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CASE OUTLINE IN MERCANTILE LAW

Dean Nilo T. Divina

Letters of Credit

A. Definition and Nature of Letter of Credit

Usage and customs apply in commercial transactions in the absence of any particular provision
in the Code of Commerce, as provided in Article 2 of the same Code. Hence, the rule that all
parties concerned in documentary credit operations deal in documents and not in goods bind
the parties in a letter of credit transaction. (Bank of the

Philippine Islands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))

An order of the court releasing the proceeds of an irrevocable letter of credit to the applicant,
which was issued to pay for tobacco purchased from the beneficiary of the letter of credit,
violates the irrevocable nature of the letter of credit. An irrevocable letter of credit cannot,
during its lifetime, be cancelled or modified without the express permission of the beneficiary.
(Philippine Virginia Tobacco Administration vs. De Los Angeles, 164 SCRA 543 (1988))

The primary purpose of the letter of credit is to substitute for and therefore support, the
agreement of the buyer/importer to pay money under a contract or other arrangement.
Hence, the failure of a buyer/importer to open a letter of credit as stipulated amounts to a
breach of contract which would entitle the seller/exporter to claim damages for such breach.
(Reliance Commodities, Inc. Vs. Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993))

In a letter of credit transaction, there are three separate and distinct relationships: a) between
the account party (buyer/importer) and the beneficiary (seller/exporter), which may be a
contract of sale or non-sale; b) between the account party and the issuing bank, where the
former applies to the latter for a specified L/C and agrees to reimburse the bank for amounts
paid by it pursuant to the L/C; and c) between the issuing bank and the beneficiary where the
former, upon presentation of stipulated documents, pays the latter the amount under the L/C.
Such relationships are interrelated but independent of one another. (Rodzssen Supply
Company, Inc. vs. Far East Bank and Trust Company, 357 SCRA 618 (2001))

Commercial letters of credit involve the payment of money under a contract of sale wherein
the seller-beneficiary presents to the issuing bank documents that would show that he has
taken affirmative steps to comply with the sales agreement. On the other hand, standby letters
of credit are used in non-sale setting where the beneficiary presents documents that would
show that the obligor has not complied with his obligation. (Transfield Philippines, Inc. vs.
Luzon Hydro Corp. 443 SCRA 307 (2004))

The stay order issued by the rehabilitation court pursuant to the Interim Rules of

Corporate Rehabilitation does not apply to the beneficiary of the letter of credit
against the banks that issued it because the prohibition on the enforcement of claims against
the debtor, guarantors or sureties of the debtors does not extend to the claims against the
issuing bank in a letter of credit. Letters of credit are primary obligations and not accessory
contracts and while they are security arrangements, they are not thereby converted into
contracts of guaranty. (MWSS vs. Hon. Daway, 432 SCRA 559 (2004))

Parties to a Letter of Credit

Rights and Obligations of Parties

A buyer who applied for a letter of credit to pay for imported dyestuffs must reimburse the
issuing bank which paid the beneficiary, even if the shipment contained colored chalks. Banks
are not required to investigate if the contract underlying the letter of credit has been fulfilled
or not because in a transaction involving letter of credit, banks deal only with documents and
not with goods. (Bank of the Philippine

Islands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))

The issuing bank’s (IBAA) obligation under an Irrevocable Standby Letter of Credit executed to
secure a contract of loan cannot be reduced by the direct payments made by the principal
debtors to the creditor. Although a letter of credit is a security arrangement, it is not
converted thereby into a contract of guaranty; the obligation of the bank under the letter of
credit is original and primary. (Insular Bank of Asia & America vs. Intermediate Appellate
Court, 167 SCRA 450 (1988))

The mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank, in accepting the instructions of the issuing bank, has also confirmed the
letter of credit. The petitioner, as a notifying bank, assumes no liability except to notify the
beneficiary of the existence of the letter of credit; it does not give an absolute assurance to
the beneficiary that it will undertake the issuing bank’s obligation as its own according to the
terms and conditions of the credit. (Feati Bank & Trust Company vs. Court of Appeals, 196
SCRA 576 (1991))
Drafts drawn by the beneficiary need not be presented to the applicant for acceptance before
the issuing bank can seek reimbursement. Once the issuing bank has paid the beneficiary after
the latter’s compliance with the terms of the letter of credit, the issuing bank becomes
entitled to reimbursement. (Prudential Bank & Trust Company vs. IAC, 216 SCRA 257 (1992))

When the notifying bank entered into a discounting arrangement with the beneficiary, it acts
independently as a negotiating bank. As such, the negotiating bank has a right to recourse
against the issuer bank and until reimbursement is obtained, the beneficiary, as the drawer of
the draft, continues to assume a contingent liability thereon. (Bank of America vs. Court of
Appeals, 228 SCRA 357 (1993))

A notifying or advising bank does not incur any liability arising from a fraudulent letter of
credit as its obligation is limited only to informing the beneficiary of the existence of the letter
of credit. Such notifying bank does not warrant the genuineness of the
letter of credit but is bound only to check its apparent authenticity. (Bank of America vs. Court
of Appeals, 228 SCRA 357 (1993))

While a marginal deposit, a collateral security, earns no interest in favor of the applicant, the
bank is not only able to use the same for its own purposes, interest-free, but it is also able to
earn interest on the money loaned to the applicant. The buyer/importer's marginal deposit
should then be set off against his debt, for it would be onerous to compute interest and other
charges on the face value of the letter of credit which the bank issued, without first crediting
or setting off the marginal deposit which the importer paid to the bank. (Abad vs. Court of
Appeals, 181 SCRA 191 (1990); Consolidated Bank & Trust Corporation vs. Court of Appeals,
356 SCRA 671 (2001))

An issuing bank which paid the beneficiary of an expired letter of credit can recover payment
from the applicant which obtained the goods from the beneficiary to prevent unjust
enrichment. (Rodzssen Supply Company, Inc. vs. Far East Bank and Trust Company, 357 SCRA
618 (2001))

Basic Principles of Letter of Credit

Doctrine of Independence

Where the applicant entered into a contract, the performance of which is secured by a
standby letter of credit, the resort to arbitration by the applicant/contractor, in the absence of
a stipulation that any dispute must first be settled through arbitration before the beneficiay
can draw on the letter of credit, does not preclude the beneficiary to draw on the letter of
credit upon its issuance of a certificate of default.

The claim of fraud will not be sufficient to support an injunction against payment by reason of
the “independence principle” which assures the beneficiary of prompt payment independent
of any breach of the main contract and precludes the issuing bank from determining whether
the main contract is actually accomplished or not. (Transfield Philippines, Inc. vs. Luzon Hydro
Corp. 443 SCRA 307 (2004))
The issuing bank is not liable for damages even if the shipment did not conform to the
specifications of the applicant. Under the “independence principle”, the obligation of the
issuing bank to pay the beneficiary arises once the latter is able to submit the stipulated
documents under the letter of credit. Hence, the bank is not liable for damages even if the
shipment did not conform to the specifications of the applicant.

(Land Bank of the Philippines vs. Monet’s Export and Manufacturing Corp., 453 SCRA

173 (2005))

Where the trial court rendered a decision finding the buyer solely liable to pay the seller and
omitted by inadvertence to insert in its decision the phrase “ without prejudice to the decision
that will be made against the issuing bank “ , the bank can not evade responsibility based on
this ground. The seller who is entitled to draw on the credit line of the buyer from a bank
against the presentation of sales invoices and official receipts of the purchases and who
obtained a court judgment solely against the buyer even though the suit is against the bank
and the buyer may still enforce the
liability of the same bank under a letter of credit issued to secure the credit line. The so-called
"independence principle" in a letter of credit assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not. Philippine National Bank
vs. San Miguel Corporation. No. 186063, January 15, 2014.

Fraud Exception Principle

The untruthfulness of a certificate accomplanying a demand for payment under a standy letter of
credit may qualify as fraud sufficient to support injunction against payment. However, under the
“fraud exception principle”, this must constitute fraud in relation to the independent purpose or
character of the letter of credit and not only fraud under the main agreement; moreover,
irreparable injury will be suffered if injunction will not be granted. (Transfield Philippines, Inc. vs.
Luzon Hydro Corp. 443 SCRA 307 (2004))

Doctrine of Strict Compliance

When the letter of credit required the submission of a certification that the applicant/buyer has
approved the goods prior to shipment, the unjust refusal of the applicant/buyer to issue said
certification is not sufficient to compel the bank to pay the beneficiary thereof. Under the
doctrine of strict compliance, the documents tendered must strictly conform to the terms of the
letter of credit, otherwise, the bank which accepts a faulty tender, acts on its own risks and may
not be able to recover from the applicant/buyer. (Feati Bank & Trust Company vs. Court of
Appeals, 196 SCRA 576 (1991))

Trust Receipts Law


A. Definition/Concept of a Trust Receipt Transaction

Loan/Security Feature

The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money
or goods to the prejudice of another regardless of whether the latter is the owner or not. The law
does not seek to enforce payment of the loan, thus, there is no violation of the constitutional
provision against imprisonment for non-payment of debt. (People vs. Hon. Nitafan and Betty Sia
Ang, 207 SCRA 726 (1992))

Compensation shall not be proper when one of the debts consists in civil liability arising from a
penal offense; moreover, any compromise relating to the civil liability does not automatically
extinguish the criminal liability of the accused. The mere failure of the entrustee to deliver the
proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes prejudice
not only to another, but more to the public interest. (Metropolitan Bank & Trust Company vs.
Tonda, 338 SCRA 254 (2000))
A trust receipt is a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit except through utilization, as
collateral of the merchandise imported or purchased. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a
security for the loan; hence, the transaction involves a loan feature represented by a letter of
credit, and a security feature which is in the covering trust receipt which secures an
indebtedness. (Lee vs. Court of Appeals, 375 SCRA 579 (2002))

Ownership of the Goods, Documents and Instruments under a Trust Receipt

The transaction is a simple loan when the goods subject of the agreement had been purchased
and delivered to the supposed entrustee prior to the execution of the trust receipt agreement.
The acquisition of ownership over the goods before the execution of the trust receipt
agreement makes the contract a simple loan, regardless of the denomination of the contract.
(Colinares vs. Court of Appeals, 339 SCRA 609 (2000))

Respondent Corporation is not an importer which acquired the bunker fuel oil for re-sale; it
needed the oil for its own operations. More importantly, at no time did title over the oil pass
to petitioner bank, but directly to respondent Corporation to which the oil was directly
delivered long before the trust receipt was executed; thus, the contract executed by the
parties is a simple loan and not a trust receipt agreement. (Consolidated Bank & Trust Corp. vs.
Court of Appeals, 356 SCRA 671

(2001))

In a trust receipt transaction, the entrustee has neither absolute ownership, free disposal nor
the authority to freely dispose of the articles subject of the agreement.

Since the goods could not have been subjected to a valid mortgage, there can also be no valid
foreclosure especially when the mortgagee who subsequently foreclosed and purchased the
said goods were in bad faith, having knowledge of the inclusion of such articles in a trust
receipt agreement. (DBP vs. Prudential Bank, 475 SCRA 623 (2005))

Rights of the Entruster

Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent Purchaser
for Value

The security interest of the entruster pursuant to the written terms of a trust receipt shall be
valid as against all creditors of the entrustee for the duration of the trust receipt agreement,
including among others, the laborers of the entrustee. The only exception to the rule is when
the properties are in the hands of an innocent purchaser for value and in good faith.
(Prudential Bank vs. National Labor Relations Commission, 251 SCRA 412 (1995))

Obligation and Liability of the Entrustee


Commercial invoices attached to the applications for letters of credit and of trust receipts,
which only provide for the list of items sought to be purchased and their prices will not
prove delivery of the goods to the entrustee. Hence, criminal liability will not attach and
the accused should be acquitted in the estafa cases. (Ramos vs. Court of Appeals, 153
SCRA 276 (1987))

While the presumption found under the Negotiable Instruments Law may not necessarily
be applicable to trust receipts and letters of credit, the presumption of consideration
applies on the drafts drawn in connection with the letters of credit. Hence, the drafts
signed by the beneficiary/suppliers in connection with the corresponding letters of credit
proved that said suppliers were paid by the bank

(entruster) for the account of the entrustee. (Lee vs. Court of Appeals, 375 SCRA 579
(2002))

When there is a violation of the Trust Receipts Law, what is being punished is the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner. However, failure to comply with the
obligations due to serious liquidity problems and after the entrustee was placed under
rehabilitation does not amount to dishonesty and abuse of confidence, thus, the entrustee
cannot be said to have violated the law. (Pilipinas Bank vs. Ong, 387 SCRA 37 (2002))

Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or Instruments

When the goods subject of the transaction, such as chemicals and metal plates, were not
intended for sale or resale but for use in the fabrication of steel communication towers,
the agreement cannot be considered a trust receipt transaction but a simple loan. P.D. No.
115 punishes the entrustee for his failure to deliver the price of the sale, or if the goods are
not sold, to return them to the entruster, which, in the present case, is absent and could
not have been complied with; therefore, the liability of the entrustee is only civil in nature.
(Anthony L. Ng vs. People of the Philippines, G.R. No. 173905, April 23, 2010)
Under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to
turn over the proceeds of the sale of goods covered by the trust receipt to the entruster; or
(2) when the entrustee fails to return the goods under trust, if they are not disposed of in
accordance with the terms of the trust receipts. When both parties know that the
entrustee could not have complied with the obligations under the trust receipt without his
fault, as when the goods subject of the agreement were not intended for sale or resale, the
transaction cannot be considered a trust receipt but a simple loan, where the liability is
limited to the payment of the purchase price. (Land Bank of the Philippines vs. Perez, G.R.
No. 166884, June 13, 2012)

When both parties entered into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to
Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon
by the parties would be the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank the amount spent
for the purchase of the goods. (Hur Tin Yang vs. People of the Philippines, G.R. No.
195117, August 14, 2013)

Return of Goods, Documents or Instruments in Case of Non-Sale

A trust receipt transaction is a security agreement, pursuant to which the entruster


acquires a security interest in the goods, which are released to the possession of the
entrustee who binds himself to hold the goods in trust for the entruster and to sell or
otherwise dispose of the goods or to return them in case of non-sale. The return of the
goods to the entruster however, does not relieve the entrustee of the obligation to pay the
loan because the entruster is not the factual owner of the goods and merely holds them as
owner in the artificial concept for the purpose of giving stronger security for the loan.
(Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))

Liability for Loss of Goods, Documents or Instruments

Under the Trust Receipts Law, the loss of the goods subject of the trust receipt regardless
of the cause and period or time it occurred, does not extinguish the civil obligation of the
entrustee. Hence, the fact that the entrustee attempted to make a tender of goods to the
bank and as a consequence of the latter’s refusal, the goods were stored in the entrustee’s
warehouse and thereafter gutted by fire, the liability of the entrustee still subsists; the
principle of res perit domino will not apply to the bank which holds only a security of
interest over the goods. (Rosario Textile Mills Corp. vs.

Home Bankers Savings and Trust Company, 462 SCRA 88 (2005))

Penal Sanctions if Offender is a Corporation


Recognizing the impossibility of imposing the penalty of imprisonment on a corporation, it
was provided that if the entrustee is a corporation, the penalty shall be imposed upon the
directors, officers, employees or other officials or persons responsible for the offense.
However, the person signing the trust receipt for the corporation is not solidarily liable
with the entrustee-corporation for the civil liability arising from the criminal offense unless
he personally bound himself under a separate contract of surety or guaranty. (Ong vs.
Court of Appeals, 401 SCRA 649 (2003))

When the entrustee is a corporation, the director, officer, employee, or any person
responsible for the violation of the Trust Receipts Law is held criminally liable without
prejudice to the civil liability, which is imposed upon the entrustee-corporation. The fact
that the officer signed in his official capacity means that the corporation is the one civilly
liable; however, when such officer also signed a trust receipt in his personal capacity, he
will also be held civilly liable together with the corporation, with the scope of liability
depending on whether he signed as a surety or as a guarantor. (Tupaz IV vs. Court of
Appeals, 475 SCRA 398 (2005))

The fact that the officer who signed the trust receipt on behalf of the entrustee-
corporation signed in his official capacity without receiving the goods as he had never
taken possession of such nor committing dishonesty and abuse of confidence in transacting
with the entrustor, is immaterial. The law specifically makes the director, officer, employee or
any person responsible criminally liable precisely for the reason that a corporation, being a
juridical entity, cannot be the subject of the penalty of imprisonment. (Alfredo Ching vs.
Secretary of Justice, 481 SCRA 609 (2006))

D. Remedies Available

After the infomation is filed in court, compromise of the estafa case arising from violation of
the Trust Receipts Law will not amount to novation and will not extinguish the criminal liability
of the accused. (Ong vs. Court of Appeals, 124 SCRA 578 (1983))

Although the surrender of the goods to the entruster results in the acquittal of the accused in
the estafa case, it is not a bar to the institution of a civil action for collection because of the
loan feature (civil in nature) of the trust receipt transaction, which is entirely distinct from its
security feature (criminal in nature). Accordingly, Article 31 of the New Civil Code provided
that when the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal
proceedings and regardless of the result of the latter. (Vintola vs. Insular Bank of Asia and
America, 150 SCRA 140 (1987))

The entruster’s repossession of the subject machinery and equipment, not for the purpose of
transferring ownership to the entruster but only to serve as security to the loan, cannot be
considered payment of the loan under the trust receipt and letter of credit. Payment would
legally result only after PNB had foreclosed on said securities, sold the same and applied the
proceeds thereof to TCC's loan obligation. (Philippine

National Bank vs. Pineda, 197 SCRA 1 (1991))

When the entrustee defaults on his obligation, the entruster has the discretion to avail of
remedies which it deems best to protect its right. The law uses the word “may” in granting to
the entruster the right to cancel the trust and take possession of the goods; hence, the option
is given to the entruster. (South City Homes, Inc. vs. BA Finance Corporation, 371 SCRA 603
(2001))

A civil case filed by the entruster against the entrustees based on the failure of the latter to
comply with their obligation under the Trust Receipt agreement is proper because this breach
of obligation is separate and distinct from any criminal liability for misuse and/or
misappropriation of goods or proceeds realized from the sale of goods released under the
trust receipts. Being based on an obligation ex contractu and not ex delicto, the civil action
may proceed independently of the criminal proceedings instituted against the entrustees
regardless of the result of the latter. (Sarmiento vs.

Court of Appeals, 394 SCRA 315 (2002))

Novation may take place either by express and unequivocal terms or when the old and new
obligations cannot stand together and are incompatible on every point. The execution of the
Memorandum of Agreement, which provided for principal conditions incompatible with the
trust agreement, extinguished the obligation under the trust
receipts without prejudice to the debtor’s civil liability. (Pilipinas Bank vs. Ong, 387

SCRA 37 (2002))

As provided under Section 7, P.D. No. 115, in the event of default of the entrustee, the entruster
may cancel the trust and take possession of the goods subject of the trust or of the proceeds
realized therefrom at any time; the entruster may, not less than five days after serving or sending
of notice of intention to sell, proceed with the sale of the goods at public or private sale where the
entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. This is by
reason of the fact that the initial repossession by the bank of the goods subject of the trust receipt
did not result in the full satisfaction of the entrustee’s loan obligation. (Landl & Company vs.
Metropolitan

Bank, 435 SCRA 639 (2004))

E. Warehouseman’s Lien

Notwithstanding the right of PNB over the stocks of sugar as the endorsee of the quedans,
delivery to it shall be effected only upon payment of the storage fees. The warehouseman may
demand payment of his lien prior to the delivery of the stocks of sugar because under Section 29
of the Warehouse Receipts Law, the warehouseman loses his lien upon the goods by surrendering
possession thereof. (Philippine National Bank vs. Se, Jr., 256 SCRA 380 (1996))

A warehouseman may enforce his lien under the following instances: 1) he may refuse to deliver
the goods until his lien is satisfied; 2) he may sell the goods and apply the proceeds thereof to the
value of the lien; and 3) by other means allowed by law to a creditor against his debtor, for the
collection from the depositor of all charges and advances which the depositor expressly or
impliedly contracted with the warehouseman; or such remedies allowed by law for the
enforcement of a lien against personal property. (Philippine National Bank vs. Sayo, Jr., 292 SCRA
202 (1998))

The refusal of the warehouseman to deliver the sugar to the endorsee of the quedans on the
ground that it has claimed ownership over the sugar by reason of non-payment of its buyer, not
being one of the remedies available to the warehouseman to enforce his lien, caused the loss of
the warehouseman’s lien. Nevertheless, the loss did not extinguish the obligation to pay the
warehouseman’s fees but merely caused the fees and charges to cease to accrue from the date of
the rejection by the warehouseman to heed the previous lawful demand for the release of the
goods. (Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))

Negotiable Instruments Law

A. Forms and Interpretation

1. Requisites of Negotiability

A check which reads “Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.” is not negotiable because the payee ceased to be indicated with
reasonable certainty in contravention of Section 8 of the Negotiable
Instruments Law. As worded, it could be accepted as deposit to the account of the
party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent,
for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. (Equitable
Banking Corporation vs. the Honorable Intermediate Appellate Court and The Edward
J. Nell Co., G.R. No. 74451 May 25, 1988)

Without the words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a negotiable instrument, but
will merely "step into the shoes" of the person designated in the instrument and will
thus be open to all defenses available against the latter. (Juanita Salas vs. Hon. Court
of Appeals and First Finance & Leasing Corporation, G.R. No. 76788 January 22, 1990)

The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants
themselves non-negotiable. (Metropolitan Bank & Trust Company vs. Court Of

Appeals, Golden Savings & Loan Association, Inc., Lucia Castillo, Magno Castillo and
Gloria Castillo, G.R. No. 88866 February 18, 1991)

When the documents provide that the amounts deposited shall be repayable to the
depositor, such instrument is negotiable because it is payable to the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him, but the amounts are to be repayable to
the bearer of the documents or, for that matter, whosoever may be the bearer at the
time of presentment. [Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank
and Trust Company, G.R. No. 97753, August 10, 1992]

The language of negotiability which characterizes a negotiable paper as a credit


instrument is its freedom to circulate as a substitute for money. This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time. (Traders Royal Bank vs.
Court of Appeals, Filriters Guaranty Assurance Corporation and Central Bank of the
Philippines, G.R. No. 93397, March 3, 1997)
Under the fictitious payee rule, a check made expressly payable to a non-fictitious and
existing person is not necessarily an order instrument if the payee is not the intended
recipient of the proceeds of the check. There is, however, a commercial bad faith
exception to this rule which provides that a showing of commercial bad faith on the
part of the drawee bank, or any transferee of the check for that matter, will work to
strip it of this defense. (Philippine National Bank vs. Erlando T. Rodriguez and Norma
Rodriguez, G.R. No. 170325, September 26, 2008)

Under the Negotiable Instruments Law, a check made payable to cash is payable to the
bearer and could be negotiated by mere delivery without the need of an indorsement.
However, the drawer of the post-dated check can not be liable for estafa to the person
who did not acquire the instrument directly from drawer but through negotiation of
another by mere delivery. This is because the drawer did not use the check to defraud
the holder/private complainant. PEOPLE OF THE PHILIPPINES VS. GILBERT REYES

WAGAS. G.R. No. 157943, September 4, 2013

2. Kinds of Negotiable Instruments

Postal money orders are not negotiable instruments, the reason being that in establishing and
operating a postal money order system, the government is not engaged in the commercial
transactions but merely exercises a governmental power for the public benefit. Some of the
restrictions imposed upon money orders by postal laws and regulations are inconsistent with
the character of negotiable instruments. For instance, such laws and regulations usually
provide for not more than one endorsement; payment of money orders may be withheld under
a variety of circumstances. (Philippine Education Co., inc. vs. Mauricio A. Soriano, et al., G.R.
No. L-

22405, June 30, 1971)

Bank withdrawal slips are non-negotiable and the giving of immediate notice of dishonor of
negotiable instruments does not apply in this case. Since the withdrawal slips deposited with
petitioner’s current account with Citibank were not checks,

Citibank was not bound to accept the withdrawal slips as a valid mode of deposit, but having
erroneously accepted them as such, Citibank – and petitioner as account-holder – must bear
the risks attendant to the acceptance of these instruments. (Firestone Tire & Rubber Company
of the Philippines vs. Court of Appeals and Luzon Development Bank, G.R. No. 113236, March
5, 2001)

A check is “a bill of exchange drawn on a bank payable on demand” which may either be an
order or a bearer instrument. Under Section 9(c) of the NIL, a check payable to a specified
payee may nevertheless be considered as a bearer instrument if it is payable to the order of a
fictitious or non-existing person like checks issued to “Prinsipe Abante” or “Si Malakas at si
Maganda,” who are well-known characters in Philippine mythology. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No. 170325, September 26, 2008)
A certificate of deposit is defined as a written acknowledgement by a bank of the receipt of a
sum of money on deposit which the bank promise to pay to the depositor or the order of the
depositor or to some other person or his order whereby the relation of debtor and creditor
between the bank and the depositor is created. A document to be considered a certificate of
deposit need not be in a specific form. Thus, a passbook of an interest-earning deposit
account issued by a bank is a certificate of deposit drawing interest because it is considered a
written acknowledgment by a bank that it has accepted a deposit of a sum of money from a
depositor. Thus, it is subject to documentary stamp tax. Prudential Bank v. Commissioner of
Internal Revenue (CIR) G.R. No. 180390, July 27, 2011

B. Completion and Delivery

The 17 original checks, completed and delivered to petitioner, are sufficient by themselves to
prove the existence of the loan obligation of the respondents to petitioner. Sec. 16 of the NIL
provides that when an instrument is no longer in the possession of the person who signed it
and it is complete in its terms "a valid and
intentional delivery by him is presumed until the contrary is proved. (Ting Ting Pua vs .

Spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng, G.R. No. 198660, October 23,
2013)

Insertion of Date

Completion of Blanks

In any case, it is no defense that the promissory notes were signed in blank as Section 14 of
the Negotiable Instruments Law concedes the prima facie authority of the person in
possession of negotiable instruments to fill in the blanks. (Quirino Gonzales

Logging Concessionaire, Quirino Gonzales and Eufemia Gonzales vs. the Court of Appeals
(CA) and Republic Planters Bank, G. R. No. 126568, April 30, 2003)

Incomplete and Undelivered Instruments

Complete but Undelivered Instruments

As Assistant City Fiscal, the source of the salary of the payee is public funds which he
receives in the form of checks from the Department of Justice. Since the payee of a
negotiable interest acquires no interest with respect thereto until it is delivered, such
checks, as a necessary consequence of being public fund, may not be garnished because
such funds do not belong to him. (Loreto D. de la Victoria, as City Fiscal of Mandaue City
and in his personal capacity as garnishee vs. Hon. Jose P. Burgos,

Presiding Judge, RTC, Br. XVII, Cebu City, and Raul H. Sesbreño, G.R. No. 111190, June

27, 1995)
If the post-dated check was given to the payee in payment of an obligation, the purpose of
giving effect to the instrument is evident, thus title or ownership the check was transferred
to the payee. However, if the PDC was not given as payment, then there was no intent to
give effect to the instrument and ownership was not transferred. The evidence proves that
the check was accepted, not as payment, but in accordance with the policy of the payee to
cover the transaction ( purchase of beer products ) and in the meantime the drawer was to
pay for the transaction by some other means other than the check. This being so, title to
the check did not transfer to the payee; it remained with the drawer. The second element
of the felony of theft was therefore not established. Hence, there is no probable cause for
theft.- San Miguel Corporation vs. Puzon, Jr. G.R. No. 167567, 22 September 2010

The fact that a person, other than the named payee of the crossed check, was presenting it
for deposit should have put the bank on guard. It should have verified if the payee
authorized the holder to present the same in its behalf or indorsed it to him. The bank’s
reliance on the holder’s assurance that he had good title to the three checks constitutes
gross negligence even though the holder was related to the majority stockholder of the
payee. While the check was not delivered to the payee, the suit may still prosper because
the payee did not assert a right based on the undelivered check but on quasi-delict.
Equitable Banking Corporation vs Special Steel Products,

June 13, 2012


Signature

Signing in Trade Name

Signature of Agent

Under Section 20 of the Negotiable Instruments Law, where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in
a representative capacity, he is not liable on the instrument if he was duly authorized; but the
mere addition of words describing him as an agent or as filing a representative character,
without disclosing his principal, does not exempt him from personal liability. In the instant
case, an inspection of the drafts accepted by the defendant shows that nowhere has he
disclosed that he was signing as a representative of the Philippine Education Foundation
Company and such failure to disclose his principal makes him personally liable for the drafts
he accepted. (The Philippine Bank of Commerce vs. Jose M. Aruego, G.R. Nos. L-25836-37,
January 31, 1981)

Indorsement by Minor or Corporation

Forgery

As a general rule, a bank or corporation who has obtained possession of a check upon an
unauthorized or forged indorsement of the payee’s signature and who collects the amount of
the check from the drawee, is liable for the proceeds thereof to the payee or other owner,
notwithstanding that the amount has been paid to the person from whom the check was
obtained. The theory of the rule is that the possession of the check on the forged or
unauthorized indorsement is wrongful and when the money had been collected on the check,
the proceeds are held for the rightful owners who may recover them. The payee ought to be
allowed to recover directly from the collecting bank, regardless of whether the check was
delivered to the payee or not. (Westmont Bank (formerly Associated Banking Corp.) vs.
Eugene Ong, G.R. No. 132560, January 30, 2002)
The possession of a check on a forged or unauthorized indorsement is wrongful, and when the
money is collected on the check, the bank can be held ‘for moneys had and received.’ The
proceeds are held for the rightful owner of the payment and may be recovered by him. The
position of the bank taking the check on the forged or unauthorized indorsement is the same
as if it had taken the check and collected without indorsement at all. The act of the bank
amounts to conversion of the check.

(Associated Bank and Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing
business under the name and style "Melissa’s RTW," G.R. No. 89802, May 7,

1992)

It is a rule that when a signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party, can be acquired through or under such signature. However, the rule does
provide for an exception, namely: "unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority." In the
instant case, it is the exception that applies as the petitioner is precluded from setting
up the forgery, assuming there is forgery, due to his own negligence in entrusting to
his secretary his credit cards and checkbook including the verification of his
statements of account. (Ramon K. Ilusorio vs. Hon. Court of Appeals, G.R. No. 139130,
November 27, 2002)

A forged signature is a real or absolute defense, and a person whose signature on a


negotiable instrument is forged is deemed to have never become a party thereto and
to have never consented to the contract that allegedly gave rise to it. The
counterfeiting of any writing, consisting in the signing of another’s name with intent to
defraud, is forgery. (Bank of the Philippine Islands vs. Casa Montessori Internationale
and Leonardo T. Yabut, G.R. No. 149454, May 28, 2004)

Even if the bank performed with utmost diligence, the drawer whose signature was
forged may still recover from the bank as long as he or she is not precluded from
setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments
Law plainly states that no right to enforce the payment of a check can arise out of a
forged signature. Since the drawer is not precluded by negligence from setting up the
forgery, the general rule should apply. (Samsung Construction Company Philippines,
Inc. vs. Far East Bank and Trust Company and Court Of Appeals, G.R. NO. 129015,
August 13, 2004)

As between a bank and its depositor, where the bank’s negligence is the proximate
cause of the loss and the depositor is guilty of contributory negligence, the greater
proportion of the loss shall be borne by the bank. The bank was negligent because it
did not properly verify the genuineness of the signatures in the applications for
manager’s checks while the depositor was negligent because it clothed its
accountant/bookkeeper with apparent authority to transact business with the Bank
and it did not examine its monthly statement of account and report the discrepancy to
the Bank. the court allocated the damages between the bank and the depositor on a
60-40 ratio.–Philippine National Bank vs. FF Cruz and Company, G.R. No. 173259, July
25, 2011

While its manager forged the signature of the authorized signatories of clients in the
application for manager’s checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks
in the case at bar. It allowed its manager to encash the Manager’s checks that were
plainly crossed checks. A crossed check is one where two parallel lines are drawn
across its face or across its corner. Based on jurisprudence, the crossing of a check has
the following effects: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once — to the one who has an account
with the bank; and (c) the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose and he must inquire if he
received the check pursuant to this purpose; otherwise, he is not a holder in due
course. In other words, the crossing of a check is a warning that the check should be
deposited only in the account of the payee. When a check is crossed,it is the duty of the
collecting bank to ascertain that the check is only deposited to the payee’s account. Philippine
Commercial International Bank vs. Balmaceda,G.R. No. 158143, September 21, 2011

D. Consideration

A check which is regular on its face is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon is deemed to have become a
party thereto for value. Thus, the mere introduction of the instrument sued on in evidence
prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a negotiable
instrument is presumed to have been given or indorsed for a sufficient consideration unless
otherwise contradicted and overcome by other competent evidence. (Travel-On, Inc. vs. Court
of Appeals and Arturo S. Miranda, G.R. No. L-56169, June 26, 1992)

In actions based upon a negotiable instrument, it is unnecessary to aver or prove


consideration, for consideration is imported and presumed from the fact that it is a negotiable
instrument. The presumption exists whether the words "value received" appear on the
instrument or not. (Remigio S. Ong vs. People of the Philippines and Court of Appeals, G.R.
No. 139006, November 27, 2000)

Letters of credit and trust receipts are not negotiable instruments, but drafts issued in
connection with letters of credit are negotiable instruments. While the presumption found
under the Negotiable Instruments Law may not necessarily be applicable to trust receipts and
letters of credit, the presumption that the drafts drawn in connection with the letters of credit
have sufficient consideration applies. (Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap,
Richard Velasco and Alfonso Co vs.

Court of Appeals and Philippine Bank of Communications, G.R. NO. 117913, February 1, 2002)

When promissory notes appear to be negotiable as they meet the requirements of Section 1
of the Negotiable Instruments Law, they are prima facie deemed to have been issued for
consideration unless sufficient evidence was adduced to show otherwise. (Quirino Gonzales
Logging Concessionaire, Quirino Gonzales and Eufemia

Gonzales vs. the Court of Appeals (CA) and Republic Planters Bank, G. R. No. 126568, April 30,
2003)

Upon issuance of a negotiable check, in the absence of evidence to the contrary, it is


presumed that the same was issued for valuable consideration which may consist either in
some right, interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered
or undertaken by the other side. Under the Negotiable Instruments Law, it is presumed that
every party to an instrument acquires the same for a consideration or for value. As petitioner
alleged that there was no consideration for the issuance of the subject checks, it devolved
upon him to present convincing evidence to overthrow the presumption and prove that the
checks were in fact issued
without valuable consideration. Petitioner, however, has not presented any credible evidence
to rebut the presumption, as well as North Star’s assertion, that the checks were issued as
payment for the US$85,000 petitioner owed to the corporation and not to the manager who
facilitate the fund transfer. - Cayanan v. North Star International Travel Inc.,G.R. No. 172954,
October 5, 2011

E. Accommodation Party

Section 29 of the Negotiable Instruments Law by clear mandate makes the accomodation
party "liable on the instrument to a holder for value, notwithstanding that such holder at the
time of taking the instrument knew him to be only an accommodation party." It is not a valid
defense that the accommodation party did not receive any valuable consideration when he
executed the instrument. It is not correct to say that the holder for value is not a holder in due
course merely because at the time he acquired the instrument, he knew that the indorser was
only an accommodation party. (Ang Tiong vs. Lorenzo Ting, doing business under the name &
style of Prunes Preserves MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)

When a promissory note which is payable to GSIS is not payable to bearer or order, such
instrument is non-negotiable. As such, third party mortgagor who mortgaged his property to
secure the obligation of another is not liable as an accommodation party but liable under
Article 2085 of the Civil Code to the effect that third persons who are not parties to the
principal obligation may secure the latter by pledging or mortgaging their own property.
(GSIS vs. Court of Appeals, G.R. No. L-40824, February 23, 1989)

When the checks are dishonored for lack of funds, the party who indorsed those checks as
accommodation endorser is liable for the payment of the checks. (People vs. Maniego, 148
SCRA 30, 1987)

When a married couple signed a promissory note in favor of a bank to enable the sister of the
husband to obtain a loan, they are considered as accommodation parties who are liable for the
payment of said loan. (Town Saving and Loan Bank, Inc. vs. Court of Appeals, 223 SCRA 459,
1993)
While a maker who signed a promissory note for the benefit of his co-maker ( who received
the loan proceeds ) is considered an accommodation party, he is, nevertheless, entitled to a
written notice on the default and the outstanding obligation of the party accommodated.
There being no such written notice, the Bank is grossly negligent in terminating the credit line
of the accommodation party for the unpaid interest dues from the loans of the party
accommodated and in dishonoring a check drawn against the such credit line. Gonzales vs
Phillippine Commercial and International Bank, GR No. 180257, February 23, 2011

Negotiation

Distinguished from Assignment


If an assigned promissory note had already been extinguished because its maker is
similarly indebted to the assignor, then the defense of set-off or legal compensation could
also be invoked against the assignee of the note. The debtor’s consent is not needed to
effectuate assignment of credit and negotiation. (Sesbreno vs. Court of Appeals, 222 SCRA
466, 1993)

2. Modes of Negotiation

Where a check is made payable to the order of ’cash’, the word ‘cash’does not purport to
be the name of any person’, and hence the instrument is payable to bearer. The drawee
bank need not obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. (Ang Tek Lian vs. the Court of Appeals, G.R. No. L-
2516, September 25, 1950)

Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred


from one person to another in such a manner as to constitute the transferee the holder
thereof, and a holder may be the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof. In case of a bearer instrument, mere delivery would suffice.
[Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and Trust Company, G.R.
No. 97753, August 10, 1992]

Kinds of Indorsements G. Rights of the Holder

Holder in Due Course

Where the payee acquired the check under circumstances that should have put it to
inquiry as to the title of the holder who negotiated the check to him, the payee has the
duty to present evidence that he acquired the check in good faith. As holder's title was
defective or suspicious, it cannot be stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this reason the presumption that it is a
holder in due course or that it acquired the instrument in good faith does not exist.
(Vicente R. De Ocampo & Co. vs. Anita Gatchalian, et al., G.R. No. L-15126, November
30, 1961)

A holder in due course holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof. This being so, petitioner cannot set
up against respondent the defense of nullity of the contract of sale between her and VMS.
(Juanita Salas vs. Hon. Court of Appeals and First Finance &

Leasing Corporation, G.R. No. 76788 January 22, 1990)

Possession of a negotiable instrument after presentment and dishonor, or payment, is


utterly inconsequential; it does not make the possessor a holder for value within the
meaning of the law. It gives rise to no liability on the part of the maker or drawer and
indorsers. (Stelco Marketing Corporation vs. Hon. Court of Appeals and Steelweld

Corporation of the Philippines, Inc., G.R. No. 96160 June 17, 1992)
It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser’s title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law, and as such the consensus of authority is to the effect that the holder of
the check is not a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. vs. the
Court of Appeals and State Investment House, Inc., G.R. No. 93048, March 3, 1994)

The disadvantage of not being a holder in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable. One such defense is absence or failure of
consideration. (Atrium Management Corporation vs. Court of Appeals, et al.,

G.R. No. 109491, February 28, 2001)

The weight of authority sustains the view that a payee may be a holder in due course.

Hence, the presumption that he is a prima facie holder in due course applies in his favor.
However, said presumption may be rebutted and vital to the resolution of this issue is the
concurrence of all the requisites provided for in Section 52 of the Negotiable Instruments
Law. (Cely Yang vs. Hon. Court of Appeals, Philippine Commercial International Bank, Far
East Bank & Trust Co., Equitable Banking Corporation, Prem Chandiramani and Fernando
David, G.R. No. 138074, August 15, 2003)

Defenses Against the Holder H. Liabilities of Parties

Maker

Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers and liable as such. (Republic Planters Bank vs. Court of
Appeals, 216 SCRA 730, 1992)
2. Drawer

The acceptance of a check implies an undertaking of due diligence in presenting it for


payment, and if he from whom it is received sustains loss by want of such diligence, it will
be held to operate as actual payment of the debt or obligation for which it was given. If no
presentment is made at all, the drawer cannot be held liable irrespective of loss or injury
unless presentment is otherwise excused. (Myron C. Papa vs. A.U.

Valencia & Co., Inc., et al. G.R. No. 105188. January 23, 1998)

In the case of DAUD, the depositor has, on its face, sufficient funds in his account,
although it is not available yet at the time the check was drawn, whereas in DAIF, the
depositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does not
expose the drawer to possible prosecution for estafa and violation of BP 22, while
DAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islands vs.
Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

3. Acceptor

To simplify proceedings, the payee of the illegally encashed checks should be allowed to
recover directly from the bank responsible for such encashment regardless of whether or
not the checks were actually delivered to the payee. (Associated Bank and Conrado Cruz,
vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the name and style
"Melissa’s RTW," G.R. No. 89802, May 7, 1992)

As a general rule, a bank or corporation who has obtained possession of a check upon an
unauthorized or forged indorsement of the payee’s signature and who collects the amount
of the check from the drawee, is liable for the proceeds thereof to the payee or other
owner, notwithstanding that the amount has been paid to the person from whom the
check was obtained. The theory of the rule is that the possession of the check on the
forged or unauthorized indorsement is wrongful and when the money had been collected
on the check, the proceeds are held for the rightful owners who may recover them. The
payee ought to be allowed to recover directly from the collecting bank, regardless of
whether the check was delivered to the payee or not. [Westmont Bank (formerly
Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560, January 30, 2002]

If a bank pays a forged check, it must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor. A bank is liable, irrespective of
its good faith, in paying a forged check. (Samsung Construction

Company Philippines, Inc. vs. Far East Bank and Trust Company and Court Of Appeals, G.R.
NO. 129015, August 13, 2004)

4. Indorser
Section 63 of the Negotiable Instruments Law makes "a person placing his signature upon
an instrument otherwise than as maker, drawer or acceptor" a general indorser "unless he
clearly indicates by appropriate words his intention to be bound in some other capacity."
(Ang Tiong vs. Lorenzo Ting, doing business under the name & style of Prunes Preserves
MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)

After an instrument is dishonored by non-payment, indorsers cease to be merely


secondarily liable; they become principal debtors whose liability becomes identical to that
of the original obligor.The holder of the negotiable instrument need not even proceed
against the drawer before suing the indorser. (Maria Tuazon vs. Heirs of

Bartolome Ramos, 463 SCRA 408, 2005)

The collecting bank which accepted a post-dated check for deposit and sent it for clearing
and the drawee bank which cleared and honored the check are both liable to the drawer
for the entire face value of the check. Allied Banking Corporation vs. Bank of the
Philippine Islands, GR. 188363, February 27, 2013
5. Warranties

The subject checks were accepted for deposit by the Bank for the account of Sayson although
they were crossed checks and the payee was not Sayson but Melissa’s RTW.

The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all
legal intents and purposes treated the said checks as negotiable instruments and, accordingly,
assumed the warranty of the endorser. (Associated Bank and Conrado Cruz, vs. Hon. Court of
Appeals, and Merle V. Reyes, doing business under the name and style "Melissa’s RTW," G.R.
No. 89802, May 7, 1992)

I. Presentment for Payment

The effects of crossing a check relate to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment must be made by the
holder or by some person authorized to receive payment on his behalf.

Who the holder or authorized person depends on the face of the check. (Associated Bank and
Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the name
and style "Melissa’s RTW," G.R. No. 89802, May 7, 1992)

1. Necessity of Presentment for Payment

Under the Negotiable Instruments Law, an instrument not payable on demand must be
presented for payment on the day it falls due. When the instrument is payable on demand,
presentment must be made within a reasonable time after its issue. In the case of a bill of
exchange, presentment is sufficient if made within a reasonable time after the last negotiation
thereof. (International Corporate Bank vs. Gueco, 351 SCRA 516, 2001)

Parties to Whom Presentment for Payment Should Be Made


Dispensation with Presentment for Payment

Dishonor by Non-Payment

J. Notice of Dishonor

The term "notice of dishonor" denotes that a check has been presented for payment and was
subsequently dishonored by the drawee bank. This means that the check must necessarily be
due and demandable because only a check that has become due can be presented for
payment and subsequently be dishonored. A postdated check cannot be dishonored if
presented for payment before its due date. (Jaime Dico vs. Hon. Court of Appeals and People
of the Philippines, G.R. NO. 141669, February 28, 2005)

1. Parties to Be Notified

Notice of dishonor to the corporation, which has a personality distinct and separate from the
officer of the corporation, does not constitute notice to the latter. The
absence of notice of dishonor necessarily deprives an accused an opportunity to preclude
a criminal prosecution. (Lao vs. Court of Appeals, G.R. No. 119178, June 20, 1997)

If the drawer or maker is an officer of a corporation, the notice of dishonor to the said
corporation is not notice to the employee or officer who drew or issued the check for and
in its behalf. (Ofelia Marigomen vs. People of the Philippines, G.R. No. 153451, May 26,
2005)

Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer has
no right to expect or require the bank to honor the check, or if the drawer has
countermanded payment. In the instant case, all the checks were dishonored for any of the
following reasons: "account closed", "account under garnishment", insufficiency of funds",
or "payment stopped." In the first three instances, the drawers had no right to expect or
require the bank to honor the checks, and in the last instance, the drawers had
countermanded payment. (Great Asian Sales Center Corporation and Tan Chong

Lin vs. the Court of Appeals and Bancasia Finance and Investment Corporation, G.R. No.
105774, April 25, 2002)

2. Parties Who May Give Notice and Dishonor

When what was stamped on the check was “Payment Stopped Funded” and “DAUD”
which means drawn against uncollected deposits, the check was not issued without
sufficient funds and was not dishonored due to insufficiency of funds. Even with
uncollected deposits, the bank may honor the check at its discretion in favor of favored
clients, in which case there would be no violation of B. P. 22. (Eliza T. Tan vs.

People of the Philippines, G.R. No. 141466, January 19, 2001)

3. Effect of Notice
In the case of DAUD, the depositor has, on its face, sufficient funds in his account,
although it is not available yet at the time the check was drawn, whereas in DAIF, the
depositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does not
expose the drawer to possible prosecution for estafa and violation of BP 22, while

DAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islands vs.
Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

The failure of the prosecution to prove the existence and receipt by petitioner of the
requisite written notice of dishonor and that he was given at least five banking days within
which to settle his account constitutes sufficient ground for his acquittal in a case for
violation of BP 22. (James Svendsen vs. People of the Philippines, G.R. NO.

175381, February 26, 2008)

4. Form of Notice

A notice of dishonor received by the maker or drawer of the check is thus indispensable
before a conviction for violation of BP 22 can ensue. The notice of dishonor may be sent by
the offended party or the drawee bank, and it must be in
writing. A mere oral notice to pay a dishonored check will not suffice. The lack of a written
notice is fatal for the prosecution. (Jaime Dico vs. Hon. Court of Appeals and People of the
Philippines, G.R. NO. 141669, February 28, 2005)

Waiver

Dispensation with Notice

Effect of Failure to Give Notice K. Discharge of Negotiable Instrument

Discharge of Negotiable Instrument

In depositing the check in his name, the depositor did not become the out-right owner of
the amount stated therein. By depositing the check with the bank, depositor was, in a way,
merely designating the bank as the collecting bank. This is in consonance with the rule that
a negotiable instrument, such as a check, whether a manager’s check or ordinary check, is
not legal tender. As such, after receiving the deposit, under its own rules, the bank shall
credit the amount to the depositor’s account or infuse value thereon only after the drawee
bank shall have paid the amount of the check or the check has been cleared for deposit.
The depositor’s contention that after the lapse of the 35-day period the amount of a
deposited check could be withdrawn even in the absence of a clearance thereon,
otherwise it could take a long time before a depositor could make a withdrawal is
untenable. Said practice amounts to a disregard of the clearance requirement of the
banking system. Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641 (2000)

Mere delivery of a check does not discharge the obligation. The obligation is not
extinguished and remains suspended until the payment by commercial document is
actually realized. Thus, although the value of a check was deducted from the funds of the
drawer but the funds were never delivered to the payee because the drawee bank set off
the amount against the losses it incurred from the forgery of the drawer’s check, the
drawer’s obligation to the payee remains unpaid. Cebu International Finance
Corporation vs. Court of Appeals, 316 SCRA 488 (1999)

While Section 119 of the Negotiable Instrument Law in relation to Article 1231 of the Civil
Code provides that one of the modes of discharging a negotiable instrument is by any
other act which will discharge a simple contract for the payment of money, such as
novation, the acceptance by the holder of another check which replaced the dishonored
bank check did not result to novation. There are only two ways which indicate the
presence of novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be explicitly stated and declared
in unequivocal terms as novation is never presumed. Secondly, the old and the new
obligations must be incompatible on every point. In the instant case, there was no express
agreement that the holder’s acceptance of the replacement
check will discharge the drawer and endorser from liability. Neither is there incompatibility
because both checks were given precisely to terminate a single obligation arising from the
same transaction. Anamer Salazar vs. JY Brothers Marketing Corporation, GR no. 171998,
October 20, 2010

Discharge of Parties Secondarily Liable

Right of Party Who Discharged Instrument

Renunciation by Holder

L. Material Alteration

Concept

An alteration is said to be material if it alters the effect of the instrument. It means an


unauthorized change in an instrument that purports to modify in any respect the obligation of
a party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of the Negotiable
Instruments Law. (Philippine National Bank vs. Court of Appeals, Capitol City Development
Bank, Philippine Bank of Communications, and F. Abante Marketing, G.R. No. 107508, April
25, 1996)

The serial number is not an essential requisite for negotiability under Section 1 of the
Negotiable Instrument Law and an alteration of which is not material. The alteration of the
serial number does not change the relations between the parties. (Philippine
National Bank vs. Court of Appeals, Capitol City Development Bank, Philippine Bank of
Communications, and F. Abante Marketing, G.R. No. 107508, April 25, 1996)

Alterations of the serial numbers do not constitute material alterations on the checks. Since
there were no material alterations on the checks, respondent as drawee bank has no right to
dishonor them and return them to petitioner, the collecting bank. (The International
Corporate Bank, Inc. vs. Court of Appeals and Philippine National Bank,

G.R. NO. 129910, September 5, 2006)

2. Effect of Material Alteration

Payment made under materially altered instrument is not payment done in accordance with
the instruction of the drawer. When the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty to charge its client's account only for bona
fide disbursements he had made. Since the drawee bank, in the instant case, did not pay
according to the original tenor of the instrument, as directed by the drawer, then it has no
right to claim reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawer's account which it was
expected to treat with utmost fidelity. (Metropolitan Bank and Trust Company vs.

Renato D. Cabilzo, G.R. No. 154469, December 6, 2006)

Acceptance

Definition

The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer. (Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine Rayon Mills
Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

Indeed, "acceptance" and "payment" are, within the purview of the law, essentially different
things, for the former is "a promise to perform an act," whereas the latter is the "actual
performance" thereof. In the words of the Law, "the acceptance of a bill is the signification by
the drawee of his assent to the order of the drawer," which, in the case of checks, is the
payment, on demand, of a given sum of money. (Philippine

National Bank vs. the Court of Appeals and Philippine Commercial and Industrial Bank, G.R.
No. L-26001, October 29, 1968)

2. Manner

When a check had been certified by the drawee bank, such certification is equivalent to
acceptance because it enables the holder to use it as money. Also, where a holder procures a
check to be certified, the check operates as an assignment of a part of the funds to the
creditor. (New Pacific Timber vs. Seneris, 101 SCRA 686, 1980)

Acceptance may be done in writing by the drawee in the bill itself, or in a separate instrument.
(Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine Rayon Mills Inc. and
Anacleto R. Chi, G.R. No. 74886, December 8, 1992)
Time for Acceptance

Rules Governing Acceptance

N. Presentment for Acceptance

Time/Place/Manner of Presentment

Presentment for acceptance is defined as the production of a bill of exchange to a drawee for
acceptance. Presentment for acceptance is necessary only where the bill is payable after sight
or in any other case, where presentment for acceptance is necessary in order to fix the
maturity of the instrument, or where the bill expressly stipulates that it shall be presented for
acceptance, or where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee. (Prudential Bank vs. Intermediate Appellate Court, Philippine Rayon
Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

2. Effect of Failure to Make Presentment


While it is true that the delivery of a check produces the effect of payment only when it is
encashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor’s unreasonable delay in presentment. After more than ten (10)
years from the payment in part by cash and in part by check, the presumption is that the check
had been encashed, and the failure to encash for more than ten (10) years undoubtedly
resulted in the impairment of the check through unreasonable and unexplained delay on the
part of the payee. (Myron C. Papa vs. A.U. Valencia & Co., Inc., et al. G.R. No. 105188. January
23, 1998)

Dishonor by Non-Acceptance

O. Promissory Notes

Where an instrument containing the words ‘I promise to pay’ is signed by two or more persons,
they are deemed to be jointly and severally liable thereon. Under Section 17

(g) of the Negotiable Instrument Law and Art. 1216 of the Civil Code, where the promissory
note was executed jointly and severally by two or more persons, the payee of the promissory
note had the right to hold any one or any two of the signers of the promissory note responsible
for the payment of the amount of the note. (Philippine National Bank vs. Concepcion Mining
Company, Inc., et al., G.R. No. L-16968. July 31, 1962.)

The buyer of a car shall be liable to pay the unpaid balance on the promissory note and not
just the installments due and payable before the said automobile was carnapped.

Being the principal contract, the promissory note is unaffected by whatever befalls the subject
matter of the accessory contract. (Perla Compania De Seguros, Inc. vs. the Court of Appeals,
Herminio Lim And Evelyn Lim, G.R. No. 96452, May 7, 1992)
When a promissory note expresses "no time for payment," it is deemed "payable on demand.
(Jose L. Ponce de leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571, December 18,
1970)

When there is a discrepancy between the amount in words and the amount in figures in the
check, the rule in the Negotiable Instruments Law is that it would be the amount in words that
would prevail. (People of the Philippines vs. Martin L. Romero and

Ernesto C. Rodriguez, G.R. No. 112985, April 21, 1999)

An instrument which begins with I, We, or Either of us promise to pay, when signed by two or
more persons, makes them solidarily liable. Also, the phrase ‘joint and several’ binds the
makers jointly and individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the suit. (Astro
Electronics Corp. and Peter Roxas vs. Philippine Export and Foreign Loan

Guarantee Corporation, G.R. No. 136729, September 23, 2003)

Checks

Definition
Settled is the doctrine that a check is the only a substitute for money and not money;
hence, the delivery of such an instrument does not, by itself, operate as payment. This is
especially true in case of post-dated check. Thus, the issuance of a post-dated check was
not effective payment. It did not comply with the cardholder’s obligation to pay his past
due credit card charges. Consequently, the card company was justified in suspending his
credit card. BPI Card Corporation vs. Court of Appeals, 296 SCRA 260 (1998)

2. Kinds

Under accepted banking practice, crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The crossing is special where the name of
a bank or a business institution is written between the two parallel lines, which means that
the drawee should pay only with the intervention of that company. The crossing is general
where the words written between the two parallel lines are "and

Co." or "for payee’s account only," which means that the drawee bank should not encash
the check but merely accept it for deposit. (Associated Bank and Conrado Cruz, vs. Hon.
Court of Appeals, and Merle V. Reyes, doing business under the name and style "Melissa’s
RTW," G.R. No. 89802, May 7, 1992)

The effects of crossing a check are: (1) that the check may not be encashed but only
deposited in the bank; (2) that the check may be negotiated only once –– to one who has
an account with a bank; and (3) that the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose. (State Investment

House vs. IAC, 175 SCRA 310, 1989)

A memorandum check is an evidence of debt against the drawer and although may not be
intended to be presented, has the same effect as an ordinary check and if passed on to a
third person, will be valid in his hands like any other check. (People vs. Nitafan, G.R. No.
75954, October 22, 1992)
A cashier’s check is a primary obligation of the issuing bank and accepted in advance by its
mere issuance. By its very nature, a cashier’s check is the bank’s order to pay drawn upon
itself, committing in effect its total resources, integrity and honor behind the check. A
cashier’s check by its peculiar character and general use in the commercial world is
regarded substantially to be as good as the money which it represents. (Tan vs. Court of
Appeals, G.R. No. 108555, December 20, 1994)

Payment in check by the debtor may be acceptable as valid, if no prompt objection to said
payment is made. Consequently, the debtor’s tender of payment in the form of manager’s
check is valid. Thus, where the seller of real property tendered the return of the
reservation fee in the form of manager’s check because the sale agreement was not fully
consummated owing to the failure of the buyer to pay the balance of the purchase price
within the stipulated period, the tender of the manager’s check was considered a valid
tender of payment. When the buyer refused to accept the check,
the consignation of the check with the court was sufficient to satisfy the obligation.

(Teddy G. Pabugais vs. Dave Sahijiwani, G.R. No. 156846, February 23, 2004)

While its manager forged the signature of the authorized signatories of clients in the
application for manager’s checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks in
the case at bar. It allowed its manager to encash the Manager’s checks that were plainly
crossed checks. A crossed check is one where two parallel lines are drawn across its face or
across its corner. Based on jurisprudence, the crossing of a check has the following effects:
(a) the check may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once — to the one who has an account with the bank; and (c) the act of
crossing the check serves as a warning to the holder that the check has been issued for a
definite purpose and he must inquire if he received the check pursuant to this purpose;
otherwise, he is not a holder in due course. In other words, the crossing of a check is a
warning that the check should be deposited only in the account of the payee. When a
check is crossed,it is the duty of the collecting bank to ascertain that the check is only
deposited to the payee’s account. Philippine Commercial International Bank vs.
Balmaceda,G.R. No. 158143, September 21, 2011

3. Presentment for Payment

A judgment creditor cannot validly refuse acceptance of the payment of the judgment
obligation tendered in the form of a cashier’s check. A cashier’s check issued by a bank of
good standing is deemed as cash. (New Pacific Timber vs. Seneris, G.R. No. 41764,

December 19, 1980)

The obligation of the judgment debtor subsists when the check issued by a judgment
debtor was made payable to the sheriff who encashed the same but failed to deliver its
proceeds to the judgment creditor. This is because a check does not produce the effect of
payment until encashed. (Philippine Airlines vs. Court of Appeals, G.R. No. 49188, January
30, 1990)
Tendering a check on the last day of the grace period to pay the purchase price is not valid
and a seller has a right to cancel the contract. A check, be it a manager’s check or ordinary
check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender
of payment and may be refused by the creditor. (Bishop of Malolos vs. Intermediate
Appellate Court, G.R. No. 72110, November 16, 1990)

A check may be used for the exercise of the right of redemption, the same being a right
and not an obligation. (Fortunado vs. Court of Appeals, 196 SCRA 26, 1991)

The judgment creditor may validly refuse the tender of payment partly in check and partly
in cash. A cashier’s check tendered by the judgment debtor to satisfy the judgment debt is
not a legal tender. (Tibajia, Jr. vs. Court of Appeals, G.R. No. 100290, June 4, 1993)
A check does not constitute legal tender, but once the creditor accepted a fully funded check to
settle an obligation, he is estopped from later on denouncing the efficacy of such tender of
payment. By accepting the tendered check and converting it into money, the creditor is presumed
to have accepted it as payment and to hold otherwise would be inequitable and unfair to the
obligor. (Far East Bank & Trust Company vs. Diaz Realty, Inc., G.R. No. 138588, August 23, 2001)

A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. (International Corporate Bank vs. Sps.
Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

Where a manager’s check made payable to “cash” and appearing regular on its face, was
presented to another bank that immediately honors it – no faulty may be attributed to such bank
in relying upon the integrity of the check, even if payment thereon was later ordered stopped by
the drawer-bank because the one who encashed the check was actually not the intended payee.
In other words, as between the bank that honored the manager’s check and the drawer-bank, it is
the latter that should bear the loss. (Security Bank and Trust Company vs. Rizal Commercial
Banking Corporation, G.R. No. 170984, 30 January 2009)

a. Time

A check must be presented for payment within a reasonable time after its issue, and in
determining what is a “reasonable time”, regard is to be had to the nature of the instrument, the
usage of trade or business with respect to such instruments and the facts of the particular case.
The test is whether the payee employed such diligence as a prudent man exercise in his own
affairs. This is because the nature and theory behind the use of a check points to its immediate use
and payability. (International Corporate

Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

b. Effect of Delay
Failure to present for payment within a reasonable time will result to the discharge of the drawer
only to the extent of the loss caused by the delay. Failure to present on time, thus, does not totally
wipe out all liability. In fact, the legal situation amounts to an acknowledgment of liability in the
sum stated in the check. In this case, the debtors have not alleged, much less shown that they or
the bank which issued the manager’s check has suffered damage or loss caused by the delay or
non-presentment. Definitely, the original obligation to pay certainly has not been erased.
(International Corporate

Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

IV. Insurance Code

A. Concept of Insurance
One test in order to determine whether one is engaged in insurance business is whether the
assumption of risk and indemnification of loss (which are elements of an insurance business)
are the principal object and purpose of the organization or whether they are merely incidental
to its business. If these are the principal objectives, the business is that of insurance. But if they
are merely incidental and service is the principal purpose, then the business is not insurance.
In this case, Health Maintenance Organizations (HMOs) are not insurance business.
(Philippine Health Care Providers, Inc., vs. Commissioner of Internal Revenue, G.R. No.
167330, September 18, 2009)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured
alone, but equally so for the insurer; in fact, it is mere so for the latter, since its dominant
bargaining position carries with it stricter responsibility. (Qua Chee Gan v. Law Union, 98 Phil
85, 1955)

Being a contract of adhesion, terms of a policy are to be construed strictly against the party
which prepared the contract - the insurer. By reason of exclusive control of insurance contract,
ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture. (Philamcare Health System vs. Court of Appeals, 379 SCRA 356,
2002)

The cardinal principle in Insurance Law is that a policy or contract of insurance is to be


construed liberally in favor of the insured and strictly as against the insurance company, yet,
contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms, which the parties themselves have used. (Lalican vs. Insular Life
Assurance Company, Ltd. 597 SCRA 159, 2009)

Contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying
the excluded classes therein are to be given their meaning as understood in common speech.
A contract of insurance is a contract of adhesion. So, when the terms of the insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. Alpha Insurance and Surety Co. vs. Castor,
GR No. 198174, September 2, 2013
B. Elements of an Insurance Contract

Under Sec. 2(a) of the Insurance Code, an insurance contract is an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event, and with the following elements: 1.) Insured has an
insurable interest; 2.) Insured is subject to a risk of loss by the happening of the designated
peril; 3.) Insurer assumes risk; 4.) Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons bearing a similar risk; and 5.) In
consideration of the insurer’s promise, the insured pays a premium. (Philamcare Health System
vs. Court of Appeals, 379 SCRA 432, 1997)
For purposes of determining the liability of a health care provider to its members, a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the same
to the extent agreed upon under the contract. Limitations as to liability must be distinctly
specified and clearly reflected in the extent of coverage which the company voluntary assume,
otherwise, any ambiguity arising therein shall be construed in favor of the member. Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly against
the party which prepared the contract - the insurer. This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital service contracts, such as “ standard
charges “, must be liberally construed in favor of the subscriber, and if doubtful or reasonably
susceptible of two interpretations the construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly construed against the provider. Thus,
if the member, while on vacation, underwent a procedure in the USA, the standard charges
referred to in the contract should mean standard charges in USA and not the cost had the
procedure been conducted in the Philippines. Fortune Medicare Inc. vs Amorin. G.R. No.
195872, March 12, 2014.

C. Characteristics/Nature of Insurance Contracts

The only persons entitled to claim the insurance proceeds are either the insured, if still alive;
or the beneficiary, if the insured is already deceased, upon the maturation of the policy. The
exception to this rule is a situation where the insurance contract was intended to benefit third
persons who are not parties to the same in the form of favorable stipulations or indemnity. In
such a case, third parties may directly sue and claim from the insurer. Because no legal
proscription exists in naming as beneficiaries the children of illicit relationships by the insured,
the shares of Eva in the insurance proceeds, whether forfeited by the court in view of the
prohibition on donations under

Article 739 of the Civil Code or by the insurers themselves for reasons based on the insurance
contracts, must be awarded to the said illegitimate children, the designated beneficiaries, to
the exclusion of heirs. (Heirs Of Loreto c. Maramag vs. Eva Verna De Guzman Maramag, et al.,
G.R. No. 181132, June 5, 2009)

The insurance contract is primarily a risk-distributing device, a mechanism by which all


members of a group exposed to a particular risk contribute premiums to an insurer. From
these contributory funds are paid whatever losses occur due to exposure to the peril insured
against. Each party therefore takes a risk: the insurer being compelled upon the happening of
the contingency to pay the entire sum agreed upon; and the
insured of a parting with the amount required as premium, without receiving anything
therefore in case the contingency does not happen. (Tibay vs. Court of Appeals, 257 SCRA 126,
1996)

Classes

Marine

The evidence shows that the loss of the cargo was due to the perils of the ship; that the sinking
of the barge was due to improper loading of the logs on one side so that the barge was tilting
on one side and for that it did not navigate on even keel; that it was no longer seaworthy that
was why it developed leak. A loss which, in the ordinary course of events, results from the
natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from
the negligent failure of the ship's owner to provide the vessel with proper equipment to
convey the cargo under ordinary conditions, is not a peril of the sea but such a loss is rather
due to what has been aptly called the 'peril of the ship.' The insurer undertakes to insure
against perils of the sea and similar perils, not against perils of the ship. (Isabela Roque, doing
business under the name and style of Isabela Roque Timber Enterprises, et al., vs. The
Intermediate Appellate Court, et al., G.R. No. L-66935, November 11, 1985)

The rusting of steel pipes in the course of a voyage is a “peril of the sea” in view of the toll on
the cargo of wind, water, and salt conditions. (Cathay Insurance Co., vs. The

Court of Appeals, et al., G.R. No. L-76145, June 30, 1987)

Fire may not be considered a natural disaster or calamity since it almost always arises from
some act of man or by human means. It cannot be an act of God unless caused by lightning or
a natural disaster or casualty not attributable to human agency. In the case at bar, it is not
disputed that a small flame was detected on the acetylene cylinder and that by reason thereof,
the same exploded despite efforts to extinguish the fire. Verily, the cause of the fire was the
fault or negligence of ESLI. (Philippine Home Assurance Corporation vs. Court of Appeals, G.R.
No. 106999, June 20, 1996)
A marine insurance policy providing that the insurance was to be “against all risks” must be
construed as creating a special insurance and extending to other risks than are usually
contemplated, and covers all losses except such as arise from the fraud of the insured. The
burden of the insured, therefore, is to prove merely that the goods he transported have been
lost, destroyed or deteriorated and thereafter, the burden is shifted to the insurer to prove
that the loss was due to excepted perils. In the present case, there being no showing that the
loss was caused by any of the excepted perils, the insurer is liable under the policy. (Filipino
Merchants Insurance Co., Inc., vs. Court Of Appeals, et al., G.R. No. 85141, November 28,
1989)

An “all risks” provision of a marine policy creates a special type of insurance which extends
coverage to risks not usually contemplated and avoids putting upon the insured the burden of
establishing that the loss was due to peril falling within the policy’s coverage. The insurer can
avoid coverage upon demonstrating that a specific provision expressly excludes the loss from
coverage but in this case, the damage
caused to the cargo has not been attributed to any of the exceptions provided for nor is
there any pretension to this effect. (Choa Tiek Seng, doing business under the name and
style of Seng’s Commercial Enterprises vs. The Court of Appeals, et al., G.R. No.

84507, March 15, 1990)

Fire

As defined by Section 60 of the Insurance Code, an open policy is one in which the value of
the thing insured is not agreed upon but is left to be ascertained in case of loss. This means
that the actual loss, as determined, will represent the total indemnity due the insured from
the insurer except only that the total indemnity shall not exceed the face value of the
policy. Where the actual loss in an open policy has been ascertained, the factual
determination should be respected in the absence of proof that it was arrived at
arbitrarily. (Development Insurance Corporation vs. Intermediate Appellate Court, et al.,
G.R. No. L-71360, July 16, 1986)

Casualty

It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Except with respect to
compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These
contracts are, therefore, governed by the general provisions applicable to all types of
insurance. Outside of these, the rights and obligations of the parties must be determined
by the terms of their contract, taking into consideration its purpose and always in
accordance with the general principles of insurance law. (Fortune Insurance and Surety
Co., Inc. vs. Court of Appeals and Producers Bank of the Philippines, G.R. No. 115278, May
23, 1995)

It has been aptly observed that in burglary, robbery, and theft insurance, the opportunity
to defraud the insurer—the moral hazard—is so great that insurers have found it necessary
to fill up their policies with countless restrictions, many designed to reduce this hazard.
Seldom does the insurer assume the risk of all losses due to the hazards insured against.
Persons frequently excluded under such provisions are those in the insured’s service and
employment. The purpose of the exception is to guard against liability should the theft be
committed by one having unrestricted access to the property. (Fortune Insurance and
Surety Co., Inc. vs. Court of Appeals and Producers Bank of the Philippines, G.R. No.
115278, May 23, 1995)

Suretyship

A surety contract is merely a collateral one, its basis is the principal contract or
undertaking which it secures. Necessarily, the stipulations in such principal agreement
must at least be communicated or made known to the surety. (First Lepanto-Taisho

Insurance Corporation vs. Chevron Philippines, Inc., G.R. No. 177839, January 18,

2012)
The surety bond must be read in its entirety and together with the contract between

NPC and the contractors. The provisions must be construed together to arrive at their true
meaning. Certain stipulations cannot be segregated and then made to control. In the case
at bar, it cannot be denied that the breach of contract in this case, that is, the
abandonment of the unfinished work of the transmission line of the NPC by the contractor
FEEI was within the effective date of the contract and the surety bond. Such abandonment
gave rise to the continuing liability of the bond as provided for in the contract which is
deemed incorporated in the surety bond executed for its completion. (National Power
Corporation vs. Court of Appeals, et al., G.R. No. L-43706, November 14, 1986)

Under Section 176 of the Insurance Code, as amended, the liability of a surety in a surety
bond is joint and several with the principal obligor. Finman's bond was posted by

Pan Pacific in compliance with the requirements of Article 31 of the Labor Code in order
to guarantee compliance with prescribed recruitment procedures, rules and regulations,
and terms and, conditions of employment as appropriate. While Finman has refrained
from attaching a copy of the bond it had issued to its Petition for Certiorari, there can be
no question that the conditions of the surety bond include the POEA Rules and Regulation.
It is settled doctrine that the conditions of a bond specified and required in the provisions
of the statute or regulation providing for the submission of the bond, are incorporated or
built into all bonds tendered under that statute or regulation, even though not there set
out in printer's ink. (Finman General Assurance Corporation vs. William Inocencio, et al.,
G.R. No. 90273-75, November 15, 1989)

Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to the
obligor. No contract of suretyship or bonding shall be valid and binding unless and until
the premium therefor has been paid, except where the obligee has accepted the bond, in
which case the bond becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety. A continuing bond, as in this case
where there is no fixed expiration date, may be canceled only by the obligee, which is the
NFA, by the Insurance Commissioner, and by the court. By law and by the specific contract
involved in this case, the effectivity of the bond required for the obtention of a license to
engage in the business of receiving rice for storage is determined not alone by the
payment of premiums but principally by the
Administrator of the NFA. (Country Bankers Insurance Corporation vs. Antonio Lagman,
G.R. No. 165487, July 13, 2011)

The extent of the surety’s liability is determined by the language of the suretyship contract
or bond itself. It can not be extended by implications beyond the terms of the contract.

Having accepted the bond, the creditor is bound by the recital in the surety bond that the
terms and conditions of its distributorship contract be reduced in writing or at the very
least communicated in writing to the surety. Such non-compliance by the creditor impacts
not on the validity or legality of the surety contract but on the creditor’s right to demand
performance. First Lepanto-Taisho Insurance Corporation vs Chevron Philippines, GR No.
177839, January 18, 2012
Life

Where a GSIS member failed to state his beneficiary or beneficiaries in his application for
membership, the proceeds of the retirement benefits shall accrue to his estate and will be
distributed among his legal heirs in accordance with the law on intestate succession. (Re:
Claims for Benefits of the Heirs of the Late Mario vs. Chanliongco, Adm. Matter No. I90-
RET., October 18, 1977)

A life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned for both are founded upon the same consideration: liberality. A beneficiary is
like a donee, because from the premiums of the policy which the insured pays, out of
liberality, the beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the new Civil Code should equally operate
in life insurance contracts. The conviction for adultery or concubinage is not necessary
before the disabilities mentioned in Article 739 may effectuate. It would be sufficient if
evidence preponderates upon the guilt of the consort for the offense indicated. (The
Insular Life Assurance Company, Ltd., vs. Carponia t. Ebrado And

Pascuala Vda. De Ebrado, G.R. No. l-44059, October 28, 1977)

There is nothing in the policy that relieves the insurer of the responsibility to pay the
indemnity agreed upon if the insured is shown to have contributed to his own accident.
Indeed, most accidents are caused by negligence. Lim was unquestionably negligent and
that negligence cost him his own life. But it should not prevent his widow from recovering
from the insurance policy he obtained precisely against accident. (Sun Insurance Office,
Ltd., vs. The Court of Appeals, G.R. No. 92383, July 17, 1992)

The legitimate heirs of the insured who were not designated as beneficiaries in the life
insurance policies are considered third parties to the insurance contracts and, thus are not
entitled to the proceeds thereof. The insurance companies have no legal obligation to turn
over the insurance proceeds to them. The revocation of the common law spouse of the
insured as a beneficiary in one policy and her disqualification as such in another are of no
moment considering that the designation of the illegitimate children as beneficiaries in
the Insurance Policies remains valid. Because no legal proscription exists in naming as
beneficiaries children of illicit relationships by the insured, the shares of the common-law
spouse in the insurance proceeds, whether forfeited by the Court in view of the prohibition
on donation under Article 739 of the Civil Code or by the insurers themselves for reasons
based on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of the legitimate heirs. It is only in cases where
the insured has not designated any beneficiary, or when the designated beneficiary is
disqualified by law to receive the proceeds, that the insurance policy proceeds shall
redound to the benefit of the estate of the insured. Heirs of Loreto C. Maramag vs.
Maramag, GR No. 181132, June 5, 2009

6. Compulsory Motor Vehicle Liability Insurance


Insurer’s liability under Third Party Liability coverage accrues immediately upon
occurrence of injury or event upon which the liability depends and does not depend on
the recovery of judgment by the injured party against the insured. Therefore, insurer
can be sued and held directly liable by the injured party to the extent of the coverage
(Vda. De Maglana vs. Hon. Cosolacion, 212 SCRA 268, 1992)

The liability of the insured carrier or vehicle owner is based on tort, in accordance with
the provisions of the Civil Code; while that of the insurer arises from contract,
particularly, the insurance policy. The third-party liability of the insurer is only up to
the extent of the insurance policy and that required by law; and it cannot be held
solidarily liable for anything beyond that amount. (The Heirs of George Y. Poe vs.
Malayan Insurance Company, Inc., G.R. No. 156302, April 7, 2009 14, 1996)

The main purpose of the “authorized driver” clause is that a person other than the
insured owner, who drives the car on the insured’s order, such as his regular driver, or
with his permission, such as a friend or member of the family or the employees of a car
service or repair shop must be duly licensed drivers and have no disqualification to
drive a motor vehicle. The mere happenstance that the employee(s) of the shop owner
diverts the use of the car to his own illicit or unauthorized purpose in violation of the
trust reposed in the shop by the insured car owner does not mean that the “authorized
driver” clause has been violated such as to bar recovery, provided that such employee
is duly qualified to drive under a valid driver’s license. It is the theft clause, not the
“authorized driver” clause, that applies. (Jewel Villacorta vs. The Insurance

Commission, et al., G.R. No. 54171. October 28, 1980)

Under the “authorized driver” clause, an authorized driver must not only be permitted
to drive by the insured but it is also essential that he is permitted under the law and
regulations to drive the motor vehicle and is not disqualified from so doing under any
enactment or regulation. At the time of the accident, Stokes had been in the
Philippines for more than 90 days and under the law, he could not drive a motor
vehicle without a Philippine driver’s license. He was therefore not an “authorized
driver” under the terms of the insurance policy in question, and MALAYAN was right in
denying the claim of the insured. (James Stokes, as Attorney-in-Fact of Daniel Stephen
Adolfson vs. Malayan Insurance Co., Inc., G.R. No. L-34768. February 24, 1984)

The requirement under the “authorized driver clause” that the driver be “permitted in
accordance with the licensing or other laws or regulations to drive the Motor Vehicle
and is not disqualified from driving such motor vehicle by order of a Court of Law or by
reason of any enactment or regulation in that behalf,” applies only when the driver “is
driving on the insured’s order or with his permission.” It does not apply when the
person driving is the insured himself. (Andrew Palermo vs. Pyramid Insurance Co., Inc.,
G.R. No. L-36480. May 31, 1988)

Where the driver’s temporary operator’s permit had expired, and the insurance policy
states that a driver with an expired Traffic Violation Receipt or expired Temporary

Operator’s permit is not considered an authorized driver within the meaning of the
policy, the expiration of the same bars recovery under the policy. In liability insurance,
the parties are bound by the terms of the policy and the right of insured to recover is governed
thereby. (Agapito Gutierrez vs. Capital Insurance & Surety Co., Inc., G.R. No. L-26827, June 29,
1984)

From a reading Section 378, the following rules on claims under the “no fault indemnity”
provision, where proof of fault or negligence is not necessary for payment of any claim for
death or injury to a passenger or a third party, are established: 1.) A claim may be made
against one motor vehicle only. 2.) If the victim is an occupant of a vehicle, the claim shall lie
against the insurer of the vehicle in which he is riding, mounting or dismounting from. 3.) In
any other case (i.e. if the victim is not an occupant of a vehicle), the claim shall lie against the
insurer of the directly offending vehicle. 4.) In all cases, the right of the party paying the claim
to recover against the owner of the vehicle responsible for the accident shall be maintained.
(Perla Compania

De Seguros, Inc., vs. Hon. Constante A. Ancheta, Presiding Judge of the Court of First Instance
of Camarines Norte, Branch III, et al., G.R. No. L-49699, August 8, 1988)

Insurable Interest

In Life/Health

Every person has an insurable interest in the life and health of: 1.) Himself, or his spouse and of
his children; 2.) Any person: (a) on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest; (b) under legal obligation to him for the
payment of money, respecting property or service, of which death or illness might delay or
prevent the performance; and (c) upon whom whose life any estate or interest vested in him
depends. (Philamcare Health System vs. Court of

Appeals, 379 SCRA 356, 2002)


The existence of an insurance interest gives a person the legal right to insure the subject
matter of the policy of insurance. Section 19 of the Insurance Code states that an interest in
the life or health of a person insured must exist when the insurance takes effect, but need not
exist thereafter or when the loss occurs. (Lalican vs. Insular Life Assurance Company Ltd, 597
SCRA 159, 2009)

An employer corporation has an insurable interest on its manager where the death of the
manager will be detrimental to the corporation’s operations. (El Oriente Fabrica de Tabacos
vs. Posada, 56 Phil 147, 1931)

In Property

A non-life insurance policy such as the fire insurance policy taken by spouses Cha over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured
must exist at the time the insurance takes effect and at the time the loss occurs. The basis of
such requirement of insurable interest in property insured is based on sound public policy: to
prevent a person from taking out an insurance policy on property upon which he has no
insurable interest and collecting the proceeds of said policy in case of loss of the property. In
such a case, the contract of insurance is a
mere wager which is void under Section 25 of the Insurance Code. (Spouses Nilo Cha and
Stella Uy Cha vs. Court of Appeals, G.R. No. 124520. August 18, 1997)

With the transfer of the location of the subject properties, without notice and without the
insurer’s consent, after the renewal of the policy, the insured clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides that a neglect to communicate that which a party knows and
ought to communicate, is called a concealment.

Under Section 27 of the Insurance Code, “a concealment entitles the injured party to
rescind a contract of insurance.” Moreover, under Section 168 of the Insurance Code, the
insurer is entitled to rescind the insurance contract in case of an alteration in the use or
condition of the thing insured. Section 168 of the Insurance Code provides, as follows: An
alteration in the use or condition of a thing insured from that to which it is limited by the
policy made without the consent of the insurer, by means within the control of the insured,
and increasing the risks, entitles an insurer to rescind a contract of fire insurance. Malayan
Insurance Company vs. PAP Co. (PHIL. BRANCH). G.R. No. 200784, August 07, 2013.

Double Insurance and Over Insurance

A double insurance exists where the same person is insured by several insurers separately
in respect of the same subject and interest. Since, the insurable interests of a mortgagor
and a mortgagee on the mortgaged property are distinct and separate, the two policies of
the PFIC do not cover the same interest as that covered by the policy of the private
respondent, no double insurance exists. (Armando Geagonia vs. Court of Appeals, et al.,
G.R. No. 114427, February 6, 1995)

By the express provision of Section 93 of the Insurance Code, double insurance exists
where the same person is insured by several insurers separately in respect to the same
subject and interest. The requisites in order for double insurance to arise are as follows: 1.)
The person insured is the same; 2.) Two or more insurers insuring separately; 3.) There is
identity of subject matter; 4.) There is identity of interest insured; and 5.)
There is identity of the risk or peril insured against. In the present case, even though the
two insurance policies were issued over the same goods and cover the same risk, there
arises no double insurance since they were issued to two different persons/entities having
distinct insurable interests. Necessarily, over insurance by double insurance cannot
likewise exist. (Malayan Insurance Co., Inc., vs. Philippine First

Insurance Co., Inc. and Reputable Forwarder Services, Inc., G.R. No. 184300, July 11, 2012)

Multiple or Several Interests on Same Property

As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be covered by one policy, or each may
take out a separate policy covering his interest, either at the same or at separate times.
The mortgagor's insurable interest covers the full value of the mortgaged property, even
though the mortgage debt is equivalent to the full value of the property. The mortgagee's
insurable interest is to the extent of the debt, since the
property is relied upon as security thereof, and in insuring he is not insuring the property but
his interest or lien thereon. (Armando Geagonia vs. Court of Appeals, et al., G.R. No. 114427,
February 6, 1995)

Where a mortgagor pays insurance premium under group insurance policy (Mortgage
Redemption Insurance), making loss payable to mortgagee, the insurance is on mortgagor’s
interest, and mortgagor continues to be a party to the contract. In this type of policy
insurance, mortgagee is simply an appointee of the insurance fund, such loss-payable clause
does not make mortgagee a party to the contract (Great Pacific Life vs. Court of Appeals, 316
SCRA 677, 1999)

Perfection of the Contract of Insurance

Offer and Acceptance/Consensual

It needs not much emphasis to say that an application form does not prove that insurance was
secured. Anybody can get an application form for insurance, fill it up at home before filing it
with the insurance company. In fact, the very first sentence of the form states that it merely
“forms the basis of a contract between you and NZILife.”

There was no contract yet. Furthermore, there is no proof that the insurance company
approved the proposal, no proof that any premium payments were made, and no proof from
the record of exhibits as to the date it was accomplished. It appearing that no insurance was
issued to Lam Po Chun with accused-appellant as the beneficiary, the motive capitalized upon
by the trial court vanishes. (People of the Philippines vs. Yip Wai Ming, G.R. No. 120959,
November 14, 1996)

Where the provisions in the binding deposit receipt shows that it is intended to be merely a
provisional or temporary insurance contract and the same is merely an acknowledgment, on
behalf of the company, that the latter's branch office had received from the applicant the
insurance premium and had accepted the application subject for processing by the insurance
company, the acceptance thereof is merely conditional and is subordinated to the act of the
company in approving or rejecting the application. Since Pacific Life disapproved the
insurance application, the binding deposit receipt in question never become in force at
anytime since in life insurance, a "binding slip" or "binding receipt" does not insure by itself.
(Great Pacific Life

Assurance Company vs. Honorable Court of Appeals, G.R. No. L-31845. April 30, 1979)

For a valid cancellation of the policy,the following requisites must concur: 1.) There must be
prior notice of cancellation to the insured; 2.) The notice must be based on the occurrence,
after the effective date of the policy, of one or more of the grounds mentioned; 3.) The notice
must be (a) in writing, (b) mailed, or delivered to the named insured, (c) at the address shown
in the policy; 4. It must state (a) which of the grounds mentioned in Section 64 is relied upon
and (b) that upon written request of the insured, the insurer will furnish the facts on which the
cancellation is based. MICO claims it canceled the policy in question for non-payment of
premium. However, there is no proof that the notice, assuming it complied with the other
requisites, was actually mailed to and received by Pinca. (Malayan Insurance Co., Inc. vs.
Gregoria Cruz
Arnaldo, in her capacity as the Insurance Commissioner, et al., G.R. No. L-67835,

October 12, 1987)

Delay in Acceptance

Delivery of Policy

Premium Payment

By accepting the promise of Plastic Era to to pay the insurance premium within thirty (30)
days from the effective date of policy, Capital Insurance has implicitly agreed to modify
the tenor of the insurance policy and in effect, waived the provision therein that it would
only pay for the loss or damage in case the same occurs after the payment of the premium.
Considering that the insurance policy is silent as to the mode of payment, Capital
Insurance is deemed to have accepted the promissory note in payment of the premium.
This rendered the policy immediately operative on the date it was delivered. By accepting
its promise to pay, Capital Insurance had in effect extended credit to Plastic Era.
Therefore, Capital Insurance did not have the right to cancel the policy for nonpayment of
the premium except by putting Plastic Era in default and giving it personal notice to that
effect. (Capital Insurance & Surety Co., Inc., vs. Plastic Era Co., Inc., et al., G.R. No. L-
22375, July 18, 1975)

It is explicit in the policy that PSIC's agreement to indemnify Woodwork for loss by fire
only arises "after payment of premium,". Compliance by the insured with the terms of the
contract is a condition precedent to the right of recovery. Since the premium had not been
paid, the policy must be deemed to have lapsed. The non-payment of premiums does not
merely suspend but put, an end to an insurance contract, since the time of the payment is
peculiarly of the essence of the contract. (Philippine Phoenix

Surety & Insurance Company vs. Woodwork, Inc., G.R. No. L-25317, August 6, 1979)
The non-payment of premium on the cover note is no cause for Pacific to lose what is due
it as if there had been payment of premium, for non-payment by it was not chargeable
against its fault. Had all the logs been lost during the loading operations, but after the
issuance of the cover note, liability on the note would have already arisen even before
payment of premium. This is how the cover note as a "binder" should legally operate
otherwise, it would serve no practical purpose in the realm of commerce, and is supported
by the doctrine that where a policy is delivered without requiring payment of the
premium, the presumption is that a credit was intended and policy is valid. (Pacific Timber
Export Corporation vs. Court of Appeals, et al., G.R. No. L-38613, February 25, 1982)

It is obvious from both the Insurance Act and the stipulation of the parties that time is of
the essence in respect of the payment of the insurance premium so that if it is not paid the
contract does not take effect unless there is still another stipulation to the contrary. In the
instant case, Arce was given a grace period to pay the premium but the period having
expired with no payment made, he cannot insist that Capital is nonetheless obligated to
him. (Pedro Arce vs. Capital Insurance & Surety Co., Inc., G.R.

No. L-28501, September 30, 1982)


Under Section 77 of the Insurance Code, the remedy for the non-payment of
premiums is to put an end to and render the insurance policy not binding. The non-
payment of premium does not merely suspend but puts an end to an insurance
contract since the time of the payment is peculiarly of the essence of the contract.
Unless premium is paid, an insurance contract does not take effect. Since admittedly
the premiums have not been paid, the policies issued have lapsed. The insurance
coverage did not go into effect or did not continue and the obligation of Philamgen as
insurer ceased. (Arturo Valenzuela, et al. vs. Court Of Appeals, et al., G.R. No. 83122,
October 19, 1990)

Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to
the obligor. No contract of suretyship or bonding shall be valid and binding unless and
until the premium therefor has been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and enforceable irrespective of whether
or not the premium has been paid by the obligor to the surety. (Philippine Pryce
Assurance Corporation vs. Court Of Appeals, et al., G.R. No. 107062, February 21,
1994)

Section 78 of the Insurance Code explicitly provides that an acknowledgment in a


policy or contract of insurance of the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until the premium is actually paid. This Section establishes a
legal fiction of payment and should be interpreted as an exception to Section 77.

(American Homes Assurance vs. Antonio Chua, G.R. 130421, June 28, 1999)

Section 77 of the Insurance Code of 1978 provides that an insurer is entitled to


payment of the premium as soon as the thing insured is exposed to the peril insured
against. The first exception is provided by Section 77 itself, and that is, in case of a life
or industrial life policy whenever the grace period provision applies. The second is that
covered by Section 78 of the Insurance Code, which provides that any
acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid. A third exception was laid down in Makati Tuscany Condominium
Corporation vs. Court of Appeals, wherein the Court ruled that Section 77 may not
apply if the parties have agreed to the payment in installments of the premium and
partial payment has been made at the time of loss. Tuscany has also provided a fourth
exception, namely, that the insurer may grant credit extension for the payment of the
premium. This simply means that if the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed even though the premium is paid after the
loss but within the credit term. Moreover, as a fifth exception, estoppel bars it from
taking refuge under said Section, since Masagana relied in good faith on such practice.
(Ucpb General Insurance Co. Inc., vs. Masagana Telemart, Inc., G.R. No. 137172, April
4, 2001)
FEBTC is estopped from claiming that the insurance premium has been unpaid. FEBTC
induced Maxilite and Marques to believe that the insurance premium has in fact been
debited from Maxilite’s account. However, FEBTC failed to do so. FEBTC’s conduct clearly
constitutes gross negligence in handling Maxilite’s and Marques’ accounts. As a
consequence, FEBTC must be held liable for damages pursuant to Article 2176 of the Civil
Code. (Jose Marques and Maxilite Technologies, Inc., vs. Far East Bank And Trust Company,
et al., G.R. No. 171379, January 10, 2011)

In life insurance, even though insured may have obtained an endowment policy, payment
of premiums is not a debt or obligation, but an exercise of a right on the part of the
insured. If insured wants to keep policy alive, he may pay premium. But the insurer may not
compel him to pay the premium if insured desires to let the policy lapse. (Constantino vs.
Asia Life, 87 Phil 248, 1950)

The age of the insured was not concealed to the insurance company for her application for
insurance coverage which was on a printed form furnished by Manila

Bankers and which contained very few items of information clearly indicated her age of
the time of filing the same to be almost 65 years of age. Despite such information which
could hardly be overlooked in the application form, Manila Bankers received her payment
of premium and issued the corresponding certificate of insurance without question. As
there was sufficient time (45 days) for the Manila Bankers to process the application and
issue notice that the applicant was over 60 years of age and thereby cancel the policy on
that ground if it was minded to do so, Manila Bankers’ failure to act, is therefore either
attributable to its willingness to waive such disqualification; or, through the negligence or
to the incompetence of its employees for which it has only itself to blame. (Regina Edillon
vs. Manila Bankers Life Insurance, et al., G.R. No. L-

34200, September 30, 1982)

Non-Default Options in Life Insurance


Reinstatement of a Lapsed Policy of Life Insurance

The stipulation in a life insurance policy giving the insured the privilege to reinstate it
upon written application within three years from the date it lapses and upon of evidence
of insurability satisfactory to the insurance company and the payment of all overdue
premiums and any other indebtedness to the company, does not give the insured absolute
right to such reinstatement by the mere filing of an application therefor. The company has
the right to deny the reinstatement if it is not satisfied as to the insurability of the insured
and of the latter does not pay all overdue premiums and all other indebtedness to the
company. After the death of the insured the insurance company cannot be compelled to
entertain an application for reinstatement of the policy because the conditions precedent
to reinstatement can no longer be determined and satisfied. (James McGuire v. The
Manufacturers Life Insurance Co.,

G.R. No. L-3581. September 21, 1950)

Where a life insurance policy lapsed, and as compliance with the conditions for
reinstatement of the policy, the insured paid only part of the overdue premium, the failure
to pay the balance of the overdue premium prevented the reinstatement said
policy and thereafter the recovery therefrom. (Andres vs. Crown Life Ins. Co., G.R. No.

L-10875, January 28, 1958)

Refund of Premiums

Great Pacific should have informed Cortez of the deadline for paying the first premium before
or at least upon delivery of the policy to him, so he could have complied with what was
needful and would not have been misled into believing that his life and his family were
protected by the policy, when actually they were not. And, if the premium paid by Cortez was
unacceptable for being late, it was the company's duty to return it. By accepting his premiums
without giving him the corresponding protection, Great Pacific acted in bad faith and since his
policy was in fact inoperative or ineffectual from the beginning, the company was never at
risk, hence, it is not entitled to keep the premium. (Great Pacific Life Insurance Corporation vs.
Court of Appeals, et al., G.R. No. L-57308, April 23, 1990)

Rescission of Insurance Contracts

a. Concealment

Where the applicant, in apparent bad faith, withheld the fact material to the risk to be
assumed by the insurance company, the latter is entitled to rescind the contract of insurance.
The contract of insurance is one of perfect good faith, not for the insured alone but equally so
for the insurer. Where there is concealment or a neglect to communicate that which a party
knows and ought to communicate, whether intentional or unintentional, rescission is available
as a remedy to the insurer. (Great Pacific Life Assurance Company vs. Honorable Court of
Appeals, G.R. No. L-31845.

April 30, 1979)

Concealment exists where the assured had knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that he should communicate it to the assurer,
but he designedly and intentionally withholds the same. In the absence of evidence that the
insured had sufficient medical knowledge as to enable him to distinguish between "peptic
ulcer" and "a tumor", his statement that said tumor was

"associated with ulcer of the stomach, " should be construed as an expression made in good
faith of his belief as to the nature of his ailment and operation. (Ng Gan Zee vs. Asian Crusader
Life Assurance Corporation, G.R. No. L-30685, May 30, 1983)

Where the insured is specifically required to disclose to the insurer any other insurance and its
particulars which he may have effected on the same subject matter, the knowledge of such
insurance by the insurer's agents, even assuming the acquisition thereof by the former, is not
the "notice" that would estop the insurers from denying the claim. Obligations arising from
contracts have the force of law between the contracting parties and should be complied with
in good faith. (New Life Enterprises and Julian Sy vs. Court of Appeals, et al., G.R. No. 94071,
March 31, 1992)
Where the insured is specifically required to disclose to the insurer matters relating to
his health, the insured's failure to disclose the fact that he was hospitalized for two
weeks prior to filing his application for insurance, raises grave doubts about his bona
fides. Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries. (Sunlife Assurance Company of Canada vs. The Court of Appeals, et al., G.R.
No. 105135, June 22, 1995)

In group insurance, there is no medical examination required. But if in group insurance


an application form requires an answer to previous sickness, and that is falsely denied,
then there is concealment. (Saturnino v. Phil-Am Life, 7 SCRA 316, 1963)

One who solicits insurance is an underwriter and not an agent of the insurance
company. If insurer appoints a general agent, then such agent can bind the company
by virtue of the written appointment. On the other hand, an underwriter who fills up a
policy with false answers and later insured signs the policy, the false answers become
the insured’s own answer because he signed the policy. (Soliman v. U.S. Life, 104 Phil.
1046, 1958)

b. Misrepresentation/Omissions

When the insured signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these
representations that he concealed his chronic heart ailment and diabetes. He cannot
sign the application and disown the responsibility for having it filled up. Thus, the
insurance company had every right to act on the faith of that certification. (Ma.
Lourdes s. Florendo vs. Philam Plans, Inc., et al., G.R. No. 186983, February 22, 2012)

By virtue of the “incontestability clause”, the insurer has two years from the date of
issuance of the insurance contract or of its last reinstatement within which to contest
the policy, whether or not, the insured still lives within such period. After two years, the
defenses of concealment or misrepresentation, no matter how patent or well founded,
no longer lie. Considering that the insured died before the two-year period had
lapsed, Phil-Am Insurance is not, therefore, barred from proving that the policy is void
ab initio by reason of the insured’s fraudulent concealment or misrepresentation.

(Emilio Tan vs. The Court of Appeals, G.R. No. 48049. June 29, 1989)

The "Incontestability Clause" under Section 48 of the Insurance Code provides that an
insurer is given two years – from the effectivity of a life insurance contract and while
the insured is alive – to discover or prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or misrepresentation of the
insured or his agent. After the two-year period lapses, or when the insured dies within
the period, the insurer must make good on the policy, even though the policy was
obtained by fraud, concealment, or misrepresentation. (Manila Bankers Life Insurance

Corporation vs. Cresencia p. Aban, G.R. No. 175666, July 29, 2013)
The incontestability clause precludes the insurer from disowning liability under the policy it
issued on the ground of concealment or misrepresentation regarding the health of the insured
after a year of its issuance. Since insured died on the 11th month following the issuance of his
plan, the incontestability period has not yet set in. Consequently, the insurer was not barred
from questioning the beneficiary’s entitlement to the benefits of the pension plan. Florendo
vs. Philam Plans, GR. No 186983, February 22, 2012

c. Breach of Warranties

The insurance company is barred by waiver (or rather estoppel) to claim violation of the so-
called fire hydrants warranty, for the reason that knowing fully all that the number of hydrants
demanded therein never existed from the very beginning, the insurance company
nevertheless issued the policies in question subject to such warranty, and received the
corresponding premiums. It would be perilously close to conniving at fraud upon the insured
to allow insurance company to claim now as void ab initio the policies that it had issued to the
plaintiff without warning of their fatal defect, of which it was informed, and after it had misled
the defendant into believing that the policies were effective. (Qua Chee Gan v. Law Union, 98
Phil 85, 1955)

An alteration in the use or condition of a thing insured from that to which it is limited by the
policy made without the consent of the insurer, by means within the control of the insured,
and increasing the risks, entitles an insurer to rescind a contract of fire insurance. (Malayan
Insurance Company, Inc. vs. Pap Co., Ltd., G.R. No. 200784, August 7, 2013)

H. Claims Settlement and Subrogation

Where the insurance policy clearly and categorically placed PCSI's liability for all damages
arising out of death or bodily injury sustained by one person as a result of any one accident at
P12,000.00 and under the law prevailing, P.D. 612, the minimum liability is P12,000 per
passenger, the stipulation regarding PCSI’s liability under the insurance contract not being
less than P12,000.00, and therefore not contrary to law, morals, good customs, public order or
public policy, must be upheld as effective, valid and binding as between the parties. (Perla
Compania De Seguros, Inc. vs. Court of Appeals, G.R. No. 78860, May 28, 1990)

The right of subrogation accrues simply upon payment by the insurance company of the
insurance claim. When it is not disputed that the insurance company indeed paid, then there
is valid subrogation in its favor. Malayan Insurance Co vs Alberto, GR No. 194320, February 1,
2012

1. Notice and Proof of Loss


The Insurance Code provides that a policy may declare that a violation of specified
provisions thereof shall avoid it. Thus, in fire insurance policies, which contain provisions
such as Condition No. 15 of the insurance policy, a fraudulent discrepancy between the
actual loss and that claimed in the proof of loss voids the insurance policy. Mere filing of
such a claim will exonerate the insurer. (United Merchants Corporation vs. Country
Bankers Insurance Corporation, G.R. No. 198588, July 11, 2012)

A perusal of the records shows that Usiphil Incorporated, after the occurrence of the fire,
immediately notified Finman Gen. Assurance thereof. Thereafter, Usiphil Incorporated
submitted the following documents: (1) Sworn Statement of Loss and Formal Claim and;
(2) Proof of Loss. The submission of these documents, constitutes substantial compliance.
Indeed, as regards the submission of documents to prove loss, substantial, not strict as
urged by Finman Gen. Assurance, compliance with the requirements will always be
deemed sufficient. (Finman Gen. Assurance vs. Court of Appeals, 361 SCRA 214, 2001)

Plaintiff's verified claim totalled P31,860.85, of which, in accordance with the terms of
the policy, three-fourths was asked, or P23,895.64. Dependant's inventory of the goods
found after the fire came to P13,113. The difference between plaintiff's claim and
defendant's estimate of the loss, which was confirmed in the trial court, was P18,747.85.
In connection with these figures plaintiff suggests too low a valuation by the
representatives of the defendant. Computed at plaintiff's valuation, the goods
inventoried by the defendant's committee would amount to P19,346.30. There would,
however, still remain a considerable void between the two amounts, of P12.514.55. In this
case, the difference under one hypothesis is about 50 per cent, and under another
hypothesis, about 25 per cent. Still that constitutes a serious discrepancy between the
true value of the property and that sworn to in the proofs of loss, and is an outstanding
fact to be considered as bearing upon the presence of fraud. It is more than an honest
misstatement, more than inadvertence or mistake, more than a mere error in opinion,
more than a slight exaggeration, and in connection with all the surrounding
circumstances, discloses a material overvaluation made intentionally and willfully. The
insured cannot therefore recover. (Tan It v. Sun Insurance, 51 Phil. 212, 1927)

Guidelines on Claims Settlement

Unfair Claims Settlement; Sanctions


Prescription of Action

There is absolutely nothing in the law which mandates that the two periods prescribed in
Section 384 of the Insurance Code—that is, the six-month period for filing the notice of
claim and the one-year period for bringing an action or suit must always concur. On the
contrary, it is very clear that the one-year period is only required “in proper cases.” The
one-year period should instead be counted from the date of rejection by the insurer as
this is the time when the cause of action accrues. Since in the case at hand, there has yet
been no accrual of cause of action, prescription has not yet set in. This is because, before
such final rejection, there was no real necessity for bringing suit. (Summit Guaranty And
Insurance Company, Inc. vs. Hon. Jose C. De
Guzman, in his capacity as Presiding Judge of Branch III, CFI of Tarlac, et al., G.R. No. L-

50997, June 30, 1987)

In case the claim was denied by the insurer but the insured filed a petition for
reconsideration, the prescriptive period should be counted from the date the claim
was denied at the first instance by the insurance company and not from the denial of
the reconsideration (Sun Life Office, Ltd. vs. Court of Appeals, GR. No. 89741, Mar 13,
1991)

Where the delay in bringing the suit against the insurance company was not caused by
the insured or its subrogee but by the insurance company itself, it is unfair to penalize
the insured or its subrogee by dismissing its action against the insurance company on
the ground of prescription. To prevent the insurance company from evading its
responsibility to the insured through this clever scheme, and to protect the insuring
public against similar acts by other insurance companies, the one-year period under
Section 384 should be counted not from the date of the accident but from the date of
the rejection of the claim by the insurer. It is only from the rejection of the claim by the
insurer that the insured’s cause of action accrued since a cause of action does not
accrue until the party obligated refuse, expressly or impliedly, to comply with its duty.
(Country Bankers Insurance Corp., vs. The Travellers Insurance and Surety Corp., et al.,
G.R. No. 82509, August 16, 1989)

Subrogation

Payment by the insurer to the assured operates as an equitable assignment to the


former of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. There are a few recognized exceptions to
this rule. For instance, if the assured by his own act releases the wrongdoer or third
party liable for the loss or damage, from liability, the insurer’s right of subrogation is
defeated. Similarly, where the insurer pays the assured the value of the lost goods
without notifying the carrier who has in good faith settled the assured’s claim for loss,
the settlement is binding on both the assured and the insurer, and the latter cannot
bring an action against the carrier on his right of subrogation . And where the insurer
pays the assured for a loss which is not a risk covered by the policy, thereby effecting
“voluntary payment”, the former has no right of subrogation against the third party
liable for the loss. (Pan Malayan Insurance Corporation vs. Court Of Appeals, et al., G.R.
No. 81026, April 3, 1990)

The payment by the insurer to the assured operates as an equitable assignment of all
remedies the assured may have against the third party who caused the damage.

Subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer. (Aboitiz Shipping Corporation v. Insurance Company Of North
America, G.R. No. 168402, August 6, 2008; Malayan Insurance Co., Inc., vs. Rodelio
Alberto, et al., G.R. No. 194320, February 1, 2012)

The proximate cause of the sinking of the vessel was her condition of unseaworthiness
arising from her having been top-heavy when she departed from the Port of
Zamboanga. Since the vessel was unseaworthy with reference to the cargo, there was
therefore a breach of warranty of seaworthiness that rendered the assured not entitled
to the payment of its claim under the policy. Hence, when PhilAmGen paid the claim
of the bottling firm there was in effect a “voluntary payment” and no right of
subrogation accrued in its favor. In other words, when PhilAmGen paid it did so at its
own risk. (The Philippine American General Insurance Company, Inc., vs. Court of
Appeals, et al., G.R. No. 116940, June 11, 199)

As the insurer, Fireman's Fund is entitled to go after the person or entity that violated
its contractual commitment to answer for the loss insured against.. Upon payment of
the loss, the insurer is entitled to be subrogated pro tanto to any right of action which
the insured may have against the third person whose negligence or wrongful act
caused the loss. When the insurance company pays for the loss, such payment operates
as an equitable assignment to the insurer of the property and all remedies which the
insured may have for the recovery thereof. (Fireman’s Fund Insurance Copany vs.
Jamila & Company, Inc., G.R. No. L-27427, April 7, 1976)

St. Paul, as insurer, after paying the claim of the insured for damages under the
insurance, is subrogated merely to the rights of the assured. As subrogee, it can
recover only the amount that is recoverable by the latter. Since the right of the
assured, in case of loss or damage to the goods, is limited or restricted by the
provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to
like limitations and restrictions. (St. Paul Fire & Marine Insurance Co. vs. Macondray &
Co., Inc., et al., G.R. No. L-27796, March 25, 1976)

When Manila Mahogany executed a release claim discharging San Miguel


Corporation from all actions, claims, demands and rights of action arising out of or as a
consequence of the accident after the insurer had paid the proceeds of the policy, the
insurer is entitled to recover from the insured the amount of insurance money paid.

Since the insurer can be subrogated to only such rights as the insured may have, should
the insured, after receiving payment from the insurer, release the wrongdoer who
caused the loss, the insurer loses his rights against the wrongdoer. But in such a case,
the insurer will be entitled to recover from the insured whatever it has paid to the
latter, unless the release was made with the consent of the insurer. (Manila Mahogany
Manufacturing Corporation vs. Court of Appeals, G.R. No. L-52756, October 12, 1987)

The presentation in evidence of the marine insurance policy is not indispensable


before the insurer may recover from the common carrier the insured value of the lost
cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is
sufficient to establish not only the relationship of American Home as insurer and
Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the
amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. (Delsan Transport

Lines, Inc. vs. Court of Appeals, et al., G.R. No. 127897, November 15, 2001)

The insurer, upon happening of the risk "insured" against and after payment to the
insured, is subrogated to the rights and cause of action of the latter. As such, the
insurer has the right to seek reimbursement for all the expenses paid. However, in a
contract of carriage involving the shipment of knock-down auto parts of Nissan motor vehicles
which were allegedly lost and destroyed, the insurer was not properly subrogated because of the
non-presentation of any marine insurance policy. The submission of a marine risk note instead of
the insurance policy doesn't satisfy the requirement for subrogation. The marine risk note is not an
insurance policy. It is only an acknowledgment or declaration of the insurer confirming the
specific shipment covered by its marine open policy, the evaluation of the cargo and the
chargeable premium. (Eastern Shipping Lines, Inc. vs. Prudential Guarantee and Assurance, Inc.,
G.R. No. 174116, September 11, 2009)

V. Transportation Laws

Transportation Laws

A. Common Carriers

There is no doubt that FPIC is a common carrier. It is engaged in the business of transporting or
carrying goods, i.e. petroleum products, for hire as a public employment. It undertakes to carry for
all persons indifferently, that is, to all persons who choose to employ its services, and transports
the goods by land and for compensation. The fact that FPIC has a limited clientele does not
exclude it from the definition of a common carrier. (First Philippine Industrial Corporation vs.
Court of Appeals, G.R. No. 125948, 29 December 1989)

Article 1732 makes no distinction between one whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying only as an ancillary activity (in local
Idiom as "a sideline"). It also carefully avoids making any distinction between a person or
enterprise offering transportation service on a regular or scheduled basis and one offering such
service on an occasional, episodic or unscheduled basis. Neither does it distinguish between a
carrier offering its services to the "general public," i.e., the general community or population, and
one who offers services or solicits business only from a narrow segment of the general population.
(Pedro De Guzman vs. Court of Appeals, G. R. No. L-47822, 22 December 1988).
Article 1732 does not distinguish between one whose principal business activity is the carrying of
goods and one who does such carrying only as an ancillary activity. The contention of Sanchez
Brokerage that it is not a common carrier but a customs broker whose principal function is to
prepare the correct customs declaration and proper shipping documents as required by law is
bereft of merit. It suffices that Sanchez Brokerage undertakes to deliver the goods for pecuniary
consideration. (A.F. Sanchez Brokerage Inc. vs. The Hon. Court of Appeals, G.R. No. 147079, 21
December 2004)

There is no dispute that Cebu Salvage was a common carrier. At the time of the loss of the cargo,
it was engaged in the business of carrying and transporting goods by water, for compensation, and
offered its services to the public. Cebu Salvage was the one which contracted with MCCII for the
transport of the cargo. It had control over what vessel it would use. All throughout its dealings
with MCCII, it represented itself as a common carrier. The fact that it did not own the vessel it
decided to use to consummate the
contract of carriage did not negate its character and duties as a common carrier. The

MCCII (respondent’s subrogor) could not be reasonably expected to inquire about the
ownership of the vessels which petitioner carrier offered to utilize. As a practical matter, it
is very difficult and often impossible for the general public to enforce its rights of action
under a contract of carriage if it should be required to know who the actual owner of the
vessel is. In fact, in this case, the voyage charter itself denominated Cebu Salvage as the
"owner/operator" of the vessel. (Cebu Salvage Corporation vs. Philippine Home Assurance
Corporation, G.R. No. 150403, January 25, 2007)

Much of the distinction between a “common or public carrier” and a ”private or special
carrier” lies in the character of the business, such that if the undertaking is an isolated
transaction, not a part of the business or occupation, and the carrier does not hold itself
out to carry the goods for the general public or to a limited clientele, although involving
the carriage of goods for a fee, the person or corporation providing such service could
very well be just a private carrier. (Philippine American General Insurance Company vs. Pks
Shipping Company, G.R. No. 149038, 9 April 2003)

In a contract of private carriage, the parties may validly stipulate that responsibility for the
cargo rests solely on the charterer, exempting the shipowner from liability for loss of or
damage to the cargo caused even by the negligence of the ship captain. Pursuant to
Article 1306 of the Civil Code, such stipulation is valid because it is freely entered into by
the parties and the same is not contrary to law, morals, good customs, public order, or
public policy. Unlike in a contract involving a common carrier, private carriage does not
involve the general public. Hence, the stringent provisions of the Civil Code on common
carriers protecting the general public cannot justifiably be applied to a ship transporting
commercial goods as a private carrier. (Valenzuela Hardwood And Industrial Supply, Inc.
vs. Court of Appeals, G.R. No. 102316, 30 June 1997)

A freight forwarder’s liability is limited to damages arising from its own negligence,
including negligence in choosing the carrier; however, where the forwarder contracts to
deliver goods to their destination instead of merely arranging for their transportation, it
becomes liable as a common carrier for loss or damage to goods. A freight forwarder
assumes the responsibility of a carrier, which actually executes the transport, even though
the forwarder does not carry the merchandise itself.–Unsworth Transport International (
Phils. vs. Court of Appeals ,G.R. No. 166250, 26 July 2010

A customs broker whose services were engaged for the release and withdrawal of the
cargoes from the pier and their subsequent delivery to the consignee’s warehouse and the
owner of the delivery truck whom the customs broker contracted to transport the cargoes
to the warehouse are both common carriers. The latter is considered a common carrier in
the absence of indication that it solely and exclusively rendered services to the customs
broker. Thus, when the truck failed to deliver one of the cargoes, both the broker and
owner of the truck are liable. Being both common carriers, they are mandated from the
nature of their business and for reasons of public policy, to observe the extraordinary
diligence in the vigilance over the goods transported by them according to all the
circumstances of such case. Thus, in case of loss of the goods, the common carrier is
presumed to have been at fault or to have acted negligently. Loadmasters Customs

Services, Inc. vs. Glodel Brokerage Corporation, GR No. 179446, January 10, 2011
Persons engaged in the business of transporting students from their respective residences to
their school and back are considered common carrier. Despite catering to a limited clientele,
they operated as a common carrier because they held themselves out as a ready
transportation indiscriminately to the students of a particular school living within or near
where they operated the service and for a fee. Spouses Perena vs Spouses Nicolas, GR No.
157917, August 29, 2012

1. Diligence Required of Common Carriers

Under Article 1733 of the Civil Code, common carriers from the nature of their business and
for reasons of public policy are bound to observe extraordinary diligence in the vigilance over
the goods and for the safety of passengers transported by them according to all
circumstances of each case. Thus, under Article 1735 of the same Code, in all cases other than
those mentioned in Article 1734 thereof, the common carrier shall be presumed to have been
at fault or to have acted negligently, unless it proves that it has observed the extraordinary
diligence required by law. More importantly, common carriers cannot limit their liability for
injury or loss of goods where such injury or loss was caused by its own negligence. Otherwise
stated, the law on averages under the Code of Commerce cannot be applied in determining
liability where there is negligence. (American Home Assurance Company vs. The Court of
Appeals, G.R. No. 94149, 5 May 1992)

Article 1736 of the Civil Code imposes upon common carriers the duty to observe
extraordinary diligence from the moment the goods are unconditionally placed in their
possession "until the same are delivered, actually or constructively, by the carrier to the
consignee or to the person who has a right to receive them. However, in the bills of lading
issued for the cargoes in question, the parties agreed to limit the responsibility of the carrier
for the loss or damage by inserting a stipulation stating that the carrier shall not be
responsible for loss or damage to shipments billed 'owner's risk' unless such loss or damage is
due to negligence of carrier. Since such stipulation is valid, and there is nothing therein that is
contrary to law, morals or public policy, the absence of negligence on the part of its
employees exempt the carrier from liability for loss of goods due to fire. (Amparo C.
Servando, Clara Uy Bico vs. Philippine Steam Navigation Co., G.R. No. L-36481-2, 23 October
1982)
A common carrier is presumed at fault in the absence of a satisfactory explanation on how the
airplane crash occured. (Vda. De Abeto vs. Philippine Air Lines, Inc. 115 SCRA 489, 1982)

When a bus hit a tree and house due to the fast and reckless driving of the bus driver resulting
in injury to one of its passengers, the bus owner is liable and such liability does not cease even
upon proof that he exercised all the diligence of a good father of family in the selection and
supervision of its employees. R Transport Corporation vs. Pante, GR No. 162104, September
15, 2009
Though it is true that common carriers are presumed to have been at fault or to have acted
negligently if the goods transported by them are lost, destroyed, or deteriorated, and that
the common carrier must prove that it exercised extraordinary diligence in order to
overcome the presumption, the plaintiff must still, before the burden is shifted to the
defendant, prove that the subject shipment suffered actual shortage. This can only be done if
the weight of the shipment at the port of origin and its subsequent weight at the port of
arrival have been proven by a preponderance of evidence, and it can be seen that the former
weight is considerably greater than the latter weight, taking into consideration the
exceptions provided in Article 1734 of the Civil Code. Asian Terminals, Inc vs. Simon
Enterprises, Inc. GR No. 177116, February 27, 2013

2. Liabilities of Common Carriers

If a railroad company maintains a signaling device at a crossing to give warning of the


approach of a train, the failure of the device to operate is generally held to be evidence of
negligence, which may be considered with all the circumstances of the case in determining
whether the railroad company was negligent as a matter of fact. (Victorino Cusi and Pilar
Pobre vs. Philippine National Railways, G.R. No. L-29889, 31 May 1979).

For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned
with a sufficient number of competent officers and crew. The failure of a common carrier to
maintain in seaworthy condition its vessel involved in a contract of carriage is a clear breach
of its duty prescribed in Article 1755 of the Civil Code. (Loadstar Shipping

Co., Inc. vs. Court of Appeals, G.R. No. 131621, September 28, 1999)

The foundation of LRTA’s liability is the contract of carriage and its obligation to indemnify
the victim arises from the breach of that contract by reason of its failure to exercise the high
diligence required of the common carrier. In the discharge of its commitment to ensure the
safety of passengers, a carrier may choose to hire its own employees or avail itself of the
services of an outsider or an independent firm to undertake the task. In either case, the
common carrier is not relieved of its responsibilities under the contract of carriage. (Light
Rail Transit Authority & Rodolfo

Roman vs. Marjorie Navidad, G.R. No. 145804, 6 February 2003)

The "kabit system" is an arrangement whereby a person who has been granted a certificate of
convenience allows another person who owns motors vehicles to operate under such
franchise for a fee. A certificate of public convenience is a special privilege conferred by the
government. Although not outrightly penalized as a criminal offense, the "kabit system" is
invariably recognized as being contrary to public policy and, therefore, void and inexistent
under Article 1409 of the Civil Code. (Lita Enterprises, Inc. vs. Intermediate Appellate Court,
G.R. No. L-64693, 27 April 1984)

It is settled in our jurisprudence that only the registered owner of a public service vehicle is
responsible for damages that may arise from consequences incident to its operation, or
maybe caused to any of the passengers therein. (Victor Juaniza vs. Eugenio Jose, G.R.

No.L-50127-28, 30 March 1979)


In dealing with vehicles registered under the Public Service Law, the public has the right
to assume that the registered owner is the actual or lawful owner thereof. It would be
very difficult and often impossible as a practical matter, for members of the general
public to enforce the rights of action that they may have for injuries inflicted by the
vehicles being negligently operated if they should be required to prove who the actual
owner is. (Ma. Luisa Benedicto vs. Hon. Intermediate Appellate Court, G.R. No. 70876, 19
July 1990)

While the registered owner or operator of a passenger vehicle is jointly and severally
liable with the driver of the said vehicle for damages incurred by passengers or third
persons as a consequence of injuries or death sustained in the operation of the said
vehicle, the registered owner or operator has the right to be indemnified by the real or
actual owner of the amount that he may be required to pay as damage for the injury
caused. The right to be indemnified being recognized, recovery by the registered owner
or operator may be made in any form-either by a cross-claim, third-party complaint, or
an independent action. (Angel Jereos vs. Hon. Court of Appeals, G.R. No. L-48747, 30
September 1982)

In an action based on quasi delict, the registered owner of a motor vehicle is solidarily
liable for the injuries and damages caused by the negligence of the driver, in spite of the
fact that the vehicle may have already been the subject of an unregistered Deed of Sale
in favor of another person. Unless registered with the Land Transportation Office, the
sale -- while valid and binding between the parties -- does not affect third parties,
especially the victims of accidents involving the said transport equipment. (Equitable

Leasing Corporation vs. Lucita Suyom et al., G.R. No. 143360, 5 September 2002)

The principle of last clear chance only applies in a suit between the owners and drivers of
two colliding vehicles. It does not arise where a passenger demands responsibility from
the carrier to enforce its contractual obligations, for it would be inequitable to exempt
the negligent driver and its owner on the ground that the other driver was likewise guilty
of negligence. (William Tiu, doing business under the name and style of “D’ Rough
Riders,” vs. Pedro A. Arriesgado, G.R. No. 138060, 1 September 2004)
When an airline issues a ticket to a passenger confirmed on a particular flight, on a
certain date, a contract of carriage arises, and the passenger has every right to expect
that he would fly on that flight and on that date. If he does not, then the carrier opens
itself to a suit for breach of contract of carriage. Where an airline had deliberately
overbooked, it took the risk of having to deprive some passengers of their seats in case
all of them would show up for the check in. For the indignity and inconvenience of being
refused a confirmed seat on the last minute, said passenger is entitled to an award of
moral damages. (Spouses Cesar & Suthira Zalamea vs. Court of Appeals, G.R. No. 104235
November 18, 1993)

In an action for breach of contract of carriage, the aggrieved party does not have to
prove that the common carrier was at fault or was negligent. All that is necessary to
prove is the existence of the contract and the fact of its non-performance by the carrier.

(Singapore Airlines Limited vs. Fernandez, G.R. No. 142305, December 10, 2003)
It is PAL’s duty to provide assistance to Spouses Miranda and, for that matter, any other
passenger similarly inconvenienced due to delay in the completion of the transport and
the receipt of their baggage. Therefore, its unilateral and voluntary act of providing cash
assistance is deemed part of its obligation as an air carrier, and is hardly anything to rave
about. (Philippine Airlines, Inc., vs. Court of Appeals, G.R. No. 119641, May 17, 1996)

Assuming arguendo that the airline passengers have no vested right to these amenities in
case a flight is cancelled due to force majeure, what makes PAL liable for damages in this
particular case and under the facts obtaining herein is its blatant refusal to accord the
so-called amenities equally to all its stranded passengers who were bound for Surigao

City. No compelling or justifying reason was advanced for such discriminatory and
prejudicial conduct. The refund of hotel expenses was surreptitiously and
discriminatorily made by PAL since the same was not made known to everyone, except
through word of mouth to a handful of passengers. This is a sad commentary on the
quality of service and professionalism of an airline company, which is the country’s flag
carrier at that. The discriminatory act of PAL against Pantejo ineludibly makes the former
liable for moral damages under Article 21 in relation to Article 2219 (10) of the Civil
Code. (Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. 120262, July 17, 1997)

Cathay’s contention that there was no contract of carriage that was breached because
Singson’s ticket was open-dated is untenable. To begin with, the round trip ticket issued
by the carrier to the passenger was in itself a complete written contract by and between
the carrier and the passenger. It had all the elements of a complete written contract, to
wit: (a) the consent of the contracting parties manifested by the fact that the passenger
agreed to be transported by the carrier to and from Los Angeles via San Francisco and

Hongkong back to the Philippines, and the carrier’s acceptance to bring him to his
destination and then back home; (b) cause or consideration, which was the fare paid by
the passenger as stated in his ticket; and, (c) object, which was the transportation of the
passenger from the place of departure to the place of destination and back, which are
also stated in his ticket. Clearly therefore Singson was not a mere "chance passenger
with no superior right to be boarded on a specific flight," as erroneously claimed by
Cathay and sustained by the Court of Appeals. (Carlos Singson vs. Court of Appeals, G.R.
No. 119995, November 18, 1997)
Spouses Vazquez had every right to decline the upgrade and insist on the Business Class
accommodation they had booked for and which was designated in their boarding passes.
They clearly waived their priority or preference when they asked that other passengers
be given the upgrade. It should not have been imposed on them over their vehement
objection. By insisting on the upgrade, Cathay breached its contract of carriage with
Spouses Vazquez. (Cathay Pacific Airways, Ltd., vs. Spouses Daniel Vazquez

And Maria Luisa Madrigal Vazquez, G.R. No. 150843, March 14, 2003)

When an airline issues a ticket to a passenger, confirmed for a particular flight on a


certain date, a contract of carriage arises. The passenger has every right to expect that
he be transported on that flight and on that date, and it becomes the airline’s obligation
to carry him and his luggage safely to the agreed destination without delay. If the
passenger is not so transported or if in the process of transporting, he dies or is injured,
the carrier may be held liable for a breach of contract of carriage. (Philippine Airlines

Inc. vs. Court of Appeals, G.R. No. 123238, September 22, 2008)

It was established that the primary cause of the death of the passenger of the jeepney was
the negligence of the driver of the truck which collided with the passenger jeepney. Thus,
the truck owner is liable for this failure to rebut the presumption of negligence in hiring and
supervision of his employee. Whenever an employee’s negligence causes damage or injury to
another, there instantly arises a presumption juris tantum that the employer failed to
exercise diligentissimi patris families in the selection or supervision of his employee. Thus, in
the selection of prospective employees, employers are required to examine them as to their
qualification, experience and service record. With respect to the supervision of employees,
employers must formulate standard operating procedures, monitor their implementation,
and impose disciplinary measures for breaches thereof. These facts must be shown by
concrete proof. The Heirs of the late Ruben Reinoso, Sr. vs. Court of Appeals, GR No. 116121,
July 18, 2011

In a contract of carriage, it is presumed that the common carrier is at fault or is negligent


when a passenger dies or is injured. In fact, there is even no need for the court to make an
express finding of fault or negligence on the part of the common carrier. This statutory
presumption may only be overcome by evidence that the carrier exercised extraordinary
diligence. Unfortunately, the common carrier miserably failed to overcome this presumption
as the accident which led to the passenger’s death was due to the reckless driving and gross
negligence of its driver. Heirs of Josemaria Ochoa vs. G&S Transport Corporation, March 19,
as affirmed in the July 16, 2012 decision

B. Vigilance over Goods

1. Exempting Causes

a. Requirement of Absence of Negligence


It is a well known physical fact that cars may skid on greasy or slippery roads, as in the instant
case, without fault on account of the manner of handling the car. Skidding means partial or
complete loss of control of the car under circumstances not necessarily implying negligence.
It may occur without fault. (Saturnino Bayasen vs. Court of Appeals,

G.R. No.L-25785, 26 February 1981)

A fortuitous event is possessed of the following characteristics: (a) the cause of the
unforeseen and unexpected occurrence, or the failure of the debtor to comply with his
obligations, must be independent of human will; (b) it must be impossible to foresee the
event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the obligor must be free from any participation in the
aggravation of the injury resulting to the creditor. Under the circumstances of this case, the
explosion of the new tire may not be considered a fortuitous event. There are human factors
involved in the situation. The fact that the tire
was new did not imply that it was entirely free from manufacturing defects or that it was
properly mounted on the vehicle. Neither may the fact that the tire bought and used in
the vehicle is of a brand name noted for quality, resulting in the conclusion that it could
not explode within five days’ use. (Alberta Yobido vs. Court of Appeals, G.R. No. 113003,
17 October 1997)

In order that a common carrier may be absolved from liability in case of force majeure, it
is not enough that the accident was caused by force majeure. The common carrier must
still prove that it was not negligent in causing the injuries resulting from such accident.
Considering that the bus driver did not immediately stop the bus at the height of the
commotion; the bus was speeding from a full stop; the victims fell from the bus door
when it was opened or gave way while the bus was still running; the conductor panicked
and blew his whistle after people had already fallen off the bus; and the bus was not
properly equipped with doors in accordance with law - it is clear that Bachelor and
Rivera have failed to overcome the presumption of fault and negligence found in the law
governing common carriers. (Bachelor Express, Incorporated vs. The Honorable Court of

Appeals (Sixth Division), G.R. No. 85691, 31 July 1990)

Mechanical defects in the carrier are not considered a caso fortuito that exempts the
carrier from responsibility. Even granting arguendo that the engine failure was a
fortuitous event, when the vessel finally left the port of Cebu, there was no longer any
force majeure that justified by-passing a port of call. The "interruption" was caused by
the captain upon instruction of management, hence, the owner of the vessel and the ship
agent shall be civilly liable for the acts of the captain. (Sweet Lines, Inc. vs. The

Honorable Court of Appeals, Micaela b. Quintos, et al., G.R. No. L-43640, 28 April 1983)

A mishap caused by defective brakes can not be consideration as fortuitous in character.


Certainly, the defects were curable and the accident preventable. (Vicente Vergara vs.
The Court of Appeals, G.R. No. 77679, 30 September 1987)
The intervention of the municipal officials was not In any case, of a character that would
render impossible the fulfillment by the carrier of its obligation. Ganzon was not duty
bound to obey the illegal order to dump into the sea the scrap iron. Moreover, there is
absence of sufficient proof that the issuance of the same order was attended with such
force or intimidation as to completely overpower the will of the petitioner's employees.
The mere difficulty in the fulfillment of the obligation is not considered force majeure.

(Mauro Ganzon vs. Court of Appeals, G.R. no. L-48757, 30 May 1988)

Despite the report of Philippine Constabulary agent Generalao that the Maranaos were
going to attack its buses, Fortune took no steps to safeguard the lives and properties of
its passengers. The seizure of the bus of the Fortune was foreseeable and, therefore, was
not a fortuitous event which would exempt petitioner from liability. (Fortune Express,
Inc. vs. Court of Appeals, G.R. No. 119756, 18 March 1999)

Indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on the
course of the typhoon by weather bulletins at intervals of six hours, the captain and crew
were well aware of the risk they were taking as they hopped from island to island. In so
doing, they failed to observe that extraordinary diligence required of them explicitly by
law. (Pedro Vasquez, et al., vs. The Court of Appeals, G.R. No. L-42926, 13 September

1985)

Loadstar was at fault or negligent in not maintaining a seaworthy vessel and in having allowed
its vessel to sail despite knowledge of an approaching typhoon. In any event, it did not sink
because of any storm that may be deemed as force majeure, inasmuch as the wind condition
in the area where it sank was determined to be moderate. Since it was remiss in the
performance of its duties, Loadstar cannot hide behind the “limited liability” doctrine to
escape responsibility for the loss of the vessel and its cargo.

(Loadstar Shipping Co., Inc. vs. Court of Appeals, G.R. No. 131621, 28 September 1999)

Negligence is conduct that creates undue risk of harm to another. It is the failure to observe
that degree of care, precaution and vigilance that the circumstances justly demand, whereby
that other person suffers injury. Petitioner’s vessel was carrying chemical cargo—alkyl
benzene and methyl methacrylate monomer. While knowing that their vessel was carrying
dangerous inflammable chemicals, its officers and crew failed to take all the necessary
precautions to prevent an accident. Petitioner was, therefore, negligent. (Smith Bell Dodwell
Shipping Agency Corporation vs. Catalino Borja, G.R. No. 143008. June 10, 2002)

b. Absence of Delay

The oft-repeated rule regarding a carrier's liability for delay is that in the absence of a special
contract, a carrier is not an insurer against delay in transportation of goods.

When a common carrier undertakes to convey goods, the law implies a contract that they
shall be delivered at destination within a reasonable time, in the absence, of any agreement
as to the time of delivery. But where a carrier has made an express contract to transport and
deliver property within a specified time, it is bound to fulfill its contract and is liable for any
delay, no matter from what cause it may have arisen. This result logically follows from the
well-settled rule that where the law creates a duty or charge, and the party is disabled from
performing it without any default in himself, and has no remedy over, then the law will excuse
him, but where the party by his own contract creates a duty or charge upon himself, he is
bound to make it good notwithstanding any accident or delay by inevitable necessity because
he might have provided against it by contract. Whether or not there has been such an
undertaking on the part of the carrier to be determined from the circumstances surrounding
the case and by application of the ordinary rules for the interpretation of contracts. (Aniceto
Saludo, Jr. vs. Hon. Court of

Appeals, G.R. No. 95536, March 23, 1992).

Petitioner's late delivery of the baggage for eleven (11) days was not motivated by ill will or
bad faith. In fact, it immediately coordinated with its Central Baggage Services to trace
private respondent's suitcase and succeeded in finding it. Under the circumstances,
considering that petitioner's actuation was not attendant with bad faith, the award of moral
damages is unfair. (Philippine Air Lines vs. Florante Miano, G.R. No. 106664, March 8, 1995).

c. Due Diligence to Prevent or Lessen the Loss


The rule is that if the improper packing or, in this case, the defect/s in the container, is/are
known to the carrier or his employees or apparent upon ordinary observation, but he
nevertheless accepts the same without protest or exception notwithstanding such condition,
he is not relieved of liability for damage resulting therefrom. In this case, Calvo accepted the
cargo without exception despite the apparent defects in some of the container vans. Hence,
for failure of Calvo to prove that she exercised extraordinary diligence in the carriage of
goods in this case or that she is exempt from liability, the presumption of negligence as
provided under Art. 1735 holds. (Virgines Calvo doing business under the name and style
Transorient Container Terminal Services, Inc. vs. Ucpb General Insurance Co., Inc., G.R. No.
148496, 19 March 2002)

While it may be true that the tire that blew-up was still good because the grooves of the tire
were still visible, this fact alone does not make the explosion of the tire a fortuitous event. No
evidence was presented to show that the accident was due to adverse road conditions or that
precautions were taken by the Camoro to compensate for any conditions liable to cause
accidents. The sudden blowing-up, therefore, could have been caused by too much air
pressure injected into the tire coupled by the fact that the jeepney was overloaded and
speeding at the time of the accident. (Roberto Juntilla vs. Clemente Fontanar, G.R. No. L-
45637, 31 May 1985)

Immediately before the collision, Llamoso was actually violating the following traffic rules
and regulations. Thus, a legal presumption arose that Llamoso was negligent, a presumption
KBL was unable to overthrow. (Kapalaran Bus Line vs. Angel Coronado, G.R.

No. 85331, 25 August 1989)

Even if the weather encountered by the ship is to be deemed a natural disaster under Article
1739 of the Civil Code, Central Shipping failed to show that such natural disaster or calamity
was the proximate and only cause of the loss. Human agency must be entirely excluded from
the cause of injury or loss. In other words, the damaging effects blamed on the event or
phenomenon must not have been caused, contributed to, or worsened by the presence of
human participation. Hence, if a common carrier fails to exercise due diligence - or that
ordinary care that the circumstances of the particular case demand, to prevent or minimize
the loss before, during and after the occurrence of the natural disaster, the carrier shall be
deemed to have been negligent. (Central Shipping Company, Inc., vs. Insurance Company of
North America, G.R. No. 150751,
September 20, 2004)

2. Contributory Negligence

Where he contributes to the principal occurrence, as one of its determining factors, he can
not recover. Where, in conjunction with the occurrence, he contributes only to his own injury,
he may recover the amount that the defendant responsible for the event should pay for such
injury, less a sum deemed a suitable equivalent for his own imprudence. (M. H. Rakes vs. The
Atlantic Gulf and Pacific Company, G.R. No. 1719, January 23, 1907).

3. Duration of Liability
a. Delivery of Goods to Common Carrier

By the said act of delivery, the scraps were unconditionally placed in the possession and
control of the common carrier, and upon their receipt by the carrier for transportation, the
contract of carriage was deemed perfected. Consequently, the petitioner-carrier's
extraordinary responsibility for the loss, destruction or deterioration of the goods
commenced. Pursuant to Art. 1736, such extraordinary responsibility would cease only upon
the delivery, actual or constructive, by the carrier to the consignee, or to the person who has a
right to receive them. The fact that part of the shipment had not been loaded on board the
lighter did not impair the said contract of transportation as the goods remained in the
custody and control of the carrier, albeit still unloaded. (Mauro Ganzon vs. Court of Appeals,
G.R. No. L-48757, May 30, 1988)

b. Actual or Constructive Delivery

Delivery to the customs authorities is not the delivery contemplated by Article 1736, supra, in
connection with second paragraph of Article 1498, supra, because, in such a case, the goods
are then still in the hands of the Government and their owner could not exercise dominion
whatever over them until the duties are paid. (Lu Do & Lu YM Corporation v. I.V. Binamira,
G.R. No. L-9840, April 22, 1957)

The receipt of goods by the carrier has been said to lie at the foundation of the contract to
carry and deliver, and if actually no goods are received there can be no such contract. The
liability and responsibility of the carrier under a contract for the carriage of goods commence
on their actual delivery to, or receipt by, the carrier or an authorized agent and delivery to a
lighter in charge of a vessel for shipment on the vessel, where it is the custom to deliver in
that way, is a good delivery and binds the vessel receiving the freight, the liability
commencing at the time of delivery to the lighter and, similarly, where there is a contract to
carry goods from one port to another, and they cannot be loaded directly on the vessel and
lighters are sent by the vessel to bring the goods to it, the lighters are for the time its
substitutes, so that the bill of landing is applicable to the goods as soon as they are placed on
the lighters. (Compañia Maritima vs. Insurance

Company of North America, G.R. No. L-18965, October 30, 1964)


The liability of a common carrier does not cease by mere transfer of custody of the cargo to
the arrastre operator. Like the duty of seaworthiness, the duty of care of the cargo is non-
delegable and the carrier is accordingly responsible for the acts of the master, the crew, the
stevedore and his other agents. The fact that a consignee is required to furnish persons to
assist in unloading a shipment may not relieve the carrier of its duty as to such unloading. It is
settled in maritime law jurisprudence that cargoes while being unloaded generally remain
under the custody of the carrier. Since the damage to the cargo was incurred during the
discharge of the shipment and while under the supervision of the carrier, the latter is liable
for the damage caused to the cargo.
The arrastre operator is likewise liable. The functions of an arrastre operator involve the
handling of cargo deposited on the wharf or between the establishment of the consignee or
shipper and the ship’s tackle. Being the custodian of the goods discharged from a vessel, an
arrastre operator’s duty is to take good care of the goods and to turn them over to the party
entitled to their possession. While it is true that an arrastre operator and a carrier may not be
held solidarily liable at all times, the facts of these cases show that apart from the stevedores
of the arrastre operator being directly in charge of the physical unloading of the cargo, its
foreman picked the cable sling that was used to hoist the packages for transfer to the dock.
Moreover, the fact that the packages were unloaded with the same sling unharmed is telling
of the inadequate care with which the stevedore handled and discharged the
cargo.Westwind Shipping Corporation vs. UCPB General Insurance Co., GR no. 2002289,
November 25, 2013

Temporary Unloading or Storage

Stipulation for Limitation of Liability a. Void Stipulations

Condition No. 14 printed at the back of the passage tickets should be held as void and
unenforceable for first, it is not just and fair to bind passengers to the terms of the conditions
printed at the back of the passage tickets, and second, Condition No. 14 subverts the public
policy on transfer of venue of proceedings of this nature, since the same will prejudice rights
and interests of innumerable passengers in different parts of the country who, under
Condition No. 14, will have to file suits against Sweet Lines only in the City of Cebu. (Sweet
Lines, Inc. vs. Hon. Bernardo Teves, Presiding Judge, CFI of Misamis Oriental, Branch VII, G.R.
No. L-37750, 19 May 1978)

Limitation of Liability to Fixed Amount

Limitation of Liability in Absence of Declaration of Greater Value


The stipulation in the bill of lading limiting the common carrier's liability to the value of the
goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and
binding. This limitation of the carrier's liability is sanctioned by the freedom of the
contracting parties to establish such stipulations, clauses, terms, or conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs and public
policy. A stipulation fixing or limiting the sum that may be recovered from the carrier on the
loss or deterioration of the goods is valid, provided it is (a) reasonable and just under the
circumstances, and (b) has been fairly and freely agreed upon. In the case at bar, the shipper
and consignee are, therefore, bound by such stipulations. (St. Paul Fire

& Marine Insurance Co., vs. Macondray & Co, Inc., et al., G.R. No. L-27796, 25 March 1976)
A stipulation in a contract of carriage that the carrier will not be liable beyond a specified
amount unless the shipper declares the goods to have a greater value is generally deemed to
be valid and will operate to limit the carrier's liability, even if the loss or damage results from
the carrier's negligence. Pursuant to such provision, where the shipper is silent as to the value
of his goods, the carrier's liability for loss or damage thereto is limited to the amount
specified in the contract of carriage and where the shipper states the value of his goods, the
carrier's liability for loss or damage thereto is limited to that amount. Under a stipulation such
as this, it is the duty of the shipper to disclose, rather than the carrier's to demand the true
value of the goods and silence on the part of the shipper will be sufficient to limit recovery in
case of loss to the amount stated in the contract of carriage. (Eastern and Australian
Steamship Co., Ltd. vs. Great

American Insurance Co., G.R. No. L-37604 October 23, 1981)

5. Liability for Baggage of Passengers

a. Checked-In Baggage

Where airline passenger’s luggage was left at airline’s fault in Manila and passenger was not
adequately or properly given assistance in Hawaii to locate his luggage an award of moral
damages is proper (Pan American World Airways, Inc. vs. Intermediate Appellate

Court, G.R. No. 68988. June 21, 1990)

Baggage in Possession of Passengers C. Safety of Passengers

A common carrier is bound to carry its passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with due regard to all the
circumstances. In a contract of carriage, it is presumed that the common carrier was at fault
or was negligent when a passenger dies or is injured. Unless the presumption is rebutted, the
court need not even make an express finding of fault or negligence on the part of the
common carrier. This statutory presumption may only be overcome by evidence that the
carrier exercised extraordinary diligence. (Victory Liner,

Inc. vs. Rosalito Gammad, G.R. No. 159636, November 25, 2004)

The petitioner has the obligation to transport its passengers to their destinations and to
observe extraordinary diligence in doing so. Death or any injury suffered by any of its
passengers gives rise to the presumption that it was negligent in the performance of its
obligation under the contract of carriage. (Philippine National Railways vs. The Honorable
Court of Appeals, G.R. No. L-55347. October 4, 1985)

But while petitioner failed to exercise extraordinary diligence as required by law, it appears
that the deceased was chargeable with contributory negligence. Since he opted to sit on the
open platform between the coaches of the train, he should have held tightly
and tenaciously on the upright metal bar found at the side of said platform to avoid falling off
from the speeding train. Such contributory negligence, while not exempting the PNR from
liability, nevertheless justified the deletion of the amount adjudicated as moral damages.
(Philippine National Railways vs. The Honorable Court of Appeals, G.R.

No. L-55347. October 4, 1985)

It is a matter of common knowledge and experience about common carriers like trains and
buses that before reaching a station or flagstop they slow down and the conductor announces
the name of the place. It is also a matter of common experience that as the train or bus
slackens its speed, some passengers usually stand and proceed to the nearest exit, ready to
disembark as the train or bus comes to a full stop. This is especially true of a train because
passengers feel that if the train resumes its run before they are able to disembark, there is no
way to stop it as a bus may be stopped. It was negligence on the conductor’s part to announce
the next flag stop when said stop was still a full three minutes ahead. That the announcement
was premature and erroneous is shown by the fact that immediately after the train slowed
down, it unexpectedly accelerated to full speed. The negligence of petitioner-appellant in
prematurely and erroneously announcing the next flag stop was the proximate cause of the
deaths of Martina Bool and Emelita Gesmundo. Any negligence of the victims was at most
contributory and does not exculpate the accused from criminal liability. (Clemente Briñas vs.
The People of the Philippines, G.R. No. L-30309. November 25, 1983)

Void Stipulations

Duration of Liability

a. Waiting for Carrier or Boarding of Carrier

A public utility bus, once it stops, is in effect making a continuous offer to bus riders. Hence, it
becomes the duty of the driver and the conductor, every time the bus stops, to do no act that
would have the effect of increasing the peril to a passenger while he was attempting to board
the same. The premature acceleration of the bus in this case was a breach of such duty.
Pedrito, by stepping and standing on the platform of the bus, is already considered a
passenger and is entitled all the rights and protection pertaining to such a contractual
relation. Hence, it has been held that the duty which the carrier passengers owes to its
patrons extends to persons boarding cars as well as to those alighting therefrom. (Dangwa
Transportation Co., Inc. vs. Court of Appeals, G.R. No.

95582, 7 October 1991)

b. Arrival at Destination

Anacleto Viana was still a passenger at the time of the incident. When the accident occurred,
the victim was in the act of unloading his cargoes, which he had every right to do, from
Aboitiz's vessel. A carrier is duty bound not only to bring its passengers safely to their
destination but also to afford them a reasonable time to claim their baggage.
(Aboitiz Shipping Corporation vs. Hon. Court of Appeals, Eleventh Division, G.R. No.

884458, 6 November 1989)

It has been recognized as a rule that the relation of carrier and passenger does not cease at
the moment the passenger alights from the carrier's vehicle at a place selected by the carrier
at the point of destination, but continues until the passenger has had a reasonable time or a
reasonable opportunity to leave the carrier's premises. And, what is a reasonable time or a
reasonable delay within this rule is to be determined from all the circumstances. In the
present case, the father returned to the bus to get one of his baggages which was not
unloaded when they alighted from the bus. Raquel, the child that she was, must have
followed the father. However, although the father was still on the running board of the bus
awaiting for the conductor to hand him the bag or bayong, the bus started to run, so that
even he (the father) had to jump down from the moving vehicle. It was at this instance that
the child, who must be near the bus, was run over and killed. In the circumstances, it cannot
be claimed that the carrier's agent had exercised the "utmost diligence" of a "very cautions
person" required by Article 1755 of the Civil

Code to be observed by a common carrier in the discharge of its obligation to transport


safely its passengers. (La Mallorca vs. Honorable Court of Appeals, G.R. No. L-20761, July 27,
1966)

3. Liability for Acts of Others

a. Employees

The misconduct on the part of the carrier’s employees toward a passenger gives the latter an
action for damages against the carrier. (Sabena Belgian World Airlines vs. Honorable Court
of Appeals G.R. No. 82068. March 31, 1989)

The negligence of the employee gives rise to the presumption of negligence on the part of
the employer. This is the presumed negligence in the selection and supervision of the
employee. The theory of presumed negligence, in contrast with the American doctrine of
respondent superior, where the negligence of the employee is conclusively presumed to be
the negligence of the employer, is clearly deducible from the last paragraph of Article 2180
of the Civil Code which provides that the responsibility therein mentioned shall cease if the
employers prove that they observed all the diligence of a good father of a family to prevent
damages. (Leopoldo Poblete vs. Donato Fabros, G.R. No. L-29803, 14

September 1979)

It must be emphasized that a contract to transport passengers is quite different in kind and
degree from any other contractual relations, and this is because of the relation, which an air
carrier sustains with the public. Its business is mainly with the travelling public. It invites
people to avail [themselves] of the comforts and advantages it offers. The contract of air
carriage, therefore, generates a relation attended with a public duty.

Neglect or malfeasance of the carrier’s employees naturally could give ground for an
action for damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21,
2001)

The basis of the carrier's liability for assaults on passengers committed by its drivers rests
either on (1) the doctrine of respondeat superior or (2) the principle that it is the carrier's
implied duty to transport the passenger safely. Under the first, which is the minority view, the
carrier is liable only when the act of the employee is within the scope of his authority and
duty. It is not sufficient that the act be within the course of employment only. Under the
second view, upheld by the majority and also by the later cases, it is enough that the assault
happens within the course of the employee's duty. It is no defense for the carrier that the act
was done in excess of authority or in disobedience of the carrier's orders.The carrier's liability
here is absolute in the sense that it practically secures the passengers from assaults
committed by its own employees. As can be gleaned from Art. 1759, the Civil Code of the
Philippines evidently follows the rule based on the second view. At least three very cogent
reasons underlie this rule: (1) the special undertaking of the carrier requires that it furnish its
passenger that full measure of protection afforded by the exercise of the high degree of care
prescribed by the law, inter alia from violence and insults at the hands of strangers and other
passengers, but above all, from the acts of the carrier's own servants charged with the
passenger's safety;

(2) said liability of the carrier for the servant's violation of duty to passengers, is the result of
the formers confiding in the servant's hands the performance of his contract to safely
transport the passenger, delegating therewith the duty of protecting the passenger with the
utmost care prescribed by law; and (3) as between the carrier and the passenger, the former
must bear the risk of wrongful acts or negligence of the carrier's employees against
passengers, since it, and not the passengers, has power to select and remove them. (Antonia
Maranan vs. Pascual Perez, et al, G.R. No. L-22272, June 26, 1967)

b. Other Passengers and Strangers

A tort committed by a stranger which causes injury to a passenger does not accord the latter
a cause of action against the carrier. The negligence for which a common carrier is held
responsible is the negligent omission by the carrier's employees to prevent the tort from
being committed when the same could have been foreseen and prevented by them.
(Jose Pilapil vs. Hon. Court of Appeals, G.R. No. 52159, 22 December 1989)

4. Extent of Liability for Damages

It is well-settled that when death occurs as a result of the commission of a crime (reckless
imprudence), the following items of damages may be recovered: (1) an indemnity for the
death of the victim; (2) an indemnity for loss of earning capacity of the deceased; (3) moral
damages; (4) exemplary damages; (5) attorney’s fees and expenses of litigation, and (6)
interest in proper cases. (Clemente Briñas vs. The People of the Philippines, G.R. No. L-
30309. November 25, 1983)
Article 1764 in relation to Article 2206 of the Civil Code, holds the common carrier in
breach of its contract of carriage that results in the death of a passenger liable to pay the
following: (1) indemnity for death, (2) indemnity for loss of earning capacity, and (3)
moral damages. (Victory Liner, Inc. vs. Rosalito Gammad, G.R. No. 159636, November
25, 2004)

The Civil Code, in Article 1764 thereof, expressly makes Article 2206 applicable "to the
death of a passenger caused by the breach of contract by a common carrier."
Accordingly, a common carrier is liable for actual or compensatory damages under
Article 2206 in relation to Article 1764 of the Civil Code for deaths of its passengers
caused by the breach of the contract of transportation. (Sulpicio Lines, Inc. vs. The

Honorable Court of Appeals, G.R. No. 113578, 14 July 1995)

Under Article 1764 and Article 2206 (1) of the Civil Code, the award of damages for
death is computed on the basis of the life expectancy of the deceased, not of his
beneficiary. (Philippine Airlines, Inc. vs. Hon. Court of Appeals, G.R. No. 54470. May 8,

1990)

Article 2220 of the Civil Code says that moral damages may be awarded in “breaches of
contract where the defendant acted fraudulently or in bad faith.” So, proof of
infringement of an agreement by a party, standing alone, will not justify an award of
moral damages. There must, in addition, as the law points out, be competent evidence of
fraud of bad faith by that party. If the plaintiff, for instance, fails to take the witness stand
and testify as to his social humiliation, wounded feelings, anxiety, etc., moral damages
cannot be recovered. The rules applies, of course, to common carriers. (Pan American

World Airways, Inc. vs. Intermediate Appellate Court, G.R. No. 68988. June 21, 1990)
In awarding moral damages for breach of contract of carriage, the breach must be
wanton and deliberately injurious or the one responsible acted fraudulently or with
malice or bad faith. Where in breaching the contract of carriage the defendant airline is
not shown to have acted fraudulently or in bad faith, liability for damages is limited to
the natural and probable consequences of the breach of obligation which the parties had
foreseen or could have reasonably foreseen. In that case, such liability does not include
moral and exemplary damages. Moral damages are generally not recoverable in culpa
contractual except when bad faith had been proven. However, the same damages may
be recovered when breach of contract of carriage results in the death of a passenger.

The award of exemplary damages has likewise no factual basis. It is a requisite that the
act must be accompanied by bad faith or done in wanton, fraudulent or malevolent
manner—circumstances which are absent in this case. In addition, exemplary damages
cannot be awarded as the requisite element of compensatory damages was not present.
(Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21, 2001)

The rule is that moral damages are recoverable in a damage suit predicated upon a
breach of contract of carriage only where (a) the mishap results in the death of a
passenger and (b) it is proved that the carrier was guilty of fraud and bad faith even if
death does not result. For having arrived at the airport after the closure of the flight
manifest, respondent’s employee could not be faulted for not entertaining petitioners’
tickets and travel documents for processing, as the checking in of passengers for SAS
Flight SK 893 was finished. There was no fraud or bad faith as would justify the court’s award
of moral damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21,
2001)

The law distinguishes a contractual breach effected in good faith from one attended by bad
faith. Where in breaching the contract, the defendant is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation and which the parties had foreseen or could
reasonably have foreseen; and in that case, such liability would not include liability for moral
and exemplary damages. Under Article 2232 of the Civil Code, in a contractual or quasi-
contractual relationship, exemplary damages may be awarded only if the defendant had
acted in “a wanton, fraudulent, reckless, oppressive or malevolent manner.” (China Airlines
Limited vs. Court of Appeals, 211 SCRA 897, 1992)

Exemplary damages may be allowed only in cases where the defendant acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner, There being no evidence of fraud,
malice or bad faith on the part of petitioner, the grant of exemplary damages should be
discarded. (Philippine National Railways vs. The Honorable Court of Appeals, G.R. No. L-
55347. October 4, 1985)

D. Bill of Lading

A bill of lading is a written acknowledgment of the receipt of goods and an agreement to


transport and to deliver them at a specified place to a person named or on his or her order. It
operates both as a receipt and as a contract. It is a receipt for the goods shipped and a
contract to transport and deliver the same as therein stipulated. As a receipt, it recites the
date and place of shipment, describes the goods as to quantity, weight, dimensions,
identification marks, condition, quality, and value. As a contract, it names the contracting
parties, which include the consignee; fixes the route, destination, and freight rate or charges;
and stipulates the rights and obligations assumed by the parties. (Unsworth Transport
International Phils., Inc. vs. Court of Appeals, G.R. No. 166250, July 26, 2010)

The bill of lading defines the rights and liabilities of the parties in reference to the contract
of carriage. Stipulations therein are valid and binding in the absence of any showing that the
same are contrary to law, morals, customs, public order and public policy. Where the terms
of the contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of the stipulations shall control. In light of the foregoing, there can be no
question about the validity and enforceability of

Stipulation No. 7 in the bill of lading. The twenty-four hour requirement under the said
stipulation is, by agreement of the contracting parties, a sine qua non for the accrual of the
right of action to recover damages against the carrier. (Provident Insurance Corp., vs. Court
of Appeals, G.R. No. 118030, January 15, 2004)

The holding in most jurisdictions has been that a shipper who receives a bill of lading without
objection after an opportunity to inspect it, and permits the carrier to act on it
by proceeding with the shipment is presumed to have accepted it as correctly stating the
contract and to have assented to its terms. In other words, the acceptance of the bill without
dissent raises the presumption that all the terms therein were brought to the knowledge of
the shipper and agreed to by him and, in the absence of fraud or mistake, he is estopped from
thereafter denying that he assented to such terms. This rule applies with particular force
where a shipper accepts a bill of lading with full knowledge of its contents and acceptance
under such circumstances makes it a binding contract. (Magellan Manufacturing Marketing
Corporation vs. Court of Appeals, G.R. No. 95529, August 22, 1991)

1. Three-Fold Character

A bill of lading serves two functions: First, it is a receipt for the goods shipped; Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations. A bill of lading delivered and
accepted constitutes the contract of carriage even though not signed, because the
acceptance of a paper containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all its terms and conditions of which the acceptor has
actual or constructive notice (Keng Hua Paper Products Co., Inc. vs. Court of Appeals, 286
SCRA 257, 1998).

A bill of lading, aside from being a contract and a receipt, is also a symbol of the goods
covered by it. A bill of lading which has no notation of any defect or damage in the goods is
called a “clean bill of lading.” A clean bill of lading constitutes prima facie evidence of the
receipt by the carrier of the goods as therein described. (Lorenzo

Shipping Corp. vs. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004)

Delivery of Goods

Period of Delivery
Delivery Without Surrender of Bill of Lading

The surrender of the original bill of lading is not a condition precedent for a common carrier
to be discharged of its contractual obligation. If surrender of the original bill of lading is not
possible, acknowledgment of the delivery by signing the delivery receipt suffices. This is what
respondent did. (National Trucking and Forwarding Corporation vs. Lorenzo Shipping
Corporation, G.R. No. 153563, February 07, 2005)

c. Refusal of Consignee to Take Delivery

3. Period for Filing Claims

The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within which
claims must be presented does not begin to run until the consignee has received such
possession of the merchandise that he may exercise over it the ordinary control pertinent to
ownership. In other words, there must be delivery of the cargo by the carrier
to the consignee at the place of destination. (Lorenzo Shipping Corp. vs. Chubb and

Sons, Inc., G.R. No. 147724, June 8, 2004)

In order that the condition therein provided in Article 366 of the Code of Commerce may be
demanded there should be a consignment of goods, through a common carrier, by a
consignor in one place to a consignee in another place. And said article provides that the
claim for damages must be made "within twenty-four hours following the receipt of the
merchandise" by the consignee from the carrier. In other words, there must be delivery of the
merchandise by the carrier to the consignee at the place of destination. In the instant case,
the consignor is the branch office of Lee Teh & Co., Inc., at Catarman, Samar, which placed
the cargo on board the ship Jupiter, and the consignee, its main office at Manila. The cargo
never reached Manila, its destination, nor was it ever delivered to the consignee, the office of
the shipper in Manila, because the ship ran aground upon entering Laoang Bay, Samar on the
same day of the shipment. Such being the case, it follows that the aforesaid article 366 does
not have application because the cargo was never received by the consignee. (New Zealand
Insurance Co.,

Ltd., vs. Adriano Choa Joy, Etc., G.R. No. L-7311, September 30, 1955)

Under the Code of Commerce, the notice of claim must be made within twenty four (24)
hours from receipt of the cargo if the damage is not apparent from the outside of the
package. For damages that are visible from the outside of the package, the claim must be
made immediately. Provisions specifying a time to give notice of damage to common carriers
are ordinarily to be given a reasonable and practical, rather than a strict construction.
Understandably, when the goods were delivered, the necessary clearance had to be made
before the package was opened. Upon opening and discovery of the damaged condition of
the goods, a report to this effect had to pass through the proper channels before it could be
finalized and endorsed by the institution to the claims department of the shipping company.
The call to Aboitiz was made two days from delivery, a reasonable period considering that the
goods could not have corroded instantly overnight such that it could only have sustained the
damage during transit. Moreover, Aboitiz was able to immediately inspect the damage while
the matter was still fresh. In so doing, the main objective of the prescribed time period was
fulfilled. Thus, there was substantial compliance with the notice requirement in this case.
(Aboitiz Shipping Corporation vs. Insurance Company of North America, G.R. No.

168402, August 6, 2008)


4. Period for Filing Actions

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor
actually constitutes a condition precedent to the accrual of a right of action against a carrier
for loss of or damage to the goods. The shipper or consignee must allege and prove the
fulfillment of the condition. If it fails to do so, no right of action against the carrier can accrue
in favor of the former. The aforementioned requirement is a reasonable condition precedent;
it does not constitute a limitation of action. The requirement of giving notice of loss of or
injury to the goods is not an empty formalism. The fundamental reasons for such a stipulation
are (1) to inform the carrier that the cargo has been damaged, and that it is being charged
with liability therefor; and
(2) to give it an opportunity to examine the nature and extent of the injury. “This protects the
carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh
and easily investigated so as to safeguard itself from false and fraudulent claims.” (Federal Express
Corporation vs. American Home Assurance Company, G.R. No.

150094, August 18, 2004)

The Court has construed the 24-hour claim requirement as a condition precedent to the accrual of
a right of action against a carrier for loss of, or damage to, the goods. The shipper or consignee
must allege and prove the fulfillment of the condition. Otherwise, no right of action against the
carrier can accrue in favor of the shipper or consignee. (Ucpb General Insurance Co., Inc., vs.
Aboitiz Shipping Corporation, et. Al., G.R. No. 168433, February 10, 2009)

The bills of lading unequivocally prescribes a time frame of thirty (30) days for filing a claim with
the carrier in case of loss of or damage to the cargo and sixty (60) days from accrual of the right of
action for instituting an action in court, which periods must concur. As the requirements in Article
366, restated with a slight modification in the assailed paragraph 5 of the bills of lading, are
reasonable conditions precedent, they are not limitations of action. Being conditions precedent,
their performance must precede a suit for enforcement and the vesting of the right to file spit
does not take place until the happening of these conditions. (Philippine American General
Insurance Co., Inc. and Tagum Plastics, Inc., vs. Sweet Lines, Inc., G.R. No. 87434 August 5, 1992)

E. Maritime Commerce

Charter Parties

Bareboat/Demise Charter

Time Charter
Where the agreement executed by the parties was a time charter where the possession and
control of the barge was retained by the owner, the latter is, therefore, a common carrier legally
charged with extraordinary diligence in the vigilance over the goods transported by him. The
sinking of the vessel created a presumption of negligence and/or unseaworthiness which the
barge owner failed to overcome and gave rise to his liability for the charterer lost cargo despite
the latter’s failure to insure the same. Oceaneering Contractrors (Phils), Inc. v. Nestor Barreto,
doing business as NNB Lighterage , GR No. 184215, February 9, 2011

c. Voyage/Trip Charter

It bears stressing that subject Letter of Agreement is considered a Charter Party. A charter party is
classified into (1) “bareboat” or “demise” charter and (2) contract of
affreightment. Subject contract is one of affreightment, whereby the owner of the vessel
leases part or all of its space to haul goods for others. It is a contract for special service to
be rendered by the owner of the vessel. Under such contract the ship owner retains the
possession, command and navigation of the ship, the charterer or freighter merely
having use of the space in the vessel in return for his payment of the charter hire.

(National Food Authority vs. Court of Appeals, G.R. No. 96453, August 4, 1999)

A charter party is a contract by which an entire ship, or some principal part thereof, is let
by the owner to another person for a specified time or use; a contract of affreightment is
one by which the owner of a ship or other vessel lets the whole or part of her to a
merchant or other person for the conveyance of goods, on a particular voyage, in
consideration of the payment of freight. A contract of affreightment may be either time
charter, wherein the leased vessel is leased to the charterer for a fixed period of time, or
voyage charter, wherein the ship is leased for a single voyage. In both cases, the charter-
party provides for the hire of the vessel only, either for a determinate period of time or
for a single or consecutive voyage, the ship owner to supply the ship’s store, pay for the
wages of the master of the crew, and defray the expenses for the maintenance of the
ship. Under a demise or bareboat charter on the other hand, the charterer mans the
vessel with his own people and becomes, in effect, the owner for the voyage or service
stipulated, subject to liability for damages caused by negligence. If the charter is a
contract of affreightment, which leaves the general owner in possession of the ship as
owner for the voyage, the rights and the responsibilities of ownership rest on the owner.
The charterer is free from liability to third persons in respect of the ship. It is only when
the charter includes both the vessel and its crew, as in a bareboat or demise that a
common carrier becomes private, at least insofar as the particular voyage covering the
charter-party is concerned. (Caltex Philippines, Inc. vs. Sulpicio Lines, Inc., et. al., G.R.
No. 131166, September 30, 1999)

A bareboat or demise charter is where the ship owner turns over possession of his vessel
to the charterer, with the latter undertaking to provide the crew, victuals, supplies, and
fuel during the term of the charter. In a time charter, the ship owner retains possession
and control of his vessel through the master and crew who remain in his employ. A
voyage charter is simply a contract of affreightment where the master and crew remain
in the employ of the ship owner. In a demise or bareboat charter, the charterer who is
treated ass owner pro hac vice, and not the general owner, is liable for expenses of the
voyage including wages of seamen. (Lintonjua Shipping Company, Inc. vs. National

Seamen Board, 176 SCRA 189)

Cebu Salvage and MCCII entered into a "voyage charter," also known as a contract of
affreightment wherein the ship was leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight. Under a voyage charter, the
shipowner retains the possession, command and navigation of the ship, the charterer or
freighter merely having use of the space in the vessel in return for his payment of freight. An
owner who retains possession of the ship remains liable as carrier and must answer for loss or
non-delivery of the goods received for transportation. (Cebu Salvage Corporation vs.
Philippine Home Assurance Corporation, G.R. No. 150403, January 25, 2007)

2. Liability of Ship Owners and Shipping Agents

The real and hypothecary nature of maritime law simply means that the liability of the carrier
in connection with losses related to maritime contract is confined to the vessel, which is
hypothecated for such obligations or which stands as the guaranty for their settlement. The
only time the Limited Liability Rule does not apply is when there is an actual finding of
negligence on the part of the vessel owner or agent. (Aboitiz Shipping Corporation vs.
General Accident Fire and Life Assurance Corporation Ltd., 217 SCRA

359, 1993)

In case of collision of vessels, in order to avail of the benefits of Article 837 of the Code of
Commerce the shipowner or agent must abandon the vessel. In such case the civil liability
shall be limited to the value of the vessel with all the appurtenances and freight earned
during the voyage. However, where the injury or average is due to the ship-owner's fault as in
this case, the shipowner may not avail of his right to limited liability by abandoning the
vessel. (Luzon Stevedoring Corporation vs. Court of Appeals, G.R. No. L-58897, 3 December
1987)

The term "ship agent" as used in the foregoing provision is broad enough to include the ship
owner. Pursuant to said provision, therefore, both the ship owner and ship agent are civilly
and directly liable for the indemnities in favor of third persons, which may arise from the
conduct of the captain in the care of goods transported, as well as for the safety of
passengers transported. However, under the same Article, this direct liability is moderated
and limited by the ship agent's or ship owner's right of abandonment of the vessel and
earned freight. The most fundamental effect of abandonment is the cessation of the
responsibility of the ship agent/owner. The ship owner's or agent's liability is merely co-
extensive with his interest in the vessel such that a total loss thereof results in its extinction.
"No vessel, no liability" expresses in a nutshell the limited liability rule. The total destruction
of the vessel extinguishes maritime liens as there is no longer any res to which it can attach.
(Chua Yek Hong vs. Intermediate Appellate Court, G.R. No. 74811, 30 September 1988)

The LIMITED LIABILITY RULE cannot be availed of by the charterers/sub-charterer in order to


escape from their liability. The Code of Commerce is clear on which indemnities may be
confined or restricted to the value of the vessel and these are the – “indemnities in favor of
third persons which may arise from the conduct of the captain in the care of the goods which
he loaded on the vessel.” Thus, what is contemplated is the liability to third persons who may
have dealt with the SHIPOWNER, the AGENT or even the CHARTERER in case of demise or
bareboat charter.

The Charterer cannot use the said Rule because the it does not completely and absolutely
step into the shoes of the shipowner or even the ship agent because there remains
conflicting rights between the former and the real shipowner as derived from their charter
agreement. Therefore, even if the contract is for a bareboat or demise charter where possession,
free administration and even navigation are temporarily surrendered to the charterer, dominion
over the vessel remains with the shipowner. Ergo, the charterer or the sub-charterer, whose rights
cannot rise above that of the former, can never set up the Limited Liability Rule against the very
owner of the vessel. Dela Torre vs. Court of Appeals, GR No. 160088, July 13, 2011

Liability for Acts of Captain

Exceptions to Limited Liability

The limited liability rule, however, is not without exceptions, namely: (1) where the injury or death
to a passenger is due either to the fault of the ship owner, or to the concurring negligence of the
ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman supra); (2) where the
vessel is insured; and (3) in workmen's compensation claims (Abueg vs. San Diego, supra). In this
case, there is nothing in the records to show that the loss of the cargo was due to the fault of the
private respondent as shipowners, or to their concurrent negligence with the captain of the
vessel. (Chua Yek Hong vs. Intermediate Appellate Court, G.R. No. 74811, 30 September 1988)

The international rule is not to the effect that the right of abandonment of vessels, as a legal
limitation of a ship owner’s liability, does not apply to cases where injury or average was
occasioned by the shipowner’s fault. Where the ship owner is likewise to be blamed,

Article 587 of the Code of Commerce will not apply, and such situation will be governed by the
provision of the Civil Code on common carriers (Philippine American General Insurance Co. vs.
Court of Appeals, 273 SCRA 262, 1997).
3. Accidents and Damages in Maritime Commerce

General Average b. Collisions

In American jurisprudence that there is a presumption of fault against a moving vessel that strikes
a stationary object such as a dock or navigational aid. In admiralty, this presumption does more
than merely require the ship to go forward and produce some evidence on the presumptive
matter. The moving vessel must show that it was without fault or that the collision was occasioned
by the fault of the stationary object or was the result of inevitable accident. It has been held that
such vessel must exhaust every reasonable possibility which the circumstances admit and show
that in each, they did all that reasonable care required. In the absence of sufficient proof in
rebuttal, the presumption of fault attaches to a moving vessel which collides with a fixed object
and makes a prima facie case of fault against the vessel. (Far Eastern Shipping Company vs. Court
of Appeals, G.R. No. 130068, October 1, 1998)
Carriage of Goods by Sea Act a. Application

The law of the country to which the goods are to be transported governs the liability of the
common carrier in case of their loss, destruction or deterioration" (Article 1753, Civil Code).
Thus, the rule was specifically laid down that for cargoes transported from Japan to the
Philippines, the liability of the carrier is governed primarily by the Civil Code and in all
matters not regulated by said Code, the rights and obligations of common carrier shall be
governed by the Code of commerce and by laws (Article 1766, Civil Code). Hence, the
Carriage of Goods by Sea Act, a special law, is merely suppletory to the provision of the Civil
Code. (National Development Company vs. The Court of Appeals, G.R. No. L-49469, August
19, 1988)

Inasmuch as neither the Civil Code nor the Code of Commerce states a specific prescriptive
period on the matter, the Carriage of Goods by Sea Act (COGSA) — which provides for a one-
year period of limitation on claims for loss of, or damage to, cargoes sustained during transit
— may be applied suppletorily to the case at bar. This one-year prescriptive period also
applies to the insurer of the goods. (Loadstar Shipping Co., Inc., vs. Court of Appeals, G.R. No.
131621 September 28, 1999)

It is to be noted that the Civil Code does not of itself limit the liability of the common carrier
to a fixed amount per package although the Code expressly permits a stipulation limiting
such liability. Thus, the COGSA which is suppletory to the provisions of the Civil

Code, steps in and supplements the Code by establishing a statutory provision limiting the
carrier's liability in the absence of a declaration of a higher value of the goods by the shipper
in the bill of lading. The provisions of the Carriage of Goods by.Sea Act on limited liability are
as much a part of a bill of lading as though physically in it and as much a part thereof as
though placed therein by agreement of the parties. (Eastern

Shipping Lines, Inc., vs. Intermediate Appellate Court, G.R. No. L-69044 May 29, 1987)
It is settled in maritime law jurisprudence that cargoes while being unloaded generally
remain under the custody of the carrier. In the instant case, the damage or losses were
incurred during the discharge of the shipment while under the supervision of the carrier.

Consequently, the carrier is liable for the damage or losses caused to the shipment. Section 2
of the COGSA provides that under every contract of carriage of goods by sea, the carrier in
relation to the loading, handling, stowage, carriage, custody, care, and discharge of such
goods, shall be subject to the responsibilities and liabilities and entitled to the rights and
immunities set forth in the Act. Section 3 (2) thereof which states that among the carriers’
responsibilities are to properly and carefully load, handle, stow, carry, keep, care for, and
discharge the goods carried. (Philippine First Insurance

Co. Inc., vs. Wallem Phils. Shipping, Inc., G.R. No. 165647, 26 March 2009)

Carriage of Goods by Sea Act is applicable up to the final port of destination and that the fact
that transshipment was made on an interisland vessel did not remove the contract of carriage
of goods from the operation of said Act. (Sea-Land Service, Inc.,vs. Intermediate Appellate
Court, G.R. No. 75118 August 31, 1987)
As defined in the Civil Code and as applied to Section 3 (6) paragraph 4 of the Carriage of
Goods by Sea Act, "loss" contemplates merely a situation where no delivery at all was made
by the shipper of the goods because the same had perished, gone out of commerce, or
disappeared that their existence is unknown or they cannot be recovered. It does not include
a situation where there was indeed delivery — but delivery to the wrong person, or a
misdelivery, as alleged in the complaint in this case. (Domingo Ang vs. American Steamship
Agencies, Inc., G.R. No. L-22491, January 27, 1967)

“Loss” refers to the deterioration or disappearance of goods. Conformably with this concept
of what constitutes “loss” or “damage,”the deterioration of goods due to delay in their
transportation constitutes “loss” or “damage” within the meaning of §3(6) of the

Carriage of Goods by the Sea Act, so that as suit was not brought within one year the action
was barred. (Mitsui O.S.K. Lines Ltd. vs. Court of Appeals, G.R. No. 119571, March

11, 1998)

b. Notice of Loss or Damage

COGSA provides that the notice of claim need not be given if the state of the goods, at the
time of their receipt, has been the subject of a joint inspection or survey. As stated earlier,
prior to unloading the cargo, an Inspection Report as to the condition of the goods was
prepared and signed by representatives of both parties. Moreover, failure to file a notice of
claim within three days will not bar recovery if it is nonetheless filed within one year. This
one-year prescriptive period also applies to the shipper, the consignee, the insurer of the
goods or any legal holder of the bill of lading. (Belgian

Overseas Chartering and Shipping N.V. vs. Philippine First Insurance Co., Inc., G.R. No.

143133, June 5, 2002)


Under Section 3 (6) of the COGSA, notice of loss or damages must be filed within three days
of delivery. Under the same provision, however, a failure to file a notice of claim within three
days will not bar recovery if a suit is nonetheless filed within one year from delivery of the
goods or from the date when the goods should have been delivered. The filing of an
amended pleading does not retroact to the date of the filing of the original. It is true that, as
an exception, an amendment which merely supplements and amplifies facts originally
alleged in the complaint relates back to the commencement of the action and is not barred
by the statute of limitations which expired after the service of the original complaint. The
exception, however, would not apply to the party impleaded for the first time after the
service of the amended complaint. In this case, petitioner was not impleaded as a defendant
in the original complaint filed on March 11, 1993. It was only on

June 7, 1993 that the Amended Complaint, impleading petitioner as defendant, was filed.
Considering this circumstances, clearly, the suit against the petitioner was filed beyond the
prescriptive period of the filing of claims as provided in the COGSA. Wallem Philippines
Shipping vs SR Farms, GR No. 161849, July 9, 2010

In any event the carrier and the ship shall be discharged from all liability in respect of loss or
damage unless suit is brought within one year after delivery of the goods or the date when
the goods should have been delivered: Provided, That if a notice of loss or damage, either
apparent or concealed, is not given as provided for in this section, that fact shall not affect or
prejudice the right of the shipper to bring suit within one year after the delivery of the goods
or the date when the goods should have been delivered. Asian Terminals Inc., v. Philam
Insurance Co. G.R. NO. 181262 , July 24, 2013

c. Period of Prescription

The one-year period of limitation is designed to meet the exigencies of maritime hazards. In
a case where the goods shipped were neither lost nor damaged in transit but were, on the
contrary, delivered in port to someone who claimed to be entitled thereto, the situation is
different, and the special need for the short period of limitation in cases of loss or damage
caused by maritime perils does not obtain. (Mitsui O.S.K. Lines Ltd., represented by
Magsaysay Agencies, Inc. vs. Court of Appeals, G.R. No. 119571, March 11, 1998)

The one-year period within which the consignee should sue the carrier is computed from
"the delivery of the goods or the date when the goods should have been delivered". The
sensible and practical interpretation is that delivery within the meaning of section 3(6) of the
Carriage of Goods by Sea Law means delivery to the arrastre operator. That delivery is
evidenced by tally sheets which show whether the goods were landed in good order or in bad
order, a fact which the consignee or shipper can easily ascertain through the customs broker.
To use as basis for computing the one-year period the delivery to the consignee would be
unrealistic and might generate confusion between the loss or damage sustained by the goods
while in the carrier's custody and the loss or damage caused to the goods while in the arrastre
operator's possession. (Union Carbide

Philippines, Inc. vs. Manila Railroad Co., G.R. No. L-27798, June 15, 1977)

An action based on misdelivery of the cargo which should be distinguished from loss thereof.
The one-year period provided for in section 3 (6) of the Carriage of Goods by Sea Act refers
to loss of the cargo. What is applicable in case of misdelivery of the cargo is the four-year
period of prescription for quasi-delicts prescribed in article 1146 (2) of the Civil Code or ten
years for violation of a written contract as provided for in article 1144 (1) of the same Code.
As Ang filed the action less than three years from the date of the alleged misdelivery of the
cargo, it has not yet prescribed. Ang, as indorsee of the bill of lading, is a real party in interest
with a cause of action for damages. (Domingo Ang vs. Compania Maritima, Maritime
Company of the Philippines)

The one-year prescription period under the COGSA applies to the insurer of the goods.
Otherwise, what the Act intends to prohibit after the lapse of the one-year prescriptive
period can be done indirectly by the shipper or owner of the goods by simply filing a claim
against the insurer even after the lapse of one year. This could not have been the intention of
the law which has also for its purpose the protection of the carrier and the ship from
fraudulent claims by having "matters affecting transportation of goods by sea be decided in
as short a time as possible" and by avoiding incidents which would

"unnecessarily extend the period and permit delays in the settlement of questions affecting
the transportation. (Filipino Merchants Insurance Company, Inc. vs. Honorable
Jose Alejandro, Presiding Judge of Branch XXVI of the Court of First Instance of Manila,

G.R. No. L-54140, October 14, 1986)

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall
be discharged from all liability for loss or damage to the goods if no suit is filed within one
year after delivery of the goods or the date when they should have been delivered. Under
this provision, only the carrier's liability is extinguished if no suit is brought within one year.
But the liability of the insurer is not extinguished because the insurer's liability is based not
on the contract of carriage but on the contract of insurance. A close reading of the law
reveals that the Carriage of Goods by Sea Act governs the relationship between the carrier
on the one hand and the shipper, the consignee and/or the insurer on the other hand. It
defines the obligations of the carrier under the contract of carriage. It does not, however,
affect the relationship between the shipper and the insurer. The latter case is governed by
the Insurance Code. The Filipino Merchants case is different from the case at bar. In
Filipino Merchants, it was the insurer which filed a claim against the carrier for
reimbursement of the amount it paid to the shipper. In the case at bar, it was the shipper
which filed a claim against the insurer. The basis of the shipper's claim is the "all risks"
insurance policies issued by private respondents to petitioner Mayer. The ruling in Filipino
Merchants should apply only to suits against the carrier filed either by the shipper, the
consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of
the Carriage of Goods by Sea Act applies to the insurer, it meant that the insurer, like the
shipper, may no longer file a claim against the carrier beyond the one-year period
provided in the law. But it does not mean that the shipper may no longer file a claim
against the insurer because the basis of the insurer's liability is the insurance contract. An
insurance contract is a contract whereby one party, for a consideration known as the
premium, agrees to indemnify another for loss or damage which he may suffer from a
specified peril. (Mayer Steel Pipe Corporation vs. Court of Appeals, G.R. No. 124050 June
19, 1997)

The general provisions of the new Civil Code (Art. 1155 providing for the interruption of
the prescriptive period) cannot be made to apply in a case under COGSA, as such
application would have the effect of extending the one-year period of prescription fixed
in the law. It is desirable that matters affecting transportation of goods by sea be decided
in as short a time as possible; the application of the provisions of Article 1155 of the new
Civil Code would unnecessarily extend the period and permit delays in the settlement of
questions affecting transportation, contrary to the clear intent and purpose of the law.
(Dole Philippines, Inc. vs. Maritime Company of the Philippines, G.R. No. L-61352 February
27, 1987)
Notwithstanding the fact that the case was filed beyond the one-year prescriptive period
provided under the COGSA, the suit ( against the insurer ) will not be dismissed of the
delay was not due the claimant’s fault. Had the insurer processed and examined the claim
promptly, the claimant or the insurer itself, as subrogee, could have taken the judicial
action on time. By making an unreasonable demand for an itemized list of damages which
caused delay, the insurer should bear the loss with interest, New World International
Development Corporation vs NYK-FilJapan Shipping Corporation, GR No. 171468, August
24, 2011
The term “ carriage of goods “ covers the period from the time when the goods are loaded to
the time when they are discharged from the ship; thus, it can be inferred that the period of
time when the goods have been discharged from the ship and given to the custody of the
arrastre operator is not covered by the COGSA. Under the COGSA, the carrier and the ship
may put up the defense of prescription if the action for damages is not brought within one
year after delivery of the goods or the date when the goods should have been delivered.
However, the COGSA does not mention than an arrastre operator may invoke the
prescriptive period; hence, it does not cover the arrastre operator. The arrastre operator’s
responsibility and liability for losses and damages are set forth in the contract for cargo
handling services executed between the Philippine Ports Authority and Marina Port Services.
Insurance Company of North America vs. Asian Terminals, Inc. GR No. 180784, February 15,

2012

d. Limitation of Liability

Lastly, as to the liability of the carrier, it was reduced to to US$500 per package as provided
in the Bill of Lading and by Section 4(5) of COGSA. Stipulation in the bill of lading limiting to
a certain sum the common carrier's liability for loss or destruction of a cargo -- unless the
shipper or owner declares a greater value -- is sanctioned by law. There are, however, two
conditions to be satisfied: (1) the contract is reasonable and just under the circumstances,
and (2) it has been fairly and freely agreed upon by the parties.The rationale for this rule is to
bind the shippers by their agreement to the value

(maximum valuation) of their goods. (Belgian Overseas Chartering and Shipping N.V. vs.

Philippine First Insurance Co., Inc., G.R. No. 143133, June 5, 2002)

F. The Warsaw Convention


Applicability

Limitation of Liability

The Warsaw Convention however denies to the carrier availment "of the provisions which
exclude or limit his liability, if the damage is caused by his willful misconduct or by such
default on his part as, in accordance with the law of the court seized of the case, is
considered to be equivalent to willful misconduct," or "if the damage is (similarly) caused by
any agent of the carrier acting within the scope of his employment." The Hague

Protocol amended the Warsaw Convention by removing the provision that if the airline took
all necessary steps to avoid the damage, it could exculpate itself completely, and declaring
the stated limits of liability not applicable "if it is proved that the damage resulted from an
act or omission of the carrier, its servants or agents, done with intent to cause damage or
recklessly and with knowledge that damage would probably result."

The same deletion was effected by the Montreal Agreement of 1966, with the result that a
passenger could recover unlimited damages upon proof of willful misconduct. (Alitalia vs.
Intermediate Appellate Court, G.R. No. 71929, December 4, 1990)
Under Article 28 ( 1 ) of the Warsaw Convention, the plaintiff may bring the action for
damages before: 1) the court where carrier is domiciled; 2 ) the court where the carrier has
its principal place of business; 3 ) the court where the carrier has an establishment by which
the contract has been made; or 4 ) the court of the place of destination. In this case, it is not
disputed that respondent is a British corporation domiciled in London, United Kingdom with
London as its principal place of business. Hence, under the first and second jurisdictional
rules, the petitioner may bring her case before the courts of London in the United Kingdom.
In the passenger ticket and baggage check presented by both the petitioner and respondent,
it appears that the ticket was issued in Rome, Italy. Consequently, under the third
jurisdictional rule, the petitioner has the option to bring her case before the courts of Rome
in Italy. Finally, both the petitioner and respondent aver that the place of destination is
Rome, Italy, which is properly designated given the routing presented in the said passenger
ticket and baggage check. Accordingly, petitioner may bring her action before the courts of
Rome, Italy. Thus, the RTC of Makati correctly ruled that it does not have jurisdiction over the
case filed by the petitioner even though it was based on tort and not on breach of contract.
Lhuillier vs British Airways,

G.R. No. 171092, March 15, 2010.

a. Liability to Passengers

In its ordinary sense, "delay" means to prolong the time of or before; to stop, detain or hinder
for a time, or cause someone or something to be behind in schedule or usual rate of
movement in progress. "Bumping-off," which is the refusal to transport passengers with
confirmed reservation to their planned and contracted destinations, totally forecloses said
passengers' right to be transported, whereas delay merely postpones for a time being the
enforcement of such right. Consequently, Section 2, Article 30 of the Warsaw Convention
which does not contemplate the instance of "bumping-off" but merely of simple delay,
cannot provide a handy excuse for Lufthansa as to exculpate it from any liability to
Antiporda. (Lufthansa German Airlines vs. Court of Appeals, G.R. No. 83612, November 24,
1994)
b. Liability for Checked Baggage

While the Warsaw Convention has the force and effect of law in the Philippines, being a
treaty commitment by the government and as a signatory thereto, the same does not operate
as an exclusive enumeration of the instances when a carrier shall be liable for breach of
contract or as an absolute limit of the extent of liability, nor does it preclude the operation of
the Civil Code or other pertinent laws. The acceptance in due course by

PAL of Mejia’s cargo as packed and its advice against the need for declaration of its actual
value operated as an assurance to Mejia that in fact there was no need for such a declaration.
Mejia can hardly be faulted for relying on the representations of PAL’s own personnel. In
other words, Mejia could and would have complied with the conditions stated in the air
waybill, i.e., declaration of a higher value and payment of supplemental transportation
charges, entitling her to recovery of damages beyond the stipulated limit
of US$20 per kilogram of cargo in the event of loss or damage, had she not been
effectively prevented from doing so upon the advice of PAL’s personnel for reasons best
known to themselves. Even if the claim for damages was conditioned on the timely filing
of a formal claim, under Article 1186 of the Civil Code that condition was deemed
fulfilled, considering that the collective action of PAL’s personnel in tossing around the
claim and leaving it unresolved for an indefinite period of time was tantamount to

“voluntarily preventing its fulfillment.” On grounds of equity, the filing of the baggage
freight claim, which sufficiently informed PAL of the damage sustained by private
respondent’s cargo, constituted substantial compliance with the requirement in the
contract for the filing of a formal claim. (Philippine Airlines Inc. vs. Court of Appeals, G.R.
No. 119706, March 14, 1996)

The nature of an airline’s contract of carriage partakes of two types, namely: a contract
to deliver a cargo or merchandise to its destination and a contract to transport
passengers to their destination. A business intended to serve the travelling public
primarily, it is imbued with public interest, hence, the law governing common carriers
imposes an exacting standard. Neglect or malfeasance by the carrier’s employees could
predictably furnish bases for an action for damages. American jurisprudence provides
that an air carrier is not liable for the loss of baggage in an amount in excess of the limits
specified in the tariff which was filed with the proper authorities, such tariff being
binding on the passenger regardless of the passenger’s lack of knowledge thereof or
assent thereto. This doctrine is recognized in this jurisdiction. (British Airways vs. Court of
Appeals, G.R. No. 121824, January 29, 1998)

Article 19 of the Warsaw Convention provides for liability on the part of a carrier for

“damages occasioned by delay in the transportation by air of passengers, baggage or


goods.” Article 24 excludes other remedies by further providing that “(1) in the cases
covered by articles 18 and 19, any action for damages, however founded, can only be
brought subject to the conditions and limits set out in this convention.” Therefore, a
claim covered by the Warsaw Convention can no longer be recovered under local law, if
the statute of limitations of two years has already lapsed. Nevertheless, the Court notes
that jurisprudence in the Philippines and the United States also recognizes that the
Warsaw Convention does not “exclusively regulate” the relationship between passenger
and carrier on an international flight. The Court finds that the present case is
substantially similar to cases in which the damages sought were considered to be outside
the coverage of the Warsaw Convention. (Philippine Airlines Inc. vs. Hon. Adriano

Savillo, et. al., G.R. No. 149547, July 4, 2008)

In United Airlines v. Uy, the Court distinguished between the (1) damage to the
passenger’s baggage and (2) humiliation he suffered at the hands of the airline’s
employees. The first cause of action was covered by the Warsaw Convention which
prescribes in two years, while the second was covered by the provisions of the Civil Code
on torts, which prescribes in four years. Had the present case merely consisted of claims incidental
to the airlines’ delay in transporting their passengers, Griño’s Complaint would have been time-
barred under Article 29 of the Warsaw Convention. (Philippine Airlines Inc. vs. Hon. Adriano
Savillo, et. al., G.R. No. 149547, July 4, 2008)

c. Liability for Handcarried Baggage

3. Willful Misconduct

The Warsaw Convention however denies to the carrier availment ‘of the provisions which exclude
or limit his liability, if the damage is caused by his willful misconduct or by such default on his part
as, in accordance with the law of the court seized of the case, is considered to be equivalent to
willful misconduct,’ or ‘if the damage is similarly caused by any agent of the carrier acting within
the scope of his employment.’ Under domestic law and jurisprudence (the Philippines being the
country of destination), the attendance of gross negligence (given the equivalent of fraud or bad
faith) holds the common carrier liable for all damages which can be reasonably attributed,
although unforeseen, to the non-performance of the obligation, including moral and exemplary
damages. (Sabena World Airlines vs. Court of Appeals, G.R. No. 104685, March 14, 1996)

VI. The Corporation Code

Corporation

Definition

A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec.
2, B.P. 68)

2. Attributes of the Corporation


When the corporation ( BB Sportswear, Inc. ) which the plaintiff erroneously impleaded in a
collection case was not the party to the actionable agreement and turned out to be not registered
with the Securities and Exchange Commission, the judgment may still be enforced against the
corporation ( BB Footwear, Inc. ) which filed the answer and participated in the proceedings, as
well as its controlling shareholder who signed the actionable agreement in his personal capacity
and as a single proprietorship doing business under the trade name and style of BB Sportswear

Enterprises. Benny Hung vs BPI Finance Corporation . G.R. No. 182398, 20 July 2010

If the title over the land where the Hidden Valley Springs Resort is located is registered in the
name of the corporation, the heirs of a stockholder who occupy houses built at the expense of the
corporation cannot claim ownership over said properties. A stockholder is not the owner of any
part of the capital of the corporation
and is not entitled to the possession of any definite portion of its property or assets.

(Rebecca Boyer-Roxas and Guillermo Roxas vs. Hon. Court of Appeals and Heirs of Eugenia V.
Roxas, Inc., G.R. No. 100866, July 14, 1992)

When negotiations ensued in light of a planned takeover of company and the counsel of the
buyer advised the stockholder through a letter that he may take the machineries he brought
to the corporation out with him for his own use and sale, the stockholder cannot recover said
machineries and equipment because these properties remained part of the capital property of
the corporation. It is settled that the property of a corporation is not the property of its
stockholders or members. (Ryuichi Yamamoto vs. Nishino Leather Industries, Inc. and Ikuo
Nishino, G.R. No. 150283, April 16, 2008)

B. Classes of Corporations

By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation
whose right to exercise corporate powers may not be inquired into collaterally in any private
suit to which such corporation may be a party. A corporation which has failed to file its by-laws
within the prescribed period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations, details the
procedures and remedies that may be availed of before an order of revocation can be issued.
There is no showing that such a procedure has been initiated in this case. (Sappari K.
Sawadjaanvs. the Honorable Court of Appeals, the Civil Service Commission and Al-amanah
Investment Bank of the Philippines, G.R. No. 141735, June 8, 2005)

Where persons associate themselves together under articles to purchase property to carry on
a business, and their organization is so defective as to come short of creating a corporation
within the statute, they become in legal effect partners inter se, and their rights as members of
the company to the property acquired by the company will be recognized. However, such a
relation does not necessarily exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their purpose is that no partnership shall
exist, and it should be implied only when necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock in a proposed corporation which is never
legally formed does not become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution. (Pioneer Insurance & Surety
Corporation vs. the Hon. Court of Appeals, Border Machinery & Heavy Equipment, Inc.,
(BORMAHECO),

Constancio M. Maglana and Jacob S. Lim, G.R. No. 84197, July 28, 1989)

The plan of the parties to consolidate their respective jeepney drivers' and operators'
associations into a single common association, if not yet approved by the SEC, neither had its
officers and members submitted their articles of consolidation in accordance with Sections 78
and 79 of the Corporation Code, is a mere proposal to form a unified association. Any dispute
arising out of the election of officers of said unified association is therefore not an intra-
corporate dispute. (Reynaldo M. Lozano vs. Hon. Eliezer R. De los Santos, Presiding Judge,
RTC, Br. 58, Angeles City; and Antonio Anda,

G.R. No. 125221, June 19, 1997)


Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation, who therefore know that it has not been
registered, there is no corporation by estoppel. (Reynaldo M. Lozano vs. Hon. Eliezer R.
De los Santos, Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda, G.R. No.
125221, June 19, 1997)

Under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general
partners. Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by
persons with whom he previously had an existing relationship, he is deemed to be part
of said association and is covered by the scope of the doctrine of corporation by
estoppel. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, 3
November 1999)

When the petitioner is not trying to escape liability from the contract but rather the
one claiming from the contract, the doctrine of corporation by estoppel is not
applicable. This doctrine applies to a third party only when he tries to escape liability
on a contract from which he has benefited on the irrelevant ground of defective
incorporation. (International Express Travel & Tour Services, Inc. vs. Hon. Court of
Appeals, Henri Kahn, Philippine Football Federation, G.R. No. 119002, October 19,
2000)

The persons who illegally recruited workers for overseas employment by representing
themselves to be officers of a corporation which they knew had not been incorporated
are liable as general partners for all debts, liabilities and damages incurred or arising
as a result thereof. (People of the Philippines vs. Engr. Carlos Garcia y Pineda, Patricio
Botero y Vales, Luisa Miraples (at large) & Patricio Botero y Vales, G.R. No. 117010, 18

April 1997)

A Local Water District is a GOCC with an original charter and is not a private
corporation because it is not created under the Corporation Code. A law enacted by
Congress creating a private corporation with a special charter is unconstitutional
because private corporations may exist only under a general law. (Engr. Ranulfo C.
Feliciano, in his capacity as General Manager of the Leyte Metropolitan Water District

(LMWD), Tacloban City vs. Commission on Audit, Chairman CELSO D. GANGAN,


Commissioners Raul C. Flores and Emmanuel M. Dalman, and Regional Director of

COA Region VIII, G.R. No. 147402, 14 January 2004)

The Philippine National Red Cross (PNRC) can neither be classified as an


instrumentality of the State, so as not to lose its character of neutrality as well as its
independence, nor strictly as a private corporation since it is regulated by international
humanitarian law and is treated as an auxiliary of the State. The PNRC enjoys a special
status as an important ally and auxiliary of the government in the humanitarian field in
accordance with its commitments under international law. (Dante V. Liban, Reynaldo
M. Bernardo and Salvador M. Viari vs. Richard J. Gordon, G. R. No. 175352, January 18,

2011)
It is clear that a corporation is considered a government-owned or -controlled corporation
only when the Government directly or indirectly owns or controls at least a majority or 51%
share of the capital stock. Consequently, RPN was neither a government-owned nor a
controlled corporation because of the Government’s total share in RPN’s capital stock being
only 32.4%. (Antonio M. Carandang vs. Honorable Aniano A. Desierto, Office of the
Ombudsman, G.R. No. 153161, January 12, 2011)

Corporation by estoppel results when a corporation represented itself to the public as such
despite its not being incorporated. A corporation by estoppel may be impleaded as a party
defendant considering that it possesses attributes of a juridical person, otherwise, it can not
be held liable for damages and injuries it may inflict to other persons. Macasaet vs. Francisco,
GR No. 156759, June 5, 2013

Nationality of Corporations

Place of Incorporation Test

In times of war, the nationality of a private corporation is determined by the character or


citizenship of its controlling stockholders. The corporation was considered an enemy because
majority of its stockholders were German nationals. (Filipinas Compañia De Segurosvs.
Christern, Huenefeld and Co., Inc.,G.R. No. L-2294, May 25, 1951)

2. Control Test

A corporation organized under the laws of the Philippines of which at least 60% of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines, is considered a Philippine National. As such, the corporation may acquire
disposable lands in the Philippines. (Marissa R. Unchuan vs. Antonio J.P. Lozada, Anita Lozada
and the Register of Deeds of Cebu City, G.R. No. 172671, April 16, 2009)

The fact that the religious organization has no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its members are of foreign nationality. The
purpose of the sixty per centum requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to exploit natural resources shall be
controlled by Filipinos; and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of Filipino citizens. (Register of
Deeds vs. Ung Sui Si Temple, G.R. No. L-6776, May 21, 1955)

Grandfather Rule

D. Corporate Juridical Personality

Doctrine of Separate Juridical Personality


FBCI’s acquisition of the “substantial and controlling shares of stocks” of Esses and Tri-

Star does not create a substantial change in the rights or relations of the parties that would
entitle FBCI to possession of the Calatagan Property, a corporate property of Esses and Tri-
Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation has a personality
distinct from that of its stockholders. Properties registered in the name of the corporation
are owned by it as an entity separate and distinct from its members. (Ricardo S. Silverio, jr.,
Esses Development Corporation, and Tri-Star Farms, Inc. vs. Filipino Business Consultants,
Inc., G.R. No. 143312, August 12, 2005)

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to
claim and recover compensation for the damages arising from the wrongful attachment of
its assets. Only the corporation is the real party in interest for that purpose. (Stronghold
Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No. 173297, March 6, 2013)

A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have exceeded
their authority, corporate officers are not personally liable for their official acts. Corporate
directors and officers may be held solidarily liable with the corporation for the termination
of employment only if done with malice or in bad faith.(Rolando DS. Torres v. Rural Bank of
San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)

In order for the Court to hold the officer of the corporation personally liable alone for the
debts of the corporation and thus pierce the veil of corporate fiction, the Court has
required that the bad faith of the officer must first be established clearly and convincingly.
Petitioner, however, has failed to include any submission pertaining to any wrongdoing of
the general manager. Necessarily, it would be unjust to hold the latter personally liable.
Moreso, if the general manager was never impleaded as a party to the case. Mercy Vda. de
Roxas, represented by Arlene C. Roxas-Cruz, in her capacity as substitute appellant-
petitioner v. Our Lady's Foundation, Inc. G.R. No. 182378, March 6, 2013.

Where two banks foreclosed mortgages on certain properties of a mining company and
resumed business operations thereof by organizing a different company to which the
banks transferred the foreclosed assets, the banks are not liable to a contractor which was
engaged by the re-organized mining company even though the latter is wholly-owned by
the two banks and they have interlocking directors, officers and stockholders. While
ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and
without more, however, these circumstances are insufficient to establish an alter ego
relationship or connection between the two banks and the new mining company on the
other hand, that will justify the puncturing of the latter’s corporate cover. Mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital stock of
a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. Likewise, the existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations. Development Bank of the
Philippines vs. Hydro Resources Contractors Corporation, GR. No. 167603, March 13, 2013
The fact that an employee of the corporation was made to resign and not allowed to enter
the workplace does not necessarily indicate bad faith on the part of the employer
corporation if a sufficient ground existed for the latter to actually proceed with the
termination. ABBOT LABORATORIES VS. ALCARAZ, G.R. No. 192571, July 23, 2013

Other than mere ownership of capital stock, circumstances showing that the corporation is
being used to commit fraud or proof of existence of absolute control over the corporation
has to be proven. In short, before the corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established. The mere fact that the same controlling
stockholder/officer signed the loan document on behalf of the corporation does not prove
that he exercised control over the finances of the corporation. Neither is the absence of a
board resolution authorizing him to contract the loan nor the Corporation’s failure to
object thereto support this conclusion. While he is the signatory of the loan and the
money was delivered to him, the proceeds of the loan were intended for the business plan
of the corporation. That the business plan did not materialize is also not a sufficient proof
to justify a piercing, in the absence of proof that the business plan was a fraudulent
scheme geared to secure funds from the lender. NUCCIO SAVERIOS VS. PUYAT, G.R. No.
186433, November 27, 2013

a. Liability for Torts and Crimes

A corporation is civilly liable in the same manner as natural persons for torts, because the
rules governing the liability of a principal or master for a tort committed by an agent or
servant are the same whether the principal or master be a natural person or a corporation,
and whether the servant or agent be a natural or artificial person. A corporation is liable,
therefore, whenever a tortious act is committed by an officer or agent under express
direction or authority from the stockholders or members acting as a body, or, generally,
from the directors as the governing body. (Philippine National

Bank vs. Court of Appeals, et al., G.R. No. L-27155, May 18, 1978)

To the extent that the stockholders are actively engaged in the management or operation
of the business and affairs of a close corporation, the stockholders shall be held to strict
fiduciary duties to each other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained reasonably adequate liability
insurance. (Sergio F. Naguiat, doing business under the name and style Sergio F.
NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor Relations Commission (Third
Division), National Organization Of Workingmen and its members, Leonardo T. Galang, et
al., G.R. No. 116123, March 13, 1997)

The powers to increase capitalization and to offer or give collateral to secure indebtedness
are lodged with the corporation’s board of directors. However, this does not mean that the
officers of the corporation other than the board of directors cannot be made criminally
liable for their criminal acts if it can be proven that they participated therein. (Gregorio
Singian, Jr. vs. the Honorable Sandiganbayan and the Presidential Commission on Good
Government, G.R. Nos. 160577-94, December 16, 2005)
An employee of a company or corporation engaged in illegal recruitment may be held
liable as principal, together with his employer, if it is shown that he actively and
consciously participated in illegal recruitment, because the existence of the corporate
entity does not shield from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime. The corporation obviously
acts, and can act, only by and through its human agents, and it is their conduct which
the law must deter. (The Executive Secretary, et al. vs. Court of Appeals, et al., G.R. No.
131719, May 25, 2004)

The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes
the directors, officers or employees or other persons responsible for the offense liable
to suffer the penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and
the People of the Philippines, G.R. No. 119858, April 29, 2003)

Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise means
necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in the violations of the law.
(Alfredo Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February 6, 2006)

b. Recovery of Moral Damages

A corporation whose checks were dishonored by the drawee bank despite availability
of funds and because of the negligence of the bank employees can recover moral
damages for besmirched reputation. The standing of the corporation was reduced in
the business community because of the bank’s negligence.(Simex International,
Incorporated vs. Court of Appeals, G.R. No. 88013 March 19, 1990)

Moral damages may be awarded to a corporation whose reputation has been


besmirched. In the instant case, FEMSCO has sufficiently shown that its reputation was
tarnished after it immediately ordered equipment from its suppliers on account of the
urgency of the project, only to be canceled later by the counterparty in the contract.
(Jardine Davies, Inc. vs. Court of Appeals and Far East Mills Supply Corporation, G.R.
No. 128066, June 19, 2000)

A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. Nevertheless, AMEC’s claim
for moral damages falls under item 7 of Article 2219 of the Civil Code which expressly
authorizes the recovery of moral damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.
[Filipinas Broadcasting Network, Inc. vs. AGO Medical And Educational Center-Bicol
Christian College of Medicine, (AMEC-BCCM) and Angelita F. Ago, G.R. No. 141994,

January 17, 2005]

As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only exception to this rule is when
the corporation has a reputation that is debased, resulting in its humiliation in the business
realm. But in such a case, it is essential to prove the existence of the factual basis of the
damage and its causal relation to petitioner's acts. Thus, where the records are bereft of
evidence that the name or reputation of the corporation has been debased as a result of
Meralco’s act ( which in this case is the disconnection without written notice of the
disconnection of the electricity supply to the building of the corporation due to alleged
meter tampering ), the corporation is not entitled to moral damages. (Manila Electric
Company vs. T.E.A.M. Electronics Corporation, Technology Electronics Assembly and
Management Pacific Corporation; and Ultra Electronics Instruments, Inc., G.R. No.
131723, December 13, 2007)

While the Court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis of the
damage and its causal relation to the defendant’s acts. This is so because moral damages,
though incapable of pecuniary estimation, are in the category of an award designed to
compensate the claimant for actual injury suffered and not to impose a penalty on the
wrongdoer. In this case, there being no wrongful or unjust act on the part of BPI in
demanding payment from the spouses and in seeking the foreclosure of the chattel and
real estate mortgages, there is no lawful basis for award of damages in favor of the
spouses. (Herman C. Crystal, et al. vs. Bank of the Philippine Islands, G.R.

No. 172428, November 28, 2008)

2. Doctrine of Piercing the Corporate Veil

The court must first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and the doctrine of piercing the
veil of corporate entity can only be raised during a full-blown trial over a cause of action
duly commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service. Kukan International Corporation vs.
Hon. Judge Amor Reyes, G.R. No. 182729, 29 September 2010

However, in another case involving an action for breach of contract of carriage resulting
to the death of one of the passengers , Supreme Court ruled that if the RTC had sufficient
factual basis to conclude that the two corporations are one and the same entity as when
they have the same President and controlling shareholder and it is generally known in the
place where they do business that both transportation companies are one, the third party
claim filed by the other corporation was set aside and the levy on its property held valid
even though the latter was not made a party to the case . The judgment may be enforced
against the other corporation to prevent multiplicity of suits and save the parties
unnecessary expenses and delay. Gold Line Tours vs. Heirs of Maria Concepcion Lacsa, GR
No. 159108, 18 June 2012
The doctrine of piercing the veil of corporate fiction is applicable not only to corporations
but also to a single proprietorship as when the corporation transferred its employees to
the company owned by the controlling stockholder of the corporation and yet despite the
transfer, the employees’ daily time records, reports, daily income remittances and
schedule of work were all made, performed, filed and kept in the corporation. The
corporation is clearly hiding behind the supposed separate and distinct personality of the
company. As such, the corporation and the company should be solidarily liable for the
claims of the illegally dismissed employees. Prince Transport, Inc. vs. Garcia, GR No.
167291, January 12, 2011

Although the corporate veil between two corporations can not be pierced for lack of legal
basis, it does not necessarily mean that the corporate officers of such corporations are
exempt from liability. Section 31 of the Corporation Code makes a director or officer
personally liable if he is guilty of bad faith or gross negligence in directing the affairs of
the corporation. In this case, the officers of the corporation who maliciously terminated
the employment of certain employees without any valid ground and in order to suppress
their right to self-organization, having acted in bad faith in directing the affairs of the
corporation, are solidarily liable with the corporation for the unlawful dismissal. Park
Hotel vs. Soriano, GR No. 171118, September 10, 2012

Where the court rendered judgment against a stock brokerage firm directing the latter to
return shares of stock which it sold without authority, but the writ of execution was
returned unsatisfied, an alias writ of execution could not be enforced against its parent
company because the court has not acquired jurisdiction over the latter and while the
parent company owns and controls the brokerage firm, there is no showing that the
control was used to violate the rights of the plaintiff. Pacific Rehouse Corporation vs. Court
of Appeals, GR. No. 199687, March 24, 2014

a. Grounds for Application of Doctrine

When an operator of a bus transportation sold his two certificates of public convenience
to another corporation with the condition, among others, that he shall not for a period of
10 years from the date of the sale, apply for any TPU service identical or competing with
the buyer, the organization of a corporation barely 3 months after the sale with the wife of
operator and his brother and sister-in-law as the incorporators is a clear violation of the
condition. A seller or promisor may not make use of a corporate entity as a means of
evading the obligation of his covenant. Where the Corporation is substantially the alter
ego of the covenantor to the restrictive agreement, it can be enjoined from competing
with the covenantee. (Villa Rey Transit, Inc. vs. Eusebio E. Ferrer, Pangasinan
Transportation Co., Inc. and Public Service Commission, G.R. No. L-23893, October 29,
1968)

Aggravating RANSOM's clear evasion of payment of its financial obligations is the


organization of a "run-away corporation," ROSARIO, in 1969 at the time the unfair labor
practice case was pending before the CIR by the same persons who were the officers and
stockholders of RANSOM, engaged in the same line of business as RANSOM, producing
the same line of products, occupying the same compound, using the same machineries,
buildings, laboratory, bodega and sales and accounts
departments used by RANSOM, and which is still in existence. This is another instance
where the fiction of separate and distinct corporate entities should be disregarded as
the second corporation seeks the protective shield of a corporate fiction whose veil in
the present case could, and should, be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its employees. (A.C. Ransom Labor Union-
CCLU vs. National Labor Relations Commission, et al., G.R. No. L-69494, May 29, 1987)

The fact that the businesses of private respondent and Acrylic are related, that some of
the employees of the private respondent are the same persons manning and providing
for auxilliary services to the units of Acrylic, and that the physical plants, offices and
facilities are situated in the same compound, it is the Court’s considered opinion that
these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
Hence, the Acrylic not being an extension or expansion of private respondent, the
rank-and-file employees working at Acrylic should not be recognized as part of,
and/or within the scope of the petitioner, as the bargaining representative of private
respondent. (Indophil Textile Mill Workers Union-PTGWO vs. Voluntary Arbitrator

Teodorico P. Calica and Indophil Textile Mills, Inc., G.R. No. 96490, February 3, 1992)

The defense of separateness will be disregarded where the business affairs of a


subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction
applies only when such fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime. (Bibiano O. Reynoso, IV vs. Hon. Court of Appeals and

General Credit Corporation, G.R. Nos. 116124-25, November 22, 2000)

The sale of Times’ franchise as well as most of its bus units to a company owned by
Rondaris’ daughter and family members, right in the middle of a labor dispute, is highly
suspicious. It is evident that the transaction was made in order to remove Times’
remaining assets from the reach of any judgment that may be rendered in the unfair
labor practice cases filed against it. (Times Transportation Company, Inc. vs. Santos
Sotelo, et al., G.R. No. 163786, February 16, 2005)
Piercing the veil of corporate fiction is warranted when a corporation ceased to exist
only in name as it re-emerged in the person of another corporation, for the purpose of
evading its unfulfilled financial obligation under a compromise agreement. Thus, if the
judgment for money claim could not be enforced against the employer corporation, an
alias writ may be obtained against the other corporation considering the indubitable
link between the closure of the first corporation and incorporation of the other.
Livesey vs. Binswanger Philippines, GR No. 177493, March 19, 2014

b. Test in Determining Applicability

The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows: 1.) Control, not mere majority or complete stock
control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; 2.) Such
control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal rights; and 3.) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. (Concept Builders, Inc. vs. the
National Labor Relations Commission, et al., G.R. No. 108734, May 29, 1996)

Concept Builders ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. It is very
obvious that the second corporation seeks the protective shield of a corporate fiction whose
veil in the present case could, and should, be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its employees. (Ibid.)

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one and the same. While the
conditions for the disregard of the juridical entity may vary, the following are some probative
factors of identity that will justify the application of the doctrine of piercing the corporate
veil, as laid down in Concept Builders, Inc. v NLRC: (1) Stock ownership by one or common
ownership of both corporations; (2) Identity of directors and officers; (3) The manner of
keeping corporate books and records, and (4) Methods of conducting the business. (Heirs of
Fe

Tan Uy, represented by her heir, Mauling Uy Lim vs. International Exchange Bank, G.R.

No. 166282 & 83, February 13, 2013)

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
In this connection, case law lays down a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory, namely:

Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own

Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary
be completely under the control and domination of the parent. It inquires whether a
subsidiary corporation is so organized and controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the parent corporation such that its separate
existence as a distinct corporate entity will be ignored. In addition, the control must be shown
to have been exercised at the time the acts complained of took place.

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if
the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the
plaintiff should be established. The plaintiff must prove that, unless the corporate veil is
pierced, it will have been treated unjustly by the defendant’s exercise of control and improper
use of the corporate form and, thereby, suffer damages. Development Bank of the Philippines
vs. Hydro Resources Contractors Corporation, GR. No. 167603, March 13, 2013

E. Incorporation and Organization

When the President of a non-existent principal entered into a contract and failed to pay its
obligation, he shall be the one liable to the aggrieved party. A person acting as a
representative of a non-existent principal is the real party to the contract sued upon, being
the one who reaped the benefits resulting from it.(Mariano A. Albert vs. University Publishing
Co., Inc., G.R. No. L-19118, January 30, 1965)
Where a national sports association which is not created by a special law or a general enabling
act, through its president, secured airline tickets for the trips of its athletes and officials to the
South East Asian Games and later on failed to pay the obligation, the president shall be
personally liable. It is a settled principle in corporation law that any person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such
privileges and becomes personally liable for contract entered into or for other acts performed
as such agent.(International Express Travel & Tour Services, Inc. vs. Hon. Court of Appeals,
Henri Kahn, Philippine Football Federation,

G.R. No. 119002, October 19, 2000)

A corporation created and organized for the purpose of conducting the business of selling
optical lenses or eyeglasses is not engaged in the practice of optometry
because the determination of the proper lenses to sell to private respondent's clients
entails the employment of optometrists who have been precisely trained for that purpose.
Private respondent's business, rather, is the buying and importing of eyeglasses and lenses
and other similar or allied instruments from suppliers thereof and selling the same to
consumers. (Samahanng Optometrists saPilipinas, Ilocos Sur-Abra Chapter, et al. vs.
Acebedo International Corporation and the Hon. Court of Appeals, G.R. No. 117097, 21
March 1997)

Promoter

Liability of Promoter

Liability of Corporation for Promoter’s Contracts

As a general rule, a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any
business. This is subject to the exception that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified by the corporation when
organized. (Rizal Light & Ice Co., Inc. vs.the Municipality of Morong, Rizal and the Public
Service Commission,G.R. No. L-20993, September 28, 1968)

2. Number and Qualifications of Incorporators

It is possible for a business to be wholly owned by one individual because the validity of its
incorporation is not affected when such individual gives nominal ownership of only one
share of stock to each of the other four incorporators. As between the corporation on the
one hand, and its shareholders and third persons on the other, the corporation looks only
to its books for the purpose of determining who its shareholders are. (Nautica Canning
Corporation, et al. vs. Roberto C. Yumul,G.R. No. 164588, October 19, 2005)

3. Corporate Name — Limitations on Use of Corporate Name


A change in the name of the corporation does not make it a new corporation and does not
affect its properties, right and liabilities. It is the same corporation with a different name,
and its character is in no respect changed. (Republic Planters Bank vs. Court of Appeals,
G.R. No. 93073, December 21, 1992)

The Court cannot impose on a bank that changes its corporate name the obligation to
notify a debtor of such change absent any law, circular or regulation requiring it as such
act would be judicial legislation. Unless there is a law, regulation or circular from the SEC
or BSP requiring the formal notification of all debtors of banks of any change in corporate
name, such notification remains to be a mere internal policy that banks may or may not
adopt. (P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank,

Inc., et al., G.R. No. 129552, June 29, 2005)

To fall within the prohibition under Section 18 of the Corporation Code, two requisites
must be proven, to wit: 1.) that the complainant corporation acquired a prior right over the
use of such corporate name; and 2.) the proposed name is either: (a) identical, or
(b) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or (c) patently deceptive, confusing or contrary to existing
law. Petitioner’s corporate name which is “Industrial Refractories Corp. of the Phils.” and
respondent’s corporate name which is “Refractories Corp. of the Phils.” obviously contain
the identical words “Refractories”, “Corporation” and “Philippines;” hence, petitioner’s
corporate name clearly falls within the prohibition. (Industrial Refractories Corporation of
the Philippines vs. Court of Appeals, Securities and Exchange Commission and Refractories
Corporation of the Philippines, G.R. No. 122174, October 3, 2002)

It is the SEC’s duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and it
has authority to de-register at all times and under all circumstances corporate names
which in its estimation are likely to generate confusion. Clearly therefore, the present case
falls within the ambit of the SEC’s regulatory powers.(Ibid.)

A change in the corporate name does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the identity of the corporation, or on
its property, rights, or liabilities because the corporation upon such change in its name, is
in no sense a new corporation, nor the successor of the original corporation.(P.C. Javier &
Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et al., G.R. No. 129552, June 29,
2005)

The mere change in the corporate name is not considered under the law as the creation of
a new corporation; hence, the renamed corporation remains liable for the illegal dismissal
of its employee separated under that guise. Verily, the amendments of the articles of
incorporation of Zeta to change the corporate name to Zuellig Freight and Cargo Systems,
Inc. did not produce the dissolution of the former as a corporation. (Zuellig Freight and
Cargo Systemsvs. National Labor Relations Commission, et al., G.R.

No. 157900, July 22, 2013)

4. Corporate Term
When the period of corporate life expires, the corporation ceases to be a body corporate
for the purpose of continuing the business for which it was organized, but it shall
nevertheless be continued as a body corporate for three years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or against it
and enabling it gradually to settle and close its affairs, to dispose of and convey its
property and to divide its assets. There is no need for the institution of a proceeding for
quo warranto to determine the time or date of the dissolution of a corporation because
the period of corporate existence is provided in the articles of incorporation. (Philippine
National Bank vs.the Court of First Instance of Rizal, Pasig, et al.,G.R. No. 63201, May 27,
1992)

5. Minimum Capital Stock and Subscription Requirements

The submission of the Board that the value of the assets of Asturias Sugar Central, Inc.
transferred to MSCI, as well as the loans or advances made by MTII to MSCI should
have been taken into consideration in computing the paid-up capital of MSCI is
unmeritorious, at best, and betrays the Board's sheer lack of grasp of a basic concept in
Corporation Law, at worst. Not all funds or assets received by the corporation can be
considered paid-up capital, for this term has a technical signification in Corporation Law
which is the portion of the authorized capital stock of the corporation, subscribed and
then actually paid up. (MSCI-NACUSIP Local Chapter vs. National Wages and Productivity
Commission and Monomer Sugar Central, Inc., G.R. No. 125198, March 3, 1997)

In short, the term “capital” in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors. To construe broadly the term

“capital” as the total outstanding capital stock, including both common and non-voting
preferred shares, grossly contravenes the intent and letter of the Constitution that the
“State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.” A broad definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates to control of the public utility. (Wilson
P. Gamboa vs. Finance Secretary Margarito B. Teves, et al., G.R. No. 176579, June 28,
2011)

Since the constitutional requirement of at least 60 percent Filipino ownership applies not
only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement applies uniformly and across
the board to all classes of shares, regardless of nomenclature and category, comprising the
capital of a corporation. Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation, the

60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares without
voting rights. (Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al.,
G.R. No. 176579, October 9, 2012)

Articles of Incorporation
a. Nature and Function of Articles

The best proof of the purpose of a corporation is its articles of incorporation and by-laws,
and in the case at bar, a perusal of the Articles of Incorporation of Ellice and

Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of.
It is well to note that, if a corporation’s purpose, as stated in the Articles of

Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation
has purposes other than those stated, and mandamus will lie to compel it to issue the
certificate of incorporation.(Alicia E. Gala, et al.vs. Ellice Agro-Industrial

Corporation, et al., G.R. No. 156819, December 11, 2003)

b. Contents

The fact that it maintains branch offices in some parts of the country does not mean that it
can be sued in any of these places because to allow an action to be instituted in any place
where a corporate entity has its branch offices would create confusion and
inconvenience to the corporation. The residence of a corporation is the place where its
principal office is established. (Clavecillia Radio System vs. Hon. Agustin Antillon, as City
Judge of the Municipal Court of Cagayan de Oro City and New Cagayan Grocery, G.R. No.
L-22238, February 18, 1967)

The venue in this case was improperly laid because the principal office of Hyatt as stated
in the Articles of Incorporation is in Makati but the case was filed in Mandaluyong where
Hyatt transferred its operations. Since the principal place of business of a corporation
determines its residence or domicile, then the place indicated in petitioner’s articles of
incorporation becomes controlling in determining the venue for the filing of a case. (Hyatt
Elevators and Escalators Corporation vs.

Goldstar Elevators Phils., Inc., G.R. No. 161026, October 24, 2005)

c. Amendment

The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer shall be
valid except between the parties, and shall be registered in the Membership Book unless
made in accordance with these Articles and the By-Laws." The authority granted to a
corporation to regulate the transfer of its stock does not empower it to restrict the right of
a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to
the formalities and procedure to be followed in effecting transfer. (Marsh Thomson vs.
Court of Appeals and the American Champer of Commerce of the Philippines, Inc,, G.R.
No. 116631, October 28, 1998)

Non-Amendable Items

Registration and Issuance of Certificate of Incorporation

8. Adoption of By-Laws
a. Nature and Functions of By-Laws

Every corporation has the inherent power to adopt by-laws 'for its internal government,
and to regulate the conduct and prescribe the rights and duties of its members towards
itself and among themselves in reference to the management of its affairs. Under section
21 of the Corporation Law, a corporation may prescribe in its by-laws the qualifications,
duties and compensation of directors, officers and employees.

(John Gokongwei, Jr. vs. Securities and Exchange Commission, et al ., G.R. No. L-45911,
April 11, 1979)

Corporate powers may be directly conferred upon corporate officers or agents by statute,
the articles of incorporation, the by-laws or by resolution or other act of the board of
directors. Since the by-laws are a source of authority for corporate officers and agents of
the corporation, a resolution of the Board of Directors of Citibank appointing an attorney
in fact to represent and bind it during the pre-trial conference of the case at bar is not
necessary because its by-laws allow its officers, the Executing

Officer and the Secretary Pro-Tem - to execute a power of attorney to a designated


bank officer, William W. Ferguson in this case, clothing him with authority to direct
and manage corporate affairs. (Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R.
No. 102300, March 17, 1993)

Since the SEC will grant a license only when the foreign corporation has complied with
all the requirements of law, it follows that when it decides to issue such license, it is
satisfied that the applicant's by-laws, among the other documents, meet the legal
requirements. Therefore, petitioner bank's by-laws, though originating from a foreign
jurisdiction, are valid and effective in the Philippines. (Citibank, N.A. vs. Hon.
Segundino G. Chua, et al., G.R. No. 102300, March 17, 1993)

Non-filing of the by-laws will not result in automatic dissolution of the corporation.
Under Section 6(I) of PD 902-A, the SEC is empowered to ‘suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of a corporation’
on the ground inter alia of ‘failure to file by-laws within the required period.’ (Loyola
Grand Villas Homeowners (South) Association, Inc. vs. Hon. Court of Appeals, Home

Insurance And Guaranty Corporation, Emden Encarnacion and Horatio Aycardo, G.R.
No. 117188, August 7, 1997)

Conformably with Section 25 of the Corporation Code, a position must be expressly


mentioned in the By-Laws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a By-Law enabling provision is not enough to
make a position a corporate office. (Matling Industrial and Commercial Corporation,
et al. vs. Ricardo R. Coros, G.R. No. 157802, October 13, 2010)

b. Requisites of Valid By-Laws

A provision in the by-laws of the corporation stating that of the 15 members of its
Board of Directors, only 14 members would be elected while the remaining member
would be the representative of an educational institution located in the village of the
homeowners, is invalid for being contrary to law. The fact that for fifteen years it has
not been questioned or challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later challenge to
its validity because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity(Grace Christian High Schoolvs.the Court Of Appeals,
Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No.

108905, 23 October 1997)

The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer shall
be valid except between the parties, and shall be registered in the Membership Book
unless made in accordance with these Articles and the By-Laws." The authority granted
to a corporation to regulate the transfer of its stock does not empower it to restrict the
right of a stockholder to transfer his shares by means of by-laws provisions, but merely
authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. (Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)
c. Binding Effects

CBC is not bound by the provision in the by-laws of the VGCCI granting the VGCCI a
preferred lien over the share of stock of a member for unpaid dues. The by-law restricting the
transfer of shares cannot have any effect on the transferee of the shares in question as he had
no knowledge of such by-law when the shares were assigned to him. (China Banking
Corporation vs. Court of Appeals, and Valley Golf and Country Club, Inc., G.R. No. 117604,
March 26, 1997)

PMI College alleged that the employment contract entered into between the school and
Galvan is invalid because the signatory thereon was not the Chairman of the Board as
required by its by-laws. However, since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the corporation,
unless they have knowledge of the same. (PMI Colleges vs. the National Labor Relations
Commission and Alejandro Galvan, G.R. No. 121466, 15 August 1997)

d. Amendment or Revision

When an amendment to a provision in the Amended By-Laws requiring the unanimous vote
of the directors present at a special or regular meeting was not printed on the application
form for proprietory membership, and what was printed thereon was the original provision
which was silent on the required number of votes needed for admission of an applicant as a
proprietary member, the Board of Directors committed fraud and evident bad faith in
disapproving respondent’s application under Article 31 of the Corporation Code. The
explanation given by the petitioner that the amendment was not printed on the application
form due to economic reasons is flimsy and unconvincing because such amendment, aside
from being extremely significant, was introduced way back in 1978 or almost twenty (20)
years before respondent filed his application. (Cebu Country Club, Inc., et al. vs. Ricardo F.
Elizagaque, G.R. No. 160273, January 18, 2008)

Corporate Powers

General Powers, Theory of General Capacity


The stevedoring services which involve the unloading of the coal shipments into the NPC pier
for its eventual conveyance to the power plant are incidental and indispensable to the
operation of the plant. A corporation is not restricted to the exercise of powers expressly
conferred upon it by its charter, but has the power to do what is reasonably necessary or
proper to promote the interest or welfare of the corporation. (National Power Corporation
vs. Honorable Abraham P. Vera, Presiding Judge, Regional Trial Court, National Capital
Judicial Region, Branch 90, Quezon City and Sea Lion International Port Terminal Services,
Inc., G.R. No. 83558, February 27,

1989)

It would seem that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint
venture with others. (WolrgangAurbach, John Griffin, David P. Whittinghamand Charles
Chamsay vs. Sanitary Wares Manufacturing Corporatoin, Ernesto V. Lagdameo, Ernesto R.
Lagdameo, Jr., Enrique R. Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young and
Avelino V. Cruz, G.R. No. 75875, December 15, 1989)

Providing gratuity pay is one of the express powers of the corporation under the
Corporation Code and therefore, resolutions passed by the board approving the grant of
gratuity pay to the employees of the corporation during a meeting where one of the
directors was not notified thereof are not ultra vires. The grant of gratuity pay does not
require shareholders’ approval as it is not tantamount to the sale, lease, exchange or
disposition of all or substantially all of the corporation's assets.(Lopez Realty, Inc., and

Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al., and the National Labor Relations
Commission, G.R. No. 76801 August 11, 1995)

“Lideco Corporation” had no personality to intervene since it had not been duly registered
as a corporation. If petitioner “Laureano Investment & Development Corporation” legally
and truly wanted to intervene, it should have used its corporate name as the law requires
and not another name which it had not registered.(Laureano Investment & Development
Corporation vs. the Honorable Court of Appeals and BORMAHECO, Inc., G.R. No. 100468,
May 6, 1997)

The power of a corporation to sue and be sued is exercised by the board of directors.

The physical acts of the corporation, like the signing of documents, can be performed only
by natural persons duly authorized for the purpose by corporate bylaws or by a specific act
of the board. Absent the said board resolution, a petition may not be given due course.
(LigayaEsguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571, September 2, 2013)
The lawyer who signed the pleading, verification and certification against non-forum
shopping must be specifically authorized by the Board of Directors of the Corporation to
make his actions binding on his principal. Maranaw Hotels and Resort Corporation v. Court
of Appeals, 576 SCRA 463 (2009)

If the real party in interest is a corporate body, an officer of the corporation can sign the
certification against forum shopping so long as he has been duly authorized by a resolution of
its board of directors. The court did not commit grave abuse of discretion in dismissing the
petition for lack of authority of authority of the officer who signed the certification of non-
forum shopping in representation of petitioner corporation. San Miguel Bukid Homeowners
Association, Inc. vs City of Mandaluyong, et al, GR no.153653, October 2,

2009; Republic of the Philippines vs. Coalbrine International Philippines, et al GR No.


161838, April 7, 2010

The following officers may sign the verification and certification against non-forum
shopping on behalf of the corporation even in the absence of board resolution,

a)Chairperson of the Board of Directors;

b)President,

c)General
Manager,
d)

Personnel

Officer,
e)
Employment
Specialist
in
labor
case.

These officers are in the position to verify the truthfulness and correctness of the
allegations in the petition. Mid Pasig Land and Development Corporation v. Tablante, G.R.
No. 162924, February 4, 2010; PNCC Skyway Traffic Management and Security Division
Workers Organization vs PNCC Skyway Corporation, GR No. 171231, February 17, 2010

The general rule is that a corporation can only exercise its powers and transact its business
through its board of directors and through its officers and agents when authorized by a
board resolution or its bylaws. The power of a corporation to sue and be sued is exercised
by the board of directors. The physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by
corporate bylaws or by a specific act of the board. Absent the said board resolution, a
petition may not be given due course. Esguerra vs. Holcim Philippines G.R. No. 182571,
September 2, 2013

In a complaint for nullification of mortgage and foreclosure with damages against the
mortgagee-bank, the plaintiff can not compel the officers of the bank to appear and
testify as plaintiff’s initial witnesses unless written interrogatories are first served upon the
bank officers. This is in line with the Rules of Court provision that calling the adverse party
to the witness stand is not allowed unless written interrogatories are first served upon the
latter. This is because the officers of a corporation are considered adverse parties as well in
a case against the corporation itself based on the principle that corporations act only
through their officers and duly authorized agents. Spouses Afulugencia vs. Metropolitan
Bank and Trust Co. G.R. No. 185145, February 05, 2014

Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Term

Section 11 of Corporation Code provides that a corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. Upon the expiration of the period fixed in the articles of
incorporation in the absence of compliance with the legal requisites for the extension of
the period, the corporation ceases to exist and is dissolved ipso facto.(Philippine National
Bank vs. the Court of First Instance of Rizal, Pasig, et al.,G.R. No. 63201, May 27, 1992)

b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded


Indebtedness

Prior to the approval by the Securities and Exchange Commission of the increase in the
authorized capital stock, such payments cannot as yet be deemed part of a corporation’s
paid-up capital, technically speaking, because its capital stock has not yet been legally
increased. Such payments constitute deposits on future subscriptions,
money which the corporation will hold in trust for the subscribers until it files a
petition to increase its capitalization and a certificate of filing of increase of capital
stock is approved and issued by the SEC. (Central Textile Mills, Inc.vs. National Wages
and Productivity Commission, et al., G.R. No. 104102, August 7, 1996)

Power to Deny Pre-Emptive Rights

Power to Sell or Dispose of Corporate Assets

The sale or disposition of all or substantially all properties of the corporation requires,
in addition to a proper board resolution, the affirmative votes of the stockholders
holding at least two-thirds (2/3) of the voting power in the corporation in a meeting
duly called for that purpose. No doubt, the questioned resolution was not confirmed at
a subsequent stockholders meeting duly called for the purpose by the affirmative votes
of the stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. (Rosita Peña vs. the Court of Appeals, Spouses Rising T. Yap and Catalina
Yap, Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,

Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)

Where an asset constitutes the only property of the corporation, its sale to a third-
party is a sale or disposition of all the corporate property and assets of said corporation
falling squarely within the contemplation of Section 40 of the Corporation Code.
Hence, for the sale to be valid, the majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide members of the corporation
should have been obtained.(Islamic Directorate of the Philippines, Manuel F. Perea
and Securities & Exchange Commission,vs. Court of Appeals And Iglesia Ni Cristo, G.R.

No. 117897, May 14, 1997)

e. Power to Acquire Own Shares


The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. (Boman Environmental Development Corporation vs.

Hon. Court of Appeals and Nilcar Y. Fajilan, G.R. No. 77860, November 22, 1988)

f. Power to Invest Corporate Funds in Another Corporation or Business

A corporation, under the Corporation Code, has only such powers as are expressly
granted to it by law and by its articles of incorporation, those which may be incidental
to such conferred powers, those reasonably necessary to accomplish its purposes and
those which may be incident to its existence. In the case at bar, a company engaged in
the practice of lending money is categorically prohibited from “engaging in
pawnbroking as defined under PD 114.”(Pilipinas Loan Company, Inc. vs. Hon.
Securites and Exchange Commission and Filipinas Pawnshop, Inc., G.R. No. 104720,
April 4, 2001)
A mining corporation cannot engage in the highly speculative business of urban real
estate development, and could not have validly acquired real estate property. ((Heirs
of Antonio Pael and Andrea Alcantara and CrisantoPael vs. Court of Appeals, Jorge H.
Chin and Renato B. Mallari, G.R. No. 133547, February 10, 2000)

g. Power to Declare Dividends

The dividends received by a corporation from corporate investments in other


companies are corporate earnings. As such shareholder, the dividends paid to it were
its own money, which may then be available for wage increments. (Madrigal &
Company, Inc. vs. Hon. Ronaldo B. Zamora, et al., G.R. NO. L-48237, June 30, 1987)

Dividends cannot be declared for preferred shares which were guaranteed a quarterly
dividend if there are no unrestricted retained earnings. "Interest bearing stocks", on
which the corporation agrees absolutely to pay interest before dividends are paid to
common stockholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only. (Republic Planters Bank vs . Hon. Enrique
A. Agana, Sr., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay
City, Robes-Francisco Realty & Development Corporation and Adalia F. Robes, G.R.
No. 51765, March 3, 1997)

Power to Enter Into Management Contract

Ultra Vires Acts

Applicability of Ultra Vires Doctrine

Consequences of Ultra Vires Acts

While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law, there are however certain corporate acts that
may be performed outside of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation such as the
establishment of the local post office which is a vital improvement in the living
condition of the employees and laborers who came to settle in a mining camp which is
far removed from the postal facilities. The term ultra vires should be distinguished
from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.
(Republic of the Philippines vs. Acoje Mining Company, Inc., G.R. No. L-18062,

February 28, 1963)

The act of issuing the checks was well within the ambit of a valid corporate act, for it
was for securing a loan to finance the activities of the corporation, hence, not an ultra
vires act. (Atrium Management Corporation vs. Court of Appeals, et al., G.R. No.

109491, February 28, 2001)

Unlike illegal acts which contemplate the doing of an act that is contrary to law,
morals, or public policy or public duty, and are void, ultra vires acts are those which are
not illegal but are merely not within the scope of the articles of incorporation and by-
laws. They are merely voidable and may become binding and enforceable when ratified by
the stockholders. (Maria Clara Pirovana, et al.vs.the De La Rama Steamship Co., G.R. No. L-
5377, December 29, 1954)

How Exercised

By the Shareholders

By the Board of Directors

The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law.
Directors must act as a body in a meeting called pursuant to the law or the corporation's
by-laws, otherwise, any action taken therein may be questioned by any objecting director
or shareholder; but an action of the board of directors during a meeting, which was illegal
for lack of notice, may be ratified either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the corporation's subsequent course of
conduct.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al.,
and the National Labor Relations Commission, G.R. No. 76801 August 11, 1995)

By the express mandate of the Corporation Code (Section 26), all corporations duly
organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and residences
of the directors, trustees and officers elected. In determining whether the filing of a suit
was authorized by the board of directors, the list of directors in the latest general
information sheet filed with the Securities and Exchange Commission is controlling.
(Premium Marble Resources, Inc.vs. the Court of Appeals, G.R. No. 96551. November 4,
1996)

Under Section 36 of the Corporation Code, read in relation to Section 23,it is clear that
where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. In this case, the petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by the corporation’s board of director
to sue Victor AngSiong for and on behalf of the firm, and therefore he had no such power
or authority to sue on Concord’s behalf.(Tam Wing Takvs. Hon. Ramon P. Makasiar, G.R.
No. 122452, January 29, 2001)

c. By the Officers

When the practice of the corporation has been to allow its general manager to negotiate
and execute contracts in its copra trading activities for and in behalf of the corporation
without prior board approval, the board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval. Settled jurisprudence has it
that where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. (The Board of Liquidators, representing the
Government of the Republic of the Philippines vs.Heirs
of Maximo M. Kalaw, Juan Bocar, Estate of the deceased Casimiro Garcia, and Leonor

Moll,G.R. No. L-18805, August 14, 1967)

When a bank, by its acts and failure to act, has clearly clothed its manager with
apparent authority to sell an acquired asset in the normal course of business, it is
legally obliged to confirm the transaction by issuing a board resolution to enable the
buyers to register the property in their names. It has a duty to perform necessary and
lawful acts to enable the other parties to enjoy all benefits of the contract which it had
authorized. (Rural Bank Of Milaor (Camarines Sur) vs. Francisca Ocfemia, Rowena
Barrogo, Marife O. Niño, FelicisimoOcfemia, Renato Ocfemia Jr., and Winston
Ocfemia, G.R. No. 137686, February 8, 2000)

If a corporation consciously lets one of its officers, or any other agent, to act within the
scope of an apparent authority, it will be estopped from denying such officer’s
authority. Since the records show that Calo, who was an Account Officer, was the one
assigned to transact on petitioner’s behalf respecting the loan transactions and
arrangements of Inland as well as those of Hanil-Gonzales and Abrantes, it is presumed
that he had authority to sign for the bank in the Deed of Assignment.(Westmont Bank
(formerly Associated Citizens Bank and now United Overseas Bank, Phils.) And The
Provincial Sheriff of Rizal vs. Inland Construction and Development Corp., G.R. No.
123650, March 23, 2009)

Accordingly, the authority to act for and to bind a corporation may be presumed from
acts of recognition in other instances, wherein the power was exercised without any
objection from its board or shareholders. Undoubtedly, petitioner had previously
allowed Atty. Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent authority to modify
the same via the second letter-agreement. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with the power to
bind the corporation. (Associated Bank vs. Spouses Rafael and MonalizaPronstroller,
G.R. No. 148444, 14 July 2008)

Although a branch manager, within his field and as to third persons, is the general
agent and is in general charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted him and the usual course and
conduct thereof, yet the power to modify or nullify corporate contracts remains
generally in the board of directors. Being a mere branch manager alone is insufficient
to support the conclusion that he has been clothed with “apparent authority” to
verbally alter terms of written contracts, especially when viewed against the telling
circumstances of this case: the unequivocal provision in the mortgage contract; the
corporation’s vigorous denial that any agreement to release the mortgage was ever
entered into by it; and, the fact that the purported agreement was not even reduced
into writing considering its legal effects on the parties’ interests. Banate vs. Philippine
Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No. 163825, July 13, 2010

A corporation can not deny the authority of lawyer when they clothed him with
apparent authority to act in their behalf such as when he entered his appearance
accompanied by the corporation’s general manager and the corporation never questioned
his acts and even took time and effort to forward all the court documents to him. The
lawyer may not have been armed with a board resolution but the doctrine of apparent
authority imposes liability not as a result of contractual relationship but rather because of
the actions of the principal or an employer in somehow misleading the public that the
relationship or the authority exists. Megan Sugar Corporation vs. RTC of Ilo-ilo Br. 68, GR
no. 170352, June 1, 2011

The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other agent
to act within the scope of an apparent authority, and it holds him out to the public as
possessing the power to do those acts.

Apparent authority is derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent as
having the power to act or, in other words the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, within or beyond the scope of his ordinary powers. It is
not the quantity of similar acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation. When the sole management of
the corporation was entrusted to two of its officers/incorporators with the other officers
never had dealings with the corporation for 14 years and that the board and the
stockholders never had its meeting, the corporation is now estopped from denying the
officers’ authority to obtain loan from the lender on behalf of the corporation under the
doctrine of apparent authority. Advance Paper Corporation vs Arma Traders Corporation ,
G.R.

No 176897, December 11, 2013.

4. Trust Fund Doctrine

In the instant case, the rescission of the Pre-Subscription Agreement will effectively result
in the unauthorized distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed. The Trust Fund Doctrine provides that
subscriptions to the capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims.(Ong Yong, et al. vs. David S. Tiu, et
al., G.R. No. 144476 & G.R. No. 144629, 8 April 2003)

When negotiations ensued in light of a planned takeover of company and the counsel of
the buyer advised the stockholder through a letter that he may take the machineries he
brought to the corporation out with him for his own use and sale, the previous stockholder
cannot recover said machineries and equipment because these properties remained part
of the capital property of the corporation. Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors which are preferred over the stockholders in the distribution of
corporate assets. (Ryuichi Yamamoto vs. Nishino

Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008)
Board of Directors and Trustees

Doctrine of Centralized Management

Business Judgment Rule

The determination of the necessity for additional offices and/or positions in a corporation is a
management prerogative which courts are not wont to review in the absence of any proof that
such prerogative was exercised in bad faith or with malice.Indeed, it would be an improper
judicial intrusion into the internal affairs of

Filport for the Court to determine the propriety or impropriety of the creation of offices
therein and the grant of salary increases to officers thereof. (Filipinas Port

Services, Inc., represented by stockholders, Eliodoro C. Cruz and Mindanao Terminal and
Brokerage Services, Inc. vs. Victoriano S. Go, et al., G.R. No. 161886, March 16, 2007)

The Board of Directors of Matling could not validly delegate the power to create a corporate
office to the President, in light of Section 25 of the Corporation Code requiring the Board of
Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers
was a discretionary power that the law exclusively vested in the Board of Directors, and could
not be delegated to subordinate officers or agents. (Matling Industrial and Commercial
Corporation, et al. vs. RICARDO R. COROS, G.R. No. 157802, October 13, 2010)

Under section 21 of the Corporation Law, a corporation may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers and employees. A provision in
the by-laws of the corporation that no person shall qualify or be eligible for nomination for
elections to the board of directors if he is engaged in any business which competes with that
of the Corporation is valid, as long as due process is observed. (John Gokongwei, Jr. vs.
Securities and Exchange Commission, et al., G.R. No. L-45911, April 11, 1979)
3. Tenure, Qualifications and Disqualifications of Directors or Trustees

The board of directors of corporations must be elected from among the stockholders or
members. Thus, a provision in the by-laws of the corporation stating that of the fifteen
members of its Board of Directors, only 14 members would be elected while the remaining
member would be the representative of an educational institution located in the village of the
homeowners, is invalid for being contrary to law as it violates the one-year term limit of the
directors. (Grace Christian High Schoolvs.the Court Of

Appeals, Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No.
108905, 23 October 1997)

Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party to
its execution — from legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner. Any director
who executes a voting trust agreement over all his shares ceases to be a stockholder of
record in the books of the corporation and therefore ceases to be a director.(Ramon C. Lee
and Antonio DM. Lacdao vs. the Hon. Court of Appeals, Sacoba Manufacturing Corp.,
Pablo Gonzales, Jr. and Thomas Gonzales, G.R. No. 93695, 4 February 1992)

Elections

Cumulative Voting/Straight Voting

Quorum

Removal

Filling of Vacancies

When an incumbent member of the board of directors continues to serve in a holdover


capacity, it implies that the office has a fixed term, which has expired, and the incumbent
is holding the succeeding term. A vacancy resulting from the resignation of an officer in a
hold-over capacity, by the terms of Section 29 of the Corporation Code, must be filled by
the stockholders in a regular or special meeting called for the purpose.(Valle Verde
Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, 4 September 2009)

7. Compensation

The proscription against granting compensation to directors/trustees of a corporation is


not a sweeping rule as worthy of note is the clear phraseology of Section 30 which states:
“xxx [T]he directors shall not receive any compensation, as such directors, xxx.”

The unambiguous implication is that members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the corporation in a
capacity other than as directors/trustees. (Western Institute of Technology, Inc., et al.
vs.Ricardo T. Salas, et al., G.R. No. 113032, 21 August 1997)

8. Fiduciary Duties and Liability Rules

Before a director or officer of a corporation can be held personally liable for corporate
obligations, the following requisites must concur: (1) the complainant must allege in the
complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith. In this case, petitioners are correct to argue that it was not alleged, much less
proven, that Uy committed an act as an officer of Hammer that would permit the piercing
of the corporate veil as what the complaint simply stated is that she, together with her
errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the
Surety Agreement which was later found by the RTC to have been forged.(Heirs of Fe Tan
Uy, represented by her heir, Mauling Uy Lim vs. International Exchange Bank, G.R. No.
166282 & 83, February 13, 2013)
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation. The governing law on personal liability of directors
for debts of the corporation is still Section 31 of the Corporation Code.(Alert Security and
Investigation Agency, Inc. and/or Manuel D. Dasig vs. SaidaliPasawilan,
WilfredoVercelesand MelchorBulusan, G.R. No. 182397, September 14, 2011)

The rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Neither Article 212[e] nor Article 273 (now 272) of the Labor Code
expressly makes any corporate officer personally liable for the debts of the corporation.
(Antonio C. Carag vs. National Labor Relations Commission, et al., G.R. No. 147590, April
2, 2007)

The execution of a document by a bank manager called “pagares” which guaranteed


purchases on credit by a client is contrary to the General Banking law which prohibits bank
officers from guaranteeing loans of bank clients. In this case, it is plain from the guarantee
Grey executed that he was acting for himself, not in representation of

UCPB; hence, UCPB cannot be bound by Grey’s above undertaking since he appears to
have made it in his personal capacity. (United Coconut Planters Bank vs. Planters Products,
Inc., Janet Layson and Gregory Grey, G.R. No. 179015, June 13, 2012)

To hold the general manager personally liable alone for the debts of the corporation and
thus pierce the veil of corporate fiction, it is required that the bad faith of the officer be
established clearly and convincingly. Petitioner, however, has failed to include any
submission pertaining to any wrongdoing of the general manager. Necessarily, it would be
unjust to hold the latter personally liable. (Mercy Vda. de Roxas vs. Our Lady's Foundation,
Inc., G.R. No. 182378, March 6, 2013)

A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have exceeded
their authority, corporate officers are not personally liable for their official acts. Corporate
directors and officers may be held solidarily liable with the corporation for the termination
of employment only if done with malice or in bad faith.(Rolando DS. Torres v. Rural Bank of
San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)

Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are
not their personal liability but the direct responsibility of the corporation they represent.
As a rule, they are only solidarily liable with the corporation for the illegal termination of
services of employees if they acted with malice or bad faith.

To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) it must be alleged in the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the officer was guilty of gross negligence
or bad faith; and (2) there must be proof that the officer acted in bad faith. The fact that
the corporation ceased its operations the day after the promulgation of the SC resolution
finding the corporation liable does not prove bad faith on the part of the incorporator of
the corporation. Polymer Rubber Corporation vs. Ang, G.R. No. 185160. July 24, 2013

Although joint and solidary liability for money claims and damages against a corporation
attaches to its corporate directors and officers under R.A. 8042, it is not automatic. To
make them jointly and solidarily liable, there must be a finding that they were remiss in
directing the affairs of the corporation, resulting in the conduct of illegal activities. Absent
any findings regarding the same, the corporate directors and officers cannot be held liable
for the obligation of the corporation against the judgment debtor.(Elizabeth M. Gaguivs.
Simeon Dejeroand TeodoroPermejo, G.R. No. 196036, October 23, 2013)

9. Responsibility for Crimes

The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the
officers or employees or other persons responsible for the offense liable to suffer the
penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and the People of the
Philippines, G.R. No. 119858, April 29, 2003)

Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The rationale is that such officers
or employees are vested with the authority and responsibility to devise means necessary to
ensure compliance with the law and, if they fail to do so, are held criminally accountable;
thus, they have a responsible share in the violations of the law. (Alfredo Ching vs. the
Secretary of Justice, et al., G. R. No. 164317, February 6, 2006)

Inside Information

Contracts
By Self-Dealing Directors with the Corporation

Between Corporations with Interlocking Directors

When a mortgagee bank foreclosed the mortgage on the real and personal property of
the debtor and thereafter assigned the properties to a corporation it formed to manage
the foreclosed assets, the unpaid seller of the debtor cannot complain that the assignment
is invalid simply because the mortgagee and the assignee have interlocking
directors.There is no bad faith on the part of DBP by its creation of Nonoc

Mining, Maricalum and Island Cement as the creation of these three corporations was
necessary to manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value.(Development Bank of the Philippines vs.
Honorable Court of Appeals and Remington Industrial Sales Corporation , G.R. No.
126200, August 16, 2001)

c. Management Contracts
Executive Committee

Meetings

The non-signing by the majority of the members of the GSIS Board of Trustees of the minutes
of the meeting does not necessarily mean that the supposed resolution was not approved by
the board. The signing of the minutes by all the members of the board is not required because
it is the signature of the corporate secretary gives the minutes of the meeting probative value
and credibility.(People of the Philippines vs. Hermenegildo Dumlao y Castiliano and Emilio
La'o y Gonzales, G.R. No. 168918,

March 2, 2009)

Regular or Special

When and Where

Notice

Who Presides

Quorum

Under Section 25 of the Corporation Code of the Philippines, the articles of incorporation or
by-laws of the corporation may fix a greater number than the majority of the number of board
members to constitute the quorum necessary for the valid transaction of business. When only
three (3) out of five (5) members of the board of directors of PAMBUSCO convened on
November 19, 1974 by virtue of a prior notice of a special meeting,there was no quorum to
validly transact business since, under

Section 4 of the amended by-laws hereinabove reproduced, at least four (4) members must be
present to constitute a quorum in a special meeting of the board of directors of PAMBUSCO.
(Rosita Peña vs. the Court of Appeals, Spouses Rising T. Yap and Catalina Yap, Pampanga Bus
Co., Inc., Jesus Domingo, Joaquin Briones, Salvador

Bernardez, Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)

Rule on Abstention

H. Stockholders and Members

Rights of a Stockholder and Members

Doctrine of Equality of Shares

Participation in Management

Proxy

When proxies are solicited in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation,
should be properly seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A. From the language of Section 5(c) of

Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification


of voting shares, or the validity of votes cast in favor of a candidate for election to the
board of directors are properly cognizable and adjudicable by the regular courts
exercising original and exclusive jurisdiction over election cases. (Government Service
Insurance System vs. the Hon. Court of Appeals, G.R. No. 183905, April 16, 2009)

Voting Trust

Cases When Stockholders’ Action is Required

By a Majority Vote

By a Two-Thirds Vote

By Cumulative Voting

Proprietary Rights

Right to Dividends

Right of Appraisal

In order to give rise to any obligation to pay on the part of the corporation, the dissenting
stockholder should first make a valid demand that the corporation refused to pay despite
having unrestricted retained earnings. Otherwise, the corporation could not be said to be
guilty of any actionable omission that could sustain the action to collect. The collection
suit filed by the dissenting stockholder to enforce payment of the fair value of his shares is
premature if at the time of demand for payment, the corporation had no surplus profit.
The fact that the Corporation subsequent to the demand for payment and during the
pendency of the collection case posted surplus profit did not cure the prematurity of the
cause of action. Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24,
2010
c. Right to Inspect

Considering that the foreign subsidiary is wholly owned by the corporation and, therefore,
under its control, it would be more in accord with equity, good faith and fair dealing to
construe the statutory right of a stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are in the
corporation's possession and control.(John Gokongwei, Jr. vs. Securities and Exchange
Commission, et al., G.R. No. L-45911, April 11, 1979)

The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident
of ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership.(John Gokongwei, Jr. vs.
Securities and Exchange Commission, et al., G.R. No. L-45911, April

11, 1979)
The only express limitation on the right of inspection, according to the Court, is that

(1) the right of inspection should be exercised at reasonable hours on business days; (2) the
person demanding the right to examine and copy excerpts from the corporate records and
minutes has not improperly used any information secured through any previous
examination of the records of such corporation; and (3) the demand is made in good faith
or for a legitimate purpose. (Victor Africa vs. Presidential Commission on Good
Government, et al., G.R. No. 83831, January 9, 1992)

d. Pre-Emptive Right

Even if pre-emptive right does not exist either because the issue comes within the
exceptions in Section 39 of the Corporation Code or because it is denied in the articles of
incorporation, an issue of shares may still be objectionable if the directors acted in breach
of trust and their primary purpose is to perpetuate or shift control of the corporation or to
“ freeze out” the minority interest. The issuance of unissued shares out of the original
authorized capital stock pursuant to a rehabilitation plan the propriety and validity of
which was on question by the minority stockholders and subsequently disapproved by the
court amounts to unlawful dilution of the minority shareholdings. Majority of Stockholders
of Ruby Industrial Corporation vs Lim, GR No. 165887, June 6, 2011

Right to Vote

Right to Dividends

Stock dividends cannot be issued to one who is not a stockholder of a corporation for
payment of services rendered.(Nielson & Company, Inc. vs.Lepanto Consolidated Mining
Company, G.R. No. L-21601, December 17, 1966)

Dividends are distributed to stockholders pursuant to their right to share in corporate


profits. When a dividend is declared, it belongs to the person who is the substantial and
beneficial owner of the stock at the time regardless of when the distribution profit was
earned. (Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553, July 13, 1998)

g. Right of First Refusal

A joint venture agreement giving to the shareholders the right to purchase the shares of
their co-shareholders before they are offered to a third party does not violate the
provision of the Constitution limiting land ownership to Filipinos and Filipino corporations.
If the corporation still owns the land, the right of first refusal can be validly assigned to a
qualified Filipino entity in order to maintain the 60% - 40% ratio.(J.G. Summit Holdings,
Inc. vs. Court of Appeals, et al. G.R. No. 124293, January 31, 2005)

Remedial Rights

Individual Suit

Representative Suit
c. Derivative Suit

A suit to enforce pre-emptive right in a corporation is not a derivative suit because it was
not filed for the benefit of the coporation. The petitioner was suing on her own behalf, and
was merely praying that she be allowed to subscribe to the additional issuances of stocks in
proportion to her shareholdings to enable her to preserve her percentage of ownership in
the corporation. (Gilda C. Lim, Wilhelmina V. Joven and Ditas A. Lerios , vs. Patricia Lim-Yu,
in her capacity as a minority stockholder of Limpan Investment Corporation, G.R. No.
138343, February 19, 2001)

The personal injury suffered by the spouses cannot disqualify them from filing a derivative
suit on behalf of the corporation. It merely gives rise to an additional cause of action for
damages against the erring directors.(Virginia O. Gochan, et al. vs.

Richard G. Young, et al., G.R. No. 131889, March 12, 2001)

For a derivative suit to prosper, it is required that the minority stockholder suing for and on
behalf of the corporation must allege in his complaint that he is suing on a derivative cause
of action on behalf of the corporation and all other stockholders similarly situated who
may wish to join him in the suit. A public prosecutor, by the nature of his office, is under no
compulsion to file a criminal information where no clear legal justification has been shown,
and no sufficient evidence of guilt nor prima facie case has been presented by the
petitioner. (Tam Wing Tak vs. Hon. Ramon P. Makasiar, G.R. No. 122452, January 29, 2001)

The bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction
on the RTC (as a special commercial court) if he cannot comply with the requisites for the
existence of a derivative suit. These requisites are: a.) the party bringing suit should be a
shareholder during the time of the act or transaction complained of, the number of shares
not being material; b.) the party has tried to exhaust intra-corporate remedies, i.e., has
made a demand on the board of directors for the appropriate relief, but the latter has
failed or refused to heed his plea; andc.) the cause of action actually devolves on the
corporation; the wrongdoing or harm having been or being caused to the corporation and
not to the particular stockholder bringing the suit.(Oscar C. Reyes vs. Hon. Regional Trial
Court of Makati, Branch 142,

Zenith Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, 11 August 2008)
The stockholder filing a derivative suit should have exerted all reasonable efforts to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation to obtain the relief he desires and to allege such fact with
particularity in the complaint. The allegation that the suing stockholder talked to the other
stockholder regarding the dispute hardly constitutes “ all reasonable efforts to exhaust all
remedies available “. The complaint should also allege the fact that there was no appraisal
right available under for the acts complained of and that the suit was not a nuisance or
harassment suit. The fact that the corporation involved is a family corporation should not
in any way exempt the suing stockholder from the requirements and formalities for filing a
derivative suit. Yu vs. Yukayguan, 588 SCRA 589 ( 2009 )
Petitioners seek the nullification of the election of the Board of Directors composed of herein
respondents, who pushed through with the election even if petitioners had adjourned the meeting
allegedly due to lack of quorum. Petitioners are the injured party, whose rights to vote and to be
voted upon were directly affected by the election of the new set of board of directors. The party-
in-interest are the petitioners as stockholders, who wield such right to vote. The cause of action
devolves on petitioners, not the condominium corporation, which did not have the right to vote.
Hence, the complaint for nullification of the election is a direct action by petitioners, who were
the members of the Board of Directors of the corporation before the election, against
respondents, who are the newly-elected Board of Directors. Under the circumstances, the
derivative suit filed by petitioners in behalf of the condominium corporation is improper. Legaspi
Towers 300,

Inc., vs. Muer G.R. No. 170783, June 18, 2012.

A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce


corporate rights against the corporation’s directors, officers or other insiders. Under Sections 23
and 36 of the Corporation Code, the directors or officers, as provided under the by-laws, have the
right to decide whether or not a corporation should sue. Since these directors or officers will
never be willing to sue themselves or impugn their wrongful and fraudulent decisions,
stockholders are permitted by law to bring an action in the name of the corporation to hold these
directors and officers accountable. In derivative suits, the real party in interest is the corporation
while the stockholder is only a nominal party.

Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative

suits:

The person filing the suit must be a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed;

He must have exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the relief he desires;
No appraisal rights are available for the act or acts complained of; and

The suit is not a nuisance or harassment suit.

The complaint filed by a stockholder to compel another stockholder to settle his share of the loan
because this will affect the financial viability of the corporation can not be considered as a
derivative suit because the loan was not a corporate obligation but a personal debt of the
stockholders. The fact that the stockholders attempted to constitute a mortgage over “ their “
share in a corporate asset can not affect the corporation where the wordings of the mortgage
agreement reveal that it was signed by the stockholders in their personal capacity as the owners of
the pro-indiviso share in the corporate property and not on behalf of the corporation. A NG, FOR

AND IN BEHALF OF SUNRISE MARKETING (BACOLOD), INC. V. SPS. ANG.G.R. No. 201675, June 19, 2013
Obligation of a Stockholder

Meetings

Regular or Special

When and Where

Notice

Who Calls the Meetings

Quorum

Quorum is based on the totality of the shares which have been subscribed and issued,
whether it be founders’ shares or common shares. There is no gainsaying that the contents
of the articles of incorporation are binding, not only on the corporation, but also on its
shareholders. (Jesus V. Lanuza, et al.vs. Court of Appeals, et al., G.R. No. 131394, March 28,
2005)

Minutes of the Meetings I. Capital Structure

Subscription Agreements

A subscription contract necessarily involves the corporation as one of the contracting


parties since the subject matter of the transaction is property owned by the corporation –
its shares of stock. Hence, a stockholder cannot, by himself, rescind a pre-subscription
contract. (Ong Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 &

G.R. No. 144629, April 8, 2003)

Consideration for Stocks


Shares of Stock

a. Nature of Stock

Upon the death of a shareholder, the heirs do not automatically become stockholders of
the corporation and acquire the rights and privileges of the deceased as shareholder of
the corporation. The stocks must be distributed first to the heirs in estate proceedings, and
the transfer of the stocks must be recorded in the books of the corporation.(JoselitoMusni
Puno vs. Puno Enterprises, Inc., represented by Jesusa Puno, G.R. No. 177066, September
11, 2009)

The authority granted to a corporation to regulate the transfer of its stock does not
empower it to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations as to the formalities and procedure to be followed
in effecting transfer. (Marsh Thomson vs. Court of Appeals and the American Champer of
Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)
The registered owner of the shares of a corporation, even if they are sequestered by the
government through the PCGG, exercises the right and the privilege of voting on them. The
PCGG as a mere conservator cannot, as a rule, exercise acts of dominion by voting these
shares. The registered owner of sequestered shares may only be deprived of these voting
rights, and the PCGG authorized to exercise the same, only if it is able to establish that (1)
there is prima facie evidence showing that the said shares are ill-gotten and thus belong to
the State; and (2) there is an imminent danger of dissipation, thus necessitating the
continued sequestration of the shares and authority to vote thereupon by the PCGG while
the main issue is pending before the Sandiganbayan. (Trans Middle East (Phils.)
vs.Sandiganbayan, G.R. No. 172556, June 9, 2006)

The arrangement provided for in the by-laws of the Corporation whereby a lien is
constituted on the membership share to answer for dues, assessments and subsequent
obligations to the corporation cannot be upheld unless coupled by a corresponding pledge
or chattel mortgage agreement . Valley Golf and Country Club, Inc. v. Vda. De Caram, 585

SCRA 218 (2009)

A stock corporation is expressly granted the power to issue or sell stocks. The power to
issue stocks is lodged with the Board of Directors and no stockholders meeting is required
to consider it because additional issuances of stock ( unlike increase in capital stock ) does
not need approval of the stockholders. What is only required is the board resolution
approving the additional issuance of shares. The corporation shall also file the necessary
application with the SEC to exempt these from the registration requirements under the

SRC. Majority of Stockholders of Ruby Industrial Corporation vs Lim, GR No. 165887, June

6, 2011

Under the two-tiered test, the government, thru PCGG, may vote sequestered shares if
there is a prima facie evidence that the shares are ill-gotten and there is imminent danger
of dissipation of assets while the case is pending. However, the two- tiered test
contemplates a situation where the registered stockholders were in control and had been
dissipating company assets and the PCGG wanted to vote the sequestered shares to save
the company. It does not apply when the PCGG had voted the shares and is in control of the
sequestered corporation . Africa vs. Hon. Sandiganbayan , G.R. Nos. 172222/G.R. No.
174493/ G.R. No. 184636, November 11, 2013

Since the law does not prescribe a period for registration of shares in the books of the
corporation, the action to enforce the right to have it done does not begin until a demand
for it had been made and was refused. Africa vs. Hon. Sandiganbayan, ibid.

b. Subscription Agreements

A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only in the manner and
under the conditions prescribed by the statute or the charter or the
articles of incorporation. Subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt. (Philippine National Bank vs.Bitulok Sawmill, Inc., et al.,
G.R. Nos. L-24177-85, June 29, 1968)

Consideration for Shares of Stock

Watered Stock

Definition

Liability of Directors for Watered Stocks

Trust Fund Doctrine for Liability for Watered Stocks

Situs of the Shares of Stock

Classes of Shares of Stock

"Interest bearing stocks", on which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in question and to
pay the corresponding dividends, committed grave abuse of discretion amounting to lack
or excess of jurisdiction in ignoring both the terms and conditions specified in the stock
certificate, as well as the clear mandate of the law.(Republic

Planters Bank vs. Hon. Enrique A. Agana, Sr., as Presiding Judge, Court of First Instance of
Rizal, Branch XXVIII, Pasay City, Robes-Francisco Realty & Development
Corporation and Adalia F. Robes, G.R. No. 51765, March 3, 1997)

Payment of Balance of Subscription

Call by Board of Directors

Notice Requirement

Sale of Delinquent Shares i. Effect of Delinquency

At the root of the sale of delinquent stock is the non-payment of the subscription price for
the share of stock itself. The stockholder or subscriber has yet to fully pay for the value of
the share or shares subscribed. In this case, Clemente had already fully paid for the share in
Calatagan and no longer had any outstanding obligation to deprive him of full title to his
share. (Calatagan Golf Club, Inc. vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009)

Call by Resolution of the Board of Directors

Notice of Sale

Auction Sale and the Highest Bidder

Certificate of Stock
a. Nature of the Certificate

While shares of stock constitute personal property, they do not represent property of
the corporation. A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of
the corporation.(Stockholders of F. Guanzon and Sons, Inc. vs.Register of Deeds of
Manila, G.R. No. L-18216, October 30, 1962)

A certificate of stock is the paper representative or tangible evidence of the stock


itself and of the various interests therein. The certificate is not stock in the corporation
but is merely evidence of the holder's interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but
is not essential to the existence of a share in stock or the nation of the relation of
shareholder to the corporation. (Alfonso S. Tan vs. Securities And Exchange

Commission, G.R. No. 95696 March 3, 1992)

The certificate of stock itself once issued is a continuing affirmation or representation


that the stock described therein is valid and genuine and is at least prima facie
evidence that it was legally issued in the absence of evidence to the contrary. A mere
typewritten statement advising a stockholder of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered as a
formal certificate of stock.(Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553,

July 13, 1998)

Uncertificated Shares

Negotiability

i. Requirements for Valid Transfer of Stocks


The law is clear that in order for a transfer of stock certificate to be effective, the
certificate must be properly indorsed and that title to such certificate of stock is vested
in the transferee by the delivery of the duly indorsed certificate of stock. Since the
certificate of stock covering the questioned 1,500 shares of stock registered in the
name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable
conclusion is that the questioned shares of stock belong to Chuidian. (Enrique Razon
vs. Intermediate Appellate Court and Vicente B. Chuidian, in his capacity as
Administrator of the Estate of the Deceased Juan T. Chuidian, G.R. No. 74306, 16

March 1992)

Where a stockholder executed a Special Power of Attorney in favor of his wife who, by
virtue of said SPA, sold the shares, the corporation cannot refuse to register the shares
in favor of the assignee on the ground that upon the death of the stockholder, the
shares of stock became the property of his estate which should be settled and
liquidated first before any distribution could be made. For the petitioner Rural Bank of
Salinas to refuse registration of the transferred shares in its stock and transfer book,
which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. (Rural Bank of Salinas, Inc. vs. Securities
and Exchange Commission, et al., G.R. No. 96674, June 26, 1992)

Section 63 of the Corporation Code which provides that "no shares of stock against
which the corporation holds any unpaid claim shall be transferable in the books of the
corporation" does not include monthly dues. The term "unpaid claim" refers to "any
unpaid claim arising from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any other
transaction."(China Banking Corporation vs. Court of Appeals, and Valley Golf and
Country Club, Inc., G.R. No. 117604, March 26, 1997)

Section 63 of the Corporation Code strictly requires the recording of the transfer in the
books of the corporation, and not elsewhere, to be valid as against third parties.

Thus, the transfer of the subject certificate made by Dico to petitioner was not valid as
to the spouses Atinon, the judgment creditors, as the same still stood in the name of
Dico, the judgment debtor, at the time of the levy on execution. (Nemesio Garcia vs.

Nicolas Jomouad, Ex-Officio Provincial Sheriff of Cebu, and Spouses Jose Atinon& Sally
Atinon, G.R. No. 133969, 26 January 2000)

For a valid transfer of stocks, there must be strict compliance with the mode of transfer
prescribed by law. The requirements are: (a) There must be delivery of the stock
certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and (c) To be valid against third
parties, the transfer must be recorded in the books of the corporation. A deed of
assignment of shares without endorsement and delivery is binding only on the parties
and does not necessarily make the transfer effective as against the corporation.(The

Rural Bank of Lipa City, Inc., et al.vs. Honorable Court of Appeals, G.R. No. 124535,
September 28, 2001)
Without such recording, the transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with
the requirements of Section 64 of the Corporation Code. The situation would be
different if the petitioner was himself the registered owner of the stock which he
sought to transfer to a third party, for then he would be entitled to the remedy of
mandamus.(Vicente C. Ponce vs. Alsons Cement Corporation, and Francisco M. Giron,
Jr., G.R. No. 139802, December 10, 2002)

Section 63 of the Corporation Code provides that shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. The failure of the stockholder to deliver the stock certificate to the buyer
within a reasonable time the shares covered by the stock certificate should have been
delivered is a substantial breach that entitles the buyer to rescind the sale under Article
1191 of the Corporation Code . It is not entirely correct to say the sale had already
been consummated as the buyer already enjoyed the rights a shareholder can exercise.
The enjoyment of these rights will not suffice where the law, by its express
terms, requires a specific form to transfer ownership. Fil-Estate Golf and Development vs.
Vertex Sales and Trading Inc., G.R. No. 202079, June 10, 2013

The Corporation whose shares of stock are the subject of a transfer transaction (through
sale, assignment, donation, or any other mode of conveyance) need not be a party to the
transaction, as may be inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is necessary that the transfer is
recorded in the books of the corporation. In a share purchase transaction, the parties are
the seller and buyer of the shares. Not being a party to the sale, the Corporation is in no
position to appeal the ruling rescinding the sale of the shares. If the Seller of the shares
filed no appeal against the court decision declaring the rescission of the sale, then the
rescission is deemed final despite any appeal by the corporation whose shares of stock are
the subject of the transfer transaction. Forest Hills Golf & Country Club vs.

Vertex Sales and Trading Inc.G.R. No. 202205, March 6, 2013.

d. Issuance

i. Full Payment

When a stockholder in a stock corporation subscribes to a certain number of shares but


does not pay the full amount for such shares, a certificate of stock shall still be issued to
him and he shall be entitled to vote the shares even though they are not fully paid. (Irineo
S. Baltazar vs. Lingayen Gulf Electric Power, Co., Inc., G.R. No. L-16236, June 30, 1965)

Payment Pro-Rata

Lost or Destroyed Certificates

Stock and Transfer Book


Contents

A stock and transfer book is necessary as a measure of precaution, expediency and


convenience since it provides the only certain and accurate method of establishing the
various corporate acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate books and records, is
not in any sense a public record, and thus is not exclusive evidence of the matters and
things which ordinarily are or should be written therein. (Jesus V. Lanuza, et al.vs. Court of
Appeals, et al., G.R. No. 131394, March 28, 2005)

b. Who May Make Valid Entries

In the absence of any provision to the contrary, the corporate secretary is the custodian of
corporate records. The transferor, even though he may be the controlling stockholder
cannot take the law into his hands and cause himself the recording of the transfers of the
qualifying shares to his nominee-directors in the stock and transfer
book of the corporation.(Manuel A. Torres, Jr., (Deceased), et al. vs. Court of Appeals, et al.,
G.R. No. 120138, September 5, 1997)

Disposition and Encumbrance of Shares

Allowable Restrictions on the Sale of Shares

Sale of Partially Paid Shares

Sale of a Portion of Shares Not Fully Paid

Sale of All of Shares Not Fully Paid

Sale of Fully Paid Shares

Requisites of a Valid Transfer

Involuntary Dealings with Shares

J. Dissolution and Liquidation

An action to correct entries in the General Information Sheet of the Corporation; to be


recognized as a stockholder and to inspect corporate documents is an intra-corporate dispute
which does not constitute a continuation of corporate business. As such, pursuant to Section
145 of the Corporation Code, this action is not affected by the subsequent dissolution of the
corporation. The dissolution of the corporation simply prohibits it from continuing its business.
However, despite such dissolution, the parties involved in the litigation are still corporate
actors. The dissolution does not automatically convert the parties into total strangers or
change their intra-corporate relationships. Neither does it change or terminate existing
causes of action, which arose because of the corporate ties between the parties. Thus, a cause
of action involving an intra-corporate controversy remains and must be filed as an intra-
corporate dispute despite the subsequent dissolution of the corporation.“ Aguirre vs. FQB +7,

Inc, GR No. 170770, January 9 2013.


Modes of Dissolution a. Voluntary

Where No Creditors Are Affected

A resolution approved by the Board of Directors is not sufficient to dissolve a corporation. The
Corporation Code establishes the procedure and other formal requirements a corporation
needs to follow in case it elects to dissolve and terminate its structure voluntarily and where
no rights of creditors may possibly be prejudiced under Section 118 which should have been
strictly complied with by the members of the club. (Teodoro B. Vesagas and Wilfred D. Asis vs.
the Honorable Court of Appeals and DelfinoRaniel and HelendaRaniel, G.R. No. 142924,
December 5, 2001)

Where Creditors Are Affected

By Shortening of Corporate Term b. Involuntary

By Expiration of Corporate Term


Upon the expiration of the period fixed in the articles of incorporation in the absence of
compliance with the legal requisites for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto. There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in the articles of
incorporation. (Philippine National Bank vs.the Court of First Instance of Rizal, Pasig, et
al.,G.R. No. 63201, May 27, 1992)

Failure to Organize and Commence Business Within 2 Years from Incorporation

Legislative Dissolution

Dissolution by the SEC on Grounds under Existing Laws

Methods of Liquidation

By the Corporation Itself

Conveyance to a Trustee within a Three-Year Period

The word "trustee" as used in the corporation statute must be understood in its general
concept which could include the counsel to whom was entrusted in the instant case, the
prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of
the corporation to a trustee upon its dissolution is more for the protection of its creditor
and stockholders. (Carlos Gelano and Guillermina Mendoza De Gelano vs. the Honorable
Court of Appeals and Insular Sawmill, Inc., G.R. No. L-39050 February

24, 1981)
The trustee (of a dissolved corporation) may commence a suit which can proceed to final
judgment even beyond the three-year period of liquidation. No reason can be conceived
why a suit already commenced by the corporation itself during its existence, not by a mere
trustee who, by fiction, merely continues the legal personality of the dissolved
corporation, should not be accorded similar treatment – to proceed to final judgment and
execution thereof. Indeed, the rights of a corporation that has been dissolved pending
litigation are accorded protection by Section 145 of the

Corporation Code which provides “no right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution of said corporation or
by any subsequent amendment or repeal of this Code or of any part thereof.” (Rene
Knecht and Knecht, Inc. vs. United Cigarette Corp., represented by Encarnacion Gonzales
Wong, and Eduardo Bolima, Sheriff, Regional Trial Court, Branch 151, Pasig City, G.R. No.
139370, July 4, 2002)

c. By Management Committee or Rehabilitation Receiver

During rehabilitation receivership, the assets are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or preference over another by the
expediency of an attachment, execution or otherwise. For what would prevent an alert
creditor, upon learning of the receivership, from rushing posthaste to the
courts to secure judgments for the satisfaction of its claims to the prejudice of the less
alert creditors. (Alemar'sSibal& Sons, Inc. vs. Honorable Jesus M. Elbinias, in his
capacity as the Presiding Judge of Regional Trial Court, National Capital Region,
Branch CXLI (141), Makati, and G.A. Yupangco& Co., Inc., G.R. No. 75414 June 4,
1990)

The appointment of a receiver operates to suspend the authority of a corporation and


its directors and officers over its property and effects, such authority being reposed in
the receiver. Thus, a corporate officer had no authority to condone a debt. (Victor Yam
&Yek Sun Lent, doing business under the name and style of Philippine Printing Works
vs. the Court of Appeals and Manphil Investment Corporation, G.R. No. 104726,

February 11, 1999)

d. Liquidation after Three Years

Although the cancellation of a corporation’s certificate of registration puts an end to


its juridical personality, Sec. 122 of the Corporation Code, however provides that a
corporation whose corporate existence is terminated in any manner continues to be a
body corporate for three years after its dissolution for purposes of prosecuting and
defending suits by and against it and to enable it to settle and close its affairs. Thus,
corporations whose certificate of registration was revoked by the SEC may still
maintain actions in court for the protection of its rights which includes the right to
appeal. (Paramount Insurance Corp. vs. A.C. Ordoñez Corporation and Franklin
Suspine, G.R. No. 175109, August 6, 2008)

To allow a creditor’s case to proceed independently of the liquidation case, a


possibility of favorable judgment and execution thereof against the assets of the
distressed corporation would not only prejudice the other creditors and depositors but
would defeat the very purpose for which a liquidation court was constituted as well.
The requirement that all claims against the bank be pursued in the liquidation
proceedings filed by the Central Bank is intended to prevent multiplicity of actions
against the insolvent bank and designed to establish due process and orderliness in the
liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice
and arbitrariness. (Lucia Barramedavda. de Ballesteros vs. Rural Bank of Canaman,

Inc., represented by its liquidator, the Philippine Deposit Insurance Corporation, G.R.
No. 176260, November 24, 2010)

The executed releases, waivers and quitclaims are valid and binding upon the parties
notwithstanding the fact that these documents were signed six years after the
Corporation’s revocation of the Certificate of Incorporation. These documents are thus
proof that the employees had received their claims from their employer-corporation in
whose favor the release and quitclaim were issued. The revocation of the corporation
does not mean the termination of its liabilities to these employees.

Section 122 of the Corporation Code provides for a three-year winding up period for a
corporation whose charter is annulled by forfeiture or otherwise to continue as a body
corporate for the purpose, among others, of settling and closing its affairs As such,
these liabilities are obligations of the dissolved corporation and not of the corporation
who contracted the services of the dissolved corporation. Vigilla vs. Philippine College of
Criminology, GR No. 200094, June 10, 2013

Other Corporations

Close Corporations

a. Characteristics of a Close Corporation

A corporation does not become a close corporation just because a man and his wife own
98.86% of its subscribed capital stock; So too, a narrow distribution of ownership does not, by
itself, make a close corporation. The features of a close corporation under the Corporation
Code must be embodied in the Articles of Incorporation.(San Juan

Structural and Steel Fabricators, Inc. vs. Court of Appeals, Motorich Sales Corporation, Nenita
Lee Gruenberg, ACL Development Corp. and JNM Realty and Development Corp., G.R. No.
129459, September 29, 1998)

To the extent that the stockholders are actively engaged in the management or operation of
the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary
duties to each other and among themselves. Said stockholders shall be personally liable for
corporate torts unless the corporation has obtained reasonably adequate liability insurance.
(Sergio F. Naguiat, doing business under the name and style Sergio F. NaguiatEnt., Inc., &
Clark Field Taxi, Inc. vs. National Labor Relations Commission (Third Division), National
Organization Of Workingmen and its members, Leonardo T. Galang, et al., G.R. No. 116123,
13 March 1997)

Validity of Restrictions on Transfer of Shares

Issuance or Transfer of Stock in Breach of Qualifying Conditions

When Board Meeting is Unnecessary or Improperly Held


When a corporation is classified as a close corporation, a board resolution authorizing the sale
or mortgage of the subject property is not necessary to bind the corporation for the action of
its president. At any rate, corporate action taken at a board meeting without proper call or
notice in a close corporation is deemed ratified by the absent director unless the latter
promptly files his written objection with the secretary of the corporation after having
knowledge of the meeting which, in this case, petitioner failed to do. (Manuel R.Dulay
Enterprises, Inc., VirgilioE. Dulay AndNepomucenoRedovanvs. the Honorable Court of
Appeals, G.R. No. 91889 August

27, 1993)

Pre-Emptive Right

Amendment of Articles of Incorporation

Deadlocks

Non-Stock Corporations

Definition

Purposes
Treatment of Profits

Distribution of Assets upon Dissolution

The second paragraph of Section 108 of the Corporation Code, although setting the term
of the members of the Board of Trustees at five years, contains a proviso expressly
subjecting the duration to what is otherwise provided in the articles of incorporation or
by-laws of the educational corporation. In AUP’s case, its amended By-Laws provided that
members of the Board of Trustees were to serve a term of office of only two years; and the
officers, who included the President, were to be elected from among the members of the
Board of Trustees during their organizational meeting, which was held during the election
of the Board of Trustees every two years. Naturally, the officers, including the President,
were to exercise the powers vested by Section 2 of the amended By-Laws for a term of only
two years, not five years. (PetroniloJ.

Barayuga vs. Adventist University of the Philippines, through its Board of Trustees,
represented by its Chairman, Nestor D. Dayson, G.R. No. 168008, August 17, 2011)

Section 89 of the Corporation Code pertaining to non-stock corporations which provides


that "the right of the members of any class or classes (of a non-stock corporation) to vote
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws," is an exception to Section 6 of the same code where it is
provided that "no share may be deprived of voting rights except those classified and
issued as ‘preferred’ or ‘redeemable’ shares, unless otherwise provided in this Code." The
stipulation in the By-Laws providing for the election of the Board of Directors by districts is
a form of limitation on the voting rights of the members of a non-stock corporation as
recognized under the aforesaid Section 89. (Rev. Luis Ao-as, et al. vs. Hon. Court of
Appeals, G.R. No. 128464, June 20, 2006)

Religious Corporations - Exclude

Foreign Corporations

a. Bases of Authority over Foreign Corporations


Consent

Doctrine of “Doing Business” (related to definition under the Foreign

Investments Act, R.A. No. 7042)

A foreign company that merely imports goods from a Philippine exporter, without opening
an office or appointing an agent in the Philippines, is not doing business in the Philippines.
Since the contract between petitioner and NMC involved the purchase of molasses by
petitioner from NMC, it was NMC, the domestic corporation, which derived income from
the transaction and not petitioner. To constitute “doing business,” the activity undertaken
in the Philippines should involve profit-making.(Cargill, Inc. vs. Intra Strata Assurance
Corporation, G.R. No. 168266, March

15, 2010)

Participating in the bidding process constitutes “doing business” because it shows the
foreign corporation’s intention to engage in business in the Philippines. The bidding for
the concession contract is but an exercise of the corporation’s reason for creation
or existence. (Hutchison Ports Philippines Limitedvs.Subic Bay Metropolitan Authority,

International Container Terminal Services Inc., Royal Port Services, Inc. and the
Executive Secretary, G.R. No. 131367, August 31, 2000)

A contract entered into by a foreign corporation not licensed to do business in the


Philippines is not void even as against the erring foreign corporation. The lack of
capacity at the time of the execution of the contracts was cured by the subsequent
registration. (The Home Insurance Company vs.Eastern Shipping Lines, G.R. No. L-
34382 July 20, 1983)

The appointment of a distributor in the Philippines is not sufficient to constitute

“doing business” unless it is under the full control of the foreign corporation. If the
distributor is an independent entity which buys and distributes products, other than
those of the foreign corporation, for its own name and its own account, the latter
cannot be considered to be doing business in the Philippines. (Steelcase, Inc. vs.
Design International Selections, Inc., G.R. No. 171995, April 18, 2012)

b. Necessity of a License to Do Business

The primary purpose of the license requirement is to compel a foreign corporation


desiring to do business within the Philippines to submit itself to the jurisdiction of the
courts of the state and to enable the government to exercise jurisdiction over them for
the regulation of their activities in this country. If a foreign corporation operates a
business in the Philippines without a license, and thus does not submit itself to

Philippine laws, it is only just that said foreign corporation be not allowed to invoke
them in our courts when the need arises. (Ibid.)
Requisites for Issuance of a License

Resident Agent c. Personality to Sue

The following principles governing a foreign corporation’s right to sue in local courts
have long been settled, to wit: a) if a foreign corporation does business in the
Philippines without a license, it cannot sue before the Philippine courts; b) if a foreign
corporation is not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction; and c) if a foreign corporation does business
in the Philippines with the required license, it can sue before Philippine courts on any
transaction. Apparently, it is not the absence of the prescribed license but the “doing

(of) business” in the Philippines without such license which debars the foreign
corporation from access to our courts. (MR Holdings, Ltd.vs. Sheriff Carlos P. Bajar,

Sheriff Ferdinand M. Jandusay, Solidbank Corporation, and Marcopper Mining


Corporation, G.R. No. 138104, April 11, 2002)

A party is estopped from challenging the personality of a corporation after having


acknowledged the same by entering into a contract with it. The principle is applied to
prevent a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the benefits
of the contract. (Global Business Holdings, Inc. vs. Surecomp Software, B.V., G.R. No. 173463,
October 13, 2010)

Suability of Foreign Corporations

Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated


Transactions

A foreign corporation doing business in the Philippines may sue in Philippine Courts although
not authorized to do business in the Philippines against a Philippine citizen or entity who had
contracted with and benefited by said corporation. (Steelcase, Inc. vs. Design International
Selections, Inc., G.R. No. 171995, April 18, 2012)

Grounds for Revocation of License

L. Mergers and Consolidations

Definition and Concept

In the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their rights,
properties and liabilities are acquired by the surviving corporation. (Associated Bank vs. Court
of Appeals and Lorenzo Sarmiento, Jr., G.R. No. 123793, June 29, 1998)

There are two types of corporate acquisitions: asset sales and stock sales. In asset sales, the
corporate entity sells all or substantially all of its assets to another entity. In stock sales, the
individual or corporate shareholders sell a controlling block of stock to new or existing
shareholders.
In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected
employees, but is liable for the payment of separation pay under the law. The buyer in good
faith, on the other hand, is not obliged to absorb the employees affected by the sale, nor is it
liable for the payment of their claims. The most that it may do, for reasons of public policy and
social justice, is to give preference to the qualified separated personnel of the selling firm.

In contrast with asset sales, in which the assets of the selling corporation are transferred to
another entity, the transaction in stock sales takes place at the shareholder level. Because the
corporation possesses a personality separate and distinct from that of its shareholders, a shift
in the composition of its shareholders will not affect its existence and continuity.

Thus, notwithstanding the stock sale, the corporation continues to be the employer of its
people and continues to be liable for the payment of their just claims. Furthermore, the
corporation or its new majority shareholders are not entitled to lawfully dismiss corporate
employees absent a just or authorized cause.
The fact that there was a change in the composition of its shareholders did not affect the
employer-employee relationship between the employees and the corporation, because an
equity transfer affects neither the existence nor the liabilities of a corporation. Thus, the
corporation continued to be the employer of the corporation’s employees
notwithstanding the equity change in the corporation. This outcome is in line with the rule
that a corporation has a personality separate and distinct from that of its individual
shareholders or members, such that a change in the composition of its shareholders or
members would not affect its corporate liabilities.

In this case, the corporate officers and directors who induced the employees to resign with
the assurance that they would be rehired by the new management are personally liable to
the employees who were not actually rehired. However, the officer who did not
participate in the termination of employment and persons who participated in the
unlawful termination of employment but are not directors and officers of the corporation
are not personally liable. SME BANK INC, vs. GASPAR, G.R. No. 186641, October 8, 2013

Where the purchase and sale of identified assets between two companies under a
Purchase and Sale Agreement does not constitute a merger, the seller and the purchaser
are considered entities different from one another. Thus, the purchaser company can not
be held liable for the payment of deficiency documentary stamp tax against the seller
company. Commission of Internal Revenue vs, Bank of Commerce, GR No. 180529,
November 25, 2013

2. Constituent vs. Consolidated Corporation

In consolidation, all the constituents are dissolved and absorbed by the new consolidated
enterprise, while in merger, all constituents, except the surviving corporation, are
dissolved. The surviving or consolidated corporation assumes automatically the liabilities
of the dissolved corporations, regardless of whether the creditors have consented or not to
such merger or consolidation. (John F. McLeod vs.National Labor Relations Commission
(First Division), et al., G.R. No. 146667, January 23, 2007)

Plan of Merger or Consolidation


Articles of Merger or Consolidation

Procedure

Effectivity

A merger is not effective unless it has been approved by the Securities and Exchange
Commission. (Philippine National Bank & National Sugar Development Corporation vs.
Andrada Electric & Engineering Company, G.R. No. 142936, April 17, 2002)

The issuance of the certificate of merger is crucial because not only does it bear out

SEC’s approval but it also marks the moment when the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights and properties, as well as liabilities, shall be taken and
deemed transferred to and vested in the surviving corporation.(Mindanao Savings and Loan
Association, Inc., represented by its Liquidator, the Philippine Deposit Insurance Corporation vs.
Edward Willkom; Gilda Go; RemediosUy; MalayoBantuas, in his capacity as the Deputy Sheriff of
Regional Trial Court, Branch 3, Iligan City; and the Register of Deeds of Cagayan de Oro City, G.R.
No. 178618, October 11, 2010)

Limitations

Effects

Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs
or liquidation of their assets, because the surviving corporation automatically acquires all their
rights, privileges and powers, as well as their liabilities. The fact that the promissory note was
executed after the effectivity date of the merger does not militate against petitioner because the
agreement itself clearly provides that all contracts -- irrespective of the date of execution --
entered into in the name of the absorbed corporation shall be understood as pertaining to the
surviving bank, herein petitioner. (Associated Bank vs. Court of Appeals and Lorenzo Sarmiento,
Jr.,G.R. No. 123793, June 29, 1998)

It is more in keeping with the dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles of merger or
the merger plan. By upholding the automatic assumption of the non-surviving corporation’s
existing employment contracts by the surviving corporation in a merger, the Court strengthens
judicial protection of the right to security of tenure of employees affected by a merger and avoids
confusion regarding the status of their various benefits which were among the chief objections of
our dissenting colleagues. (Bank of the Philippine Islands vs. BPI Employees Union-Davao
Chapter-Federation Of Unions In Bpi Unibank, G.R. No. 164301, October 19, 2011)

Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that it was
in possession of defendants' deposit accounts became a
"virtual party" to or a "forced intervenor" in the civil case. As such, it became bound by the orders
and processes issued by the trial court despite not having been properly impleaded therein.
Consequently, by virtue of its merger with BPI , the latter, as the surviving corporation, effectively
became the garnishee, thus the "virtual party" to the civil case. Bank of Philippine Islands v. Lee,
G.R. No. 190144, August 1, 2012

VII. Securities Regulation Code (R.A. No. 8799)

A. State Policy, Purpose

The rise and fall of stock market indices reflect to a considerable degree the state of the economy.
Securities transactions are impressed with public interest, and are thus
subject to public regulation; in particular, the laws and regulations requiring payment of
traded shares within specified periods are meant to protect the economy from excessive stock
market speculations, and are thus mandatory. (Abacus Securities Corporation vs. Ruben Ampil,
G.R. No. 160016, February 27, 2006)

B. Securities Required to be Registered

The issuance of checks for the purpose of securing a loan to finance the activities of the
corporation is well within the ambit of a valid corporate act. It is one thing for a corporation to
issue checks to satisfy isolated individual obligations, and another for a corporation to execute
an elaborate scheme where it would comport itself to the public as a pseudo-investment
house and issue postdated checks instead of stocks or traditional securities to evidence the
investments of its patrons. (Betty Gabionza and

Isabelita Tan vs. Court of Appeals, G.R. No. 161057, September 12, 2008)

Corporate registration is just one of the several requirements before a corporation may deal
with timeshares. Prior to fulfillment of all the other requirements under the Securities
Regulation Code, a corporation is absolutely proscribed from dealing with unregistered
timeshares. (Timeshare Realty vs. Cesar Lao, G.R. No. 158941, February 11, 2008)

For an investment contract to exist, the following elements, referred to as the Howey test
must concur: (1)a contract, transaction, or scheme; (2)an investment of money; (3)investment
is made in a common enterprise; (4) expectation of profits; and

(5)profits arising primarily from the efforts of others. Network marketing, a scheme adopted
by companies for getting people to buy their products where the buyer can become a down-
line seller, who earns commissions from purchases made by new buyers whom he refers to the
person who sold the product to him, is not an investment contract. (Securities and Exchange
Commission vs. Prosperity.Com, Inc., G.R. No.
164197, January 25, 2012)

A person is liable for violation of Section 28 of the SRC where, acting as a broker, dealer or
salesman is in the employ of a corporation which sold or offered for sale unregistered
securities in the Philippines. The transaction initiated by the investment consultant of a
corporation is an investment contract or participation in a profit sharing agreement that falls
within the definition of law—an investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
(Securities and Exchange Commission vs. Oudine Santos, G.R. No. 195542, March 19, 2014)

Exempt Securities

The exemption from registration of the securities issued by banking or financial institutions
provided under the law does not imply that petitioner as a listed corporation, is also exempt
from complying with the reportorial requirements. (Union Bank of the Philippines vs.
Securities and Exchange Commission, G.R. No. 138949, June 6, 2001)
Exempt Transactions

Under the ruling issued by the SEC, an issuance of previously authorized but still unissued
capital stock may, in a particular instance, be held to be an exempt transaction by the SEC
under Section 6(b) so long as the SEC finds that the requirements of registration under the
Revised Securities Act are "not necessary in the public interest and for the protection of the
investors" by reason, inter alia, of the small amount of stock that is proposed to be issued or
because the potential buyers are very limited in number and are in a position to protect
themselves. (Nestle Philippines, Inc. vs. Court of Appeals, G.R. No. 86738, November 13, 1991)

Procedure for Registration of Securities

Prohibitions of Fraud, Manipulation and Insider Trading

The trading contract signed by the parties is a contract for the sale of products for future
delivery, in which either seller or buyer may elect to make or demand delivery of goods agreed
to be bought and sold, but where no such delivery is actually made. The written trading
contract in question is not illegal but the transaction between the parties purportedly to
implement the contract is in the nature of a gambling agreement; it is not buying and selling
and is illegal as against public policy. (Onapal Philippines Commodities, Inc. vs. Court of
Appeals, G.R. No. 90707, February 1, 1993)

Manipulation of Security Prices

Short Sales

Fraudulent Transactions

Insider Trading
The term “insiders” now includes persons whose relationship or former relationship to the
issuer gives or gave them access to a fact of special significance about the issuer or the
security that is not generally available, and one who learns such a fact from an insider knowing
that the person from whom he learns the fact is such an insider. Insiders have the duty to
disclose material facts which are known to them by virtue of their position but which are not
known to persons with whom they deal and which, if known, would affect their investment
judgment. (Securities and Exchange Commission vs. Interport Resources Corporation, et. al.,
G.R. No. 135808, October 6, 2008)

Protection of Investors

A “public company,” as contemplated by the SRC is not limited to a company whose shares of
stock are publicly listed; even companies whose shares are offered only to a specific group of
people, are considered a public company, provided they fall under Subsec. 17.2 of the SRC,
which provides: “any corporation with a class of equity securities listed on an Exchange or with
assets of atleast Fifty Million Pesos

(P50,000,000.00) and having two hundred (200) or more holders, at least two hundred
(200) of which are holding at least one hundred (100) shares of a class of its equity
securities.” Philippine Veterans Bank meets the requirements and as such, is subject to the
reportorial requirements for the benefit of its shareholders. (Philippine Veterans Bank v.
Callangan, in her capacity Director of the Corporation Finance Department of the
Securities and Exchange Commission and/or the Securities and Ex-change Commission,
G.R. No. 191995, August 3, 2011)

Tender Offer Rule

A tender offer is an offer by the acquiring person to stockholders of a public company for
them to tender their shares; it gives the minority shareholders the chance to exit the
company under reasonable terms, giving them the opportunity to sell their shares at the
same price as those of the majority shareholders. The mandatory tender offer is still
applicable even if the acquisition, direct or indirect, is less than 35% when the purchase
would result in ownership of over 51% of the total outstanding equity securities of the
public company. (Cemco Holdings, Inc. vs. National Life Insurance

Company of the Philippines, G.R. No. 171815, August 7, 2007)

Rules on Proxy Solicitation

The right of stockholder to vote by proxy is generally established by the Corporation Code,
but it is the SRC which specifically regulates the form and use of proxies, more particularly
proxy solicitation, a procedure that antecedes proxy validation. When proxies are solicited
in relation to the election of corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly
seen as an election controversy within the original and exclusive jurisdiction of the trial
courts. (GSIS vs. Court of Appeals, G.R. No. 183905, April 16, 2009)

Disclosure Rule
Section 27 (SRC) penalizes an insider’s misuse of material and non-public information
about the issuer, for the purpose of protecting public investors; Section 26 widens the
coverage of punishable acts, which intend to defraud public investors through various
devices, misinformation and omissions. Section 23 imposes upon (1) a beneficial owner of
more than ten percent of any class of any equity security or (2) a director or any officer of
the issuer of such security, the obligation to submit a statement indicating his or her
ownership of the issuer’s securities and such changes in his or her ownership thereof.
(Securities and Exchange Commission vs. Interport Resources Corporation, et. al., G.R. No.
135808, October 6, 2008)

Under the law, what is required to be disclosed is a fact of “special significance” which may
be (a) a material fact which would be likely, on being made generally available, to affect
the market price of a security to a significant extent, or (b) one which a reasonable person
would consider especially important in determining his course of action with regard to the
shares of stock. (Securities and Exchange Commission vs. Interport Resources Corporation,
et. al., G.R. No. 135808, October 6, 2008)
F. Civil Liability

Under Section 62 of the SRC, no action shall be maintained to enforce any liability created under
Section 56 of the SRC ( False registration statement ) and Section 57 ( sale of unregistered security
and liabilities arising in connection with prospectus, communication and other reports ) unless
brought within two ( 2 ) years after discovery of the untrue statement or omission or after the
viola-tion upon which it is based but not more than five ( 5 ) years after the security was bona fide
offered to the public or more than 5 years after the sale, respectively. The prescriptive periods
under the mentioned sections pertain only to the civil liability in cases of violations of the SRC and
not to criminal liability under the same violations. (Citibank N.A. vs. Tanco-

Gabaldon, et al. G.R. No. 198444, September 4, 2013)

Civil suits falling under the SRC (like liability for selling unregistered securities ) are under the
exclusive original jurisdiction of the RTC and hence, need not be first filed before the SEC, unlike
criminal cases wherein the latter body exercises primary jurisdiction. (Jose U. Pua vs. Citibank, N.
A. G.R. No. 180064, September 16, 2013)

VIII. Banking Laws

The New Central Bank Act (R.A. No. 7653)

State Policies

Creation of the Bangko Sentral ng Pilipinas (BSP)

Responsibility and Primary Objective

The BSP, through the Monetary Board, is the government agency charged with the responsibility
of administering the monetary, banking and credit system of the country and is granted the power
of supervision and examination over banks and non-bank financial institutions performing quasi-
banking functions, including savings and loan associations. It is empowered to conduct
investigations and examine the records of savings and loan associations where, upon discovery of
any irregularity, the Monetary

Board may impose appropriate sanctions. (Romeo Busuego vs. Court of Appeals, G.R. No. 95326,
March 11, 1999)

The Bangko Sentral shall have supervision over, and conduct periodic or special examinations of,
banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied
activities. When the complaint filed by a stockholder of the bank pertains to the bank’s alleged
engaging in unsafe, unsound, and fraudulent banking practices, more particularly, acts that
violate the prohibition on self-dealing, it is clear that the acts complained of pertain to the
conduct of banking business, hence, jurisdiction lies with the BSP (Monetary Board). (Ana Maria
Koruga vs. Teodoro Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)

Monetary Board—Powers and Functions


The Monetary Board, is vested with exclusive authority to assess, evaluate and determine
the condition of any bank, and finding such condition to be one of insolvency, or that its
continuance in business would involve a probable loss to its depositors or creditors, forbid
bank or non-bank financial institution to do business in the Philippines; and shall designate
an official of the BSP or other competent person as receiver to immediately take charge of
its assets and liabilities. When the complaint filed by a stockholder of the bank pertains to
the alleged unsafe and unsound banking practices, the authority to determine the
existence of such is with the Monetary Board. (Ana Maria Koruga vs. Teodoro Arcenas, Jr.,
G.R. No. 168332/ G.R. No. 169053, June 19, 2009)

The actions of the Monetary Board under Sec. 29 and 30 of RA 7653, which pertain to the
power to appoint a conservator or a receiver for a bank, may not be restrained or set aside
by the court except on petition for certiorari on the ground that the action taken was in
excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess
of jurisdiction. Hence, the issuance by the RTC of writs of preliminary injunction is an
unwarranted interference with the powers of the Monetary Board. (BSP Monetary Board
vs. Hon. Antonio-Valenzuela, G.R. No. 184778, October 2, 2009)

How the BSP handles Banks in Distress a. Conservatorship

The Monetary Board, upon finding that the bank failed to put up the required capital to
restore its solvency, prohibited a bank from doing business and instructed the

Acting Superintendent of Banks to take charge of the assets of the bank. When by reason
of this prohibition, only a portion of the loan approved by the bank was released to its
debtor, it also follows that the bank, in exercising its right to foreclose the real estate
mortgage, can only foreclose up to the extent of the amount it released. (Central Bank of
the Philippines vs. Court of Appeals, G.R. No. L-45710 October 3, 1985)

The following requisites must be present before the order of conservatorship may be set
aside by a court: 1) The appropriate pleading must be filed by the stockholders of record
representing the majority of the capital stock of the bank in the proper court; 2) Said
pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and 3) There must be
convincing proof, after hearing, that the action is plainly arbitrary and made in bad faith.
(Central Bank of the Philippines vs. Court of Appeals, G.R. No. 88353, May 8, 1992)

The authority of the conservator under the Central Bank Law is limited to acts of
administration; the conservator merely takes the place of the bank’s board of directors and
as such, the former cannot perform acts the latter cannot do. Hence, the conservator
cannot revoke a contract of sale of a property acquired by the bank entered into by a bank
officer even though the price agreed upon is no longer reflective of the fair market value
of the property by reason of its appreciation of value
over time. (First Philippine International Bank vs. Court of Appeals, G.R. No. 115849,

January 24, 1996)

b. Closure

The express representations made by the Central Bank that it would support the bank
and avoid its liquidation if the latter’s stockholders would execute a voting trust
agreement turning over the management of the bank to the CB and mortgage or
assign their properties to CB should not be disregarded. Under the rule of promissory
estoppel, the Central Bank cannot thereafter refuse to comply with its representations
after the undertaking has been complied with by the bank. (Emerito Ramos vs. Central

Bank of the Philippines, G.R. No. L-29352, October 4, 1971)

The closure and liquidation of a bank may be considered an exercise of police power.
Nonetheless, the validity of such exercise of police power is subject to judicial inquiry
and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary,
unjust, or a denial of due process and equal protection clauses of the Constitution.
(Central Bank vs. Court of Appeals, G.R. L-50031-32, July 27, 1981)

The claim that the Central Bank, by suspending the banking operations, had made it
impossible for the bank to pay its debts, or the further claim that it had fallen into a
"distressed financial situation," cannot in any sense excuse it from its obligation to
remit the time deposits of its depositors which matured before the bank’s closure.

(Overseas Bank of Manila vs. Court of Appeals, G.R. No. L-45866, April 19, 1989)

The Central Bank Act vests authority upon the Central Bank and Monetary Board to
take charge and administer the monetary and banking system of the country and this
authority includes the power to examine and determine the financial condition of
banks for purposes provided for by law, such as for the purpose of closure on the
ground of insolvency stated in Section 29 of the Central Bank Act. Nonetheless, the
authority given must not be exercised arbitrarily such as to prematurely conclude that
a bank is insolvent if the basis for such conclusion is lacking and insufficient. (Banco
Filipino Savings and Mortgage Bank vs. Central Bank, G.R. No. 70054, December 11,
1991)

Under R.A. No. 265, an examination is required to be made before the Monetary Board
could issue a closure order; however, under R.A. No. 7653, prior notice and hearing are
no longer required and a report made by the head of the supervising and examining
department suffices for a bank to be closed and placed under receivership. The
purpose of the law is to make the closure of the bank summary and expeditious for the
protection of the public interest. (Rural Bank of San Miguel vs. Monetary Board, G.R.

No. 150886, February 16, 2007)

Under the “close now, hear later” principle, the BSP can impose the sanction of closure
upon a bank even without prior notice and hearing, which is grounded on practical and
legal considerations to prevent unwarranted dissipation of the bank’s assets and as a
valid exercise of police power to protect the depositors, creditors, stockholders, and
the general public. The remedy of the closed bank is a subsequent one, which will
determine whether the closure of the bank was attended by grave abuse of discretion.

(BSP Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No. 184778, October 2, 2009)

c. Receivership

The Monetary Board, upon finding that the bank failed to put up the required capital
to restore its solvency, prohibited a bank from doing business and instructed the
Acting Superintendent of Banks to take charge of the assets of the bank. When by
reason of this prohibition, only a portion of the loan approved by the bank was
released to its debtor, it also follows that the bank, in exercising its right to foreclose
the real estate mortgage, can only foreclose up to the extent of the amount it
released. (Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-45710,
October 3, 1985)

As a rule, the execution of a judgment cannot be stayed. However, in the present case,
the respondent bank was placed under receivership and to execute the judgment
would unduly deplete the assets of respondent bank; moreover, the assets of the
insolvent banking institution are held in trust for the equal benefit of all creditors, and
after its insolvency, one cannot obtain an advantage or a preference over another by
an attachment, execution or otherwise. (Spouses Romeo Lipana and Milagros Lipana
vs. Development Bank of Rizal, G.R. No. 73884, September 24, 1987)

When a bank is placed under receivership, the appointed receiver is tasked to take
charge of the bank’s assets and properties and the scope of the receiver’s power is
limited to acts of administration. The receiver’s act of approving the exclusive option
to purchase granted by the bank’s president is beyond the authority of the former and
as such, it cannot be considered a valid approval. (Abacus Real Estate Development
Center, Inc. vs. Manila Banking Corp., G.R. No. 162270, April 06, 2005)

The Monetary Board may forbid a bank from doing business and place it under
receivership without prior notice and hearing it the MB finds that a bank: (a) is unable
to pay its liabilities as they become due in the ordinary course of business; (b) has
insufficient realizable assets to meet liabilities; (c) cannot continue in business without
involving probable losses to its depositors and creditors; and (d) has willfully violated a
cease and desist order of the Monetary Board for acts or transactions which are
considered unsafe and unsound banking practices and other acts or transactions
constituting fraud or dissipation of the assets of the institution. (Alfeo D. Vivas, vs.
Monetary Board and PDIC, G.R. No. 191424, August 7, 2013)

d. Liquidation

Resolutions of the Monetary Board with regard to handling banks in distress such as
appointing a receiver to take charge of the bank's assets and liabilities; or determining
whether the banking institutions may be rehabilitated, or should be liquidated and
appointing a liquidator towards this end are by law final and executory. Nonetheless,
the same may be set aside by the court upon proof that the action is plainly arbitrary
and made in bad faith, which may be asserted as an affirmative defense or a
counterclaim in the proceeding for assistance in liquidation. (Apollo M. Salud vs.

Central Bank of the Philippines, G.R. No. L-17620, August 19, 1986)

The pendency of the case questioning the validity of foreclosure did not diminish thepowers
and authority of the designated liquidator to effectuate and carry on the administration of the
bank. As such, the liquidator has the authority to resist or defend suits instituted against the
bank by its debtors and creditors; it likewise has the authority to bring actions for foreclosure
of mortgages executed by debtors in favor of the bank. (Banco Filipino Savings and Mortgage
Bank vs. Central Bank, G.R. No. 70054, December 11, 1991)

The court shall have jurisdiction in the same proceedings to adjudicate disputed claims against
the bank and enforce individual liabilities of the stockholders and do all that is necessary to
preserve the assets of such institution and to implement the liquidation plan approved by the
Monetary Board. Hence, all claims against the insolvent bank should be filed in the liquidation
proceeding and it is not necessary that a claim be initially disputed in a court or agency before
it is filed with the liquidation court. (Jerry Ong vs. Court of Appeals, G.R. No. 112830, February
1, 1996)

The rule that all claims against a bank must be filed in the liquidation proceedings does not
apply to actions filed by the bank itself for the preservation of its assets and protection of its
property, such as a petition for the issuance of a Writ of Possession instituted by the bank
itself. Moreover, a bank ordered closed by the Monetary Board retains its personality which
can sue and be sued through its liquidator. (Domingo

Manalo vs. Court of Appeals, G.R. No. 141297, October 8, 2001)

A bank, which is previously declared in default for failing to file an answer in a case filed by
another bank cannot rely on the rule that a bank placed under receivership is not liable to pay
interest and penalty on its loan accounts with another bank. By not bothering to file a motion
for reconsideration, the bank is now precluded from relying on the rule with regard to
payment of interests when a bank has been placed under receivership because to do so would
render nugatory the order of default issued by the court. (Rural Bank of Sta. Catalina vs. Land
Bank of the Philippines, G.R. No. 148019, July 26, 2004)
As a rule, bank deposits are not preferred credits. However, when the deposits covered by a
cashier’s check were purchased from a bank at the time when it was already insolvent, the
purchase is entitled to preference in the assets of the bank upon its liquidation by reason of
the fraud in the transaction. (Leticia G. Miranda vs. Philippine Deposit Insurance Corporation,
G.R. No. 169334, September 8, 2006)

How the BSP Handles Exchange Crisis

Legal Tender Power

Rate of Exchange

B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)


Purpose

R.A. No. 1405 hopes to discourage private hoarding and at the same time encourages the
people to deposit their money in banking institutions, so that it may be utilized by way of
authorized loans and thereby assist in economic development. The absolute
confidentiality rule in R.A. No. 1405 actually aims to give protection from unwarranted
inquiry or investigation if the purpose of such inquiry or investigation is merely to
determine the existence and nature, as well as the amount of the deposit in any given bank
account. (BSB Group, Inc. vs. Sally Go, G.R. No. 168644, February 16, 2010)

Prohibited Acts

In a case where the money paid by an insurance company for treasury bills was deposited
in a bank account, the examination of the said bank account is prohibited under R.A. No.
1405 by reason of the fact that the subject matter of the action filed by the insurance
company against the seller of the treasury bills is the failure to deliver the treasury bills,
not the money deposited. (Oñate vs. Abrogar, G.R. No. 107303, February 23, 1995)

When a collecting bank sued the drawee bank because the latter had erroneously
undercoded the amount of the check it presented for clearing, the collecting bank cannot
be allowed to examine the account of the drawer of the check absent any showing that the
money in the said account is the subject matter of litigation. The action filed by the
collecting bank is not for the recovery of the money contained in the deposit but for the
recovery of the money from the drawee bank as a result of the latter’s alleged failure to
inform the former of the discrepancy. (Union Bank of the

Philippines vs. Court of Appeals, G.R. No. 134699, December 23, 1999)

Deposits Covered

When the account subject of the complaint is in the foreign currency, such complaint filed
for violation of R.A. No. 1405 did not toll the running of the prescriptive period to file the
appropriate complaint for violation of R.A. No. 6426. The Law on Secrecy of Bank Deposits
(R.A. No. 1405) covers deposits under the Philippine Currency; a separate and distinct law
governs deposits under the foreign currency (R.A. No. 6426). (Intengan vs. Court of
Appeals, G.R. No. 128996, February 15, 2002)

The “deposits” covered by the law on secrecy of bank deposits should not be limited to
those creating a creditor-debtor relationship; the law must be broad enough to include
“deposits of whatever nature” which banks may use for authorized loans to third persons.
R.A. No. 1405 extends to funds invested such as those placed in a trust account which the
bank may use for loans and similar transactions. (Ejercito vs. Sandiganbayan, G.R. Nos.
157294-95, November 30, 2006)

Exceptions

When pursuant to a court order garnishing the depositor’s funds, a bank complied by
delivering in check the amount garnished to the sheriff, the bank cannot be held liable
to its depositor. There is no violation of the law on secrecy of bank deposits when the bank
had no choice but to comply with the court order for delivery of the garnished amount.
(RCBC vs. De Castro, G.R. No. L-34548, November 29, 1988)

One of the exceptions under R.A. No. 1405 is when a court order is issued for the
disclosure of bank deposits in a case where the money deposited is the subject matter of
litigation. When the subject matter is the money the bank transmitted by mistake, an
inquiry to the whereabouts of the amount extends to whatever concealed by being held or
recorded in the name of the persons other than the one responsible for the illegal
acquisition. (Mellon Bank, N.A. vs. Magsino, G.R. No. 71479, October 18, 1990)

The law on secrecy of bank deposits cannot be used to preclude the bank deposits from
being garnished for the satisfaction of a judgment. There is no violation of R.A.

No. 1405 because the disclosure is purely incidental to the execution process and it was
not the intention of the legislature to place bank deposits beyond the reach of the
judgment creditor. (PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991)

In a case for violation of the Anti-Graft and Corrupt Practices Act, the Ombudsman can
only examine bank accounts upon compliance with the following requisites: there is a
pending case before a court of competent jurisdiction; the account must be clearly
identified, and the inspection must be limited to the subject matter of the pending case;
the bank personnel and the account holder must be informed of the examination; and
such examination must be limited to the account identified in the pending case. If there is
no pending case yet but only an investigation by the Ombudsman, any order for the
examination of the bank account is premature. (Marquez vs. Desierto, G.R. No.

135882, June 27, 2001; Office of the Ombudsman vs. Ibay, G. R. No. 137538,

September 3, 2001)

One of the exceptions under R.A. 1405 is when the inquiry into the bank deposits is
premised on the fact that the money deposited in the account is itself the subject of the
action. Such is not the case when the respondent was charged with qualified theft and
when the attempt of inquiry serves no other purpose but to establish the existence of such
account, its nature and the amount kept in it. (BSB Group, Inc. vs. Sally Go, G.R. No.
168644, February 16, 2010)

In case the bank complies with the provisions of the law and the unclaimed balances are
eventually escheated to the Republic, the bank shall not thereafter be liable to any person
for the same. However, when the manager’s check was never negotiated or presented for
payment to the bank, the procurer of the check retained ownership of the funds; hence,
proper notice should have been given to the latter for compliance with the law. (Rizal
Commercial Banking Corporation vs. Hi-Tri Development

Corporation, 672 SCRA 514 (2012))

Garnishment of Deposits, Including Foreign Deposits

The law on secrecy of bank deposits cannot be used to preclude the bank deposits from
being garnished for the satisfaction of a judgment. There is no violation of R.A.

No. 1405 because the disclosure is purely incidental to the execution process and it
was not the intention of the legislature to place bank deposits beyond the reach of the
judgment creditor. (PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991)

A foreign transient who raped a minor, escaped and was made liable for damages to the victim
cannot invoke the exemption from court process of foreign currency deposits under R.A. No.
6426. The garnishment of his foreign currency deposit should be allowed by reason of equity
and to prevent injustice; moreover, the purpose of the law is to encourage foreign currency
deposits and not to benefit a wrongdoer. (Salvacion vs. Central Bank of the Philippines, G.R.
No. 94723, August 21, 1997)

General Banking Law of 2000 (R.A. No. 8791)

Definition and Classification of Banks

When a corporation loans out the money obtained from almost 60,000 savings account
deposits opened by the public with the said corporation, it is clear that these transactions
partake the nature of banking, as defined by the law. Accordingly, the corporation has violated
the law by engaging in banking without securing the administrative authority required in R.A.
No. 337. (Republic of the Philippines vs. Security Credit and Acceptance Corporation, G.R. No.
L-20583, January 23, 1967)

Distinction of Banks from Quasi-Banks and Trust Entities

Transactions involving purchase of receivables at a discount, well within the purview of


investing, reinvesting or trading in securities, which as investment company is authorized to
perform, does not constitute a violation of the General Banking Act. In this case, the funds
supposedly lent have not been shown to have been obtained from the public by way of
deposits, hence, it cannot be said that the investment company was engaged in banking.
(Teodoro Bañas vs. Asia Pacific Finance Corporation, G.R. No.

128703, October 18, 2000)


R.A. No. 8791 or the General Banking Law of 2000 provided that banks shall refer to entities engaged
in the lending of funds obtained in the form of deposits. Financial intermediaries, on the other hand,
are defined as persons or entities whose principal functions include the lending, investing or placement
of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise
coursed through them, either for their own account or for the account of others; pawnshops fall under
this category. (First Planters Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 174134,
July 30, 2008)

Bank Powers and Liabilities a. Corporate Powers

An alien-owned commercial bank is allowed to purchase and hold real estate conveyed to it in
satisfaction of debts previously contracted in the course of its dealings such as loans and other
similar transactions. The civil liability arising from the criminal offense committed by the
bank’s former employee is not a debt contracted in the course of a bank’s dealings and thus,
the transfer made by the employee is not
allowed. (Register of Deeds of Manila vs. China Banking Corporation, 4 SCRA 1145

(1962))

Banks are entities engaged in the lending of funds obtained through deposits from the
public and it is for this reason that their viability depends largely on their ability to return
those deposits on demand. In this case, when the borrower is proven to have committed
fraud by altering and falsifying its financial statements in order to obtain its credit
facilities, the bank has the right to annul any credit accommodation or loan, and demand
the immediate payment thereof. (Banco de Oro-EPCI, Inc. vs. JAPRL Development
Corporation, G.R. No. 179901, April 14, 2008)

b. Banking and Incidental Powers

An investment management agreement, which created a principal-agent relationship


between petitioners as principals and respondent as agent for investment purposes, is not
a trust or an ordinary bank deposit; hence, no trustor-trustee-beneficiary or even
borrower-lender relationship existed. Banks may legally exercise investment management
activities but the Monetary Board may regulate such operations to insure that said
operations do not endanger the interests of the depositors and other creditors of the
banks. (Spouses Raul and Amalia Panlilio vs. Citibank, N.A., G.R. No. 156335, November
28, 2007)

Diligence Required of Banks—Relevant Jurisprudence

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions; the bank must
record every single transaction accurately, down to the last centavo, and as promptly as
possible. When the bank’s negligence caused the dishonor of the checks issued by its
client, which eventually resulted to the latter’s embarrassment and financial loss, the bank
should be held liable for damages. (Simex International (Manila) Inc. vs. Court of Appeals,
183 SCRA 360 (1990))
In the absence of any stipulation, the depositary’s responsibility for the safekeeping of the
objects deposited would require the diligence of a good father of a family; hence, any
stipulation exempting the depositary from any liability arising from the loss of the things
deposited on account of fraud, negligence or delay would be void for being contrary to
law and public policy. The bank’s negligence in failing to notify the depositor aggravated
the injury or damage to the stamp collection which was inundated by floodwaters, thus,
the bank should be held liable. (Luzan Sia vs. Court of Appeals, G.R. No. 102970, May 13,
1993)

The degree of diligence required of banks, which should be more than that of a good
father of a family is grounded on the fiduciary nature of the relationship between the bank
and its depositors on account of the bank’s obligation as a depositary of its clients’
deposits. Nevertheless, in a sale and issuance of foreign exchange demand draft, the same
degree of diligence is not required because the nature of the transaction does not involve
the bank’s fiduciary relationship with its depositors.

(Gregorio Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001)
When the bank teller has failed to return the passbook to its owner or to the
authorized representative of the depositor, the bank is presumed to have failed to
exercise and observe a higher degree of diligence required of it, which makes it liable
for the damage done to the depositor. However, the bank’s liability can be mitigated
by the depositor’s contributory negligence when the latter allowed a signed
withdrawal slip to fall into the hands of an unauthorized person. (Consolidated Bank
and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003)

Allowing the pretermination of the account despite noticing discrepancies in the


signature and photograph of the person claiming to be the depositor, accompanied by
the failure to surrender the original certificate of time deposit, amounted to
negligence on the part of the bank. A bank that fails to exercise the degree of
diligence required of it becomes liable for damages. (Citibank, N.A. vs. Spouses Luis &
Carmelita Cabamongan, G.R. No. 146918, May 2, 2006)

No less than the highest degree of diligence is required of banks by reason of the fact
that the banking business is impressed with public interest. Banks are expected to treat
the accounts of its depositors with meticulous care, hence, when checks are encashed
by the employees of the bank without the necessary documents, any loss resulting
from the transactions should be borne by the bank by reason of its negligence.
(Philippine Savings Bank vs. Chowking Food Corporation, G.R. No. 177526, July 4,
2008)

A bank that regularly processes checks that are neither payable to the customer nor
duly indorsed by the payee is apparently grossly negligent in its operations. The
degree of responsibility, care and trustworthiness expected of the banks’ employees
and officials is far greater than those of ordinary clerks and employees; thus, the banks
are expected to exercise the highest degree of diligence in the selection and
supervision of their employees. (Philippine National Bank vs. Erlando T. Rodriguez, et.
al., G.R. No. 170325, September 26, 2008)

The fiduciary relationship between the bank and the depositor means that the bank’s
obligation to observe high standards of integrity and performance is deemed written
into every deposit agreement between a bank and its depositor. When the bank failed
to perform a routine verification of the signature affixed in the cash transfer slip, the
bank should be held liable for a withdrawal made by an unauthorized agent of the
depositor. (Central Bank of the Philippines vs. Citytrust Banking Corporation, G.R. No.

141835, February 4, 2009)

When the drawee bank pays a person other than the payee named on the check, it
does not comply with the terms of the check and violates its duty to charge the
drawer’s accounts only for properly payable items. In disregarding established banking
rules and regulations, the bank was clearly negligent, thus, should be made liable.
(Bank of America, NT and SA vs. Associated Citizens Bank, G.R. No. 141018, May 21,
2009)
The premature debiting of the postdated check by the bank which resulted to insufficiency
of funds that brought about the dishonor of two checks, which caused the electric supply
to be cut-off and affected business operations, indicates the negligence of the bank. For
its failure to exercise extra-ordinary diligence, which is required of banks, it should be
made liable. (Equitable PCI Bank vs. Arcelito B. Tan, G.R. No. 165339, August 23, 2010)

A banking institution serving as an originating bank for the Unified Home Lending
Program (UHLP) of the Government owes a duty to observe the highest degree of
diligence and a high standard of integrity and performance in all its transactions with its
clients because its business is imbued with public interest. (Comsavings Bank vs.

Spouses Danilo and Estrella Capistrano, G.R. No. 170942, August 28, 2013)

As a business affected with public interest and by reason of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. A bank that mismanages
the trust accounts of its client cannot benefit from the inaccuracies of the reports resulting
therefrom; it cannot impute the consequence of its negligence to the client which resulted
to miscrediting of funds. (Land Bank of the Philippines vs. Emmanuel Oñate, G.R. No.
192371, January 15, 2014)

The mortgagee, as a banking institution, owed it to Guariña Corporation to exercise the


highest degree of diligence, as well as to observe the high standards of integrity and
performance in all its transactions because its business was imbued with public interest.
The bank failed in its duty by prematurely foreclosing the mortgages and unwarrantedly
causing the foreclosure sale of the mortgaged properties despite the mortgagor not being
yet in default. (Development Bank of the Philippines vs. Guariña Agricultural and Realty
Development Corporation, G.R. No. 160758, January 15, 2014)

Nature of Bank Funds and Bank Deposits


The fiduciary nature of a bank-depositor relationship does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether
express or implied; hence, failure by the bank to pay the depositor is failure to pay a
simple loan, and not a breach of trust. The law simply imposes on the bank a higher
standard of integrity and performance in complying with its obligations under the contract
of simple loan, beyond those required of non-bank debtors under a similar contract of
simple loan. (Consolidated Bank and Trust Corporation vs. Court of

Appeals, G.R. No. 138569, September 11, 2003)

Stipulation on Interests

A banking institution which has been declared insolvent and subsequently ordered closed
by the Central Bank of the Philippines cannot be held liable to pay interest on bank
deposits which accrued during the period when the bank is actually closed and non-
operational. However, the bank is still liable for the interest on bank deposits which
accrued up to the date of its closure. (Fidelity Savings and Mortgage Bank vs.

Hon. Pedro Cenzon, G.R. No. L-46208, April 5, 1990)


When the stipulation on the interest rate is void, it is as if there was no express contract
thereon; hence, courts may reduce the interest rate as reason and equity demand, which
would depend on the circumstances of each case. In the present case, the fact that
petitioner made partial payments makes the stipulated penalty charge of 3% per month or
36% per annum, in addition to regular interests, iniquitous and unconscionable. (Ileana
Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009)

Section 78 of the General Banking Act requires payment of the amount fixed by the court
in the order of execution, with interest thereon at the rate specified in the mortgage
contract, which shall be applied for the one-year period reckoned from the date of
registration of the certificate of sale. Nonetheless, when the period to exercise the right of
redemption was effectively extended beyond one year, it is only fair and just to require the
payment of 12% interest per annum beyond the one-year period up to the date of
consignment of the redemption price with the RTC. (Heirs of Estelita

Burgos-Lipat namely: Alan B. Lipat and Alfredo B. Lipat, Jr. vs. Heirs of Eugenio D. Trinidad
namely: Asuncion R. Trinidad, et. al., G.R. No. 185644, March 2, 2010)

The General Banking Act applies insofar as the redemption price is concerned, when the
mortgagee is a bank and the latter cannot dictate or alter the terms of redemption by
imposing additional charges and including other loans. The foreclosure and sale of the
mortgaged property extinguishes the mortgage indebtedness; hence, the bank can no
longer invoke its provisions or even refer to the 18% annual interest charged in the
promissory note, an obligation allegedly covered by the terms of the Contract. (Asia

Trust Development Bank vs. Carmelo H. Tuble, G.R. No. 183987, July 25, 2012)

The CB Circular No. 905 merely suspended the effectivity of the Usury Law, thereby
allowing the parties to freely stipulate on the rate of interest. Nonetheless, the lifting of
the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest. (Advocates for Truth in Lending vs. BSP, G.R. No.
192986, January 15, 2013)
Grant of Loans and Security Requirements

Ratio of Net Worth to Total Risk Assets

Single Borrower’s Limit

Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their


Related Interests

Under the law on DOSRI transactions, the following elements must be present to
constitute a violation: 1) the offender is a director or officer of any banking institution; 2)
the offender, either directly or indirectly, for himself or as representative or agent of
another, borrows from the bank, becomes a guarantor, indorser, or surety or becomes in
any manner an obligor for money borrowed from bank or loaned by it; 3) the offender has
performed any of such acts without the written approval of the majority of the directors of
the bank, excluding the offender, as the director concerned. The
language of the law is broad enough to encompass either the act of borrowing or guaranteeing, or
both. (Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009)

The law on DOSRI transactions imposes three restrictions: a) the approval requirement, which
refers to the written approval of the majority of the bank’s board of directors, excluding the
director concerned; b) the reportorial requirement, which mandates that the approval should be
entered upon the records of the corporation, and a copy of the entry be transmitted to the
appropriate supervising department; and c) the ceiling requirement, which limits the amount of
credit accommodations to an amount equivalent to the respective outstanding deposits and book
value of the paid-in capital contribution in the bank. Failure to observe the three requirements
constitutes commission of three separate and different offenses. (Jose C. Go vs. BSP, G.R. No.
178429, October 23, 2009)

The rule on DOSRI transactions covers loans by a bank director or officer which are made either:
(1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. The bank
officer’s act of indirectly securing a fraudulent loan application by using the name of an
unsuspecting person and without prior compliance with the requirements of the law would make
the officer liable not only for violation of the law on DOSRI transactions but also for estafa
through falsification of commercial documents. (Hilario P. Soriano vs. People of the Philippines,
et. al., G.R. No. 162336, February 1, 2010)

There must be competent evidence to establish that the loans granted were in the nature of
DOSRI or were issued in violation of the Single Borrower’s Limit; nonetheless, even assuming that
they were of such nature, the loans would not be void for that reason. Instead, the bank or the
officers responsible for the approval and grant of the DOSRI loan would be subject to sanctions
under the law. (Republic of the Philippines vs. Sandiganbayan, et. al., G.R. No. 166859/G.R. No.
169203/G.R. No. 180702, April

12, 2011)

IX. Intellectual Property Code (Exclude Implementing Rules & Regulations)


Intellectual Property Rights in General

Intellectual Property Rights

Differences between Copyrights, Trademarks and Patent

A trademark is any visible sign capable of distinguishing the goods (trademark) or services (service
mark) of an enterprise and shall include a stamped or marked container of goods; a trade name
refers to the name or designation identifying or distinguishing an enterprise. Copyright is
confined to literary and artistic works which are original intellectual creations in the literary and
artistic domain protected from the moment of their creation. On the other hand, patentable
inventions refer to any technical solution of a problem in any field of human activity which is new,
involves an inventive step and is industrially applicable. (Pearl & Dean (Phil.), Inc. vs. Shoemart,

Inc., G.R. No. 148222, August 15, 2003)


Technology Transfer Arrangements B. Patents

Patentable Inventions

A utility model is a technical solution to a problem in any field of human activity which is
new and industrially applicable; it may be, or may relate to, a product, or process, or an
improvement of any of the aforesaid. Being plain automotive spare parts that must
conform to the original structural design of the components they seek to replace, the

Leaf Spring Eye Bushing and Vehicle Bearing Cushion are not ornamental; they lack the
decorative quality or value that must characterize authentic works of applied art and in
actuality, they are utility models, useful articles, albeit with no artistic design or value.
(Jessie Ching vs. William Salinas, et. al., G.R. No. 161295, June 29, 2005)

Non-Patentable Inventions

Ownership of a Patent a. Right to a Patent

When petitioner never secured a patent for the light boxes, it therefore acquired no
patent rights which could have protected its invention. The ultimate goal of a patent
system is to bring new designs and technologies into the public through disclosure; hence,
ideas, once disclosed to the public without protection of a valid patent, are subject to
appropriation without significant restraint. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc.,
G.R. No. 148222, August 15, 2003)

First-to-File Rule

Inventions Created Pursuant to a Commission

Right of Priority
Grounds for Cancellation of a Patent

Remedy of the True and Actual Inventor

Rights Conferred by a Patent

The tiles produced from respondent’s process are suitable for construction and
ornamentation, which previously had not been achieved by tiles made out of the old
process of tile making; therefore, the said invention having brought about a new and
useful kind of tile, the patent is legally issued. With this, the act of making, using and
selling tiles embodying said patented invention constitute infringement. (Domiciano
Aguas vs. Conrado De Leon, G.R. No. L-32160, January 30, 1982)

The validity of the patent issued by the Philippine Patent Office and the question over the
inventiveness, novelty and usefulness of the improved model of the LPG burner are
matters which are better determined by the Patent Office. There is a presumption that the
Philippine Patent Office has correctly determined the patentability of the model and such
action must not be interfered with in the absence of competent evidence to the contrary.
(Manzano vs. Court of Appeals, G.R. No. 113388, September 5, 1997)

There can be no infringement of a patent until a patent has been issued, since whatever
right one has to the invention covered by the patent arises alone from the grant of patent.
A patent gives the inventor the right to exclude all others from making, using or selling his
invention. (Creser Precision Systems, Inc. vs. Court of Appeals, G.R. No. 118708, February
2, 1998)

When the language of its claims is clear and distinct, the patentee is bound thereby and
may not claim anything beyond them. the language of Letter Patent No. 14561 fails to
yield anything at all regarding Albendazole and no extrinsic evidence had been adduced
to prove that Albendazole inheres in petitioner’s patent in spite of its omission therefrom
or that the meaning of the claims of the patent embraces the same. (Smith Kline Beckman
Corporation vs. Court of Appeals, G.R. No. 126627, August 14, 2003)

The patent law has a three-fold purpose: first, it seeks to foster and reward invention;
second, it promotes disclosure of inventions to stimulate further innovation and to permit
the public to practice the invention once the patent expires; and third, the stringent
requirements for patent protection seek to ensure that ideas in the public domain remain
there for the free use of the public and it is only after an exhaustive examination by the
patent office that patent is issued. Not having gone through the arduous examination for
patents, petitioner cannot exclude others from the manufacture, sale or commercial use of
the light boxes on the sole basis of its copyright certificate over the technical drawings.
(Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

A patentee shall have the exclusive right to make, use and sell the patented machine,
article or product, and to use the patented process for the purpose of industry or
commerce, throughout the territory of the Philippines for the term of the patent; and such
making, using, or selling by any person without the authorization of the patentee
constitutes infringement of the patent. The patentee’s exclusive rights exist only during
the term of the patent, hence, after the cut-off date, the exclusive rights no longer exist
and the temporary restraining order can no longer be issued in its favor. (Phil.
Pharmawealth, Inc. vs. Pfizer, Inc., G.R. No. 167715, November 17, 2010)

Limitations of Patent Rights

Prior User

Use by the Government

Patent Infringement

Tests in Patent Infringement


Literal Infringement

To determine whether the particular item falls within the literal meaning of the patent
claims, the court must juxtapose the claims of the patent and the accused product within
the overall context of the claims and specifications, to determine whether there is exact
identity of all material elements. Viewed from any perspective or angle, the power tiller of
the defendant is identical and similar to that of the turtle power tiller of plaintiff in form,
configuration, design, appearance, and even in the manner of operation. (Pascual Godines
vs. Court of Appeals, G.R. No. 97343, September 13, 1993)

ii. Doctrine of Equivalents

Under the doctrine of equivalents, there is infringement if two devices do the same work
in substantially the same way, and accomplish substantially the same result, even though
they differ in name, form, or shape. The reason for the doctrine of equivalents is that to
permit the imitation of a patented invention which does not copy any literal detail would
be to convert the protection of the patent grant into a hollow and useless thing. (Pascual
Godines vs. Court of Appeals, G.R. No. 97343, September 13, 1993)

The doctrine of equivalents provides that an infringement takes place when a device
appropriates a prior invention by incorporating its innovative concept and, although with
some modification and change, performs substantially the same function in substantially
the same way to achieve substantially the same result; it requires satisfaction of the
function-means-and-result test. In this case, while both compounds have the effect of
neutralizing parasites in animals, identity of result does not amount to infringement of
patent unless Albendazole operates in substantially the same way or by substantially the
same means as the patented compound, even though it performs the same function and
achieves the same result. (Smith Kline Beckman Corporation vs.

Court of Appeals, G.R. No. 126627, August 14, 2003)

b. Defenses in Action for Infringement


An invention must possess the essential elements of novelty, originality and precedence
and for the patentee to be entitled to protection, the invention must be new to the world.
When a patent is sought to be enforced, the questions of invention, novelty or prior use,
and each of them, are open to judicial examination; in cases of infringement of patent no
preliminary injunction will be granted unless the patent is valid and infringed beyond
question and the record conclusively proves the defense is sham. (Rosario Maguan vs.
Court of Appeals, G.R. L-45101, November 28, 1986)

Licensing

Voluntary

Compulsory

Assignment and Transmission of Rights


C. Trademarks

A "trademark" is any word, name, symbol, emblem, sign or device or any combination thereof
adopted and used by a manufacturer or merchant to identify his goods and distinguish them
from those manufactured, sold or dealt in by others; it is any visible sign capable of
distinguishing goods. The trademark is not merely a symbol of origin and goodwill; it is often
the most effective agent for the actual creation and protection of goodwill. (Pribhdas J.
Mirpuri vs. Court of Appeals, G.R. No. 114508, November 19, 1999)

Definition of Marks, Collective Marks, Trade Names

Acquisition of Ownership of Mark

The name and container of a beauty cream product are proper subjects of a trademark
inasmuch as the same falls squarely within its definition. In order to be entitled to exclusively
use the same in the sale of the beauty cream product, the user must sufficiently prove that she
registered or used it before anybody else did. The petitioner’s copyright and patent
registration of the name and container would not guarantee her the right to the exclusive use
of the same for the reason that they are not appropriate subjects of the said intellectual rights.
(Elidad C. Kho, doing business under the name and style of KEC Cosmetics Laboratory vs. Court
of Appeals, et. al., G.R. No. 115758, March 19, 2002)

Even if the registration of a mark is prevented with the filing of an earlier application for
registration, this must not, however, be interpreted to mean that ownership should be based
upon an earlier filing date. While RA 8293 removed the previous requirement of proof of
actual use prior to the filing of an application for registration of a mark, proof of prior and
continuous use is necessary to establish ownership of a mark, which constitutes sufficient
evidence to oppose the registration of a mark. (E.Y. Industrial Sales vs. Shien Dar Electricity
and Machinery Co. , G.R. No. 184850, 20 October 2010)

The cancellation of registration of a trademark has the effect of depriving the registrant of
protection from infringement from the moment the judgment or order of cancellation has
become final. Accordingly, a distributor has no right to the registration of the disputed
trademarks since the right to register a trademark is based on ownership. An exclusive
distributor who employs the trademark of the manufacturer does not acquire proprietary
rights of the manufacturer, and a registration of the trademark by the distributor as such
belongs to the manufacturer, provided the fiduciary relationship does not terminate before
application for registration is filed. (Superior Commercial Enterprises, Inc. vs. Kunnan
Enterprises Ltd. and Sports Concept & Distributor, Inc., G.R. No. 169974, April 20, 2010)

It is not the application or registration of a trademark that vests ownership thereof, but it is
the ownership of a trademark that confers the right to register the same. Registration merely
creates a prima facie presumption of the validity of the registration, of the registrant’s
ownership of the trademark, and of the exclusive right
to the use thereof; it is rebuttable, thus, it must give way to evidence to the contrary.

(Birkenstock Orthopaedie Gmbh and Co. Kg vs. Philippine Shoe Expo Marketing
Corporation, G.R. No. 194307, November 20, 2013)

Acquisition of Ownership of Trade Name

Non-Registrable Marks

Prior Use of Mark as a Requirement

Tests to Determine Confusing Similarity between Marks

Both Berris’ (“D-10 80 WP”) and Abyadang’s mark (“NS D-10 PLUS”) have “D-10” as a
common component, which also happened to be the dominant feature of Berris’ mark.

In applying both the dominancy test and holistic test, the likelihood of confusion is present
considering the fact that both marks pertain to the same type of goods; both products use
the same type of material for the packaging and have identical color schemes. Considering
these striking similarities, the buyers of both products, mainly farmers, may be misled into
thinking that “NS D-10 PLUS” could be an upgraded formulation of the “D-10 80 WP”;
hence, Berris properly opposed Abyadang’s application for registration. (Berris
Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No. 183404, October 13, 2010)

A resort to either the Dominancy Test or the Holistic Test shows that colorable imitation
exists between respondent's "Gold Toe" and petitioner's "Gold Top." An examination of
the products in question shows that their dominant features are gold checkered lines
against a predominantly black background and a representation of a sock with a
magnifying glass; in addition, both products use the same type of lettering; both also
include a representation of a man's foot wearing a sock and the word
"linenized" with arrows printed on the label; lastly, the names of the brands are similar --
"Gold Top" and "Gold Toe." (Amigo Manufacturing, Inc. vs. Cluett Peabody Co., Inc., G.R.
No. 139300, March 14, 2001)

a. Dominancy Test

The word MASTER, the dominant feature of the opposer’s mark, is neither generic nor
descriptive and as such, it cannot be invalidated as a trademark. When the term

“MASTER” has acquired a certain connotation to mean the coffee products MASTER

ROAST and MASTER BLEND produced by Nestle, the use by the CFC of the term

“MASTER” in the trademark for its coffee product FLAVOR MASTER is likely to cause
confusion or mistake or even deception of the ordinary purchasers. (Societe Des

Produits Nestle, S.A. vs. Court of Appeals and CFC Corporation, G.R. No. 112012, April 4,
2001)

Respondents have adopted in "Big Mak" not only the dominant but also almost all the
features of "Big Mac." Applied to the same food product of hamburgers, with both marks
aurally and visually the same, it will likely result in confusion in the public mind.
(McDonald’s Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18,

2004)

With the predominance of the letter "M," and prefixes "Mac/Mc" found in both marks,
the inevitable conclusion is there is confusing similarity between the trademarks Mc

Donald’s marks and "MACJOY AND DEVICE" especially considering the fact that both
marks are being used on almost the same products falling under Classes 29 and 30 of
the International Classification of Goods i.e. Food and ingredients of food. In this case,
the common awareness or perception of customers that the trademarks McDonalds
mark and MACJOY & DEVICE are one and the same, or an affiliate, or under the
sponsorship of the other is not far-fetched. (McDonald’s Corporation vs. Macjoy

Fastfood Corporation, G.R. No. 166115, February 2, 2007)

Both the words PYCNOGENOL and PCO-GENOLS have the same suffix “GENOL”
which appears to be merely descriptive and furnish no indication of the origin of the
article and hence, open for trademark registration by the plaintiff thru combination
with another word or phrase such as PYCNOGENOL. Although there were
dissimilarities in the trademark due to the type of letters used as well as the size, color
and design employed on their individual packages/bottles, still the close relationship
of the competing products’ name in sounds as they were pronounced, clearly indicates
that purchasers could be misled into believing that they are the same and/or originates
from a common source and manufacturer. (Prosource International, Inc. vs. Horphag
Research Management SA, G.R. No. 180073, November 25, 2009)

In applying the dominancy test, both confusion of goods and confusion of business
were apparent in both trademarks as the mark “Dermaline Dermaline, Inc.” is
confusingly similar with the registered trademark “Dermalin”. Dermaline’s stance that
its product belongs to a separate and different classification from Myra’s products with
the registered trademark does not eradicate the possibility of mistake on the part of
the purchasing public to associate the former with the latter, especially considering
that both classifications pertain to treatments for the skin. (Dermaline, Inc. Vs. Myra
Phamaceuticals, Inc., G.R. No. 190065, August 1, 2010)
“NANNY” is confusingly similar to “NAN,” the prevalent feature of Nestle’s line of
infant powdered milk products which is is written in bold letters and used in all
products. The first three letters of “NANNY” are exactly the same as the letters of

“NAN” and when “NAN” and “NANNY” are pronounced, the aural effect is confusingly
similar. (Soceite Des Produits Nestle, S.A. vs. Dy, Jr., G.R. No. 172276, August 8, 2010)

The Dominancy Test focuses on the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the
mind of the purchasing public. Respondent’s use of the stylized “S” in its Strong rubber
shoes infringes on the mark of the petitioner as it is the dominant feature of the latter’s
trademark; the likelihood of confusion is present as purchasers may associate the
respondent’s product as connected with petitioner’s business. (Sketchers USA vs. Inter
Pacific Industrial Trading Corporation, GR No. 164321, March 28, 2011)

b. Holistic Test
The similarities of the competing trademarks in this case are completely lost in the
substantial differences in the design and general appearance of their respective hang tags.
The trademarks FRUIT OF THE LOOM and FRUIT FOR EVE do not resemble each other as
to confuse or deceive an ordinary purchaser, who must be thought of as having, and
credited with, at least a modicum of intelligence to be able to see the obvious differences
between the two trademarks in question. (Fruit of the Loom, Inc. vs. Court of Appeals, G.R.
No. L-32747, November 29, 1984)

In applying the holistic test, petitioner’s trademark, “STYLISTIC MR. LEE,” which pertains to
jeans, should be considered as a whole. The test of fraudulent simulation is to be found in
the likelihood of the deception of some persons in some measure acquainted with an
established design and desirous of purchasing the commodity with which that design has
been associated. When the casual buyer is predisposed to be more cautious in his
purchase, as in this case where the products concerned are not inexpensive, the likelihood
of confusion is absent. (Emerald Garment Manufacturing

Corporation vs. Court of Appeals, G.R. No. 100098, December 29, 1995)

The application of the holistic test entails a consideration of the entirety of the marks as
applied to the products, including the labels and packaging, in determining confusing
similarity. Although the perceived offending word “MARK” is itself prominent in
petitioner’s trademarks “MARK VII” and “MARK TEN,” the entire marking system should be
considered as a whole and not dissected, because a discerning eye would focus not only on
the predominant word but also on the other features appearing in the labels; only then
would such discerning observer draw his conclusion whether one mark would be
confusingly similar to the other and whether or not sufficient differences existed between
the marks. (Philip Morris, Inc. vs. Fortune Tobacco Corporation, G.R. No. 158589, June 27,
2006)

The gravamen of the offense of infringement of a registered trademark is the likelihood of


confusion. In applying the Holistic Test, confusion was remote because the jeans made and
sold by Levi’s Philippines were not only very popular but also quite expensive, as opposed
to Diaz’s tailored jeans which were acquired on a “made-to-order” basis; moreover, since
the jeans are expensive, the casual buyer is predisposed to be more cautious and
discriminating in and would prefer to mull over his purchase. (Victorio Diaz vs. People of
the Philippines, G.R. No. 180677, February 18, 2013)

Well-Known Marks

Respondent’s BARBIZON as well as its BARBIZON and Bee Design and BARBIZON and

Representation of a Woman trademarks qualify as well-known trademarks entitled to


protection. Hence, “Barbizon” cannot be registered as a trademark for ladies’ underwear.
(Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No. 114508, November 19,

1999)

The Paris Convention for the Protection of Industrial Property does not automatically
exclude all countries of the world which have signed it from using a tradename which
happens to be used in one country. “GALLO” cannot be considered a “well-known”
mark within the contemplation and protection of the Paris Convention in this case since
GALLO wines and GALLO cigarettes are neither the same, identical, similar nor related
goods. (Mighty Corporation and La Campana Fabrica De Tabaco, Inc. vs. E. & J. Gallo
Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)

The scope of protection under Article 6bis of the Paris Convention, wherein both the
United States and the Philippines are signatories, extends to a well-known mark, which
should be protected in a country even if the mark is neither registered nor used in that
country. Respondent, the owner of a well-known mark, has the legal capacity to sue
petitioners for the latter’s use of the IN-N-OUT Burger trademark for the name of their
restaurant and for the identical or confusingly similar mark for their hamburger wrappers
and french-fries receptacles, which effectively misrepresent the source of the goods and
services. (Sehwani, Inc. vs. In-N-Out Burger, Inc., G.R. No. 171053,

October 15, 2007)

The essential requirement under the Paris Convention (and the Intellectual Property

Code) is that the trademark to be protected must be “well-known” in the country where
protection is sought and the power to determine whether a trademark is well-known lies
in the competent authority of the country of registration or use. “Harvard” is a well-known
name and mark not only in the United States but also internationally, including the
Philippines; as such, even before Harvard University applied for registration of the mark
“Harvard” in the Philippines, the mark was already protected under the Paris Convention.
(Fredco Manufacturing Corporation vs. President and Fellows of Harvard College, GR No.
185917, June 1, 2011)

Rights Conferred by Registration

Emphasis should be on the similarity of the products involved and not on the arbitrary
classification or general description of their properties or characteristics. The mere fact
that one person has adopted and used a trademark on his goods does not prevent the
adoption and use of the same trademark by others on unrelated articles of a different kind.
(Hickok Manufacturing, Co., Inc. vs. Court of Appeals, G.R. No. L-44707, August 31, 1982)

The adoption and use of a trademark on one’s goods does not prevent the adoption and
use of the same trademark by others for products which are of different description. The
registered owner of the trademark “Brut” for toilet articles such as after shave lotion and
deodorant cannot oppose the registration of the trademark

“Brute” for briefs, since the two products are unrelated, notwithstanding the former’s
pending application for registration. (Faberge, Inc. vs. Intermediate Appellate Court, G.R.
No. 71189, November 4, 1992)

One who has adopted and used a trademark on his goods does not prevent the adoption
and use of the same trademark by others for products which are of a different description.
The GALLO trademark registration certificates in the Philippines and in other countries
expressly state that they cover wines only, without any evidence or indication that
registrant Gallo Winery expanded or intended to expand its business
to cigarettes. (Mighty Corporation and La Campana Fabrica De Tabaco, Inc. vs. E. & J.

Gallo Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)

Section 147 of R.A. No. 8293 provides for the exclusive right of the owner of a registered
mark to prevent third parties not having the owner’s consent from using in the course of
trade identical or similar signs or containers for goods or services which are identical or
similar to those in respect of which the trademark is registered where such use would
result in a likelihood of confusion. Berris, as a prior user and prior registrant, is the owner
of the mark “D-10 80 WP”; hence, it has acquired the rights conferred under the law.
(Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No. 183404, October 13, 2010)

Use by Third Parties of Names, etc. Similar to Registered Mark

Infringement and Remedies

In upholding the right of the petitioner to maintain a suit for unfair competition or
infringement of trademarks of a foreign corporation before the Philippine courts, the
duties and rights of foreign states under the Paris Convention for the Protection of
Industrial Property to which the Philippines and France are parties are upheld. (Melbarose
R. Sasot and Allandale R. Sasot vs. People of the Philippines, G.R. No. 143193, June 29,
2005)

It is not evident whether the single registration of the trademark “Dockers and Design”
confers on the owner the right to prevent the use of a fraction thereof in the course of
trade and it is also unclear whether the use without the owner’s consent of a portion of a
trademark registered in its entirety constitutes material or substantial invasion of the
owner’s right. Injunction will not lie when the petitioners’ right to injunctive relief has not
been clearly and unmistakably demonstrated and when the right has yet to be determined.
(Levi Strauss & Co., Levi Strauss (Phils.), Inc. vs. Clinton Apparelle, Inc., G.R. No. 138900,
September 20, 2005)

San Miguel claims that it has invested hundreds of millions over a period of 170 years to
establish goodwill and reputation now being enjoyed by the “Ginebra San Miguel” mark
such that the full extent of the damage cannot be measured with reasonable accuracy.
Nonetheless, a writ of preliminary injunction cannot be issued in favor of

San Miguel when it failed to prove the probability of irreparable injury which it will stand
to suffer if the sale of “Ginebra Kapitan” is not enjoined. Moreover, the right to the
exclusive use of the word “Ginebra” has yet to be determined in the main case.

(Tanduay Distillers, Inc. vs. Ginebra San Miguel, Inc., G.R. No. 164324, August 14, 2009)

a. Trademark Infringement

The question is not whether the two articles are distinguishable by their label when set
side by side but whether the general confusion made by the article upon the eye of the
casual purchaser who is unsuspicious and off his guard, is such as to likely result in his
confounding it with the original. It is not difficult to see that the Sunshine label is a
colorable imitation of the Del Monte trademark; the predominant colors used in the

Del Monte label are green and red-orange, the same with Sunshine; the word "catsup"
in both bottles is printed in white and the style of the print/letter is the same; and
although the logo of Sunshine is not a tomato, the figure nevertheless approximates
that of a tomato. (Del Monte Corporation and Philippine Packing Corporation vs.
Court of Appeals, G.R. No. L-78325, January 25, 1990)

The fact that the words pale pilsen are part of ABI's trademark does not constitute an
infringement of SMC's trademark: SAN MIGUEL PALE PILSEN, for "pale pilsen" are
generic words descriptive of the color ("pale"), of a type of beer ("pilsen"), which is a
light bohemian beer with a strong hops flavor that originated in the City of Pilsen in

Czechoslovakia and became famous in the Middle Ages. Moreover, ABI’s use of the
steinie bottle, similar but not identical to the SAN MIGUEL PALE PILSEN bottle, is not
unlawful as SMC did not invent but merely borrowed the steinie bottle from abroad
and it has not claimed neither patent nor trademark protection for that bottle shape
and design. (Asia Brewery, Inc. vs. Court of Appeals and San Miguel Corporation, G.R.

No. 103543, July 5, 1993)

One who has adopted and used a trademark on his goods does not prevent the
adoption and use of the same trademark by others for products which are of a
different description. Assuming arguendo that "Poster Ads" could validly qualify as a
trademark, the failure of Pearl & Dean to secure a trademark registration for specific
use on the light boxes meant that there could not have been any trademark
infringement since registration was an essential element thereof. (Pearl & Dean (Phil.),

Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

When a trademark is used by a party for a product in which the other party does not
deal, the use of the same trademark on the latter’s product cannot be validly objected
to. There is no infringement when the trademark “CANON” is used by the petitioner
for paints, chemical products, toner and dyestuff while it is used by the private
respondent for footwear (sandals). (Canon Kabushiki Kaisha vs. Court of Appeals, G.R.
No. 120900, July 20, 2004)

Mere unauthorized use of a container bearing a registered trademark in connection


with the sale, distribution or advertising of goods or services which is likely to cause
confusion, mistake or deception among the buyers/consumers can be considered as
trademark infringement. The petitioners, as directors/officers of MASAGANA, are
utilizing the latter in violating the intellectual property rights of Petron and Pilipinas

Shell; thus, petitioners collectively and MASAGANA should be considered as one and
the same person for liability purposes. (William C. Yao, Sr., et. al. vs. People of the
Philippines, G.R No. 168306, June 19, 2007)

The trademark “ Marlboro “ is not only valid for being neither generic nor descriptive,
it was also exclusively owned by PMPI, as evidenced by the certificate of registration
issued by the Intellectual Property Office. Infringement of trademark clearly lies since
the counterfeit cigarettes not only bore PMPI’s trademark, but they were also
packaged almost exactly as PMPI’s products. (Ong vs. People of the Philippines, GR

No. 169440, November 23, 2011)


The mere unauthorized use of a container bearing a registered trademark in connection
with the sale, distribution or advertising of goods or services which is likely to cause
confusion among the buyers or consumers can be considered as trademark infringement.
Petitioners’ act of refilling, without the respondents’ consent, the LPG containers bearing
the registered marks of the respondents will inevitably confuse the consuming public, who
may also be led to believe that the petitioners were authorized refillers and distributors of
respondent’s LPG products. (Republic Gas Corporation (REGASCO), et. al. vs. Petron
Corporation, et. al., G.R. No. 194062, June 17, 2013)

The Rules on the Issuance of the Search and Seizure in Civil Actions for Infringement of

Intellectual Property Rights are not applicable in a case where the search warrants were
applied in anticipation of criminal actions for violation of intellectual property rights
under RA 8293. Rule 126 of the Revised Rules of Court would apply and a warrant shall be
validly issued upon finding the existence of probable cause. (Century Chinese Medicine
Co., et. al. vs. People of the Philippines, G.R. No. 188526, November

11, 2013)

Damages

Requirement of Notice

Unfair Competition

Mere similarity in the shape and size of the container and label does not constitute unfair
competition. SMC cannot claim unfair competition arising from the fact that

ABI's BEER PALE PILSEN is sold, like SMC's SAN MIGUEL PALE PILSEN in amber steinie
bottles absent any showing that the BEER PALE PILSEN is being passed off as SAN MIGUEL
PALE PILSEN. (Asia Brewery, Inc. vs. Court of Appeals and San Miguel Corporation, G.R.
No. 103543, July 5, 1993)

The essential elements of an action for unfair competition are (1) confusing similarity in
the general appearance of the goods, and (2) intent to deceive the public and defraud a
competitor. The confusing similarity may or may not result from similarity in the marks, but
may result from other external factors in the packaging or presentation of the goods. In
this case, the intent to deceive and defraud may be inferred from the fact that there was
actually no notice (on their plastic wrappers) to the public that the

“Big Mak” hamburgers are products of “L.C. Big Mak Burger, Inc.”(McDonald’s

Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004)

Hoarding does not relate to any patent, trademark, trade name or service mark that the
respondents have invaded, intruded into or used without proper authority from the
petitioner nor are the respondents alleged to be fraudulently “passing off” their products
or services as those of the petitioner. The respondents are not also alleged to be
undertaking any representation or misrepresentation that would confuse or tend to
confuse the goods of the petitioner with those of the respondents, or vice versa. What in
fact the petitioner alleges is an act foreign to the Code, to the concepts it embodies and to
the acts it regulates; as alleged, hoarding inflicts unfairness by seeking to limit the
opposition’s sales by depriving it of the bottles it can use for these sales. (Coca-
Cola Bottlers Philippines, Inc. (CCBPI), Naga Plant vs. Quintin Gomez, et, al., G.R. No.

154491, November 14, 2008)

Unfair competition has been defined as the passing off (or palming off) or attempting to
pass off upon the public of the goods or business of one person as the goods or business of
another with the end and probable effect of deceiving the public. The mere use of the LPG
cylinders for refilling and reselling, which bear the trademarks "GASUL" and "SHELLANE"
will give the LPGs sold by REGASCO the general appearance of the products of the
petitioners. (Republic Gas Corporation (REGASCO), et. al. vs. Petron Corporation, et. al.,
G.R. No. 194062, June 17, 2013)

Trade Names or Business Names

The ownership of a trademark or tradename is a property right which the owner is entitled
to protect since there is damage to him from confusion or reputation or goodwill in the
mind of the public as well as from confusion of goods. By appropriating the word
"CONVERSE," respondent's products are likely to be mistaken as having been produced by
petitioner. The risk of damage is not limited to a possible confusion of goods but also
includes confusion of reputation if the public could reasonably assume that the goods of
the parties originated from the same source. (Converse Rubber Corporation vs. Universal
Rubber Products, Inc., G.R. No. L-27906, January 8, 1987)

A trade name previously used in trade or commerce in the Philippines need not be
registered with the IPO before an infringement suit may be filed by its owner against the
owner of an infringing trademark. Nonetheless, respondent does not have the right to the
exclusive use of the geographic word “San Francisco” or the generic word

“coffee.” It is only the combination of the words “SAN FRANCISCO COFFEE,” which is
respondent’s trade name in its coffee business, that is protected against infringement on
matters related to the coffee business to avoid confusing or deceiving the public.

(Coffee Partners vs. San Francisco Coffee and Roastery, Inc., G.R. No. 169504, 3 March
2010)
The Philippines is obligated to assure nationals of countries of the Paris Convention that
they are afforded an effective protection against violation of their intellectual property
rights in the Philippines in the same way that their own countries are obligated to accord
similar protection to Philippine nationals. Thus, under Philippine law, a trade name of a
national of a State that is a party to the Paris Convention, whether or not the trade name
forms part of a trademark, is protected “without the obligation of filing or registration.”
(Fredco Manufacturing Corporation vs. President and Fellows of Harvard College, GR No.
185917, June 1, 2011)

Under the Paris Convention to which the Philippines is a signatory, a trade name of a
national of a State that is a party to the Paris Convention, whether or not the trade name
forms part of a trademark, is protected without the obligation of filing or registration. It
follows then that the applicant for registration of trademark is not the lawful owner
thereof and is not entitled to registration if the trademark has been in prior use by a
national of a country which is a signatory to the Paris Convention. (Ecole
De Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs. Renaus Cointreau & Cie and Le
Cordon Bleu Int’l, B.V., G.R. No. 185830, June 5, 2013)

13. Collective Marks

Copyrights

At most, the certificates of registration and deposit issued by the National Library and the
Supreme Court Library serve merely as a notice of recording and registration of the work but
do not confer any right or title upon the registered copyright owner or automatically put his
work under the protective mantle of the copyright law; it is not a conclusive proof of copyright
ownership. Hence, when there is sufficient proof that the copyrighted products are not
original creations but are readily available in the market under various brands, as in this case,
validity and originality will not be presumed. (Manly Sportwear Manufacturing, Inc. vs.
Dadodette Enterprises and/or Hermes Sports Center, G.R. No. 165306, September 20, 2005)

Basic Principles, Sections 172.2, 175 and 181

Copyrightable Works

Original Works

Derivative Works

Non-Copyrightable Works

The format or mechanics of a television show is not included in the list of protected works in
Sec. 2 of P.D. No. 49, which is substantially the same as Sec. 172 of the Intellectual Property
Code (R.A. No, 8293). For this reason, the protection afforded by the law cannot be extended
to cover them. (Francisco Joaquin, Jr. vs. Franklin Drilon, et. al., G.R. No. 108946, January 28,
1999)

Pearl & Dean’s copyright protection extended only to the technical drawings and not to the
light box itself as the latter does not fall under the category of “prints, pictorial illustrations,
advertising copies, labels, tags and box wraps.” The light box was not a literary or artistic piece
which could be copyrighted under the copyright law; and no less clearly, neither could the
lack of statutory authority to make the light box copyrightable be remedied by the simplistic
act of entitling the copyright certificate issued by the National Library as "Advertising Display
Units.” (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

Rights of Copyright Owner

Rules on Ownership of Copyright

Limitations on Copyright
Under Sec. 184.1 (h), the use made of a work by or under the direction or control of
the Government, by the National Library or by educational, scientific or professional
institutions where such use is in the public interest and is compatible with fair use will
not constitute copyright infringement. The carriage of ABS-CBN’s signals by virtue of
the must-carry rule is under the direction and control of the government through the
NTC. The imposition of the must-carry rule is within the NTC’s power to promulgate
rules and regulations, as public safety and interest may require, to encourage a larger
and more effective use of communications, radio and television broadcasting facilities,
and to maintain effective competition among private entities in these activities
whenever the Commission finds it reasonably feasible. (ABS-CBN

Broadcasting Corporation vs. Philippine Multi-Media System, Inc., G.R. Nos. 175769-
70, January 19, 2009)

PMSI cannot be said to be infringing upon the exclusive broadcasting rights of ABS-
CBN under the IP Code for PMSI does not perform the functions of a broadcasting
organization, thus, it cannot be said that it is engaged in rebroadcasting Channels 2
and 23. PMSI is not the origin nor does it claim to be the origin of the programs
broadcasted by the ABS-CBN; the former did not make and transmit on its own but
merely carried the existing signals of the latter and when PMSI’s subscribers view ABS-

CBN’s programs in Channels 2 and 23, they know that the origin thereof was the latter.
ibid

Doctrine of Fair Use

Copyright Infringement

For the playing and singing the musical compositions involved, the combo was paid as
independent contractors; it is therefore obvious that the expenses entailed thereby are
either eventually charged in the price of the food and drinks or to the overall total of
additional income produced by the bigger volume of business which the
entertainment was programmed to attract. Consequently, it is beyond question that
the playing and singing of the combo in defendant-appellee's restaurant constituted
performance for profit contemplated by the Copyright Law. (Filipino Society of
Composers, Authors and Publishers, Inc. vs. Benjamin Tan, G.R. No. L-36402, March 16,

1987)

Infringement of a copyright is a trespass on a private domain owned and occupied by


the owner of the copyright, and, therefore, protected by law, and infringement of
copyright, or piracy, which is a synonymous term in this connection, consists in the
doing by any person, without the consent of the owner of the copyright, of anything
the sole right to do which is conferred by statute on the owner of the copyright.

Failure to comply with registration and deposit does not deprive the copyright owner
of the right to sue for infringement but merely limits the remedies available to him
because the copyright for a work is granted from the moment of creation. (Columbia
Pictures, Inc., et. al. vs. Court of Appeals, G.R. No. 110318, August 28, 1996)

To constitute infringement, it is not necessary that the whole or even a large portion of
the work shall have been copied; if so much is taken that the value of the original is
sensibly diminished, or the labors of the original author are substantially and to an injurious extent
appropriated by another, that is sufficient in point of law to constitute piracy. The injury is
sustained when respondent lifted from petitioners’ book materials that were the result of the
latter’s research work and compilation and misrepresented them as her own, even circulating the
book DEP for commercial use without acknowledging petitioners as her source. (Pacita Habana,
et. al. vs. Felicidad Robles and Goodwill Trading Co., Inc., G.R. No. 131522, July 19, 1999)

The gravamen of copyright infringement is not merely the unauthorized

“manufacturing” of intellectual works but rather the unauthorized performance of any of the
rights exclusively granted to the copyright owner. Hence, any person who performs any of such
acts without obtaining the copyright owner’s prior consent renders himself civilly and criminally
liable for copyright infringement. (NBI-Microsoft

Corporation vs. Judy Hwang, et. al., G.R. No. 147043, June 21, 2005)

Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC)

X. Special Laws

The Chattel Mortgage Law and Real Estate Mortgage Law (Excluded and made a part of Civil Law
coverage)

Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194)

Policy of the Law

Covered Institutions
Obligations of Covered Institutions

Covered Transactions

Suspicious Transactions

When is Money Laundering Committed

Unlawful Activities or Predicate Crimes

Since the account of Glasgow in CSBI was (1) covered by several suspicious transaction reports
and (2) placed under the control of the trial court upon the issuance of the writ of preliminary
injunction, the conditions provided in Section 12(a) of RA 9160, as amended, were satisfied. A
criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil
forfeiture proceeding. A finding of guilt for an unlawful activity is not an essential element of civil
forfeiture. (Republic of the Philippines vs. Glasgow Credit and Collection Services, Inc., G.R. No.
170281, January 18, 2008)
Section 11 allows the AMLC to inquire into bank accounts without having to obtain a judicial
order in cases where there is probable cause that the deposits or investments are related to
kidnapping for ransom, certain violations of the Comprehensive Dangerous Drugs Act of 2002,
hijacking and other violations under R.A. No. 6235, destructive arson and murder. Absent any
of the mentioned predicate crimes, a court order is necessary to inquire into bank deposits.
(Republic of the Philippines vs. Hon. Antonio Eugenio, G.R. No. 174629, February 14, 2008)

NOTE: By virtue of R.A. No. 10168, Anti-Financing of Terrorism is now included as one of the
predicate crimes where a court order is not necessary to examine or inquire into bank
deposits.

Anti-Money Laundering Council

Functions

Freezing of Monetary Instrument or Property

The amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the Court of
Appeals over the extension of freeze orders. It is solely the CA which has the authority to issue
a freeze order as well as to extend its effectivity; it also has the exclusive jurisdiction to extend
existing freeze orders previously issued by the AMLC vis-à-vis accounts and deposits related to
money-laundering activities. (Republic of the Philippines vs. Cabrini Green & Ross, Inc., G.R.
No. 154522, May 5, 2006)

The primary objective of a freeze order is to temporarily preserve monetary instruments or


property that are in any way related to an unlawful activity or money laundering, by
preventing the owner from utilizing them during the duration of the freeze order. The
effectivity of the freeze order was limited to a period not exceeding six months, which may be
extended by the CA should it become completely necessary. Nonetheless, when the Republic
has not offered any explanation why it took six years before a civil forfeiture case was filed in
court, it can only be concluded that the continued extension of the freeze order beyond the
six-month period violated the party’s right to due process. (Ret. Lt. Gen. Jacinto Ligot, et. al. vs.
Republic of the

Philippines, G.R. No. 176944, March 6, 2013)

Authority to Inquire Into Bank Deposits

C. Foreign Investments Act (R.A. No. 7042)

Policy of the Law

Definition of Terms

Foreign Investment

“Doing Business” in the Philippines


Under Sec 3 (d) of the Foreign Investments Act of 1991, the phrase "doing business" shall
include appointing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totalling one hundred eighty
(180) days or more. Thus, the phrase includes "appointing representatives or distributors in
the Philippines" but not when the representative or distributor independently transacts
business in its name and for its own account. (Alfred Hahn vs. Court of Appeals, G.R. No.
113074, January 22, 1997)

Whether a foreign corporation is "doing business" does not necessarily depend upon the
frequency of its transactions, but more upon the nature and character of the transactions.
“Doing business” covers any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business organization.
(Eriks Pte. Ltd. vs. Court of Appeals, G.R. No. 118843, February 6, 1997)

To constitute "doing business", the activity to be undertaken in the Philippines is one that
is for profit-making. When the activities of the foreign corporation were confined to (1)
maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by the respondent domestic corporation; and (2) consignment of equipment
with the respondent to be used in the processing of products for export, the foreign
corporation cannot be deemed to be "doing business" in the Philippines. (Agilent
Technologies Singapore (Pte.) Ltd. vs. Integrated Silicon Technology

Philippines Corporation, G.R. No. 154618, April 14, 2004)

The appointment of a distributor in the Philippines is not sufficient to constitute “doing


business” unless it is under the full control of the foreign corporation. In the present case,
the distributor is an independent entity which buys and distributes products, other than
those of the foreign corporation, for its own name and its own account; hence, the latter
cannot be considered to be doing business in the Philippines. (Steelcase, Inc. vs. Design
International Selections, Inc., G.R. No. 171995, April 18, 2012)

Export Enterprise
Domestic Market Enterprise

Registration of Investments on Non-Philippine Nationals

Foreign investments in Domestic Market Enterprise

Foreign Investment Negative List

The Foreign Investments Act is the basic law governing foreign investments in the
Philippines, irrespective of the nature of business and area of investment. The concept of a
negative list or the Foreign Investments Negative List provides for two components: List A,
which enumerates the areas of activities reserved to Philippine nationals by mandate of
the Constitution and specific laws; and List B, which
enumerates the areas of activities and enterprises regulated pursuant to law. (Heirs of

Wilson Gamboa vs. Finance Secretary Margarito Teves, G.R. No. 176579, October 9,
2012)