to begin with (JstudentK is a fact, JintelligenceK is an opinionK). 2raudulent intent in this case is presu$ed.

b.

c.

'ec. 53. :f a representation is false in a $aterial point, whether affir$ative or pro$issory, the in"ured party is entitled to rescind the contract fro$ the ti$e when the representation beco$es false. &he right to rescind granted by this Code to the insurer is waived by the acceptance of pre$iu$ pay$ents despite %nowledge of the grounds for rescission. (As a$ended by A1 Alg. 5>5) Ge#era& R+&e< Any $isrepresentation on a $aterial point entitles the in"ured party to rescind the contract fro$ the ti$e the representation beco$es false. EA'ept"!#$< The right to rescind on the ground of $isrepresentation is dee$ed waived when the insurer accepts pre$iu$ pay$ents despite %nowledge of the $isrepresentation. )owever, a person cannot be held liable for any $isrepresentation that he $ay apparently have co$$itted if (!) he has no personal %nowledge of the $atter in @uestion, (2) he relies on the infor$ation of others and (*) he believes such infor$ation to be true based on such external source, or if he sub$its the infor$ation fro$ an external source in its entirety to the insurer. &he 9NC91&:F0 to this rule is when the infor$ation relied upon proceeds fro$ an agent of the insured, whose duty it is to give the infor$ation • 2raud or intent to $isrepresent facts not essential to entitle the in"ured party to $age 159 o0 355

'ec. 5B. A representation cannot @ualify an express provision in a contract of insurance; but it $ay @ualify an i$plied warranty • A representation cannot @ualify an express provision or an express warranty in a contract of insurance because a representation is not a part of the contract but only a collateral induce$ent to it. :t $ay however @ualify an i$plied warranty.

'ec. 5!. A representation $ay be altered or withdrawn before the insurance is effected, but not afterwards. o A representation, not being a part of the contract of insurance, $ay be altered or , $

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rescind a contract of insurance on the ground of false representation. &o be dee$ed false, it is sufficient if the representation fails to correspond with the facts in a $aterial point.

Ca#"&a#% .$. CA9 **- SCRA 00- ( 55-) Fa't$< &he insured failed to disclose to the insurer that he was diagnosed to be suffering fro$ Jsinus tachycardiaK and that he had consulted with a doctor. )e died of congestive heart failure. )is wife, as the beneficiary filed a clai$ with the insurer who denied the sa$e. Rat"!< &he infor$ation the insured failed to disclose was $aterial to the ability of the insurer to esti$ate the probable ris% he presented as a sub"ect of life insurance, had he disclosed it, it $ay be reasonably assu$ed that the insurer would have $ade further in@uires and would have probably refused to issue a nonG$edical insurance policy or at the very least re@uired a higher pre$iu$ for the sa$e coverage. <ateriality is the probable and reasonable influence of the facts upon the party to who$ the co$$unication should have been $ade, in assessing the ris% involved, in $a%ing or o$itting to $a%e further in@uires and in accepting the application for insurance. B+ . CA Fa't$< &he insured applied for a life insurance with private respondent insurance co$pany. )e concealed a $aterial#i$portant fact in his application for$ when he failed to disclose that he had consulted a doctor prior to his application and that he was suffering fro$ certain sy$pto$s. :nsured died and his brother, the petitioner in the case filed a clai$ which was denied by the insurer. Rat"!< &he insured is guilty of conceal$ent as the fact which he failed to disclose to the insurance co$pany deprived the respondent of the opportunity to $a%e the necessary in@uiry as to the nature of his past illness so that it $ay for$ its esti$ate relative to the approval of his application. JA neglect to co$$unicate that which a party %nows and ought to co$$unicate, is called conceal$entK and J.hether intentional or unintentional, the conceal$ent entitles the insurer to rescind the contract of insuranceK. :nsurer is relieved fro$ liability. Pa'"("' Ba#4"#% . CA Fa't$< &he insured, 1ara$ount is in the business of shirt $anufacturing, it too% out a fire insurance policy with Friental :nsurance for 7!P. Aecause of it(s indebtedness to 1acific Aan%ing Corp., the policy was endorsed to 1acific as $ortgagee#trustor. &he property insured was gutted by fire. 1acific $ade a clai$ on the insurance policy which was denied by Friental because it appeared that 1ara$ount failed to disclose coGinsurance with * other insurance co$panies (only declared * others) in violation of 1olicy Condition ] *. Rat"!< Ay reason of the unrevealed coG insurances, the insured had been guilty of a false declaration; a clear $isrepresentation and a vital one because where the insured had been as%ed to reveal but did not, that was deception. )ad the insurer %nown that there were $any coG insurers, it could have hesitated or plainly desisted fro$ entering into such contract. )ence, the insured was guilty of clear fraud. &he insurance policy against fire expressly re@uired that notice should be given by the insured of - . . / $age 160 o0 355

'ec. 57. &he $ateriality of a representation is deter$ined by the sa$e rules as the $ateriality of a conceal$ent.

0.7. CONCEALMENT .$. MISREPRESENTATION CONCEALMENT :nsured withholds infor$ation of $aterial facts fro$ the insurer MISREPRESENTATION :nsured $a%es erroneous state$ents of facts with the intent of inducing the insurer to enter into the insurance contract

Deter$ined by the sa$e rules as to $ateriality 'a$e effects on the part of the insured; insurer has right to rescind :n"ured party is entitled to rescind a contract of insurance on ground of conceal$ent or false representation, whether intentional or not 4ules on conceal$ent and representation apply li%ewise to the insurer as insurance contract is one of ut$ost good faith 'ec. 5>. &he provisions of this chapter apply as well to a $odification of a contract of insurance as to its original for$ation. N% . A$"a# Cr+$a)er$ Fa't$< &he insured applied for a 2BGyear endow$ent insurance on his life and na$ed his wife as beneficiary. Cpon application he gave infor$ation regarding a previous operation (that a tu$or was ta%en out). :nsured died of liver cancer. &he insurer denied the clai$ of the beneficiary clai$ing $isrepresentation since the operation which the insured undertoo% was for Jpeptic ulcerK and not re$oval of a tu$or. Rat"!< Conceal$ent exist where the insured had %nowledge of a fact $aterial to the ris%, and honesty, good faith and fair dealing re@uires that he should co$$unicate it to the insurer, but he intentionally withhold the sa$e. &he insured infor$ed the $edical exa$iner that the tu$or he was operated on was associated with ulcer of the sto$ach. :n the absence of evidence that the insured had sufficient $edical %nowledge as to enable hi$ to distinguish between Jpeptic ulcerK and tu$orK his state$ent was an expression $ade in good faith of his belief as to the nature of his ail$ent and operation. :f the operation and ail$ent of the insured had such an i$portant bearing on the assu$ption of ris% by the insurer, it should have $ade further in@uires on the $atter or re@uired copies of the hospital records before approving the application. As provided by 'ection *2 where the right to $aterial infor$ation $ay be waived JVby neglect to $a%e in@uires as to such facts where they are distinctly i$plied in other facts of which infor$ation is co$$unicatedK 100% UP L AW , $ B A R ' $ !

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Rat"!< &he insurer is dee$ed estopped fro$ clai$ing that the insured is dis@ualified. 'he did not conceal nor $isrepresent her age and the insurance corporation has been given sufficient infor$ation to %now that the insured is over 7B years of age, yet they continued to accept the pre$iu$ pay$ent and issued her the policy. Ne: L"(e E#terpr"$e . C!+rt !( Appea&$ Fa't$< &he insured contracted * insurance policies fro$ * different insurance co$panies for the stoc%sGinGtrade of 0ew ,ife 9nterprises. :t was undisputed that the plaintiff failed to indicate any coGinsurance in any of the three policies. .hen the building occupied by the insured enterprise was gutted and the stoc%sGinGtrade insured against were burned, the plaintiff filed clai$s with the * insurers which were all denied. &he reason was that the insured violated the ter$s of policy in relation to coGinsurance. Rat"!< &he ter$s of the contract are clear and una$biguous. &he insured is specifically re@uired to disclose to the insurer any other insurance and its particulars which he $ay have effected on the sa$e sub"ect. &he excuse of the plaintiff that the agent of the insurance co$pany was aware of the other insurers or that he failed to read the ter$s of the policies cannot be accepted when the words and language of the docu$ents are clear and plain or readily understandable by an ordinary reader. &here is absolute no roo$ for interpretation or construction and the courts are not allowed to $a%e contracts for the parties. &he parties $ust abide by the ter$s of the contract because such ter$s constitute the $easure of the insurer(s liability and co$pliance therewith is a condition precedent to the insured(s right to recovery fro$ the insurer. A2er"'a# H!2e . CA Fa't$< &he insured too% out a fire insurance policy to cover the stoc%sGinGtrade of his business fro$ the plaintiff insurer. .hen a fire gutted the business, he filed a clai$ against plaintiff insurer and several other insurance co$panies for which he also had a policy for the sa$e stoc%sGinGtrade. &he plaintiff insurer refused pay$ent clai$ing that the insured violated the policy in several instances + for our purposes the violation was the failure of the insured to disclose coGinsurance. )owever, during trial, the trial court found that although the insured failed to disclose coG insurance, the loss ad"uster of the insurance co$pany had previous %nowledge of the coG insurance prior to the clai$. Rat"!< &he insurer is estopped fro$ clai$ing exe$ption fro$ liability due to the violation of the policy on nonGdisclosure. :t cannot be said that petitioner was deceived by respondent by the latter(s nonGdisclosure of the other insurance contracts when petitioner actually had prior %nowledge as petitioner(s loss ad"uster had %nown all along of the other existing insurance contracts. &he loss ad"uster being an e$ployee of petitioner is dee$ed a representative of the latter whose awareness of the other insurance contracts binds the petitioner and thus there was no violation of the Jother insuranceK clause by the respondent and petitioner is liable to pay its share of the loss.

other insurance upon the sa$e property, the total absence of such notices nullifies the policy. E%+ara$ . Great Ea$ter# Fa't$< &he insured applied for a life insurance policy with defendant and na$ed beneficiary his $otherGinGlaw, the petitioner in the case. :nsured falsely answered @uestions on the application for$ regarding his health and $edical history. Also, when he the insurance co$pany(s physician conducted a physical exa$ination, another person pretending to be the insured was presented. :nsured died of intestinal occlusion. Rat"!< &he insured per$itted fraud to be co$$itted against the insurance co$pany in the fact that he allowed a healthy and robust person to substitute in his place since he %new that he was in bad health. :t is i$$aterial the cause of death since at the ti$e he applied for the insurance on his life he was affected by a $alady that would have been sufficient cause for the re"ection of his application by the insurance co$pany. &he contract of insurance is null and void because it is false, fraudulent and illegal. Great Pa'"("' L"(e . CA ( 555) Fa't$< A group life insurance was executed between -re1a,ife and DA1 for $ortgagors of DA1 to the a$ount of debt to DA1. &he insured in this case was one such $ortgagor to DA1. -re1a,ife granted insurance and a couple of $onths later, insured died of J$assive cerebral he$orrhageK. Cpon DA1(s clai$ -re1a,ife denied clai$ing nonGdisclosure of insured that he was suffering fro$ hypertension at the ti$e of application for the insurance based on the testi$ony of a doctor who declared that the cause of death was Jpossible hypertension several years agoK Rat"!< -re1a,ife failed to establish that the insured concealed a $aterial fact as the $edical findings were not conclusive since the doctor who gave the testi$ony did not conduct an autopsy on the insured nor had he any %nowledge of insured(s previous hospital confine$ents. &he death certificate only stated that hypertension as Jpossible cause of deathK. Conceal$ent exist where the assured had %nowledge of a fact $aterial to the ris%, and honesty, good faith and fair dealing re@uires that he should co$$unicate it to the assurer, but he intentionally withholds the sa$e. 2raudulent intent on the part of the insured $ust be established to entitle the insurer to rescind the contract. <isrepresentation as a defense of the insurer to avoid liability is an affir$ative defense and the duty to establish such defense rests upon the insurer. E)"&&!# . Ma#"&a Ba#4er$ L"(e Fa't$< &he insured applied for a 6BGday insurance coverage against accident and in"uries. 'he clearly indicated in the application for$ that her date of birth was Iuly !!, !6B5 (which $ade her al$ost 73 at the ti$e of application). &he insurer accepted her pre$iu$ pay$ent and issued her a certificate of insurance. Cnder the insurance policy, there contained a provision which excludes the co$pany fro$ any liability to pay clai$s when the insured is under !7 or over 7B. :nsured died of a vehicular accident during the effectivity of the insurance coverage. 100% UP L AW , $ B A R ' $ !

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&he policy is a &"(e "#$+ra#'e p!&"'? :t is pa?a,&e !# the )eath of the insured :t has been "# (!r'e )+r"#% the &"(et"2e of the insured for a period of at least two years fro$ the date of issue or its last reinstate$ent. &his twoGyear period $ay be shortened but it cannot be extended by stipulation.

,ife insurance policy wording that provides a ti$e li$it on the insurer(s right to dispute a policy(s validity based on $aterial $isstate$ents in the application. :ncontestability $eans that after the re@uisites are shown to exist, the insurer shall be estopped fro$ contesting the policy or setting up any defense, except as is allowed, on the ground of public policy •

'ec. 5?. .henever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right $ust be exercised previous to the co$$ence$ent of an action on the contract. .After a policy of life insurance $ade payable on the death of the insured shall have been in force during the lifeti$e of the insured for a period of two years fro$ the date of its issue or of its last reinstate$ent, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent conceal$ent or $isrepresentation of the insured or his agent.

&he period of two years for contesting a life insurance policy by the insurer $ay be shortened but it cannot be extended by stipulation.

'ec. 22> :n the case of individual life or endow$ent insurance, the policy shall contain in substance the following conditions (b) A provision that the policy shall be incontestable after it shall have been in force during the lifeti$e of the insured for a period of two years fro$ its date of issue as shown in the policy, or date of approval of last reinstate$ent, except for nonGpay$ent of pre$iu$ and except for violation of the conditions of the policy relating to $ilitary or naval service in ti$e of war.

1. RESCISSION
1. . Gr!+#)$ !. Conceal$ent 2. 2alse representation + $isrepresentation *. Areach of .arranty 1.*. Whe# I#$+rer M+$t EAer'"$e R"%ht t! Re$'"#)< N!#=L"(e P!&"'? • <ust be exercised prior to the co$$ence$ent of an action on the contract. &he insurer is no longer entitled to rescind a contract of insurance after the insured has filed an action to collect the a$ount of the insurance. • TT)owever, it has been held that where any of the $aterial representations is false, the insurer(s tender of the pre$iu$s and notice that the policy is cancelled before co$$ence$ent of the suite, operates to rescind a contract of insurance L"(e P!&"'? • &he defense is available only during the first two years of a life insurance policy. Fr upon the first two years after reinstate$ent. 1.-. I#'!#te$ta,"&"t? '&a+$e$16 • &he principle of incontestability states that, after the re@uisites are shown to exist, the insurer shall be estopped fro$ contesting the policy or setting up any defense, except as is allowed, on the grounds of public policy. :n life insurance policies, the incontestability begins after two years fro$ the ti$e the policy too% effect. After this period, the insurer is no longer allowed to declare the policy void or file an action for rescission on the grounds of conceal$ent of $isrepresentation of the insured. :t has the following re@uisites
13

De(e#$e$ N!t Barre) ,? I#'!#te$ta,&e C&a+$e< !. &hat the person ta%ing the insurance &a'4e) "#$+ra,&e "#tere$t as re@uired by law. 2. &hat the 'a+$e !( the )eath of the insured is a# eA'epte) r"$4. *. &hat the pre2"+2$ ha.e #!t ,ee# pa"). 5. &hat the '!#)"t"!#$ !( the p!&"'? re&at"#% t! 2"&"tar? !r #a.a& $er."'e have been ."!&ate). 3. &hat the (ra+) "$ !( a part"'+&ar&? ."'"!+$ t?pe, as where the policy was ta%en out in furtherance of a sche$e to $urder the insured, or where the insured substitutes another person for the $edical exa$ination, or where the beneficiary feloniously %ills the insured. 7. &hat the ,e#e("'"ar? (a"&e) t! (+r#"$h pr!!( !( )eath !r t! '!2p&? :"th a#? '!#)"t"!#$ "2p!$e) by the policy after the loss has happened. >. &hat the a't"!# :a$ #!t ,r!+%ht :"th"# the t"2e $pe'"("e). Ar%e#te . We$t C!a$t L"(e I#$. C!. Fa't$< &he insured spouses signed an application for "oint insurance which was accepted by the insurer. &he wife died of cerebral apoplexy a couple of $onth after the effectivity of the policy. .hen the husband filed a clai$, the insurer denied the clai$ due to fraud and $isrepresentation of the insured. :t appeared that the answers the spouses gave in their $edical exa$inations with regard to their health and previous illnesses and $edical attendance were untrue. Rat"!< &he spouses were guilty of conceal$ent. As to the issue of the application of section 5> (now sec. 5?) on the ti$e the insurer $ust exercise the right to rescind, the court held that a failure to exercise the right of rescission cannot pre"udice any defense to the action which the conceal$ent $ay furnish. .here any of the $aterial - . . / $age 162 o0 355

Thi 1# c$:ere& i% 1**(, 1**), 1**?, 1**1, #%& 1*(?. T#Ce %$te $8 the , 0e#r 9eri$& #%& the &#te $8 i u#%ce #%& their re"e:#%ce.
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contract Always written on the face of the policy, actually or by reference <ust be co$plied with strictly

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to the contract <ay be written in a totally disconnected paper or $ay be oral Fnly substantial truth is re@uired. 2alsity of a representation renders the policy void on the ground of fraud. :nsurer $ust show the $ateriality of a representation in order to defeat an action on the policy.

representations are false, the insurer(s tender of the pre$iu$ and notice that the policy is cancelled, before the co$$ence$ent of suit thereon, operate to rescind the contract of insurance, and are a sufficient co$pliance with the law.

6. WARRANTIES
6. . De("#"t"!# :s a state$ent or pro$ise set forth in the policy itself or incorporated in it by proper reference, the untruth or nonGfulfill$ent of which in any respect and without reference to whether the insurer was in fact pre"udiced by such untruth or nonG fulfill$ent, renders the policy voidable by the insurer. A warranty $ay also be $ade by an insurer. 'ec. 7>. i$plied. A warranty is either expressed or

2alsity or nonG fulfill$ent of a warranty operates as a breach of contract 1resu$ed $aterial

6.*. M"#)$ !( Warra#t"e$< !. EApre$$ Warra#t? (Se' 67 L 7 ) is an agree$ent contained in the policy or clearly incorporated whereby the insured stipulates that certain facts relating to the ris% are or shall be true or certain acts relating to the sa$e sub"ect have been or shall be done. I2p&"e) Warra#t? (2ar"#e "#$+ra#'e !#&?) is a warranty which fro$ the very nature of the contract or fro$ the general tenor of the words, although no express warranty is $entioned, is necessarily e$bodied in the policy as a part thereof and which binds the insured as though expressed in the contract. (&here is an i$plied warranty that the ship is seaworthy when the policy attaches) A(("r2at".e Warra#t? (Se'. 68) is one which asserts the existence of a fact or condition at the ti$e it is $ade Pr!2"$$!r? :arra#t? !r EAe'+t!r? Warra#t? (Se'. 7* L 7-) is one where the insured stipulates that certain facts or conditions pertaining to the ris% shall exist or that certain things with reference thereto shall be done or o$itted. :t is in the nature of a condition subse@uent.

'ec. >B. .ithout pre"udice to section fiftyGone, every express warranty, $ade at or before the execution of a policy, $ust be contained in the policy itself, or in another instru$ent signed by the insured and referred to in the policy as $a%ing a part of it. • :n order that a stipulation $ay be considered a warranty, it $ust not only be clearly shown that the parties intended it as such but it $ust also for$ a part of the contract itself or if contained in another instru$ent, it $ust be signed by the insured and referred to in the policy as $a%ing a part of it. <ere reference alone is not sufficient to give this effect. &he designation or nonGdesignation of a clause as a warranty is not controlling. .hat is essential is the intent of the contracting parties to create a warranty, regardless of the for$ of words used.

2.

*. 5.

'ec. >!. A state$ent in a policy, of a $atter relating to the person or thing insured, or to the ris%, as a fact, is an express warranty thereof. 'ec. >2. A state$ent in a policy, which i$ports that it is intended to do or not to do a thing which $aterially affects the ris%, is a warranty that such act or o$ission shall ta%e place. • • • 'ection >2 refers to pro$issory warranty. Areach of pro$ises or agree$ents as to future acts will not avoid a policy unless the pro$ises are $aterial to the ris%. 9xpress warranties regarding the person, thing, or ris% $ust refer to a state$ent of fact. :f it is a $ere belief, it will not constitute a warranty as far as the policy is concerned, but $erely a warranty that the state$ent is his honest opinion or "udg$ent.

IIIarranties are either affirmative or promissory and e>pressed or implied E so it comes in pairs you can have an implied affirmative warranty or an e>pressed affirmative warranty IIA warranty is presumed to be affirmative unless the contrary intention appears

'ec. 7?. A warranty $ay relate to the past, the present, the future, or to any or all of these. 'ec. 76. 0o particular for$ of words is necessary to create a warranty.

6.-. Warra#t"e$ . Repre$e#tat"!# WARRANTB Considered part of the 100% UP L AW REPRESENTATION Collateral induce$ent , $

'ec. >*. .hen, before the ti$e arrives for the perfor$ance of a warranty relating to the future, a loss insured against happens, or perfor$ance beco$es unlawful at the place of the contract, or i$possible, the o$ission to fulfill the warranty does not avoid the policy.

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'ec. !76. An alteration in the use or condition of a thing insured fro$ that to which it is li$ited by the policy, which does not increase the ris%, does not affect a contract of fire insurance. Re@+"$"te$ A&terat"!# t! E#t"t&e I#$+rer t! Re$'"#)< !. &he +$e !r '!#)"t"!# !( the th"#% "$ $pe'"("'a&&? &"2"te) !r $t"p+&ate) in the policy. 2. 'uch use or condition as li$ited by the policy is a&tere). *. &he a&terat"!# "$ 2a)e :"th!+t the '!#$e#t !( the "#$+rer 5. &he a&terat"!# "$ 2a)e ,? 2ea#$ :"th"# the '!#tr!& !( the "#$+re) 3. &he a&terat"!# "#'rea$e$ the r"$4. I#'rea$e !( R"$4 !r Ha/ar) "# Ge#era& • :ncrease of hazard ta%es place whenever the insured property is put to so$e new use, and the new use increases the chance of loss. 1re$ise 9very insurance policy is $ade in reference to the conditions surrounding the sub"ect $atter of the ris% and the pre$iu$ is fixed with reference thereto. &here is thus an i$plied pro$ise or underta%ing on the part of the insured that he will not change the pre$ises or the character of the business carried there, or to be carried on there, so as to increase the ris% of loss by fire. Ge#era& R+&e< :nsurer is not liable if there was an increase in the ris% or hazard. &here is increase in hazard when the new use increases the chance of loss. &he increase of the ris% of loss $ust in all cases be of a substantial character. EA'ept"!#$< (Alterations which will not warrant the avoidance of the policy) !. &he use of the property is changed but it did not in any way increased the ris% of loss 2. &he use of $aterials prohibited fro$ being used as per the policy if such $aterials are necessary or ordinarily used in the insured(s business. *. :ncrease in ris%s brought about by the underta%ing of necessary repairs in the pre$ises 5. :ncrease in ris%s due to negligent acts te$porarily endangering the property, or te$porary acts or conditions which have ceased prior to the occurrence of the loss. 3. Alteration $ade by accident or without the %nowledge of the insured. Oualifier )owever, the acts of the insured(s tenants which cause alterations are dee$ed presu$ptively %nown to the insured. EA'ept"!# t! the eA'ept"!#< Cnder 'ection >3, the breach of an i$$aterial provision will not avoid the policy, but the insurer is given the right to insert ter$s which, if violated, would avoid it. &he increase in ris% brought by an alteration is therefore irrelevant if there is already a provision in the policy which stipulates that A0H alteration, of whatever nature and effect, shall avoid the policy. • F!r $e'. 68 t! !perate9 e#t"t&"#% the "#$+rer the r"%ht t! re$'"#)9 there 2+$t ,e a# a't+a& "#'rea$e !( r"$4 a#) :h"&e "t "$ #!t #e'e$$ar? that the "#'rea$e) r"$4 $h!+&) ha.e 'a+$e !r '!#tr",+te) t! the &!$$9 "t "$ #e'e$$ar? that the "#'rea$e ,e !( a $+,$ta#t"a& 'hara'ter. - . . / $age 164 o0 355

6.0. Whe# Brea'h !( Warra#t? )!e$ #!t a.!") p!&"'?< !. .hen &!$$ !''+r$ ,e(!re ti$e for per(!r2a#'e 2. .hen per(!r2a#'e ,e'!2e$ +#&a:(+& *. .hen per(!r2a#'e ,e'!2e$ "2p!$$",&e (legal U physical i$possibility) 5. .hen "#$+rer :a".e$ the :arra#t?, i$pliedly or expressly. 6.1. Mater"a&"t? a#) Fra+) "# Warra#t? 'ec. >5. &he violation of a $aterial warranty, or other $aterial provision of a policy, on the part of either party thereto, entitles the other to rescind. 'ec. >3. A policy $ay declare that a violation of specified provision thereof shall avoid it, otherwise the breach of an i$$aterial provision does not avoid the policy. 'ec. >7. A breach of warranty without fraud, $erely exonerates an insurer fro$ the ti$e that it occurs, or where it is bro%en in its inception, prevents the policy fro$ attaching to the ris%. • • • 2raud is not essential to entitle the insurer to rescind a contract for breach of warranty. 2alsity, not fraud, is the basis of liability in warranty. :f the breach of the warranty was WITHOUT FRAUD + insured is entitled to !. Ret+r# !( pre2"+2 paid at a proGrata rate fro$ the ti$e of breach if it occurs after the inception of the contract 2. &o a&& the pre2"+2$ "( "t "$ ,r!4e# )+r"#% the "#'ept"!# !( the '!#tra't. :n this case the contract is void ab initio and never beca$e binding. :f the breach of the warranty was WITH FRAUD + policy is void ab initio and the insured is not entitled to the return of the pre$iu$ paid

6.6. Warra#t"e$ "# F"re I#$+ra#'e 'ec. !7>. As used in this Code, the ter$ Jfire insuranceK shall include insurance against loss by fire, lightning, windstor$, tornado or earth@ua%e and other allied ris%s, when such ris%s are covered by extension to fire insurance policies or under separate policies. (a) • A fire insurance is a contract of inde$nity by which the insurer, for consideration, agrees to inde$nify the insured against loss of, or da$age to, property by fire.

'ec. !7?. An alteration in the use or condition of a thing insured fro$ that to which it is li$ited by the policy $ade without the consent of the insurer, by $eans within the control of the insured, and increasing the ris%, entitles an insurer to rescind a contract of fire insurance.

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:n case of partial loss, the full a$ount of the partial loss (but should not exceed the valuated a$ount) &otal loss exists when the result of the fire is such as to render the property wholly unfit for use. :f the thing is insured under two or $ore policies, each policy shall contribute proG rata to the pay$ent of such whole or partial loss. &he insured is not a coGinsurer under a fire insurance policy in the absence of stipulation unli%e in $arine insurance.

'ec. !>B. A contract of fire insurance is not affected by any act of the insured subse@uent to the execution of the policy, which does not violate its provisions, even though it increases the ris% and is the cause of a loss. • :f the policy does not contain any prohibition li$iting the use or condition of the thing insured, an alteration in said use or condition does not constitute a violation of the policy. &he contract is not affected by such alteration even though it increases the ris% and is the cause of the loss.

• •

'ec. !>!. :f there is no valuation in the policy, the $easure of inde$nity in an insurance against fire is the expense it would be to the insured at the ti$e of the co$$ence$ent of the fire to replace the thing lost of in"ured in the condition in which it was at the ti$e of the in"ury; but if there is a valuation in a policy of fire insurance, the effect shall be the sa$e as in a policy of $arine insurance. 'ec. !>2. .henever the insured desires to have a valuation na$ed in his policy, insuring any building or structure against fire, he $ay re@uire such building or structure to be exa$ined by an independent appraiser and the value of the insured(s interest therein $ay then be fixed as between the insurer and the insured. &he cost of such exa$ination shall be paid for by the insured. A clause shall be inserted in such policy stating substantially that the value of the insured(s interest in such building or structure has been thus fixed. :n the absence of any change increasing the ris% without the consent of the insurer or of fraud on the part of the insured, then in case of a total loss under such policy, the whole a$ount so insured upon the insured(s interest in such building or structure, as stated in the policy upon which the insurers have received a pre$iu$, shall be paid, and in case of a partial loss, the full a$ount of the partial loss shall be so paid, and in case there are two or $ore policies covering the insured(s interest therein, each policy shall contribute pro rata to the pay$ent of such whole or partial loss. Aut in no case the insurer be re@uired to pay $ore than the a$ount thus stated in such policy. &his section shall not prevent the parties fro$ stipulating in such policies concerning the repairing, rebuilding or replacing of buildings or structures wholly or partially da$aged or destroyed. Mea$+re !( I#)e2#"t? U#)er a# Ope# P!&"'? • 9ntitled to recover a$ount of actual loss sustained (burden of establishing the a$ount of loss by a preponderance of evidence is upon the insured) Mea$+re !( I#)e2#"t? U#)er a 3a&+e) P!&"'? • &he valuation in the policy of fire insurance is conclusive between the parties in the ad"ust$ent of either partial or total loss if the insured has an insurable interest and was not guilty of fraud • :n case of total loss, the insured can recover the whole a$ount so insured as stated in the policy (the valuated a$ount)

C!=I#$+ra#'e C&a+$e • :s a clause re@uiring the insured to $aintain insurance to an a$ount e@ual to a specified percentage of the value of the insured property under penalty of beco$ing coGinsurer to the extent of such deficiency. <any property owners realizing the possibility of total destruction is slight, $erely ta%e out a s$all percentage of the value of the building or goods. &o prevent the insured fro$ ta%ing out such s$all a$ount of insurance, and thereby reduce pre$iu$ pay$ents the insurers often insert as a rider to the standard fire policy a so called JcoGinsuranceK clause which results in reducing the recovery in case of partial loss to but a portion of the su$ na$ed in the policy though in case of total loss, the insurer is liable for the a$ount na$ed in the policy. Opt"!# t! re,+"&) '&a+$e • &he insurer is given the option to reinstate the property da$aged or destroyed or any part thereof, instead of paying the a$ount of loss or da$age. :f the insurer chooses to rebuild, he has to co$pletely underta%e it no $atter how $uch it will cost hi$, unless the policy expressly states that any repair shall only be to the extent of the a$ount of the insurance. 'ec. !>*. 0o policy of fire insurance shall be pledged, hypothecated, or transferred to any person, fir$ or co$pany who acts as agent for or otherwise represent the issuing co$pany, and any such pledge, hypothecation, or transfer hereafter $ade shall be void and of no effect insofar as it $ay affect other creditors of the insured. E((e't !( P&e)%e !( F"re I#$+ra#'e P!&"'? • After a loss has occurred, the insured <AH pledge, hypotheticate or transfer a fire insurance policy or rights thereunder. • .hat is being transferred is not the policy itself but the right to clai$ against the insurer. • &his right however is sub"ect to the prohibition of 'ection !>*. P"!#eer . Bap Fa't$< &he insured was the owner of a store selling bags and footwear, she too% out a fire insurance fro$ petitioner insurance co$pany covering her stoc%s, office furniture, fixtures and fittings of every %ind and description. A condition was set which re@uired the insured to disclose to - . . / $age 165 o0 355

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the insurer of any insurance or insurances Jalready effected, or which $ay be subse@uently effectedK. :t further stipulated that JVunless such notice be given and the particulars of such insurance or insurances be stated in or endorsed on this 1olicy by or on behalf of the Co$pany before the occurrence of any loss or da$age, all benefits under this 1olicy shall be forfeitedK. &he insured failed to infor$ the insurer of another coG insurance. 2ire bro%e out, gutted the store of insured. Cpon filing of clai$, petitioner insurance co$pany denied the clai$ for violation of condition in the policy. Rat"!< Ay the plain ter$s of the policy, other insurance without the consent of petitioner would ipso facto avoid the contract. :t re@uired not affir$ative act of election on the part of the co$pany to $a%e operative the clause avoiding the contract, wherever the specified conditions occur. :ts obligation ceases, unless, being infor$ed of the fact, it consented to the additional insurance. 2urther$ore, the court @uoting Iustice Aengson (-en :nsurance U 'urety Corp v 0g )ua) said that JVand considering the ter$s of the policy which re@uired the insured to declare other insurances, the state$ent in @uestion $ust be dee$ed to be a state$ent (.A44A0&H) binding on both insurer and insured, that there were no other insurance on the propertyV.the annotation then, $ust be dee$ed to be a warranty that the property was not insured by any other policy. Eiolation thereof entitled the insured to rescind.K B!+#% . M")&a#) TeAt"&e I#$+ra#'e Fa't$< &he insured, an owner of a candy and fruit store too% out a fire insurance policy fro$ the defendant insurance co$pany to insure his residence and his bodega. Cnder the policy, a condition was set as Qwarranty AQ which stipulates that no hazardous goods be stored or %ept for sale and no hazardous trade or process shall be carried in the building. During the enforce$ent of the insurance policy, the insured %ept * boxes of fire crac%ers. 'o$eti$e later a fire bro%e out which partially destroyed the building but it appeared that the fire crac%ers were not the cause of the fire as they were found in an area not burned. Cpon clai$ insurer denied pay$ent. Rat"!< &he ter$s of the contract constitute the $easure of the insurerRs liability. :f the contract has been ter$inated by a violation of its ter$s on the part of the insured, there can be no recovery. Co$pliance with the ter$s of the contract is a condition precedent to the right of recovery. A violation of the ter$s of a contract of insurance, by either party, will constitute the basis for a ter$ination of the contractual relations, at the election of the other (in this case the insurer). &he right to ter$inate the contractual relations exist even though the violation was not the direct cause of the loss, since the deposit of the Jhazardous goodsK in the building insured was a violation of the ter$s of the contract. &he insurer is relieved fro$ his liability since the deposit of the hazardous $aterials created a new ris% not included in the ter$s of the contract. &he insurer had neither been paid, nor had he entered into a contract to cover the increased ris%. ECCEPTIONSFL ECCLUSION 100% UP L AW , $ B A R ' $ !

:ntends to li$it the liability of the insurer under certain circu$stances.

M+$#%" . We$t C!a$t I#$+ra#'e C!. I#'. Fa't$< &he insured too% out two life insurance policies with defendant insurer designating as his beneficiaries the plaintiffs in the case. :n his application the insured untruthfully answered @uestions regarding his health particularly about having consulted any physician regarding an illness or ail$ent. :t appeared that prior to his application for insurance, the insured had been treated for a nu$ber of ail$ents including peptic ulcer, &A etc. &he insured died, and upon his death his beneficiaries filed a clai$ with defendant insurance co$pany who denied the clai$. Rat"!< &he insured is guilty of conceal$ent and thus relieves the insurer fro$ paying the clai$. &he insured %new that he had suffered fro$ a nu$ber of ail$ent before subscribing the application, yet he concealed the$ and o$itted the hospital where he was confined as well as the na$e of his physician who treated hi$. &he conceal$ent and false state$ent constituted fraud, since this caused the defendant insurer to accept the ris% when it would have otherwise refused. 'uch conceal$ent of the insured rendered the policy null and void (as held also in Argente v .est Coast). F"&"p"#a$ C"a )e Se%+r!$ . Na.a Fa't$< Fn 2ebruary !6*6, plaintiff 0ava and defendant 2ilipinas ,ife Assurance entered into !> separate contracts of life insurance for which the insured issued !> life insurance policies for which the insurer issued !> life insurance policies, one of said policies having a face value of 1!B,BBB while the rest a face value of 13,BBB each, or a total of 16BP. 9ach and every policy contains a policy loan clause. Fn April !65?, plaintiff applied for a loan of 13,BBB in line with the loan clause but defendants refused citing certain regulations issed by the :nsurance Co$$issioner on <ay !657. He&)< Defendant(s refusal to give the loan applied for by the plaintiff violated the loan clause e$bodied in each of the life insurance policies. &his violation of the loan clause in the policy entitled plaintiff to rescind all policies under 'ection 76 of the :nsurance Act, which provides Jthe violation of a $aterial warranty, or other $aterial provision of a policy, on the part of either party thereto, entitles the other to rescind.K Fur :nsurance ,aw does not contain an express provision as to what the court should do in cases of rescission of an insurance policy under 'ection 76, the provision that should apply is that e$bodied in Art. !263 of the old civil code, as postulated in Art. !7 of the sa$e Code, which provides that on $atters which are not governed by special laws the provision of said Code shall supple$ent its deficiency. &he CA was correct in ordering defendant to refund to plaintiff all pre$iu$s paid by hi$ up to the filing of the action a$ounting to 1*5,755.7B. GROUNDS AND RESCISSION ECERCISE OF RIGHT OF

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(a) non pay$ent of pre$iu$; (b) conviction of a cri$e arising out of acts increasing the hazard insured against (c) discovery of fraud or $aterial $isrepresentation; (d) discovery of willful or rec%less acts or o$issions increasing the hazard insured against; (e) physical changes in the property insured which results in the property beco$ing uninsurable; or (f) a deter$ination by the Co$$issioner that the continuation of the policy would violate or would place the insurer in violation of this Code. 'ec. 73. All notices of cancellation $entioned in the preceding section shall be in writing, $ailed or delivered to the na$ed insured at the address shown in the policy and shall state (a) which of the grounds set forth in section 75 is relied upon; and (b) that, upon written re@uest of the na$ed insured, the insurer will furnish the facts on which the cancellation is based. F!r2 a#) S+(("'"e#'? !( N!t"'e !( Ca#'e&&at"!# !. &here $ust be pr"!r #!t"'e !( 'a#'e&&at"!# to the insured. 2. &he #!t"'e 2+$t ,e ,a$e) !# the !''+rre#'e, after the effective of the policy, !( !#e !r 2!re !( the %r!+#)$ $entioned "# $e't"!# 60. *. :t $ust be "# :r"t"#%9 2a"&e) !r )e&".ere) to the na$ed insured at the address shown in the policy. 5. :t 2+$t $tate :h"'h !( the %r!+#)$ set forth is relied upon 3. :t is the )+t? !( the "#$+rer +p!# :r"tte# re@+e$t !( the "#$+re) t! (+r#"$h the (a't$ "# :h"'h the 'a#'e&&at"!# "$ ,a$e). &he pre$iu$ referred to in 'ection 75 $ust be a pre$iu$ subse@uent to the first, because it spea%s of nonGpay$ent Jafter the effective date of the policyK. :f there was no pre$iu$ paid at all, the action appropriate would be a declaration of nullity, based on 'ection >> which provides that Jno policy or contract of insurance issued by an insurance co$pany is valid and binding unless and until the pre$iu$ thereof has been paidK 'ec. !>B. A contract of fire insurance is not affected by any act of the insured subse@uent to the execution of the policy, which does not violate its provisions, even though it increases the ris% and is the cause of a loss. 'ec. 22> :n the case of individual life or endow$ent insurance, the policy shall contain in substance the following conditions (b) A provision that the policy shall be incontestable after it shall have been in force during the lifeti$e of the insured for a period of two years fro$ its date of issue as shown in the policy, or date of approval of last reinstate$ent,

'ec. 5?. .henever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right $ust be exercised previous to the co$$ence$ent of an action on the contract. After a policy of life insurance $ade payable on the death of the insured shall have been in force during the lifeti$e of the insured for a period of two years fro$ the date of its issue or of its last reinstate$ent, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent conceal$ent or $isrepresentation of the insured or his agent. 'ec. 7*. A condition, stipulation, or agree$ent, in any policy of insurance, li$iting the ti$e for co$$encing an action thereunder to a period of less than one year fro$ the ti$e when the cause of action accrues is void. Whe# Ca+$e !( A't"!# A''r+e$ • &he right of the insured to the pay$ent of his loss accrues fro$ the happening of the loss. • &he cause of action in an insurance contract does not accure C0&:, &)9 :0'C49D(' C,A:< :' 2:0A,,H 49I9C&9D AH &)9 :0'C494, because before such final re"ection, there is no real necessity for binging suit. • &he period is to be co$puted not fro$ the ti$e the loss actually occurs but fro$ the ti$e when the insured has a right to bring an action against the insurer. TTCause of Action + re@uires as essential ele$ents not only a legal right of the plaintiff and a correlative obligation of the defendant but also JA0 AC& F4 F<:'':F0 F2 &)9 D9290DA0& :0 E:F,A&:F0 F2 'A:D ,9-A, 4:-)&K, the cause of action in favor of the insured does not accrue until the insurer refuses expressly or i$pliedly to co$ply with his duty to pay the a$ount of the loss. Ge#era& R+&e< a clause in the policy to the effect that an action upon the policy $ust be brought within a certain period is valid and will prevail over the general law on li$itations of actions as prescribed by the Civil Code, if not contrary to 'ec. 7*, :C. EA'ept"!#$< :n industrial life insurance policies, the period cannot be less than 7 years after the cause of action accrues. 8a'@+e&"#e 8"2"#e/ 3)a. De Ga,r"e& .$. CA9 G.R. N!. 6-88- (N!.e2,er 09 556) Cnder *?5 of the :nsurance Code, notice of clai$ $ust be filed within six $onths fro$ the date of accident, otherwise teh clai$ shall be dee$ed waived. Action or suit $ust be brought to proper cases, with the Co$$ission of the court within one year fro$ the denial of clai$, otherwise, the clai$ant(s right of action shall prescribe. 'ec. 75. 0o policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or $ore of the following

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builderRs ris%s, and all personal property floater ris%s; (b) 1erson or property in connection with or appertaining to a $arine, inland $arine, transit or transportation insurance, including liability for loss of or da$age arising out of or in connection with the construction, repair, operation, $aintenance or use of the sub"ect $atter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily in"ury to any person arising out of ownership, $aintenance, or use of auto$obiles); (c) 1recious stones, "ewels, "ewelry, precious $etals, whether in course of transportation or otherwise; (d) Aridges, tunnels and other instru$entalities of transportation and co$$unication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, doc%s and slips, and other aids to navigation and transportation, including dry doc%s and $arine railways, da$s and appurtenant facilities for the control of waterways. (2) Q<arine protection and inde$nity insurance,Q $eaning insurance against, or against legal liability of the insured for loss, da$age, or expense incident to ownership, operation, chartering, $aintenance, use, repair, or construction of any vessel, craft or instru$entality in use of ocean or inland waterways, including liability of the insured for personal in"ury, illness or death or for loss of or da$age to the property of another person. . . HNa."%at"!#a& EAp!$+reI E ,a$"' '!#'ept "# )e("#"t"!#. • Dean says that since the :C (:nsurance Code) does not really define what $arine insurance is, $ost i$portant is to "ust point out that 0AE:-A&:F0A, 9N1F'C49 is the co$$on thread that runs through the enu$eration in 'ec. 66 • 4elated to 0avigation of the ship De("#"t"!# !( 2ar"#e "#$+ra#'e +#)er the IC a#) +#)er the I#$+ra#'e A't (La: :F' IC a2e#)e)) • Ca$pos the :C gives the ter$s of $arine insurance a very wide coverage including property exposed to ris%s not connected with navigation. • &he si$ple clear definition in the :A was better 7arine insurance is an insurance against risks connected with navigation to which a ship) cargo) freightage) profits) or other insurable interest in movable property may be e>posed during a certain voyage or a fi>ed period of time I#$+ra#'e A't (!&) )e("#"t"!#) <arine insurance covers all %inds of $ovable property, but it operated only if such property is exposed to ris%s connected with navigation. I#$+ra#'e C!)e (pre$e#t )e(J#) Covers property exposed to ris%s of navigation and even those exposed to ris%s not connected with navigation, li%e ris%s connected with all other $eans of transportation, including overland and perhaps even $age 168 o0 355

except for nonGpay$ent of pre$iu$ and except for violation of the conditions of the policy relating to $ilitary or naval service in ti$e of war. 'ec. *?B. 0o cancellation of the policy shall be valid unless written notice thereof is given to the land transportation operator or owner of the vehicle and to the ,and &ransportation Co$$ission at least fifteen days prior to the intended effective date thereof. Cpon receipt of such notice, the ,and &ransportation Co$$ission, unless it receives evidence of a new valid insurance or guaranty in cash or surety bond as prescribed in this Chapter, or an endorse$ent of revival of the cancelled one, shall order the i$$ediate confiscation of the plates of the $otor vehicle covered by such cancelled policy. &he sa$e $ay be reissued only upon presentation of a new insurance policy or that a guaranty in cash or surety bond has been $ade or posted with the Co$$issioner and which $eets the re@uire$ents of this chapter, or an endorse$ent or revival of the cancelled one. (As a$ended by 1D 0o. !533)

C5apter += MA#I"
. DEFINITION

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'ec. 66. <arine :nsurance includes (!) :nsurance against loss of or da$age to (a) Eessels, craft, aircraft, vehicles, goods, freights, cargoes, $erchandise, effects, disburse$ents, profits, $oneys, securities, choses in action, evidences of debts, valuable papers, botto$ry, and respondentia interests and all other %inds of property and interests therein, in respect to, appertaining to or in connection with any and all ris%s or perils of navigation, transit or transportation, or while being asse$bled, pac%ed, crated, baled, co$pressed or si$ilarly prepared for ship$ent or while awaiting ship$ent, or during any delays, storage, tranship$ent, or reship$ent incident thereto, including war ris%s, $arine
1)

Thi 1# # Ce& i% ,00@, ,00,, 1**,, #%& 1*(,. N$te the &e8i%iti$% $8 c$% tructi:e t$t#" "$ , t$t#" "$ , #%& %$tice $8 #2#%&$%/e%t. A" $ C%$1 i/9"ie& 1#rr#%tie #%& i% t#%ce 1he% :e e" /#0 9r$cee& t$ # 9$rt $ther th#% it 9$rt $8 &e ti%#ti$%.
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instru$ent of transportation, or is a $ovable type of goods which is often at different locations. Divisions of inland $arine insurance 1roperty in transit + the insurance provides protection to property fre@uently exposed to loss while it is in transportation fro$ one location to another Aailee liability + the insurance provides protection to persons who have te$porary custody of the goods or personal property of others, such as carriers, laundry$en, warehouse$en, garage%eepers 2ixed transportation property + the insurance covers bridges, tunnels, and other instru$entalities of transportation and co$$unication, although as a $atter of fact they are fixed property. &hey are insured because they are essential to the transportation syste$. <arine policies $ust exclude buildings, their furniture, fixtures, fixed contents, and supplies held in storage. &hey invariably extend to cover $ore perils than those included in the usual fire policy. :n order for a ris% to @ualify for a $arine contract, there $ust be included so$e additional $arine peril such as collapse, collision, flood, etc. 2loater + in inland $arine insurance, the ter$ is used in the sense that it provides insurance to follow the insured property wherever it $ay be located, sub"ect always to territorial li$its of the contract. Although the basis for eligibility is the fact that transportation or $ove$ent of property is often present, the condition need not necessarily occur. 2loaters have been issued covering property that is seldo$ $oved.

Criticis$ of :C def(n :t(s confusing i$practical and unrealistic to apply provision intended specifically and only for ris%s of navigation (w#c ca$e down to us fro$ the usages and custo$s of $erchants) to ris%s connected with land and air transportation. :C definition also didn(t serve any legal purpose by widening the scope of the definition since $ost of the special provisions in the :C relating to $arine insurance can properly apply only to ships or other property exposed to navigational ris%s. 9verything covered by the new definition would anyway be necessarily governed by the general provisions of the :C, even if the old definition had "ust been retained. &ransportation insurance is concerned with the perils of property in transit as opposed to perils at a generally fixed location.

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MaG!r )"."$"!#$ !( tra#$p!rtat"!# (2ar"#e) "#$+ra#'e !) FC9A0 <A4:09 :0'C4A0C9. An insurance against ris% connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in $ovable property $ay be exposed during a certain voyage or a fixed period of ti$e. 'cope of ocean $arine insurance it provide protection for (a) ships or hulls, (b) goods or cargoes; (c) earnings such as freight, passage $oney, co$$issions, or profits; (d) liability incurred by the owner or any party interested in or responsible for the insured property by reason of $ariti$e perils. All ris%s or losses $ay be insured against, except such as are repugnant to public policy or positively prohibited. A general $arine insurance policy which does not state the ris%s assured is valid and covers the usual $arine ris%s; and in a $arine policy, the general enu$eration of Jall other perils, etc.K extends only to $arine da$age of li%e %ind to those enu$erated. &o sustain recovery on a $arine policy, the loss $ust have been proxi$ately caused by the ris% or peril insured against. 2) :0,A0D <A4:09 :0'C4A0C9. Covers pri$arily the land or over the land transportation perils of property shipped by railroads, $otor truc%s, airplanes, and other $eans of transportation. :t also covers ris%s of la%e, river, or other inland waterway transportation and waterborne perils outside of those ris%s that fall definitely within the ocean $arine category. to be eligible for inland $arine contract, the ris% $ust involve an ele$ent of transportation. 9ither the property is actually in transit held by persons who are not its owners, or at a fixed location but an i$portant 100% UP L AW , $

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Pr!pert? '!.ere) ,? 2ar"#e p!&"'? • A $arine policy $ay cover any property or interest therein which $ay be sub"ected to the ris%s of navigation. Definition in policy $ay be $odified or enlarged by riders, warranties, or indorse$ents attached to the policy. • &er$ Jgoods and $erchandiseK usually found in a $arine policy includes all articles which are carried on the ship for CF<<94C:A, purposes. (Does not incl ex. Clothing of crew, food, etc). 9xpected profits fro$ the sale of such goods $ay also be protected. • Fre"%ht !r Fre"%hta%e + all benefits derived by the owner, either fro$ chartering (borrowing the entire ship) of the ship or its e$ploy$ent for the carriage of his own goods or those of others. &his is not covered unless e>pressly stated in the policy • 2reight :nsurance doesn(t cover passage $oney payable by passenger at the co$pletion of the voyage unless expressly provided. R"$4$ :h"'h 2a? ,e "#$+re) a%a"#$t • :nsurer is liable for all losses 14FN:<A&9,H caused by the perils covered by the $arine policy • Csually enu$erated - . . / $age 169 o0 355

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Barratr? G willful and intentional act on the part of the $aster or crew, in pursuance of so$e unlawful or fraudulent purpose, without the consent of the owner, and to the pre"udice of his interest; 0either honest error or "udg$ent nor $ere negligence. <ay be covered by policy Ta4"#% at $ea9 arre$t$9 re$tra"#t$9 a#) )eta"#2e#t$ !( a&& 4"#%$9 pr"#'e$ a#) pe!p&e G extraordinary acts by a sovereign authority in ti$e of war, or under other unusual international conditions li%e bloc%ades and e$bargoes. Acts done in the course of regular proceedings not included (i.e. vessel libeled and detained for nonG pay$ent of debt) since there is nothing fortuitous about the situation. :ncludes not only JarrestsK caused by political acts of a seizing state but also by ordinary legal processes such as a lawsuit on ownership and possession of goods. (see <alayan :nsurance Corp v CA case) A&& !ther per"&$9 &!$$e$ a#) 2"$(!rt+#e$ G covers ris%s which are of li%e %ind with the particular ris%s which are enu$erated in the preceding part of the sa$e clause of the contract

.*. HPer"&$ !( the SeaI a#) HPer"&$ !( the Sh"pI o Per"& !( the Sea includes only casualties arising fro$ the ."!&e#t a't"!# of the ele$ents and )!e$ #!t '!.er !r)"#ar? :ear a#) tear li%e the silent, natural and gradual action of the ele$ents on the vessel itself, or other da$age usually incident to the voyage. :t also does not include (!) an in"ury due to the violence of so$e $arine force if such violence was not unusual or unexpected; (2) loss of a sail during a te$pest, for neither events are unusual (but carrying away of a $ast or loss of an anchor will be covered, for in such cases the stor$(s violence is definitely unusual and not to be expected as incident to navigation) 2ortuitous and unusual <ust be connected with $ariti$e navigation :t is a relative ter$ and the $eaning $ay vary with the circu$stances. :t e$braces all %inds of $arine casualty such as (!) shipwrec%, foundering, stranding, collision, and da$ages done to the ship or goods at sea by violent action of wind and waves; (2) loses occasioned by the "ettisoning of cargo if it is $ade for the purpose of saving a vessel rendered unworthy during the voyage, not through the fault of the captain; (*) barratry, or any willful $isconduct on the part of the $aster or crew in pursuance of so$e unlawful or fraudulent purpose without the consent of the owners, and to the pre"udice of the owner(s interest. Aarratry re@uires a willful and intentional act in its co$$ission. 0o honest error of "udg$ent or $ere negligence, unless cri$inally gross, can be barratry. &he $eaning of Jperils of the seaK varies with circu$stances. 2F4 9NA<1,9, a vessel designed for inland waters was insured. :t was towed in the -ulf of <exico. &he insurer was aware of the hazardous nature of the "ourney and charged extra pre$iu$. :f any loss occurs, it will be held to be due to perils of the sea although a seaGgoing vessel would not have been da$aged by the $oderate waves encountered. • Per"& !( the Sh"p ,oss which in the ordinary course of events results fro$ (a) the Nat+ra& and inevitable action of the sea; (b) !r)"#ar? Wear a#) Tear of the ship; (c) the #e%&"%e#t (a"&+re !( the $h"pJ$ !:#er to provide the vessel with proper e@uip$ent to convey the cargo +#)er !r)"#ar? '!#)"t"!#$ &he insurer does not underta%e to insure against perils of the ship.

La Ra/!# S!'"a& HG! T"a!'! ? Her2a#!$I . U#"!# I#$+ra#'e S!'"et? !( Ca#t!# Lt). 5acts A drain pipe passing through the hold where the insured rice was stowed had beco$e corroded in course of ti$e, w#c created a hole in the pipe. An atte$pt was $ade to ce$ent the hole and cover it with a strip of iron but due to the loading of the ship, this part of the pipe was sub$erged in water during the trip and was washed out. .ater flowed into the hold and da$aged the rice. Issue .F0 the insurer was liable Hel" 0F. A loss which in the ordinary course of events, results fro$ the natural and inevitable action of the sea, fro$ the ordinary wear and tear of the ship, or fro$ the negligent failure of the ship(s owner to provide the vessel with proper e@uip$ent to convey the cargo under ordinary conditions, is not a peril of the sea, but rather a Jperil of the ship.K :n such a case, the re$edy of the insured shipper or consignee is not against the insurer but against the shipowner. Catha? I#$+ra#'e . CA 5actsF 4e$ington :ndustrial 'ales filed for the recovery of losses incurred due to the rusting of steel pipes it i$ported fro$ Iapan while it was in transit. Cathay :nsurance refused pay$ent clai$ing that the rusting was not due to a peril of the sea since it was not a casualty which could not be foreseen. Hel"F &here is no @uestion that rusting of steel pipes in the course of voyage is a Jperil of the seaK in view of the toll on the cargo by wind, water and salt conditions. ()A0-,AAFa Aut in any case, the 'C decided through construction) .e would fail to observe a cardinal rule in the interpretation of contracts, na$ely, that any a$biguity therein should be construed against the issuer#drafter, na$ely, the insurer.

-ote: /verything that happens thru the inherent vice of the thing) or by the act of the owner) master or shipper shall not be reputed a peril if not otherwise borne in the policy

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Ge#era& R+&e< there can be no valid $arine insurance unless supported by an insurable interest in the thing insured. EA'ept"!#< in certain cases of $arine insurance, the insurer will still be held liable if he agreed to insure a ship or cargo Jlost or not lostK, that is, he agreed to be bound in any case, even if it would later on be proved that the insured had nothing to insure when the contract was $ade. 'ec. !B!. &he insurable interest of the owner of the ship hypothecated by botto$ry is only the excess of its value over the a$ount secured by botto$ry.

Ma&a?a# I#$+ra#'e C!rp . CA ( 557) 5acts &PC <ar%eting was the owner#consignee of soya bean $eal shipped fro$ Arazil to <anila. :t was insured by <alayan :nsurance. .hile the vessel was in 'outh Africa it was arrested and detained due to a lawsuit @uestioning its ownership and possession. As a result, &PC <ar%eting filed a clai$ with <alayan for the nonG delivery of the cargo. Issue .o0 the arrest of the vessel by the civil authority was a peril of the sea Hel" &he JarrestK caused by ordinary "udicial process is dee$ed included a$ong the covered ris%s. (Decision detailed the history of the J2ree fro$ Capture and 'eizureK clause) Although the 2ree fro$ Capture and 'eizureK clause was originally inserted in $arine policies to protect against ris%s of war, its interpretation in recent years to include seizure or detention by civil authorities see$s consistent with the general purposes of the clause. F"&"p"#! Mer'ha#t$ I#$+ra#'e C! . CA 5acts A ship$ent of fish$eal insured by 2ilipino <erchants Co. was found to be da$aged upon its unloading in the 1ort of <anila. &he owner#consignee filed action to recover the a$ount represented by the da$ages based on the Jall ris%sK clause of the policy but 2il.<erchants refused clai$ing that there $ust be so$e casualty or accidental cause to which the loss is attributable. Hel" An Jall ris%s policyK should be read literally (not technically) as $eaning all ris%s whatsoever and covering all losses by an accidental cause of any %ind. :t has evolved to grant a greater protection than that afforded by the JperilsK clause in order to assure that no loss can happen through the incident of a cause neither insured against nor creating liability in the ship. &he insured under an all ris%s policy has the initial burden of proving that the cargo was da$aged when unloaded fro$ the vessel, thereafter, the burden then shifts to the insurer to show the exception to the coverage. Cnder this policy it is sufficient to show that there was da$age occasioned by so$e accidental cause of any %ind and there is no necessity to point to any particular cause. *. INSURABLE INTEREST 'ec. !BB. &he owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay hi$ its value in case of loss 1rovided, &hat in this case the insurer shall be liable for only that part of the loss which the insured cannot recover fro$ the charterer. • Fwner of Eessel has insurable interest in the vessel even if he has $ortgaged it. )owever, if ship is chartered and charterer agrees to pay hi$ its value in case of loss, it is only liable for that part of the loss which the insured cannot recover fro$ the charterer. :nsurable interest of insured in $arine insurance

'ec. !B2. 2reightage, in the sense of a policy of $arine insurance, signifies all the benefits derived by the owner, either fro$ the chartering of the ship or its e$ploy$ent for the carriage of his own goods or those of others. 'ec. !B*. &he owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage. 'ec. !B5. &he interest $entioned in the last section exists, in case of a charter party, when the ship has bro%en ground on the chartered voyage. :f a price is to be paid for the carriage of goods it exists when they are actually on board, or there is so$e contract for putting the$ on board, and both ship and goods are ready for the specified voyage. 'ec. !B3. Fne who has an interest in the thing fro$ which profits are expected to proceed has an insurable interest in the profits. 'ec. !B7. &he charterer of a ship has an insurable interest in it, to the extent that he is liable to be da$nified by its loss. I# Sh"p • B!tt!2r? L!a# + one given on the security of the ship, on condition that the loan be repaid only if the ship arrives safely at the port of destination; $oney given in advance; if ship sin%s, botto$ry loan extinguished and owner doesn(t have to pay it. • Aotto$ry loans and $arine insurance can share protection and coverage of sa$e ris%s; but cannot coextend with each other. • .here a vessel is hypothecated by way of botto$ry, the owner has an insurable interest only in the excess of the vessel(s value over the a$ount of the botto$ry loan. &his is so because when the vessel botto$ed is lost, the owner need not pay the loan and is therefore benefited to the extent of the a$ount of the load obtained - . . / $age 171 o0 355

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and the loss he actually suffers is only the difference bet the actual value of the vessel I# Sh"p O:#er !( the Sh"p I# G!!)$ a#) Pr!("t$ Sh"ppe) I# Fre"%hta%e G)as insurable interest in expected freightage w#c accdg to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage G :f 2reight is 1ayable upon the Co$pletion of voyageG F.094 has insurable interest

G)as insurable interest :nterest in goods ship in A,, cases even if carries to the extent the ship has been that he $ay be liable chartered by one who for their loss, but 0F& has agreed to pay, its &F 9NC99D &)9 EA,C9 value in case of loss. thereof :n this case, insurer(s (of the ship owner) liability is li$ited to the part of the loss which insured cannot recover fro$ the charterer. G :f ship is sub"ected to botto$ry loan, Fwner(s interest is only in excess of value over a$ount secured by botto$ry. Charterer <ay ta%e out policy )as insurable interest F covering insurable in goods since they will Sh"pper interest, which can be suffer da$age in case only to the extent that of loss he $ay be da$nified by the loss and the botto$ry. • &he lender in botto$ry is entitled to receive a high rate of interest to co$pensate hi$ for the ris% of losing his loan.

2reight 1A:D in ADEA0C9 + Charterer or 'hipper has insurable interest

-. CONCEALMENT 'ec. !B>. :n $arine insurance each party is bound to co$$unicate, in addition to what is re@uired by section twentyGeight, a&& the "#(!r2at"!# :h"'h he p!$$e$$e$, $aterial to the ris%, except such as is $entioned in 'ection thirty, and to state the exact and whole truth in relation to all $atters that he represents, or upon in@uiry discloses or assu$es to disclose. 'ec. !B?. :n $arine insurance, infor$ation of the belief or expectation of a third person, in reference to a $aterial fact, is $aterial.

'ec. !B6. A person insured by a contract of $arine insurance is presu$ed to have %nowledge, at the ti$e of insuring, of a prior loss, if the infor$ation $ight possibly have reached hi$ in the usual $ode of trans$ission and at the usual rate of co$$unication.

'ec. !!B. A conceal$ent in a $arine insurance, in respect to any of the following $atters, does not vitiate the entire contract, but $erely exonerates the insurer fro$ a loss resulting fro$ the ris% concealed

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fro$ a third person. I# 2ar"#e "#$+ra#'e< the insured is bound to co$$unicate the beliefs# opinions and expectations of third persons, as long as the infor$ation is in reference to a $aterial fact. 1resu$ptive %nowledge by insured of prior loss 'ec. !B6 establishes a rebuttable presu$ption of %nowledge of prior loss on the part of the insured, on the recognition of the fact that co$$unication s technology nowadays $a%es it possible for the insured to be apprised of the loss of his vessel i$$ediately after it occurs. &he insured is not bound, however, to use all accessible $eans of infor$ation at the very last instant of ti$e to ascertain the condition of the property insured. .hen conceal$ent does not vitiate entire contract Ge#era& R+&e "# "#$+ra#'e< conceal$ent of a $aterial fact entitles the in"ured party to rescind. I# 2ar"#e "#$+ra#'e< if loss happens under any of the conditions in 'ection !!B and such was concealed, the insurer is $erely , $ exonerated fro$ liability. &he insurer, however, re$ains liable to pay for da$age or loss brought by other perils of the sea. REPRESENTATION 'ec. !!!. :f a representation by a person insured by a contract of $arine insurance, is intentionally false in any $aterial respect, or in respect of any fact on which the character and nature of the ris% depends, the insurer $ay rescind the entire contract. 'ec. !!2. &he eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of $arine insurance. (0ote .ill be void if there is fraud) Applicability of rules on representation to $arine insurance &he rules on representation are applicable to $arine insurance, li%e the rules on distinction between representations and warranties, construction of representations, and avoidance of the policy based on a substantial $isrepresentation of any $aterial fact or circu$stance. &he test of $ateriality of representations also applies in $arine insurance. • Anything which concerns the state of the vessel at any particular period of her voyage are $aterial. 'tate$ents of the nature and a$ount of cargo, or - . . / •

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whether the vessel was overloaded, or where the insurer did not rely thereon, have been held to be i$$aterial. • 9ffect of falsity of representation as to expectation 4epresentations of expectations are state$ents of future facts or events which are in their nature contingent and which the insurer is bound to %now that the insured could not have intended to state as %nown facts, but as $ere expectations or intentions. Cnless $ade with fraudulent intent, failure of the fulfill$ent of a representation of expectation is not a ground for rescission. &hey $ust be carefully distinguished fro$ pro$issory warranties. Spe'"a& R+&e "# Mar"#e I#$+ra#'e • 'ubstantial truth of any $aterial state$ent is 0F& sufficient • ,aw re@uires the insured to state the exact and whole truth in relation to all $atters that he represents, or upon in@uiry, discloses or assu$es to disclose. • Due to nature of contract

(a) &he national character of the insured; (b) &he liability of the thing insured to capture and detention; (c) &he liability to seizure fro$ breach of foreign laws of trade; (d) &he want of necessary docu$ents; (e) &he use of false and si$ulated papers. • Conceal$ent in $arine insurance is the failure to disclose any $aterial fact or circu$stance which in fact or law is within, or which ought to be, within the %nowledge of one party and of which the other has no actual or presu$ptive %nowledge. &he rules are stricter than in the case of fire insurance because, in the latter, the insurer can easily obtain infor$ation regarding the property insured. :n $arine insurance, the vessels insured are often absent or afloat. Cnder 'ection !B>, it is sufficient that the insured is in possession of the $aterial fact concealed although he $ay not be aware of it. Fpinions or expectations of third persons Ge#era& R+&e "# "#$+ra#'e< the insured is not bound to co$$unicate infor$ation of his own "udg$ent and what he learns •

R+&e$ !# C!#'ea&2e#t a#) M"$repre$e#tat"!# are STRICTER "# 2ar"#e "#$+ra#'e. Wh?K • 2ailure to disclose any $aterial fact or circu$stance which in law or fact is within, or which ought to be within the $age 173 o0 355

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(a) &hose which the other %nows; (b) &hose which, in the exercise of ordinary care, the other ought to %now, and of which the for$er has no reason to suppose hi$ ignorant; (c) &hose of which the other waives co$$unication; (d) &hose which prove or tend to prove the existence of a ris% excluded by a warranty, and which are not otherwise $aterial; and (e) &hose which relate to a ris% excepted fro$ the policy and which are not otherwise $aterial. TEST !( Mater"a&"t?< Ihether the concealed fact caused the loss and not its probable influence on the other party in deciding whether or not to enter the contract Repre$e#tat"!#$< 6nsured must state the e>act and whole truth in relation to all matters that he represents of upon inquiry discloses or assumes to disclose Fa&$e repre$e#tat"!#$< !. Any $isrepresentati on of a $aterial fact $ade with (ra+)+&e#t "#te#t 2. &he character and nature of the r"$4 )epe#)$ !# the (a't 2"$repre$e#t e) E((e't< :nsurer $ay 49'C:0D the contract EA'ept"!#< 9ventual falsity of a representation as to expectation, in the absence of fraud, does not avoid the contract.

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0egros to <anila using Coastwise ,ighterage Corp(s open barges. )owever, one of the barges san% when it hit an un%nown sun%en ob"ect while approaching <anila Aay 1ort. Aecause of this, 1agGAsa re"ected the ship$ent as a total loss and 1hil. -eneral :nsurance Co$pany paid for the loss. 1hil-en then filed an action against Coastwise ,ighterage see%ing to recover the a$ount it paid 1agGasa. Coastwise clai$s that it was unaware of the hidden danger in its path, thus it beca$e i$possible for Coastwise to avoid it, even with the exercise of extraordinary diligence. He&)< Coastwise(s assertion is belied by the evidence. &he patron of the vessel which san% ad$itted that he was not licensed thus, it cannot safely clai$ to have exercised extraordinary diligence by placing a person whose navigational s%ills are @uestionable at the hel$ of the vessel w#c $et the accident. ,ogically, a person w#o license to navigate lac%s not "ust the s%ill to do so, but also the fa$iliarity with the usual and safe routes ta%en by seasoned and legally authorized persons. 0. IMPLIED WARRANTIES 'ec. !!*. :n every $arine insurance upon a ship or freight, or freightage, or upon any thing which is the sub"ect of $arine insurance, a warranty is i$plied that the ship is seaworthy. 'ec. !!5. A ship is seaworthy when reasonably fit to perfor$ the service and to encounter the ordinary perils of the - . . / voyage conte$plated by the parties to the policy. 'ec. !!3. An i$plied warranty of seaworthiness is co$plied with if the ship be seaworthy at the ti$e of the of co$$ence$ent of the ris%, except in the following cases (a) .hen the insurance is $ade for a specified length of ti$e, the i$plied warranty is not co$plied with unless the ship be seaworthy at the co$$ence$ent of every voyage it underta%es during that ti$e; (b) .hen the insurance is upon the cargo which, by the ter$s of the policy, description of the voyage, or established custo$ of the trade, is to be transhipped at an inter$ediate port, the i$plied warranty is not co$plied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the co$$ence$ent of each particular voyage. 'ec. !!7. A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but re@uires that it be properly laden, and provided with a co$petent $aster, a sufficient nu$ber of co$petent officers and sea$en, and the re@uisite appurtenances and e@uip$ent, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and i$ple$ents for the voyage. 'ec. !!>. .here different portions of the voyage conte$plated by a policy differ in respect to the things $age 174 o0 355

%nowledge of one party and of which the other has no actual or presu$ptive %nowledge. 2ailure to disclose the ff. will give the insurer the right to rescincd (0o $ore liability). <aterial facts within %nowledge of party A&& "#(!r2at"! # he p!$e$$e$$ which are $aterial to ris%, except as is $entioned in 'ec. *B (cf with 'ec. 2? which only re@uire co$$unica tion of facts which are $aterial to the contract as to which he $a%es no warranty) Aeliefs and expectation s of *rd persons in reference to a $aterial fact.

'ec. 2?. 9ach party to a contract of insurance $ust co$$unicated to the other, in good faith, all facts within his %nowledge which are $aterial to the contract and as to which he $a%es no warranty, and which the other has not the $eans of ascertaining. 'ec. *B. 0either party to a contract of insurance is bound to co$$unicate infor$ation of the $atters following, except in answer to the in@uiries of the other

C!a$t:"$e . CA Fa't$< 1agGAsa 'ales had $olasses transported fro$ , $

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liability for the ris%s assu$ed in every insurance upon any $arine venture whether of vessel, cargo, or freight. 0. . I2p&"e) :arra#t"e$ "# 2ar"#e "#$+ra#'e a) 'eaworthiness b) Deviation c) Fther :$plied .arranties G Carry the re@uisite docu$ents to show nationality or neutrality G 0ot engage in any illegal venture d) it is also i$pliedly warranted that the insured has an insurable interest in the sub"ect $atter insured • -eneral provisions on warranties also apply to $arine insurance F0,H $arine insurance has :<1,:9D .A44A0&:9' provided by law ship(s structure, but re@uires ship to be pr!per&? &a)e# '!2pete#t 2a$ter $+(("'"e#t #+2,er !( '!2pete#t !(("'er$ a#) 're: re@uisite app+rte#a #'e$ a#) e@+"p2e#t (ballasts, cables, anchors, cordage, sails, food, water, fuel, lights, necessary#p roper stores and i$ple$ents for the voyage) :n a ("t $tate as to repair, e@uip$ent, crew and in all other respects to perfor$ the voyage insured and to encounter the ordinary perils of navigation <ust also be "# a $+"ta,&e '!#)"t"!# t! 'arr? the 'ar%! put on board or intended to be put on board 'uch warranty can be excluded only by clear provisions of the policy .here seaworthiness ad$itted by insurer a. Ad$ission is stipulated in the contract the issue of seaworthine ss cannot

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be raised by the insurer without showing conceal$en t or $isreprese ntation by the insured. &he ad$ission $ay $ean (!) that the :arra#t? !( $ea:!rth" #e$$ "$ t! ,e ta4e# a$ (+&("&&e); or (2) that the r"$4 !( +#$ea:!rt h"#e$$ "$ a$$+2e) by the insurer :nsertion of waiver clauses in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. .h

re@uisite to $a%e the ship seaworthy therefor, a warranty of seaworthiness is co$plied with if, at the co$$ence$ent of each portion, the ship is seaworthy with reference to that portion. 'ec. !!?. .hen the ship beco$es unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipownerRs interest fro$ liability fro$ any loss arising therefro$. 'ec. !!6. A ship which is seaworthy for the purpose of an insurance upon the ship $ay, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of the insurance upon the cargo. 'ec. !2B. .here the nationality or neutrality of a ship or cargo is expressly warranted, it is i$plied that the ship will carry the re@uisite docu$ents to show such nationality or neutrality and that it will not carry any docu$ents which cast reasonable suspicion thereon. • .arranty, in $arine insurance, has been defined as a stipulation, either expressed or i$plied, for$ing part of the policy as to so$e fact, condition or circu$stance relating to the ris%. :$plied .arranties G conditions upon the underwriterRs

b.

c.

a) Sea:!rth"#e$$< Mea#"#% • 'hip is seaworthy when reasonably fit to perform the services and to encounter the ordinary perils of the voyage contemplated by the parties to the policy • 0F& absolute guarantee that vessel will safely $eet all possible perils • C:4CC<'&A0C 9' deter$ine .F0 vessel is reasonably seaworthy • 'eaworthiness extends not only to condition of , $ B A R ' $ !

ere unseaworthines s un%nown to owner of cargo insured a. 'CAI9C& <A&&94 :' CA4-F the i$plied warranty of seaworthine ss attaches to whoever is insuring the cargo, .F0 he is the shipowner. b. ,ac% of %nowledge by the insured is i$$aterial in ordinary $arine insurance and is not a defense in order to $age 175 o0 355

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recover on the policy. 'ince the law provides for an i$plied warranty, it beco$es the obligation of a cargo owner to loo% for a reliable co$$on carrier which %eeps its vessels in seaworthy condition. 'hipper $ay have no control over the vessel but he has full control in the choice of the co$$on carrier that will transport his goods. Cargo owner $ay also enter into a contract of insurance which specifically provides that the insurer answers not only for the perils of the sea but also provides for coverage of perils of the ship. A charterer of a vessel has no obligation before transportin g its cargo to ensure that the vessel co$plied with all the legal re@uire$en ts. &he duty rests upon the co$$on carrier si$ply for being engaged in Qpublic services.Q f. Aecause of the i$plied warranty of seaworthine ss, shippers are not expected, when transacting with co$$on carriers, to in@uire into the vesselRs seaworthine ss, genuinenes s of its licenses and co$pliance with all $ariti$e laws. 'eaworthiness is a relative ter$ depending upon the #at+re !( $h"p ($ust be in a fit state as to repair, e@uip$ent, crew and in all other respects to perfor$ the voyage insured and encounter the ordinary perils; suitable condition to carry cargo), #at+re !( .!?a%e (deter$ines .F0 vessel is wellGfitted), #at+re !( $er."'e (nature of cargo should be deter$ined; the vessel should be reasonable capable of safely carrying the cargo to the port of destination). 2ailure of a co$$on carrier to $aintain in seaworthy condition the vessel is a clear breach of its duty prescribed in Article !>33, CC. , $ •

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:t is not necessary that the cargo itself shall be seaworthy. cargo which by the ter$s of the policy, description of the voyage, or established custo$ of the trade, is to be transshippe d!? at an inter$ediat e port; ea'h .e$$e& upon which the cargo is shipped $ust be seaworthy at the co$$ence $ent of each particular voyage (!!>) :n case of 3!?a%e policy conte$plati ng a voyage in different stages + ship $ust be seaworthy at the co$$ence $ent of each portion; stages $ust be separate

c.

d.

e.

Whe# :arra#t? )ee2e) '!2p&"e) :"thD eA'ept"!#$ • :$plied warranty of seaworthiness is dee$ed co$plied with if ship is seaworthy A& &)9 &:<9 F2 &)9 CF<<90C9<9 0& F2 &)9 4:'P; .hat $atters is that at the start of the voyage insured, ship is seaworthy. Assured $a%es no warranty that vessel will continue to be seaworthy, or that the crew won(t be negligent G 1rinciple Aehind this :f vessel, crew, and e@uip$ent be originally sufficient, the assured has done all that he contracted to do (not any$ore responsible for future deficiency). • 9xceptions 'ecs. !!3a, !!3b, !!> (!!3a) :n case of TIME policy + insurance $ade for a specified length of ti$e, ship $ust be seaworthy at the '!22e#'e 2e#t !( e.er? .!?a%e she $ay underta%e (!!3b) in case of Car%! policy + :nsurance is upon the - . . /

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Transshipment - the #ct $8 t#Ci%! c#r!$ $ut $8 $%e hi9 #%& "$#&i%! it i% #%$ther $r the tr#% 8er $8 !$$& 8r$/ the :e e" ti9u"#te& i% the c$%tr#ct $8 #88rei!ht/e%t t$ #%$ther :e e" 2e8$re the 9"#ce $8 &e ti%#ti$% %#/e& i% the c$%tr#ct h# 2ee% re#che& $r the tr#% 8er 8$r 8urther tr#% 9$rt#ti$% 8r$/ $%e hi9 $r c$%:e0#%ce t$ #%$ther. F#ct $8 tr#% hi9/e%t i %$t &e9e%&e%t u9$% the $1%er hi9 $8 the tr#% 9$rti%! c$%:e0#%ce 2ut r#ther $% the 8#ct $8 #ctu#" 9h0 ic#" tr#% 8er $r c#r!$e 8r$/ $%e :e e" t$ #%$ther. Tr#% hi9/e%t $8 8rei!ht 1ith$ut "e!#" e;cu e, h$1e:er c$/9ete%t #%& #8e the :e e" i%t$ 1hich the tr#% 8er i /#&e, i #% i%8ri%!e/e%t $% the ri!ht $8 the hi99er #%& u2Hect the c#rrier t$ "i#2i"it0 i8 the 8rei!ht i "$ t e:e% 20 # c#u e $ther1i e e;ce9te&.

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relieved of liability but the contract of insurance is not affected as to any other ris% or loss covered and not caused or increased by such particular defect. 2. Aenefit of exoneration is given only to an Qinsurer on ship or shipownerRs interest.Q D+e )"&"%e#'e #!t a )e(e#$e • .arranty precludes any defense that insured had exercised due diligence to $a%e the ship seaworthy. • '):1 <C'& AC&CA,,H A9 '9A.F4&)H Sea:!rth"#e$$ a$ t! 'ar%! • 'hip $ay be seaworthy for purpose of insurance on the ship, but $ay still be unseaworthy for purpose of insurance of the cargo (ex. 'hip with porthole only ! foot above waterline $ay be fit to travel the sea, but not fit to carry wheat or rice because water will go into the ship via the porthole and da$age the cargo) R!@+e . IAC 5actsF <anila Aay ,ighterage Corp, a co$$on carrier, entered into a contract w# 4o@ue whereby <anila Aay ,ighterage would carry on board its barge 4o@ue(s logs fro$ 1alawan to <anila. &he logs were insured by 1ioneer , $ B A R ' $ ! :nsurance. )owever, the barge san%. :t was found that the barge was not seaworthy (one of the hatches was left open, there was a lea% in the barge). 1ioneer refused to pay da$ages because of the breach of the i$plied warranty on seaworthiness. 4o@ue(s defense is that as a $ere shipper of cargo, they have no control of the ship therefore seaworthiness has nothing to do with the $atter of insurance over the logs. IssueF .F0 the i$plied warranty of seaworthiness also applies to $arine insurance on cargo. Hel"F H9' 2or every contract of insurance which is a sub"ect of $arine insurance, a warranty is i$plied that the ship will be seaworthy. 'ince the law provides for an i$plied warranty of seaworthiness in every contract of $arine insurance, it beco$es the obligation of a cargo owner to loo% for a reliable co$$on carrier which %eeps its vessels in seaworthy condition. &he shipper of the cargo $ay have no control over the vessel but he has full control in the choice of the co$$on carrier that will transport his goods. De&$a# Tra#$p!rt . CA 5actsF Caltex entered into a contract of affreight$ent with Delasan &ransport ,ines to transport Caltex(s fuel oil fro$ its refinery to different parts of the country. )owever, the ship to ^a$boanga which was insured by A$erican )o$e Corp. san%. A$erican )o$e - . . /

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paid Caltex representing the insured value of the lost cargo. A$erican )o$e, exercising its right of subrogation, de$anded of Delsan the sa$e a$t it paid to Caltex but Delsan refused. :t was found that the chief $ate of the vessel was not @ualified under the 1hil. <erchant <arine 4ules. IssueF .F0 the pay$ent $ade by A$erican )o$e to Caltex a$ounted to ad$ission that the vessel was seaworthy Hel"F 0F. &he pay$ent $ade by A$erican )o$e operates as a waiver of its right to enforce the ter$ of the i$plied warranty against Caltex under the insurance policy. )owever, the sa$e cannot be validly interpreted as an auto$atic ad$ission of the vessel(s seaworthiness by A$erican ho$e as to foreclose recourse against Delsan for any liability under its contractual obligation as a co$$on carrier. &he fact of pay$ent grants the private respondent subrogatory right w#c enables it to exercise legal re$edies that would otherwise be available to Caltex as owner of the lost cargo.. ,) 3!?a%e De."at"!# a#)

and distinct in order to have a different degree of seaworthine ss for particular parts. S'!pe !( Sea:!rth"#e$$ !( .e$$e& !. :0'C4A0C9 F0 CA4-F it $ust be properly loaded, stowed, dunnaged, and secured so as not to i$peril the navigation of the vessel to cause in"ury to the vessel or cargo. 2. :0'C4A0C9 F0 E9''9, ship is not unseaworthy because of so$e defect in loading or stowage which is easily curable by those on board, and was cured before the loss. *. D9CP CA4-F carrying it raises a presu$ption of unseaworthiness which can be overco$e only by showing affir$atively that the dec% cargo was not li%ely to interfere with the due $anage$ent of the vessel. Where $h"p ,e'!2e$ +#$ea:!rth? )+r"#% .!?a%e Ge#era& R+&e< &here is no i$plied warranty that the vessel will re$ain in a seaworthy condition throughout the life of the policy. !. .hen the vessel beco$es unseaworthy during the voyage, it is the duty of the $aster, as the shipownerRs representative, to exercise due diligence to $a%e it seaworthy again, and if loss should occur because of his negligence in repairing the defect, the insurer is 100% UP L AW

'ec. !2!. .hen the voyage conte$plated by a $arine insurance policy is described by the places of beginning and ending, the voyage insured in one which confor$s to the course of sailing fixed by $ercantile usage between those places. 'ec. !22. :f the course of sailing is not fixed by $ercantile $age 177 o0 355

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2. 1orts of destination *. :nter$ediate ports of call 0a$es !. 1orts of departure 2. 1orts of destination G 'everal routes to destination

COMM #CIAL LA$
property is not "ustified, unless it is to $a.e a#!ther .e$$e& "# )"$tre$$, a deviation (!r the p+rp!$e !( $a."#% &"(e does not constitute a breach of warranty. Iustification rests on ground of hu$anity. De."at"!# t! repa"r )a2a%e) $h"p • :f during voyage, vessel beco$es so da$aged as to render it unsafe without undergoing repairs, insurer is not relieved by deviation fro$ the ship(s course in order to $a%e the nearest port for such repairs (can fall under Javoid perilK) • <aster $ust consider distance, facilities of port, @uic%ness new $aterial can be procured, etc. (not necessarily nearest port, but $ust be $ost proper port for repair). • Fnce repair is $ade, ship $ust pursue new course without deviation in shortest and $ost expeditious $anner (otherwise, this is deviation and will absolve insurer) Wa".er !( :arra#t? a%a"#$t "2pr!per )e."at"!# • Done by expressly per$itting waiver in policy Jat a 149<:C< to be hereafter arranged,K $age 178 o0 355

increased ris% or not • .)H does i$proper deviation !. Eoyage insured is the one exonerateS which confor$s to course Aecause of sailing fixed by insured $ercantile usage between novated ports ('ec. !2!) contract 2. without consent of insurera • &9'& .F0 'ec. !2*. deviation was Deviation is a proper or not departure fro$ the (NOT .F0 ris% course of the voyage was increased insured, $entioned in or di$inished) R+&e< the last two sections, - 2ixed 4oute or an unreasonable Ge#era& R+&e< - Csual Custo$ delay in pursuing the when the voyage - Discretionary ($ost voyage or the covered by the policy is natural) co$$ence$ent of an described by the places entirely different of beginning and De."at"!# ('ec. !2*) voyage. ending, the voyage • :s any insured is the one +#eA'+$e) which confor$s to the )epart+re course of sailing fixed 'ec. !25. A fro$ the deviation is proper by $ercantile usage regular course between the places, or (a) .hen caused or route of the by circu$stances over in absence of the latter, insured voyage the way between the which neither the or any other act $aster nor the owner places that to a $aster which of ordinary s%ill and of the ship has any substantially control; discretion would $ean alters the ris% the $ost natural, direct (b) .hen constitutes a necessary to co$ply and advantageous deviation route. &he insurer is with a warranty, or to • Depart+re avoid a peril, whether not liable for a loss (r!2 '!+r$e of after an i$proper or not the peril is ship insured against; deviation fro$ the • U#rea$!#a,&e JusualK course or the (c) .hen $ade in )e&a? in good faith, and upon JbestK course /ter$s in pursuing @uotation $ine8. reasonable grounds of voyage belief in its necessity to EA'ept"!#< the • Co$$ence$en insurer is not avoid a peril; or t of e#t"re&? (d) .hen $ade in exonerated fro$ )"((ere#t liability for loss good faith, for the .!?a%e purpose of saving happening after proper deviation. &he effect is hu$an life or relieving Pr!per a#) I2pr!per another vessel in as if there was no De."at"!# deviation. distress. • 14F194 deviation + Whe# )e."at"!# "$ those allowed pr!per 'ec. !23. 9very by law ('ec. • 0o vitiation of deviation not specified !25) in the last section is the policy if the • :<14F194 i$proper. deviation is deviation + all G+$t"("e) !r other deviation 'a+$e) ,? not $entioned a't+a& 'ec. !27. An in 'ec. !25; #e'e$$"t? insurer is not liable for any loss which is e@ual any loss happening to suffered by in i$portance the thing insured thing insured to such subse@uent to an subse@uent to deviation. i$proper deviation. i$proper • 'uch deviation co$pulsory What 3!?a%e exonerates deviations are I#$+re) insurer fro$ ris%s i$pliedly P!&"'? What $h"p 2+$t )! liability, assu$ed by the 0a$es Eessel insured <C'& follow regardless of underwriter. !. 1orts of course '19C:2:9D whether .hile deviation depature deviation to save usage, the voyage insured by a $arine insurance policy is that way between the places specified, which to a $aster of ordinary s%ill and discretion, would $ean the $ost natural, direct and advantageous. 100% UP L AW , $ B A R ' $ ! - . . /

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warranty extends to insuredRs interest in all the property intended to be covered by the policy, but not to the interest of a third person not covered by the policy. A warranty of national character $ay be gathered fro$ the language of the policy although an exception has been $ade where the fact recited could have no relation to the ris%. :$plied that ship will #!t e#%a%e "# a#? .e#t+re :h"'h "$ "&&e%a& under the laws of the country where contract is $ade or before whose courts @uestion $ay co$e; CA00F& be waived since rule of public policy. :$plied warranty to carry re@uisite docu$ents !) .arranty of nationality also re@uires that the vessel be conducted and docu$ented as of such nation, a breach of warranty in either particular will avoid the policy. 2) .arranty is a continuing one, change of nationality is a breach of the warranty, but warranty is not bro%en by a contract for sale and transfer to an alien at a future date. , $ *) 1roper papers $ust be produced when necessary to prove ownership. 1roduction not excused because the papers were lost by the fault of the $aster.

COMM #CIAL LA$
heard of. &he length of ti$e which is sufficient to raise this presu$ption depends on the circu$stances of the case. 'ec. !**. .hen a ship is prevented, at an inter$ediate port, fro$ co$pleting the voyage, by the perils insured against, the liability of a $arine insurer on the cargo continues after they are thus reshipped. 0othing in this section shall prevent an insurer fro$ re@uiring an additional pre$iu$ if the hazard be increased by this extension of liability. 'ec. !*5. :n addition to the liability $entioned in the last section, a $arine insurer is bound for da$ages, expenses of discharging, storage, reship$ent, extra freightage, and all other expenses incurred in saving cargo reshipped pursuant to the last section, up to the a$ount insured. 0othing in this or in the preceding section shall render a $arine insurer liable for any a$ount in excess of the insured value or, if there be none, of the insurable value. 'ec. !*3. Cpon an actual total loss, a person insured is entitled to pay$ent without notice of abandon$ent. 'ec. !*7. .here it has been agreed that an insurance upon a particular thing, or class of things, shall be free fro$ particular average, a $arine insurer is not liable for any particular average loss not depriving the insured of the possession, at the port of destination, of the $age 179 o0 355

provided DC9 0F&:C9 be given by insured upon recipt of advice of such deviation. 4e@uire$ent 9N149''9D in policy. 149<:C< paid, 0F&:C9 given

') Other I2p&"e) Warra#t"e$ • .hen 0ationality or 0eutrality of ship or cargo is expressly warranted, it(s i$plied ship will 'arr? re@+"$"te )!'+2e#t$ $h!:"#% #at"!#a&"t? !r #e+tra&"t? and will not carry docu$ents that will cause reasonable suspicion 0ationality G doesn(t $ean that the ship was built in such country, but that the property belongs to a sub"ect thereof G 0eutrality + property insured belongs to neutrals; a warranty of neutrality i$ports that the property insured is neutral in fact, and in appearance and conduct, that the property shall belong to neutrals, that no act of insured or his agent shall be done which can legally co$pro$is e its neutrality; 100% UP L AW

1. LOSS
1. . M"#)$ '!.ere)9 A't+a& a#) C!#$tr+'t".e L!$$ 'ec. !2>. A loss $ay be either total or partial. 'ec. !2?. 9very loss which is not total is partial. 'ec. !26. A total loss $ay be either actual or constructive. 'ec. !*B. An actual total loss is cause by (a) A total destruction of the thing insured; (b) &he irretrievable loss of the thing by sin%ing, or by being bro%en up; (c) Any da$age to the thing which renders it valueless to the owner for the purpose for which he held it; or (d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. 'ec. !*!. A constructive total loss is one which gives to a person insured a right to abandon, under 'ection one hundred thirtyGnine. 'ec. !*2. An actual loss $ay be presu$ed fro$ the continued absence of a ship without being

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deprives owner of possession, at the port of destination of thing insured. 3. Cnder 'ection !*B, the co$plete physical destruction of the sub"ect $atter as in the case of fire is not essential to constitute an actual total loss (/b8, /c8, /d8). 'uch loss $ay exist where the for$ and specie of the thing is destroyed although the $aterials of which it consisted still exist (1an <alayan v. CA /6!8). 2or exa$ple, when repairs would be $ore expensive than the original cost of the vessel and effective deprivation of use and possession of property. • 1resu$ed fro$ continued absence of ship without being heard of (for length of ti$e sufficient to raise such presu$ption) •

COMM #CIAL LA$
:nsured has AA'F,C&9 right to clai$ whole a$ount of insurance even without notice of abandon$ent. Fnce he receives a$ount, it ta%es the place of the vessel and $ust be used to pay for any da$age for which it be held liable. $ay have co$e to the hands of the insured. • .hy differentiate between the 2 types of total loss the %ind of loss is the basis for the application of the doctrine of abandon$ent ('ection !*?, !*6). :n actual total loss, no abandon$ent necessary; but if loss $erely constructively total, an abandon$ent beco$es necessary to recover as for a total loss. 'tipulation of Jactual total lossK only strictly construed an insurance against Jtotal loss onlyK covers any total loss, actual or constructive, although there is authority to the contrary. :f against JabsoluteK or Jactual total loss, insurer not liable for constructive loss.

whole of such thing, or class of things, even though it beco$es entirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured. 'ec. !*>. An insurance confined in ter$s to an actual loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the entire thing insured. MINDS !( LOSS !) &otal + underwriter is liable for the whole of the a$ount insured G $ay be actual or absolute F4 constructive or technical 2) 1artial (refer to gen. and part average) TOTAL LOSS (a#? &!$$ #!t t!ta& "$ part"a&) a. A't+a& T!ta& L!$$ !. &otal destruction thing insured 2. :rretrievable loss of thing by sin%ing or by being bro%en up *. Any da$age to thing which renders it valueless to owner for the purpose for which the owner held it • ,oss by sin%ing $ay not be irretrievable, but there(s still actual total loss if thing beco$es valueless to owner for purpose for which he held it • &F&A, ,F'' is cost of 49&4:9EA, e@ual to or $ore than original value 5. Any other event which effectively 100% UP L AW

Ge#era& R+&e< if a vessel is not heard of at all within a reasonable ti$e after sailing or for a reasonable ti$e after she was last seen, she will be presu$ed to have been lost fro$ a peril insured against. H!: pre$+2pt"!# "$ e$ta,&"$he)< 1laintiff $ust prove that vessel left the port of outfit for the voyage insured. &hen, he $ust show that the vessel was not heard of at port of departure after sailing, without calling witnesses fro$ port of destination to show she never arrived there. 0o rule as to the ti$e after which $issing vessel is presu$ed lost= depends on the circu$stances of the case.

,. C!#$tr+'t".e (!r Te'h#"'a&) t!ta& &!$$D A,a#)!#2e#t (re(er t! the #eAt (e: $e't"!#$) • ,oss, although not actually loss, is of character that the insured is entitled, if he thin%s fit, to treat it as total by abandon$ent. • -ives the insured the right to abandon the thing insured by relin@uishing to the insurer his interest in such a thing, entitling hi$ to recover for a total loss thereof • 4ight to abandon granted by law if the peril insured against causes a loss of $ore than b the value of the thing insured. • :nsurer ac@uires all rights over the thing insured • :f abandon$ent is not proper or properly $ade, the insurer would still be liable as upon the Actual total loss, deducting fro$ the a$ount any proceeds fro$ the thing insured which - . . /

L"a,"&"t? !( "#$+rer "# 'a$e !( part"a& &!$$ !( $h"p !r "t$ e@+"p2e#t • &here is a deduction fro$ the cost of repairs of Jone third new for oldK, on the theory that the new $aterials render the vessel $uch $ore valuable than it was before the loss. .hen repairs are $ade, oneG third of the cost of the repair is laid upon the insured as his burden, and the i$plied agree$ent under the policy is that in case of da$age to the ship by a peril within the policy, the loss shall be esti$ated at twoGthirds of the cost of repairs fairly executed or oneG third new for old, as is co$$only expressed.

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discharging, storage, reship$ent, extra freiathage, and all other expenses incurred in saving cargo reshipped + such liability, however, cannot exceed the a$ount of insurance ('ec !*5) Ge#era& R+&e< if the original ship be disabled, and the $aster, acting with a wise discretion, as the agent of the $erchant and the shipowner, forwards the cargo in another ship, such necessary and "ustifiable change of ship will not discharge the underwriter on the goods fro$ liability for any loss which $ay ta%e place on goods after such reship$ent. EA'ept"!#< the general rule is not obligatory if the crew had to procure a vessel fro$ distant places and there are serious i$pedi$ents in the way of putting the cargo on board. S+,$")"ar? R+&e< additional pre$iu$ $ay be re@uired if the hazard is increased by extension of liability. LIABILITB OF INSURER IN CASE OF A3ERAGE A.era%e + any extraordinary or accidental expenses incurred during the voyage for the preservation of the vessel, cargo or both and all da$ages to the vessel and cargo fro$ the ti$e it is loaded and the voyage co$$enced until it ends and the cargo unloaded T:! 4"#) !( A.era%e$ (U#)er A)2"ra&t? La:)< a. Part"'+&ar A.era%e + partial loss caused by the peril insured , $ against which is not a general average loss out of the ordinary use of the thing • 0ot everyone benefits. • N!t "#te#t"!#a&&? caused to prevent a co$$on danger • :nsurer liable for the particular average unless policy excludes it. • ,iability is li$ited to the proportion of the contribution attaching to his policy value where this is less than the contributing value of the thing insured. • ,iability for particular insurance Ge#era& R+&e< an insurer is liable for both general and particular average loss. EA'ept"!#< parties can stipulate, as it often happens in $arine insurance, that the insurer will not be liable for loss, partial or total, arising fro$ perils of the sea, of a certain class of goods which are perishable or peculiarly sub"ect to da$age. EA'ept"!#< they $ay also agree to exe$pt particular average. &hen, insurer is liable only for general average and not for particular average 9NC91& if the particular average loss has the effect of Jdepriving insured of possession at the port of destination of the wholeK of the thing insured. ,. Ge#era& A.era%e + co$$on benefit (to everyone) INTENTIONAL da$age to save the $a"ority thing (so$ething is sacrificed).

COMM #CIAL LA$
• • Applies only when it is SUCCESSFUL 6ncludes all damages and e>penses which are deliberately caused in order to save the vessel) its cargo or both at the same time) from a real and known risk &herefore, when everyone benefits, everyone has to spend for it, so the person whose cargo was sacrificed cannot recover everything because part of that will go to the proGrata da$age to save the $a"ority J-eneral averageK contribution is a device for a li$ited distribution of loss. ,oss is pro tanto $ade up by proportionate or Jgeneral averageK contributions fro$ owners of interests benefited by the sacrifice. A principle of custo$ary law, independent of contract 9x. 9ntering another port for repairs, rehandling of cargo, and "ettisoning of goods to lighten vessel in case of danger of shipwrec% -ives rise to right of owner to contribution for$ those benefited thereby or fro$ insurer 2or$alities in Art. ?!* and ?!5 of the Code of Co$$erce

IF 3OBAGE CANJT BE COMPLETED ('ee 'ec. !**) • :n :nsurance Act ('ec.!27), if ship is prevented fro$ leaving an inter$ediate port by perils insured against, the $aster $ust $a%e every exertion to procure, in the sa$e or contiguous port, another ship for the purpose of conveying the cargo to its destination and the liability of a $arine insurer thereon continues after they are thus reshipped. )owever, such an obligation was deleted fro$ the :nsurance Code. Ca$pos says that this $ay be either an unintentional o$ission#error or intentional. :n any case, "# 'a$e !( re$h"p2e#t9 the "#$+rer "$ &"a,&e< !. 2or any loss which $ay ta%e place on goods until they are reshipped if voyage cannot be co$pleted in any insurance upon cargo + insurer $ay re@uired additional pre$iu$ if the hazard be increased by the extension of liability ('ec. !**) 2. :nsurer also liable for expenses necessary to co$plete the transportaion of cargo reshipped; da$ages, expenses of 100% UP L AW

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"$ $a'r"("' e) )e&",er ate&? -. Fr!2 the eApe#$ e$ !r )a2a% e$ 'a+$e) (!&&!:$ the $a."#% !( the .e$$e& a#) 'ar%! 5. &hat the eApe#$ e$ !r )a2a% e$ should have been incurre d or "#(&"'te ) a(ter ta4"#% the pr!per &e%a& $tep$. 3. Ma)e ,? the 2a$ter or upon his authorit y 6. N!t 'a+$e) ,? a#? (a+&t !( part? a$4"#% (!r '!#tr", +t"!# 7. Ne'e$$ ar? L"a,"&"t? !( "#$+rer (!r %e#era& a.era%e

COMM #CIAL LA$
&he above provision is $andatory in ter$s, and insurers, whether for vessel, cargo or freightage, are bound to contribute to the inde$nity of the general average. &his places insurer on sa$e footing as others who have an interest in the vessel or cargo, at ti$e of occurrence of the general average and who are co$pelled to contribute. • F!r2+&a (!r '!2p+t"#% &"a,"&"t? !( "#$+rer loss, the insurer, :ns. 'ociety of Canton refused it and re@uired that the ship be salvaged. After several futile atte$pts, the ship was finally raised about two $onths later and was repaired. &he cost of salvage and repair was substantially e@ual to the original cost of the vessel. IssueF .F0 :nsurance 'ociety can be held for total loss of the vessel even after its recovery Hel"F H9'. :nsurer liable for total loss because while the ship was in the botto$ of the sea, it was of no value to the owner. &o render it valueless to the insured, it is no necessary that there be an actual or total loss or destruction of all the different parts of the entire vessel. Ch!a . CA

$ust be co$plied with to incur expenses and cause da$ages corresponding to gross average. L"a,"&"t? !( I#$+rer< :f owner is insured, he has the alternative of see%ing fro$ his insurer, subrogating the latter to his said right of contribution. )e loses this alternative, however, if he neglects or waives his right to such contribution EA'ept"!#< &here can be no recovery for general average loss against the insurer !. After the separati on of the interest s liable to the contrib ution 2. .hen the insured has neglect ed or waived his right to contrib ution. Re@+"$"te$ (!r Ge#. A.e t! eA"$t !. &here $ust be '!22! # )a#%er to ship and cargo 2. 2or co$$o n safety, part !( the .e$$e& !r 'ar%!

A$t of insurancecccc x -eneral Aveage X 1roportion of -A, for &otal a$t or value involved ,oss (-A,) which insurer is liable L"2"t a$ t! &"a,"&"t? !( "#$+rer (!r %e#era& a.era%e &!$$ :t is li$ited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. :n other words, the liability of the insurer shall be less than the proportion of the general average loss assessed upon the thing insured where its contributing value is $ore than the a$ount of the insurance. :n such a case, the insured is liable to contribute ratably with the insurer to the inde$nity of the general average •

Art. ?36, 0ode of 0ommerce. &he underwriters of the vessels, of the freightage and of the cargo shall be obliged to pay for the inde$nity of the gross average in so far as is re@uired of each one of these ob"ects respectively.

5actsF Choa i$ported so$e lactose crystals fro$ )olland. &he goods were insured with 2ilipino <erchants against all ris%s. Cpon arrival in <anila, it was found that out of the 7BB bags, 5B* were in bad order. Choa filed a clai$ for the loss but 2il. <er re"ected. IssueF .F0 an Jall ris%sK coverage covers only losses occasioned by fortuitous events Hel"F 0F. An all ris% insurance policy insures against all cause Li/it of $8conceivable A/$u%t $8 i% ur#%ce II J Pr$9$rti$% $8 !e%er#" "i#2i"it0 V#"ue $8 the thi%! #:er#!e "$ # eloss e& K $8 i% urer da$age or Ph"&"pp"#e insured upon thing insured except as otherwise Ma#+(a't+r"#% C! . excluded in the policy I#$+ra#'e S!'"et? or due to fraud. &he !( Ca#t!# Lt). ter$s of the policy are clear and re@uire 5actsF &he insured no interpretation. An vessel owned by 1hil. Jall ris%sK provision <anufacturing Co. creates a special type sand due to a of insurance w#c typhoon. Despite the extends coverage to offer of 1hil <an. &o ris%s not usually abandon the vessel conte$plated and as an absolute total - . . / $age 182 o0 355

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aboard the barges of &ranspacific &owage :nc. :t was insured with Friental Assurance Corp and loaded on 2 barges. )owever, during the voyage, 56> pieces of the 36? pieces loaded on one of the barges was lost. IssueF .F0 1ana$a can de$and pay$ent for constructive loss of the logs on one of the barges Hel"F 0F. &he logs involved, although placed in two barges, were not separately valued by the policy, nor separately insured. 4esultantly, the logs lost in the barge in relation to the total nu$ber of logs loaded on the sa$e barge can not be $ade the basis for deter$ining constructive total loss. &he logs having been insured as one inseparate unit, the correct basis for deter$ining the existence of constructive total loss is the totality of the ship$ent of logs. (F2 the !,2B? logs, only 56> pieces were lost or 5!M therefore it cannot fall under constructive total loss) Pa# Ma&a?a# I#$+ra#'e . CA 5actsF &he barge carrying a ship$ent of certified rice seeds to Pa$puchea san%. &he owner of the rice seeds, the 2ood and Agricultural Frganization of the C.0. (2AF) filed its clai$ under a $arine insurance policy with 1an <alayan. ,ater, it was infor$ed by ,uzon 'tevedoring Corporation, the carrier, that the ship$ent was recovered, hence 2AF filed a clai$ w# ,uzon 'tevedoring for co$pensation fo da$ages of its cargo. IssueF .o0 2AF can recover for total loss , $ even if so$e of the rice seeds was recovered. Hel"F H9'. &he co$plete physical destruction of the sub"ect $atter is not essential t oconstitute an actual total loss. 'uch a loss $ay exist where the for$ and specie of the thing is destroyed although the $aterials which it consisted still exist. Ff the *5,!22 bags of rice seeds shipped, 2>,622 bags were deter$ined to be lost#da$aged (>?M of cargo da$aged).

COMM #CIAL LA$
without incurring either an expense to the insured of $ore than threeGfourths the value of the thing abandoned or a ris% which a prudent $an would not ta%e under the circu$stances; or (d) :f the thing insured, being cargo or freightage, and the voyage cannot be perfor$ed, nor another ship procured by the $aster, within a reasonable ti$e and with reasonable diligence, to forward the cargo, without incurring the li%e expense or ris% $entioned in the preceding subG paragraph. Aut freightage cannot in any case be abandoned unless the ship is also abandoned. 'ec. !5B. An abandon$ent $ust be neither partial nor conditional. 'ec. !5!. An abandon$ent $ust be $ade within a reasonable ti$e after receipt of reliable infor$ation of the loss, but where the infor$ation is of a doubtful character, the insured is entitled to a reasonable ti$e to $a%e in@uiry. 'ec. !52. .here the infor$ation upon which an abandon$ent has been $ade proves incorrect, or the thing insured was so far restored when the abandon$ent was $ade that there was then in fact no total loss, the abandon$ent beco$es ineffectual. 'ec. !5*. Abandon$ent is $ade by giving notice thereof to the insurer, which $ay be done orally, or in writing; 1rovided, &hat if the notice be done $age 183 o0 355

avoids putting upon the insured the burden of establishing that insurer can avoid coverage upon de$onstrating that a specific provision expressly excludes the loss fro$ coverage.

A,!"t"/ Sh"pp"#% . PHILAMGEN 5actsF <arindu@ue <ining :ndustrial Crop had shipped fro$ the C' a ship$ent of one s%id carton parts for valves. .hen cargo arrived in <anila, it was deposited in the office of Aboitiz 'hipping Corp for transship$ent to 0onoc :sland. )owever, before it was transshipped, said cargo was pilfered. <arindu@ue filed a clai$ against Aboitiz in the a$ount of the pilfered cargo. :t also filed for the sa$e a$ount against 1hilippine A$erican -eneral :nsurance Co (1hilGA$), its insurer. IssueF .F0 Aboitiz should be held liable for the pilfered cargo. Hel"F H9'. &he @uestioned ship$ent is covered by a continuing open insurance coverage fro$ the ti$e it was loaded in the C' to the ti$e it was delivered to the possession of Aboitiz in its <anila office. Aboitiz(s contention is that it could not be held liable for the pilferage as it was stolen even before it was loaded on the vessel. &his is untenable as the logs were in its possession before it was pilfered. Or"e#ta& A$$+ra#'e . CA 5actsF 1ana$a 'aw$ill Co had logs shipped fro$ 1alawan 100% UP L AW

6. ABANDONMENT
6. . Re@+"$"te$ C!#)"t"!#$ 'ec. a#)

!*?. Abandon$ent, in $arine insurance, is the act of the insured by which, after a constructive total loss, he declares the relin@uish$ent to the insurer of his interest in the thing insured. 'ec. !*6. A person insured by a contract of $arine insurance $ay abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against (a) :f $ore than threeGfourths thereof in value is actually lost, or would have to be expended to recover it fro$ the peril; (b) :f it is in"ured to such an extent as to reduce its value $ore than threeGfourths; (c) :f the thing insured is a ship, and the conte$plated voyage cannot be lawfully perfor$ed - . . /

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constructive total loss, he declares the relin@uish$ent to the insurer of his interest in the thing insured. &he insured chooses to ta%e the proceeds in place of the re$aining parts of the thing, which is ceded to the • insurer. • 4ight to abandon is granted by law to the insured if peril insured against causes a loss of $ore than b the thing insured, or where its value is reduced by $ore than b • Re2e2,er< >3U loss X Constructive ,oss which entitles re'!.er? of the full a$ount in the policy. Does not $ean that recovery is only up to >3M. Whe# C!#$tr+'t".e TOTAL &!$$ eA"$t$< V R+&e ('ec. !*6) !. :f $ore than b thereof in value is actually lost, or would have to be expended to recover fro$ peril 2. :f it is in"ured to such an extent as to reduce its value $ore than b *. :2 the thing insured is a ship, and the conte$plated voyage can(t be lawfully perfor$ed w#o incurring either an expense to the insured or $ore than b the value of the thing abandoned or - . . / a ris% which a prudent $an would not ta%e under the circu$stances 5. :f the thing insured, being cargo or freightage, and the voyage can(t be perfor$ed, nor another ship procured by the $aster, within a reasonable ti$e and with reasonable diligence, to fowrward the cargo, without incurring the li%e expense or ris% $entioned in the preceding subG paragraph. Aut freightage cannot in any case be abandoned unless the ship is also abandoned. Re@+"re2e#t$< !. &here $ust be a't+a& re&"#@+"$h2e# t by the person insured of his interest in the thing insured (!*?) 2. &here $ust be '!#$tr+'t".e t!ta& &!$$ (!*6). Any particular portion of the thing insured separately valued by the policy $ay be separately abandoned as it is dee$ed separately insured *. :t $ust be t!ta& a#) a,$!&+te (!5B) 5. :t $ust be :"th"# a rea$!#a,&e t"2e after the receipt of reliable infor$ation of the loss (!5!) 3. :t $ust be (a't+a& (!52) 7. :t $ust be $ade by giving $age 184 o0 355

orally, a written notice of such abandon$ent shall be sub$itted within seven days fro$ such oral notice. 'ec. !55. A notice of abandon$ent $ust be explicit, and $ust specify the particular cause of the abandon$ent, but need state only enough to show that there is probable cause therefor, and need not be acco$panied with proof of interest or of loss. 'ec. !53. An abandon$ent can be sustained only upon the cause specified in the notice thereof. 'ec. !57. An abandon$ent is e@uivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and inde$nity. 'ec. !5>. :f a $arine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever $ay re$ain of the thing insured, or its proceeds or salvage, as if there had been a for$al abandon$ent. 'ec. !5?. Cpon an abandon$ent, acts done in good faith by those who were agents of the insured in respect to the thing insured, subse@uent to the loss, are at the ris% of the insurer and for his benefit. 'ec. !56. .here notice of abandon$ent is properly given, the rights of the insured are not pre"udiced by the fact that the insurer refuses to accept the abandon$ent.

'ec. !3B. &he acceptance of an abandon$ent $ay be either express or i$plied fro$ the conduct of the insurer. &he $ere silence of the insurer for an unreasonable length of ti$e after notice shall be construed as an acceptance. 'ec. !3!. &he acceptance of an abandon$ent, whether express or i$plied, is conclusive upon the parties, and ad$its the loss and the sufficiency of the abandon$ent. 'ec. !32. An abandon$ent once $ade and accepted is irrevocable, unless the ground upon which it was $ade proves to be unfounded. 'ec. !3*. Fn an accepted abandon$ent of a ship, freightage earned previous to the loss belongs to the insurer of said freightage; but freightage subse@uently earned belongs to the insurer of the ship. 'ec. !35. :f an insurer refuses to accept a valid abandon$ent, he is liable as upon actual total loss, deducting fro$ the a$ount any proceeds of the thing insured which $ay have co$e to the hands of the insured. 'ec. !33. :f a person insured o$its to abandon, he $ay nevertheless recover his actual loss. ABANDONMENT • Abandon$ent, in $arine insurance, is the act of the insured by which, after a , $

100% UP L AW

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>.

#!t"'e thereof to the insurer which $ay be done orally or in writing (!5*) N!t"'e 2+$t ,e eAp&"'"t a#) 2+$t $pe'"(? the part"'+&ar 'a+$e !( the a,a#)!#2e#t (!55)

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, $

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$age 185 o0 355

I#e((e't".e a,a#)!#2e#t • Abandon$e • 9@uivalent to transfer by nt can be the insured of his interest to sustained the insurer, with all the only upon chances of recovery and cause inde$nity specified • :2 proper and notice is • :f cause is properly given, re(+$a& t! unfounded a''ept a,a#)!#2e#t does and info not pre"udice insured. upon which :nsured still liable for actual it was $ade total loss, $inus a$ount any proves proceeds of thing insured incorrect which $ay have co$e to the hands of the insured. • &hing insurer a''ept$ insured was • :2 so far abandon$ent, it(s restored conclusive between the when the parties and ad$its the loss abandon$e and the sufficiency of the nt was abandon$ent $ade that • :rrevocable unless grounds there was in prove to be unfounded fact no total loss

ACCEPTANCE 9xpress or :$plied fro$ conduct of insurer <ere silence for unreasonable length of ti$e $ay be dee$ed acceptance

NO AAA0GDF0G <90& :nsured still entitled to recover actual loss 'a$e rule applies where abandonG $ent wasn(t proper or where it wasn(t properly $ade

Ne'e$$"t? (!r a,a#)!#2e#t • &9C)0:CA, &F&A, ,F'' insured can(t clai$ the whole insurance without showing due regard to the interest the underwriter $ay ta%e in the abandoned property. :f underwriter can save so$e parts, he is entitled to ti$ely notice of abandon$ent and he can(t be liable for a total loss without it. Aut there is no obligation to abandon=insured(s choice. )e still recovers actual loss even if he doesn(t abandon (§!33). I#ter#at"!#a& R+&e< • right of abandon$ent of vessels, as a legal li$itation of a ship owner(s liability, does not apply where in"ury or average was caused by ship owner(s own fault. Art.3?> (Code of Co$$erce) refers only to cases of captain(s fault or negligence. :f owner is also at fault, Civil Code provisions on Co$$on Carriers apply. Whe# there "$ '!#$tr+'t".e t!ta& &!$$

1hilippine rule + insured $any not abandon unless loss#da$age is $ore than b of value as indicated in §!*6. A,a#)!#2e#t :here "#$+ra#'e )"."$",&e a#) :here "#)"."$",&e • &hings separately valued by the policy $ay be separately abandoned because they are separately insured ('ection !*6) &his is a @uestion of intention to be deter$ined by the language used Cr"ter"!# a$ t! eAte#t !( &!$$ Ge#era& R+&e< &he extent of in"ury to the vessel is considered with reference to the general $ar%et value i$$ediately before the disaster. &he rule is said to apply even though the policy is valued but so$e thin% otherwise. :f the policy is expressly provides that the valuation will be used, it should be followed. &he expenses incurred or to be incurred by the insured recovering the thing insured are also considered (ex. cost for refloating the ship).

A,a#)!#2e#t 2+$t ,e a,$!&+te Ge#era& R+&e< &o cover the whole interest insured, abandon$ent $ust be unconditional. EA'ept"!#< if only part of the thing is covered by the insurance, the insurer need only abandon that part. A,a#)!#2e#t 2+$t ,e 2a)e :"th"# a rea$!#a,&e t"2e • Fnce the insured received the notice of loss, he $ust choose within a reasonable ti$e .F0 he will abandon to the insurer. :f he chooses to do so, he $ust give notice so that the insurer $ay not be pre"udiced by the delay and $ay ta%e i$$ediate steps for the preservation of the property. • 4easonable ti$e G depending on the facts and circu$stances in each case. :f the first notice is not clearly $ade, the insured $ust have sufficient ti$e to ascertain the facts. )e cannot wait an undue length of ti$e to see if it will be $ore profitable to abandon or clai$ for partial loss. A,a#)!#2e#t 2+$t ,e (a't+a& !. 9xistence of loss at ti$e of abandon$ent G the right of the insured to choose between abandon$ent or recovery for total loss depends on the facts at the ti$e of the offer to abandon and not upon the state disclosed by the infor$ation received or state of loss before the ti$e of offer 2. 9ffect of subse@uent events G none. Fnce the abandon$ent is $ade good the rights of the parties beco$e fixed. &he sa$e is true when the abandon$ent is not $ade good. 'ubse@uent events will not affect it as to retroactively i$part validity. a. :nsured cannot abandon when the thing is safe or when he %new at the ti$e he $ade the offer that the vessel had been repaired and is continuing voyage. b. :f after abandon$ent, the thing is recovered, insured $ay not withdraw. *. :nstances "ustifying abandon$ent G insured $ay abandon for a total loss in case of capture, seizure, or detention of the ship or cargo; restraint by bloc%ade or e$bargo; funds for repair cannot be raised w#o fault of owner; where voyage absolutely lost; where sale $ade by $aster of the vessel because of urgent necessity. I#(!r2at"!# #ee) #!t ,e )"re't !r p!$"t".e • Direct or positive infor$ation not necessary (ex. newspaper report, letter fro$ an agent) • &he infor$ation $ust be of such facts and circu$stances as to render it highly probable that a constructive total loss has occurred, and facts sufficient to constitute a total loss $ust exist. Aut the facts and infor$ation need not be the sa$e. F!r2 !( #!t"'e !( a,a#)!#2e#t Ge#era& R+&e< no particular for$ of giving notice of abandon$ent is re@uired by law. :t $ay be $ade orally unless the policy re@uires that it be $ade in writing. 0otice by telegraph $ay be sufficient. S+,$")"ar? R+&e< if notice is done orally, the insured $ust sub$it to the insurer a written notice w#in > days fro$ the oral notice

N!t"'e !( a,a#)!#2e#t 2+$t ,e eAp&"'"t • 0otice cannot "ust be inferred fro$ so$e e@uivocal acts. &here $ust be an intention to abandon, apparent fro$ the co$$unication. • &he use of the word JabandonK is not necessary. • &here is no abandon$ent although the insured has given notice of an intention to abandon if he continues to clai$ and use the property as his own. N!t"'e !( a,a#)!#2e#t 2+$t $pe'"(? part"'+&ar 'a+$e there!( • &he grounds $ust be stated with such particularity as to enable the insurer to deter$ine .F0 he is bound to accept the offer. • 1robable cause of abandon$ent contained in the notice is sufficient. • 1roof of interest or of loss is not necessary in the notice. Pr!!( !( !ther 'a+$e$ #!t a)2"$$",&e • 'ufficient grounds for abandon$ent $ust be stated to $a%e the abandon$ent valid. )e cannot avail hi$self of any ground other than those he stated. F!r2 !( a''epta#'e !( a,a#)!#2e#t • 0eed not be express. :t $ay be i$plied by conduct, as fro$ an act of the insurer in conse@uence of an abandon$ent, which can only be "ustified under a right derived fro$ the abandon$ent (ex. when the insurer too% possession of the ship and $ade repairs already followed by retention for an unreasonable a$ount of ti$e) • 'ilence, if not for an unreasonable a$ount of ti$e will not operate as an acceptance R"%ht !( the "#$+rer t! (re"%hta%e Ge#era& R+&e< a validly $ade abandon$ent passes to the insurer the interest that the insured has over the thing S+,$")"ar? R+&e9 a$ t! a $h"p< the insurer, after abandon$ent, beco$es the owner thereof and his title beco$es vested as of the ti$e of the loss. S+,$")"ar? R+&e9 a$ t! (re"%hta%e< depends upon when such freightage was earned. :f subse@uent to the loss, it belongs to the insurer of the ship. :f previously earned, to the insurer of the freightage who is subrogated to the rights of the insured up to the ti$e of the loss. E((e't$ !( a''epta#'e !( a,a#)!#2e#t !. Cpon receiving notice of abandon$ent, the "#$+rer 2a? a''ept !r reGe't abandon$ent. 2. I#$+rer ,e'!2e$ &"a,&e (!r :h!&e a2!+#t !( "#$+ra#'e a#) ,e'!2e$ e#t"t&e) t! a&& the r"%ht$ which the insured has over the thing *. &he parties( r"%ht$ ,e'!2e ("Ae). 5. &he "#$+rer 2a? #! &!#%er re&? !# a#? "#$+(("'"e#'? "# the (!r29 t"2e !r r"%ht !( a,a#)!#2e#t. .F0 the insured has a right to abandon is i$$aterial where offer is already accepted and there is no fraud. 3. 9NC91&:F0 to the general effects of acceptance when the ground upon which it was $ade proves to be unfounded. 7. Abandon$ent can be $+$ta"#e) !#&? +p!# the %r!+#) $pe'"("e) in the notice.

E((e't !( re(+$a& t! a''ept a .a&") a,a#)!#2e#t !# "#$+rerJ$ &"a,"&"t? Ge#era& R+&e< the insured(s right to abandon is absolute when it is "ustified by circu$stances. Acceptance is not necessary to validate it. G (Actual ,oss) (1roceeds the insurer $ight have received fro$ the da$aged property)ccccccccc (,iability of insurer)

cost cannot be ascertained, its $ar%et value at the ti$e and place of lading, adding the charges incurred in purchasing and placing it on board, but without reference to any loss incurred in raising $oney for its purchase, or to any drawbac% on its exportation, or to the fluctuation of the $ar%et at the port of destination, or to expenses incurred on the way or on arrival; (c) &he value of freightage is the gross freightage, exclusive of pri$age, without reference to the cost of earning it; and (d) &he cost of insurance is in each case to be added to the value thus esti$ated.

S+,$")"ar? R+&e< upon proper abandon$ent, insured $ay still recover to the extent of the da$age proved 7. MEASURE OF INDEMNITB 7. . Ope# a#) 3a&+e) P!&"'? 'ec. !37. A valuation in a policy of $arine insurance in conclusive between the parties thereto in the ad"ust$ent of either a partial or total loss, if the insured has so$e interest at ris%, and there is no fraud on his part; except that when a thing has been hypothecated by botto$ry or respondentia, before its insurance, and without the %nowledge of the person actually procuring the insurance, he $ay show the real value. Aut a valuation fraudulent in fact, entitles the insurer to rescind the contract. 'ec. !3>. A $arine insurer is liable upon a partial loss, only for such proportion of the a$ount insured by hi$ as the loss bears to the value of the whole interest of the insured in the property insured. 'ec. !3?. .here profits are separately insured in a contract of $arine insurance, the insured is entitled to recover, in case of loss, a proportion of such profits e@uivalent to the proportion which the value of the property lost bears to the value of the whole. 'ec. !36. :n case of a valued policy of $arine insurance on freightage or cargo, if a part only of the sub"ect is exposed to the ris%, the evaluation applies only in proportion to such part. 'ec. !7B. .hen profits are valued and insured by a contract of $arine insurance, a loss of the$ is conclusively presu$ed fro$ a loss of the property out of which they are expected to arise, and the valuation fixes their a$ount. 'ec. !7!. :n esti$ating a loss under an open policy of $arine insurance the following rules are to be observed (a) &he value of a beginning of the ris%, charges which add to its are necessary to prepare ship is its value at the including all articles or per$anent value or which it for the voyage insured;

'ec. !72. :f cargo insured against partial loss arrives at the port of destination in a da$aged condition, the loss of the insured is dee$ed to be the sa$e proportion of the value which the $ar%et price at that port, of the thing so da$aged, bears to the $ar%et price it would have brought if sound. 'ec. !7*. A $arine insurer is liable for all the expenses attendant upon a loss which forces the ship into port to be repaired; and where it is stipulated in the policy that the insured shall labor for the recovery of the property, the insurer is liable for the expense incurred thereby, such expense, in either case, being in addition to a total loss, if that afterwards occurs. 'ec. !75. A $arine insurer is liable for a loss falling upon the insured, through a contribution in respect to the thing insured, re@uired to be $ade by hi$ towards a general average loss called for by a peril insured against; provided, that the liability of the insurer shall be li$ited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. 'ec. !73. .hen a person insured by a contract of $arine insurance has a de$and against others for contribution, he $ay clai$ the whole loss fro$ the insurer, subrogating hi$ to his own right to contribution. Aut no such clai$ can be $ade upon the insurer after the separation of the interests liable to the contribution, nor when the insured, having the right and opportunity to enforce the contribution fro$ others, has neglected or waived the exercise of that right. 'ec. !77. :n the case of a partial loss of ship or its e@uip$ent, the old $aterials are to be applied towards pay$ent for the new. Cnless otherwise stipulated in the policy, a $arine insurer is liable for only twoGthirds of the re$aining cost of repairs after such deduction, except that anchors $ust be paid in full. A. 3a&+e) P!&"'? • Ealuation fixes in advance the value of the property and thus avoids the necessity of proving its actual value in case of loss • Ealuation is conclusive between the parties in the ad"ust$ent of either a total or partial loss.

(b) &he value of the cargo is its actual cost to the insured, when laden on board, or where the

• •

9xception :f there is 24ACD on the part of the insured, insurer would have the right to 49'C:'':F0 &he change in a vessel(s value after a long period of voyage cannot bind the parties, as the insured value stated in the policy is conclusive upon the$. 0either party can give evidence of the real value of the thing insured. Aut when the thing has been hypothecated by botto$ry or respondentia before its insurance and without the %nowledge of the person who actually procured the insurance, the insurer $ay show the real value but he is not entitled to rescind the contract unless he can prove that the valuation was in fact fraudulent. .hen insured a coGinsurer in $arine insurance G :n $arine insurance, the insured is expected to cover by insurance the full value of the property insured. :f the value of his interest exceeds the a$ount of the insurance, he is considered the coGinsurer for an a$ount deter$ined by the difference between the insurance ta%en out and the value of the property
c (partial) ,ossccc value of thing insured A$ount of 1rofits A$ount of 4ecovery

fro$ the loss of the property and the valuation agreed upon in the policy fixes the a$ount of recovery. B. Ope# P!&"'? • ,oss is esti$ated in accordance with certain rules laid down in the code (refer to table below) • Cost of insurance $ust be added to the value of ship, cargo, or freightage as the case $ay be • )owever, $axi$u$ recovery $ay only be up to the face value of the policy

WHAT Sh"p

Car%!

N

X

G 'ection !3> applies only if (!) the loss is partial and (2) the a$ount of insurance is less than the insured entire insurable interest in the property insured. ,oss of profits separately insured G :f the profits to be realized are separately insured fro$ the vessel or cargo, the insured is entitled to recover, in case of loss, such proportion of the profits as the value of the property lost bears to the value of the whole property
V#"ue $8 9r$9ert0 "$ tIIII V#"ue $8 the 1h$"e 9r$9ert0 i% ure& A/$u%t $8 9r$8it K A/$u%t $8 rec$:er0

Fre"%hta%e

3ALUE "# OPEN POLICB Ealue at beginning of ris% (incl all articles which add to its per$anent value or which are necessary to prepare if for the voyage insured), not the value at ti$e she was built Actual cost when laden on board. :2 actual cost can(t be deter$ined, $ar%et value at ti$e and place of lading, 1,C' expenses incurred in purchasing and placing the$ on board. 9xpected profits are not considered since they can be separately isnured. -ross freightage without reference to cost of earning it

J

&he cost of insurance is added in calculating the value of the ship, cargo, or freightage of other sub"ect $atter in an open policy. .here cargo insured against partial loss is da$aged G 'ection !72 is applicable if the cargo is insured against a partial loss and it suffers da$age as a result of which its $ar%et value at the port of destination is reduced

G :f policy is valued, loss of such profits is conclusively presu$ed fro$ a loss of the property out of which they are expected to arise, and the valuation fixes their a$ount. .here only part of a cargo or freightage insured exposed to ris% G &he valuation will be reduced proportionately. &he insurer is bound to return such portion of the pre$iu$ as corresponds with the portion of the cargo which had been exposed to the ris%. 1resu$ption of loss of profits .here profits are separately insured fro$ the property out of which they are expected to arise, the insured, in case of partial loss of the property, is entitled $erely to partial inde$nity for the profits lost. :f the property is totally lost, pro tanto the total profits are also lost. 'uch loss of the profits is conclusively presu$ed

<ar%et price in sound state ,ess <ar%et price in da$aged statec X 4eduction in value (depreciation)

4educed in value N a$ount of X a$ount <ar%et price in insurance of sound state recovery C. T!ta& L!$$ I# 'a$e !( !pe# p!&"'?< • Ealue of total loss will be co$puted in rules stated above • :nsurer liable for total loss, but it can(t exceed face a$ount of policy I# 'a$e !( .a&+e) p!&"'?< • :nsurer $ust pay valuation fixed in the policy without any right to argue against its correctness except on basis of fraud • ,iability can(t exceed a$ount in policy D. Part"a& L!$$D C!=I#$+ra#'e • :n both open and valued policies, in case of partial loss, the insured is dee$ed ,? &a: as coGinsurer if the value of the insurance is

• •

less than the value of the property or interest insured, even in the absence of any agree$ent to that effect. )owever, law does not prevent parties fro$ stipulating otherwise Difference with 2ire :nsurance P!&"'? $h!+&) eApre$$&? pr!.")e (!r '!= "#$+ra#'e otherwise, insurer is liable for the full a$ount of the partial loss. :n $arine insurance, coGinsurance is $andated by law. 9xa$ple of CoG:nsurance 'hip _!BB < :nsurance _?B< ,oss _3B< .hat does insured getS _5B< G only gets proportion

the insured or by the person entitled to the benefit without unnecessary delay. :t has been held however that for$al notice of loss is not necessary if insurer has actual notice of loss already.

1roof of ,oss + is the for$al evidence given the insurance co$pany by the insured or clai$ant under a policy of the occurrence of the loss, the particulars and the data necessary to enable the co$pany to deter$ine its liability and the a$ount. :s not tanta$ount to proof or evidence under the law on evidence.  1roof of loss is distinct fro$ notice of loss and intended to !. give the insurer infor$ation by which he $ay deter$ine the extent of his liability 2. afford hi$ a $eans of detecting any fraud that $ay have been practiced upon hi$. &he law does not stipulate any re@uire$ent as to the for$ in which notice or proof of loss $ust be given. )owever according to De ,eon, it is advisable to give the notice in writing for the protection of the insured or his beneficiary. 0otice $ay be an infor$al or provisional clai$ containing a $ini$u$ of infor$ation as distinguished fro$ a for$al clai$ which contains full details of the loss, co$putations of the a$ounts clai$ed, and supporting evidence, together with a de$and or re@uest for pay$ent.

E. Other EApe#$e$ Char%ea,&e t! I#$+rer • :f ship has to $a%e port for repairs, $arine insurer $ust bear the attendant expenses • :nsurer also liable for expenses for recovery of the property if policy i$posed upon the insured the duty of such recovery, such expenses being additional to total loss F. Fra#'h"$e C&a+$e • 2ranchise X Designated 1ercentage • 'o$eti$es, policy on cargo $ay provide that unless da$age reaches a designated percentage of the value of such cargo, no a$ount will be paid by insurer. • :f loss reaches such percentage, insured will be entitled to full a$ount of loss

C5apter +I CLAIMS< S TTL M "T 8 S2B#O1ATIO"
. NOTICE AND PROOF OF LOSS
&itle !B + 0otice and 1roof of ,oss 'ec. ??. :n case of loss upon an insurance against fire, an insurer is exonerated, if notice thereof be not given to hi$ by an insured, or so$e person entitled to the benefit of the insurance, without unnecessary delay. 'ec. ?6. .hen a preli$inary proof of loss is re@uired by a policy, the insured is not bound to give such proofs as would be necessary in a court of "ustice; but it is sufficient for hi$ to give the best evidence* which he has in his power at the ti$e. 0otice of ,oss + the for$al notice given the insurer by the insured or clai$ant under a policy of the occurrence of the loss insured against.  &he purpose is to apprise the insurance co$pany so that it $ay $a%e proper investigation and ta%e such action as $ay be necessary to protect its interest.  :t is necessary as the insurer cannot be liable to pay a clai$ unless he receives notice of that clai$.  Cnder 'ec. ?? insurer is exonerated if notice of loss is not given to the insurer by

0ature of notice and proof of loss • Although they are in the for$ of conditions precedent, they are in the nature of conditions subse@uent the breach of which affects a right that has already accrued (before the loss, insurer(s liability is contingent but with the happening of the loss, his liability beco$es properly fixed). • &hese conditions are intended $erely for evidentiary purposes and do not for$ any part of the conditions of liability and are construed with $uch less strictness than those conditions that operate prior to loss. 'ec. 6B. All defects in a notice of loss; or in preli$inary proof thereof, which the insured $ight re$edy, and which the insurer o$its to specify to hi$, without unnecessary delay, as grounds of ob"ection, are waived. 'ec. 6!. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of hi$, or if he o$its to ta%e ob"ection pro$ptly and specifically upon that ground • Delay in the presentation of notice and proof of loss is dee$ed waived when due to an act of the insurer, by failure to ta%e ob"ection pro$ptly and specifically upon that ground. :f the insured atte$pted to co$ply and the co$pany $ade ob"ections, the insured will be allowed a reasonable ti$e after he is appraised within which to re$edy the defects regardless of the ti$e prescribed by the policy for furnishing proofs. Delay as a ground for resisting a clai$ places the insurer on duty to in@uire when the loss

too% place, so that it could deter$ine whether delay would be a valid ground to ob"ect to a clai$. 'ec. 62. :f the policy re@uires, by way of preli$inary proof of loss, the certificate or testi$ony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any "ust grounds of disbelief in the facts necessary to be certified or testified. Certificate or &esti$ony of 1erson other than :nsured as 1reli$inary 1roof    <ay be re@uired by the policy 'ufficient that he insured use reasonable diligence to procure it :f person refuses to give it, it is sufficient to furnish reasonable evidence to the insurer that such refusal was not induced by any grounds of D:'A9,:92 in the facts necessary to be certified.

unfair clai$ settle$ent practices. Any of the following acts by an insurance co$pany, if co$$itted without "ust cause and perfor$ed with such fre@uency as to indicate a general business practice, shall constitute unfair clai$ settle$ent practice (a) %nowingly $isrepresenting to clai$ants pertinent facts or policy provisions relating to coverages at issue; (b) failing to ac%nowledge with reasonable pro$ptness pertinent co$$unications with respect to clai$s arising under its policies; (c) failing to adopt and i$ple$ent reasonable standards for the pro$pt investigation of clai$s arising under its policies; (d) not atte$pting in good faith to effectuate pro$pt, fair and e@uitable settle$ent of clai$s sub$itted in which liability has beco$e reasonably clear; or (e) co$pelling policyholders to institute suits to recover a$ounts due under its polices by offering without "ustifiable reason substantially less than the a$ounts ulti$ately recovered in suites brought by the$. (2) 9vidence as to the nu$bers and types of valid and "ustifiable co$plaints to the Co$$issioner against an insurance co$pany, and the Co$$issioner(s co$plaint experience with other insurance co$panies writing si$ilar lines of insurance shall be ad$issible in evidence in an ad$inistrative or "udicial proceeding brought under this section. (*) :f it is found, after notice and an opportunity to be heard, that an insurance co$pany has violated this section, each instance of non co$pliance with paragraph (!) $ay be treated as a separate violation of this section and shall be considered sufficient cause for the suspension or revocation of the co$pany(s certificate of authority.

Ge#era& R+&e< :nsured $ust give, by way of preli$inary proof of loss, the certificate or testi$ony of a person other than the insured when re@uired by the policy. S+pp&e2e#tar? R+&e$< :t is sufficient for the insured to use reasonable diligence to procure it. :n case of the refusal of such person to give it, insured $ust furnish reasonable evidence to the insurer that such refusal was not induced by any "ust grounds of disbelief in the facts necessary to be certified or testified, but because of other grounds. &his re@uire$ent $ust be liberally construed in favor of the insured.

Ph"&. A2. L"(e . CA L P+&")! Fa't$< &he insured 2lorence 1ulido too% out a nonG$edical life insurance policy fro$ 1hila$life in the a$ount of !BBP and the policy was issued on 2eb. !!, !6?6. 'he died on 'ept. !B, !66! and her beneficiary, her sister 9liza 1ulido filed a clai$ which was denied by 1hila$life on the ground of fraud clai$ing that at the ti$e the insured applied for the policy, she was already actually dead. Rat"!< &here was no fraud, the death certificates and notes by the $unicipal health officer prepared in the regular perfor$ance of duties are pri$a facie evidence of facts. A dulyGregistered death certificate is considered a public docu$ent and the entries found therein are presu$ed correct, unless the party who contests its accuracy can produce positive evidence to establish otherwise which in the case at bar 1hila$life failed to do.

*. GUIDELINES ON CLAIMS SETTLEMENT
&itle !! + Clai$s 'ettle$ent 'ec. 25!. (!) 0o insurance co$pany doing business in the 1hilippines shall refuse, without "ust cause, to pay or settle clai$s arising under coverages provided by its policies, nor shall any such co$pany engage

'ec. 252. &he proceeds of a life insurance policy shall be paid i$$ediately upon $aturity of the policy, unless such proceeds are $ade payable in install$ents or as an annuity, in which case the install$ents, or annuities shall be paid as they beco$e due 1rovided, however, &hat in the case of a policy $aturing by the death of the insured, the proceeds thereof shall be paid within sixty days after presentation of the clai$ and filing of the proof of the death of the insured. 4efusal or failure to pay the clai$ within the ti$e prescribed herein will entitle the beneficiary to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the <onetary Aoard, unless such failure or refusal to pay is based on the ground that the clai$ is fraudulent. &he proceeds of the policy $aturing by the death of the insured payable to the beneficiary

shall include the discounted value of all pre$iu$s paid in advance of their due dates, but are not due and payable at $aturity. 'ec. 25*. &he a$ount of any loss or da$age for which an insurer $ay be liable, under any policy other than life insurance policy, shall be paid within thirty days after proof of loss is received by the insurer and ascertain$ent of the loss or da$age is $ade either by agree$ent between the insured and the insurer or by arbitration; but if such ascertain$ent is not had or $ade within sixty days after such receipt by the insurer of the proof of loss, then the loss or da$age shall be paid within ninety days after such receipt. 4efusal or failure to pay the loss or da$age within the ti$e prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the <onetary Aoard, unless such failure or refusal to pay is based on the ground that the clai$ is fraudulent.

than the a$ounts ulti$ately recovered in suites brought by the$.

*.*. C"."& C!)e R+&e$ !# Pre$+2pt"!# !( Death Art. *6B. After an absence of seven years, it being un%nown whether or not the absentee still lives, he shall be presu$ed dead for all purposes except for those of succession. &he absentee shall not be presu$ed dead for the purpose of opening his succession till after an absence of ten years. :f he disappeared after the age of seventyGfive years, an absence of five years shall be sufficient in order that his succession $ay be opened. (n) Art. *6!. &he following shall be presu$ed dead for all purposes, including the division of the estate a$ong the heirs (!) A person on board a vessel lost during a sea voyage, or an aeroplane which is $issing, who has not been heard of for four years since the loss of the vessel or aeroplane; (2) A person in the ar$ed forces who has ta%en part in war, and has been $issing for four years; (*) A person who has been in danger of death under other circu$stances and his existence has not been %nown for four years. (n) Art. *62. :f the absentee appears, or without appearing his existence is proved, he shall recover his property in the condition in which it $ay be found, and the price of any property that $ay have been alienated or the property ac@uired therewith; but he cannot clai$ either fruits or rents. (!65) L!#)re$ . Nat"!#a& L"(e I#$+ra#'e C!. Fa't$< 0ational ,ife issued a life insurance policy on the life of Iose C. ,ondres in the a$ount of 1hp*,BBB.BB on April !5, !65* (during the war period). )e died on 2eb. >, !653. )is beneficiary filed a clai$ which 0ational denied clai$ing that there was a lac% of proof of death and a slew of other special defenses, including the pay$ent should be $ade based on the Aallantyne scales. Rat"!< 0ational $ust pay the beneficiary of the insured the a$ount of the policy (*,BBB.BB) as the agree$ent was that the obligation will be $ade in the currency prevailing at the end of the stipulated period which in this case is the 1hilippine currency. &he proof of death was substantially $ade by the clai$ant and was not properly disproved by 0ational. Fer#a#)e/ . Nat"!#a& L"(e I#$+ra#'e C!. Fa't$< 0ational insured the life of Iuan 2ernandez for the period of Iuly !3, !65 to Iuly !5, !653. Iuan died on 0ov. 2, !655. )is beneficiaries filed their clai$ > years after his death or on Aug. !, !632. &he dispute is .F0 the Aallantyne scale is applicable in co$puting the a$ount which should be paid to the beneficiaries. &he C2: rendered "udg$ent that 0ational should pay the proceed of 1)p 3BB.BB Aallantyne scale applicable.

'ec. 255. :n case of any litigation for the enforce$ent of any policy or contact of insurance, it shall be the duty of the Co$$issioner or the Court, as the case $ay be, to $a%e a finding as to whether the pay$ent of the clai$ of the insured has unreasonably denied or withheld; and in the affir$ative case, the insurance co$pany shall be ad"udged to pay da$ages which shall consist of attorney(s fees and other expenses incurred by the insured person by reasons of such unreasonable denial or withholding of pay$ent plus interest of twice the ceiling prescribed by the <onetary Aoard of the a$ount of the clai$ due the insured, fro$ the date following the ti$e prescribed in 'ection two hundred fortyGtwo or in 'ection two hundred fortyGthree, as the case $ay be, until the clai$ is fully satisfied; 1rovided, &hat the failure to pay any such clai$ within the ti$e prescribed in said section shall be considered pri$a facie evidence of unreasonable delay in pay$ent. *. . U#(a"r C&a"2$ Sett&e2e#t 'ec. 25! (!) provides instances of unfair clai$s settle$ent done by an insurance co$pany (a) %nowingly $isrepresenting to clai$ants pertinent facts or policy provisions relating to coverages at issue; (b) failing to ac%nowledge with reasonable pro$ptness pertinent co$$unications with respect to clai$s arising under its policies; (c) failing to adopt and i$ple$ent reasonable standards for the pro$pt investigation of clai$s arising under its policies; (d) not atte$pting in good faith to effectuate pro$pt, fair and e@uitable settle$ent of clai$s sub$itted in which liability has beco$e reasonably clear; or (e) co$pelling policyholders to institute suits to recover a$ounts due under its polices by offering without "ustifiable reason substantially less

Rat"!< C2: correct. Aallantyne scale is applicable since in life insurance, the policy $atures upon the expiration of the ter$ set forth therein + in this case upon the death of Iuan. &he obligation of 0ational arose as of that date and not at the ti$e of the clai$. 'ince the 0ational could have paid his obligation at any ti$e during the Iapanese occupation. 1ay$ent after liberation $ust be ad"usted in accordance with the Aallantyne schedule.

T"! Mhe Ch"! . CA L Ea$ter# A$$+ra#'e Fa't$< &io Phe Chio i$ported fish$eal. &hese were insured with 9astern Assurance. &he vessel used to ship the fish$eal was 2ar 9astern 'hipping Co. .hen the goods reached <anila, they were found to be da$aged + and therefore useless. &he issue is .F0 the interest to be paid by 9astern Assurance is !2M or 7MS Rat"!< 7M only, as 'ec. 25* and 255 of the :nsurance Code is not applicable to the case as these provisions apply only when the court finds an unreasonable delay or refusal in the pay$ent of the clai$s. &he applicable law according to 'C is Art. 22B6 of the Civil Code which stipulates that in the absence of stipulation the legal interest applicable is 7M Catha? . CA Fa't$< ,ugay insured against fire with the 7 insurance co$panies na$ed as petitioner in this case for the total su$ of 5 $illion her printing press which was razed by fire on Dece$ber !3, !6?2. 'he filed a clai$ sub$itting all the re@uired proof of loss. After nearly !B $onths of waiting for her clai$ to be paid she filed a suit to collect her clai$. After the trial on the $erits, the &C rendered "udg$ent in favor of ,ugay and directed the 7 insurance co$panies to pay their share in the insurance and further $ade the$ pay plaintiff interest at the rate of 2x the ceiling being prescribed by the <onetary board fro$ the ti$e when the case was filed. Cpon appeal to the CA, the CA affir$ed the decision of the &C. Rat"!< &he award $ade by the &C of double interest is "ustified under 'ections 25* and 255 of the :nsurance Code which provides that J'ec. 25*. V4efusal or failure to pay the loss or da$age within the ti$e prescribed herein will entitle the assured to collect "#tere$t !# the pr!'ee)$ !( the p!&"'? (!r the )+rat"!# !( the )e&a? at the

rate !( t:"'e the 'e"&"#% pre$'r",e) ,? the M!#etar? B!ar)VK and J'ec. 255. :n case of any litigation for the enforce$ent of any policy or contract of insurance, it shall be the duty of the C!22"$$"!#er !r the C!+rt9 a$ the 'a$e 2a? ,e t! 2a4e a ("#)"#% a$ t! :hether the pa?2e#t !( the '&a"2 !( the "#$+re) ha$ ,ee# +#rea$!#a,&? )e#"e) !r :"thhe&); and in the affir$ative case, the insurance co$pany shall be ad"usted t! pa? )a2a%e$ :h"'h $ha&& '!#$"$t !( att!r#e?J$ (ee$ a#) !ther eApe#$e$ "#'+rre) ,? the "#$+re) per$!# ,? rea$!# !( $+'h +#rea$!#a,&e )e#"a& !r :"thh!&)"#% !( pa?2e#t p&+$ "#tere$t !( t:"'e the 'e"&"#% pre$'r",e) ,? the M!#etar? B!ar) !( the a2!+#t !( '&a"2 )+e the "#$+re)RI.

N!)a . Cr+/=Ar#a&)! Fa't$< 0oda obtained fro$ ^enith 2 fire insurance policies for 2 of his properties. Aoth was destroyed by fire. .hen 0oda filed a clai$, it was denied by ^enith due to pre$iu$s not paid and the other one was settled only for !3PZZ. :C denied 0oda to clai$ full a$ount due to insufficient proof of the value of his losses. Rat"!< 0oda was able to prove sufficient losses, since the docu$ent offered by 0oda were offered by ^enith itself to proof the a$ount of it(s liability being !#7th of the total loss only. &hus could very well be considered as an ad$ission of its liability up to the a$ount reco$$ended.

F"#2a# Ge#era& . CA Fa't$< C':1):, obtained a fire insurance policy fro$ 2:0<A0. &he property insured was loss due to fire and C':1):, filed a clai$. ).). Aayne was appointed by 2:0<A0 to underta%e evaluation. C':1):, sub$itted all the re@uired proof of losses substantially. Despite all these, 2:0<A0 refused to pay C':1):,(' clai$ due to failure to co$ply with Condition !* of the policy. &C and CA rule din favor of C':1):, and ordered 2:0<A0 to pay Z double the interest (25M) Rat"!< 'ubstantial co$pliance, not strict co$pliance with the re@uire$ents will be dee$ed sufficient. &he double interest of 25M is authorized by 'ections 25* and 255 of the :nsurance Code.

De&$a# Tra#$p!rt . CA ($+pra)

CLAIMS <aturity !. 2. *.

LIFE INSURANCE Cpon death of the person insured; Cpon his surviving a specific period Ftherwise contingently on the continuance or cessation of life ('ec. !?B)

NON=LIFE INSURANCE Cpon happening of event insured against 9vent $ust occur within the period specified in policy, otherwise insurer has no liablity .ithin *B days after (!) 1roof of loss is received by insurer; and (2) Ascertain$ent of loss or da$age is $ade either by agree$ent between the insured and insurer or by arbitration

Delivery of 1roceeds

-9094A, 4C,9  :$$ediately upon $aturity of policy. 9NC91&:F0  :f payable in :0'&A,,<90&' or as an A00C:&H, when such install$ents or

annuities beco$e due :2 <A&C4:&H :' C1F0 D9A&)  .ithin 7B days after presentation of clai$ and filing of proof of death of insured. 9ffect of 4efusal or 2ailure to pay clai$ within ti$e prescribed  :n case of litigation, it is the duty of the Co$$issioner or the Court to deter$ine .F0 clai$ has been unreasonably denied of withheld. 2ailure to pay any such clai$ within the ti$e prescribed shall be considered pri$a facie evidence of unreasonable delay in pay$ent.  9ntitles beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice ceiling prescribed by the $onetary board (unless refusal to pay is based on ground that claim in fraudulent) :n case da$ages awarded, this includes attorney(s fees and other expenses incurred due to delay (plus the interest)

:f ascertain$ent not $ade within 7B days after such receipt by insurer of proof of loss, loss or da$age shall be paid within 6B days after such receipt.

9ntitles beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice ceiling prescribed by the $onetary board (unless refusal to pay is based on ground that claim in fraudulent) :n case da$ages awarded, this includes attorney(s fees and other expenses incurred due to delay (plus the interest)

-. PRESCRIPTION OF ACTION
-. . T"t&e 6 E The P!&"'? 'ec. 7*. A condition, stipulation, or agree$ent in any policy of insurance, li$iting the ti$e for co$$encing an action thereunder to a period of less than one year fro$ the ti$e when the cause of action accrues, is void.  A clause in an insurance policy to the effect that an action upon the policy by the insured $ust be brought within a certain period is EA,:D and will prevail over the general law on li$itations of actions. )F.9E94, if the period fixed is less than one year fro$ the ti$e the cause of action accrues, it is EF:D. 0ature of condition li$iting period for filing clai$ :t is not $erely a procedural re@uire$ent. :t is essential for the pro$pt settle$ent of clai$s as it de$ands for suits to be brought while the evidence as to the origin and cause of the loss or destruction has not yet disappeared. :t is a condition precedent to the insurer(s liability or a resolutory cause in case the action is not filed by the insured within the stipulated period. :nsurance Code e$powers the :nsurance Co$$issioner to ad"udicate disputes relating to an insurance co$pany(s liability to an insured under a policy. A co$plaint or clai$ filed with such official is considered an JactionK or JsuitK the filing of which would have the effect of tolling the suspending the running of the prescriptive period.

*.

An act or o$ission of the defendant in violation of the legal right of plaintiff.  &he cause of action in an insurance policy therefore does not accrue until the insurer refuses expressly or i$pliedly to co$ply with his duty to pay the a$ount of the loss. M!t!r 3eh"'&e L"a,"&"t?

-.-. C!2p+&$!r? I#$+ra#'e

'ec. *?5. Any person having any clai$ upon the policy issued pursuant to this chapter shall, without any unnecessary delay, present to the insurance co$pany concerned a written notice of clai$ setting forth the nature, extent and duration of the in"uries sustained as certified by a duly licensed physician. 0otice of clai$ $ust be filed within six $onths fro$ date of the accident, otherwise, the clai$ shall be dee$ed waived. Action or suit for recovery of da$age due to loss or in"ury $ust be brought, in proper cases, with the Co$$issioner or the Courts within one year fro$ the denial of the clai$, otherwise the clai$ant(s right of action shall prescribe (As a$ended by 1D 0o. !?!5 and A1 Alg. ?>5.)

C!2p+&$!r? M!t!r 3eh"'&e L"a,"&"t? I#$+ra#'e (CPTL) E &he :nsurance Code $a%es it unlawful for any land transportation operator or owner of $otor vehicle to operate the sa$e in public highways unless there is an insurance or guaranty to inde$nify the death or bodily in"ury of a third party or passenger arising fro$ the use thereof. R+&e$ !( CPTL !. 4egistration of any vehicle will not be $ade or renewed without co$plying with the re@uire$ent. 2. &he protection $ay be co$plied with using any of the following • :nsurance policy • 'urety bond • Cash bond

Cause of Action + &he violation of a legal right co$$itted %nowingly; An act or o$ission of one party in violation of the legal right#s of the other. -.*. Re@+"$"te$FE$$e#t"a& E&e2e#t$< !. A legal right of the plaintiff 2. A correlative obligation of the defendant

F"r$t I#te%rate) B!#)"#% a#) I#$. C!.9 I#'. .$. Her#a#)!9 55 SCRA 706 &he purpose of C1&, is to give i$$ediate financial assistance to victi$s of $otor vehicle accidents and#or their dependents, especially if they are poor regardless of the financial capability of $otor vehicle owners or operators responsible for the accident. -.0. C"."& C!)e E Pre$'r"pt"!# Art. !!55. &he following action $ust be brought within ten years fro$ the ti$e the right of action accrues (!) Cpon a written contract; (2) Cpon an obligation created by law (*) Cpon a "udg$ent. (n) -eneral 4ules on 1rescription  !B Hears (CC) 9xceptions to the -eneral 4ule  St"p+&at"!# "# the '!#tra't ('ec. 7*) + a clause in an insurance policy li$iting the period for which an action upon the policy bay be brought is valid provided it be not less than one year.  M!t!r 3eh"'&e I#$+ra#'e E Fne (!) year only

0. THE INSURANCE COMMISSIONER ADMINISTRATI3E AND AD8UDICATORB POWERS
'ec. 5!7. &he Co$$issioner shall have the power to ad"udicate clai$s and co$plaints involving any loss, da$age or liability for which in insurer $ay be answerable under any %ind of policy or contract of insurance, or for which such insurer $ay be liable under a contract of suretyship, or for which a reinsurer $ay be sued under any contract of reinsurance it $ay have entered into; or for which a $utual benefit association $ay be held liable under the $e$bership certificates it has issued to its $e$bers, where the a$ount of any such loss, da$age or liability, excluding interest, cost and attorneyRs fees, being clai$ed or sued upon any %ind of insurance, bond, reinsurance contract, or $e$bership certificate does not exceed in any single clai$ one hundred thousand pesos. &he insurer or surety $ay, in the sa$e action file a counterclai$ against the insured or the obligee. &he insurer or surety $ay also file a crossGclai$ against a party for any clai$ arising out of the transaction or occurrence that is the sub"ect $atter of the original action or of a counterclai$ therein. .ith leave of the Co$$issioner, an insurer or surety $ay file a thirdGparty co$plaint against its reinsurers for inde$nification, contribution, subrogation or any other relief, in respect of the transaction that is the sub"ect $atter of the original action filed with the Co$$issioner. &he party filing an action pursuant to the provisions of this section thereby sub$its his person to the "urisdiction of the Co$$issioner. &he Co$$issioner shall ac@uire "urisdiction over the person of the

i$pleaded party or parties in accordance with and pursuant to the provisions of the 4ules of Court. &he authority to ad"udicate granted to the Co$$issioner under this section shall be concurrent with that of the civil courts, but the filing of a co$plaint with the Co$$issioner shall preclude the civil courts fro$ ta%ing cognizance of a suit involving the sa$e sub"ect $atter. Any decision, order or ruling rendered by the Co$$issioner after a hearing shall have the force and effect of a "udg$ent. Any party $ay appeal fro$ a final order, ruling or decision of the Co$$issioner by filing with the Co$$issioner within thirty days fro$ receipt of copy of such order, ruling or decision a notice of appeal to the :nter$ediate Appellate Court in the $anner provided for in the 4ules of Court for appeals fro$ the 4egional &rial Court to the :nter$ediate Appellate Court. (As a$ended by Aatas 1a$bansa Alg. ?>5). As soon as a decision, order or ruling has beco$e final and executory, the Co$$issioner shall motu proprio or on $otion of the interested party, issue a writ of execution re@uiring the sheriff or the proper officer to who$ it is directed to execute said decision, order or award, pursuant to 4ule thirtyGnine of the 4ules of Court. 2or the purpose of any proceeding under this section, the Co$$issioner, or any officer thereof designated by hi$, e$powered to ad$inister oaths and affir$ation, subpoena witnesses, co$pel their attendance, ta%e evidence, and re@uire the production of any boo%s, papers, docu$ents, or contracts or other records which are relevant or $aterial to the in@uiry. :n case of contu$acy by, or refusal to obey a subpoena issued to any person, the Co$$issioner $ay invo%e the aid of any court of first instance within the "urisdiction of which such proceeding is carried on, where such person resides or carries on his own business, in re@uiring the attendance and testi$ony of witnesses and the production of boo%s, papers, docu$ents, contracts or other records. And such court $ay issue an order re@uiring such person to appear before the Co$$issioner, or officer designated by the Co$$issioner, there to produce records, if so ordered or to give testi$ony touching the $atter in @uestion. Any failure to obey such order of the court $ay be published by such court as a conte$pt thereof. A full and co$plete record shall be %ept of all proceedings had before the co$$issioner, or the officers thereof designated by hi$, and all testi$ony shall be ta%en down and transcribed by a stenographer appointed by the Co$$issioner. A transcribed copy of the evidence and proceeding, or any specific part thereof, of any hearing ta%en by a stenographer appointed by the Co$$issioner, being certified by such stenographer to be a true and correct transcript of the testi$ony on this hearing of a particular witness, or of a specific proof thereof, carefully co$pared by hi$ fro$ his original notes, and to be a

correct state$ent of evidence and proceeding had in such hearing so purporting to be ta%en and subscribed, $ay be received as evidence by the Co$$issioner and by any court with the sa$e effect as if such stenographer were present and testified to the facts so certified. (As a$ended by 1residential Decree 0o. !533).

providing for the sub$ission of a bond are built into all bonds tendered under that statue even through not printed therein. 2in$an $ay be held liable, if it is solidarily liable with 1an 1acific under the ter$s of the bond, it $ust follow that it is also liable to both :nocencio et.al and 1F9A.  sorry guys : don(t get how prescription figures into this caseaaa

Ea%&e Star . Ch"# B+ Fa't$< Chin Hu consigned !5 bales of underwear. :nsured with 9agle 'tar. Cpon arrival to <anila, 5 bales were lost and * were da$ages. Chin Hu filed clai$ for the lost and da$ages bales against he carrier and then with the insurer. Aoth denied liability. Rat"!< Action has not prescribed under 'ec. 7!G A, the period of prescription starts to run when the cause of action accrues and the cause of action accrues only upon the re"ection of the insurer of the clai$ and not upon the filing of the clai$.

>8/8 Juris"iction of Insurance Commission :ncludes the following as long as any ':0-,9 C,A:< does 0F& 9NC99D !BB,BBB.BB (!) Clai$s and co$plaints involving liability of insurer under any %ind of policy or contract (2) 'uretyship (*) 4einsurance (5) <utual Aenefit $e$bership certificates *. Re&at"!# t! RTC  &he 4&C and :C have concurrent "urisdiction. )F.9E94, filling a co$plaint with the :C 149C,CD9' civil courts fro$ ta%ing cognizance of suit involving the sa$e sub"ect.

ACCFA . A&pha I#$ Fa't$< 2ACF<A too% out a fidelity bond of 1hp3,BBB.BB to insure its funds fro$ Alpha :nsurance which it later assigned to ACC2A. &he funds were $isappropriated upon which ACC2A i$$ediately notified Alpha of the loss and presented proof of loss within the period fixed, but despite repeated de$ands, the surety co$pany refused and failed to pay. :t filed a suit against Alpha. Alpha $oved to dis$iss clai$ing that ACC2A(s right of action has prescribed since it filed an action one year after it filed its notice of loss GG clai$ing that ACC2A(s right of action accrued upon sub$ission of notice of loss as stipulated under Condition ? of the contract. Rat"!< &he action does not accrue until the party obligated refuses, expressly or i$plied to co$ply with its duty (in this case refusal of Alpha to pay the a$ount of the bond). &he year for instituting the action in court $ust be rec%oned fro$ the ti$e of Alpha refused to co$ply with its bond and not fro$ the creditor(s filling of the clai$ of loss (since the creditor does not %now yet upon filling that the clai$ would be denied or refused). &herefore, condition ]? which re@uired action to be filed within one year fro$ the filling of the clai$ for loss contradicts the public policy expressed in 'ec. 7!GA of the 1hilippine :nsurance Act and is thus null and void

L!pe/ . F"&"p"#a$ Fa't$< ,opez insured with 2C' his Aieder$an truc% tractor and .inter .eils trailer fro$ loss or da$ages. :t appeared that ,opez concealed so$e $aterial fact with regard to @uestions as%ed by 2C'. &he vehicles figured in an accident. ,opez filed a clai$ which 2C' denied. ,opez filed a co$plaint with :C less than 2 $onths after the denial and a co$plaint with the Court !> $onths after the denial when 2C' told the :C that it refused to sub"ect itself to arbitration. 2C' clai$ed prescription. Rat"!< &he right of action has prescribed. &here is nothing in the :nsurance ,aw, nor in any of its allied ,egislations which e$power the :C to ad"udicate on disputes relating to an insurance co$pany(s liability to an insured under a policy issued by the insurer to an insured. &he validity of an insured(s clai$ under a specific policy, its a$ount, and all such other $atters as $ight involve the interpretation and construction of the insurance policy, are issues which only a regular court of "ustice $ay resolve and thus the co$plaint filed by ,opez with the :C could not have been an action or suit. &he prescription period started to run on August 2?, !67B when 2C' re"ected the clai$ of ,opez and the co$$ence$ent of an action was filed only on 'epte$ber !6, !67!with the C2: of <anila, nearly !> $onths after the clai$ was re"ected. &hus the action has already prescribed.

A#% . F+&t!# Fa't$< Ang insured his property against fire for ! year with 2ulton through its agent 1ara$ount. . !2.2>.!6>* GG 'tore was destroyed through fire (* days later, Ang filed clai$) !.!*.!633 + Ang charged with arson, ac@uitted 5.7.!637 + 2ulton denied Ang(s clai$ 5.!6.!637 + Ang received 2ulton denial 3.!637 + Ang instituted clai$ against 1ara$ount which was dis$issed w#o pre"udice on 6.!63> 3.3.!63? + Ang instituted present action against 2ulton. According to C2:, action not yet prescirbed Rat"!< Action already prescribed. &he action of Ang against 1ara$ount does not have any legal effect except that of notifying the agent and

F"#2a# . I#!'e#'"! Fa't$< 1an 1acific obtained a surety bond fro$ 2in$an in co$pliance with 1F9A rules. :nocencio et.al filed co$plaint against 1an 1acific. 1F9A ordered 1an 1acific and 2in$an "ointly and severally to pay the clai$ of :nocencio et.al. Rat"!< 1F9A has "urisdiction over the surety bonds as it is a well settled doctrine that the conditions of a bond specified in the statute

serves no other purpose. :t did not stop the prescription fro$ running. &he filing of a clai$ within one year after re"ection is a condition precedent to the liability of the insurer + a resolutory cause, the purpose of which is to ter$inate all liabilities in case action is not filed within the said period.

Tra.e&&er$ I#$+ra#'e . CA Fa't$< A >? year old wo$an was hit by a taxi cab, died. )er son (Eicente) filed a clai$ against the owner of the ,ady ,ove taxi cab, the driver and &ravellers as the co$pulsory insurer Rat"!< &ravellers cannot be held "ointly and severally liable with the owner and driver of the ,ady ,ove taxi cab as Eicente failed to attach a copy of the insurance contract to his co$plaint, there could be no basis to apprise the real nature and pecuniary li$its of &ravellers liability. 2urther, he also failed to file a written notice of clai$ with &raveller, which is an indispensable re@uire$ent thus his cause of action did not accrue. S+# I#$+ra#'e . CA ($+pra)

L!$$ D+e t! Wr!#%(+& A't !r Brea'h !( C!#tra't ,? Th"r) Per$!#9 NOT APPLICLABLE TO LIFE INSURANCE.  Fptions available to insured when through wrongful act or breach of contract co$$itted by *rd person, insured property suffers loss (!) Collect fro$ insurer + if insurer pays, insurer subrogates insured under Civil Code o 4ight of subrogation exist even if no express agree$ent recognizing it since it(s under the CC o Arises only after insurer pays insured. (2) De$and pay$ent fro$ wrongdoer  'ince ,ife :nsurance is not contract of :0D9<0:&H, subrogation obviously cannot apply. Whe# Ma? L"a,"&"t? t! S+,r!%ee ,e L"2"te)<  Aill of ,ading ('t. 1aul v <acondray)  Contributory 0egligence (&abacalera v 02')

E((e't !( 3!&+#tar? Pa?2e#t   4ight of 'ubrogation does not exist in favor of $ere volunteer :f insurer has right to rescind, but still pays insured, there is still subrogation + the * rd party has no privity. .here the insurer pays the insured for a loss or liability which is not a ris% covered by the policy, it will be considered as a volunteer with no right of subrogation. )F.9E94, insurer $ay still recover under Art. !2*7 of the Civil Code + to the extent that the debtor had been benefited. :f insured gets a$ount of policy not as pay$ent but as a ,FA0, repayable to the extent of any recovery fro$ the * rd party responsible, there can be no subrogation.

1. SUBROGATION
1. . C"."& C!)e Pr!."$"!#$ Fbligations Fbligations U Contracts + 9xtinguish$ent of

Art. !2*7. &he creditor is not bound to accept pay$ent or perfor$ance by a third person who has no interest in the fulfill$ent of the obligation, unless there is a stipulation to the contrary. .hoever pays for another $ay de$and fro$ the debtor what he has paid, except that if he paid without the %nowledge or against the will of the debtor, he can recover only insofar as the pay$ent has been beneficial to the debtor (!!3?a) Da$ages Art. 22B>. :f the plaintiff(s property has been insured, and he has received inde$nity fro$ the insurance co$pany for the in"ury or loss arising out of the wrong or breach of contract co$plained of, the insurance co$pany shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. :f the a$ount paid by the insurance co$pany does not fully cover the in"ury or loss, the aggrieved party shall be entitled to recover the deficiency fro$ the person causing the loss or in"ury.  According to sir + there is only subrogation in property insurance.

I# Ca$e !( Ge#era& A.era%e$< !. De$and contributions directly fro$ different persons liable. 2. Cla$ whole loss fro$ the insurer + insurer subrogates right of contribution. C!a$t:"$e . CA ($+pra) Ma%&a#a . C!#'!&a'"!# ($+pra)

Ce,+ Sh"p?ar) . W"&&a"2 L"#e$ Fa't$< .illia$ ,ines, :nc contracted the services of C'9. for its ships annual dryGdoc%ing and repairs. &he vessel was insured with 1rudential for 53 $illion for hull and $achinery. &he coverage included an JAdditional 1erilsK clause covering loss of or da$age to the vessel through the negligence of ship repair$an. &he vessel caught fire and san% resulting to its eventual total loss. 1rudential paid .illia$ ,ines the total a$ount of the insurance policy and sued C'9., as subrogee to the rights of .illia$ ,ines. Rat"!< 'ince it has already been resolved that the cause of the fire which gutted <E <anila City was the negligence act of C'9., the proof of pay$ent $ade by 1rudential to .illia$ ,ines, :nc operated to properly subrogate 1rudential to the rights of .illia$ ,ines under Art. 22B> of the Civil Code

1.*. C!#'ept<  1rocess of legal substitution (insurer steps into shoes of insured)  4eason 9OC:&H + to prevent the insured fro$ receiving $ore than his actual loss, while at the sa$e ti$e $a%es the person who caused loss legally responsible.

P"!#eer I#$+ra#'e . CA Fa't$< Iacob ,i$ purchased 2 aircrafts fro$ IDA using funds fro$ Aor$aheco, the Cervantes and <aglana. :nsured it with 1ioneer as surety. ,i$ failed to pay, 1ioneer paid (1ioneer reinsured the surety with an unna$ed reinsurer) and collected fro$ the reinsurer. Also foreclosed aircraft, sold it and collected proceeds. Rat"!< 1ioneer no longer has any clai$ since it has already collected the proceeds of the reinsurance on its bond. Cnder the principle of Art. 22B> of the CC, the reinsurer, on pay$ent of a loss ac@uires the sa$e rights by subrogation as are ac@uired in si$ilar cases where the original insurer pays a loss.

liability, &C dis$issed co$plaint due to no cause of action. Rat"!< 2irestone no longer has cause of action since it has already been paid by 2ire$an(s 2und. 2ire$an(s 2und however has a cause of action as this falls under Art. 22B> under the doctrine of subrogation.

Ta,a'a&era . N!rth Fr!#t Sh"pp"#% Fa't$< 'ac%s of corn grain valued at over *< were consigned to 42< under a bill of lading and insured with &abacalera et al. &he vessel was owned by 0orth 2ront. 1rior to leaving port, the vessel was inspected and was dee$ed fit to carry $erchandise. .hen it arrived, it advised 42< who did not i$$ediately co$$ence unloading without any apparent reason. .hen unloaded, there was shortage and the rest were $oldy, rancid and unfit for its purpose. 42< re"ected cargo and de$anded fro$ 0orth 2ront pay$ent for da$ages which was denied. &abacalera et.al paid, then sued 0orth 2ront. &C and CA dis$issed case. Rat"!< 0orth 1oint is liable since it is a co$$on carrier and as such is re@uired to observe extraordinary diligence in its vigilance over the goods it transports. .hen goods placed in its care are lost or da$aged, the carrier is presu$ed to have been at fault or to have acted negligently. 0orth 2ront has burden of proving it observed extraordinary diligence in order to avoid responsibility which it failed to do. )owever since 42< was guilty of contributory negligence, they should share at least 5BM of the loss. 0orth 1oint ordered to pay &abacalera et al 7BM of the total a$ount it paid to 42<.

Ma#"&a Mah!%a#? . CA Fa't$< <anila <ahogany insured its <ercedez Aenz with ^enith. Car was bu$ped and da$aged by '<C truc%. ^enith paid <ahogany in a$icable settle$ent. ^enith then de$anded rei$burse$ent fro$ '<C, but it appeared that '<C already paid <ahogany evidenced by a 4elease of Clai$. Rat"!< Ay the act of <anila <ahogany issuing a release clai$ to '<C, the right of ^enith against '<C is nullified since the insurer can be subrogated to only such rights as the insured $ay have, should the insured, after receiving pay$ent fro$ the insurer, release the wrongdoer who causes the loss, the insurer loses his rights against hi$. Aut in such a case the insurer will be entitled to recover fro$ the insured whatever it has paid, unless it was $ade with the consent of the insurer.

Pa# Ma&a?a# . CA L Fa,"e Fa't$< &he driver of 9rlinda 2abie hit the insured <itsubishi Colt ,ancer owned by the Canlubang Auto$otive 4esources Corporation. &he vehicle was insured with 1A0<A,AH who paid the a$ount insured under the Jown da$ageK coverageK of the insurance policy. 1A0<A,AH then de$anded fro$ 2abie the pay$ent of whatever a$ount it paid clai$ing that they were subrogated to the rights of Canlubang. Rat"!< Art. 22B> of the Civil Code apply in the case at bar, under the principle of subrogation. :f the insured property is destroyed or da$aged through the fault or negligence of a party other than the assured, then the insurer, upon pay$ent to the assured will be subrogated to the rights of the assured to recover fro$ the wrongdoer to the extent that the insurer has been obligated to pay. 1ay$ent by the insurer to the assured operates as an e@uitable assign$ent to the for$er of all re$edies which the latter $ay have against the third party whose negligence or wrongful act caused the loss. &he right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assign$ent of clai$. :t accrues si$ply upon pay$ent of the insurance clai$. F"re2a#J$ F+#) . 8a2"&a L C!. Fa't$< 2irestone loss so$e properties due to the acts of its e$ployees and the security guards provided by the security agency of Ia$ila U Co. 2ire$an(s 2und, the insurer of 2irestone paid the loss and proceeded against Ia$ila and Ia$ila(s insurer 2irst Ouezon City :ns. Co. Aoth denied

Ph"&a2%e# . CA Fa't$< CocaGCola Aottlers 1hilippines, :nc. (CCA1:) loaded on board J<E AsildaK >,3BB cases of !Gliter Co%e to be transported fro$ ^a$boanga City to Cebu City. &he vessel was owned and operated by 29,<A0. &he ship$ent was insured with 1):,A<-90. &he vessel san%. CCA1: filed a clai$ with 29,<A0 for recovery of da$ages which was denied and thus CCA1: filed an insurance clai$ with 1):,A<-90 which paid its clai$ for 1)p>33,23B.BB. Clai$ing its right of subrogation, 1):,A<-90 sought recourse against 29,<A0 who disclai$ed any liability fro$ the lost. Rat"!< Clearly falls under Art. 22B> of the Civil Code. &he pay$ent by the assurer to the assured operates as an e@uitable assign$ent to the assurer of all the re$edies which the assured $ay have against the third party whose negligence or wrongful act caused the loss. &he right of subrogation is not dependent upon, nor does it grow out of any privity of contract. :t accrues si$ply upon pay$ent by the insurance co$pany of the insurance clai$.

St Pa+& . Ma'!#)ra? Fa't$< .inthrop 1roducts consigned to .inthrop 'tearns drugs and $edicines (fro$ 0H to <la) through <acondray U Co. :nsured with 't. 1aul 2ire. Arrastre services provided by <la. 1ort 'ervices. Cpon arrival to <anila one dru$ and several cartons arrived in bad condition. .inthrop 'tear$s filed a clai$ for da$ages. 't. 1aul paid clai$. 't. 1aul then proceeded against the Arrastre

'ervice who resisted action which clai$ed it delivered goods in sa$e condition it received fro$ the carrier (<acondray). <acondray denied liability clai$ing liability ceased upon discharge of goods fro$ ship(s tac%le. 0ote there is a bill of lading which stipulated that the a$ount of the liability should only be Php!PZZ, but 't. 1aul paid a$ount USW!%ZZ Rat"!< 't. 1aul should receive the a$ount according to the bill of lading. &he purpose of the bill of lading is to provide for the rights and liabilities of the parties. &he stipulation in the bill of lading li$iting the co$$on carrier(s liability to the value of the goods appearing in the bill is valid and binding. 't. 1aul after paying the clai$ of the insured for da$ages under the policy is subrogated $erely to the rights of the assured as subrogee, it can recover only the a$ount that is recoverable by the latter. 'ince the right of .inthrop in case of loss or da$age to the goods is li$ited or restricted by the provision in the bill of lading, a suit by 't. 1aul as subrogee is necessarily sub"ect to li%e li$itations and restrictions.

2. 1ooling the resources of $any co$panies also extends %reater '!.era%e !( "#$+ra#'e pr!te't"!#, extended even a$ong A11,:CA0&' re@uiring large a$ounts and those not eligible for insurance at standard rates. *. C0D94.4:&94' benefit through the p&a'"#% !( a))"t"!#a& "#$+ra#'e "# a# eApa#)e) 2ar4et. 5. &he insurance :0DC'&4H benefits by re)+'"#% the :a$te ar"$"#% !+t !( p!&"'"e$ :h"'h are app&"e) (!r ,+t #!t "$$+e). 3. &he 49:0'C494 benefits through the a'@+"$"t"!# !( ,+$"#e$$ which is expected to prove profitable in the long run.

0. BENEFITS OF REINSURANCE TO THE INSURED
!. 2. *. :t gives insurance co$panies %reater ("#a#'"a& $ta,"&"t? and thus $a%es the insured(s individual policy $ore reliable. :f a large a$ount of insurance is needed, the "#$+re) 2a? !,ta"# "t :"th!+t #e%!t"at"#% :"th #+2er!+$ '!2pa#"e$. :t enables the insured to !,ta"# pr!te't"!# pr!2pt&?, without the delay that would be re@uired to divide and distribute the a$ount a$ong $any co$panies. All the insurance can be :r"tte# +#)er ")e#t"'a& '!#tra't pr!."$"!#$, whereas otherwise these $ight vary with the different co$panies a$ong who$ the insurance is divided. S2a&& '!2pa#"e$ are e#'!+ra%e) t! )".")e &ar%e eAp!$+re$ (!r $a(et? and enabled to accept a wide variety of applicants.

C5apter +II # I"S2#A"C
T"t&e * E Re"#$+ra#'e

5.

'ec. 63. A contract of reinsurance is one by which an insurer procures a third person to insure hi$ against loss or liability by reason of such original insurance.

3.

. DEFINITION OF REINSURANCE  :t is a contract whereby one party, the reinsurer, agrees to inde$nify another, the reinsured, either in whole or in part, against loss or liability which the latter $ay sustain or incur during a separate and original contract of insurance with a third party, the original insured. A contract of reinsurance is an insurance of an insurance or when insurance business is transferred fro$ one insurance co$pany to another. 'o$eti$es called Jtreaties.K

1. NATURE REINSURANCE

OF

CONTRACT

OF

*. RATIONALE OF REINSURANCE
  :t is one type of liability insurance. :t represents a further extension of the funda$ental idea of insurance, that is, distribution a$ong $any of the ris%s resting upon one. .here an insurer desires to entirely relieve hi$self of liability under contracts $ade and reinsures all his ris%s. Contracts#treaties of reinsurance are plainly beneficial to the public inas$uch as they pro$ote both efficiency and stability in the conduct of the insurance business.

-. BENEFITS OF REINSURANCE TO THE INSURER
!. :nsurers are able to "$$+e p!&"'"e$ "# eA'e$$ !( $+'h rete#t"!# &"2"t$ !r the 2aA"2+2 '&a"2 "t :"$he$ t! pa? !+t of its own resources.

&he sub"ect of the contract of reinsurance is the pri$ary insurer(s ris% and not the property insured under the original policy. !. CF0&4AC& F2 :0D9<0:&H A-A:0'& ,:AA:,:&H. &he reinsurer agrees to inde$nify the insurer, not against actual pay$ent $ade but against liabilities incurred. :t is not necessary that the insurer first pay the loss accruing to de$and pay$ent fro$ reinsurer. 2. CF0&4AC& '91A4A&9 24F< F4:-:0A, :0'C4A0C9 1F,:CH. Contracts of insurance and reinsurance are independent fro$ each other. &he practice is for the reinsurer to pay the insurer even before the latter has inde$nified the original insured. *. CF0&4AC& AA'9D F0 F4:-:0A, 1F,:CH. &he reinsurance policy is necessarily based on the original contract, and the rights of the parties in the reinsurance are greatly affected by the latter(s ter$s and conditions. &he reinsured ris% $ust be the sa$e as that covered by the original policy. 5. :0'C4AA,9 :0&949'& 49OC:49<90& A11,:CAA,9. &he doctrine of insurable interest used in the original policy is also applicable to reinsurance. )ence, the pri$ary insurer is not entitled to contract for reinsurance exceeding the li$its of the policy ceded to the reinsurer. 3. 4C,9 F0 'CA4F-A&:F0 AEA:,AA,9. :n general, a reinsurer, on pay$ent of a loss, ac@uires the sa$e rights by subrogation as

are ac@uired in si$ilar cases where the original insurer pays a loss.

reinsurer is obligated to accept a fixed share of the ris% which has to be reinsured under the contract. Fa'+&tat".e Re"#$+ra#'e Treat"e$ + there is no obligation either to cede or to accept participation in the ris% insured, each party having a free choice. A).a#ta%e t! the "#$+rer = &he advantage of the auto$atic $ethod is avoidance of delay in issuing the insurer(s policy. &he advantage of the facultative $ethod is that it receives the reinsurer(s underwriting opinion before the policy is issued. Pr!te't"!# t! the re"#$+rer = Ay agreeing to accept business auto$atically, the reinsurer is relying on the underwriting "udg$ent of the insurer and is bound to accept a case even though it $ay not agree with the underwriting decision. &he insurer is protected by the re@uire$ent that the original insurer retains its full retention li$it, which assures a $easure of selfGinterest )istory :n the !63B(s, do$estic insurer(s ceded ris%s to foreign reinsurers because there was no reinsurance co$pany in the 1hilippines. Although, today even when there are do$estic reinsurance co$panies operating in the country, do$estic ris%s are still ceded to foreign reinsurance co$panies since the 1hilippines is a CA,A<:&H 14F09 country. ,i$itation  Code li$its ris% which a nonGlife insurer $ay retain on any one sub"ect of insurance to 2BM of its net worth.  Any reinsurance ceded by it is deducted in deter$ining the ris% retained. 'ec. 6>. A reinsurance is presu$ed to be a contract of inde$nity against liability, and not $erely against da$age. 'ec. 6?. &he original insured has no interest in a contract of reinsurance.

6. REINSURANCE 3S DOUBLE INSURANCE DISTINGUISHED19
Re"#$+ra#'e :nsurer beco$es the insured, insofar as the reinsurer is concerned &he sub"ect of the insurance is the original insurer(s ris% :nsurance of a different interest Friginal insured has no interest in the contract of reinsurance which is independent of the original contract of insurance Consent of the original insured is not necessary D!+,&e I#$+ra#'e :nsurer re$ains as the insurer of the original insured &he sub"ect of the insurance is the property being insured :nsurance of the sa$e interest :nsured is the party in interest in all the contracts

&he insured has to give his consent.

'ec. 67. .here an insurer obtains reinsurance, except under auto$atic reinsurance treaties, he $ust co$$unicate all the representations of the original insured, and also all the %nowledge and infor$ation he possesses, whether previously or subse@uently ac@uired, which are $aterial to the ris%.  &he reinsured has the duty to disclose all $aterial facts to the reinsurer (since the ris% insured against in a contract of reinsurance is the probability that the original insurer $ay be co$pelled to inde$nify for$ the loss under the policy issued by hi$), the duty i$posed is si$ilar to persons see%ing an original insurance + that of the strictest good faith.

.hen called &49A&:9' + where the insurer insures all or a substantial portion of its ris% with one insurer

8. RELATIONSHIP REINSURER

OF

INSURED

TO

7. REINSURANCE TREATIES REINSURANCE POLICIES
Re"#$+ra#'e Treat? <erely an agree$ent between two insurance co$panies where one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty Contracts for insurance Re"#$+ra#'e P!&"'? Contract for inde$nity one insurer $a%es with another to protect the first insurer fro$ ris% it has already assu$ed

3S

-eneral 4ule  Friginal insured has 0F :0&949'& in the reinsurance contract  .hatever the reinsurer pays the insurer upon the happening of the loss beco$es part of the insurer(s assets, and all its creditors share e@ual rights with the insured to de$and pay$ent fro$ such funds. 9xceptions  Contract $ay expressly bind the reinsurer to pay directly to the original owner any loss for which the original insurer $ay be liable. o :nsured $ay choose to sue either insurer, reinsurer or AF&). )owever, total recovery cannot be $ore than the actual loss. o ,iability of reinsurer to original insured would not be affected by any defense which the reinsurer $ay have against the original insurer. o 0o novation which discharges original policy + original policy re$ains in full force and original insured has right to de$and that all

Contracts insurance

of

A+t!2at"' Re"#$+ra#'e Treat"e$ + the ceding co$pany (reinsured) is bound to cede and the

1*

Thi 1# # Ce& i% ,00@. N$te 1he% &$u2"e i% ur#%ce $ccur #%& the %#ture $8 the "i#2i"itie $8 the :#ri$u i% urer .

its ter$s and conditions be co$plied with. :f insured agreed with insurer and reinsurer that he will loo% only to reinsurer for inde$nity in case of loss o 0ovation discharged original insurer o &echnically not a reinsurance.

5. LIABILITB REINSURED

OF

REINSURER

TO

4einsurer is entitled to avail hi$self of every defense which the reinsured $ight urge in an action by the person originally insured. &hus, the reinsurer is not liable to the reinsured for a loss under an original policy if the latter is not liable to the original insured or for an a$ount $ore than the su$ actually paid to the insured.

to be ceded under the terms of this Agreement which are not cancelled in the ordinary course of business s!all continue in full force until t!eir e7pir, unless t!e CO.PANY &Asian) s!all+ prior to t!e 1/st of Becem$er ne7t follo:in% suc! notice+ elect to :it!"ra: t!e e7istin% cessions.K &hus insofar as the 2 reinsurance agree$ents as concerned, the express stipulations did not ipso facto ter$inate all reinsurance cessions. 'uch cessions continued to be in full force until their respective dates of expiration. 'ince it was under one of said agree$ents, na$ely, the 2acultative Fbligatory 4einsurance &reatyG2ire, that the reinsurance cessions corresponding to the -':' policy had been $ade, 2:9,D<90(' cannot avoid liability which arouse by reason of the burning of the insured property.

Ph"&a2 . A+)"t!r Fa't$< 1hila$life had a reinsurance treaty with A:4CF with an agree$ent to pay reinsurance pre$iu$s on an annual basis. &he Central Aan% collected foreign exchange $argin on the re$ittances of 1hila$life to A:4CF. 1hila$life filed for refund contending that the reinsurance pre$iu$s re$itted were paid pursuant to the reinsurance treaty and therefore were preG existing obligations expressly exe$pt fro the $argin fee. Rat"!< 1hila$life is not entitled to refund. 4einsurance treaties and reinsurance policies are not one and the sa$e. 4einsurance treaties are contracts 2F4 insurance while reinsurance policies are contracts F2 insurance. 1hila$life(s obligation to re$it reinsurance pre$iu$s beco$es fixed and definite only upon the execution of the reinsurance policy, because it is only after a reinsurance policy is $ade that pay$ent of reinsurance pre$iu$s $ay be exacted as it is only after 1hila$life see%s to re$it the reinsurance pre$iu$s that the obligation to pay the $argin fee arises.

C!@+"a . F"e&)2e#J$ I#$+ra#'e Fa't$< 2ield$en(s issued to <anila Hellow &axicab a co$$on carrier accident insurance policy which will Jinde$nify the insured in the event of accident caused by or arising out of the use of <otor Eehicle against all su$s which the insured will beco$e legally liable to pay in respect of death or bodily in"ury to any fareG paying passenger including the driver, conductor and#or inspectorVK .hile policy was in force, Carlito Co@uia driving the insured vehicle $et an accident and died. )is heirs field co$plaint against 2ield$en(s Rat"!< )eirs of Co@uia have cause of action against 2ield$en(s under Art. !*!! of the Civil (contracts pour autrui). &his rule is the exception to the general rule that only parties to a contract $ay bring an action. Cnder this exception, third parties $ay de$and the enforce$ent of the contract which was $ade for his benefit. Eter#a& Gar)e#$ Me2!r"a& Par4 C!rp. .. The Ph"&. A2er"'a# L"(e I#$+ra#'e C!. April 6, 2BB? Fa't$< &his was a co$plaint of 9ternal -ardens <e$orial 1ar% Corp. (9ternal) see%ing to clai$ on a group life policy under which the clients of 9ternal who purchased burial lots fro$ it on install$ent basis would be insured by 1hilippine A$erican ,ife :nsurance Co$pany (1hila$life). Fne such client died one year and eight $onths after 9ternal had sub$itted his application to 1hila$life, which did not act on the application. 1hila$life, however, denied 9ternal(s insurance clai$. 9ternal filed the case before the <a%ati 4&C, which had ordered 1hila$life to pay the proceeds of the policy. Fn appeal, the CA reversed the 4&C, dis$issing the case. He&)< &he Court noted that the group life policy was a$biguous as to whether the insurance coverage of 9ternal(s clients beca$e effective upon contracting a loan with 9ternal or upon 1hila$life(s approval. 9$phasizing that an insurance contract is a contract of adhesion which $ust be construed liberally in favor of the insured and strictly against the insurer, which was the party which prepared and had exclusive control over the ter$s and phraseology of the insurance contract, the 'upre$e Court interpreted the a$biguity to $ean that upon a party(s purchase of a $e$orial lot on install$ent fro$ 9ternal, an insurance contract covering the lot purchaser is created and the sa$e

F"e&)2a#J$ . A$"a# S+ret? Fa't$< 2ield$an(s and Asian entered into a reinsurance treaty wherein Asian will cede to 2ield$en(s a specified portion of the a$ount of insurance underwritten by A':A0. &he contract stipulates that if either party wishes to ter$inate or cancel the agree$ent, they $ust give at least * $oths notice by registered $ail to the other party and the cancellation was to ta%e effect as of the *!st of Dece$ber of the year in which the notice was given. 'o$eti$e in 'epte$ber !67! 2ield$en(s gave notice to Asian which Asian did not reply to, 2ield$en(s gave 2 other notices. During this ti$e, one of the reinsurance contracts + -':' property was razed by fire. Asian filed a clai$ with 2ield$en(s who denied liability pointing out that they have already ter$inated the reinsurance treaty. Rat"!< &he 2acultativeGFbligatory 4einsurance &reaty 2ire (part of the reinsurance contract#treaty) provides that Jin the event of termination of this Agreement > > >) the liability of the Fieldmen1s under current cessions s!all continue in full force an" effect until t!eir natural e7pir, > > >.K and J:n the termination of this Agreement from any cause whatever) the liability of the */6-'.*/* (Fieldmen1s) under any current cession including any amounts due

is effective until ter$inated by 1hila$life(s disapproval of the application. &he Court li%ewise found that 1hila$life(s receipt of a letter, the contents of which state that attached thereto are insurance for$s for a list of burial lot owners including the disputed application, is an ad$ission of 1hila$life against its own interest, as well as an ac%nowledge$ent of the receipt of the letter together with the attach$ents. 'uch receipt, the Court said, shifted the burden of evidence to 1hila$life to prove that the letter did not contain the disputed application. )aving failed to do so, 1hila$life is dee$ed to have received the insurance application. &he Court thus ordered 1hila$life to pay 9ternal 1h1!BB,BBB representing the proceeds of the insurance policy, in addition to legal interest and attorney(s fees. B!&a#)a S"%#e? .. S!'"a& Se'+r"t? S?$te2 Ianuary 2?, 2BB? Fa't$< &he deceased in this case had 2 co$$onG law wives, petitioner and -ina, and one legal wife, 9ditha. 1etitioner had filed a clai$ with the ''' alleging that she was the legal wife and that her husband had a co$$onGlaw wife, -ina. -ina, however, filed the sa$e clai$ with the ''', alleging that both she and petitioner were co$$onGlaw wives and that deceased had a legal wife. &he ''' had denied petitioner(s clai$ stating that the $arriage between she and the deceased was not valid as it was executed during a prior existing $arriage of the deceased against 9ditha, that deceased(s only legiti$ate child had predeceased hi$, that deceased(s 5 children with petitioner were all over 2! years of age and hence cannot @ualify as dependents, and declared deceased(s 2 children with -ina as pri$ary beneficiaries. He&)< .hoever clai$s entitle$ent to the benefits provided by law should establish his or her right thereto by substantial evidence. 'ince petitioner is dis@ualified to be a beneficiary and because the deceased has no legiti$ate child, it follows that the dependent illegiti$ate $inor children of the deceased shall be entitled to the death benefits as pri$ary beneficiaries. &he ''' ,aw is clear that for a $inor child to @ualify as a Jdependent,K the only re@uire$ents are that he#she $ust be below 2! years of age, not $arried nor gainfully e$ployed. :n this case, the $inor illegiti$ate children -inalyn and 4odelyn were born on !* April !667 and 2B April 2BBB, respectively. )ad the legiti$ate child of the deceased and 9ditha survived and @ualified as a dependent under the ''' ,aw, -inalyn and 4odelyn would have been entitled to a share e@uivalent to only 3BM of the share of the said legiti$ate child. 'ince the legiti$ate child of the deceased predeceased hi$, -inalyn and 4odelyn, as the only @ualified pri$ary beneficiaries of the deceased, are entitled to !BBM of the benefits. F"&"p"#a$ L"(e A$$+ra#'e C!2pa#? .. C&e2e#te N. Pe)r!$!9 et a&. 2ebruary 5, 2BB? Fa't$ &he respondents were duped by an agent (Ealle) of the petitioner into investing in a Jpro$otional invest$entK progra$ offering ?M prepaid interest a $onth for certain deposits $ade on a $onthly basis. Aasically, the issue is whether or not the insurance co$pany should be held solidarily liable, or whether it should hold only the agent solely liable to the respondents.

He&) 2ilipinas ,ife, as the principal, is liable for obligations contracted by its agent Ealle. Ay the contract of agency, a person binds hi$self to render so$e service or to do so$ething in representation or on behalf of another, with the consent or authority of the latter. &he general rule is that the principal is responsible for the acts of its agent done within the scope of its authority, and should bear the da$age caused to third persons. .hen the agent exceeds his authority, the agent beco$es personally liable for the da$age. Aut even when the agent exceeds his authority, the principal is still solidarily liable together with the agent if the principal allowed the agent to act as though the agent had full powers. :n other words, the acts of an agent beyond the scope of his authority do not bind the principal, unless the principal ratifies the$, expressly or i$pliedly. 2ilipinas ,ife cannot profess ignorance of Ealle(s acts. 9ven if Ealle(s representations were beyond his authority as a debit#insurance agent, 2ilipinas ,ife expressly and %nowingly ratified Ealle(s acts. :t cannot even be denied that 2ilipinas ,ife benefited fro$ the invest$ents deposited by Ealle in the account of 2ilipinas ,ife. :n our considered view, 2ilipinas ,ife had clothed Ealle with apparent authority; hence, it is now estopped to deny said authority. :nnocent third persons should not be pre"udiced if the principal failed to adopt the needed $easures to prevent $isrepresentation, $uch $ore so if the principal ratified his agent(s acts beyond the latter(s authority. B&+e Cr!$$ Hea&th Care .. Ne!2" a#) Da#"&! O&".are$ 2ebruary !2, 2BB? 2acts 0eo$i suffered a stro%e and applied for rei$burse$ent of her $edical bills fro$ petitioner, her health care provider. 1etitioner refused until a certification could be issued that her stro%e was not due to preGexisting conditions. Dr. 'aniel, her physician, however, was not able to issue such a certification, stating that because the patient invo%ed the doctorGpatient confidentiality, such infor$ation could not be given ot the petitioner. &he issue is whether petitioner was able to prove that 0eo$i(s stro%e was caused by preGexisting conditions and was therefore outside the coverage of her plan. He&) :t is an established rule in insurance contracts that when their ter$s contain li$itations on liability, they should be construed strictly against the insurer. &hese are contracts of adhesion the ter$s of which $ust be interpreted and enforced stringently against the insurer which prepared the contract. &his doctrine is e@ually applicable to health care agree$ents. 1etitioner never presented any evidence to prove that respondent 0eo$iRs stro%e was due to a preG existing condition. :t $erely speculated that Dr. 'anielRs report would be adverse to 0eo$i, based on her invocation of the doctorGpatient privilege. &his was a disputable presu$ption at best. 'uffice it to say that this presu$ption does not apply if the suppression is an exercise of a privilege. )ere, respondentsR refusal to present or allow the presentation of Dr. 'anielRs report was "ustified. :t was privileged co$$unication between physician and patient. 2urther$ore, li$itations of liability on the part of the insurer or health care provider $ust be construed in such a way as to preclude it fro$ evading its obligations. Accordingly, they should be scrutinized by the courts with Jextre$e "ealousyK and JcareK and with a J"aundiced eye.K 'ince petitioner had the burden of proving exception to

liability, it should have $ade its own assess$ent of whether respondent 0eo$i had a preGexisting condition when it failed to obtain the attending physicianRs report. :t could not "ust passively wait for Dr. 'anielRs report to bail it out. &he $ere reliance on a disputable presu$ption does not $eet the strict standard re@uired under our "urisprudence. Ph"&"pp"#e Dep!$"t I#$+ra#'e C!rp!rat"!# .. COA 2ebruary 22, 2BB? Fa't$ &he for$er 2inance 'ecretary, <r. 4oberto de Fca$po, in his capacity as exG officio Chair$an of the 1hilippine Deposit :nsurance Corporation (1D:C) Aoard for the years !665G!667 received a total a$ount of 155B,B7?.72 representing Ausiness 1olicy Develop$ent and 9nforce$ent 9xpenses (A1D99) and Christ$as gift chec%s. &he Auditor thereat issued 0otice of Disallowance disallowing in audit the pay$ent of said expenses on the ground that it partoo% of the nature of additional co$pensation or re$uneration in violation of the rule on $ultiple positions proscribed under 'ection !*, Article E:: of the 1hilippine Constitution and 'ection 2(6), 4epublic Act 0o. *36!, as a$ended. 1D:C sought reconsideration of the sub"ect disallowance but the sa$e was denied by CFA. &he 'C affir$ed with finality said CFA decision and resolution. &he 2inal Frder of Ad"udication (2FA) was issued to 1D:C for enforce$ent of the decision. )owever, instead of co$plying with the Frder, 1D:C condoned the a$ount of 15!*,?77.72 invo%ing its power to condone under 'ection ?, paragraph !2 of its charter. He&)< :t is a funda$ental rule that when a "udg$ent beco$es final and executory it beco$es i$$utable and unalterable, the prevailing party can have it executed as a $atter of right, and the issuance of a writ of execution beco$es a $inisterial duty of the court. &he writ of execution $ust confor$ to the "udg$ent to be executed and adhere strictly to the very essential particulars. 2ollowing this rule, 1D:C should have reasonably expected that an order directing the pay$ent or refund of the disallowed a$ount was forthco$ing in accordance with the CFA 4ules as, in fact, a 2inal Frder of Ad"udication was issued. .hatever $ay have been the reason for the dis$issal of 1D:C(s petition, the fact re$ains that the decision upholding the audit disallowance had beco$e final and executory. At the ris% of sounding trite, the decision is now unalterable and i$$utable. :t is no longer sub"ect to any revision, $odification or appeal. :n dis$issing the petition and affir$ing the audit disallowance, this Court effectively declared that the pay$ent of the A1D99 to 'ecretary De Fca$po is prohibited as it violates the rule against double co$pensation. &his declaration necessarily also $eans that condonation of the sa$e pay$ent in favor of the sa$e person is li%ewise prohibited. &o settle the $atter once and for all, the audit disallowance is not sub"ect to condonation following the principle that what is prohibited directly is also prohibited indirectly. &he audit disallowance cannot be circu$vented and legiti$ized by resorting to condonation. &he authority of 1D:C to condone applies only to ordinary receivables, penalties and surcharges and $ust be sub$itted to

the Co$$ission before it is i$ple$ented. &his procedure would enable the Co$$ission to in@uire into the propriety of the condonation and to deter$ine whether the sa$e will not pre"udice the govern$ent(s interest, consistent with CFA(s constitutional $andate to exa$ine, audit and settle all accounts of the govern$ent, its subdivisions, agencies and instru$entalities, including govern$entGowned and controlled corporations. 2urther$ore, 1D:C(s authority to condone under its charter is circu$scribed by the phrase Jto protect the interest of the Corporation.K &his authority does not include the power to condone a liability that arises fro$ a violation of law. .ith greater reason, the condonation of a liability that arise fro$ a violation of no less than the Constitution, as in this case, is not enco$passed by 1D:C(s charter. :t is not in the interest of 1D:C to forego audit disallowances as it is neither its $andate nor its tas% to perpetuate breaches of law. G&!r"a S!#)a?!# .. P.8. Lh+&&"er9 I#' a#) R"'ar)! D"a%! 2ebruary 2>, 2BB? Fa't$ 1etitioner had pledged her 123BP watch to respondent pawnshop. &he pawnshop was robbed, and a$ong the ite$s seized was petitioner(s watch. 1etitioner tried to recover the watch but respondent argued that the robbery was a fortuitous event, hence, they were not liable. He&) )ad respondent co$pany insured the articles pledged against burglary, petitioner would have been co$pensated for the loss fro$ the burglary. 4espondent co$pany(s failure to insure the article is, therefore, a contributory cause to petitioner(s loss. Considering, however, that petitioner agreed to a valuation of 1!3,BBB for the article pledged in case of a loss, the replace$ent value for failure to insure is li%ewise li$ited to 1!3,BBB. 0evertheless, this Court, ta%ing into account all the circu$stances of this case, dee$s it fair and "ust to award exe$plary da$ages against respondent co$pany for its failure to co$ply with the rule and regulation re@uiring it to insure the articles pledged against fire and burglary, in the a$ount of &wenty 2ive &housand (123,BBB) 1esos. &his is without pre"udice to appropriate proceedings to recover any excess value of the article pledged fro$ a$ounts that $ay be or have been awarded payable by third parties answerable for the loss arising fro$ the robbery.

/5ilippine 6eposit Insurance Corporation Act
(RA -15 a$ a2e#)e) ,? RA$ 66-79 70669 875 a#) 5-6* a#) PD$ *69 6509 01 a#) 5-1)

. Ba$"' P!&"'?
• • &o insure the deposits of all ban%s which are entitled to the benefits of insurance under this Act &o pro$ote and safeguard the interests of the depositing public by way of providing per$anent and continuing insurance coverage on all insured deposits.

*. PDIC F+#'t"!#$
• Can lend $oney to ban%s before closure

• • • •

:nsurer of deposits against ban% closures Acts as receiver for ban%s &he 1D:C Act is not applicable to Fffshore Aan%ing Cnits 0ature of insurance function co$pulsory insurance on all ban% deposits

co$$unity $aintain stability in the econo$y. •

financial

Ad$inistrative 2unctions *. . A+th!r"t? t! EAa2"#e Ba#4$ &he 1D:C has the power to conduct exa$ination of ban%s with prior approval of the <onetary Aoard 3rovided) 0o exa$ination can be conducted within !2 $onths fro$ the last exa$ination date. *.*. A+th!r"t? t! U#)er:r"te a#) A).a#'e Le%a& Fee$ a#) L"t"%at"!# EApe#$e$ 4!o are co'ere"K &he Corporation shall underwrite or advance litigation costs and expenses, or provide legal assistance to its directors, officers, e$ployees or agents in connection with any civil, cri$inal, ad$inistrative or any other action or proceeding, to which such director, officer, e$ployee or agent is $ade a party by reason of the exercise of authority or perfor$ance of functions and duties under this Act. Directors, officers, e$ployees or agents who shall resign, retire, transfer to another agency or be separated fro$ the service, shall continue to be provided with such legal protection in connection with any act done or o$itted to be done by the$ in good faith during their tenure or e$ploy$ent. This shall not apply to any civil, cri$inal, ad$inistrative or any action or proceeding initiated by the Corporation against such director, officer, e$ployee or agent. 4!at fees D e7penses are co'ere"K • ,itigation costs and expenses, including legal fees and other expenses of external counsel, or providing legal assistance • ,egal assistance shall include the grant or advance of reasonable legal fees to enable the e$ployee to engage counsel of his choice. • :n the event of a settle$ent or co$pro$ise, inde$nification shall be provided only when the Corporation is advised by counsel that the persons to be inde$nified did not co$$it any negligence or $isconduct. • &he costs and expenses incurred $ay be paid by the Corporation in advance of the final disposition upon receipt of an underta%ing by the e$ployee to repay the a$ount advanced should it ulti$ately be deter$ined by the Aoard of Directors that he is not entitled to be inde$nified. *.-. A+th!r"t? t! Pr!.")e F"#a#'"a& A$$"$ta#'e What e#t"t"e$ are '!.ere)K • Insure" $an s in "an%er of closin% .hen the Corporation has deter$ined that » an insured ban% is in danger of closing » the continued operation of such ban% is essential to provide ade@uate ban%ing service in the

Insure" $an s t!at !a'e alrea", close" &he authority to extend financial assistance $ay also be exercised in the case of a closed insured ban% if the Corporation finds that » the resu$ption of operations of such ban% is vital to the interests of the co$$unity, or » a severe financial cli$ate exists which threatens the stability of a nu$ber of ban%s possessing significant resources Entities acquirin% Dmer%in% :it! close" D closin% insure" $an s &he Corporation $ay provide any corporation » ac@uiring control of » $erging with » consolidating with » ac@uiring the assets of an insured ban% in danger of closing in order to prevent such. Closure of entities t!at ma, pro"uce s,stemic consequences .hen the <onetary Aoard has deter$ined that there are syste$ic conse@uences of a probable closure of an insured ban%, the Corporation $ay grant financial assistance in such a$ount as $ay be necessary to prevent its failure or closure and# or restore the insured ban% to viable operations. A s,stemic ris refers to the possibility that failure of one ban% to settle net transactions with other ban%s will trigger a chain reaction, depriving other ban%s of funds leading to a general shutdown of nor$al clearing and settle$ent activity. :t also $eans the li%elihood of a sudden, unexpected collapse of confidence in a significant portion of the ban%ing or financial syste$ with potentially large real econo$ic effects. What are PDICJ$ p!:er$ ("#a#'"a& a$$"$ta#'eK :"th re%ar) t! • •

:t is authorized to • $a%e loans • purchase the assets • assu$e liabilities • $a%e deposits • 1rovide financial assistance which $ay ta%e the for$ of e@uity or @uasiGe@uity of the insured ban% 3rovided &hat the Corporation shall dispose of such e@uity as soon as practicable. &he Corporation, prior to the exercise of its powers, shall deter$ine that actual payoff and li@uidation will be $ore expensive than the exercise of this power. The Corporation $ay not use its authority to purchase the voting or co$$on stoc% of an insured ban% but it can enter into and enforce agree$ents that it deter$ines to be necessary to protect its financial interests.

-. C!#'ept !( I#$+re) Dep!$"t$
&he ter$ Linsure" "epositG $eans the a$ount due to any depositor for deposits in an insured ban% net of any obligation of the depositor to the

insured ban% as of the date of closure, but not to exceed 123B,BBB.BB. :n deter$ining such a$ount due to any depositor, there shall be added together all deposits in the ban% $aintained in the sa$e right and capacity for his benefit either in his own na$e or in the na$e of others. A -oint account regardless of whether the con"unction Jand,K Jor,K Jand#orK is used, shall be insured separately fro$ any individuallyGowned deposit account 3rovided) &hat a. :f the account is held "ointly by two or $ore natural persons, or by two or $ore "uridical persons or entities, the $axi$u$ insured deposit shall be divided into as $any e@ual shares as there are individuals, "uridical persons or entities, unless a different sharing is stipulated in the docu$ent of deposit and b. :f the account is held by a "uridical person or entity "ointly with one or $ore natural persons, the $axi$u$ insured deposit shall be presu$ed to belong entirely to such "uridical person or entity c. &he aggregate of the interests of each coG owner over several "oint accounts, whether owned by the sa$e or different co$binations of individuals, "uridical persons or entities, shall li%ewise be sub"ect to the $axi$u$ insured deposit of 123B,BBB.BB -o owner#holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to the rights provided in this Act unless his na$e is registered as owner#holder thereof in the boo%s of the issuing ban%.

&he Corporation shall publish the notice once a wee% for at least * consecutive wee%s in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the co$$unity or co$$unities where the closed ban% or its branches are located. 0.0. Ca&'+&at"!# !( L"a,"&"t? ('ee 1art :::) 'pecial 1rovisions for Ioint Accounts (1D:C Aulletin 2BB5GB5) !. A "oint account regardless of whether the con"unction JandK, JorK or Jand#orK is used, shall be insured separately fro$ an individuallyGowned deposit account. :f the account is held "ointly by two or $ore natural persons, or by two or $ore "uridical persons or entities, the $axi$u$ insured deposit shall be divided into as $any e@ual shares as there are individuals, "uridical persons or entities, unless a different sharing is stipulated in the docu$ent of deposit. Docu$ent of deposit referred to in the preceding paragraph pertains to "oint account agree$ents, account ledgers, certificate of ti$e deposits, passboo%s or other evidence of deposits, speci$en signature cards, corporate resolutions, contracts or si$ilar instru$ents, copies of which $ust be in the custody or possession of the ban% upon ta%eover by 1D:C. *. :f the account is held by a "uridical person or entity "ointly with one or $ore natural persons, the $axi$u$ insured deposit shall be presu$ed to belong entirely to the "uridical person or entity. &he aggregate of the interests or total share of each coGowner over several "oint accounts, whether owned by the sa$e or different co$binations of individuals, "uridical persons or entities, shall li%ewise be sub"ect to the $axi$u$ insured deposit of 123B,BBB.BB. &he a$ount of insurance due to any depositor for deposits in an insured ban% shall be net of any $atured or un$atured obligation of the depositor to the insured ban% as of date of closure. :n case of "oint deposit accounts where only one of the coG depositors has an obligation to the closed ban%, the following shall apply a. .here the deposit is a "oint Jand#orK or JorK account which is covered by a holdGout agree$ent, the obligation secured by the holdG out agree$ent shall be deducted fro$ the balance of the "oint account, regardless of the fact that only one of the coGdepositors in the "oint account is indebted to the closed ban%. .hen the deposit is a "oint JandK account which is covered by a holdG out agree$ent, the obligation secured by the holdGout agree$ent shall be deducted only fro$ the share in the "oint account of the

2.

0. L"a,"&"t? t! Dep!$"t!r$
0. . C!22e#'e2e#t !( L"a,"&"t? ,iability co$$ences when an insured ban% is closed by the <onetary Aoard pursuant to 'ec *B of 4.A. >73*. 0.*. EAte#t !( L"a,"&"t? ,iability covers the a$ount due to any depositor for deposits in an insured ban% net of any obligation of the depositor to the insured ban% as of the date of closure, but not to exceed 123B,BBB.BB. 0.-. Deter2"#at"!# !( I#$+re) Dep!$"t$ &he Corporation shall co$$ence the deter$ination of insured deposits upon its actual ta%eover of the closed ban%. :n order that a clai$ for deposit insurance with the 1D:C $ay prosper, the law re@uires that a corresponding deposit be placed in the insured ban%. A deposit as defined in 'ection *(f), $ay be constituted only if $oney or the e@uivalent of $oney is received by a ban% (f) &he ter$ @"eposit@ $eans the unpaid balance of $oney or its e@uivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a co$$ercial, chec%ing, savings, ti$e or thrift account or which is evidenced by passboo%, chec% and#or certificate of deposit (1D:C vs CA, !66>)

5.

3.

b.

depositor who is indebted to the closed ban%, unless his coG depositor is hi$self a coGsignatory to the holdGout agree$ent. c. .here the deposit is either a "oint JandK, JorK or Jand#orK account which is not covered by a holdGout agree$ent, the obligation of the depositor who is indebted to the closed ban% shall be deducted only fro$ his share in the balance of the "oint deposit account.

0.5. Fa"&+re !( Dep!$"t!r t! C&a"2 I#$+re) Dep!$"t Cnless otherwise waived by the Corporation, if the depositor in the closed ban% shall fail to clai$ his insured deposits with the Corporation » within 2 years fro$ actual ta%eover of the closed ban% by the receiver, or » within 2 years after the twoGyear period to file a clai$, all rights of the depositor against the Corporation shall be barred. )owever, all rights of the depositor against the closed ban% and its shareholders or the receivership estate to which the Corporation $ay have beco$e subrogated, shall revert to the depositor.

0.1. M!)e !( Pa?2e#t 1ay$ent of the insured deposits shall be $ade by the Corporation as soon as possible either » by cash or » by $a%ing available to each depositor a transferred deposit in another insured. &he ter$ Ltransfer "epositG $eans a deposit in an insured ban% $ade available to a depositor by the Corporation as pay$ent of insured deposit of such depositor in a closed ban% and assu$ed by another insured ban%. 0.6. C!#)"t"!#$ that 2a? ,e "2p!$e) pr"!r t! pa?2e#t » &he Corporation, in its discretion, $ay re@uire proof of clai$s to be filed before paying the insured deposits » .here the Corporation is not satisfied as to the viability of a clai$ for an insured deposit, it $ay re@uire final deter$ination of a court of co$petent "urisdiction before paying such clai$ 0.7. E((e't !( Pa?2e#t !( I#$+re) Dep!$"t » 1D:C is discharged fro$ obligations  1ay$ent of an insured deposit to any person by the Corporation shall discharge the Corporation  1ay$ent of a transferred deposit by the new ban% or by an insured ban% in which a transferred deposit has been $ade available shall discharge the Corporation and such new ban% or other insured ban% » 1D:C is subrogated to depositor(s rights  &he Corporation, upon pay$ent of any depositor shall be subrogated to all rights of the depositor against the closed ban%. Aut the depositor shall retain his clai$ for any uninsured portion of his deposit.  All pay$ents by the Corporation of insured deposits in closed ban%s parta%e of the nature of public funds, and $ust be considered a preferred credit si$ilar to taxes due to the 0ational -overn$ent. 0.8. Fa"&+re t! $ett&e '&a"2 !( "#$+re) )ep!$"t!r 2ailure to settle the clai$, within 7 $onths fro$ the date of filing of clai$ for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or $alice, shall sub"ect the directors, officers or e$ployees responsible to i$prison$ent fro$ 7 $onths to ! year. &he period shall not apply if the validity of the clai$ re@uires the resolution of issues of facts and or law by another office, body or agency.

1. Re$tr"'t"!# !# Pa?2e#t !( D".")e#)$ ,? I#$+re) Ba#4
1. . Ge#era& R+&e< 0o insured ban% shall pay any dividend on its capital stoc% or interest on its capital notes or debentures (if such interest is re@uired to be paid only out of net profits) or distribute any of its capital assets while it re$ains in default in the pay$ent of any assess$ent due to the Corporation 1.*. EA'ept"!#< • :f such default is due to a dispute between the insured ban% and the Corporation over the a$ount of such assess$ent and Aan% deposits security satisfactory to the Corporation for pay$ent upon final deter$ination

6. Pr!h","t"!# Dep!$"t$

a%a"#$t

Sp&"tt"#%

!(

&he penalty of prision mayor or a fine of not less than 13B,BBB but not $ore than 12,BBB,BBB or both shall be i$posed upon any director, officer, e$ployee or agent of a ban% for xxx 3) splitting of deposits or creation of fictitious loans or deposit accounts. xxx 7. Pr!h","t"!# a%a"#$t I$$+a#'e !( TRO$ • 0o court, except the CA, shall issue any &4F, preli$inary in"unction or preli$inary $andatory in"unction against the Corporation. • &his prohibition shall apply in all cases, disputes or controversies instituted by a private party, the insured ban%, or any shareholder. ) • &he 'upre$e Court $ay issue a restraining order or in"unction when o the $atter is of extre$e urgency involving a constitutional issue o grave in"ustice and irreparable in"ury will arise o &he party applying shall file a bond in an a$ount to be fixed by the 'upre$e Court E((e't$ !( "$$+"#% TRO< • Any restraining order or in"unction issued in violation of this 'ection is void and of no force and effect

• Any "udge who has issued the sa$e shall suffer the penalty of suspension of at least 7B days without pay

T#A"S/O#TATIO" LA$ T#A"S/O#TATIO" LA$ I% 1eneral Considerations
A. P+,&"' Ut"&"t"e$ 587 C!#$t"t+t"!#9 Art"'&e CII Se't"!# 0o franchise, certificate, or any other for$ of authorization for the operation of a public utility shall be granted except to citizens of the 1hilippines or to corporations or associations organized under the laws of the 1hilippines, at least sixty per centu$ of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. 0either shall any such franchise or right be granted except under the condition that it shall be sub"ect to a$end$ent, alteration, or repeal by the Congress when the co$$on good so re@uires. &he 'tate shall encourage e@uity participation in public utilities by the general public. &he participation of foreign investors in the governing body of any public utility enterprise shall be li$ited to their proportionate share in its capital, and all the executive and $anaging officers of such corporation or association $ust be citizens of the 1hilippines. Se't"!# 7 :n ti$es of national e$ergency, when the public interest so re@uires, the 'tate $ay, during the e$ergency and under reasonable ter$s prescribed by it, te$porarily ta%e over or direct the operation of any privatelyGowned public utility or business affected with public interest. A%a#9 8r. .$. PIATCO9 06* SCRA 6 * (*66-) &he Constitution envisions a situation wherein the exigencies of the ti$es necessitated the govern$ent to Jte$porarily ta%e over or direct the operation of any privately owned public utility or business affected with public interestK. 'ince the 'tate, in this case, is $erely exercising its police power, such exercise $ust not be unreasonably ha$pered nor can it be a source of obligation, in the absence of da$age due to arbitrariness. Also, re@uiring, the govern$ent pay reasonable co$pensation for the reasonable use of the property pursuant to the operation of the business contravenes the Constitution. Se't"!# 8 &he 'tate $ay, in the interest of national welfare or defense, establish and operate vital industries and, upon pay$ent of "ust co$pensation, transfer to public ownership utilities and other private enterprises to be operated by the -overn$ent. Se't"!# 5 &he 'tate shall regulate or prohibit $onopolies when the public interest so re@uires. 0o co$binations in restraint of trade or unfair co$petition shall be allowed. The P+,&"' Ser."'e La:9 CA 069 a$ a2e#)e) Se'. -(,) &he ter$ Qpublic serviceQ includes every person that now or hereafter $ay own, operate, $anage, or control in the 1hilippines, for hire or co$pensation, with general or li$ited clientele, whether per$anent, occasional or accidental, and done for general business purposes, any co$$on carrier, railroad, street railway, traction railway, subGway $otor vehicle, either for freight or 100% UP L AW , $

COMM #CIAL LA$
passenger, or both with or without fixed route and whether $ay be its classification, freight or carrier service of any class, express service, stea$boat or stea$ship line, pontines, ferries, and water craft, engaged in the transportation of passengers or freight or both, shipyard, $arine railways, $arine repair shop, /warehouse8 wharf or doc%, ice plant, iceGrefrigeration plant, canal, irrigation syste$, gas, electric light, heat and power water supply and power, petroleu$, sewerage syste$, wire or wireless co$$unications syste$, wire or wireless broadcasting stations and other si$ilar public services 1rovided, however, &hat a person engaged in agriculture, not otherwise a public service, who owns a $otor vehicle and uses it personally and#or enters into a special contract whereby said $otor vehicle is offered for hire or co$pensation to a third party or third parties engaged in agriculture, not itself or the$selves a public service, for operation by the latter for a li$ited ti$e and for a specific purpose directly connected with the cultivation of his or their far$, the transportation, processing, and $ar%eting of agricultural products of such third party or third parties shall not be considered as operating a public service for the purposes of this Act. WHAT IS A PUBLIC UTILITBK M"&+$a#% Ma?! U#! La,!r Ce#ter .. Gar'"a ( 550) 1ublic utilities are privately owned and operated businesses whose services are essential to the general public. &hey are enterprises which specially cater to the needs of the public and conduce to their co$fort and convenience. As such, public utility services are i$pressed with public interest and concern. .hen, therefore, one devotes his property to a use in which the public has an interest, he, in effect grants to the public an interest in that use, and $ust sub$it to the control by the public for the co$$on good, to the extent of the interest he has thus created. A&,a#! .. Re?e$ ( 585) 2ranchises issued by Congress are not re@uired before each and every public utility $ay operate. A public utility is a business or service engaged in regularly supplying the public with so$e co$$odity or service of public conse@uence, such as electricity, gas, water, transportation, telephone or telegraph services. Apart fro$ statutes which define public utilities that are within the purview of such statutes, it would be difficult to construct a definition of a public utility which would fit every conceivable case. As its na$e indicates, however, the ter$ public utility i$plies a public use and service to the public. WHEN IS A BUSINESS A PUBLIC UTILITBK .hen it involves a co$$odity or service of public conse@uence. * CONCEPTS OF PUBLIC UTILIT