UST GN 2011 Mercantile Law Proper PDF

LETTERS OF CREDIT
LETTERSOFCREDIT Q: Is irrevocable letter of credit and confirmed

letterofcreditsynonymous?
I. DEFINITION/CONCEPT
A: An irrevocable letter of credit is not
Q:WhatisLetterofCredit(LC)? synonymous with a confirmed letter of credit. In
an irrevocable letter of credit, the issuing bank
A: It is any arrangement, however named or may not, without the consent of the beneficiary
described, whereby a bank (issuing bank), acting and the applicant, revoke its undertaking under
at the request and on the instructions of a the letter, whereas, in a confirmed letter of
customer (applicant) or on its own behalf, binds credit,thecorrespondentbankgivesanabsolute
itselfto: assurancetothebeneficiarythatitwillundertake
theissuingbanksobligationasitsownaccording
1. Pay to the order of, or accept and pay to the terms and condition of the credit.
drafts drawn by a third party (Prudential Bank and Trust Company v. IAC, G.R.
(Beneficiary),or No.74886,Dec.8,1992)
2. Authorize another bank to pay or to
acceptandpaysuchdrafts,or Q:Canacourtorderthereleasetotheapplicant
3. Authorizes another bank to negotiate, the proceeds of an irrevocable letter of credit
againststipulateddocument(s), withouttheconsentofthebeneficiary?

Provided, the terms and conditions of the credit A: No, such order violates the irrevocable nature
are complied with. (Art. 2, Uniform Customs & oftheletterofcredit.Thetermsofanirrevocable
PracticeforDocumentaryCredits.) letter of credit cannot be changed without the
consentoftheparties,particularlythebeneficiary
Note: They are in effect absolute undertakings to thereof. (Phil. Virginia Tobacco Administration v.
pay the money advanced or for the amount for DeLosAngeles,G.R.No.L27829,Aug.19,1988)
which the credit is given on the faith of the
instrument. II. GOVERNINGLAW

Q:WhatisthedurationofLC? Q: What is the law governing letter of credit
(LC)?
A:
1. Upontheperiodfixedbytheparties;or A: It is the Uniform Customs and Practice (UCP)
2. Ifnoneisfixed: for documentary Credits for International
a. 6 months from its date if used in Chamber of Commerce governs the Letters of
thePhilippines; credit(MetropolitanWaterworksvs.Daway,G.R.
b. 12 months if used abroad (Art No.160723,July21,2004).
572,ibid).
Articles567to572oftheCodeofCommerceon
Q:WhatarethekindsofLC? Letters of Credit are obsolete. However, in the
absence of any provision in the Code of
A: Commerce, commercial transaction shall be
COMMERCIALLETTERS STANDBYLETTERSOF governed by the usages and customs generally
OFCREDIT CREDIT observed.(Sec.2,CodeofCommerce)
Involvenonsale
Involvecontractsofsale.
transactions. III. NATUREOFLETTEROFCREDIT
Payableupon
certificationbythe
Q:WhatisthenatureandpurposeofLC?
Payableupon beneficiaryofthe

presentationbythe applicantsNON
A: To ensure certainty of payment. The seller is
sellerbeneficiaryof performanceofthe
documentsthatshowhe agreement.(Transfieldv. assuredofpaymentbecausethebankintervenes
hasperformedhis LuzonHydroCorp.,G.R. and makes the commitment to pay. This
contract. No.146717,Nov.22, addressesproblemsarisingfromsellersrefusalto
2004) part with his goods before being paid and the
buyers refusal to part with his money before
acquiringthegoods,thus,facilitatingcommercial
transactions.

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ACADEMICSCHAIR:LESTERJAYALANE.FLORESII UNIVERSITYOFSANTOTOMAS
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
V ICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE Facultad de Derecho Civil
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
UST GOLDEN NOTES 2011

Q:WhataretheessentialconditionsofLC? draft to the issuing bank to recover
payment.
A:
1. Issuedinfavorofadefinitepersonand The number of parties may be increased.
nottoorder. Modern letters of credit usually involve
banktobank transactions. The following
Note: The Uniform Commercial Practice for additionalpartiesmaybe:
DocumentaryCreditsallowslettersofcreditto
bepayabletoorder 1. Advising/notifying bank The
correspondent bank (agent) of the
2. Limited to a fixed or specified amount, issuing bank through which it advises
ortooneormoreamounts,butwitha thebeneficiaryoftheLC.
maximumstatedlimit.(Article568,Ibid)
2. Confirming bank bank which, upon
Note:Ifanyoftheseessentialconditionsisnot therequestofthebeneficiary,confirms
present,theinstrumentismerelyconsideredas theLCissued.
aletterofrecommendation.
3. Payingbankbankonwhichthedrafts
Q: In case the buyer was not able to pay its are to be drawn, which may be the
obligation under the letter of credit, can the issuingbankoranotherbanknotinthe
banktakepossessionoverthegoodscoveredby cityofthebeneficiary.
thesaidletterofcredit?
4. Negotiating bank bank in the city of
A: No. The opening of a Letter of Credit did not thebeneficiarywhichbuysordiscounts
vest ownership of the goods in the bank in the the drafts contemplated by the LC, if
absence of a trust receipt agreement. A letter of such draft is to be drawn on the
credit is a mere financial device developed by opening bank not in the city of the
merchants as a convenient and relatively safe beneficiary.
modeofdealingwiththesalesofgoodstosatisfy
the seemingly irreconcilable interests of a seller, Q:WhatarethestagesofLC?
who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of A:
the goods before paying. (Transfield Philippines, 1. Contractofsalebetweenthebuyerand
Inc.v.LuzonHydroCorporation,G.R.No.146717, seller
Nov.22,2004) 2. ApplicationforLCbythebuyerwiththe
bank
IV. PARTIESTOALETTEROFCREDIT 3. IssuanceofLCbythebank
4. Shippingofgoodsbytheseller
Q: Who are the parties to a Letter of Credit 5. Execution of draft and tender of
transaction? documentsbytheseller
6. Redemption of draft (payment) and
A: obtaining of documents by the issuing
1. Applicant/Buyer/Importer procures bank
theletterofcredit,purchasesthegoods 7. Reimbursement to the bank and
and obliges himself to reimburse the obtainingofdocumentsbythebuyer
issuing bank upon receipt of the
documentstitle. A. RIGHTSANDOBLIGATIONSOFPARTIES

2. Issuing Bank One which, whether a Q: Explain the three(3)distinct but intertwined
paying bank or not, Issues the letter of contractrelationshipsthatareindispensableina
credit and undertakes to pay the seller letterofcredittransaction.
upon receipt of the draft and proper
documents of title from the seller and A:
to surrender them to the buyer upon 1. Between the applicant/buyer/importer
reimbursement. andthebeneficiary/seller/exporterThe
applicant/buyer/importeristheonewho
3. Beneficiary/Seller/Exporter In whose procures the letter of credit while the
favor the instrument is executed. One beneficiary/seller/exporter is the one
whodeliversthedocumentsoftitleand
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MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
LETTERS OF CREDIT
who in compliance with the contract of Q: Should the marginal deposit made by the
sale ships the goods to the buyer and customer, in possession of the bank be first
deliversthedocumentsoftitleanddraft deducted from the principal indebtedness
to the issuing bank to recover payment beforecomputingtheinterest?
for the goods. Their relationship is
governedbythecontractofsale. A: Yes, since it is supposed to be returned upon
compliance with his obligation. Indeed, it would
2. Between the issuing bank and the be onerous to compute interest and other
beneficiary/seller/exporter The issuing charges on the face value of the letter of credit
bank is the one that issues the letter of which the issuing bank issued, without first
credit and undertakes to pay the seller creditingorsettingoffthemarginaldepositwhich
upon receipt of the draft and proper theimporterpaidtoit.Requiringtheimporterto
documents of title. On the other hand, pay the interest on the entire letter of credit
the beneficiary/seller/exporter without deducting first his marginal deposit
surrendersdocumentoftitletothebank wouldbeaclearcaseofunjustenrichmentbythe
in compliance with the terms of the LC. bank.(Abadv.CA,G.R.42735,Jan.22,1990)
Their relationship is governed by the
termsoftheLC. Q:Whataretheliabilitiesofcorrespondent
banks?
3. Between the issuing bank and the
applicant/buyer/importer The A:
applicant/buyer/importer obliges ROLE LIABILITY
himself to reimburse the issuing bank Notifying/Advising
upon receipt of the documents of title. Doesnotincurany
Their relationship is governed by the obligationmorethan
Servesasanagentof
termsoftheapplicationfortheissuance justnotifyingthe
theissuingbank;
oftheletterofcreditbythebank.(2002 seller/beneficiaryofthe

BarQuestion) openingoftheLCafter
Warrantstheapparent
ithasdeterminedits
(Appearanceto
apparentauthority.
Q:Isanissuingbankaguarantor? unaidedsenses)
(BankofAmericaNT&
authenticityofthe
SAv.CA,G.R.No.
A: No, the concept of guarantee visavis the LetterofCredit.(Bank
105395,Dec.10,1993)
conceptofirrevocableLCisinconsistentwitheach ofAmericaNT&SAv.
Notliablefordamages
other. LCs are primary obligations and not CA,G.R.No.105395,
unlessthedocumenton
security contracts and while they are security Dec.10,1993)
itsfaceismanifestly
arrangements, they are not converted thereby fake.
intocontractsofguaranty.(MWSSv.Hon.Daway, Confirming
G.R.No.160732,June21,2004) Lendscredencetothe Directobligation,asifit
LCissuedbyalesser istheonewhichissued
Q:Whenisthebankentitledtoreimbursement? knownbank. theLC.
Negotiating
A: Once the issuing bank shall have paid the Dependsonthestageof
beneficiaryafterthelatterscompliancewiththe negotiation,thus:
terms of the LC. Presentment for acceptance to
thecustomer/applicantisnotaconditionsinequa 1.Beforenegotiation
non for reimbursement. (Prudential Bank v. IAC, Noliabilitywithrespect
Buysthesellersdraft
G.R.No.74886,Dec.8,1992) totheseller.Merely
andlateronsellsthe
suggestsitswillingness
drafttotheissuing
Q:Whatistheconsequenceofpaymentuponan tonegotiate.
bank.

expiredLC?
2.AfternegotiationA
contractualrelationship
A: An issuing bank which paid the beneficiary of
willthenarise,making
an expired letter of credit can recover the thebankliable.
payment from the applicant which obtained the Paying
goods from the beneficiary to prevent unjust Mayeitherbethe
enrichment.(RodzssenSupplyCo.v.FarEastBank issuingbankorany
andTrustCo,G.R.No.109087,May9,2001) Directobligation.
otherbankintheplace
ofthebeneficiary.
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V. BASICPRINCIPLESOFLETTEROFCREDIT C. DOCTRINEOFSTRICTCOMPLIANCE

A. DOCTRINEOFINDEPENDENCE Q:Whatisthedoctrineofstrictcompliance?

Q:Whatistheindependenceprinciple? A: The documents tendered by the
seller/beneficiary must strictly conform to the
A: The relationship of the buyer and the bank is terms of the letter of credit. The tender of
separateanddistinctfromtherelationshipofthe documents must include all documents required
buyerandsellerinthemaincontract;thebankis by the letter. Thus, a correspondent bank which
not required to investigate if the contract departsfromwhathasbeenstipulatedunderthe
underlying the LC has been fulfilled or not LCactsonitsownriskandmaynotthereafterbe
because in transactions involving LC, banks deal able to recover from the buyer or the issuing
only with documents and not goods (BPI v. De bank,asthecasemaybe,themoneythuspaidto
Reny Fabric Industries, Inc., L2481, Oct. 16, thebeneficiary.(FeatiBankandTrustCompanyv.
1970).Ineffect,thebuyerhasnocourseofaction CA,G.R.No.940209,Apr.30,1991)
againsttheissuingbank.

Q: What is the effect of the buyers failure to
procureanLCtothemaincontract?

A: The LC is independent from the contract of
sale. Failure of the buyer to open the Letter of
Credit does not prevent the birth of the Sales
Contract. (Reliance Commodities, Inc. v. Daewoo
Industrial Co. Ltd., G.R. No. 100831, Dec. 17,
1993) The opening of the LC is only a mode of
payment. The LC is not an essential requisite to
thecontractofsale.

Q:InacontractofloansecuredbyastandbyLC,
can the partial payments made on the loan be
added in computing the issuing banks liability
underitsownstandbyletterofcredit?

A: No, although these payments could result in
thereductionoftheactualamount,which,could
ultimatelybecollectedfromtheissuingbank,the
latters separate undertaking under its letters of
creditremain.Thisisbecausetheletterofcredit
is an absolute and primary undertaking which is
separate and distinct from the contract
underlying it. (Insular Bank of Asia & America v.
IAC,Nov.17,1988)

B. FRAUDEXCEPTIONPRINCIPLE

Q: What is the exception to the independence
principle?

A:TheFraudexceptionrule.Itprovidesthatthe
untruthfulness of a certificate accompanying a
demand for payment under a standby letter of
credit may qualify as fraud sufficient to support
an injunction against payment. (Transfield v.
LuzonHydro,G.R.No.146717,Nov.22,2004)

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MERCANTILELAWTEAM:
WAREHOUSE RECEIPTS LAW
WAREHOUSERECEIPTSLAW a specified person or to a specified

(ACT2137ASAMENDED) personorhisorder
5. Fees
I. NATUREANDFUNCTIONSOFAWAREHOUSE 6. Adescriptionofthegoods
RECEIPT 7. Thesignatureofthewarehouseman
8. If the receipt is issued for goods of
Q:Whatisawarehousereceipt? whichthewarehousemanistheowner,
either solely or jointly or in common
A: A written acknowledgment by the withothers,thefactofsuchownership;
warehouseman that he has received and holds and
certaingoodsthereindescribedinhiswarehouse 9. Astatementoftheamountofadvances
for the person to whom the document is issued. made and of liabilities incurred for
The warehouse receipt has twofold functions, whichthewarehousemanclaimsalien.
that is, it is a contract and a receipt. (Telengtan (Sec.2)
Bros. & Sons v. CA, G.R. No. L110581, Sept 21,
1994) Q:Whataretheeffectsofomissionofanyofthe
essentialterms?
Q: Distinguish Warehouse Receipts Law from
DocumentsOfTitleunderCivilCode. A:
1. A warehouseman shall be liable to any
A: person injured thereby for all damages
WAREHOUSERECEIPTS DOCUMENTSOFTITLE causedbytheomission
LAW UNDERCIVILCODE 2. Validityofreceiptnotaffected
Otherreceiptsof 3. Negotiabilityofreceiptsnotaffected
Warehousereceipts
documentsissuedin 4. Contract is converted to ordinary
issuedbywarehouses,
bailmentcontractsother deposit. (Gonzales v. Go Fiong & Luzon
whetherpublicor
thanwarehousereceipts Surety Co., G.R. No. 91776, Aug. 30,
private,bondedornot.
(CivilCode15071520) 1958)

Q:Whoisawarehouseman? Q:Whatistheeffectwhenthegoodsdeposited
areincorrectlydescribed?
A:Aperson,naturalorjuridical,lawfullyengaged
inthebusinessofstoringofgoodsforprofit.(Sec. A: It doesnotmake the receipt ineffective when
58,WRL) the identity of the goods is fully established by
evidence. Thus, the indorsement and delivery
Q:Whatisawarehouse? shall constitute sufficient transfer of the title of
the goods. (American Foreign Banking Corp. v.
A: The building or place where goods are Herridge,G.R.No.L21005,Dec.20,1924)
depositedandstoredforprofit.
GR: Warehouseman shall be liable for
Q:Whomayissuewarehousereceipt? damages for nonexistence or
misdescription of goods at the time of its
A: issue.
1. A warehouseman, whether public or
private,bondedornot.(Sec.1) XPN:Whenthegoodsaredescribedbased
2. A person authorized by a on:
warehouseman. 1. Seriesorlabelsuponthem
2. Statementthatthegoodsareofcertain
Q:Whatistheformofawarehousereceiptand kind.
whatareitsessentialterms?
Q:Whattermsmayandmaynotbeinserted?
A: It need not be in particular form but must
embodywithinitswrittenorprintedterms: A:Awarehousemanmayinsertinareceiptissued
1. Thelocationofthewarehouse by him any other terms and conditions provided
2. Thedateoftheissue thatsuchtermsandconditionsshallnotbe:
3. Theconsecutivenumberofthereceipt 1. Contrary to the Warehouse Receipts
4. A statement whether the goods Law.(Sec.3)
received will be delivered to bearer, to
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2. Terms reducing the required diligence Q:Whathappensiftheindorsementisnecessary
ofthewarehouseman.(Ibid.) butthenegotiablereceiptwasonlydelivered?
3. Contrarytolaw,morals,goodcustoms,
publicorderorpublicpolicy. A:
4. Those exempting the warehouseman 1. Thetransfereeacquirestitleagainstthe
from liability for misdelivery or for not transferor
givingstatutorynoticeincaseofsaleof 2. There is no direct obligation of the
goods. warehouseman;and
5. Those exempting the warehouseman 3. The transferee can compel the
fromliabilityfornegligence. transferor to complete the negotiation
by indorsing the instrument.
A. TOWHOMDELIVERED Negotiation takes effect as of the time
whentheindorsementisactuallymade.
Q:Towhomshouldthegoodsbedelivered?
Q: In case the signature of an owner of a
A: negotiable receipt was forged and the forger
1. To the person lawfully entitled to the who now holds the negotiable receipt was able
possessionofthegoods,orhisagent; towithdrawthegoodsfromthewarehouseman.
2. Tothepersonentitledtodeliveryunder What are the rights of the owner of the
a nonnegotiable instrument or with negotiablereceipt?
writtenauthority;or
3. To the lawful order of a negotiable A: If under the terms of the negotiable
receipt. (person in possession of a warehouse receipt, the goods are deliverable to
negotiablereceipt)(Sec.9) the depositor or to his order, the owner of the
said negotiable receipt may proceed against the
B. KINDS warehouseman and/or the holder. Without the
valid indorsement of the owner to the holder or
Q:Whatarethekindsofwarehousereceipt? inblank,thewarehousemanisliabletotheowner
forconversioninthemisdelivery.If,however,by
A: the terms of the negotiable warehouse receipt,
1. Negotiablewarehousereceipt the goods are deliverable to bearer (either
2. Nonnegotiablewarehousereceipt because it is so expressed in the warehouse
receipt or because of a blank indorsement by a
Q:Whatisanegotiablewarehousereceipt? persontowhoseorderthegoodsaredeliverable)
the owner may only proceed against the holder.
A:Itisareceiptinwhichitstatesthatthegoods The warehouseman is not liable for conversion
receivedwillbedeliveredtothebearerortothe where the goods are delivered to a person in
order of any person named in such receipt (Sec. possessionofabearernegotiableinstrument.
5). It is negotiated by either delivery or
indorsementplusdelivery. Q: What is the rule when more than one
negotiablereceiptisissuedforthesamegoods?
Note:Noprovisionshallbeinsertedinanegotiable
receipt that it is nonnegotiable. Such provision, if A: A warehouseman shall be liable for all
inserted, shall be void. A negotiable warehouse damagescausedbyhisfailuretodosotoanyone
receipt cannot be converted into nonnegotiable. who purchased the subsequent receipt for value
(Sec.5) supposing it to be an original, even though the
purchasebeafterthedeliveryofthegoodsbythe
Q:Whomaynegotiate? warehouseman to the holder of the original
receipt(Sec.6).
A:
1. Theownerthereof;or Note: The word duplicate shall be plainly placed
2. Any person to whom the possession or uponthefaceofeverysuchreceipt,exceptthefirst
custody of the receipt has been oneissued.(Sec.6.
entrustedbytheowner,if,bytheterms
ofthereceipt,thegoodsaredeliverable Q: What are the warranties on a warehouse
totheorderofthepersontowhomthe receipt?
possession or custody of receipt has
been entrusted or in such form that it A: A person who, for value, negotiates or
maybenegotiatedbydelivery.(Sec.40) transfers a receipt by indorsement or delivery,
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MERCANTILELAWTEAM:
including one who assigns for value a claim A:

secured by a receipt, unless a contrary intention NEGOTIABLE NEGOTIABLE
appearswarrants: INSTRUMENT WAREHOUSERECEIPT
1. Receiptisgenuine Contains an Does not contain an
2. Legalrighttonegotiateortransferit unconditional promise unconditional promise to
3. No knowledge of defects that may to pay a sum certain in pay a sum certain in
impair the validity or worth of the money. money.
receipt The subject is
Thesubjectismoney.
4. That he has a right to transfer title to merchandise.
the goods and that the goods are Thenegotiable
Thewarehousereceiptis
merchantable or fit for a particular instrumentistheobject
nottheobjectofvalue.
ofvalue.
purpose whenever such warranties
Intermediatepartiesare
would have been to transfer without a Intermediateparties
notliableforthe
receipt of goods represented thereby. becomesecondarily
warehousemansfailure
(Sec.44) liable.
todeliverthegoods.

Note: The indorsee does not guarantee that the
warehousemanwillcomplywithhisduties.(Sec.45)
D.RIGHTSOFAHOLDEROFANEGOTIABLE
WAREHOUSERECEIPTASAGAINSTA
Acreditorreceivingthewarehousereceiptgivenasa TRANSFEREEOFANONNEGOTIABLE
collateralmakesnowarranty.(Sec.46) WAREHOUSERECEIPT

Q:Whatisanonnegotiablewarehousereceipt? Q: Distinguish the rights of a holder of a
negotiablewarehousereceiptfromtherightsof
A:Itisareceiptinwhichitstatesthatthegoods a transferee of a nonnegotiable warehouse
received delivered to the depositor or to any receipt.
otherspecifiedperson.(Sec.4)
A:SeeAppendixA.
Q:Whatisrequiredinanonnegotiablereceipt?
Q: Coco was issued by a warehouseman a
A:Itshallhaveplainlyplaceduponitsfacebythe negotiable receipt for safekeeping by the latter
warehouseman issuing it nonnegotiable, or ofhisgoods.CanthejudgmentcreditorofCoco
notnegotiable.(Sec.7) levy by execution the goods covered by the
negotiablereceipt?
Note:Failuretomarknonnegotiableshallmakeit
negotiable (if the holder purchased it for value A: The goods cannot, while in the possession of
supposingittobenegotiable). the warehouseman, be attached by garnishment
or otherwise, or be levied upon under an
Q:Howisittransferred? execution unless the receipt be first surrendered
to the warehouseman, or its negotiation
A: A nonnegotiable warehouse receipt may be enjoined. The warehouseman cannot be
transferred by its delivery to the transferee compelledtodelivertheactualpossessionofthe
accompanied by a deed of assignment, donation goods until the receipt is surrendered to it or
orotherformoftransfer. impoundedbythecourt.

Q:Whatistheeffectofindorsement? Q: Assuming that prior to the levy, the receipt
wassoldtoYoyoonthebasisofwhichhefileda
A: Even if the receipt is indorsed, the transferee claim with the sheriff. Would Yoyo have better
acquiresnoadditionalright(Sec.39) rights to the goods than the creditor? Explain
youranswer.
C. DISTINCTIONBETWEENANEGOTIABLE
INSTRUMENTANDANEGOTIABLE A:Yes.Yoyo,asaholderforvalueofthereceipt,
WAREHOUSERECEIPT hasabetterrighttothegoodsthanthecreditor.
ItisYoyothatcansurrenderthereceiptwhichis
Q: Distinguish negotiable instrument from a in its possession and can comply with the other
negotiablewarehousereceipt. requirements which will oblige the
warehouseman to deliver the goods, namely, to
signareceiptforthedeliveryofthegoods,andto
paythewarehouseman'sliensandfeesandother

7

charges.(1999BarQuestion) deprivedofthepossessionofthesamebyfraud,
mistake or conversion. (PNB v. Noahs Ark Sugar
Q: Bon took the goods of Angela without her Refinery,G.R.No.107243,Sept.1,1993)
consent and deposited the same with a
warehouseman. The latter issued to Bon a II. DUTIESOFAWAREHOUSEMAN
negotiable receipt which she indorsed for value
to Ryan. Between Angela and Ryan, who has Q: What are the obligations of a
betterrightoverthegoods?Why? warehouseman?

A:Ryanhasbetterrighttothegoods.Thegoods A:
are covered by a negotiable warehouse receipt 1. To take care of the goods entrusted to
which was indorsed to Ryan for value. The hissafekeeping
negotiationtoRyanwasnotimpairedbythefact
that Bon took the goods without the consent of 2. Todeliverthemtotheholderofthe
Angela, as Ryan had no notice of such fact. receipt or the depositor provided
Moreover,Ryanisinpossessionofthewarehouse there is demand by the depositor
receipt and only he can surrender it to the accompaniedbyeither:
warehouseman.(Sec.8,WRL) a. An offer to satisfy the
warehousemanslien
Q: What is the proper recourse of the b. Anoffertosurrenderthereceipt,if
warehouseman if he is uncertain as to who is negotiable with such
entitledtothegoods?Explain. indorsements as would be
necessary for the negotiation of
A:Sincethere isaconflictingclaimofownership thereceipts;or
or title, the warehouseman should file a c. A readiness and willingness to
complaint in interpleader requiring Ryan and sign, when the goods are
Angela to interplead. The matter involves a delivered, an acknowledgement
judicialquestionastowhoseclaimisvalid.(2005 thattheyhavebeendelivered,if
BarQuestion) suchsignatureisrequestedbythe
warehouseman(Sec.8);and
Q:Whatistherulewhereawarehousereceiptis
transferredtosecurepaymentofaloanbyway 3. To keep the goods separate from the
ofpledgeormortgage? goods of other depositors, except if
authorizedbyagreementorbycustom,
A: The pledgee or mortgagee does not fungible goods may be mingled with
automaticallybecometheownerofthegoodsbut other goods of the same kind and
merely retains the right to keep and with the grade.
consentoftheownertosellthemsoastosatisfy
the obligation from the proceeds for the simple Q: When is the need for a demand by the
reasonthatthetransactionisnotasalebutonlya depositornotnecessary?
mortgage or pledge. Likewise, if the property is
lost without the fault or negligence of the A: When the warehouseman has rendered it
mortgageeorpledgee,thensaidgoodsaretobe beyondhispowertodeliverthegoods.
regarded as lost on account of the real owner,
mortgagor or pledgor. (PNB v. Sayo, Jr., G.R. No. Q: When is refusal to deliver by the
129198,July9,1998) warehousemanjustified?

Q: Does the nonpayment by the original A:
depositors of the purchase price render the 1. If the warehousemans lien is not
furthernegotiationofthereceiptinvalid? satisfiedbytheclaimants.(Sec.31)

A: No, the negotiation of the warehouse receipt 2. Where the goods have already been
by the buyer of goods purchased from and soldtosatisfythewarehousemanslien
deposited to the warehouseman is valid even if or because of their perishable or
the warehouseman who issued the negotiable hazardousnature.(Sec.34)
warehousereceiptwasnotpaidbythebuyer.The
validityofthenegotiationcannotbeimpairedby 3. If the warehouse receipt is negotiated
the fact that the owner/warehouseman was backtohim.
8
MERCANTILELAWTEAM:

4. When the holder does not satisfy the Q:Whatisconversion?
conditionsprescribedinSection8:
a. Nonsatisfaction of A:Anunathorizedassumptionandexerciseofthe
warehousemanslien. right of ownership over goods belonging to
b. Failure to surrender warehouse another through the alterationof their condition
receipt. or the exclusion of the owners right. (Bouviers
c. Refusal to sign the LawDictionary)
acknowledgement receipt,
acknowledging the receipt of the Q: What are the instances where a
goodsfromthewarehouse. warehousemanisliableforconversion?

5. Thefailurewasnotduetoanyfaulton A:
thepartofthewarehouseman: 1. Where the delivery is made to person
a. Upon request by or on behalf of otherthanthoseauthorized
the person lawfully entitled. (Sec.
10) 2. Evenifdeliveredtopersonsentitled,he
b. If he had information that the maystillbeliableforconversionifprior
delivery about to be made was to todelivery:
onenotlawfullyentitled.(Ibid.) a. He had been requested not to
c. Ifseveralpersonsclaimthegoods. makesuchdelivery;or
(Sec.17) b. He had received notice of the
d. If the warehouseman needs adverse claim or title of a third
reasonable time to ascertain the person.
validity of the claim if someone
other than the depositor claims Q:Givetheeffectsofalterationofthereceipton
titletothegoods.(Sec.18) theliabilityofthewarehouseman.
e. If the goods are lost, despite
ordinary care by the A:
warehouseman. 1. Alteration immaterial whether
fraudulent or not, whether authorized
Q:Whatifthereceiptsarelostordestroyed? or not, the warehouseman is liable
on the altered receipt according to its
A: A court of competent jurisdiction may order originaltenor
thedeliveryofthegoodsonly:
2. Authorized material alteration the
a. Upon satisfactory proof of the loss or warehousemanisliableaccordingto
destructionofthereceipt;and thetermsofthereceiptasaltered
b. Upon the giving of a bond with
sufficient sureties to be approved by 3. Material alteration innocently made
thecourt.(Sec.14) the warehouseman is liable on the
altered receipt according to its original
Note: The delivery of the goods under an order of receipt
the court shall not relieve the warehouseman from
liabilitytoapersontowhomthenegotiablereceipt 4. Materialalterationfraudulentlymade
has been or shall be negotiated for value without warehousemanisliableaccordingto
notice of the proceedings or of the delivery of the theoriginaltenorofthereceipttoa
goods.(Sec.14) purchaser of the receipt for value
withoutnotice,andeventothealterer
Q: When does the duty to insure the goods and subsequent purchasers with
arise? noticeexceptthatasregardsto
thelasttwo,thewarehousemans
A: liability is limited only to delivery as he
1. Wherethelawprovides isexcusedfromanyliability
2. Where it was an inducement for the
depositortoenterintothecontract;
3. Establishedpractice;or
4. Where the warehouse receipt contains
arepresentationtothateffect.

9

Q: What are the instances where a coopering and other charges and
warehousemaniscriminallyliableforhisacts? expensesinrelationtosuchgoods

A: 3. Charges and expenses for notice, and
1. Issuance of receipts for goods not advertisements of sale, and for sale of
received.(Sec.50) the goods where default had been
2. Issuance of receipt containing false madeinsatisfyingthewarehousemans
statement.(Sec.51) lien.(Sec.27)
3. Issuance of duplicate negotiable
warehousereceiptnotmarkedassuch. Q: What are the remedies available to a
(Sec.52) warehouseman to enforce his warehousemans
4. Issuance of a negotiable warehouse lien?
receiptofwhichheisanownerwithout
statingsuchfactofownership.(Sec.53) A:
5. Delivery of goods without obtaining 1. By refusing to deliver the goods until
negotiablewarehousereceipt.(Sec.54) thelienissatisfied
6. Negotiation of receipt for mortgaged
goods.(Sec.55) 2. By causing the extrajudicial sale of the
7. Issuance of warehouse receipts for property and applying the proceeds of
goodnotreceived.(Sec.50) thevalueofthelien
8. Comminglingofgoods.(Sec.24)
Note: Where the sale was made without
Q: What are the other acts for which the publication required and before the
warehousemanisliable? timeprovidedbylaw,suchsaleisvoidand
the purchases of the goods acquires no
A: titletothem.
1. Failure to stamp duplicate on copies
ofnegotiablereceipt.(Sec.6) 3. By filing a civil action for collection of
2. Failure to place nonnegotiable or the unpaid charges or by way of
notnegotiable on a nonnegotiable counterclaiminanactiontorecoverthe
receipt.(Sec.7) property from him or such other
3. Misdeliveryofgoods.(Sec.10) remedies allowed by law for the
4. Failure to effect cancellation of a enforcement of a lien against personal
negotiable receipt upon delivery of the property or to a creditor against his
goods.(Sec.11) debtor, for the collection from the
5. Issuingreceiptfornonexistinggoodsor depositor of all the charges which the
misdescribedgoods.(Sec.20) depositorhasboundhimselftopay.
6. Failure to take care of the goods. (Sec.
21) Q: Against whose goods may the lien be
7. Failure to give notice in case of sale of enforced?
goodstosatisfylien(Sec.33)orbecause
the goods are perishable or hazardous. A:
(Sec.34) 1. Goods belonging to the person who is
liableasdebtor;and
III. WAREHOUSEMANSLIEN
2. Goods belonging to others which have
Q:Whatiscoveredbythewarehousemanslien been deposited at any time by the
over the goods deposited or on the proceeds debtor with authority to make a valid
thereof? pledge.(Sec.28)

A: Q:Howmaythewarehousemanlosehislien?
1. Chargesforstorageandpreservationof
thegoods(insuranceandothersmaybe A:
includedaslongasitisstipulated) 1. Bysurrenderingpossessionthereof,or

2. Money advanced, interest, insurance, 2. Byrefusingtodeliverthegoodswhena
transportation, labor, weighing, demandismadewithwhichheisbound
tocomply.(Sec.29)

10
MERCANTILELAWTEAM:
Note:Whereanegotiablereceiptisissued,withthe
exception of the charges for the storage or
preservation of goods for which a negotiable
receipthasbeenissued,thelienexistsonlyfor
otherchargesexpresslyenumeratedinthereceipt
sofarastheyarewrittenalthoughtheamountof
thesaidchargeisntstated.
Lossofliendoesnotmeanthatthewarehouseman
doesnothaveanyotherremedy.
11

TRUSTRECEIPTSLAW(P.D.115) that the drafts drawn in connection with the
letters of credit have sufficient consideration
I. DEFINITION/CONCEPTOFATRUSTRECEIPT applies.(Leev.CA,G.R.No.117913,Feb.1,2002)
TRANSACTION
A. LOAN/SECURITYFEATURE
Q:Whatisatrustreceipttransaction?
Q: What is the loan and security feature of the
A:Itisanytransactionbetweentheentrusterand trustreceipttransaction?
entrustee:
A: A trust receipt arrangement is endowed with
1. Whereby the entruster who owns or its own distinctive features and characteristics.
holdsabsolutetitleorsecurityinterests Underthatsetup,abankextendsaloancovered
over certain specified goods, bytheLetterofCredit,withthetrustreceiptasa
documents or instrument, releases the security for the loan. In other words, the
same to the possession of entrustee transaction involves a loan feature represented
upon the latters execution of a TR by the letter of credit, and a security feature
agreement. which is in the covering trust receipt. A trust
receipt, therefore, is a security agreement,
2. Whereintheentrusteebindshimselfto pursuant to which a bank acquires a "security
hold the designated goods in trust for interest"inthegoods.Itsecuresanindebtedness
theentrusterand,incaseofdefault,to and there can be no such thing as security
sell such goods, documents or interest that secures no obligation. (Sps. Vintola
instrument with the obligation to turn vs. Insular Bank of Asia and America, G.R. No.
over to the entruster the proceeds to 73271,May29,1987)
theextentoftheamountowingtoitor
to turn over the goods, documents or
B. OWNERSHIPOFTHEGOODS,DOCUMENTS,
instrumentitselfifnotsold.(Sec.4,P.D.
ANDINSTRUMENTSUNDERATRUSTRECEIPT
115)

Q:Whatisatrustreceipt(TR)? Q:Whoistheownerofthearticlessubjectofthe
TR?
A:Itisthewrittenorprinteddocumentsignedby
theentrusteeinfavoroftheentrustercontaining A:Theentrustee.Atrustreceipthastwofeatures,
termsandconditionssubstantiallycomplyingwith the loan and security features. The loan is
theprovisionsofPD115. brought about by the fact that the entruster
financed the importation or purchase of the
Q:WhatarethetwoviewsregardingTR? goodsunderTR.Untilandunlessthisloanispaid,
the obligation to pay subsists. If the entrustee is
A: made to appear as the owner, it was but an
1. Asacommercialdocument(Sec.4,P.D. artificialexpedient,moreoflegalfictionthanfact,
115) for if it were really so, it could dispose of the
goods in any manner that it wants, which it
2. As a commercial transaction It is a cannotdo.Toconsidertheentrusteeasthetrue
separate and independent security owner from the inception of the transaction
transactionintendedtoaidinfinancing would be to disregard the loan feature thereof.
importersandretaildealerswhodonot (Rosario Textile Mills Corp. v. Home Bankers
have sufficient funds. (Nacu v. CA, G.R. Savings and Trust Company, G.R. No. 137232.
No.108638,Mar.11,1994) June29,2005)

Q:AreLCandTRnegotiableinstruments? II. RIGHTSOFTHEENTRUSTER

A: Letters of credit and trust receipts are not Q:Whoisanentruster?
negotiable instrument, but drafts issued in
connection with letters of credit are negotiable A: A lender, financer or creditor. Person holding
instruments. Hence, while the presumption of title over the goods documents or instruments
consideration under the negotiable instrument (GDI) subject of a trust receipt transaction;
law may not necessarily be applicable to trust releases possession of the goods upon execution
receipts and letters of credit, the presumption oftrustreceipt.(Sec.3[c])
12
MERCANTILELAWTEAM:
TRUST RECEIPTS LAW
Q:Whataretherightsoftheentruster? instruments (GDI) in trust for the

entrusterandtodisposeofthemstrictly
A: inaccordancewiththetermsofTR;
1. To receive the proceeds from the sale
of the goods, documents, or 2. To receive the proceeds of the sale for
instruments to the extent of the theentrusterandtoturnoverthesame
amountowingtohim to the entruster to the extent of
amountowingtotheentruster;
2. To the return of the goods, documents
orinstruments(GDI)incaseofnonsale 3. To insure GDI against loss from fire,
and enforcement of all other rights theft,pilferageorothercasualties.
conferredtohiminthetrustreceipt
4. To keep GDI or the proceeds thereof,
3. May cancel the trust and take whether in money or whatever form,
possession of the goods, upon default separate and capable of identification
or failure of the entrustee to comply aspropertyoftheentruster;
withanyofthetermsandconditionsof
thetrustreceipt.(Sec.7,P.D.115) 5. To return GDI to the entruster in case
theycouldnotbesoldorupondemand
A.VALIDITYOFTHESECURITYINTERESTAS oftheentruster;and
AGAINSTTHECREDITORSOFTHE
ENTRUSTEE/INNOCENTPURCHASERSFORVALUE 6. To observe all other conditions of the
trustreceipts.(Sec.9,P.D.115)
Q:Asbetweentheentrusterandthecreditorsof
the entrustee, who has a better right over the A. PAYMENT/DELIVERYOFPROCEEDSOFSALE
goods? ORDISPOSITIONOFGOODS,DOCUMENTSOR
INSTRUMENTS
A: The entruster. His security interest in goods,
documents, or instruments pursuant to the Q: What is the order in the application of
written terms of a trust receipt shall be valid as proceedsortheTRtransactions?
against all creditors of the entrustee for the
durationofthetrustreceiptagreement.(Sec.12, A:
P.D.115) 1. Expensesofthesale
2. Expensesderivedfromstoringthegoods
3. Principalobligation

Q: Who can defeat the rights of the entruster
Q:Istheentrusteeliableforthedeficiency?
overthegoods?

A: Yes, but any excess shall likewise belong to

A: A purchaser in good faith. He acquires goods,
him.(Sec.7,P.D.115)
documents or instruments free from the

entruster'ssecurityinterest.(Sec.11,P.D.115)
B. RETURNOFGOODS,DOCUMENTSOR
INSTRUMENTSINCASEOFNONSALE
III.OBLIGATIONSANDLIABILITYOFTHE

ENTRUSTEE
Q:Whatistheobligationoftheentrusteeincase
the goods, documents or instruments were not

Q:Whoisanentrustee?
sold?

A:Aborrower,buyer,importerordebtor.Person
A: The entrustee should return the goods,
to whom the goods are delivered for sale or
documents,orinstrumentstotheentrustor.(Sec.
processing in trust, with the obligation to return
4,P.D.115)
the proceeds of sale of the goods or the goods

themselvestotheentruster.(Sec.3[b])

Q:Whataretheobligationsandliabilititesofthe

entrustee?

A:
1. To hold good, documents and

13

C. LIABILITYFORLOSSOFGOODS,DOCUMENTS Q:Whatistheeffectofinsufficiencyofproofof
ORINSTRUMENTS deliveryofgoods?

Q: Who shall bear the loss of goods which are A: Estafa cannot lie. (Ramos v. CA, G.R. No. L
thesubjectofTR? 399225,Aug.21,1987)

A: The entrustee. Loss of goods, documents or Q:Whatwillhappentothecriminalactionifthe
instruments which are the subject of a TR, entrusteecompliedwithhisobligationunderthe
pendingtheirdisposition,irrespectiveofwhether TRagreement?
ornotitwasduetothefaultornegligenceofthe
entrustee, shall not extinguish his obligation to A:
theentrusterforthevaluethereof.(Sec.10,P.D. 1. If compliance occurred before the
115) criminal charge there is no criminal
liability.
D. PENALSANCTIONIFOFFENDERISA
CORPORATION 2. Ifcomplianceoccurred afterthecharge
even before conviction the criminal
Q: What acts or omissions are penalized under actionwillnotbeextinguished.
theTRLaw?
Q: What is the penal sanction if offender is a
A: The TR Law declares the failure to turn over corporation?
goodsorproceedsrealizedfromsalethereof,asa
criminal offense under Art. 315(l)(b) of RPC A: The Trust Receipts Law recognizes the
(estafa). The law is violated whenever the impossibility of imposing the penalty of
entrusteeorpersontowhomtrustreceiptswere imprisonment on a corporation. Hence, if the
issued fails to: (a) return the goods covered by entrustee is a corporation, the law makes the
the trust receipts; or (b) return the proceeds of officers or employees or other persons
the sale of said goods. (Metropolitan Bank v. responsible for the offense liable to suffer the
Tonda,G.R.No.134436,Aug.16,2000) penalty of imprisonment. The reason is obvious,
corporations, partnerships, associations and
Q: Does P.D. 115 violate the prohibition in the other juridical entities cannot be put to jail.
Constitution against imprisonment for non Hence, the criminal liability falls on the human
paymentofadebt? agent responsible for the violation of the Trust
ReceiptsLaw.(Ongvs.CA,G.R.No.119858,April
A: No. What is being punished is the dishonesty 29,2003)
andabuseofconfidenceinthehandlingofmoney
orgoodstotheprejudiceofanotherregardlessof IV.REMEDIESAVAILABLE
whetherthelatteristheownerornot.Itdoesnot
seektoenforcepaymentoftheloan.Thus,there Q:Intheeventofdefaultbytheentrusteeonhis
can be no violation of a right against obligation under the trust receipt agreement, is
imprisonmentfornonpaymentofadebt.(People it absolutely necessary for the entruster to
v.Nitafan,G.R.No.81559,Apr6,1992) cancel the trust and take possession of the
goodstobeabletoenforcehisrightthereunder?
Q: Is lack of intent to defraud a bar to the
prosecutionoftheseactsoromissions? A:Thelawusestheword"may"ingrantingtothe
entruster the right to cancel the trust and take
A:No.Themerefailuretoaccountorreturngives possession of the goods. Consequently, the
rise to the crime which is malum prohibitum. entrusteehasthediscretiontoavailofsuchright
There is no requirement to prove intent to or seek any alternative action, such as a third
defraud (Ching v. Secretary of Justice, G.R. No. party claim or a separate civil action which it
164317, Feb. 6, 2006; Colinares v. CA, G.R. No. deemsbesttoprotectitsright,atanytimeupon
90828,Sept.5,2000;Ongv.CA,G.R.No.119858, defaultorfailureoftheentrusteetocomplywith
Apr.29,2003)(2006BarQuestion) any of the terms and conditions of the trust
agreement.(SouthCityHomes,Inc.v.BAFinance
Corporation,G.R.No.135462,Dec.7,2001)

14
MERCANTILELAWTEAM:
TRUST RECEIPTS LAW
Q: Can the repossession of the goods by the 2. The transaction does not fall under PD
entrusterbeconsideredaspayment? 115. (Colinares v. CA, G.R. No. 90828,
Sept. 5, 2000, Consolidated v. CA, G.R.
A:No,paymentwouldlegallyresultonlyafterthe No.114286,Apr.19,2001)
entruster has foreclosed on the securities, sold
thesameandappliedtheproceedsthereoftothe Note:Inthesecases,theexecutionofaTR
entrusteesobligation.Sincethetrustreceiptisa was made after the goods covered by it
mere security arrangement, the repossession by had been purchased, making the buyer
the entruster cannot be considered payment of the owner thereof. The transaction does
the loan/advances given to the entrustee under not involve a trust receipt but a simple
the letter of credit/trust receipt. (PNB v. Pineda, loaneventhoughthepartiesdenominate
G.R.No.46658,May13,1991) thetransactionasoneofatrustreceipt.

Q. Earl failed to comply with his undertaking 3. Nonreceipt of the goods or where
underthetrustreceiptheissuedinfavorofABC proofofdeliveryofgoodscoveredbya
bank.Thebankfiledbothcriminalandcivilcases trust receipt to the accused is
against Earl. The court proceeded with the civil insufficient. (Ramos v. CA, G.R. No. L
caseindependentlyfromthecriminalcase.Isthe 399225,Aug.21,1987)
court correct in proceeding independently
althoughacriminalcaseisalsoinstituted? 4. Cancellation of the trust receipt
agreement and taking into possession
A: Yes, the complaint against Earl was based on ofthegoodsbytheentruster.
the failure of the latter to comply with his
Note:Mererepossessionofthegoodswill
obligationasspelledoutintheTR. Thisbreachof
extinguishcriminalliability.
obligation is separate and distinct from any

criminal liability for "misuse and/or
5. Compromise by parties before filing of
misappropriation of goods or proceeds realized
information in court. (Ong v. CA, G.R.
fromthesaleofgoods,documentsorinstruments
No.119858,Apr.29,2003)
released under trust receipts", punishable under

Section13oftheTrustReceiptsLaw.Beingbased
6. Novation before the filing of the
on an obligation ex contractu and not ex delicto,
criminalcomplaint.
thecivilactionmayproceedindependentlyofthe

criminal proceedings instituted against
7. Loss of goods without fault of the
petitioners regardless of the result of the latter.
entrustee.
(Sarmientov.CA,G.R.No.122502,Dec.27,2002)

8. Consignment.
Q. What is the effect of novation of a trust

agreement?
Q: Can deposits in a savings account openedby
the buyer subsequent to the TR transaction be

A. Where the entruster and entrustee entered
appliedtooutstandingobligationsundertheTR
into an agreement which provides for conditions
account?
incompatible with the trust receipt agreement,

the obligation under the trust receipt is
A:No,thereceiptofthebankofasumofmoney
extinguished. Hence, the breach in the
without reference to the trust receipt obligation
subsequent agreement does not give rise to a
does not obligate the bank to apply the money
criminal liability under P.D. 115 but only civil
received against the trust receipt obligation.
liability.(PhilippineBankv.Ong,G.R.No.133176,
Neither does compensation arise because
Aug.8,2002)
compensation is not proper when one of the
debts consists in civil liability arising from

Q: What are the defenses to negate criminal
criminal. (Metropolitan Bank and Trust Co. v.
liabilityoftheentrustee?
Tonda,G.R.No.134436,Aug.16,2000).
A:
1. Compliance with the terms of the trust
receipteitherbypayment,returnofthe
proceedsorreturnofthegoods.

15

NEGOTIABLEINSTRUMENTSLAW pay on demand or at a fixed or
determinablefuturetimeasumcertain
I.FORMSANDINTERPRETATION in money to order or to bearer. (Sec.
126)
Q: What are the elements of a negotiable
instrument? Note:ChecksarespecialformofBOE.

A: Q: Distinguish promissory note from a bill of
1. In writing and signed by the maker or exchange.
drawer
2. Contains an unconditional promise or A:
ordertopayasumcertaininmoney PROMISSORY BILLOF
3. Payable on demand, or at a fixed or NOTE EXCHANGE
determinablefuturetime Promiseto
Ordertopay
4. Payabletoorderortobearer(socalled pay
badgesofnegotiability) Astonumber 2original
3parties
5. If addressed to a drawee, he must be ofparties parties
named or otherwise indicated with Makeris Draweris
Astoliability
reasonablecertainty.(Sec.1) primarily secondarily
ofparties
liable liable
Note: A negotiable instrument need not follow the 2
exact language of NIL, as long as the terms are presentments
Only1
sufficient which clearly indicate an intention to Astonumber (for
presentment
conform to the requirements of the law. (Sec. 10) of acceptance
(for
No.5appliesonlytobillsofexchange.Apromissory presentments andfor
payment)is
notehasnodrawee. needed payment)are
needed
generally
needed
A.REQUISITESOFNEGOTIABILITY

II.COMPLETIONANDDELIVERY
Q: What are the factors to determine the

negotiabilityoftheinstrument?
A.INSERTIONOFDATE

A:
Q: Is the date essential to make an instrument
1. Words that appear on the face of
negotiable?
negotiableinstrument

2. Requirements enumerated in Section 1
A: The date is not essential (Sec. 6 [a]). If dated,
ofNIL
suchdateisdeemedaprimafacieproofthatitis
3. Intention of the parties by considering
thetruedateofthemaking,drawing,acceptance
thewholeoftheinstruments
orindorsementoftheinstrument.(Sec.11)

B.KINDSOFNEGOTIABLEINTRUMENTS
Q:Whenisdateimportant?

Q: What are the two kinds of negotiable
A: Date is important to determine maturity, as
instrumentsunderthelaw?
when:

1. Wheretheinstrumentispayablewithin
A:
a specified period after date, or after
1. Promissory notes (PN) An
sight.
unconditional promise in writing made
2. When the instrument is payable on
byonepersontoanother,signedbythe
demand,dateisnecessarytodetermine
maker, engaging to pay on demand, or
whether the instrument was presented
atafixedordeterminablefuturetime,a
withinareasonabletimefromissue,or
sum certain in money to order or to
fromthelastnegotiation.
bearer.(Sec.184)
3. When the instrument is an interest

bearing one, to determine when the
2. Bill of exchange (BOE) An
intereststartstorun.
unconditional order in writing

addressed by one person to another

signedbythepersongivingit,requiring

the person to whom it is addressed to
16
MERCANTILELAWTEAM:
NEGOTIABLE INSTRUMENTS LAW
Q:Whenmaydatebeinserted?
2.Completeinstrument
A: a. Delivered
1. Where an instrument expressed to be i. Withforgeryandalteration
payable at a fixed period after date is ii. Without forgery and
issuedundated,or alteration
2. Wheretheacceptanceofaninstrument b. Notdelivered
payable at a fixed period after sight is i. Withforgeryandalteration
undated ii. Without forgery and
alteration
Note:Anyholdermayinsertthereinthetruedateof
issue or acceptance, and the instrument shall be
payableaccordingly.(Sec.13) C.INCOMPLETEBUTDELIVEREDINSTRUMENTS

Q:Whatistheeffectofinsertionofwrongdate? Q:Whenisaninstrumentincomplete?

A: It does not avoid the instrument in the hands A: When it is wanting in any material particular.
of a subsequent holder in due course. In the (Sec.14)
hands of a holder in due course, the date
inserted, even if wrong, is to be regarded as the Q: When may a prior party be bound by an
truedate(Sec.13). incompletebutdeliveredinstrument?

Note: With respect to the person who inserted the A: If it is filled up strictly in accordance with the
wrong date, however, the instrument is avoided. authoritygivenandwithinareasonabletime.But
(BankofHoustonv.Day,145Mo.Appl.410,122SW
if any such instrument, after completion, is
756)
negotiated to a holder in due course, it is valid
andeffectualforallpurposesinhishands,andhe
B.COMPLETIONOFBLANKS
mayenforceitasifithadbeenfilledupstrictlyin
accordancewiththeauthoritygivenandwithina
Q:Whohastheauthoritytofilluptheblanksin
reasonabletime.(Sec.14)
anincompletebutdeliveredinstrument?

Q: Lorenzo signed several blank checks

A: The holder has a prima facie authority to
instructing Nicky, his secretary, to fill them as
completeit.
payment for his obligations. Nicky filled one
check with her name as payee, placed

A signature on a blank paper delivered by the
P30,000.00thereon,endorsedanddelivereditto
person making the signature in order that the
Evelynaspaymentforgoodsthelatterdelivered
paper may be converted into a negotiable
to the former. When Lorenzo found out about
instrumentoperatesasaprimafacieauthorityto
thetransaction,hedirectedthedraweebankto
fillitupassuchforanyamount.(Sec.14)
dishonor the check. When Evelyn encashed the
check, it was dishonored. Is Lorenzo liable to

Q:Whatismeantbymaterialparticular?
Evelyn?

A: Any particular proper to be inserted in a
A: Yes. This covers the deliveryof an incomplete
negotiableinstrumenttomakeitcomplete.
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was

Q: What are the various situations involving
prima facie authority on the part of Nicky to fill
negotiableinstruments?
upanyofthematerialparticularsthereof.Having
doneso,andwhenitisfirstcompletedbeforeitis
A:
negotiatedtoaholderinduecourselikeEvelyn,it
1. Incompleteinstrument
is valid for all purposes, and she may enforce it
a. Delivered
within a reasonable time, as if it had been filled
i. Withforgeryandalteration
upstrictlyinaccordancewiththeauthoritygiven.
ii. Without forgery and
(2006BarQuestion)
alteration

b. Notdelivered

i. Withforgeryandalteration

ii. Without forgery and
alteration

17

D.INCOMPLETEANDUNDELIVERED debtor, third person, and drawee bank for the
INSTRUMENTS amountofthecheck?

Q: What is the rule when an instrument is A: No, the payee of a negotiable instrument
incompleteandundelivered? acquiresnointerestwithrespecttheretountilits
deliverytohim.Withouttheinitialdeliveryofthe
A: Not valid against the party whose signature instrument from the drawer to the payee, there
wasplacedbeforedelivery,whethertheholderis can be no liability on the instrument.
a holder in due course or not. With respect, (DevelopmentBankofRizalv.SimaWei,G.R.No.
however,toaholderinduecourse,nondelivery 85419,Mar.9,1993)
must be proved because as to him, there is a
primafaciepresumptionofdelivery. Q: What is the effect if the instrument is in the
possessionofaholderinduecourse?
Reason:Deliveryisessentialtovalidity.(Sec.15)
A: Valid delivery is conclusively presumed. (Sec.
Q: What about the party whose signature was 16)
placedafterdelivery?
Q:Whatiftheinstrumentisinthepossessionof
A: Valid against the party whose signature was apartyotherthanaholderinduecourse?
placedafterdeliverylikeanindorserbecausethe A: Possession of such party constitutes prima
indorser warrants the instrument to be genuine facie presumption of delivery but subject to
andinallrespectwhatitpurportstobe. rebuttal.

Q: Can a Holder in duecoursehold a maker for Q: When is delivery made conditional or for a
instruments which are incomplete and specialpurpose?Provideexamples.
undeliveredsupposingthatthenotewasstolen,
filledup,andwassubsequentlynegotiated? A: It depends upon whom the instrument is
delivered.Iftheinstrumentlandsinthehandsof
A: No. the law is specific that the instrument is a holder in due course (one who does not know
not a valid contract in the hands of any holder. of the conditional delivery or of its special
Thephraseanyholderincludesaholderindue purpose), the instrument will be as if there isno
course. condition.

E.COMPLETEBUTUNDELIVERED To a holder not in due course, prior parties are
notboundbytheinstrument.
Q: What is the effect if an instrument is
undelivered? Note: The law contemplates that the condition is
orally or verbally conveyed to the holder upon
A:Itisincompleteandrevocableuntildeliveryof delivery,becauseoftherulethatthenegotiabilityis
theinstrumentforthepurposeofgivingiteffect. determinedonlyuponthefaceoftheinstrument.
(Sec.16)
Q:Whoareimmediateparties?
Q:Whatisdelivery?
A:Personshavingknowledgeoftheconditionsor
A: Delivery refers to the transfer of possession, limitations placed upon the delivery of an
actual or constructive, from one person to instrument.Itmeansprivity,andnotproximity.
another(Sec.191),withtheintenttotransfertitle
topayeeandrecognizehimasholderthereof. Q:Whoareremoteparties?

Q:Whenisaninstrumentissued? A: Persons without knowledge as to the
conditionsorlimitationsplaceduponthedelivery
A: The instrument is deemed issued the first of an instrument, even if he is the next party
deliveryoftheinstrument,completeinform,toa physically.
personwhotakesitasholder.(Sec.191)

Q: Can a creditor bank who was the payee in a
check fraudulently obtained by a third person
who subsequently encashed it sue the drawer

18
MERCANTILELAWTEAM:
F.COMPLETEANDDELIVEREDINSTRUMENTS III.RULESONINTERPRETATION

Q: What are the rules when an instrument is Q:Whataretherulesofconstructionincaseof
completeanddelivered? ambiguitiesinanegotiableinstrument?
A: A:
1. Without forgery and alteration, all 1. Wordsprevailoverfigures
partiesarebound. 2. Interest runs from the date of the
instrument, if date from which interest
2. With forged indorsement and/or istorunisunspecified;ifundated,from
alteration theissue
a. Orderinstruments 3. If undated, deemed dated on the date
i. Orderpromissorynote ofissue
- Prior parties notbound. 4. Writtenprovisionsprevailoverprinted
Forged signature is 5. If there is doubt whether it is a bill or
wholly inoperative (Sec. note,theholdermaytreatitaseitherat
23); unless estoppel sets hiselection
in with regard prior 6. When not clear in what capacity it was
parties(cutoffrule). signed,deemedsignedasanindorser
- Subsequent parties 7. If "I promise to pay" but signed by two
bound. or more persons, jointly and severally
liable.
ii. Orderbillofexchange
- Drawers account cannot IV.SIGNATURE
be charged by the
Drawee; Q:Whoarethepersonsliableonaninstrument?
- Drawer has no cause of
action against collecting A:
bank, since the duty of GR:Onlypersonswhosesignaturesappearon
the latter is only to aninstrumentareliablethereon.(Sec.18)
payee;
- Draweecanrecoverfrom XPN:
collectingbank; 1. Person signs in trade or assumed name
- Drawer not liable to the (Sec. 18 [2]) Party who signed must
collecting bank. have intended to be bound by his
Collecting bank bears signature.
loss (can recover from
personitpaid) 2. Principal is liable if a duly authorized
- Payee can recover from: agentsignsinhisownbehalfdisclosing
Drawer and Collecting the name of the principal and adding
bank, but not from wordstoshowheismerelysigningina
Drawee unless with representative capacity. (Sec. 19)
acceptanceofthebill; Authority may be given orally or in
writing (SPA, only an evidence of
b. Bearerinstruments authorityofanagenttothirdparties)
i. Bearerpromissorynote
- Priorpartiesliable; 3. Incaseofforgery(Sec.23)
- Forged signatory not 4. Acceptormakeshisacceptanceofabill
liabletopartynotholder onaseparatepaper(Sec.134)
induecourse. 5. Person makes a written promise to
accept the bill before it is drawn (Sec.
ii. Bearerbillofexchange 135)

- Draweebankliable.

19

A.SIGNINGINTRADENAME destroy the right of such an infant
indorsertodisaffirmundertherulesof
Q:Isapersonsigningintradenameliable? infancy
2. Passespropertytherein
A: Yes. As a general rule, only persons whose 3. Voidable.Therefore,partiespriortothe
signatures appear on an instrument are liable minor or corporation cannot escape
thereon.Butonewhosignsinatradeorassumed liability by setting up as defense the
nameisliableasifhesignedhisownname(Sec. incapacityoftheindorsers.
18 [2]). It is necessary, however, that the party 4. A minor, however, may be held bound
who signed intended to be bound by his byhissignatureinaninstrumentwhere
signature. he is guilty of actual fraud committed
by specifically stating that he is of age.
B.SIGNATUREOFANAGENT (PNB v. CA, G.R. No. L34404, June 25,
1980)
Q: What are the legal effects of an agents
signatureinanegotiableinstrument? D.FORGERY

A: Provided that the requisites are complied Q:Whatisforgery?
with,thelegaleffectsofanagentssignatureina
negotiableinstrumentare: A:Forgeryisthecounterfeitmakingorfraudulent
1. Hissignaturewillbindhisprincipal alterationofanywriting.
2. He will be exempt from personal
liability Q:Whenisthereforgery?

Q: What are the requisites toexempt an agent A:Signatureisaffixedbyonewhodoesnotclaim
fromliability? to act as an agent and who has no authority to
bindthepersonwhosesignaturehehasforged.
A:
1. Heisdulyauthorized Q:Whenistherewantofauthority?
2. He adds words to his signature
indicating that he signs as A:Signatureisaffixedbyonewhopurportstobe
agent/representative anagentbuthasnoauthoritytobindthealleged
3. He discloses the name of his principal.
principal.(Sec.20)
Q:Whatistheeffectwhenthereisforgery?
Q:Whatismeantbyprocuration?
A:
A: Procuration is the act by which a principal GR: It does NOT render the instrument void.
gives power to another to act in his place as he The signature is wholly inoperative, and no
couldhimself(Finkv.Scott,143S.E.305) right to retain the instrument, or to give a
discharge thereof, or to enforce payment
Q: What is the effect of a signature by thereof against any party to it, is acquired
procuration? throughorundersuchsignature.(Cutoffrule)

A:Itoperatesasnoticethattheagenthasbuta XPN:
limited authority to sign and the principal is 1. Ifthepartyagainstwhomitissoughtto
bound only in case the agent in so signing acted enforce such right is precluded from
withintheactuallimitsofhisauthority.(Sec.21) settingupforgeryorwantofauthority.
(Sec.23)
C.INDORSEMENTBYMINORORCORPORATION 2. Where the forged signature is not
necessarytotheholderstitle,inwhich
Q: What are the effects of an infant or case, the forgery may be disregarded
corporationsindorsement? (Sec.48)

A:
1. Notvoid.Theincapacityoftheinfantis
not a defense which can be availed of
by prior parties. However, it does not
20
MERCANTILELAWTEAM:
Q: Can a payee sue the collecting bank for the 3. Where bill payable to order: The party
amountofthecheckswhenitmadepaymentof whose indorsement is forged is not
the same under a forged endorsement in favor liable to any holder even a HIDC. The
oftheforger? forged indorsement is wholly
inoperative.
A: Yes, since the signature of the payee was
forged to make it appear that he had made an Q: A client indorsed a check with a forged
indorsementinfavoroftheforger,suchsignature indorsement. The collecting bank indorsed the
should be deemed as inoperative and check with the drawee bank. What are the
ineffectual.The collecting bank grossly erred in liabilitiesoftheparties?
making payment by virtue of said forged
signature. The collecting bank is liable to the A: The collecting bank isbound by its warranties
payee and must bear the loss because it is its as an indorser and cannot set up the defense of
legal duty to ascertain that the payees forgeryasagainstthedraweebank.
endorsement was genuine before cashing the
check.(WestmontBankv.Ong, G.R.No.132560, Thedraweebankisunderstrictliabilitytopaythe
Jan.30,2002) checktotheorderofthepayee.Paymentundera
forged indorsement is not to the drawer's order.
Q: Who are precluded from setting up the Since the drawee bank did not pay a holder or
defenseofforgery? other person entitled to receive payment, it has
no right to reimbursement from the drawer.
A: (AssociatedBankv.CA,G.R.No.107382,Jan.31,
1. Those who admit/warrant the 1996)
genuinenessofthesignature:indorsers,
persons negotiating by delivery and Q:Whatistheremedyofthedraweebank?
acceptor;(Sec56)
2. Those who by their acts, silence, or A:Thedraweebankmaynotdebittheaccountof
negligence, areestoppedfromclaiming the drawer but may generally pass liability back
forgery; through the collection chain to the party who
3. A holder of a bearer instrument who tookfromtheforgerand,ofcourse,totheforger
subsequently negotiates such himself, if available. If the forgery is that of the
instrument with a prior forged payee's or holder's indorsement, the collecting
indorsement(forgedindorsementisnot bankisheldliable,withoutprejudicetothelatter
necessary to his title it being a bearer proceeding against the forger. Since a forged
instrument). indorsement is inoperative, the collecting bank
hadnorighttobepaidbythedraweebank.The
Q:Whataretherightsofthepartiesincasesof former must necessarily return the money paid
forgedinstruments? by the latter because it was paid wrongfully.
(AssociatedBankv.CA,G.R.No.107382,Jan.31,
A: 1996)
1. Wherenotepayabletoorder:
1. Party whose signature was forged Q: What is the liability of the drawee bank and
is not liable to a holder, even a the drawer for the amount paid on checks with
HIDC forgedindorsements,ifthesamewasduetothe
2. Indorsementiswhollyinoperative. negligence of both the drawee bank and the
drawer?
2. Wherenotepayabletobearer:
a. The party whose indorsement is A:Thelossoccasionedbysuchnegligenceshould
forged is liable to a HIDC, but not bedividedequallybetweenthedrawer/depositor
toonewhoisnotaHIDC andthedrawee.
Reason: it can be negotiated by
meredelivery Q: Can a drawerdepositor who entrusted his
b. The only defense available is want check books, credit cards, passbooks, bank
ofdeliverybutthisdefensecanbe statementsandcancelledcheckstohissecretary
raised only against a holder not in and who had introduced the secretary to the
duecourse. bank for purposes of reconciliation of his
accounts hold the drawee bank liable for the
21

amounts withdrawn by the secretary by forging (Associated Bank v. CA, G.R. No.
hissignatureonthechecks? 107382, Jan. 31, 1996; BPI v. Case
Montessori Internationale, G.R. No.
A: No, he is precluded from setting up the 149454,May28,2004).
forgeryduetohisownnegligenceinentrustingto
his secretary his credit cards and check book However,thedrawermaybeprecluded
including the verification of his statements of or estopped from setting up the
account.(Ilusoriov.CA,G.R.No.139130,Nov.27, defense of forgery as against the
2002) draweebank,whenitisshownthatthe
drawerhimselfhadbeenguiltyofgross
Q:Canadrawer,fromwhomcheckswerestolen negligence as to have facilitated the
but failed to report the same to the authorities forgery (Metropolitan Waterworks v.
or the drawee bank, recover the value of the CA,G.R.No.L62943,July14,1986).
checks paid by the drawee bank on the forged
checkswhichwasstolenfromthedrawer? 2. Drawee bank versus collecting bank
When the signature of the drawer is
A:No,thedrawercannotrecover.Heistheone forged, as between the draweebank
which stands to be blamed for its and collecting bank, the draweebank
negligence/predicament.(SecurityBankandTrust sustains the loss, since the collecting
Company v. Triumph Lumber and Construction bank does not guarantee the signature
Corp.,G.R.No.126696,Jan.21,1999) of the drawer. The payment of the
check by the drawee bank constitutes
the proximate negligence since it has
Q: How is forgery proven and who has the
the duty to know the signature of its
burdenofproof?
clientdrawer.(PhilippineNationalBank

v.CA,G.R.No.L26001,Oct.29,1968).
A:Forgery,asanyothermechanismoffraudmust

be proven clearly and convincingly, and the
3. Forged payee's signature When
burden of proof lies on the party alleging
draweebank pays the forged check, it
forgery.(Chiang Yia Min v. CA, G.R. No. 137932,
mustbeconsideredaspayingoutofits
Mar.28,2001)
fundsandcannotchargetheamountso

paidtotheaccountofthedepositor.In
Q: Discuss the legal consequences when a bank
such case, the bank becomes liable
honorsaforgedcheck.
since its primary duty is to verify the

authenticity of the payee's signature
A:
(TradersRoyalBankv.RadioPhilippines
1. When drawer's signature is forged
Network, G.R. No. 138510, Oct. 10,
Draweebank by accepting the check
2002; Westmont Bank v. Ong, G.R. No.
cannot set up the defense of forgery,
132560,Jan.30,2002).
because by accepting the instrument,

the drawee bank admits the
4. Forged endorsement Drawer's
genuinenessofsignatureofdrawer(BPI
account cannot be charged, and if
Family Bank v. Buenaventura, G.R. No.
charged, he can recover from the
148196,Sept.30,2005;Sec.23,NIL).
draweebank (Associated Bank v. CA,

G.R.No.107382,Jan.31,1996).
Unless a forgery is attributable to the

fault or negligence of the drawer
Drawer has no cause of action against
himself,theremedyofthedraweebank
collecting bank, since the duty of
is against the party responsible for the
collecting bank is only to the payee
forgery. Otherwise, draweebank bears
(Manila Lighter Transportation, Inc. v.
the loss. A draweebank paying on a
CA,G.R. No. L50373 Feb. 15, 1990).
forged check must be considered as
Draweebank can recover from the
paying out of its funds and cannot
collecting bank (Great Eastern Life Ins.
charge the amount to the drawer
Co.v.Hongkong&ShanghaiBank,G.R.
(Samsung Construction Co. Phils, v. Far
No.18657,Aug.23,1922)becauseeven
East Bank, G.R. No. 129015, Aug. 13,
if the indorsement on the check
2004). If the draweebank has charged
depositedbythebank'sclientisforged,
drawer'saccount,thelattercanrecover
collecting bank is bound by its
such amount from the draweebank
22
MERCANTILELAWTEAM:
warranties as an indorser and cannot V.CONSIDERATION

set up defense of forgery as against
drawee bank (Associated Bank v. CA, Q:Whatisconsideration?
G.R.No.107382,Jan.31,1996).
A: It is an inducement to a contract that is the
Q: What are the kinds of fraud relating to a cause,priceorimpellinginfluence,whichinduces
negotiableinstrument? apartytoenterintoacontract.

A: Q:Whatisthepresumptionrecognizedbylawas
1. Fraud in the execution or fraud in totheexistenceofconsideration?
factumAperson,withoutnegligence,
has signed an instrument which was in A: Every negotiable instrument is deemed prima
factanegotiableone,butwasdeceived facie to have been issued for a valuable
as to the character of the instrument consideration.(Sec.24)
and without knowledge of it (real
defense). Q:Whatconstitutesvalue?

2. Fraudintheinducementorsimplefraud A: It is any consideration sufficient to support a
Relatestothequantity,quality,value simplecontract.
orcharacteroftheconsiderationofthe
instrument. Deceit is not in the Note:Anantecedentorpreexistingdebtconstitutes
character of the instrument but in its valueandisdeemedsuchwhethertheinstrumentis
amountorterms(personaldefense). payableondemandoratafuturetime.(Sec.25)

Q: The drawers signature was forged. There is, Loveandaffectiondonotconstitutevaluewithinthe
however, a provision in the monthly bank meaningofthelaw.
statement that if the drawers signature was
forged, the drawer should report it within 10 Q:Whoisaholderforvalue?
days from receipt of the statement to the
drawee. The drawer, however failed to do so. A:Onewhohasgivenavaluableconsiderationfor
What will be its effect insofar as the drawers the instrument issued or negotiated to him (Sec.
rightisconcerned? 26).

A:Thefailureofthedrawertoreporttheforgery Q:Uptowhatextentcanaholderbeconsidered
withintendaysfromreceiptofthemonthlybank aholderforvalue?
statement from the drawee bank does not
preclude the drawer from questioning the A: The holder is deemed as such not only as
mistakeofthedraweebankdespitetheprovision. regards the party to whom the value has been
(BPIv.CASAMontessor,G.R.No.149454,May28, given to by him but also in respect to all those
2004) whobecamepartiespriortothetimewhenvalue
wasgiven.
Q: If forgery was committed by an employee of
the drawer whose signature was forged, does Note:Wheretheholderhasalienontheinstrument
the relationship amount to estoppel such that arisingeitherfromcontractorbyimplicationoflaw,
heisdeemedaholderforvaluetotheextentofhis
the drawer is precluded in recovering from the
lien.(Sec.27)
draweebank?

Q:Whatistheeffectofwantofconsideration?
A:Thebarefactthattheforgerywascommitted

byanemployeeofthepartywhosesignaturewas
A:Itbecomesamatterofdefenseasagainstany
forgedcannotnecessarilyimplythatsuchpartys
personnotaholderinduecourse(Sec.28);
negligence was the cause of the forgery in the

absence of some circumstances raising estoppel
Q: What is the effect of partial failure of
againstthedrawer.(SamsungConstructionCo.v.
consideration?
Far East Bank and Trust Company, G.R. No.

129015,Aug.13,2004)
A:Partialfailureofconsiderationisadefensepro
tanto, whether the failure is an ascertained and
liquidatedamountorotherwise(Sec.28)
23

Q: Who has the burden of proving that a Q: What are the requisites to be an
negotiable instrument was issued for a accommodationparty?
consideration?
A:
A:Thedrawerofacheck,notthepayee,hasthe 1. Accommodation party must sign as
burdenofprooftoshowthattheinstrumentwas maker,drawer,acceptororindorser
issued without sufficient consideration. Since a 2. No value is received by the
negotiable instrument is presumed to have been accommodation party for the
issued for a valuable consideration, the mere accommodatedparty;and
presentation of a dishonored instrument in 3. Thepurposeistolendthename.
evidence entitles the holder to recover from the
drawer even if the payee did not establish the Note: It does not mean, however, that one cannot
accountability of the drawer. (TravelOn v. CA, beanaccommodationpartymerelybecausehehas
G.R.No.L56169,June26,1992) receivedsomeconsiderationfortheuseofhisname.
The phrase without receiving value therefor only
Q: Can a logging concessionaire which issued means that no value has been received for the
promissory notes in favor of a bank to secure instrumentandnotforlendinghisname.
advances in connection to its log exportations
raise the defense of want of consideration in a Q: What are the distinctions between an
case filed by the bank for the payment of the accommodationpartyandaregularparty?
PN?
A:
ACCOMMODATION
A: No, the promissory note appears to be REGULARPARTY
PARTY
negotiable as they meet the requirements of
Signsaninstrument
Sec.1 of the NIL. Such being the case, the notes
withoutreceiving Signstheinstrument
are prima facie deemed to have been issued for
valuetherefore(Sec. forvalue(Sec.24)
consideration. It bears noting that no sufficient 29)
evidence was adduced by the logging Purposeofsigning:
concessionaire to show otherwise. (Quirino lendhisnameto
Gonzales Logging Concessionaire v. CA, G.R. No. Notforthatpurpose
anotherperson(Sec.
126568,Apr.30,2003) 29)
Mayalwaysshow,by Cannotdisclaim
Q:Whatismeantbyfailureofconsideration? parolevidence,thathe personalliabilityby
isonlysuch parolevidence
A: Failure of consideration means the failure or Cannotavailofthe
refusal of one of the parties to do, perform or defenseof
complywiththeconsiderationagreedupon. absence/failureof
Mayavail
considerationagainsta
Q: How is absence or failure of consideration holdernotindue
distinguishedfrominadequacyofconsideration? course
Maysue
A: Inadequacy of consideration does not reimbursementafter
invalidate the instrument, unless there has been payingthe Maynotsue
holder/subsequent
fraud, mistake or undue influence (Art. 1355,
party
NCC). However, knowledge of inadequacy of
consideration would render the holder not a
holderinduecourse.(Sec.53) Q:Uptowhatextentisanaccommodationparty
liable?
VI.ACCOMODATIONPARTY
A:
Q:Whoisanaccommodationparty? 1. Right to revoke accommodation
before the instrument has been
A:Onewhohassignedtheinstrumentasmaker, negotiatedforvalue.
drawer, acceptor, or indorser, without receiving 2. Right to reimbursement from
valuetherefor,andforthepurposeoflendinghis accommodated party the
nametosomeotherperson.(Sec.29) accommodatedpartyistherealdebtor.
Hence,thecauseofactionisnotonthe
instrument but on an implied contract
ofreimbursement.
24
MERCANTILELAWTEAM:
3. Right to contribution from other

solidary accommodation maker. VII.NEGOTIATION
(Sadayav.Sevilla,G.R.No.L17845,Apr.
27,1967) Q:Whenisaninstrumentnegotiated?

Q: Can a party who signed on the note as an A: An instrument is negotiated when it is
accommodation party raise the defense of transferredfromonepersontoanotherinsucha
absenceorwantofconsideration? mannerastoconstitutethetransfereetheholder
thereof.(Sec.30)
A: No. An accommodation party who lends his
name to enable the accommodated party to Note: A holder is the payee or indorser of a bill or
obtain credit or raise money is liable on the note, who is in possession of it, or the bearer
instrument to a holder for value even if he thereof.(Sec.191)
receivesnopartoftheconsideration.Heassumes
the obligation to the other party and binds Q: What are the methods of transferring a
himself to pay the note on its due date. By negotiableinstrument?
signing the note, the accommodation party thus
became liable for the debt even if he had no A:
direct personal interest in the obligation or did 1. Issue first delivery of the instrument
notreceiveanybenefittherefrom.(DelaRamav. completeinformtoapersonwhotakes
Admiral United Savings Bank, G.R. No. 154740, itasaholder.
Apr.16,2008) 2. Negotiation an instrument is
negotiated when it is transferred from
Q: Can a corporation be an accommodation onepersontoanotherinsuchamanner
party, if so, does the liability of an as to constitute the transferee the
accommodationpartyattachtoacorporation? holderthereof.
3. Assignment absent any express
A: No. The issue or indorsement of negotiable prohibition against assignment or
paperbyacorporationwithoutconsiderationand transfer written on the face of a non
for the accommodation of another is ultra vires. negotiable instrument, the same may
Hence, one who has taken the instrument with beassignedortransferred.
knowledgeoftheaccommodationnaturethereof
cannot recover against a corporation where it is A.DISTINGIUSHEDFROMASSIGNMENT
only an accommodation party. (CrisologoJose v.
CA,G.R.No.80599,Sept.15,1989) Q: What distinguishes negotiation from
assignment?
Q: May a holder for value recover from an
accommodation party notwithstanding his A:
knowledgeofsuchfact? NEGOTIATION ASSIGNMENT
Nonnegotiable
A:Yes,aholderforvaluemayrecover.Thisisso instrumentmaybe
Onlyanegotiable
becauseanaccommodationpartyisliableonthe assignedabsentofany
instrumentmaybe
prohibitionagainst
instrumenttoaholderforvalue,notwithstanding negotiated
assignmentwrittenon
that such holder at the time of taking the
itsface.
instrument knew him to be only an
Thetransfereecan
accommodationparty.Theaccommodationparty Thetransferee,ifheis
havenobetterrights
is liable to a holder for value as if the contract aHIDCmayacquire
thanhistransferor;he
was not for accommodation. It is not a valid betterrightsthanhis
merelystepsintothe
defense that the accommodation party did not transferor.
shoesoftheassignor
receive any valuable consideration when he Theholdercanhold
executed the instrument. Nor is it correct to say Thetransfereehasno
thedrawerliableand
that the holder for value is not a holder in due rightofrecoursefor
theindorsersliableif
paymentagainst
course merely because at the time he acquired thepartyprimarily
immediateparties.
the instrument, he knew that the indorser was liabledoesnotpay.
onlyanaccommodationparty.(AngTiongv.Ting,
G.R.No.L26767,Feb.22,1968)

25

B.MODESOFNEGOTIATION Q:Cantherebepartialindorsement?

Q:Whatarethemethodsofnegotiation? A:
GR: No. Indorsement must be of the entire
A: instrument.(Sec.32)
1. If payable to bearer it is negotiated by
delivery XPN:Whenthereispartialpayment.

2. Ifpayabletoorderitisnegotiatedbythe Q:Whatistheeffectwhenanorderinstrument
indorsement of the holder completed by wasdeliveredwithoutindorsement?
delivery.(Sec.30)
A: The transfer operates as an ordinary
Q: What is the effect, if any, if a bearer assignment (Sec.49). Without the indorsement,
instrument is negotiated by indorsement and the transferee would not be the holder of the
delivery? instrument. When indorsement is subsequently
obtained, the transfer operates as a negotiation
A: A bearer instrument, even when indorsed only as of the time the negotiation is actually
specially,mayneverthelessbefurthernegotiated made.
by delivery, but the person indorsing specially
shallbeliableasendorsertoonlysuchholdersas Note: The transferee has the right to require the
make title through his endorsement (once a transferortoindorsetheinstrument.
bearer instrument, always a bearer instrument).
(Sec.40) Q: What is the effect when a negotiable
Note: This rule does not apply to an instrument instrumentismerelyassigned?
originally payable to order but is converted into
bearer instrument because the only or last A:Thetransfereedoesnotbecomeaholderand
indorsementisanindorsementinblank. hemerelystepsintotheshoesofthetransferor.
Any defense available against the transferor is
Q: Earl Louie makes a promissory note payable availableagainstthetransferee.(Salasv.CA,G.R.
tobeareranddeliversthesametoJoana.Joana, No.76788Jan.22,1990)
however,endorsesittoAnainthismanner:
Q:Whatisanindorsement?
"PayabletoAna.Signed:Joana."
A:Indorsementisthewritingofthenameofthe
Later, Ana, without indorsing the promissory indorser on the instrument with the intent to
note,transfersanddeliversthesametoBatista. transfertitletothesame.
The note is subsequently dishonored by Earl
Louie. May Batista proceed against Earl Louie Q:WhatarethedifferentkindsofIndorsement?
forthenote?
A:
A: Yes. Earl Louie is liable to Batista under the 1. Special(Sec.34)Specifiesthepersonto
promissorynote.ThenotemadebyEarlLouieisa whom or to whose order the
bearer instrument. Despite special indorsement instrumentistobepayable.Alsoknown
made by Joana thereon, the note remained a asspecificindorsementorindorsement
bearerInstrumentandcanbenegotiatedbymere infull.
delivery.WhenAnadeliveredandtransferredthe
note to Batista, the latter became a holder 2. Blank(Sec.34)Specifiesnoindorsee.
thereof. As such holder, Batista can proceed 1. Instrument is payable to bearer
againstEarlLouie.(1998BarQuestion) andmaybenegotiatedbydelivery;
2. May be converted to special
Q:Whereindorsementshouldbeplaced? indorsement by writing over the
signature of the indorser in blank
A: any contract consistent with the
1. Ontheinstrumentitself;or characterofindorsement(Sec.35).
2. On a separate piece of paper attached
totheinstrumentcalledallonge.(Sec. 3. AbsoluteThe indorser binds himself to
31) pay:

26
MERCANTILELAWTEAM:
a. upon no other condition than 1. Forgery;

failureofpriorpartiestodoso 2. Lack of good title on the part of the
b. upon due notice to him of such indorser;
failure 3. Lack of capacity to indorse on the part
ofthepriorparties;or
4. Conditional Right of the indorsee is 4. The fact that at the time of the
madetodependonthehappeningofa indorsement, the instrument was
contingentevent.Partyrequiredtopay valuelessornotvalidatthetimeofthe
maydisregardtheconditions(Sec.39) indorsement which fact was known to
him.
5. RestrictiveWhentheinstrument:
a. Prohibitsfurthernegotiationofthe Note: A qualified indorser guarantees only the
instrument (it destroys the genuineness of the instrument but does not
negotiabilityoftheinstrument); guaranteeitspayment.
b. Constitutestheindorseetheagent
oftheindorser;(Sec.36) Q: What are the rights of an indorsee in a
c. Vests the title in the indorsee in restrictiveindorsement?
trust for or to the use of some
persons. But mere absence of A:
wordsimplyingpowertonegotiate 1. Toreceivepaymentoftheinstrument;
does not make an instrument 2. To bring any action thereon that the
restrictive. indorsercouldbring;and
3. To transfer his rights as such indorsee,
6. Qualified(Sec. 34) constitutes the where the form of the indorsement
indorser a mere assignor of the title to authorizeshimtodoso.(Sec.37)
theinstrument.Itismadebyaddingto
the indorsers signature words like, Q:Whatdosubsequentindorseesacquireunder
withoutrecourse(servesasanordinary therestrictiveindorsement?
equitableassignment)(Sec.38)
A:Allsubsequentindorseesacquireonlythetitle
st
7. Jointindorsement made payable to 2 ofthe1 indorsee.(Sec.37)
or more persons who are not partners.
(Sec.41) Q:Whenthereisajointindorsement,whomust
indorse?
Note:Allofthemmustindorseunlessthe
oneindorsinghasauthoritytoindorsefor A:
theothers GR: All must indorse in order for the
transaction to operate as a negotiation. (Sec.
6. Irregular(Sec. 64) A person who, not 41)
otherwise a party to an instrument,
places thereon his signature in blank XPN:
beforedelivery. 1. Payeesorindorseesarepartners;and
2. Payee or indorsee indorsing has
7. Facultative Indorser waives authoritytoindorsefortheothers.
presentment and notice of dishonor,
enlarging his liability and his Q: What are the instances where the
indorsement. indorsements served only as equitable
assignment?
8. Successive indorsement to two
personsinsuccession. A:
1. Indorsement of part of the amount of
Note: Any of them can indorse to effect theinstrument.(Sec.32)
negotiationoftheinstrument. 2. In cases of qualified indorsement. (Sec.
38)
Q:Whatistheeffectofaqualifiedindorsement: 3. ConditionalIndorsement.(Sec.39)
4. Transfer of an instrument payable to
A: A qualified indorsee has limited liability. He is orderbymeredelivery.(Sec.49)
liableonlyiftheinstrumentisdishonoredbynon
acceptanceornonpaymentdueto:

27

Q:Whencananindorsementbestrickenout? A.HOLDERINDUECOURSE

A: The holder may, at any time, strike out any Q:Whatconstitutespaymentinduecourse?
indorsement which is not necessary to his title.
Indorserwhoseindorsementisstruckout,andall A:Whenmade:
indorsers subsequent to him, are relieved from 1. At or after the maturity of the
liabilityontheinstrument.(Sec.48) instrument
2. Totheholderthereof,ingoodfaithand
Q: When can a prior party negotiate an withoutnoticethathistitleisdefective
instrument? (Sec.88)

A: Where an instrument is negotiated back to Q:Whoisaholderinduecourse(HIDC)?
him. But, he is not entitled to enforce payment
thereofagainstanyinterveningpartytowhomhe A:Hewhotakesanegotiableinstrument:
waspersonallyliable.(Sec.50)
1. That is complete and regular upon its
Q:Whatarethelimitationstorenegotiation? face;

A: In the following cases, a prior party cannot Note: Absence of the required
furthernegotiatetheinstrument: documentary stamp will not make the
1. Where it is payable to the order of a instrument incomplete. (It is not a
thirdperson,andithasbeenpaidby requisiteofnegotiabilityunderSec.1and
thedrawer(Sec.121[a]); it is not a material particular under Sec.
2. Where it was made or accepted for 125)

accommodation and has been paid by
2. Became the holder before it was
thepartyaccomodated(Sec.121[b]);
overdue,andwithoutnoticethatithas
3. Inothercases,wheretheinstrumentis
beenpreviouslydishonored,ifsuchwas
discharged when acquired by a prior
thefact;
party.(Sec.119)

Note: if the instruments is payable on
VII.RIGHTSOFAHOLDER demand, the date of maturity is
determined by the date of presentment,
Q:Whoisaholder? which must be made within a reasonable
timeafteritsissue,ifitisanote,orafter
A:Thepayeeorindorseeofabillornotewhois thelastnegotiationthereof,ifitisabillof
in possession of it or the bearer thereof. (Sec. exchange.(Secs.71and143[a])
191)
Where transferee receives notice of any
Q:Whataretheclassesofholders? infirmityintheinstrumentofdefectinthe
title of the person negotiating the same
A: beforehehadpaidthefullamountagreed
1. Holders in general (Simple Holders). tobepaid,hewillbedeemedaholderin
(Sec.51) due course only to the extent of the
2. Holdersforvalue.(Sec.26) amountpaidbyhim.(Sec.54)
3. Holdersinduecourse.(Secs.52,57)
3. Tookitingoodfaithandforvalue;
Q:Whataretherightsofaholderingeneral?
4. Atthetimeitwasnegotiatedtohim,he
A: had no notice of any infirmity in the
1. Righttosue instrument or defect in the title of the
2. Righttoreceivepayment(Sec.51) personnegotiatingit.(Sec.52)

Note: Knowledge of the agent is
Note:Ifthepaymentisinduecourse,the
constructiveknowledgetotheprincipal.
instrumentisdischarged.

28
MERCANTILELAWTEAM:
Q:WhoisdeemedtobeaHIDC?
Q:WhataretherightsofaHNIDC?
A:
GR:Everyholderisdeemedprimafacietobe A: The rights similar to an assignee. The other
aholderinduecourse; rightsare:
1. He may receive payment and if the
XPN: When it is shown that the title of any payment is in due course, the
person who has negotiated the instrument instrumentisdischarged
wasdefective.(Sec.59) 2. He is entitled to the instrument but
holdsitsubjecttothesamedefensesas
Q:CanapayeebeaHIDC? ifitwerenonnegotiable
3. He may sue on the instrument in his
A: There can be no doubt that a proper ownname.(Sec.5)
interpretation of NIL as a whole leads to the
conclusion that a payee may be a holder in due Q: What are the rights of a holder through a
course under the circumstances in which he HIDC?
meets the requirements of Sec. 52. (De Ocampo
v.Gatchalian,G.R.No.L15126,Nov.30,1961) A:HehasalltherightsofaHIDCfromwhomhe
derives his title in respect of all parties prior to
Note: There is a contrary view on the matter, suchholder,providedheisnothimselfapartyto
wherein it is contended that under subsection 4 of any fraud or illegality affecting the instrument.
Sec.52,theholderinduecoursemusthaveacquired (Sec.58)
the instrument through negotiation and an
instrumentisissuedandnotnegotiatedtoapayee. Note: A payee or indorsee whose title is defective
cannotbetteritbysellingtheinstrumenttoaHIDC
Q:CanadraweebeaHIDC? andbuyingitagain.Similarly,aHIDCwhonegotiates
the instrument to a holder other that one in due
A: A drawee does not by paying a bill become a course and then reacquires it will hold the
holderinduecoursesinceaholderreferstoone instrumentasaholderinduecourse.
who has taken the instrument as it passes along
in the course of negotiation; whereas a drawee, Q:Howdoestheshelterprincipleembodiedin
upon acceptance and payment, strips the theNegotiableInstrumentsLawoperatetogive
instrument of negotiability and reduces it to a the rights of a HIDC to a holder who does not
merevoucherorproofofpayment. havethestatusofaHIDC?Brieflyexplain.

Q:WhataretherightsofaHIDC? A:Undertheshelterprinciple,apersonwhodoes
not qualify as a holder in due course can,
A: nonetheless,acquiretherightsandprivilegesofa
1. Holdtheinstrumentfreefromdefenses holder in due course if he deriveshis title to the
availabletopartiesamongthemselves instrument through a holder in due course.
2. Hold the instrument free from any However, a person who previously held the
defectoftitleofpriorparties instrument cannot improve his position by later
3. Receivepayment reacquiring it from a holder in due course if the
4. Enforce payment of the instrument for former holder was a party to fraud or illegal
the full amount thereof against all activityaffectingtheinstrumentorhadnoticeof
partiesliable a claim or defense against theinstrument. (2008
5. Sue BarQuestion)

Q:Whoisaholdernotinduecourse(HNIDC)? Q: When is the title of a person (transferor)
defective?
A:
1. One who became a holder of an A:
instrument without any of the 1. In its acquisition When he obtained the
requisitesunderSec.52 instrument, or any signature thereto, by
fraud, duress, or force and fear, or other
2. Onetowhomaninstrumentpayableon unlawful means, or for an illegal
demand is negotiated after an consideration.
unreasonablelengthoftimefromissue.
(Sec.53)

29

2. InthenegotiationWhenhenegotiatesit particularly when the check was crossed. The
in breach of faith, or under such crossingofacheckservesawarningtotheholder
circumstancesasamounttoafraud.(Sec. that the check had been issued for a definite
55) purpose so that he must inquire if received the
check pursuant to that purpose, otherwise, he is
Q: What constitutes notice of defect (on the not a holder in due course. (State Investment
transferee)? Housev.IAC,G.R.No.72764,July13,1989)

A: The person to whom it is negotiated must Q: What is the effect of possession of a
have had actual knowledge of such facts or negotiable instrument after presentment and
knowledgeofotherfactsthathisactionintaking dishonor?
theinstrumentamountedtobadfaith.(Sec.56)
A: It does not make the possessor a holder for
Q: What is the effect of notice before the full valuewithinthemeaningofthelaw.Itgivesrise
amountispaid? tonoliabilityonthepartofthemakerordrawer
orindorsers.(STELCOMarketingCorp.vs.CA,G.R.
A: Transferee will be deemed a holder in due No.96160,June17,1992)
courseonlytotheextentoftheamounttherefore
paidbyhim.(Sec.54) Q:Isacorporationtowhichfourcrossedchecks
wereindorsedbythepayeecorporationaholder
Q: The drawer delivered a check to Wilma, an induecourseandhenceentitledtorecoverthe
agent,forsafekeepingonlyandforthepurpose amountofthecheckswhenthesamehadbeen
of evidencing her sincere intention to buy a car dishonored for the reason of payment
owned by RC, who is Wilmas principal. Wilma stopped?
did not return the check and delivered it as
paymentforherhospitalexpensestoMBClinic. A: The checks were crossed checks and
Does the presumption that every holder is specifically indorsed for deposit to payees
presumedtobeHIDCapplytoMBClinic? account only. From the beginning, the
corporationwasawareofthefactthatthechecks
A:No,therulethatapossessoroftheinstrument were all for deposit only to payees account.
isprimafacieaHIDCdoesnotapplytoMBClinic Clearly then, it could not be considered a HIDC.
because there was a defect in the title of the However,itdoesnotfollowasalegalproposition
holder, since the instrument was not payable to thatsimplybecauseitwasnotaHIDCforhaving
WILMA or to bearer, the drawer had no account takentheinstrumentsinquestion,w/noticethat
with the payee, Wilma did not show or tell the the same was for deposit only, that it was
payee why she had the check in his possession altogether precluded from recovering on the
and why he was using it for the payment of his instrument.ThedisadvantageinnotbeingaHIDC
own account. As holders title was defective or is that the negotiable instrument is subject to
suspicious, it cannot be stated that the payee defenses as if it were nonnegotiable. (Atrium
acquired the check without knowledge of said Management Corp. v. CA, G.R. No. 109491, Feb.
defectinholderstitle,thepresumptionthatitis 28,2001)
a HIDC does not exist. (De Ocampo& Co. v.
Gatchalian,G.R.No.L15126,Nov.30,1961) B.DEFENSESAGAINSTTHEHOLDER

Q: NSW received three postdated and crossed Q:WhatarethedefensesagainsttheHolder?
checks issued on the condition that the drawer
on due date would make sufficient deposits to A:
cover the checks. NSW did not wait for the
maturity and indorsed the check to an 1. RealDefensesthosethatareavailable
investment house, which deposited the same. against all parties, both immediate and
The checks bounced. Is the investment house a remote,includingholdersinduecourse.
holderinduecourse?
2. Personal Defenses defenses which are
A:No,thatthecheckshadbeenissuedsubjectto not available against a holder in due
theconditionthatthedraweronduedatewould course. Those which grow out of the
make the back up deposit for said check which agreement or conduct of a particular
condition was not made, constitutes a good person in regard to the instrument
defense against the holder who is not a HIDC, which renders it inequitable or him,
30
MERCANTILELAWTEAM:
though holding the legal title, to A.MAKER

enforceitagainstthepartysoughttobe
madeliable. Q:Whataretheliabilitiesamaker?

A:
IX.LIABILITIESOFPARTIES 1. Engagestopayaccordingtothetenorof
theinstrument;and
Q:Whoareprimarilyliable? 2. Admits the existence of the payee and
histhencapacitytoindorse.(Sec.60)
A:
1. Makerinapromissorynote Note: Liability of the maker is primary and
2. Acceptorinabillofexchange unconditional.

Q:Whoaresecondarilyliable? Q: When is a maker precluded from settingup
thesedefenses?
A:
1. Drawer A:
2. Indorser 1. Thatpayeeisafictitiousperson
2. That payee was insane, a minor, or a
Q:Distinguishadrawerfromamaker. corporationactingultravires.

A: Q: What are words which depict the nature of
DRAWER MAKER theliabilityofthemakers/drawers?
IssuesaBOE IssuesaPN
Onlysecondarilyliable Primarilyliable A:AninstrumentwhichbeginswithI,orEither
Canlimithisliabilityby of us promise to pay, when signed by two or
puttingwithout Cannotlimitliability morepersons,makesthemsolidarilyliable.Also,
recourse the phrase joint and several binds the makers
jointly and individually to the payee so that all
Q:Whataretheconditionsinorderforpersons maybesuedtogetherforitsenforcement,orthe
secondarily liable in a BOE (drawer and creditormayselectoneormoreastheobjectof
indorsers)tobecomeliable? the suit. (Astro Electronics Corp. v. Phil. Export
and Foreign Loan Guarantee Corporation, G.R.
A: No.96073,Dec.21,2003)
1. The bill is presented for acceptance
(Sec.143) Q:OntherightbottommarginofaPNappeared
2. The bill is dishonored by non thesignatureofthecorporationspresidentand
acceptance or nonpayment (Sec. 70); treasurer above their printed names with the
and phrase and in his personal capacity. The
3. Thenecessaryproceedingsfordishonor corporation failed to pay its obligation. Are the
aredulytaken.(Sec.152) officersliable?

Q:Towhomshouldpresentmentbemade? A: Yes, persons who write their names on the
faceofpromissorynotesaremakersandliableas
such.Theofficersarecomakersandassuch,they
A: cannot escape liability arising therefrom.
1. Promissorynotemaker (Republic Planters Bank v. CA, G.R. No. 93073,
2. Billofexchangedrawee/acceptor Dec.21,1992)
Q: What are the liabilities of those secondarily

Q: X draws a check against his current account
liable?
with Bonifacio Bank in favor of B. Although X
doesnothavesufficientfunds,thebankhonors
A:SeeAppendixB
the check when it is presented for payment.
Apparently, X has conspired with the bank's
bookkeeper so that his ledger card would show
thathestillhassufficientfunds.
31

The bank files an action for recovery of the indicatesbyappropriatewordshisintentiontobe
amount paid to B because the check presented boundinsomeothercapacity.(Sec.63)
hasnosufficientfunds.Decidethecase.
Note: A person who places his indorsement on an
A:ThebankcannotrecovertheamountpaidtoB instrumentnegotiablebydeliveryincursallliabilities
forthecheck.Whenthebankhonoredthecheck, ofanindorser.(Sec.67)
it became an acceptor. As acceptor, the bank
became primarily and directly liable to the
payee/holderB. Q: Distinguish an irregular indorser from a
TherecourseofthebankshouldbeagainstXand generalindorser.
itsbookkeeperwhoconspiredtomakeX'sledger
show that he has sufficient funds. (1998 Bar A:Anirregularindorser,nototherwiseapartyto
Question) the instrument, places his signature thereon in
blank before delivery to add credit thereto. A
B.DRAWER general indorser is a regular party to the
instrument like a maker, drawer or acceptor and
Q:Towhomisthedrawersecondarilyliable? he signs upon delivery of the instrument. While
an irregular indorser signs for accommodation, a
A: regular indorser signs for valuable consideration.
1. Theholder (Sec.64[2])(2005BarQuestion)
2. Any of the indorsers intervening
between holder and drawer who is Q:Whoisaqualifiedindorser?
compelled to pay by the holder, the
drawerwillbeliabletothatindorserso
A: A qualified indorser is a person who indorses
compelledtopay
withoutrecourse.(Sec.65)

C.ACCEPTOR
Q: Does an indorser warrant the solvency of
Q:Whataretheliabilitiesofanacceptor? priorparties?

1. Engagestopayaccordingtothetenorof A: A general indorser warrants the solvency of
hisacceptance priorparties,whileaqualifiedindorserdoesnot.
2. Admits the existence of the drawer, the
genuineness of his signature and his Q: A issued a promissory note payable to B or
capacity and authority to draw the bearer.AdeliveredthenotetoB.Bindorsedthe
instrument notetoC.Cplacedthenoteinhisdrawer,which
3. Admits the existence of the payee and wasstolenbythejanitorX.Xindorsedthenote
histhencapacitytoindorse.(Sec.62) to D by forging C's signature. D indorsed the
notetoEwhointurndeliveredthenotetoF,a
Note: Drawee does not become liable until he holder in due course, without indorsement.
acceptstheinstrumentinwhichcasehebecomesan Discuss the individual liabilities to F of A, B and
acceptor. C.

Q: When is an acceptor is precluded from A:AisliabletoF.Asthemakerofthepromissory
settingupthesedefenses? note,AisdirectlyorprimarilyliabletoF,whoisa
holderinduecourse.Despitethepresenceofthe
1. That the drawer is nonexistent or special indorsements on the note, these do not
fictitious detract from the fact that a bearer instrument is
2. Thatthedrawerssignatureisaforgery always negotiable by mere delivery, until it is
3. That there is no consideration between indorsedrestrictivelyfordepositonly.
himandthedrawer
B,asageneralendorser,isliabletoFsecondarily,
D.INDORSER and warrants that the instrument is genuineand
inallrespectswhatitpurportstobe;thathehas
Q:Whoisdeemedanindorser? goodtitletoit;thatallpriorpartieshadcapacity
tocontract;thathehasnoknowledgeofanyfact
A: A person placing his signature upon an whichwouldimpairthevalidityoftheinstrument
instrumentotherwisethanasmakeroracceptor, or render it valueless; that at the time of his
is deemed to be an indorser, unless he clearly indorsement, the instrument is valid and
32
MERCANTILELAWTEAM:
subsisting; and that on due presentment, it shall applied As deposit in the PNB for payment of
be accepted or paid, or both, according to its thewarrant.Istheapplicationofthedepositof
tenor, and that if it be dishonored and the Aproperlyenforced?
necessaryproceedingsondishonorbedulytaken, A: No. The general indorser of a negotiable
he will pay the amount thereof to the holder, or instrument engages that if it be dishonored and
to any subsequent indorser who may be the necessary proceedings of dishonor be duly
compelledtopay. taken, he will pay the amount thereof to the
holder. In this connection, it has been held that
CisnotliabletoFsincethelattercannottracehis noticeofdishonorisnecessaryinordertocharge
title to the former. The signature of C in the an indorser and that the right of action against
supposedindorsementbyhimtoDwasforgedby him does not accrue until the notice is given
X.Ccanraisethedefenseofforgerysinceitwas (Gullasv.PNB,G.R.No.L43191,Nov.13,1935)
his signature that was forged. (2001 Bar
Question) Q: What is the order of liability among the
indorsers?
Q:Canacollectingbankdebittheaccountofthe
depositorwhenthechecksindorsedtoit(bank)
A:
wereforged?
1. Among themselves Liable prima facie
intheorderinwhichtheyindorse(Sec.
A: Yes, because the depositor of a check as
68)
indorser warrants that it is genuine and in all

respect what it purports to be. Thus, when the
2. TotheholderInanyorder
checks deposited had forged indorsements and

the collecting bank, as a consequence of such
Note: Every indorser is liable to all indorsers
forgery, was made to pay the drawee bank, the
subsequenttohim,butnotthoseindorserspriorto
collecting bank can debit the account of the him.
depositor for his breach of warranty (JaiAlai
Corporation Of The Philippines v. BPI, G.R. No. L Q:CarmeloindorsedachecktoLinas.Paolostole
29432,Aug.6,1975). the check from Linas, forged the latters
signatureandindorsedittoJohan.DenverBank
Q:Phebean,thedrawerissuedachecktoJames. encashed the check upon presentment thereof
James,subsequentlyindorsedittoTrude.When byJohan.Whoisthepartyliable?
Trudeisabouttoencashthecheck,thedrawee
Union Bank refused to encash it due to A: The bank is the party liable. It is the primary
insufficiency of funds. Trude sued James for dutyofthebanktoknowthatthecheckwasduly
payment of money. James alleged that the suit indorsedbytheoriginalpayeeand,whereitpays
should be dismissed because Phebean is an the amount of the checks to a third person who
indispensableparty.DoesJamesargumenthold has forged the signature of the payee, the loss
water? fallsonsuchbankwhocashedthechecks.Abank
engaged in business is invested with public
A: No. There is no privity between the drawer interestanditisitsdutytopretectitsclientsand
andtheholder.Thedrawerismerelysecondarily allpersonswhotransactbusinesswithit.(Traders
liable.Asindorser,thebuyerwarrantedthatupon Royal Bank v. RPN, G.R. No. 138510, Oct. 10,
duepresentment,thechecksweretobeaccepted 2002)
orpaid,orboth,accordingtotheirtenor,andthat
incasetheyweredishonored,shewouldpaythe Q:Whatistheliabilityofanagentorbrokerwho
corresponding amount. After an instrument is negotiatesaninstrumentwithoutindorsement?
dishonored by nonpayment, indorsers cease to
be merely secondarily liable; they become A: He incurs all the liabilities prescribed to a
principal debtors whose liability becomes general indorser unlesshe discloses the nameof
identicaltothatoftheoriginalobligor.(Tuazonv. hisprincipalandthefactthatheisactingonlyas
Heirs of Bartolome Ramos, G.R. No. 156262, July anagent.(Sec.69)\
14,2005)
Note:Parolevidenceisnotadmissibletorelievean
Q:TreasurywarrantswereindorsedbyAandB. agent or broker whose endorsement brings him
These were presented for encashment by PNB. withintheaboveliability.
Subsequently, these were dishonored by the
Insular Treasurer. Because of the dishonor, PNB
33

E.WARRANTIES A.NECESSITYOFPRESENTMENTFORPAYMENT

Q: What are the warranties provided by the Q:WhenisPPnecessary?
personnegotiatinganinstrument?
A: PP is only necessary to charge persons
A: secondarily liable (Sec. 70). But PP is not
1. Thattheinstrumentisgenuineandinall necessaryinthefollowinginstances:
respectswhatitpurportstobe
2. Thathehasgoodtitletoit 1. As to drawer, where he has noright to
3. That all prior parties had capacity to expect or require that the drawee or
contract acceptor will pay the instrument (Sec.
4. That he has no knowledge of any fact 79)
which would impair the validity of the
instrumentorrenderituseless. 2. As to indorser where the instrument
was made or accepted for his
X.PRESENTMENTFORPAYMENT(PP) accommodation and he has no reason
to expect that the instrument will be
Q:Whatispresentmentforpayment(PP)? paidifpresented(Sec.80)

A: The presentation of an instrument to the 3. When dispensed with under Sec. 82,
person primarily liable for the purpose of suchas:
demandingandreceivingpayment. a. Where, after the exercise of
reasonable diligence, presentment
Q:Howshouldpresentmentbemade? cannotbemade
b. Where the drawee is a fictitious
A: person
GR: Instrument must be exhibited to the c. Bywaiverofpresentment,express
person from whom payment is demanded; orimplied
when paid, it must be delivered to person d. When the instrument has been
payingit.(Sec.74) dishonoredbynonacceptance

XPN:Whenexhibitionisexcused: Q: What is the rule if the instrument is, by its
1. Debtor does not demand to see the terms,payableataspecialplace(atabankorat
instrument and refuses payment on an office or at a residence but not in an
someothergrounds;or unspecifiedplacelikeManilaCity)?
2. Instrumentislostordestroyed.
A: If he is able and willing to pay it there at
Q: What is the liability of a bank paying a maturity, such ability and willingness are
certificate of deposit payable to bearer without equivalenttoatenderofpaymentuponhispart.
requiringitssurrender? (Sec.70)

A:Thebankremainsliabletotheholderifitpaid Q: PN is the holder of a negotiable promissory
the certificate of deposit payable to bearer note.ThenotewasoriginallyissuedbyRPtoXL
without requiring its surrender (Far East Bank & as payee. XL indorsed the note to PN for goods
TrustCompanyv.Querimit,G.R.No.148582,Jan. bought by XL. The note mentions the place of
16,2002). payment on the specified maturity date as the
office of the corporate secretary of PX Bank
Q: Can a payee claimpayment for a promissory duringbankinghours.Onmaturitydate,RPwas
note which was stolen and as such is not in his attheaforesaidofficereadytopaythenotebut
possession? PN did not show up. What PN later did was to
sue XL for the face value of the note, plus
A: No because he is not a holder of the interestandcosts.Willthesuitprosper?Explain.
promissory note. To make presentment for
payment,itisnecessarytoexhibittheinstrument, A: Yes. The suit will prosper as far as the face
which he cannot do because he is not in value of the note is concerned, but not with
possessionthereof. respect to the interest due subsequent to the
maturity of the note and the costs of collection.
RP was ready and willing to pay the note at the

34
MERCANTILELAWTEAM:
specified place of payment on the specified the check becomes stale and valueless and thus,
maturitydate,butPNdidnotshowup.PNlosthis shouldnotbepaid.
right to recover the interest due subsequent to
the maturity of the note and the costs of Q:Isthebankliabletothepayeefordepositing
collection.(2000BarQuestion) and encashing the crossed checks to an
unauthorizedperson?
Q:WhataretherequisitesforasufficientPP?
A: Yes. The effects of crossing a check relate to
A: themodeofitspresentmentforpayment.Under
1. Madebytheholder,orhisagent Sec. 72 of the NIL, presentment for payment, to
2. Atareasonablehouronabusinessday be sufficient, must be made by the holder or by
3. Ataproperplace somepersonauthorizedtoreceiveonhisbehalf.
4. PP was made to the person primarily Whotheholderorauthorizedpersondependson
liable,orifheisabsentorinaccessible, the instruction stated on the face of the check.
toanypersonfoundattheplacewhere Thechecksherehadbeencrossedandissuedfor
thepresentmentismade(Sec.72) payeesaccountonly.Thisonlysignifiesthatthe
drawers had intended the same for deposit only
Note:Wheretheperson/sprimarilyliableis/are: by the person indicated (Associated Bank v. CA,
1. Dead payment must be made to his G.R.No.89802,May7,1992).
personalrepresentative(Sec.76)
2. Liable as partners and no place of
payment specified payment may be Q: What is the order of preference with regard
made to any of them though there has totheplaceofpresentment?
beenadissolutionofthefirm(Sec.77)
3. Several persons, not partners, and no A:
place of payment is specified payment 1. Specifiedplaceintheinstrument
mustbemadetoallofthem(Sec.78) 2. Address of the person to make the
paymentifgivenintheinstrument
Q: When must presentment for payment be
3. Usual place of business or residence of
made?
thepersontomakethepayment
4. Whereverhecanbefound;or
A:
5. At his Last known place of business or
INSTRUMENT TIMEFORPRESENTMENT
residence(Sec.73)
GR:Onthedayitfallsdue.(Sec.

85)
Q: How must presentment be made where the

XPN: If the due date falls on a instrumentispayableatabank?
Payableata
fixedor Saturday,presentmentmustbe
madeonthenextMonday. A: Must be made during banking hours, unless
determinable the person to make payment has no funds there
futuretime
Note:Ifpresentmentforpayment to meet it at any time during the day, in which
is made before maturity; it will casepresentmentatanyhourbeforethebankis
not result to a discharge of the closedonthatdayissufficient.(Sec.75)
instrument(Sec.50).
Promissory B.PARTIESTOWHOMPRESENTMENTFOR
Within a reasonable time after
notepayable PAYMENTSHOULDBEMADE
itsissue.
ondemand
Within a reasonable time after Q: Who are the parties to whom presentment
the last negotiation thereof
forpaymentshouldbemade?
(Sec.71).
Billof

exchange Note: Last negotiation means
A: Presentment for payment must be made the
payableon the last transfer for value. primary party to the (1) maker in case of a
demand Subsequent transfers between promissorynote,ortothe(2)acceptorincaseof
banks for purposes of collection anacceptedbill.Ifthebillofexchangeorcheckis
are not negotiations within Sec. payable on demand, the presentment must be
71. made to the drawee althoughhe is not liableon
thebill.
Note: Reasonable time means not more than 6
months from the date of issue. Beyond said period Note: If the person primarily liable is absent or
inaccessible,thenpresentmentmustbemadetoany

35

personofsufficientdiscretionattheproperplaceof XI.NOTICEOFDISHONOR
presentment.
Q:Whatisnoticeofdishonor?
C.DISPENSATIONWITHPRESENTMENTOF
PAYMENT A:Givenbytheholdertothepartiessecondarily
liable, drawer and each indorser, that the
Q: What is the effect when presentment is not instrument was dishonored by nonpayment or
made? nonacceptancebythedrawee/maker.

A:Drawerandtheindorsersaredischargedfrom Note: Persons primarily liable need not be given
their secondary liability unless such presentment notice of dishonor because they are the ones who
isexcused. dishonoredtheinstrument.

Q: When is the delay in making presentment Q:Whatarethepurposesforrequiringnoticeof
excused? dishonor?

A: A:
3. When caused by circumstances beyond 1. Toinformpartiessecondarilyliablethat
thecontroloftheholder;and the maker or acceptor has failed to
4. Not imputable to his default, meethisengagement.
misconduct,ornegligence(Sec.81). 2. To advise them that they are required
tomakepayment.
Note:Onlythedelayinpresentmentisexcusedand
not the presentment itself. Hence, as soon as the Q:WhenisaPNconsidereddishonored?
causeofdelayceasestooperate,presentmentmust
bemadewithreasonablediligence(Sec.81). A:
1. Ifnotaccepted
D.DISHONORBYNONPAYMENT 2. Notpaidwhenpresented;or
3. Where presentment is excused,
Q: When is an instrument dishonored by non instrumentisoverdueandunpaid.(Sec.
payment? 83)

A: Q: What is the liability of person secondarily
1. Nonpayment upon due presentation. liablewheninstrumentdishonored?
Happenswhen:
a. The instrument is duly presented
A: After the necessary proceedings for dishonor
for payment to party primarily
had been duly taken, an immediate right of
liable;&
recourse to all parties secondarily liable thereon
b. It is either refused or cannot be
accruestotheholder.(Sec.84)
obtained.

2. Nonpayment without presentation. A.PARTIESTOBENOTIFIED
Happenswhen:
c. Presentmentisexcused Q:Towhommustnoticebegiven?
d. theinstrumentisoverdue
e. itisunpaid A:Noticeofdishonorshouldbegivento:

Q: What is the effect of dishonor by non 1. Thedrawer;or
payment? 2. Hisagent(Sec.97)
3. Where party is dead to a personal
A:Astotheholder,afteraninstrumenthasbeen representative or sent to the last
dishonored by nonpayment, the person residence or last place of business of
secondarily liable becomes the principal debtors thedeceased(Sec.98)
and he need not proceed against the person 4. When the parties to be notified are
primarilyliable. partners notice to any one partner
though there has been a dissolution
(Sec.99)

36
MERCANTILELAWTEAM:
5. Notice to joint parties who are not D.FORMOFNOTICE

partnersmustbegiventoeachofthem
(Sec.100) Q:Whatistheformandcontentsofanoticeof
6. Where a party has been adjudged a dishonor?
bankrupttothepartyhimselfortohis
trusteeorassignee(Sec.101) A:
1. Oral;or
Q:Theinstrumentwasdishonoredinthehands 2. Inwriting
of the agent. To whom and when may he give 3. Itmaybegivenbypersonaldelivery,or
notice? bymail(Sec.96)
4. Mustcontainthefollowing:
A: a. Descriptionoftheinstrument;
1. To the parties secondarily liable b. Statement that it has been
WithinthetimefixedbySecs.102104, presented for payment or for
and107,otherwise,theyaredischarged acceptance and that it has been
dishonored(Ifprotestisnecessary,
2. To his principal The principal must notice must also contain a
give notice to parties secondarily liable statement that it has been
asifheweretheholder.(Sec.94) protested).
c. Statementthatthepartygivingthe
B.PARTIESWHOMAYGIVENOTICEOF noticeintendstolookfortheparty
DISHONOR addressedforpayment.

Q:Whogivesthenotice? Note: A written notice need not be signed, and an
insufficient notice may be supplemented or
A: validatedbyverbalcommunication.Amisdescription
1. Holder of the instrumentdoesnot vitiate the notice unless
2. Anotherinbehalfoftheholder the party to whom the notice is given is in fact
3. Any party to the instrument who may misledthereby.(Sec.95)

be compelled to pay and who, upon
E.WAIVER
taking it up, would have a right to

reimbursementfromthepartytowhom
Q:Whenmaywaiverofnoticebegiven?
noticeisgiven.(Sec.90)

A:
C.EFFECTOFNOTICE
1. Before the time of giving notice has
arrived;or
Q: What is the effect of notice of dishonor if
2. After the omission to give due notice.
givenbyoronbehalfoftheholder?
(Sec.109)

A:Noticeofdishonorinurestothebenefitof:
Q:Whatarethewaystogiveawaiverofnotice?

1. All holders subsequent to the holder
A:Itcaneitherbe:
whohasgivennotice;and
1. Express;or
2. All parties prior to the holder but
2. Implied (e.g. Payment by an indorser
subsequenttothepartytowhomnotice
after he learns of the default of the
has been given and against whom they
maker admission of liability after
mayhavearightofrecourse.(Sec.92)
dishonor).(Sec.109)

Q: What is the effect of notice of dishonor if
Q:Whoareaffectedbythewaiverofnotice?
givenbypartyentitledthereto?

A:
A:Noticeofdishonorinurestothebenefitof:
1. All parties (if embodied on the face of
theinstrument);or
1. Theholder;and
2. Particularindorser(ifwrittenabovethe
2. All parties subsequent to the party to
signatureofsuchindorser)(Sec.110)
whomnoticeisgiven(Sec.93).

37

F.DISPENSATIONOFNOTICE 2. Indorser is person to whom the
instrumentispresentedforpayment;or
Q:Whenisnoticeofdishonornotnecessary? 3. Instrument was made or accepted for
hisaccommodation(Sec.115)
A:
1. Waiverofnotice.(Sec.109) G.EFFECTOFFAILURETOGIVENOTICE
2. Waiverofprotest.(Sec.111)
3. Whenafterduediligence,noticecannot Q:Whatistheeffectofomissionofaprevious
begiven.(Sec.112) holder to give notice of dishonor by non
4. DrawerincasesunderSec.114 acceptance?
5. IndorserincasesunderSec.115;and
6. Where due notice of dishonor by non A:Itdoesnotprejudicetherightsofaholderin
acceptance has been given (notice of due course subsequent to the omission to
dishonor by nonpayment not present the instrument to the drawee for
necessary).(Sec.116) acceptanceandnotifythedrawerandindorsersif
acceptanceisrefused.(Sec.117)
Q:Withregardtothedrawer,whencananotice
ofdishonorbedispensedwith?
Q:Whenshouldthenoticebegiven?

A:
A:
1. GR: As soon as instrument was
1. When drawer and drawee is the same
dishonored(Sec.102)Partyisallowed
person
oneentiredayforthepurposeofgiving
2. Drawee is fictitious or does not have
notice.
thecapacitytocontract

3. Drawer is person to whom the
XPN:Delayisexcused(Sec.113)
instrument is presented for payment

(he is the one who dishonored the
Note: An instrument cannot be
instrument)
dishonoredbynonpaymentuntilafterthe
4. Drawerhasnorighttoexpectorrequire maturity
that the drawee or acceptor will honor
theinstrument. 2. Partiesresideinthesameplace
5. Drawer has countermanded the a. PlaceofbusinessBeforecloseof
payment (e.g. stop payment order) business hours on the day
(Sec.114) following
b. ResidenceBeforetheusualhours
Q: Juben issued to Y 2 postdated checks as ofrestonthedayfollowing
security for pieces of jewelry to be sold. Y c. By mail Deposited in the post
negotiatedthechecktoS.WhenJubenfailedto office in time to reach him in the
sell the jewelry he withdrew all his funds from usual course on the day following
the drawee bank. After dishonor, Juben (Sec.103)
contends that the holder failed to give her a
notice of dishonor. Is notice of dishonor 3. Partiesresideindifferentplaces
necessary? a. By mail Deposited in the post
officeintimetogobymail(actual
A: He was responsible for the dishonor of his departure in the course of mail
checks, hence, there was no need to serve him from the post office in which the
notice of dishonor. (State Investment House, Inc. notice was deposited) the day
v.CA,G.R.No.101163,Jan.11,1993) followingthedayofdishonor.
b. If no mail At a convenient hour
Q:Withregardtotheindorser,whenisitnot (ofthesender)onthatday,bythe
necessarytogiveanoticeofdishonor? nextmailthereafter
c. Other than by post office (e.g.
A: personal messenger) Within the
1. Drawee is fictitious or has no capacity time that notice would have been
to contract, and indorser was aware of receivedinduecourseofmail,ifit
thesefacts at the time he indorsed the has been deposited in the post
instrument;
38
MERCANTILELAWTEAM:
office within the time specified in XII.DISCHARGE

(a)(Sec.104)
A.DISCHARGEOFNEGOTIABLEINSTRUMENT
4. Time of notice to antecedent parties
Same time for giving notice that the Q:Whatisdischarge?
holderhasafterthedishonor(Sec.107)
A:Itisthereleaseofallparties,whetherprimary
Note: Actual receipt of the party within the time or secondary, from the obligations arising
specified by law is sufficient though not sent in the thereunder. It renders the instrument without
placesspecifiedabove.(Sec.108) force and effect, and consequently, it can no
longerbenegotiated.
Q:Whatistheeffectoffailuretogivenoticeof
dishonor? Q: What are the methods for discharge of
instrument?
A:
GR: Any person to whom such notice is not A:
given is discharged, but he will still be liable 1. Paymentbyprincipaldebtor:
for breach of warranties pertaining to the a. Byoronbehalfofprincipaldebtor
instrument. b. Atorafteritsmaturity
c. Totheholderthereof
XPN: d. In good faith and without notice
1. Waiver.(Sec.109) thattheholderstitleisdefective
2. Noticeisdispensedwith.(Sec.112) 2. Paymentbyaccommodatedparty
3. Notnecessarytodrawer.(Sec.114) 3. Intentional cancellation of instrument
4. Notnecessarytoindorser.(Sec.115) by the holder (by expressly stating it in
theinstrumentorwhentheinstrument
Q: What is the effect of lack of notice of istornup,burnedordestroyed)
dishonor on the instrument which is payable in 4. Any act which discharges a simple
installments? contract for the payment of money
under Art. 1231 of the NCC specifically
A: remission,novation,andmerger.
1. No acceleration clause Failure to give
notice of dishonor on a previous Note: Loss of the negotiable instrument
installment does not dischargedrawers will not extinguish liability; compensation
and indorsers as to succeeding isnotavailablesolongasanobligationis
installments. evidenced by a negotiable instrument.
(Commercial Law Review, Villanueva,
2. With acceleration clause It depends 2009ed)
upon whether the clause is automatic
oroptional. 5. Reacquisition by principal debtor in his
a. Automatic failure to give notice ownright.Reacquisitionmustbe:
of dishonor as to a previous a. Bytheprincipaldebtor
installment will discharge the b. Inhisownright
personssecondarilyliableastothe c. At or after date of maturity
succeedinginstallments; (instrument is discharged; if made
b. Optional if not exercised, the before, it may be renegotiated)
rulewouldbethesameasifthere (Sec.119)
is no acceleration clause. If
exercised, the rule would be the B.DISCHARGEOFPARTIESSECONDARILYLIABLE
sameasiftheinstallmentcontains
an automatic acceleration clause. Q: What are the methods of discharge of
(TownSavingsBankv.CA,G.R.No. secondaryparties?
106011,June17,1993)

A:
1. Any act which discharges the
instrument;
2. Intentionalcancellationofhissignature
bytheholder

39

3. Discharge of prior party which may be 2. It was made or accepted for
madewhensignatureisstrickenout accommodation, and has been paid by
4. Valid tender of payment by a prior thepartyaccommodated.
party;
5. Release of the principal debtor, unless D.RENUNCIATION
holder expressly reserves his right of
recourse against the said subsequent Q:Whatisrenunciation?
parties
6. Extensionoftimeofpayment,unless: A:Theactofsurrenderingaclaimorrightwithor
a. Extension is consented to by such withoutrecompense(apersonaldefense).
party
b. Holder expressly reserves his right Q:Howisrenunciationbyholdermade?
of recourse against such party.
(Sec.120) A:
1. Mustbewritten
Q: What are the effects of payment by persons 2. If oral, the instrument must be
secondarilyliable? surrendered to the person primarily
liable.(Sec.122)
A:
1. Instrumentisnotdischarged Q:Whataretheeffectsofrenunciation?
2. Itonlycancelshisownliabilityandthat
ofthepartiessubsequenttohim A:
3. GR:Instrumentmayberenegotiated 1. Madeinfavorofprincipaldebtormade
at or after the maturity (made
XPN: absolutely and unconditionally) of the
a. Where it is payable to the order instrument discharges the instrument
of a third person, and has been (Sec.122)
paidbythedrawer;and
b. Where it is paid by the 2. Madeinfavorofasecondarypartymay
accommodatedparty be made by the holder before, at or
after maturity discharges only the
Note:(a)and(b)hasthesameeffectas secondarypartiesandallsubsequentto
paymentbythepartyprimarilyliable. him(Sec.122)

4. Personpayingisremittedtohisformer 3. Renunciation does not affect the rights
rights (as regards prior parties) and he of a holder in due course without
may strike out his own and all notice.(Sec.120)
subsequentindorsements.(Sec.121)
Q:Whatistheruleregardingcancellationofan
C.RIGHTOFAPARTYWHODISCHARGED instrument?
INSTRUMENT
A: It is presumed intentional. It is inoperative if
Q:Whataretherightsofapartywhodischarged unintentional, or under amistake or without the
theinstrument? authorityoftheholder.Butwhereaninstrument
oranysignatureappearstohavebeencancelled,
A: burdenofproofliesonthepartywhoallegesthat
GR:Thepartysodischargingtheinstrument the cancellation was made unintentionally, or
isremittedtohisformerrightsasregardsall underamistakeorwithoutauthority.(Sec.123)
priorparties,andhemaystrikeouthisown
and all subsequent indorsements, and again
XIII.MATERIALALTERATION
negotiatetheinstrument.

A.CONCEPT

XPN: Q:Whatisamaterialalteration?
1. Where it is payable to the order of a
third person, and has been paid by the A:Anychangeintheinstrumentwhichaffectsor
drawee;& changestheliabilityofthepartiesinanyway.

40
MERCANTILELAWTEAM:
Q:Whatconstitutesamaterialalteration? numbers or other change to an incomplete

instrument relating to the obligation of a party.
A:Anyalterationwhichchangesthe: Thealterationoftheserialnumberofacheckdid
1. Date notchangetherelationsbetweenthepartiesnor
2. Sum payable, either principal or the effect of the instrument. Hence, the
interest; alterationontheserialnumberofacheckisnota
3. Timeorplaceofpayment materialalteration.(InternationalCorporateBank
4. Numberorrelationsoftheparties vs.CA,G.R.No.141968,Feb.12,2001)
5. Medium or currency in which payment
istobemade;or XIV.ACCEPTANCE
6. Addsaplaceofpaymentwhennoplace
of payment is specified, or any other A.DEFINITON
change or addition which alters the
effectoftheinstrumentinanyrespect. Q:Whatisacceptanceofabill?
(Sec.125)
A:Asignificationbythedraweeofhisassentto
Note:Thechangeinthedateofindorsementisnot theorderofthedrawer(Sec.132).
material where the date is not necessary to fix the
maturityoftheinstrument. Q:Whatistheeffectofacceptance?

B.EFFECTOFMATERIALALTERATION A:Uponacceptance,thebill,ineffectbecomesa
note. The drawee who thereby becomes an
Q: What is the effect of material alteration acceptor assumes the liability of the maker
whichisnotapparent? (whichisprimaryliability)andthedrawer,thatof
thefirstindorser.
A:
1. Avoidstheinstrumentexceptagainst: B.MANNER
a. A party who has made the
alteration; Q:Whataretherequisitesforacceptance?
b. A party who authorized or
assentedtothealteration;or A:
c. The indorsers who indorsed 1. In writing, except constructive
subsequent to the alteration acceptanceandtoaforeignbillpayable
(becauseoftheirwarranties) inanotherstate(unlesstheotherstate
requiresforwrittenacceptance)
2. IfnegotiatedtoaHIDC,hemayenforce 2. Signed by the drawee (without it, he is
the payment thereof according to its notliable)
originaltenoragainstthepartypriorto 3. Must express a promise to pay money
the alteration. He may also enforce (notgoods)
payment thereof against the party 4. Deliveredtotheholder(beforedelivery
responsible for the alteration for the or notification, acceptor may revoke or
alteredamount. cancelhisacceptance).

3. If negotiated to a NHIDC, he cannot Q:Whatarethekindsofacceptance?
enforcepaymentagainstthepartyprior
to the alteration. He may however A:
enforce payment according to the 1. General Assents without qualification
altered tenor from the person who totheorderofthedrawer(Sec.139).
caused the alteration and from the
indorsers.(Sec.124) Note: A holder may refuse to accept a
qualified acceptance and if he does not
Q: Is there material alteration when the serial obtainanunqualifiedacceptance,hemay
numberofacheckhadbeenaltered? treat the bill as dishonored by non
acceptance.
A: No. An alteration is said to be material if it
alters the effect of the instrument. It means an a. Qualified An acceptance which in
unauthorized change in an instrument that expresstermsvariestheeffectofthe
purports to modify in any respect the obligation billasdrawn(Sec.139).
ofapartyoranunauthorizedadditionofwordsor

41

b. Conditionalmakespaymentbythe D.RULESGOVERNINGACCEPTANCE
acceptor dependent on the
fulfillment of a condition therein Q:Whatistheeffectofacceptinganinstrument
stated. withaqualifiedacceptance?
c. Partial an acceptance to pay part A:
onlyoftheamountforwhichthebill GR: When the holder takes a qualified
isdrawn. acceptance the drawer and indorsers are
d. Localanacceptancetopayonlyat
dischargedfromliabilityonthebill.
aparticularplace.

e. Qualifiedastotime
f. Theacceptanceofsomeoneormore
XPN:
of the drawees but not of all. (Sec. 1. When they have expressly or impliedly
141) authorized the holder to take a
qualifiedacceptance,or
2. Constructive/implied 2. Subsequentlyassentthereto
a. Drawee to whom the bill is 3. Implied assent (when they did not
delivered for acceptance destroys express their dissent to the holder
it;or within a reasonable time when they
b. Drawee refuses, within 24 hours received a notice of qualified
after such delivery, or within such acceptance).(Sec.142)
time as isgivenhim, to return the
billacceptedornonaccepted Q:Whenmayanincompletebillbeaccepted?

3. Extrinsictheacceptanceiswrittenon A: Acceptance may be made before the bill has
a paper other than thebill itself. To be been signed by the drawer or while otherwise
bindingupontheacceptor: incomplete,orafteritisoverdue,orevenafterit
a. Acceptance must be shown to the has been dishonored by nonacceptance or non
person to whom the instrument is payment.(Sec.138)
negotiated;and
b. Such person must take the bill for Q: What is the effect of the certification by the
value on the faith of such draweebank?
acceptance(Sec.134).
A: Certification implies that the check is drawn
4. Virtualconditions: uponsufficientfundsinthehandofthedrawee,
a. Unconditional promise in writing that they have been set apart for its satisfaction
toacceptabill and that they shall be so applied whenever the
b. Promisemadebeforeitisdrawn checkispresentedforpayment.Whereacheckis
c. Any person who, upon faith certified by the bank on which it is drawn, the
thereof,receivedthebillforvalue. certification is equivalent to acceptance (New
(Sec.135) Pacific Timber v. Seneris, G.R. No. L41764, Dec.
19,1980).
C.TIMEFORACCEPTANCE
XV.PRESENTMENTFORACCEPTANCE
Q: What is the time allowed for the drawee to
maketheacceptance? Q:Whatispresentmentforacceptance(PA)?

A:Thedrawerhas24hoursafterpresentmentto A: Production or exhibition of a bill of exchange
decidewhetherornothewillacceptthebill.The to the drawee for his acceptance or payment
acceptance, if given, dates as of the day of (alsoincludespresentmentforpayment).
presentation.(Sec.136)
Q:WhataretherulesastoPA?
Note: Drawee bank is not entitled to 24 hours to
decidewhetherornottopayachecksinceacheckis A:
presentedforpayment,notacceptance. GR:PAisnotnecessarytorenderanypartyto
thebillliable.(par.2,Sec.143)

42
MERCANTILELAWTEAM:
XPN:
1. Payable after sight, or when it is 2. Holderhasnotime,withtheexerciseof
necessaryinordertofixthematurityof reasonablediligence,topresentthebill
theinstrument for acceptance before presenting it for
2. Expressly stipulated that it shall be payment on the day that it falls due.
presentedforacceptance;or (Sec.147)
3. Where the bill is drawn payable
elsewhere than at the residence or Q:Whenispresentmentexcused?
place of business of the drawee. (Sec.
143) A:
1. Draweeisdead,orhasabsconded,oris
Note: The holder must either present it for a fictitious person not having capacity
acceptanceornegotiateitwithinareasonabletime, tocontractbybill
otherwise, the drawer and all indorsers are 2. After exercise of reasonable diligence,
discharged.(Sec.144) presentmentcannotbemade;or
3. Although presentment has been
A.TIME/PLACE/MANNEROFPRESENTMENT irregular, acceptance has been refused
onsomeotherground.(Sec.148)
Q:HowmustPAbemade?
C.DISHONORBYNONACCEPTENCE
A:
1. Byoronbehalfoftheholder Q:Whenisabilldishonoredbynonacceptance?
2. Atareasonablehouronabusinessday
3. Beforethebillisoverdue;and A:
4. To the drawee or some person 1. When it is duly presented for
authorizedtoacceptorrefusetoaccept acceptance and such an acceptance is
onhisbehalf.When: refusedorcannotbeobtained;or
2. When presentment for acceptance is
a. Addressed to 2 or more drawees excused, and the bill is not accepted.
notpartnersToall(exceptwhen (Sec.149)
onewasgivenauthority)
b. Drawee is dead To his personal Q: What is the duty of the holder where bill is
representative notaccepted?

Note:Wheredraweeisdead,PAis
notrequired. A:Thepersonpresentingitmusttreatthebillas
dishonored by nonacceptance or he loses the
c. Draweeisbankruptorinsolventor right of recourse against the drawer and
has made an assignment for the indorsers.(Sec.150)
benefitofcreditorsTohimorto
histrusteeorassignee.(Sec.145) Q: What are the rules when abillisdishonored
bynonacceptance?
B.EFFECTOFFAILURETOMAKEPRESENTMENT
A:
Q: What is the effect of failure to make 1. Right of recourse against all secondary
presentment? partyaccruestotheholder
2. No presentment for payment is
A: Failure to make such presentment will necessary since dishonor of the
discharge the drawer from liability or to the instrument by nonpayment is to be
extentofthelosscausedbythedelay(Republicof expected
the Philippines vs. PNB, G.R. No. L 3. Iftheinstrumentisacceptedafterithas
16106,December30,1961). been dishonored by nonacceptance
presentment for payment is necessary
Q:WhenmaydelayinmakingPAbeexcused? uponmaturity;and
4. In case of nonpayment, holder must
A: give the corresponding notice of
1. Bill drawn payable elsewhere than at dishonor; otherwise, secondary parties
the place of business or the residence aredischarged.
ofthedrawee;and

43

XVI.PROMISSORYNOTES makerwithouttheformalityofatrialif
thenoteisnotpaidonitsduedate.
Q:Whatisapromissorynote?
XVII.CHECKS
A: An unconditional promise in writing made by
one person to another, signed by the maker, A.DEFINITION
engaging to pay on demand, or at a fixed or
determinablefuturetime,asumcertaininmoney Q:Whatisacheck?
toorderortobearer.(Sec.184NIL)
A: It is a bill of exchange drawn on a bank and
Q: What are the special types of promissory payable on demand (Sec. 185). It must be
notes? presented for payment within a reasonable time
after its issue or the drawer shall be discharged
A: from liability thereon to the extent of the loss
causedbythedelay.(Sec.186)
1. Certificate of deposit a written
acknowledgment by a bank of the B.KINDS
receipt of money on deposit on which
the bank promises to pay to the Q:Whatarethedifferentkindsofchecks?
depositor or to him or his order or to
some other person or to him or his A:
order, or to a specified person or 1. Cashiers or managers check Drawn
bearer, on demand or on a fixed date, bythebankscashierormanager,asthe
oftenwithinterest. case may be, upon the bank itself and
deemed accepted by the act of
2. Bonds A promise, under seal, to pay issuance.
money.
a. Registered bond one payable 2. Travelers check Upon which the
only to the person whose name holders signature must appear twice,
appears on the face of the onetobeaffixedbyhimatthetimeitis
certificate. issued and the second counter
b. Coupon bond one to which are signature, to be affixed by him in the
attachedcouponswhichentitlethe presenceofthepayeebeforeitispaid,
holdertointerestwhendue. otherwise,itisincomplete.

3. BankNotePNofissuingbankpayable 3. CertifiedcheckBearsuponitsfacean
to bearer on demand and intended to agreementbythedraweebankthatthe
circulateasmoney. checkwillbepaidonpresentation.

4. Due Bill An instrument where one 4. Memorandum check Memo is
person acknowledges his indebtedness written across its face, signifying that
toanother drawer will pay holder absolutely
withoutneedofpresentment.
5. MortgageNoteaninstrumentsecured
byeitherarealorpersonalproperty. Q:Whatisacrossedcheck?Whataretheeffects
ofcrossingacheck?Explain.
6. Titleretaining Note an instrument
used to secure the purchase price of A:Acrossedcheckisacheckwithtwo(2)parallel
goods lines,writtendiagonallyontheupperrightcorner
thereof. It is a warning to the drawee bank that
7. Collateral Note it is used when the payment must be made to the right party;
maker pledges securities to the payee otherwise the bank has no authority to use the
tosecurethepaymentoftheamountof drawer's funds deposited with the bank. To be
thenote assuredthatitwillavoidanymistakeinpayingto
the wrong party, banks adopted the policy that
8. JudgmentNotethisisanotetowhich crossed checksmust bedeposited in the payee's
a power of attorney is added enabling account. When withdrawal is made, the banks
thepayeetotakejudgmentagainstthe can be sure that they are paying to the right
party. The crossing becomes a warning also to
44
MERCANTILELAWTEAM:
whoeverdealswiththesaidinstrumenttoinquire shouldinsteadsuethedrawerwhomightinturn
as to the purpose of its issuance. Otherwise, if sue the bank. This is so because no privity of
something wrong happens to the payment contractexistsbetweenthedraweebankandthe
thereof, that person cannot claim to be a holder payee (Villanueva v. Nite, G.R. No. 148211, July
in due course. Hence, he is subject to the 25,2006).
personal defense on the part of the drawer that
there is breach of trust committed by the payee Q: When will the delivery of a check produce
in not complying with the drawer's instruction. theeffectofpaymentevenifthesamehadnot
(2005BarQuestion) beenencashed?
Q:Whatisastalecheck? A:Ifthedebtorwasprejudicedbythecreditor's
unreasonable delay in presentment. Acceptance
A: A check which has not been presented for ofacheckimpliesanundertakingofduediligence
paymentwithinareasonabletimeafteritsissue. in presenting it for payment. If no such
It is valueless and thus, should not be paid. A presentment was made, the drawer cannot be
checkbecomesstale6monthsfromdateofissue. heldliableirrespectiveoflossorinjurysustained
by the payee. Payment will be deemed effected
Q:Whatistheeffectofastalecheck? andtheobligationforwhichthecheckwasgiven
as conditional payment will be discharged. (Pio
A: The drawer and all indorsers are discharged BarrettoRealtyCorp.v.CA,G.R.No.132362,June
fromliabilitythereon.(Sec.188) 28,2001).
Q:Whatisamemorandumcheck?
A: A memorandum check is an evidence of debt

against the drawer and although may not be
intendedtobepresented,hasthesameeffectas
an ordinary check and if passed on to a third
person, will be valid in his hands like any other
check.(Peoplev.Nitafan,G.R.No.75954,Oct.22,
1992)
C.PRESENTMENTFORPAYMENT
Q:Withinwhattimemustacheckbepresented?
A:Withinareasonabletimeafteritsissueorthe
drawerwillbedischargedfromliabilitythereonto
the extent of the loss caused by the delay (Sec.
186).
Q: What is the effect of delay to make

presentmentforpayment?
A:Theindorsershallbedischargedfromliability.
(PNBvs.Seeto,G.R.No.L4388,August13,1952)
Note:SeealsoSec.186andabove.
Q: A check was dishonored due to material

alteration. Creditor filed an action against
drawee bank for the amount. Is the creditor
entitled?
A: No. If a bank refuses to pay a check

(notwithstanding the sufficiency of funds), the
payeeholdercannot,asprovidedunderSections
185and189oftheNIL,suethebank.Thepayee
45

INSURANCECODE connectionwithorconcerninitthathe
will derive pecuniary benefit or
I.CONCEPTOFINSURANCE advantagefromitspreservationandwill
suffer pecuniary loss from its
Q:Whatlawsgoverninsurance? destruction or injury by the happening
oftheeventinsuredagainst.
A:
1. InsuranceCodeof1978(P.D.1460) 4. Assumption of Risk The insurer
2. NewCivilCode assumes that risk of loss for a
3. SpecialLaws consideration.

Q:Whatisacontractofinsurance? 5. RiskoflossTheinsuredissubjecttoa
risk of loss through the destruction or
A:Itisanagreementwherebyoneundertakesfor impairment of that interest by the
aconsiderationtoindemnifyanotheragainstthe happeningofdesignatedperil.
loss,damageorliabilityarisingfromanunknown
orcontingentevent.(Sec.2[1],InsuranceCode) Note: Because of the first element, an
insurance contract therefore is a risk
Note:Acontractofinsuranceisstillacontract,thus distributingdevice.
it must have all the essential elements of a valid
contractasenumeratedinArt.1318oftheNewCivil Q:Whatismoralhazard?
Code
A: An undesirable side effect in the transfer of
Q:WhatisUberrimaeFidesContract? risk.Itisaphenomenononwhichtheexistenceof
insurance could have the perverse effect of the
A. The contract of insurance is one of Perfect probabilityofloss.
GoodFaithnotfortheinsuredalone,butequally
so far the insurer. It requires the parties to the III.CHARACTERSITICSANDNATUREOFAN
contract to disclose conditions affecting the risk INSURANCECONTRACT
ofwhichHeoughttoknow.
Q:Whatarethenatureandcharacteristicsofan
II.ELEMENTSOFCONTRACTOFINSURANCE insurancecontract?

Q: What are the elements of a contract of A:
insurance? 1. Consensual Acceptance of the offer
perfectsthecontractofinsurance.
A:SPEAR
1. Scheme to distribute losses Such Note: Insurance contracts through
assumption of risk is part of a general correspondence follow the cognition
scheme to distribute actual losses theory wherein an acceptance made by
among a large group or substantial lettershallnotbindthepersonmakingthe
number of persons bearing a similar offer except from the time it came to his
risk. knowledge(Enriquezv.SunLifeAssurance
Co. of Canada, GR No. L15774, Nov. 29,
2. PaymentofpremiumAsconsideration 1920).
for the insurers promise, the insured
makes a ratable contribution called 2. VoluntaryThepartiesmayincorporate
premium,toageneralinsurancefund such terms and conditions as they may
deem convenient Provided they do not
3. Existence of insurable interest The contraveneanyprovisionoflawandare
insured possesses an interest of some not opposed to public policy, law
kind susceptible of pecuniary morals,goodcustoms,orpublicorder.
estimation, known as insurable
interest. GR: The taking out of an insurance
contractisnotcompulsory.
In general (except in life insurance
policies),apersonisdeemedtohavean XPN:Liabilityinsurancemayberequired
insurable interest in the subject matter by law in certain instances (E.g.
insured where he has a relation or compulsory motor vehicle liability
46
MERCANTILELAWTEAM:
INSURANCE CODE
insurance, or employees under Labor IV.CLASSESOFINSURANCE

Code, or as a condition to granting a
license to conduct a business or calling Q:Whatarethe3classesofinsurance?
affectingthepublicsafetyorwelfare).
A:
3. Aleatory Liability of the insurer 1. Lifeinsurancedependentuponhuman
dependsuponsomecontingentevent. life.
a. Individuallife
Note: An aleatory contract is a contract b. Grouplife
where one or both of the parties c. Industriallife
reciprocallybindthemselvestogiveordo
upon the happening of an event which is 2. NonLifeInsurance
uncertain, or which is to occur at an a. Marine
indeterminatetime(Art.2010,NCC). b. Fire
c. Casualty
4. UnilateralItimposeslegaldutiesonly
oninsurerwhopromisestoindemnifyin 3. Contracts of suretyship or bonding. (De
caseofloss. Leon, The Insurance Code Annotated,
2006)
5. Conditional It is subject to conditions
the principal one of which is the A.MARINEINSURANCE
happeningoftheeventinsuredagainst.
Q:Whatismarineinsurance?
6. Contractofindemnity
A: Insurance against risks connected with
GR:Theinsurerpromisestomakegood navigation, to which a ship, cargo, freightage,
onlythelossoftheinsured. profits or other insurable interest in movable
property,maybeexposedduringacertainvoyage
XPN:Alifeinsuranceisnotacontractof orfixedperiodoftime.
indemnity. It is not applicable to life
insurance policies because life is not Q:Whatvesselsarecontemplatedinmarine
capable of pecuniary estimation. The insurance?
only situation where the principle of
indemnityisapplicabletolifeinsurance A: Those used, or at least, intended for
isiftheamountinthepolicyisfixed.An navigation. E.g., one for shipping, chartering,
example would be in a case where a voyage and the like. Vessels which are used as
creditorinsuresthelife ofhisdebtor museums or those that are stationary are not
totheextentofthelattersdebtto entitled to be insured under this a marine
theformer. insurance.

7. PersonalEachpartyhavinginviewthe Q:Whatdoesmarineinsuranceinclude?
character, credit and conduct of the
other. A:Marineinsuranceincludes:

8. PropertySinceinsuranceisacontract, 1. Insuranceagainstlossordamageto:
itispropertyinlegalcontemplation. a. Vessels, goods, freight, cargo,
merchandise, profits, money,
9. Risk distributing device Insurance valuable papers, bottomry and
servestodistributetheriskofeconomic respondentia, and interest in
lossamongasmanyaspossibleofthose respect to all risks or perils of
who are subject to the same kind of navigation;
loss. b. Persons or property in connection
withmarineinsurance;
10. Onerous there is a valuable c. Precious stones, jewels, jewelry
considerationcalledthepremium and precious metals whether in
the course of transportation or
otherwise;and
47

d. Bridges, tunnels, piers, docks and b. Earnings such as freight, passage
other aids to navigation and money
transportation(Sec.99) c. Liability incurred by reason of
maritimeperils
Note:Cargocanbethesubjectofmarine d. Shipsorhulls
insurance,andonceitisenteredinto,the
implied warranty of seaworthiness 2. Inland marine insurance covers
immediately attaches to whoever is primarilythelandorovertheland(but
insuringthecargo,whetherhebetheship sometimes water) transportation perils
owner or not. (Roque v. IAC, G.R. No. L ofpropertyshippedbyrailroads,motor
66935,Nov.11,1985) trucks, airplanes, and other means of
transportation. It also covers risks of
2. Marine protection and Indemnity lake,river,ortheotherinlandwaterway
insurance which means insurance transportation and other waterborne
against, or against legal liability of the perils outside of those risks that fall
insured for loss, damage, or expense definitely within the ocean marine
incident to ownership, operation, category.Classes:PtBFF
chartering,maintenance,use,repair,or
construction of any vessel, craft or a. Property in Transit Provides
instrumentality in use of ocean or protection to the property
inland waterways, including liability of frequentlyexposedtolosswhileit
the insured for personal injury, illness is being transported from one
ordeathorforlossofordamagetothe locationtoanother.
propertyofanotherperson.(Sec.99)
b. Bailee liability Insurance for
Measureofindemnity: thosewhohavetemporarycustody
a. Valuedpolicythepartiesare ofthegoods.
boundbythevaluation,ifthe
insured had some interest at c. Fixed transportation property
riskandthereisnofraud(Sec. They are so insured because they
156) are held to be an essential part of
b. Open policy the following transportation system such as
rules shall apply in estimating bridges,tunnels,etc.
aloss:
i. value of the ship value d. Floater Provides insurance to
at the beginning of the follow the insured property
risk whereveritmaybelocatedsubject
ii. valueofthecargoactual always to the territorial limits of
cost when laden on thecontract.
boardormarketvalueat
the time and place of Q: What does the phrase perils of the sea or
lading perilsofnavigationmean?
iii. valueoffreightagegross
freightage exclusive of A: It includes only those casualties due to the
primage unusual violence or extraordinary action of wind
iv. cost of insurance in and wave, or to other extraordinary causes
eachcasetobeaddedto connectedwithnavigation.
theestimatedvalue(Sec.
161) Q:Whatdoesperilsoftheshipmean?

Q: What are the two major divisions of Marine A: It is a loss which, in the ordinary course of
insurance? events,resultsfrom:
1. Thenaturalandinevitableactionofthe
A: sea
1. Ocean marine insurance covers 2. Theordinarywearandtearoftheship
primarily sea perils of ships and 3. Thenegligentfailureoftheshipsowner
cargoes.Scope:GELS to provide the vessel with proper
a. Goodsorcargoes
48
MERCANTILELAWTEAM:
INSURANCE CODE
equipment to convey the cargo under then shifts to the insurer to show the exception
ordinaryconditions. tothecoverage.

Q: Does an insurer undertake to insure against Q:Whatistheextentoftheinsurableinterestof
perilsoftheship? thefollowing?

A: A:
GR:No. 1. Shipowner
a. Overthevesseltotheextentofits
XPN:Intheabsenceofanystipulationtothe value,exceptthatifchartered,the
contrary, the insurer does not undertake to insuranceisonlyuptotheamount
insureagainstperilsoftheship.Thepurpose not recoverable from the
of an ocean marine policy is to secure an charterer.(Sec.100)
indemnity against accidents which may b. If hypothecated by a bottomry
happen not against event which must loan, the insurable interest is only
happen. up to the excess of the values of
thevesselovertheloan.(Sec.101)
Q: A marine insurance policy on a cargo states c. He also has an insurable interest
that the insurer shall be liable for losses onexpectedfreightage.(Sec.103)
incidenttoperilsofthesea.Duringthevoyage,
seawater entered the compartment where the 2. Cargo owner over the cargo and
cargowasstoredduetothedefectivedrainpipe expectedprofits.(Sec.105)
of the ship. The insured filed an action on the
policyforrecoveryofthedamagescausedtothe 3. Chartererovertheamountheisliable
cargo.Maytheinsuredrecoverdamages? to the ship owner, if the ship is lost or
damagedduringthevoyage(Sec.106).
A:No.Theproximatecauseofthedamagetothe
cargo insured was the defective drainpipe of the 4. Creditor/lenderamountoftheloan
ship.Thisisperiloftheship,andnotperilofthe
sea.Thedefectinthedrainpipewastheresultof Q: What is the risk insured against in marine
the ordinary use of the ship. To recover under a insurance?
marine insurance policy, the proximate cause of
thelossordamagemustbeperilofthesea.(1998 A:
BarQuestion) GR:Onlyperilsoftheseaisinsuredagainst.

Q:Whatisanallrisksmarineinsurancepolicy? XPN:Unlessperilsof theshiparecoveredby
anallriskspolicy.
A:
GR: It is that which insures against all causes Q: What are the distinctions between perils of
ofconceivablelossordamage. theseaandperilsoftheship?

XPN: A:
1. Asotherwiseexcludedinthepolicy;or PERILSOFTHESEA PERILSOFTHESHIP
2. Due to fraud or intentional misconduct Includes only those A loss which in the
onthepartoftheinsured.(ChoaTiekv. casualtiesduetothe: ordinary course of
CA,G.R.No.84507,Mar.15,1990)This 1. Unusual events,resultsfromthe:
typeofpolicygrantsgreaterprotection violence;or 1. Natural and
than that afforded by the perils 2. Extraordinary inevitable action of
clause. action of wind thesea;
andwave;or 2. Ordinary wear and
3. Other tearoftheship;or
Q:Whohastheburdenofproofinanallrisks
extraordinary 3. Negligent failure of
marineinsurancepolicy?
causes the ships owner to
connected with provide the vessel

A: The insured under an "all risks insurance navigation. with proper
policy" has the initial burden of proving that the equipment to
cargo was in good condition when the policy convey the cargo
attached and that the cargo was damaged when under ordinary
unloadedfromthevessel;thereafter,theburden conditions.
49

in freight although there are goods
Q:Whatisaloanonbottomry? ready for shipment or the master is
provided with funds for the purpose of
A: It is one which is payable only if the vessel purchasingacargo.
givenassecurityfortheloancompletesinsafety
thecontemplatedvoyage. 2. Where the vessel is a mere seeking
Q:Whatisfreightage? shiporavessellookingforcargotobe
transported,theownerhasnoinsurable
A:Itisthebenefitwhichistoaccruetotheowner interest in freight to be earned on
of the vessel from its use in the voyage goodsnotloaded.
contemplated or benefit derived from the
employmentoftheship. Q: What are special marine insurance contracts
andclauses?
Q:Whereisfreightagederivedfrom?
A:
A: 1. Allrisks policy insurance against all
1. Thecharteringoftheship causes of conceivable loss or damage,
2. Its employment for the carriage of his except:
owngoods a. Excluded risk stipulated in the
3. Its employment for the carriage of policy,or
goodsofothers.(Sec.102) b. due to fraud or intentional
misconduct on the part of the
Q: When does insurable interest in expected insured(ChaoTiekSengv.CA,GR.
freightageinacharterpartyexist? No.84507,Mar.15,1990)

A:Itexistswhentheinsuredhasaninchoateright The insured has the initial burden
to freight, that is, he must be in such position of proving that the cargo was in
withregardtofreightthatnothingcouldprevent good condition when the policy
him from ultimately having a perfect right to it attached and that the cargo was
buttheinterventionoftheperilsinsuredagainst. damagedwhenunloadedfromthe
vessel; thereafter, the burden
Q:Whendoesinchoaterighttofreightexists? shifts to the insurer to show the
exceptiontothecoverage.
A:
1. Wherefreightisthepricetobepaidfor 2. Barratry clause a clause which
the hire of the ship under a charter provides that there can be no recovery
party, the ship owner has an inchoate on the policy in case of any willful
right to freight as soon as there is an misconductonthepartofthemasteror
inception of performance by the ship crew in pursuance of some unlawful or
underthecharterparty. fraudulentpurposewithouttheconsent
of the owner and to the prejudice of
2. Assoonasthegoodsareactuallyputon owners interest. It requires an
boardandwherepartofthegoodshas intentional and willful act in its
been loaded and the balance is ready, commission. No honest error or
there is an insurable interest in the judgment or mere negligence, unless
wholefreight. criminallygross,canbebarratry.(Roque
v.IAC,G.R.No.L66935,Nov.11,1985)
3. Where the ship owner has made a
bindingcontractforfreightandtheship 3. Inchamaree clause a clause which
isinreadinesstoreceivethegoods,he makes the insurer liable for loss or
hasaninsurableinterest. damagetothehullormachineryarising
fromthe:
Q: When is insurable interest in expected a. Negligence of the captain,
freightageinacharterpartynonexistent? engineers,etc.
b. Explosion,breakageofshafts;and
A: c. Latentdefectofmachineryorhull.
1. Wherethereisnocontractandnopart (Thames and Mersey Marine
ofthegoodsexpectedtobecarriedare
onboard,thereisnoinsurableinterest
50
MERCANTILELAWTEAM:
INSURANCE CODE
Insurance Co v. Hamilton Fraser 5. The use of false and simulated papers.

andCo[1887]12AC484) (Sec.110)

4. Sue and labor clause a clause under Q: What are the distinctions on concealment in
whichtheinsurermaybecomeliableto marineinsuranceandotherpropertyinsurance?
pay the insured in addition to the loss
actually suffered, such expenses as he
may have incurred in his efforts to A:
protect the property against a peril for OTHERPROPERTY
MARINEINSURANCE
which the insurer would have been INSURANCE
liable(Sec.163) Theinformationor
Theinformationorthe beliefofa3rdpartyis
Note: Such clause constitutes an exception to the belieforexpectationof notmaterialandneed
principle that an insurance contract is one of 3rdpersonsinreference notbecommunicated,
indemnity(wheretheinsurerpromisestomakegood toamaterialfactis unlessitproceedsfrom
onlythelossoftheinsured)sincetheinsurerisliable materialandmustbe anagentoftheinsured
topayadditionalexpensesfortheprotectionofthe communicated. whosedutyistogive
propertyagainstaninsuredperil. information.
Theconcealmentofany
Q:Whatisconcealmentinmarineinsurance? factinrelationtoanyof Concealmentofany
themattersstatedin materialfactwill
A:Itisthefailuretodiscloseanymaterialfactor Sec.110doesnotvitiate vitiatetheentire
circumstance which in fact or law is within, or theentirecontractbut contract,whetheror
merelyexoneratesthe notthelossresults
which ought to be within the knowledge of one
insurerfromarisk fromtherisk
party and of which the other has no actual or
resultingfromthefact concealed.
presumptiveknowledge.
concealed.

Q:Isinformationofthebelieforexpectationofa
Q: What is the effect of false representation by
third person, in reference to a material fact,
theinsured?
material?

A:Anymisrepresentationofamaterialfactmade
A: Yes. Thus, there is concealment where the
with fraudulent intent avoids the policy. If the
insured at the time of application for insurance
misrepresentationisnotintentionalorfraudulent
did not disclose the opinion of marine experts
but the fact misrepresented is material to the
who inspected the vessel insured that it was
risk, the insurer may rescind the contract from
unseaworthy.(Sec.108)
thetimerepresentationbecomesfalse.(Sec.111)

Q: When is the insured presumed to have
Q: What is the distinction between promissory
knowledgeofapriorlossinmarineinsurance?
representation and representation of
expectation?
A:Theinsuredispresumedtohaveknowledgeof

a prior loss at the time of insuring, if the
A:
information might possibly have reached him in
PROMISSORY REPRESENTATIONOF
the usual mode of transmission and at the usual REPRESENTATION EXPECTATION
rateofcommunication.(Sec.109) Itisanypromisetobe It is a statement of
fulfilled after the future facts or events
Q: What matters, when concealed, do not contracthascomeinto whichareintheirnature
vitiatetheentireinsurancecontract,butmerely existence or any contingent and which
exoneratestheinsurerfromalossresultingfrom statement concerning the insurer is bound to
theriskconcealed? what is to happen know that the insured
duringtheexistenceof could not have intended
A: theinsurance to state as known facts,
1. Nationalcharacteroftheinsured but as intentions or
2. The liability of the thing insured to expectationsmerely.
captureanddetention
3. The liability to seizure from breach of Q:Whatistheeffectoffalsityastoexpectation?
foreignlawsoftrade
4. Thewantofnecessarydocuments A: Representations of expectation or intention,
unless made with fraudulent intent, their failure

51

of fulfillment is not ground for rescission. (Sec. the commencement of each portion.
112) (Sec.117)

Q:Whatiswarrantyinmarineinsurance? Q: What is the effect of the admission of
seaworthinessbytheinsurer?
A: It is a stipulation, either express or implied,
forming part of the policy as to some fact, A:Ifthepolicyprovidesthattheseaworthinessof
conditionorcircumstancerelatingtotherisk. the vessel as between insured and insurer is
admitted, the issue of seaworthiness cannot be
Q: What are the implied warranties in marine raised by the insurer without showing
insurance? concealmentormisrepresentationbytheinsured.
(Phil. American General Insurance Co. v. CA, G.R.
A: No.116940,June11,1997)
1. Seaworthiness.(Sec.113)
2. Nondeviation from the agreedvoyage. Q:Whatdoestheadmissionofseaworthinessby
(Secs.123,124,125) theinsurermean?
3. Nonengagementfromillegalventure.
4. Warranty of neutrality the ship will A:Itmaymean:
carry neutrality of the ship or cargo 1. Thatthewarrantyofseaworthinessisto
where such nationality or neutrality is betakenasfulfilled;or
expresslywarranted.(Sec.120) 2. That the risk of unseaworthiness is
5. Presenceofinsurableinterest assumed by the insurer. (Philippine
American General Insurance Co., Inc. v
Q:Whatisseaworthiness? CA,GRNo.116940.June11,1997)

A:Itisarelativetermdependinguponthenature Q: What is the effect if unseaworthiness is
oftheship,voyage,serviceandgoodsdenotingin unknowntotheownerofthecargo?
general, a ships fitness to perform the service
and to encounter the ordinary perils of the A: It is immaterial in ordinary marine insurance
voyage, contemplated by the parties to the andmaynotbeusedbyhimasadefenseinorder
policy.(Sec.114) to recover on the marine insurance policy. It
becomestheobligationofacargoownertolook
Q: When is the warranty of seaworthiness for a reliable common carrier, which keeps its
compliedwith? vesselsinseaworthyconditions.Theshippermay
havenocontroloverthevesselbuthehascontrol
A: in the choice of the common carrier that will
GR: The warranty of seaworthiness is transport his goods. (Roque v. IAC, G.R. No. L
compliedwithiftheshipbeseaworthyatthe 66935,Nov.11,1985)
time of the commencement of the risk. (Sec.
115) There is no implied warranty that the Q: What is the scope of the seaworthiness of a
vessel will remain in seaworthy condition vessel?
throughoutthelifeofthepolicy.
A:Awarrantyofseaworthinessextendsnotonly
XPN: totheconditionofthestructureoftheshipitself,
1. Inthecaseoftimepolicytheshipmust but requires that it be properly laden, and
beseaworthyatthecommencementof provided with a competent master, a sufficient
every voyage she may undertake. (Sec. number of competent officers and seamen, and
115[a]) therequisiteappurtenancesandequipment,such
asballasts,cablesandanchors,cordageandsails,
2. In the case of cargo policy each vessel food, water, fuel and lights, and other necessary
upon which cargo is shipped or orproperstoresandimplementsforthevoyage.
transshippedmustbeseaworthyatthe (Sec.116)
commencement of each particular
voyage.(Sec.115[b]) Q:Whatarethetwokindsoftotalloss?

3. In the case of voyage policy A:
contemplating a voyage in different 1. Actualtotalloss
stages the ship must be seaworthy at 2. Constructivetotalloss
52
MERCANTILELAWTEAM:
INSURANCE CODE
Q: In an insurance upon cargo, what is the

Q:Whatarethedistinctionsbetweenthetwo? liabilityoftheinsurerincaseofreshipment?

A: A:Iftheoriginalshipbedisabled,andthemaster,
CONSTRUCTIVETOTAL actingwithawisediscretion,astheagentofthe
ACTUALTOTALLOSS
LOSS merchant and the ship owners, forwards the
Itexistswhenthe Itisonewhichtheloss, cargo in another ship, such necessary and
subjectmatterofthe althoughnotactually justifiable change of ship will not discharge the
insuranceiswholly total,isofsucha underwriter on the goods from liability for any
destroyedorlostor characterthatthe losswhichmaytakeplaceongoodssubsequently
whenitissodamaged insuredisentitled,ifhe to such reshipment. (Sec. 133) The insurer may,
asnolongertoexistin thinksfit,totreatitas however, require additional premium if the
itsoriginalcharacter. totalbyabandonment.
hazardbeincreasedbyhisextensionofliability.
(Sec.131)

Therightofthe Abandonmentbythe
Q.Whatisdeviationinmarineinsurancepolicy?
insuredtoclaimthe insuredisnecessaryin

wholeinsuranceis ordertorecoverfora
absolute.Noneedto totalloss(Sec.138)in A:Deviationisadepartureofthevesselfromthe
givenoticeof theabsenceofany courseofthevoyage,oranunreasonabledelayin
abandonment.(Sec. provisiontothecontrary pursuingthevoyage,orthecommencementofan
135) inthepolicy. entirelynewvoyage.(Sec.123)

Q:Whatconstitutesactualtotalloss? Q:Whatarethefourcasesofdeviationin
marineinsurance?
A:
1. Atotaldestructionofthethinginsured A:
2. The irretrievable loss of the thing by 1. Departure from the course of sailing
sinking,orbybeingbrokenup fixed by mercantile usage between the
3. Anydamagetothethingwhichrenders places of beginning and ending
it valueless to the owner for the specifiedinthepolicy.(Sec.121)
purposeforwhichheheldit;or
4. Any other event which effectively 2. Departure from the most natural,
deprives the owner of the possession, direct, and advantageous route
at the port of destination, of the thing between the places specified if the
insured.(Sec.130) course of sailing is not fixed by
mercantileusage.(Sec.122)
Note:Completephysicaldestructionisnotessential
toconstituteactualtotalloss. 3. Unreasonable delay in pursuing the
voyage.(Sec.123)
Q:Whatisconstructivetotalloss?
4. The commencement of an entirely
A: differentvoyage.
1. Actuallossofmorethanofthevalue
oftheobject Q:Whatarethetwokindsofdeviation?
2. Damagereducingvaluebymorethan
ofthevalueofthevesselandofcargo; A:
and 1. ProperThiswillnotvitiateapolicyof
3. Expenseoftransshipmentexceedsof marine insurance because deviation is
thevalueofthecargo.(Sec.131) consideredjustifiedorcausedbyactual
necessity which is equal in importance
Q:Whenisactuallosspresumed? tosuchdeviation.(Sec.124)

A: It may be presumed from the continued 2. Improper The insurer becomes
absence of a ship without being heard of. The immediately absolved from further
length of time which is sufficient to raise his liability under the policy for losses
presumption depends on the circumstances of occurring subsequent to the deviation
thecase.(Sec.132) because deviation is considered to be
without just cause. Every deviation not
specified in Sec.124 is improper. (Sec.
125)

53

Q:Whatistheeffectofavalidabandonment?
Q:Whatistheadditionalliabilityoftheinsurer
ofgoodsreferredtointhereshipmentofcargo? A: It is equivalent to a transfer by the insured of
hisinterest,totheinsurer,withallthechancesof
A:Themarineinsurerisboundfor: recovery and indemnity. The insurer becomes
1. Damages entitled to all the rights which the insured
2. Expensesofdischarging possessedinthethinginsured.(Sec.146)
3. Storage
4. Shipment Q: What are the forms of acceptance of
5. Extrafreightage abandonment?
6. All other expenses incurred in saving
cargoreshipped.(Sec.134) A:
1. Express
Note: The liability of the insurer cannot exceed the 2. Impliedfromtheconductoftheinsurer
amountoftheinsurance. 3. Mere silence of the insurer for
unreasonable length of time after
Q:Whatisabandonment? notice.(Sec.150)

A: It is the act of the insured by which, after a Q: When may the insured, by a contract of
constructive total loss he declared the marineinsurance,abandonthethinginsured?
relinquishmenttotheinsurerofhisinterestinthe
thinginsured. A:
1. If more than threefourths thereof in
Q: What are the requisites for the validity of value is actually lost, or would have to
abandonment? beexpendedtorecoveritfromtheperil

A: 2. If it is injured to such an extent as to
1. Theremustbeanactualrelinquishment reduce its value more than three
by the person insured of his interest in fourths
thethinginsured.(Sec.138)
3. If the thing insured is a ship, and the
2. Theremustbeaconstructivetotalloss. contemplated voyage cannot be
(Sec.139) lawfully performed without incurring
either an expense to the insured of
3. The abandonment must neither be more than threefourths the value of
partialnorconditional.(Sec.140) the thing abandoned or a risk which a
prudentmanwouldnottakeunderthe
4. It must be made within a reasonable circumstances;or
time after receipt of reliable
informationofthelos.s(Sec.141) 4. If the thing insured is cargo or
freightage, and the voyage cannot be
5. Itmustbefactual.(Sec.142) performed, nor another ship procured
bythemaster,withinareasonabletime
6. It must be made by giving notice and with reasonable diligence to
thereof to the insurer which may be forward the cargo, without incurring
doneorallyorinwriting.(Sec.143) the like expense or risk mentioned in
theprecedingsubparagraph.(Sec.139)
7. The notice of abandonment must be
explicit and must specify the particular Note:Freightagecannotinanycasebeabandoned,
causeofabandonment.(Sec.144) unlesstheshipisalsoabandoned.

Q:Whatistheformofnoticeofabandonment? Q:Whatisthethreefourthrule?

A: Abandonment may be done orally, or in A:Whatiscontemplatedasunderthelawmust
writing;Providedthatifthenoticebedoneorally bemorethan.Whenwhatwaslostwasexactly
a written notice of such abandonment shall be ,therulecannotbeapplied.
submitted within 7 days from such oral notice.
(Sec.143) Q: An insurance company issued a marine
insurance policy covering a shipment by sea
54
MERCANTILELAWTEAM:
INSURANCE CODE
from Mindoro to Batangas of 1,000 pieces of Q: What is the effect of the insurers refusal to
Mindorogardenstonesagainsttotallossonly. acceptavalidabandonment?
Thestoneswereloadedintwolighters,thefirst
with600piecesandthesecondwith400pieces. A: If the insurer declines to accept a proper
Because of rough seas, damage was caused the abandonment,heisliableasuponanactualtotal
secondlighterresultinginthelossof325outof loss less any proceeds the insured may have
the400pieces.Theowneroftheshipmentfiled receivedonaccountofthedamagedpropertyas
claims against the insurance company on the whentheinsuredsucceedsinsellingtheproperty
ground of constructive total loss inasmuch as as damaged (Sec. 154). If the abandonment was
morethanofthevalueofthestoneshadbeen improper, the insured may nevertheless recover
lost in one of the lighters. Is the insurance totheextentofthedamageproved.
companyliableunderitspolicy?Why?
Q:Whatistheeffectofinsuredsfailuretomake
A: The insurance company is not liable under its abandonment?
policy covering against total loss only the
shipment of 1,000 pieces of Mindoro garden A:Theinsuredhasanelectiontoabandonornot,
stones.Thereisnoconstructivetotallossthatcan and cannot be compelled to abandon although
beclaimedsincetheruleistobecomputedon abandonment is proper. If the insured fails to
the total 1,000 pieces of Mindoro garden stones abandon,hemayneverthelessrecoverhisactual
covered by thesingle policy coverage. (1992 Bar loss(Sec.155).
Question)
Q:Whendoescoinsuranceexist?
Q: What are the effects of acceptance of
abandonment? A: There is coinsurance if the value of the
insureds interest exceeds the amount of
A: insurance; he is considered the coinsurer for an
1. The insurer becomes at once liable for amount determined by the difference between
thewholeamountoftheinsuranceand the insurance taken out and the value of the
alsobecomesentitledtoallrightswhich property.
insured possessed in the thing insured.
(Sec.146) Amarineinsurerisliableuponapartiallossonly
forsuchproportionoftheamountinsuredbyhim
2. Itfixestherightsoftheparties;whether as the loss bears to the value of the whole
express or implied, is conclusive upon interest of the insured in the property insured
them,andirrevocable.(Sec.152) (Sec.157).

3. It stops the insurer to rely on any Note:Coinsuranceappliesonlytomarineinsurance.
insufficiencyintheform,time,orright, Logically, there cannot be coinsurance in life
of abandonment. Whether the insured insurance.Butcoinsuranceappliesinfireinsurance
has a right to abandon is immaterial onlywhenexpresslystipulatedbytheparties.
where the abandonment is accepted
andthereisnofraud. Q:Whataretherequisitesforcoinsurance?

4. On accepted abandonment of a ship, A: There is coinsurance when the following
the freightage earned subsequent to requisitesconcur:
the loss belongs to the insurer of the 1. The amount of insurance is less than
ship. But freightage earned previously theinsuredsinsurableinterest;
belongstotheinsurerofsaidfreightage 2. Thelossispartial.
who is subrogated to the rights of the
insureduptothetimeoftheloss.(Sec. Q: What is the Formula to determine the
153) amountrecoverable?

XPN: Where the ground upon which it was A:
made proves to be unfounded. (Sec. 152) (Partial)LossXAmountofInsurance=Amount
Under Sec. 145, abandonment can be ofrecovery
sustained only upon the ground specified in Valueofthing
thenoticethereof. Insured

55

Illustration: expenses incurred on the way or on
If a vessel valued at P1M is insured for only P800, arrival;
000andisdamagedtotheextentofP400,000,the
insurerwill berequired to pay only 80% oftheloss 3. Value of freightage the gross
suffered, or P320,000; the other 20% or P80,000 freightage, exclusive of primage,
beingbornebytheinsuredhimself. without reference to the cost of
earning;
P400,000or2/5XP800,000=P320,000

P1M
Note: Primage is a compensation paid to

thecaptainafterasuccessfulvoyage.
The insured is considered a coinsurer as to the

uninsuredportionofP200,000.

4. CostofinsuranceItisalwaysaddedin
Note:Ifthelossistotal,theinsurerisliableforthe calculatingthevalueoftheship,cargo,
full amount of P800,000. On the other hand, if the orfreightageorothersubjectmatterin
property is insured to its full value, the insured is anopenpolicy.(Sec.161)
entitledtorecoverthefullamountofthepartialloss
ofP400,000. Q: What does the phrase port of refuge
expensesmean?
Q:Incaseofloss,whatistheinsuredentitledto
recover if profits to be realized are separately A: These are the additional expenses incurred in
insured? repairing the damages suffered by a vessel
because of the perils insured against as well as
A: If profits to be realized are separately insured those incurred for saving the vessel from such
from the vessel or cargo, the insured is entitled perils,suchastheexpenseoflaunchingorraising
torecover,incaseofloss,suchproportionofthe the vessel or of towing or navigating it into port
profits as the value of the property lost bears to forhersafety.Theseareitemstobebornebythe
thevalueofthewholeproperty.(Sec.158) insurer in addition to a total loss if that
afterwardstakesplace.(Sec.163)
Q: When is the loss of profits conclusively
presumed? Q: What are the rightsof the insured in caseof
generalaverage?
A: When profits are valued and insured by a
contract of marine insurance, a loss of them is A:
conclusivelypresumedfromalossoftheproperty GR: The insurer is liable for any general
outofwhichtheywereexpectedtoarise,andthe averageloss(Sec.136) whereitispayableor
valuationfixestheiramount.(Sec.160) hasbeenpaidbytheinsuredinconsequence
ofaperilinsuredagainst.
Q: What are the rules for estimating loss under
anopenpolicyofmarineinsurance? The insured may either hold the insurer
directly liable for the whole of the insured
A: value of the property sacrificed for the
1. Value of the ship In ascertaining the general benefit, subrogating him to his own
value of the vessel, the value is to be right of contribution or demand contribution
taken as of the commencement of the from the other interested parties as soon as
risk and not its value at the time she the vessel arrives at her destination (Sec.
wasbuilt; 135).

2. ValueofcargoThevalueofthecargo XPN: There can be no recovery for general
is its actual cost to the insured, when averagelossagainsttheinsurer:
laden on board, or where that cost 1. After the separation of the interests
cannotbeascertained,itsmarketvalue liable to contribution, that is to say,
at the time and place of lading it on after the cargo liable for contribution
board,butwithoutreferencetoanyloss hasbeenremovedfromthevessel;or
incurred in raising money for its
purchase, or to any drawback on its 2. When the insured has neglected or
exportation,ortothefluctuationofthe waivedhisrighttocontribution.
marketattheportofdestination,orto
Note:Generalaverageisaprincipleoflaw
whereby,whenitisdecidedbythemaster
56
MERCANTILELAWTEAM:
INSURANCE CODE
of a vessel, acting for all the interest

concernedtosacrificeapartofaventure 2. Such use or condition as limited by the
exposedtoacommonandimminentperil policyisaltered;
in orderto save the rest, the interests so
savedarecompelledtocontributeratably 3. The alteration is made without the
or proportionately to the owner of the consentoftheinsurer;
interestsacrificed,sothatthecostofthe
sacrificeshallfallequallyuponall.(Hector
4. Thealterationismadebymeanswithin
S.DeLeon,TheLawonInsurance,2003)
thecontroloftheinsured;and

Q:WhatisFreeFromParticularAverageClause
5. Thealterationincreasestherisk.
(FPAClause)?

Note:Acontractoffireinsuranceisnotaffectedby
A: A clause agreed upon in a policy of marine
any act of the insured subsequent to the execution
insurance in which it is stated that the insurer
of the policy, which does not violate its provisions
shallnotbeliableforaparticularaverage. eventhoughitincreasestheriskandisthecauseof
theloss.(Sec.170)
Theinsurerisliableonlyforgeneralaverageand
not for particular average unless such particular Q: What are the distinctions of ocean marine
averagelossastheeffectofdeprivingtheinsured andfirepolicies?
ofthepossessionattheportofdestinationofthe
wholeofthethinginsured.(Sec.136) A:
OCEANMARINE FIREINSURANCE
Q:Whatisthelimitastoliabilityofinsurer? Apolicyofinsuranceon Where the hazard is fire
a vessel engaged in alone and the subject is
A: The liability of the insurer for any general navigation is a contract an unfinished vessel,
average loss is limited to the proportion of of marine insurance neverafloatforavoyage,
contribution attaching to his policy value where although it insures thecontracttoinsureisa
thisislessthanthecontributingvalueofthething againstfirerisksonly. fire risk, especially in the
insured.(Sec.164) absence of an express
agreement that it shall
B.FIREINSURANCE have the incidents of
marinepolicy,orwhereit
Q:Whatisfireinsurance? insures materials in a
shipyard for use in
A: It is a contract of indemnity by which the constructingvessels.

insurer, for a consideration, agrees to indemnify
Also where a policy
the insured against loss of or damage by fire,
insures against fire, a
lightning, windstorm, tornado or earthquake and vessel while moored and
otheralliedrisks,whensuchrisksarecoveredby inuseasahospital
extension to fire insurance policies or under
separatepolicies.(Sec.167) Q: Why is the distinction between marine and
fireinsuranceimportant?
Note: The liability of an insurer is to pay for direct

loss only. The insurer may be liable to pay for
consequentiallossesifcoveredbyextensiontosuch A:
firepoliciesorinsuredunderseparatepolicy 1. In marine insurance, the rules on
constructive total loss (Secs. 131, 139)
Q: When does alteration in the thing insured and abandonment (Sec. 138) apply but
entitletheinsurertorescind? notinfireinsurance;

A:Inorderthattheinsurermayrescindacontract 2. Incaseofpartiallossofathinginsured
of fire insurance for any alteration made in the forlessthanitsactualvalue,theinsured
use or condition of the thing insured, the inamarinepolicyisacoinsurerofthe
followingrequisitesmustbepresent: uninsuredportion(Sec.157),whilethe
insured may only become a coinsurer
1. The use or condition of the thing is in fire insurance if expressly agreed
specially limited or stipulated in the uponbytheparties.(Sec.172)
policy;

57

Q: What is the measure of indemnity in open 2. Third party liability insurance
andvaluedpoliciesinfireinsurance? Insuranceagainstspecifiedperilswhich
may give rise to liability on the part of
A: the insured of claims for injuries or
OPENPOLICIES VALUEDPOLICIES damagetopropertyofothers.
The expense necessary to The parties are bound
replace the thing lost or by the valuation, in Q: What are some rules on third party liability
injured in the condition it theabsenceoffraud. insurance?
was at the time of the
injury. A:
1. Insurable interest is based on the
Q:Whatisacoinsuranceclause? interest of the insured in the safety of
the persons, and their property, who
A: It is that which requires the insured to may maintain an action against him in
maintain insurance to an amount equal to the case of their injury or destruction
valueorspecifiedpercentageofthevalueofthe respectively.
insured property under penalty of becoming co
insurertotheextentofsuchdeficiency. 2. In a third party liability (TPL) insurance
contract, the insurer assumes the
Note: The insured is not a coinsurer under fire obligation by paying the injured third
policiesintheabsenceofstipulation. party to whom the insured is liable.
Prior payment by the insured to the
Q:Whatisafallofbuildingclause? third person is not necessary in order
that the obligation may arise. The
A: It is that which provides, in a fire insurance moment the insured becomes liable to
policy, that if the building or any part thereof third persons, the insured acquires an
falls,exceptasaresultoffire,allinsurancebythe interestintheinsurancecontractwhich
policyshallimmediatelycease. maybegarnishedlikeanyothercredit.

Q:Whatisanoptiontorebuildclause? 3. In burglary, robbery and theft
insurance, the opportunity to defraud
A: It gives the insurer the option to rebuild the
the insurer (moral hazard) is so great
destroyed property instead of paying the
that insurer have found it necessary to
indemnity. This clause serves to protect the
fill up the policies with many
insurer against unfair appraisals friendly to the
restrictions designed to reduce the
insured.(Sec.172)
hazard.Personsfrequentlyexcludedare

those in the insureds service and
C.CASUALTYINSURANCE
employment. The purpose of the

exception is to guard against liability
Q:Whatiscasualtyinsurance?
should theft be committed by one

having unrestricted access to the
A: It is that which covers loss or liability arising
property.
from accident or mishap, excluding those falling

under types of insurance as fire or marine. (Sec.
4. Right of third party injured to sue the
174)
insurer of party at fault depends on

whether the contract of insurance is
Q: What are the two divisions of casualty
intended to benefit third persons also
insurance?
oronlytheinsured

A:
Q:Whendoestheinjuredpersonhavetheright
1. Accident or health insurance
tosueinsurerofthepartyatfault?
Insuranceagainstspecifiedperilswhich

may affect the person and/or property
A:
oftheinsured.
1. Indemnity against third party liability

injured third party can directly sue the
E.g. personal accident, robbery/theft
insurer.
insurance

58
MERCANTILELAWTEAM:
INSURANCE CODE
Purpose:Toprotectinjuredpersonagainst A:Beverlycanrecovertheproceedsofthepolicy
the insolvency of the insured who causes from the insurer. The death of the insured was
suchinjury. notduetosuicideorwillfulexposuretoneedless
peril which are excepted risks. The insureds act
2. Indemnity against actual loss or waspurelyanactofnegligencewhichiscovered
payment third party has no cause of by the policy and for which the insured got the
action against the insurer. The third insurance for his protection. In fact, he removed
persons recourse is limited to the themagazinefromthegunandwhenhepointed
insuredalone.Thecontractissolelyfor the gun to his temple he did so because he
theinsurertoreimbursetheinsuredfor thoughtthatitwassafeforhimtodoso.Hedid
liabilityactuallysatisfiedbyhim. sotoassurehissisterthatthegunwasharmless.
Thereisnoneinthepolicythatwouldrelievethe
Note: The insurer is not solidarily liable with the insurer of liability for the death of the insured
insured. The insurers liability is based on contract; since the death was an accident. (1995 Bar
that of the insured is based on torts. Furthermore, Question)
theinsurersliabilityislimitedbytheamountofthe
insurancecoverage.
Q:Whatisliabilityinsurance?

Q: Chirs, a boxer, is a holder of an accident A:Ithasbeensaidtobeacontractofindemnity
insurancepolicy.Inaboxingmatch,dediedafter forthebenefitoftheinsuredandthoseinprivity
being knocked out by the opponent. Can his with him, or those to whom the law upon the
fatherwhoisabeneficiaryundersaidinsurance grounds of public policy extends the indemnity
policy successfully claim indemnity from the againstliability.
insurancecompany?
Q:Whatsthedifferencebetweentheliabilityof
A:Yes.Clearly,theproximatecauseofdeathwas the insurer and that of the insured in case for
the boxing contest. Death sustained in a boxing indemnityagainstthirdpersonliability?
contest is an accident. (De la Cruz v. Capital
Insurance&SuretyCo.,G.R.No.L21574,June30, A:
1966)(1990BarQuestion) INSURER INSURED
Theliabilityisdirectbut Liability is direct and can

Q: SunMoon Insurance issued a Personal
the insurer cannot be beheldliablewithallthe
AccidentPolicytoHenryDywithafacevalueof
held solidarily liable partiesatfault.
P500,000. A provision in the policy states that with the insured and
the company shall not be liable in respect of otherpartiesatfault.
bodily injury consequent upon the insured Liability is based on Liabilityisbasedontort.
personattemptingtocommitsuicideorwillfully contract
exposing himself to needless peril except in an
The thirdparty liability The liability extends to
attempt to save human life. Six months later
is only up to the extent theamountofactualand
Henry Dy died of a bullet wound in his head. of the insurance policy other damages. (Heirs of
Investigation showed that one evening Henry and that required by GeorgeY.Poev.Malayan
was in a happy mood although he was not law Insurance Company, Inc.
drunk. G.R. No. 156302, Apr. 7,
2009)
Hewasplayingwithhishandgunfromwhichhe
had previously removed its magazine. He Q: In liability insurance, is the insureds liability
pointedthegunathissisterwhogotscared.He mustfirstbedeterminedbythecourtbeforethe
assured her it was not loaded. He then pointed thirdpartyliabilityinsurercouldbesued?
thegunathistempleandpulledthetrigger.The
gunfiredandHenryslumpedonthefloor. A:No,thecontentionoftheinsurerisnotcorrect.
There is no need to wait for the decision of the
Henrys wife Beverly, as the designated court determining insureds liability with finality
beneficiary, sought to collect under the policy. before the third party liability insurer could be
SunMoon Insurance rejected her claim on the sued. The occurrence of the injury to a third
ground that the death of Henry was not person immediately gave rise to the liability of
accidental.Beverlysuedtheinsurer.Decideand the insurer under its policy. In other words,
Discussfully. whereaninsurancepolicyinsuresdirectlyagainst
liability,theinsurersliabilityaccruesimmediately
upon the occurrence of the injury or event upon

59

whichtheliabilitydepends.Theinsurercannotbe 2. The contract of suretyship or bonding
heldsolidarilyliablewiththeinsured.Theliability shall not be valid and binding unless
of the insurer is based on contract while that of and until the premium therefore has
the insured is based on tort. If the insurer was beenpaid
solidarilyliablewiththeinsured,itcouldbemade
topaymorethantheamountstatedinthepolicy. 3. Where the obligee has accepted the
This would, however, be contrary to the bond, it shall be valid and enforceable
principlesunderlyinginsurance contracts. Onthe notwithstanding that the premium has
otherhand,iftheinsurerwassolidarilyliableand not been paid; (Philippine Pryce
itismadetopayonlyuptotheamountstatedin AssuranceCorp.v.CA,G.R.No.107062,
the insurance policy, the principles underlying Feb.21,1994)
solidaryobligationswouldbeviolated.(1996Bar
Question) 4. If the contract of suretyship or bond is
not accepted by, or filed with the
Q:Whatisanoactionclause? obligee, the surety shall collect only a
reasonableamount;
A: It is a requirement in a policy of liability
insurance which provides that suit and final 5. If the nonacceptance of the bond be
judgment be first obtained against the insured, due to the fault or negligence of the
that only thereafter can the person injured surety, no service fee, stamps, or taxes
recoveronthepolicy.(Guingonv.DelMonte,G.R. imposed shall be collected by the
No.L21806,Aug.17,1967) surety;and

Note: A no action clause must yield to the 6. In the case of continuing bond (for a
provisions of the Rules of Court regarding term longer than one year or with no
multiplicityofsuits.(Shafterv.RTC,G.R.No.78848, fixed expiration date), the obligor shall
Nov.14,1988) paythesubsequentannualpremiumas
it falls due until the contract is
D.SURETYSHIP cancelled.(Sec.177)

Q:Whatissuretyship? Q:Whatarethetypesofsuretybonds?

A: It is an agreement whereby the surety A:
guarantees the performance by another of an 1. Contract bonds These are connected
undertaking or an obligation in favor of a third withconstructionandsupplycontracts.
party.(Sec.175) They are for the protection of the
owneragainstapossibledefaultbythe
Q:Whatisthenatureofliabilityofsurety? contractororhispossiblefailuretopay
materialmen, laborers and sub
A: contractors.
1. Solidarywiththebondobligor
The position of surety, therefore, is to
2. Limited to the amount in the bond (it answer for a failure of the principal to
cannotbeextendedbyimplication) perform in accordance with the terms
andspecificationsofthecontract.
3. Itisdeterminedstrictlybythetermsof
thecontractofsuretyshipinrelationto Theremaybetwobonds:
the principal contract between the
obligorandtheoblige a. Performance bond One covering
the faithful performance of the
Q: What are the rules in the payment of contract;and
premiumsinsuretyship? b. Payment bond One covering the
payment of laborers and material
A: men.
1. The premium becomes a debt as soon
asthecontractofsuretyshiporbondis 2. Fidelity bonds They pay an employer
perfected and delivered to the obligor for loss growing out of a dishonest act
(Sec.77) ofhisemployee.

60
MERCANTILELAWTEAM:
INSURANCE CODE
For the purposes of underwriting, they cessation of life (Sec. 180). It is a mutual
areclassifiedas: agreementbywhichapartyagreestopayagiven
sum on the happening of a particular event
a. Industrial bond One contingent on the duration of human life, in
requiredbyprivateemployers consideration of the payment of a smaller sum
to cover loss through immediately, or in periodical payments by the
dishonestyofemployees;and otherparty.
b. Public official bond One
required of public officers for Q: What are the distinctions between life
the faithful performances of insuranceandfire/marineinsurance?
theirdutiesandasacondition
of entertaining upon the A:SeeAppendixC
dutiesoftheiroffices.
Q:Whatarethekindsoflifeinsurancepolicies?
3. Judicial bonds They are those which
arerequiredinconnectionwithjudicial A:
proceedings. 1. Ordinary life, general life or old line
policy Insured pays a premium every
Q:Whatarethedistinctionsbetweensuretyship yearuntilhedies.Surrendervalueafter
andpropertyinsurance? 3years.

A: 2. Limited payment Insured pays
SURETYSHIP PROPERTY premium for a limited period. It is
INSURANCE payable only at the death of the
Itisanaccessorycontract. The principal contract insured.
itself.
There are three parties: There are only two 3. Endowment Insured pays a premium
the surety, obligor/debtor, parties: insurer and foraspecifiedperiod.Ifheoutlivesthe
andtheobligee/creditor. insured period, the face value of the policy is
More of a credit A contract of paid to him; if not, his beneficiaries
accommodation with the indemnity receivebenefit.
surety assuming primary
liability 4. Term insurance Insured pays once
Surety is entitled to No right of recovery only, and he is insured for a specified
reimbursement from the forthelosstheinsurer period. If he dies within the period, his
principal and his may sustain except
beneficiaries benefit. If he outlives the
guarantors for the loss it when the insurer is
period, no person benefits from the
may suffer under the entitled to
contract. subrogation.
insurance. Also known as temporary
A bond may be cancelled May be cancelled
insurance.
by or with the consent of unilaterally either by
the obligee or by the the insured or by the 5. Industrial life Life insurance entitling
commissioner or by the insurer on grounds theinsuredtopaypremiumsweekly,or
court. providedbylaw. where premiums are payable monthly
Requiresacceptanceofthe Does not need oroftener
obligee before it becomes acceptance of any
validandenforceable. thirdparty. 6. Variable contract Any policy or
A riskshifting device, the A riskdistributing contractoneitheragrouporindividual
premiumpaidbeinginthe device, the premium basis issued by an insurance company
natureofaservicefee. paid being considered providing for benefits or other
a ratable contribution contractual payments or values
toacommonfund. thereunder to vary so as to reflect
investment results of any segregated
E.LIFEINSURANCE portfolioofinvestment.

Q:Whatislifeinsurance?

A: It is that which is payable on the death of a
person or on his surviving a specified period, or
otherwise contingently on the continuance of

61

Q:Whatistheeffectifthebeneficiarywillfully F.COMPULSORYMOTORVEHICLELIABILITY
bringaboutthedeathoftheinsured? INSURANCE

A: Q:Whatismotorvehicleliabilityinsurance?
GR: The interest of a beneficiary in a life
insurance policy shall be forfeited when the A:Itisaprotectioncoveragethatwillanswerfor
beneficiary is the principal, accomplice; legal liability for losses and damages for bodily
accessoryinwillfullybringingaboutthedeath injuries or property damage that may be
of the insured, in which event, the nearest sustained by another arising from the use and
relative of the insured shall receive the operationofamotorvehiclebyitsowner.
proceeds of said insurance, if not otherwise
disqualified.(Sec.12) Q:Whatisthepurposeofmotorvehicleliability
insurance?
XPN:
1. Thebeneficiaryactedinselfdefense; A: To give immediate financial assistance to
2. The insureds death was not victims of motor vehicle accidents and/or their
intentionally caused (e.g., thru dependents,especiallyiftheyarepoorregardless
accident); offinancialcapabilityofmotorvehicleownersof
3. Insanity of the beneficiary at the time operatorsresponsiblefortheaccidentsustained.
hekilledtheinsured. (First Integrated Bonding Insurance Co., Inc. v.
Hernando,G.R.No.L51221,July31,1991)
Q:Whenistheinsurerliableincaseofsuicide?
Q:Whoisapassenger?
A:
1. The suicide is committed after the A:Anyfarepayingpersonbeingtransportedand
policyhasbeeninforceforaperiodof2 conveyed in and by a motor vehicle for
yearsfromthedateofitsissueorofits transportation of passengers for compensation,
lastreinstatement. including persons expressly authorized by law or
by the vehicles operator or his agents to ride
2. Thesuicideiscommittedafterashorter withoutfare.(Sec.373[b])
period provided in the policy although
withinthe2yearperiod Q:Whoisathirdparty?

3. Thesuicideiscommittedinthestateof A:Anypersonotherthanapassengerasdefined
insanity regardless of the date of inthissectionandshallalsoexcludeamemberof
commission, unless suicide is an thehousehold,oramemberofthefamilywithin
exceptedrisk.(Sec.180A) theseconddegreeofconsanguinityoraffinity,of
a motor vehicle owner or land transportation
Note:Thepolicycannotprovideaperiodlongerthan operator, as likewise defined herein, or his
2years.Ifthepolicyprovidesforalongerperiodand employee in respect of death, bodily injury, or
thesuicideiscommittedwithinsaidperiodbutafter damage to property arising out of and in the
2years,theinsurerisliable. courseofemployment.(Sec.373,[c])

Theinsurerisnotliableifitcanshowthatthepolicy Q: What is the meaning of a motor vehicle
was obtained with the intention to commit suicide owner?
even in the absence of any suicide exclusion in the
policy.
A: It means the actual legal owner of a motor

vehicle, whose name such vehicle is duly
Q: What is the measure of indemnity under a
registered with the Land Transportation Office.
policyofinsuranceuponlifeorhealth?
(Sec.373,[d])

A: Unless the interest of a person insured is
Q: What is the meaning of land transportation
susceptibleofexactpecuniarymeasurement,the
operator?
measureofindemnityunderapolicyofinsurance

uponlifeorhealthisthesumfixedinthepolicy.
A: It means the owner or owners of motor
(Sec.183)
vehicles for transportation of a passenger for

compensation, including school buses. (Sec. 373,

[e])

62
MERCANTILELAWTEAM:
INSURANCE CODE
This nofault claim does not apply to property

Q:Whatisanofaultindemnityclause? damage. If the total indemnity claim exceeds P15,
000andthereiscontroversyinrespectthereto,the
A: It is a clause where the insurer is required to findingoffaultmaybeavailedofbytheinsureronly
pay a third party injured or killed in an accident as to the excess. The first P15, 000 shall be paid
without the necessity of proving fault or withoutregardtothefault.
negligence on the part of the insured. There is a
stipulated maximum amount to be recovered. Q:Whatistheauthorizeddriverclause?
(1994BarQuestion)
A:Itindemnifiestheinsuredowneragainstlossor
Q: What are the rules under the no fault damage to the car but limits the use of the
clause?? insuredvehicleto:
1. Theinsuredhimself;or
2. Any person who drives on his order or
A: with his permission. (Villacorta v.
1. The total indemnity in respect of any Insurance Commissioner, G.R. No.
onepersonshallnotexceedP15,000for 54171,Oct.28,1980)
all motor vehicles (Insurance
MemorandumCircularNo.42006)(Sec. Q: What is the main purpose of an authorized
378) driverclause?

2. Proofofloss: A: Its main purpose is to require a person other
a. Policereportofaccident than the insured, who drives the car on the
b. Death certificate and evidence insuredsorder,suchas,hisregulardriver,orwith
sufficienttoestablishproperpayee hispermission,suchasafriendormemberofthe
c. Medical report and evidence of familyortheemployeesofacarserviceorrepair
medical or hospital disbursement. shop to be duly licensed drivers and have no
(Sec.378[ii]) disqualification to drive a motor vehicle.
(Villacorta v. Insurance Commission, G.R. No. L
3. Claim may be made against one motor 54171,Oct.28,1980)
vehicleonly
Q:Whatisthetheftclause?
4. Incaseofanoccupantofavehicle,the
claimshalllieagainsttheinsurerofthe A: It is that which includes theft as among the
vehicle in which the occupant is riding, risks insured against. Where a car is unlawfully
mountingordismountingfrom andwrongfullytakenwithouttheknowledgeand
consent of the owner, such taking constitutes
5. Inanyothercase,claimshalllieagainst theft and it is the theft clause, not the
the insurer of the directly offending authorized driver clause which should apply.
vehicle (Palermo v. Pyramid Inc., G.R. No. L36480, May
31,1988)
6. Inallcases,therightofthepartypaying
the claim to recover against the owner Q:Whatisacooperationclause?
of the vehicle responsible for the
accidentshallbemaintained A:Itisthatwhichprovidesthattheinsuredshall
give all such information and assistance as the
Note:Theclaimantisnotfreetochoosefromwhich insurermayrequire,usuallyincludingattendance
insurerhewillclaimthe"nofaultindemnity,"asthe attrialsorhearings.
law, by using the word "shall, makes it mandatory
that the claim be made against the insurer of the Q: When a passenger jeepney,insuredbut with
vehicleinwhichtheoccupantisriding,mountingor anauthorizeddriversclauseandwasdrivenby
dismounting from. That said vehicle might not be adriverwhoonlyholdsaTrafficViolationreport
the one that caused the accident is of no moment (TVR) because his license was confiscated, met
since the law itself provides that the party paying anaccident,maytheownerofthejeepneyclaim
may recover against the owner of the vehicle fromtheinsurancecompany?
responsible for the accident. (Perla Compania de
Seguros, Inc. v. Ancheta, G.R. No. L49599, Aug. 8, A:Yes.Thefactthatthedriverwasmerelyholding
1988) a TVR does not violate the condition that the
driver should have a valid and existing drivers

63

license. Besides, such a condition should be amountoramountsrequiredaslimits
disregarded because what is involved is a ofindemnityforthesamepurpose.
passenger jeepney, and what is involved here is
notowndamageinsurancebutthirdpartyliability V.INSURABLEINTEREST
where the injured party is a third party not privy
tothecontractofinsurance.(2003BarQuestion) Q:Whatisaninsurableinterest?

Q:AnnainsuredherbrandnewcarwithVilches A:
Ins.Co.forcomprehensivecoveragewhereinthe GR:Apersonisdeemedtohaveaninsurable
insurancecompanyundertooktoindemnifyhim interest in the subject matter insured where
againstlossordamagetothecara)byaccidental he has a relation or connection with or
collision b) by fire, external explosion, burglary, concern in it that he will derive pecuniary
or theft, and c) malicious act. The car was benefit or advantage from its preservation
carnapped and at that time, Annas license was and will suffer pecuniary loss from its
already expired. Anna filed a claim with the destructionorinjurybythehappeningofthe
insurance company but it denied the claim eventinsuredagainst.
because of authorized driver clause. May the
insurance company be held liable to indemnify XPN: The term has a somewhat broader
Annaforthelossoftheinsuredvehicle? meaninginconnectionwithlifeinsurance.To
have an insurable interest in the life of a
A: Yes. The car was lost due to theft. What person, the expectation of benefit from the
appliesinthiscaseisthetheftclause,andnot continued life of that person need not
the authorized driver clause. It is immaterial necessarilybeofpecuniarynature.
that Anna was driving the car with an expired
drivers license at the time it was carnapped. Q: Differentiate insurable interest in life
(1993BarQuestion) insurance and insurable interest in property
insurance.
Q: Who are the persons subject to the
compulsory motor vehicle liability insurance A: Insurable interest in life exists when there is
requirement? reasonablegroundfoundedontherelationofthe
parties, either pecuniary or contractual or by
A: blood or affinity, to expect some benefit or
1. Motorvehicleowner(MVO)oronewho advantagefromthecontinuanceofthelifeofthe
is the actual legal owner of a motor insured.
vehicle in whose name such vehicle is
registeredwiththeLTO;or On the other hand, every interest in property,
whetherrealorpersonal,oranyrelationthereto,
2. Land transportation operator (LTO) or orliabilityinrespectthereof,ofsuchnaturethat
one who is the owner of a motor a contemplated peril might directly damnify the
vehicle or vehicles being used for insured.(Sec.13)
conveyingpassengersforcompensation
includingschoolbuses. Q:Whatarethereasonsfortherequirementof
aninsurableinterest?
Q: What are the substitutes for a compulsory
motorvehicleliabilityinsurancepolicy? A:
1. As deterrence to the insured The
A:MVOsorLTOs,insteadofaCMLVIpolicy,may requirement of an insurable interest to
either: supportacontractofinsuranceisbased
1. PostasuretybondwiththeInsurance upon considerations of public policy
Commissionerwhoshallbemadethe which render wager policies invalid. A
obligee or creditor in the bond in wager policy is obviously contrary to
suchamountoramountsrequiredas publicinterest.
limitsofindemnitytoanswerforthe
samelossessoughttobecoveredby 2. As a measure of limit of recovery If
aCMLVIpolicy;or and to the extent that any particular
insurance contract is a contract to pay
2. Make a cash deposit with the indemnity,theinsurableinterestofthe
Insurance Commission in such insured will be the measure of the
64
MERCANTILELAWTEAM:
INSURANCE CODE
upper limit of his provable loss under a. Of any person on whom he depends
thecontract. wholly or in part for education or
support,orinwhomhehasapecuniary
A.INLIFE/HEALTH interest;(Section10,[b])

Q: What are the two general classes of life Mere blood relationship or mere
policies? relationship by affinity does not
constitute an insurable interest; there
A: mustbeariskofmonetarylossfromthe
1. Insurance upon ones life are those insuredsdeath.
taken out by the insured upon his own
life (Section 10[a]) for the benefit of b. Of any person under a legal obligation
himself, or of his estate, in case it to him for the payment of money, or
matures only at his death, for the respectingpropertyorservices,ofwhich
benefit of third person who may be death or illness might delay or prevent
designatedasbeneficiary. performance;(Sec.10,[c])

The question of insurable interest is c. Of any person upon whose life any
immaterialwherethepolicyisprocured estate or interest vested in him
by the person whose life is insured. A depends.(Sec.10,[d])
person who insures his own life can
designateanypersonashisbeneficiary, Q: Who are the persons under Sec. 10, (c) who
whether or not the beneficiary has an haveaninsurableinterestonthelifeandhealth
insurable interest in the life of the ofaperson?
insured subject to the limits under
Article739and2012oftheNCC. A:Acreditormaynamehimselfasbeneficiaryina
policyhetakesonthelifeofhisdebtor.Thedeath
Note: An application for insurance on of the debtor may either prevent payment if his
onesownlifedoesnotusuallypresentan estate is not sufficient to pay his debts or delay
insurableinterestquestion. such payment if an administrator has to be
appointedtosettlehisestate.ExceptSection10,
2. Insurance upon life of another are (a) of the Insurance Code, an insurance contract
thosetakenoutbytheinsureduponthe partakesthenatureofacontractofindemnity.
lifeofanother. (Sec.10[a],[b],[c]and
[d]) Q: What is theextent of the creditors recovery
uponthedeathofthedebtor?
Where a person names himself
beneficiary in a policy he takes on the A:
life of another, he must have insurable GR:Limitedtotheamountofhisinterest(the
interestinthelifeofthelatter. amountowingtohim).

Q:Forwhoselifeandhealthdoesapersonhave XPN: If the debtor is the insured and the
aninsurableinterest? creditorisnamedbeneficiary,thecreditorwill
be entitled to the whole proceeds of the
A: Of himself, of his spouse and of his children policy upon the debtors death, though his
(Sec.10[a]) creditmaybemuchless.

Q: Is the insured beneficiary required to prove Note:Thedebtorwastheonewhoappliedfor
insurableinterest? theinsurance,toinsurehisownlife.

A: No, because he is presumed to have an XPNtoXPN:
insurable interest on the life of his spouse or his 1. If debtor applied for insurance and
children. designated creditor in compliance with
creditors requirement that debtor will
Thehusbandandwifeaswellasparentandchild take insurance to insure creditors
do have some pecuniary interest in each others interest.
lifesincetheyarelegallyobligedtosupporteach
other.

65

2. Apersonmaytakeapolicyonthelifeof 1. An existing interest The existing
hisbusinesspartnerbecausethelatters interestinthepropertymaybelegalor
death may result in an interruption of equitabletitle.
business operations which can be in
turncausefinancialloss. Examples of insurable interest arising
3. Abusinessfirmcantakeoutapolicyon fromlegaltitle:
the life of its officers or employees a. Trustee,asinthecaseoftheseller
whose services proved valuable to the ofpropertynotyetdelivered;
business. The proceeds are not taxable b. Mortgagor of the property
incomebutconstituteindemnitytothe mortgaged;
employer for the loss which the c. Lessorofthepropertyleased
businesssuffersbecauseofthedeathof
avaluedofficeroremployee. Examples of insurable interest arising
fromequitabletitle:
Q:Istheconsentofthepersoninsuredessential a. Purchaser of property before
tothevalidityofthepolicy? delivery or before he has
performed the conditions of the
A: No. So long as it could be proved that the sale
insuredhasaninsurableinterestattheinception b. Mortgageeofpropertymortgaged;
of the policy, the insurance is valid even without c. Mortgagor, after foreclosure but
suchconsent. beforetheexpirationoftheperiod
within which redemption is
Q:Whenmustinsurableinterestexist? allowed

A: 2. An inchoate interest founded on an
1.Lifeorhealthinsurance existinginterest

GR: Insurable interest in life or health Example:Astockholderhasaninchoate
must exist when the insurance takes interest in the property of the
effect, bur need not exist thereafter or corporationofwhichheisastockholder,
whenthelossoccurs.(Sec.19) whichisfoundedonanexistinginterest
arising from his ownership of shares in
XPN: thecorporation
a. Whentheinsuranceistakenbythe
creditor on the life of the debtor, 3. Anexpectancycoupledwithanexisting
thecreditorisrequiredtohavean interest in that out of which the
insurable interest not only at the expectancyarises.
timeofthecontractbutalsoatthe
timeofthedebtorsdeathbecause Note:Expectancytobeinsurablemustbe
in this case, it is considered as a coupled with an existing interest or
contractofindemnity. foundedonanactualrighttothethingor
b. Whentheinsuranceistakenbythe uponanyvalidcontractforit.(Sec.16)
employer on the life of the
employee. Q: If the owner sold the property subject of
insuranceandwasdestroyedbyafirebeforehe
3. Property Insurance When the was able to redeem the same, is the insurer
insurance takes effect and when the liable?
loss occurs, but need not exist in the
meantime.(Sec.19) A:No.Atthetimeoftheloss,hewasnolonger
theownerofthepropertyinsuredashefailedto
B.INPROPERTY redeem the property. The law requires in
propertyinsurancethatapersoncanrecoverthe
Q: What may consist an insurable interest in proceedsofthepolicyifhehasinsurableinterest
property? atthetimeoftheissuanceofthepolicyandalso
at the time when the loss occurs. At the time of
A: fire,theownernolongerhadinsurableinterestin
thepropertyinsured.

66
MERCANTILELAWTEAM:
INSURANCE CODE
Q: Angela, owner of a condominium unit, interestisrequisitetotheexistencethereof.Itis

insured the same against fire with the ELM sufficient that the insured is so situated with
InsuranceCo.,andmadethelosspayabletohis referencetothepropertythatwouldbeliableto
sister, Antonette. In case of loss by fire of the lossshoulditbeinjuredordestroyedbytheperil
saidcondominiumunit,whomayrecoveronthe against which it is insured. Anyone has an
fireinsurancepolicy? insurable interest in property who derives a
benefit from its existence or would suffer loss
A:Angelacanrecoveronthefireinsurancepolicy from its destruction. (Gaisano Cagayan, Inc. v.
forthelossofsaidcondominiumunit.Hehasthe Insurance Company of North America, G.R. No.
insurable interest as ownerinsured. As 147839,June8,2006)
beneficiaryinthefireinsurancepolicy,Antonette
cannot recover on the fire insurance policy. For Q: What is the extent of insurable interest of a
thebeneficiarytorecoveronthefireorproperty commoncarrierordepositoryinathingheldby
insurancepolicy,itisrequiredthatshemusthave him?
insurableinterestinthepropertyinsured.Inthis
case,Antonettedoesnothaveinsurableinterest A:Totheextentofhisliabilitybutnottoexceed
inthecondominiumunit.(2001BarQuestion) thevaluethereof(Sec.15).Thisissobecausethe
lossofthethingbythecarrierordepositorymay
Q: A piece of machinery was shipped to Joeben cause liability against him to the extent of its
on the basis of C&F Manila. Pablo insured said value.
machinery with the Talaga Merchants Ins. Co.
(Tamic) for loss or damage during the voyage. C.DOUBLEINSURANCEANDOVERINSURANCE
ThevesselsankenroutetoManila.Joebenthen
filed a claim with Tamic which was denied for Q: What are the distinctions between double
thereasonthatpriortothedelivery,Joebenhad insuranceandoverinsurance?
noinsurableinterest.Decidethecase.
A:
A: Jeoben had an existing insurable interest on DOUBLEINSURANCE OVERINSURANCE
the piece of machinery he bought. The purchase
Theremaybenoover
of goods under a perfected contract of sale Whentheamountof
insuranceaswhenthe
alreadyvestsequitableinterestonthepropertyin theinsuranceis
sumtotaloftheamounts
favor of the buyer even while it is pending beyondthevalueof
ofthepoliciesissueddoes
delivery.(1991BarQuestion) theinsuredsinsurable
notexceedtheinsurable
interest.
interestoftheinsured.
Q: If the owner sold the property subject of
Theremaybeonlyone
insuranceandwasdestroyedbyafirebeforehe
insurer,withwhom
was able to redeem the same, is the insurer theinsuredtakes
liable? Twoormoreinsurers.
insurancebeyondthe
valueofhisinsurable
A:No.Atthetimeoftheloss,hewasnolonger interest.
theownerofthepropertyinsuredashefailedto Prohibitedbylaw
redeem the property. The law requires in Notprohibitedbylaw,
becauseitisa
propertyinsurancethatapersoncanrecoverthe unlessthereisa
wageringcontractand
stipulationtothe
proceedsofthepolicyifhehasinsurableinterest nolongeracontractof
contrary.
atthetimeoftheissuanceofthepolicyandalso indemnity.
at the time when the loss occurs. At the time of
fire,theownernolongerhadinsurableinterestin Q:Whendoesdoubleinsuranceexist?
thepropertyinsured.
A: Double insurance exists where the same
Q: What is the measure of insurable interest in person is insured by several insurers separately,
property? inrespecttothesamesubjectandinterest.(Sec.
93)
A: The extent to which the insured might be
damnified by loss or injury thereof. (Sec. 17). Q:Givetherequisitesofdoubleinsurance.
Insurableinterestinpropertydoesnotnecessarily
imply a property interest in, or lien upon, or A:STRIP
possession of, the subject matter of the 1. Personinsuredisthesame
insurance, and neither title nor a beneficial
67

2. Two or more insurers insuring A:
separately 1. To prevent an increase in the moral
3. Subjectmatteristhesame hazard
4. Interestinsuredisthesame 2. Topreventoverinsuranceandfraud
5. Riskorperilinsuredagainstisthesame
Q: What is the effect of nondisclosure of the
Q: What is the purpose of the rule on double existence of other insurances covering the
insurance? subject matter of the insurance being applied
for,iftheapplicantisrequiredtodoso?
A: To prevent overinsurance and thus avert the
perpetration of fraud. The public, as well as the A:Theinsuredcannotrecoverfromtheinsurance
insurer,isinterestedinpreventingthesituationin because he is guilty of violation of warranty/
which a loss would be profitable to the insured condition.
(Pioneer Insurance and Surety Corp v. Yap, G.R.
No.L36232,Dec.19,1974) Q:Whataretheruleswheretheinsuredisover
insuredbydoubleinsurance?
Q:Isdoubleinsuranceprohibitedbylaw?
A:
A: No. A person may therefore procure two or 1. Theinsured,unlessthepolicyotherwise
more insurances to cover his property. What is provides, may claim payment from the
prohibitedbylawisoverinsurance. insurersinsuchorderashemayselect,
up to the amount which the insurers
Q: The building worth P70 Million was totally are severally liable under their
razedbyfire.Iftheownerdecidestoclaimfrom respectivecontracts.
Eastern Insurance Corp. only P50 Million, will
theclaimprosper?Explain. 2. Where the policy under which the
insured claims is a valued policy, the
A:Yes,theclaimwillprosperiftheownerdecides insured must give credit as against the
toclaimfromEasternInsuranceCorporationonly valuation for any sum received by him
P50 Million because the amount sought to be under any other policy without regard
claimed does not exceed the value of his totheactualvalueofthesubjectmatter
insurableinterest.EasternInsuranceCorporation, insured.
however, can recover from Northern Insurance
Corporation and Southern Insurance Corporation 3. Where the policy under which the
theirproportionateshareoftheamountitpaidto insured claims is an unvalued policy he
theowner.(2008BarQuestion) must give credit, as against the full
insurablevalue,foranysumreceivedby
Q: Can an insurer provide that the insured may himunderanypolicy.
notprocureadditionalinsurance?
4. Where the insured receives any sum in
A:Yes,theinsurermayinsertanotherinsurance excess of the valuation in the case of
clausewhichwillprohibitdoubleinsurance.The valuedpolicies,oroftheinsurablevalue
rationale is to prevent the danger that the in the case of unvalued policies, he
insuredwilloverinsurehisproperty. must hold such sum in trust for the
insurers, according to their right of
Q:Whatisadditionalorotherinsuranceclause? contributionamongthemselves.

A:Aconditioninthepolicyrequiringtheinsured 5. Each insurer and the other insurers, to
to inform the insurer of any other insurance contribute ratably to the loss in
coverageofthepropertyinsured.Itislawfuland proportion to the amountfor which he
specificallyallowedunderSec.75whichprovides isliableunderhiscontract.(Sec.94)
that a policy may declare that a violation or a
specified provision thereof shall avoid it, Q: What is the nature of the liability of the
otherwise the breach of an immaterial provision severalinsurersindoubleinsurance?Explain.
doesnotavoidit.
A: In double insurance, the insurers are
Q:Whatareitspurposes? considered as coinsurers. Each one is bound to
contributeratablytothelossinproportiontothe
68
MERCANTILELAWTEAM:
INSURANCE CODE
amountforwhichheisliableunderhiscontract. asecurity.Ininsuringtheproperty,heis
Thisisknownastheprincipleofcontributionor not insuring the property itself but his
contribution clause. (Sec. 94 [e]) (2005 Bar interestorlienthereon.
Question)
Note: In case of an insurance taken by the
D.MULTIPLEORSEVERALINTERESTSONSAME mortgageealoneandforhisbenefit,themortgagee,
PROPERTY after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes
Q:Whataretheinstanceswheremorethanone by subrogation to the insurer to the extent of the
insurable interest may exist in the same insurancemoneypaid.
property?
VI.PERFECTIONOFACONTRACT
A:
1. In trust, both trustor and trustee have Q:Whatisapolicyofinsurance?
insurable interest over the property in
trust. A: It is the written instrument in which the
2. In a corporation, both the corporation contractofinsuranceissetforth(Sec.49).Itisthe
and its stockholders have insurable written document embodying the terms and
interestovertheassets. stipulationsofthecontractofinsurancebetween
3. In partnership both the firm and theinsuredandinsurer.Itisnotnecessaryforthe
partners has insurable interest over its perfectionofthecontract.
assets.
4. In assignment both the assignor and Q:Whatistheformofaninsurancecontract?
assigneehasinsurableinterestoverthe
propertyassigned. A:Maybeverbalorinwriting,orpartlyinwriting
5. In lease, the lessor, lessee and sub andpartlyverbal.However,thelawprovidesthat
lesseeshaveinsurableinterestoverthe nopolicyofinsuranceshallbeissuedordelivered
propertyinlease. unless in the form previously approved by the
6. In mortgage, both the mortgagor and InsuranceCommission.
mortgageehaveinsurableinterestover
thepropertymortgaged. Q:Whenistheinsurancecontractperfected?

Q: Is the insurable interest of mortgagor and A: When the assent or consent is manifested by
mortgagee in case of a mortgaged property the themeetingoftheofferandtheacceptanceupon
same? the thing and the cause which are to constitute
the contract. Mere offer or proposal is not
A:Eachhasaninsurableinterestintheproperty contemplated. (De Lim v. Sun Life Assurance Co.,
mortgaged and this interest is separate and G.R.No.L15774,Nov.29,1920)
distinct from the other. Therefore, insurance
taken by one in his name only and in his favor A.OFFERANDACCEPTANCEININSURANCE
alonedoesnotinuretothebenefitoftheother. CONTRACT
The same is not open to objection that there is
doubleinsurance.(Sec.8) Q. How offer is made in property and liability
insurance?
Q: What is the extent of insurable interest of
mortgagorandmortgagee? A. It is the insured who makes an offer to the
insurer,whoacceptstheoffer,rejectsit,ormakes
A: a counteroffer. The offer is usually accepted by
1. Mortgagor To the extent of its value aninsuranceagentonbehalfoftheinsurer.
as owner of the property. The loss or
destructionofthepropertyinsuredwill Q. How offer is made in Life and Health
not extinguish the mortgage debt. The Insurance?
exceptionisinmarineinsurance.
A.itdependsuponwhethertheinsuredpaysthe
2. MortgageeTotheextentofthedebt. premiumatthetimeheappliesforinsurance.
Such interest continues until the
mortgage debt is extinguished. The 1. If he does not pay the premium, his
propertyreliedonasmortgagedisonly application is considered an invitation
to the insurer to make an offer, which

69

he must then accept before the insured, the policy is considered
contractgoesintoeffect. constructively delivered if insured
2. If he pays the premium with his diedbeforereceivingthepolicy.
application, his application will be b. ByagentIfdeliveredtotheagent
consideredanoffer. of the insurer, whose duty is
ministerial, or delivered to the
Q.Whenisthereanacceptance? agent of the insured, the policy is
considered constructively
A. Where the application for insurance delivered.
constitutes an offer by the insured, a policy is
issued strictly in accordance with the offer is an Q:Whatistheimportanceofdelivery?
acceptanceoftheofferthatperfectsthecontract.
A:
Q. When can there be an issuance of policy 1. It becomes the evidence of the
withoutacceptance? makingofacontractandofitsterms;
2. It is considered as communication of
A. If the issued policy does not conform to the the insurers acceptance of the
insuredsapplication,itisanoffertotheinsured insuredsoffer;
whichhemayacceptorreject. 3. It becomes the determination of
policyperiod;
Q.Whatistheeffectofdelay? 4. It marks the end of insurers
opportunitytodeclinecoverage.
A. Unreasonable delay in returning the premium
raises the presumption of acceptance of the B.PREMIUMPAYMENT
insurance application. (Gloria v. Philippine
AmericanLifeIns.Co.,[CA}73O.G.[No.37]8660) Q:Whatispremium?

Q:Whendoesthepolicybecomebinding? A:Itisanagreedpriceforassumingandcarrying
the risk that is, the consideration paid an
A: insurer for undertaking to indemnify the insured
1. When all the conditions precedent againstaspecifiedperil.
stated in the offer have been satisfied;
and Q:Whatisthedifferencebetweenpremiumand
2. Whendelivered assessment?

Q:Whataretherequisitesforavaliddelivery? A:Premiumisleviedandpaidtomeetanticipated
losses, while assessment are collected to meet
A: actual losses. Also, while premium is not a debt,
1. Intention of the insurer to give legal assessment properly levied, unless otherwise
effectasacompletedinstrument; expresslyagreed,isadebt.
2. Word or act by insurer putting the
instrumentbeyondhislegal,thoughnot Q: When does payment of premium become a
necessarilyphysicalcontrol; debtorobligation?
3. Insured must acquiesce in this
intention. A:
1. In fire, casualty and marine insurance,
Note:Possessionofthepolicybytheinsuredraises the premium payable becomes a debt
thepresumptionofdelivery,whilethepossessionby assoonastheriskattaches.
theinsurerisprimafacieevidenceofnodelivery. 2. Inlifeinsurance,thepremiumbecomes
adebtonlywhen,inthecaseofthefirst
Q:Whatarethe2typesofdelivery? premium, the contract has become
binding, and in the case of subsequent
A: premiums, when the insurer has
1. Actual delivery to the person of the continued the insurance after maturity
insured. ofthepremium,inconsiderationofthe
2. Constructive insuredsexpressorimpliedpromiseto
a. By mail If policy was mailed pay.
alreadyandpremiumwaspaidand
nothing is left to be done by the
70
MERCANTILELAWTEAM:
INSURANCE CODE
Q: Does nonpayment of balance of premiums payment,insurerisdeemedtohaveacceptedthe

cancelthepolicy? promissorynoteinpaymentofthepremium.This
renderedthepolicyimmediatelyoperativeonthe
A: No, a contrary rule would place exclusively in dateitwasdelivered.(CapitalInsurance&Surety
the hands of the insured the right to decide Co. Inc. v. Plastic Era Co., Inc. G.R. No. L22375,
whether the contract should stand or not. July18,1975)
(Philippine Phoenix Surety & Insurance, Co., Inc.,
v. Woodworks, Inc., G.R. No. L22684, Aug. 31, Q:Canfortuitouseventexcusetheinsuredfrom
1967) notpayingthepremiums?
Q: What are the effects of nonpayment of

A:
premiums?
GR: No, nonpayment of premiums does not
merely suspend but put an end to an

A: Nonpayment of the first premium unless
insurance contract since the time of the
waived, prevents the contract from becoming
payment is peculiarly of the essence of the
binding notwithstanding the acceptance of the
contract.
applicationortheissuanceofthepolicy.

XPN:
Nonpayment of the subsequent premiums does
1. The insurer has become insolvent and
not affect the validity of the contracts unless, by
hassuspendedbusiness,orhasrefused
express stipulation, it is provided that the policy
without justification a valid tender of
shallinthateventbesuspendedorshalllapse.
premiums. (Gonzales v. Asia Life Ins.
Co.,G.R.No.L5188,Oct.29,1952)
Q:Isthefireinsurancepolicyabindingoneeven
2. Failure to pay was due to the wrongful
ifthepremiumstatedinthepolicyisnotpaid?
conductoftheinsurer.
3. The insurer has waived his right to

A: No, insurance is a contract whereby one
demandpayment.
undertakes for a consideration to indemnify

another against loss, damage or liability arising
Q:Whatistheeffectofacceptanceofpremium?
fromanunknowncontingentevent.

A: Acceptance of premium within the stipulated

The consideration is the premium. The premium
periodforpaymentthereof,includingtheagreed
must be paid at the time and in the way and
graceperiod,merelyassurescontinuedeffectivity
manner specified in the policy, and if not, the
of the insurance policy in accordance with its
policywilllapseandbeforfeitedbyitsownterms.
terms.(Stokev.MalayanInsuranceCo.,Inc.,G.R.
No.L34768,Feb.28,1984)
The nonpayment of consideration constitutes

inability of the agreement (Philippine Surety and
Where an insurer authorizes an insurance agent
InsuranceCompanyv.Woodwork,Inc.,G.R.No.L
or broker to deliver a policy to the insured, it is
25317,Aug.6,1979)
deemedtohaveauthorizedsaidagenttoreceive
thepremiuminitsbehalf.Theinsurerisboundby
Q: If the applicant failed to pay premium and its agents acknowledgment of the receipt of
instead execute a promissory note in favor of paymentofpremium.
the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in Q:Whatistheeffectofpaymentofpremiumby
caseofloss? postdatedcheck?

A: Yes, the insurer is liable because there has A: Delivery of a promissory note or a check will
beena perfected insurance contract. The insurer notbesufficienttomakethepolicybindinguntil
acceptedthepromiseoftheapplicanttopaythe the said note or check has been converted into
insurancepremiumwithinthirty30daysfromthe cash. This is consistent with Article 1249 of the
effective date of policy. By so doing, it has CivilCode.
implicitly agreed to modify the tenor of the
insurance policy and in effect, waived any Note: Payment by means of a check or note,
provision therein that it would only pay for the acceptedbytheinsurer,bearingadatepriortothe
lossordamageincasethesameoccursafterthe loss, assuming availability of the funds thereof,
payment of the premium. Considering that the wouldbesufficientevenifitremainsunencashedat
insurance policy is silent as to the mode of the time of the loss. The subsequent effects of
71

encashment would retroact to the date of the 6. Whenthepublicinterestsorequires,as
instrumentanditsacceptancebythecreditor. determined by the Insurance
Commissioner
Q:Whatiftherewasnopremiumpaid,maythe
insurer recover the unpaid premium from the E.g.: In compulsory motor vehicle
insured? insurance,ifthepolicywasissuedwithout
payment of premium by the vehicle
A:No,thecontinuanceoftheinsurersobligation owner,theinsurerwillstillbeheldliable.
isconditioneduponthepaymentofthepremium, Toruleotherwisewouldprejudicethe3rd
so that no recovery can be had upon a lapsed partyvictim.
policy, the contractual relation between the
partieshavingceased.Iftheperilinsuredagainst Q: What is the effect of acknowledgment of
hadoccurred,theinsurerwouldhavehadavalid receiptofpremiuminpolicy?
defenseagainstrecoveryunderthepolicy.
A:Conclusiveevidenceofitspayment,insofaras
Q:Whatisthecashandcarryrule? to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding
A: untilthepremiumisactuallypaid(Sec.78).
GR:Nopolicyorcontractof insuranceissued
byaninsurancecompanyisvalidandbinding When the policy contains such written
unless and until the premium thereof has acknowledgment, it is presumed that the insurer
been paid. Any agreement to the contrary is has waived the condition of prepayment. It
void.(2003BarQuestion) hereby creates a legal fiction of payment. The
presumption is however, extended only to the
XPN:Apolicyisvalidandbindingevenwhen questionofthebindingeffectofthepolicy.
thereisnonpaymentofpremium:
As far as the payment of the premium itself is
1. In case of life or industrial life policy concerned, the acknowledgment is only a prima
whenever the grace period provision facie evidence of the fact of such payment. The
applies. insurer may still dispute its acknowledgment but
only for the purpose of recovering the premium
2. When there is acknowledgment in a due and unpaid. Whether payment was indeed
policy of a receipt of premium, which madeisaquestionoffact.
the law declares to be conclusive
evidence of payment, even if there is Q: Is the insurance company liable when a car,
stipulation therein that it shall not be boughtoninstallmentbasis,metanaccidentbut
binding until the premium is actually thecarisnotyetfullypaid?
paid.Thisiswithoutprejudicehowever
to right of insurer to collect A:Yes,wheninsuredandinsurerhaveagreedto
correspondingpremium.(Sec.77) the payment of premium by installments and
partial payment has been made at the time of
3. When there is an agreement allowing loss, then the insurer becomes liable. When the
the insured to pay the premium in car loss happened on the 5th month, the six
installments and partial payment has months agreed period of payment had not yet
been made at the time of loss (Makati elapsed. The owner may recover from Peninsula
Tuscany CondominiumCorp.v.CA,G.R. InsuranceCompany,butthelatterhastherightto
No.95546,Nov.6,1992). deduct the amount of unpaid premium from the
insuranceproceeds.(2006BarQuestion)
4. When there is an agreement to grant
the insured credit extension for the C.NONDEFAULTOPTIONSINLIFEINSURANCE
payment of the premium. (Art. 1306,
NCC), and loss occurs before the Q: What are the devices used to prevent the
expiration of the credit term. (UCPB forfeiture of a life insurance after the payment
General Insurance v. Masagana ofthefirstpremium?
Telemart, G.R. No. 137172, Apr. 4,
2001). A:
1. GraceperiodAfterthepaymentofthe
5. When estoppel bars the insurer to firstpremium,theinsuredisentitledto
invokenonrecoveryonthepolicy. a grace period of 30 days within which
72
MERCANTILELAWTEAM:
INSURANCE CODE
to pay the succeeding premiums. (Sec. D.REINSTATEMENTOFALAPSEDPOLICY

227,(a)).
Q. What is purpose of the Reinstatement
2. CashsurrendervalueTheamountthe Provision?
insurer agrees to pay to the holder of
the policy if he surrenders it and A. The purpose of the provision is to clarify the
releases his claim upon it. (Cyclopedia requirementsforrestoringapolicytopremium
rd
LawDictionary,3 ed.,1077) paying status after it has been permitted to
lapsed.
3. Extended insurance It is where the
insured is given a right, upon default, Q. Within what period shall the holder of the
after payment of at least three full policy be entitled to reinstatement of the
annual premiums (see Sec. 227 [f]) to contract?
havethepolicycontinuedinforcefrom
the date of default for a time either A. The law requires that the policy owner be
stated or equal to the amount as the permitted to reinstate the policy, subject to the
netvalueofthepolicytakenasasingle violations specified, any time within three (3)
premium, will purchase. (De Leon, The years from the date of default of premium
Insurance Code of the Philippines payment.Alongerperiod,beingmorefavorable
Annotated,2006) totheinsured,maybeused.

4. PaidupInsuranceTheinsuredisgiven Q. Is reinstatement of a lapsed policy an
aright,upondefault,afterthepayment absoluterightoftheinsured?
of at least three annual premiums to
havethepolicycontinuedinforcefrom A.Reinstatementisnotanabsoluterightofthe
thedateofdefaultforthewholeperiod insured, but discretionary on the part of the
of the insurance without further insurer, which has the right to deny
payment of premiums.(ibid.) It results reinstatement if it were not satisfied as to the
toareductionoftheoriginalamountof insurability of the insured, and if the latter did
insurance, but for the same period not pay all overdue premiums and other
originally stipulated.(6 Couch 2d., 355; indebtedness to the insurer. (McGuire vs.
37C.J.S.364) ManufacturersLifeIns.Co.,87Phil.370).

5. AutomaticLoanClauseAstipulationin Q.WhatdoesEvidenceofInsurabilityincludes?
thepolicyprovidingthatupondefaultin
paymentofpremium,thesameshallbe A.EvidenceofInsurabilityisbroaderphrasethan
paid from the loan value of the policy Evidence of Good Health and includes such
until that value is consumed. In such a otherfactorsastheinsuredsoccupation,habits,
case,thepolicyiscontinuedinforceas financial condition, and other risk selection
fully and effectively as though the factors.
premiumshadbeenpaidbytheinsured
from funds derived from other Q. A life insurance policy lapsed. The insured
sources.(6Couch2d.,383) appliedforreinstatementofthepolicyandpaid
only a part of the overdue premiums.
6. Reinstatement Provision that the Subsequently,theinsureddied.Wastheinsurer
holderofthepolicyshallbeentitledto liable?
reinstatement of the contract at
anytimewithin3yearsfromthedateof A.Theinsureriswasnotliableasthepolicywas
default in the payment of premium, notreinstated.Thefailuretopaythebalanceof
unless the cash surrender value has theoverduepremiumspreventedreinstatement
been paid, or the extension period and recovery of the face value of the policy.
expired,uponproductionofevidenceof (Andresvs.CrownLifeIns.Co.,55O.G.3483).
insurabilitysatisfactorytothecompany
and the payment of all overdue
premiumsandanyindebtednesstothe
company upon said policy. (Sec. 227,
(j)).

73

E.REFUNDOFPREMIUMS ii. In case of overinsurance by
several insurers, the insured is
Q: When is the insured entitled to recover entitled to a ratable return of
premiumsalreadypaidoraportionthereof? the premium, proportioned to
the amount by which the
A: aggregate sum insured in all
1. Whole: the policies exceeds the
a. When no part of the thing insured insurable value of the thing
has been exposed to any of the insured(Sec.82).
perilsinsuredagainst(Sec.79)
b. When the contract is voidable E.g.Wherethereisatotalover
because of the fraud or insuranceofP500,000.00inan
misrepresentations of the insurer aggregateP2,000,000.00policy
ofhisagent(Sec.81). (P1,500,000.00 is only the
c. When the insurance is voidable insurable value), 25%
becauseoftheexistenceoffactsof (proportion of P500k to P2M)
which the insured was ignorant of the premiums paid to the
withouthisfault(Sec.81). several insurers should be
d. When the insurer never incurred returned.
any liability under the policy
because of the default of the Q: When insured not entitled to return of
insured other than actual fraud premiumspaid?
(Sec.81).
e. When rescission is granted due to A:
insurers breach of contract (Sec. 1. The risk has already attached and the
74). riskisentireandindivisible;
2. Inlifepolicies;
2. Prorata: 3. If contract is void ab initio because of
a. When the insurance is for a fraudbytheinsured;
definite period and the insured 4. If contract is illegal and the parties are
surrenders his policy before the inparidelicto.
termination thereof; (Sec. 79 [b]);
except: VII.RESCISSIONOFINSURANCECONTRACTS
i. Policy not made for a definite
periodoftime; Q.Whataretheinstanceswhereinacontractof
ii. Short period rate is agreed insurancemayberescinded?
upon;
iii. Lifeinsurancepolicy. A.
1.Concealment
b. When there is overinsurance. The 2.Misrepresentation/omission
premiums to be returned shall be 3.Breachofwarranties
proportioned to the amount by
which the aggregate sum insured A.CONCEALMENT
in all the policies exceeds the
insurablevalueofthethingatrisk. Q:Whatisconcealment?
(Sec.82)
i. In case of overinsurance by A:Concealmentisaneglecttocommunicatethat
doubleinsurance,theinsureris whichapartyknowsandoughttocommunicate.
not liable for the total amount (Sec.26)
of the insurance taken, his
liability being limited to the Q:Whataretherequisitesinconcealment?
property insured. Hence, the
insurer is not entitled to that A:
portion of the premium 1. Apartyknowsafactwhichheneglects
corresponding to the excess of tocommunicateordisclosetotheother
the insurance over the party
insurable interest of the 2. Such party concealing is duty bound to
insured. disclosesuchfacttotheother
74
MERCANTILELAWTEAM:
INSURANCE CODE
3. Such party concealing makes no Q: What are the matters that need not be
warrantyastothefactconcealed disclosed?
4. The other party has no means of
ascertainingthefactconcealed A:
5. Thefactmustbematerial GR: The parties are not bound to
communicate information of the following
Q:Whatisthetestofmateriality? matters:
1. Thosewhichtheotherknows
A:Itisdeterminednotbytheevent,butsolelyby 2. Thosewhich,intheexerciseofordinary
the probable and reasonable influence of the care, the other ought to know and of
factsuponthepartytowhomthecommunication which, the former has no reason to
isdue,informinghisestimateoftheadvantages supposehimignorant
of the proposed contract, or in making his 3. Those of which the other waives
inquiries.(Sec.31) communication
Q: What is the presumption when the insured 4. Thosewhichproveortendtoprovethe
failed to convey the nature of the facts to the existence of a risk excluded by a
insurer? warranty, and which are not otherwise
material
A: 5. Those which relate to a risk excepted
GR:Thefailureoftheinsuredtocommunicate from the policy and which are not
isintentionalratherthaninadvertent. otherwisematerial;
6. Thenatureoramountoftheinterestof
XPN: In the absence of evidence of the one insured (except if he is not the
uninsurability of a person afflicted with ownerofthepropertyinsured,Sec.34).
chronic cough, concealment thereof is no
groundforannulmentofthepolicy. XPN:Inanswertoinquiriesoftheother.(Sec.
30)
Note: As long as the facts concealed are material.
Sec. 27 states concealment, whether intentional or Note: Neither party is bound to communicate,
not. even upon inquiry, information of his own
judgment, because such would add nothing to
Q:Howdoesitdifferfrommaterialityinmarine theappraisaloftheapplication.
insurance?
The parties are bound to know all the general
A: Rules on concealment are stricter since the causes which are open to his inquiry, equally
insurerwouldhavetodependalmostentirelyon withtheother,andallgeneralusagesoftrade.
the matters communicated bythe insured. Thus,
in addition to material facts, each party must Q:Whatarethemattersthatmustbedisclosed
disclose all the information he possesses which evenintheabsenceofinquiry?
are material to the information of the belief or
expectation of a third person, in reference to a A:
material fact. But a concealment in a marine 1. Thosematerialtothecontract
insurance in any of the following matters 2. Thosewhichtheotherhasnomeansof
enumerated under Section 110, Insurance Code ascertaining
does not vitiate the entire contract, but merely 3. Those as to which the party with the
exoneratestheinsurerfromalossresultingfrom duty to communicate makes no
theriskconcealed. warranty

Q:Whatisthetestinascertainingtheexistence Note: Matters relating to the health of the insured
ofconcealment? are material and relevant to the approval of the
issuance of the life insurance policy as these
A: If the applicant is aware of the existence of definitely affect the insurers action to the
some circumstances which he knows would application. It is wellsettled that the insured need
notdieofthediseasehehadfailedtodisclosetothe
influence the insurer in acting upon his
insurer, as it is sufficient that his nondisclosure
application, good faith requires him to disclose
misled the insurer in forming his estimates of the
thatcircumstance,thoughunasked.
risks of the proposed insurance policy or in making
inquiries (Sunlife Assurance Company of Canada v.
CA,G.R.No.105135,June22,1995).
75

Informationastothenatureofinterestneednotbe Reason: Information is no longer material as it will
disclosedexceptInpropertyinsurance,iftheinsured no longer influence the other party to enter into
isnottheowner.Ifsomebodyisinsuringproperties suchcontract.
ofwhichheisnottheowner,hemustdisclosewhy
he has insurable interest that would entitle him to Q: Joanna applied for a nonmedical life
ensureit. insurance.TheJoannadidnotinformtheinsurer
that one week prior to her application for
Q:Maytherighttoinformationofmaterialfacts insurance,hewasexaminedandconfinedatSt.
bewaived? Lukes Hospital where she was diagnosed for
lungcancer.Theinsuredsoonthereafterdiedin
A:Yes. a plane crash. Is the insurer liable considering
1. Bythetermsofthecontract thatthefactconcealedhadnobearingwiththe
2. By the failure to make an inquiry as to causeofdeathoftheinsured?Why?
such facts, where they are distinctly
implied in other facts from which A: No. The concealed fact is material to the
informationiscommunicated.(Sec.33) approvalandissuanceoftheinsurancepolicy.Itis
Q:Whataretheeffectsofconcealment? well settled that the insured need not die of the
disease she failed to disclose to the insurer. It is
A: sufficient that his nondisclosure misled the
1. If there is concealment under Section insurerinforminghisestimateoftherisksofthe
27, the remedy of the insurer is proposedinsurancepolicyorinmakinginquiries.
rescission since concealment vitiates (2001BarQuestion)
thecontractofinsurance.
2. The party claiming the existence of Q:Whataretheinstanceswherebyconcealment
concealmentmustprovethattherewas madebyanagentprocuringtheinsurancebinds
knowledgeofthefactconcealedonthe theprincipal?
part of the party charged with
concealment. A.
3. Good faith is not a defense in 1. Where it was the duty of the agent to
concealment. Concealment, whether acquire and communicate information
intentionalorunintentionalentitlesthe ofthefactsinquestion;
injured party to rescind the contract of 2. Where it was possible for the agent, in
insurance.(Sec.27) the exercise of reasonable diligence to
4. The matter concealed need not be the havemadeoftheinsurancecontract.
causeofloss.
5. To be guilty of concealment, a party Note: Failure on the part of the insured to
must have knowledge of the fact disclose such facts known to his agent, or
concealed at the time of the effectivity whollyduetothefaultoftheagent,willavoid
ofthepolicy. the policy, despite the good faith of the
insured.
Q:Whenshouldconcealmenttakeplaceinorder
thatthepolicymaybeavoided? B.MISREPRESENTATION/OMMISON

A: At the time the contract is entered into and Q:Whatisrepresentation?
not afterwards. The duty of disclosure ends with
thecompletionofthecontract.Waiverofmedical A: An oral or written statement of a fact or
examination in a nonmedical insurance contract condition affecting the risk made by the insured
renders even more material the information totheinsurancecompany,tendingtoinducethe
required of the applicant concerning previous insurertoassumetherisk.
condition of health and diseases suffered, for
such information necessarily constitutes an Q:Whatarethekindsofrepresentation?
important factor which the insurer takes into
consideration in deciding whether to issue the A:
policyornot.Failuretocommunicateinformation 1. Oralorwritten;(Sec.36)
acquiredaftertheeffectivityofthepolicywillnot 2. Affirmative;(Sec.39)or
beagroundtorescindthecontract. 3. Promissory.(Sec.42)

76
MERCANTILELAWTEAM:
INSURANCE CODE
Q:Whatisanaffirmativerepresentation? appears that it was merely a statement of belief or

anexpectationthatissusceptibletopresent,actual
A: Any allegation as to the existence or non knowledge.Thestatementofanerroneousopinion,
existenceofafactwhenthecontractbegins.(e.g. belief or information, or of an unfulfilled intention,
thestatementoftheinsuredthatthehousetobe will not avoid the contract of insurance, unless
insuredisusedonlyforresidentialpurposesisan fraudulent.
affirmativerepresentation).
Q:Whatisthetestofmateriality?
Q:Whatisapromissoryrepresentation?
A: It is to be determined not by the event, but
A: Any promise to be fulfilled after the contract solely by the probable and reasonable influence
has come into existence or any statement of the facts upon the party to whom the
concerning what is to happen during the representation is made, in forming his estimates
existenceoftheinsurance. ofthedisadvantagesoftheproposedcontractor
inmakinghisinquiries(similarwithconcealment).
Q:Whenshouldrepresentationbemade? (Sec.46)

A: At the time of, or before, issuance of the Q:Whataretheeffectsofmisrepresentation?
policy.(Sec.37)
A:
Q:Whatismisrepresentation? 1. It renders the insurance contract
voidable at the option of the insurer,
A: It is an affirmative defense. To avoid liability, although the policy is not thereby
the insurer has the duty to establish such a rendered void ab initio. The injured
defense by satisfactory and convincing evidence. party entitled to rescind from the time
(Ng Gan Zee v. Asian Crusader Life Assn. Corp., when the representation becomes
G.R.No.L30685,May30,1983) false;
2. When the insurer accepted the
Note: In the absence of evidence that the insured payment of premium with the
has sufficient medical knowledge to enable him to knowledgeofthegroundforrescission,
do distinguish between peptic ulcer and tumor, thereiswaiverofsuchright;
the statement of deceased that said tumor was 3. There is no waiver of the right of
associated with ulcer of the stomach should be rescission if the insurer had no
considered an expression in good faith. Fraudulent knowledge of the ground therefore at
intent of insured must be established to entitle the time of acceptance of premium
insurer to rescind the insurance contract. payment.
Misrepresentation, as a defense of insurer, is an
affirmativedefensewhichmustbeproved.(NgGan Q: What is the effect of collusion between the
Zee v. Asian Crusader Life Assn. Corp., G.R. No. L insurersagentandtheinsured?
30685,May30,1983)
A: It vitiates the policy even though the agent is
Q: What are the requisites of a false actingwithintheapparentscopeofhisauthority.
representation(misrepresentation)? The agent ceases to represent his principal. He,
thus, represents himself; so the insurer is not
A: estoppedfromavoidingthepolicy.
1. The insured stated a fact which is
untrue; Q: What are the characteristics of
2. Such fact was stated with knowledge representation?
that it is untrue and with intent to
deceiveorwhichhestatespositivelyas A:
true without knowing it to be true and 1. Notapartofthecontractbutmerelya
whichhasatendencytomislead; collateralinducementtoit
3. Such fact in either case is material to 2. Oralorwritten
therisk. 3. Made at the time of, or before issuing
thepolicyandnotafter
Note: A representation cannot qualify an express 4. Altered or withdrawn before the
provision in a contract of insurance but it may
insuranceiseffectedbutnotafterwards
qualify an implied warranty. A representation as to
5. Mustbepresumedtorefertothedate
the future is to be deemed a promise unless it
thecontractgoesintoeffect.(Sec.42)

77

Q:Whatarethesimilaritiesofconcealmentand 6. Proofofdeathwasnotgiven.(Sec.242)
representation? 7. That the conditions of the policy
relating to military or naval service.
A: (Secs.227[b],228[b])
1. Refer to the same subject matter and 8. That the action was not bought within
both take place before the contract is thetimespecified.(Sec.62)
entered.
2. Concealmentorrepresentationpriorto Q: What is the remedy of the injured party in
loss or death gives rise to the same caseofmisrepresentation?
remedy; that is rescission or
cancellation. A:Ifthereismisrepresentation,theinjuredparty
3. The test of materiality is the same. is entitled to rescind from the time when the
(Secs.31,46) representationbecomesfalse.
4. The rules of concealment and
representation are the same with life Q:Whenshouldtherighttorescindthecontract
andnonlifeinsurance. beexercised?
5. Whetherintentionalornot,theinjured
partyisentitledtorescindacontractof A:Therighttorescindmustbeexercisedprevious
insuranceongroundofconcealmentor to the commencement of an action on the
falserepresentation. contract.(theactionreferredtoisthattocollecta
6. Sincethecontractofinsuranceissaidto claimonthecontract)
beoneofutmostgoodfaithonthepart
of both parties to the agreement, the Q.WhatisOmission?
rules on concealment and
representation apply likewise to the A. The failure to communicate information of
insurer. mattersprovingortendingtoprovethefalsityof
warranty.
Q: How does concealment differ from
misrepresentation?
Q.WhatistheeffectofOmission?
A: In concealment, the insured withholds the
information of material facts from the insurer, A.Thecontractofinsurancemayberescinded.
whereasinmisrepresentation,theinsuredmakes
erroneous statements of facts with the intent of Q.IncaseofOmission,whoisentitledtorescind
inducing the insurer to enter into the insurance thecontract?
contract.
A.Theinsurerisentitledtorescindthecontract.
Q: How is concealment and misrepresentation
appliedincaseoflossordeath? C.BREACHOFWARRANTIES

A: Q:Whatarewarranties?
GR: If the concealment or misrepresentation
isdiscoveredbeforelossordeath,theinsurer A: Statements or promises by the insured set
cancancelthepolicy.Ifthediscoveryisafter forth in the policy itself or incorporated in it by
lossordeath,theinsurercanrefusetopay. proper reference, the untruth or nonfulfillment
ofwhichinanyrespect,andwithoutreferenceto
XPN: The incontestability clause under whether the insurer was in fact prejudiced by
paragraph2ofSection48. such untruth or nonfulfillment render the policy
voidablebytheinsurer.
XPNtoXPN:
1. Nonpayment of premiums. (Secs. 77, Q:Whatisthepurposeofwarranties?
22[b],228[b],203[b])
2. Violation of condition. (Secs. 227 [b], A: To eliminate potentially increasing moral or
228[b]) physical hazards which may either be due to the
3. Noinsurableinterest acts of the insured or to the change of the
4. Cause of death was excepted or not conditionoftheproperty.
covered
5. Fraudofavicioustype
78
MERCANTILELAWTEAM:
INSURANCE CODE
Q:Whatisthebasisofwarranties? materialityinorderto
defeatanactiononthe
A: The insurer took into consideration the policy.
conditionofthepropertyatthetimeofeffectivity
ofthepolicy. Q:Whataretheeffectsofbreachofwarranty?

Q:Whatarethekindsofwarranties? A:
1. Material
A:
1. Express an agreement contained in GR:Violationofmaterialwarrantyorof
the policy or clearly incorporated materialprovisionofapolicywillentitle
therein as part thereof whereby the theotherpartytorescindthecontract.
insured stipulates that certain facts
relating to the risk are or shall be true, XPN:
or certain acts relating to the same a. Loss occurs before the time of
subjecthavebeenorshallbedone. performanceofthewarranty;
b. The performance becomes
2. Implied It is deemed included in the unlawful at the place of the
contract although not expressly contract;and
mentioned. c. Performance becomes
impossible.
Peculiar only to marine insurance, and
therefore is deemed included in the 2. Immaterial
contract, although not expressly
mentioned: GR:Itwillnotavoidthepolicy.

a. Thattheshipwillnotdeviatefrom XPN: When the policy expressly
theagreedvoyageunlessdeviation provides or declares that a violation
isproper thereofwillavoidit.
b. That the ship will not engage in
illegalventure For instance, an Other Insurance
c. Warranty of neutrality, that the Clause which is a condition in the
ship will carry the requisite policy requiring the insured to inform
documents of nationality or the insurer of any other insurance
neutrality where such nationality coverageoftheproperty.Aviolationof
orneutralityiswarranted the clause by the insured will not
d. Presenceofinsurableinterest constitute a breach unless there is an
e. That the ship is seaworthy at the additional provision stating that the
timeofthecommencementofthe violation thereof will avoid the policy.
insurancecontract. (Sec.75)

Q: What are the distinctions between warranty Q: What is the effect of a breach of warranty
andrepresentation? withoutfraud?

A: A: The policy is avoided only from the time of
WARRANTY REPRESENTATION breach(Sec.76)andtheinsuredisentitled:
Consideredpartsof Collateralinducementto
thecontract. thecontract. 1. To the return of the premium paid at a
Alwayswrittenon pro rata from the time of breach if it
Maybewritteninatotally
thefaceofthe occurs after the inception of the
disconnectedpaperormay
policy,actuallyorby contract;or
beoral.
reference. 2. To all premiums if it is broken during
Mustbestrictly Onlysubstantialproofis theinceptionofthecontract.
compliedwith. required.
Itsfalsityornon
Itsfalsityrendersthepolicy
fulfillmentoperates
voidonthegroundof
asabreachof
fraud.
contract.
Presumedmaterial. Insurermustshowits

79

VIII.CLAIMSSETTLEMENTANDSUBROGATION A:Whentheinsurer:MaJoRDeW

A.NOTICEANDPROOFOFLOSS 1. Writestotheinsuredthatheconsiders
the policy null and void as the
Q:Whatislossininsurance? furnishing of notice or proof of loss
wouldbeuseless;
A:Theinjury,damageorliabilitysustainedbythe 2. Recognizeshisliabilitytopaytheclaim;
insured in consequence of the happening of one 3. Deniesallliabilityunderthepolicy
ormoreoftheperilsagainstwhichtheinsurer,in 4. Joinsintheproceedingsfordetermining
considerationofthepremium,hasundertakento the amount of the loss by arbitration,
indemnifytheinsured.Itmaybetotal,partial,or making no objections on account of
constructiveinMarineInsurance. noticeandpreliminaryproof;or
5. Makes Objection on any ground other
Q:Whatisnoticeofloss? than the formal defect in the
preliminaryproof.
A: It is the more or less formal notice given the
insurerbytheinsuredorclaimantunderapolicy Q:Whenisdelayinthepresentationofnoticeor
oftheoccurrenceofthelossinsuredagainst. proofoflossdeemedwaived?

Q: What are the conditions before the insured A:Ifcausedby:
mayrecoveronthepolicyaftertheloss? 1. Anyactoftheinsurer;and
2. By failure to take objection promptly
A: andspecifically uponthatground.(Sec.
1. Theinsuredorsomepersonentitledto 91)
the benefit of the insurance, without
unnecessary delay, must give notice to Q:Whatisproofofloss?
theinsurer;(Sec.88)
2. When required by the policy, insured A:Itisthemoreorlessformalevidencegiventhe
must present a preliminary proof loss company by the insured or claimant under a
whichisthebestevidencehehasinhis policy of the occurrence of the loss, the
poweratthetime.(Sec.89) particulars thereof and the data necessary to
enablethecompanytodetermineitsliabilityand
Q:Whatarethepurposesofnoticeofloss? theamountthereof.

A: Q:Whatisthetimeforpaymentofclaims?
1. Togiveinsurerinformationbywhichhe
may determine the extent of his LIFEPOLICIES NONLIFEPOLICIES
liability; 1Maturing upon the
2. To afford the insurer a means of expiration of the term
detectinganyfraudthatmayhavebeen the proceeds are
practiceduponhim;and immediately payable to The proceeds shall be
the insured, except if paidwithin30daysafter
3. Tooperateasacheckuponextravagant
proceeds are payable in thereceiptbytheinsurer
claims.
installments or annuities of proof of loss and
ascertainmentoftheloss
whichshallbepaidasthey
Q:Whatistheeffectoffailuretogivenoticeof becomedue ordamagebyagreement
loss? of the parties or by
2. Maturing at the death arbitration but not later
A: of the insured, occurring than 90 days from such
FIREINSURANCE OTHERTYPESOFINSURANCE prior to the expiration of receipt of proof of loss,
Failuretogivenoticewillnot the term stipulated the whether or not
Failuretogive
exoneratetheinsurer,unless proceeds are payable to ascertainment is had or
noticedefeatsthe
thereisastipulationinthe thebeneficiarieswithin60 made.(Sec.243)
rightoftheinsured
policyrequiringtheinsured days after presentation of
torecover.
todoso. claimandfilingofproofof
death(Sec.242)
Q: What are the instances when the defects in
the notice or proof of loss are considered
waived?

80
MERCANTILELAWTEAM:
INSURANCE CODE
B.GUIDELINESONCLAIMSSETTLEMENT 5. Compelling policyholders to institute

suits to recover amounts due under its
Q.WhatisClaimSettlement? policies by offering without justifiable
reason substantially less than the
A.Claimsettlementistheindemnificationof the amounts ultimately recovered in suits
sufferedbytheinsured.Theclaimantmaybethe broughtbythem.(Sec.241,Par.1)
insured or reinsured, the insurer who is entitled
to subrogation, or a third party who has a claim Q. What is the sanction for the insurance
againsttheinsured. companies which engaged to unfair settlement
practices?
Q.WhataretherulesinClaimSettlement?
A. Sec. 241 enumerates the grounds which shall
A. be considered as sufficient as sufficient cause of
1. No insurance company doing business the suspension or revocation of an insurance
in the Philippines shall refuse, without companyscertificateofauthority.
justifiablecause,topayorsettleclaims
arising under coverages provided by its Q. What is the obligation of the insurer with
policies, nor shall any such company regard to the insureds decision to compromise
engage in unfair claim settlement thirdpartyclaim?
practices.
A. Where a policy gives the insurer a control of
2. Evidence as to numbers and types of the decision to settle claim or to litigate it, the
valid and justifiable complaints to the insurer nevertheless is required to observe a
Commissioner against an insurance certainmeasureofconsiderationfortheinterest
company, and the Commissioners oftheinsured.Therulehascometobegenerally
complaint experience with other accepted that while the express terms of the
insurance companies writing similar policy do not impose of the insurer the duty to
linesofinsuranceshallbeadmissiblein claim settle the claim at all costs, there is an
evidenceinanadministrativeorjudicial implieddutyonhisparttogivedueconsideration
proceeding brought under this section totheinterestoftheinsuredinitsexerciseofthe
(Sec.241) option to reject a compromise settlement and
proceed with litigation. In insurance contracts,
Q.Whatisthepurposeoftherule? the law requires strict observance of the
standards of good faith and fair dealing on the
A.Toeliminateunfairclaimsettlementpractices. partoftheinsurer.

Q.Whataretheactswhichconstituteunfair Q:Whatistheeffectofrefusalorfailuretopay
claimsettlementpractices? theclaimwithinthetimeprescribed?

A. A:Secs.242,243and244providethattheinsurer
1. Knowinglymisrepresentingtoclaimants shall be liable to pay interest twice the ceiling
pertinent facts or policy provisions prescribed by the Monetary Board which means
relatingtocoveragesatissue. twice 12% per annum (legal rate of interest
prescribed in CB No. 416) or 24% per annum
2. Failingtoacknowledgewithreasonable interest on the proceeds of the insurance from
promptness pertinent communications the date following the time prescribed in Secs.
with respect to claims arising under its 242 or 243 until the claim is fully satisfied
policies. (Prudential Guarantee and Assurance, Inc. v.
TransAsia Shipping Lines, Inc. G. R. No. 151890,
3. Failing to adopt and implement June20,2006)
reasonable standards for the prompt
investigation of claims arising under its Note: Refusal or failure to pay the loss or damage
policies. will entitle the assured to collect interest UNLESS
suchrefusalorfailuretopayisbasedontheground
4. Not attempting in good faith to thattheclaimisfraudulent.
effectuate prompt, fair and equitable
settlementofcalimssubmittedinwhich
liabilityhasbecomereasonablyclear;or

81

Q:Whataretherulesontheprescriptiveperiod? Q. From what time shall the period of
prescription be computed in case the insured
A: askedforreconsiderationofthedenialofclaim?
1. The parties to a contract of insurance
mayvalidlyagreethatanactiononthe A.Incasetheclaimwasdeniedbytheinsurerbut
policy should be brought within a theinsuredfileapetitionforreconsideration,the
limited period of time, provided such prescriptive period should be counted from the
period is not less than 1 year from the date the claim was denied at the first instance
timethecauseofactionaccrues.Ifthe and not from the denial of the reconsideration.
period agreed upon is less than 1 year To rule otherwise would give the insured a
from the time the cause of action scheme or devise to waste time until any
accrues, such agreement is void. (Sec. evidencewhichmaybeconsideredagainsthimis
63) destroyed. (Sun life Office, Ltd. vs. CA, 195 SCRA
193;Asked,V[a},1996BarExams.).
a. The stipulated prescriptive period
shallbegintorunfromthedateof Q.Whatistheprescriptiveperiodofprescription
theinsurersrejectionoftheclaim inmotorvehicleinsurance?
filed by the insured or beneficiary
andnotfromthetimeofloss. A.Itisoneyearfromdenialoftheclaimandnot
b. Incasetheclaimwasdeniedbythe fromthedateoftheaccident.
insurer but the insured filed a
petition for reconsideration, the Q.WhatisthePrincipleofSubrogation?
prescriptive period should be
counted from the date the claim A.Iftheplaintiffspropertyhasbeeninsured,and
was denied at the first instance he has received indemnity from the insurance
and not from the denial of the company for the injury or loss arising out of
reconsideration (Sun Life Office, wrong or breach of contract complained of, the
Ltd.vs.CA,GR.No.89741,Mar13, insurance company shall be subrogated to the
1991) rightsoftheinsuredagainstthewrongdoerorthe
personwhohasviolatedthecontract.(Art.2207,
2. If there is no stipulation or the NCC)
stipulation is void, the insured may
bringtheactionwithin10yearsincase Q:Shouldtherebeacontractbeforetheinsurer
thecontractiswritten. besubrogated?

3. In a comprehensive motor vehicle A: The principle of subrogation inures to the
liability insurance (CMVLI), the written insurer without any formal assignment or any
notice of claim must be filed within 6 express stipulation to that effect in the policy.
months from the date of the accident; Saidrightisnotdependentuponnordoesitgrow
otherwise, the claim is deemed waived out of any private contract. Payment to the
even if the same is brought within 1 insured makes the insurer a subrogee in equity.
yearfromitsrejection.(Vda.DeGabriel (Malayan Insurance Co., Inc. v. CA, G.R. No. L
vs.CA,GRNo.103883,Nov14,1996) 36413,Sept.26,1988)

4. The suit for damages, either with the Note: Incapacity of the insured will not affect the
proper court or with the Insurance capacity of the subrogee because capacity is
Commissioner, should be filed within 1 personaltotheholder(LorenzoShippingv.Chuband
yearfromthedateofthedenialofthe Sons,Inc.,G.R.No.147724,June8,2004).
claim by the insurer, otherwise,
claimants right of action shall Q:Whataretherulesonindemnity?
prescribe.(Sec.384)
A:
Q: What is the prescriptive period in 1. Applies only to property insurance
commencinganaction? except when the creditor insures the
lifeofhisdebtor
A: Within one year from time cause of action
accrues. 2. Insurance contracts are not wagering
contractsorgamblingcontracts.

82
MERCANTILELAWTEAM:
INSURANCE CODE
Note:Wageringcontractsarethosewhere 4. Where the insurer pays the insured for

the parties contemplate gain through alossorrisknotcoveredbythepolicy
merechance.
5. Lifeinsurance
Q:Whatarethepurposesofsubrogation?
6. For recovery of loss in excess of
A: insurancecoverage.
1. To make the person who caused the
losslegallyresponsibleforit

2. To prevent the insured from receiving
double recovery from the wrongdoer
andtheinsurer

3. To prevent the tortfeasors from being
free from liability and is thus founded
onconsiderationofpublicpolicy
Q:Whataretherulesonsubrogation?
A:
1. Applicable only to property insurance
the value of human life is regarded as
unlimited and therefore, no recovery
from a third party can be deemed
adequate to compensate the insureds
beneficiary.

2. Therightofinsureragainstathirdparty
is limited to the amount recoverable
fromlatterbytheinsured.
Q: What if the amount paid by the insurance

companydoesnotfullycovertheinjuryorloss?

A:Theaggrievedpartyshallbeentitledtorecover
thedeficiencyfromthepersoncausingthelossor
injury.(Art.2207,NCC)
Q: What are the instances where the right of

subrogationdoesnotapply?

A:
1. Where the insured by his own act
releases the wrongdoer or third party
liableforlossordamagefromliability

2. The insurer loses his rights against the
wrongdoersincetheinsurercanonlybe
subrogated to only such rights as the
insuredmayhave

3. Wheretheinsurerpaystheinsuredthe
value of the loss without notifying the
carrierwhohasingoodfaithsettledthe
insuredclaimforloss

83

TRANSPORTATIONLAW B.LIABILITIESOFCOMMONCARRIER

I.COMMONCARRIERS Q: When does liability of the common carrier
commence in connection to the transfer of
Q:Whatarecommoncarriers? goods?

A:PeBuLaCoPu A:Itbeginswiththeactualdeliveryofthegoods
1. Must be a Person, corporation, firm or for transportation, and not merely with the
association formalexecutionofareceiptorbilloflading;the
2. Must be engaged in the Business of issuance of a bill of lading is not necessary to
carrying or transporting passengers or complete delivery and acceptance. (Compania
goodsorboth Maritimav.InsuranceCo.ofNorthAmerica,G.R.
3. Thecarriageortransportmusteitherbe No.L18965,Oct.30,1964)
byLand,waterorair
4. TheserviceisforCompensation Q:Whendoesthedutytoexerciseextraordinary
5. TheserviceisofferedtothePublic. diligence commence and cease with respect to
transportofpassengers?
A.DILIGENCEREQUIRED
A: The duty of the common carrier commence
Q:Whatisthediligencerequired? fromthemomentthepersonwhopurchasesthe
ticket from the carrier presents himself at the
A:Extraordinarydiligence. proper place and in a proper manner to be
transported.
Q:Whatismeantbyextraordinarydiligence?
The relation of carrier and passenger continues
A:Itisthatextrememeasureofcareandcaution untilthepassengerhasbeenlandedattheportof
which persons of unusual prudence and destination and has left the vessel owner's dock
circumspection use for securing and preserving or premises. Once created, the relationship will
their own property or rights. The law requires not ordinarily terminate until the passenger has,
common carriers to render service with the after reaching his destination, safely alighted
greatestskillandutmostforesight. fromthecarrier'sconveyanceorhadareasonable
opportunity to leave the carrier's premises.
Q: What are the requirements of extraordinary (AboitizShippingCorp.v.CA,G.R.No.84458,Nov.
diligenceincarriagebysea? 6,1989)

A: Q:Whataretheliabilitiesofacommoncarrierin
1. Warranty of shipworthiness (TransAsia caseofbreachofcontractofcarriage?
Shipping vs. CA, GR No. 118126, March
4,1996) A:
1. Culpa contractual negligence based
2. No Overloading. (Negros Navigation vs. on contract; filed against the common
CA,GRNo.110398,November7,1997) carrierwhereinheisapassenger.

Q: What are the requirements of extraordinary 2. Culpa aquiliana negligence based on
diligenceincarriagebyland? tort; filed against the drivers of both
vehiclesandtheownersthereof.
A:
1. Goodconditionofthevehicle 3. Culpa criminal negligence based on a
2. Compliancewithtrafficrules crime;filedagainstthedriveratfaultif
hisactamountstoacrime.
Q: What is the reason for requiring common
carrierstoobserveextraordinarydiligence? Q: What are the defenses available in culpa
contractual?
A:Thenatureofthebusinessofcommoncarriers
and the exigencies of public policy demand that A:
theyobserveextraordinarydiligence. 1. Exerciseofextraordinaryduediligence
2. Due diligence in the selection and
supervisionofemployees
84
MERCANTILELAWTEAM:
TRANSPORTATION LAW
3. Fortuitousevent
4. Contributory negligence of passengers XPN:
itdoesnotbarrecoveryofdamages 1. Where the mishap results in the death
for death or injury if the proximate ofthepassenger
causeisthenegligenceofthecommon 2. Where it is proved that the common
carrier but the amount of damages carrier was guilty of fraud or bad faith,
shallbeequitablyreduced.(Art.1762) evenifdeathdoesnotresult.

Q: What are the kinds of damages that may be II.VIGILANCEOVERGOODS
recoveredincaseofdeathofapassenger(culpa
contractual)? A.EXEMPTINGCAUSES

A: Q: What is the presumption on the loss,
1. Anindemnityforthedeathofthevictim destruction,ordeteriorationofgoods?
2. An indemnity for loss of earning
capacityofthedeceased A:
3. Moraldamages GR:Thecommoncarrierispresumedtohave
4. Exemplarydamages been at fault or to have acted negligently
when the goods transported are lost,
Note: Carrier is not liable for exemplary destroyedordeteriorated.
damages where there is no proof that it
acted in a wanton, fraudulent, reckless, Note: The presumption of fault or negligence
oppressiveormalevolentmanner against the carrier is only a disputable
presumption. The law, in creating such a
5. Attorney's fees and expenses of presumption merely relieves the owner of the
litigation goods, for the time being, from introducing
6. Interest in proper cases. (Brias v. evidencetofastenthenegligenceontheformer,
People,G.R.No.L30309,Nov.25,1983) because thepresumption stands in the place of
evidence.
Q: What are the distinctions between an action
to enforce liability of the employer of the XPN: When the same is due to any of the
negligent driver under Art. 103 of the RPC, and followingcausesonly:
anactionbasedonquasidelict? 1. Caso Fortuito (Flood, storm,
earthquake, lightning or other natural
A: disaster or calamity). Provided, the
ART.103,RPC ART.2180,NCC followingconditionsarepresent:
(QUASIDELICT) a. Naturaldisasterwastheproximate
Employer is only Liability is primary and andonlycause;
subsidiarilyliable. direct. b. Carrier exercised diligence to
There must be a Action may proceed prevent or minimize loss before,
judgment of conviction independently from the duringandaftertheoccurrenceof
against the negligent criminalaction. thenaturaldisaster;and
driver otherwise the c. The common carrier has not
action against the negligently incurred delay in
employer would be transporting the goods. (Art. 1740,
premature. NCC)
The defense of due The defense of due
diligenceinselectionand diligence in selection 2. Actofthepublicenemyinwar,whether
supervisionofemployees and supervision of internationalorcivil,provided:
cannotbeinvoked. employees may be a. Act was the proximate and only
invoked. cause;
b. Carrier exercised diligence to
Q: What is the liability with regard to moral prevent or minimize loss before,
damages? duringandaftertheact;and
c. Nodelay.(Art.1740,NCC)
A:
GR: Moral damages are not recoverable for 3. Actoromissionoftheshipperorowner
breach of contract of carriage in view of Art. ofthegoods,provided:
221920oftheCivilCode.
85

a. If proximate and only cause causedbytheactualfaultorprivityofthecarrier
exempting; (Eastern Shipping Lines v. IAC, G.R. No. L69044,
b. If contributory negligence May29,1987).
mitigating
Note: In case that the goods have been already
4. Thecharacterofthegoodsordefectsin deposited in the warehouse of Bureau of Customs
the packing or in the containers. thenthegoodswas destroyedby fire, the carrier is
Provided, carrier exercised due not anymore liable (Sevando vs. Philippine Steam
diligencetoforestallorpreventloss(Art Navigation,G.R.No.L364812,October23,1982).
1742).
Q: Is the occurrence of a typhoon a fortuitous
Note: If the fact of improper packing is event?
known to the carrier or its servants, or
apparent upon ordinary observation, but A:
itacceptsthegoodsnotwithstandingsuch GR: Yes, if all the elements of a natural
condition, it is not relieved from disaster or calamity concur. This holds true
responsibility for loss or injury resulting especially if the vessel was seaworthy at the
therefrom.(SouthernLinesInc.,v.CA,G.R. timeitundertookthatfatefulvoyageandthat
No.L16629,Jan.31,1962) it was confirmed with the Coast Guard that
the weather condition would permit safe
5. Order or act of competent authority. travel of the vessel to its destination.
Provided,theauthorityiswithpowerto (Philippine American General Insurance Co.,
issue order (Art. 1743). If the officer Inc. v. MGG Marine Services, Inc., G.R. No.
actswithoutlegalprocess,thecommon 135645,Mar.8,2002)
carrier will be held liable (Ganzon vs.
CA,GRNo.L48757,May30,1988). XPN: If a vessel sank due to a typhoon, and
therewasfailuretoascertainthedirectionof
Note: In all cases other than those enumerated the storm and the weather condition of the
above, there is presumption of negligence even if path they would be traversing, it constitutes
there is an agreement limiting the liability of the lack of foresight and minimum vigilance over
commoncarrierinthevigilanceoverthegoods. its cargoes taking into account the
surrounding circumstances of the case. Thus,
Q:Aremechanicaldefectsconsideredfortuitous thecommoncarrierwillstillbeliable.(Arada
events?Giveillustrations. v.CA,G.R.No.98243,July1,1992)

A: No. Mechanical defects in the carrier are not Q: Is a common carrier liable for the acts of
considered acaso fortuitothat exempts the strangersorcriminals?
carrier from responsibility. (Sweet Lines, Inc. v.
CA,G.R.No.L46340,Apr.29,1983) A:Yes.Acommoncarrierisliableevenforactsof
strangerslikethievesorrobbers.
1. Tireblowoutofajeepisnotafortuitous
eventwherethereexistsaspecificactof XPN: where such thieves or robbers acted "with
negligence by the carrier consisting of graveorirresistiblethreat,violenceorforce."The
thefactthatthejeepneywasoverloaded common carrier is not liable for the value of the
andspeedingatthetimeoftheincident. undeliveredmerchandisewhichwaslostbecause
(Juntilla v. Fontanar, G.R. No. L45637, of an event that is beyond his control. (De
May31,1985) Guzmanv.CA,G.R.No.L47822,Dec.22,1988)

2. Defective brakes cannot be considered Q: Could a hijacking of a common carrier
fortuitous in character. (Vergara v. CA, guarded by 4 persons be considered force
G.R.No.77679,Sept.30,1987) majeure if only 1 of the 2 hijackers was armed
withbladedweapon?
Q:Isfireconsideredanaturaldisaster?
A: No. The hijacking in this case cannot be
A: No. This must be so as it arises almost considered force majeure. The hijackers did not
invariably from some act of man or by human act with grave or irresistible threat, violence or
means. It does not fall within the category of an force.(1995BarQuestion)
actofGodunlesscausedbylightningorbyother
natural disaster or calamity. It may even be
86
MERCANTILELAWTEAM:
TRANSPORTATION LAW
Q: What are the requisites of absence of natural disaster shall not free such
negligence? carrierfromresponsibility;(Art.1740)

A: 3. If the common carrier, without just
1. The cause of the breach of obligation cause, delays the transportation of the
must be independent of the will of the goods or changes the stipulated or
debtor usual route, the contract limiting the
2. The event must be unforeseen or common carriers liability cannot be
unavoidable availed of in case of the loss,
3. The event must be suchas to render it destruction, or deterioration of the
impossible for the debtor to fulfil his goods;(Art.1747)
obligationinanormalmanner 4. An agreement limiting the common
4. The debtor must be free from nay carriersliabilityfordelayonaccountof
participation in or aggravation of the strikesorriotsisvalid.(Art.1748)
injurytothecreditor.
Q: What are the defenses available to any
Q:Whatistheimportanceofabsenceofdelay? common carrier to limit or exempt it from
liability?
A: The absence of delay is important in case of
natural disaster because if a common carrier A:
incurs in delay in transporting the goods, such 1. Observance of extraordinary diligence;
disaster shall not free such carriers from or
responsibility.(Art.1740NCC)
2. Proximate cause of the incident
Q: What are the rules regarding the time of mentioned in Art. 1734. (2001 Bar
deliveryofgoodsanddelay? Question)

A: A. CONTRIBUTORYNEGLIGENCE
1. If there is an agreement as to time of
delivery delivery must be within the Q: What is the rule if there is contributory
timestipulatedinthecontractorbillof negligenceonthepartoftheshipper?
lading
GR:Iftheshipperorownermerelycontributedto
2. Ifthereisnoagreementdeliverymust the loss, destruction or deterioration of the
bewithinareasonabletime.(Saludo,Jr. goods, the proximate cause thereof being the
v.CA,G.R.No.95536,Mar.23,1992) negligenceofthecommoncarrier,thelattershall
be liable for damages, which however, shall be
Q:Ifthereisdelayinthedeliveryofgoods,what equitablyreduced.(Art.1741)
istheliabilityofthecarrier?
XPN: In a collision case and allision cases, the
A: The carrier shall be liable for damages partiesareliablefortheirowndamages.
immediatelyandproximatelyresultingfromsuch
neglectofduty.(Saludo,Jr.v.CA,GRNo.95536, B. DURATIONOFLIABILITY
Mar.23,1992)
Q:Whendoesthedutytoexerciseextraordinary
Q: What are the Civil Code provisions regarding diligence start and end with respect to carriage
delayinthetransportationofgoods? ofgoods?

A: A: It lasts from the time the goods are
1. Those who in the performance of their unconditionally placed in the possession of, and
obligations are guilty of fraud, receivedbythecarrierfortransportationuntilthe
negligence, or delay, and those who in samearedelivered,actuallyorconstructively,by
any manner contravene the tenor thecarriertotheconsigneeortothepersonwho
thereof, are liable for damages; (Art. hasarighttoreceivethem.(Art.1736)
1170)

2. Ifthecommoncarriernegligentlyincurs
in delay in transporting the goods, a
87

Q:Towhomshoulddeliverybemade? C. STIPULATIONFORLIMITATIONOFLIABILITY

A:Itmustbedelivered,actuallyorconstructively, Q: Are stipulations limiting the carriers liability
totheconsigneeortothepersonwhohasaright valid?
toreceivethem.
A:Yes,provideditbe:
Note: Delivery of the cargo to the customs 1. In writing, signed by the shipper or
authoritiesisnotdeliverytotheconsignee,ortothe owner
personwhohasarighttoreceivethem.(LuDo&Lu 2. Supported by a valuable consideration
YmCorp.v.Binamira,G.R.No.L9840,Apr.22,1957) other than the service rendered by the
commoncarrier
Q:Whatisconstructivedelivery? 3. Reasonable, just and not contrary to
publicpolicy.(Art.1744)
A:Itisadeliveryofarepresentationofproperty
(asawritteninstrument)ormeansofpossession Q: May a stipulation limiting the common
(asakey)thatisconstruedbyacourtassufficient carriers liability be annulled by the shipper or
to show the transferor's intent or to put the owner?
propertyunderthetransferee'scontrol
A:Yes,ifthecommoncarrierrefusedtocarrythe
Q:Whatistherightofstoppageintransitu? goodsunlesstheshipperorowneragreedtosuch
stipulation. However, under this provision,
A: It is the right exercised by the seller by annulmentoftheagreementlimitingthecarriers
stopping the delivery of the goods to a certain liabilityisstillnecessary.(Art.1746)
buyerorconsignee(becauseofinsolvency)when Note: There is no need to annull, if the common
suchgoodsarealreadyintransit. carrierwithoutjustcause:

Q:Whatistheruleastounloading,storageand 1. Delaysthetransportationofthegoods;or
stoppageintransitu? 2. Changesthestipulatedorusualroute,the
contract limiting the common carriers
A: liability cannot be availed of in case of
GR: The common carriers duty to observe loss, destruction, or deterioration of the
extraordinary diligence in the vigilance over goods.(Art.1747)
thegoodsremainsinfullforceandeffecteven
whentheyaretemporarilyunloadedorstored Q: What are some stipulations limiting the
intransit. liabilityofcommoncarrierswhichmaybevalid?

XPN: When the shipper or owner has made A:
useoftherightofstoppageintransitu. 1. An agreement limiting the common
carriersliabilityfordelayonaccountof
Q: What is the diligence required in exercising strikesorriots.(Art.1748)
therightofstoppageintransitu?
2. Astipulationthatthecommoncarriers
A:Ordinarydiligencebecauseofthefollowing: liability is limited to the value of the
1. Itisholdingthegoodsinthecapacityof goods appearing in the bill of lading,
an ordinary bailee or warehouseman unless the shipper or owner declares a
andnotasacarrier; greater value and pays corresponding
2. There is a change of contract from a freight.(Art.1749)
contract of carriage to a contract of
deposit; 3. A contract fixing the sum that may be
recoveredfortheloss,destruction,and
Note: If the seller instructsto deliveritsomewhere deterioration of goods is binding
else, a new contract of carriage is formed and the provided that it is just and reasonable
carriermustbepaidaccordingly. under the circumstances and it has
beenfairlyandfreelyagreedupon.(Art.
1750)

4. When a passenger is carried
gratuitously, a stipulation limiting the
commoncarriersliabilityfornegligence
88
MERCANTILELAWTEAM:
TRANSPORTATION LAW
isvalid,butnotforwillfulacts orgross caseofitsloss,destructionordeterioration.(Art.

negligence. However, the reduction of 1752)
fare does not justify any limitation of
the common carriers liability. (Art. Q: When is the limitation of the amount of
1758) liabilityvalid?

Q: What are void stipulations in a contract of A: When it is reasonable and just under the
carriageofgoods? circumstances, and has been freely and fairly
agreedupon.(Art.1750)
A:
1. That the goods are transported at the Q: Is the liability limited to the value of the
riskoftheownerorshipper goods appearing in the bill of lading when
stipulated?
2. That the common carrier will not be
liable for any loss, destruction, or A:
deteriorationofthegoods GR: A stipulation that the common carriers
liability is limited to the value of the goods
3. That the common carrier need not appearinginthebillofladingisbinding.
observeany diligence in the custody of
thegoods XPN:theshipperorownerdeclaresagreater
value and pays corresponding freight. (Art.
4. That the common carrier shall exercise 1749).
adegreeofdiligencelessthanthatofa
good father of a family, or a man of D. LIABILITYFORBAGGAGEOFPASSENGERS
ordinary prudence in the vigilance over
themovablestransported Q:Whatrulewillapplyoncheckedinbaggageof
passengers?
5. That the common carrier shall not be
responsiblefortheactsoromissionsof A:TheprovisionsofArticles1733to1753ofthe
hisoritsemployees CivilCodeshallapply.

6. That the common carriers liability for Q: What rule will apply when the baggage is in
acts committed by thieves, or of the personal custody of the passengers of their
robbers who do not act with grave or employees?
irresistible threat, violence or force, is
dispensedwithordiminished A:
1. The common carrier shall be
7. That the common carrier is not responsible for shippers baggage as
responsible for the loss, destruction or depositaries, provided that notice was
deterioration of goods on account of giventothem,ortotheiremployees,of
the defective condition of the car, the effects brought by the guests and
vehicle, ship, airplane or other that, on the part of the shipper, they
equipment used in the contract of take the precautions which said
carriage common carriers or their substitutes
advised relative to the care and
8. Any similar stipulation that is vigilance of their effects. (Art. 1998,
unreasonable, unjust and contrary to NCC)
publicpolicy.(Art.1745)
2. The responsibility shall include the loss
Q: What is the effect of the agreement on of,orinjurytothepersonalpropertyof
limiting the liability to the presumption of theshippercausedbytheemployeesof
negligenceofthecarrier? the common carrier as well as
strangers; but not that which may
A: Even if there is an agreement limiting the proceed from any force majeure. (Art.
liability of the common carrier in the vigilance 2000,NCC)
over the goods, the common carrier is still
disputably presumed to have been negligent in 3. The act of a thief or robber, who has
enteredthecarrierisnotdeemedforce
89

majeure, unless it is done with the use However, the reduction of fare does not justify
ofarmsorthroughanirresistibleforce. any limitation of the common carriers liability.
(Art.2001,NCC) (Art.1758)

4. The common carrier is not liable for B. DURATIONOFLIABILITY
compensation if the loss is due to the
acts of the shipper, his family, or Q:Whendoesthisdutybegintoexist?
servants, or if the loss arises from the
characterofthethingsbroughtintothe A: The duty exists from the moment the person
carrier.(Art.2002,NCC) offerstobetransportedplaceshimselfinthecare
and control of the common carrier who accepts
5. Thecommoncarriercannotfreehimself himassuchpassenger.Thedutycontinuesuntil
fromresponsibilitybypostingnoticesto thepassengerhas,afterreachinghisdestination,
the effect that he is not liable for the safely alighted from the carriers conveyance or
articles brought by the passenger. Any has had a reasonable opportunity to leave the
stipulation between the common carriers premises and to look after his baggage
carrier and the shipper whereby the andprepareforhisdeparture.
responsibilityoftheformerassetforth
in Articles 1998 to 2001 is suppressed Q:WhenaPublicUtilityVehicleisnotinmotion,
or diminished shall be void. (Art. 2003, is there a necessity for a person who wants to
NCC) ridethesametosignalhisintentiontoboard?

Q:Couldacommoncarrierbeheldliableforthe A:No.Whenthebusisnotinmotionthereisno
lossofavaluableitemstolenbyotherpassenger necessity for a person who wants to ride the
when the victim told the driver that he has same to signal his intention to board. A public
valuableitem? utility bus, once it stops, is in effect making a
continuousoffertobusriders.Hence,itbecomes
A: Yes. Ordinarily, the common carrier is not the duty of the driver and the conductor, every
liable for acts of other passengers. But the timethebusstops,todonoactthatwouldhave
commoncarriercannotrelieveitselffromliability the effect of increasing the peril to a passenger
if the common carriers employees could have whilehewasattemptingtoboardthesame.The
prevented the act or omission by exercising due premature acceleration of the bus in this case
diligence. In this case, the passenger asked the was a breach of such duty. (Dangwa vs. CA, G.R.
driver to keep an eye on the bag which was No.95582,October7,1991)
placed beside the drivers seat. If the driver
exercisedduediligence,hecouldhaveprevented
Q: If the bus started moving slowly when the
thelossofthebag.(1997BarQuestion)
passengerisboardingthesame,isthepassenger

negligent?
III.SAFETYOFPASSENGERS

A. VOIDSTIPULATIONS A: No. Further, even assuming that the bus was
moving, the act of the victim in boarding the
Q:Arestipulationslimitingthecommoncarriers same cannot be considered negligent under the
responsibilityforthesafetyofpassengersvalid? circumstances. As clearly explained in the
testimony of the aforestated witness for
A:No.Theresponsibilityofacommoncarrierfor petitioners, Virginia Abalos, the bus had "just
the safety of passengers as required in Articles started" and "was still in slow motion" at the
1733 and 1755 cannot be dispensed with or point where the victim had boarded and was on
lessened by stipulation, by posting of notices, by its platform. (Dangwa vs. CA, G.R. No. 95582,
statementsontickets,orotherwise.(Art.1757) October7,1991)

Q: What is the rule in case of nonpaying Q: What is the duty of the common carriers in
passengersorifthefareisreduced? boardingofpassengers?

A: It is the duty of common carriers of
A: When a passenger is carried gratuitously, a
passengers,includingcommoncarriersbyrailroad
stipulation limiting the common carriers liability
train, streetcar, or motorbus, to stop their
for negligence is valid, but not for willful acts or
conveyancesareasonablelengthoftimeinorder
grossnegligence.
90
MERCANTILELAWTEAM:
TRANSPORTATION LAW
toaffordpassengersanopportunitytoboardand
enter,andtheyareliableforinjuriessufferedby A:Thebasisofthecarrier'sliabilityforassaultson
boarding passengers resulting from the sudden passengers committed by its drivers rests on the
starting up or jerking of their conveyances while principle that it is the carrier's implied duty to
theyaredoingso(Dangwavs.CA,G.R.No.95582, transport the passenger safely. As between the
October7,1991). carrier and the passenger, the former must bear
the risk of wrongful acts or negligence of the
Q:Isapersonmeresteppingontheplatformof carrier's employees against passengers, since it,
abusalreadyconsideredapassenger? andnotthepassengers,haspowertoselectand
remove them. (Maranan v. Perez, G.R. No. L
22272,June26,1967)
A: Yes. The person, by stepping and standing on

the platform of the bus, is already considered a
Q: What is the extent of liability of common
passenger and is entitled all the rights and
carriersforactsofcopassengersorstrangers?
protection pertaining to such a contractual

relation. Hence, it has been held that the duty
A: A common carrier is responsible for injuries
which the carrier owes to its patrons extends to
sufferedbyapassengeronaccountofthewillful
personsboardingcarsaswellastothosealighting
acts or negligence of other passengers or of
therefrom (Dangwa vs. CA, G.R. No. 95582,
strangers, if the carriers employees through the
October7,1991).
exercise of the diligence of a good father of a
family would have prevented or stopped the act
Q: Robert De Alban and his family rode a bus oromission.(Art.1763)
owned by Joeben Bus Company. Upon reaching
theirdesireddestination,theyalightedfromthe Q:Inajeepney,Angela,apassenger,wasinjured
bus but Robert returned to get their baggage. because of the flammable material brought by
However, his youngest daughter followed him Antonette,anotherpassenger.Antonettedenied
without his knowledge. When he stepped into hisbaggagetobeinspectedinvokingherrightto
thebusagain,thebusacceleratedthatresulting privacy. Should the jeepney operator be held
to Roberts daughter death. The bus ran over liablefordamages?
her.Isthebuscompanyliable?
A: No. The operator is not liable for damages. In
A:Yes.Therelationofcarrierandpassengerdoes overland transportation, the common carrier is
not cease at the moment the passenger alights not bound nor empowered to make an
from the carriers vehicle at a place selected by examinationonthecontentsofpackagesorbags,
the carrier at the point of destination, but particularly those handcarried by passengers.
continues until the passenger has had a (Nocum v. Laguna Tayabas Bus Company, G.R.
reasonable time or reasonable opportunity to No.L23733,Oct.31,1969)
leave the current premises (La Mallorca vs. CA,
GRL20761,27July1966). Q: In the question above, if it were an airline
company involved, would your answer be the
C. LIABILITYFORACTSOFOTHERS same?

A:No.Thecommoncarriershouldbemadeliable.
Q: Are common carriers liable for acts of its In case of air carriers, it is unlawful to carry
employees? flammable materials in passenger aircrafts, and
airline companies may open and investigate
A:Commoncarriersareliableforthedeathofor suspiciouspackagesandcargoespursuanttoR.A.
injuries to passengers through the negligence or 6235.(1992BarQuestion)
willful acts of the formers employees, although
such employees may have acted beyond the

Q:Apassengerwasinjuredbecauseabystander
scope of their authority or in violation of the
outside the bus hurled a stone. Is the bus
ordersofthecommoncarriers.
companyliable?
The liability of the common carriers does not

cease upon proof that they exercised all the
A:No.Thereisnoshowingthatanysuchincident
diligence of a good father of a family in the
previously happened so as to impose an
selection and supervision of their employees.
obligationonthepartofthepersonnelofthebus
(Art.1759)
companytowarnthepassengersandtotakethe

necessary precaution. Such hurling of a stone
Q:Whatistherationalebehindthisprinciple?

91

constitutes fortuitous event in this case. The bus premises(AboitizShippingCorporationvs.CA,GR
company is not an insurer of the absolute safety No.84458,November6,1989)
of its passengers. (Pilapil v. CA, G.R. No. 52159,
Dec.22,1989)(1994BarQuestion) Q: What is the rule in case of nonpaying
passengersorifthefareisreduced?
D. EXTENTOFLIABILITYFORDAMAGES
A: When a passenger is carried gratuitously, a
Q:Whoarenotconsideredpassengers? stipulation limiting the common carriers liability
for negligence is valid, but not for willful acts or
A: gross negligence. However, the reduction of fare
does not justify any limitation of the common
1. One who remains on a carrier for an
carriersliability(Art.1758).
unreasonable length of time after he

has been afforded every safe
opportunitytoalight Q: What is assumption of risk on the part of
2. Onewhohasboardedbyfraud,stealth, passengers?
ordeceit
3. One who attempts to board a moving A:Passengersmusttakesuchrisksincidenttothe
vehicle,althoughhehasaticket,unless modeoftravel.
theattemptbewiththeknowledgeand
Note:Carriersarenotinsurersofanyandallrisksto
consentofthecarrier
passengers and goods. It merely undertakes to
4. One who has boarded a wrong vehicle,
perform certain duties to the public as the law
has been properly informed of such imposes, and holds itself liable for any breach
fact, and on alighting, is injured by the thereof.(Pilapilv.CA,G.R.No.52159,Dec.22,1989)
carrier
5. Invited guests and accommodation Q: Is a carrier liable to its passengers for
passengers damages caused by mechanical defects of
equipments or appliances installed in the
Note: The carrier is thus not obliged to exercise
carrier?
extraordinarydiligencebutonlyordinarydiligencein

theseinstances.
A:Yes,wheneveritappearsthatthedefectwould

have been discovered by the carrier if it had
Q: May a common carrier be held liable to a
exercised the degree of care which under the
passenger who was injured and eventually died
circumstances was incumbent upon it, with
whiletryingtoboardthevehicle?
regard to inspection and application of the

necessary tests. The manufacturer is considered
A: Yes. It is the duty of common carriers of
asbeinginlawtheagentorservantofthecarrier,
passengers to afford passengers an opportunity
as far as regards the work of constructing the
toboardandenter,andtheyareliableforinjuries
appliance. The good repute of the manufacturer
suffered by boarding passengers resulting from
willnotrelievethecarrierfromliability.
the sudden starting up or jerking of their

conveyanceswhiletheyaredoingso.Thevictim,
The rationale of the carrier's liability is the fact
by stepping and standing on the platform of the
thatthepassengerhasneitherchoicenorcontrol
bus, is already considered a passenger and is
over the carrier in the selection and use of the
entitledalltherightsandprotectionpertainingto
equipment and appliances in use by the carrier.
such a contractual relation. (Dangwa
Havingnoprivitywhateverwiththemanufacturer
Transportation Co., Inc. v. CA, G.R. No. 95582,
or vendor of the defective equipment, the
Oct.7,1991)
passenger has no remedy against him, while the
carrierusuallyhas.Itisbutlogical,therefore,that
Q: Is the victims presence in a vessel after 1 thecarrier,whilenotininsurerofthesafetyofhis
hour from his disembarkation was no longer passengers, should nevertheless be held to
reasonable and he consequently ceased to be a answer for the flaws of his equipment if such
passenger? flawswereatalldiscoverable.(Necesitov.Paras,
G.R.No.L10605,June30,1958)
A: No. Carrierpassenger relationship continues
untilthepassengerhasbeenlandedattheportof
destination and has left the vesselowners
92
MERCANTILELAWTEAM:
TRANSPORTATION LAW
Q: Should the diligence of the passenger be theparties.(PhoenixAssuranceCo.,Ltd.v.United

considered in determining liability in case of StatesLines,G.R.No.L24033,Feb.22,1968)
injury?
Q:WhatarethethreefunctionsofBillofLading?
A:Yes.Thepassengermustobservethediligence
ofagoodfatherofafamilyorordinarydiligence A:
toavoidinjurytohimself(Art.1761).Thismeans 1. Itisareceiptforthegoodsshipped
that if the proximate cause of the passengers 2. It is a contract by which the three
injuryishisnegligence,thecommoncarrierisnot parties namely the shipper, carrier and
liable. consignee undertake specific
Q: Who has the burden of proof in cases of responsibilities and assume stipulated
contributorynegligence? obligations;and
3. It is a legal evidence of the contract
A: The common carrier since it will benefit from betweentheshipperandthecarrier.As
suchmitigatedliability. evidence, its contents shall decide all
disputeswhichmayarisewithregardto
Q: May the registered owner of the vehicle be theirexecutionandfulfillment.
held liable for damages suffered by a third
person in the course of the operation of the NOTE: In the absence of a bill of lading, their
vehicle? respectiveclaimsmaybedeterminedbylegalproofs
whicheachofthecontractingpartiesmaypresentin
conformitywithlaw.
A: Yes. The registered owner of a public service
vehicleisresponsiblefordamagesthatmayarise Q:Whatarethetwotypesofbilloflading?
from consequences incident to its operation or
that may be caused to any of the passengers A:
therein (Gelisan v. Alday, G.R. No. L30212, Sept 1. Negotiable If issued to the bearer or
30, 1987). Also, the liability of the registered to the order of any person named in
owner of a public service vehicle for damages suchbill.
arising from the tortious acts of the driver is 2. Nonnegotiable If issued to a specific
primary, direct, and joint and several or solidary personnamedinsuchbill.
with the driver. (Philtranco Service Enterprises,
Inc.v.CA,G.R.No.120553)June17,1997) Q:Whatistheperiodofdeliveryofgoods?

IV.BILLOFLADING A: If a period has been fixed for the delivery of
thegoods,itmustbemadewithinsuchtime,and,
Q:Whatisabilloflading? for failure to do so, the carrier shall pay the
indemnity stipulated in the bill of lading, neither
A: It is a written acknowledgement of receipt of the shipper nor the consignee being entitled to
goods and agreement to transport them to a anythingelse(Art.370,CodeofCommerce).
specific place and to a named person or to his
order. Q: If indemnity is not stipulated, how will it be
determined?
Q: What is the twofold character of a bill of
lading? A: If no indemnity has been stipulated and the
delayexceedsthetimefixedinthebilloflading,
A:Abillofladingoperatesbothasareceiptand the carrier shall be liable for the damages which
asacontract.Itisareceiptforthegoodsshipped the delay may have caused. (Art. 370, Code of
andacontracttotransportanddeliverthesame Commerce)
as therein stipulated. As a receipt, it recites the
date and place of shipment, describes the goods Q: What is the duty of the carrier if there is no
as to quantity, weight, dimensions, identification periodoftimefixedforthedeliveryofgoods?
marks and condition, quality, and value. As a
contract, it names the contracting parties, which A: The carrier shall be under the obligation to
include the consignee, fixes the route, forwardthemwiththefirstshipmentofthesame
destination, and freight rate or charges, and orsimilarmerchandisehemaymaketothepoint
stipulates the rights and obligations assumed by where he must deliver them, and should he not
doso,thedamagesoccasionedbythedelayshall
besufferedbyhim.(Art.358)

93

Q:Isthesurrenderofthebillofladingnecessary 1. Consignment of goods through a
upondeliveryofthegoods? common carrier, by a consignor in one
place to a consignee in another place;
A: Yes. If the carrier fails to require such and
surrender: 2. Thedeliveryofthemerchandisebythe
carrierto theconsigneeattheplaceof
1. If nonnegotiable Action against the destination (New Zealand Ins. Co., Ltd.
carrierdoesnotlie. v. Choa Joy, G.R. No. L7311, Sept. 30,
1955).
2. If negotiable Action by the shipper
maylieagainstthecarrier Q: What is the effect of paying the
transportation charges in the filing of an action
Q: When could a consignee refuse to take onaccountofdamagestogoods?
deliveryofgoods?
A:
A: 1. IfpaidbeforecheckingthegoodsThe
1. When a part of the goods transported righttofileaclaimisnotwaived.
are delivered and the consignee is able
toprovethathecannotmakeuseofthe 2. If paid after the goods were checked
partwithouttheothers;(Art.365) The right to file a claim is already
2. If the goods are damaged and such waived (Southern Lines, Inc. v. CA, G.R.
damage renders the goods useless for No.L16629,Jan.31,1962).
the particular purpose for which there
aretobeused;(Art.365) Note:Thefilingofclaimisaconditionprecedentfor
3. When there is delay on account of the recoveryofdamages.
faultofthecarrier;(Art.371)or
4. Ifthecargoconsistsofliquidsandthey Q: What is the doctrine of Combined or
have leaked out, nothing remaining in ConnectingServices?
the containers but onefourth () of
their contents, on account of inherent A: The carrier which delivered the goods to the
defectofcargo.(Art.687) consigneeshallassumetheobligations,rightsand
actions of those who preceded him in the
Note:Inallcases,theshippermayexercisetheright conveyanceofthegoods.
ofabandonmentbynotifyingthecarrier.Ownership
over damaged goods passes to the carrier and Theshipperorconsigneeshouldproceedagainst
carrier must pay shipper the market value of the theonewhoexecutedthecontractoragainstthe
goodsatpointofdestination. others who received the goods without
reservation.Butevenifthereisreservation,they
Q:Whatistheperiodforfillingclaims? are not exempted from liabilities that they may
have incurred by reason of their own acts (Art.
A: 373,CodeofCommerce).
1. Immediately after delivery if the
damageisapparent;or The carrier may then file a thirdparty complaint
2. Within 24 hours from delivery If the against the one who is really responsible. The
damageisnotapparent.(Art.366,Code carrierisanindispensibleparty.Buttheshipper
ofCommerce) or consignee may sue all of them as alternative
defendants.
Q: When does Article 366 of the Code of
Commerceapply? Q:Whatistheperiodforfilingactions?

A: It applies in case of domestic transportation A: It shall prescribe eight days after the delivery
(interisland)wherethereisdamagetothegoods has been made, and once prescribed, the carrier
transported. shall have no other action than that
correspondingtohimasanordinarycreditor(Art.
Q: What are the requisites before claim for 375,CodeofCommerce).
damagesunderArt.366maybedemanded?

A:

94
MERCANTILELAWTEAM:
TRANSPORTATION LAW
V.MARITIMECOMMERCE Q:Whatarethedistinctionsbetweenabareboat
or demise charter party from contracts of
A.CHARTERPARTIES affreightment?

Q:Whatisacharterpartycontract? A:
BAREBOAT/DEMISE CONTRACT OF
A: A contract whereby the whole or part of the CHARTERCONTRACT AFFREIGHTMENT
ship is let by the owner to a merchant or other Ship owner remains
Negligence of the
person for a specified time or use for the liable and carrier must
charterergivesrisetoits
conveyance of goods, in consideration of the answer for any breach
liabilitytoothers.
payment of freight. (Caltex v. Sulpicio Lines, G.R. ofduty.
No.131166,Sept.30,1999) Charterer is not
Charterer is regarded as regardedasowner.Ship
Q:Whataretheclassesofcharterparty? owner pro hac vice. Ship owner retains
owner temporarily ownership over the
A: relinquishes possession vessel. (Coastwise
and ownership of the Lighterage v. CA, G.R.
1. Bareboat or demise the ship owner
vessel. No. 114167, July 12,
gives possession of the entire vessel to
1995)
the charterer. In turn, the charterer

supplies, equips, and mans the vessel.
Q:Whatismeantbyownerprohacvice?
Thechartereristheownerprohacvice.

A: The charterer is considered the owner of the
2. Contract of affreightment the owner
vessel for the voyage or service stipulated. The
of the vessel leases a part or all of its
chartererandnottheownerofthevesselisliable
space to haul goods for others. It can
forvesselsexpenses,includingseamanswages.
eitherbe:

Q:Whataretheinstanceswhenacharterparty
a. Time charter Vessel is chartered
mayberescinded?
for a particular time or duration.

While the ship owner still retains
A:
possession and control of the
1. Attherequestofthecharterer:
vessel, the charterer has the right
a. By abandoning the charter and
to use all vessels facilities. The
payinghalftheprice
charterer may likewise designate
b. Errorintonnageorflag
vesselsdestination.
c. Failure to place vessel at

charterersdisposal
b. Voyage charter Vessel is
d. Return the vessel due to pirates,
chartered for a particular voyage
enemies,andbadweather
orseriesofvoyages.
e. Arrival at port for repairs if
repairstakelessthan30days,pay
Q:Whatisavoyagecharter?
full freightage; if more than,

freightage in proportion to the
A:Avoyagecharterisacontractwhereintheship
distancecovered.
wasleasedforasinglevoyagefortheconveyance

of goods, in consideration of the payment of
2. Attherequestoftheshipowner:
freight. The shipowner retains the possession,
a. Ifextralaydaysterminatewithout
command and navigation of the ship, the
the cargo being placed alongside
charterer merely having use of the space in the
vessel;and
vessel in return for his payment of freight. An
b. Sale by the owner of the vessel
ownerwhoretainspossessionoftheshipremains
beforeloadingbythecharterer.
liableascarrierandmustanswerforlossornon

deliveryofthegoodsreceivedfortransportation.
3. Duetofortuitousevent:
(Cebu Salvage Corp. vs. Philippine Home
a. War There is a governmental
AssuranceCorp.,G.R.No.150403,Jan.25,2007)
prohibition of commercial

intercourse, intended to bring
Note:Thesameconceptappliestoatimecharter.
about an entire cessation for the
timebeingofalltradewhatever

95

b. Blockade A sort of 5. To adopt all proper measures to keep
circumvallation around a place by the vessel well supplied and equipped,
which all foreign connection and purchasingallthatmaybenecessaryfor
correspondenceis,asfarashuman the purpose, provided there is no time
powercaneffectit,tobecutoff to request instruction from the ship
agent
c. Prohibitiontoreceivecargoatport
ofdestination 6. To order, in similar urgent cases while
onavoyage,therepairsonthehulland
d. Embargo A proclamation or engines of the vessel and in its rigging
order of State, usually issued in and equipment, which are absolutely
times of war or threatened necessary to enable it to continue and
hostilities, prohibiting the finishitsvoyage.(Art.610)
departure of ships or goods from
someoralltheportsofsuchState Q:Whataretheobligationsofthecaptain?
untilfurtherorder;or
A:
e. Inability of the vessel to navigate. 1. Inventoryofequipment
(Art.640) 2. Keep a copy of Code of Commerce on
board
B.LIABILITYOFSHIPOWNERSANDSHIPPING 3. Have a log book, freight book,
AGENTS accountingbook
4. Conduct a marine survey of vessel
Q: What is the threefold character of the beforeloading
captain? 5. Remainonboardwhileloading
6. Demand pilot on departure and on
A: arrivalateachport
1. Generalagentoftheshipowner 7. Beondeckwhensightingland
2. Vesselstechnicaldirector 8. Arrivals under stress: to file marine
3. Government representative of the flag protestin24hours
henavigatesunder 9. Record bottomry loan with Bureau of
Customs
Q: What are the inherent powers of the ship 10. Keep papers and properties of crew
captain? memberswhomightdie
11. Conduct himself according to the
A: instuctionsoftheshipagent
1. To appoint or make contracts with the 12. Reporttoshipagentonarrival
crewintheshipagentsabsence,andto 13. Observe rules on the situation of lights
proposesaidcrew,shouldsaidagentbe andmaneuverstopreventcollisions
present; but the ship agent may not 14. Remain on board until the last hope to
employ any member against the save the vessel is lost and to abide by
captain'sexpressrefusal thedecisionofthemajoritywhetherto
abandonornot
2. To command the crew and direct the 15. In case of shipwreck: file marine
vessel to the port of its destination, in protest,within24hours
accordance with the instructions he 16. Comply with rules and regulation on
mayhavereceivedfromtheshipagent navigation.(Art.612)

3. Toimposecorrectionalpunishment: Q: In what cases shall the ship owner/agent be
a. Upon those who fail to comply liabletothedamagescausedbythecaptain?
withorders;or
b. Thosewantingindiscipline A:
1. Damages suffered by the vessel and its
4. Tomakecontractsforthecharterofthe cargo by reason of want of skill or
vessel in the absence of the ship agent negligenceonhispart
orofitsconsignee 2. Thefts committed by the crew,
reserving his right of action against the
guiltyparties;
96
MERCANTILELAWTEAM:
TRANSPORTATION LAW
3. Losses,fines,andconfiscationsimposed A:Incaseof:
an account of violation of customs, 1. War
police, health, and navigation laws and 2. Changeofdestination
regulations; 3. Outbreakofdisease
4. Lossesanddamagescausedbymutinies 4. Newownerofvessel.(Art.647)
on board the vessel or by reason of
faults committed by the crew in the Q:Whoistheshipownerofavessel?
service and defense of the same, if he
doesnotprovethathemadetimelyuse A: The person in possession, management,
of all his authority to prevent or avoid controloverthevessel,andtherighttodirecther
them; navigation. While in their possession, the ship
5. Those caused by the misuse of the ownersalsoreceivefreightearnedandpaid.
powers;
6. Forthosearisingbyreasonofhisgoing Q:Whoisashipagent?
out of his course or taking a course
whichheshouldnothavetakenwithout A: The person entrusted with provisioning or
sufficient cause, in the opinion of the representingthevesselintheportinwhichitmay
officersofthevessel,atameetingwith be found. Hence, whether acting as agent of the

the shippers or supercargoes who may owner of the vessel or as agent of the charterer,

beonboard.Noexceptionswhatsoever he will be considered as the ship agent and may
shallexempthimfromthisobligation; be held liable as such, as long as he is the one
7. For those arising by reason of his that provisions or represents the vessel.
voluntarily entering a port other than (Macondray & Co., Inc. v. Provident Insurance
that of his destination, outside of the Corp,G.R.No.154305,Dec.9,2004)
cases or without the formalities
referredtoinArticle612;and Q: What are the civil liabilities of ship owners
8. For those arising by reason of non andagents?
observance of the provisions contained
in the regulations on situation of lights A:
rd
and manoeuvres for the purpose of 1. Damages suffered by a 3 person for
preventingcollisions(Art.618). tortcommittedbythecaptain;
2. Contracts entered for provisioning and
Note: Ship owner/agent is not liable for the repairofvessel;
obligations contracted by the captain if the latter 3. Indemnities in favor of 3rd persons
exceeds his powers and privileges inherent in his arisingfromtheconductofthecaptain
position of those which may have been conferred fromthecareofgoods;and
upon him by the former. However, if the amount 4. Damagesincaseofcollisionduetofault
claimedwereusedforthebenefitofthevessel,the or negligence or want of skill of the
shipownerorshipagentisliable. captain.

Q:Inwhatcausesshallthecaptainbenotliable Q:Whatarethepowers,functions,andliabilities
forlossorinjurytopersonsorcargo? ofshipagents?

A: A:
1. Forcemajeure 1. Indemnity for expenses incurred for
2. Obligations contracted for the vessels shipsbenefit.
benefit, except when the captain 2. Discharge of captain and/or crew
expresslyagreestobeliable. members. The following are the rules
observedbytheshipagent:
Q: May the captain have himself substituted by a. Captain and/or crew members
another? contract not for a definite period
orvoyage:
A: No, in the absence of consent from the ship
agent, and should he do so he shall be liable for i. Before vessel sets out to sea:
alltheactsofthesubstitute.(Art.615) Ship agent at his discretion may
discharge the captain and
Q: When may the captain and crew members members of the crew. Ship
rescindtheircontractualemployment? agent must pay captain and/or
97

crew members salaries earned Q:Whatistherationaleofthisdoctrine?
accordingtotheircontracts,and
without any indemnity A: To offset against innumerable hazards and
whatsoever, unless there is an perils in sea voyage and to encourage ship
expressedagreement; building and maritime commerce. By
abandonment, the ship owner and ship agent
ii. During voyage: Captain and/or exempt themselves from liability, thus avoiding
crew member shall receive the possibility of risking his whole fortune in the
salary until return to the port business (Real and hypothecary nature of
where contract was made. MaritimeLaw)
Article 637 of the Code of
Commerce enumerates the just Q: What are the cases in which the doctrine of
causesfordischarge. limitedliabilityisallowed?

b. Where captain and members of A:
the crews contracts with ship 1. Civil liability of the ship agent or
agent be for a definite period or shipowner for the indemnities in favor
voyage: ofthirdpersons;(Art.587)
2. Civil liability of the coowners of the
i. Captain and/or crew members vessel for the results of the acts of the
may not be discharged until captain;(Art.590)
after the fulfillment of their 3. If the vessel and her cargo be totally
contracts, except by reason of lost,byreasonofcaptureorshipwreck,
insubordination in serious alltherightsshallbeextinguished,both
matters,robbery,theft,habitual as regards the right of the crew to
drunkenness, or damage caused demandwagesandtherightoftheship
to the vessel or to its cargo agent to recover the advances made;
through malice or manifest or (Art.643)or
proven negligence. (Art. 605, 4. Extinction of civil liability incurred by
CodeofCommerce) the shipowner or agent in cases of
maritimecollisions.(Art.837)
ii. If the captain should be the
vessels coowner, he may not Q: What are the exceptions to the doctrine of
be discharged unless ship agent limitedliability?
returns his amount of interest
therein. In the absence of A:
agreementbetweentheparties, 1. Repairs and provisioning of the vessel
interest shall be appraised by beforethelossofthevessel;(Art.586)
expertsappointedinthemanner
establishedbycivilprocedure. 2. Insurance proceeds. If the vessel is
insured, the proceeds will go to the
Q:WhatistheDoctrineofLimitedLiability? persons entitled to claim from the
shipowner; (Vasquez v. CA, G.R. No. L
A: Also called the no vessel, no liability 42926,Sept.13,1985)
doctrine,itprovidesthatliabilityofshipowneris
limited to ship owners interest over the vessel. 3. Workmens Compensation cases (now
Consequently, in case of loss, the ship owners Employees Compensation under the
liability is also extinguished. Limited liability LaborCode);(Ochingv.SanDiego,G.R.
likewise extends to ships appurtenances, No.775,Dec.17,1946)
equipment, freightage, and insurance proceeds.
Theshipownersoragentsliabilityismerelyco 4. Whentheshipownerisguiltyoffaultor
extensivewithhisinterestinthevessel,suchthat negligence;
a total loss of the vessel results in the liabilitys
extinction. The vessels total destruction Note:Butifthecaptainistheonewhois
extinguishes maritime liens because there is no guilty, doctrine may still be invoked,
longeranyrestowhichtheycanattach.(Monarch hence,abandonmentisstillanoption.
Insurancev.CA,G.R.No.92735,June8,2000)
5. Privatecarrier;or

98
MERCANTILELAWTEAM:
TRANSPORTATION LAW
6. Voyageisnotmaritimeincharacter. Q: Who shall be liable for the amount of the

generalaverages?
Q:Ifavesselwasinsured,maytheclaimantsgo
aftertheinsuranceproceeds? A:Allpersonshavinganinterestinthevesseland
cargothereinatthetimeoftheoccurrenceofthe
A.Yes.Incaseofalostvessel,theclaimantsmay averageshallcontribute.(Art.812)
go after the proceeds of the insurance covering
thevessel.(1999BarQuestion) Q: Who shall be liable for the amount of the
particularaverages?
Q:Doesthetotaldestructionofthevesselaffect
theliabilityoftheshipownerforrepairsonthe A:Theownerofthethingswhichgaverisetothe
vesselcompletedbeforeitsloss? expenses or suffered the damage shall bear the
simpleorparticularaverages(Art.810).
A:No.(2000BarQuestion)
Q: What are the distinctions between general
C.ACCIDENTSANDDAMAGESINMARITIME averageandparticularaverage?
COMMERCE A:
GENERALAVERAGE PARTICULARAVERAGE
Q: What are the accidents in maritime
Boththeshipandcargo No common danger to
commerce?
aresubjecttothesame both the vessel and the
danger cargo
A: There is a deliberate Expenses and damages
1. Averages sacrifice of part of the are not deliberately
2. Arrivalunderstress vessel,cargo,orboth made
3. Collision Damage or expenses Didnotinuretocommon
4. Shipwreck incurred to the vessel, benefit and profit of all
its cargo, or both, personsinterestedinthe
Q:Whatareaverages? redounded to the vesselandhercargo.
benefit of the
A:Allextraordinaryoraccidentalexpenseswhich respectiveowners.
may be incurred during the voyage for the All those who have Only the owner of the
preservationofthevesselorcargoorboth. benefited shall satisfy goods benefiting from
theaverage. the damage shall bear
Q:Whatarethekindsofaverages? theexpenseofaverage.

A: Q: What are goods not covered by general
1. General average Damages or averageevenifnotsacrificed?
expenses deliberately caused in order
to save the vessel, its cargo or both A:
fromrealandknownrisk. 1. Goods not recorded in the books or
recordsofthevessel(Art.855[2])
2. Particular average Damages or
expenses caused to the vessel or cargo 2. Fuelforthevesselifthereismorethan
that did not inure to the common sufficient fuel for the voyage (Rule IX,
benefit, and borne by respective YorkAntwerpRule)
owners.
Q:Whatisjettison?
Q:Whataretherequisitesforgeneralaverage?
A: Act of throwing overboard part of a vessels
A: cargo or hull in hopes of saving a ship from
1. Commondangerpresent; sinking.
2. Deliberatesacrificeofpartofthevessel
orcargo; Q: What is the order of goods to be cast
3. Successful saving of vessel and/or overboardincaseofjettison?
cargo;and
4. Properprocedureandlegalsteps. A:
1. Those on deck, preferring the bigger
bulkwithleastvalue.
99

2. Those below upper deck, beginning unless a departure therefrom becomes
withtheheaviestwithleastutility. necessary to avoid imminent danger. The
vessel which does not make such strict
Q:Distinguishbetweenoverseasandinterisland observanceisliable.
traderegardingreimbursementandpaymentof
generalaveragesonjettisoneddeckcargo. 3. Third Zone time when collision is
certainanduptothetimeofimpact.
A: Note: An error at this point no longer
1. In case of overseas trade, the York bearsanyconsequence.
Antwerp Rules prohibit the loading of
cargo on deck. In case such cargo is Q:Whatisanerrorinextremis?
jettisoned, the owner will not be
entitled to reimbursement in view of A: The sudden movement made by a faultless
the violation. If the cargo were saved, vessel during the third zone of collision with
the owner must contribute to general anothervesselwhichisatfaultunderthesecond
average. zone. Even if sudden movement is wrong, no
2. In case of interisland trade, the York responsibilitywillfallonthefaultlessvessel.
Antwerp Rules allow deck cargo. If the
cargo loaded on deck is jettisoned as a Q: What are the rules governing liabilities of
result of which the vessel was saved, partiesincaseofcollision?
the cargo owner is entitled to
reimbursement. If the cargo is saved, A:
thecargoownermustcontributetothe 1. OnevesselatfaultTheshipownerof
generalaverage. such vessel shall be liable for all
resultingdamages.
Reason: In interisland trade, voyages are usually
shortandthereareinterveningislandsandtheseas 2. BothvesselsatfaultEachvesselshall
aregenerallynotrough.Inoverseastrade,thevessel suffer their respective losses but as
is exposed for many days to the peril of the sea regardstheownersofthecargoes,both
makingdeckcargoisdangeroustonavigation. vessels shall be jointly and severally
liable.
Q:Whatiscollision?
3. VesselatfaultnotknownEachvessel
A:Itistheimpactoftwomovingvessels. shallsufferitsownlossesandbothshall
besolidarilyliableforlosesordamages
Q:Whatisallision? on the cargo. (Doctrine of Inscrutable
Fault).
A:Itistheimpactbetweenamovingvesselanda
stationaryone. 4. Fortuitous event Each shall bear its
owndamage.
Q:Whatarethezonesoftimeinthecollisionof
vessel? 5. Third vessel at fault The third vessel
shall be liable for losses and damages
A: sustained.
1. First zone all time up to the moment
whenriskofcollisionbegins. Q:Whatistheroleofaprotestwithrespectto
collisions?
Note:Onevesselisaprivilegedvesseland
the other is a vessel required to take A: The action for recovery of damages arising
actiontoavoidcollision. fromcollisionscannotbeadmittedifaprotestor
declaration is not presented within twentyfour
2. Second zone time between moment hours before the competent authority of the
when risk of collision begins and point where the collision took place, or that of
moment it becomes practically a the first port of arrival of the vessel, if in
certainty. Philippineterritory,andtotheFilipinoconsulifit
occurredinaforeigncountry(Art.835).
Note: In this zone, the conduct of the
vessels are primordial. It is in this zone
that vessels must observe nautical rules,
100
MERCANTILELAWTEAM:
TRANSPORTATION LAW
Note: Failure to make a protest is not an and the captain of SS Joanna was not asleep.
impediment to the maintenance of a civil action Whoshouldbearthedamagestothevesselsand
basedonquasidelict. theircargoes?

Q:Whenisaprotestrequired? A: The ship owners of SS Anna and M/V Joanna
shalleachbeartheirrespectivelossofvessels.For
A: thelossesanddamagessufferedbytheircargoes,
1. Arrivalunderstress;(Art.612[8]) both ship owners are solidarily liable. (1998 Bar
2. Shipwreck;(Arts.601[15],843) Question)
3. If the vessel has gone through a
hurricane or where the captain believes Q:Whatisashipwreck?
that the cargo has suffered damages or
averages;(Art.642)and A:Thelossofthevesselatseaasaconsequence
4. Maritimecollision.(Art.835) of its grounding, or running against an object in
sea or on the coast. If the wreck was due to
Q:Whocanfileamaritimeprotest? malice, negligence, or lack of skill of the captain,
the owner of the vessel may demand indemnity
A: fromsaidcaptain.
1. In case of maritime collision, the
passenger or other persons interested Q:Whoshallbearthelossesinshipwreck?
whomaybeonboardthevesselorwho
were in a condition who can make A:
known their wishes (Arts. 835836) or GR:Thelossofashipandhercargoshallfall
thecaptainhimself.(VerzosaandRuizv. upontheirrespectiveowners.(Art.840)
Lim,G.R.No.20145,Nov.15,1923)
XPN: If the wreck was due to malice,
2. Thecaptainincasesof: negligence, or lack of skill of the captain, or
a. Arrivalunderstress because the vessel put to sea was
b. Shipwreck;or insufficientlyrepairedandequipped,theship
c. If the vessel has gone through a agentortheshippersmaydemandindemnity
hurricane or where the captain from the captain for the damage caused to
believes that the cargo has the vessel or to the cargo by the accident.
suffereddamagesoraverages. (Art.841)

Q: Two vessels figured in a collision resulting in Q:Whatisarrivalunderstress?
considerablelossofcargo.Thedamagedvessels
were safely conducted to a port. Kim, a A: It is the arrival of a vessel at the nearest and
passenger and Ruby, a shipper who suffered most convenient port, if during the voyage the
damage to his cargo, did not file maritime vessel cannot continue the trip to the port of
protest.CanKimandRubysuccessfullymaintain destination on account of the lack of provisions,
anactiontorecoverlossesanddamagesarising wellfoundedfearofseizure,privateersorpirates,
fromthecollision? orbyreasonofanyaccidentoftheseadisablingit
tonavigate.(Art.819)
A:Ruby,theshippercansuccessfullymaintainan
actiontorecoverlossesanddamagesarisingfrom Note:Inarrivalunderstress,thecaptainmustfilea
the collision notwithstanding his failure to file a Protest which is merely a disclaimer for the
maritime protest since the filing thereof is shipownernottobeliable.
required only on the part of Kim, who, being a
passenger of the vessel at the time of the Q:Whenisarrivalunderstressunlawful?
collision, was expected to know the
circumstancesofthecollision.Kim'sfailuretofile A:
a maritime protest will therefore prevent him 1. Lack of provisions is due to negligence
from successfully maintaining an action to tocarryaccordingtousageandcustoms
recover his losses and damages. (Art 836).(2007 2. Risk of enemy not well known of
BarQuestion) manifest
3. Defect of vessel is due to improper
Q: During a typhoon, vessel SS Anna collided repair;or
with M/V Joanna. The collision would be 4. Malice, negligence, lack of foresight or
avoidedifthecaptainofSSAnnawasnotdrunk skillofcaptain.(Art.820)

101

D.CARRIAGEOFGOODSBYSEAACT year after the delivery of the goods." Which of
thesetwoprovisionsshouldprevail?
Q:WhenwillCOGSAapply?
A: Clause 18 must of necessity yield to the
A: It will only be applied in terms of loss or provisionsoftheCarriageofGoodsbySeaActin
damage of goods transported to and from view of the proviso contained in the same Act
Philippineportsinforeigntrade.Itmayalsoapply whichsays:"Anyclause,covenant,oragreement
to domestic trade when there is a paramount in a contract of carriage relieving the carrier or
clauseinthecontract. theshipfromliabilityforlossordamagetoorin
connection with the goods or lessening such
Q:WhatcasesarecoveredundertheCOGSA? liability otherwise than as provided in this Act,
shall be null and void and of no effect." (Sec. 3)
A: It applies only in case of loss or damage, and This means that a carrier cannot limit its liability
nottomisdeliveryorconversionofgoods.(Angv. in a manner contrary to what is provided for in
American Steamship Agencies, Inc., G.R. No. L said Act, and so clause 18 of the bill of lading
22491,Jan.27,2967) mustofnecessitybenullandvoid.(E.E.Elser,Inc.
v.CA,G.R.No.L6517,Nov.29,1954)
Also, the deterioration of goods due to delay in
their transportation constitutes "loss" or Q:Whenshouldsuitsforlossordamageofcargo
"damage" within the meaning of Sec. 3(6) of bebrought?
COGSA. (Mitsui O.S.K. Lines Ltd. v. CA, G.R. No.
119571,Mar.11,1998) A: The suit should be brought within one year
from:
Q: When should notice be filed in case of 1. Delivery of the goods, in case of
damagetogoodsundertheCOGSA? damage;or
2. The date when the goods should have
A: beendelivered,incaseofloss.
1. IfthedamageisapparentNoticemust
be immediately given. The notice may Q: To whom should such delivery be made as
eitherbeinwritingororally. basisofthecomputationoftheoneyearperiod?

2. If the damage is not apparent Notice A: The oneyear period is computed from the
must be given within 3 days after delivery of goods to the operator and not to the
delivery. consignee.

Q: What is the consequence if no notice was
Q:Whatinstancesdotheoneyearperiodapply?
filed?

A:
A:Thereisnoconsequenceontherighttobring
1. Amendment of pleadings for lack of
suitifnonoticeisfiledunlikeundertheCodeof
jurisdiction
Commerce. It only gives rise to a presumption
2. Filingofthirdpartycomplaint
that the goods are delivered in the same
3. Loss or damage to cargo, excluding
conditionastheyareshipped.
delayormisdelivery

4. Subrogation.(Art2207,NCC)
There is also no consequence if the

transportation charges and expenses are paid
Q: When is the one year period in the COGSA
unlikeundertheCodeofCommerce.
interrupted?

Q: Clause 18 of the bill of lading provides that
A:
the owner should not be liable for loss or
1. Whenanactionisfiledincourt;or
damage of cargo unless written notice thereof
2. When theres a contrary agreement
was given to the carrier within 30 days after
betweentheparties
receipt of the goods. However, Section 3 of the

CarriageofGoodsbySeaActprovidesthateven

if a notice of loss or damage is not given as

required, "that fact shall not affect or prejudice

therightoftheshippertobringsuitwithinone

102
MERCANTILELAWTEAM:
TRANSPORTATION LAW
Q: Is Art. 1155 of the Civil Code providing that 1. The liability limit is set at $500 per
the prescription of actions is interrupted by the packageorcustomaryfreightunlessthe
making of an extrajudicial written demand by nature and value of such goods is
the creditor applicable also to actions brought declaredbytheshipper.
undertheCOGSA? 2. Shipper and carrier may agree on
another maximum amount, but not
A:No,writtenclaimsdoesnottolltherunningof more than amount of damage actually
the oneyear prescriptive period under the sustained.
COGSA. (Dole Philippines, Inc. v. Maritime
Company of the Philippines, G.R. No. L61352, Note:Whenthepackagesareshippedinacontainer
Feb.27,1987) supplied by carrier and the number of such units is
stated in the bill of lading, each unit and not the
Q:Whoarethepersonswhocangivenoticeto, containerconstitutethepackage.
andbringsuitagainstthecarrier?
Q: What are the instances where there is no
A: liabilityunderCOGSA?
1. Theshipper
2. Theconsignee;or A:
3. Anylegalholderofthebillofladinglike 1. if the nature or value of goods
the indorsee, subrogee, or the insurer knowingly and fraudulently misstated
ofthegoods.(Kuyv.EverettSteamship byshipper
Corporation, G.R. No. L5554, May 27, 2. if damage resulted from dangerous
1953) nature of shipment loaded without
consentofcarrier
Q: Does the oneyear prescriptive period within 3. if unseaworthiness not due to
whichtofileacaseagainstthecarrieralsoapply negligence
to a claim filed by an insurer who stands as a 4. ifdeviationwastosavelifeorproperty
subrogeetotheinsured? atsea.

A: Yes, it includes the insurer of goods. Also, VI.PUBLICSERVICEACT
whether the insurer files a third party complaint
or maintains an independent action is of no A.DEFINITIONOFPUBLICUTILITY
moment(FilipinoMerchantsInsuranceCo.,Inc.v.
Alejandro,G.R.No.L54140,Oct.14,1986). Q:Whatisapublicutility?

Note: The ruling in the abovecited case should A: A business or service engaged in regularly
applyonlytosuitsagainstthecarrierfiledeitherby supplying the public with some commodity or
the shipper, the consignee or the insurer, not to service of public consequencesush aselectricity,
suitsbytheinsuredagainsttheinsurer.Thebasisof gas, water, transportation, telephone or
the insurers liability is the insurance contract and telegraphservice.
suchclaimprescribesin10years,inaccordancewith
Art. 1144 of the Civil Code. (Mayer Steel Pipe Q:Whatisapublicservice?
Corporationv.CA,G.R.No.124050,June19,1997)
A:Everypersonthatmayown,operate,manage,
Q: What is the prescriptive period in case of controlinthePhilippines,forhire/compensation,
misdeliveryandconversionofgoods? with general/limited clientele whether
permanent, occasional or accidental, and done
A: In case of misdelivery or conversion, the for general business purposes, any common
properperiodsare: carrier, railroad, street railway, traction railway,
1. Ifthereisawrittencontract10years subway motor vehicle, steamboat, or steamship
(Art.1144,CivilCode) line, ferries and watercraft, shipyard, iceplant,
2. Oralcontract6years(Art.1145) electriclight,heatandpoweroranyotherpublic
3. Forquasidelict4years(Art.1146) utility.

Q: What is the amount of the carriers liability
undertheCOGSA?
A:
103

B.NECESSITYFORCERTIFICATEOFPUBLIC Q: Does the CPC confer upon the holder any
CONVENIENCE proprietaryrightorinterestintheroutecovered
thereby?
Q: What is a Certificate of Public Convenience
(CPC)? A: No. (Luque v. Villegas, G.R. No. L22545, Nov.
28, 1969). However, with respect to other
A: An authorization issued for the operation of persons and other public utilities, a certificate of
public services for which no franchise, either publicconvenienceasproperty,whichrepresents
municipal or legislative, is required by law, such therightandauthoritytooperateitsfacilitiesfor
asacommoncarrier. publicservice,cannotbetakenorinterferedwith
without due process of law. Appropriate actions
Under the Public Service Law, a certificate of maybemaintainedincourtsbytheholderofthe
public convenience can be sold by the holder certificate against those who have not been
thereof because it has considerable material authorized to operate in competition with the
value and is considered a valuable asset formerandthosewhoinvadetherightswhichthe
(Raymundov.LunetaMotorCo.,G.R.No.39902, former has pursuant to the authority granted by
Nov.29,1933). the Public Service Commission (A.L. Animen
Transportation Co. v. Golingco, G.R. No. 17151,
Q: What is a certificate of public convenience Apr.6,1922)
andnecessity(CPCN)?
Q: What are the requirements for the grant of
A: A certificate issued by the appropriate certificateofpublicconvenience?
government agency for the operation of a public
service for which prior franchise is required by A:
law. 1. Applicant must be a citizen of the
Note: There is no more distinction between a CPC Philippines. If the applicant is a
and a CPCN. Unless otherwise exempt, no public Corporation, 60% of its capital must be
service shall operate without having been issued a ownedbyFilipinos
CPCoraCPCN. 2. Applicantmustprovepublicnecessity
3. Applicant must prove the operation of
Q: Chris was granted a Certificate of Public proposed public service will promote
Convenience (CPC) in 1986 to operate a ferry public interest in a proper and suitable
betweenMindoroandBatangasusingthemotor manner;and
vessel MV Gela. He stopped operations in 4. Applicant must have sufficient financial
1988 due to unserviceability of the vessel. In capability to undertake proposed
1989, Nicole was granted a CPC for the same services and meeting responsibilities
route. After a few months, she discovered that incidental to its operation. (Kilusang
Elisa was operating on her route under Chris Mayo Uno v. Garcia G.R. No. 108584,
CPC. Because Nicole filed a complaint for illegal Dec.22,1994)
operations with the Maritime Industry
Authority, Chris and Elisa jointly filed an Q: Cite instances where a certificate of public
application for sale and transfer of Chris CPC convenienceisnotnecessary?
and substitution of the vessel MV Gela with
anotherownedbyElisa.ShouldChrisandElisas A:
jointapplicationbeapproved? 1. Warehouses
2. Animaldrawn vehicles or banca
A:No.ThejointapplicationofChrisandElisafor poweredbyoarorbysail;tugboatsand
the sale and transfer of Chris CPC and lighters
substitution of the vessel MV Gela with another 3. Airshipsexceptastofixingrates
vessel owned by the transferee should not be 4. Radio companies, except as to fixing of
approved. The certificate of public convenience rates
andMVGelaareinseparable.Theunserviceability 5. Iceplants
of the vessel covered by the certificate had 6. Publicmarket
likewiserenderedineffectivethecertificateitself, 7. Publicutilitiesoperatedbythenational
and the holder thereof may not legally transfer government or political subdivision
the same to another. (Cohon v. CA, G.R. No. exceptastorates.
82558,Aug20,1990)(1992BarQuestion)

104
MERCANTILELAWTEAM:
TRANSPORTATION LAW
Q: What are the grounds that oppositors may The fact that it is only one trip and of little
raisetotheapplicationforacertificateofpublic consequenceisnotsufficientreasontograntthe
convenience? application. (Yangco v. Esteban, G.R. No. 38586,
Aug.18,1933)
A:
1. Theareahasalreadyawellestablished Q:WhatistheProtectionofInvestmentRule?
operatorprioroperatorrule.
2. Interpose an objection stating that the A: The law contemplates that the first licensee
grantoftheapplicationwouldresultto willbeprotectedinhisinvestmentandwillnotbe
aruinouscompetition. subjectedtoaruinouscompetition.
3. Attack the citizenship of the applicant
(Sec.11,Art.XIIofthe1987Constitution So long as an operator under a prior license
prohibits the granting of franchise or complies with its terms and conditions and the
certificate for the operation of public reasonablerulesandregulationsforitsoperation,
utility in favor of nonFilipino citizens); andmeetsthereasonabledemandsofthepublic,
or it will be protected rather than destroy its
4. The applicant does not have the investmentbythegrantingofthesecondlicense
necessaryfinancialcapacity. to another person for the same thing over the
samerouteoftravel.
Q:Whatistheprioroperatorrule?
Note: The "prior operator" and "protection of
A: Provides existing franchise operator investment" rules cannot take precedence over the
preferential right within authorized territory as convenience of the public. (Martires Ereno Co. v.
long as said operator renders satisfactory and Public Service Commission, G.R. No. L25962, Sept.
economical service. This rule subordinates the 30,1975)
prior applicant rule which gives first applicant
priority only if things and circumstances are C.FIXINGOFRATES
equal. A prior operator must be given the
opportunity to extend its transportation services Q:Whohasthepowertofixrates?
before permitting a new operator to operate in
theterritoryofsaidprioroperator. A:PublicServiceCommision

Q: What are the exceptions of prior operator Q: What is the extent of power by the
rule? Commissiontofixrates?

A: Where public interest would be better served A: The Public Service Commission has the power
bythenewoperator: tofixanddeterminethefollowingwhichshallbe
imposedobservedandfollowedthereafterbyany
1. Where the old operator failed to make publicservice:
anoffertomeettheincreaseintraffic; 1. Individualorjointrates
2. Where the CPC granted to the new 2. Tolls
operatorsamaidencertificate; 3. Charges
3. Whentheapplicationoftherulewould 4. Classifications
beconducivetomonopoly. 5. Schedules
6. Commutation
Q:WhatisthePriorApplicantRule? 7. Mileage
8. Kilometrage
A: Applies to situations wherein two applicants 9. Otherspecialrates.(Sec16)
are applying for a certificate of public
convenience over a given territory. Where both Q:MaytheCommissionapproveratesproposed
applicants are similarly situated, the prior bypublicservices?
applicantshallhavethecertificateovertheother.
A: Yes. The Commission may, in its discretion,
Q:WhatistheThirdOperatorRule? approve rates proposed by public services
provisionally and without necessity of any
A: Where two operators are more than serving hearing;butitshallcallahearingthereonwithin
the public there is no reason to permit a third thirty days, thereafter, upon publication and
operator to engage in competition with them. notice to the concerns operating in the territory
105

affected.In case the public service equipmentof Enterprises, Inc. v. IAC, G.R. No. 64693, Apr. 27,
an operator is used principally or secondarily for 1984)
the promotion of a private business, the net
profits of said private business shall be Q: May the registered owner of the vehicle be
considered in relation with the public service of allowedtoprovethatthereisalreadyatransfer
suchoperatorforthepurposeoffixingtherates. ofownershiptoanotherpersonunderthekabit
(Sec16) system?

Q: Cite examples of public utilities which A: No. One of the primary factors considered in
certificateofpublicconvenienceisnotnecessary thegrantingofacertificateofpublicconvenience
exceptastofixingofrated. for the business of public transportation is the
financial capacity of the holder of the license, so
1. Airships thatliabilitiesarisingfromaccidentsmaybeduly
2. Radiocompanies compensated.The kabitsystem renders illusory
3. Publicutilitiesoperatedbythenational suchpurposeand,worse,maystillbeavailed of
governmentorpoliticalsubdivision bythegranteetoescapecivilliabilitycausedbya
negligentuseofavehicleownedbyanotherand
Q: In determining the just and reasonable rates operatedunderhislicense.
to be charged by a public utility,what are
thethree major factors that should be Ifaregisteredownerisallowedtoescapeliability
consideredbytheregulatingagency? by proving who the supposed owner of the
vehicleis,itwouldbeeasyforhimtotransferthe
A: subject vehicle to another who possesses no
1. Rateofreturn propertywithwhichtorespondfinanciallyforthe
2. Ratebaseand damage done. (Lim v. CA, G.R. No. 125817, Jan.
3. The return itself or the computed 16,2002)
revenue to be earned by the public
utility based on the rate of return and Q: What is the reason behind the proscription
rate base (Republic vs Meralco, GR No. againstthekabitsystem?
141314,November15,2002).
A: The thrust of the law in enjoining the kabit
Note:Therateofreturnofapublicutility system is not so much as to penalize the parties
is not prescribed by administrative and but to identify the person upon whom
judicial pronouncements. The Supreme responsibilitymaybefixedincaseofanaccident
Courthasconsistentlyadopteda12%rate withtheendviewofprotectingtheridingpublic.
ofreturnforpublicutilities(Ibid). Thepolicythereforelosesitsforceifthepublicat
largeisnotdeceived,muchlessinvolved.(Limv.
Q: Are proceeds from public utilities excluded CA,G.R.No.125817,Jan.16,2002)
fromgrossincomefortaxpurposes?
Q:Whatisthesocalledboundarysystem?
A:Yes(Sec.32[B]NIRC).
A: Under this system the driver is engaged to
D.UNLAWFULARRANGEMENTS drive the owner/operators unit and pays the
latterafeecommonlycalledboundaryfortheuse
Q:Whatisthesocalledkabitsystem? oftheunit.Whateverheearnedinexcessofthat
amount is his income. (Paguio Transport Corp. v.
A: It is an arrangement whereby a person who NLRC,G.R.No.119500,Aug.28,1998)
has been granted the certificate allows other
persons who own motor vehicles to operate Q:Whatkindofrelationshipexistsbetweenthe
under his license, sometimes for a fee or owner of the vehicle and the driver under a
percentageoftheearnings.(2005BarQuestion) "boundarysystem"arrangement?

Note:Althoughnotoutrightlypenalizedasacriminal A: The relationship between jeepney
offense,thekabitsystemisinvariablyrecognizedas owners/operators on one hand and jeepney
being contrary to public policy and therefore, void drivers on the other under the boundary system
andinexistentunderArt.1409oftheNewCivilCode.
is that of employeremployee and not of lessor
It is a fundamental principle that the court will not
lessee. (Martinez v. NLRC, G.R. No. 117495, May
aid either party to enforce an illegal contract, but
will leave them both where it finds them. (Lita
29,1997)

106
MERCANTILELAWTEAM:
TRANSPORTATION LAW
The features which characterize, the "boundary VII.THEWARSAWCONVENTION

system" namely, the fact that the driver does
notreceiveafixedwagebutgetsonlytheexcess A.APPLICABILITY
oftheamountoffarescollectedbyhimoverthe
amount he pays to the jeepowner, and that the Q:Whenisthislawapplicable?
gasolineconsumedbythejeepisfortheaccount
ofthedriverarenotsufficienttowithdraw,the A: This Convention applies to all international
relationship between them from that of the carriage of persons, luggage or goods performed
employerandemployee.(NationalLaborUnionv. by aircraft for reward. It applies equally to
Dinglasan,G.R.No.L14183,Nov.4,1993) gratuitouscarriagebyaircraftperformedbyanair
transportundertaking.(Art.1[1])
E.APPROVALOFSALE,ENCUMBRANCEORLEASE
OFPROPERTY Q:Whatisaninternationaltransportation?

Q:Whataretheguidelinestoeliminatethesale A: Any carriage in which, according to the
andtransferofexpiredand/ordeadCPCs? contract made by the parties, the place of
departure and the place of destination, whether
A: or not there be a break in the carriage or a
1. No approval of sale and transfer of a transshipment,aresituatedeither:
CPC shall be accepted where the 1. Within the territories of two High
validity of CPC being conveyed is less ContractingParties;or
than 6 months on the date of its filing 2. Within the territory of a single High
withtheLTFRB. Contracting Party, if there is an agreed
2. Noapplicationforapprovalofsaleand stoppingplacewithinaterritorysubject
transfer of a CPC shall be accepted tothesovereignty,suzerainty,mandate
unlesstheunitsauthorizedthereinare or authority of another Power, even
registeredwiththeLTOforthecurrent thoughthatPowerisnotapartytothe
year. Convention.(Art.1[2])
3. Where the authorized units under the
CPC conveyed have all not been Note:AHighContractingPartyisoneoftheoriginal
registeredwiththeLTOforthecurrent partiestotheconvention.
year, the application for the approval
of sale and transfer will be accepted B.LIMITATIONOFLIABILITY
and processed only for the actual
number of registered units Q:Whatarethelimitationstotheliabilityofair
correspondingtotheCPCconveyed. carriers?
4. Noapplicationforapprovalofsaleand
transfer of a CPC shall be accepted, A:
unless all fees/dues have been fully 1. In the carriage of persons 250,000
paidtotheLTOandLTFRB,andtaxesto francs for each passenger.
theBIR(DOTCOrder201034). Nevertheless, by special contract, the
carrierandthepassengermayagreeto
Q: Is the approval by the Public Utility ahigherlimitofliability.
Commissionofthesale,encumbranceorleaseof
propertyisaconditionprecedenttothevalidity 2. In the carriage of registered baggage
ofacontract? and of cargo Two hundred and fifty
(250)francsperkilogramme,unlessthe
A: No. While in the old law the sale without the passenger or consignor has made, at
approval of the Public Utility Commission was thetimewhenthepackagewashanded
declarednullandvoid,underCommonwealthAct overtothecarrier,aspecialdeclaration
146, the new law, the sale may not only be ofinterestindeliveryatdestinationand
negotiated but completed before said approval. has paid a supplementary sum if the
In other words, the approval by the Commission casesorequires.
isnotaconditionprecedenttothevalidityofthe
contract. The approval is only necessary to Note:Inthecaseofloss,damageordelay
protect public interest (Darang vs. Belizar, G.R. ofpartofregisteredbaggageorcargo,or
No.L19487,January31,1967). of any object contained therein, the
weight to be taken into consideration in
determining the amount to which the

107

carrier'sliabilityislimitedshallbeonlythe complaint within the reglamentary period. (United
total weight of the package or packages Airlinesv.Uy,G.R.No.127768,Nov.19,1999)
concerned. Nevertheless, when the loss,
damage or delay of a part of the Q: Could a person recover a claim covered by
registered baggage or cargo, or of an WarsawConventionafterthelapsetwoyears?
objectcontainedtherein,affectsthevalue
of other packages covered by the same A: No. A claim covered by the Warsaw
baggagecheckorthesameairwaybill,the Convention can no longer be recovered under
total weight of such package or packages locallaw,ifthestatuteoflimitationsoftwoyears
shall also be taken into consideration in
hasalreadylapsed.(PAL.v.Savillo,557SCRA66)
determiningthelimitofliability.

B.WILLFULLMISCONDUCT
3. As regards objects of which the

passenger takes charge himself Five
Q:Whatconstituteswillfulmisconduct?
thousand (5,000) francs per passenger.

(Art.22)
A:Thedefinitionof"willfulmisconduct"depends

in some measure on which court is deciding the
Note: Carrier is not entitled to the
foregoinglimitifthedamageiscausedby
issue. Some common factors that courts will
willful misconduct or default on its part considerare:
(Art.25)
1. Knowledge that an action will probably
Q: Is a stipulation relieving the carrier from or resultininjuryordamage
limitingitsliabilityvalid?
2. Recklessdisregardoftheconsequences
A:No.Anyprovisiontendingtorelievethecarrier ofanaction,or
ofliabilityortofixalowerlimitthanthatwhichis
laid down in this Convention shall be null and 3. Deliberately failing to discharge a duty
void but the nullity of such provision does not related to safety. Courts may also
involve the nullity of the whole contract. (Art. considerotherfactors
23[1])
Q: Is the failure of the carrier to deliver the
Q:Whataretheexceptionstotheselimitations? passengersluggageatthedesignatedtimeand
placeipsofactoconstituteswilfulmisconduct?
A:
1. Willfulmisconduct A: No. There must be a showing that the acts
2. Defaultamountingtowillfulmisconduct complained of were impelled by an intention to
3. Acceptingpassengerswithoutticket violatethelaw,orwereinpersistentdisregardof
4. Accepting goods without airway bill or one'srights.Itmustbeevidencedbyaflagrantly
baggagewithoutbaggagecheck or shamefully wrong or improper conduct (Luna
vs.CA,GRNo.10037475,November27,1992).
Q: When will ones right to damages be
extinguished? Q: Is the carriers guessingof which luggage
contained the firearms constitutes willful
A: The right to damages shall be extinguished if misconduct?
an action is not brought within two years,
reckoned from the date of arrival at the A: Yes. The guessingof which luggage contained
destination, or from the date on which the the firearms amounted to willful misconduct
aircraft ought to have arrived, or from the date under Section 25(1) of the Warsaw Convention.
onwhichthecarriagestopped. (Northwest Airlines vs. CA, GR No. 120334,
January20,1998)
Note: Despite the express mandate that an action
fordamagesshouldbefiledwithin2yearsfromthe Q: Is the allegation of willful misconduct
arrivalattheplaceofdestination,suchruleshallnot resulting in a tort is insufficient to exclude the
beappliedwheredelayingtacticswereemployedby casefromtherealmofWarsawConvention?
airline itself in a case where a passenger wishes to
settlehiscomplaintoutofcourtbuttheairlinegave A: Yes. A cause of action based on tort did not
him the runaround, answering the passengers bringthecaseoutsidethesphereoftheWarsaw
letters but not giving in to his demands, hence, Convention. (Lhuiller vs. British Airways, GR No.
giving the passenger no time to institute the 171092,March15,2010).
108
MERCANTILELAWTEAM:
CORPORATION LAW
CORPORATIONLAW participated in the business affairs of the

proposed corporation would be considered as
Q: What are the distinctions between partners under a de facto partnership. On the
partnershipandcorporation? other hand, parties who took no part
notwithstanding their subscriptions do not
A:SeeAppendixD becomepartnerswithothersubscribers.(Pioneer
Insurancev.CA,G.R.No.84197,July28,1989)
A.CORPORATIONDEFINED
Q:Mayacorporationenterintoajointventure?
Q:Whatisacorporation?
A: Yes. It may enter into a joint venture with
A:Anartificialbeingcreatedbyoperationoflaw another where the nature of that venture is in
having the right of succession, and the powers, line with the business authorized by its charter.
attributesandpropertiesexpresslyauthorizedby (Aurbach v. Sanitary Wares Manufacturing
lawandincidenttoitsexistence.(Sec.2) Corporation,G.R.No.75875,Dec.15,1989)

Q: May a corporation enter into a contract of Q: What are the distinctions between joint
partnership? accountandpartnership?

A: A:
GR:Corporationshavenopowertoenterinto JOINTACCOUNT PARTNERSHIP
partnership. Hasnofirmnameandis
conductedInthenameof Hasafirmname.
Reason: Public policy. In a partnership, the theostensiblepartner.
corporation would be bound by the acts of the Hasnojuridical Hasjuridical
persons who are not its duly appointed and personalityandcansueor personalityandmay
authorized agents and officers, which would be besuedonlyinthename sueorbesuedunder
entirely inconsistent with the policy of the law oftheostensiblepartner. itsfirmname
thatthecorporationshallmanageitsownaffairs Hasnocommonfund. Hasacommonfund.
separatelyandexclusively. Theostensiblepartner Allgeneralpartners
managesitsbusiness havetherightof
XPN: The SEC allowed corporations to enter operations. management.
into partnerships with other Liquidationmay,by
Liquidationthereofcan
corporationsandindividualsprovided: agreement,be
onlybedonebythe
entrustedtoapartner
ostensiblepartner.
1. The authority to enter into partnership orpartners.
relation is expressly conferred by the
CharterortheAOIandthenatureofthe Q:Whataretheattributesofacorporation?
business venture to be undertaken by
the partnership is in line with the A:
business authorized by the charter or 1. Itisanartificialbeing
the AOI. (SEC Opinions, Feb. 29, 1980, 2. Itiscreatedbyoperationoflaw
Dec.1,1993,andFeb.23,1994.) 3. Itenjoystherightofsuccession
4. It has the powers, attributes and
2. The partnership must be a limited properties expressly authorized by law
partnership and the corporation must orincidenttoitsexistence
bealimitedpartner
Q: What are the theorieson the formation of a
3. If it is a foreign corporation, it must corporation?
obtain a license to transact business in
thecountry. A:
1. Concession theory or fiat theory
Q: Does a defective incorporation result into a Means that a corporation was
partnership? conceived as an artificial person owing
existencethroughcreationbyaforeign
A: The answerdepends on whether or not there power. It has without any existence
isaclearintenttoparticipateinthemanagement until it has received the imprimatur of
ofthebusinessaffairsonthepartoftheinvestor. the state acting according to law,
Partieswhointendstoparticipateorhasactually through the SEC. (Tayag v. Benguet

109

Consolidated, Inc., G.R. No. L23276, good and welfare and where no
Nov.29,1968) part of its income is distributable
as dividends to its members,
Note: Philippine jurisprudence adopted trustees,orofficers.(Sec87)
thistheoryastheunderlyingbasisforthe
existence and powers of corporate 2. As to the number of persons who
entities. composethem:
a. Corporation aggregate
2. Theory of corporate enterprise or corporation consisting of more
economic unit The corporation is not thanonememberorcorporator;
merely an artificial being, but more of
an aggregation of persons doing b. Corporation Sole religious
business, or an underlying business corporation which consists of one
unit. (However, this doctrine is being memberorcorporatoronlyandhis
usedinsupportofotherdoctrines) successor.

Note: Recognizes the existence of a 3. As to whether they are for religious
businessenterpriseasthebasesofseveral purposeornot:
contractsandtransactionsapartfromthe a. Ecclesiastical corporation one
issue of whether there was duly
organizedforreligiouspurpose
constitutedajuridicalperson.

b. Laycorporationoneorganizedfor
3. Genossenschaft theory Treats a
apurposeotherthanforreligion.
corporationastherealityofthegroup

asasocialandlegalentity,independent
4. As to whether they are for charitable
of State recognition and concession.
purposeornot:
(Tayag v. Benguet Consolidated, Inc.,
a. Eleemosynary one established for
G.R.No.L23276,Nov29,1968)
religiouspurposes

Q:Whatarethetwokindsoffranchise?
b. Civil one established for business

orprofit
A:

1. Corporate or primary/general franchise
5. As to state or country under or by
grantgiventoexistasacorporation;
whoselawstheyhavebeencreated:

a. Domestic one incorporated under
2. Specialorsecondaryfranchisecertain
thelawsofthePhilippines
rights and privileges conferred upon

existing as a corporation (e.g. right to
b. Foreignoneformed,organized,or
use the streets of a municipality to lay
existingunderanylawsotherthan
pipes of tracks, erect poles, or string
thoseofthePhilippinesandwhose
wires).
laws allow Filipino citizens and

corporations to do business in its
B.CLASSIFICATIONOFCORPORATIONS
owncountryorstate.(Sec123)

Q:Whataretheclassificationsofcorporation?
6. As to their legal right to corporate

existence:
A:
a. De jure one existing both in fact
1. AstoCorporationCode:
andinlaw
a. STOCK CORPORATION one which

have capital stock divided into
b. De facto one existing in fact but
shares and are authorized to
notinlaw
distribute to the holders of such

shares dividends or allotments or
7. As to whether they are open to the
the surplus profits on the basis of
publicornot:
thesharesheld.(Sec3)
a. Close one which is limited to

selected persons or members of
b. NONSTOCKCORPORATIONisone
thefamily.(Sec96105)
which do not issue shares and are
creatednotforprofitbutforpublic
110
MERCANTILELAWTEAM:
CORPORATION LAW
b. Open one which is open to any Q: What are the requisites of a de facto
personwhomaywhichtobecome corporation?
astockholderormemberthereto
A:
8. As to their relation to another 1. Organizedunderavalidlaw.
corporation
a. Parent or Holding one which is 2. Attempt in good faith to form a
relatedtoanothercorporationthat corporation according to the
ithasthepowereither,directlyor requirementsofthelaw.
indirectly to, elect the majority of
the director of such other Note: The Supreme Court requires that
corporation Articles of Incorporation have already
been filed with the SEC and the
b. Subsidiaryonewhichissorelated corresponding certificate of incorporation
to another corporation that the isobtained.
majority of its directors can be
elected either, directly or 3. Useofcorporatepowers.
indirectly, by such other
corporation Note: The corporation must have
performedtheactswhicharepeculiartoa
corporation like entering into a

9. As to whether they are corporations in
subscriptionagreement,adoptingbylaws,
atruesenseoronlyinalimitedsense: andelectingdirectors.
a. Trueonewhichexistsbystatutory
authority Q: How is the status of a de facto corporation
attacked?
b. Quasi one which exist without
formallegislativegrant. A: The existence of a de facto corporation shall
notbeinquiredintocollaterallyinanyprivatesuit
i. Corporation by prescription one to which such corporation may be a party. Such
which has exercised corporate inquirymaybemadebytheSolicitorGeneralina
powers for an indefinite period quowarrantoproceeding.(Sec.20)
withoutinterferenceonthepartof
thesovereignpowerandwhichby Note: However, as long as it exists, a de facto
fictionoflaw,isgiventhestatusof corporation enjoys all attributes of a corporation
acorporation; untiltheStatequestionsitsexistence.

ii. Corporation by estoppel one Incomparisonwithacorporationbyestoppelwhere
which in reality is not a the stockholders are liable as general partners,
corporation, either de jure or de stockholdersinadefactocorporationareliableasa
facto, because it is so defectively dejurecorporation.Hence,uptotheextentoftheir
formed, but is considered a shareholdings.
corporations in relation to those
only who, by reason of theirs acts Q: Distinguish de facto corporation from
or admissions, are precluded from corporationbyestoppel.
asserting that it is not a
corporation. A:
DEFACTO CORPORATIONBY
10.As to whether they are for public CORPORATION ESTOPPEL
(government)orprivatepurpose: Thereisnoexistencein
Thereisexistenceinlaw
a. Public one formed or organized for law
the government or a portion of the Thedealingsamongthe Thedealingsamongthe
State partiesonacorporate partiesonacorporate
basisisnotrequired basisisrequired

Whenrequisitesare Itwillbeconsidereda
b. one formed for some provate
lacking,itcanbe corporationinanyshape
purpose,benefitorend
corporationbyestoppel orform
111

C.NATIONALITYOFCORPORATIONS vote is owned and held by Filipino
citizens
Q: What are the tests in determining the
nationalityofcorporations? 2. Corporations organized abroad and
registered as doing business in the
A: PhilippinesundertheCorporationCode
1. Incorporation test Determined by the of which 100% of the capital stock
state of incorporation, regardless of the entitledtovotebelongtoFilipinos.
nationalityofthestockholders.
Note:However,itprovidesthatwhereacorporation
2. Domiciliary test Determined by the and its nonFilipino stockholders own stocks in a
principal place of business of the SECregisteredenterprise,atleast60%ofthecapital
corporation. stock outstanding and entitled to vote of both
corporationsandatleast60%ofthemembersofthe
3. Control test Determined by the board of directors of both corporations must be
nationality of the controlling Filipinocitizens(DOUBLE60%RULE).

stockholders or members. This test is
Q: What is the nationality of a corporation
appliedintimesofwar.
organizedandincorporatedunderthelawsofa

foreigncountry,butowned100%byFilipinos?
4. Grandfather rule Nationality is

attributedtothepercentageofequityin
A: Under the control test of corporate
the corporation used in nationalized or
nationality, this foreign corporation is of Filipino
partlynationalizedarea.
nationality.Wheretherearegroundsforpiercing

the veil of corporate entity, that is, disregarding
Q:Whataretherequisitesofthecontroltest?
the fiction, the corporation will follow the

nationality of the controlling members or
A:
stockholders, since the corporation will then be
1. Control,notmeremajorityorcomplete
considered as one and the same. (1998 Bar
stockcontrol,butcompletedomination,
Question)
not only of finances but of policy and

business practice in respect to the
D.CORPORATEJURIDICALPERSONALITY
transaction attacked such that the

corporate entity as to this transaction
Q: What is the doctrine of separate (legal)
hadatthattimenoseparatemind,will
personality?
orexistenceofitsown

A: It is a wellsettled doctrine that a corporation
2. Such control must have been used by
has a personality distinct and separate from its
the defendant to commit fraud or
individual stockholders or members (Cruz vs.
wrong,toperpetuatetheviolationofa
Dalisay,A.M.No.R181P,July31,1987).
statutoryorotherpositivelegalduty,or

dishonestorunjustactincontravention
Q: What are the significancesof thedoctrineof
ofplaintiffslegalright;and
separatepersonality?

3. The control and breach of duty must
A:
proximately cause the injury or unjust
1. Liability for acts or contracts the acts
loss complained of. (Velarde v. Lopez,
of the stockholders do not bind the
Inc., G.R. No. 153886, Jan. 14, 2004;
corporation unless they are properly
Heirs of Ramon Durano, Sr. v. Uy, G.R.
authorized. The obligations incurred by
No.136456,Oct.24,2000)
a corporation, acting through its

authorizedagentsareitssoleliabilities.
Q: Who are considered Philippine Nationals
The obligations of the corporation are
under Foreign Investment Act of 1991 (R.A. No.
not the obligations of its shareholders
7042)?
andmembersandviceversa.(Ceasev.

CA,G.R.No.L33172,Oct.18,1979)
A:

1. Corporations organized under
2. Right to bring actions may bring civil
Philippine laws of which 60% of the
andcriminalactionsinitsownnamein
capitalstockoutstandingandentitledto
112
MERCANTILELAWTEAM:
CORPORATION LAW
the same manner as natural persons. XPN:Ifthepenaltyofthecrimeisonlyfineor

(Art.46,CivilCode) forfeiture of license or franchise. (Ching v
SecretaryofJustice,G.R.No.164317,Feb.6,
3. Righttoacquireandpossessproperty 2006)
property conveyed to or acquired by
thecorporationisinlawthepropertyof Q:Isacorporationentitledtomoraldamages?
the corporation itself as a distinct legal
entity and not that of the stockholders A:
ormembers.(Art.44[3],CivilCode) GR: A corporation is not entitled to moral
damages because it has no feelings, no
Note: The interest of the shareholder in emotions, no senses. (ABSCBN Broadcasting
the properties of the corporation is Corporation v. CA, G.R. No. 128690 Jan 21,
inchoate only. The interest of the 1999 and Phillip Brothers Oceanic, Inc, G.R.
shareholder on a particular property No.126204,Nov.20,2001)
becomes actual, direct and existing only
upon the liquidation of the assets of the XPN:
corporation and the same property is 1. The corporation may recover moral
assignedtotheshareholderconcerned.
damagesunderitem7ofArticle2219of
the New Civil Code because said

4. Acquisition of court of jurisdiction
provision expressly authorizes the
service of summons may be made on
recovery of moral damages in cases of
the president, general manager,
libel, slander, or any other form of
corporate secretary, treasurer or in
defamation. Article 2219(7) does not
house counsel. (Sec. 11, Rule 14, Rules
qualify whether the injured party is a
ofCourt).
naturalorjuridicalperson.Therefore,a

corporation, as a juridical person, can
5. Changes in individual membership
validly complain for libel or any other
corporation remains unchanged and
formofdefamationandclaimformoral
unaffected in its identity by changes in
damages (Filipinas Broadcasting
itsindividualmembership.
Network, Inc. v. AMECBCCM, G.R. No.

141994,Jan17,2005.
Q:Isacorporationliablefortorts?

2. Whenthecorporationhasareputation
A: Yes whenever a tortuous act is committed by
that is debased, resulting in its
anofficeroragentundertheexpressdirectionor
humiliation in the business realm
authority of the stockholders or members acting
(Manila Electric Company v. T.E.A.M.
asabody,or,generally,fromthedirectorsasthe
ElectronicsCorporation,et.al.,G.R.No.
governing body. (PNB v. CA, G.R. No. L27155,
131723,Dec.13,2007.
May18,1978)

Q: What is the doctrine of piercing the veil of

Q:Isacorporationliableforcrimes?
corporatefiction?

A:
A: It is the doctrine that allows the State to
GR: No. Since a corporation is a mere legal
disregard the notion of separate personality of a
fiction, it cannot be held liable for a crime
corporationforjustifiablereason/s.
committed by its officers, since it does not

havetheessentialelementofmalice; insuch Note: This is an exception to the Doctrine of
case the responsible officers would be SeparateCorporateEntity.
criminally liable. (People v. Tan Boon Kong,
G.R.No.L32066.Mar.15,1930) Q:Whataretheeffectsofpiercingtheveil?

Note: An officer of a corporation can be held
A: Courts will look at the corporation as an
criminally liable for acts or omissions done in
aggregation of persons undertaking the business
behalf of the corporation only where the law
directly makes the person who fails to perform
asagroup.
theactintheprescribedmannerexpresslyliable
criminally.(Siav.People,L30896,Apr.28,1983) Note:Whentheveilofcorporatefictionispiercedin
proper cases, the corporate character is not
necessarily abrogated. It continues for legitimate
objectives. The decision applies only for that

113

particularcase.(ReynosoIVv.CA,G.R.Nos.116124 E.CAPITALSTRUCTURE
25,Nov22,2000)
Q.Whatarethecomponentsofacorporation?
Q: What circumstances the mere existence of
which does not necessarily entitle piercing the A:
veil? 1. Corporators Those who compose a
corporation,whetherasstockholdersor
A: members
1. Controlling ownership of the
corporationsshare 2. Incorporators They are those
2. 2corporationshavecommondirectors mentioned in the Articles of
3. Substantialidentityoftheincorporators Incorporation as originally forming and
or 2 corporations and identity of its composingthecorporationandwhoare
business signatoriesthereof.

Q: What are the tests in piercing the corporate 3. Directors and trustees The Board of
veil? Directors is the governing body in a
stock corporation while the Board of
A: Trusteesisthegoverningbodyinanon
1. Fraudtest(Whencorporatefictionused stockcorporation.
to justify a wrong, protect fraud of
defendcrime) 4. Corporate officers they are the
2. Controltest officers who are identified as such in
3. Alterego or instrumentality test (or the Corporation Code, the Articles of
conduitcases) Incorporation, or the Bylaws of the
4. Publicconvenienceorobjectivetest corporation.
5. Equitycases/test
5. Stockholders Owners of shares of
Q: Plaintiffs filed a collection action against X stockinastockcorporation.
Corporation. Upon execution of the court's
decision,XCorporationwasfoundtobewithout 6. Members Corporators of a
assets. Thereafter, plaintiffs filed an action corporation which has no capital stock.
against its present and past stockholder Y Theyarenotownersofsharesofstocks,
Corporationwhichownedsubstantiallyallofthe and their membership depends on
stocks of X corporation. The two corporations terms provided in the articles of
have the same board of directors and Y incorporationorbylaws(Sec.91).
Corporation financed the operations of X
corporation. May Y Corporation be held liable 7. PromoterApersonwho,actingalone
forthedebtsofXCorporation?Why? or with others, takes initiative in
foundingandorganizingthebusinessor
A: Yes, Y Corporation may be held liable for the enterprise of the issuer and receives
debts of X Corporation. The doctrine of piercing consideration therefor. (Sec. 3.10, R.A.
theveilofcorporationfictionappliestothiscase. No.8799,SRC)
The two corporations have the same board of
directors and Y Corporation owned substantially 8. Subscriber persons who have agreed
all of the stocks of X Corporation, which facts to take and pay for original, unissued
justifytheconclusionthatthelatterismerelyan sharesofacorporationformedortobe
extension of the personality of the former, and formed.
thattheformercontrolsthepoliciesofthelatter.
Added to this is the fact that Y Corporation 9. Underwriterapersonwhoguarantees
controls the finances of X Corporation which is onafirmcommitmentand/ordeclared
merely an adjunct, business conduit or alter ego best effort basis the distribution and
of Y Corporation. (CIR v. Norton & Harrison saleofsecuritiesofanykindbyanother.
Company,G.R.No.L17618,Aug.31,1964)(2001
BarQuestion)

114
MERCANTILELAWTEAM:
CORPORATION LAW
(1)NUMBERANDQUALIFICATIONSOF cooperatives are allowed to be incorporators

INCORPORATORS ofruralbanks.

Q:Whatarethedistinctionsbetweencorporator Note: An incorporator can be corporator. Non
andincorporator? residentsmaybeincorporatorsbecausethelawonly
requires the majority to be residents of the
A: Philippines.
INCORPORATOR CORPORATOR
Mayornotbesignatory Anincorporatorremainstobeanincorporatoreven
SignatoryoftheArticles if he will later on cease to be a shareholder.
oftheArticlesof
ofIncorporation However, an incorporator who ceases to hold a
Incorporation
Ceasetobea sharecannotbeconsideredacorporator.
corporatorbysaleofhis
Doesnotceasetobean sharesincaseofstock
incorporatoruponsaleof corporation.Incaseof (2)MINIMUMCAPITALSTOCKAND
hisshares nonstockcorporation, SUBSCRIPTIONREQUIREMENTS
whenthecorporator
ceasestoeamember. Q:Whatarethecapitalstockrequirements?
GR:5to15natural
persons A:
XPN: In case of GR: There is no minimum authorized capital
Nolimit
cooperative,incorporator stockaslongasthepaidupcapitalisnotless
of rural bank; thanP5,000.00
corporationsole
Originallyformspartof XPN:Asprovidedbyspeciallaw(e.g.Banks).
Notnecessarily
thecorporation
GR:Filipinocitizenshipis Q:Isitrequiredthateachsubscriberpay25%of
notarequirement. Dependingonthe
eachsubscribedshare?
natureofbusinessof

XPN:Whenengagedina thecorporation.Ifitis
A:No.Itisonlyrequiredthatatleast25%ofthe
business which is partly nationalized,the
or wholly nationalized citizenshipbecomes subscribedcapitalmustbepaid.
where majority must be material.
residents (3)CORPORATETERM

Q: What are the required number and the Q:Whatisthetermofcorporateexistence?
qualifications of incorporators in a stock
corporation? A:
GR: It depends on the period stated in the
A: ArticlesofIncorporation.
1. Naturalperson
2. GR: Not less than 5 but not more than XPN: Unless sooner dissolved or unless said
15 periodisextended.

Note: Extension may be made for periods not
XPN:Corporationsole
exceeding(50)yearsinanysingleinstancebyan

amendment of the articles of incorporation.
3. Oflegalage
However, extension must be made within 5
4. Majority must be residents of the years before the expiry date of the corporate
Philippines term. Extention must aldo comply with
5. Each must own or subscribe to at least proceduralrequirementsforamendmentofAOI.
oneshare.(Sec.10)
Q: What is the doctrine of relation or relating
Q:Whocanbeincorporators? backdoctrine?

A: A: Generally, the filing and recording of a
GR: Only natural persons can be certificate of extension after the term cannot
incorporators. relate back to the date of the passage of the
resolution of the stockholders to extend the life
XPN: When otherwise allowed by law, Rural of the corporation. However, the doctrine of
Banks Act of 1992, where incorporated

115

relationappliesifthefailuretofiletheapplication 4. They cannot be issued by banks, trust
for extension within the term of the corporation companies,insurancecompanies,public
isduetotheneglectoftheofficerwithwhomthe utilities and building and loan
certificateisrequiredtobefiledortoawrongful association;
refusalonhisparttoreceiveit(Aquino,Philippine 5. Thearticlesofincorporationmuststate
Corporate Law Compendium, 2006). SHARES OF the fact that it issued no par value
STOC shares as well as the number of said
(4)CLASSIFICATIONOFSHARES shares;
6. Once issued, they are deemed fully
Q:Whatarethekindsorclassificationsofshare? paidandnonassessable.(Sec.6)

A: Q:Whatarecommonshares?
1. Parvalueshares
2. Noparvalueshares A: These are ordinarily and usually issued stocks
3. Commonshares without extraordinary rights and privileges, and
4. Preferredshares entitle the shareholder to a pro rata division of
5. Redeemableshares profits. It represents the residual ownership
6. Treasuryshares interest in the corporation. The holders of this
7. Foundersshare kind of share have complete voting rights and
8. Votingshares theycannotbedeprivedofthesaidrightsexcept
9. Nonvotingshares asprovidedbylaw.
10. Convertibleshares
11. Wateredstock Q:Whatarepreferredshares?
12. Fractionalshare
13. Sharesinescrow A:Theseentitletheshareholdertosomepriority
14. Overissuedstock ondistributionofdividendsandassetsoverthose
15. Streetcertificate holdersofcommonshares.
16. Promotionshare
Q:Areholdersofpreferredsharescreditors?
Q:Whatareparvalueshares?
A: No. Holders thereof cannot compel the
A: Shares with a value fixed in the articles of corporation to give them dividends. The
incorporation and the certificates of stock. The preference only applies once dividends are
par value fixes the minimum issue price of the declared.
shares.
Q:Whatarethekindsofpreferredshares?
Note: A corporation cannot sell less than the par
valuebutashareholdermaysellthesamelessthan A:
theparvaluebecauseitishis. 1. Preferred shares as to assets Shares
which gives the holder preference in
Shares sold below its par value is called watered the distribution of the assets of the
stocks. corporationincaseofliquidation.

Q:Whatarenoparvalueshares? a. Participating preferred shares
Entitled to participate with the
A:Theseareshareshavingnostatedvalueinthe common shares in excess
articleofincorporation. distribution

Q: What are the limitations on no par value b. Nonparticipating preferred shares
shares? Not entitled to participate with
the common shares in excess
A: distribution.
1. Shares which are no par value, cannot
haveanissuedpriceoflessthanP5.00; 2. PreferredsharesastodividendsShares
2. Theentireconsiderationforitsissuance which are entitled to receive dividends
constitutes capital so that no part of it onsaidsharetotheextentagreedupon
shouldbedistributedasdividends; before any dividends at all are paid to
3. They cannot be issued as preferred theholdersofcommonstock.
stocks;
116
MERCANTILELAWTEAM:
CORPORATION LAW
corporation by purchase, donation, and

a. Cumulative preferred shares If a redemptionorthroughsomelawfulmeans.(Sec.
dividend is omitted in any year, it 9)
must be made up in a later year
before any dividend may be paid Toputsimply,thesearesharesreacquiredbythe
onthecommonsharesinthelater corporation. They are called treasury shares
year. because they remain in the corporate treasury
untilreissued.Moreimportantly,theyhaveno:
b. Noncumulative preferred shares 1. VotingRights
There is no need to make up for 2. Righttodividends.
undeclareddividends
Note: Treasury shares are not retired shares. They
Q: What is preferred cumulative participating do not revert to the unissued shares of the
shareofstock? corporation but are regarded as property acquired
bythecorporationwhichmaybereissuedorresold
A: This is a kind of share which gives the holder atapricetobefixedbytheBoardofDirectors(SEC
preferenceinthepaymentofdividendsaheadof Rules Governing Redeemable and Treasury Shares,
common stockholders and to be paid the CCPNo.11982).
dividends due for prior years and to participate
further with common stockholders in dividend Q: What are the other means in which a
declaration. corporationmayacquireitsownshares?

Q:Whatareredeemableshares? A:
1. To collect or compromise unpaid
A: These are shares of stocks issued by a indebtednesstothecorporation;
corporation which said corporation can purchase 2. Toeliminatefractionalshares;
or take up from their holders upon expiry of the 3. To pay dissenting or withdrawing
periodstatedincertificatesofstockrepresenting stockholders entitled to payment for
saidshares(Sec.8). theirshares;
4. Redemption;and
Q: What are unrestricted retained earnings 5. Closecorporation.
(URE)?
Q:Whatarethelimitationsontreasuryshares?
A: These are surplus profits not subject to
encumbrance. A:
1. They may be reissued or sold again as
Q: What are the limitations on redeemable longastheyareheldbythecorporation
shares? astreasuryshares.
2. Cannotparticipateindividends.
A: 3. It cannot be represented during
1. Issuanceofredeemablesharesmustbe stockholdersmeetings.
expressly provided in the articles of 4. The amount of URE equivalent to the
incorporation; cost of treasury shares being held shall
2. Thetermsandconditionsaffectingsaid be restricted from being declared and
shares must be stated both in the issuedasdividends.
articles of incorporation and in the
Note:Whentreasurysharesaresoldbelowitsparor
certificatesofstock;
issued value, there can be no watering of stock
3. Redeemablesharesmaybedeprivedof
because such watering contemplates an original
voting rights in the articles of issuanceofshares.
incorporation, unless otherwise
providedintheCode.(Sec.6,par.6) Q:Whatarefounders'shares?
4. Redemption cannot be made if it will
causeinsolvencyofthecorporation. A: Shares classified as such in the articles of
incorporation which may be given special
Q:Whataretreasuryshares? preference in voting rights and dividend
payments.Butifanexclusiverighttovoteandbe
A: Shares that have been earlier issued as fully voted for as director is granted, this privilege is
paid and have thereafter been acquired by the
117

subject to approval by the SEC, and cannot Q:Whatisafractionalshare?
exceed5yearsfromthedateofapproval.(Sec.7)
A:Asharewithavalueoflessthanonefullshare.
Q:Whatarevotingshares?
Q:Whataresharesinescrow?
A: Shares with a right to vote. If the stock is
originally issued as voting stock, it may not A:Subjecttoanagreementbyvirtueofwhichthe
thereafter be deprived of the right to vote share is deposited by the grantor or his agent
withouttheconsentoftheholder. with a third person to be kept by the depositary
untiltheperformanceofcertainconditionorthe
Q:Whatarenonvotingshares? happening of a certain event contained in the
agreement.
A:Shareswithoutrighttovote.
Q:Whatisanoverissuedstock?
Thelawonlyauthorizesthedenialofvotingrights
in the case of redeemable shares and preferred A:Itisastockissuedinexcessoftheauthorized
shares,providedthatthereshallalwaysbeaclass capitalstock;itisnullandvoid.
or series of shares which have complete voting
rights. Q:Whatisastreetcertificate?

Q:Whataretheinstanceswhenholdersofnon A: It is a stock certificate endorsed by the
votingsharesareallowedtovote? registeredholderinblankandthetransfereecan
command its transfer to his name from issuing
A:Theseredeemableandpreferredshares,when corporation.
such voting rights are denied, shall nevertheless
beentitledtovoteonthefollowingfundamental Q:Whatispromotionalshare?
matters:
1. Amendmentofarticlesofincorporation A:Thisisashareissuedbypromotersorthosein
2. Adoptionandamendmentofbylaws some way interested in the company, for
3. Sale,lease,exchange,mortgage,pledge incorporating the company, or for services
or other disposition of all or rendered in launching or promoting the welfare
substantially all of the corporate ofthecompany.
property
4. Incurring,creatingorincreasingbonded Q:Areclassesofsharesinfinite?
indebtedness
5. Increaseordecreaseofcapitalstock A: Yes. There can be other classifications as long
6. Merger or consolidation of the astheyareindicatedintheAOI,stockcertificate
corporation with another corporation andnotcontrarytolaw.
orothercorporations
7. Investment of corporate funds in Q:Whomayclassifyshares?
another corporation or business in
accordancewiththisCode A:
8. Dissolution of the corporation. (Sec. 6 1. Incorporators the classes and number
par.6) of shares which a corporation shall
issue are first determined by the
Q:Whatareconvertibleshares? incorporatorsasstatedinthearticlesof
incorporationfiledwiththeSEC.
A: A share that is changeable by the stockholder
from one class to another at a certain price and 2. Board of directors and stockholders
withinacertainperiod. after the corporation comes into
existence; they may be altered by the
GR: Stockholder may demand conversion at boardofdirectorsandthestockholders
hispleasure. by amending the articles of
incorporationpursuanttoSec.16.
XPN: Otherwise restricted by the articles of
incorporation.

118
MERCANTILELAWTEAM:
CORPORATION LAW
F.INCORPORATIONANDORGANIZATION 2. Firm Commitment the underwriter

purchases outright the securities and
Q:Whatisincorporation? thenresellsthesame

A: It is the performance of conditions, acts, 3. Best Efforts the underwriter merely
deeds, and writings by incorporators, and the sellsforcommission.
official acts, certification or records, which give
thecorporationitsexistence. (2)SUBSCRIPTIONCONTRACT

Q: What are the steps in the creation of a Q:Whatisasubscriptioncontract?
corporation?
A: It is a contract for the acquisition of unissued
A: stock in an existing corporation or a corporation
1. Promotion still to be formed. It is considered as such
2. Incorporation(Sec10) notwithstandingthefactthatthepartiesreferto
3. Formalorganizationandcommencementof itaspurchaseorsomeothercontract.(Sec.60)
businessoperations(Sec22)
Q:Whatarethekindsofsubscriptioncontracts?
(1)PROMOTER
A:
Q:Whoisapromoter? 1. GR: Preincorporation subscription
entered into before the incorporation
A:Isapersonwhobringsaboutorcausetobring and irrevocable for a period of six (6)
about the formation and organization of a months from the date of subscription
corporationby: unlessallothersubscribersconsentorif
1. bringing together the incorporators or the corporation failed to materialize. It
the persons interested in the cannot also be revoked after filing the
enterprise, Articles of Incorporation with the SEC
2. procuring subscriptions or capital for (Sec.61)
thecorporationand
3. setting in motion the machinery which XPN:Whencreditorswillbeprejudiced
leads to the incorporation of the thereby.
corporationitself.
2. Postincorporation subscription
Q:Whatistheliabilityofapromoter? enteredintoafterincorporation.

A:Allpromoter(s)havejointpersonalliabilityfor (3)PREINCORPORATIONSUBCRIPTION
acorporationthatwasneverformed.Heremains AGREEMENTS
liableoncontractsevenafterincorporationeven
thoughcorporationadoptsthecontract. Q:Whoarerequiredtopaytheirsubscriptionin
full?
Q:Arepromotersagentsofacorporation?
A:
A: No. Promoters are not agents of the 1. Nonresident foreign subscribers upon
corporationbeforeitcomesintoexistence. incorporation must pay in full their
Uponincorporation,thepracticeisfortheBODto subscriptions unless their unpaid
pass a resolution ratifying the contracts entered subscriptions are guaranteed by a
into by the incorporators with the promoter. surety bond or by an assumption by a
Then,theybecomeagentsofthecorporation. resident stockholder through an
affidavitofliability.
Q: What are the kinds of underwriting
agreement? 2. Incaseofnoparvalueshares,theyare
deemedfullypaidandnonassessable.
A:
1. Englishtheunderwritersellswhatthe Q:Isastockholderentitledtothesharesofstock
corporationcannotsell subscribedalthoughnotfullypaid?

A: Yes. As long as the shares are not considered
delinquent,theyareentitledtoallrightsgranted

119

toitwhetherornotthesubscribedcapitalstocks (4)CONSIDERATIONFORSTOCKS
arefullypaid.
Q: What are valid considerations in a
Q: What are the distinctions between subscriptionagreement?
subscriptionandpurchase?
A:
A: 1. Actualcashpaidtothecorporation;
SUBSCRIPTION PURCHASE
Maybemadebeforeor Maybemadeonly 2. Property, tangible or intangible (i.e.
afterincorporation afterincorporation patents or copyrights), the requisites
Buyerdoesnot areasfollows:
becomea a. The property is actually received
Subscriberbecomesa stockholderuntilthe bythecorporation
stockholderevenifhehas fulfillmentofthe b. The property is necessary or
notfullypaidthe termsofthesaleand convenient for its use and lawful
subscription registrationthereof purposes
inthebooksofthe
c. It must be subject to a fair
corporation
valuation equal to the par or
Cannotbereleasedfromhis Thecorporationmay
issuedvalueofthestockissued
subscriptionunlessall rescindorcancelthe
stockholdersagreethereto contractfornon
d. Thevaluationthereofshallinitially
andnocreditoristhereby fulfillmentofthe be determined by the
prejudiced contractbythebuyer incorporators;and
Corporatecreditorsmay e. The valuation is subject to the
Creditorsmaynot approvalbytheSEC.
proceedagainstthe
proceedagainstthe
subscriberforhisunpaid
buyerfortheunpaid 3. Labor or services actually rendered to
subscriptionincasethe
priceasthereisno
assetsofthecorporation thecorporation
privityofcontract
arenotsufficienttopay
betweenthem
theirclaims 4. Prior corporate obligations or
Inpurchase indebtedness
Maybeinanyform,written
amountingtomore
ororal,expressorimplied,
than500pesos,the Note: The indebtedness involved is one
andtherefore,notcovered
StatuteofFrauds thatisacknowledgedbytheboard.
bytheStatuteofFrauds
shallapply
Subscriptionpriceare Purchasepricedoes 5. Amounts transferred from unrestricted
consideredassetsofthe notbecomeassetsof retained earnings to stated capital (in
corporation,hence, thecorporation caseofdeclarationofstockdividends)
creditorsmaygoafterthem unlessfullypaid
6. Outstanding shares in exchange for
Q: What is the rule on right to issuance of stocksintheeventofreclassificationor
certificateofstock? conversion.

A: A corporation may now, in the absence of Note: Promissory notes or future services are not
provisions in their bylaws to the contrary, apply validconsiderations.
payments made by subscribersstockholders,
eitheras: (5)ARTICLESOFINCORPORATION

1. Full payment for the corresponding Q:Definearticlesofincorporation.
numberofsharesofstock,theparvalue
of each of which is covered by such A: Articles of Incorporation (AOI) is one that
payment;or defines the charter of the corporation and the
contractual relationships between the State and
2. Payment prorata to each and all the the corporation, the stockholders and the State,
entirenumberofsharessubscribedfor. and between the corporation and its
(Baltazarv.LingayenGulfElectricPower stockholders.
Co., Inc, G.R. No. L1623638, June 30,
1965)

120
MERCANTILELAWTEAM:
CORPORATION LAW
Q:WhatarethecontentsofAOI? 5. Certification under oath by corporate

secretary and a majority of the
A:NaPPlaTINumASONO BOD/BOT stating the fact that said
1. Nameofcorporation amendment/shavebeendulyapproved
2. Purpose/s, indicating the primary and bytherequiredvoteofthestockholders
secondarypurposes or members, shall be submitted to the
3. Placeofprincipaloffice SEC;
6. MustbeapprovedbySEC.(Sec.16);
Note:Todeterminepropervenueinfiling 7. Must be accompanied by a favorable
ofanaction recommendation of the appropriate
governmentagencyincasesof:
4. Termofexistence a. Banks
5. Names, nationalities and residences of b. Banking and quasibanking
Incorporators institutions
6. Number of directors or trustees, which c. Buildingandloanassociations
shall not be less than 5 nor more than d. Trust companies and other
15,exceptforcorporationsole financialintermediaries
7. Names, nationalities, and residences of e. Insurancecompanies
the persons who shall Act as directors f. Publicutilities
or trustees until the first regular ones g. Educationalinstitutions
areelectedandqualified h. Other corporations governed by
8. IfaStockcorporation,theamountofits speciallaws.(Sec.17[2])
authorized capital stock, number of
shares and in case the shares are par Q:WhendoesamendmentofAOItakeeffect?
value shares, the par value of each
share; A: Upon approval by the SEC. That is upon
9. Names,nationalities,numberofshares, issuanceofamendedcertificateofincorporation.
and the amounts subscribed and paid
by each of the Original subscribers Q: Is it necessary that the approval of SEC be
which shall not be less than 25% of express?
authorizedcapitalstock;
10. IfNonstock,theamountofcapital,the A: No, implied approval of SEC is also allowed.
names,residences,andamountpaidby Thus amendment may also take effect from the
eachcontributor,whichshallnotbeless dateoffilingwithSECifnotacteduponwithin6
than25%oftotalsubscription;nameof months from the date of filing for a cause not
treasurerelectedbysubscribers;and attributabletothecorporation.
11. Other matters as are not inconsistent
with law and which the incorporators Q:WhataretheprovisionsofAOIthatcannotbe
may deem necessary and convenient. amended?
(Sec.14)
A:Thosemattersreferringtoaccomplishedfacts,
Q:Whatarethelimitationsintheamendmentof excepttocorrectmistakes.
AOI?
E.g.
A: 1. Namesofincorporators
1. Theamendmentmustbeforlegitimate 2. Names of original subscribers to the
purposes and must not be contrary to capital stock of the corporation and
other provisions of the Corporation theirsubscribedandpaidupcapital
CodeandSpeciallaws; 3. Namesoftheoriginaldirectors
2. ApprovedbymajorityofBOD/BOT; 4. Treasurer elected by the original
3. Vote or written assent of stockholders subscribers
representing 2/3 of the outstanding 5. Memberswhocontributedtotheinitial
capitalstockor2/3ofmembers; capitalofthenonstockcorporation
4. The original and amended articles 6. Witnesses to and acknowledgement
together shall contain all provisions withAOI
required by law to be set out in the
articles of incorporation. Such articles,
as amended, shall be indicated by
underscoringthechange/smade;

121

Q: What are the grounds for the rejection or revocation of corporate franchise or
disapprovalofAOIoramendmenttheretobythe certificateofincorporation(Sec.22).
SEC?
Note:Theaboveshallnotbeapplicableifitisdueto
A: causes beyond the control of the corporation as
1. Ifsuchisnotsubstantiallyinaccordance determinedbySEC.
withtheformprescribed
2. The purpose/s of the corporation are Q:Isthedissolutionorrevocationduetofailure
patently unconstitutional, illegal, tooperateorinoperationautomatic?
immoral, or contrary to government
rulesandregulations A:No,SECisoftheopinionthatthereshouldbe
3. Thetreasurersaffidavitconcerningthe proper proceedings for the revocation of AOI in
amount of capital stock subscribed compliancewithdueprocess.
and/orpaidisfalse
4. The required percentage of ownership (6)CORPORATENAME
of the capital stock to be owned by
Filipino citizens has not been complied Q: What are the limitations in adopting
with.(Sec.17) corporatename?

Note: The above grounds are not exclusive. The A:
groundsaccordingtoP.D.No.902Aare: 1. The proposed name is identical or
deceptively or confusingly similar to
1. Fraud in procuring its certificate of thatofanyexistingcorporation
incorporation; 2. Anyothernameprotectedbylaw;or
2. Serious misrepresentation as to what the 3. Patently deceptive, confusing or
corporation can do or its doing to the contrarytoexistinglaws.(Sec.18)
great prejudice of, or damage to, the 4. The corporate name shall contain the
generalpublic; word Corporation or its abbreviation
3. Refusal to comply with, or defiance or a Corp.orIncorporated,orInc.
lawful order of the SEC restraining the
5. Thepartnershipnameshallcontainthe
commission of acts which would amount
wordCompanyorCo.
toagraveviolationofitsfranchise;
4. Continuous inoperation for a period of at
6. For limited partnership, the word
least five (5) years after commencing the LimitedorLtd.Shallbeincluded
transactionofitsbusiness(Sec.22); 7. If the name or surname of a person is
5. Failure to file the bylaws within the used as part of a corporate or
requiredperiod; partnership name, the consent of said
6. Failuretofilerequiredreports. person or his heirs must be submitted
except if that person is a stockholder,
Q:IsthereanautomaticrejectionoftheAOIor member,partneroradeclarednational
anyamendmentthereto? hero.
8. The name of a dissolved firm shall not
A: No, the SEC shall give the incorporators a be allowed to be used by other firms
reasonable time within which to correct or within3yearsaftertheapprovalofthe
modify the objectionable portions of the AOI or dissolution of the corporation by SEC,
amendment.(Sec.17[1]) unless allowed by the last stockholders
representing at least majority of the
Q: What is the effect of nonuse of corporate outstanding capital stock of the
charter and continuous inoperation of a dissolved firm (SEC Memorandum
corporation? Circular14).

A: Q: If a corporation changes its corporate name,
1. Failure to organize and commence isitconsideredanewcorporation?
business within 2 years from
incorporation its corporate powers A:No,itisthesamecorporationwithadifferent
ceases and the corporation shall be name,anditscharacterisinnorespectchanged.
deemeddissolve. (Republic Planters Bank v. CA, G.R. No. 93073,
Dec21,1992)
2. Continuous inoperation for at least 5
years ground for the suspension or
122
MERCANTILELAWTEAM:
CORPORATION LAW
(7)REGISTRATIONANDISSUANCEOF present either in person or by

CERTIFICATEOFINCORPORATION representative authorized to act by
written proxy, the owners of the
Q: What are the basic requirements for a stock majority of the outstanding capital
corporation? stock or majority of the members
entitledtovote.
A: 2. The election must be by ballot if
1. Nameverificationslip requested;
2. AOIandbylaws 3. Astockholdercannotbedeprivedinthe
3. Treasurersaffidavit articles of incorporation or in the by
4. Registrationdatasheet lawsofhisstatutoryrighttouseanyof
5. Proof of payment of subscription like themethodsofvotingintheelectionof
Bank Certificate of Deposit if the paid directors;
upcapitalisincash 4. Nodelinquentstockshallbevoted;
6. Favorable endorsement from proper 5. The candidates receiving the highest
government agency in case of special number of votes shall be declared
corporations. elected.(Sec.24)

Q:Whatisthecontentofatreasurersaffidavit? Q: Is a provision in the bylaws of the
corporation declaring a person engaged in a
A: That at least 25% of the authorized capital competingbusinessineligiblefornominationfor
stockofthecorporationhasbeensubscribed,and electionstotheboardofdirectorsvalid?
at least 25% of the total subscription has been
fully paid in actual cash and/or property; such A: Yes, provided that before such nominee is
paidupcapitalbeingnotlessthanP5,000. disqualified, he should be given due process to
show that he is not covered by the
Q:Whatisthedoctrineofcorporateentity? disqualification (Gokongwei v. SEC, G.R. No. L
45911,Apr.11,1979).
A:
GR:Acorporationcomesintoexistenceupon Note: The disqualification of a competition from
the issuance of the certificate of being elected to the board is a reasonable exercise
incorporation. Then and only then will it ofcorporateauthority.
acquireajuridicalpersonality.
Q:Whohasjurisdictionoverelectioncontestsin
XPN: Sec. 112 clearly states that from and stockandnonstockcorporation?
afterthefilingwiththeSECofthearticlesof
incorporation, the chief archbishop shall A: As amended by R.A. 8799 (The Securities
becomecorporationsole Regulation Code), the jurisdiction of the SEC
under Sec. 5 P.D. No. 902A (SEC Reorganization
(8)ELECTIONOFDIRECTORSANDTRUSTEES Act) is now transferred to Courts of General
Jurisdiction(RegionalTrialCourt).Thus,RTCnow
Q: Is permanent representation allowed in the hasjurisdictionoverelectioncontest.
BOD?
Q: In case where there are 2 lists of BOD
A: No, the board of directors of corporations submittedtoSEC,whichoneiscontrolling?
mustbeelectedfromamongthestockholdersor
membersdirectorseveryyear.Estoppeldoesnot A: It is the list of directors in the latest general
set in to legitimize what is wrongful. (Grace information sheet as filed with the SEC which is
ChristianHighSchoolv.CA,G.R.No.108905,Oct. controlling. (Premium Marble Resources, Inc. v.
23,1997) CA,G.R.No.96551,Nov.4,1996)

Q: What are the limitations on the election of Q: What is the next step after the election of
directors/trustees? directors?

A: A: The directors must formally organize by the
1. At a meeting of stockholders or electionofcorporateofficers.(Sec.25)
members called for the election of
directors or trustees, there must be

123

Q:Whoarethecorporateofficers? 3. Must not impair obligations and
contracts or property rights of
A: stockholders
1. President Must be a director at the 4. Must be consistent with the charter or
timetheassumesoffice,notatthetime articlesofincorporation
ofappointment; 5. Mustbereasonable
2. Treasurer May or may not be a 6. Must be of general application and not
director;asamatterofsoundcorporate directedagainstaparticularindividual.
practice,mustbearesident
3. Secretary Need not be a director Q: In case of conflict between the bylaws and
unlessrequiredbythebylaws;mustbe thearticlesofincorporationwhichprevails?
aresidentandcitizenofthePhilippines;
(Sec.25);and A: The AOI prevails because the bylaws are
4. Such other officers as may be provided intendedmerelytosupplementtheformer.
inthebylaws.
Q:Whatisthebindingeffectofbylaws?
Note: An officer is also considered a corporate
officer if he has been appointed by the board of A:
directors. (Easycall Communications Phils., Inc. v. 1. As to members and corporation They
EdwardKing,G.R.No.145901,Dec.15,2005) havetheforceofcontractbetweenthe
Anytwoormorepositionsmaybeheldconcurrently membersthemselves.
bythesameperson,exceptthatnooneshallactas
president and secretary or as president and 2. As to third persons They are not
treasureratthesametime.(Sec.25)
bound to know the bylaws which are

merelyprovisionsfor the
Q: What are the distinctions between a
governmentofacorporationandnotice
corporateofficerandacorporateemployee?
tothemwillnotbepresumed.

A: Note: Bylaws have no extracorporate force
CORPORATE and are not in the nature of legislative
CORPORATEOFFICER
EMPLOYEE enactments so far as third persons are
Positionisprovidedfor Employedbytheaction concerned.
inthebylawsorunder ofthemanagingofficer

theCorporationCode. ofthecorporation.
Q:Givetheproceduresinadoptingbylaws.
RTCactingasaspecial

commercialcourthas LAhasjurisdictionin
A: The bylaws may be adopted before or after
jurisdictionoverintra caseoflabordisputes.
corporatecontroversies. incorporation. In all cases, the Bylaws shall be
effective only upon the issuance by the SEC of a
certificationthatthebylawsarenotinconsistent
(9)ADOPTIONOFBYLAWS
withtheAOI.
Q:Whatarebylaws?
1. Pre incorporation It shall be
A: Rules and regulations or private laws enacted approved and signed by all the
by the corporation to regulate, govern and incorporatorsandsubmittedtotheSEC,
control its own actions, affairs and concerns and togetherwithAOI.
ofitsstockholdersormembersanddirectorsand
officersinrelationtheretoandamongthemselves 2. Postincorporation
intheirrelationtoit. a. Vote of the majority of the
stockholders representing the
Q:Whataretherequisitesforthevalidityofby outstanding capital stock or
laws? members;
b. Bylaws shall be signed by the
A: stockholders or members voting
1. Must be consistent with the forthem;
CorporationCode,otherpertinentlaws c. It shall be kept in the principal
andregulations office of the corporation and
2. Must not be contrary to morals and subject to the inspection of the
publicpolicy stockholders ore members during
officehours
124
MERCANTILELAWTEAM:
CORPORATION LAW
d. Copythereof,dulycertifiedby the owners of at least a majority of the

BOD or BOT countersigned by the outstandingcapitalstock/members;or
secretary of the corporation, shall
be filed with the SEC and shall be 2. By the board only after due delegation
attached with the original AOI. by the stockholders owning 2/3 of the
(Sec.46) outstanding capital stock/members.
Provided,thatsuchpowerdelegatedto
Q:Whatistheeffectofnonfilingofthearticles the board shall be considered as
ofincorporationwithintherequiredperiod? revokedwheneverstockholdersowning
at least majority of the outstanding
A: Failure to submit the bylaws within 30 days capitalstockormembers,shallvoteata
from incorporation does not automatically regularorspecialmeeting.(Sec.48)
dissolvethecorporation.Itismerelyagroundfor
suspension or revocation of its charter after Q: What are the distinctions between AOI and
propernoticeandhearing.Thecorporationis, at bylaws?
the very least, a de facto corporation whose
existence may not be collaterally attacked. A:
(Sawadjaanv.CA,G.R.No.142284,June8,2005) AOI BYLAWS
Conditionsubsequent;its
Conditionprecedent
Q:Whatarethecontentsofbylaws? absencemerelyfurnishesa
intheacquisitionof
groundfortherevocation
corporateexistence
A: ofthefranchise
1. Time, place and manner of calling and Essentiallyacontract
conducting regular or special meetings betweenthe
Fortheinternal
ofdirectorsortrustees corporationandthe
governmentofthe
2. Time and manner of calling and stockholders/
corporationbuthasthe
members;between
conducting regular or special meetings forceofacontractbetween
thestockholders/
ofthestockholderormembers thecorporationandthe
memberinterse,and
3. The required quorum in meeting of stockholders/members,
betweenthe
stockholders or members and the andbetweenthe
corporationandthe
mannerofvotingtherein stockholdersandmembers;
State;
4. The form for proxies of stockholders
andmembersandthemannerofvoting Maybeexecutedafter
them incorporation.Sec.46
5. The qualification, duties and Executedbefore allowsthefilingoftheby
compensation of directors or trustees, incorporation lawssimultaneouslywith
officersandemployees theArticlesof
6. Time for holding the annual election of Incorporation
directors or trustees and the mode or Amendedbya
mannerofgivingnoticethereof majorityofthe
7. Mannerofelectionorappointmentand directors/trustees Maybeamendedbya
the term of office of all officers other andstockholders majorityvoteoftheBOD
thandirectorsortrustees representing2/3of andmajorityvoteof
8. Penaltiesforviolationofthebylaws theoutstanding outstandingcapitalstockor
9. In case of stock corporations, the capitalstock,or2/3 amajorityofthemember
ofthemembersin innonstockcorporation
mannerofissuingcertificates
caseofnonstock
10. Suchothermattersasmaybenecessary
corporations
for the proper or convenient
Powerto Powertoamendorrepeal
transaction of its corporate business amend/repealarticles bylawsoradoptnewby
andaffairs.(Sec.47) cannotbedelegated lawsmaybedelegatedby
bythestockholders/ the2/3oftheoutstanding
Q:Whatarethewaysofamending,repealingor memberstothe capitalstockor2/3ofthe
adoptingnewbylaws? boardofdirectors/ membersinthecaseof
trustees nonstockcorporation
A:
1. Amendment may be made by
stockholders together with the Board
by majority vote of directors and
125

G.CORPORATEPOWERS Q: When does the power to sue and be sued
commence?
Q:Whatarethekindsofpowersofcorporation?
A: Upon issuance by SEC of Certificate of
A: Incorporation.
1. Express powers Granted by law,
Corporation Code, and its Articles of Q:Whatarethelimitationsofthecorporationin
Incorporation or Charter, and dealingwithproperty?
administrativeregulations
A:
2. Inherent/incidental powers Not 1. In dealing with any kind of property, it
expressly stated but are deemed to be must be in the furtherance of the
within the capacity of corporate purpose for which the corporation was
entities. organized.

3. Implied/necessary powers Exists as a 2. Constitutional limitations cannot
necessary consequence of the exercise acquirepubliclandsexceptbylease.
of the express powers of the
corporation or the pursuit of its With regard to private land, 60% of the
purposesasprovidedforintheCharter corporation must be owned by the
Filipinos, same with the acquisition of a
(1)GENERALPOWERS condounit.

Q: What are the general powers of a Note: No law disqualifies a person from
corporation? purchasing shares in a landholding
corporation even if the latter will exceed
A:SuSuCoABSPMEDPO the allowed foreign equity, what the law
disqualifiesisthecorporationfromowning
1. ToSUeandbesued land.
2. OfSUccession
3. ToadoptanduseofCorporateseal 3. Speciallawsubjecttotheprovisionsof
4. ToamenditsArticlesofIncorporation theBulkSalesLaw
5. ToadoptitsBylaws
6. For Stock corporations: issue and sell Q:Whataretherequisitesforavaliddonation?
stocks to subscribers and treasury
stocks; for nonstock corporations: A:
admitmembers 1. Donationmustbereasonable
7. To Purchase, receive, take or grant, 2. Must be for valid purposes including
hold, convey, sell, lease, pledge, public welfare, hospital, charitable,
mortgage and deal with real and cultural, scientific, civic or similar
personalproperty,securitiesandbonds; purposes
8. ToEnterintomergerorconsolidation 3. Mustnotbeanaidinany
9. To Make reasonable Donations for a. Politicalparty,
public welfare, hospital, charitable, b. Candidateand
cultural, scientific, civic or similar c. Partisanpoliticalactivity
purposes, provided that no donation is 4. Donation must bear a reasonable
giventoany relation to the corporations interest
a. Politicalparty, andnotbesoremoteandfanciful.
b. Candidateand
c. Partisanpoliticalactivity. Q:Canacorporationactassuretyorguarantor?

10. To establish Pension, retirement, and A:
other plans for the benefit of its GR:No.
directors, trustees, officers and
employeesbasisofwhichisthelabor XPN: Such guaranty may be given in the
code accomplishment of any object for which the
11. To exercise Other powers essential or corporation was created, or when the
necessarytocarryoutitspurposes. particular transaction is reasonably necessary
orproperintheconductofitsbusiness.
126
MERCANTILELAWTEAM:
CORPORATION LAW
Q: What are the specific powers of a 4. Copy of the amended AOI shall be
corporation? submitted to the SEC for its approval;
and
A: 5. In case of special corporation, a
1. Power to extend or shorten corporate favorable recommendation of
term.(Sec.37) appropriate government agency. (Sec.
2. Increase or decrease corporate stock. 37)
(Sec.38)
3. Incur, create, or increase bonded Note: The extension must be done during the
indebtedness.(Sec.38) lifetime of the corporation not earlier than 5 years
4. Denypreemptiveright.(Sec.39) prior to the expiry date unless exempted. The
5. Sell, dispose, lease, encumber all or extensionmustnotexceed50years.
substantially all of corporate assets.
(Sec.40) After the term had expired without extension, the
6. Purchaseoracquireshares.(Sec.41) corporation is dissolved. The remedy of the
stockholdersisreincorporation.
7. Invest corporate funds in another

corporation or business for other
Any dissenting stockholder may exercise his
purpose other than primary purpose appraisal right in case of shortening or extending
.(Sec.42) corporateterm(Sec.37).
8. Declare dividends out of unrestricted
retainedearnings.(Sec.43) (b)POWERTOINCREASEORDECREASECAPITAL
9. Enter into management contract with STOCK
another corporation (not with an
individual or a partnership within Q: What are the procedural requirements in
general powers) whereby one increasingordecreasingcapitalstock?
corporation undertakes to manage all A:
orsubstantiallyallofthebusinessofthe 1. MajorityvoteoftheBOD;
other corporation for a period not 2. Ratification by stockholders
longer than five (5) years for any one representing 2/3 of the outstanding
term.(Sec.44) capitalstock;
10. Amend Articles of Incorporation. (Sec.
16) 3. Writtennoticeoftheproposedincrease
ordiminutionofthecapitalstockandof
(2)SPECIFICPOWERS thetimeandplaceofthestockholders
meetingatwhichtheproposedincrease
(a)POWERTOEXTENDORSHORTEN or diminution of the capital stock must
CORPORATETERM beaddressedtoeachstockholderathis
place of residence as shown on the
Note:Maybeusedasmeanstovoluntarilydissolvea booksofthecorporationanddeposited
corporation
totheaddresseeinthepostofficewith

postageprepaid,orservedpersonally
Q: What are the procedural requirements in

extending/shorteningcorporateterm?
4. Acertificateinduplicatemustbesigned
by a majority vote of the directors of

A:
the corporation and countersigned by
1. MajorityvoteoftheBODorBOT;
the chairman and the secretary of the
2. Ratification by 2/3 of the SH
stockholdersmeeting,settingforth:
representing outstanding capital stock

or by at least 2/3 of the members in
a. That the foregoing requirements
caseofnonstockcorporation;
havebeencompliedwith;
3. Written notice of the proposed action
b. The amount of increase or
and of the time and place of the
diminutionofthecapitalstock;
meeting shall be addressed to each
c. If an increase of the capital stock,
stockholder or member at his place of
the amount of capital stock or
residenceasshownonthebooksofthe
number of shares of no par stock
corporation and deposited to the
actually subscribed, the names,
addressee in the post office with
nationalities and residences of the
postageprepaid,orservedpersonally;
persons subscribing, the amount
127

of capital stock or number of no 3. Number of shares and increasing or
par stock subscribed by each, and decreasingtheparvalue.
the amount paid by each on his
subscriptionincashorproperty,or Q: The stockholders of People Power, Inc. (PPI)
the amount of capital stock or approved two resolutions in a special
number of shares of no par stock stockholders'meeting:
allottedtoeachstockholderifsuch a) Resolution increasing the authorized
increase is for the purpose of capitalstockofPPI;and
making effective stock dividend b) Resolution authorizing the Board of
authorized; Directors to issue, for cash payment,
d. The amount of stock represented the new shares from the proposed
atthemeeting;and capital stock increase in favor of
e. The vote authorizing the increase outside investors who are non
ordiminutionofthecapitalstock stockholders.

Note: The increase or decrease in the capital stock The foregoing resolutions were approved by
or the incurring, creating or increasing bonded stockholders representing 99% of the total
indebtednessshallrequirepriorapprovaloftheSEC. outstandingcapitalstock.Thesoledissenterwas
JimmyMoratowhoowned1%ofthestock.
Q: What is the additional requirement with
respecttotheincreaseofcapitalstock? Are the resolutions binding on the corporation
and its stockholders including Jimmy Morato,
A:TheapplicationtobefiledwiththeSECshallbe thedissentingstockholder?
accompanied by the sworn statement of the
treasurerofthecorporation,showingthatatleast A: No. The resolutions are not binding on the
25% of the amount subscribed has been paid corporation and its stockholders including Jimmy
eitherincashorpropertyorthattherehasbeen Morato. While these resolutions were approved
transferred to the corporation property the by the stockholders, the directors' approval,
valuation of which is equal to 25% of the which is required by law in such case, does not
subscription. exist.(1998BarQuestion)

Q: What shall be the basis of the required 25% Q: What remedies, if any, are available to
subscription? Morato?

A: It shall be based on the additional amount by A: Jimmy Morato can petition the Securities and
whichthecapitalstockincreasedandnotonthe Exchange Commission to declare the two (2)
totalcapitalstockasincreased. resolutions,aswellasanyandallactionstakenby
theBoardofDirectorsthereunder,nullandvoid.
Note:Therewillbenotreasurersaffidavitincaseof (1998BarQuestion)
decrease in capital stock. Corporation need not
exhaust its original capital before increasing capital Q:Whatisbondedindebtedness?
stock.
A:Itisalongtermindebtednesssecuredbyreal
Q: What is the additional requirement with orpersonalproperty(corporateassets).
respecttothedecreaseofcapitalstock?
Note: The requirements for the power to incur,
A: The same must not prejudice the right of the create or increase bonded indebtedness is also the
creditors. samewiththepowertoincreaseordecreasecapital
stock.
Q:Whatarethewaysofincreasingordecreasing
thecapitalstock? Not all borrowings of the corporation need
stockholders approval. Only bonded indebtedness
A:Byincreasingordecreasingthe: requiressuchapproval.
1. Numberofsharesandretainingthepar
value;
2. Par value of existing shares without
increasingordecreasingthenumberof
shares;

128
MERCANTILELAWTEAM:
CORPORATION LAW
(c)POWERTODENYPREEMPTIVERIGHT issues of shares made by the corporation in

proportion to the number of shares he holds on
Q:Whatispreemptiveright? recordinthecorporation.

A: It is the preferential right of shareholders to Q:WhenshouldstockholderAexercisethepre
subscribe to all issues or disposition of shares of emptiveright?
any class in proportion to their present
shareholdings.(Sec.39) A: Preemptive right must be exercised in
accordance with the Articles of Incorporation or
Q:Whatisthepurposeofpreemptiveright? the ByLaws. When the Articles of Incorporation
and the ByLaws are silent, the Board may fix a
A: To enable the shareholder to retain his reasonable time within which the stockholders
proportionate control in the corporation and to mayexercisetheright.
retainhisequityinthesurplus.
Q: Assuming a stockholder disagrees with the
Q: Is therepreemptive right on the reissuance issuance of new shares and the pricing for the
oftreasuryshares? shares,maythestockholderinvokehisappraisal
rights and demand payment for his
A: Yes. When a corporation reacquires its own shareholdings?
shareswhichtherebybecometreasuryshares,all
shareholders are entitled to preemptive right A:No,thestockholdermaynotexerciseappraisal
when the corporation reissues or sells these right because the matter that he dissented from
treasury shares. The reissuance of treasury is not one of those where right of appraisal is
shares is not among the exception provided by available under the Corporation Code. (1999 Bar
Sec.39whenpreemptiverightdoesnotexist. Question)

Q: May preemptive right be waived by the Q: When can the corporation deny preemptive
stockholder? right?

A: Yes when the stockholder fails to exercise his A: The corporation can deny preemptive right if
preemptive right after being notified and given the articles of incorporation or amendment
anopportunitytoavailofsuchright. theretodeniessuchright.

Q: Is the preemptive right of a stockholder Q:Distinguishpreemptiverightfromrightof
transferable? firstrefusal.

A:Yes,unlessthereisanexpressrestrictioninthe A:
AOI. RIGHTOFFIRST
PREEMPTIVERIGHT
REFUSAL
Q: Suppose that X Corporation has already Arisesonlybyvirtueof
issued the 1000 originally authorized shares of contractual
Maybeexercisedeven
the corporation so that its Board of Directors stipulationsbutisalso
whenthereisnoexpress
andstockholderswishtoincreaseX'sauthorized grantedunderthe
provisionoflaw
capital stock. After complying with the provisionsonclose
requirements of the law on increase of capital corporation
stock,Xissuedanadditional1000sharesofthe Pertainstounsubscribed
portionoftheauthorized Exercisableagainst
samevalue.
capitalstock.Arightthat anotherstockholderof
maybeclaimedagainst thecorporationofhis
Assume that stockholder A presently holds 200
thecorporation.It sharesofstock
outofthe1000originalshares.WouldAhavea includestreasuryshares.
preemptive right to 200 of the new issue of
1000shares?Why? Q:Whataretheinstanceswhenpreemptive
rightisnotavailable?
A: Yes, A would have a preemptive right to 200
of the new issue of 1000 shares. A is a A:
stockholder of record holding 200 shares in X 1. Sharestobeissuedtocomplywithlaws
Corporation. According to the Corporation Code, requiring stock offering or minimum
eachstockholderhasthepreemptiverighttoall stockownershipbythepublic;

129

2. Shares issued in good faith with the 2. If the proceeds of the sale or other
approval of the stockholders disposition of such property and assets
representing 2/3 of the outstanding are to be appropriated for the conduct
capital stock in exchange for property oftheremainingbusiness;
neededforcorporatepurposes; 3. If the transaction does not cover all or
3. Shares issued in payment of previously substantiallyalloftheassets.
contracteddebts;
4. IncasetherightisdeniedintheArticles Q: What is the effect of sale of all or
ofIncorporation; substantially all of assets of one corporation to
5. Waiveroftherightbythestockholder. anothercorporation?

(d)SELL,LEASE,EXCHANGE,MORTGAGE,PLEDGE A:
OROTHERDISPOSITION(SLEMPO)OFALLOR GR: The selling corporation of all or
SUBSTANTIALLYALLOFCORPORATEASSETS substantially all of the assets of the
purchasing corporation shall not be liable for
Q:Whataretheproceduralrequirements? thedebtsofthetransferorcorporation.

A: XPN:
1. MajorityvoteoftheBODorBOT 1. Express or implied assumption of
2. Ratification by stockholders liabilities;
representingatleast 2/3 of the 2. Mergerorconsolidation;
outstanding capital stock or by at least 3. If the purchase was in fraud of
2/3 of the members in case of non creditors;
stockcorporation 4. If the purchaser becomes a
3. Written notice of the proposed action continuationoftheseller;
and of the time and place of the 5. If there is violation of the Bulk Sales
meetingaddressedtoeachstockholder Law.
or member at his place of residence as
shownonthebooksofthecorporation (e)POWERTOACQUIREOWNSHARES
and deposited to the addressee in the
post office with postage prepaid, or Q:Canacorporationacquireitsownshares?
servedpersonally.(Sec.40)
A:
Note: The sale of the assets shall be subject to the GR:Intheabsenceofstatutoryauthority,the
provisions of existing laws on illegal combinations corporationcannotacquireitsownshares
andmonopolies. XPN:SECOpinion,Oct.12,1992,imposedthe
followingconditionsonitsexercise:
After such authorization or approval by the 1. Thecapitalofthecorporationmustnot
stockholders the board may, nevertheless, in its beimpaired;
discretion,abandonsuchSLEMPO.(Sec.40) 2. Legitimate and proper corporate
objectiveisadvanced;
Any dissenting stockholder shall have the option to
3. Condition of the corporate affairs
exercisehisappraisalright.
warrantsit;

4. Transactionisdesignedandcarriedout
Q: What is meant by substantially all of
ingoodfaith
corporateassets?
5. Interest of creditors not impaired, that

is, not violative of the trust fund
A:Ifthecorporationwouldbe:
doctrine.
1. rendered incapable of continuing the

business,or
Note:Sec.41oftheCoderequiresthat:
2. accomplishing the purpose for which it 1. the acquisition should be for a legitimate
wasincorporated. corporatepurpose;and
2. there should be unrestricted retained
Q: When may the corporation forgo the earnings[URE].
ratificationbySH/members?

A:
1. If sale is necessary in the usual and
regularcourseofbusiness;
130
MERCANTILELAWTEAM:
CORPORATION LAW
Q: What are the instances where corporation 3. In case of stock dividend, resolution of
mayacquireitsownshares? theboardwiththeconcurrenceofvotes
representing2/3ofoutstandingcapital.
A:
1. To eliminate fractional shares out of Q:Whatareunrestrictedretainedearnings?
stockdividends;
2. To collect or compromise an A: These are retained earnings which have not
indebtednesstothecorporation,arising been reserved or set aside by the board of
out of unpaid subscription, in a directorsforsomecorporatepurpose.
delinquency sale and to purchase
delinquentsharessoldduringsaidsale; Q:Whoareentitledtoreceivedividends?
3. To pay dissenting or withdrawing
stockholders (in the exercise of the A:Thestockholdersofrecorddateinsofarasthe
stockholdersappraisalright); corporation is concerned; if there is no record
4. Toacquiretreasuryshares; date, the stockholders at the time of declaration
5. Redeemable shares regardless of ofdividends(notatthetimeofpayment).
existenceofretainedearnings;
6. Toeffectadecreaseofcapitalstock; Note: In case of transfer, dividends declared before
7. In close corporations, when there is a the transfer of shares belong to the transferor and
deadlock in the management of the those declared after the transfer belongs to the
business. transferee.

(g)INVESTCORPORATEFUNDSINANOTHER Q:Whoareentitledtoreceivedividendsincase
CORPORATION OR BUSINESS FOR OTHER ofmortgagedorpledgedshares?
PURPOSEOTHERTHANPRIMARYPURPOSE
A:
Q:Whataretherequirements? GR: The mortgagor or the pledgor has the
righttoreceivethedividends.
A:
1. Approval by the majority vote of the XPN: When the mortage or pledge is
BODorBOT recordedinthebooksofthecorporation,in
2. Ratification by stockholders suchacasethenthemortgageeorpledgeeis
representing at least 2/3 of the entitledtoreceivethedividends.
outstanding capital stock or by at least
2/3 of the members in case of non Q:Whataretheformsofdividends?
stockcorporation
3. Ratificationmustbemadeatameeting A:
dulycalledforthepurposes,and 1. Cash
4. Prior written notice of the proposed
investment and the time and place of Note: Cash dividends due on delinquent
stock shall first be applied to the unpaid
themeetingshallbemadeaddressedto
balance on the subscription plus cost and
eachstockholderormemberbymailor
expenses.
bypersonalservice.
2. Stock
Note: Investment of a corporation in a business

which is in line with its primary purpose requires
Note:Stockdividendsarewithheldfromthe
onlytheapprovaloftheboard.
delinquent stockholder until his unpaid
subscriptionisfullypaid.
Anydissentingstockholdershallhaveappraisalright.

3. Property
(f)POWERTODECLAREDIVIDENDSOUTOF
UNRESTRICTEDRETAINEDEARNINGS(URE) Note:Stockholdersareentitledtodividends
PRORATA based on the total number of
Q:Whataretherequirements? shares and not on the amount paid on
shares.
A:
1. Existence of unrestricted retained
earnings
2. Resolutionoftheboard

131

Q:Whenmaycorporationdeclaredividends? Revaluationsurplus
Increaseinthevalueofa Cannotbedeclaredas
A: fixedassetasaresultof dividendsbecause
GR:Evenifthereareexistingprofits,BODhas itsappreciation.Theyare thereisnoactualgain
discretion to determine whether dividends bynaturesubjectto (gaininpaperonly).
aretobedeclared. fluctuations.
Reductionsurplus the
XPN: Stock corporations are prohibited from surplusarisesfromthe Itcannotbedeclared
retaining surplus profits in excess of 100% of reductionoftheparvalue ascashdividendbut
theirpaidincapitalstock. oftheissuedsharesof canbedeclaredonlyas
stocks. stockdividends
XPNtoXPN:
1. Definite corporate expansion projects GainfromSaleofReal
Availableasdividends
approvedbytheboardofdirectors; Property
2. Corporation is prohibited under any Cannotbedeclaredas
loan agreement with any financial stockorcashdividends
TreasuryShares
butitmaybedeclared
institution or creditor from declaring
aspropertydividend
dividends without its/his consent and
OperationalIncome
suchconsenthasnotyetbeensecured; Availableasdividends
Income
3. Theretentionisnecessaryunderspecial

circumstances obtaining in the
Q:Distinguishcashandstockdividends.
corporation, such as when there is a

need for special reserve for probable
A:
contingencies.
CASHDIVIDENDS STOCKDIVIDENDS

Partofgeneralfund Partofcapital
Q: What if there is a wrongful or illegal
Resultsincashoutlay Nocashoutlay
declarationofdividends?
Onceissued,canbelevied

Notsubjecttolevyby bycorporatecreditors
A: The Board of Directors is liable. The corporatecreditors becausetheyrepartof
stockholders should return the dividends to the corporatecapital
corporation(solutioindebiti). Declaredonlybythe Declaredbytheboard
boardofdirectorsat withtheconcurrenceof
Q:Whatarethesourcesofdividends? itsdiscretion thestockholders
(majorityofthe representingatleast2/3
A: quorumonly,not oftheoutstandingcapital
GR: Dividends can only be declared out of majorityofallthe stockataregular/special
actual and bona fide unrestricted retained board) meeting
earnings. Doesnotincreasethe Corporatecapitalis
corporatecapital increased
XPN:Dividendscanbedeclaredoutofcapital Itsdeclarationcreates
inthefollowinginstances: adebtfromthe Nodebtiscreatedbyits
1. Dividends from investments wasting corporationtoeachof declaration
assetscorporation; itsstockholders
2. Liquidatingdividends Ifreceivedby
individual:subjectto
Notsubjecttotaxeither
Q:Whatarethesourcesofretainedearnings?Is tax;
receivedbyindividualora
Ifreceivedby
itavailablefordividends? corporation
corporation:not

subjecttotax
A:
Canberevokeddespite
SOURCESOFRETAINED AVAILABILITYFOR Cannotberevoked
announcementbutbefore
EARNINGS DIVIDENDS afterannouncement
issuance
PaidinsurplusItisthe Canbewithhelduntil
Itcannotbedeclared
differencebetweenthe Appliedtotheunpaid
ascashdividendbut paymentofunpaid
parvalueandtheissued balanceofdelinquent
canbedeclaredonlyas balanceofdelinquent
valueorsellingpriceof shares
stockdividends shares
theshares

Note: For the purposes of this distinction, property
dividendsareconsideredascashdividends.
132
MERCANTILELAWTEAM:
CORPORATION LAW
Q: May stock dividends be issued to a person Q: What is the allowed period for every
whoisnotastockholderinpaymentofservices management contract entered into by the
rendered? corporation?

A:No.Onlystockholdersareentitledtopayment A:
ofstockdividends.(Nielson&Co.,Inc.v.Lepanto GR: Management contract shall be entered
ConsolidatedMiningCo.,G.R.No.21763,Dec.17, into for a period not longer than 5 years for
1966). anyoneterm.

(h)POWERTOENTERINTOMANAGEMENT XPN:Incasesofservicecontractsoroperating
CONTRACT agreements which relate to the exploitation,
development, exploration or utilization of
Q:Whatisamanagementcontract? naturalresources,itmaybeenteredforsuch
periods as may be provided by the pertinent
A: It is any contract whereby a corporation lawsorregulations.
undertakes to manage or operate all or
substantially all of the business of another (i)ULTRAVIRESACTS
corporation, whether such contracts are called
service contracts, operating agreements or Q:Whatareultraviresacts?
otherwise.(Sec.44)
A: Those powers that are not conferred to the
Note:Sec.44refersonlytoamanagementcontract corporationbylaw,byitsAOIandthosethatare
with another corporation. Hence, it does not apply not implied or necessary or incidental to the
to management contracts entered into by a exerciseofthepowerssoconferred.(Sec45)
corporationwithnaturalpersons.
Q:Whatarethetypesofultraviresacts(UVA)?
Q:Whataretherequirements?
A:
A: 1. Acts done beyond the powers of the
1. Contract must be approved by the corporation(throughBOD)
majority of the BOD or BOT of both 2. Ultraviresactsbycorporateofficers
managingandmanagedcorporation; 3. Actsorcontractswhichareperseillegal
2. Ratified by the stockholders owning at asbeingcontrarytolaw.
least the majority of the outstanding
capital stock, or members in case of a Q: When does the act of the officers bind the
nonstock corporation, of both the corporation?
managing and the managed
corporation,atameetingdulycalledfor A:
thepurpose 1. Ifitisprovidedinthebylaws
3. Contract must be approved by the 2. Ifauthorizedbytheboard
stockholders of the managed 3. Under the doctrine of apparent
corporation owning at least 2/3 of the authority
outstanding capital stock entitled to 4. Whentheactwasratified
vote,2/3memberswhen:
a. Stockholders representing the Q:Whatisthedoctrineofapparentauthority?
same interest in both of the
managing and the managed A: If a corporation knowingly permits one of its
corporation own or control more officers, or any other agent, to act within the
than 1/3 of the total outstanding scope of an apparent authority, it holds him out
capitalstockentitledtovoteofthe to the public possessing the power to do those
managingcorporation; acts; and thus, the corporation will, as against
b. Majority of the members of the anyone who has in good faith dealt with it
BOD of the managing corporation through such agent, be estopped from denying
also constitute a majority of the theagentsauthority.
BODofthemanagedcorporation.
Q: When is the corporation estopped to deny
ratification of contracts or acts entered by its
officersoragents?

133

A: Generally, when the corporation has 3. Creditors Nullification of contract in
knowledgethatitsofficersoragentsexceedtheir fraudofcreditors.
power,itmustpromptlydisaffirmthecontractor
act, and allow the other party or third person to (j)DOCTRINEOFINDIVIDUALITYOF
act in the belief that it was authorized or has SUBCRIPTION
been ratified. Otherwise, if it acquiesces, with
knowledge of the facts, or if it fails to disaffirm, Q: What is the Doctrine of Individuality of
ratification will be implied. (Premiere Subscription?
Development Bank vs. CA, G.R. No. 159352, Apr.
14,2004) A: A subscription is one entire and indivisible
whole contract. It cannot be divided into
Q:Whataretheeffectsofanultraviresact? portions.(Sec.64)

A: Ultra vires acts entered into by the board of (k)DOCTRINEOFEQUALITYOFSHARES
directors binds the corporation and the courts
willnotinterfereunlesstermsareoppressiveand Q:Whatisthedoctrineofequalityofshares?
unconscionable.(Gamboavs.Victoriano,G.R.No.
L43324.May5,1979) A: Where the articles of incorporation do not
provideforanydistinctionofthesharesofstock,
Thesearetheeffectsforthespecificacts: allsharesissuedbythecorporationarepresumed
to be equal and enjoy the same rights and
1. Executed contract courts will not set privileges and are also subject to the same
asideorinterferewithsuchcontracts liabilities.(Sec.6)
2. Executory contracts no enforcement
even at the suit of either party (void (l)TRUSTFUNDDOCTRINE
andunenforceable)
3. Partly executed and partly executory Q:Whatisthetrustfunddoctrine?
principle of no unjust enrichment at
expenseofanothershallapply A:Thesubscribedcapitalstockofthecorporation
4. Executory contracts apparently is a trust fund for the payment of debts of the
authorizedbutultravirestheprinciple corporationwhichthecreditorshavetherightto
ofestoppelshallapply. look up to satisfy their credits, and which the
corporationmaynotdissipate.Thecreditorsmay
Q:Whatarethedistinctionsbetweenultravires sue the stockholders directly for the latters
actsandillegalacts? unpaidsubscription.

A: Q: What are the exceptions to the trust fund
ULTRAVIRESACT ILLEGALACTS doctrine?
Notnecessarilyunlawful, Unlawful;againstlaw,
butoutsidethepowers morals,publicpolicy, A: The Code allows distribution of corporate
ofthecorporation andpublicorder capitalonlyintheseinstances:
Canberatified Cannotberatified 1. Amendment of the AOI to reduce
Canbindthepartiesif authorizedcapitalstock;
whollyorpartly Cannotbindtheparties 2. Purchase of redeemable shares by the
executed corporation regardless of existence of
unrestrictedretainedearnings;
Q: What are the remedies in case of ultra vires 3. Dissolution and eventual liquidation of
act? thecorporation.

A: (3)HOWEXERCISED
1. State
a. Obtainajudgmentofforfeiture;or Q:Howarecorporatepowersexercised?
b. The SEC may suspend or revoke
thecertificateofregistration A:
1. BytheshareholdersTheshareholders
2. Stockholders participate in controlling the affairs of
a. Injunction;or thecorporationbyexercisingtheirright
b. Derivativesuit to vote. They can elect the directors
who will actually govern the
134
MERCANTILELAWTEAM:
CORPORATION LAW
corporation and they can also vote on g. To adopt/amend/repeal the by

importantmattersthatarestillreserved laws or adopt new bylaws. (Secs.
to them by the Corporation Code. 46,48)
(Aquino,2006)
2. Proprietaryrights
2. BytheBoardofDirectorsTheBoardof a. To transfer stock in the corporate
Directorsisprimarilyresponsibleforthe book.(Sec.63)
governance of the corporation. Their b. To receive dividends when
primary duty is to set the policies for declared.(Sec.43)
the accomplishment of the corporate c. To the issuance of certificate of
objectives. (Art. 3, Revised Code of stock or other evidence of stock
Corporate Governance). They elect the ownership.(Sec.63)
officers who carry out the policies that d. Toparticipateinthedistributionof
theyhaveestablished. corporate assets upon dissolution.
(Sec.118,119)
3. By the Officers They are elected by e. To preemption in the issue of
the Board of Directors tasked to carry shares.(Sec.39)
outthepolicieslaiddownbytheBoard,
thearticlesofincorporationandtheby 3. Remedialrights
laws. a. To inspect corporate books. (Sec.
74)
H.STOCKHOLDERSANDMEMBERS b. To recover stock unlawfully sold
fordelinquency.(Sec.69)
Q: How does one become a shareholder in a c. To demand payment in the
corporation? exercise of appraisal right. (Secs.
41,81)
A:Apersonbecomesashareholderthemoment d. To be furnished recent financial
he: statements or reports of the
1. Entersintoasubscriptioncontractwith corporationsoperation(Sec.75);
an existing corporation (he is a e. To bring suits (derivative suit,
stockholder upon acceptance of the individual suit, and representative
corporation of his offer to subscribe suit).
whether the consideration is fully paid
ornot), (2)PARTICIPATIONINMANAGEMENT
2. Purchase treasury shares from the
corporation,or (a)PROXY
3. Acquires shares from existing
shareholders by sale or any other Q:Whatisaproxy?
contract.
A: Proxy is a written authorization, empowering
(1)FUNDAMENTALRIGHTS another person (proxy) to represent a
shareholder and vote in his stead in the
Q:Whataretherightsofstockholders? stockholdersmeeting.

A: Q:Whataretherequirementsforavalidproxy?
1. ManagementRight
a. Toattendandvoteinpersonorby A:
proxy at a stockholders meetings. 1. Proxies shall be in writing and shall be
(Secs.50,58) signed by the stockholder or member
b. To elect and remove directors. concerned
(Secs.24,18) 2. The proxy shall be filed before the
c. To approve certain corporate acts. scheduled meeting with the corporate
(Sec.58) secretary;
d. To compel the calling of the
meetings.(Sec.50) Note: For public companies, the SEC
e. Tohavethecorporationvoluntarily requiresthatproxyformsbesubmittedat
dissolved.(Sec.118,119) least5daysbeforethemeeting.
f. To enter into a voting trust
agreement.(Sec.59)

135

3. Unless otherwise provided (continuing Q: When may the right to vote by proxy be
in nature) in the proxy, it shall be valid exercised?
only for the meeting for which it is
intended;and A:
1. ElectionoftheBOD/BOT
4. Noproxyshallbevalidandeffectivefor 2. Voting in case of joint ownership of
aperiodlongerthan5yearsatanyone stock
time. (Sec.58 B.P. 68 as amended by 3. VotingbytrusteeunderVTA
Sec.20,SRC) 4. Pledgeormortgageofshares
5. Asprovidedforinthebylaws
Note: Stockholders or members may attend and
vote in their meetings by proxy (Sec. 58); directors Q:Howandwhenisaproxyrevoked?
cannot do so. Directors must always act in person.
(Sec.25). A:Aproxymayberevokedinwriting,orallyorby
conduct.
Q: Is the power to appoint a proxy a personal
right? GR: One who has given a proxy the right to
votemayrevokethesameatanytime.
A: Yes. The right to vote is inseparable from the
right of ownership of stock. Therefore, to be XPN:Saidproxyiscoupledwithinteresteven
valid,aproxymusthavebeengivenbytheperson itmayappearbyitstermstobeirrevocable.
whoisthelegalownerofthestockandisentitled
tovote.(SECOpinion,Sept.9,1991) (b)VOTINGTRUSTAGREEMENT

Note:Innonstockcorporationstherighttovoteby Q:Whatisavotingtrustagreement(VTA)?
proxy,oreventherighttovoteitselfmaybedenied
to members in the articles of incorporation or the
A: It is an agreement whereby one or more
bylawsaslongasthedenialisnotdiscriminatory.
stockholders transfer their shares of stocks to a

trustee,whotherebyacquiresforaperiodoftime
Q:Whatisthedurationofproxy?
thevotingrights(and/oranyotherspecificrights)

over suchshares; and in return, trust certificates
A:
are given to the stockholder/s, which are
1. Specificproxyauthoritygrantedtothe
transferablelikestockcertificates,subject,tothe
proxy holder to vote only for a
trustagreement.
particularmeetingonaspecificdate.

Q:WhatarethespecificlimitationsonVTA?
2. Continuingproxygrantsauthoritytoa

proxy to appear and vote for and in
A:
behalfofashareholderforacontinuing
1. VTA can be entered into for a period
periodwhichshouldnotbemorethan5
not exceeding 5 years at any one time
yearsatanyonetime.
except when it is a condition in a loan

agreement but shall automatically
Note: Bylaws may provide for a shorter
durationofacontinuingproxy.
expireuponfullpaymentoftheloan;
2. Itmustbeinwritingandnotarized,and
Q:Whatistheextentofauthorityofaproxy? shall specify the terms and conditions
thereof;(Sec.59)
A:
1. GeneralproxyAgeneraldiscretionary Q: What are the procedural requirements for
power to attend and vote at annual VTAtobevalid?
meeting.
A:
2. LimitedproxyRestricttheauthorityto 1. Execution and notarization of the VTA
votetospecifiedmattersonlyandmay stating the terms and conditions
direct the manner in which the vote thereof
shallbecast
2. Acertifiedcopyofsuchagreementshall
be filed with the corporation and with

136
MERCANTILELAWTEAM:
CORPORATION LAW
the SEC, otherwise, it is ineffective and Q:Whatarethedistinctionsbetweenavoting

unenforceable trustagreementandproxy?

3. Thecertificate/sofstockcoveredbythe A:
VTAshallbecancelled VOTINGTRUST PROXY
Theagreementis Revocableanytime
4. A new certificate shall be issued in the irrevocable exceptonewithinterest
name of the trustee/sstating that they Trusteeacquireslegal Proxyhasnolegaltitle
areissuedpursuanttotheVTA titletothesharesofthe tothesharesofthe
transferringstockholder principal
5. Thetransfershallbenotedinthebooks Notonlyrighttovoteis
of the corporation, that it is made given,otherrightsas Onlyrighttovoteis
pursuanttosaidVTA wellexcepttherightto given
receivedividends
6. The trustee/s shall execute and deliver Thetrustmayvotein
personorbyproxy Theproxymustvotein
to the transferors voting trust
unlesstheagreement person
certificates, which shall be transferable
providesotherwise
inthesamemannerandwiththesame
Theagreementmustbe Proxyneednotbe
effectascertificatesofstock notarized notarized
Proxycanonlyactata
7. No VTA shall be entered into for the Trusteeisnotlimitedto
specifiedstockholders
purpose of circumventing the law actatanyparticular
meeting(ifnot
against monopolies and illegal meeting
continuing)
combinations in restraint of trade or Thesharecertificate
usedforpurposesoffraud.(Sec.59) shallbecancelledand Nocancellationofthe
transferredtothe certificateshallbemade
Q:Whatistheeffectofavotingtrustagreement trustee
withrespecttotherightsofthetrustorandthe Atrusteecanvoteand
Aproxycanonlyvotein
trustee? exercisealltherightsof
theabsenceofthe
thestockholdereven
ownersofthestock
A: A voting trust agreement results in the whenthelatteris

separation of the voting rights of a stockholder present
from his other rights such as the right to receive Therighttovoteis
dividendsandotherrightstowhichastockholder Thevotingrightis inherentinor
may be entitled until the liquidation of the divorcedfromthe inseparablefromthe
corporation. It is the trustee of the shares who ownershipofstocks righttoownershipof
stock
acquireslegaltitletothesharesunderthevoting
Anagreementmustnot Aproxyisusuallyof
trustagreementandthusentitledtotherightto
exceed5yearsatany shorterduration
vote and the right to be elected as board of
onetimeexceptwhen althoughunderSec.58
directors while the trustorstockholder has the thesameismadea itcannotexceed5years
beneficialtitlewhichincludestherighttoreceive conditionofaloan. atanyonetime
dividends(Leevs.CA205SCRA752) Governedbythelawon Governedbythelawon
trust agency
Note:Unlessexpresslyrenewed,allrightsgrantedin
a voting trust agreement shall automatically expire
Q:Whatisapoolingagreement?
attheendoftheagreedperiod,andthevotingtrust

certificatesaswellasthecertificatesofstockinthe
A: This is an agreement, also known as voting
name of the trustee or trustees shall thereby be
deemedcancelledandnewcertificatesofstockshall agreement, entered into by and between 2 or
bereissuedinthenameofthetransferors.(Sec.59) more stockholders to make their shares as one
unit (ex: Shareholders, A,B,C,D,E, holds 50% of
the outstanding capital stock, entered into a
pooling agreement to vote for F as a memberof
the board of director). This usually relates to
election of directors where parties often provide
forarbitrationincaseofdisagreement.Thisdoes
not involve a transfer of stocks but is merely a
privateagreement(Sec.100).

137

Q:Whenarepoolingagreementsvalid?
Q:Whoisentitledtoreceivedividends?
A: As long as they do not limit the discretion of
the BOD in the management of corporate A:
affairs or work any fraud against stockholders GR: Those stockholders at the time of
notpartytothecontract. declaration. Dividends belong to the person
who owns the stock when the dividend is
Q: What is the difference between Pooling declared.
AgreementandVotingTrustAgreement?
XPN:
A: In Pooling Agreement, the stockholders
themselves exercise their right to vote. On the 1. In case a record date is provided for. A
other hand, the trustees are the ones who recorddateisthefuturedatespecifiedin
exercise the right to vote under the Voting Trust the resolution declaring dividend that
Agreement. the dividend shall be payable to those
who are stockholders of record on such
(c)CASESWHENSTOCKHOLDERSACTIONIS specifiedfuturedateorasofthedateof
REQUIRED themeetingdeclaringsuchdividends.
2. Unpaid Subscribers. Section 72 provides
Q: Give the summary of vote requirements for that holders of shares not fully paid
stockholderanddirectors which are not delinquent shall have all
therightsofastockholder.
A:SeeAppendixE
Q: What are the instances where a stockholder
Q: Is a provision stating that the consentof the mayexercisehisappraisalright?
board must be obtained before transfer of
sharesvalid? A: Any stockholder of a corporation shall have
the right to dissent and demand payment of the
A: No. A shareholder has the right to transfer, fairvalueofhissharesinthefollowinginstances:
sell,assignordisposehissharesasanincidentof
ownership. A provision that requires any to first 1. Incaseanyamendmenttothearticlesof
obtain the consent of the board of directors or incorporation has the effect of changing
other stockholders of the corporation before he orrestrictingtherightsofanystockholder
can transfer his shares is void as it unduly or class of shares, or of authorizing
restrains the exercise of the stockholder of his preferences in any respect superior to
righttotransfer. those of outstanding shares of any class,
orofextendingorshorteningthetermof
(3)PROPRIETARYRIGHTS corporateexistence.
2. In case of sale, lease, exchange, transfer,
Q: What are the proprietary rights of a mortgage, pledge or other disposition of
stockholder? all or substantially all of the corporate
property and assets as provided in the
A: Code.
1. RighttoDividend 3. Incaseofmergerorconsolidation.
2. RightofFirstRefusal
3. AppraisalRight Q:Whatistherightoffirstrefusal?
4. RighttoInspect
5. PreemptiveRight A: A right that grants to the corporation or
6. RighttoVote anotherstockholdertherighttobuythesharesof
stockofanotherstockholderatafixedpriceand
Q: What is the right to dividend of a only valid if made on reasonable terms and
stockholder? consideration.

A: It is the right of the stockholder to demand Except in the case of a close corporation where
payment of dividends after board declaration. therightoffirstrefusalisrequiredtobeafeature
Stockholders are entitled to dividends pro rata to be found in the articles of incorporation, the
based on the total number of shares that they rightoffirstrefusalcanonlyarisebymeansofa
ownandnotontheamountpaidfortheshares.
138
MERCANTILELAWTEAM:
CORPORATION LAW
contractualstipulation,orwhenitisprovidedfor 2. There must remain other shares with full

inthearticlesofincorporation. votingrights

Note: When the bylaws provide a right of first Q:Whenarenonvotingsharesentitledtovote?
refusal, it is null and void. There is no authority to
create property restrictions in bylaws provisions. A: The nonvoting shares may still vote in the
(Hodgesv.Lezama,62O.G.6823) followingmatters:

Q: May a provision in the articles of 1. Amendment of the articles of
incorporationvalidlygrantarightoffirstrefusal incorporation
infavorofotherstockholders? 2. Adoptionandamendmentofbylaws
3. Sale, lease, exchange, mortgage, pledge
A: Yes, the SEC, as a matter of policy, allows orotherdispositionofallorsubstantially
restrictionsontransferofsharesinthearticlesof allofthecorporateproperty.
incorporation if the same is necessary and 4. Incurring, creating or increasing bonded
convenienttotheattainmentoftheobjectivefor indebtedness
which the company was incorporated, unless 5. Increaseordecreaseofcapitalstock
palpably unreasonable under the circumstances. 6. Merger or consolidation of the
(SECOpinion,Feb.20,1995) corporation with another corporation or
othercorporations
Q:WhatistheRighttoInspect? 7. Investmentofcorporatefundsinanother
corporation or business in accordance
A: It is the right of a stockholder to inspect the withthecorporationcode
books of the corporation provided the following 8. Dissolutionofthecorporation
requisitesarepresent:
Q: What is the rule in case of pledged or
1. Itmustbeexercisedatreasonablehourson mortgagedshares?
businessdays;
2. Thestockholderhasnotimproperlyusedany A: As a rule, In case of pledged or mortgaged
information he has secured through any shares in stock corporations, the pledgor or
previousexaminationand mortgagorshallhavetherighttoattendandvote
3. Demand is made in good faith or for a atmeetingsofstockholders
legitimatepurpose.
XPN:Thepledgeeormortgageeisexpresslygiven
Q:WhatisPreemptiveright? bythepledgorormortgagorsuchrightinwriting
which is recorded on the appropriate corporate
A: It is the preferential right of shareholders to books.
subscribe to all issues or disposition of shares of
any class in proportion to their present Q:Whatistheruleincaseofjointownershipof
shareholdings.(Sec.39) stock?

Q:Howcanthestockholdersexercisetheirright A: Generally, in case of shares of stock owned
tovote? jointly by two or more persons, in order to vote
the same, the consent of all the coowners shall
A: The stockholders can exercise their right to benecessary.
vote through the election, replacement and
removalofBoardofDirectorsorTrusteesandon XPN:Ifthereisawrittenproxy,signedbyallthe
other corporate acts which require stockholders coowners, authorizing one or some of them or
approval. any other person to vote such share or shares.
Provided,That whenthesharesareownedinan
Q: What are the conditions for the issuance of "and/or"capacitybytheholdersthereof,anyone
nonvotingshares? of the joint owners can vote said shares or
appointaproxytherefor.
A:Theissuanceofnonvotingsharesissubjectto
the following conditions under Section 6 of the Note: treasury shares shall have no voting right as
CorporationCode: longassuchsharesremainintreasury.

1. Onlypreferredorredeemablesharesmaybe
madenonvotingshares;

139

(4)REMEDIALRIGHTS Board of Directors, the majority stockholders
adopted a resolution authorizing MOP
Q: What actions can the stockholders or Corporation to withdraw the suit. Pursuant to
membersbring? said resolution, the corporate counsel filed a
Motion to Dismiss in the name of the MOP
A: Corporation. Should the motion be granted or
1. Derivativesuitonebroughtbyoneor denied?Reasonbriefly.
more stockholders or members in the
name and on behalf of the corporation A: It should not be denied. The requisites for a
toredresswrongscommittedagainstit validderivativesuitexistinthiscase.First,AAwas
or to protect or vindicate corporate exempt from exhausting his remedies within the
rights, whenever the officials of the corporation and did not have a demand on the
corporation refuse to sue or are the BoardofDirectorsforthelattertosue.Here,such
ones to be sued or hold control of the ademandwouldbefutile,sincethedirectorswho
corporation. The requisites are as comprisethemajority(namelyBB,CC,DDandEE
follows: are the ones guilty of the wrong complained of.
Second, AA appears to be a stockholder at the
a. There should be an existing cause timeoftheallegedmisappropriationofcorporate
of action in favor of the funds.Third,thesuitisbroughtonbehalfandfor
corporation; the benefit of MOP Corporation. In this
b. Refusal of the corporation to file connection, it was held in
anactiondespitedemandfromthe Commart(Phils.)Inc.v.SEC, G.R. No. 85318, June
stockholder. 3, 1991, that to grant to the corporation
c. The party filing the suit must be a concernedtherightofwithdrawingordismissing
stockholder at the time of the the suit, at the instance of the majority
objectionable acts or transactions stockholders and directors who themselves are
occurred unless such transactions the persons alleged to have committed the
arecontinuinginnature;and breach of trust against the interests of the
d. Theactionmustbebroughtinthe corporation would be to emasculate the right of
name of the corporation which theminoritystockholderstoseekredressforthe
mustbealleged corporation.Filingsuchactionasaderivativesuit
even by a lone stockholder is one of the
Note: The stockholder is only nominal protections extended by law to minority
partyinaderivativesuit.Therealpartyin stockholdersagainstabusesofthemajority.
interestisthecorporation.
(5)OBLIGATIONSOFASTOCKHOLDER
2. Individualsuitandactionbroughtbya
stockholder against the corporation for Q:Whataretheobligationsofstockholders?
directviolationofhiscontractualrights.
A: The stockholders have the following
3. Representative suit one brought by a obligations:
personinhisownbehalfandonbehalf
ofallsimilarlysituated. 1. Obligation to pay the corporation for
the unpaid subscription including
Q:Whichcourthasjurisdictionoveraderivative interesttherein;
suit?
2. Obligation to pay the creditors of the
A: A derivative suit is an intracorporate corporation to the extent of their
controversy hence under the jurisdiction of the subscription if the corporate assets are
RTCactingspecialcommercialcourt. notsufficient.

Q:AA,aminoritystockholder,filedasuitagainst
BB, CC, DD, and EE, the holders of majority
shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
complaint averred, inter alia, that MOP
Corporation is the corporation in whose behalf
and for whose benefit the derivative suit is
brought. In their capacity as members of the
140
MERCANTILELAWTEAM:
CORPORATION LAW
(6)MEETINGS
A:
Q:Whenwillstockholders/membersmeetingbe 1. Itmustbeheldintheproperplace;
held? 2. Itmustbeheldatthestateddateandat
the appointed time or at a reasonable
A: timethereafter;
REQUIREDWRITTEN
3. Itmustbecalledbytheproperperson:
DATEOFMEETING a. The person or persons designated
NOTICE
in the bylaws have authority to
Regularmeeting call stockholders or members
1. Annuallyondate meeting
fixedintheby b. Intheabsenceofsuchprovisionin
laws;or 1. Within the the bylaws it may be called by a
2. Ifthereisnodate periodprovided directorortrusteeorbyanofficer
inthebylaws inthebylaws entrustedwiththemanagementof
anydateinApril 2. Intheabsence thecorporation
asdeterminedby ofprovisionin c. A stockholder or member may
theboard. thebylaws2
make the call on order of the SEC
weekspriorto
wheneverforanycausethereisno
Venue: In the city or themeeting.
municipality where the
personauthorizedtocallameeting
principalofficeislocated d. The special meeting for the
removal of directors or trustees
Specialmeeting
may be called by the secretary or
1. Withinthe bystockholderormember.
1. Anytimedeemed
periodprovided
necessary;or 4. Theremustbeapreviousnotice
inthebylaws
2. Asprovidedinthe 5. Theremustbeaquorum
2. Ifnoprovision
bylaws
inthebylaws
Q: What are the rules on meeting or voting
1weekpriorto
Venue:Principaloffice whichareapplicabletocertainkindsofshares?
themeeting

Q: What is the required quorum in a stock A:
corporation? 1. Delinquent shares shall not be entitled
tovote
A: 2. Treasury shares have no voting rights
GR:Shallconsistofthestockholdersrepresenting while they remain in the treasury (Sec.
majority of the outstanding capital stock or a 57)
majority of the actual and living members with 3. Fractionalsharesshallnotbeentitledto
voting rights, in the case of nonstock vote
corporation. (Tan v. Sycip, G.R. No. 153468, Aug. 4. Escrow shares shall not be entitled to
17,2006) vote before the fulfillment of the
conditionimposedthereon
XPN: 5. Unpaid shares, if not delinquent, are
1. Adifferentquorummaybeprovidedfor entitledtoalltherightsofastockholder
inthebylaws includingtherighttovote
2. The corporation code provides for 6. Sequesteredshares
certain resolutions that must be As a rule, the right to vote remains on
approved by at least 2/3 of the the shareholder and the entity making
outstandingcapitalstock,inwhichcase, the sequestration may not exercise the
majority of the outstanding capital righttovote
stock is insufficient to constitute a
quorum, presence of the stockholders XPN:TheTwoTieredTest
representing 2/3 of the outstanding a. Whether there is a prima facie
capital stock is necessary for such evidence showing that the said
purpose. shares are illgotten and thus
belongtotheState
Q: What are the requirements for a valid b. Whether there is an immediate
meeting whether stockholders/members or the danger of dissipation thus
board? necessitating their continued
141

sequestration and voting by the recordingit.Thereisnoviolationofthe
PCGG while the main issue is AntiWire Tapping Act (R.A. 4200)
pending with the Sandiganbayan. because all the parties to the board
(Republic vs. Sandiganbayan, G.R. meeting are aware that all the
No.107789,Apr.30,2003) communicationsarerecorded.

XPN to the XPN: The twotiered test Note:Thebasictypesofteleconferencingare:
does not apply in cases involving funds 1. Videoconferencing;
of public character (public character 2. Computerconferencing;
exception). In such cases, the 3. Audioconferencing.
government is granted the authority to
votesaidshares,namely: I.BOARDOFDIRECTORANDTRUSTEES
a. Where the government shares are
taken over by private persons or (1)REPOSITORYOFCORPORATEPOWERS
entities who or which registered
themintheirownnames;and Q:Whoshallexercisecorporatepowers?
b. Where the capitalization of shares
that were acquired with public A:
funds somehow landed in private GR: The Board of Directors or the Board of
hands(ibid). Trustees(Sec.23).

7. Pledgor, mortgagor, or administrator XPN:
shares (Sec. 55); pledgor or mortagor 1. In case of delegation to the Executive
has the right to attend and vote at Committee duly authorized in the by
meetings unless pledge or morgagee is laws;
expresslygivensuch right in writing, as
recordedonthebooks. 2. Authorization pursuant to a contracted
manager whichmay be an individual, a
Executor, administrators, receivers, and partnership,oranothercorporation.
other legal representatives may attend
andvoteinbehalfofthestockholderor Note: In case the contracted manager is
members without need of any written another corporation, the special rule in
Sec.44applies.
proxy. In Gochan v. Young, G.R. No.

131889,Mar.12,2001,itwasheldthat
3. In case of close corporations, the
heirs are not prohibited from
stockholders may manage the business
representing the deceased with regard
ofthecorporationinsteadbyaboardof
to shares of stock registered in the
directors,ifthearticlesofincorporation
name of the latter, especially when no
soprovide.
administratorhasbeenappointed.

Q:Whoisanindependentdirector?
8. Sharesjointlyowned(Sec.56)consent

ofallthecoownersisnecessary,unless
A: Shall mean a person other than an officer or
thereisawrittenproxysignedbyallthe
employee of the corporation, its parent or
coowners. If shares are owned in an
subsidiaries, or any other individual having a
and/or capacity by the holders
relationship with the corporation, which would
thereof,anyoneofthejointownerscan
interfere with the exercise of independent
voteorappointaproxythereof.
judgment in carrying out the responsibilities of a

director(Sec38,SRC).
Q: Is teleconferencing or videoconferencing

valid?
Q: How many independent directors are

required for the corporations covered by the
A:Yes.(R.A.8792,asimplementedbySECMemo.
RevisedCodeofCorporateGovernance(RCCG)?
CircularNo.15,Nov30,2001)provided:

1. Directors must express their intent on
A: At least 2 or such number of independent
teleconferencing;
directors that constitute 20% of the members of
2. Properidentificationofthoseattending;
theboardwhicheverislesser,butinnocaseless
3. Thecorporatesecretarymustsafeguard
than2(Art.3[A],RCCG).
the integrity of the meeting by

142
MERCANTILELAWTEAM:
CORPORATION LAW
Note: All other companies not covered are Q: What are the common qualifications of a
encouraged to have independent directors on their directorandtrustee?
board.
A:
(2)TENURE,QUALIFICATIONSAND 1. Majority of the directors/trustees must
DISQUALIFICATIONSOFDIRECTORS beresidentsofthePhilippines(Sec.23)
2. He must not have been convicted by
Q:WhatisthetermofofficeofBOD/BOT? finaljudgmentofanoffensepunishable
byimprisonmentforperiodexceeding6
A: years or a violation of the Corporation
GR:Theregulardirectorshallholdofficefor Code,committedwithin5yearspriorto
1year. thedateofhiselection(Sec.27)
3. Hemustbeoflegalage
XPN:Ifnoelectionisheld,thedirectorsand 4. Other qualifications as may be
officersshallholdpositionunderaholdover prescribedinspeciallawsorregulations
capacity until their successors are elected orinthebylawsofthecorporation
and qualified. This is applicable to a going
concern where there is no break in the Q:Whatarethegroundsfordisqualificationofa
exercise of the duties of the officers and director?
directors.(SECOpinion,Dec.15,1989).
A:
Q:Whatarethequalificationsofadirector? 1. Conviction by final judgment of an
offense punishable by imprisonment
A: exceeding6years
1. Mustownatleast1shareofthecapital 2. Violation of the Corporation Code
stock; committed within 5 years prior to his
electionorappointment(Sec27)
Note:Ownershipofstockshallstandinhis
nameonthebooksofthecorporation. Note:PleasereadArt3.[E]oftheRevisedCodeof
Apersonwhodoesnotownastockatthe CorporateGovernance.
time of his election or appointment does
not disqualify him as director if he (3)ELECTIONS
becomes a shareholder before assuming
the duties of his office. (SEC Opinions,
Q:Whatarethedifferentmethodofvoting?
Nov.9,1987&Apr.5,1990)

A:
2. Mustbeanaturalperson;
1. Straightvotingeverystockholdermay

Note: What is material is the legal title,
votesuchnumberofsharesforasmany
not beneficial ownership of the stock as persons as there are directors to be
appearing on the books of the elected.
corporation.
2. Cumulativevotingforonecandidatea
Q: What are the additional qualifications stockholder is allowed to concentrate
provided by the Revised Code of Corporate his votes and give one candidate, as
Governance? many votes as the number of directors
tobeelectedmultipliedbythenumber
A:Adirectorshouldhavethefollowing: ofhissharesshallequal.

1. College education or equivalent 3. Cumulative voting by distribution a
academicdegree stockholdermaycumulatehissharesby
2. Practical understanding of the business multiplyingthenumberofhissharesby
ofthecorporation the number of directors to be elected
3. Membership in good standing in anddistributethesameamongasmany
relevant industry, business or candidatesasheshallseefit.
professionalorganizations
4. Previousbusinessexperience(Art3.[D], Note: Cumulative voting in case of nonstock
RCCG) corporations only if it is provided in the AOI.
The members of nonstock corporations may
castasmanyvotesastherearetrusteestobe

143

elected but may cast not more than one vote thevoteoftheBoardofDirectorsissufficientfor
foronecandidate. thepurpose.(2001BarQuestion)

Q: What is the quorum required in a stock or (5)FILLINGOFVACANCIES
nonstockcorporation?
Q:Whatarethewaysoffillingupthevacancies
A: Majority of the outstanding capital stock as intheboard?
statedinthearticlesofincorporation.
A:
(4)REMOVAL 1. Vacancies filled up by stockholders or
members,ifitisdueto
Q:Whomayremovedirectorsortrustees? a. Removal
b. Expirationofterm
A: The power to remove belongs to the c. Grounds other than removal or
stockholdersexclusively.(Sec.28) expiration of term, e.g. death,
resignation, abandonment, or
Q: What are the requisites for removal of disqualification where the
directorsortrustees? remaining directors do not
constitute a quorum for the
A: purposeoffillingthevacancy
1. It must take place either at a regular d. Ifthevacancymaybefilledbythe
meeting or special meeting of the remainingdirectorsortrusteesbut
stockholdersormemberscalledforthe the board refers the matter to
purpose stockholdersormembers;or
2. Previous notice to the stockholders or e. increaseinthenumberofdirectors
members of the intention to remove a
director 2. Vacancies filled up by the remaining
3. Avoteofthestockholdersrepresenting directors constituting a quorum or by
2/3 of outstanding capital stock or 2/3 the members of the board if still
ofmembers constituting a quorum, at least a
4. Generally, removal may be with or majorityofthemareempoweredtofill
withoutcause any vacancy occurring in the board
other than by removal by the
However,ifthedirectorwaselectedby stockholdersor members,expirationof
the minority, there must be cause for term or increase in the number of
removal because the minority may not boardseats.(Sec.29)
be deprived of the right to
representation to which they may be Note: A director elected to fill vacancy shall serve
entitledunderSec.24oftheCode.(Sec. theunexpiredterm.(Sec.29)
28)
(6)COMPENSATION
Q: In 1999, Corporation A passed a board
resolution removing X from his position as Q:Howaredirectorscompensated?
manager of said corporation. The bylaws of A
corporation provide that the officers are the A:
president, vicepresident, treasurer and GR: Directors, in their capacity as such, are
secretary. Upon complaint filed with the SEC, it not entitled to receive any compensation
heldthatamanagercouldberemovedbymere exceptforreasonableperdiems.
resolution of the board of directors. On motion
forreconsideration,Xallegedthathecouldonly XPN:
be removed by the affirmative vote of the 1. Whentheircompensationisfixedinthe
stockholdersrepresenting2/3oftheoutstanding bylaws
capital stock. Is X's contention legally tenable. 2. When granted by the vote of
Why? stockholders representing at least a
majority of the outstanding capital
A: No. Stockholders' approval is necessary only stockataregularorspecialmeeting
fortheremovalofthemembersoftheBoard.For 3. When they are also officers of the
the removal of a corporate officer or employee, corporation
144
MERCANTILELAWTEAM:
CORPORATION LAW
4. When a BOD/BOT becomes entitled to both Schiera and Jaz are directors. Malyn also
compensation other than reasonable found that Schiera and Jaz, on behalf of Patio
perdiems Investments, had obtained a loan of P500,
000.00, from PBCom Bank, for the purpose of
Q:Whatisthelimitationonthecompensationof opening Fort Patio Cafe. This loan was secured
directors? by the assets of Patio Investments and
personallyguaranteedbySchieraandJaz.
A:Innocaseshallthetotalyearlycompensation
of directors, as such directors exceed 10% of the Malyn then filed a corporate derivative action
netincomebeforeincometaxofthecorporation before the Regional Trial Court of Makati City
duringtheprecedingyear.(Sec.30) against Schiera and Jaz, alleging that the two
directors had breached their fiduciary duties by
(7)DISLOYALTY misappropriating money and assets of Patio
InvestmentsintheoperationofFortPatioCafe.
Q:Whatisdoctrineofcorporateopportunity?
Did Schiera and Jaz violate the principle of
A: Where a director, by virtue of his office, corporateopportunity?Explain.
acquiresforhimselfabusinessopportunitywhich
should belong to the corporation, thereby A: Shciera and Jaz violated the principle of
obtaining profits to the prejudice of such corporate opportunity, because they used Patio
corporation: Investments to obtain a loan, mortgaged its
assets and used the proceeds of the loan to
A director shall refund to the corporation all the acquireacoffeeshopthroughacorporationthey
profitsherealizesonabusinessopportunity(Sec. formed.(Sec.34)(2005BarQuestion)
34)which:
1. The corporation is financially able to (8)BUSINESSJUDGMENTRULE
undertake;
2. From its nature, is in line with Q:Whatisbusinessjudgmentrule?
corporationsbusinessandisofpractical
advantagetoit;and A: GR: Courts will not interfere in the decisions
3. The corporation has an interest or a madebytheBODasregardstheinternalaffairsof
reasonableexpectancy. thecorporation

Note: The rule shall be applied notwithstanding XPN:Unlesssuchcontractsaresounconscionable
thefactthatthedirectorriskedhisownfundsin and oppressive as to amount to a wanton
theventure. destructionofrightsoftheminority. (Ingersoll v.
Malabon Sugar Co., G.R. No. L16977, Apr. 21,
Ifsuchactisratifiedbyavoteofthestockholders 1922)
representing at least 2/3 of the outstanding
capital stock, the director is excused from Q: What are the consequences of business
remittingtheprofitrealized. judgmentrule?

Q: Malyn, Schiera and Jaz are the directors of A:
PatioInvestments,aclosecorporationformedto 1. Resolutions and transactions entered
run the Patio Cafe, an al fresco coffee shop in into by theBoard within the powers of
Makati City. In 2000, Patio Cafe began the corporation cannot be reversed by
experiencing financial reverses, consequently, the courts not even on the behest of
some of the checks it issued to its beverage thestockholders.
distributorsandemployeesbounced.
2. Directorsandofficersactingwithinsuch
In October 2003, Schiera informed Malyn that business judgment cannot be held
shefoundalocationforasecondcafeinTaguig personallyliableforsuchacts.
City. Malyn objected because of the dire
financialconditionofthecorporation. (9)SOLIDARYLIABILITYFORDAMAGES

Sometime in April 2004, Malyn learned about Q: What are the instances when directors or
FortPatioCafelocatedinTaguigCityandthatits trusteesaresolidaryliablewiththecorporation?
development was undertaken by a new
corporation known as Fort Patio, Inc., where

145

A: (11)PERSONALLIABILITY
GR: The directors or trustees are not liable
solidarily with the corporation by reason of Q:Whataretheinstanceswhereadirectormay
theirseparateanddistinctpersonalities. beheldpersonallyliable?

XPN: A:
1. Willfully and knowingly voting for and 1. Willfullyandknowinglyvotingforand
Assenting to patently unlawful acts of Assentingtopatentlyunlawfulactsof
thecorporation;(Sec.31) thecorporation.(Sec.31)
2. Gross negligence or bad faith in 2. Gross negligence or bad faith in
directing the affairs of the corporation; directing the affairs of the corporation.
(Sec.31) (Sec.31)
3. Acquiring any personal or pecuniary 3. Acquiring any personal or pecuniary
Interestinconflictofduty;(Sec.31) Interestinconflictofduty.(Sec.31)
4. Agreeing or stipulating in a contract to 4. Actingwithoutauthorityorinexcessof
holdhimselfliablewiththecorporation; authority or are motivated by illwill,
or malice or bad faith, which gives rise to
5. By virtue of a specific provision of Law consequent damages. (Lim vs. NLRC,
(Uichicovs.NRLC,G.R.No.121434,June G.R.No.80685.March16,1989)
2,1997). 5. Consenting to the issuance of Watered
stocks, or, having knowledge thereof,
Note: When the officers of the corporation failing to file objections with the
exceeded their authority, their actions are not secretary.(Sec.65)
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them (12)RESPONSIBILITIESFORCRIMES
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535,Aug.18,2006). Q: When is a director or officer liable for a
criminaloffense?
Q:Whencouldadirectorbesolidaryliablewith
thecorporationforterminationofemployees? A: Where a law requires a corporation to do a
particularact,failureofwhichonthepartofthe
A:Onlywhentheterminationisdonewithmalice responsible officer to do so constitutes an
or in bad faith on the part of the director. offense,theresponsibleofficeriscriminallyliable
Without any evidence of bad faith or malice, therefore. The reason is that a corporation can
directors may not be held personally liable actthroughitsofficersandagentsandwherethe
(Equitable Banking Corporation vs. NLRC, GR No. business itself involves a violation of law all who
02467,June13,1997). participate in it are liable. While the corporation
maybefinedforsuchcriminal offenseifthelaw
(10)LIABILITIESFORWATEREDSTOCKS so provides, only the responsible corporate
officer can be imprisoned. (People vs. Tan Boon
Q: What is the liability of directors for the Kon, 1930) However, a director or officer can be
issuanceofwateredstocks? heldliableforacriminaloffenseonlywhenthere
is a specific provision of law making a particular
A: Any director or officer of a corporation officerliablebecausebeingacorporateofficerby
consenting to the issuance of stocks for a itselfisnotenoughtoholdhimcriminallyliable.
consideration less than its par or issued value or
for a consideration in any form other than cash, (13)SPECIALFACTDOCTRINE
valued in excess of its fair value, or who, having
knowledge thereof, does not forthwith express Q:WhatisSpecialFactDoctrine?
hisobjectioninwritingandfilethesamewiththe
corporatesecretary,shallbesolidarily,liablewith A:Itisadoctrineholdingthatacorporateofficer
thestockholderconcernedtothecorporationand withsuperiorknowledgegainedbyvirtueofbeing
its creditors for the difference between the fair an insider owes a limited fiduciary duty to a
valuereceivedatthetimeofissuanceofthestock shareholder in transactions involving transfer of
andtheparorissuedvalueofthesame(Sec.65). stock(MiriamWebsterDictionary,2006).

146
MERCANTILELAWTEAM:
CORPORATION LAW
(14)INSIDEINFORMATION with respect to the corporation in which he has

nominalinterest.
Q:WhatisinsideInformation?
Where any of the first two conditions is absent,
A: Information not known to the public that one said contract must be ratified by the vote of the
has obtained by virtue of being an insider like a stockholders representing at least 2/3 of the
director(MiriamWebsterDictionary,2006). outstanding capital stock or 2/3 of the members
inameetingcalledforthepurpose,provided:
(15)CONTRACTS 1. That full disclosure of the adverse
interest of the director/ trustee
Q: Give the rules on contracts entered into by involvedismadeatsuchmeeting
directors/trusteesoforofficers. 2. The contract is fair and reasonable
underthecircumstances.
A:
1. Contracts which are entered by one or Q:SupposethatthebylawsofXCorporation,a
more of the corporate miningfirm,providesthat"Thedirectorsshallbe
directors/trustees,orofficers(Sec.32) relieved from all liability for any contract
Voidable at the option of the enteredintobythecorporationwithanyfirmin
corporation,unless: which the directors may be interested." Thus,
director A acquired claims which overlapped
a. The presence of such with X's claims and were necessary for the
director/trustee in the board development and operation of X's mining
meeting approving the contract properties.Isthebylawprovisionvalid?Why?
was not necessary to constitute a
quorum; A: No. It is in violation of Sec. 32 of the
b. The vote of such director/trustee CorporationCode.
in the board meeting approving
thecontractwasnotnecessaryfor Q: What happens if director "A" is able to
theapprovalofthecontract; consummate his mining claims over and above
c. Thecontractisfairandreasonable thatofthecorporation'sclaims?
underthecircumstances;
d. Inthecaseofanofficer,therewas A: "A" should account to the corporation for the
previous authorization by the profitswhichherealizedfromthetransaction.He
boardofdirectors. grabbed the business opportunity from the
corporation.(Sec.34)(2001BarQuestion)
Note: Even if stockholders representing
2/3 of the outstanding capital stock (16)EXECUTIVECOMMITTEE
authorizes the contract, the 3rd element
(contractisfairandreasonable)cannotbe Q:Whatisanexecutivecommittee?
dispensed with if the transaction is to be
validandenforceable. A: A body created by the bylaws and composed
of not more than three members of the board
2. Contracts entered into between which,subjecttothestatutorylimitations,hasall
corporations with interlocking directors theauthorityoftheboardtotheextentprovided
(Sec.33)Valid,providedthat: in the board resolution or bylaws. The
a. Thecontractisnotfraudulent;and committeemayactbyamajorityvoteofallofits
b. Thecontractisfairandreasonable members(Sec.35).
underthecircumstances.
Note: An executive committee can only be created
Q:Whatistheeffectiftheinterlockingdirectors byvirtueofaprovisioninthebylawsandthatinthe
interest in nominal in one corporation and absence of such bylaw provision, the board of
substantialinanother? directors cannot simply create or appoint an
executive committee to perform some of its
A: If the interlocking directors interest in one functions.(SECOpinion,Sept.27,1993)
corporation or corporations is nominal (not
exceeding 20% of the outstanding capital stock) A person not a director can be a member of the
and in the other substantial, then all the first 3 executive committee but only in a
conditionsprescribedinSec.32 mustbepresent recommendatoryoradvisorycapacity.

147

Q:Arethedecisionsoftheexecutivecommittee A: The president shall preside at all meetings of
subjecttoappealtotheboard? the directors or trustees as well as of
stockholders or members unless the bylaws
A:No.However,iftheresolutionoftheExecutive provideotherwise.(Sec.54)
Committee is invalid, i.e. not one of the powers
conferred to it, it may be ratified by the board Note: All proceedings had and any business
(SECOpinion,July29,1995). transacted at any meeting of the stockholders or
members, if within the powers or authority of the
Q:Whatarethelimitationsonthepowersofthe corporation, shall be valid even if the meeting be
executivecommittee? improperly held or called, provided all the
stockholders or members of the corporation are
A:Itcannotactonthefollowing: presentordulyrepresentedatthemeeting.
1. Mattersneedingstockholderapproval
2. Fillingupofboardvacancies Q:WhatistherequirednumberofBOD/BOTto
3. Amendment, repeal or adoption of by constitutequorum?
laws
4. Amendmentorrepealofanyresolution A:
oftheBoardwhichbyitsexpressterms GR: Majority of the number of directors or
isnotamendableorrepealable trustees.
5. Cashdividenddeclaration.(Sec.3)
XPN: If AOI or the bylaws provide for a
Q:Whataretheexecutivecommitteesprovided greaternumber.
intheRevisedCodeofCorporateGovernance?
Note:

GR: Every decision of at least a majority of the
A:
directors or trustees present at a meeting at
1. AuditCommittee which there is quorum shall be valid as a
2. NominationCommittee corporateact.
3. Compensation and Remuneration
Committee XPN:

(17)MEETINGS 1. Theelectionofofficerswhichshallrequire
thevoteofamajorityofallthemembers
Q:WhenwillBOD/BOTmeetingsbeheld? oftheboard.(Sec.25[2])
2. No board approval is necessary where
A: thereiscustom,usageandpracticeinthe
REQUIREDWRITTEN corporation not requiring prior board
DATEOFMEETING approvalorwheresubsequentapprovalis
/VERBALNOTICE
sufficient.(BoardofLiquidatorsv.Kalaw,
RegularMeeting
G.R.No.L18805,Aug.14,1967)
1. Thedatefixed 1. Withintheperiod
inthebylaws; providedinthe Note: The quorum is the same even if there is
or bylaws vacancyintheboard.
2. Ifthereisno 2. Intheabsenceof
dateintheby provisioninthe A meeting with a quorum remains to be such
lawsshallbe bylaws1day throughout the proceedings even if at any time
heldmonthly priortothe during the proceedings, the required number of
scheduled participantstoconstituteaquorumislessened(e.g.
Venue:Anywhere meeting walkoutduringthemeeting).
SpecialMeeting
1. Withintheperiod Q:WhatistheeffectofAbstention?
1. Anytimeupon
providedinthe
thecallofthe
bylaws A:Anabstentionmayhavethepracticaleffectof
president;or
2. Ifnoprovisionin a "no" vote since the motion may fail for lack of
2. Asprovidedin
thebylaws1 sufficient"yes"votes.Unlessagreaternumberis
thebylaws
daypriortothe called for in the articles or bylaws, a matter is

scheduled deemed "approved" by the board if at any
Venue:Anywhere
meeting
meeting at which a quorum is present at least a
majority of the required quorum of directors
Q:Whoshallpresideatallmeetings?

148
MERCANTILELAWTEAM:
CORPORATION LAW
votes in favor of the action (Sec 7211, United 2. Thecertificatemustbesealedwiththe

StatesCorporationCode). sealofthecorporation
3. Thecertificatemustbedelivered
Note: The Corporation Code is based from the 4. Theparvalueastoparvalueshares,or
United States Corporation Code; annotations of the full subscription as to no par value
USCorporationCodemightapply. shares must be fully paid, the basis of
which is the doctrine of indivisibility of
Q:WhentoAbstain? subscription
5. The original certificate must be
A: Whenever a director believes he/she has a surrendered where the person
conflict of interest, the director should abstain requesting the issuance of a certificate
from voting on the issue and make sure his/her is a transferee from the stockholder
abstention is noted in the minutes.(Robert's (Bitongv.CA.,G.R.No.123553,July13,
Rules, 10th ed., p 394.) The other reason a 1998).
director might abstain is that he/she believes
there was insufficient information for making a Q: What are the distinctions between shares of
decision. Otherwise, directors should cast votes stockfromcertificatesofstock?
on all issues put before them. Failure to do so
could be deemed a breach of their fiduciary A:
duties. SHAREOFSTOCK CERTIFICATEOFSTOCK
Evidenceoftheholders
Q: Give an example where a director needs to ownershipofthestock
Unitofinterestina
abstain andofhisrightasa
corporation
shareholderandofhis
A: To avoid Insider Trading, Insiders are extentspecifiedtherein.
obligatedtoabstainfromtradingthesharesofhis Itisanincorporeal
Itisconcreteand
corporation.Thisdutytoabstainisbasedontwo orintangible
tangible
factors: property
1. The existence of a relationship giving Itmaybeissuedby
access, directly or indirectly, to thecorporation Itmaybeissuedonlyif
information intended to be available evenifthe thesubscriptionisfully
only for a corporate purpose and not subscriptionisnot paid.
fullypaid.
forthepersonalbenefitofanyone;
2. The inherent unfairness involved when
a party takes advantage of such (A)NATUREOFTHECERTICIATE
informationknowingitisunavailableto
Q:Whatisthenatureofacertificateofstock?
those with whom he is dealing (SEC vs.
Interport Resources Corporation, G.R.
A:Acertificateofstockisaprimafacieproofthat
No.135808,October6,2008).
thestockdescribedthereinisvalidandgenuinein
theabsenceofanevidencetothecontrary.
J.CAPITALAFFAIRS
(B)UNCERTIFICATEDSHARES
(1)CERTIFICATEOFSTOCK
Q:Whatisanuncertificatedshare?
Q:Whatisacertificateofstock?
A: An uncertificated share is a subscription duly
A: It is a paper representation or tangible recorded in the corporate books but has no
evidence of the stock itself and of various correspondingcertificateofstockyetissued.
intereststherein(Tanv.SEC,G.R.No.95696,Mar.
3,1992) Q:Mayastockholderalienatehissharesevenif
there is no certificate of stock issued by the
Q: What are the requisites for the issuance of corporation?
theCertificateofStock?
A:Yes.Theabsenceofacertificateofstockdoes
A: not preclude the stock holder from alienating or
1. The certificate must be signed by the transferringhissharesofstock.
president or vicepresident,
countersigned by the secretary or
assistantsecretary

149

Q: In case of a fully paid subscription but the purchaserwhoreliedontheendorsementbyA
corporations has not yet issued a certificate of ofthecertificateofstock.(2001BarQuestion)
stock,howcanthetransferbeeffected?
i.REQUIREMENTSFORVALIDTRANSFEROF
A:Incaseofafullypaidsubscription,withoutthe STOCK
corporation having issued a certificate of stock,
thetransfermaybeeffectedbythesubscriberor Q: What are the requirements for a valid
stockholder executing a contract of sale of deed transferofstock?
ofassignmentcoveringthenumberofsharessold
and submitting said contract or deed to the
corporatesecretaryforrecordal. A:
1. The certificate of stock must be duly
Q: How are transfers of subscription not fully endorsed by the transferor or his legal
paiddone? representative.
2. There must be delivery of the stock
A: In case of subscription not fully paid, the certificate.
corporation may record such transfer, provided 3. To be valid against third parties, the
that the transfer is approved by the board of transfermustberecordedinthebooks
directors and the transferee executes a verified of the corporation. (G.R. No. 124535,
assumption of obligation to pay the unpaid September28,2001)
balanceofthesubscription.
Q:Howaresharesofstocktransferred?
(C)NEGOTIABLITY
A:
Q:Isastockcertificatenegotiable? 1. If represented by a certificate, the
following must be strictly complied
A: No. It is regarded as quasinegotiable in the with:
sensethatitmaybetransferredbyendorsement a. Indorsementbytheownerandhis
coupledwithdelivery. agent
b. Deliveryofthecertificate
Q:Whyisastockcertificatenotnegotiable? c. To be valid to third parties, the
transfer must be recorded in the
A: Because the holder thereof takes it without books of the corporation. (Rural
prejudice to such rights or defenses as the Bank of Lipa v. CA, G.R. No.
registered owners or transferors creditor may 124535,Sept28,2001).
haveunderthelaw,exceptinsofarassuchrights
ordefensesaresubjecttothelimitationsimposed 2. Ifnotrepresentedbyacertificate(such
by the principles governing estoppel. (De los aswhenthecertificatehasnotyetbeen
Santosv.Republic,G.R.No.L4818,Feb.28,1955) issuedorwhereforsomereasonisnot
inthepossessionofthestockholder).
Q:AistheregisteredownerofStockCertificate a. By means of deed of assignment:
No.000011.Heentrustedthepossessionofsaid and
certificatetohisbestfriendBwhoborrowedthe b. Suchisdulyrecordedinthebooks
said endorsed certificate to support B's ofthecorporation.
application for passport (or for a purpose other
than transfer). But Bsold the certificate to X, a Q:AistheregisteredownerofStockCertificate
bonafidepurchaserwhoreliedontheendorsed No.000011.Heentrustedthepossessionofsaid
certificates and believed him to be the owner certificatetohisbestfriendBwhoborrowedthe
thereof. said endorsed certificate to support B's
application for passport (or for a purpose other
CanAclaimthesharesofstocksfromX?Explain. than transfer). But Bsold the certificate to X, a
bonafidepurchaserwhoreliedontheendorsed
A: No. Since the shares were already transferred certificates and believed him to be the owner
to"B","A"cannotclaimthesharesofstockfrom thereof.
"X". The certificate of stock covering said shares
havebeendulyendorsedby"A"andentrustedby CanAclaimthesharesofstocksfromX?Explain.
himto"B".Byhissaidacts,"A"isnowestopped
from claiming said shares from "X", a bona fide
150
MERCANTILELAWTEAM:
CORPORATION LAW
A: No. Since the shares were already transferred (D)ISSUANCE

to"B","A"cannotclaimthesharesofstockfrom
"X". The certificate of stock covering said shares Q: When may a corporation issue a stock
havebeendulyendorsedby"A"andentrustedby certificate?
himto"B".Byhissaidacts,"A"isnowestopped
from claiming said shares from "X", a bona fide A: Under Sec. 64 of the Corporation Code, a
purchaserwhoreliedontheendorsementbyA certificate of stock may only be issued to a
ofthecertificateofstock.(2001BarQuestion) subscriber if the full amount of subscription
together with interest and expenses (in case of
Q: What if the transfer is not recorded, is it delinquentshares)ifanydue,hasbeenpaid.
valid?
Q:Whatistheruleonrighttoissuance?
A: Yes, but, only insofar as the parties to the
transferareconcerned. A: A corporation may now, in the absence of
provisions in their bylaws to the contrary, apply
Note:Tobindthecorporationthedeedeffectingthe payments made by subscribersstockholders,
transfer must be duly recorded in the corporate eitheras:
books.(Sec.63)
1. Full payment for the corresponding
Q: May a stockholder bring suit to compel the numberofsharesofstock,theparvalue
corporate secretary to register valid transfer of of each of which is covered by such
stocks? payment;or
2. Payment prorata to each and all the
A: Yes, it is the corporate secretarys duty and entirenumberofsharessubscribedfor.
obligationtoregistertransfersofstocks. (Baltazarv.LingayenGulfElectricPower
Co., Inc, G.R. No. L1623638, June 30,
Q: What are the remedies where corporation 1965)
refusestotransfercertificateofstocks?
Q: What is the Doctrine of Individuality of
A: Subscription?
1. Petitionformandamus
2. Suit for specific performance of an A: A subscription is one entire and indivisible
expressorimpliedcontract whole contract. It cannot be divided into
3. May sue for damages where specific portions.(Sec.64)
performancecannotbegranted
(E)STOCKANDTRANSFERBOOK
Note: There must be a special power of attorney
executed by the registered owner of the share Q: What books are required to be kept by a
authorizing transferor to demand transfer in the corporation?
stock and transfer book (Ponce vs. Arsons Cement,
G.R.No.139802,Dec.10,2002).
A:
1. Book for the minutes of SH and BOD

Thelawdoesnotprescribeaperiodwithinwhich
meetings
the registration of the transfer of shares should
2. Recordoftransactions
be effected. Hence, the action to enforce the
3. Stockandtransferbook
right does not accrue until there has been a
4. Otherbooksrequiredtobekept
demandandarefusalconcerningthetransfer.

i.CONTENTS
Q: When may the corporation validly refuse to

registerthetransferofshares?
Q:Whatarethecontentsofastockandtransfer
book?
A: The corporation may refuse to register the

transferofsharesifithasanexistingunpaidclaim
A:
over the shares to be transferred. The unpaid
1. All stocks in the name of the
claim refers to the unpaid subscription on the
stockholdersalphabeticallyarranged
shares transferred and not to any other
2. Amount paid and unpaid on all stocks
indebtednessthatthetransferormayhavetothe
and the date of payment of any
corporation.(Sec.63)
installment
151

3. Alienation,saleortransferofstocks 5. The right does not extend to trade
4. Other entries as the bylaws may secrets
prescribe 6. Itissubjecttolimitationsunderspecial
laws,e.g.SecrecyofBankDepositsand
ii.WHOMAYMAKEVALIDENTRIES FCDA or the Foreign Currency Deposits
Act.
Q: Who may make proper entries in stock and
transferbooks? Note: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
A:Theobligationanddutyfallsonthecorporate whollyownedbythecorporation
secretary. If the corporate secretary refuses to
comply, the stockholder may rightfully bring suit (F)LOSTORDESTROYEDCERTIFICATES
to compel performance. The stockholder cannot
take the law on to his hands; otherwise such Q: What is the procedure for the issuance of a
entry shall be void. (Torres, Jr. v. CA, G.R. No. new stock certificate in lieu of those which have
120138,Sept.5,1997) beenlost,stolenordestroyed?

Q:Whatistheprobativevalueofthestockand
transferbook? A:
1. The registered owner of a certificate of
A: The entries are considered prima facie stock in a corporation or his legal
evidence of the matters stated therein and may representative shall file with the
besubjecttoprooftothecontrary(Bitongv.CA, corporation an affidavit in triplicate
G.R.No.123553,July13,1999). setting forth, if possible, the
circumstances as to how the certificate
Q: Who are the persons given the right to was lost, stolen or destroyed, the
inspectcorporatebooks? number of shares represented by such
certificate, the serial number of the
A: certificate and the name of the
1. Any director, trustee, stockholder or corporationwhichissuedthesame.
member
2. Votingtrustcertificateholder 2. After verifying the affidavit and other
3. Stockholderofsequesteredcompany informationandevidencewiththebooks
4. Beneficialownersofshares ofthecorporation,saidcorporationshall
publish a notice in a newspaper of
Q:WhatisthebasisofSHsrightofinspection? generalcirculationpublishedintheplace
where the corporation has its principal
A: As owners of the assets and property of the office, once a week for three (3)
corporation stockholders should be entitled to consecutiveweeksattheexpenseofthe
the right of inspection which is predicated upon registered owner of the certificate of
thenecessityofselfprotection. stock which has been lost, stolen or
destroyed.
Q: What are the limitations on the right to
inspection? 3. Aftertheexpirationofone(1)yearfrom
the date of the last publication, if no
A: contest has been presented to said
1. The right must be exercised during corporation regarding said certificate of
reasonablehoursonbusinessdays stock, the right to make such contest
2. Thepersondemandingtherighthasnot shallbebarredandsaidcorporationshall
improperly used any information cancelinitsbooksthecertificateofstock
obtained through any previous whichhasbeenlost,stolenordestroyed
examination of the books and records and issue in lieu thereof new certificate
ofthecorporation ofstock.
3. Thedemandismadeingoodfaithorfor
legitimate purpose germane to his 4. If the registered owner files a bond or
interestasastyockholder.(Sec.74) other security effective for a period of
4. Itshouldfollowtheformalitiesthatmay one (1) year, a new certificate may be
berequiredinthebylaws issuedevenbeforetheexpirationofthe
one(1)yearperiod.
152
MERCANTILELAWTEAM:
CORPORATION LAW
Q:Maythecorporationbesuedfortheissuance Q:Whenmayacorporationissueareplacement
of new certificates of stock in case of lost or certificate of subscription without waiting for
destroyedcertificate? theexpirationofoneyear?

A: No, the corporation cannot be sued unless A:Theregisteredownershallfileabondorother
thereisbadfaith,fraudornegligencepresent. security effective for a period of one (1) year in
which caseanewcertificatemaybeissuedeven
Q: A stockholder claimed that his stock before the expiration of the one (1) year period.
certificatewaslost.Aftergoingthroughwiththe Provided,Thatifacontesthasbeenpresentedto
procedurefortheissuanceoflostcertificate,and saidcorporationorifanactionispendingincourt
nocontestwaspresentedwithin1yearfromthe regarding the ownership of said certificate of
last publication, the corporation issued a new stock which has been lost, stolen or destroyed,
certificate of stock in lieu of the supposed lost theissuanceofthenewcertificateofstockinlieu
certificate.Thestockholderimmediatelysoldhis thereofshallbesuspendeduntilthefinaldecision
sharesandendorsedthereplacementcertificate by the court regarding the ownership of said
to a buyer. It turned out that the original certificateofstockwhichhasbeenlost,stolenor
certificatewasnotlost,butsoldandendorsedto destroyed.(Sec.73)
another person. (1) May the corporation be
madeliablebytheaggrievedparty?(2)Whowill (G)SITUSOFSHARESOFSTOCK
haveabetterrightovertheshares,theendorsee
oftheoriginalcertificateortheendorseeofthe Q:Whereisthesitusofsharesofstock?
replacementcertificate?
A: The situs of shares of stock is the country
A: wherethecorporationisdomiciled.
1. No, the corporation cannot be made
liable. Except in cases of fraud, bad Note: For purposes of execution, attachment,
faith, or negligence on the part of the garnishmentorauctionsale,itisnotthedomicileor
corporation and its officers, no action the residence of the owner of the shares but the
maybebroughtagainstanycorporation domicile or residence of the corporation, which is
which have issued certificates of stock theplaceofitsprincipalbusiness,whichdetermines
inlieuofthoselost,stolen,ordestroyed thesitusofthesharesofstock.
pursuant to the procedure prescribed
bylaw. (2)WATEREDSTOCK

2. The endorsee of the replacement (A)DEFINITION
certificate has a better right to the
shares.Afterexpirationof1yearfrom Q:Whatisawateredstock?
thedateofthelastpublication,andno
contest has been presented to said A:Astockissuedinexchangeforcash,property,
corporation regarding said certificate, share, stock dividends, or services lesser than its
therighttomakesuchcontesthasbeen parvalue.
barred and said corporation already
cancelled in its books the certificate WateredStocksincludestocks:
which have been lost, stolen, or 1. Issued without consideration (bonus
destroyed and issued in lieu thereof share)
newcertificate. 2. Issued for a consideration other than
cash, the fair valuation of which is less
Q:Whatifthereareoppositionsontheissuance than its par or issued value (discount
of new certificates, what may the corporation share)
do? 3. Issuedasstockdividendwhenthereare
nosufficientretainedearningstojustify
A: The corporation may file an interpleader it
proceeding to compel the parties to litigate 4. Issued as fully paid when the
amongthemselves. corporation has received a lesser sum
ofmoneythanitsparorissuedvalue

Note:Waterinthestockrepresentsthedifference
between the fair market value at the time of the
issuance of the stock and the par or issued value f
153

said stock. Both par and no par stocks can thus be stockholder through an affidavit of
wateredstocks. liability.

Wateredstocksreferonlytooriginalissueofstocks 2. In case of nopar value shares, they are
but not to a subsequent transfer of such stocks by deemedfullypaidandnonassessable.
thecorporation.
Q:Whenshouldthebalanceofthesubscription
(B)LIABILITYOFDIRECTORSFORWATERED bepaid?
STOCKS
A:Itshouldbepaid:
Q:Whatistheextentoftheliabilityofdirectors 1. On the date specified in the
who consented to the issuance of a watered subscription contract, without need of
stock? demandorcall,or
2. If no date of payment has been
A: Directors who consent to the issuance of a specified, on the date specified on the
wateredstockarepersonallyliable.Althoughthe callmadebytheBOD;orwithin30days
general rule is that directors, trustees or officers from the date of call (grace period is
are not solidarily liable with the corporation, granted
consenting to the issuance of a watered stock is 3. When insolvency supervenes upon a
oneoftheexceptions. corporation and the court assumes
jurisdiction to wind it up, all unpaid
Note:PursuanttoSec.65oftheCorporationCode,a subscriptions become payable on
directororofficerwhoconsentstotheissuanceofa
demand, and are at once recoverable,
watered stock or having knowledge thereof does
withoutnecessityofanypriorcall.
notforthwithexpresshiswrittenobjectionwiththe
corporate secretary is liable jointly and severally

withthestockholderconcernedforthewaterinthe Q:Willtheunpaidbalanceaccrueinterest?
stockinfavorofthecorporationanditscreditors.
A: Yes, if so required by the bylaws and at the
(C)TRUSTFUNDDOCTRINEFORLIABILITYFOR rateofinterestfixedinthebylaws.Ifnorateof
WATEREDSTOCK interestisfixedinthebylaws,suchrateshallbe
deemedtobethelegalrate.(Sec.66)
Q:Whatisthetrustfunddoctrine?
The above interest is different from the interest
A:Thesubscribedcapitalstockofthecorporation contemplatedbySec.67.Thesaidunpaidbalance
is a trust fund for the payment of debts of the willonlyaccrueinterest,bywayofpenalty,onthe
corporationwhichthecreditorshavetherightto datespecifiedinthecontractofsubscriptionoron
look up to satisfy their credits, and which the thedatestatedinthecallmadebytheboard.
corporationmaynotdissipate.
Note:InterestcontemplatedinSec.66ispertainsto
moratoryinterestwhichistheinterestonaccountof
Q: Where does the solidary liability of directors
delay,whileSec.67speaksofcompensatoryinterest
consenting to the issuance of watered stock
whichistheineterstonaccountofsubscriptioninan
emanates?
installmentbasis.

A:Thesolidaryliabilityofthedirectorsemanates
Q: What is the effect of failure to pay the
from the fiduciary character of the position of
subscriptiononthedateitisdue?
directororcorporateofficer.

A: It shall render the entire balance due and
(3)PAYMENTOFBALANCEOFSUBSCRIPTION
payableandshallmaketheshareholderliablefor

interestatthelegalrateonsuchbalance,unlessa
Q:Whoarerequiredtopaytheirsubscriptionin
different rate of interest is provided in the by
full?
laws.

A:
(A)CALLBYBOARDOFDIRECTORS
1. Nonresident foreign subscribers upon

incorporation must pay in full their
Q: How does the board of directors call for the
subscriptions unless their unpaid
paymentofunpaidsubscription?
subscriptions are guaranteed by a surety

bond or by an assumption by a resident
154
MERCANTILELAWTEAM:
CORPORATION LAW
A: A call is made in a form of board resolution 1. Resolution the board shall issue
that unpaid subscription to the capital stock are resolution ordering the sale of
due and payable and the same or such delinquentstock
percentage thereof shall be collected, together 2. Noticenoticeofsaidsale,withacopy
withallaccruedinterest,onaspecifieddateand oftheresolution,shallbesenttoevery
that if no payment is made within 30 days from delinquent stockholder either
said date, all stocks covered by said subscription personallyorbyregisteredmail
shall thereupon become delinquent and shall be 3. Publication the notice shall
subjecttopublicauctionsale. furthermore be published once a week
for two consecutive weeks in a
Q: Is the call of the board of directors always newspaper of general circulation in the
necessary to collect payment for unpaid province or city where the principal
subscription? officeofthecorporationislocated
4. Salethedelinquentstockshallbesold
A: No. A call is not necessary where the atthepublicauctiontobeheldnotless
subscription contract specifies the date of than 30 days nor more than 60 days
payment. from the date stocks become
delinquent;
(B)NOTICEREQUIREMENT 5. Transfer the stock so purchased shall
betransferredtosuchpurchaserinthe
Q:Whatisthenoticerequirementincasethere books of the corporation and a
isacalloftheboardofdirectorsforpaymentof certificateforsuchstockshallbeissued
subscription? inhisfavor;and
6. Credit remainder the remaining
A:Thenoticeofthecallhastobeservedonthe shares,ifany,shallbecreditedinfavor
stockholdersconcernedinthemannerprescribed ofthedelinquentstockholderwhoshall
inthecall,whichmayeitherbebyregisteredmail likewisebeentitledtotheissuanceofa
and/orpersonaldeliveryandpublication. certificate of stock covering the same
(Aquino, Philippine Corporate Law
(4)SALEOFDELINQUENTSHARES Compendium,2006).

Q:Whenwillthesharebecomedelinquent? Q: Who is the winning bidder in a delinquency
sale?
A: If within 30 days from expiry of the date of
paymentorfromthedatestatedinthecallmade A:
by the board, no payment is made, all stocks 1. The person participating in the
covered by said subscription shall thereupon delinquency sale who offers to pay the
become delinquent and shall be subject to full amount of the balance of the
delinquency sale unless the BOD orders subscription together with the accrued
otherwise. interest, costs of advertisement and
expenses of sale, for the smallest
Note: Call means the resolution or formal numberofshares;
declaration of the board that the unpaid 2. If there is no bidder as mentioned
subscriptionsaredueandpayable. above, the corporation may bid for the
same,andhetotalamountdueshallbe
Q:Whataretheremediesofcorporationsto credited as paid in full in the books of
enforcepaymentofstocks? the corporation. Such shares shall be
consideredastreasuryshares.
A:
1. Extrajudicialsaleatpublicauction(Sec. Note:Theboardisnotboundtoacceptthehighest
67) bid unless the contrary appears. This is for the
2. Judicialaction(Sec.70) reason that in public sale, the bidder is the one
makingtheoffertopurchasewhichthecorporation
Q: What is the procedure for the sale of isfreetoacceptorreject.
delinquentstocks?

A:

155

Q: When may delinquency sale be discontinued A: No. Stocks become delinquent when the
orcancelled? unpaid subscription and accrued interests
thereon are not paid within 30 days from their
A: If the delinquent SH pays the unpaid balance duedateasspecifiedinthesubscriptioncontract
plusinterest,costsandexpensesonorbeforethe orinthecallbytheboardofdirectors.
date specified for the sale or when the BOD
ordersotherwise. The delinquency is automatic after said 30 day
period and does not need a declaration by the
Q:Canastockholderassailthedelinquencysale? boardmakingthestockdelinquent.

A: The stockholder may file an action to nullify (C)NOTICEOFSALE
thesaleonthegroundofirregularityordefectin
the notice of sale or in the sale itself. But the Q:Whatisthenoticerequirementincaseofsale
stockholder must first pay the amount for which ofdelinquentstock?
thesharesaresoldwithinterestfromthedateof
sale at the legal rate. The action shall be A: The notice of sale and copy of the board
commenced within 6 months from the date of resolutionorderingthesaleshallbe:
sale.(Sec.69) 1. Sent to every delinquent stockholder
either personally or by registered mail
(A)EFFECTOFDELINQUENCY or;
2. Published once a week for 2
Q:Whataretheeffectsofstockdelinquency? consecutive weeks in a newspaper of
general circulation in the province or
A: city where the principal office of the
1. Uponthestockholder corporation,asspecifiedinitsarticlesof
a. Accelerates the entire amount of incorporation,islocated.
theunpaidsubscription;
b. Subjects the shares to interest (D)AUCTIONSALE
expensesandcosts;
c. Disenfranchises the shares from Q:Whatistheprocedurefortheauctionsaleof
any right that inheres to the to a adelinquentshare?
stockholder, except the right to
dividends (but which shall be A:Theprocedureisasfollows:
appliedtoanyamountdueonsaid 1. The board of directors shall pass a
shares, or, in the case of stock board resolution ordering the sale of
dividends, to be withheld by the delinquentstock.
corporation until full payment of 2. A notice of sale and copy of the board
thedelinquentshares.(Sec.43) resolution ordering the sale shall be
sent to every delinquent stockholder
2. Upon the director owning delinquent either personally or by registered mail
shares or; published once a week for 2
a. If the delinquent stockholder is a consecutive weeks in a newspaper of
director, the director shall general circulation in the province or
continue to be a director but he city where the principal office of the
cannot run for reelection corporation,asspecifiedinitsarticlesof
(SundiangandAquino,Reviewerin incorporation,islocated.
CommercialLaw,2006) 3. The minimum bid shall be the full
b. A delinquent stockholder seeking amount of the balance on the
to be elected as director may not subscription plus the accrued interest,
be a candidate for, not be duly cost of advertisement and expenses of
electedto,theboard. saleforthesmallestnumberofshares.
4. Thesalewillbeawardedtothehighest
(B)CALLBYRESOLUTIONOFBOARDOF bidderwhowillbegivenacertificateof
DIRECTORS sale and the same will be registered in
thebooksofthecorporation.
Q:Doesacalloftheboardofdirectorsrequired 5. Should there be no bidder, the
todeclareastockdelinquent? corporation may bid for the same if it

156
MERCANTILELAWTEAM:
CORPORATION LAW
has unrestricted earnings to cover the 2. To afford the corporation the

amount. opportunity to object or refuse its
consent to the transfer in case it has
Q: How do youdetermine thehighest bidder in anyclaimagainstthestockand
anauctionsale?
3. To avoid fictitious and fraudulent
A:Giventhetotalamountdue,thehighestbidder transfer
is determined by the smallest number of shares
orafractionofasharethatthebidderiswillingto (A)ALLOWABLERESTRICTIONSONTHESALEOF
buyforsaidtotalamount. SHARES

Q: May the sale of delinquent share in public Q: Can a stockholder dispose of his shares
auctionbequestioned? withoutanyrestriction?

A: The sale at public auction of delinquent share A: Shares of stock are regarded as personal
is absolute and not subject to redemption. propertyofthestockholderandasageneralrule,
However, an action may be filed to question the hemaydisposeofthemasheseesfitunlessthe
sale,therequisitesforwhichare: corporation has been dissolved, or unless the
righttodosohasbeenrestrictedinthearticlesof
1. Thereshouldbeallegationandproofof incorporation and in the stock certificate or the
irregularity or defect in the notice of owners right of disposing his shares has been
saleorinthesaleitself. hamperedbyhisownactions.

2. Thepartyfilingtheactionmustfirstpay Q: Can the corporation provide regulations to
thepartyholdingthestockthesumfor thesale/transferofthesharesofstockholders?
which the stock was sold with legal
interestfromthedateofsale. A:Yes,buttheauthoritygrantedtoacorporation
to regulate the transfer of its stock does not
3. Theactionisfiledwithin6monthsfrom empower it to restrict the right of a stockholder
thedateofsale. to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and
Q: Does the action to question a delinquency procedure to be followed in effecting transfer
saleprescribe? (Thomson vs. CA, G.R. No. 116631, October
28,1998).
A:Yes.Theactionprescribes6monthsfromsuch
sale. Q:Whataretherequisitesforarestrictiontobe
valid?
(5)ALIENATIONOFSHARES
A:Tobevalid,restrictionsonthesale/transferof
Q: Is the registration of the corporation of the sharesmustbe:
transfer of shares required for the alienation to
bevalid? 1. Providedinthearticlesofincorporation
and
A:Asbetweenthepartiestothecontractofsale, 2. it must be printed at the back of the
registration of the transfer of shares is not certificateofstock.
required for the sale to be valid but until it has
been recorded in the books of the corporation, Note:Thelatterrequirementisneededtobindthird
the transferee will not be considered as a persons who may buy or deal with the shares of
stockholderofthecorporation. stock.

Q:Whatarethereasonsfortherecordalofthe (B)SALEOFPARTIALLYPAIDSHARES
alienationofshares?
Q: May a shareholder sell his shares if the
A:Thereasonsfortherecordalare: paymentofhissubscriptionisincomplete?

1. Toenablethecorporationtoknowatall A: Yes. The incomplete payment of the
timestheiractualstockholders. subscription does not preclude the subscriber
from alienating his shares of stock. Since in this
case,thereisstillnostockcertificatesthatcanbe

157

issued (See Sec. 64), the transfer may be thru a Q: Give examples of involuntary dealings of
SharePurchaseAgreementContract. a share.

(C)SALEOFAPORTIONOFSHARESNOTFULLY A:
1. Attachment
PAID
2. Saleonexecutionofjudgmentorsales

fortaxes
Q:Isthesaleofaportionofsharesnotfullypaid
3. Adverseclaims
allowed?
4. Foreclosureofmortgageofstocks

A:Yes,incaseofdelinquentshares.
Q:Mustinvoluntarydealingsberegistered?
(D)SALEOFALLSHARESNOTFULLYPAID
A:Yes.Itistheactofregistrationwhichcreatesa
Q: Is the sale of shares of not fully paid constructive notice to the whole world of such
subscriptionallowed? instrument or court writ or process and is the
operative act that conveys ownership or affects
A:Yesbuttobindthecorporation,consentofthe the land insofar as third persons are concerned.
corporationshallbeobtainedunlessnotallowed (Aquino,p.185,2007ed)
byAOI.
K.DISSOLUTIONANDLIQUIDATION

(E)SALEOFFULLYPAIDSHARES
Q:Whatismeantbydissolution?

Q:Isthesaleoffullypaidsharesallowed?
A: It is the extinguishment of the franchise of a

corporation and the termination of its corporate
A: Yes, even without the consent of the
existence.
corporationaslongastherequisitesforthevalid

transferofsharesarecomplied.
(1)MODESOFDISSOLUTION

(F)REQUISITESOFAVALIDTRANSFER
Q: What are the modes of dissolution of

corporation?
Q: What are the requirements for a valid

transfer of stock already fully paid and covered
A:VoluntaryandInvoluntarydissolution.
bystockccertificates?

(A)VOLUNTARY
A:

1. There must be a delivery of the stock
Q:Whatarethevoluntarymodesofdissolution
certificate.
ofacorporation?
2. The certificate of stock must be duly

endorsed by the transferor or his legal
A:
representative.
1. Wherenocreditorsareaffected
3. To be valid against third parties, the
Procedure:
transfermustberecordedinthebooks
a. Majority vote of the board of
of the corporation (Rural Bank of Lipa
directorsortrustees;and
vs.CA,G.R.No. 124535,September28,
b. Resolution duly adopted by the
2001).
affirmative vote of the

stockholdersowningatleast2/3of
(G)INVOLUNTARYDEALINGS
the outstanding capital stock or at

least 2/3 of the members at a
Q:Whatisinvoluntarydealing?
meeting duly called for that

purpose.
A: It refers to such writ, order or process issued
c. A copy of the resolution
by a court of record affecting shares of stocks
authorizingthedissolutionshallbe
whichbylawshouldberegisteredtobeeffective,
certifiedbyamajorityoftheboard
and also to such instruments which are not the
of directors or trustees and
willful acts of the registered owner and which
countersigned by the secretary of
may have been executed even without his
thecorporation.
knowledgeoragainsthisconsent.
d. Such copy shall be filed with SEC.
(Sec.118)
158
MERCANTILELAWTEAM:
CORPORATION LAW
2. Wherecreditorsareaffected consolidation, except the surviving or

Procedure: consolidated corporation which shall
a. Filingapetitionfordissolutionwith continuetoexist.(Secs.79and80)
theSEC
b. Such petition must be signed by 6. Expiration of the corporate term (Sec.
majority of the board of directors 11).
ortrustees
c. Must also be verified by the (B)INVOLUNTARY
presidentorsecretaryoroneofits
directors Q: What are the involuntary modes of
d. The dissolutionwas resolved upon dissolutionofacorporation?
by the affirmative vote of the
stockholders representing at least A:
2/3 of the outstanding capital 1. Byexpirationofcorporateterm
stock or at least 2/3 of the
members at a meeting duly called 2. Failure to organize and commence
forthatpurpose. transaction of its business within 2
e. If there is no sufficient objection, years from date of incorporation (Sec.
andthematerialallegationsofthe 22).
petition are true, a judgment shall
be rendered dissolving the 3. Continuous inoperation for a period of
corporation and directing such atleast5years.
disposition of its assets as justice
requires, and may appoint a 4. Legislative dissolution. In this case, a
receiver to collect such assets and corporation created by special law is
pay the debts of the corporation. dissolvedalsobyaspeciallaw.
(Sec.119)
5. Dissolution of SEC on grounds under
3. By shortening the corporate term A existinglaws.
voluntary dissolution may be effected
by amending the AOI to shorten its Q:WhatareexamplesofdissolutionbytheSEC
corporate term pursuant to the underexistinglaws?
provisions of the Code. A copy of the
amendedAOIshallbesubmittedtothe A: Examples of dissolution by the SEC under
SEC. Upon approval of the amended speciallawsare:
AOI of the expiration of the shortened
term, the corporation shall be deemed 1. Failure to file bylaws within the
dissolved without any further requiredperiodbut,accordingtoaSEC
proceedings, subject to the provisions Opinion,SECwillgiveittheopportunity
oftheCodeonliquidation. to explain such failure and not
automaticallydissolvethecorporation.
As an additional requirement, the SEC
requires to submit the final audited 2. By order of the SEC upon a verified
financial statement not older than 60 petition and after proper notice and
days before the application for hearing on the ground of serious
shorteningthecorporateterm. misrepresentation as to what the
corporation can do or is doing to the
4. In case of a corporation sole, by great prejudice of or damage to the
submitting to the SEC for approval, a generalpublic.
verified declaration of dissolution
(Sec.115). This merely needs the 3. Revocationorforfeitureofthefranchise
affidavit of the presiding elder. No orcertificateofincorporationduetoits
needforaboardresolution. misuse or nonuse pursuant to quo
warranto proceedings filed by the
5. By merger or consolidation, whereby SolicitorGeneral.
the constituent corporations
automatically cease upon issuance by 4. Failuretofilerequiredreports.
the SEC of the certificate of merger or
159

Q: XYZ Corporation entered into a contract of
lease with ABC, Inc., over a piece of real estate Q: The Securities and Exchange Commission
foratermof20years,renewableforanother20 approved the amendment of the articles of
years, provided that XYZ's corporate term is incorporationofGHQCorporationshorteningits
extended in accordance with law. Four years corporate life to only 25 years in accordance
after the term of XYZ Corporation expired, but with Sec. 120 of the Corporation Code. As
still within the period allowed by the lease shortened, the corporation continued its
contract for the extension of the lease period, businessoperationsuntilMay30,1997,thelast
XYZCorp.notifiedABC,Inc.,thatitisexercising dayofitscorporateexistence.Priortosaiddate,
the option to extend the lease. ABC, Inc., therewereanumberofpendingcivilactions,of
objectedtotheproposedextension,arguingthat varyingnaturebutmostlymoneyclaimsfiledby
sincethecorporatelifeofXYZCorp.hadexpired, creditors, none of which was expected to be
it could no longer opt to renew the lease. XYZ completed or resolved within five years from
Corp. countered that withstanding the lapse of May 30, 1997. If the creditors had sought your
its corporate term it stillhas the right to renew professionalhelpatthattimeaboutwhetheror
theleasebecausenoquowarrantoproceedings nottheircasescouldbepursuedbeyondMay30,
forinvoluntarydissolutionofXYZCorp.hasbeen 1997,whatwouldhavebeenyouradvice?
instituted by the Office of the Solicitor General.
Is the contention of XYZ Corp. meritorious? A: The cases can be pursued even beyond May
Explainbriefly. 30,1997,thelastdayofthecorporateexistence
of GHQ Corporation. The corporation is not
A: XYZ Corporations contention is not actually dissolved upon the expiration of its
meritorious based on the ruling of the Supreme corporate term. There is still the period for
Court in PNB v. CFI of Rizal, May 27, 1992. XYZ liquidationorwindingup.(2000BarQuestion)
Corp. was dissolved ipso facto upon the
expiration of its original term. It ceased to be a Q:XCorporationshorteneditscorporatelifeby
bodycorporateforthepurposeofcontinuingthe amending its articles of incorporation. It has no
business for which it was organized, except only debts but owns a prime property located in
for purposes connected with its winding up or Quezon City. How would the said property be
liquidation. Extending the lease is not an act to liquidated among the five stockholders of said
wind up or litigate XYZs affairs. It is contrary to corporation? Discuss two methods of
the idea of winding up the affairs of the liquidation.
corporation.(2004BarQuestion)
A: The prime property of X Corporation can be
(2)METHODSOFLIQUIDATION liquidated among the five stockholders after the
property has been conveyed by the corporation
Q:Whatarethemodesofliquidation? to the five stockholders, by dividing or
partitioning it among themselves in any two of
A: thefollowingways:
1. Bythecorporationitselforitsboardof 1. By physical division or partition based
directorsortrustees;(Sec.122,par.1) ontheproportionofthevaluesoftheir
2. Byatrusteetowhomtheassetsofthe stockholdings;or
corporation had been conveyed. (Sec. 2. Bysellingthepropertytoathirdperson
122, par. 2); (Board of Liquidators v. and dividing the proceeds among the
Kalaw,G.R.No.L18805,Aug.14,1967) five stockholders in proportion to their
3. By a management committee or stockholdings;or
rehabilitation receiver appointed by 3. Afterthedeterminationofthevalueof
SEC;(Sec.119,lastpar.) the property, by assigning or
transferring the property to one
Q: Does a corporation in the process of stockholder with the obligation on the
liquidationhavelegalauthoritytoengageinany part of said stockholder to pay the
newbusiness? otherfourstockholderstheamount/sin
proportion to the value of the
A:No,acorporationintheprocessofliquidation stockholding of each. (2001 Bar
has no legal authority to engage in any new Question)
business, even if the same is in accordance with
the primary purpose stated in its article of
incorporation.
160
MERCANTILELAWTEAM:
CORPORATION LAW
Q:Whataretheconsequencesiftheliquidation A:No.Theappointmentofareceiveroperatesto
isnotterminatedwithinthe3yearperiod? suspendtheauthorityofacorporationandofits
directors and officers over its property and
A: effects, such authority being reposed in the
1. Pending suits for or against the receiver (Yam v. CA, G.R. No. 104726 Feb 11,
corporation which were initiated prior 1999).
to the expiration of the 3year period
shall continue. (Gelano v. CA, G.R. No. Q:WhenmaytheCommissionappointareceiver
L39050,Feb.24,1981) toundertakethewindingupandliquidationofa
2. New actions may still be filed against corporation?
the trustee of the corporation even
aftertheexpirationofthe3yearperiod A: Where the application for dissolution of a
but before the affairs of said corporationisuponapplication,affectingrightsof
corporationhavebeenfinallyliquidated creditors, or involuntarily initiated by verified
or settled by the trustee. (Republic v. complaint, the Commission may appoint a
Marsman, G.R. No. L18956 Apr. 27, receivertoundertakethewindingupratherthan
1972) entrust the responsibility to directors and
3. A corporation which has a pending corporateofficers.
action which cannot be finished within
the 3year period is authorized to Q:Whatistheeffectifthecorporationappoints
convey all its property, including a trustee and convey all its property to him for
pendingchosesofaction,ofatrusteeto the benefit of stockholders, members, creditors
enableittoprosecuteanddefendsuits andotherpersonsininterest?
by or against the corporation beyond
the3yearperiod.Wherenotrusteeis A: After such conveyance to the trustee, all
appointed, its counsel who prosecuted interest which the corporation had in the
and represented the interest of the property terminates and the legal interests vests
corporation may be considered as inthetrustee,subjecttothebeneficialinterestof
trusteeofsaidcorporation,atleastwith stockholders, members, creditors or other
respect to the matter in litigation personsininterest.
(Gelanov.CA,G.R.No.L39050,Feb.24,
1981). The directors may also be L.OTHERCORPORATIONS
permitted to continue as trustees to
complete the liquidation. (Clemente v. (1)CLOSEDCORPORATION
CA,G.R.No.82407,Mar.27,1995)
4. The creditors of the corporation who Q:Whatisaclosecorporation?
were not paid may follow the property
of the corporation that may have A:
passedtoitsstockholdersunlessbarred 1. Whosearticlesofincorporationprovide
by prescription or laches or disposition that:
ofsaidpropertyinfavorofapurchaser a. All the corporations issued stock
ingoodfaith. of all classes, exclusive of treasury
shares, shall be held of record by
Q: What is the rationale behind the 3year not more than a specified number
period? or persons not exceeding twenty
(20);
A: The continuance of a corporations legal b. All the issued stock of all classes
existence for three years for the purpose of shall be subject to one or more
enablingittocloseupitsbusinessisnecessaryto specifiedrestrictionsontransfer;
enable the corporation to collect the demands c. Thecorporationshallnotlistinany
dueitaswellastoallowitscreditorstoassertthe stockexchangeormakeanypublic
demandsagainstit. offering of any of its stock of any
class.
Q: May the corporation, through its president 2. Whosestocks,atleast2/3ofthevoting
condonepenaltiesandchargesafterithadbeen stocks or voting rights of which are
placedunderreceivership? owned or controlled by another
corporation which is a close
corporation.
161

Note: The Corporation is not a close corporation (B)VALIDITYONRESTRICTIONSONTRANSFEROF
even iftheshares belong to lessthantwentyif not SHARES
all the requisites are present. (San Juan Structural Q: What are the conditions for validity of
and Steel Fabricators, Inc. v. CA, G.R. No. 129459, restrictionsontransferofshares?
Sept.29,1998)
A:
(A)CHARACTERISTICSOFACLOSE 1. SuchrestrictionsmustappearintheAOI
CORPORATION and in the bylaws as well as in the
certificateofstock,otherwisetheyshall
Q: What are the characteristics of a close not be binding on any purchaser
corporation? thereofingoodfaith
2. They shall not be more onerous than
A: grantingtheexistingstockholdersorthe
1. Stockholders may act as directors corporationstheoptiontopurchasethe
without need of election and therefore shares of the transferring stockholders
areliableasdirectors withsuchreasonableterms,conditions,
2. Stockholders who are involved in the orperiodstatedtherein
management of the corporation are
liable in the same manner as directors Note: Any transfer made should not result in
are exceedingthenumberofstockholdersasallowedby
3. Quorum may be greater than mere theCode.
majority
4. Transfer of stocks to others, which Q:Whatisthenatureofrestrictionsontransfer?
would increase the number of
stockholders to more than the A: It is in the nature of a right of first refusal in
maximumareinvalid favorofstockholderswhichcanbewaivedbythe
5. Corporate actuations may be binding stockholder, if the latter fails to exercise the
evenwithoutaformalboardmeeting,if optiontopurchasewithintheperiodstatedinthe
the stockholder had knowledge or articlesandbylaws.
ratified the informal action of the
others (C)ISSUANCEORTRANSFEROFSTOCKIN
6. Preemptive right extends to all stock BREACHOFQUALIFYINGCONDITION
issues
7. Deadlock in board are settled by the Q:Cangoodfaithbeadefenseintheissuanceor
SEC, on the written petition by any transferinbreachofqualifyingconditions?
stockholder
8. Stockholder may withdraw and avail of A:No,accordingtoSec.99,thereisaconclusive
hisrightofappraisal presumptionofknowledgeoftherestrictions.

Q:Whatcannotbeaclosecorporation? (D)WHENBOARDMEETINGISUNNECESSARYOR
IMPROPERLYHELD
A:MOSBIPEP
1. Miningcompanies Q: What is the effect of unnecessary or
2. Oilcompanies improperlyheldboardmeeting?
3. Stockexchanges
4. Banks A: Any action by the directors of a close
5. Insurancecompanies corporationwithoutameetingshallbevalidif:
6. Publicutility 1. Before or after such action is taken,
7. Educationalinstitutions written consent is signed by all the
8. Other corporation declared to be directors
vestedwithPublicinterest.(Sec.96) 2. All the stockholders have actual or
implied knowledge of the action and
Note: A close corporation is different from a makenopromptobjection
closed corporation and a closely held 3. The directors are accustomed to take
corporation. informal action with the express or
implied acquiescence of all the
stockholders

162
MERCANTILELAWTEAM:
CORPORATION LAW
4. Allthedirectorshaveexpressorimplied Q:Whatistheremedyincaseofdeadlocksina
knowledgeoftheactioninquestionand closecorporation?
makenopromptobjectionthereto.
A:TheSECmaybeaskedtointerveneandtheSEC
(E)PREEMPTIVERIGHT mayperformsuchactionsthatmaybenecessary
under the circumstances including the
Q: What is the difference between preemptive appointmentofaprovisionaldirectorwho,asan
right in an ordinary corporation and in a close impartialpersonwillhaveallthepowersofaduly
corporation? electeddirector.

A: In an ordinary corporation, the preemptive
right extends only to new issues out of the (2)NONSTOCKCORPORATION
increased capital stock. In a close corporation,
preemptive right extends to all stock, including (A)DEFINITION
treasurystock.
Q: What is the concept of a nonstock
(F)AMENDMENTTOTHEARTICLESOF corporation?
INCORPORATION
A: It is one where no part of its income is
Q:CorporationA,aclosecorporation,amended distributableasdividendstoitsmembers.
its articles of incorporation and removed the
provision that all shares of stock, exclusive of Evenifthereisastatementofcapitalstock,foras
treasury stock, shall be held by a specified long as there is no distribution of unrestricted
numberofshareholdersnotexceeding20. retainedearningstoitsmembers,thecorporation
isnonstock.
What is the effect of such amendment to
CorporationA? Any profit which it may obtain as an incident to
its operations shall whenever necessary or
A: It is a special feature of a close corporation proper,beusedinfurtheranceofthepurposeor
that its shares of stock exclusive of treasury purposesforwhichitwasorganized.
shares shall be held by not more that 20 stock
holders. The deletion of such special feature Note: They are governed by the same rules
would render Corporation A, no longer a close establishedforstockcorporations,subjecthowever,
corporation. to special provisions governing nonstock
corporations.
Q: What is the required number of vote for the
deletionofsuchspecialfeature? Q: What are the characteristics of a nonstock
corporation?
A: The amendment by deletion of said special
feature and of the provision reducing a quorum A:
orvotingrequirementsrequiresthevoteof2/3of 1. It does not have capital stock divided
all outstanding shares, regardless of their intoshares
classifications, restrictions or voting rights. All
other matters may be amended by an ordinary 2. No part of its income during its
votebystockholdersconstitutingaquorum. existenceisdistributableasdividendsto
itsmembers,trustees,orofficers
(G)DEADLOCKS
(B)PURPOSES
Q:Whatisdeadlockinaclosecorporation?
Q: For what purposes may a nonstock
A:Itiswhenthedirectorsorstockholdersareso corporationbeorganized?
divided respecting the management of the
business and affairs of the corporation that the A: Nonstock corporation may be formed or
votesrequiredforanycorporateactioncannotbe organized for charitable, religious, educational,
obtainedandasaresult,businessandaffairscan professional,cultural,fraternal,literary,scientific,
no longer be conducted to the advantage of the social,civicservice,orsimilarpurposes,liketrade,
stockholdersgenerally. industry, agriculture and like chambers, or any
combinationthereof.

163

(C)TREATMENTOFPROFITS entitled to distribution of capital. They are only
entitledtodistributionofcapitalupondissolution
Q:Mayanonstockcorporationearnprofit? when it is provided for in the articles of
incorporation or bylaws. (SEC Opinion, Nov. 27,
A: Yes. Mere intangible or pecuniary benefit to 1985)
the members does not change the nature of the
corporation. (3)RELIGIOUSCORPORATION

Q:Ifanonstockcorporationearnsprofit,doesit Q:Whatisareligiouscorporation?
rendersuchcorporationastockcorporation?
A: A corporation composed entirely of spiritual
A:No.Thefactthatanonstockcorporationearns persons and which is organized for the
a profit does not make it a profitmaking furtherance of a religion or for perpetuating the
corporation where such profit or income is used rights of the church or for the administration of
for purposes set forth in its articles of church or religious work or property. It is
incorporation and is not distributed to its differentfromanordinarynonstockcorporation
incorporators,membersorofficers. organizedforreligiouspurposes.(Secs.109116)

(D)DISTRIBUTIONOFASSETSUPON Q:Arereligiousgroupsrequiredtoberegistered
DISSOLUTION withtheSEC?

Q:Whatistheorderofdistributionofassetson A:No,theCorporationCodedoesnotrequireany
dissolutionofnonstockcorporations? religiousgroupstoberegisteredasacorporation
but if it wants to acquire legal personality, its
A: membersshouldincorporateundertheCode.
1. Allitscreditorsshallbepaid
Q:WhatarethekindsofReligiousCorporation?
2. Assets held subject to return on
dissolution, shall be delivered back to A:
theirgivers 1. Corporation sole a special form of
corporation,usuallyassociatedwiththe
3. Assets held for charitable, religious clergy, consisting of one person only
purposes, etc., without condition for andhissuccessors,whoisincorporated
their return on dissolution, shall be bylawtogivesomelegalcapacitiesand
conveyedtooneormoreorganizations advantages(Sec.110);
engagedinsimilaractivitiesasdissolved
corporation; 2. Religious societies or corporate
aggregate a nonstock corporation
4. All other assets shall be distributed to governed by a board but with religious
members,asprovidedforintheArticles purposes. It is incorporated by an
orbylaws aggregate of persons, religious order,
diocese,synod,sect,etc.(Sec.116)
5. In case of there is no provision in the
AOI or bylaws, distribution may be (A)CORPORATIONSOLE
made in accordance to a plan of
distribution adopted by the board of Q:Howisacorporationsoleorganized?
trusteesbymajorityvoteandbyatleast
2/3ofthemembers.(Sec.94) A: By the mere filing of a verified articles of
incorporation with the SEC without the need of
Q: Can a nonstock corporation offset unused anissuanceofacertificateofincorporation.(Sec.
contributionsofmembersagainstthebalanceof 111)
receivablesfromthesamemembers?
(i)NATIONALITY
A: No. The unused contributions of members
cannot be offset against the balance of Q:Whatisthenationalityofacorporationsole?
receivables because this would amount to
distribution of the capital of the corporation. A: A corporation sole does not have any
Members of Nonstock Corporation are not nationality but for purposes of applying
164
MERCANTILELAWTEAM:
CORPORATION LAW
nationalizationlaws,nationalityisdeterminednot 4. Names and addresses of the persons

bythenationalityofitspresidingelderbutbythe who will supervise the dissolution and
nationality of its members, constituting the sect windingup
in the Philippines. Thus, the Roman Catholic
ChurchcanacquirelandsinthePhilippinesevenif Q: If a corporation sole wants to become a
it is headed by the Pope. (Roman Catholic corporation aggregate, does it need to be
Apostolic Church v. Land Registration dissolvedfirst?
Commission,G.R.No.L8451,Dec.20,1957)
A: No. There is no point to dissolving the
Q:Mayacorporationsoleacquireproperty? corporation sole of one member to enable the
corporation aggregate to emerge from it. The
A: Yes, a corporation sole may acquire property CorporationCodeprovidesnospecificmechanism
even without court intervention by purchase, for amending the articles of incorporation of a
donationandotherlawfulmeans. corporation sole but Section 109 of the
Corporation Code allows the application to
Q: How may a corporation sole alienate religious corporations of the general provisions
property? governingnonstockcorporations.

A: Innonstockcorporations,theamendmentneeds
1. By obtaining an order from the RTC of the concurrence of at least twothirds of its
the province where the property is membership.Ifsuchapprovalmechanismismade
situated after notice of the application tooperateinacorporationsole,itsonemember
for leave to sell or mortgage has been in whom all the powers of the corporation
givenbypublicationorotherwise technicallybelongs,needstogettheconcurrence
of twothirds of its membership (Iglesia
2. In cases where the rules, regulations Evangelica Metodista v. Bishop Lazaro. GR.
and discipline of the religious 184088July6,2010).
denomination, sect or church, religious
societyororderconcernedrepresented Q:Whataretherequirementsforamendmentof
by such corporation sole regulate the the articles of incorporation of a corporation
method of acquiring, holding, selling sole?
and mortgaging real estate and
personal property, such rules, A: The requirements for amendment of the
regulations and discipline shall control, articlesofincorporationofacoporationsoleare:
andtheinterventionofthecourtsshall 1. The amendment is not contrary to any
notbenecessary.(Sec.113) provision or requirement under the
CorporationCode,andthat
Q: How is the vacancy filled in a corporation 2. That it is for a legitimate purpose.
sole? (Iglesia Evangelica Metodista v. Bishop
Lazaro.GR.184088July6,2010)
A:Byaccessiontotheofficebythesuccessorsof
any chief archbishop, bishop, priest, minister, (ii)RELIGIOUSSOCIETIES
rabbiorpresidingelder.(Sec.114)
Q:Whatarereligioussocieties?
Note: They shall be permitted to transact business
onthefilingwiththeSECacopyoftheircommission, A:Religioussocietiesaregroupswithinareligious
certificate of election, or letters of appointment, denomination such as religious order, diocese,
dulycertifiedbyanynotarypublic.
synodordistrictorganization.

Q:Howisacorporationsoledissolved?
Q:Canreligioussocietiesincorporatethemselves
for the administration and management of its

A: By filing a verified declaration of dissolution
affairs,propertiesandestate?
stating:

1. Thenameofthecorporation
A: Yes, provided that such incorporation is not
2. Reasonfordissolution
forbidden by the constitution, rules, regulations
3. Authorizationforthedissolutionbythe
ordisciplineofthereligiousdenominationwhich
particular religious denomination, sect
itispart.(Sec.116)
orchurch

165

Q: What are the requirements for a religious (ii)DOCTRINEOFDOINGBUSINESS
societytobeincorporated?
Q:Whatarethejurisdictionaltestsofdoingor
A:SeeSec.116 transacting business in the Philippines for
foreigncorporations?
Q: Where two factions of a religious
denominationareindisputeastowhowouldbe A:
entitled to the possession of the properties of 1. TwinCharacterizationTest
thecorporation,towhosefavorshouldtheissue a. Continuity Test doing business
beresolved? implies a continuity of commercial
dealings and arrangements, and
A: The issue should be resolved in favor of the contemplates to some extent the
faction having the numerical majority of the performance of acts or works or
members. The minority, in choosing to separate the exercise of some functions
themselvesintoadistinctbody,andrefusingthe normally incident to and in
authority of the governing body, can claim no progressive prosecution of, the
rights to the property from the fact that they purpose and object of its
oncehavebeenmembers. organization.
b. Subsequent Test a foreign
(4)FOREIGNCORPORATIONS corporation is doing business in
the country if it is continuing the
Q:Whatisaforeigncorporation? body or substance of the
enterprise of business for which it
A: It is a corporation formed, organized or was organized. (Philippine
existing under any law other than those of the Corporate Law, Villanueva, 2001
Philippines,andwhoselawsallowFilipinocitizens ed.)
andcorporationtodobusinessinitsowncountry
orstate.(Sec.123) 2. ContractTest
Whether the contracts entered into by
Note:Thedefinitionespousestheincorporationtest the foreign corporation, or by an agent
and the reciprocity rule and is significant for acting under the control and direction
licensingpurposes. of the foreign corporation, are
consummatedinthePhilippines.
(A)BASESOFAUTHORITYOVERFOREIGN
CORPORATION To be doing or transacting business in
thePhilippinesforthepurposesofSec.
Q:Whatarethebasesofauthorityoverforeign 133 of the Corporation Code, the
corporation? foreign corporation must actually
transactbusinessinthePhilippines,that
A: is, perform specific business
1. Consent transactions within the Philippines
2. DoingbusinessinthePhilippines territory on a continuing basis, in its
ownnameorforitsownaccount.
(i)CONSENT
Note: Actual transaction of business
Q: What is an example of consent of foreign within the Philippine territory is an
corporation? essential requisite for the Philippines to
acquire jurisdiction over a foreign
A: Filing of an action by a foreign corporation corporation and thus require the foreign
before Philippine courts would mean that by corporation to secure a Philippine
voluntary appearance the local courts have businesslicense(B.VanZuidenBros.,Ltd.
actuallyobtainedjurisdictionoverthe"person"of v. GTVL Manufacturing Industries, Inc.,
G.R.No.147905,May28,2007).
the foreign corporation. (Communication

MaterialsandDesign,Inc.v.CA,260SCRA673,73

SCAD374(1996)

.
166
MERCANTILELAWTEAM:
CORPORATION LAW
Q: What are the considered as doing or A:Foreigncorporationsneedlicenseto:

transacting business in the Philippines for 1. Placethemunderthejurisdictionofthe
foreigncorporations? court;
2. Place them in the same footing as
A: domesticcorporation;
1. Soliciting orders, service contracts, 3. Protect the public in dealing with the
andopeningoffices saidcorporation.
2. Appointing representatives,
distributors domiciled in the Q: What are the jurisprudential rules related to
Philippinesorwhostayforaperiod the consequences of not obtaining license by a
or periods totaling 180 days or foreigncorporation?
more
3. Participating in the management, A:
supervision or control of any 1. Doctrine of isolated transactions
domestic business, firm, entity, or foreign corporations, even unlicensed
corporationinthePhilippines ones can sue or be sued on a
4. Any act or acts that imply a transactionorseriesoftransactionsset
continuity of commercial dealings apart from their common business in
orarrangements,andcontemplate the sense that there is no intention to
tosomeextenttheperformanceof engage in a progressive pursuit of the
acts or works or the exercise of purpose and object of business
some functions normally incident transaction (Eriks Pte. Ltd. v. CA, G.R.
to and in progressive prosecution No.118843,Feb.6,1997)
of, the purpose and object of its
organization. 2. InparidelictoruleinthecaseofTop
Weldmanufacturingvs.ECEDS.A.(G.R.
Q: What are the requisites for obtaining license No. L44944, Aug. 9, 1985), the court
todobusiness? denied the relief prayed for by
petitioner when it ruled that the very
A: purpose of the law was circumvented
1. The foreign corporation should file a and evaded when the petitioner
verified application containing and entered into the said agreements
togetherwiththefollowing: despitetheprohibitioncontainedinthe
a. Designated resident agent (who questioned law. The parties were
will receive summons and notices considered as being in pari delicto
forthecorporation; because they equally violated R.A. No.
b. aspecialpowerofattorneyshould 5455.
also be submitted for such
purpose; 3. Doctrine of Estoppel the party is
2. An agreement that if it ceases to estoppedfromquestioningthecapacity
transactbusinessorifthereisnomore of a foreign corporation to institute an
resident agent, summons shall then be action in our courts where it had
servedthroughSEC; obtainedbenefitsfromitsdealingswith
3. Oath of Reciprocity. Certificate under such foreign corporations and
Oath of the authorized official of the thereafter omitted a breach or sought
foreign corporations country that to renege its obligations (Merrill Lynch
allowsFilipinocitizensandcorporations v.CA,G.R.No.978160,July24,1992)
todobusinessinsaidcountry.
4. Within60daysfromissuanceoflicense, Q: What are considered doing business under
the corporation should deposit at least theForeignInvestmentAct?
P100, 000.00 (cash, property or bond)
for the benefit of creditors subject to A: Under the Foreign Investment Act, the
furtherdepositeverysixmonths. followingareconsidereddoingbusiness:

1. Solicitingorders
Q: Why do foreign corporations need license to 2. Servicecontracts
transactbusinessinthePhilippines? 3. Appointing representatives or distributors
domiciled in the Philippines or who in any
167

calendaryearstayinthecountryforaperiod A: Under the Foreign Investment Act, the
orperiodstotaling180daysormore followingarenotconsidereddoingbusiness:
4. Openingoffices,whethercalledliasonoffices 1. Mereinvestmentasashareholderbya
orbranches foreign entity in a foreign corporation
5. Establishing a factory, workshop or dulyregisteredtodobusiness.
processingplant 2. Theexerciseofrightsasastockinvestor
6. Undertaking building construction or and
erectionprojects 3. Havinganomineedirectororofficerto
7. Openingastore,whetherwholesaleorretail represent its interest in such
without prejudice to the provisions of the corporation
RetailTradeAct 4. Appointing a representative or
8. Maintaining or operating a warehouse for distributor domiciled in the Philippines
business purposes including the storage, which transacts business in its own
displayordeliveryofitsownproducts nameandforitsownaccount.
9. Participating in the management, 5. Publication of general advertisement
supervision or control of any domestic throughanyprintorbroadcastmedia
business, firm, entity or corporation in the 6. Maintaining a stock of goods in the
Philippines Philippines solely for the purpose of
10. Anyotheractoractsthatimplyacontinuity having the same processed by another
of commercial dealings or arrangements, entityinthePhilippines.
and contemplate to that extent, 7. Consignment by a foreign entity of
performance normally incident to , and in equipment with a local company to be
progressive prosecution of, commercial gain used in the processing of products for
orofthepurposeandobjectofthebusiness exportand
organization 8. Performing services auxiliary to an
11. Itshallnotinclude: existing isolated contract of sale which
a. Mere investment as a shareholder are not on a continuing basis, such as
by a foreign entity in domestic installinginthePhilippinesmachineryit
corporations duly registered to do has manufactured or exported to the
business and/or the exercise of Philippines,servicingthesame,training
suchrightsassuchinvestor domestic workers to operate it and
b. Having a nominee director or similarincidentalservices.
officer to represent its interests in
suchcorporations (B)NECESSITYOFALICENSETODOBUSINESS
c. Appointing a representative or
distributor domiciled in the Q: Why is there a necessity torequire a foreign
Philippines which transacts corporationtoacquirealicensebeforeengaging
business in its own name and for inbusinessinthePhilippines?
itsownaccount
12. Thefollowingactsbythemselvesshallnotbe A: The purpose of the law in requiring that a
deemeddoingbusinessinthePhil: foreign corporation doing business in the
a. The publication of a general Philippinesbelicensedtodosoistosubjectsuch
advertisement through corporation to the jurisdiction of the courts. The
newspapers, brochures or other objectisnottopreventforeigncorporationfrom
publicationmediaorthroughradio performing single acts but to prevent it from
ortelevision acquiring a domicile for the purpose of business
b. Maintaining the stock of goods in without taking steps necessary to render it
the Phil solely for the purpose of amenabletosuitsinlocalcourts.
having the same processed by
anotherentityinthePhil. (i)REQUISITESFORISSUANCEOFLICENSE
c. CollectinginformationinthePhil.
d. Performing services auxiliary to an Q: What are the requisites for the issuance of
existingcontractorsale,whichare licensetoaforeigncorporation?
notonacontinuingbasis.
A: A foreign corporation applying for a license
Q: What are not considered doing business shallsubmittotheSEC:
undertheForeignInvestmentAct?

168
MERCANTILELAWTEAM:
CORPORATION LAW
1. Copyofitsarticlesofincorporationand
bylaws, certified in accordance with Q:Whatisthepurposeofappointingaresident
law agent?
2. Their translation to an official language
ofthePhilippines,ifnecessary. A: The appointment of a resident agent is
3. The application, which shall be under required for the purpose of accepting and
oath. receiving,onbehalfoftheforeigncorporation:a)
4. Attached to the application for license notice affecting the corporation pending the
shall be a duly executed certificate establishment of its local office and b) summons
underoathbytheauthorizedofficialor andotherlegalprocessesinallproceedingsforor
officials of the jurisdiction of its againstthecorporation.
incorporation,attestingtothefactthat:
a. The laws of the country or Q: Can a resident agent sign the certificate of
state of the applicant allow nonforumshopping?
Filipino citizens and
corporations to do business A:No,whilearesidentagentmaybeawareofthe
therein actionsfiledagainsttheprincipal,hemaynotbe
b. The applicant is an existing aware of the actions initiated by the principal,
corporationingoodstanding. therefore he cannot sign the certificate of non
c. If such certificate is in a forumshoppingthatisarequirementforfilingof
foreignlanguage,atranslation an initiatory pleading in court (Expert Travel &
thereof in English under oath ToursInc.v.CA,G.R.No.152392,May26,2005).
of the translator shall be
attachedthereto. (C)PERSONALITYTOSUE

Theapplicationshalllikewisebeaccompaniedby Q: Do all foreign corporations have the
a statement under oath of the president or any personalitytosue?
other person authorized by the corporation,
showing to the satisfaction of the SEC and other A:No.
governmental agency in the proper cases that GR: Only foreign corporations that have been
the: issued a license to operate a business in the
Philippineshavethepersonalitytosue.(Sec.133)
1. Applicant is solvent and in sound
financialcondition,and XPN: Under the rule on estoppel, a party is
2. Setting forth the assets and estoppedtochallengethepersonalityofaforeign
liabilities of the corporation as of corporationtosue,evenifithasnolicense,after
the date not exceeding one (1) having acknowledged the same by entering to a
yearimmediatelypriortothefiling contractwithit.
oftheapplication.
One who has dealt with a corporation of foreign
Note: Foreign banking, financial and insurance originasacorporateentityisestoppedtodenyits
corporations shall, in addition to the above corporateexistence.
requirements,complywiththeprovisionsofexisting
lawsapplicabletothem. (D)SUABILITYOFFOREIGNCORPORATIONS

(ii)RESIDENTAGENT Q:Canaforeigncorporationwithoutanylicense,
engagedindoingbusinessinthePhilippines,be
Q:Whocanbearesidentagent? suedinthecountry?

A: A: Yes. While an unlicensed foreign corporation
1. An individual, who must be of good doing business in the country cannot maintain
moral character and of sound financial any action, said corporation can be sued in the
standing,residinginthePhilippines;or country.
2. A domestic corporation lawfully
transacting business in the Philippines,
designated in a written power of
attorney by a foreign corporation
authorized to do business in the
Philippines.

169

(E)INSTANCESWHEREANUNLICENSEDFOREIGN
CORPORATIONBEALLOWEDTOSUE 5. Amisrepresentationinmaterialmatters
inreports;
Q: Give instances when unlicensed foreign
corporationscansue. 6. Failure to pay taxes, imposts, and
assessments;
A:
1. Isolatedtransactions; 7. Engage in business unauthorized by
1. The action aims to protect its good SEC;and
name,goodwill,andreputation;
2. The subject contracts provide that 8. Acting as dummy of a foreign
Philippinecourtswillbetheonlyvenue corporation;(Sec.134).
tofuturedisputesorcontroversies;
3. Alicensesubsequentlygrantedenables (M)MERGERANDCONSOLIDATION
the foreign corporation to sue on
contracts executed before the grant of 1.DEFINITIONANDCONCEPT
thelicense;
4. Recovery of erroneously delivered Q:Whatismerger?
property;
5. Where the unlicensed foreign A: One where a corporation absorbs the other
corporationhasadomesticcorporation. and remains in existence while others are
dissolved.(Sec.76)
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a Q:Whatisconsolidation?
country which is a party to any convention,
treaty, or agreement relating to intellectual A: One where a new corporation is created and
property rights or the repression of unfair consolidatingcorporationsareextinguished.(Sec.
competition, to which the Philippines is also a 76)
party or extend reciprocal rights sue in
trademarkorservicemarkenforcementaction? Q: What are the distinctions between merger
andconsolidation?
A:Yes,theforeigncorporationmentionedabove
may sue in trademark or service mark A:
enforcement action. This is in accordance with MERGER CONSOLIDATION
Section 160, in relation to Section 3 of R.A. No. Alloftheconstituent
Allconsolidated
8393, The Intellectual Property Code. (Sehwani corporationsinvolved
corporationsaredissolved
Inc.v.InnOut Burger,G.R.No.171053,Oct.15, aredissolvedexcept
withoutexception
2007) one
Nonewcorporationis Asinglenewcorporation
(F)GROUNDSFORREVOCATIONOFLICENSE created emerges
Thesurviving
Allassets,liabilities,and
Q: What are the grounds for revocation of corporationacquires
capitalstockofall
licenseofaforeigncorporation? alltheassets,
consolidatedcorporations
liabilities,andcapital
aretransferredtothenew
stockofallconstituent
A: corporation
corporations
1. Failure to file annual reports required

bytheCode;
(2)CONSTITUENTVS.CONSOLIDATED

CORPORATION
2. Failure to appoint and maintain a

resident agent in the Philippines as
Q:Whatisthedifferencebetweenaconstituent
requiredbytheCode;
andconsolidatedcorporation?

3. FailuretoinformtheSECofthechange
A:Aconstituentcorporationiscreatedwhentwo
ofaddressoftheresidentagent;
or more corporations merge into a single

corporation which is one of those merging
4. Failure to submit copy of amended
corporations. A consolidated corporation, on the
articlesorbylawsorarticlesofmerger
other hand, is created when two or more
orconsolidation;
170
MERCANTILELAWTEAM:
CORPORATION LAW
corporations merge into an entirely new c. Statementofchanges,ifany,inthe

corporation. present articles of surviving
corporation; or the articles of the
(3)PLANOFMERGERORCONSOLIDATION new corporation to be formed in
caseofconsolidation.
Q:Whatisaplanofmergerorconsolidation?
2. Plan for merger or consolidation shall
A: The plan of merger or consolidation is a plan be approved by majority vote of each
createdbytherepresentativesoftheconstituent boardoftheconcernedcorporationsat
corporations, providing for the details of such separatemeetings.
merger.
3. The same shall be submitted for
Q: What should the plan of merger or approval by the stockholders or
consolidationcontain? members of each such corporation at
separatecorporatemeetingsdulycalled
A:Theplanofmergerorconsolidationshallset forthepurpose.Noticeshouldbegiven
forththefollowing: to all stockholders or members at least
1. Names of corporations involved two(2)weekspriortodateofmeeting,
(constituentcorporations) eitherpersonallyorbyregisteredmail.
2. Termsandmodeofcarryingitout
3. Statement of changes, if any, in the 4. Affirmative vote of 2/3 of the
present articles of surviving outstanding capital stock in case of
corporation; or the articles of the new stock corporations, or 2/3 of the
corporation to be formed in case of members of a nonstock corporation
consolidation. shallberequired.

(4)ARTICLESOFMERGERORCONSOLIDATION 5. Dissenting stockholders may exercise
the right of appraisal. But if Board
Q:Whatisanarticleofmergerorconsolidation? abandons the plan to merge or
consolidate,suchrightisextinguished.
A: An article of merger or consolidation is a
document to be signed by the president or vice 6. The plan may still be amended before
president of the each corporation and signed by the same is filled with the SEC;
theirsecretaryorassistantsecretarysettingforth: however, any amendment to the plan
mustbeapprovedbythesamevotesof
1. The plan of the merger or the plan of the board members of trustees and
consolidation stockholders or members required for
2. Astostockcorporations,thenumberof theoriginalplan.
shares outstanding, or in the case of
nonstock corporations, the number of 7. After such approval, Articles of Merger
members or Articles of Consolidation shall be
3. As to each corporation, the number of executed by each of the constituent
shares or members voting for and corporations,signedbypresidentorVP
againstsuchplan,respectively and certified by secretary or assistant
secretary,settingforth:
(5)PROCEDURE a. Planofmergerorconsolidation
b. In stock corporation, the number
Q: What is the procedure for merger or of shares outstanding; in non
consolidation? stock,thenumberofmembers
c. Astoeachcorporation,numberof
A: shares or members voting for and
1. Boardofeachcorporationshalldrawup againstsuchplan,respectively
a plan of merger or consolidation,
settingforth: 8. FourcopiesoftheArticlesofMergeror
a. Names of corporations involved Consolidationshallbesubmittedtothe
(constituentcorporations) SEC for approval. Special corporations
b. Termsandmodeofcarryingitout like banks, insurance companies,
building and loan associations, etc.,
171

need the prior approval of the 2. The separate existence of the constituent
respective government agency corporations shall cease, except that of the
concerned. survivingortheconsolidatedcorporation

9. If SEC is satisfied that the merger or 3. The surviving or the consolidated
consolidation is legal, it shall issue the corporation shall possess all the rights,
Certificate of Merger or the Certificate privileges, immunities and powers and shall
ofIncorporation,asthecasemaybe. besubjecttoallthedutiesandliabilitiesofa
corporationorganizedunderthisCode
10. If the SEC is not satisfied, it shall set a
hearing, giving due notice to all the 4. The surviving or the consolidated
corporationsconcerned.(Secs.7679) corporation shall thereupon and thereafter
possess:
(6)EFFECTIVITY a. Alltherights,privileges,immunitiesand
franchises of each of the constituent
Q: When shall the merger or consolidation corporations
becomeeffective? b. All property, real or personal, and all
receivables due on whatever account,
A:UponissuancebytheSECofthecertificateof including subscriptions to shares and
mergerandconsolidation. otherchosesinaction,andallandevery
other interest of, or belonging to, or
Inthecaseofmergerorconsolidationofbanksor duetoeachconstituentcorporation
banking institutions, building and loan c. These shall be deemed transferred to
associations, trust companies, insurance and vested in such surviving or
companies, public utilities, educational consolidated corporation without
institutions and other special corporations furtheractordeed
governed by special laws, the favorable
recommendation of the appropriate government 5. The surviving or consolidated corporation
agencyshallfirstbeobtained. shall:
a. Be responsible and liable for all the
(7)LIMITATIONS liabilitiesandobligationsofeachofthe
constituent corporations in the same
Q: What are the limitations with regard to manner as if such surviving or
mergerorconsolidationofcorporations? consolidated corporation had itself
incurredsuchliabilitiesorobligations
A: Subject to the limitations provided by the b. Anypendingclaim,actionorproceeding
Constitution, the merger or consolidation should brought by or against any of such
not create illegal combinations nor create constituent corporations may be
monopolies and it should not eliminate free and prosecuted by or against the surviving
healthycompetition. orconsolidatedcorporation
c. Therightsofcreditorsorliensuponthe
(8)EFFECTS property of any of such constituent
corporations shall not be impaired by
Q: What are the effects of a merger or such merger or consolidation
consolidation?

A:Theeffectsofmergerorconsolidationare:

1. Theconstituentcorporationsshallbecomea
singlecorporationwhich:
a. Incaseofmerger,shallbethesurviving
corporation designated in the plan of
merger
b. In case of consolidation, shall be the
consolidated corporation designated in
theplanofconsolidation

172
MERCANTILELAWTEAM:
SECURITIES REGULATION CODE
SECURITIESREGULATIONCODE registration statements, and

registration and licensing
I.STATEPOLICY(PURPOSE) applications

Q: What is the nature of the Securities e. Regulate, investigate or supervise
RegulationCode(SRC)? the activities of persons to ensure
compliance
A: The SRC isenacted to protect the public from
unscrupulous promoters, who stake business or f. Supervise, monitor, suspend or
ventureclaimswhichhavereallynobasis,andsell take over the activities of
sharesorintereststhereintoinvestors. exchanges, clearing agencies and
otherSROs
Q: What is the state policy with regard to the
SRC? g. Impose sanctions for the violation
of laws and the rules, regulations
A: and orders issued pursuant
1. Establish a sociallyconscious market thereto;
thatregulatesitself
2. Encourage widest participation of h. Prepare,approve,amendorrepeal
ownership in enterprises and enhance rules, regulations and orders, and
democratizationofwealth issue opinions and provide
3. Promotedevelopmentofcapitalmarket guidance on and supervise
4. Protect investors and ensure full and compliance with such rules,
fairdisclosureaboutsecurities regulationsandorders
5. Minimize, if not totally eliminate,
insider trading and other fraudulent or i. Deputize any and all enforcement
manipulative devices; and practices agenciesoftheGovernmentaswell
whichdistortsthefreemarket asanyprivateinstitutions

II.POWERSANDFUNCTIONSOFTHESECURITIES j. Compel the officers of any
ANDEXCHANGECOMMISSION(SEC) registered corporation or
association to call meetings of
Q: What are the powers and functions of the stockholdersormembers
Commission?
k. Suspend, or revoke, after proper
A: noticeandhearingthefranchiseor
certificate of registration of
1. Regulatory corporations, partnerships or
associations
a. Have jurisdiction and supervision
over all corporations, partnerships l. Exercise such other powers as
or associations who are the whichareincidentaltotheprimary
grantees of primary franchises powersoftheCommission
and/or a license or permit issued
bytheGovernment; 2. Adjudicative

b. Formulate policies and a. Issueceaseanddesistorder
recommendations on issues
concerningthesecuritiesmarket; b. Punish for contempt of the
Commission, both direct and
c. Advise Congress and other indirect
governmentagenciesonallaspects
of the securities market and c. Issue subpoena duces tecum and
propose legislation and summon witnesses to appear in
amendmentsthereto; any proceedings of the
Commission
d. Approve,reject,suspend,revokeor
require amendments to
173

d. Ordertheexamination,searchand A:
seizure of all documents, papers, GR:Nosecuritycanbesoldorofferedforsale
files and records, tax returns, and or distribution within the Philippines unless
books of accounts of any entity or accompaniedbyaregistrationstatementfiled
personunderinvestigation. withandapprovedbytheSEC.

Note: The SECs jurisdiction under Section 5 of PD XPN:
No. 902A (intracorporate disputes) has been 1. Exemptsecurities
transferredtotheappropriateRTC,pursuanttoSec. 2. Securitiessoldinexempttransactions.
5.2ofSRC.
Q:Whataretheeffectsofnonregistration?
III.SECURITESTOBEREGISTERED
A: The issuer would be penalized. Issuers of
Q:Whataresecurities? securitiesnotregisteredshallbesubjectcriminal,
civilandadministrativecharges.
A:Securitiesareshares,participationorinterests
inacorporationorinacommercialenterpriseor Q:Whataretheexemptsecurities?
profitmaking venture and evidenced by a
certificate,contract,instrument,whetherwritten A:
orelectronicincharacter.Itincludes: 1. Any security issued or guaranteed by
the Government of the Philippines, or
1. Equity instruments Shares of stock, by any political subdivision or agency
certificatesofinterestorparticipationin thereof, or by any person controlled or
a profit sharing agreement, certificates supervised by, and acting as
of deposit for a future subscription, instrumentalityofsaidgovernment.
proprietary or nonproprietary
membershipcertificatesincorporations 2. Any security issued or guaranteed by
2. Investments instruments Investment the government of any country with
contracts, , fractional undivided which the Philippines maintains
interestsinoil, gas, or other diplomatic relations, or by any state,
mineralrights provinceorpoliticalsubdivisionthereof
3. Debt instruments bonds, debentures, on the basis of reciprocity: Provided,
notes, evidence of indebtedness, asset that the SEC may require compliance
backedsecurities with the form and content of
4. Derivativesoptionsandwarrants disclosurestheSECmayprescribe
5. Trust instruments Certificates of
assignments, certificates of 3. Certificatesissuedbyareceiverorbya
participation, trust certificates, voting trusteeinbankruptcydulyapprovedby
trustcertificatesorsimilarinstruments; theproperadjudicatorybody.
6. Future Other instruments as may in
the future be determined by the SEC. 4. Any security or its derivatives the sale
(1996BarQuestion) or transfer of which, by law, is under
the supervision and regulation of the
Q:Whatisregistrationwithregardtosecurities? Office of Insurance Commission,
Housing and Land Use Regulatory
A: ItisthedisclosingtotheSECofallmaterial Board, or the Bureau of Internal
andrelevantinformation about the issuer of Revenue.
thesecurity.
5. Anysecurityissuedbyabankexceptits
Q:Whyisregistrationofsecuritiesmandated? ownsharesofstock.

A:Itspurposeistoinformthepublicforthemto 6. Other securities as determined by the
beabletomakegoodbusinessjudgment.Itisthe SEC
filingofregistrationstatement.
Note:Beinganissuerofanexemptsecuritydoesnot
Q:Whatistherulewithregardtoregistrationof exempt such issuer from the requirement of
securities? submissionofreportsfullandfairdisclosure.

174
MERCANTILELAWTEAM:
Q:Whatareexempttransactions? IV.PROCEDUREFORREGISTRATIONOF
SECURITIES
A:
1. Anyjudicialsale,orsalebyanexecutor, Q: What is the procedure for registration of
administrator, guardian, receiver or securities?
trusteeininsolvencyorbankruptcy
A:
2. Those sold by a pledge, mortgagee, or 1. Application All securities required to
any other similar lien holder, to be registered shall be registered
liquidate a bona fide debt (a security throughthefilingbyissuerwithSEC,of
pledged in good faith as security for aswornregistrationstatement.
suchdebt
2. ProspectusTheregistrationstatement
3. Those sold or offered for sale in an shallincludeanyprospectusrequiredor
isolated transaction, the owner not permittedtobedelivered;
beinganunderwriter
3. Other information The information
4. Distribution by the corporation of requiredfortheregistrationofanykind
securities to its stockholders as and all securities shall include, among
dividends; others,theeffectofthesecuritiesissue
onownership,onthemixofownership,
5. Saleofcapitalstockofacorporationto especiallyforeignandlocalownership;
itsownstockholdersexclusively
4. Signatories to registration statement
6. Bonds or notes secured by a mortgage The registration statement shall be
aresoldtoasinglepurchaseratasingle signedbytheissuers:
sale a. Executiveofficer
b. Principaloperatingofficer
7. Deliveryofsecurityinexchangeforany c. Comptroller
other security pursuant to the right of d. Principalaccountingofficer
conversion e. Corporate secretary or
persons performing similar
8. Brokers transactions executed upon functions
thecustomersorders
Note: it shall be accompanied by a
9. Share subscriptions prior to dulyverifiedresolutionoftheBoDof
incorporation or in pursuance of an theissuer
increaseinitsauthorizedcapitalstock
5. WrittenconsentofexpertThewritten
10. Exchange of securities by the issuer consent of the expert named as having
with its existing security holders certified any part of the registration
exclusively statement or any document used in
connectiontherewithshallalsobefiled
11. Salebyissuertofewerthan20persons
in the Philippines during any 12 month 6. Certification by selling stockholders
period Where the registration statement
includes:
12. Sale to banks, investment houses, a. Shares to be sold by the
insurance companies and any entities sellingshareholders
ruledqualifiedbytheSEC b. Awrittencertificationbysuch
selling shareholders as to the
accuracy of any part of the
registration statement
contributed by such selling
shareholders shall also be
filed

7. Fees The issuer shall pay to the SEC;
the SEC shall prescribe by rule,

175

diminishing the fees in inverse c. Hasbeenorisengagedorisabout
proportion, the value of the aggregate to engage in fraudulent
priceoftheoffering transactions
Has made any false or misleading
8. Notice and publication Notice of the representationsofmaterialfactsin
filingoftheregistrationstatementshall any prospectus concerning the
beimmediatelypublishedbytheissuer issueroritssecurities;or
in two newspapers of general d. Has failed to comply with any
circulation in the Philippines; once a requirement that the SEC may
week for two consecutive weeks, impose as a condition for
recitingthat: registration of the security for
a. A registration statement has which registration statement has
beenfiled,and beenfiled.
b. The aforesaid registration
statement and papers 2. Theregistrationstatementisonitsface
attached thereto are open to incomplete or inaccurate or includes
inspection at the SEC during anyuntruestatementofamaterialfact
businesshours. or omits to state a material fact
requiredtobestatedtherein.
Note: copies shall be furnished to
interested parties at a reasonable 3. Theissueroranyunderwriterhasbeen
charge. convicted by a competent judicial or
administrative body of an offense
9. SECPowerforproductionofbooksThe involving moral turpitude and/or fraud
SECmay: or is enjoined by the SEC or other
a. Compel the production of all competent judicial or administrative
the books and papers of such body for violations of securities,
issuer commoditiesandotherrelatedlaws
b. Administeroaths
c. Examine the officers of such 4. Any issuer who refuses to permit the
issuer, or any other person examination to be made by the
connected therewith as to its Commissioner.
businessandaffairs
Q: What are the grounds for suspension or
10. Ruling Within 45 days after the date cancellationofcertificateofregistration?
of the filing of the registration
statement, or by such later date to A:
whichtheissuerhasconsented,theSEC 1. Fraudinprocuringregistration
shalldeclaretheregistrationstatement 2. Serious misrepresentation as to
effective or rejected, unless the objectivesofcorporation
applicant is allowed to amend the 3. Refusal to comply with lawful order of
registrationstatement. SEC
4. Continuous inoperation for at least 5
Q: What are the grounds for rejection and years
revocationofregistration? 5. Failure to file bylaws within required
period
A: The following acts constitute a ground for 6. Failuretofilereports
revocationofregistration: 7. Othersimilargrounds.(Sec.6[L])

1. Theissuer: Q: What are the grounds for suspension of
a. Has been judicially declared registration?
insolvent
b. Has violated any of the provisions A:
oftheCode,therulespromulgated 1. If any time, the information contained
pursuant thereto, or any order of in the registration statement filed is or
the SEC of which the issuer has has become misleading, incorrect,
notice in connection with the inadequate or incomplete in any
offering for which a registration materialrespect;or
statementhasbeenfiled
176
MERCANTILELAWTEAM:
2. The sale or offering for sale of the Q:Aresecuritymarketprofessionalsrequiredto

security registration there under may beregistered?
workortendtoworkafraud;
3. Pending investigation of the security A: Yes. No broker shall sell any securities unless
registered to ascertain whether the he is registered with the SEC (Sec. 19, Revised
registration of such security should be Securities Act) (Nicolas vs. CA, et al., G.R. No.
revoked on any ground specified the 12285,Mar.27,1998)
SRC;and
4. Refusal to furnish information required Q: Can a stockbroker without license from the
bytheCommission.(Sec.15) SEC, recover management fees allegedly earned
from handling the securities transactions of a
Q: Who are the securities market professionals client?
asclassifiedbytheSRC?
A: No. An unlicensed person may not recover
A:Theyarethebroker,dealer,associatedperson compensation for services as a broker where a
ofabrokerordealer,andasalesman. statuteorordinanceisapplicableandsuchisofa
regulatorynature.
Q:Whoisabroker?
Q:Whatismargintrading?
A: A person engaged in the business of buying
andsellingsecuritiesfortheaccountofothers. A: A kind of trading that allows a broker to
advance for the customer/investor part of the
Q:Whoisadealer? purchase price of the security and to keep it as
collateralforsuchadvance.
A: Any person who buys and sells securities for
his/her own account in the ordinary course of Q:Whatisthemarginallowancestandard?
business.
A: The credit extended must be for an amount
Q: Who is an associated person of a broker or notgreaterthan,whicheverishigherof:
dealer? 1. 65% of the current market price of the
security;or
A: He is an employee of a broker or dealer who 2. 100%ofthelowestmarketpriceduring
directlyexercisescontrolofsupervisoryauthority thepreceding36months,butnotmore
butdoesnotincludeasalesman,oranagent,ora than75%ofthecurrentmarketprice.
person, whose functions are solely clerical or
ministerial. Q: What are the purposes of the margin
requirements?
Q:Whoisasalesman?
A: They are primarily intended to achieve a
A:Heisanaturalperson,employedassuch,oras macroeconomic purpose the protection of the
anagent,byadealer,issuerorbrokertobuyand overall economy from excessive speculation in
sellsecurities;butforthepurposeofregistration, securities. Their recognized secondary purpose is
shallnotincludeanyemployeeofanissuerwhose toprotectsmallinvestors.
compensation is not determined directly or
indirectlyonsalesofsecuritiesoftheissuer. Q: Who has the burden of compliance with
marginrequirements?
Q: What is the obligation of the broker to his
client? A: Thebrokersanddealers.

A: The primary obligation of the broker is to Note: In securities trading, the brokers are
ensure his accounts compliance with the law. essentially the counterparties to the stock
(Abacus Securities Corp. v. Ampil, G.R. No. transactionsattheExchange.Sincetheprincipalsof
160922,Feb.27,2006) the broker are generally undisclosed, the broker is
personally liable for the contracts thus made.
Note: Since abrokeragerelationship isessentiallya Brokers have a right to be reimbursed for sums
contract for the employments of an agent, the law advanced by them with the express or implied
oncontractsgovernthebrokerprincipalrelationship authorization of the principal. (Abacus Securities
Corporation v. Ampil, G.R. No. 160016, Feb. 27,
2006)

177

V.PROHIBITIONSONFRAUD,MANIPULATIONS thepurposeofmanipulatingprices
ANDINSIDERTRADING aredrawingunsuspectinginvestors
into the market leaving them
A.MANIPULATIONOFSECURITYPRICES defrauded of their money and
securities.
Q: What acts are considered manipulation of
securityprices? Q: Suppose A is the owner of several inactive
securities. To create an appearance of active
A: tradingforsuchsecurities,AconniveswithBby
1. Transactions intended to create active whichAwillofferforsalesomeofhissecurities
trading: andBwillbuythematacertainfixedprice,with
a. WashSaleengagingintransaction theunderstandingthatalthoughtherewouldbe
inwhichthereisnogenuinechange an apparent sale, A will retain the beneficial
intheactualownershipofasecurity ownershipthereof.
b. MatchedSaleThereisachangeof
ownership in the securities by 1. Isthearrangementlawful?
entering an order for the 2. If the sale materializes, what is it
purchase/sale of security with the called?
knowledge that a simultaneous
orderofsubstantiallythesamesize, A:
time, and price, for the sale or 1. No.Thearrangementisnotlawful.Itis
purchase of any such security, has anartificialmanipulationofthepriceof
or will be entered by or for the securities. This is prohibited by the
sameordifferentparties. SecuritiesRegulationCode.
c. Similar transactions where there is 2. If the sale materializes, it is called a
nochangeofbeneficialownership. wash sale or simulated sale. (2001 Bar
Question)
2. Engaging in transactions which induce
pricetoincreaseordecrease: B.SHORTSALES
a. Marking the close buying and
sellingsecuritiesatthecloseofthe Q:WhatisShortSelling?
markettoaltertheclosingpriceof
thesecurity. A:Itisthesellingofshareswhichthesellerdoes
b. Painting the tape engaging in a not actually own or possess and therefore he
series of transactions in securities cannot,himself,supplythedelivery.
that are reported publicly to give
the impression of activity or price C.FRAUDULENTTRANSACTIONS
movementinasecurity.
c. Squeezing the float refers to Q:Whatareconsideredfraudulenttransactions?
taking advantage of a shortage of
securities in the market by A:
controlling the demand side and 1. Obtainingmoneyorpropertybymeans
exploiting market congestion of any untrue statement of a material
during such shortages in a way to fact
createartificialprices.
d. Hype and dump engaging in 2. Engaging in any act, transaction,
buying activity at increasingly practice or course of business, which
higher prices and then selling operates as a fraud or deceit upon any
securities in the market at the person.
higherprices.
e. Boiler room operations theuse of D.INSIDERTRADING
high pressure sale tactics to
promote purchase and sale of Q:Whatisinsidertrading?
securities
f. Daisychainitreferstoaseriesof A: A purchase or sale made by an insider or his
purchase and sales of the same relative within the second degree shall be
issue at successively higher prices presumed to be effected while in possession of
by the same group of people with material nonpublic information if transacted
after such information came into existence but
178
MERCANTILELAWTEAM:
prior to the public dissemination of such Q:Whenisinformationmaterialnonpublic?

information,andlapseofreasonabletimeforthe
markettoabsorbsuchinformation. A:If:
1. Information about the issuer or the
Q:Whoisaninsider? security which has not been generally
disclosedtothepublicandwouldlikely
A: A person in possession of corporate affect the market price of the security
informationnotgenerallyavailabletothepublic. after being disseminated to the public
and the lapse of a reasonable time for
Q:Whomaybeaninsider? the market to absorb the information;
or
A: 2. Would be considered by a reasonable
1. Theissuer person important under the
2. A director or officers of or a person circumstancesindetermininghiscourse
controllingtheissuer ofactionwhethertobuy,sellorholda
3. A person whose relationship or former security(Sec.27.2).(1995BarQuestion)
relationship to the issuer gives him
access to material information about Q: What are the possible defenses against
the issuer or the security that is not insidertrading?
generallyavailabletothepublic
4. A government employee, or director , A:
or officer of an exchange, clearing 1. That the information was acquired not
agency and/or selfregulatory on account of his relationship with the
organizationwhohasaccesstomaterial issuer;or
information about an issuer or a 2. That the other party knew or can be
security that is not generally available presumed to know the material
tothepublic;or information.
5. Constructive Insider A person who
learns such information by a VI.PROTECTIONOFINVESTORS
communication from any of the
foregoing insiders. (Sec. 3.8) (1995 Bar Q: What are the provisions in the SRC intended
Question) toprotecttheinvestors?

Q: What are the other prohibited acts in an A:
insidertrading? 1. TenderOfferRule
2. Rulesonproxysolicitation
A: Itshallbeunlawful: 3. Disclosurerule
1. Foraninsidertocommunicatematerial
nonpublicinformationabouttheissuer A.TENDEROFFERRULE
or the security to any person who
thereby becomes an insider, where Q:Whatisatenderoffer?
original insider communicating knows
or has reason to believe that such A:Publiclydeclaredintentiontobuysecuritiesof
personwilllikelybuyorsellonthebasis publiccompaniesgiventoallstockholdersby:
ofsuchinformation 1. FilingwiththeSECadeclarationtothat
2. For any person, other than the tender effect,andpayingthefilingfee.
offeror,whoisinpossessionofmaterial 2. Furnishing the issuer a statement
nonpublic information relating to such containing the information required of
tender offer to transact securities the issuers as SEC may prescribe,
coveredbythetenderoffer including subsequent or additional
3. For the tender offeror, or those acting materials.
in his behalf, the issuer of securities 3. Publishingallrequestsorinvitationsfor
covered by the tender offer, and any tender, or materials making a tender
insider, to communicate material non offerorrequestingorinvitinglettersof
public information relating to the suchsecurity.
tenderofferwhichwouldlikelyresultin
violation of prohibition of the insider Note: It is also defined as an offer by the acquiring
fromtrading. persontostockholdersofapubliccompanyforthem
179

totendertheirsharesonthetermsspecifiedinthe Q:Whataretheunlawfulandprohibitedacts
offer. relatingtotenderoffers?

Q:Whatisthepurposeoftenderoffer? A:Itshallbeunlawfulforanypersonto:
1. Make any untrue statement of a
A:Tenderofferisinplacetoprotecttheinterest material fact or omit to state any
of minority stockholders of a target company materialfactnecessaryinordertomake
againstanyschemethatdilutesthesharevalueof statementsmadenotmisleading,and
the investments. It affords such minority
shareholderstheopportunitytowithdraworexit 2. Engageinanyfraudulent,deceptive,or
from the company under reasonable terms, a manipulative acts or practices in
chance to sell their shares at the same price as connection with any tender offer or
thoseofthemajoritystockholders. requestorinvitationfortenders,orany
solicitation of security holders in
Q:Inwhatinstancesisatenderofferrequiredto opposition to or in favor of any such
bemade? offer,request,orinvitation.

A: B.RULESONPROXYSOLICITATION
TheSRCprovides:
1. The person intends to acquire 15% or Q: What are the requisite for valid proxy
more of the equity share of a public solicitation?
company pursuant to an agreement
made between or among the person A:
andoneormoresellers. 1. Itmustbeinwriting
2. The person intends to acquire 30% or 2. Itmustbesignedbythestockholderor
more of the equity shares of a public hisdulyauthorizedrepresentative
companywithinaperiodof12months. 3. Itmustbefiledbeforethescheduled
3. The person intends to acquire equity meetingwiththecorporatesecretary
shares of a public company that would (Sec.20)
resultinownershipofmorethan50%of
thesaidshares. Note: The proxy shall be valid only for the meeting
forwhichitisintended.Noproxyshallbevalidand
However,theIRRoftheSRCprovides: effective for a period longer than 5 years at one
1. The person intends to acquire 35% or time.
more of the equity share of a public
company pursuant to an agreement Q:Whataretherulesonproxysolicitationwith
made between or among the person regardtobrokerordealer?
andoneormoresellers.
2. The person intends to acquire 35% or 1. No broker or dealer shall give any
more of the equity shares of a public proxy, consent or authorization, in
companywithinaperiodof12months. respect of any security carried for the
3. The person intends to acquire equity account of a customer, to a person
shares of a public company that would other than the customer, without the
resultinownershipofmorethan51%of express written authorization of such
thesaidshares. customer.

Note: Tender offer applies to both direct and 2. A broker or dealer who holds or
indirectacquisition. acquires the proxy for at 10% or such
percentage as the Commission may
Q: What may be considered as a public prescribe of the outstanding share of
company? the issuer, shall submit a report
identifying the beneficial owner within
A: 10 days after such acquisition, for its
1. Thoselistedonanexchange;or ownaccountorcustomer,totheissuer
2. Thosewithassetsofatleast50Mpesos of the security, to the Exchange where
andhaving200shareholdersowningat the security is traded and to the
least100shareseach. Commission.(Sec.20)

180
MERCANTILELAWTEAM:
C.DISCLOSURERULE securityistraded,andtotheCommission
aswornstatementcontaining:
Q:Whendoesdisclosurebegin?
a. Hispersonalcircumstances
A: It begins at registration and continues b. The nature of such beneficial
periodicallythruperiodicreport. ownership
c. If the purpose was to acquire control
Q:Mayitbesuspended? of the business, any plans the
recipient may have affecting a major
A:Yes.Itmaybesuspendedwhenonthefirstday changein
of the fiscal year if it has less than 100 d. thebusiness
shareholders(Rule17.1,SRCIRR). e. The number of shares beneficially
owned,andthenumberofsharesfor
Q:Whendoesthedisclosurerequirementend? whichthereisarighttoacquire
f. granted to such person or his
A: associates
GR: Disclosure does not end because once a g. Informationastoanyagreementwith
reporting company, it remains as such even athirdpersonregardingthesecurities
when registration of securities has been (Sec.18)
revoked(Rule13SCRIRR).
3. Persons that has beneficial ownership of
XPN:Iftheprimarylicenseisrevoked. 10%ormore:

XPN to the XPN: In case of hospitals and Every person who is directly or indirectly
educationalinstitutionsiftheprimarylicense thebeneficialownerofmorethan10%of
is revoked, disclosure requirement still anyclassofanyequitysecurity,orwhois
continuesbecauseofpublicinterest. directororanofficeroftheissuerofsuch
security,shallfile:
Q:Givethereportorialrequirements.
a. Statement with the SEC and, if such
A: security is listed for trading on an
1. Issuers: Exchange, also with the Exchange, of
a. Within135days,aftertheend ofthe the amount of all equity securities of
issuers fiscal year, an annual report such issuer of which he is the
which shall include, a balance sheet, beneficialowner,
profit and loss statement and b. Within10daysafterthecloseofeach
statementofcashflows,forsuchlast calendarmonth,ifthereisachangein
fiscal year, certified by an ownership during such month, a
independent certified public statementindicatinghisownershipat
accountant, and a management the close of the calendar month and
discussion and analysis of results of suchchangesinhisownershipashave
operations; occurredduringsuchcalendarmonth.
b. Other periodical reports for interim (Sec.23)
fiscal periods and current reports on
significantdevelopmentsoftheissuer VII.CIVILLIABILITIES
(Sec.17)
Q: What are the grounds for civil liability to
2. PersonsAcquiringSecurities: arise?
If the issuer is one that has to make a
report, any person who acquires directly A:
or indirectly the beneficial ownership of 1. FalseRegistrationStatement.(Sec.56)
more than 5% of such class, or in excess 2. Fraud with connection to prospectus,
of such lesser per centum as the communicationsandreports.(Sec.57)
Commission may prescribe, shall, within 3. Fraud in connection with security
10 days after such acquisition or such transactions.(Sec.58)
reasonable time as fixed by the 4. Manipulation of security prices. (Sec.
Commission, submit to the issuer of the 60)
security, to the Exchange where the 5. Insidertrading.(Sec.61)
181

the reading of the registration statement by
Q: Who are the persons that may be liable in suchperson(Sec.56).
caseoffalseregistrationstatement?
Q: Who are the persons liable with regard to
1. Theissuerandeverypersonwhosigned fraud with connection to prospectus,
theregistrationstatement communicationsandreports?
2. Every person who was a director of, or A:
any other person performing similar 1. Anypersonwhoofferstosellsorsells
functions, or a partner in, the issuer at a. in violation any provisions on
thetimeofthefilingoftheregistration registrationofsecurities;and
statement or any part, supplement or b. by the use of any means or
amendment thereof with respect to instruments of transportation or
whichhisliabilityisasserted communication, by means of a
3. Every person who is named in the prospectusorotherwrittenororal
registration statement as being or communication.
about to become a director of, or a
person performing similar functions, or Q: Who are the persons liable with regard to
a partner in, the issuer and whose fraudinconnectionwithsecuritytransactions?
writtenconsenttheretoisfiledwiththe
registrationstatement A: Any personwho engages in any act or
4. Everyauditororauditingfirmnamedas transactioninviolationofSections19.2,20or26
having certified any financial ofSRC.
statementsusedinconnectionwiththe
registrationstatementorprospectus Q: Who are the persons liable for the
5. Every person who, with his written manipulationofsecurityprices?
consent, which shall be filed with the
registrationstatement,hasbeennamed A:Anypersonwhowillfullyparticipatesinanyact
ashavingpreparedorcertifiedanypart or transaction in violation of Section 24 shall be
of the registration statement, or as liabletoanypersonwhoshallpurchaseorsellany
having prepared or certified any report securityatapricewhichwasaffectedbysuchact
orvaluationwhichisusedinconnection ortransaction.
with the registration statement, with
respect to the statement, report, or Q: Who are the persons liable with regard to
valuation,whichpurportstohavebeen insidertrading?
preparedorcertifiedbyhim
6. Every selling shareholder who A:Anypersonincaseoflegaltenderwho:
contributed to and certified as to the 1. Purchases or sells a security while in
accuracyofaportionoftheregistration possession of material information not
statement,withrespecttothatportion generallyavailabletothepublic.
of the registration statement which 2. Communicates material nonpublic
purports to have been contributed by information
him
7. Every underwriter with respect to such Q:Howarethepersonsenumeratedliable?
security
A:Jointlyandseverally
Note: If the person who acquired the security
did so after the issuer has made generally Q: What is the prescriptive period for filing of
available to its security holders an income action?
statement covering a period of at least twelve
months beginning from the effective date of A: 2 years after the discovery of the facts
the registration statement, then the right of constituting the cause of action and within 5
recovery under this subsection shall be yearsaftersuchcauseofactionaccrued
conditionedonproofthatsuchpersonacquired
the security relying upon such untrue Q: What court has the jurisdiction over civil
statement in the registration statement or
liabilities?
relyingupontheregistrationstatementandnot

knowing of such income statement, but such
reliance may be established without proof of
A:RegionalTrialCourt

182
MERCANTILELAWTEAM:
Q:Whatisthelimitationforawardingdamages?
A:
1. The court can award not exceeding
triple theamount of the transaction
plusactualdamage

2. The court is also authorized to award
attorneysfeesnotexceeding30%ofthe
award
Q: When may the court award exemplary

damages?

A:Incasesof:
1. BadFaith
2. Fraud
3. Malevolenceor
4. Wantonness in the violation of SRC or the
rulesandregulationspromulgated
183

BANKINGLAWS Government, through the Secretary of
# Finance and the Secretary of Budget
I.THENEWCENTRALBANKACT(RA7653) and Management, may thereafter
determine.(Sec.2)
Q:WhatisBangkoSentralngPilipinas(BSP)?
C.RESPONSIBILITYANDPRIMARYOBJECTIVE
A:Thestatescentralmonetaryauthority;itisthe
government agency charged with the Q:WhataretheresponsibilitiesofBSP
responsibility of administering the monetary,
banking and credit system of the country and is A:
granted the power of supervision and 1. Toprovidepolicydirectionsintheareas
examination over bank and nonbank financial ofmoney,banking,andcredit
institutions performing quasibanking functions, 2. Tosupervisebankoperations
includingsavingsandloanassociations.(Busuego 3. To regulate the operations of finance
vs.CA,G.R.No.L48955,June30,1987) companies and nonbank financial
institutions performing quasibanking
functions, and similar institutions. (Sec.
A.STATEPOLICIES
3)

Q: What are the policies of the state with
Q:WhataretheprimaryobjectivesofBSP
respecttothecreationoftheBSP?

A:
A:
1. Tomaintainpricestabilityconduciveto
1. The State shall maintain a central
a balanced and sustainable growth of
monetary authority that shall function
theeconomy.
and operate as an independent and
2. To promote and maintain monetary
accountable body corporate in the
stability and the convertibility of the
discharge of its mandated
peso.(Sec.3)
responsibilities concerning money,

bankingandcredit.
Q:WhatarethefunctionofBSP

1. Issuerofcurrency.(Sec.4960)
2. In line with this policy, and considering
2. Custodian of reserves. (Secs. 6466, 94,
itsuniquefunctionsandresponsibilities,
103)
the central monetary authority
3. Clearing channel or house; especially
establishedunderthisAct,whilebeinga
wherethePCHCdoesnotoperate.(Sec.
governmentowned corporation, shall
102)
enjoy fiscal and administrative
4. Banker of the government the BSP
autonomy(Sec.1.)
shall be the official depository of the

Governmentandshallrepresentitinall
B.CREATIONOFTHEBANGKOSENTRALNG
monetaryfunddealings(Secs.110116)
PILIPINAS
5. Financial advisor of the government

(Secs.123124)UnderArticleVII,Sec.
Q:Whatarethesalientconsiderationsonthe
20 of the 1987 Constitution, the
creationofBSP?
President may contract or guarantee

foreign loans but with the prior
A:
concurrenceoftheMonetaryBoard.
1. It is established as an independent
6. Sourceofcredit(Secs.6163,8189,
centralmonetaryauthority.
109)

7. Supervisorofthebankingsystem(Sec.
2. Its capital shall be P50,000,000,000, to
25
be fully subscribed by the Philippine
shallincludethepowerto:
Government.
a. Examine, extending to enterprises

wholly or majorityowned or
3. TheP10,000,000,000ofthecapitalshall
controlled by the bank (Sec. 7, RA
be fully paid for by the Government
8791); this power may not be
upon the effectivity of this Act and the
restrained by a writ of injunction
balancetobepaidforwithinaperiodof
unless there is convincing proof
2yearsfromtheeffectivityofthisActin
such manner and form as the
184
MERCANTILELAWTEAM:
BANKING LAWS
that the action of the BSP is negligence or misconduct. The costs and
aplainlyarbitrary(Sec.25) expenses incurred in defending the
b. Placeabankunderreceivershipor aforementionedaction,suitorproceedingmay
liquidation(Sec.30) bepaidbytheBangkoSentralinadvanceofthe
c. Initiate criminal prosecution of final disposition of such action, suit or
erringofficersofbanks proceeding upon receipt of an undertaking by
8. Governmentagent(Secs.117122)D or on behalf of the member, officer, or
employee to repay the amount advanced
should it ultimately be determined by the

D.MONETARYBOARD
Monetary Board that he is not entitled to be
indemnifiedasprovidedinthissubsection.(Sec
Q:WhatistheMonetaryBoard? 15)
A: The body through which the powers and

functions of the Bangko Sentral are exercised. E.HOWBSPHANDLESBANKSINDISTRESS
(Sec6)
Q: What is the function of the BSP on a
Q: What are the powers and functions of the distressedbank?
MonetaryBoard?
A: Appointment of a conservator or receiver or
A: closureofthebank.
1. Issue rules and regulations it considers
necessaryfortheeffectivedischargeof Q: Distinguish between the grounds for
the responsibilities and exercise of its conservatorship, receivership and liquidation
powers andtheireffects.

A:SeeAppendixF
2. Direct the management, operations,

and administration of the Bangko
(1)CONSERVATORSHIP
Sentral, reorganize its personnel, and

issue such rules and regulations as it
Q:Whoisaconservator?
may deem necessary or convenient for

thispurpose
A: One appointed if the bank is in the state of
illiquidityorthebankfailsorrefusestomaintain
3. Establish a human resource
a state of liquidity adequate to protect its
managementsystem
depositorsandcreditors.Thebankstillhasmore
assets than its liabilities but its assets are not
4. Adopt an annual budget for and liquid or not in cash thus it cannot pay its
authorize such expenditures by the obligation when it falls due. The bank, not the
BangkoSentralasareintheinterestof CentralBank,paysforfees.
the effective administration and
operations of the Bangko Sentral in Q:Whatarethepowersofaconservator?
accordance with applicable laws and
regulations A:
1. To take charge of the assets, liabilities,
5. Indemnify its members and other andthemanagementthereof
officialsoftheBangkoSentral,including 2. Recognizethemanagement
personnel of the departments 3. collect all monies and debts due said
performing supervision and bank
examination functions against all costs 4. Exerciseallpowersnecessarytorestore
and expenses reasonably incurred by itsviabilitywiththepowertooverrule
such persons in connection with any or revoke the actions of the previous
civilorcriminalaction.(Sec15) management and board of directors of
the bank or quasibank (First Philippine
Note: In the event of a settlement or International Bank vs. CA, G.R. No.
compromise,indemnificationshallbeprovided 115849,Jan.24,1996).
only in connection with such matters covered
by the settlement as to which the Bangko Note:Suchpowerscannotextendtopost
Sentral is advised by external counsel that the facto repudiation of perfected
person to be indemnified did not commit any transactions. Thus, the law merely gives
185

the conservator power to revoke A:Thelawdoesnotcontemplatepriornoticeand
contracts that are deemed to be hearingbeforethebankmaybedirectedtostop
defective void, voidable, unenforceable operations and placed under receivership. The
or rescissible. Hence, the conservator purposeistopreventunwarranteddissipationof
merely takes the place of the banks thebanksassetsandasavalidexerciseofpolice
board. power to protect the depositors, creditors,
stockholders and the general public. (Central
5. To bring court actions to assail or BankofthePhilippinesv.CA,G.R.No.76118Mar.
repudiatecontractsenteredintobythe 30,1993)
bank.
Q: Can the closure and liquidation of a bank,
Q:Whenisconservatorshipterminated? whichisconsideredanexerciseofpolicepower,
bethesubjectofjudicialinquiry?
A: When Monetary Board is satisfied that the
institutioncancontinuetooperateonitsownand A: Yes. While the closure and liquidation of a
theconservatorshipisnolongernecessary. bank may be considered an exercise of police
power, the validity of such exercise of police
Note:WhentheMonetaryBoard,onthebasisofthe
power is subject to judicial inquiry and could be
report of the conservator or of its own findings,
set aside if it is either capricious, discriminatory,
determine that the continuance in business of the
institution would involve probable losses to its
whimsical, arbitrary, unjust or a denial or due
depositors or creditors, the bank will go under process and equal protection clauses of the
receivership. Constitution (Central Bank v. CA, G.R. No. L
5003132,July27,1981).
(2)CLOSURE
Q: Upon maturity of the timedeposit, the bank
Q:WhenmaytheMonetaryBoardcloseabank failed to remit. By reason of punitive action
orquasibank? taken by Central Bank, the bank has been
prevented from performing banking operations.
A: Is the bank still obligated to pay the time
1. Cash Flow test Inability to pay deposits despite the fact that its operations
liabilities as they become due in the weresuspendedbytheCentralBank?
ordinarycourseofbusiness(Sec.30[a]
NCBA). A:Thesuspensionofoperationsofabankcannot
2. Balance sheet test Insufficiency of excuse noncompliance with the obligation to
realalizable assets to meet its liabilities remit the time deposits of depositors which
(Sec30[b]NCBA). matured before the banks closure. (Overseas
3. Inability to continue business without Bank of Manila v. CA, G.R. No. 45886, Apr. 19,
involving probable losses to its 1989)
depositors and creditors (Sec 30 [c]
NCBA). (3)RECEIVERSHIP
4. willful violation of a cease and desist
orderunderSection37thathasbecome Q:Whoisareceiver?
final, involving acts or transactions
which amount to fraud or a dissipation A: One appointed if bank is already insolvent
oftheassets(Sec30[d]NCBA). whichmeansthatitsliabilitiesaregreaterthanits
5. Notification to the BSP or public assets.
announcement of a bank holiday (Sec
53,GBL). Q:Whatarethedutiesofareceiver?
6. Suspension of payment of its deposit
liabilities continuosly for more than 30 A:
days(Sec53,GBL). 1. The receiver shall immediately gather
7. Persisting in conducting its business in and take charge of all the assets and
an unsafe or unsound manner (Sec 56, liabilitiesoftheinstitution.
GBL). 2. Administer the same for the benefit of
the creditors, and exercise the general
Q:Whatistheclosenowhearlaterdoctrine? powersofareceiverundertheRevised
RulesofCourt
186
MERCANTILELAWTEAM:
BANKING LAWS
3. Shall not, with the exception of validityofitsclosure,duringthependencyofthe

administrative expenditures, pay or casetheliquidatorcancontinueprosecutionsuits
commit any act that will involve the for collection and foreclosure of mortgages, as
transfer or disposition of any asset of they are acts done in the usual course of
the institution: Provided that the administration of the bank. (Banco Filipino v.
receivermaydepositorplacethefunds CentralBank,G.R.No.70054,Dec.11,1991)
of the institution in nonspeculative
investments(Sec30,NCBA). Q:AnintracorporatecasewasfiledbeforeRTC.
Ontheotherhand,anothercomplaintwasfiled
Q:Isthereceiverauthorizedtotransactbusiness before BSP to compel a bank to disclose its
in connection with the banks assets and stockholdingsinvokingthesupervisorypowerof
property? thelatter.Isthereaforumshopping?

A: No, the receiver only has authority to A: None. The two proceedings are of different
administer the same for the benefit of its nature praying for different relief. The complaint
creditors. (Abacus Real Estate Development filed with the BSP was an invocation of its
Center, Inc. v. Manila Banking Corp, G.R. No. supervisory powers over banking operations
162270,Apr.6,2005) which does not amount to a judicial proceeding.
(Suanv.MonetaryBoard,A.C.No.6377,Mar.12,
Q: Should the issue of whether or not the 2007)
MonetaryBoardsresolutionisarbitrarybeonly
raisedinaseparateaction? Q: Where will the claims against the insolvent
bankbefiled?
A: No. While resolutions of the Monetary Board
forbiddingabanktodobusinessonaccountofa A: Where liquidation is undertaken with judicial
conditionofinsolvencyandappointingareceiver intervention,allclaimsagainsttheinsolventbank
totakechargeofthebanksassetsordetermining shouldbefiledintheliquidationproceeding.Itis
whetherthebankmayberehabilitatedorshould notnecessarythataclaimbeinitiallydisputedin
be liquidated are by law final and executory. a court or agency before it is filed with the
However, they can be set aside by the court on liquidation court. (Ong v. CA, G.R. No. 112830,
one specific ground if the action is plainly Feb.1,1996)
arbitraryandmadeinbadfaith.Suchcontention
can be asserted as an affirmative defense of a Note:Thejudicialliquidationisintendedtoprevent
counterclaim in the proceeding for assistance in multiplicityofactionsagainsttheinsolventbank.
liquidation. (Salud v. Central Bank, G.R. No. L
17630,Aug.19,1986) Where it is the bank that files a claim against
another person or legal entity, the claim should be
(4)LIQUIDATION filedintheregularcourts.

Q:Whatisliquidation? Q:Whatistheruleofpromissoryestoppel?

A: It is an act of settling a debt by payment or A: The doctrine was applied in one case where
other satisfaction. It is also the act or process of theSCheldthattheCBmaynotthereafterrenege
converting assts into cash especially to settle onitsrepresentationandliquidatethebankafter
debts(BlacksLawDictionary). majority stockholders of the bank complied with
theconditionsandpartedwithvaluetotheprofit
Q: Can the liquidator of a distressed bank ofCB,whichthusacquiredadditionalsecurityfor
prosecuteanddefendsuitsagainstthebankand itsownadvances,tothedetrimentofthebanks
foreclose mortgages for and in behalf of the stockholders, depositors and other creditors.
bank while the issue on receivership and (Ramosv.CentralBankofthePhilippines,G.R.No.
liquidationisstillpending? L29352,Oct.4,1971)

A: Yes. The Central Bank is vested with the Q:Canafinalandexecutoryjudgmentagainstan
authority to take charge and administer the insolventbankbestayed?
monetary and banking systems of the country
andthisauthorityincludesthepowertoexamine A:Yes,aftertheMonetaryBankhasdeclaredthat
and determine the financial conditions of banks a bank is insolvent and has ordered it to cease
for the purpose of closure on the ground of operations, the assets of the insolvent bank are
insolvency. Even if the bank is questioning the heldintrustfortheequalbenefitofallcreditors.

187

One cannot obtain an advantage or preference 1. Notesforanyseriesordenomination
over another by attachment, execution or Morethan5yearsold
otherwise. The final judgment against the bank 2. CoinsMorethan10yearsold
should be stayed as to execute the judgment
would unduly deplete the assets of the banks to Q: How is the Power to determine Rates of
the obvious prejudice of other depositors and Exchangeexercised?
creditors. (Lipana v. Development Bank of Rizal,
G.R.No.L73884,Sept.24,1987) A:
1. The Monetary Board shall determine
F.HOWBSPHANDLESEXCHANGECRISIS the rates at which the Bangko Sentral
shall buy and sell spot exchange, and
Q:WhatisLegalTender? shallestablishdeviationlimitsfromthe
effective exchange rate or rates as it
A: All notes and coins issued by the Bangko maydeemproper.
Sentral are fully guaranteed by the Republic and 2. The Monetary Board shall similarly
shall be legal tender in the Philippines for all determine the rates for other types of
debts,bothpublicandprivate(Sec.52) foreign exchange transactions by the
BangkoSentral,includingpurchasesand
salesofforeignnotesandcoins,butthe
Q:Whatisthelegaltenderpowerofcoins?
margins between the effective
A: exchange rates and the rates thus
1. 1Peso,5Pesoand10Pesocoins:In established may not exceed the
amountsnotexceedingP1,000.00 corresponding margins for spot
2. 25centavocoinorless:Inamountsnot exchangetransactionsbymorethanthe
exceedingP100.00(CircularNo.537, additionalcostsorexpensesinvolvedin
2006) eachtypeoftransactions.

Q: What are the rules on BSPs Authority to Q: What actions does the Bangko Sentral take
replacelegaltender? when international stability of Peso is
threatened?
A:
1. Notes and coins called in for A: Whenever the international reserve of the
replacement shall remain legal tender BangkoSentralfallstoalevelwhichtheMonetary
for a period of one year from the date Board considers inadequate to meet the
ofcall. prospective demands on the Bangko Sentral for
2. Afterthatperiod,theyshallceasetobe foreigncurrencies,orwhenevertheinternational
legaltenderduringthefollowingyearor reserve appears to be in imminent danger of
for such longer period as MB may falling to such a level, or whenever the
determine. international reserve is falling as a result of
3. Aftertheexpirationofthislatterperiod, payments or remittances abroad which , in the
the notes and coins which have not opinion of the Monetary Board, are contrary to
been exchanged shall cease to be a thenationalwelfare,theMonetaryBoardshall:
liability of BSP and shall be 1. Take such remedial measures as are
demonetized.(Sec.57) appropriate and within the powers
grantedtotheMonetaryBoard,andthe
Note:Checksrepresentingdemanddepositsdo BangkoSentral
not have legal tender power and their
acceptance in the payment of debts, both 2. Submit to the President of the
public and private, is at the option of the PhilippinesandtheCongress,andmake
creditor. However, a check which has been public a detailed report which shall
cleared and credited to the account of the includes, as a minimum, a description
creditorshallbeequivalenttoadeliverytothe andanalysisof:
creditor of cash in an amount equal to the
a. The nature and causes of the
amountcreditedtohisaccount(Sec.60).
existingorimminentdecline;
b. The remedial measures already
Q:Whatistheperiodofreplacement? taken or to be taken by the
MonetaryBoard
A:
188
MERCANTILELAWTEAM:
BANKING LAWS
c. The monetary, fiscal or 1. Examination/inquiry/looking into all

administrative measures further depositsofwhatevernaturewithbanks
proposed orbankinginstitutionsinthePhilippines
d. The character and extent of the (including investment in bonds issued
cooperation required from other by the government) by any person,
government agencies for the governmentofficialoroffice(Sec.2)
successfulexecutionofthepolicies 2. Disclosure by any official or employee
oftheMonetaryBoard(Sec.67). of any banking institution to any
authorized person of any information
Q: What are the emergency restrictions on the concerningsaiddeposit(Sec.3)
foreignexchangeoperations?
C. DEPOSITSCOVERED
A:
1. Temporarily suspending and restricting Q:Whatarethekindsofdepositscovered?
salesofforeignexchangebytheBangko
Sentral; A:
1. All deposits of whatever nature with
2. Subjecting all transactions in gold and banks or banking institutions found in
foreign exchange to license by the thePhilippines;or
BangkoSentral; 2. Investments in bonds issued by the
Philippine government, its branches,
3. Requiring that any foreign exchange andinstitutions.(Sec.2,R.A.1405)
thereafter obtained by any person
residing or entity operating in the Q: Are trust funds covered by the term
Philippines be delivered to the Bangko deposit?
Sentral or to any bank or agent
designated by the Bangko Sentral for A: Yes, the money deposited under the trust
the purpose, at the effective exchange agreementisintendednotmerelytoremainwith
rateorrates(Sec.72) the bank but to be invested by it elsewhere. To
holdthatthistypeofaccountisnotprotectedby
Note: In order that the Bangko Sentral may R.A. 1405 would encourage private hoarding of
atalltimeshaveforeignexchangeresources funds that could otherwise be invested by banks
sufficient to enable it to maintain the
in other ventures, contrary to the policy behind
stability and convertibility of the peso, or in
order to promote the domestic investment the law. (Ejercito v. Sandiganbayan, G.R. No.
ofbankresources,theMonetaryBoardmay 15729495,Nov.30,2006)
require the banks to sell to the Bangko
Sentral or to other banks all or part of their Note:Despitesuchpronouncementthattrustfunds
surplus holdings of foreign exchange. (Sec. are considered deposits, trust funds remain not
76) coveredbyPDIC.
II.SECRECYINBANKDEPOSITS(R.A.1405) Q:Areforeigncurrencydepositscoveredbythe
SecrecyinBankDeposits(R.A.1405)?
A. PURPOSE

Q:Whatisthepurpose? A: No. Foreign currency deposits are covered by
R.A. 6426 otherwise known as the Foreign
A: CurrencyAct.Underthesamelaw,allauthorized
1. To encourage deposit in banking foreign currency deposits are considered of an
institutions;and absolutely confidential nature and, except upon
2. To discourage private hoarding so that the written permission of the depositors, in no
banksmaylendsuchfundsandassistin instance shall be examined, inquired or looked
the economic development of the into by any person, government official, bureau
country. or office whether judicial or administrative
private.
B. PROHIBITEDACTS

Q:Whataretheprohibitedactsunderthelaw?

A:

189

D. EXCEPTIONS investmentwithanybankinginstitution
isrelatedtothefollowing:HKMAD
Q:Whataretheinstanceswhereexaminationor
disclosureof information about depositscanbe a. Hijacking,
allowed? b. Kidnapping,
c. Murder,
A: d. DestructiveArson,and
1. Upon written consent of the depositor. e. Violation of the Dangerous Drugs
(Sec.2) Act.(2004,2006BarQuestion)

2. Incasesofimpeachment.(Sec.2) Q: What are the requisites before the
Ombudsmanmayexaminedeposits?
3. Uponorderofcompetentcourtincases
of bribery or dereliction of duty of A:
publicofficials.(Sec.2) 1. Thereisapendingcasebeforecourtof
competentjurisdiction
4. Incaseswherethemoneydepositedor 2. Theaccountmustbeclearlyidentified
invested is the subject matter of the 3. Thereisnoticeupontheaccountholder
litigation.(Sec.2) and bank personnel of their presence
duringinspection.
5. Upon order of the Commissioner of
InternalRevenueinrespectofthebank Note: The inspection must cover only the
deposits of a decedent for thepurpose account identified in the pending case.
of determining such decedents gross (Marquez v. Desierto, G.R. No. 138569, Sept.
estate.(Sec.6[F][1],NIRC) 11,2003)

6. UpontheorderoftheCommissionerof Q: Can a bank be compelled to disclose the
Internal Revenue in respect of bank recordsoftheaccountsofadepositorunderthe
depositsofataxpayerwhohasfiledan investigationforunexplainedwealth?
application for compromise of his tax
liabilitybyreasonoffinancialincapacity A: Since cases of unexplained wealth are similar
topayhistaxliability.(Sec.6[f][1],NIRC) tocasesofbribery,derelictionofduty,noreason
is seen why it cannot be excepted from the rule
7. In case of dormant accounts/deposits making bank deposits confidential. In this
for at least 10 years under the connection, inquiry into illegally acquired
UnclaimedBalancesAct.(Sec.2,ActNo. property in antigraft cases extends to cases
3936). where such property is concealed by being held
orrecordedinthenameofotherpersons.Thisis
8. When the examination is made by the alsobecausetheAntiGraftandCorruptPractices
BSPtoinsurecompliancewiththeAML Act, bank deposits shall be taken into
Law in the course of a periodic or consideration in determining whether or not a
specialexamination public officer has acquired property manifestly
outofproportionwithhislawfulincome.(PNBv.
9. Withcourtorder: Gancayco,G.R.No.L18343,Sept.30,1965)
a. In cases of unexplained wealth
under Sec. 8 of the AntiGraft and Q:Inanactionfiledbythebanktorecoverthe
Corrupt Practices Act (PNB v. moneytransmittedbymistake,canthebankbe
Gancayco,L18343,Sept.30,1965) allowed to present the accounts which it
b. In cases filed by the Ombudsman believed were responsible for the acquisition of
and upon the latters authority to themoney?
examine and have access to bank
accounts and records (Marquez v. A: Yes, R.A. 1405 allows the disclosure of bank
Desierto, GR 138569, Sept. 11, deposits in cases where the money deposited is
2003) thesubjectmatteroflitigation. Inanactionfiled
bythebanktorecoverthemoneytransmittedby
10. Without court order: If the AMLC mistake, necessarily, an inquiry into the
determines that a particular deposit or whereaboutsoftheamountextendstowhatever
is concealed by being held or recorded in the
name of the persons other than the one
190
MERCANTILELAWTEAM:
BANKING LAWS
responsible for the illegal acquisition. (Mellon Q: How about foreign currency deposits, can
Bank, N.A. v. Magsino, G.R. No. 71479, Oct. 18, theybesubjecttogarnishment?
1990)
A:
Q:TheLawonSecrecyofBankDepositsprovides GR: Foreign currency deposits shall be
that all deposits of whatever nature with banks exempt from attachment, garnishment, or
or banking institutions are absolutely any other order or process of any court,
confidentialinnatureandmaynotbeexamined, legislative body, government agency or any
inquired or looked into by any person, administrative body whatsoever. (Sec 8. R.A.
governmental official, bureau or office. 6426)
However,thelawprovidesexceptionsincertain
instances. Which of the following may not be XPN:TheapplicationofSection8ofR.A.6426
amongtheexceptions? depends on the extent of its justice. The
1. incasesofimpeachment garnishment of a foreign currency deposit
2. incasesinvolvingbribery shouldbeallowedtopreventinjusticeandfor
3. incasesinvolvingBIRinquiry equitablegrounds,otherwise,itwouldnegate
4. in cases of antigraft and corrupt Article 10 of the New Civil Code which
practices provides that in case of doubt in the
5. incaseswherethemoneyinvolvedisthe interpretation or application of laws, it is
subjectoflitigation presumedthatthelawmakingbodyintended
right and justice to prevail. (Salvacion vs.
A: Under Section 6(F) of the National Internal Central Bank of the Philippines, G.R. 94723,
Revenue Code, the Commissioner of Internal August21,1997)
Revenue can inquire into the deposits of a
decedent for the purpose of determining the Q: Can the foreign currency deposit of a
gross estate of such decedent. Apart from this transient foreigner who illegally detained and
case, a BIR inquiry into bank deposits cannot be raped a minor Filipina, be garnished to satisfy
made. theawardfordamagestothevictim?

Thus, exception 3 may not always be applicable. A: The exemption from garnishment of foreign
Turning to exception 4, an inquiry into bank currency deposits under R.A. 6426 cannot be
deposits is possible only in prosecutions for invokedtoescapeliabilityforthedamagestothe
unexplained wealth under the Antigraft and victim. The garnishment of the transient
CorruptPracticesAct.However,allothercasesof foreigners foreign currency deposit should be
antigraft and corrupt practices will not warrant allowed to prevent injustice and for equitable
an inquiry into bank deposits. Thus, exception 4 grounds. The law was enacted to encourage
may not always be applicable. Like any other foreign currency deposit and not to benefit a
exception,itmustbeinterpretedstrictly. wrongdoer. (Salvacion vs. Central Bank of the
Philippines,G.R.94723,August21,1997)
Exceptions 1, 2, and 5 on the other hand, are
providedexpresslyintheLawonSecrecyofBank F. PENALTIESFORVIOLATION
Deposits. They are available to depositors at all
times.(2004BarQuestion) Q: What are the penalties for violation of R.A.
1405?
E. GARNISHMENTOFDEPOSITS,INCLUDING
FOREIGNDEPOSITS A:Thepenaltyofimprisonmentofnotmorethan
5yearsorafineofnotmorethan20,000pesosor
Q: Does garnishment of a bank deposit violate both, in the discretion of the court shall be
thelaw? imposed upon any official or employee of a
banking institution who, upon conviction, was
A: No, the prohibition against examination does foundtohaveviolatedR.A.1405.
not preclude its being garnished for satisfaction
ofjudgment.Thedisclosureispurelyincidentalto
the execution process and it was not the
intentionofthelegislaturetoplacebankdeposits
beyond the reach of judgment creditor. (PCIB v.
CA,G.R.No.84526,Jan.28,1991)

191

III.GENERALBANKINGACT(R.A.8791) a,suchastheAlAmanahIslamicInvestment
BankofthePhilippineswhichwascreatedby
A.DEFINITIONANDCLASSIFICATIONOFBANKS RA6848.

Q:Whatarebanks? 7. Other classification of banks as determined
by the Monetary Board of the Bangko
A: Entities engaged in the lending of funds SentralngPilipinas.
obtainedthroughdepositsfrompublic.
Q: Differentiate universal banks, commercial
Q: What are the elements determinative of a banksandthriftbanks.
bank?
A:SeeAppendixG

A: B.DISTINCTIONOFBANKSFROMQUASIBANKS
1. Mustbeauthorizedbylaw; ANDTRUSTENTITIES
2. Accepts fund, in the form of a deposit,
fromthepublic;and Q:Whatisaquasibank?
3. Lendsmoneytothepublic.
A:Theseareentitiesengagedintheborrowingof
Q: Give the classifications of banks and their funds through the issuance, endorsement or
definition. assignment with recourse or acceptance of
deposit substitutes for purposes of relending or
1. Universal banks Primarily governed by the purchasing of receivables and other obligations
GeneralBankingLaw(GBL),canexercisethe (Sec 4). Unlike banks, quasibanks do not accept
powersofaninvestmenthouseandinvestin deposits.
nonallied enterprises and have the highest
capitalizationrequirement. Q:Whataretrustentities?

2. Commercial banks Ordinary banks A: These are entities engaged in trust business
governed by the GBL which have a lower that act as a trustee or administer any trust or
capitalization requirement than universal hold property in trust or on deposit for the use,
banksandcanneitherexercisethepowersof benefit, or behoof of others (Sec. 79). A bank
aninvestmenthousenorinvestinnonallied doesnotactasatrustee.
enterprises.
Q:Whatarefinancialintermediaries?
3. Thrift banks These are a) Savings and
mortgage banks; b) Stock savings and loan A: Persons or entities whose principal functions
associations; c) Private development banks, include the lending, investing, or placement of
which are primarily governed by the Thrift funds on pieces of evidence of indebtedness or
BanksAct(R.A.7906). equitydepositedwiththem,acquiredbythemor
otherwisecoursedthroughthem,eitherfortheir
4. Rural banks Mandated to make needed ownaccountorfortheaccountofothers.
credit available and readily accessible in the
rural areas on reasonable terms and which Q:Whataredepositsubstitutes?
are primarily governed by the Rural Banks
Actof1992(RA7353). A: It is an alternative form of obtaining funds
fromthepublic,otherthandeposits,throughthe
5. Cooperative banks Those banks organized issuance, endorsement, or acceptance of debt
whose majority shares are owned and instruments,fortheborrower'sownaccount,for
controlled by cooperatives primarily to the purpose of relending or purchasing of
provide financial and credit services to receivables and other obligations. These
cooperatives. It shall include cooperative instrumentsmayinclude,butneednotbelimited
rural banks. They are governed primarily by to, bankers acceptances, promissory notes,
theCooperativeCode(RA6938). participations, certificates of assignment and
similar instruments with recourse, and
6. Islamic banks Banks whose business repurchaseagreements.
dealings and activities are subject to the
basic principles and rulings of Islamic Shari
192
MERCANTILELAWTEAM:
BANKING LAWS
C.BANKPOWERSANDLIABILITIES same group of persons (Corporate

Stockholdings) shall be considered
Q:Whatarethecorporatepowersofabank? related interests and must be fully
disclosed in all transactions by such
A: All powers provided by the corporation code corporations or related group of
like issuance of stocks and entering into merger personswiththebank.(Sec13)
orconsolidationwithothercorporationorbanks.
Q:Whatistheeffectofmergerorconsolidation
Q: What are the rules regarding the issuance of ofbankstothenumberofdirectorsallowed?
stocksbyabank?
A:Thenumberofdirectorsmaybemorethan15
A: butshouldnotexceed21(Sec.17).
1. The Monetary Board may prescribe
rules and regulations on the types of Q: How many independent directors are
stockabankmayissue. required?

2. Banks shall issue par value stocks only A:2(Sec.16)
.(Sec.9)
Q: When may the Monetary Board limit the
3. GR: No bank shall purchase or acquire grantofcompensationtothedirectors?
sharesofitsowncapitalstockoraccept
itsownsharesasasecurityforaloan A: Only in exceptional cases and when the
circumstanceswarrant,suchasbutnotlimitedto
XPN:whenauthorizedbytheMonetary thefollowing:
Board
1. When a bank is under comptrollership
Note: That in every case the stock so orconservatorship
purchased or acquired shall, within six
2. WhenabankisfoundbytheMonetary
months from the time of its purchase or
Board to be conducting business in an
acquisition, be sold or disposed of at a
publicorprivatesale.(Sec10)
unsafeorunsoundmanner
3. WhenabankisfoundbytheMonetary
4. Foreign individuals and nonbank Board to be in an unsatisfactory
corporations may own or control up to financialcondition
40% of the voting stock of a domestic
bank. This rule shall apply to Filipinos Q: What is required for a bank may register or
anddomesticnonbankcorporations. amendtheirarticlesofincorporationwithSEC?

Note: The percentage of foreignowned A: Certificate of Authority to Register issued by
voting stocks in a bank shall be theMonetaryBoard.(sec.14)
determined by the citizenship of the
individual stockholders in that bank. The Q: What should be proven by banks to satisfy
citizenship of the corporation which is a theMonetaryBoardandgrantthatcertificate?
stockholder in a bank shall follow the
citizenship ofthe controllingstockholders A:
of the corporation, irrespective of the 1. That all requirements of existing laws
placeofincorporation.(Sec11) and regulations to engage in the
business for which the applicant is
5. Stockholdings of individuals related to proposedtobeincorporatedhavebeen
each other within the fourth degree of compliedwith
consanguinity or affinity, legitimate or
commonlaw,shallbeconsideredfamily 2. That the public interest and economic
groupsorrelatedinterestsandmustbe conditions, both general and local,
fullydisclosedinalltransactionsbysuch justifytheauthorization
corporations or related groups of
personswiththebank.(Sec12) 3. That the amount of capital, the
financing, organization, direction and
6. Two or more corporations owned or administration, as well as the integrity
controlled by the samefamily group or andresponsibilityoftheorganizersand
193

administrators reasonably assure the D.DILIGENCEREQUIREDBYBANKS
safety of deposits and the public
interest. Q: What is the degree of diligence required of
banksinhandlingdeposits?
Q:Whenarethebanksprohibitedondeclaring
ofdividends? A: Extraordinary diligence. The appropriate
A: standardofdiligencemustbeveryhigh,ifnotthe
1. Its clearing account with the Bangko highest, degree of diligence; highest degree of
Sentralisoverdrawn;or care (PCI Bank vs. CA, 350 SCRA 446, PBCom vs.
2. It is deficient in the required liquidity CA, G.R. No. 121413, 29 Jan. 2001) This applies
floor for government deposits for five only to cases where banks are acting in their
ormoreconsecutivedays,or fiduciary capacity, that is, as depository of the
3. It does not comply with the liquidity depositsoftheirdepositors.(Reyesv.CA,G.R.No.
standards/ratios prescribed by the 118492,Aug.15,2001)
Bangko Sentral for purposes of
determining funds available for Q: Does the bank need to exercise extra
dividenddeclaration;or ordinary diligence in all commercial
4. It has committed a major violation as transactions?
may be determined by the Bangko
Sentral A:No,thedegreeofdiligencerequiredofbanks,
is more than that of a good father of the family
Q:Whatarethepowerswhichmaybenecessary where the fiduciary nature of their relationship
in carrying on the business of commercial with their depositors is concerned, that is,
banking? depositary of deposits. But the same higher
degreeofdiligenceisnotexpectedtobeexerted
A: by banks in commercial transactions that do not
1. Accepting drafts and issuing letters of involve their fiduciary relationship with their
credit depositors, such as sale and issuance of foreign
2. Discountingandnegotiatingpromissory exchange demand draft. (Reyes v. CA, G.R. No.
notes, drafts, bills of exchange and 118492,Aug.15,2001)
otherinstrumentevidencingdebt
3. Acceptingorcreatingdemanddeposits, Q: What is the effect when the teller gave the
receiving other types of deposit and passbooktoawrongperson?
depositsubstitutes
4. Buying and selling FOREX and gold or A: If the teller gives the passbook to the wrong
silverbullion person, they would be clothing that person
5. Acquiring marketable bonds and other presumptive ownership of the passbook,
debtsecurities facilitating unauthorized withdrawals by that
6. Extendingcredit person. For failing to return the passbook to
7. Determinationofbondsandotherdebt authorized representative of the depositor, the
securities eligible for investment bank presumptively failed to observe such high
including maturities and aggregate degreeofdiligenceinsafeguardingthepassbook
amount of such investment, subject to andinsuringitsreturntothepartyauthorizedto
such rules as the Monetary Board may receivethesame.Thebanksliability,however,is
promulgate.(Sec.29) mitigated by the depositors contributory
negligenceinallowingawithdrawalslipsignedby
Q: What are the additional powers given to a authorizedsignatoriestofallintothehandsofan
universal bank aside from those mentioned in impostor. (Consolidated Bank and Trust
section29? Corporation vs. CA, GR No, 138569, September
11,2003).
A:
1. Actasinvestmenthouse Q: Did a bank exercise the diligence required
2. Ability invest in nonallied enterprises. when the pretermination of the account is
(Sec24) allowed despite discrepancies in the signature
andphotographofthepersonclaimingtobethe
depositor and failure to surrender the original
certificateoftimedeposit?

194
MERCANTILELAWTEAM:
BANKING LAWS
A: No. The bank is negligent because the d. Time deposit an account with
depositor did not present the certificate of fixed term; payment of which
deposit (Citybank, N.A., vs. Sps. Cabamongan, cannot be legally required within
G.R.No.146918,May2,2006). suchaspecifiednumberofdays.

Q: Is the bank liable when an employee 2. As trusteetrustor: Trust account a
encashed a check without the requisite of savings account, established under a
endorsement? trust agreement containing funds
administered by the bank for the
A: Yes. The fiduciary nature of the relationship benefitofthetrustororanotherperson
between the bank and the depositors must orpersons.
always be of paramount concern. (Philippine
SavingsBankvs.Chowking,G.R.No.177526,July 3. Asagentprincipal:
04,2008). a. Depositofchecksforcollection
b. Depositforspecificpurpose
E.NATUREOFBANKFUNDSANDBANK c. Depositforsafekeeping
DEPOSITS
Q:Whatarethetypesofdepositaccounts?
Q:Whatisthedepositfunctionofbanks?
A:
A: The function of the bank to receive a thing, 1. Individual;or
primarily money, from depositors with the 2. Joint:
obligation of safely keeping it and returning the a. And account the signature of
same. bothcodepositorsarerequiredfor
withdrawals.
Q: What are the kinds of deposits between a b. And/or account either one of
bankanditsdepositors? thecodepositorsmaydepositand
withdraw from the account
A: without the knowledge consent
1. Asdebtorcreditor: andsignatureoftheother.
a. Demand deposits all those
liabilities of banks which are Q:Isananonymousaccountprohibited?
denominated in the Philippine
currency and are subject to A:
payment in legal tender upon GR: Anonymous accounts or those under
demand by representation of fictitious names are prohibited. (R.A. 9160 as
checks. amended by by R.A. 9194; BSP Circular No.
251,July21,2000)
b. Savings deposits the most
common type of deposit and is XPN: In case where numbered accounts is
usuallyevidencedbyapassbook. allowed such as in foreign currency deposits.
However, banks/nonbank financial
Note: The requirement of institutions should ensure that the client is
presentation of passbooks is usually identified in an official or other identifying
includedinthetermsandconditions documents. (Sec. 8, R.A. 6426 as amended,
printed in the passbooks. A bank is FCDA)
negligent if it allows the withdrawal
withoutrequiringthepresentationof Q:Whatisthenatureofabankdeposit?
passbook(BPIv.CA,GRNo.112392,
Feb.29,2000).
A: All kinds of bank deposits are loan. The bank

can make use as its own the money deposited.
c. Negotiable order of withdrawal
Said amount is not being held in trust for the
account(NOWA)Interestbearing
depositor nor is it being kept for safekeeping.
deposit accounts that combine he
(Tang Tiong Tick v. American Apothecaries, G.R.
payable on demand feature of
No.43682,Mar.31,1938)
checks and investment feature of

savingaccounts.

195

Q:Intheenforcementofobligationsconcerning function. (Divina, Handbook on Philippine
deposit,willtheremedyofmandamuslie? CommercialLaw)

A: No, because all kinds of deposit are loans. F.STIPULATIONONINTERESTS
Thus,therelationshipbeingcontractualinnature,
mandamus cannot be availed of because Q:Whataretherulesonstipulationofinterests?
mandamus will not lie to enforce the A:
performance of contractual obligations. (Lucman 1. Central Bank Circular 416 12% per
v. Alimatar Malawi, G.R. No. 159794, Dec. 19, annumincasesof:
2006) a. Loans
b. Forbearance of money, goods and
Q: Does the fiduciary nature of the bank credits
depositor relationship convert the contract c. Judgement involving such loan or
between banks and depositors to a trust forbearance, in the absence of
agreement? expressagreementastosuchrate
ofinterest
A: No, thus, failure by the bank to pay the
depositorisfailuretopaysimpleloan,andnota Note: During the interim period from the
breach of trust. (Consolidated Bank and Trust dateofjudgmentuntilactualpayment.
Corp.v.CA,G.R.No.138569,Sept.11,2003)
Pursuant to P.D. No. 116 amending Act
Q: After procuring a checking account, the No.2655(UsuryLaw),theCentralBankof
depositor issued several checks. He was the Philippines issued Circular No. 416
surprised to learn later that they had been raising the legal rate of interest from 6%
to12%perannum.
dishonored for insufficient funds. Investigation

disclosed that deposits made by the depositor
In the absence of a stipulation as to
were not credited to its account. Is the bank interest, the loan due will now earn
liablefordamages? interest at the legal rate of 12% per
annum.(Sulitv.CA,G.R.No.119247,Feb.
A:Yes,thedepositorexpectsthebanktotreathis 17,1997).
account with utmost fidelity, whether such
accountconsistonlyofafewhundredpesosorof 2. Interestaccruingfromunpaidinterest
millions. The bank must record every single interestdueshallearninterestfromthe
transactionaccurately,downto thelastcentavo, time it is judicially demanded although
andaspromptlyaspossible.Thishastobedoneif the obligation may be silent upon this
the account is to reflect at any given time the point.
amountofmoneythedepositorcandisposeofas
heseesfit,confidentthatthebankwilldeliverit Q:IfthebankwasforbiddenbyCentralBankto
asandtowhomeverhedirects.Ablunderonthe do business, does it still have the obligation to
part of the bank, such as the dishonor of the payinterestondeposit?
check without good reason, can cause the
depositor not a little embarrassment if not also A: No, because a bank lends money, engages in
financial loss and perhapsevencivil and criminal international transactions, acquires foreclosed
litigation.(SimexIntl.v.CA,G.R.No.88013,Mar. mortgaged properties or their proceeds and
19,1990) generallyengagesinotherbankingandfinancing
activities in order that it can derive income
Q: Is a safety deposit box a form of deposit or therefrom. Therefore, unless a bank can engage
lease? in those activities from which it can derive
income,itisinconceivablehowitcancarryonas
A:Thecontractfortheuseofasafedepositbox a depository obligated to pay interest on money
shouldbegovernedbythelawonlease. deposited with it. (Fidelity & Savings and
MortgageBankv.Cenzon,G.R.No.L46208,Apr.
Undertheoldbankinglaw,asafetydepositboxis 5,1990)
a special deposit. However, the new General
Banking Law, while retaining the renting of safe
deposit box as one of the services that the bank
may render, deleted reference to depository
196
MERCANTILELAWTEAM:
BANKING LAWS
G.GRANTOFLOANSANDSECURITY thebankcouldgrantshouldatnotime
REQUIREMENTS exceed 25% of the banks net worth.
(Sec35.1,GBL)
Q:Whatisnetworth?
XPN:
A: The total of the unimpaired paidin surplus, a. As the Monetary Board may
retained earnings and undivided profit, net of otherwise prescribe for reasons
valuationreservesandotheradjustmentsasmay ofnationalinterest
berequiredbytheBSP.(Sec.24.2) b. Deposits of rural banks with
governmentowned or controlled
Q:Whatisriskedbasedcapital? financial institutions like LBP,
DBP,andPNB.
A: The minimum ratio prescribed by the
Monetary Board which the net worth of a bank 2. The total amount of loans, credit
must bear to its total risk assets which may accommodations and guarantees
includecontingentaccounts. prescribedin(a)maybeincreasedbyan
additional10%ofthenetworthofsuch
Note:However,theMonetaryBoardmayrequireor bank provided that additional liabilities
suspend compliance with such ratio whenever areadequatelysecuredbytrustreceipt,
necessary for a maximum period of one year and shipping documents, warehouse
thatsuchratioshallbeapplieduniformlytobanksof receipts and other similar documents
thesamecategory(Sec.34). which must be fully covered by an
insurance.(Sec.35.2,GBL)
Q:Whatistheeffectofnoncompliancewiththe
ratio? 3. Loansandothercreditaccommodations
securedbyREMshallnotexceed75%of
A: the appraised value of the real estate
1. Distribution of net profits may be securityplus60%oftheappraisedvalue
limited or prohibited and MB may of the insured improvements (Sec. 37,
requirethatpartorallofthenetprofits GBL)
beusedtoincreasethecapitalaccounts
of the bank until the minimum CM/intangiblepropertysuchaspatents,
requirementhasbeenmet;or trademarks,etc.shallnotexceed75%of
theappraisedvalueofthesecurity(Sec.
2. GR: Acquisition of major assets and 38,GBL)
making of new investments may be
restricted. 4. Loans being contractual, the period of
payment may be subject to stipulation
XPN: purchases of evidence of by the parties. In the case of
indebtedness guaranteed by the amortization,theamortizationschedule
Government(Sec.34). hasnofixedperiodasitdependsonthe
projecttobefinancedsuchthatifitwas
Note: In case of a bank merger or capableofraisingrevenues,itshouldbe
consolidation, or when a bank is under atleastonceayearwithagraceperiod
rehabilitation under a program approved of3yearsiftheprojecttobefinancedis
by BSP, the MB may temporarily relieve not that profitable which could be
the surviving bank, consolidated bank, or deferredupto5yearsiftheprojectwas
constituent bank or corporations under not capable of raising revenues. (Sec.
rehabilitation from full compliance with 44,GBL)
therequiredcapitalratio.(Sec.5)
5. LoansgrantedtoDOSRI:
Q:Whatarethelimitationsimposeduponbanks a. Director
withrespecttoitsloanfunction? b. Officer
c. Stockholder, which should at least
A: 1% (if below 1% not anymore
1. GR: Single borrowers limit The total covered)
amount of loans, credit d. Related Interests, such as DOSs
accommodations and guarantees that spouses, their relatives within the
197

first degree whether by Q: What are the transactions covered by the
consanguinity or affinity, DOSRIregulation?
partnership whereby DOS is a
partner or a corporation where A: The transaction covered are loan and credit
DOSownsatleast20%. accommodation.Notbeingaloan,theceilingwill
not apply to lease and sale. However, it should
Q: What are excluded from such loan stillcomplywiththeproceduralrequirement.
limitations?
Q:Whatisthearmslengthrule?
A:Nonriskloans,suchas:
1. Loans secured by obligations of the A:Itprovidesthatanydealingsofabankwithany
Bangko Sentral ng Pilipinas or the of its DOSRI shall be upon terms not less
PhilippineGovernment favorable to the bank than those offered to
2. Loans fully guaranteed by the others.[Sec.36(2)]
Government
3. Loans covered by assignment of Q:Canthebankterminatetheloananddemand
depositsmaintainedinthelendingbank immediate payment if the borrower used the
andheldinthePhilippines fundsforpurposesotherthanthatagreedupon?
4. Loans, credit accommodations and
acceptances under letters of credit to A: If the bank finds that the borrower has not
theextentcoveredbymargindeposits employed the funds borrowed for the purpose
5. Other loans or credit accommodations agreed upon between the bank and the
which the MB may specify as nonrisk borrower, the bank may terminate the loan and
items. demand immediate payment. (Banco de Oro v.
Bayuga,G.R.No.L49568,Oct.17,1979)
Q: What is joint and solidary signature (JSS)
practice? H.PENALTIESFORVIOLATION

A: A common banking practice requiring as an Q: What are the acts that may be penalized of
additional security for a loan granted to a fine and imprisonment as provided in the New
corporation the joint and solidary signature of a CentralBankAct(NCBA)?
major stockholder or corporate officer of the A:
borrowing corporation. (Security Bank v. Cuenca, 1. Refusal to Make Reports or Permit
G.R.No.138544,Oct.3,2000) Examination(Sec.34NCBA)
2. FalseStatement(Sec.35.NCBA)
Q: In case of DOSRI accounts, what are the 3. Other acts that violates any banking
requirementsthatmustbecompliedwith? laws(Sec.36,NCBA)

A: Q: What are the administrative sanctions that
1. Procedural requirement Loan must be the Monetary Board may impose
approved by the majority of all the notwithstandingwithSections3436ofNCBA?
directors not including the director
concerned. CB approval is not A:
necessary; however, there is a need to 1. Finesinamountsasmaybedetermined
inform them prior to the transaction. by the Monetary Board to be
Loan must be entered in the books of appropriate, but in no case to exceed
thecorporation.(Sec.36) P30,000adayforeachviolation,taking
into consideration the attendant
2. SubstantiverequirementLoanmustnot circumstances, such as the nature and
exceed the paid in contribution and gravity of the violation or irregularity
unencumbereddeposits.(Nottoexceed andthesizeofthebankorquasibank
15%oftheportfolioor100%ofthenet
worth,whicheverislower.)(Sec.36[4]) 2. Suspension of rediscounting privileges
or access to Bangko Sentral credit
Q:Whatistheeffectofnoncompliancewiththe facilities
foregoingrequirements?
3. Suspension of lending or foreign
A:ViolationofDOSRIisacrimeandcarrieswithit exchange operations or authority to
penalsanction.
198
MERCANTILELAWTEAM:
BANKING LAWS
accept new deposits or make new any deposit, collection of loans and/or
investments receivables,orwhopaysout orpermitsorcauses
to be transferred any securities or property of
4. Suspension of interbank clearing saidbankshallbesubjecttothepenalprovisions
privileges;and/or oftheNewCentralBankAct(Sec.70GBL).

5. Revocation of quasibanking license. IV.PHILIPPINEDEPOSITINSURANCE
(Sec37,NCBA) CORPORATION
(R.A.3591ASAMENDEDBYR.A.9302)
Note: Resignation or termination from
office shall not exempt such director or A. BASICPOLICY
officer from administrative or criminal
sanctions. Q.Whatisthebasicpolicyforthecreationofthe
PDIC?
Q:Whomayfileacriminalcaseforviolationsof
bankinglaws? A:PDICshallpromoteandsafeguardtheinterests
of the depositing public by way of providing
A:Itdoesnotappearfromthelawthatonlythe permanent andcontinuing insurance coverage in
CentralBankoritsrespondentofficialscancause all insured deposits. (As Amended by Sec. 1, R.A.
the prosecution of alleged violations of banking 9302)
laws. Said violations constitute a public offense,
the prosecution of which is a matter of public Q:Whatisthecoverageoftheinsurance?
interest and hence, anyone even private
individualscandenouncesuchviolationsbefore A: The deposit liabilities of any bank or banking
the prosecuting authorities. (Perez v. Monetary institution, which is engaged in the business of
Board,G.R.No.L23307,June30,1967) receivingdeposits,shallbeinsuredwithPDIC.The
coverageiscompulsory.
Q: May the Monetary Board issue sanctions on
unfitdirectors? B. CONCEPTOFINSUREDDEPOSITS

A:Yes.Afterduenoticetotheboardofdirectors Q:Whatisaninsureddeposit?
of the bank, the Monetary Board may disqualify,
suspend or remove any bank director or officer A:Insureddepositmeanstheamountduetoany
who commits or omits an act which render him bona fide depositor for legitimate deposits in an
unfitfortheposition.Indeterminingwhetheran insured bank net of any obligation of the
individualisfitandpropertoholdthepositionof depositor to the insured bank as of the date of
a director or officer of a bank, regard shall be closure,butnottoexceedP500,000.00.Suchnet
given to his integrity, experience, education, amount shall be determined according to such
training,andcompetence.(Sec.16,GBL) regulations as the Board of Directors may
prescribe.(AsamendedbySec.3,R.A.9576)
Q:Howcouldabankbedissolved?
C. LIABILITYTODEPOSITORS
A:
1. VoluntaryLiquidation(Sec.68GBL) (1)DEPOSITLIABILITIESREQUIREDTOBE
2. Receivership and Involuntary INSUREDWITHPDIC
Liquidation(Sec.69GBL)
Q:Whataredepositscoveredbyinsurance?
Q:Whatisthepenaltyfortransactionsafterthe
bankbecomesinsolvent? A:
1. The unpaid balance of money or its
A: Any director or officer of any bank declared equivalentreceivedbyabankintheusual
insolvent or placed under receivership by the course of business and for which it has
Monetary Board who refuses to turn over the given of is obliged to give credit to a
bank's records and assets to the designated commercial, checking, savings, time or
receivers,orwhotamperswithbanksrecords,or thrift account, or issued in accordance
whoappropriatesforhimselfforanotherpartyor with Banko Sentral rules and regulations
destroys or causes the misappropriation and and other applicable laws, together with
destructionofthebank'sassets,orwhoreceives such other obligations of a bank, which,
or permits or causes to be received in said bank

199

consistent with banking usage and
practices, the Board of Directors shall 2. Deposit accounts or transactions which
determineandprescribebyregulationsto are unfunded, or that are fictitious or
bedepositliabilitiesofthebank;and fraudulent

2. Subject to the approval of the Board of 3. Deposit accounts or transactions
Directors, any insured bank which is constituting, and/or emanating from,
incorporated under the laws of the unsafeandunsoundbankingpractice/s,as
Philippines which maintains a branch determined by the Corporation, in
outside the Philippines may elect to consultationwiththeBSP,afterduenotice
include for insurance its deposit and hearing, and publication of a cease
obligations payable only at such branch. anddesistorderissuedbytheCorporation
(AsAmendedbySec.2R.A.9576) against such deposit accounts or
transactions
Note: The approval of the Board shall be final and
executor,andmaynotberestrainedorsetasideby 4. Deposits that are determined to be the
the court, except on appropriate petition for proceedsofanunlawfulactivityasdefined
certiorarionthegroundthattheactionwastakenin under R.A. 9160, as amended. (As
excess of jurisdiction or with such grave abuse of AmendedbySec.2R.A.9576)
discretion as to amount to a lack or excess of
jurisdiction. The petition for certiorari may only be (4)EXTENTOFLIABILITY
filedwithin30daysfromnoticeofdenialofclaimfor

depositinsurance.(AsAmendedbySec.2R.A.9576)
Q:Whatistheextentof thePDICsliabilitytoa

bankdepositor?
Q:Aredepositsinforeigncurrencycovered?

A:Theamountduetoanydepositorfordeposits
A: Deposit obligations in foreign currency of any
in an insured bank net of any obligation of the
insuredbankarelikewiseinsured.
depositor to the insured bank as of the date of

Note: Foreign currency deposits are covered under
closure, but not to exceed P500,00.00 per
the provisions of RA 3591, as amended, and depositor.
insurancepaymentshallbeinthesamecurrencyin
whichtheinsureddepositsaredenominated(Sec.9, (5)DETERMINATIONOFINSUREDDEPOSITS
RA6426;CircularNo.1389,1993).
Q: When and how shall PDIC commence the
(2)COMMENCEMENTOFLIABILITY determinationofinsureddeposits?

Q: When will the liability by the Corporation to A: PDIC shall commence the determination of
payinsureddepositscommence? insured deposits due the depositors of a closed
bankuponitsactualtakeoveroftheclosedbank.
A: Whenever an insured bank shall have been PDIC shall give notice to the depositors of the
closed by the Monetary Board pursuant to closedbankoftheinsureddepositsduethemby
Section 30 (Proceedings in Receivership and whatever means deemed appropriated by the
Liquidation)ofR.A.7653,otherwiseknownasthe Board of Directors. PDIC shall publish the notice
New Central Bank Act, payment of the insured onceaweekforatleast3consecutiveweeksina
deposits on such closed bank shall be made by newspaper of general circulation or, when
the Corporation as soon as possible. (Sec 14 appropriate, in a newspaper circulated in the
R.A.3591,asamended) community or communities where the closed
bank or its branches are located. (Sec 16 R.A.
(3)DEPOSITACCOUNTSNOTENTITLEDTO 3591,asamended)
PAYMENT
(6)CALCULATIONOFLIABILITY
Q: What are the deposits which are excluded
fromPDICcoverage? (a)PERDEPOSITOR,PERCAPACITYRULE

A: Q:Whatarethetypesofdepositscovered?
1. Investment products such as bonds and
securities, trust accounts, and other A: Demand, savings and time deposits. If the
similarinstruments depositorhasallthreetypesofaccountswiththe
200
MERCANTILELAWTEAM:
BANKING LAWS
same bank, he can only recover up to 1. A has P400,000 deposit can recover
P500,000.00.Heisconsideredasonedepositor. P400,000
2. A has P200,000 deposit in 3 branches
Q: Is the liability of PDIC on a per bank or per onlyP500,000
branchbasis? 3. A has P200,000 deposit in 3 branches of
XYZ and another P200,000 deposit in 3
A: Per bank basis. (Catindig 2003, Verde branchesofABCP500,000oneachbank
4. A and/or B P600,000 deposit half
Publications)
(P300,000)each

Q: How do youdetermine theamountdue toa Note: Individuallyowned accounts are insured
depositor? separately from joint accounts. If depositor made
morethan1jointaccount,themaximumamounthe
A: In determining such amount due to any canrecoverisonlyupto250,000.
depositor, there shall be added together all
depositsinthebankmaintainedinthesameright (c)MODEOFPAYMENT
and capacity for his benefit either in his own
nameandthenameoftheothers. Q:Whatarethemodesofpaymentofaninsured
deposit?
(b)JOINTACCOUNTS
A:
Q:Howistheamountduedeterminedincaseof 1. Bycash;or
jointaccount? 2. Bymakingavailabletoeachdepositora
transferred deposit in another insured
A: A joint account regardless of whether the bank in an amount equal to insured
conjunctionand,or,and/orisused,shallbe deposit of such depositor. (Sec. 14 R.A.
insured separately from any individuallyowned 3591,asamended)
depositaccount:Provided,that:
Note:Provided:PDIC,initsdiscretion,mayrequire
1. If the account is held jointly by two or proofofclaimstobefiledbeforepayingtheinsured
more natural persons, or by two or deposits, and that in any case where PDIC is not
more juridical persons or entities, the satisfiedastotheviabilityofaclaimforaninsured
maximum insured deposit shall be deposit,itmayrequirefinaldeterminationofacourt
divided into as many equal shares as of competent jurisdiction before paying such claim.
there are individuals, juridical persons (Sec.14R.A.3591,asamended)
or entities, unless a different sharing is
stipulated in the document of deposit; (d)EFFECTOFPAYMENTOFINSUREDDEPOSIT
and
Q: What are the effects of payment to the
2. If the account is held by a juridical depositorofhisinsureddeposit?
person or entity with one or more
natural persons, the maximum insured A:
shallbepresumedtobelongentirelyto 1. PDIC is discharged from any further
suchjuridicalpersonorentity. liabilitytothedepositor;and
2. PDIC is subrogated to all the rights of
Note: The aggregate of the interests of each co thedepositoragainsttheclosedbankto
owner over several joint accounts, whether owned theextentofsuchpayment.
bythesameordifferentcombinationsofindividuals,
juridicalpersonsorentities,shalllikewisebesubject (e)PAYMENTSOFINSUREDDEPOSITSAS
tothemaximuminsureddepositofP500,000.00. PREFERREDCREDITUNDERARTICLE2244,CIVIL
CODE
The provisions of any law to the contrary
notwithstanding,noowner/holderofanynegotiable Q: Are insured deposits paid by PDIC to the
certificate of deposit shall be recognized as a depositor/spreferredcreditsunderArticle2244
depositor entitled to the rights provided in this Act
againsttheclosebank?
unless his name is registered as owner/holder

thereofinthebooksoftheissuingbank[Sec.4(g)].
A: Yes. All payments by PDIC of insured deposits

Illustration: in closed banks partake of the nature of public
funds, and as such, must be considered a
preferred credit similar to taxes due to the

201

National Government in the order of preference examination can be conducted within
underArticle2244oftheNewCivilCode.(Sec.15 12 months from the last examination
R.A.3591,asamended) date;and

(f)FAILURETOSETTLECLAIMOFINSURED 2. PDIC, may, in coordination with the
DEPOSITOR Bangko Sentral, conduct a special
examination as the Board of Directors,
Q:WhatistheperiodbywhichPDICshallsettle by an affirmative vote of a majority of
aclaimofinsureddepositor? allitsmembers,ifthereisathreatened
or impending closure of a bank. (Sec 8
A: PDIC has 6 months from the date of filing of R.A.3591,asamended)
claimforinsureddeposit.
Note: Prior approval of the Monetary Board is not
Q:Whatistheeffectoffailuretosettleaclaim necessary when PDIC conducts an investigation of
ofinsureddepositorwithinthe6monthperiod? banks. "Investigation" and "examination" are distinct
proceduresunderthecharterofthePDICandtheBSP.
A: The power of investigation covers all factfinding
GR: Failure to settle the claim. Within 6 investigationsonfraud,irregularitiesand/oranomalies
committedinbanksthatareconductedbyPDICbased
months from the date of filing of claim for
on complaints from depositors or other government
insured deposit, where such failure was due
agenciesand/orfinalreportsofexaminationsofbanks
tograveabuseofdiscretion,grossnegligence, conducted by the Bangko Sentral ng Pilipinas and/or
bad faith, or malice, shall, upon conviction, PDIC.(PDICvs.PhilippineCountrysideRuralBank,Inc.,
subjectthedirectors,officersoremployeesof G.R.No.176438,January24,2011)
PDIC responsible for the delay, to
imprisonmentfrom6monthstooneyear. Q:WhenmayPDICexerciseitspowertoinquire
orexaminedepositaccounts?
XPN:Theperiodshallnotapplyifthevalidity
of the claim requires the resolution of issues A: PDIC may inquired into or examine deposit
offactsandorlawbyanotheroffice,bodyor accounts and all information related thereto in
agency.(Sec14R.A.3591,asamended) case there is a finding of unsafe or unsound
bankingpractice.(Sec8R.A.3591,asamended)
(g)FAILUREOFDEPOSITORTOCLAIMINSURED
DEPOSITS Q: What are unsafe or unsound banking
practices?
Q: What is the period by which a depositor of
insureddepositsmayfilehisclaim? A: They refer to actions or lack of actions which
are contrary to generally accepted standards of
A: 2 years from the closure of the bank by the prudentoperation.
CentralBank.
Q:DoesPDICsinquiryorexaminationofdeposit
Q:Whatistheeffectofthefailurebyadepositor accounts violate the laws regarding secrecy of
to claim insured deposit/s within the period bankdeposits?
prescribedbylaw?
A:No.NotwithstandingtheprovisionsofSecrecy
A: It constitutes a waiver of his (depositor) right of Bank Deposits, Foreign Currency Act, General
to claim if he fails to claim his insured deposits Banking Law, and other laws, PDIC and/or the
withthePDICwithin2yearsfromactualtakeover Bangko Sentral, may inquire into or examine
of the closed bank by the receiver, unless deposit accounts in case there is a finding of
otherwise waived by PDIC. (Sec. 16(e) R.A. 3591, unsafe or unsound banking practice. (Section 8
asamended) R.A.3591,asamended)

Q: When may PDIC exercise its power to Q:Whendoessplittingofdepositsoccur?
examinebanks?
A: Whenever a depositors deposit account
A: exceeds P500,000.00 is broken down and
1. PDIC may conduct examination of transferred into 2 or more accounts in the
banks with prior approval of the name/s of natural or juridical persons who have
Monetary Board. However, no no beneficial ownership on transferred deposits
202
MERCANTILELAWTEAM:
BANKING LAWS
within120daysimmediatelyprecedingorduring
a bankdeclared bank holiday, or immediately
precedingaclosureorderbytheMonetaryBoard
of the BSP for the purpose of availing of the
maximum deposit insurance coverage. (Sec
21(f)(5)R.A.3591,asamended)
Q:Whatisthepenaltyforsplittingofdeposits?
A: The penalty of prision mayor or a fine of not

less than 50,000.00 but not more than
2,000,000.00, or both, at the discretion of the
court.(Sec.21(f)R.A.3591,asamended)
Q:WhatisruleregardingissuancesofTROs,etc.
against PDIC for acts under R.A. 3591, as
amended?
A:
GR:Nocourt,excepttheCourtofAppeals,
shallissueanytemporaryrestrainingorder,
preliminary injunction or preliminary
mandatory injunction against PDIC for any
action under R.A. 3591, as amended. Such
prohibition applies in all cases, disputes or
controversies instituted by a private party,
theinsuredbank,oranyshareholderofthe
insuredbank.

XPN: The Supreme Court may issue a
restraining order or injunction when the
matter is of extreme urgency involving
constitutional issue, such that unless a
temporaryrestrainingorderisissued,grave
injustice and irreparable injury will arise.
203

INTELLECTUALPROPERTYLAWS C.TECHNOLOGYTRANSFERARRANGEMENTS

I.INTELLECTUALPROPERTYRIGHTSINGENERAL Q:Whatisatechnologytransferarrangement?

A.INTELLECTUALPROPERTYRIGHTS A: Contracts or arrangements involving the
transfer of systematic knowledge for the
Q: What are covered by intellectual property manufacture of a product, the application of the
rights? process, or rendering a service including
management contracts, and transfer, assignment
A: or licensing of all forms of intellectual property
1. CopyrightandRelatedRights rights, including licensing of computer software
2. Mark(trade,serviceandcollective) except computer software developed for mass
3. Geographicindications market.(Sec.4.2,IPC)
4. Industrialdesigns
5. Patents Q:Whatisundisclosedinformation?
6. Layout designs (Topographies) of
IntegratedCircuits A:Itisaninformationwhich:
7. Protection of Undisclosed Information.
(Sec. 4.1, Intellectual Property Code 1. Isasecretinthesensethatitisnot,asa
[IPC]) body or in precise configuration and
assembly of components, generally
B.DIFFERENCESBETWEENCOPYRIGHTS known among, or readily accessible to
TRADEMARKSANDPATENT personswithinthecirclesthatnormally
deal with the kind of information in
Q: What are the distinctions among trademark, question.
patentandcopyright?
2. Has commercial value because it is a
A: secret
INTELLECTUAL
DEFINITION
PROPERTIES 3. Hasbeensubjectedtoreasonablesteps
Anyvisiblesigncapableof underthecircumstances,bytheperson
distinguishingthegoods lawfullyincontroloftheinformation,to
(trademark)orservices(service keep it a secret. (Article 39, TRIPS
Trademark
mark)ofanenterpriseandshall Agreement)
includeastampedormarked
containerofgoods. Q: What is the nature of undisclosed
Thenameordesignation information/tradesecret?
Tradename identifyingordistinguishingan
enterprise.
A:Thosetradesecretsareofaprivilegednature.
Literaryandartisticworkswhich The protection of industrial property encourages
areoriginalintellectualcreations
investments in new ideas and inventions and
Copyright intheliteraryandartisticdomain
stimulates creative efforts for the satisfaction of
protectedfromthemomentof
humanneeds.Itspeedsuptransferoftechnology
theircreation.
Anytechnicalsolutionofa
and industrialization, and thereby bring about
probleminanyfieldofhuman social and economic progress. Verily, the
Patentable activitywhichisnew,involvesan protection of industrial secrets is inextricably
Inventions inventivestepandisindustrially linked to the advancement of our economy and
applicable.(Khov.CA,G.R.No. fosters healthy competition in trade. (Air
115758,Mar.11,2002). PhilippinesCorporationv.Pennswell,Inc.,G.R.No.
172835,Dec.13,2007)
Q:Whatisageographicindication?
II.PATENTS
A: Its an indication which identifies a good as
originatingintheterritory,whereagivenquality, Q:Whatisapatent?
reputation or other characteristic of the good is
essentially attributable to its geographical origin. A:Astatutorygrantwhichconferstoaninventor
(Art. 22, TradeRelated Aspects of Intellectual orhislegalsuccessor,inreturnforthedisclosure
PropertyRights) of the invention to the public, the right for a
204
MERCANTILELAWTEAM:
INTELLECTUAL PROPERTY LAW
limited period of time to exclude others from Q: What is meant by made available to the
making, using, selling or importing the invention publicandwhatareitseffects?
withintheterritoryofthecountrythatgrantsthe
patent. A:Tobemadeavailabletothepublicmeansat
leastonememberofthepublichasbeenableto
A.PATENTABLEINVENTIONS access knowledge of the invention without any
restriction on passing that knowledge on to
Q:Whatarethepatentableinventions? others.

A:Anytechnicalsolutionofaprobleminanyfield GR: When a work has already been made
of human activity which is new, involves an available to the public, it shall be non
inventivestepandisindustriallyapplicable.Itmay patentableforabsenceofnovelty.
be,ormayrelateto,aproduct,orprocess,oran
improvementofanyoftheforegoing.(Sec.21) XPN: Nonprejudicial disclosure the
disclosure of information contained in the
Q:Whataretheconditionsforpatentability? applicationduringthe12monthperiodbefore
the filing date or the priority date of the
A:NIA applicationifsuchdisclosurewasmadeby:
1. Novelty An invention shall not be
considered new if it forms part of a 1. Theinventor;
priorart.(Sec.23,IPC)
2. Apatentofficeandtheinformationwas
2. Involves an inventive step if, having contained:
regardtopriorart,itisnotobvioustoa a. In another application filed by the
person skilled in the art at the time of inventorandshouldhavenothave
the filing date or priority date of the beendisclosedbytheoffice,or
applicationclaimingtheinvention. b. In an application filed without the
knowledge or consent of the
3. Industrially Applicable An invention inventor by a third party which
that can be produced and used in any obtained the information directly
industry, shall be industrially applicable orindirectlyfromtheinventor;
(Sec.27,IPC).
3. A third party which obtained the
Q:Whatispriorart? information directly or indirectly from the
inventor.(Sec.25,IPC)
A:
1. Everything which has been made Q: Who has the burden of proving want of
available to the public anywhere in the noveltyofaninvention?
world, before the filing date or the
prioritydateoftheapplicationclaiming A: The burden of proving want of novelty is on
theinvention him who avers it and the burden is a heavy one
whichismetonlybyclearand satisfactoryproof
2. The whole contents of a published which overcomes every reasonable doubt.
application, filed or effective in the (Manzanov.CA,G.R.No.113388.Sept.5,1997)
Philippines,withafilingorprioritydate
that is earlier than the filing or priority Q:Whatisinventivestep?
date of the application. Provided, that
the application which has validly A:
claimed the filing date of an earlier GR:Aninventioninvolvesaninventivestepif,
applicationunderSection31oftheIPC, havingregardtopriorart,itisnotobviousto
there shall be a prior art with effect as a person skilled in the art at the time of the
of the filing date of such earlier filing date or priority date of the application
application: Provided further, that the claimingtheinvention.(Sec.26,IPC)
applicant or the inventor identified in
both applications are not one and the XPN:Inthecaseofdrugsandmedicines,there
same.(Sec.24,IPC) is no inventive step if the invention results
fromthemerediscoveryofanewformornew
propertyofaknownsubstancewhichdoesnot
205

result in the enhancement of the known some or all of the interconnections of
efficacy of that substance. (Sec. 26.2, as an integrated circuit, or such a three
amendedbyR.A.9502) dimensionaldispositionpreparedforan
integrated circuit intended for
Q:Whatisthetestofnonobviousness? manufacture. Registration is valid for
10yearswithoutrenewalcountedfrom
A:Ifanypersonpossessingordinaryskillintheart dateofcommencementofprotection.
was able to draw the inferences and he
constructsthatthesupposedinventordrewfrom 4. Utility model A name given to
priorart,thenthelatterdidnotreallyinvent. inventionsinthemechanicalfield

Q:Whoisconsideredapersonofordinaryskill? Q: When does an invention qualify as a utility
model?
A:Apersonwhoispresumedto:
1. Be an ordinary practitioner aware of A:Ifitisnewandindustriallyapplicable.Amodel
what was common general knowledge of implement or tools of any industrial product
intheartattherelevantdate. even if not possessed of the quality of invention
2. Have knowledge of all references that butwhichisofpracticalutility.(Sec.109.1,IPC)
are sufficiently related to one another
and to the pertinent art and to have Q:Whatisthetermofautilitymodel?
knowledge of all arts reasonably
pertinent to the particular problems A: 7 years from date of filing of the application
withwhichtheinventorwasinvolved. (Sec.109.3,IPC).
3. Have had at his disposal the normal
means and capacity for routine work B.NONPATENTABLEINVENTIONS
and experimentation. (Rules and
RegulationsonInventions,Rule207) Q:Whatarenotpatentableinventions?

Q: What are other forms of patentable A:PADSCAD
inventions?
1. Discoveries, scientific theories and
A: mathematicalmethods
1. Industrial design Any composition of
linesorcolorsoranythreedimensional 2. In the case of Drugs and medicines,
form, whether or not associated with mere discovery of a new form or new
lines or colors. Provided that such property of a known substance which
composition or form gives a special does not result in the enhancement of
appearancetoandcanserveaspattern theefficacyofthatsubstance
for an industrial product or handicraft.
(Sec.112,IPC) 3. Schemes, rules and methods of
performing mental acts, playing games
Note:Generallyspeaking,anindustrialdesignisthe or doing business, and programs for
ornamental or aesthetic aspect of a useful article. computers
(Vicente Amador, Intellectual Property
Fundamentals,2007) 4. Methodsfortreatmentofthehumanor
Animalbody
2. IntegratedcircuitAproduct,initsfinal
form,oranintermediateform,inwhich 5. Plant varieties or animal breeds or
theelements,atleastoneofwhichisan essentially biological process for the
active elements and some of all of the production of plants or animals. This
interconnections are integrally formed provision shall not apply to micro
inandoronapieceofmaterial,andin organisms and nonbiological and
which is intended to perform an microbiologicalprocesses
electronicfunction.
6. Aestheticcreations
3. Layout design/topography The three
dimensional disposition, however
expressed,oftheelements,atleastone
of which is an active element, and of
206
MERCANTILELAWTEAM:
7. Anything which is Contrary to public tothepatentshallbelongtotheperson

order or morality. (Sec. 22, IPC as who filed an application for such
amendedbyR.A.9502) invention,or
2. Where two or more applications are
Q:Arecomputerprogramspatentable? filed for the same invention, to the
applicant whi has the earliest filing
A: date.(Sec.29,IPC)
GR: Computer programs are not patentable
butarecopyrightable. Q: Cheche invented a device that can convert
rainwater into automobile fuel. She asked
XPN: They can be patentable if they are part Macon, a lawyer, to assist in getting her
ofaprocess(e.g.businessprocesswithastep invention patented. Macon suggested that they
involvingtheuseofacomputerprogram). form a corporation with other friends and have
thecorporationapplyforthepatent,80%ofthe
C.OWNERSHIPOFAPATENT shares of stock thereof to be subscribed by
Cheche and 5% by Macon. The corporation was
Q:Whoisentitledtoapatent? formed and the patent application was filed.
However,Chechedied3monthslaterofaheart
A: attack. Franco, the estranged husband of
1. Inventor,hisheirs,orassigns. Cheche, contested the application of the
corporationandfiledhisownpatentapplication
2. Joint invention Jointly by the as the sole surviving heir of Cheche. Decide the
inventors.(Sec.28,IPC) issuewithreasons.

3. 2 or more persons invented separately A: The estranged husband of Cheche cannot
and independently of each other To successfully contest the application. The right
thepersonwhofiledanapplication; over inventions accrue from the moment of
creationandasarightitcanlawfullybeassigned.
4. 2 or more applications are filed the Oncethetitletheretoisvestedinthetransferee,
applicant who has the earliest filing the latter has the right to apply for its
date or, the earliest priority date. First registration.TheestrangedhusbandofCheche,if
tofilerule.(Sec.29,IPC) notdisqualifiedtoinherit,merelywouldsucceed
totheinterestofCheche.(1990BarQuestion)
5. Inventions created pursuant to a
commission Person who commissions Q:Whomayapplyforapatent?
the work, unless otherwise provided in
thecontract.(Sec.30.1,IPC) A: Any person who is a national or who is
domiciled or has a real and effective industrial
6. Employee made the invention in the establishmentinacountrywhichisapartytoany
courseofhisemploymentcontract: convention, treaty or agreement relating to
a. The employee, if the inventive intellectual property rights or the repression of
activity is not a part of his regular unfair competition, to which the Philippines is
duties even if the employee uses also a party, or extends reciprocal rights to
thetime,facilitiesandmaterialsof nationalsofthePhilippinesbylaw.(Sec.3,IPC)
theemployer.
b. The employer, if the invention is Q: What are the steps in the registration of a
the result of the performance of patent?
his regularlyassigned duties,
unlessthereis an A:Theprocedureforthegrantofpatentmaybe
agreement, express or implied, to summarizedasfollows:
thecontrary.(Sec.30.2,IPC) 1. Filingoftheapplication
2. Accordanceofthefilingdate
Q:Whatisthefirsttofilerule? 3. Formalityexamination
4. ClassificationandSearch
A: 5. Publicationofapplication
1. If two (2) or more persons have made 6. Substantiveexamination
the invention separately and 7. GrantofPatent
independently of each other, the right 8. Publicationupongrant
207

9. Issuanceofcertificate(Salao,Essentials Q:Whataretheconditionsinavailingofpriority
of Intellectual Property Law: a date?
Guidebook on Republic Act No. 8293
andRelatedLaws.,2008) A:
1. The local application expressly claims
Q:Howisdisclosuremade? priority;

A:Theapplicationshalldisclosetheinventionina 2. It is filed within 12 months from the
mannersufficientlyclearandcompleteforittobe datetheearliestforeignapplicationwas
carriedoutbyapersonskilledintheart. filed;and

Q:Whatisaclaim? 3. A certified copy of the foreign
application together with an English
A: Defines the matter for which protection is translationisfiledwithin6monthsfrom
sought.Eachclaimshallbeclearandconcise,and thedateoffilinginthePhilippines.(Sec.
shallbesupportedbythedescription. 31,IPC)

Q:Whatisanabstract? Q: Leonard and Marvin applied for Letters
Patent claiming the right of priority granted to
A: A concise summary of the disclosure of the foreign applicants. Receipt of petitioners
invention as contained in the description, claims application was acknowledged by respondent
andmerelyservesastechnicalinformation. DirectoronMarch6,1954.TheirApplicationfor
Letters Patent in the US for the same invention
Q:Whatisunityofinvention? indicatedthattheapplicationintheUSwasfiled
on March 16, 1953. They were advised that the
A: The application shall relate to one invention "Specification" they had submitted was
only or to a group of inventions forming a single "incomplete" and that responsive action should
general inventive concept. (Sec. 38.1) If several be filed with them four months from date of
independent inventions which do not form a mailing, which was August 5, 1959. On July 3,
single general inventive concept are claimed in 1962, petitioners submitted two complete
oneapplication,theapplicationmustberestricted copies of the Specification. Director of patents
toasingleinvention.(Sec.38.2,IPC) held that petitioners' application may not be
treatedasfiled.Isthedirectorcorrect?
Q: What is the concept of divisional
applications? A: Yes, it is imperative that the application be
complete in order that it may be accepted. It is
A: Divisional applications come into play when essentialtothevalidityofLettersPatentthatthe
two or more inventions are claimed in a single specifications be full, definite, and specific. The
applicationbutareofsuchanaturethatasingle purpose of requiring a definite and accurate
patentmaynotbeissuedforthem.Theapplicant, descriptionoftheprocessistoapprisethepublic
is thus required to divide, that is, to limit the of what the patentee claims as his invention, to
claims to whichever invention he may elect, informtheCourtsastowhattheyarecalledupon
whereas those inventions not elected may be to construe, and to convey to competing
made the subject of separate applications which manufacturersanddealersinformationofexactly
are called divisional applications. (SmithKline what they are bound to avoid. To be entitled to
Beckman Corp. v. CA, GR No. 126627, Aug. the filing date of the patent application, an
14,2003) invention disclosed in a previously filed
application must be described within the instant
Q:Whatisprioritydate? application in such a manner as to enable one
skilled in the art to use the same for a legally
A: An application for patent filed by any person adequate utility. (Boothe v. Director of Patents,
who has previously applied for the same G.R.No.L24919,Jan.28,1980)
invention in another country which by treaty,
convention, or law affords similar privileges to Q: What are the rights conferred by a patent
Filipinocitizens,shallbeconsideredasfiledasof applicationafterthefirstpublication?
thedateoffilingtheforeignapplication.(Sec.31,
IPC) A: The applicant shall have all the rights of a
patentee against any person who, without his
208
MERCANTILELAWTEAM:
authorization, exercised any of the rights Q:Whatiftheground/sforcancellationrelateto

conferred under Section 71 in relation to the someoftheclaimsorpartsoftheclaimonly?
invention claimed in the published patent
application, as if a patent had been granted for A: Cancellation may be effected to such extent
thatinvention,providedthatthesaidpersonhad: only.(Sec.61.2,IPC)
1. Actual knowledge that the invention
that he was using was the subject Q: What are the grounds for cancellation of a
matterofapublishedapplication;or utilitymodel?
2. Received written notice that the
invention was the subject matter of a A:
publishedapplicationbeingidentifiedin 1. The invention does not qualify for
thesaidnoticebyitsserialnumber registrationasautilitymodel
2. That the description and the claims do
Note:Thattheactionmaynotbefileduntilafterthe not comply with the prescribed
grant of a patent on the published application and requirements
withinfour(4)yearsfromthecommissionoftheacts
3. Any drawing which is necessary for the
complainedof(Sec.46,IPC).
understanding of the invention has not
beenfurnished
Q:Whenshallthepatenttakeeffect?
4. That the owner of the utility model
registration is not the inventor or his

A: A patent shall take effect on the date of the
successorintitle.(Sec.109.4,IPC)
publication of the grant of the patent in the IPO

Gazette.(Sec.50.3,IPC)
Q: What are the grounds for cancellation of an
industrialdesign?
Q:Whatisthedurationofapatent,utilitymodel

andindustrialdesign?
A:
1. The subject matter of the industrial

A:
designisnotregistrable;
1. Patent20yearsfromdateoffilingof
2. Thesubjectmatterisnotnew;or
application without renewal. (Sec. 54,
3. The subject matter of the industrial
IPC)
design extends beyond the content of

the application as originally filed (Sec.
2. Utility Model 7 years from the filing
120IPC).
date of the application without

renewal.(Sec.109.3,IPC)
E.REMEDYOFTHETRUEANDACTUALOWNER

3. Industrial Design 5 years from the
Q:Whataretheremediesofpersonsnothaving
filingdateoftheapplication,renewable
therighttoapatent?
for not more than two (2) consecutive

periods of five (5) years each. (Sec.
A:Ifapersonotherthantheapplicantisdeclared
118.2,IPC)
byfinalcourtorderordecisionashavingtheright
to a patent, he may within 3 months after such

D.GROUNDSFORCANCELATIONOFAPATENT
decisionhasbecomefinal:

Q:Whatarethegroundsforthecancellationof
1. Prosecutetheapplicationashisown
patents?
2. Fileanewpatentapplication
3. Request the application to be refused;

A:NDCI
or
1. TheinventionisNotneworpatentable;
4. Seekcancellationofthepatent.
2. The patent does not Disclose the

invention in a manner sufficiently clear
Q:Whatistheremedyofatrueinventor?
andcompleteforittobecarriedoutby

anypersonskilledintheart;or
A:Hemayonlyaskthecourttosubstitutehimas
3. Contrary to public order or
a patentee or to cancel the patent and ask for
morality.(Sec.61.1,IPC)
damages when the application of the false
4. Patent is found Invalid in an action for
inventor is granted. He may not the IPO of
infringement(Sec.82,IPC)
processingthefalseapplication.
209

F.RIGHTSCONFEREDBYAPATENT act includes testing, using, making
or selling the invention including
Q:Whataretherightsconferredbyapatent? anydatarelatedthereto,solelyfor
purposesreasonablyrelatedtothe
A: development and submission of
1. Subject matter is a product Right to information and issuance of
restrain, prohibit and prevent any approvals by government
unauthorized person or entity from regulatoryagenciesrequiredunder
making, using, offering for sale, selling any law of the Philippines or of
orimportingtheproduct. anothercountrythatregulatesthe
manufacture, construction, use or
2. Subject matter is a process Right to saleofanyproduct.(Sec.72.4,IPC)
restrain prohibit and prevent any
unauthorized person or entity from e. Where the act consists of the
manufacturing, dealing in, using, preparation for individual cases, in
offering for sale, selling or importing a pharmacy or by a medical
any product obtained directly or professional, of a medicine in
indirectly from such process (Sec. 71, accordance with a medical
IPC). prescription.(Sec.72.5,IPC)

3. Right to assign the patent, to transfer f. Wheretheinventionisusedinany
bysuccession,andtoconcludelicensing ship, vessel, aircraft, or land
contracts.(Sec.71.2,IPC) vehicle of any other country
entering the territory of the
G.LIMITATIONOFPATENTRIGHTS Philippines temporarily or
accidentally.(Sec.72.5,IPC)
Q: What are the exceptions to the rights
conferredbyapatent? 2. Prior user Person other than the
applicant, who in good faith, started
A: usingtheinventioninthePhilippines,or
1. Ingeneral undertakenseriouspreparationstouse
the same, before the filing date or
a. GR: If put on the market in the priority date of the application shall
Philippines by the owner of the have the right to continue the use
product, or with his express thereof, but this right shall only be
consent. transferredorassignedfurtherwithhis
enterpriseorbusiness.(Sec.73,IPC)
XPN: Drugs and medicines .
introduced in the Philippines or 3. Use by Government A government
anywhere else in the world by the agency or third person authorized by
patent owner, or by any party the government may exploit invention
authorized to use the invention even without agreement of a patent
(Sec. 72.1, as amended by R.A. ownerwhere:
9502)
a. Public interest, as determined by
b. Where the act is done privately the appropriate agency of the
and on a noncommercial scale or government,sorequires;or
for a noncommercial purpose. b. A judicial or administrative body
(Sec.72.2,IPC) hasdeterminedthatthemannerof
exploitation by owner of patent is
c. Exclusively for experimental use of anticompetitive.(Sec.74,IPC)
the invention for scientific
purposes or educational purposes 4. ReversereciprocityofforeignlawAny
(experimental use provision). (Sec. condition, restriction, limitation,
72.3,IPC) diminution,requirement,penaltyorany
similarburdenimposedbythelawofa
d. Bolar Provision In the case of foreigncountryonaPhilippinenational
drugs and medicines, where the seeking protection of intellectual
210
MERCANTILELAWTEAM:
property rights in that country, shall 2. Regional exhaustion allows the

reciprocally be enforceable upon possibilityofimportingintothenational
nationals of said country, within territoryapatentedproductoriginating
Philippinejurisdiction.(Sec.231,IPC) from any other member state of a
regionaltradeagreement.
Q:Whoisaparallelimporter?
3. National exhaustion limits the
A: One which imports, distributes, and sells circulation of products covered by
genuineproductsinthemarket,independentlyof patentinonecountrytoonlythoseput
an exclusive distributorship or agency agreement on the market by the patent owner or
withthemanufacturer. its authorized agents in that same
country. In this case, there can be no
Note: Such acts of underground sales and parallelimportation.
marketing of genuine goods, undermines the
propertyrightsandgoodwilloftherightfulexclusive 4. Modified exhaustion all respect
distributor. Such goodwill is protected by the law identicaltotheInternationalexhaustion
onunfaircompetition.(SolidTrianglev.Sheriff,G.R. except for the allowance of the
No.144309,Nov.23,2001) restriction of the extent of exhaustion
through explicit contractual terms.
Q:Whatisthedoctrineofexhaustion? (Carlos Correa,. Internationalization of
the Patent System and New
A: Also known as the doctrine of first sale, it Technologies. International Law
providesthatthepatentholderhascontrolofthe Journal,Vol.20.No.3,2002)
firstsaleofhisinvention.Hehastheopportunity
toreceivethefullconsiderationforhisinvention H.PATENTINFRINGEMENT
fromhissale.Hence,heexhaustshisrightsinthe
futurecontrolofhisinvention. Q:Whatconstitutesinfringementofpatent?

It espouses that the patentee who has already A:
soldhisinventionandhasreceivedalltheroyalty 1. Making, using, offering for sale, selling
andconsiderationforthesamewillbedeemedto or importing a patented product or a
have released the invention from his monopoly. product obtained directly or indirectly
The invention thus becomes open to the use of fromapatentedprocess;or
thepurchaserwithoutfurtherrestriction.(Adams 2. Use of a patented process without
v.Burke,84U.S.17,1873) authorization of the owner of the
patent(Sec.76,IPC)
Q:HowdoestheDoctrineExhaustionofapplyin
Philippinejurisdiction? Q:Whatarethetestsinpatentinfringement?

A: A:
GR:PatentrightsareExhaustedbyfirstsalein 1. Literal infringement Test Resort must
thePhilippines(Domesticexhaustion). behad,inthefirstinstance,towordsof
theclaim.Iftheaccusedmatterclearly
XPN:Excepthoweverondrugsandmedicines: falls within the claim, infringement is
first sale in any jurisdiction exhausts committed.
(Internationalexhaustion)(R.A.9502).
Minor modifications are sufficient to
Q:Whatarethedifferentkindsofexhaustion? put the item beyond literal
infringement.(Godinesv.CA,G.R.No.L
A: 97343,Sept.13,1993)
1. International exhaustion allows any
party to import into the national 2. Doctrine of Equivalents There is
territory a patented product from any infringement where a device
othercountryinwhichtheproductwas appropriates a prior invention by
placed on the market by the patent incorporating its innovative concept
holderoranyauthorizedparty. and, although with some modification
and change, performs substantially the
samefunctioninsubstantiallythesame
211

way to achieve substantially the same contributoryinfringer.Itmustbeproventhatthe
result.(Ibid.) product can only be used for infringement
purposes. If it can be used for legitimate
3. Economic interest test when the purposes,theactionshallnotprosper.
processdiscoverers economic interest
arecompromised,i.e.,whenotherscan Q: What are the remedies of the owner of the
import the products that result from patentagainstinfringers?
the process, such an act is said to be
prohibited. A:
1. Civil action for infringement The
Q:Doestheuseofapatentedprocessbyathird ownermaybringacivilaction withthe
person constitute an infringement when the appropriate Regional Trial Court to
allegedinfringerhassubstituted,inlieuofsome recover from infringer the damages
unessentialpartofthepatentedprocess,awell sustainedbytheformer,plusattorneys
knownmechanicalequivalent." fees and other litigation expenses, and
to secure an injunction for the
A: Yes, under the doctrine of mechanical protectionofhisrights.
equivalents, the patentee is protected from
colorable invasions of his patent under the guise 2. CriminalactionforinfringementIfthe
of substitution of some part of his invention by infringement is repeated, the infringer
some well known mechanical equivalent. It is an shall be criminally liable and upon
infringement of the patent, if the substitute conviction,shallsufferimprisonmentof
performsthesamefunctionandwaswellknown not less than six (6) months but not
at the date of the patent as a proper substitute morethanthree(3)yearsand/orafine
fortheomittedingredient.(Gsellv.YapJue,G.R. notlessthanP100,000.00butnotmore
No.L4720,Jan.19,1909) thanP300,000.00

Q:Whatismeantbyequivalentdevice? 3. Administrative remedy Where the
amount of damages claimed is not less
A: It is such as a mechanic of ordinary skill in than P200,000.00, the patentee may
construction of similar machinery, having the choose to file an administrative action
forms, specifications and machine before him, againsttheinfringerwiththeBureauof
could substitute in the place of the mechanism Legal Affairs (BLA). The BLA can issue
described without the exercise of the inventive injunctions, direct infringer to pay
faculty. patentee damages, but unlike regular
courts, the BLA may not issue search
Q: What is the doctrine of file wrapper and seizure warrants or warrants of
estoppel? arrest.

A: This doctrine balances the doctrine of Q: What are the limitations tothe civil/criminal
equivalents. Patentee is precluded from claiming action?
aspartofpatentedproductthatwhichhehadto
excise or modify in order to avoid patent office A:
rejection,andhemayomitanyadditionsthathe 1. No damages can be recovered for acts
was compelled to add by patent office of infringement committed more than
regulations. four (4) years before the filing of the
actionforinfringement.(Sec.79,IPC)
Q: What is the doctrine of contributory
infringement? 2. The criminal action prescribes in three
(3) years from the commission of the
A:Asidefromtheinfringer,anyonewhoactively crime.(Sec.84,IPC)
inducestheinfringementofapatentorprovides
the infringer with a component of a patented Q:Whocanfileanactionforinfringement?
product or of a product produced because of a
patented process knowing it to be especially A:
adaptedforinfringingthepatentedinventionand 1. The patentee or his successorsin
not suitable for substantial noninfringing use is interest may file an action for
liablejointlyandseverallywiththeinfringerasa infringement.(CreserPrecisionSystems,
212
MERCANTILELAWTEAM:
Inc. v. CA, G.R. No. 118708, Feb. 2, 1. TheDirectorofLegalAffairsmaygranta

1998) license to exploit a patented invention,
even without the agreement of the
2. Any foreign national or juridical entity patent owner, in favor of any person
who meets the requirements of Sec. 3 whohasshownhiscapabilitytoexploit
and not engaged in business in the theinvention(Sec.93,IPC).
Philippines,towhichapatenthasbeen
grantedorassigned,whetherornotitis 2. R.A. 9502 (Universally Accessible
licensed to do business in the Cheaper and Quality Medicines Act of
Philippines.(Sec.77,IPC) 2008)howeveramendedSec.93sothat
itistheDirectorGeneraloftheIPOwho
Q: What are the defenses in an action for maygrantalicensetoexploitpatented
infringement? invention under the grounds
enumeratedtherein.
A:
1. Invalidityofthepatent;(Sec.81,IPC); Note: Clarification either by legislation of
2. Any of the grounds for cancellation of judicial interpretation as to who has
patents: jurisdiction should be made to avoid
a. That what is claimed as the confusion. (Salao, Essential of Intellectual
inventionisnotneworpatentable Property Law: a Guidebook on Republic
b. That the patent does not disclose ActNo.8293andRelatedLaws,2008)
the invention in a manner
sufficiently clear and complete for Q: What are the grounds for compulsory
it to be carried out by any person licensingandtheperiodforfilingapetition?
skilledintheart;or
c. That the patent is contrary to A:
public order or morality. (Sec. 61, 1. Nationalemergency
IPC)
2. Where the public interest, at any time
I.LICENSING afterthegrantofthepatent

Q: What are the modes of obtaining license to 3. Whereajudicialoradministrativebody
exploitpatentrights? has determined that the manner of
exploitationbytheownerofthepatent
A: orhislicenseeisanticompetitiveatany
1. Voluntarylicensing(Sec.85,IPC)and timeafterthegrantofthepatent
2. Compulsorylicensing(Sec.93,IPC)
4. Incaseofpublicnoncommercialuseof
Q:Whatisvoluntarylicensing? the patent by the patentee, without
satisfactoryreasonatanytimeafterthe
A: The grant by the patent owner to a third grantofthepatent
person of the right to exploit a patented
invention. 5. If the patented invention is not being
worked in the Philippines on a
Q:Whataretherightsofalicensorinvoluntary commercial scale, although capable of
licensing? being worked, without satisfactory
reason after the expiration of 4 years
A:Intheabsenceofanyprovisiontothecontrary fromthedateoffilingoftheapplication
inthetechnologytransferarrangement,thegrant or 3 years from the date of the patent
of a license shall not prevent the licensor from whicheverislater.(Sec.93inrelationto
grantingfurtherlicensestothirdpersonnorfrom Sec.94)
exploiting the subject matter of the technology
transferarrangementhimself(Sec.89,IPC). 6. Where the demand for patented drugs
and medicines is not being met to an
Q:Whocangrantacompulsorylicense? adequate extent and on reasonable
terms, as determined by the Secretary
A: of the Department of Health (Sec. 10,
R.A.9502)

213

Q: Grounds for cancellation of the compulsory J.ASSIGNMENTANDTRANSMISSIONOFRIGHTS
license?
A: Q:Whataretheformsofassignment?
1. Groundforthegrantofthecompulsory
license no longer exists and is unlikely A:
torecur; 1. Total assignment of entire right, title
orinterestinandtothepatentandthe
2. Licensee has neither begun to supply inventioncoveredthereby.
the domestic market nor made serious 2. Partial
preparationtherefore; a. Separate rights assignment of a
specificright(ex:righttosell)b.
3. Licensee has not complied with the b. Pro Indiviso assignment of an
prescribedtermsofthelicense. aliquot part which results in co
ownership
Q:Cezarworksinacarmanufacturingcompany
owned by Joab. Cezar is quite innovative and Q:Howisthetransferofrightseffected?
loves to tinker with things. With the materials
andpartsofthecar,hewasabletoinventagas A:
saving device that will enable cars to consume 1. Byinheritanceorbequest
less gas. Francis, a coworker, saw how Cezar 2. Licensecontract
createdthedeviceandlikewise,cameupwitha
similar gadget, also using scrap materials and Q: What is the effect of an assignment of a
spare parts of the company. Thereafter, Francis patent?
filedanapplicationforregistrationofhisdevice
with the Bureau of Patents. Eighteen months A:Theassignmentworksasanestoppelsbydeed,
later, Cezar filed his application for the preventingtheassignorfromdenyingthenovelty
registration of his device with the Bureau of andutilityofthepatentedinventionwhensuedy
Patents. theassigneeforinfringement.

Q:Isthegassavingdevicepatentable?Explain. QWhatshouldbetheformofanassignment?

A: Yes because it is new, it involves an inventive A:
stepanditisindustriallyapplicable. 1. Inwriting
2. Acknowledged and certified before a
Q:Assumingthatitispatentable,whoisentitled notarypublicorotherofficerauthorized
tothepatent?What,ifany,istheremedyofthe toperformnotarialacts
losingparty? 3. RecordedintheIPO

A: Francis is entitled to the patent, because he Q: What is the effect if the assignment was not
hadtheearlierfilingdate.TheremedyofCezaris recordedintheIPO?
to file a petition in court for the cancellation of
thepatentofFrancisonthegroundthatheisthe A: A deed of assignment affecting title shall be
true and actual inventor, and ask for his void as against any subsequent purchaser or
substitutionaspatentee.(2005BarQuestion) mortgagee for valuable consideration and
without notice unless, it is so recorded in the
Q: Supposing Albert Einstein were alive today Office, within three (3) months from the date of
andhefiledwiththeIntellectualPropertyOffice said instrument, or prior to the subsequent
(IPO) an application for patent for his theory of purchaseormortgage.Evenwithoutrecordal,the
relativity expressed in the formula E=mc2. The instrumentsarebindingupontheparties.
IPO disapproved Einstein's application on the
ground that his theory of relativity is not Q: May a licensee maintain a suit for
patentable.IstheIPO'sactioncorrect? infringement?

A: Yes, the IPOs action is correct. Section 22 of A:
theIntellectualPropertyLawexpresslystatesthat GR: Only the patentees, his heirs, assignee,
discoveries, scientific theories and mathematical grantee or personal representatives may bring
methodsareamongthosematterswhicharenot anactionforinfringement.
patentable.(2006BarQuestion)
214
MERCANTILELAWTEAM:
XPN: If the licensing agreement provides that tradename in the Philippines and that it had
the licensee may bring an action for been using the same in its restaurant business.
infringement or if he was authorized to do so Shangrila Corporation counters that it is an
by the patentee through a special power of affiliate of an international organization which
attorney. has been using such logo and tradename
"Shangrila" for over 20 years. However,
III.TRADEMARKS Shangrila Corporation registered the tradename
and logo in the Philippines only after the suit
A.DEFINITIONOFMARKS,COLLECTIVEMARKS, wasfiled.
TRADENAMES
Whichofthetwocorporationshasabetterright
Q: What is a trademark and how does it differ tousethelogoandthetradename?Explain.
fromatradename?
A: S Development Corporation has a better right
A: Any visible sign capable of distinguishing the to use the logo and tradename, since it was the
goods(trademark)orservices(servicemark)ofan firsttoregisterthelogoandtradename.
enterprise.Atradenameisanameordesignation
identifyingordistinguishinganenterprise. AlternativeAnswer:
S Development Corporation has a better right to
TRADEMARK TRADENAME use the logo and tradename, because its
Anaturalorartificial certificate of registration upon which the
Goodsorservices
personwhodoes infringement case is based remains valid and
offeredbyaproprietor
businessandproduces subsistingforaslongasithasnotbeencancelled.
orenterpriseare
orperformsthegoods (ShangrilaInternationalHotelManagementv.CA,
designatedby
orservicesdesignated G.R. No. 111580, June 21, 2001) (2005 Bar
trademark(goods)or
bytrademarkorservice Question)
servicemarks(services).
mark.
Referstobusiness and Q: How does the international affiliation of
Referstothegoods.
itsgoodwill.
ShangrilaCorporationaffecttheoutcomeofthe
Acquiredonly by
Neednotberegistered. dispute?Explain.
registration.

A:SinceShangrilaCorporationisnottheownerof
Q:Whatisacollectivemark?
thelogoandtradenamebutismerelyanaffiliate
of the international organization which has been

A:A"collectivemark"orcollectivetradename"is
usingthemitisnottheowneranddoesnothave
amarkortradenameusedbythemembersofa
therightsofanowner.(Sec.147,IPC)
cooperative, an association or other collective

groupororganization.(Sec.40,R.A.166)
AlternativeAnswer:
The international affiliation of Shangrila

Q:Whatarethefunctionsoftrademark?
Corporationshallhavenoeffectontheoutcome
of the dispute.Section 8 of the Paris Convention

A:
provides that "there is no automatic protection
1. To point out distinctly the origin or
affordedanentitywhosetradenameisallegedto
ownership of the articles to which it is
be infringed through the use of that name as a
affixed.
trademark by a local entity." (Kabushi Kaisha

Isetan v. IAC, G.R. No. 75420, Nov. 15, 1991)
2. To secure to him who has been
(2005BarQuestion)
instrumental in bringing into market a

superiorarticleormerchandisethefruit
Q: What are the salient features of the Paris
ofhisindustryandskill
conventionoftrademarks?

3. To prevent fraud and imposition.
A:
(Etepha v. Director of Patents, G.R. No.
1. National Treatment Principle foreign
L20635,Mar.31,1966)
nationals are to be given the same

treatment in each of the member
Q: S Development Corporation sued Shangrila
countries as that country makes
Corporation for using the "S" logo and the
availableinitsowncitizens.
tradename"Shangrila".Theformerclaimsthatit

was the first to register the logo and the

215

2. Right of Priority any person who has Pilsen in Czechoslovakia. Pilsen is a primarily
duly filed registration for trademark geographically descriptive word, hence, non
shall enjoy a right of priority of 6 registrable and not appropriable by any beer
months(Rule203,TrademarkRules) manufacturer (Asia Brewery, Inc. v. CA, G.R. No.
103543,July5,1993).
3. ProtectionagainstUnfairCompetition
Q: Who may file an opposition to trademark
4. Protection of Tradenames protected registrationandonwhatground?
in all countries without obligation of
filingorregistration. A: Any person who believes that he would be
damagedbytheregistrationofamarkmay,upon
5. ProtectionofWellKnownMarks paymentoftherequiredfeeandwithinthirty(30)
days after the publication referred to in
B.ACQUISITIONOFOWNERSHIPOFMARK Subsection 133.2, file with the Office an
oppositiontotheapplication.(Sec.134,IPC)
Q:Howaremarksacquired?
Q: Laberge, Inc., manufactures and markets
A:Marksareacquiredsolelythroughregistration. aftershave lotion, shaving cream, deodorant,
(Sec.122,IPC) talcum powder and toilet soap, using the
trademark PRUT, which is registered with the
Q:Whatmarksmayberegistered? Phil. Patent Office. Laberge does not
manufacture briefs and underwear and these
A: Any word, name, symbol, emblem, device, items are not specified in the certificate of
figure, sign, phrase, or any combination thereof registration. JG who manufactures briefs and
exceptthoseenumeratedunderSection123,IPC. underwear, wants to know whether, under our
laws, he can use and register the trademark
Q: What are the requirements for a mark to be PRUTE for his merchandise. What is your
registered? advice?

A: A: Yes, he can use and register the trademark
1. A visible sign (not sounds or scents); PRUTE for his merchandise. The trademark
and registeredinthenameofLabergeInc.coversonly
2. Capable of distinguishing ones goods aftershave lotion, shaving cream, deodorant,
andservicesfromanother. talcumpowderandtoiletsoap.Itdoesnotcover
briefsandunderwear.Thelimitofthetrademark
Q:Whatisthedoctrineofsecondarymeaning? isstatedinthecertificateissuedtoLabergeInc.It
doesnotincludebriefsandunderwearwhichare
A: This doctrine is to the effect that a word or different products protected by Laberges
phrase originally incapable of exclusive trademark. JG can register the trademark
appropriationwithreferencetoanarticleonthe PRUTE to cover its briefs and underwear
market, because it is geographical or otherwise (FabergeInc.v.IAC,G.R.No.71189,Nov.4,1992)
descriptive,mayneverthelessbeusedexclusively (1994BarQuestion)
by one producer with reference to his article so
long as in that trade and to that branch of the C.ACQUISITIONANDOWNERSHIPOFTRADE
purchasing public, the word or phrase has come NAME
tomeanthatthearticlewashisproduct.(G.and
C.MerriamCo.v.Saalfield,198F.369,373,cited Q:Howaretradenamesacquired?
in Ang v. Teodoro, G.R. No. L48226, Dec. 14,
1942) A: Trade names or business names are acquired
through adoption and use. Registration is not
Q: Is there an infringement of trademark when required.(Sec.165,IPC)
two similar goods use the same words, PALE
PILSEN?

A: No, because pale pilsen are generic words
descriptive of the color (pale) and of a type of
beer(pilsen),whichisalightbohemianbeerwith
strong hops flavor that originated in the City of
216
MERCANTILELAWTEAM:
D.NONREGISTRABLEMARKS designate the goods or services in

everyday language and established
Q:Whatmarksmaynotberegistered? tradepractice

A: 10. Consists exclusively that may serve in
1. Consists of immoral, deceptive or trade to designate the kind, quality,
scandalous matter or falsely suggest a quantity, intended purpose, value,
connection with persons, institutions, geographical origin, time or production
beliefs,ornationalsymbols of the goods or rendering of the
services, or other characteristics of the
2. Consists of the flag or coat of arms or goodsorservices
other insignia of the Philippines or any
of its political subdivisions, or of any 11. Consists of shapes that may be
foreignnation necessitated by technical factors or by
the nature of the goods themselves or
3. Consistsofaname,portraitorsignature factorsthataffecttheirintrinsicvalue
identifying a particular living individual
except by his written consent, or the 12. Consists of color alone, unless defined
name, signature, or portrait of a byagivenform;or
deceased President of the Philippines,
during the life of his widow except by 13. Is contrary to public order or morality.
writtenconsentofthewidow (Sec.123)

4. Identical with a registered mark E.PRIORUSEOFMARKASAREQUIREMENT
belonging to a different proprietor or a
mark with an earlier filing or priority Q:Istheprioruseofthemarkstillarequirement
date,inrespectof: forregistration?
1. Thesamegoodsorservices,or
2. Closely related goods or services, A: No. Actual prior use in commerce in the
or Philippineshasbeenabolishedasaconditionfor
3. If it nearly resembles such a mark theregistrationofatrademark.(RA8293)
as to be likely to deceive or cause
confusion; Q:Whenisnonuseexcused?

5. Isidenticalwithaninternationallywell A:
known mark, whether or not it is 1. If caused by circumstances arising
registered here, used for identical or independentlyofthewilloftheowner.
similargoodsorservices Lackoffundsisnotanexcuse.
2. Ausewhichdoesnotalteritsdistinctive
6. Isidenticalwithaninternationallywell character though the use is different
known mark which is registered in the fromtheforminwhichitisregistered.
Philippines with respect to nonsimilar 3. Use of mark in connection with one or
goods or services. Provided, that the more of the goods/services belonging
interestsoftheowneroftheregistered to the class in which the mark is
mark are likely to be damaged by such registered.
use 4. Theuseofamarkbyacompanyrelated
totheapplicant/registrant.
7. Is likely to mislead the public as to the 5. The use of a mark by a person
nature, quality, characteristics or controlled by the registrant. (Section
geographical origin of the goods or 152,IPC)
services

8. Consists exclusively of signs that are
generic for the goods or services that
theyseektoidentify

9. Consists exclusively of signs that have
become customary or usual to
217

F.TESTTODETERMINECONFUSINGSIMILARITY misleading similarity in general appearance, not
BETWEENMARKS similarity of trademarks. (Converse Rubber Co. v.
Jacinto Rubber & Plastics Co., G.R. Nos. 27425,
Q: What are the tests in determining whether 30505,Apr.28,1980)(1996BarQuestion)
thereisatrademarkinfringement?
Q: What is the socalled related goods
A: principle?
1. Dominancy test Focuses on the
similarity of the prevalent features of A:Goodsarerelatedwhenthey;1)belongtothe
the competing marks. If the competing same class or have the same descriptive
trademark contains the main or properties; 2) when they possess the same
essential or dominant features of physical attributes or essential characteristics
another, and confusion is likely to withreferencetotheirform,composition,texture
result, infringement takes place. (Asia orquality.
Brewery v. CA, G.R. No. 103543, 5 July
1993) Q:Whatistheruleofidemsonans?

2. Totality or holistic test Confusing A: Two names are said to be "idem sonantes" if
similarity is to be determined on the the attentive ear finds difficulty in distinguishing
basis of visual, aural, connotative them when pronounced. (Martin v. State, 541
comparisons and overallimpressions S.W.2d605)
engendered by the marks in
controversyastheyareencounteredin Note:Similarityofsoundissufficienttorulethatthe
themarketplace. two marks are confusingly similar when applied to
merchandise of the same descriptive properties.
Note: The dominancy test only relies on visual (MarvexCommercialv.DirectorofPatent,G.R.No.
comparisons between two trademarks whereas the L19297,Dec.22,1966)
totality or holistic test relies not only on the visual
but also on the aural and connotative comparisons Q: What are the types of confusion that arise
and overall impressions between the two from the use of similar or colorable imitation
trademarks. (Societe Des Produits Nestl, S.A. v. CA, marks?
G.R.No.112012,Apr.4,2001)
A:
Q: N Corporation manufactures rubber shoes 1. Confusionofgoods(productconfusion);
under the trademark Jordann which hit the and
Philippine market in 1985, and registered its 2. Confusion of business (source or origin
trademark with the Bureau of Patents, confusion). (McDonalds Corporation v.
Trademarks and Technology in 1990. PK L.C.BigMakBurger,Inc.,etal.,G.R.No.
Company also manufactures rubber shoes with 143993,Aug.18,2004)
the trademark Javorski which it registered
withBPTTTin1978.In1992,PKCoadoptedand Note: While there is confusion of goods when the
copied the design of N Corporations Jordann productsarecompeting,confusionofbusinessexists
rubber shoes, both as to shape and color, but when the products are noncompeting but related
retained the trademark Javorski on its enoughtoproduceconfusionofaffiliation.
products. May PK Company be held liable to N
Co?Explain. Q:Whatiscolorableimitation?

A: PK Co may be liable for unfairly competing A: Such a close or ingenious imitation as to be
against N Co. By copying the design, shape and calculatedtodeceiveordinarypersons,orsucha
color of N Corporations Jordann rubber shoes resemblance to the original as to deceive an
and using the same in its rubber shoes ordinary purchaser giving such attention as a
trademarked Javorski, PK is obviously trying to purchaser usually gives, as to cause him to
pass off its shoes for those of N. It is of no purchase the one supposing it to be the other.
moment that the trademark Javorski was (Societe des Produits Nestl, S.A. v. CA, G.R. No.
registered ahead of the trademark Jordann. 112012,Apr.4,2001)
Priorityinregistrationisnotmaterialinanaction
for unfair competition as distinguished from an
actionforinfringementoftrademark.Thebasisof
anactionforunfaircompetitionisconfusingand
218
MERCANTILELAWTEAM:
G.WELLKNOWNMARKS Q: What are the rights of a registered mark

owner?
Q: What constitutes an internationally well
knownmark? A:
1. Protection against reproduction, or
A: imitation or unauthorized use of the
1. Considered by the competent authority mark(infringementofmark)
of the Philippines to be wellknown 2. Tostopentryofimportedmerchandise
international and in the Philippines as into the country containing a mark
the mark of a person other than the identical or similar to the registered
applicantorregistrant mark

2. Need not be used or registered in the 3. Totransferorlicenseoutthemark.
Philippines

3. Need not be known by the public at I.USEBYTHIRDPARTIESOFNAMES,ETC.
large but only by relevant sector of the SIMILARTOREGISTEREDMARK
public.
Q: What is the effect of use of Indications by
Q: What does the law provide as regards third parties for purposes other than those for
internationallywellknownmarks? whichthemarkisused?

A: A:Registrationofthemarkshallnotconferonthe
GR: Prohibition on subsequent registration registered owner the right to preclude third
does not include services and goods of parties from using bona fide their names,
differentnatureorkind. addresses,pseudonyms,ageographicalname,or
exact indications concerning the kind, quality,
XPN: quantity, destination, value, place of origin, or
1. Iftheinternationallywellknownmarkis timeofproductionorofsupply,oftheirgoodsor
not registered in the Philippines, the services.
application for registration of a
subsequent or similar mark can be J.INFRINGEMENTANDREMEDIES
rejected only if the goods or services
specified in the application are similar Q:Whatistrademarkinfringement?
to those of the internationally well
knownmark A: The use without consent of the trademark
owner of any a) reproduction, b) counterfeit, c)
2. If the internationally wellknown mark copy or d) colorable imitation of any registered
is registered in the Philippines, the mark or tradename in connection with the sale,
application for registration of a offering for sale, or advertising of any goods,
subsequent or similar mark can be business or services on or in connection with
refused even if the goods or services which such use is likely to cause confusion or
specified in the application are not mistake or to deceive purchasers or others as to
identical or similar to those of the thesourceororiginofsuchgoodsorservices,or
internationallywellknownmark identity of such business; or reproduce,
counterfeit, copy or colorably imitate any such
H.RIGHTSCONFERREDBYREGISTRATION markortradenameandapplysuchreproduction,
counterfeit,copyorcolorablelimitationtolabels,
Q: What is the duration of a certificate of signs, prints, packages, wrappers, receptacles or
trademarkregistration? advertisements intended to be used upon or in
connectionwithsuchgoods,businessorservices
A:10years,renewableforaperiodofanother10 (Esso Standard Eastern v. CA, G.R. No. L29971,
years. Each request for renewal must be made Aug.31,1982)
within6monthsbeforeoraftertheexpirationof
theregistration.

219

Q: What are the elements to be established in presumed if a letter R within a circle is
trademarkinfringement? appended) and stop him permanently
fromusingthemark.
A:
1. Thevalidityofthemark 2. Criminaltheownerofthetrademark
2. Theplaintiffsownershipofthemark may ask the court to issue a search
3. The use of the mark or its colorable warrant and in appropriate cases,
imitationbytheallegedinfringerresults remediesavailableshallalsoincludethe
in likelihood of confusion. seizure, forfeiture and destruction of
(McDonaldsCorporationv.L.C.BigMak the infringing goods and of any
Burger, Inc., G.R. No. 143993, Aug 18, materials and implements the
2004) predominant use of which has been in
thecommissionoftheoffense.
Q:Whatismeantbynoncompetinggoods?
3. Administrative This remedy is the
A: Those which, though they are not in actual sameasinpatentinfringementcases.If
competition, are so related to each other that it the amount of damages claimed is not
mightreasonablybeassumedthattheyoriginate less than P200,000.00, the registrant
fromonemanufacturer. maychoosetoseekredressagainstthe
Noncompetinggoods may also be those which, infringer by filing an administrative
beingentirelyunrelated,couldnotreasonablybe action against the infringer with the
assumedtohaveacommonsource.Inthecaseof BureauofLegalAffairs.
related goods, confusion of business could arise
outoftheuseofsimilarmarks;inthelattercase Q: How is the amount of damages in a civil
of nonrelated goods, it could not.The vast actionforinfringementascertained?
majority of courts today follow the modern
theory or concept of "related goods"which the A: The owner of a trademark which has been
court has likewise adopted and uniformly infringedisentitledtoactualdamages:
recognized and applied. (Esso Standard Eastern,
Inc.v.CA,G.R.No.L29971,Aug.31,1982) 1. The reasonable profit which the
complaining party would have made,
Q: Is there infringement even if the goods are hadthedefendantnotinfringedhissaid
noncompeting? rights;or
2. Theprofitwhichthedefendantactually
A: madeoutofinfringement;or
GR:No. 3. The court may award as damages a
reasonable percentage based upon the
XPN:Ifitpreventsthenaturalexpansionofhis amountofgrosssalesofthedefendant
business and, second, by having his business of the value of the services in
reputation confused with and put at the connection with which the mark or
mercy of the second user. (Ang v. Teodoro, tradenamewasissued.
G.R.No.L48226,Dec.14,1942)
Q:Whatcourthasjurisdictionoverviolationsof
Q: What are the remedies of the owner of the intellectualpropertyrights?
trademarkagainstinfringers?
A: It is properly lodged with the Regional Trial
A: Court even if the penalty therefore is
1. Civil both civil and criminal actions imprisonmentoflessthansixyears,orfrom2to
may be filed with the Regional Trial 5 years and a fine ranging from P50,000 to
Courts. The owner of the registered P200,000.
mark may ask the court to issue a
preliminary injunction to quickly Note: R.A. 8293 and R.A. 166 are special laws
prevent infringer from causing damage conferring jurisdiction over violations of intellectual
to his business. Furthermore, the court property rights to the Regional Trial Court. They
willrequireinfringertopaydamagesto shouldthereforeprevailoverR.A.No.7691,whichis
the owner of the mark provided a general law. (Samson v. Daway, G.R. No. 160054
defendant is shown to have had notice 55,July21,2004)
oftheregistrationofthemark(whichis
220
MERCANTILELAWTEAM:
Q: What are the limitations on the actions for Q:Whoareguiltyofunfaircompetition?

infringement?
A:
A: 1. Anyperson,whoissellinghisgoodsand
1. Right of prior user registered mark gives them the general appearance of
shall be without affect against any goods of another manufacturer or
person who, ingood faith, before filing dealer, either as to the goods
orprioritydate,wasusingthemarkfor themselves or in the wrapping of the
purposes of his business. (Sec 159.1, packages in which they are contained,
IPC) or the devices or words thereon, or in
any other feature of their appearance,
2. Relief against publisher injunction which would be likely to influence
against future printing against an purchasers to believe that the goods
innocentinfringerwhoisengagedsolely offered are those of a manufacturer or
in the business of printing the mark. dealer, other than the actual
(Sec.159.2,IPC) manufacturer or dealer, or who
otherwise clothes the goods with such
3. Relief against newspaper injunction appearance as shall deceive the public
against the presentation of advertising and defraud another of his legitimate
matter in future issues of the trade, or any subsequent vendor of
newspaper, magazine or in electronic such goods or any agent of any vendor
communications in case the engagedinsellingsuchgoodswithalike
infringement complained of is purpose;
contained in or is part of paid
advertisement in such materials. (Sec. 2. Any person who by any artifice, or
159.3,IPC) device, or who employs any other
means calculated to induce the false
K.UNFAIRCOMPETITION belief that such person is offering the
services of another who has identified
Q: What distinguishes infringement of suchservicesinthemindofthepublic;
trademarkfromunfaircompetition? or

A: 3. Any person who shall make any false
INFRINGEMENTOF UNFAIR statementinthecourseoftradeorwho
TRADEMARK COMPETITION shall commit any other act contrary to
Thepassingoffofones good faith of a nature calculated to
Unauthorizeduseofa
goodsasthoseof discreditthegoods,businessorservices
trademark.
another. ofanother.(Sec.168.3)
Fraudulentintentis Fraudulentintentis
unnecessary. essential. Q:Isthelawonunfaircompetitionbroaderthan
Priorregistrationofthe Registrationisnot thelawontrademark?
trademarkisa necessary.(DelMonte
prerequisitetothe Corp.v.CA,G.R.No. A:Yes.Forthelatter(trademarkinfringement)is
action. 78325,Jan.23,1990)
more limited but it recognizes a more exclusive
right derived from the trademark adoption and
Q: What is the right protected under unfair registration by the person whose goods or
competition? businessisfirstassociatedwithit.Hence,evenif
one fails to establish his exclusive property right
A:Apersonwhohasidentifiedinthemindofthe to a trademark, he may still obtain relief on the
publicthegoodshemanufacturesordealsin,his ground of his competitors unfairness or fraud.
business or services from those of others, Conduct constitutes unfair competition if the
whetherornotaregisteredmarkisemployed,has effectistopassoffonthepublicthegoodsofone
apropertyrightinthegoodwillofthesaidgoods, man as the goods of another. (Mighty
business or services so identified, which will be Corporation v. E. & J. Gallo Winery, G.R. No.
protected in the same manner as other property 154342,July14,2004)
rights.(Sec.168.1,IPC)

221

Q:Whataretheelementsofanactionforunfair Q: What are the limitations on use of trade
competition? nameorbusinessname?

A: A:Apersonmaynot:
1. Confusing similarity in the general
appearanceofthegoods;and 1. Use any name or designation contrary
topublicorderormorals
Note:Theconfusingsimilaritymayormay
notresultfromsimilarityinthemarks,but 2. Use a name if it is liable to deceive
may result from other external factors in trade circles or the public as to the
the packaging or presentation of the nature of the enterprise identified by
goods. thatname.(Sec.165.1,IPC)

2. Intenttodeceivethepublicanddefraud 3. Subsequentlyuseatradenamelikelyto
acompetitor. misleadthepublicasathirdparty.(Sec.
165.2,b,IPC)
Note: The intent to deceive and defraud
may be inferred from the similarity in 4. Copy or simulate the name of any
appearance of the goods as offered for domestic product (for imported
saletothepublic.Actualfraudulentintent
products).
need not be shown. (McDonalds

Corporationv.L.C.BigMakBurger,Inc.,et
5. Copy or simulate a mark registered in
al.,G.R.No.143993,Aug.18,2004)
accordance with the provisions of IPC

(forimportedproducts).
Q: The NBI found that SG Inc.is engaged in the

reproduction and distribution of counterfeit
6. Use mark or trade name calculated to
"playstation games" and thus applied with the
induce the public to believe that the
Manila RTC warrants to search respondent's
article is manufactured in the
premises in Cavite. RTC granted such warrants
Philippines,orthatitismanufacturedin
andthus,theNBIservedthesearchwarrantson
any foreign country or locality other
the subject premises. SG Inc. questioned the
than the country or locality where it is
validity of the warrants due to wrong venue
infactmanufactured.
since the RTC of Manila had no jurisdiction to

issue a search warrant enforceable in Cavite. Is
Note: Items 4, 5 and 6 only applies to
thecontentionofSGInc.correct?
imported products and those imported

articles shall not be admitted to entry at
A: No, unfair competition is a transitory or any customhouse of the Philippines (Sec.
continuingoffenseunderSection168ofRepublic 166,IPC).
ActNo.8293.Assuch,petitionermayapplyfora

searchwarrantinanycourtwhereanyelementof
Q:Howisthechangeintheownershipofatrade
theallegedoffensewascommitted,includingany
namemade?
of the courts within Metro Manila and may be
validly enforced in Cavite. (Sony Computer
Entertainment Inc. v. Supergreen Inc. G.R. No. A: It shall be made with the transfer of the
161823,Mar.22,2007) enterprise or part thereof identified by that
name.(Sec.165.4,IPC)
L.TRADENAMESORBUSSINESSNAMES
M.COLLECTIVEMARKS
Q:Whatisatradenameorbusinessname?
Q:Whatisacollectivemark?
A: Any individual name or surname, firm name,
device nor word used by manufacturers, A:A"collectivemark"orcollectivetradename"
industrialists, merchants, and others to identify isamarkortradenameusedbythemembersof
their businesses, vocations or occupants a cooperative, an association or other collective
(Converse rubber Corp. vs. Universal Rubber groupororganization.(Sec.40,R.A.166)
Products, GR No. L27425, L30505, April 28,
1980).

222
MERCANTILELAWTEAM:
Q:Whatshouldanapplicationforregistrationof c. If its registration was obtained

acollectivemarkcontain? fraudulently or contrary to the
provisionsoftheIPC;
A: d. Iftheregisteredmarkisbeingused
1. Theapplicationshalldesignatethemark by, or with the permission of, the
asacollectivemark registrant so as to misrepresent
2. Accompanied by a copy of the thesourceofthegoodsorservices
agreement,ifany,governingtheuseof onorinconnectionwithwhichthe
thecollectivemark(Sec.167.2,IPC) markisused;
e. Nonuse of the mark within the
Q:Whatarethegroundsforthecancellationof Philippines, without legitimate
collectivemarks? reason, for an uninterrupted
periodof3years.
A:
1. The Court shall cancel the registration IV.COPYRIGHTS
of a collective mark if the person
requesting the cancellation proves that Q:Whatiscopyright?
only the registered owner uses the
mark, A: A right over literary and artistic works which
are original intellectual creations in the literary
2. Or that he uses or permits its use in and artistic domain protected from the moment
contravention of the agreements ofcreation.(Sec.171.1,IPC)
referredtoinSubsection166.2,
A.BASICPRINCIPLES
3. Or that he uses or permits its use in a
mannerliabletodeceivetradecirclesor Q:Whataretheelementsofcopyrightability?
the public as to the origin or any other
commoncharacteristicsofthegoodsor
servicesconcerned(Sec167.3). A:
1. OriginalityMusthavebeencreatedby
Note: The registration of a collective mark, or an the authors own skill, labor, and
application therefor shall not be the subject of a judgment without directly copying or
licensecontract. evasivelyimitatingtheworkofanother.
(Ching Kian Chuan v. CA, G.R. No.
N.CRIMINALPENALTIES 130360,Aug.15,2001)

Q: What are the criminal penalties for unfair
2. Expression Must be embodied in a
competition, infringement, false designation of
medium sufficiently permanent or
originandfalserepresentations?
stable to permit it to be perceived,
reproduced or communicated for a

A: A penalty of imprisonment from 2 years to
periodmorethanatransitoryduration.
5and a fine ranging from P50,000 to P200,000

(Sec.170,IPC.)
Q:Whataretheelementsoforiginality?

Q:Cantrademarkregistrationbecancelled?
A:
1. It is independently created by the

A:Yes,byanypersonwhobelievesthathewillbe
author,and
damagedbytheregistrationofthemark:
2. It possesses some minimal degree of
creativity
1. Within 5 years, from the date of the

registrationofthemark;or
Q:Whendoescopyrightvest?

2. Atanytime;
A: Works are protected from the time of their
a. Iftheregisteredmarkbecomesthe
creation, irrespective of their mode or form of
generic name for the goods or
expression,aswellasoftheircontent,qualityand
services, or a portion thereof, for
purpose.
whichitisregistered;

b. Ifthemarkhasbeenabandoned;

223

B.COPYRIGHTABLEWORKS Q:P&Dwasgrantedacopyrightonthetechnical
drawings of light boxes as "advertising display
Q:Whatarecopyrightableworks? units". SMI, however, manufactured similar or
identical to the light box illustrated in the
A: technical drawings copyrighted by P&D for
1. LiteraryandArtisticWorks leasingouttodifferentadvertisers.Wasthisan
BOLDMANGASPAPCO infringement of P&Ds copyright over the
technicaldrawings?
a. Books, pamphlets, articles and
otherwritings A: No, P&Ds copyright protection extended only
b. Lectures, sermons, addresses, tothetechnicaldrawingsandnottothelightbox
dissertations prepared for Oral itself. The light box was not a literary or artistic
delivery, whether or not reduced piece which could be copyrighted under the
inwritingorothermaterialform copyright law. If SMI reprinted P&Ds technical
c. Letters drawings for sale to the public without license
d. Dramatic,choreographicworks from P&D, then no doubt they would have been
e. Musicalcompositions guilty of copyright infringement. Only the
f. WorksofArt expression of an idea is protected by copyright,
g. PeriodicalsandNewspapers not the idea itself. If what P&D sought was
h. Works relative to Geography, exclusivity over the light boxes, it should have
topography, architecture or instead procured a patent over the light boxes
science itself. (Pearl and Dean Inc. v. Shoe Mart Inc., GR
i. WorksofAppliedart No.148222,Aug.15,2003)
j. Works of a Scientific or technical
character Q: What is the difference between collection of
k. Photographicworks workandcollectivework?
l. Audiovisual works and
cinematographicworks A:
m. Pictorial illustrations and COLLECTIONOFWORK COLLECTIVEWORK
advertisements
n. Computerprograms;and Itisnotnecessarythat Thereisanagreement
o. Other literary, scholarly, scientific thereisanagreement. wherebytheauthors
Individualcontribution boundthemselvesnotto
andartisticworks.(Sec.172.1,IPC)
iscapableofcopyright beidentifiedwiththe

protection. work.
2. DerivativeWorks

Q: Juan Xavier wrote and published a story
a. Dramatizations, translations,
similar to an unpublished copyrighted story of
adaptations, abridgements,
ManolingSantiago.Itwas,however,conclusively
arrangements, and other
proventhatJuanXavierwasnotawarethatthe
alterations of literary or artistic
story of Manoling Santiago was protected by
works;
copyright. Manoling Santiago sued Juan Xavier

for infringement of copyright. Is Juan Xavier
b. Collectionsofliterary,scholarly,or
liable?
artistic works and compilations of

dataandothermaterialswhichare
A: Yes. Juan Xavier is liable for infringement of
original by reason of the selection
copyright. It is not necessary that Juan Xavier is
or coordination or arrangement of
aware that the story of Manoling Santiago was
theircontents.(Sec.173)
protected by copyright. The work of Manoling

Santiago is protected from the time of its
Note:DerivativeWorksshallbeprotected
as new works, provided that such new creation.(1998BarQuestion)
work shall not affect the force of any
subsisting copyright upon the original Note: There will still be originality sufficient to
worksemployedoranypartthereof,orbe warrantcopyrightprotectioniftheauthor,through
construedtoimplyanyrighttosuchuseof hisskillandeffort,hascontributedadistinguishable
theoriginalworks,ortosecureorextend variation from the older works. In such a case, of
copyright in such original works. (Sec. course, only those parts which are new are
173.2,IPC) protected by the new copyright. Hence, in such a
case,thereisnocaseofinfringement.JuanXavieris
224
MERCANTILELAWTEAM:
no less an author because others have preceded prosecutor to dismiss the case for lack of
him. probable cause. Was the decision of the DOJ
Secretarycorrect?
C.NONCOPYRIGHTABLEWORKS
A:Yes,theformatofashowisnotcopyrightable.
Q:Whatarethesubjectsnotprotected? Thecopyrightlawenumeratestheclassesofwork
entitled to copyright protection.The format or
A: mechanicsofatelevisionshowisnotincludedin
1. Idea, procedure, system, method or the list of protected works. For this reason, the
operation, concept, principle, discovery protection afforded by the law cannot be
ormeredataassuch extended to cover them. Copyright, in the strict
2. News of the day and other items of senseoftheterm,ispurelyastatutoryright.Itis
pressinformation a new or independent right granted by the
3. Any official text of a legislative, statute, and not simply a preexisting right
administrativeorlegalnature,aswellas regulatedbythestatute.Beingastatutorygrant,
anyofficialtranslationthereof the rights are only such as the statute confers,
4. Pleadings and may be obtained and enjoyed only with
5. Decisions of courts and tribunals this respect to the subjects and by the persons, and
refers to original decisions and not to on terms and conditions specified in the statute.
annotated decisions such as the SCRA The copyright does not extend to the general
orSCADasthesealreadyfallunderthe concept or format of its dating game show.
classificationofderivativeworks,hence (Joaquinv.Drilon,G.R.No.108946,Jan.28,1999)
copyrightable
6. Any work of the Government of the Q: Rural is a certified public utility providing
Philippines telephone service to several communities in
Manila. It obtains data for the directory from
GR: Conditions imposed prior the subscribers, who must provide their names and
approval of the government agency or addresses to obtain telephone service. Feist
officewhereintheworkiscreatedshall Publications, Inc., is a publishing company that
be necessary for exploitation of such specializes in areawide telephone directories
work for profit. Such agency or office, covering a much larger geographic range than
may, among other things, impose as directories such as Rural's. Feist extracted the
conditionthepaymentofroyalties. listingsitneededfromRuralssdirectorywithout
itsconsent.Aredirectoriescopyrightable?
XPN: No prior approval or conditions
shall be required for the use of any A: No, directories are not copyrightable and
purpose of statutes, rules and therefore the use of them does not constitute
regulations, and speeches, lectures, infringement. The Intellectual Property Code
sermons, addresses, and dissertations, mandates originality as a prerequisite for
pronounced,read,orrenderedincourts copyright protection. This requirement
of justice, before administration necessitates independent creation plus a
agencies,indeliberativeassembliesand modicum of creativity. Since facts do not owe
inmeetingsofpubliccharacter.(Section their origin to an act of authorship, they are not
176,IPC) original, and thus are not copyrightable. A
compilation is not copyrightable per se, but is
7. TV programs, format of TV programs copyrightableonlyifitsfactshavebeen"selected,
(Joaquinv.Drilon,G.R.No.108946,Jan. coordinated, or arranged in such a way that the
28,1999) resulting work as a whole constitutes an original
8. Systemsofbookkeeping;and work of authorship." Thus, the statute envisions
9. Statutes. that some ways of selecting, coordinating, and
arranging data are not sufficiently original to
Q: BJ Productions, Inc. (BJPI) is the trigger copyright protection. Even a compilation
holder/grantee of a copyright of Rhoda and that is copyrightable receives only limited
Me, a dating game show aired from 1970 to protection, for the copyright does not extend to
1977. Subsequently, however, RPN aired the facts contained in the compilation. (Feist
gameshowItsaDate,whichwasproducedby Publications, Inc. v. Rural Telephone Service Co.,
IXL Productions, Inc. (IXL). As such, an 499U.S.340)
informationforcopyrightinfringementwasfiled
against RPN. The DOJ Secretary directed the

225

D.RIGHTSOFACOPYRIGHTOWNER own creation or in a distorted
versionofhiswork.(Sec.193,IPC)
Q:Whatisthepresumptionofauthorship?
3. Droit de suite (Right to proceeds in
A:Thenaturalpersonwhosenameisindicatedon subsequent transfers or follow up
aworkintheusualmannerastheauthorshall,in rights) This is an inalienable right of
the absence of proof to the contrary, presumed theauthororhisheirstoreceivetothe
to be the author of the work. This is applicable extent of 5% of the gross proceeds of
even if the name is a pseudonym, where the thesaleorleaseofaworkofpaintingor
pseudonymleavesnodoubtastoidentityofthe sculpture or of the original manuscript
author.(Sec.219.1,IPC) ofawriterorcomposer,subsequentto
itsfirstdispositionbytheauthor.
The person or body corporate, whose name
appears on the audiovisual work in the usual Thefollowingworksarenotcovered:
manner shall, in the absence of proof to the a. Prints
contrary, be presumed to be the maker of said b. Etchings
work.(Sec.219.2,IPC) c. Engravings
d. Worksofappliedart
Q:Whataretherightsofanauthor? e. Similar works wherein the author
primarily derives gain from the
A: proceeds of reproductions. (Sec.
1. EconomicrightsTherighttocarryout, 201,IPC)
authorizeorpreventthefollowingacts:
Q: ABC is the owner of certain musical
a. Reproduction of the work or compositions among which are the songs
substantialportionthereof entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay
b. Carryout derivative work Akin,""SapagkatKamiAyTaoLamang"and"The
(dramatization, translation, Nearness Of You. Soda Fountain Restaurant
adaptation, abridgement, hired a combo with professional singers to play
arrangement or other and sing musical compositions to entertain and
transformationofthework) amuse customers. They performed the above
c. First distribution of the original mentioned compositions without any license or
andeachcopyoftheworkbysale permission from ABC to play or sing the same.
or other forms of transfer of Accordingly,ABCdemandedfromSodaFountain
ownership payment of the necessary license fee for the
d. Rentalright playing and singing of aforesaid compositions
e. Publicdisplay but the demand was ignored. ABC filed an
f. Publicperformance infringement case against Soda Fountain. Does
g. Other communications to the the playing and singing of musical compositions
public. inside an establishment constitute public
performanceforprofit?
2. Moral rights For reasons of
professionalism and propriety, the A:Yes.ThepatronsoftheSodaFountainpayonly
authorhastheright: for the food and drinks and apparently not for
a. To require that the authorship of listening to the music, but the music provided is
the works be attributed to him for the purpose of entertaining and amusing the
(attributionright) customers in order to make the establishment
b. To make any alterations of his moreattractiveanddesirable.Fortheplayingand
work prior to, or to withhold it singing the musical compositions involved, the
frompublication combo was paid as independent contractors by
c. Righttopreserveintegrityofwork, Soda Fountain. It is therefore obvious that the
objecttoanydistortion,mutilation expenses entailed thereby are added to the
orothermodificationwhichwould overhead of the restaurant which are either
be prejudicial to his honor or eventually charged in the price of the food and
reputation;and drinksortotheoveralltotalofadditionalincome
d. To restrain the use of his name producedbythebiggervolumeofbusinesswhich
withrespecttoanyworknotofhis the entertainment was programmed to attract.
Consequently, it is beyond question that the
226
MERCANTILELAWTEAM:
playing and singing of the combo in defendant Note: The person/s to be charged with the
appellee'srestaurantconstitutedperformancefor posthumous enforcement of moral rights shall be
profit. (FILSCAP v. Tan, G.R., No. L36402, Mar. named in writing to be filed with the National
16,1987) Library. In default of such person or persons, such
enforcement shall devolve upon either the author's
Q:MalangSantosdesignedforAmbassadorNeri heirs,andindefaultoftheheirs,theDirectorofthe
forhispersonalchristmasgreetingsfortheyear NationalLibrary.(ibid.)
1959 a christmas card depicting a Philippine
rural Christmas time scene. The following year Q:Whataretheexceptionstomoralrights?
McCullough Printing Company, without the
knowledge and authority of Santos, displayed A:
the very design in its album of Christmas cards a. Absentanyspecialcontractatthetime
andoffereditforsale.Santosfiledforcopyright creatorlicenses/permitsanothertouse
infringement contending that the publication of hiswork,thefollowingaredeemednot
hisdesignwaslimitedasitwasintendedonlyfor to contravene creators moral rights,
Ambassador Neris use, hence, it could not be provided they are done in accordance
used for public consumption. Is there copyright withreasonablecustomarystandardsor
infringement? requisitesofthemedium:
a. Editing
A:No.Iftherewereaconditionthatthecardsare b. Arranging
to be limitedly published, then Ambassador Neri c. Adaptation
would be the aggrieved party, and not Santos. d. Dramatization
And even if there was such a limited publication e. Mechanical and electric
or prohibition, the same was not shown on the reproduction
faceofthedesign.Whenthepurposeisalimited
publication, but the effect is general publication, b. Complete destruction of work
irrevocable rights thereupon become vested in unconditionallytransferredbycreators.
thepublic,inconsequenceofwhichenforcement (Sec.197,IPC)
of the rights under a copyright becomes
impossible. (Malang v. McCullough Printing Q:Canmoralrightsbewaived?
Company,G.R.No.L19439,Oct.31,1964)
A:
Q: May an author be compelled to perform his GR: Moral rights can be waived in writing,
contract? expresslysostatingsuchwaiver.

A:Anauthorcannotbecompelledtoperformhis XPN:Eveninwriting,waiverisnotvalidif:
contracttocreateaworkorforthepublicationof 1. Usethenameoftheauthor,titleofhis
his work already in existence. However, he may work, or his reputation with respect to
be held liable for damages for breach of such any version/adaptation of his work,
contract.(Sec.195,IPC) which because of alterations,
substantially tend to injure
Q:Whatisthenatureofmoralrights? literary/artistic reputation of another
author
A: These are personal rights independent from
theeconomicrights.Beingapersonalright,itcan 2. Use name of author in a work that he
onlybegiventoanaturalperson.Hence,evenif didnotcreate
he has licensed or assigned his economic rights,
he continues to enjoy the abovementioned Q:Whataretheneighboringrights?
moral rights. (Amador, Intellectual Property
Fundamentals,2007) A: These are the rights of performers, producers
of sound recording and broadcasting
Q:Whatisthetermofmoralrights? organizations.

A: It shall last during the lifetime of the author
and for fifty (50) years after his death and shall
notbeassignableorsubjecttolicense.(Sec.198,
IPC)

227

Q:Whatisthescopeofaperformersrights? Q: When are performers entitled to additional
remunerationontheirperformance?
A: Performers shall enjoy the following exclusive
rights: A: The performer shall be entitled to an
additionalremunerationequivalenttoatleast5%
1. Asregardstheirperformances,theright of the original compensation he received for the
ofauthorizing: first communication or broadcast in every
a. The broadcasting and other communication to the public or broadcast of a
communication to the public of performance subsequent to the first
theirperformance;and communication or broadcast, unless otherwise
b. The fixation of their unfixed providedinthecontract.(Sec.206,IPC)
performance.
Q:Whatisthescopeoftherightsofproducers
2. The right of authorizing the direct or onsoundrecordings?
indirect reproduction of their
performancesfixedinsoundrecordings, A: Producers of sound recordings shall enjoy the
inanymannerorform; followingexclusiverights:
1. The right to authorize the direct or
3. The right of authorizing the first public indirect reproduction of their sound
distributionoftheoriginalandcopiesof recordings, in any manner or form; the
their performance fixed in the sound placing of these reproductions in the
recording through sale or rental or marketandtherightofrentalorlending
otherformsoftransferofownership;
2. The right to authorize the first public
4. Therightofauthorizingthecommercial distributionoftheoriginalandcopiesof
rental to the public of the original and their sound recordings through sale or
copies of their performances fixed in rental or other forms of transferring
sound recordings, even after ownership;and
distribution of them by, or pursuant to
theauthorizationbytheperformer;and 3. The right to authorize the commercial
rental to the public of the original and
5. The right of authorizing the making copies of their sound recordings, even
available to the public of their after distribution by them by or
performancesfixedinsoundrecordings, pursuant to authorization by the
bywireorwirelessmeans,insuchaway producer.(Sec.208,IPC)
that members of the public may access
themfromaplaceandtimeindividually Note: Fair use and limitations to copyrights shall
chosenbythem.(Sec.203,IPC) apply mutatis mutandis to performers. (Sec. 210,
IPC)
Q:Whatarethemoralrightsofperformers?
Q: What is the scope of the rights of
A: The performer, shall, as regards his live aural broadcastingorganizations?
performances or performances fixed in sound
recordings,havetherighttoclaimtobeidentified A: Broadcasting organizations shall enjoy the
as the performer of his performances, except exclusive right to carry out, authorize or prevent
wheretheomissionisdictatedbythemannerof anyofthefollowingacts:
theuseoftheperformance,andtoobjecttoany 1. Therebroadcastingoftheirbroadcasts
distortion,mutilationorothermodificationofhis 2. The recording in any manner, including
performances that would be prejudicial to his the making of films or the useof video
reputation. tape, of their broadcasts for the
purposeofcommunicationtothepublic
Q:Whenareperformersrightslost? oftelevisionbroadcastsofthesame
3. The use of such records for fresh
A:Onceaperformerhasauthorizedbroadcasting transmissions or for fresh recording.
orfixationofhisperformance.(Sec205,IPC) (Sec.211,IPC)

Note: Fair use and limitations to copyrights shall
applymutatismutandistoperformers.(Ibid.)

228
MERCANTILELAWTEAM:
Q:Whenareneighboringrightsnotapplicable? irrespective of the nationality or

residenceoftheauthors.(Sec.221,
A: IPC)
1. Exclusive use of a natural person for
ownpersonalpurposes 2. Forperfomers
2. Short excerpts for reporting current a. Performers who are nationals of
events thePhilippines;
3. Soleuseforthepurposeofteachingor b. Performers who are not nationals
forscientificresearch of the Philippines but whose
4. Fairuseofthebroadcast performances:
i. Take place in the Philippines;
Q: What are the term of protection given to or
performers, producers and broadcasting ii. Are incorporated in sound
organizations? recordings that are protected
underIPC;or
A: iii. Which has not been fixed in
1. For performances not incorporated in sound recording but are
recordings,50yearsfromtheendofthe carried by broadcast
year in which the performance took qualifying for protection
place;and underIPC.(Sec.222,IPC)

2. For sound or image and sound 3. Ofsoundrecordings
recordings and for performances a. Soundrecordingstheproducersof
incorporatedtherein,50yearsfromthe which are nationals of the
end of the year in which the recording Philippines;and
tookplace. b. Sound recordings that were first
published in the Philippines. (Sec.
3. Incaseofbroadcasts,thetermshallbe 223,IPC)
20 years from the date the broadcast
took place. Theextended termshall be 4. Forbroadcast
applied only to old works with a. Broadcasts of broadcasting
subsisting protection under the prior organizations the headquarters of
law.(Sec.215,IPC) which are situated in the
Philippines;and
Q: To whom are the rights granted to b. Broadcasts transmitted from
copyrightable works applicable (points of transmitters situated in the
attachment)? Philippines.(Sec.224,IPC)

A: Note: The provisions of IPC shall also apply to
1. For literary and artistic works and works, performers, producers of sound
derivativeworks recordings and broadcasting organizatins that
a. Works of authors who are are to be protected by virtue of and in
nationalsof,orhavetheirhabitual accordance with any international convention
residencein,thePhilippines; or other international agreement to which the
Philippines is a party. (Sec. 221.2 and 224.2,
b. Audiovisualworkstheproducerof
IPC)
which has his headquarters or

habitual residence in the
E.RULESONOWNERSHIPOFCOPYRIGHT
Philippines;

c. Works of architecture erected in
Q:Whoownscopyright?
the Philippines or other artistic

worksincorporatedinabuildingor
A:
other structure located in the
1. Author Original literary and artistic
Philippines;
works.(Sec.178.1,IPC)
d. Works first published in the

Philippines;and
2. CoauthorsWorksofjointauthorship;
e. Works first published in another
in the absence of agreement, their
country but also published in the
rightsshallbegovernedbytheruleson
Philippines within thirty days,
coownership.

229

Q:Distinguishcollectiveworkfromjointwork.
Note: If work of joint authorship consists
ofpartsthatcanbeusedseparately,then A:
the author of each part shall be the
COLLECTIVEWORK JOINTWORK
originalownerofthecopyrightinthepart
thathehascreated.(Sec.178.2,IPC) Elementsremain
Separateelementsmerge
unintegratedand
intoaunifiedwhole.
3. In the course of employment, the disparate.
copyrightshallbelongto: Workcreatedby2or
morepersonsatthe
a. The employee, if not a part of his initiativeandunderthe
Workpreparedby2or
regular duties even if the directionofanother
moreauthorswiththe
employee uses the time, facilities with
intentionthattheir
and materials of the employer. theunderstandingthat
contributionsbemerged
(Sec.178.3,IPC) itwillbedisclosedby
intoinseparableor
thelatterunderhis
b. The employer, if the work is the independentpartsofthe
ownnameandthatof
result of the performance of his unitarywhole.
thecontributionsof
regularlyassigned duties, unless naturalpersonswill
there is an agreement, express or NOTbeidentified
implied,tothecontrary.(ibid.) Eachauthorshallenjoy Jointauthorsshallbeco
copyrighttohisown owners.Coownership
4. The person who commissioned the contribution shallapply.
work shall own the work but the Theworkwillbe
copyrighttheretoshallremainwiththe attributedtothe
creator In cases of work pursuant to personunderwhose Jointauthorsshallbe
commission, unless there is a written initiativeanddirection bothentitledtothe
stipulation to the contrary. (Sec. 178.4, itwascreatedunless acknowledgmentas
IPC) thecontributor authorsofthework.
expresslyreserveshis
5. GR: Producer, the author of the right.
scenario, the composer of the music,
thefilmdirector,andtheauthorofthe Q: BR and CT are noted artists whose paintings
worksoadaptedaudiovisualwork. are highly prized by collectors. Dr. DL
commissionedthemtopaintamuralatthemain
XPN: The producers shall exercise the lobby of his new hospital for children. Both
copyrighttoanextentrequiredforthe agreed to collaborate on the project for a total
exhibition of the work in any manner. fee of two million pesos to be equally divided
(Sec.178.5,IPC) between them. It was also agreed that Dr. DL
hadtoprovideallthematerialsforthepainting
6. Writerinrespectofletterssubjectto and pay for the wages of technicians and
theprovisionsofArticle723,CivilCode. laborers needed for the work on the project.
(Sec.178.6,IPC) Assume that the project is completed and both
BR and CT are fully paid the amount of P2M as
7. GR: Publishers deemed artists' fee by DL. Under the law on intellectual
representativesoftheauthorincaseof property, who will own the mural? Who will
anonymousandpseudonymousworks. ownthecopyrightinthemural?Why?Explain.

XPN: When the contrary appears or A: Under Sec. 178.4 of the Intellectual Property
wherethepseudonymoradoptedname Code,incaseofcommissionedwork,thecreator
leaves no doubt as to the authors (in the absence of a written stipulation to the
identity;orauthordiscloseshisidentity. contrary) owns the copyright, but the work itself
belongs to the person who commissioned the
8. Incaseofcollectiveworkscontributor creation. Accordingly, the mural belongs to DL.
is deemed to have waived his right However, BR and CT own the copyright, since
unless he expressly reserves it. (Sec. thereisnostipulationtothecontrary.(1995Bar
196,IPC) Question)

230
MERCANTILELAWTEAM:
Q: What is the principle of automatic 1. Performance of a work, once it has

protection? been lawfully made accessible to the
public, if done privately and free of
A: Works are protected by the sole fact of their charge or for a charitable or religious
creation irrespective of their content, quality or institutionorsociety.
purpose. Such rights are conferred from the
momentofcreation. 2. The making of quotations from a
published work if they are compatible
Q:Whatisthetermofprotectionofcopyright? with fair use and only to the extent
justifiedforthepurpose.
A:
3. Communication to the public by mass
media of articles on current political,
TYPEofWORK DURATION social, economic, scientific or religious
Lifetimeofthecreator topic, lectures, addresses and other
Singlecreation andfor50yearsafter worksofthesamenature
hisdeath
Lifetimeofthelast 4. Aspartofreportsofcurrentevents(e.g.
survivingcocreatorand music played or tunes on the occasion
Jointcreation ofasportingeventandsuchtuneswere
for50yearsafterhis
death. pickedupduringanewcoverageofthe
50yearsafterthedate event).
oftheirfirstpublication;
exceptwherebefore 5. For teaching purposes, provided that
theexpirationofsaid the source and of the name of the
period,theauthors author, if appearing in the work, are
Anonymousor
identityisrevealedoris mentioned.
pseudonymouswork
nolongerindoubt,the
1sttwomentionedrules 6. Recording made in educational
shallapply;orif
institutions of a work included in a
unpublished,50years
broadcast for the use of such
fromtheirmaking.
educational institutions, provided that
Workofanappliedart
suchrecordingmustbedeletedwithina
ofanartisticcreation
reasonable period after they were first
withutilitarianfunctions
broadcast.
orincorporatedina

usefularticlewhether
25yearsfromthetime 7. Themakingofephemeralrecordingsby
madebyhandor
ofthemaking. a broadcasting organization by means
producedonan
industrialscale of its own facilities and for use in its
Audiovisualworks ownbroadcast.

includingthose

producedbyprocess 8. Theusemadeofaworkbyorunderthe
50yearsfromdateof
analogousto directionorcontrolofthegovernment,
publicationand,if
photographyorany by the National Library or by
unpublished,fromthe
processformaking educational, scientific or professional
dateofmaking.
audiovisualrecordings institutions where such use is in the
Lifetimeoftheauthor public interest and is compatible with
NewspaperArticle and50yearsafter.(Sec. fairuse.
213,IPC)
9. The public performance of a work, in a
F.LIMITATIONSONCOPYRIGHT place where no admission fee is
charged.
Q: What are the general limitations on
copyright? 10. Public display of the original or a copy
of the work not made by means of a
A: The following acts shall not constitute film,slide,televisionimageorotherwise
infringementofcopyright: on screen or by means of any other
device or process (e.g. Public display
231

using posters mounted on walls and materials;
displayboards). d. A computer program except as
providedinSection189;and
11. Anyusemadeofaworkforthepurpose e. Any work in cases where
of any judicial proceedings or for the reproduction would unreasonably
giving of professional advice by a legal conflict with a normal exploitation
practitioner. of the work or would otherwise
unreasonably prejudice the
Q:Whataretheotherlimitationsoncopyright? legitimate interests of the author.
(Sec.187,IPC)
A:
1. The fair use of a copyrighted work for 4. Any library or archive whose activities
criticism, comment, news reporting, are not for profit may, without the
teaching including multiple copies for authorizationoftheauthorofcopyright
classroom use, scholarship, research, owner, make a single copy of the work
and similar purposes is not an byreprographicreproduction:
infringement of copyright. (Sec. 185, a. Where the work by reason of its
IPC) fragile character or rarity cannot
belenttouserinitsoriginalform;
Note: Decompilation, which is the b. Where the works are isolated
reproduction of the code and translation articles contained in composite
oftheformsofthecomputerprogramto works or brief portions of other
achieve the interoperability of an published works and the
independentlycreatedcomputerprogram reproductionisnecessarytosupply
with other programs, may also constitute them, when this is considered
fair use (e.g. the software program for expedient, to persons requesting
Windows 7 will be disassembled by a
theirloanforpurposesofresearch
skilled programmer in order to
or study instead of lending the
understand much of the structure and
operationoftheprogram).
volumesorbookletswhichcontain
them;and
2. Copyrightinaworkofarchitectureshall c. Wherethemakingofsuchacopyis
includetherighttocontroltheerection in order to preserve and, if
of any building which reproduces the necessary in the event that it is
wholeorasubstantialpartofthework lost, destroyed or rendered
eitherinitsoriginalformorinanyform unusable, replace a copy, or to
recognizably derived from the original, replace, in the permanent
provided,thatthecopyrightinanysuch collectionofanothersimilarlibrary
work shall not include the right to or archive, a copy which has been
control the reconstruction or lost, destroyed or rendered
rehabilitation in the same style as the unusable and copies are not
original of a building to which that availablewiththepublisher.
copyrightrelates.(Sec.186,IPC)
But it shall not be permissible to
3. Theprivatereproductionofapublished produce a volume of a work published
work in a single copy, where the in several volumes or to produce
reproduction is made by a natural missingtomesorpagesofmagazinesor
person exclusively for research and similar works, unless the volume, tome
private study, shall be permitted, orpartisoutofstock.(Sec.188,IPC)
withouttheauthorizationoftheowner
of copyright in the work but shall not 5. The reproduction in one backup copy
extendtothereproductionof: or adaptation of a computer program
a. Aworkofarchitectureintheform shall be permitted, without the
ofbuildingorotherconstruction; authorizationoftheauthorof,orother
b. An entire book, or a substantial owner of copyright in, a computer
part thereof, or of a musical work program, by the lawful owner of that
in graphic form by reprographic computer program, provided, the copy
means; oradaptationisnecessaryfor:
c. A compilation of data and other
232
MERCANTILELAWTEAM:
a. The use of the computer program Q: What are the factors that should be
inconjunctionwithacomputerfor consideredinordertodeterminefairuse?
thepurpose,andtotheextent,for
which the computer program has A:
beenobtained;and 1. The purpose and character of the use,
b. Archival purposes, and, for the including whether such use is of a
replacementofthelawfullyowned commercial nature or is for nonprofit
copy of the computer program in educationalpurpose;
the event that the lawfully 2. Thenatureofthecopyrightedwork;
obtained copy of the computer 3. The amount and substantiality of the
program is lost, destroyed or portion used in relation to the
renderedunusable.(Sec.187,IPC) copyrightedworkasawhole;and
4. Theeffectoftheuseuponthepotential
6. Theimportationofacopyofaworkby market for or value of the copyrighted
an individual for his personal purposes work.
shall be permitted without the
authorizationoftheauthorof,orother Note: The fact that a work is unpublished shall
owner of copyright in, the work under not by itself bar a finding of fair use if such
thefollowingcircumstances: finding is made upon consideration of all the
a. When copies of the work are not abovefactors.(Sec.182.2,IPC)
availableinthePhilippinesand:
i. Not more than one copy at one Q:Whatisthemustcarryrule?
time is imported for strictly
individualuseonly;or A: Mustcarry rule is another limitation on
ii. The importation is by authority copyright. It obligates operators to carry the
of and for the use of the signals of local channels within their respective
PhilippineGovernment;or systems.Thisistogivethepeoplewideraccessto
iii. The importation, consisting of more sources of news, information, education,
notmorethanthreesuchcopies sports event and entertainment programs other
orlikenessesinanyoneinvoice, than those provided for by mass media and
is not for sale but for the use afforded television programs to attain a well
only of any religious, charitable, informed, wellversed and culturally refined
or educational society or citizenry and enhance their socioeconomic
institution duly incorporated or growth. (ABSCBN Broadcasting Corporation v.
registered, or is for the Philippine Multimedia System, G.R. No. 175769
encouragement of the fine arts, 70,Jan.19,2009)
or for any state school, college,
university, or free public library Q: Ford contracted with H&R Publishing to
inthePhilippines. publish his unwritten memoirs. The agreement
gave H&R the exclusive first serial right to
b. When such copies form parts of license prepublication excerpts. As the memoirs
libraries and personal baggage werenearingcompletion,H&R,asthecopyright
belonging to persons or families holders, negotiated a prepublication licensing
arrivingfromforeigncountriesand agreement with Time Magazine. Shortly before
arenotintendedforsale,provided, the Time article's scheduled release, an
that such copies do not exceed unauthorized source provided The Nation
three.(Sec.190,IPC) MagazinewiththeunpublishedFordmanuscript.
An editor of The Nation produced an article
Q:Whatisthedoctrineoffairuse? which consisted of verbatim quotes of
copyrighted expression taken from the
A:Fairusepermitsasecondaryusethatserves manuscriptwhichwerethegistofthememoirs.
the copyright objective of stimulating productive As a result, Time refused to pay H&R as agreed
thought and public instruction without upon in the prepublication agreement. H&R
excessively diminishing the incentives for brought an action for infringement against
creativity. Nation Magazine. Nation magazine contended
that the article it published constitutes fair use
and thus it cannot be held liable for
infringement.Isthecontentioncorrect?

233

A: No, the article does not constitute fair use.
Taking into account the factors as especially A:Itmaybeassignedinwholeorinpart.Within
relevant in determining fair use, leads to the the scope of the assignment, the assignee is
conclusionthattheuseinquestionherewasnot entitled to all the rights and remedies which the
fair. First of all, the purpose or character of the assignor had with respect to the copyright. (Sec.
use was commercial (to scoop a competitor), 180.1,IPC)
meaning that The Nation's use was not a good
faith use of fair use in simply reporting news. Q:Iscopyrightsimilarwiththematerialobject?
Also, although the verbatim quotes in question
were an insubstantial portion of the Ford A:No,thecopyrightisdistinctfromtheproperty
manuscript, they qualitatively embodied Mr. inthematerialobjectsubjecttoit.Consequently,
Ford's distinctive expression, and played a key the transfer or assignment of the copyright shall
roleintheinfringingarticle.Andlastly,theeffect not itself constitute a transfer of the material
of the use on the potential market for the value object. Nor shall a transfer or assignment of the
of the copyrighted work was also great, because solecopyorofoneorseveralcopiesofthework
the Nation's liberal use of verbatim excerpts imply transfer or assignment of the copyright.
posed substantial potential for damage to the (Sec.181,IPC)
marketability of first serialization rights in the
copyrighted work. (Harper & Row v. Nation Q: What are the requisites for a transfer of
Enterprises,471U.S.539,1985) copyrighttotakeeffect?

Q:Whatarepublishedworks? A:
1. Ifintervivos,mustbeinwriting;and
A: Those works which, with the consent of the 2. Filed in National Library upon payment
authors,aremadeavailabletothepublicbywire ofprescribedfees.(Sec.182,IPC)
orwirelessmeansinsuchawaythatmembersof
the public may access these works from a place Q: Is filing of the assignment or license of
and time individually chosen by them: provided, copyrightamandatoryrequirement?
that availability of such copies has been such, as
to satisfy the reasonable requirement of the A: No, Section 182 uses the permissive word
public, having regard to the nature of the work. may in reference to the filing of the deed of
(Sec.171.7,IPC) assignment or transfer of copyright, this filing
should not be understood as mandatory for
Q: What is the difference between public validity and enforceability. The filing is entirely
performance and communication to the public optional for the parties and may be useful only
ofaperformance? for evidentiary and notification purposes.
(Amador, Intellectual Property Fundamentals,
A: 2007)

COMMUNICATIONSTO Q:Whatisthelimitationregardingsubmissionof
PUBLIC
THEPUBLICOFA a literary, photographic or artistic work to a
PERFORMANCE
PERFORMANCE newspaper, magazine or periodical for
Performanceata publication?
Thetransmissiontothe
placeoratplaces
public,byanymedium,
wherepersons A: Unless a greater right is expressly granted,
otherwisethanby
outsidethenormal suchsubmissionshallconstituteonlyalicenseto
broadcasting,ofsoundsof
circleofafamilyand makeasinglepublication.(Sec.180.3,IPC)
aperformanceorthe
thatfamilysclosest
representationsofsounds
socialacquaintances Note:Iftwoormorepersonsjointlyownacopyright
fixedinasoundrecording.
areorcanbepresent. or any part thereof, neither of the owners shall be
Thecommunicationcanbe entitled to grant licenses without the prior written
Itisperformedata
accessedthroughwiredor consentoftheotherownerorowners.(Ibid.)
specifictimeand
wirelessmeansatatime
place.(e.g.The
andplaceconvenientto Q:Whatiscopyrightinfringement?
PacquiaoClottey
theviewer(e.g.The
MatchinDallasTexas
PacquiaoClotteyMatch
Stadium) A: It is the doing by any person, without the
watchedviaYouTube)
consent of the owner of the copyright, of

anything the sole right to do which is conferred
Q:Mayacopyrightbetransferred/assigned?
bystatuteontheownerofthecopyright.Theact
234
MERCANTILELAWTEAM:
ofliftingfromanothersbooksubstantialportions
of discussions and examples and the failure to Q: What are the available remedies in case of
acknowledge the same is an infringement of copyrightinfringement?
copyright. (Habana v. Robles, G.R.
No.131522,July19,1999) A:
1. Injunction
Q:Whatdoessubstantialreproductionmean? 2. Damages, including legal costs and
other expenses, as he may have
A: It is not necessarily required that the entire incurredduetotheinfringementaswell
copyrightedwork,orevenalargeportionofit,be as the profits the infringer may have
copied. If so much is taken that the value of the madeduetosuchinfringement
original work is substantially diminished, there is 3. Impoundingduringthependencyofthe
an infringement of copyright and to an injurious action sales invoices and other
extent,theworkisappropriated.Itisnodefense documentsevidencingsales
that the pirate did not know whether or not he 4. Destruction without any compensation
was infringing any copyright; he at least knew allinfringingcopies
that what he was copying was not his, and he 5. Moral and exemplary damages (Sec.
copied at his peril. In cases of infringement, 216.1);or
copying alone is not what is prohibited. The 6. Seizure and impounding of any article,
copying must produce an injurious effect. which may serve as evidence in the
(Habana v. Robles, G.R. No. 131522, July 19, courtproceedings.(Sec.216.2)
1999)
Q: What are the criminal penalties in case of
Q:Whatisplagiarism? copyrightinfringement?

A:Itisthepracticeofclaimingorimplyingoriginal A:
authorship of (or incorporating material from) 1. Imprisonment of one (1) year to three
someoneelseswrittenorcreativework,inwhole (3) years plus a fine ranging from Fifty
or in part, into ones own without adequate thousand pesos (P50,000) to One
acknowledgment. hundred fifty thousand pesos
(P150,000)forthefirstoffense.
Q: What is the difference between copyright 2. Imprisonment of three (3) years and
infringementandplagiarism? one (1) day to six (6) years plus a fine
A: ranging from One hundred fifty
COPYRIGHT thousand pesos to Five hundred
PLAGIARISM
INFRINGEMENT thousand (P500,000) for the second
Theunauthorizeduseof offense.
copyrightedmaterialina 3. Imprisonment of six (6) years and one
Theuseofanothers
mannerthatviolatesoneof daytonine(9)yearsplusafineranging
information,language,
thecopyrightowners from Five hundred thousand pesos
orwriting,whendone
exclusiverights,suchasthe (P500,000) to P1,500,000 for the third
withoutproper
righttoreproduceor offense.
acknowledgmentof
performthecopyrighted
theoriginalsource.
work,ortomakederivative
4. In all cases, subsidiary imprisonment in
worksthatbuilduponit.
casesofinsolvency.
Copyrightinfringementisa

verybroadtermthat
describesavarietyofacts. Q:Whatisaffidavitevidence?
Plagiarismisspecificas
Itmaybeduplicationofa
itrefersonlytousing A:Anaffidavitmadebeforethenotarypublicin
work,rewritingapiece,
someoneelseswork actions for infringement, reciting the facts
performingawrittenwork
withoutproper requiredtobestatedundertheIPC.(Sec.216.1)
ordoinganythingthatis
acknowledgement.
normallyconsideredtobe
theexclusiverightofthe Note:Asaprimafacieproof,theaffidavitshiftsthe
copyrightholder. burden of proof to the defendant, to prove the
ownershipofthecopyrightedwork.
Publicdocumentscan
Thereisnocopyright
beplagiarizedsolong
infringementonpublic
asitisnot
documents.
acknowledged.
235

SPECIALLAWS Corp. v. IAC, G.R. No. L 68010, May 30, 1986)
Knowledge,howeverisequivalenttoregistration.
I.THECHATTELMORTGAGELAW
(ACT1508INREL.TOARTS.1484,1485,2140 C.REGISTRATION,WHENANDWHERE
AND2141OFTHECIVILCODE)
Q: What is the period within which to make
A.ESSENTIALREQUISITES registrationandwhere?

Q:Whataretheessentialrequisitesforavalid A:Thereisnospecifictimewithinwhichachattel
chattelmortgage? mortgage should be recorded but the law is
substantially complied with if registration is
A: made:
1. Constituted to secure fulfillment of the
principalobligation 1. Before the mortgagor has complied
2. Mortgagoristheabsoluteownerofthe withhisprincipalobligation;and
property 2. No right of innocent third parties is
3. Mortgagor has free disposal of the prejudiced.
property, in the absence thereof, that
he be legally authorized for such Q:Whatisthedualregistrationrule?
purpose
4. That it involves a personal property. A:
(Sec.2085,NCC) GR: The property must be registered twice;
first, in the place where mortgagor resides
B.FORMALREQUISITES and second, in the place where property is
situated.(Sec.4,Act1508)
Q:Whataretheformalrequisitesforavalid
chattelmortgage? XPN: First, if the mortgagor resides in the
same place where the property is located;
A: second, if the amount of the loan is above P
1. Affidavitofgoodfaith 500,000.00, registration which should be
2. Registration with the Chattel Mortgage made in the city or municipality where the
Registry propertyissituated.(Sec.116,P.D.1159)
3. Ifnecessary,additionalregistrationwith
thepropergovernmentagency D.AFTERACQUIREDPROPERTY

Q:Whatisanaffidavitofgoodfaith? Q:CantheCMcoverafteracquiredproperties?

A: A certificate included in the chattel mortgage A:
contract executed by both mortgagor and GR:No,becauseSection7ofAct1508provides:
mortgageestatingthat: Achattelmortgageshallbedeemedtocoveronly
1. The obligation is valid, just and the property described therein and not like or
subsisting;and substituted property thereafter acquired by the
2. It is not one entered into for purposes mortgagor and placed in the same depository as
offraud. thepropertyoriginallymortgage.

Q: What is the effect of absence of affidavit of XPN: Where the afteracquired property is in
goodfaith? renewalof,orinsubstitutionfor,goodsonhand
when the mortgage was executed, or is
A: It does not affect the validity of the chattel purchased with the proceeds of the sale of such
mortgage but the same will be unenforceable goods.(Torresv.Limjap,G.R.No.34385,Sept.21,
againstthirdpersons. 1931)

Q:WhatisthestatusofanunrecordedCM? E.AFTERINCURREDOBLIGATION

A:Themortgageisvalidandbindingbetweenthe Q:CantheCMcoverafterincurredobligations?
parties. Registration is necessary only for the
purposeofbindingthirdperson.(FilipinasMarble A:No,theaffidavitofgoodfaithinaCMmakesit
obvious that the debt referred to in the law is
236
MERCANTILELAWTEAM:
SPECIAL LAWS
current, not an obligation that is yet merely

contemplated. (Acme Shoe v. CA, G.R. No. A:Equityofredemptionmaybeexercisedbythe
103576,Aug.22,1996) mortgagorafterhisdefaultintheperformanceof
his obligation but before the sale of the
Q: What then is the consequence of a CM mortgagedpropertyorconfirmationofsale.
coveringafterincurredobligations?
Q:Whomayredeem?
A:ApromiseexpressedinaCMtoincludedebts
that are yet to be contracted can be a binding A:Thefollowingmayredeemiftheconditionof
commitment that can be compelled upon. The themortgageisbroken:
security itself, however, does not come into 1. Mortgagor
existence or arise until after a CM agreement 2. Apersonholdingsubsequentmortgage
coveringnewlycontracteddebtisexecutedeither 3. Asubsequentattachingcreditor(Sec.
byconcludingafreshCMorbyamendingtheold 13,Act1508)
contractconformablywiththeformprescribedby
the CM law. The remedy of foreclosure can only I.CLAIMFORDEFICIENCY
coverthedebtsextantatthetimeofconstitution
and during the life of the CM sought to be Q: Is the mortgagee entitled to recover the
foreclosed. deficiency?

F.RIGHTOFJUNIORMORTGAGEE A:
GR: Yes, mortgagee is entitled to recover
Q: What is the right of a subsequent attaching deficiency.
creditor?
XPN:
A: A subsequent attaching creditor acquired the 1. RectoLaw
properties in question subject to the creditors 2. In accommodation mortgages, the
mortgagelienasitexistedthereonatthetimeof accommodationmortgagorisliableonly
the attachment. What may be attached in this to the extent of the value of the
case is only the equity or right of redemption of mortgagedproperty;
the mortgagor. (Allied Banking Corporation v. 3. Due to death of mortgagor. (Vda. De
Salas,G.R.No.L49091,Dec.13,1988) Jacob v. CA, G.R. No. 88602, Apr. 6,
1990)
G.FORECLOSUREPROCEDURE
Q:WhendoestheRectoLawapply(Articles1484
Q: When and how is foreclosure of CM &1485ofthecivilcodeCivilCode)?
conducted?
A:
A: After 30 days from the time the condition is 1. Sale of personal property, the price of
broken: which is payable in two or more
1. Atapublicauctionbyapublicofficer installments
2. Provided at least 10 days notice of the
time, place, and purpose of such sale 2. Contracts purporting to be leases of
hasbeenpostedattwoormorepublic personal property with option to buy
placesinsuchmunicipality (Art.1485,NCC)
3. At a public place in the municipality
wherethemortgagorresides,orwhere Q: What are the requisites for the sale to be
thepropertyissituated coveredundertheRectoLaw?

H.REDEMPTION A:
1. Saleofpersonalproperty
Q:IstherearightofredemptioninCM? 2. Payableininstallments
3. CMconstitutedoverthesameproperty
A: There is no right of redemption in Chattel
Mortgage.Thereisonlyanequityofredemption. Note: It does not contemplate a sale on straight
term in which the balance, after payment of initial
Q: When is equity of redemption may be sum, should be paid in its totality at the time
exercised? specified in the promissory note. (Levy Hermanos
237

Inc. v. Lazaro Blas Gervaci, G.R. No. 46306, Oct. 27, Q:WhatisthenatureofREM?
1939)
A: It creates real right over the property, such
Q:UndertheRectoLaw,whataretheremedies that in subsequent transfers by the mortgagor,
oftheunpaidseller? thetransfereemustrespectthemortgage.

A: B.REMEDIESAVAILABLETOMORTGAGEEUPON
1. Exact fulfillment of the obligation, DEFAULTOFTHEMORTGAGOR
shouldthevendeefailtopay(actionfor
specificperformance) Q: What are the alternative remedies of the
2. Cancel the sale, should the vendees mortgagee?
failure to pay cover two or more
installments(rescission);or A:
3. Foreclose the chattel mortgage on the 1. Mortgagorisliving
thing sold, should the vendees failure a. Foreclosure
topaycover2ormoreinstallments. a. Judicial(Rule68,ROC)
b. Extrajudicial(Act3135)
Q:Cantheunpaidselleravailofallremedies? b. Ordinary action for collection of
moneyeffectiswaiverofREM
A:No,theremediesarealternative.
2. Mortgagorisdead
Note: However, recovery of property through a a. Waivethemortgageandclaimthe
replevincasepreparatorytoforeclosurewillnotbar entire debt from the estate of the
the other remedies if there was no actual mortgagorasanordinaryclaim
foreclosure.Ifsellermortgageeoptstofileanaction
b. Judicialforeclosure;and
forspecificperformance,heshallbedeemedtohave
c. Relyonthemortgage.(Sec.7,Rule
waivedhisrightasamortgageebutmaystilllevyon
86.ROC)
themortgagedproperty(onexecution).
d. Extrajudicialforeclosure(Act3135)
Q: Is the mortgagees letter informing the before it is barred by prescription
mortgagor of his intent to foreclose is already withoutrighttofileaclaimforany
consideredaforeclosureofthechattel? deficiency. (Vda. De Jacob v. CA,
G.R.No.88602,Apr.6,1990)
A: No. A mere offer by the mortgagor to
C.NEEDFORSPECIALPOWEROFATTORNEY
surrender the chattel, not accepted by the

mortgagee, does not preclude the mortgagee
Q:Whyisspecialofpowerofattorneyneeded?
from bringing suit to recover the balance of the

purchaseprice. (IndustrialFinanceCorpv.Castor
A: Because an extrajudicial foreclosure may only
Tobias,G.R.No.L41555,July271977)
be effected if the mortgage contract covering a

II.REALESTATEMORTGAGELAW(ACT3135,AS real estate, clause is incorporated therein giving
AMENDEDBYRA4118) the mortgagee the power, upon default of the
debtor to foreclose the mortgage by an
extrajudicial sale of the mortgaged property
A.COVERAGE
(Pineda, Credit Transactions and Quasicontracts,
Q:Whatisrealestatemortgage(REM)? 2006).

D.AUTHORITYTOFORECLOSEEXTRAJUDICIALLY
A:Itisacontractwherebythedebtorsecuresto

the creditor the fulfillment of a principal
Q:Maytheauthoritytosellmaybedoneina
obligation, specially subjecting to such security
separatedocumentbutannexedtothecontract
immovable property or real rights over
ofmortgage?
immovable property which obligation shall be
satisfied with the proceeds of the sale of said
A:Yes(Pineda,CreditTransactionsandQuasi
propertyorrightsincasethesaidobligationisnot
contracts,2006).
compliedwithatthetimestipulated.

238
MERCANTILELAWTEAM:
SPECIAL LAWS
Q:Istheauthorityextinguishedbythedeathof Note: A certificate of posting is not

themortgagorormortgagee? indispensable for the validity of an
extra judicial foreclosure sale of real
A:No,becauseitisanessentialandinseparable property. What the law requires is
partofabilateralagreement(G.R.No.L21813,July thepostingofthenoticeofsaleand
30,1966). notthecertificateofposting.(DBPv.
CAG.R.No.125838June10,2003)
E.FORECLOSUREPROCEDURE
5. Foreclosure the remedy available to
Q: What are the stages in extrajudicial themortgageebywhichhesubjectsthe
foreclosure? mortgaged property to the satisfaction
of the obligation to secure which the
A: mortgagewasgiven.(59C.J.S.482)
1. Execution of contract of loan and REM
agreementwiththecorrespondingSPA. 6. Registration of sale with the RD This
pertainstotheannotationofthesaleto
2. Default of the mortgagordebtor either theTCTonfilewiththeRD.
by:
a. Nonpayment;or 7. RedemptionThemortgagorreacquires
b. Violation of the terms of the loan or buys back the property, which may
orREMagreement. havepassedunderthemortgage.

3. Filing of petition for sale with clerk of 8. ConsolidationoftitleByfilingaffidavit
court who acts as exofficio sheriff withRD.TheAffidavitofConsolidation
(A.M. No. 99100500). Afterwards, ofTitlemustindicatetherelevantdates
the clerk of court will raffle it among to show mortgagors failure to redeem
the sheriffs, who shall conduct the withintheallowabletime.Thisenables
foreclosure sale once given the themortgageetoacquirefullownership
authoritytodoso. over the property. His inchoate right
ripenstofullownership.
Note:Petitionisfiledwheretheproperty
is located. In case the mortgaged 9. Cancellation of the title of the
properties are located in different mortgagorandIssuanceofanewtitlein
provinces, the venue of the extrajudicial favorofmortgageeThebasisofwhich
foreclosure proceedings is the place istheorderofcourtconfirmingthesale.
where each of the mortgaged property is
located. 10. PetitionforawritofpossessionThere
is no need to file an ejectment suit.
A mortgage action prescribes in 10 years Here, the mortgagee employs force to
fromthetimetherightofactionaccrues, oust the mortgagor from the property.
that is, from the time the mortgagor This writ may be even issued during
defaults in the payment of his obligation redemption period provided the
to the mortgagee and not from the date mortgageeissuedabond,butthegrant
oftheexecutionofthemortgagecontract. of which is discretionary on the part of
(Candov.SpousesOlazo,G.R.No.160741,
the court. But if the petition for the
Mar.22,2007)
writ is filed after the expiration of the

redemption period, the issuance of
4. Compliance with certain jurisdictional
which is ministerial on the part of the
requirements:
court. This writ can be issued without
a. Publication in a newspaper of
the issuance of a bond; in fact it can
generalcirculationonceaweekfor
even be issued ex parte. The writ
3consecutiveweeks;and
cannotbesuspendedevenbythefiling
b. Posting of the notice of sale for
of the mortgagor of an action to annul
not less than 20 days in at least 3
theforeclosuresale.
public/conspicuous places in the

province or municipality where

propertyislocated.

239

Q: What is meant by once a week for three A: If the winning bidder is able to secure
consecutiveweeks? possession,themortgagormaypetitionthatthe
sale is set aside and the writ of possession be
A:Aperiodof7days,inclusiveofthefirstdayof cancelled on the ground that he wasn't in
publication.Thepublicationmustbemade7days defaultorthatthesalewasn'tmadein
apart.(PNBv.CA,G.R.No.108870,July14,1995) accordance with Act 3135. This must be filed
within 30 days from issuance of the writ of
Q:Isthereaneedforpersonalnotice? possession

A: No, because foreclosure of CM is an action in H.REDEMPTION
rem whereby mere publication is enough to
confer jurisdiction over the subject matter. Q:Whomayredeem?
Personal notice to the parties is not necessary.
(GSISv.CA,G.R.No.40824,Feb.23,1989) A: The debtor, his successorsininterest, or
anyjudicialcreditororjudgmentcreditorofsaid
Q: What happens when the foreclosure sale is debtor, or any person having a lien on the
postponed? property subsequent to the mortgage or deed
of trust under which the property is sold,
A:Thenoticeofsalemustberepublishedoncea mayredeemthesameatanytimewithinthe
week for three consecutive weeks, otherwise, term of 1 year from and after the date of the
foreclosureisinvalid.(Tambuntingv.CA,G.R.No. sale and such will be governed by the rules of
L48278,Nov.8,1988) Court.

Q:Istheruleonrepublicationabsolute? Q:Whatistheamountofredemptionprice?

A: A: The redemption price would be the
GR:Yes. mortgaged obligation plus the interest as
XPN: stipulatedintheoriginalobligation.
1. The sale was not finished and is
continued the following day until Q:Whatistheruleastotheredemptionpricein
completed;or casethemortgageeisabankinginstitution?
2. Whenthereiswaiver.
A:Wherethemortgageeisabankinginstitution,
F.POSSESSIONBYPURCHASEROFFORECLOSED the redemption price is the amount fixed by the
PROPERTY courtintheorderofexecutionortheamountdue
underthemortgageddeed.(Tolentinov.CA,G.R.
Q: Who retains possession of the foreclosed No.171354,Mar.7,2007)
property?
Q: What is the redemption price in case of
A: Upon foreclosure, the mortgagor shall remain accomodationmortgagors?
in possession of the property until the period to
redeem expires and no redemption was made. A: Accommodation mortgagors are not liable for
If the winning bidder wantsto take the payment of the loan of the debtor. The
possession during the redemption period, he liability of the accommodation mortgagors
mayexecuteabondintheamountequivalentto extends only up to the loan value of their
the use of the property for 12 months, to mortgaged property and not to the entire loan
indemnifythedebtorincaseitbeshownthatthe itself.Hence, itisonlyjustthattheybeallowed
salewasmadewithoutviolatingthemortgageor to redeem their mortgaged property by paying
without complying with the requirements of the only the winning bid price thereof (plus interest
Act. Upon approval, a writ of possession will be thereon) at thepublic auction sale. (Belo v. PNB,
issuedinhisfavor. G.R.No.134330,Mar.1,2001)

G.REMEDYOFDEBTORIFFORECLOSUREISNOT Q: When must the buyer exercise the right of
PROPER redemption?

Q:Whatistheremedyofdebtorifforeclosureis A: One year from the date of registration of
notproper? certificateofsale.

240
MERCANTILELAWTEAM:
SPECIAL LAWS
Note: The exercise of the right of redemption is an Q: What are the remedies availing in favor of
implied admission of the regularity of the thirdpartiesadverselyaffectedbytheorderfor
foreclosuresaleandestopsthemortgagorfromlater theissuanceofthewritofpossessioninfavorof
impugningitsvalidityonthatground.Redemptionis thewinningbidder?
inconsistent with the claim of the invalidity of the
sale. A:
1. Terceria to determine whether the
Q: When does the one year period for sheriffs has rightly or wrongfully taken
redemptionnotapply? hold of the property not belonging to
thejudgmentdebtororobligor;and
A: It does not apply to real estate mortgages 2. An independent separate action to
constitutedbyjuridicalpersonsinfavorofabank, vindicate their claim of ownership
quasibank or trust entity. Right to redeem can and/or possession over the foreclosed
only be exercised until but not after the property.(ChinaBankingCorporationv.
registrationofthecertificateofsaleor3months Ordinario, G.R. No. 121943, Mar. 24,
from foreclosure, whichever is earlier, under the 2003)
followingconditions:
1. Mortgagor must be a juridical person Note: A third party in possession of the
that is either a partnership or a propertywhoisclaimingarightadverseto
corporation thatof the debtor/mortgagor may notbe
2. Mortgageeisabank,quasibankortrust dispossessedonthestrengthofamereex
entity;and parte possessory writ, since to do so
3. Foreclosureisdoneextrajudicially. would be tantamount to his summary
ejectment. (Penson v. Spouses Maranan,
Q:Whatistheeffectoffilinganactiontoannul G.R. No. 148630, June 20, 2006). The
the foreclosure sale during the oneyear availableremediesarecumulative.
redemptionperiod?
Q: What is the effect of a pending action for
A: It will not toll the running of the oneyear annulmentofsale?
redemption period. (MBTC v. Spouses Tan, G.R.
No.159934,June26,2008) A: the mortgagee is still entitled to writ of
possession, without prejudice to the eventual
Note:Ajudicialactioninstitutedforthesolepurpose outcome of the said case. (Baldueza vs. CA, G.R.
ofdeterminingtheamountoftheredemptionprice, No.155813,October15,2008)
iffiledbeforetheexpirationoftheoriginalperiodto
redeem,hastheeffectofavalidexerciseoftheright J.ANNULMENTOFSALE
to redeem and will suspend the running of the
period of redemption even if unaccompanied by a Q: Is the filing of an action to nullify the
simultaneous tender of the redemption price. extrajudicial sale a prejudicial question to the
However,beforethisrulecanbemadetoapply,itis petitionfiledbythemortgageefortheissuance
essential that the judicial action was instituted by ofthewritofpossession?
themortgagoringoodfaithandnotmerelydesigned
todelaytheredemptiveperiodindefinitely.(Heirsof A:No,acomplaintforannulmentofextrajudicial
Norberto Quisumbing v. PNB, G.R. No. 178242,Jan.
saleisacivilactionandapetitionfortheissuance
20,2009)
ofwritofpossessionisbutanincidenttotheland
registration proceeding hence no prejudicial

I.WRITOFPOSSESSION
questioncanarisefromthetwoactions.(Pahang

vs.VestilGR.No.148595,July12,2004).
Q: When is the issuance of the Writ of

Possessionaministerialdutyofthecourt?
Q:Isthefilingoftheannulmentofsaletollthe1
yearredemptionperiod?
A: The writ may be issued during redemption

periodprovidedthemortgageegivesabond,the
A: No, Settled is the rule that the period within
grantofwhichisdiscretionaryonthepartofthe
which to redeem the property sold at a sheriffs
court.Butifthepetitionforthewritisfiledafter
sale is not suspended by the institution to annul
the expiration of the redemption period, the
theforeclosuresale(Metrobankvs.Sps.Tan,G.R.
issuanceisministerialonthepartofthecourt
No.178449,October17,2008).

241

III.TRUTHINLENDINGACT(RA3765)(TILA) C.COVEREDANDEXCLUDEDTRANSACTIONS

A.PURPOSE Q: What are the credit transactions covered by
TILA?
Q: What is the purpose of Truth in Lending Act
(TILA)? A:
1. Loans, mortgages, deeds of trust,
A:Toprotectpersonsfromalackofawarenessof advancesanddiscounts;
the true cost of credit and to prevent the 2. Conditional sales contracts, any
uninformeduseofcredit. contract to sell, or sale or contract of
sale of property or services, either for
B.OBLIGATIONOFCREDITORSTOPERSONTO presentorfuturedelivery,underwhich
WHOMCREDITISEXTENDED part or all of the price is payable
subsequent to the making of such sale
Q:WhendoesTILAapply? orcontract;
3. Anyrentalpurchasecontract;
A: It applies tocreditors who extend loans, sales 4. Any contract for the hire, bailment or
oninstallmentsandothercredittransactions. leasingofproperty;
5. Any option, demand, lien, pledge or
Q:Whataretheitemsrequiredtobedisclosed? other claim against, or for delivery of,
propertyormoney;
A: 6. Anypurchase,orotheracquisitionof,or
1. Increditsales: any credit upon the security of, any
a. Cashpriceordeliveredprice; obligationorclaimarisingoutofanyof
b. Creditfordownpaymentortrade theforegoing;and
in; 7. Anytransactionorseriesoftransactions
c. Totalamounttobefinanced; havingasimilarpurposeoreffect.(Sec.
d. Chargesnotincidenttothesale; 3)
e. Finance charges amounts to be
paid by the debtor incident to the Q:WhattransactionsarenotcoveredbyTILA?
extension of credit such as
interests, discounts, collection A:
fees, credit investigation fees and 1. Those which do not involve the
attorneysfees; payment of any finance charges by the
f. Percentage of the finance charges debtor;and
otheamounttobefinanced; 2. Where the debtor is the one specifying
g. Effectiveinterestrate; a definite and fixed set of credit terms
h. Repaymentprogram;and such as bank deposits, insurance
i. Default or delinquency charges or contracts,saleofbonds,etc.
latepayments.(Sec.4,TILA)
D.CONSEQUENCESOFNONCOMPLIANCEWITH
2. Inconsumerloans: OBLIGATION
a. Amountofcredit;
b. Charges; Q: What is the effect of noncompliance with
c. Amounttobefinanced; TILA?
d. Amountoffinancecharge;
e. Effectiveinterestrates; A:
f. Percentage of finance charge and ONTRANSACTION ONCREDITOR
amounttobefinanced; Failuretodisclosetoanypersonanyinformationin
g. Default or delinquency charges; violationofTILAoranyregulationissued.
and (Sec.6[a])
h. Descriptionofsecurity. Liableintheamountof
P100orinanamount
Chargesnotitemized
Q:Whenandhowshoulddisclosurebemade? equaltotwicethe
cannotbecollected.If
financecharged
alreadypaid,canbe
A:Priortotheconsummationofthetransaction requiredbysuch
recovered
creditor,whicheveris
andinaclearstatementinwriting.
thegreater,however,

suchliabilityshallnot
242
MERCANTILELAWTEAM:
SPECIAL LAWS
exceedP2,000onany and transfer companies and other

credittransaction. similarentities;and
WillfulviolationofanyprovisionofTILAorany 10. Other entities administering or
regulationissued. otherwise dealing in currency,
Shallbeliabletoafine commodities or financial derivatives
Exceptasprovidedin
ofnotlessthanP1,000 based thereon, valuable objects, cash
subsec.(a),
ormorethanP5,000or substitutes,andothersimilarmonetary
nothingshallaffectthe
imprisonmentfornot instruments or property supervised or
validityorenforceability
lessthan6months,nor regulated by SEC. (Sec. 3 R.A. 9160, as
ofanycontractor
morethanoneyearor
transactions. amended)
both.

C.OBLIGATIONOFCOVEREDINSTITUTIONS
Q: When must an action for violation of the

TruthinLendingActbebrought?
Q: What is the obligation of the covered
institutions?
A:Within1yearfromthedateoftheoccurrence

oftheviolation.
A: They are mandated by the AMLA to submit
coveredandsuspicioustransactionreportstothe
IV.ANTIMONEYLAUNDERING.ACTOF2001
AMLC.
(R.A.9160ASAMENDEDBYRA9194)

D.COVEREDTRANSACTIONS
A.POLICYOFTHELAW

Q:WhatareCoveredTransactions?
Q: What is the policy for the enactment of the

AntiMoneyLaunderingAct?
A: These are single transactions in cash or other
equivalentmonetaryinstrumentinvolvingatotal
A: To protect and preserve the integrity and
amountinexcessof500,000.00within1banking
confidentiality of bank accounts and to ensure
day.
thatthePhilippinesshallnotbeusedasamoney

laundering site for the proceeds of any unlawful Note: These transactions are required to be
activity.(Sec.1R.A.9160,asamended) reportedtotheAntiMoneyLaunderingCouncil.

B.COVEREDINSTITUTIONS E.SUSPICIOUSTRANSACTIONS

Q:Whatarethecoveredinstitutions? Q:WhatareSuspiciousTransactions?

A: A:Regardlessofamount,ifanyofthefollowingis
1. Banks present:
2. Nonbanks
3. Quasibanks 1. No underlying economic, trade or legal
4. Trustentities justification
5. All other institutions, their subsidiaries 2. Client not properly identified;
andaffiliatessupervisedorregulatedby numbered accounts are allowed
BSP providedclientisidentified
6. Insurance companies and all other 3. Transaction is not commensurate with
institutionssupervisedandregulatedby financialcapabilityoftheclient
theInsuranceCommission 4. Transaction is so structured that it
7. Securities dealers, brokers, salesmen, cannotbereportedtotheAMLC
investment houses and other similar 5. Transaction which deviates from usual
entities managing securities or profileoftheclient
renderingservicesasinvestmentagent, 6. Relates to unlawful activity as defined
advisor,orconsultant bylaw
8. Mutual funds, closedend investment 7. Analogoustransactions
companies, common trust funds, pre
need companies and other similar
entities
9. Foreign exchange, corporations, money
changers,moneypayments,remittance

243

F.WHENISMONEYLAUNDERINGCOMMITTED against noncombatant persons and
similartargets
Q:WhatisthemeaningofMoneyLaundering? 13. Fraudulentpracticesandotherviolations
undertheSRCof2000;
A: A crime whereby the proceeds of unlawful 14. Felonies or offenses of a similar nature
activity are transacted, making them appear to thatarepunishableunderthepenallaws
have come from lawful transaction. (Sec. 4 R.A. ofothercountries.(Sec.3(i)R.A.9160,as
9160,asamended) amended)

Q:Howismoneylaunderingcommitted? Q:Alvinisjoblessbutisreputedtobeajueteng
operator. He has never been charged or
A:Itiscommittedbythefollowingpersons: convicted of any crime. He maintains several
bankaccountsamountingtoP100Million.AMLC
1. Anypersonknowingthatthemonetary charged Alvin with violation of the AntiMoney
instrument or property represents, Laundering Law. Can Alvin move to dismiss the
involves, or relates to, the proceeds of case on the ground that he has no criminal
any unlawful activity, transacts or record?
attempts to transact said monetary
instrumentorproperty A: No. The contention of Alvin is not tenable
because under AMLA, "money laundering crime"
2. Anypersonknowingthatanymonetary committed when the proceeds of an "unlawful
instrument or property involves the activity," like jueteng operations, are made to
proceeds of any unlawful activity appear as having originated from legitimate
performsorfailstoperformanyactasa sources.
resultofwhichhefacilitatestheoffense
referredtoinNo.1above Themoneylaunderingcrimeisseparatefromthe
unlawfulactivityofbeingajuetengoperator,and
3. Anypersonknowingthatanymonetary requires no previous conviction for the unlawful
instrument or property is required activity.(Sec.3,AMLA)
underthisActtobedisclosedandfiled
with the AntiMoney Laundering
Q: In disclosing Alvin's bank accounts to the
Council (AMLC), fails to do so. (Sec 4
AMLC,didthebankviolateanylaw?
R.A.9160,asamended)

A:No,thebankdidnotviolateanylaw.Thebank
G.UNLAWFULACTIVITIESORPREDICATECRIMES
being specified as a "covered institution" under

the AntiMoney Laundering Law, is obliged to
Q:Whatareconsideredasunlawfulactivitiesor
report to the AMLC covered and suspicious
predicatecrimesunderAMLA?
transactions, without thereby violating any law.

This is one of the exceptions to the Secrecy of
A:Theserefertoanyactoromissionorseriesor
BankDepositAct.
combination thereof involving or having direct
relationtothefollowing:
H.ANTIMONEYLAUNDERINGCOUNCIL
1. Kidnappingforransom
2. Drugtraffickingandrelatedoffenses Q: What is the purpose of the law on creating
3. Graftandcorruptpractices theAMLC?
4. Plunder
5. RobberyandExtortion A:AMLCiscreatedto:
6. JuetengandMasiao 1. Toprotectandpreservetheintegrityand
7. Piracy confidentialityofbankaccounts;
8. Qualifiedtheft 2. To ensure that the Philippines shall not
9. Swindling be used as a money laundering site for
10. Smuggling proceedsofanyunlawfulactivity;and
11. Violations under the Electronic 3. To extend cooperation in transnational
CommerceActof2000 investigation and prosecution of person
12. Hijacking,destructivearson,andmurder, involved in money laundering activities
includingthoseperpetratedbyterrorists wherevercommitted.

244
MERCANTILELAWTEAM:
SPECIAL LAWS
I. FUNCTIONS
11. To impose administrative sanctions for
Q:WhatarethefunctionsofAMLC? the violation of laws, rules, regulations
and orders and resolutions issued
A: pursuant thereto. (Sec. 7 R.A. 9160, as
1. To require and receive reports of amended)
suspicious transactions from covered
institutions 12. To examine or inquire into bank
deposits/investmentsuponorderofany
Note: Covered institutions include, (banks and competentcourtincasesofviolationof
all other institutions and their subsidiaries and theAMLA,whenithasbeenestablished
affiliates supervised or regulated by BSP; that there is probable cause that the
insurance companies and all other institutions deposits/investments are related to an
supervised or regulated by the IC; and unlawful activity. (Sec. 11 R.A. 9160, as
securitiesdealersandotherentitiessupervised amended)
orregulatedbytheSEC)

Note:Nocourtorder,however,isnecessaryincases
2. To issue orders addressed to the involvingkidnappingforransom;narcoticsoffenses;
Supervising Authority or the covered and hijacking, destructive arson and murder,
institution including those perpetrated by terrorists against
noncombatantpersonsandsimilartargets.
3. To institute civil forfeiture proceedings
and all other remedial proceedings J.FREEZINGOFMONETARYINSTRUMENTOR
throughtheOSG PROPERTY

4. To cause the filing of complaints with Q:WhohasjurisdictionforviolationsofAMLA?
the DOJ or the Ombudsman for the A:
prosecution of money laundering 1. RTCallcasesonmoneylaundering
offenses
2. Sandiganbayan Those committed by
5. To investigate suspicious transactions public officers and private persons in
and covered transactions deemed conspiracywiththem.(Sec.5R.A.9160,
suspicious after an investigation by asamended)
AMLC
Q: Which court has the jurisdiction to issue a
6. ToapplybeforetheCA,exparte,forthe freezeorder?
freezing of any monetary
instrument/property alleged to be A: It is solely the CA which has the authority to
proceeds of any unlawful activity as issueafreezeorderuponapplicationexparteby
definedintheAMLA the AMLC and after determination that probable
causeexists.
7. Toimplementsuchmeasuresasmaybe
necessary and justified to counteract It also has the exclusive jurisdiction to extend
moneylaundering existing freeze orders previously issued by the
AMLC visvis accounts and deposits related to
8. Toreceiveandtakeactioninrespectof moneylaundering activities. (Republic v. Cabrini
anyrequestforassistancefromforeign Green&Ramos,G.R.No.154522,May5,2006)
states in their own antimoney
launderingoperations K.AUTHORITYTOINQUIREINTOBANKDEPOSITS

9. To develop educational programs on Q: When may the AntiMoney Laundering
the pernicious effects of money Council(AMLC)inquireintobankdeposits?
laundering.
A:
10. To enlist the assistance of any branch, GR: Only upon order of any competent court in
department, bureau, office, agency or casesofviolationofR.A.9160,asamended.
instrumentality of the government,
includingGOCCsinundertakinganyand
allantimoneylaunderingoperations

245

XPN: No need of court order in cases of encouragedtoundertakemeasuresthat
Kidnapping,Hijacking,Drugs,Arson,Murder.(Sec. will gradually increase Filipino
11R.A.9160,asamended) participationintheirbusinessesby
a. TakinginFilipinopartners,
V.FOREIGNINVESTMENTSACT b. ElectingFilipinostotheboard
ofdirectors,
A.POLICYOFTHELAW c. Implementing transfer of
technologytoFilipinos,
Q:Whatisthestatepolicyofthelaw? d. Generatingmoreemployment
fortheeconomyand
A: e. Enhancing skills of Filipino
1. It is the policy of the State to attract, workers.(Sec.2,RA7042)
promote and welcome productive
investments in activities which B.DEFINITIONOFTERMS
significantly contribute to national
industrialization and socioeconomic Q:Whatisforeigninvestment?
developmenttotheextentthatforeign
investmentisallowedinsuchactivityby A: It is an equity investment made by non
theConstitutionandrelevantlawsfrom Philippine national in the form of foreign
a. Foreignindividuals exchangeand/orotherassetsactuallytransferred
b. Partnerships to the Philippines and duly registered with the
c. Corporations Central Bank which shall assess and appraise the
d. Governments, including their valueofsuchassetsotherthanforeignexchange.
politicalsubdivisions
Q:Whatareconsideredasdoingortransacting
2. Foreign investments shall be business in the Philippines for foreign
encouraged in the enterprises that corporations?
significantly expand livelihood and
employment opportunities for Filipinos A:
by 1. Soliciting orders, service contracts, and
a. Enhancing economic value of openingoffices
farmproducts; 2. Appointing representatives, distributors
b. Promoting the welfare of domiciled in the Philippines or who stay
Filipinoconsumers; foraperiodorperiodstotaling180days
c. Expanding the scope, quality ormore
and volume of exports and 3. Participating in the management,
their access to foreign supervision or control of any domestic
markets; business, firm, entity, or corporation in
d. And/or transferring relevant thePhilippines
technologies in agriculture, 4. Anyactoractsthatimplyacontinuityof
industryandsupportservices. commercial dealings or arrangements,
and contemplate to some extent the
3. Foreign investments shall be welcome performance of acts or works or the
as a supplement to Filipino capital and exercise of some functions normally
technology in those enterprises serving incident to and in progressive
mainlythedomesticmarket. prosecution of, the purpose and object
ofitsorganization(Sec3(c),R.A.7042).
4. GR:Therearenorestrictionsonextent
of foreign ownership of export Q: What are considered as NOT doing or
enterprises. In domestic market transacting business in the Philippines for
enterprises, foreigners can invest as foreigncorporations?
muchas100%equity
A:
XPN: In areas included in the negative 1. Mere investment as shareholder and
list. exerciseofrightsasinvestor
2. Having a nominee director or officer to
5. Foreignownedfirmscateringmainlyto representitsinterestinthecorporation
the domestic market shall be
246
MERCANTILELAWTEAM:
SPECIAL LAWS
3. Appointingarepresentativeordistributor 4. Corporations organized abroad and

which transacts business in its own name registered as doing business in the
andforitsownaccount Philippines under the Corporation Code
4. Publication of a general advertisement of which 100% of the capital stock
throughanyprintorbroadcastmedia entitledtovotebelongtoFilipinos.
5. Maintaining a stock of goods in the
Philippines solely for the purpose of Note:However,itprovidesthatwhereacorporation
having the same processed by another and its nonFilipino stockholders own stocks in a
entityinthePhilippines SECregisteredenterprise,atleast60%ofthecapital
6. Consignmentbytheforeigncorporationof stock outstanding and entitled to vote of both
equipment with a local company to be corporationsandatleast60%ofthemembersofthe
used in the processing of products for board of directors of both corporations must be
Filipinocitizens(DOUBLE60%RULE).
export

7. CollectinginformationinthePhilippines
Q: Who are considered nonPhilippine
8. Performingservicesauxiliarytoanexisting
nationals?
isolatedcontractofsalewhicharenoton

acontinuingbasis.
A:Thosewhodonotbelongtothedefinitionofa
Philippinenational.
Q:WhatisExportEnterprise?

Q:WhatisneededforanonPhilippinenational
A: It is an enterprise wherein a manufacturer,
but not disqualified by law may do business or
processor or service [including tourism]
investinadomesticenterpriseupto100%ofits
enterpriseexportssixtypercent(60%)ormoreof
capitalwithoutneedofpriorapproval?
its output, or wherein a trader purchases

products domestically and exports sixty per cent
A: Register with the Securities and Exchange
(60%)ormoreofsuchpurchases.(Sec3(e),R.A.
Commission (SEC) or with the Bureau of Trade
7042).
Regulation and Consumer Protection (BTRCP) of
theDepartmentofTradeandIndustryinthecase
Q:Whatisdomesticmarketenterprise?
ofsingleproprietorship.

A: It is an enterprise which produces goods for
Q:MaySECorBTRCPimposeanylimitationson
sale, or renders services to the domestic market
theextentofforeignownershipinanenterprise
entirelyorifexportingaportionofitsoutputfails
additionaltothoseprovidedinR.A.7042?
toconsistencyexportatleast60%thereof.(Sec3

(e),R.A.7042).
A:
GR: The SEC or BTRCP, as the case may be,

NonPhilippine nationals may own up to one
shall not impose any limitations on the
hundred percent [100%] of domestic market
extentofforeignownershipinanenterprise
enterprises unless foreign ownership therein is
additionaltothoseprovidedinR.A.7042.
prohibited or limited by the Constitution and

existing law or the Foreign Investment Negative.
XPNs:
(Sec.7,R.A.7042)
1. That any enterprise seeking to avail of
incentives under the Omnibus

C.REGISTRATIONOFINVESTMENTSOFNON
InvestmentCodeof1987mustapplyfor
PHILIPPINENATIONALS
registration with the Board of
Investments (BOI), which shall process

Q:WhoareconsideredPhilippinenationals?
such application for registration in
accordance with the criteria for

A:
evaluationprescribedinsaidCode;
1. AcitizenofthePhilippines

2. A domestic partnership or association
2. ThatanonPhilippinenationalintending
wholly owned by citizens of the
to engage in the same line of business
Philippines;
asanexistingjointventure,inwhichhe
3. Corporations organized under Philippine
or his majority shareholder is a
laws of which 60% of the capital stock
substantial partner, must disclose the
outstanding and entitled to vote is
fact and the names and addresses of
ownedandheldbyFilipinocitizens;
the partners in the existing joint
247

venture in his application for
registrationwiththeSEC. 3. In addition to the foregoing, any
person, firm or juridical entity involved
D.FOREIGNINVESTMENTINEXPORT shall be subject to forfeiture of all
ENTERPRISES benefits granted under R.A. 7042. (Sec
14)
Q: What are rules regarding foreign registration
inexportenterprises? E.FOREIGNINVESTMENTDOMESTICMARKET
ENTERPRISES
A:
1. Foreigninvestmentinexportenterprises
Q:Whatistheruleregardingforeigninvestment
whose products and services do not fall
indomesticmarketenterprises?
within Lists A and B of the Foreign
InvestmentNegativeListisallowedupto
100%ownership A:NonPhilippinenationalsmayownupto100%
of domestic market enterprises unless foreign
2. Export enterprises which are non ownershipthereinisprohibitedorlimitedbythe
Philippine nationals shall register with Constitution and existing law or the Foreign
BOI and submitthe reports that may be InvestmentNegativeList.
required to ensure continuing
complianceoftheexportenterprisewith F.FOREIGNINVESTMENTNEGATIVELIST
itsexportrequirement.
Q:WhatisForeignInvestmentNegativeList?
3. BOI shall advise SEC or BTRCP, as the
case may be, of any export enterprise A: It is a list ofareas of economic activity whose
that fails to meet the export ratio foreign ownership is limited to a maximum of
requirement. 40% of the equity capital of the enterprises
engagedtherein.
4. TheSECorBTRCPshallthereuponorder
the noncomplying export enterprise to Q:WhatareincludedintheListA?
reduce its sales to the domestic market
to not more than 40% of its total A:SeeAppendixG
production; failure to comply with such
SEC or BTRCP order, without justifiable Q:WhatareincludedintheListB?
reason, shall subject the enterprise to
cancellationofSECorBTRCPregistration, A:
and/orthepenaltiesprovidedinthislaw. 1. Defenserelated activities, requiring
(Sec6,R.A.7042) prior clearance and authorization from
theDepartmentofNational Defenseto
Q: What are the penalties provided under R.A. engageinsuchactivity,suchasthe:
7042? a. Manufacture
b. Repair
A: c. Storage
1. A person who violates any provision of d. Distributionof
R.A. 7042 or of the terms and i. Firearms
conditionsofregistrationoroftherules ii. Ammunition
and regulations issued pursuant iii. Lethalweapons
thereto,oraidsorabetsinanymanner iv. Militaryordnance
any violation shall be subject to a fine v. Explosives
notexceedingP100,000. vi. Pyrotechnics
vii. Similarmaterials
2. Iftheoffenseiscommittedbyajuridical
entity,itshallbesubjecttoafineinan XPN: Such manufacturing or repair
amount not exceeding 1/2 of 1% of activity is specifically authorized,
total paidin capital but not more than with a substantial export
P5,000,000.00 The president and/or component, to a non Philippine
officials responsible therefor shall also national by the Secretary of
be subject to a fine not exceeding NationalDefense;or
P200,000.00
248
MERCANTILELAWTEAM:
SPECIAL LAWS
2. Those that have implications on public

health and morals, such as the
manufactureanddistributionof
a. Dangerousdrugs
b. Allformsofgambling
c. Nightclubs
d. Bars
e. Beerhouses
f. Dancehalls
g. Saunaandsteambathhouses
h. Massageclinics.(Sec.8)
Note:ThereisnosignificantdifferencebetweenList
AandListB.

Q:Whatistheruleregardingsmallandmedium
sizeddomesticmarketenterprises?
A:
GR: Small and mediumsized domestic market
enterprises with paidin equity capital less
than the equivalent of US$200,000.00, are
reservedtoPhilippinenationals.
XPN:
1. They involve advanced technology as
determinedbytheDOST
2. Theyemployat50directemployees,then
aminimumpaidincapitalofUS$100,000.00
.(Sec.8)
249

APPENDIXA:
NEGOTIABLEWAREHOUSERECEIPTANDNONNEGOTIABLEWAREHOUSERECEIPT
NEGOTIABLEWAREHOUSERECEIPT NONNEGOTIABLEWAREHOUSERECEIPT
Maybeacquiredthroughnegotiation Maybeacquiredthroughtransferorassignment
Rightsoftheholderofthereceipt: Rightsoftransferee:

1. Ifindorsed: 1. Acquirestitletothegoodssubjecttotheterms
ofanyagreementwiththetransferor.(Sec.42)
a. Acquirestitletothegoodsasthe
personnegotiating.(Sec.41) 2. Acquirestherighttonotifythewarehouseman
b. Acquiresthedirectobligationofthe ofthetransferandtherebyacquiresthedirect
warehousemantoholdpossessionof obligationofthewarehousemantohold
thegoodsforhimasifthe possessionofthegoodsforhim.(Sec.42)
warehousemandirectlycontractedwith
him.(Ibid.) Note: Prior to notice, the title of the transferee may be
defeated by the levy of an attachment or execution upon
2. Ifnotindorsed:Hemaycompel thegoodsbyacreditorofthetransferororbyanotification
indorsement;otherwise,hewouldacquire to the warehouseman by the transferor or a subsequent
titleasthatofanassignee(Section43). purchaser from the transferor of a subsequent sale of the
goodsbythetransferor.(Sec.42)
Defeatsthelienofthesellerofthegoodscovered
Acquiresthetitleasthatofhistransferor.
thereby.(Sec.49)
Goodcoveredcannotbegarnished,attachedor
leviedonexecutionbyexecution,unless:

1. Receiptissurrendered. Pendingnotificationtothewarehouseman,goodscan
2. Itsnegotiationisenjoinedbythecourt. be.
3. Thegoodsareimpoundedbythecourt.
(Sec.25) Reason:Absentsuchnotice,boththewarehousemanand
thesheriffhavearighttoassumethatthegoodsarestill
Note: This shall not apply if the person ownedbythepersonwhosenameappearsinthereceipt.
depositing is not the owner of the goods or one
whohasnorighttoconveytitletothegoodsbinding
upontheowner.
Protectsthepurchaseringoodfaithandfor
value. Theassigneeonlystepsintotheshoesoftheassignor.

250
MERCANTILELAWTEAM:
APPENDICES
APPENDIXB:
LIABILITIESOFTHOSESECONDARILYLIABLE
ABSOLUTELIABILITY LIMITEDLIABILITY
1. QualifiedIndorserwarrantsthat:
a. Instrumentisgenuine;
1. DrawerofaBOEwarrants: b. hehasgoodtitletoit;
a. The existence of payee and his then c. capacitytocontractofallpriorparties;
capacitytoindorse and
b. That the instrument will be accepted or d. noknowledgeofanyfactwhichwould
paidbythepartyprimarilyliable;and impairthevalidityoftheinstrument.
c. That if dishonored, he pay the party (Sec.65)
entitledtobepaid.(Sec.61)
Note:Heisliabletoallpartieswhoderivetheirtitle
throughhisindorsement.
2. Generalindorser
a. Warrantsthat:
i. Instrumentisgenuine
ii. Hehadgoodtitletoit 2. Person negotiating by delivery Same
iii. All prior parties had capacity to warranties as a qualified indorser. Butunlike
contract aqualifiedindorser,apersonnegotiatingby
iv. Instrument, at the time of meredeliveryisliableonlytohisimmediate
indorsement, was valid and transferee.(par.2,Sec.65)
subsisting;
b. Onduepresentment,itshallbeaccepted Note: Person negotiating by mere delivery and a
orpaid,orbothaccordingtoitstenor qualified indorsers secondary liability is limited,
c. if the instrument is dishonored and the namely,totheirwarranties
necessary proceedings on dishonor be
duly taken, he will pay the holder. (Sec.
66)
3. Irregularindorser
a. In an order instrument, liable to the
payeeandallsubsequentparties
b. If bearer instrument or payable to order

of maker or drawer, liable to all parties

subsequenttothemakerordrawer
c. Ifhesignsforaccomodationofthepayee,
liable to all parties subsequent to payee.
(Sec.64)
251

APPENDIXC

MARINEANDLIFEINSURANCE

LIFEINSURANCE FIRE/MARINEINSURANCE
Itisacontractofinvestmentnotcontractof
Itisacontractofindemnity.
indemnity.
Alwaysregardedasvaluedpolicy. Maybeopenorvalued.
Maybetransferredorassignedtoanypersonevenif Thetransfereeorassigneemusthaveaninsurable
hehasnoinsurableinterest. interestinthethinginsured.
Theconsentoftheinsurerisnotessentialtothe
Consent,intheabsenceofwaiverbytheinsurer,is
validityoftheassignmentofalifepolicyunless
essentialintheassignmentofthepolicy.
expresslyrequired.
Insurableinterestinthelifeorhealthoftheperson Insurableinterestinthepropertyinsuredmustexist
insuredneednotexistaftertheinsurancetakes notonlywhentheinsurancetakeseffectbutalso
effectorwhenlossoccurs. whenthelossoccurs.
Insurableinterestneednothaveanylegalbasis. Insurableinterestmusthavealegalbasis.
Contingencythatiscontemplatedisacertainevent,
Thecontingencyinsuredagainstmayormaynot
theonlyuncertaintybeingthetimewhenitwilltake
occur.
place.
Theliabilityoftheinsurertomakepaymentis
Liabilityisuncertainbecausethehappeningofthe
certain,theonlyuncertainelementbeingwhensuch
perilinsuredagainstisuncertain.
paymentmustbemade.
Maybeterminatedbytheinsuredbutcannotbe
Maybecancelledbyeitherpartyandisusuallyfora
cancelledbytheinsurerandisusuallyalongterm
termofoneyear
contract.
Thelosstothebeneficiarycausedbythedeathof
Thereverseisgenerallytrueofthelossofproperty,
theinsuredcanseldombemeasuredaccuratelyin
i.e.,itiscapableofpecuniaryestimation.
termsofcashvalue.
Thebeneficiaryisundernoobligationtoproveactual Theinsuredisrequiredtosubmitproofofhisactual
financiallossasaresultofthedeathoftheinsuredin pecuniarylossasaconditionprecedentto
ordertocollecttheinsurance. collectingtheinsurance.

252
MERCANTILELAWTEAM:
APPENDICES
APPENDIXD

CORPORATIONANDPARTNERSHIP
PARTNERSHIP CORPORATION
Astocreation
Createdbymereagreementoftheparties Createdbylaworbyoperationoflaw
Commencementofjuridicalpersonality
Fromthemomentofmeetingofmindsof Fromthedateofissuanceofthecertificateofincorporation
thepartners bytheSEC
Numberofincorporators
GR:Requiresatleast5incorporatorsbutnotmorethan15
Maybeorganizedbyatleasttwopersons
XPN:Corporationsole
Powers
GR:Mayexerciseanypowerauthorizedby
thepartners.
Mayexerciseonlysuchpowersasmaybegrantedbylawand
itsarticlesofincorporation,impliedtherefromorincidental
XPN:Actswhicharecontraryto:law, thereto.
morals,goodcustoms,publicorder,public
policy
Management
Whenmanagementisnotagreedupon, Powertodobusinessandmanageitsaffairsisvestedinthe
everypartnerisanagentofthepartnership BOD/BOT
Effectofmismanagement
Apartnerassuchcansueacopartnerwho ThesuitagainstamemberoftheBODorBOTwho
mismanages mismanagesmustbeinthenameofthecorporation
Extentofliabilitytothirdpersons
GR:Partnersareliablepersonallyand
subsidiarily(sometimessolidarily)for Stockholdersareliableonlytotheextentoftheshares
partnershipdebtstothirdpersons subscribedbythemwhetherpaidornot.
XPN:Limitedpartner
RightofSuccession
Norightofsuccession Hasrightofsuccession
TransferabilityofSHsinterest
Partnercannottransferhisinterestinthe Stockholderhastherighttotransferhisshareswithoutprior
partnershipwithouttheconsentofallthe consentoftheotherstockholdersunlesstherightoffirst
otherexistingpartners. refusalisembodiedinthearticlesofincorporation.
Termofexistence
Maybeestablishedforanyperiodoftime Maynotbeformedforaterminexcessof50years.Maybe
stipulatedbythepartners extendibletonotmorethan50yearsinanyoneinstance
Firmname
Mayadoptanynameprovided:
Inalimitedpartnershipitisrequiredbylaw 1.itisnotidenticalordeceptivelysimilartoanyregistered
toaddthewordLtd.toitsname firmname;
2.notcontrarytoexistinglaw.
Dissolution
CanonlybedissolvedwiththeconsentoftheState
Maybedissolvedatanytimebythewillof
anyorallofthepartners.
Death,civilinterdictionandinsolvencyofa
partnerdissolvesthepartnership. Deathorinsolvencyofshareholderscantdissolvethe
corporation.
Governinglaw
GovernedbytheCivilCode GovernedbytheCorporationCode
253

APPENDIXE:

VOTEREQUIREMENTSFORCORPORATEACTS

CORPORATEACTS VOTEREQUIREMENT
BOARDOFDIRECTORS STOCKHOLDERS
1. Increaseordecreaseofcapitalstock MajorityvoteoftheBOD Voterepresenting2/3ofthe
outstandingcapitalstock
2. Incurring,creatingorincreasing MajorityvoteoftheBOD Voterepresenting2/3ofthe
bondedindebtedness ortrustees outstandingcapitalstock
3. Investmentofcorporatefundsin MajorityvoteoftheBOD Voterepresenting2/3ofthe
anothercorporationorbusinessorfor outstandingcapitalstock
anyotherpurpose
4. Issuanceofstockdividends ApprovaloftheBOD Voterepresenting2/3ofthe
5. Enteringintomanagementcontract ApprovaloftheBOD GR:Voteofthemajorityof
theoutstandingsharesof
stockofthemanaged
corporation.
XPN:Interlockingdirectors
orInterlockingstockholders
Voterepresenting2/3ofthe
6. Thesaleorotherdispositionofallor Approvaloftheboard Voterepresenting2/3ofthe
substantiallyallofthecorporateassets outstandingcapitalstock
7. Removalofdirectors Majorityvoteofthe
8. Electionofdirectorsortrustees;Filling Majorityoftheoutstanding
upofvacanciesbystockholders capitalstock
9. Amendmentstobylaws MajorityvoteoftheBOD Majorityvoteofthe
10. Delegationofthepowertoamendby Voterepresenting2/3ofthe

lawstotheboardofdirectors outstandingcapitalstock
11. Revocationofthedelegationofthe Majorityvoteofthe
powertoamendbylawstotheboard outstandingcapitalstock
12. Extendingorshorteningthecorporate MajorityvoteoftheBOD Voterepresenting2/3ofthe
term outstandingcapitalstock
13. Fixingtheissuedpriceofnoparvalue Majorityvoteofthe
shares outstandingcapitalstock
14. Amendmenttoarticlesofincorporation Voterepresenting2/3ofthe
15. Grantofcompensationtodirectors ApprovaloftheBoard Majorityvoteofthe
16. Ratificationofcorporatecontractwith Voterepresenting2/3ofthe
adirector outstandingcapitalstock
17. Mergerorconsolidation MajorityvoteoftheBOD Voterepresenting2/3ofthe
18. Voluntarydissolution MajorityvoteoftheBOD Voterepresenting2/3ofthe

254
MERCANTILELAWTEAM:
APPENDICES
APPENDIXF:

CONSERVATORSHIP,RECEIVERSHIPANDLIQUIDATION
CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

Grounds
1.Continuinginability 1. Inabilitytopayliabilitiesasthey 1. Insolvency
fallduee.g:bankrun,rumors,
2.Unwillingness to maintain etc. 2. Bankcannotberehabilitated
conditionofliquidity
2. Assetsarelessthanitsliabilities

3. Cannotcontinuebusiness

4. withoutcausingdamage;

5. Violationofaceaseanddesist

6. Bankholidayformorethan30
days.(Sec.30)
Effects:
1.Juridical personality is 1. Juridicalpersonalityisretained Samewithconservatorship
retained.
2. Suspensionofoperation
2.Perfectedtransactionscannot /stoppageofbusiness
berepudiated;
3. Assetsdeemedincustodialegis
(Domingov.NLRC,G.R.156761,
Oct17,2006
255

APPENDIXG:

UNIVERSALBANKS,COMMERCIALBANKSANDTHRIFTBANKS

UNIVERSALBANKS COMMERCIALBANKS THRIFTBANKS
Governinglaws
GeneralBankingLaw(GBL) GBL ThriftBanksAct(R.A.7906)
Powers
1.Hastheauthoritytoexercisethe To engage in allied undertakings Allthepowersofacommercial
powersofacommercialbank. and, in addition to the general bank,except:
powersincidenttoacorporation,
2.Toactasaninvestmenthousea may exercise all such powers as 1. ToissueimportedLC
corporation that sells and maybenecessarytocarryonthe
guarantees sale of securities and businessofcommercialbanking. 2. To accept or open checking
sharesofstocks.i.e.Petronwilltap account except with prior
aninvestmenthouseinordertosell Note: Allied undertakings are approval by the Monetary
itsstocks. those activities or entities which Board (MB requires at least
enhanceorcomplementbanking. anetassetworthof28M)
3. To engage in a nonallied
undertaking which is not related
atalltobanking.e.g.Realty
Capitalization
4.950Billion 2.4Billion 1. Manila3.25M
2. Elsewhere6.25M
Equityinvestment
Canbeastockholderinbothallied Onlyalliedundertaking Onlyalliedundertaking
andnonalliedundertaking
Nonalliedtransactions
Caninvestbutshallnotexceed25% Cannotinvest Cannotinvest
of the investee (receiving)
corporation.
Totalamountofinvestmentequity
Nottoexceed50%ofthebanksnet Nottoexceed35%ofbanksnet Not to exceed 35% of banks
worth. worth. networth.

Singleequityinvestment
Nottoexceed25%ofbanksnetworth

256
MERCANTILELAWTEAM:
APPENDICES
APPENDIXH:

NATIONALIZEDANDPARTLYNATIONALIZEDBUSINESSES
1. Zeropercent(0%)foreignequity
a. Massmediaexceptrecording;
b. Practiceofallprofessions
i. Law
ii. Medicineandalliedprofessions
iii. Accountancy,etc.
c. RetailtradeenterpriseswithpaidupcapitaloflessthanUS$2.5M(Sec.5,R.A.8762);
d. Cooperatives(Ch.III,Art.26,R.A.6938);
e. Privatesecurityagencies(Sec.4,R.A.5487);
f. Smallscalemining(Sec.3,R.A.7076);
g. Utilizationofmarineresources(Art.XII,Sec.2,Constitution);
h. Cockpits(Sec.5,P.D.449);
i. Manufacture,repair,stockpilingand/ordistributionofnuclearweapons(Art.II,Sec.8,Constitution);
j. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons
and antipersonnel mines (Various treaties to which the Philippines is a signatory and conventions
supportedbythePhilippines);
k. Manufactureoffirecrackersandotherpyrotechnicdevices(Sec.5,R.A.7183).
2. Uptosixtypercent(60%)foreignequity
a. FinancingcompaniesregulatedbytheSEC(Sec.6,R.A.5980asamendedbyR.A.8556);
b. InvestmenthousesregulatedbytheSEC(Sec.5,P.D.129asamendedbyR.A.8366).
3. Uptofortypercent(40%)foreignequity
a. Exploration,developmentandutilizationofnaturalresources(Art.XII,Sec.2,Constitution);
b. Ownershipofprivatelands(Art.XII,Sec.7,Constitution;Ch.5,Sec.22,CA141;Sec.4,R.A.9182);
c. Operationandmanagementofpublicutilities(Art.XII,Sec.11,Const.;Sec.16ofCA146);
d. Ownership/establishmentandadministrationofeducationalinstitutions(Art.XIV,Sec.4,Constitution);
e. Culture,production,milling,processing,tradingexceptingretailing,ofriceandcornandacquiring,by
barter,purchaseorotherwise,riceandcornandthebyproductsthereof(Sec.5,P.D.194;Sec.15,R.A.
8762);
f. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipal
corporation(Sec.1,R.A.5183)
g. ProjectProponentandFacilityOperatorofaBOTprojectrequiringapublicutilitiesfranchise(Art.XII,
Sec.11,Constitution;Sec.2a,R.A.7718);
h. Ownershipofcondominiumunitswherethecommonareasinthecondominiumprojectarecoowned
bytheownersoftheseparateunitsorownedbyacorporation(Sec.5,R.A.4726).
i. AdjustmentCompanies(Sec.323,P.D.613)
j. Manufacture, repair, storage and/ or distribution of products/ ingredients requiring PNP clearance
(R.A.7042asamendedbyR.A.8179)
k. Operationofdeepseacommercialfishingvessel(Sec.27,R.A.8550)
4. Uptothirtypercent(30%)foreignequity
a. Advertising(Art.XVI,Constitution).
5. Uptotwentyfivepercent(25%)foreignequity
a. Privaterecruitment,whetherforlocaloroverseasemployment(Art.27,P.D.442);
b. Contracts for the construction and repair of locallyfunded public works (Sec. 1, CA 541, LOI
630)except:
i. infrastructure/developmentprojectscoveredinR.A.7718;and
ii. projects which are foreign funded or assisted and required to undergo international
competitivebidding(Sec.2[a],R.A.7718);
c. Contractsfortheconstructionofdefenserelatedstructures(Sec.1,CA541).
6. Uptotwentypercent(20%)foreignequity
a. Privateradiocommunicationsnetwork(R.A.3846).
257

A. LETTERSOFCREDIT Irregularindorser27
IrregularIndprsement 27
B. LETTERSOFCREDIT JointIndorsement27
LocalAcceptance42
Advising/notifyingbank2 Maker31
Applicant/Buyer/Importer 2 MaterialAlteration41
Beneficiary/Seller/Exporter2 Memorandumcheck44,45
CommercialLetterofCredit1 Negotiability 16
ConfirmedLetterofCredit1 PartialAcceptance42
Confirmingbank2 PresentmentofAcceptance42,43
Doctrineofstrictcompliance4 Promissorynotes44
Fraudexceptionrule4 Protest101
Independenceprinciple4 QualifiedAcceptance42
IrrevocableLetterofCredit1 QualifiedIndorsement27
IssuingBank2 QualifiedIndorser27
Negotiatingbank2 RemoteParties 18
Payingbank2 Renunciation40
StandbyLettersofCredit1 RestrictiveIndorsement27
SpecialIndorsement26
C. WAREHOUSERECEIPTSLAW StaleCheck45
SuccessiveIndorsement27
Conversion9 Travelerscheck44
NegotiableWarehouseReceipts7 Virtual 42
NonNegotiableWarehouseReceipts7
Warehouseman 8 F. INSURANCECODE
WarehouseReceipts6
Abandonment54
D. TRUSTRECEIPTSLAW Accidentorhealthinsurance58
Additionalorotherinsuranceclause68
Entrustee12 AffirmativeRepresentation77
Entruster12 Allriskmarineinsurancepolicy49
TrustReceipt12 Authorizeddriverclause63
AutomaticLoanClause 73
E. NEGOTIABLEINSTRUMENTSLAW CashandCarryRule72
Cashsurrendervalue 73
Acceptance41 Coinsuranceclause 58
AccommodationParty24 Concealment 51
Assignment25 Contractofindemnity47
Billofexchange16 ContractofInsurance46
BlankIndorsment6 Deviation53
Cashiersormanagerscheck44 Endowment61
Certifiedcheck44 Extendedinsurance73
Check44 Fallofbuildingclause58
ConditionalAcceptance42 FireInsurance57
ConditionalIndorsement27 FreeFromParticularAverageClause57
Consideration23 Freightage50
Constructive/impliedAcceptance42 Graceperiod73
CrossedCheck45 IncontestabilityClause78
Delivery18 Industriallife61
Discharge39 Inlandmarineinsurance48
ExtrinsicAcceptance42 Insurableinterest64
FacultativeIndorsement27 Insuranceuponlifeofanother65
Forgery20 Insuranceupononeslife65
Fraudintheexecutionorfraudinfactum23 Landtransportationoperator63
Fraudintheinducementorsimplefraud23 Liabilityinsurance59
GeneralAcceptance42 LifeInsurance47
GeneralIndorser32 Limitedpayment61
Holderforvalue23 LoanonBottomry50
HolderinDueCourse29 MarineInsurance47
HoldernotinDueCourse29 Misrepresentation76,77
ImmediateParties18 MoralHazard46
Indorsement26 Motorvehicleliabilityinsurance62
258
MERCANTILELAWTEAM:
INDEX
Motorvehicleowner62 Shipagent97
NoticeofLoss80 Shipwreck101
OpenPolicy48 Thirdoperatorrule105
Optiontorebuildclause58 Thirdvesselatfault100
Ordinarylife,generallifeoroldlinepolicy61 ThirdZone100
PaidupInsurance73 Vesselatfaultnotknown100
Passenger62 Voyagecharter95
Perilsoftheseaorperilsofnavigation48 WarsawConvention107
PolicyofInsurance69
Portofrefugeexpenses56 H. CORPORATIONLAW
Premium46
Principleofsubrogation82 Appraisalright138
PromissoryRepresentation51 Articlesofincorporation120
Properdeviation53 Bondedindebtedness128
PublicEnemy85 Businessjudgmentrule145
Reinstatement73 Bylaws124
Representation76,77 Certificateofstock149
Seaworthiness52 Closecorporation161
Suretyship60 Commonshares116
Terminsurance61 Concessiontheoryorfiattheory109
TestofMateriality75 Consolidation170
Theftclause63 Continuingproxy136
Thirdpartyliabilityinsurance58 Continuitytest166
Threefourthrule54,55 Contracttest166
Valuedpolicy48 Controltest112
Variablecontract61 Corporateenterpriseoreconomicunit110
WagerPolicy65 Corporateofficers114
Warranties34 Corporation110
Corporationbyestoppels111
G. TRANSPORATATIONLAW Corporationbyprescription111
Corporationsole164
Allision100 Corporators114
Arrivalunderstress101 Cumulativepreferredshares117
Averages99 Cumulativevotingbydistribution143
Bareboatordemise95 Cumulativevotingforonecandidate143
BillofLading93 Defactocorporation111
Boundarysystem106 Derivativesuit140
CertificateofPublicConvenience104 Directorsandtrustees114
Charterpartycontract95 Dissolution158
Collision100 Doctrineofcorporateopportunity145
CommonCarrier84 Doctrineofequalityofshares134
Constructivedelivery88 Doctrineofestoppels167
Contractofaffreightment95 Doctrineofindividualityofsubscription134
Doctrineoflimitedliability98 Doctrineofisolatedtransactions167
Errorinextremis100 Doctrineofrelation115
Extraordinarydiligence84 Doctrineofseparatelegalpersonality112
Firstzone100 Domiciliarytest112
Fortuitousevent71 Domesticcorporation110
Generalaverage99 Ecclesiasticalcorporation110
Internationaltransportation107 Foreigncorporation110
Jettison99 Founders'shares117
Kabitsystem106 Fractionalshare118
Onevesselatfault100 Generalproxy136
Particularaverage57 Genossenschafttheory110
Priorapplicantrule105 Grandfatherrule112
Prioroperatorrule105 Inparidelictorule167
Prohacvice95 Incorporationtest112
Protectionofinvestmentrule105 Incorporators114
Publicservice103 Independentdirector142
Publicutility103 Individualsuit140
Rightofstoppageintransit88 Insideinformation147
Secondzone100 Liquidation160

259

Managementcontract133 Matchedsale 178
Merger170 Paintingthetape 178
Noncumulativepreferredshares117 Salesman 177
Nonparticipatingpreferredshares117 Shortselling 178
Nonstockcorporation163 Squeezingthefloat 178
Nonvotingshares118 Tenderoffer 179
Overissuedstock118 Washsale 178
Paidinsurplus132
Parvalueshares116 J. BANKINGLAWS
Participatingpreferredshares116
Piercingtheveilofcorporatefiction113 Armslengthrule198
Poolingagreement137 Bank192
Postincorporationsubscription119 CentralBankCircular416196
Preemptiveright129 Closure186
Preferredcumulativeparticipatingshares117 CommercialBank192
Preferredshares116 Conservatorship185
Preferredsharesastoassets116 CooperativeBank192
Preferredsharesastodividends116 Deposit195
Preincorporationsubscription119 Depositsubstitutes192
Promoter119 DOSRI197
Promotionalshare119 Financialintermediaries192
Proxy135 Insureddeposit199
Redeemableshares117 Interestaccruingfromunpaidinterest196
Religiouscorporation164 IslamicBank192
Religioussocietiesorcorporateaggregate164 Liquidation187
Representativesuit143 MonetaryBoard185
Revaluationsurplus132 Otherclassificationofbanks192
Rightoffirstrefusal138 Receivership186
Righttoissuance151 RuralBank192
Sharesinescrow118 Singleborrowerslimit197
Sharesofstock149 Splittingofdeposits202
Specialfactdoctrine146 ThriftBank192
Specificproxy136 UniversalBank192
Stockcorporation111
Straightvoting143 K.
INTELLECTUALPROPERTYLAWS
Streetcertificate118
Subscriptioncontract119 Abstract208
SubsequentTest116 Affidavitevidence235
Treasuryshares117 Automaticprotection231
Trustfunddoctrine134 Collectivemark215
Ultraviresacts134 Colorableimitation218
Underwriter114 Copyright223
Unrestrictedretainedearnings(URE)117 Divisionalapplications208
Votingshares118 Doctrineofcontributoryinfringement212
Votingtrustagreement(VTA)136 Doctrineofequivalence211
Wateredstock136 Doctrineofsecondarymeaning216
Dominancytest218
Droitdesuite226
I. SECURITIESREGULATIONCODE Economicinteresttest213
Equivalentdevice212
Associatedpersonofabrokerordealer177
Geographicindication204
Boilerroomoperations 178 Idemsonans208
Broker 180 Industrialdesign206
Constructiveinsider 179 Integratedcircuit206
DaisyChain 178 Internationalexhaustion221
Dealer 177 Inventivestep205
Exemptsecurities 174 Layoutdesign/topography206
Hypeanddump 178 Literalinfringementtest211
Insider 179 Modifiedexhaustion211
Insidertrading 178 Mustcarryrule233
Margintrading 177 Nationalexhaustion211
Markingtheclose 178 Neighboringrights227
260
MERCANTILELAWTEAM:
INDEX
Noncompetinggoods220
Nonprejudicialdisclosure205
Parallelimporter211
Patent204
PatentableInventions205
Personofordinaryskill206
Plagiarism235
Presumptionofauthorship226
Priorart205
Prioruser210
Prioritydate208
Publishedworks234
Regionalexhaustion211
Relatedgoodsprinciple218
Reversereciprocityofforeignlaw210
Substantialreproduction235
Technologytransferarrangement204
Testofnonobviousness206
Totalityorholistictest218
Trademark215
Trademarkinfringement219
Tradename222
Undisclosedinformation204
Unfaircompetition221
Unityofinvention208
Utilitymodel206
Voluntarylicensing213
L. SPECIALLAWS
Afteracquiredproperties236
Afterincurredobligations236
Coveredinstitutions243
Domesticmarketenterprise247
ExportEnterprise247
ForeignInvestmentNegativeList248
MoneyLaundering244
NonPhilippinenationals247
Onceaweekforthreeconsecutiveweeks240
Philippinenationals247
RectoLaw237
SuspiciousTransactions243

261

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LETTERS OF CREDIT

LETTERSOFCREDIT Q: Is irrevocable letter of credit and confirmed

WAREHOUSERECEIPTSLAW a specified person or to a specified

including one who assigns for value a claim A:

Q:Whataretherightsoftheentruster? instruments (GDI) in trust for the

A: Yes, but any excess shall likewise belong to

the goods, documents or instruments were not

the buyer subsequent to the TR transaction be

debts consists in civil liability arising from

Q: Lorenzo signed several blank checks

check with her name as payee, placed

check, it was dishonored. Is Lorenzo liable to

Instruments Law, which provides that there was

warranties as an indorser and cannot V.CONSIDERATION

tanto, whether the failure is an ascertained and

3. Right to contribution from other

a. upon no other condition than 1. Forgery;

though holding the legal title, to A.MAKER

Q: What are the liabilities of those secondarily

Apparently, X has conspired with the bank's

bookkeeper so that his ledger card would show

5. Notice to joint parties who are not D.FORMOFNOTICE

office within the time specified in XII.DISCHARGE

Q:Whatconstitutesamaterialalteration? numbers or other change to an incomplete

A: A memorandum check is an evidence of debt

Q: What is the effect of delay to make

Q: A check was dishonored due to material

A: No. If a bank refuses to pay a check

insurance, or employees under Labor IV.CLASSESOFINSURANCE

connected with provide the vessel

Insurance Co v. Hamilton Fraser 5. The use of false and simulated papers.

Q: In an insurance upon cargo, what is the

of a vessel, acting for all the interest

Theliabilityisdirectbut Liability is direct and can

This nofault claim does not apply to property

Q: Angela, owner of a condominium unit, interestisrequisitetotheexistencethereof.Itis

Q: Does nonpayment of balance of premiums payment,insurerisdeemedtohaveacceptedthe

Q: What are the effects of nonpayment of

merely suspend but put an end to an

3. The insurer has waived his right to

A: Acceptance of premium within the stipulated

to pay the succeeding premiums. (Sec. D.REINSTATEMENTOFALAPSEDPOLICY

Q:Whatisanaffirmativerepresentation? appears that it was merely a statement of belief or

B.GUIDELINESONCLAIMSSETTLEMENT 5. Compelling policyholders to institute

Note:Wageringcontractsarethosewhere 4. Where the insurer pays the insured for

Q: What if the amount paid by the insurance

Q: What are the instances where the right of

isvalid,butnotforwillfulacts orgross caseofitsloss,destructionordeterioration.(Art.

Q: Should the diligence of the passenger be theparties.(PhoenixAssuranceCo.,Ltd.v.United

6. Voyageisnotmaritimeincharacter. Q: Who shall be liable for the amount of the

The features which characterize, the "boundary VII.THEWARSAWCONVENTION

CORPORATIONLAW participated in the business affairs of the

corporation like entering into a

the same manner as natural persons. XPN:Ifthepenaltyofthecrimeisonlyfineor

the New Civil Code because said

Q: What is the doctrine of piercing the veil of

(1)NUMBERANDQUALIFICATIONSOF cooperatives are allowed to be incorporators

corporation by purchase, donation, and

F.INCORPORATIONANDORGANIZATION 2. Firm Commitment the underwriter

Q:WhatarethecontentsofAOI? 5. Certification under oath by corporate

(7)REGISTRATIONANDISSUANCEOF present either in person or by

d. Copythereof,dulycertifiedby the owners of at least a majority of the

by a majority vote of the directors of