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Commercial Law Review

Corporation Code
Maria Zarah Villanueva - Castro

CORPORATION CODE (BP BLG 68) - It exist by fiction of law only, hence
it is subject to limitations that are
*Corporation Code is the general law on Private inherent because of its nature
Corporation regarding to its creation, formation - A corporation is a juridical person
and powers. which exists by process of legal
fiction
INTRODUCTION: Doctrine of Corporate
Entity/Doctrine of Separate
A. Historical Background
Effectivity: May 1, 1980 Personality - A corporation is a
Article XII Section 16 of the 1987 legal or juridical person with a
Constitution: “The Congress shall not, personality separate and apart
except by general law, provide for the from its individual stockholders or
formation, organization, or regulation of members and from any other legal
private corporations. Government-owned entities to which it may be
or controlled corporations may be created connected
or established by special charters in the Consequences/Implications of
interest of the common good and subject Separate Personality:
1. It is entitled to own properties
to the test of economic viability.”
*Congress has limited powers in the in its own name and its
formation, creation and regulation of a properties are not the
private corporation. properties of its stockholders,
Purposes: directors and officers.
1. Uniformity Cases: Magsaysay-Labrador
2. To avoid corruption v CA; Sulo ng Bayan v
Araneta
General Rule: Congress is prohibited to *The interest of the
enact a law directly forming a private stockholders over the
corporation. properties of the corporation is
Exception: GOCC may be created by merely inchoate.
special charter. *Merely inchoate because there
are still condition precedents
*GOCC is a private corporation with regard before the shareholders get
to function and in the meantime a public their share, viz, in Asset, there
corporation with regard to ownership. are dissolution and satisfaction
of claims; in profit-sharing,
Twin Conditions must be present in
there are unrestricted retained
forming a GOCC:
earnings and declaration by the
1. Interest in the common good
Board of Directors.
2. Subject to the test of economic
2. It can incur obligations and its
viability
obligations are not the
- Means can survive alone in the
obligations of its stockholders,
market; can generate income
directors and officers.
which they can use for their
Case: Francisco v CA
operating expenses 3. The rights belonging to the
corporation cannot be invoked
CONCEPT AND ATTRIBUTES OF A
by the stockholders, directors
CORPORATION:
and officers and vice versa.
A. Statutory definition of a Corporation 4. Corporations are entitled to
Section 2 of the Corporation Code: “A certain constitutional rights,
corporation is an artificial being created by i.e., right against unreasonable
operation of law, having the right of searches and seizure, due
succession and the powers, attributes and process clause.
*It is not entitled to certain
properties expressly authorized by law or
constitutional right, i.e., right
incident to its existence.”
against self-incrimination
B. Attributes of a Corporation
particularly production of
 Artificial Being
corporate documents.

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Commercial Law Review
Corporation Code
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*Right against self-incrimination compensatory, exemplary, loss


is applicable only to natural of earning capacity.
persons. General Rule: Corporation
General Rule: Constitutional cannot claim moral damages.
guarantees are applicable to Exception: If the corporation
corporations. has a good reputation and such
Exceptions: reputation was destroyed.
1. Right against self- Case: Coastal Pacific Trading
incrimination v Southern Rolling Mills, Co.
2. Freedom to travel *In Filipinas Broadcasting
Case: Bataan Shipyard v Network Inc. v. Ago Medical and
PCGG Educational Center, the SC
5. It is liable for tort. It is liable ruled that a corporation can
when the act was committed by recover moral damages under
the officer or agent under Article 2219(7) if it was the
express direction or authority victim of defamation.
from the stockholders or
members acting as a body or Doctrine of Piercing the Veil of Corporate
generally from the directors as Entity – The doctrine that a corporation is a legal
the governing body. entity distinct from the persons composing it. It is
6. Generally, the corporation is a theory introduced for the purposes of
considered a national of the convenience and to serve the ends of justice. But
country where it was when the veil of corporate fiction is used as a
incorporated (Place of shield to perpetuate fraud, to defeat public
incorporation test) convenience, justify wrong, or defend crime, this
*Exceptions: 1. In times of war, fiction shall be disregarded and the individuals
the nationality of a corporation composing it will be treated identically.
is determined by the nationality Cases: Times Transportation Co. v Santos
of the controlling stockholders; Sotelo; Concept Builders v NLRC
2. Under the Foreign *The doctrine of piercing the veil of corporate
Investment Act of 1991 entity is the exception to the doctrine of
7. Corporations are incapable of
corporate entity.
intent, hence, they cannot
*The users of this doctrine are: 1. Stockholder; 2.
commit felonies that are
Group of stockholders; 3. Another corporation.
punishable under the RPC. They
Effects: 1. Stockholders, officers and corporation
cannot commit crimes that are
are in effect jointly liable; 2. In case of two
punishable under special laws
corporations, they will be treated as one wherein
because crimes are personal in
they will be both solidarily liable. (Instrumentality
nature requiring personal
rule)
performance of overt acts. In
*There is no effect on the existence of each
addition, the penalty of
corporation as long as their separate entity is
imprisonment cannot be
used for legitimate purposes.
imposed.
*Criminal liability falls upon to Instrumentality Rule – When one corporation is
responsible officers. so organized and controlled and its affairs are
*Responsible officers cannot
conducted so that it is in fact a mere
invoke the doctrine of separate
instrumentality or adjunct of the other, the fiction
personality.
of the corporate entity to the instrumentality may
*Corporations cannot be
be disregarded.
incarcerated.
8. Moral damages cannot be *The user is another corporation.
awarded in favor of Keyword: CONTROL
corporations because they do Requisites: 1. Control, not mere majority or
not have feelings and mental complete stock control, but complete
state. dominion, not only of finances but of policy
*Corporations can claim and business in respect to the transaction
damages such as actual, attacked so that the corporate entity as to
this transaction had at the time no separate

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mind, will or existence of its own; 2. Such - Also known as Principle of


control must have been used by the Perpetual Succession
defendant to commit fraud or wrong in
contravention of plaintiff’s legal rights; 3. The Reason: To make the corporation
aforesaid control and breach of duty must more stable
proximately cause the injury or unjust loss
 Creature of enumerated powers,
complained of.
attributes and properties
Three cases of piercing the veil:
Doctrine of Limited Capacity – No
1. Fraud Cases – when a corporation is used
corporation under the Corporation
as a cloak to cover fraud, or to do wrong;
Code, shall possess or exercise any
2. Alter Ego Cases – when the corporate
corporate powers, except those
entity is merely a farce since the corporation
conferred by law, its Articles of
is an alter ego, business conduit or
Incorporation, those implied from
instrumentality of a person or another
express powers and those as are
corporation;
necessary or incidental to the exercise
3. Equity cases – when piercing the
of the powers so conferred. The
corporate fiction is necessary to achieve
corporation’s capacity is limited to
justice or equity.
such express, implied and incidental
Probative Factors of Identity:
powers.
1. Identical shareholders; *Corporation may be restrained from
2. Same set of officers, directors, or trustees; engaging a particular transaction
3. Use of same premises, properties, tools and because it is beyond their powers.
equipments; *General Capacity – a corporation
4. Engage practically in the same business; 5. can perform any act for as long as it is
The same manner of keeping books and lawful, moral and not contrary to
records. public policy or order.
*The probative factors of identity are not Ultra Vires Doctrine – Even if the act
conclusive but may be considered as strong is lawful, moral and not contrary to
evidence. public order or policy but such act is
 Creature of Law not within the express, implied and
Article XII Section 16 of the 1987 incidental powers of the corporation
Constitution: “The Congress shall such act shall be void for being ultra
not, except by general law, provide for vires.
the formation, organization, or *These doctrines are based on Section
regulation of private corporations. 2 and Section 45 of the Corporation
Government-owned or controlled Code.
corporations may be created or
established by special charters in the C. Classification of Private Corporations:
1. As to existence of Stocks:
interest of the common good and
Stock Corporation – Corporations which
subject to the test of economic
have capital stock divided into shares and
viability.”
are authorized to distribute to the holders
Concession Theory – It is a principle
of such shares dividends or allotments of
in the creation of corporations, under
the surplus profits on the basis of the
which a corporation is an artificial
shares held. (Sec. 3)
creature without any existence until it
Non-stock Corporation – A corporation
has received the imprimatur of the
where no part of its income is distributable
State acting according to law, through
as dividends to its members, trustees, or
the SEC. The life of the corporation is a
officers, subject to the provisions of this
concession made by the State.
Code on dissolution. (Sec. 87)
 Right of Succession
Q: Is it correct to say that a Non-stock
- Capacity to have continuity of
corporation cannot generate income on
existence despite the changes on
their own?
the persons who compose it. Thus, A: NO
the personality continues despite 2. As to function/organizers:
the change of stockholders, Public Corporation – for public purpose
members, board members or and organized by the State.
officers; death or disability.
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Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro

Private Corporation – for profit making 2. An attempt in good faith to


functions and organized by private incorporate; 3. Use of corporate
persons alone or with the State powers;
3. As to laws of Incorporation (Place of 4. Filing of the Articles of Incorporation;
Incorporation) : 5. Subsequent compliance with the
Domestic Corporation – corporation requirement of law.
formed, organized or existing under the *In both corporations, there must be a
Philippine Laws. certificate of registration issued.
Foreign Corporation – corporation
formed, organized or existing under any Doctrine of Corporation by Estoppel – All
laws other than those of the Philippines persons who assume to act as a corporation
and whose laws allow Filipino citizens and knowing it to be without authority to do so
corporations to do business in its own shall be liable as general partners for all
country or state. (Sec. 123) debts, liabilities and damages incurred or
*License is necessary for; 1. Regulation arising as an result thereof: Provided,
purposes and 2. Access to local courts. however, that when any such ostensible
4. As to legal status:
corporation is sued on any transaction
De Jure Corporation – corporation
entered into by it as a corporation or on any
created in strict or substantial compliance
tort committed by it as such, it shall not be
with the mandatory requirements for
allowed to use as a defense its lack or
incorporation and the right of which to
corporate personality. (Sec. 21)
exist as a corporation cannot be
- Group of persons which holds itself
successfully attacked or questioned by
out as a corporation and enters
any party even in a direct proceeding for
into a contract with a third person
that purpose by the state.
De Facto Corporation – the due on the strength of such appearance
incorporation of any corporation claiming cannot be permitted to deny its
in good faith to be a corporation under the existence in an action under said
Corporation Code, and its right to exercise contract.
corporate powers, shall not be inquired Case: Lim Tong Lim v CA
into collaterally in any private suit to *Lim is stopped because he benefited
which such corporation may be a party. from the transaction.
Such inquiry may be made by Solicitor Remedy: To ran after those persons
General in a quo warranto proceeding. responsible for the representations
(Sec. 20) Essence: They are precluded from
- organized with a colourable denying their existence by their
compliance with the requirements previous act or conduct
of a valid law and its existence Holding Corporation – it is one which controls
cannot be inquired collaterally. another as a subsidiary by the power to elect
- There is an irregularity or defect in management. It is one that holds stocks in other
the constitution or organization. companies for purposes of control rather than for
mere investment.
Can be compared to a voidable
contract, i.e., valid until annulled. Affiliate – one related to another by owning or
*Can be challenged by the State later being owned by common management or by a
on. long-term lease of its properties or other control
Cases: Hall v Piccio; Seventh device. It may be the controlled or controlling
Adventist v Northeastern corporation, or under common control.
Mindanao Mission
*The filing of the Articles of Subsidiary Corporation – one which is so
Incorporation and the issuance of the related to another corporation that the majority
certificate of registration are the of its directors can be elected either directly or
essential requisites for the existence of indirectly by such other corporation. It is always
a de facto corporation. controlled.
Requisites:
Open Corporation – one which is open to any
1. The existence of a valid law under
person who may wish to become a stockholder or
which it may be incorporated;
member thereto.

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Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro

Close Corporation – those whose shares of certificate of incorporation under the


stock are held by limited number of persons like amended name.
the family or other closely knit group. (Sec. 96) SEC Guideline ”x x x b. In order to
prevent confusion and difficulties of
FORMATION AND ORGANIZATION OF A administration, supervision and
PRIVATE CORPORATION: control, if the proposed name contains
a word already use as a part of the
A. Submission of Articles of Incorporation; firm name or style of a registered
contractual significance entity, the proposed name must
*The life of a corporation commences from
contain two other words different and
the issuance of the Certificate of
distinct from the name of the company
Registration by the SEC upon filing of the
already registered or protected by law.
Articles of Incorporation and other
x x x”
documents. Case: Ang Mga Kaanib Ni Jesus
Article of Incorporation – is the charter
Cristo
of the corporation, and the contractual *The phrase “Ang Mga Kaanib” are
relationships between the State and the words merely descriptive of
corporation, the stockholder and the membership while the phrase “Sa
State, and between the corporation and its Bansang Pilipinas” are merely
stockholders. descriptive of the place.
Contractual Significance: *Both parties are religious institutions
1. The issuance of a certificate of *Both use the acronym H.S.K.
incorporation signals the birth of the As a rule, generic name or descriptive
corporation’s juridical personality; word may be used as a corporate
2. It is an essential requirement for the name.
existence of a corporation, even a de facto Reason: public domain; can be used
one. by anyone; public use.
Exception: Doctrine of Secondary
B. Contents and Form of the Articles of Meaning – a word or phrase originally
Incorporation (Secs. 14 and 15) incapable of exclusive appropriation
Contents of Articles of Incorporation:
with reference to an article on the
1. Corporate Name;
2. Purpose Clause; market, because geographically or
3. Principal office; otherwise descriptive, might
4. Term of existence; nevertheless have been used so long
5. Incorporators; and so exclusively by one producer
6. Directors or trustees; with reference to his article that in that
7. Capitalization;
trade and to that branch of the
8. Shares of stock;
9. Treasurer’s Affidavit. purchasing public, the word or phrase
has come to mean that the article was
 Corporate Name his product.
Purpose: Identification Requisites:
*Corporation can not adopt any name 1. Period of use;
or group of words at its pleasure 2. The use must be exclusive.
Case: Lyceum of the Philippines
because of statutory limitation, viz.,
*The exclusivity requirement was not
Sec. 18 of the Corporation Code
satisfied by Lyceum of the Philippines.
which provides that: “No corporate *In case of change of name, the
name may be allowed by the SEC if the corporation is not dissolve nor create a
proposed name is identical or new corporation; it also does not
deceptively or confusingly similar extinguish the corporate liability.
to that of any existing corporation *Change of name can be done by
or to any other name already amending the Articles of Incorporation.
protected by law or is patently Procedure:
deceptive, confusing or contrary 1. Obtain approval of majority of the
to existing laws. When a change in Board and 2/3 stockholders;
the corporate name is approved, the 2. Submission to the SEC for approval.
Commission shall issue an amended  Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities
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Commercial Law Review
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of the corporation. It is the ordinary application for existence within the


course of business of the corporation. term of the corporation is due to
*Secondary Purpose is for future neglect of the officer with whom the
expansion. There is no limit on the certificate is required to be filed or to
secondary purpose. wrongful refusal on is part to receive it.
*In case the primary purpose is not *The delay in submitting the
viable then secondary purpose may be application for extension is justifiable.
used. Keywords:
 Principal Office 1. Excusable delay;
*The principal place of business may 2. Beyond the control of the
determine the venue of court cases corporation (insuperable intervening
involving corporations. It may also causes)
determine if service of summons and  Incorporators
notices was properly made. It is also *Once an incorporator always an
important for tax purposes (local incorporator. (Fait accompli – an
taxation). accomplished fact which cannot be
*The SEC requires the exact address to altered)
be indicated in the Articles of *They are the signatories to the
Incorporation. Articles of Incorporation.
*It is the residence of the corporation. *They are originally forming the
It is where the corporation maintains corporation
Q: What is the reason behind the
its books and records and where
phrase that an incorporator is not
normally the bulk of its business is
always a corporator?
being conducted or undertaken.
A: To be an incorporator it is not
*For personal action, venue is the
necessary to own a share unlike as a
residence.
 Term of Existence corporator.
*A corporation has a maximum term of *Number is limited to 5 to 15.
*They must have a contractual
50 years. It may be extended for a
capacity.
period not exceeding 50 years in any
*Juridical person cannot create another
single instance.
juridical person.
As a rule, no extension can be made
*There is no citizen requirement but
earlier than 5 years prior to the
special laws may require otherwise.
expiration of the term. *Majority must be a resident of the
*No limitations regarding number of
Philippines.
extension can apply.  Directors and trustees
Reason: To compel the stockholders to *The Board of Directors is the
meet the corporation’s term. governing body in a stock corporation
Exception: If for compelling reasons,
while Board of Trustees is the
earlier extension will be allowed.
governing body in a non-stock
*During the three year winding up
corporation.
period, the corporation still has
*They exercise the powers of the
personality but activities are limited to
corporation.
the liquidation of the corporation Qualifications:
affairs and not to transact further 1. Every director must own at least one
business. (1) share of the capital stock;
As a rule, after the term has expired, 2. Majority of the directors or trustees
no more extensions be allowed or must be residents of the Philippines.
entertained by the SEC. *Any director who ceases to be the
Reason: No more period to extend. owner of at least one share of the
Exception: Doctrine of Relation – capital stock of the corporation of
The filing and recording of a certificate which he is a director shall thereby
of extension after the term cannot cease to be a director.
relate back to the date of the passage *Trustees of non-stock corporations
of the resolution of the stockholders to must be members thereof.
extend the life of the corporation. *Initial directors/trustees shall hold
However, the doctrine of relations office for one year until their
applies if the failure to file the successors are elected and qualified.

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Commercial Law Review
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Maria Zarah Villanueva - Castro

 Capitalization distinction of the shares of stock, all


Section 14(8) states that: “If it be a shares issued by the corporation are
stock corporation, the amount of its presumed to be equal and enjoy the
authorized capital stock in lawful same rights and privileges and are also
money of the Philippines, the number subject to the same liabilities.
of shares into which it is divided, and Classes of Shares:
in case the share are par value shares, 1. Par Value Share – shares that
the par value of each, the names, have a nominal value in the
nationalities and residences of the certificate of stock.
original subscribers, and the amount Contractual Significance: The
subscribed and paid by each on his minimum price at which the shares
subscription, and if some or all of the are to be issued.
*The price is fixed. It is stated in
shares are without par value, such fact
the Articles of Incorporation.
must be stated.”
2. No Par Value Share – those
*It is required that at least 25% of the
shares which do not have nominal
subscribed capital must be paid and in
value. However, they have issued
no case may be paid-up capital be less
value stated in the certificate or
than P5,000.
Authorized Capital Stock – the articles of incorporation.
*There is flexibility in the price.
amount fixed in the articles of
*The price is determined by the
incorporation to be subscribed and
Board.
paid by the stockholders of the Limitations:
corporation. 1. No par value shares cannot have
*Shows the total number of shares an issued price of less than P5.00;
Subscribed Capital – that portion of 2. The entire consideration for its
the authorized capital stock that is issuance constitutes capital so that
covered by subscription agreements no part of it should be distributed
whether fully paid or not. as dividends;
Paid-Up Capital – the portion of the 3. They cannot be used as
authorized capital stock which has preferred stocks;
been subscribed and actually paid. 4. They cannot be issued by banks,
Outstanding Capital Stock – the trust companies, insurance
total shares of stock issued to companies, public utilities and
subscribers or stockholders, whether building and loan association
or not fully or partially paid except (Reason: imbued with public
treasury shares so long as there is a interest);
binding subscription agreement. 5. The articles of incorporation
 Shares of stock must state the fact that it issued no
Q: Why shares of stock? par value shares as well as the
A: Because there is a share on the
number of said shares;
capitalization. 6. Once issued, they are deemed
Economic Value:
fully paid and non-assessable.
1. expectancy on the share in the
3. Voting Shares – shares with the
profits
right to vote. They have the right
2. expectancy on the share of assets in
to participate in the management
case of dissolution/liquidation.
Political Value: of the corporation through the
1. vote exercise of such right.
2. control in the management of the 4. Non-voting Shares – shares
corporation. without the right to vote.
Doctrine of Equality of Shares – *Has only a limited right to vote.
“Except as otherwise provided in the General Rule: Shareholder owning
articles of incorporation and stated in non-voting shares has no right to
the certificate of stock, each share vote.
Exceptions:
shall be equal in all respects to every
1. Amendment of the articles of
other share.”
incorporation;
- Provides that where the Article of
2. Adoption and amendment of by-
Incorporation do not provide for any
laws;

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Commercial Law Review
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3. Sale, lease, exchange, distribution of the assets of the


mortgage, pledge or other corporation in case of liquidation;
disposition of all or substantially all 2. Preferred shares as to
of the corporate property; dividends – share which gives the
4. Incurring, creating or increasing holder thereof preference in the
bonded indebtedness; distribution of the dividends to the
5. Increase or decrease of capital extent agreed upon before any
stock; 6. Merger or consolidation of dividends at all are paid to the
the corporation with another holders of common shares;
corporation or other corporations; 3. Participating preferred
7. Investment of corporate funds in shares – the holders thereof are
another corporation or business in still given the right to participate
accordance with the Corporation with the common stockholders in
Code; 8. Dissolution of the dividends beyond their stated
corporation. preference;
*The exceptions are exclusive; the 4. Non-participating preferred
list is a closed list shares – where there is no such
Statutory Constraint: Sec. 6 of participation;
the Corporation Code 5. Cumulative preferred shares
*The corporation cannot provide for – the shareholder is entitled to
shares with no voting right recover dividends in arrears. While
General Rule: Only redeemable
dividend declaration may not be
and preferred shares are deprived
compelled, once it is declared, the
of voting right.
shareholder is entitled to the said
Exception: Common shares may
arrears;
be denied of its voting right in the
6. Non-cumulative preferred
following instances: 1. Delinquent
shares – not entitled to arrears
in paying the subscription; 2. If
only to present dividends.
there was a founder’s share where 7. Redeemable Shares – are those
it was given the right to vote which permit the issuing
exclusively for 5 years (Sec. 7). corporation to redeem or purchase
5. Common Shares – the most
its own shares.
common type of shares which Limitations:
enjoy no preference. 1. Redeemable shares may be
*The basic class of stock ordinarily issued only when expressly
and usually issued without provided for in the Articles of
extraordinary rights and privileges, Incorporation;
and the owners thereof are entitled 2. The terms and conditions
to a pro rata share in the profits of affecting said shares must be
the corporation and in its assets stated both in the certificate of
upon dissolution and, likewise, in stock representing such share;
the management of its affairs 3. Redeemable shares may be
without preference or advantage deprived of voting rights in the
whatsoever. Articles of Incorporation, unless
6. Preferred Shares- shares which otherwise provided in the
enjoy preference as to dividends or Corporation Code;
assets upon dissolution as stated in 4. The corporation is required to
the Articles of Incorporation. maintain a sinking fund to answer
Reason: To attract investors. for redemption price if the
*Preference does not give them a corporation is required to redeem;
lien upon the property nor make 5. The redeemable shares are
them creditors of the corporation. deemed retired upon redemption
*Characterized as redeemable unless otherwise provided in the
shares. Articles of Incorporation;
Kinds: 6. Unrestricted retained earnings is
1. Preferred shares as to assets
not necessary before shares can be
– share which gives the holder
redeemed but there must be
thereof preference in the
sufficient assets to pay the

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creditors and to answer for noncompliance with the minimum


operations. requirement.
8. Treasury Shares – shares which General Rule: 25% must be
have been earlier issued as fully subscribed and 25% must be paid.
paid and have thereafter been Exception: If the law provides
acquired by the corporation by otherwise, i.e., special laws.
purchase, donation, redemption or
C. Grounds for rejection of the Articles of
through some lawful means.
- Shares which are previously Incorporation
1. The articles of incorporation or any
issued by the corporation but
amendment thereto is not
subsequently reacquired by the
substantially in accordance with the
corporation.
*Retired thus can no longer be re- form prescribed herein;
2. The purpose or purposes of the
issued.
*They are not entitled to dividends. corporation are patently
*They are not entitled to voting unconstitutional, illegal, immoral, or
rights. Rationale: to prevent contrary to government rules and
abuse by the management. regulations;
*These shares may again be 3. The Treasurer’s Affidavit concerning
disposed of for a reasonable price the amount of capital stock subscribed
fixed by the Board of Directors. and/or paid is false;
9. Founders’ Shares – classified as 4. The percentage of ownership of the
such in the articles of incorporation capital stock to be owned by citizens of
may be given certain rights and the Philippines has not been complied
privileges not enjoyed by the with as required by existing laws or the
owners of other stocks, provided Constitution.
that where the exclusive right to
Dual Franchise Requirement: No
vote and be voted for in the
articles of incorporation or amendment to
election of directors is granted, it
articles of incorporation of banks, banking
must be for the limited period not
to exceed 5 years subject to the and quasi-banking institutions, building
and loan associations, trust companies
approval of the SEC. The 5 year
and other financial intermediaries,
period shall commence from the
insurance companies, public utilities,
date of the approval by the SEC.
 Treasurer’s affidavit educational institutions, and other
*The SEC shall not accept the Articles corporations governed by special laws
of Incorporation of any stock shall be accepted or approved by the
corporation unless accompanied by a Commission unless accompanied by a
sworn statement of the Treasurer favourable recommendation of the
elected by the subscribers showing appropriate government agency to the
that at least 25% of the authorized effect that such articles or amendment is
capital stock of the corporation has in accordance with law.
been subscribed, and at least 25% of
D. Commencement of Corporate Existence
the total subscription has been fully
Sec. 19 of the Corporation Code states
paid to him in actual cash and/or in
that “ A private corporation formed or
property the fair valuation of which is
organized under this Code commences to
equal to at least 25% of the said
have corporate existence and juridical
subscription, such paid up capital
personality and is deemed incorporated
being not less than P5,000.
from the date the SEC issues a certificate
*If the Treasurer’s affidavit is false
of incorporation under its official seal; and
such act is tantamount to fraud. (PD
thereupon the incorporators,
902-A)
*Fraud on the part of the corporation is stockholders/members and their
a ground for revocation or suspension successors shall constitute a body politic
of license depending upon the extent and corporate under the name stated in
of the violation committed. the articles of incorporation for the period
*If there’s no Treasurer’s Affidavit, the of time mentioned therein, unless said
first ground shall apply, i. e.,
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period is extended or the corporation is *Automatic dissolution is not


sooner dissolved in accordance with law.” contemplated under Section 22. (SEC
*For purposes of determining whether a Opinion).
corporation enjoys the status of a de facto *Section 22 must be read in conjunction
corporation, it must have been at least with Sec 6(1) of PD 902-A which requires
issued a certificate of registration. that the corporation must be given the
opportunity to be heard in compliance
E. Amendment of the Articles of with the requirement of due process
Incorporation before the revocation of its license.
Sec. 16 of the Corporation Code states
that: “Unless otherwise prescribed by this
Code or by special law, and for legitimate CONTROL AND MANAGEMENT OF A
purposes, any provision or matter stated CORPORATION:
in the articles of incorporation may be
amended by a majority vote of the board A. Levels of Corporate Control
1. By Stockholders/Shareholders;
of directors or trustees and the vote or
2. By Corporate Officers;
written assent of the stockholders 3. By Directors/Trustees
representing at least 2/3 of the
outstanding capital stock, without B. Board of Directors/Trustees
prejudice to the appraisal right of  General Powers of the Board
dissenting stockholders in accordance with Sec. 23 of the Corporation Code
the provisions of this Code, or the vote or states that: “Unless otherwise provided
written assent of at least 2/3 of the in this Code, the corporate powers of
members if it be a non-stock corporation.” all corporations formed under this
*It is effective upon the approval of the Code shall be exercised, all business
SEC. conducted and all property of such
*There may be an amendment by inaction. corporations controlled and held by the
Amendment by Inaction – Upon filing board of directors or trustees to be
with the SEC of the amendment and the elected from among the holders of
Commission failed to act on it within 6 stocks, or where there is no stock, from
months from the date of filing for a cause among the members of the
not attributable to the corporation. corporation, who shall hold office for
one year until their successors are
F. Effects of Non-Use of Corporate Charter
elected and qualified.”
Sec. 22 of the Corporation Code states
Powers of the Board of Directors:
that: “If a corporation does not formally 1. Corporate Powers;
organize and commence the transaction of 2. Manage the Corporation; and
its business or the construction of its work 3. Control over and hold the properties
within 2 years from the date of its of the Corporation.
incorporation, its corporate powers cease *Board of Directors/Trustees is the
and the corporation shall be deemed statutory representative of the
dissolved. However, if the corporation has corporation.
commenced the transaction of its business General Rule: All corporate powers
but subsequently becomes continuously emanate from the Board of
inoperative for a period of at least 5 years, Directors/Trustees.
the same shall be a ground for the Exception: Unless otherwise provided
suspension or revocation of its corporate in this Code. (Limiting Clause)
The limiting clause means that there
franchise or certificate of incorporation.
are certain corporate matters that
This provision shall not apply if the failure
cannot be done by the Board by
to organize, commence the transaction of
reason that such matters fall upon the
its businesses or the construction of its
shareholders; or corporate matters
works, or to continuously operate is due to
that cannot be resolved by the Board
causes beyond the control of the
alone, i.e., it must be done with the
corporation as may be determined by the
approval of the shareholders.
SEC.”
*The period must be counted from the  Business Judgment Rule
Business Judgment Rule – questions
issuance of the Certificate of
of policy or management are left solely
Incorporation.
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to the honest decision of officers and committed within 5 years prior to the
directors of a corporation and the date of his election or appointment,
courts are without authority to shall qualify as a director, trustee or
substitute their judgment for the officer of any corporation.”
judgment of the board of directors; the Reason: The position is based on trust
board is the business manager of the and confidence.
corporation and so long as it acts in *No citizenship requirement.
*The By-Laws may provide additional
good faith its orders are not reviewable
qualifications/disqualifications.
by the courts or the SEC.
- A resolution or transaction pursued  Election of the Board Members
Sec. 24 of the Corporation Code
within the corporate powers and
provides that: “At all elections of
business operations of the corporation,
directors or trustees, there must be
and passed in good faith by the board
present, either in person or by
of directors/trustee, is valid and
representative authorized to act by
binding, and generally the courts have
written proxy, the owners of a majority
no authority to review the same and
of the outstanding capital stock, or if
substitute their own judgment, even
there be no capital stock, a majority of
when the exercise of such power may
the members entitled to vote. The
cause losses to the corporation or
election must be by ballot if requested
decrease the profits of a department.
*Great respect is accorded to the by any voting stockholder or member.
decisions of the Board of In stock corporations, every
Directors/Trustees. stockholder entitled to vote shall have
*The directors are not liable to the the right to vote in person or by proxy
stockholders in performing such acts. the number of shares of stock
 Qualifications of the Board Members standing, at the time fixed in the by-
Sec. 23 of the Corporation Code laws, in his own name on the stock
states that: “Every director must have books of the corporation, or where the
at least one share of the capital stock by-laws are silent at the time of the
of the corporation of which he is a election; and said stockholder may
director, which share shall stand in his vote such number of shares for as
name on the books of the corporation. many persons as there are directors to
Any director who ceases to be the be elected or he may cumulate said
owner of at least one share of the shares and give one candidate as
capital stock of the corporation of many votes as the number of directors
which he is a director shall thereby to be elected multiplied by the number
cease to be a director. Trustees of non- of his shares shall equal, or he may
stock corporations must be members distribute them on the same principle
thereof. A majority of the directors or among as many candidates as he shall
trustees of all corporations organized see fit: Provided, that the total number
under this Code must be residents of of votes cast by him shall not exceed
the Philippines.” the number of shares owned by him as
*In order to be eligible as director, shown in the books of the corporation
what is material is the legal title to and multiplied by the whole number of
not beneficial title or ownership of the directors to be elected: Provided,
stocks appearing on the books of the however, that no delinquent stock
corporation. shall be voted. Unless otherwise
*The directors/trustees must be provided in the articles of
natural persons. incorporation or in the by-laws,
*They must also be of legal age.
members of the corporations which
*He must possess other qualifications
have no capital stock may cast as
as may be prescribed in the by-laws of
many votes as there are trustees to be
the corporation.
*Under Sec. 27 of the Corporation elected but may not cast more than
Code: “No person convicted by final one vote for one candidate.
judgment of an offense punishable by Candidates receiving the highest
imprisonment for a period exceeding 6 number of votes shall be declared
years, or a violation of this Code elected. Any meeting of the
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stockholders or members called for an distribute the same among as many


election may adjourn from day to day candidates as he shall see fit.
or from time to time but not sine die or *Example: X has 10 shares in his
indefinitely if, for any reason, no name; there are 5 numbers of directors
election is held, or if there not present to be elected. X has 50 votes available
or represented by proxy, at the to him. X may opt to distribute the
meeting, the owners of a majority of votes to as many candidates as there
the outstanding capital stock, or if are provided that the total number of
there be no capital stock, a majority of votes does not exceed 50.
the member entitled to vote.” Purpose of cumulative voting: To
*It is the stockholders or corporators protect the minority stockholders.
who elect members of the Board of *The elected officer must act as a
Directors. body.
*The only procedure required by the *In a stock corporation, cumulative
Code is through Election. There can voting is a statutory right whereas in a
be no other modes. non-stock corporation, cumulative
*The election must be by ballot if voting is applicable if it is provided in
requested by any voting member or the Article of Incorporation.
stockholder. Sec. 26 of the Corporation Code
*A stockholder cannot be deprived in provides that: Within 30 days after the
the articles of incorporation or in the election of the directors, trustees and
by-laws of his statutory right to use officers of the corporation, the
any of the methods of voting in the secretary, or any other officer of the
election of directors. corporation, shall submit to the SEC,
*No delinquent stock shall be voted. the names, nationalities and
*It is not required that the candidate residences of the directors, trustees
received the majority vote, what the and officers elected. Should a director,
law provides is only plurality of votes. trustee or officer die, resign or in any
*Majority number is required only for manner cease to hold office, his heirs
the existence of a quorum. in case of his death, the secretary, or
Not included in outstanding
any other officer of the corporation, or
capital stocks: 1. Unissued stocks;
the director, trustee or officer himself,
2. Non-voting stocks;
3. Treasury Shares. shall immediately report such fact to
Methods of Voting: the SEC.”
1. Straight Voting – every  Term of Office
stockholder may vote such number of *The directors or trustees shall hold
shares for as many persons as there office for one (1) year subject to the
are directors to be elected. “hold over” principle, i.e., they
2. Cumulative Voting for One continue in office until their successors
Candidate – a stockholder is allowed are elected and qualified.
to concentrate his votes and give one *The one year period does not apply to
candidate as many votes as the directors initially elected for purposes
number of directors to be elected of incorporation.
multiplied by the number of his shares  Quorum Requirement in Board
shall equal. Meetings
*Example: X has 10 shares in his Sec. 25 of the Corporation Code
name; there are 5 numbers of directors states that: “Unless the articles of
to be elected. X has 50 votes (10x5) incorporation or the by-laws provide
available to him. X may opt to for a greater majority, a majority of the
concentrate all his 50 votes to a number of directors or trustees as
particular candidate. fixed in the articles of incorporation
3. Cumulative Voting by shall constitute a quorum for the
Distribution – a stockholder may transaction of corporate business, and
cumulate his shares by multiplying every decision of at least a majority of
also the number of his shares by the the directors or trustees present at a
number of directors to be elected and meeting at which there is a quorum
shall be valid as a corporate act,

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except for the election of officers non-stock corporation, on the written


which shall require the vote of a demand of a majority of the members
majority of all the members of the entitled to vote. Should the secretary
board.” fail or refuse to call the special
Q: Is the director allowed to let a proxy meeting upon such demand or fail or
attend a board meeting in behalf for refuse to give the notice, or if there is
himself? no secretary, the call for the meeting
A: NO. Proxy prohibition. may be addressed directly to the
Reason: Because of their personal
stockholders or members by any
qualifications.
stockholder or member of the
*Quorum requirement should always
corporation signing the demand.
be computed based on the number
Notice of the time and place of such
specified in the Articles of
meeting, as well as of the intention to
Incorporation regardless of ensuing
propose such removal, must be given
vacancies.
*The basis is always the number by publication or by written notice
specified in the Articles of prescribed in this Code. Removal may
Incorporation. be with or without cause: Provided,
*The corporation can modify the that removal without cause may not be
number by providing a different used to deprive minority stockholders
provision in the articles of or members of the right of
incorporation, however, the law representation to which they may be
provides that the modification must be entitled under Sec. 24 of this Code.”
for a number greater than that Requisites:
1. It must take place either at a regular
provided in the law. It cannot provide
meeting or special meeting of the
for a number less than the general
stockholders or members called for the
requirement of the code.
*For voting purposes, majority of the purpose;
2. There must be previous notice to
member present constituting a
the stockholders or member of the
quorum. Except: election of directors.
intention to remove;
 Removal of Board Members
3. The removal must be by a vote of
Sec. 28 of the Corporation Code
the stockholders representing 2/3
states that: “Any director or trustee of
outstanding capital stock or 2/3 of
a corporation may be removed from
members;
office by a vote of the stockholders
4. The director may be removed with
holding or representing at least 2/3 of
or without cause unless he was elected
the outstanding capital stock, or if the
by the minority, in which case, it is
corporation be a non-stock
required that there is cause for
corporation, by a vote of at least 2/3 of
removal.
the members entitled to vote: Reason: The functions of directors are
Provided, that such removal shall take fiduciary in nature.
place either at a regular meeting of the Requisites for the removal of
corporation or at a special meeting minority directors are:
called for the purpose, and in either 1. Justifiable cause;
case, after previous notice to 2. Satisfaction of the voting
stockholders or members of the requirements, i.e., 2/3 of OCS or
corporation of the intention to propose members.
such removal at the meeting. A special *It is the secretary of the corporation
meeting of the stockholders or upon order of the president or in case
members of a corporation for the there is no secretary, stockholder
purpose of removal of directors or representing majority of the
trustees, or any of them, must be outstanding capital stocks or member
called by the secretary on order of the signing the demand who may call a
president or on the written demand of meeting for the purpose of removal.
the stockholders representing or  Vacancies in the Board
Sec. 29 of the Corporation Code
holding at least a majority of the
provides that: “Any vacancy occurring
outstanding capital stock, or, if it be a
in the board of directors or trustees
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other than by removal by the 2. If compensation is granted to


stockholders or members or by directors by the vote of the
expiration of term, may be filled by the stockholders representing at least a
vote of at least a majority of the majority of the outstanding capital
remaining directors or trustees, if still stock at a regular or special
constituting a quorum; otherwise, said stockholders’ meeting.
vacancies must be filled by the Limitation: In no case shall the total
stockholders in a regular or special yearly compensation of directors
meeting called for that purpose. A exceed 10% of the net income before
director or trustee so elected to fill a income tax of the corporation during
vacancy shall be elected only or the the preceding year.
unexpired term of his predecessor in Reason: In order to avoid temptation
office. A directorship or trusteeship to on the part of directors to abuse
be filled by reason of an increase in powers by appropriating compensation
the number of directors or trustees packages since they are in control of
shall be filled only by an election at a corporate assets.
regular or at a special meeting of
C. Corporate Officers
stockholders or members duly called
 Concept of Corporate Officers
for the purpose, or in the same *Corporate powers reside on the Board
meeting authorizing the increase of of Directors; decision/policymaking
directors or trustees if so stated in the resides on them. Implementation of
notice of the meeting.” rules/policy lies on the corporate
General Rule: Power to elect directors
officers
is vested in the stockholders Categories:
Exception: Vacancy occurring in the 1. Statutory Corporate Officers
board of directors or trustees other – President (must be a stockholder);
than by removal by the stockholders or Secretary (must be a resident and
members or by expiration of term may citizen of the Philippines); Treasurer
be filled by the vote of at least a (must be a resident and citizen of the
majority of the remaining directors or Philippines).
trustees if still constituting a quorum. 2. As provided by the By-Laws –
 Compensation of Board Members must be clearly stated in the By-Laws
Sec. 30 of the Corporation Code that such office is a corporate office.
provides that: “In the absence of any 3. Those designated by the
provision in the by-laws fixing their Board of Directors provided the
compensation, the directors shall not Board of Directors is authorized to
receive any compensation, as such do so by the By-Laws.
directors, except for reasonable per  Validity and Binding Effect of Acts of
diems: Provided, however, that any Corporate Officers
such compensation other than per General Rule: No one, even corporate
diems may be granted to directors by officers can bind the corporation. It is
the vote of the stockholders only the Board of Directors who has
representing at least a majority of the the authority to bind the corporation.
outstanding capital stock at a regular Exceptions:
or special stockholders’ meeting. In no 1. If the By-Laws provides that such act
case shall the total yearly is part of the function of such office;
compensation of directors, as such 2. If authorized by the Board of
directors, exceed 10% of the net Directors
income before income tax of the  Doctrine of Apparent Authority
Doctrine of Apparent
corporation during the preceding
Authority/Doctrine of Estoppel –If a
year.”
General Rule: Directors are not corporation, knowingly permits one of
entitled to receive compensation its officers, or any other agent, to act
Exceptions: within the scope of an apparent
1. When their compensation is fixed in authority, it holds him out to the public
the by-laws; as possessing the power to do those
acts; and thus, the corporation will, as

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against anyone who has in good faith objections with the secretary
dealt with it through such agent, be (Sec. 65).
stopped from denying the agent’s 5. Agree or stipulate in a contract
authority. to hold himself personally liable
Cases: People’s Aircargo; Inter- with the corporation.
Asia; Lapu-Lapu 6. By virtue of a specific provision
*Requires good faith on the part of of law such as BP 22; Trust
third person. receipts Law; RA 7832 (Anti-
Electricity Pilferage Act of
D. Liability of Directors, Trustees and Officers 1997); Securities Regulation
 Instances when Corporate Code
Officers/Directors are held Solidarily
Liable *In Carag v NLRC, the Supreme Court
Sec. 31 of the Corporation Code held that not any violative of law, the
provides that: “Directors or trustees Code means that violation must have a
who wilfully and knowingly vote for or corresponding penalty. Patently unlawful
assent to patently unlawful acts of the act means that a law declares an act
corporation or who are guilty of gross unlawful and that such law provides
negligence or bad faith in directing the penalty for that unlawful act.
affairs of the corporation or acquire
any personal or pecuniary interest in  Self-Dealing Directors/Officers
conflict with their duty as such Sec. 32 of the Corporation Code
directors or trustees shall be liable states that: “A contract of the
jointly and severally for all damages corporation with one or more of its
resulting therefrom suffered by the directors or trustees or officers is
corporation, its stockholders or voidable, at the option of such
members and other persons. When a corporation, unless all of the following
director, trustee or officer attempts to conditions are present: 1. That the
acquire or acquires, in violation of his presence of such director or trustee in
duty, any interest adverse to the the board meeting in which the
corporation in respect of any matter contract was approved was not
which has been reposed in him in necessary to constitute a quorum for
confidence, as to which equity imposes such meeting; 2. That the vote of such
a disability upon him to deal in his own director or trustee was not necessary
behalf, he shall be liable as a trustee for the approval of the contract; 3.
for the corporation and must account That the contract is fair and
for the profits which otherwise would reasonable under the circumstances;
have accrued to the corporation.” and 4. That in case of an officer, the
General Rule: contract has been previously
Directors/Trustees/Officers are not authorized by the board of directors.
solidarily liable with the corporation. Where any of the first two conditions
Exceptions: set forth in the preceding paragraph is
1. Wilfully and knowingly vote for absent, in the case of a contract with a
and assent to patently unlawful director or trustee, such contract may
acts of the corporation (Sec. be ratified by the vote of the
31). stockholders representing at least 2/3
Case: Carag v NLRC
of the outstanding capital stock or of
2. Guilty of gross negligence or
at least 2/3 of the members in a
bad faith in directing the affairs
meeting called for the purpose:
of the corporation (Sec. 31).
Case: David v Construction Provided, That full disclosure of the
Industry adverse interest of the directors or
3. Acquire any personal or trustees involved is made at such
pecuniary interest in conflict of meeting: Provided, however, that the
their duty (Sec.31). contract is fair and reasonable under
4. Consent to the issuance of the circumstances.”
watered stocks or having Example:
knowledge thereof, fails to file

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In XYZ Corporation, A is a director. The interlocking director in one corporation


corporation acts through the Board of is substantial and his interest in the
Directors. XYZ Corporation and A other corporation or corporations is
entered into a lease contract. A as the merely nominal, he shall be subject to
lessor and XYZ Corporation as lessee. the provisions of the preceding section
The contract was approved by the insofar as the latter corporation or
Board of Directors. corporations are concerned.
Q: What is the status of the contract? Stockholdings exceeding 20% of the
General Rule: The contract is outstanding capital stock shall be
voidable. considered substantial for purposes of
Exception: If the requisites provided
interlocking directors.”
in Sec. 32 are present. Example:
Exception to the Exception: If A is a director of two corporation, ABC
requirement number 1 or 2 is absent, Corporation and XYZ Corporation. XYZ
in the case of a contract with a director Corporation and ABC Corporation
or trustee, such contract may be entered into a lease contract where
considered valid by the ratification of ABC Corporation is the lessor and XYZ
at least 2/3 of the outstanding capital Corporation is the lessee.
stock or 2/3 of the members. Q: Can this contract be invalidated on
Requisites: the ground that there is an interlocking
1. The presence of such director or
director?
trustee in the board meeting in which A: NO.
the contract was approved was not Q: What is the status of the contract?
necessary to constitute a quorum for A: General Rule: Contracts between
such meeting; two or more corporations having
2. The vote of such director or trustee interlocking directors are valid.
was not necessary for the approval of Exceptions:
the contract; 1. Contracts are void if contracts
3. The contract is fair and reasonable are fraudulent or if contracts are
under the circumstances; unfair and unreasonable.
4. In case of an officer, the contract 2. If the By-Laws prohibits
has been previously authorized by the interlocking director.
board of directors. Case: Gokongwei, Jr. v SEC
Reason: A’s presence in the board *The interest is nominal if his interest
meeting might affect the status of the is 20% or less of the outstanding
contract. capital stock. The interest is
substantial if his interest is more than
Self-Dealing Directors/Officers – 20% of the outstanding capital stock.
directors/officers who transact *If the interlocking director has a
business with their own corporation. substantial interest in one corporation
- This is not prohibited by law. and has a nominal interest in the other
Interlocking Directors – those who corporation, the director must comply
have been elected as directors in 2 or with the requisites provided in Sec. 32
more different corporations. on self-dealing directors.
- May be prohibited by the By-Laws Reason: The case is analogous to that
(Gokongwei case). of transactions involving self-dealing
-Not prohibited by law however there
directors because such director holds
are consequences.
substantial interest with the other
 Contracts involving Inter-locking
company.
Directors  Doctrine of Corporate Opportunity
Sec. 33 of the Corporation Code
Sec. 34 of the Corporation Code
provides that: “Except in cases of
states that: “Where a director, by
fraud, and provided the contract is fair
virtue of his office, acquires for himself
and reasonable under the
a business opportunity which should
circumstances, a contract between two
belong to the corporation, thereby
or more corporations having
obtaining profits to the prejudice of
interlocking directors shall not be
such corporation, he must account to
invalidated on that ground alone:
the latter for all such profits by
Provided, That if the interest of the
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refunding the same, unless his act has Committee is invalid it may be ratified by
been ratified by a vote of the the Board.
stockholders owning or representing at *The decision of the executive committee
least 2/3 of the outstanding capital needs no confirmation from the Board.
stock. This provision shall be Case: Filipinas Port, Inc.
*The corporation may create other
applicable notwithstanding the fact
committees.
that the director risked his own funds
Distinction: In executive committee,
in the venture.”
there is a statutory restriction on members
General Rule: A director shall refund
whereas in other committee there is no
to the corporation all the profits he
such restriction.
realizes on a business opportunity
General Rule: The executive committee
which: 1. the corporation is financially
may act on specific matters within the
able to undertake; 2. from its nature, is
competence of the board as may be
in line with corporations business and
delegated to it in the by-laws or on a
is of practical advantage to it; and 3.
majority vote of the board.
the corporation has an interest or a Exceptions:
reasonable expectancy. 1. Approval of any action for which
Exception: His act has been ratified shareholders’ approval is also required;
by a vote of the stockholders owning 2. The filing of vacancies in the board;
or representing at least 2/3 of the 3. The amendment or repeal of by-laws
outstanding capital stock. or the adoption of new by-laws;
*A business opportunity ceases to be 4. The amendment or repeal of any
corporate opportunity and transforms resolution of the board which by its
to personal opportunity where the express terms is not so amendable or
corporation refuses or is definitely no repealable;
longer able to avail itself of the 5. A distribution of cash dividends to the
opportunity. shareholders.

E. Executive Committee CORPORATE POWERS:


Sec. 35 of the Corporation Code states
that: “The by-laws of a corporation may A. Doctrine of Limited Capacity; Concept of
create an executive committee composed Ultra Vires Act
of not less than 3 members of the board to Sec. 45 of the Corporation Code states
be appointed by the board. Said that: “No corporation under this Code shall
committee may act, by majority vote of all possess or exercise any corporate powers
its members, on such specific matters except those conferred by this Code or by
within the competence of the board, as its articles of incorporation and except
may be delegated to it in the by-laws or such as are necessary or incidental to the
on a majority vote of the board, except exercise of powers so conferred.”
Ultra Vires Acts – an act committed
with respect to: (1) approval of any action
outside the object for which a corporation
for which shareholders’ approval is also
is created as defined by the law of its
required; (2) the filing of vacancies in the
organization and therefore beyond the
board; (3) the amendment or repeal of by-
power conferred upon it by law.
laws or the adoption of new by-laws; (4)
Effects of Ultra Vires Acts:
the amendment or repeal of any resolution 1. Executed Contract – courts will not
of the board which by its express terms is set aside or interfere with such
not so amendable or repealable; and (5) a contracts.
distribution of cash dividends to the 2. Executory Contract – no
shareholders.” enforcement even at the suit of either
Keyword: BY-LAWS party.
*It must be stated in the By-Laws. 3. Partly executed and Partly
*Board Resolution is not sufficient if there
executory contract – principle
is no provision in the By-Laws.
against unjust enrichment shall apply.
*The decision of the executive committee
is considered a Board Resolution. B. Classes of Corporate Powers
*The decision of the executive committee 1. Express
is not subject to appeal to the board. 2. Implied
However, if the resolution of the Executive 3. Incidental
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 Express – those expressly authorized retirement, and other plans for the benefit
by the Corporation Code and other of its directors, trustees, officers and
laws, and its Articles of Incorporation employees; and 11. To exercise such other
or Charter. powers as may be essential or necessary
 Implied – those that can be inferred to carry out its purpose or purposes as
from or necessary for the exercise of stated in the articles of incorporation.”
the express powers.  Amendment of Articles of Incorporation
 Incidental – those that are incidental Sec. 16 of the Corporation Code
to the existence of the corporation. states that: “Unless otherwise
prescribed by this Code or by special
Doctrine of Necessary Implication – those law, and for legitimate purposes, any
which can be reasonably inferred from the provision or matter stated in the
express powers given since they are necessary articles of incorporation may be
for the corporation to perform a particular act are amended by a majority vote of the
deemed part of such powers. board of directors or trustees and the
vote or written assent of the
C. Statutory Powers of a Corporation and the stockholders representing at least 2/3
Limitations on their Exercise of the outstanding capital stock,
Sec. 36 of the Corporation Code states
without prejudice to the appraisal right
that: “Every corporation incorporated
of dissenting stockholders in
under this Code has the power and
accordance with the provisions of this
capacity: 1. To sue and be sued in its
Code, or the vote or written assent of
corporate name; 2. Of succession by its
at least 2/3 of the members if it be a
corporate name for the period of time
non-stock corporation.”
stated in the articles of incorporation and *The following are excluded in
the certificate of incorporation; 3. To adopt counting the outstanding capital stock:
and use a corporate seal; 4. To amend its 1. Treasury stock; 2. Unissued shares.
articles of incorporation in accordance *Aside from the votes of majority of
with the provisions of this Code; 5. To the board and assent of the 2/3 of the
adopt by-laws, not contrary to law, morals, OCS, the approval of the SEC is
or public policy, and to amend or repeal necessary for the amendment of the
the same in accordance with this Code; 6. AOI.
In case of stock corporations, to issue or *There is an implied approval of the
sell stocks to subscribers and to sell SEC, i.e., failure to act on the
treasury stocks in accordance with the application filed by the corporation
provisions of this Code; and to admit within 6 mos.
members to the corporation if it be a non- Q: How to get the approval of the
stock corporation; 7. To purchase, receive, stockholders?
take or grant, hold, convey, sell, lease, A: 1. Call for a meeting; 2. Obtain the
pledge, mortgage and otherwise deal with written assent of the stockholders.
such real and personal property, including *In Tan v Sycip, the Supreme Court
securities and bonds of other corporations, held that in case of a non-stock
as the transaction of the lawful business of corporation, membership is personal
the corporation may reasonably and and non-transferrable unless the by-
necessarily require, subject to the laws provides otherwise. The deceased
limitations prescribed by law and the member is not entitled to vote.
Constitution; 8. To enter into merger or
Four changes in Articles of Incorporation
consolidation with other corporations as
that require the approval of the
provided in this Code; 9. To make
stockholders.
reasonable donations, including those for
1. Extension of corporate term;
the public welfare or for hospital,
2. Shortening of corporate term;
charitable, cultural, scientific, civic, or
3. Increase or Decrease of Capital Stock;
similar purposes: Provided, That no
4. Increase or Decrease of Bonded indebtedness.
corporation, domestic or foreign, shall give
*Approval of Stockholders is necessary in these
donations in aid of any political party or
changes because they are necessary for the
candidate or for purposes of partisan
corporation’s existence.
political activity; 10. To establish pension,
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 Extension/Shortening of Corporate Q: When the corporation increases its


Term capital stock, is the 25% requirement
Sec. 37 of the Corporation Code necessary? How can it be computed?
states that: “A private corporation may A: YES. The SEC ruled that the 25%
extend or shorten its term as stated in applies to the increase amount.
the articles of incorporation when *The corporation is required to
approved by a majority vote of the maintain a sinking fund.
board of directors or trustees and Q: What does bonded indebtedness
ratified at a meeting by the mean?
A: Requires longer time of payment;
stockholders representing at least 2/3
special burden on the corporation;
of the outstanding capital stock or by
involves the important assets of the
at least 2/3 of the members in case of
corporation.
non-stock corporation. Written notice
 Denial of Pre-emptive Right
of the proposed action and of the time Sec. 39 of the Corporation Code
and place of the meeting shall be states that: “All stockholders of a stock
addressed to each stockholder or corporation shall enjoy pre-emptive
member at his place of residence as right to subscribe to all issues or
shown on the books of the corporation disposition of shares of any class, in
and deposited to the addressee in the proportion to their respective
post office with postage prepaid, or shareholdings, unless such right is
served personally: Provided, That in denied by the articles of incorporation
case of extension of corporate term, or an amendment thereto: Provided,
any dissenting stockholder may That such pre-emptive right shall not
exercise his appraisal right under the extend to shares to be issued in
conditions provided in this code.” compliance with laws requiring stock
 Increase or Decrease of Capital Stock/
offerings or minimum stock ownership
Incurrence, Creation or Increase of
by the public; or to shares to be issued
Bonded Indebtedness
in good faith with the approval of the
Sec. 38 of the Corporation Code
stockholders representing 2/3 of the
states that: “No corporation shall
outstanding capital stock, in exchange
increase or decrease its capital stock
for property needed for corporate
or incur, create or increase any bonded
purposes or in payment of a previously
indebtedness unless approved by a
contracted debt.”
majority vote of the board of directors
*Coming from the increased authorized
and, at a stockholders’ meeting duly
capital stock.
called for the purpose, 2/3 of the * Similar to Right of First Refusal
outstanding capital stock shall favor *It is not a matter of right. It can be
the increase or diminution of the denied by the corporation through
capital stock, or the incurring, creating denial of such right in the articles of
or increasing of any bonded incorporation.
indebtedness. Written notice of the Purposes:
proposed increase or diminution of the 1. In order that the stockholder may be
capital stock or of the incurring, able to maintain their relative
creating, or increasing of any bonded proportional voting trend and control in
indebtedness and of the time and the corporation; 2. To avoid dilution of
place of the stockholders’ meeting at their proportionate voting and control
which the proposed increase or in the corporation.
diminution of the capital stock or the General Rule: Pre-emptive right is
incurring or increasing of any bonded available to stockholders.
Exception: if it is denied in the
indebtedness is to be considered ,
Articles of Incorporation or through
must be addressed to each stockholder
amendment.
at his place of residence as shown on
Exception to the Exception: Pre-
the books of the corporation and
emptive right shall not extend to:
deposited to the addressee in the post 1. Shares to be issued in compliance
office with postage prepaid, or served with laws requiring stock offerings or
personally. xxx.”

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minimum stock ownership by the Q: What makes the disposition


public; peculiar?
2. Shares to be issued in good faith A: The disposition is of all or
with the approval of the stockholders substantially all of the corporation’s
representing 2/3 of the outstanding properties and assets.
capital stock, in exchange for property Q: What kind of disposition involve?
needed for corporate purposes; and A: 1. Sell; 2. Lease; 3. Exchange; 4.
3. In payment of a previously Mortgage; 5. Pledge.
contracted debt. Requirements:
*Pre-emptive right is satisfied as long 1. Majority vote of the Board.
2. Vote of the Stockholders
as the corporation gives the
representing 2/3 of the OCS.
stockholder the opportunity to buy the
3. The sale does not bring about the
shares.
illegal combinations and
*The offer must first be made to the
monopolies.
stockholders.
 Sale or Disposition of Assets *No need for the approval of the SEC.
Sec. 40 of the Corporation Code Tests:
states that: “ Subject to the provisions 1. Quantitative Test – no statutory
of existing laws on illegal combinations test; pertains to the disposition of
and monopolies, a corporation may, by all assets
a majority vote of its board of directors 2. Qualitative Test – there is a
or trustees, sell, lease, exchange, statutory test; pertains to the
mortgage, pledge or otherwise dispose disposition of substantially all of its
of all or substantially all of its property assets.
and assets, including its goodwill, upon *The provision is so strict because the
such terms and conditions and for such law wants the corporation will reach its
consideration, which may be money, expiration term.
stocks, bonds or other instruments for Q: With the sale of all the assets of the
the payment of money or other corporation, will the same result to its
property or consideration, as its board dissolution?
of directors or trustees may deem A: NO. Possession or continued
expedient, when authorized by the possession of corporate properties is
vote of the stockholders representing not a condition for the existence of a
at least 2/3 of the outstanding capital corporation. Corporation still exists
stock, or in case of non-stock despite the disposition of all its
corporation by the vote of at least 2/3 properties and assets.
Q: Will the buying corporation be
of the members, in a stockholders’ or
made answerable for the liabilities of
members’ meeting duly called for the
the selling corporation?
purpose. Written notice of the
A: NO. The two corporations are two
proposed action and of the time and
separate personalities thus they are
place of the meeting shall be
separate and distinct from each other
addressed to each stockholder or
hence the buying corporation cannot
member at his place of residence as
be held liable to the obligations of the
shown on the books of the corporation
selling corporation.
and deposited to the addressee in the General Rule: The sale of all or
post office with postage prepaid, or substantially all of the assets of the
served personally: Provided, That any corporation does not make the buyer
dissenting stockholder may exercise answerable for the obligations of the
his appraisal right under the conditions seller.
provided in this Code. A sale or other Exceptions:
disposition shall be deemed to cover 1. If the buyer expressly agrees to
substantially all the corporate property assume the obligations of the
and assets if thereby the corporation seller.
would be rendered incapable of 2. If sale amounts to merger or
continuing the business or consolidation.
accomplishing the purpose for which it
was incorporated. xxx.”

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3. If and when application of piercing Sec. 42 of the Corporation Code


the veil of corporate entity doctrine states that: “Subject to the provisions
is warranted. of this Code, a private corporation may
4. If the purchaser becomes a invest its funds in any other
continuation of the seller. corporation or business or for any
5. Sale was done in violation of the purpose other than the primary
Bulk Sales Law. purpose for which it was organized
Case: PNB v Andrada when approved by a majority of the
 Acquisition of Corporate Shares board of directors or trustees and
Sec. 41 of the Corporation Code ratified by the stockholders
states that: “A stock corporation shall representing at least 2/3 of the
have the power to purchase or acquire outstanding capital stock, or by at
its own shares for a legitimate least 2/3 of the members in the case of
corporate purpose or purposes, non-stock corporations, at a
including but not limited to the stockholders’ or members’ meeting
following cases: Provided, That the duly called for the purpose. Written
corporation has unrestricted retained notice of the proposed investment and
earnings in its books to cover the the time and place of the meeting shall
shares to be purchased or acquired: 1. be addressed to each stockholder or
To eliminate fractional shares arising member at his place of residence as
out of stock dividends; 2. To collect or shown on the books of the corporation
compromise an indebtedness to the and deposited to the addressee in the
corporation, arising out of unpaid post office with postage prepaid, or
subscription, in a delinquency sale, served personally: Provided, That any
and to purchase delinquent shares sold dissenting stockholder shall have
during said sale; and 3. To pay appraisal right as provided in this
dissenting or withdrawing stockholders Code: Provided, however, That where
entitled to payment for their shares the investment by the corporation is
under the provisions of this Code.” reasonably necessary to accomplish its
Requisites:
primary purpose as stated in the
1. Unrestricted Retained Earnings
2. The acquisition must be for articles of incorporation, the approval
legitimate purpose of the stockholders or members shall
Q: What is an unrestricted retained not be necessary.”
Requisites:
earnings?
1. Majority vote of the Board
A: Earnings not allocated for any other 2. Vote of the stockholders
purpose. representing 2/3 OCS.
Q: What happens to reacquired  Declaration of Dividends
shares? Sec. 43 of the Corporation Code
A: General Rule: They are states that: “The board of directors of
automatically deemed retired. a stock corporation may declare
Exception: The AOI provides dividends out of the unrestricted
otherwise. retained earnings which shall be
payable in cash, in property, or in
Trust Fund Doctrine – The capital stock, stock to all stockholders on the basis
property and other assets of the corporation are of outstanding stock held by them:
regarded as equity in trust for the payment of the Provided, That any cash dividends due
corporate creditors. The subscribed capital stock on delinquent stock shall first be
of the corporation is a trust fund for the payment applied to the unpaid balance on the
of debts of the corporation which the creditors subscription plus costs and expenses,
have the right to look up to satisfy their credits. while stock dividends shall be withheld
Corporation may not dissipate this and the from the delinquent stockholder until
creditors may sue stockholders directly for the his unpaid subscription is fully paid:
unpaid subscription. Provided, further, That no stock
dividend shall be issued without the
 Investment of Corporate Funds
approval of stockholders representing
not less than 2/3 of the outstanding
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capital stock at a regular or special 1. Unrestricted Retained Earnings;


meeting duly called for the purpose. 2. Board approval;
Stock corporations are prohibited from 3. Ratification by the stockholders.
retaining surplus profits in excess of Q: Why stockholders’ ratification is
100% of their paid-in capital stock, necessary in the declaration of stock
except: 1. When justified by definite dividends?
corporate expansion projects or A: Because the earnings are
programs approved by the board of capitalized. It is considered to be a
directors; or 2. When the corporation is corporate assets.
prohibited under any loan agreement Q: May the board be compelled to
with any financial institution or declare dividends?
creditor, whether local or foreign, from A: General Rule: NO.
declaring dividends without its/his Exception: Stock corporations are
consent, and such consent has not yet prohibited from retaining surplus
been secured; or 3. When it can be profits in excess of 100% of their paid-
clearly shown that such retention is in capital stock.
necessary under special Exceptions to the Exception:
circumstances obtaining in the 1. Corporate expansion
corporation, such as when there is 2. Pursuant to loan agreement
need for special reserve for probable 3. Special circumstances/contingent
contingencies.” liabilities
*This section is exclusive to stock Q: Are the stock dividends considered
corporations. as watered stocks because the
Dividends – represents part of the stockholder concerned does not pay
earnings of the corporation which the anything therefor?
board has decided to distribute among A: NO. The unrestricted retained
the stockholders. earnings are considered to be a
*The fact that the corporation has consideration thus dividends received
surplus earning does not mean that it through stocks are not watered stocks.
is mandated to declare dividends; it is *The source of payment is the
still upon the sound discretion of the unrestricted retained earnings.
board of directors. Q: Are delinquent stockholders entitled
Reason: Trust Fund Doctrine to receive dividends?
*There must be a unrestricted retained
A: YES. But only in terms of cash
earnings before dividends may be
dividends.
declared.
Q: Who are entitled to receive
*The board may opt to restrict its
dividends?
earnings, as the earnings may be
A: Stockholders
allocated to legitimate business
*In Nielson case, the SC held that
purpose.
dividends cannot be given to non-
stockholders.
CASH STOCK *If there is date of record – Dividends
DIVIDENDS DIVIDENDS may be received by those persons who
does not require Requires are holders of stocks as of date of
stockholders’ stockholders’ record.
approval approval *If there is no date of record –
The stockholders The stockholders
dividends may be received by those
receive cash receive stocks
Creditor-debtor No creditor-debtor persons who are holders of stocks as of
relationship relationship the declaration.
Q: When the corporation declares
Requisites for declaration of stock dividends, would it likewise
cash/property dividends: create a creditor-debtor relationship
1. Board approval between the corporation and the
2. Unrestricted Retained Earnings stockholder?
A: NO. Stock dividends will not bring
Requisites for declaration of stock
about a creditor-debtor relationship.
dividends:
When it comes to shareholdings, the
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one holding the shares are considered into for such periods as may be
investors; risk-takers. provided by the pertinent laws or
Q: Will legal compensation possible to regulations.”
occur? Requisite:
A: NO. The parties are not mutually General Rule: Majority vote of the
creditor-debtor of each other. The OCS
Exception: 2/3 of the OCS
requisites under the Civil Code on legal
*SEC’s approval is not necessary
compensation are not present. *When the corporation enters into a
 Management Contract management contract, appraisal right
Sec. 44 of the Corporation Code
is NOT AVAILABLE to any dissenting
states that: “No corporation shall
stockholder.
conclude a management contract with Reason: Sound business policy
another corporation unless such dictates that it would be better for the
contract shall have been approved by corporation, at the inception of its
the board of directors and by operation, to be managed by a
stockholders owning at least the company who has been experienced in
majority of the outstanding capital a particular kind of business if the
stock, or by at least a majority of the managed corporation needs the
members in the case of a non-stock technical expertise, skills, experiences,
corporation, of both the managing and background of another entity.
the managed corporation, at a meeting
duly called for the purpose: Provided, CORPORATE BY-LAWS:
That 1. Where a stockholder or
stockholders representing the same A. Concept, Use and Nature of By-Laws
interest of both the managing and the By-Laws – relatively permanent and
continuing rules of action adopted by the
managed corporations own or control
more than 1/3 of the total outstanding corporation for its own government and
that of the individuals composing it and
capital stock entitled to vote of the
managing corporation; or 2. Where a those having the direction, management
and control of its affairs, in whole or in
majority of the members of the board
of directors of the managing part, in the management and control of its
affairs and activities.
corporation also constitute a majority
Nature: Regulates internal affairs of the
of the members of the board of
corporation.
directors of the managed corporation,
then the management contract must B. By-Laws in relation to Articles of
be approved by the stockholders of the Incorporation
managed corporation owning at least Distinction between By-Laws and
2/3 of the total outstanding capital Articles of Incorporation:
stock entitled to vote, or by at least By-Laws –is a condition subsequent.
2/3 of the members in the case of a Articles of Incorporation – is a condition
non-stock corporation. No precedent. Essential for corporate
management contract shall be entered existence.
into for a period longer than 5 years
for any one term. The provisions of the
ARTICLES OF BY-LAWS
next preceding paragraph shall apply
INCORPORATION
to any contract whereby a corporation
undertakes to manage or operate all or External affairs Internal Affairs
substantially all of the business of Affects the status Does not affect the
of existence of the status of the
another corporation, whether such
corporation existence but has
contracts are called service contracts, impact on the
operating agreements or otherwise: existence; failure to
Provided, however, That such service submit is a ground
contracts or operating agreements for
which relate to the exploration, disenfranchisement
development, exploitation or utilization Joint decision of the General Rule: joint
board and decision
of natural resources may be entered
stockholders Exception:
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Delegates the power *Non-submission of the By-Laws within the


to amend the By- prescribed period allowed by law is a
Laws to the Board ground for the dissolution of the
corporation.
*In Loyola Grandvillas Homeowners
C. Adoption of By-Laws; Effect of Non-Filing
Association v CA, the SC held that failure
within the prescribed period
to adopt a set of By-Laws within the
Sec. 46 of the Corporation Code states
prescribed period, notwithstanding the
that: “Every corporation formed under this
word used in the Code, the same would
Code must, within 1 month after receipt of
not result to automatic dissolution of the
official notice of the issuance of its
corporation. The failure to file by-laws
certificate of incorporation by the SEC,
would not, by itself, amount to dissolution
adopt a code of By-Laws for its
or extinguishment of the corporate
government not inconsistent with this
existence.
Code. For the adoption of By-Laws by the
*Section 46 of the Corporation Code must
corporation the affirmative vote of the
be read in conjunction with PD 902-A
stockholders representing at least a
which outlines the procedure to be
majority of the outstanding capital stock,
followed before the franchise/license of a
or of at least a majority of the members in
private corporation may be suspended or
case of non-stock corporations, shall be
revoked.
necessary. The By-Laws shall be signed by *Observance of Due Process is necessary.
the stockholders or members voting for *In Sawadjaan v CA, the SC held that
them and shall be kept in the principal meanwhile when the By-Laws is not yet
office of the corporation, subject to the submitted, the corporation, at that time,
inspection of the stockholders or members and the very least, may be considered as
during office hours. A copy thereof, duly a De Facto Corporation and therefore, its
certified to by a majority of the directors right to exist as such cannot be inquired
or trustees countersigned by the secretary into or cannot be collaterally attacked in a
of the corporation, shall be filed with the private suit. It is for the State to initiate a
SEC which shall be attached to the original proceeding questioning the existence, on
articles of incorporation. Notwithstanding the ground of its non-submission of By-
the provisions of the preceding paragraph, Laws, within the prescribed period.
By-Laws may be adopted and filed prior to
incorporation; in such case, such By-Laws D. Contents of By-Laws; Requisites of a Valid
shall be approved and signed by all the By-Law Provision
incorporators and submitted to the SEC, Sec. 47 of the Corporation Code states
together with the articles of incorporation. that: “Subject to the provisions of the
In all cases, By-Laws shall be effective Constitution, this Code, other special laws,
only upon the issuance by the SEC of a and the articles of incorporation, a private
certification that the By-Laws are not corporation may provide in its By-Laws for:
inconsistent with this Code. The SEC shall 1. The time, place and manner of calling
not accept for filing the By-Laws or any and conducting regular or special
amendment thereto of any bank, banking meetings of the directors or trustees; 2.
institution, building and loan association, The time and manner of calling and
trust company, insurance companies, conducting regular or special meetings of
public utility, educational institution or the stockholders or members; 3. The
other special corporations governed by required quorum in meetings of
special laws, unless accompanied by a stockholders or members and the manner
certificate of the appropriate government of voting therein; 4. The form for proxies
agency to the effect that such By-Laws or of stockholders and members and the
amendments are in accordance with law.” manner of voting them; 5. The
*Submission of By-Law is not a qualifications, duties and compensation of
requirement for acquisition of corporate directors or trustees, officers and
existence, however, for the corporation to employees; 6. The time for holding the
be able to continue its corporate annual election of directors or trustees
existence, the corporation is required to and the mode or manner of giving notice
submit the corporate By-Law. thereof; 7. The manner of election or

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appointment and the term of office of all Laws shall only be effective upon the
officers other than directors or trustees; 8. issuance by the SEC of a certification that
The penalties for violation of the By-Laws; the same are not inconsistent with this
9. In the case of stock corporations, the Code.”
manner of issuing stock certificates; and
10. Such other matters as may be F. By-Laws in relation to Third Parties
*In China Banking Corporation v CA,
necessary for the proper or convenient
the SC held that in the absence of
transaction of its corporate business and
evidence that China Bank is aware of the
affairs.”
Requisites: provisions of the By-Laws, China Bank is
1. It must be consistent with Corporation not bound to observe the provisions of the
Code, other pertinent laws and By-Laws. Hence, China Bank must be
regulations. allowed to register the shares in its name.
2. It must be consistent with the Articles General Rule: Third parties are not
of Incorporation. affected by the By-Laws.
3. It must be reasonable and not arbitrary Exception: If the third party has actual
or oppressive. knowledge of the provisions of the By-
4. It must not disturb vested rights, Laws.
impair contract or property rights of
stockholders or members or create CORPORATE MEETINGS:
obligations unknown to law.
A. Kinds of Corporate Meetings
Sec. 49 of the Corporation Code
E. Amendment to By-Laws
Sec. 48 of the Corporation Code provides that: “Meetings of directors,
provides that: “The board of directors or trustees, stockholders, or members may
trustees, by a majority vote thereof, and be regular or special.”
Kinds:
the owners of at least a majority of the
a. Stockholders/Members:
outstanding capital stock, or at least a 1. Regular meeting
majority of the members of a non-stock 2. Special meeting
corporation, at a regular or special b. Directors/Trustees:
meeting duly called for the purpose, may 1. Regular meeting
amend or repeal any By-Laws or adopt 2. Special meeting
new By-Laws. The owners of 2/3 of the Sec. 50 of the Corporation Code
outstanding capital stock or 2/3 of the provides that: “Regular meetings of
members in a non-stock corporation may stockholders or members shall be held
delegate to the board of directors or annually on a date fixed in the by-laws, or
trustees the power to amend or repeal any if not so fixed, on any date in April of
By-Laws or adopt new By-Laws: Provided, every year as determined by the board of
That any power delegated to the board of directors or trustees: Provided, That
directors or trustees to amend or repeal written notice of regular meetings shall be
any By-Laws or adopt new By-Laws shall sent to all stockholders or members of
be considered as revoked whenever record at least 2 weeks prior to the
stockholders owning or representing a meeting, unless a different period is
majority of the outstanding capital stock required by the by-laws. Special meetings
or a majority of the members in non-stock of stockholders or members shall be held
corporations, shall so vote at a regular or at any time deemed necessary or as
special meeting. Whenever any provided in the by-laws: Provided,
amendment or new By-Laws are adopted, however, That at least 1 week written
such amendment or new By-Laws shall be notice shall be sent to all stockholders or
attached to the original By-Laws in the members, unless otherwise provided in
office of the corporation, and a copy the by-laws. Notice of any meeting may be
thereof, duly certified under oath by the waived, expressly or impliedly, by any
corporate secretary and a majority of the stockholder or member. Whenever, for any
directors or trustees, shall be filed with the cause, there is no person authorized to
SEC the same to be attached to the call a meeting, the SEC, upon petition of a
original articles of incorporation and stockholder or member on a showing of
original By-Laws. The amended or new By- good cause therefor, may issue an order
to the petitioning stockholder or member
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directing him to call a meeting of the meeting must be sent to every director or
corporation by giving proper notice trustee at least 1 day prior to the
required by this Code or by the by-laws. scheduled meeting unless otherwise
The petitioning stockholder or member provided by the by-laws.
shall preside thereat until at least a
majority of the stockholders or members B. Requirements of a Meeting
1. It must be held at the proper place.
present have been chosen one of their
2. It must be held at the stated date and
number as presiding officer.”
at the appointed time or at a
*Regular meeting of
reasonable time thereafter.
stockholders/members shall be held 3. It must be called by the proper person.
annually on a date fixed in the by-laws or 4. There must be a previous notice.
if not so fixed, on any date in April of 5. There must be a quorum.
every year. Written notice of regular Sec. 51 of the Corporation Code
meetings shall be sent 2 weeks prior to provides that: “Stockholders’ or members’
the meeting unless a different period is meetings, whether regular or special, shall
required by the by-laws. be held in the city or municipality where
** Special meeting of the principal office of the corporation is
stockholders/members shall be held at located, and if practicable in the principal
any time deemed necessary or as office of the corporation: Provided, That
provided in the by-laws. Written notice Metro Manila shall, for purposes of this
shall be sent to all stockholders or section, be considered a city or
members at least one week or unless municipality. Notice of meetings shall be in
otherwise provided in the by-laws. writing, and the time and place thereof
Sec. 53 of the Corporation Code stated therein. All proceedings had and
provides that: “Regular meetings of the any business transacted at any meeting of
board of directors or trustees of every the stockholders or members, if within the
corporation shall be held monthly, unless powers or authority of the corporation,
the by-laws provide otherwise. Special shall be valid even if the meeting be
meetings of the board of directors or improperly held or called, provided all the
trustees may be held at any time upon the stockholders or members of the
call of the president or as provided in the corporation are present or duly
by-laws. Meetings of directors or trustees represented at the meeting.”
of corporations may be held anywhere in *Applies to both stock and non-stock
or outside of the Philippines, unless the corporations.
by-laws provide otherwise. Notice of General Rule: The meeting must be held
regular or special meetings stating the in the city or municipality where the
date, time and place of the meeting must principal office is located.
be sent to every director or trustee at Exception: Sec. 93 on non-stock
least 1 day prior to the scheduled corporations, the By-Laws may provide
meeting, unless otherwise provided by the different venue for their meeting.
by-laws. A director or trustee may waive *A casual reading of section 51 would say
this requirement, either expressly or that a corporation cannot provide any
impliedly.” other place for the meeting of
*Regular meetings of directors/trustees stockholders. But in case of a non-stock
shall be held monthly unless the by-laws corporation, Section 93 of the Corporation
provide otherwise. provides that the by-laws could provide
*Special meetings of directors/trustees any place for the meeting of its members
may be held at any time upon the call of provided that it is within the Philippines
the president or as provided in the by- and proper notice has been given.
laws. Q: Is there a conflict between Section 51
*Meetings of directors or trustees may be and Section 93?
held anywhere in or outside of the A: YES. There is conflict but this conflict
Philippines unless the by-laws provide may be reconciled. As a rule, the by-laws
otherwise. may provide a different place of meeting
*Notice of regular or special meetings provided that it is within the Philippines
stating the date, time and place of the and notice has been given. As an

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exception, if the by-laws is silent of the A: NO.


place of the meeting, section 51 applies. Q: Even if there are proxies?
Sec. 52 of the Corporation Code A: YES.
Q: Shares not yet fully paid but not
provides that: “Unless otherwise provided
yet delinquent, are they entitled to
for in this Code or in the by-laws, a
vote?
quorum shall consist of the stockholders
A: YES.
representing a majority of the outstanding *Delinquent stock is not entitled to
capital stock or a majority of the members vote and his presence would not be
in the case of non-stock corporations.” taken for purposes of quorum.
General Rule: Majority of the OCS or *The only right remain is the right
Majority of the members to receive dividends subject to the
Exception: Unless otherwise provided by provision of Section 43.
the Code or by the By-Laws. 2. Escrow Shares
*In Tan v Sycip, deceased member is not *Escrow shares are not entitled to
entitled to vote vote before the fulfillment of the
Sec. 54 of the Corporation Code condition imposed thereon.
provides that: “The president shall preside 3. Unpaid Shares
at all meetings of the directors or trustees Sec. 72 of the Corporation
as well as of the stockholders or members, Code provides that: “Holders of
unless the by-laws provide otherwise.” subscribed shares not fully paid
which are not delinquent shall have
C. Right to Vote of Stockholders all the rights of a stockholder.”
 Instances when voting right not General Rule: The holder of
available unpaid shares can exercise the
Sec. 6 of the Corporation Code right to vote.
provides that: “Except as provided in Exception: If it is provided in the
the immediately preceding paragraph, subscription contract that such
the vote necessary to approve a right cannot be exercised until the
particular corporate act as provided in subscription is fully paid.
this Code shall be deemed to refer only 4. Sequestered Shares
Q: What is the reason for
to stocks with voting rights.”
Instances when voting right is not sequestration process?
A: For investigative purposes; To
available:
1. Delinquent shares avoid wastage dissipation of
2. Treasury shares assets.
3. Fractional shares Q: Is PCGG authorized to vote for
4. Escrow shares the sequestered shares?
 Rules on: A: General Rule: No. PCGG
1. Delinquent Shares cannot vote for the sequestered
Sec. 71 of the Corporation shares because being a
Code provides that: “No delinquent conservator/administrator, it should
stock shall be voted for or be only perform acts of administration
entitled to vote or to and not acts of ownership.
representation at any stockholders’ Exception: If there is a strong
meeting, nor shall the holder evidence that indeed the shares
thereof be entitled to any of the have been purchased through
rights of a stockholder except the public funds.
right to dividends in accordance Requisites:
with the provisions of this Code, 1. Strong evidence or prima facie
until and unless he pays the evidence that the shares are ill-
amount due on his subscription gotten.
with accrued interest, and the costs 2. There is an imminent danger
and expenses of advertisement, if that the shares will be
any.” dissipated.
*Delinquency arises upon default in Case: Transmiddle East v CA
Q: During the pendency of
payment of subscription.
Q: Are they included for quorum sequestration process, are the
and voting purposes?
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sequestered shares included for signed by all the co-owners,


quorum purposes? authorizing one or some of them or
A: General Rule: YES. any other person to vote such
Q: Who can vote them? share or shares: Provided, That
A: General Rule: Stockholder of
when the shares are owned in an
record.
“and/or” capacity by the holders
*In Republic of the Philippines v
thereof, any one of the joint owners
COCOFED, the SC held that there
can vote said shares or appoint a
is a prima facie evidence that the
proxy therefor.”
shares are purchased with the use
of public funds. D. Concept of Proxy and Voting Trust
5. Pledgor, Mortgagor or
Agreement
Administrator of Shares Proxy is a written authorization given by
Sec. 55 of the Corporation
one person to another so that the second
Code provides that: “In case of
person can act for the first.
pledged or mortgaged shares in *Proxy is a representative.
stock corporations, the pledgor or *Relationship: Principal-Agent.
mortgagor shall have the right to *Proxy is authorized to vote and also
attend and vote at meetings of authorized to be present in a meeting.
stockholders, unless the pledgee or Functions: For quorum purposes; for
mortgagee is expressly given by voting purposes.
the pledgor or mortgagor such *In Board meeting, proxy is not allowed
right in writing which is recorded (Sec. 25 of the Corporation Code).
Sec. 58 of the Corporation Code
on the appropriate corporate
provides that: “Stockholders and members
books. Executors, administrators,
may vote in person or by proxy in all
receivers, and other legal
meetings of stockholders or members.
representatives duly appointed by
Proxies shall be in writing, signed by the
the court may attend and vote in
stockholder or member and filed before
behalf of the stockholders or
the scheduled meeting with the corporate
members without need of any
secretary. Unless otherwise provided in the
written proxy.”
Q: Can the pledgee/mortgagee proxy, it shall be valid only for the meeting
exercise the right to vote? for which it is intended. No proxy shall be
A: General Rule: No. The right to valid and effective for a period longer than
vote remains to the owner thus, it 5 years at any one time.”
is the pledgor/mortgagor that can Requisites:
1. Must be in writing
exercise it.
2. Filed before the scheduled meeting;
Exception: If there is an
under the SEC rule, 10 days before the
agreement that the
scheduled meeting
pledgee/mortgagee can exercise
*Proxy ensures presence of a quorum and
the right to vote.
also approval of corporate acts.
Case: Calapatia
General Rule: Proxy is revocable.
*Administrator/executor/heirs have
Exception: If proxy is coupled with
the right to vote even without prior
interest.
proxy. But the SEC requires them to Ways to revoke proxy:
submit letters of appointment or 1. By execution of subsequent proxy.
documents showing that he has 2. If the stockholder concerned would
been duly instituted as appear in the scheduled meeting.
executor/administrator of the
deceased. Voting Trust Agreement is an
6. Shares Jointly Owned agreement whereby one or more
Sec. 56 of the Corporation stockholders transfer their shares of
Code provides that: “In case of stocks to a trustee, who thereby acquires
shares of stock owned jointly by for a period of time the voting rights
two or more persons, in order to (and/or any other rights) over such shares;
vote the same, the consent of all and in return, trust certificates are given
the co-owners shall be necessary, to the stockholders, which are transferable
unless there is a written proxy,

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like stock certificates, subject however, to inspection of all corporate books and
the trust agreement. records in accordance with the provisions
of this Code. Any other stockholder may
PROXY VOTING TRUST transfer his shares to the same trustee or
AGREEMENT trustees upon the terms and conditions
The stockholder The stockholder
stated in the voting trust agreement, and
remains the ceases to be a
stockholder of stockholder of thereupon shall be bound by all the
record record provisions of said agreement. No voting
Revocable Irrevocable trust agreement shall be entered into for
General Rule: 5 the purpose of circumventing the law
years against monopolies and illegal
Exception: If combinations in restraint of trade or used
coupled with
for purposes of fraud. Unless expressly
interest
renewed, all rights granted in a voting
trust agreement shall automatically expire
*The transfer includes the transfer of legal
at the end of the agreed period, and the
title.
voting trust certificates as well as the
Sec. 59 of the Corporation Code
certificates of stock in the name of the
provides that: “One or more stockholders
trustee or trustees shall thereby be
of a stock corporation may create a voting
deemed cancelled and new certificates of
trust for the purpose of conferring upon a
stock shall be reissued in the name of the
trustee or trustees the right to vote and
transferors. The voting trustee or trustees
other rights pertaining to the shares for a
may vote by proxy unless the agreement
period not exceeding 5 years at any time:
provides otherwise.”
Provided, That in the case of a voting trust
Consequence: The stockholder entering
specifically required as a condition in a
into a voting trust agreement ceases to be
loan agreement, said voting trust may be
a stockholder of record.
for a period exceeding 5 years but shall
*In case of Lee v CA, the SC held that the
automatically expire upon full payment of
stockholder concerned loses his legal title
the loan. A voting trust agreement must
to the shares so that if the stockholder is,
be in writing and notarized, and shall
at the same time, a director of the
specify the terms and conditions thereof. A
corporation, automatically he is
certified copy of such agreement shall be
disqualified to continue performing the
filed with the corporation and with the
duties of a director because the law
SEC; otherwise, said agreement is
requires each and every director to have
ineffective and unenforceable. The
legal, not beneficial title to at least one
certificate or certificates of stock covered
share.
by the voting trust agreement shall be
cancelled and new ones shall be issued in E. Derivative Suit; Concept and Requisites
the name of the trustee or trustees stating Derivative Suit is a suit brought by any
that they are issued pursuant to said stockholder, usually a minority
agreement. In the books of the shareholder, to redress a wrong
corporation, it shall be noted that the committed against the corporation
transfer in the name of the trustee or whenever the responsible officers refuse
trustees is made pursuant to said voting to take any action thereon or are the very
trust agreement. The trustee or trustees person to be sued.
shall execute and deliver to the *This prerogative is developed through
transferors voting trust certificates, which jurisprudence.
shall be transferable in the same manner *This is expressly mandated by Sec. 31 of
and with the same effect as certificates of the Corporation Code.
stock. The voting trust agreement filed Q: Why derivative?
with the corporation shall be subject to A: From the word derive. The one bringing
examination by any stockholder of the the suit derives the cause of action from
corporation in the same manner as any the corporation.
Q: Who brings the suit?
other corporate book or record: Provided,
A: Any stockholder/member usually
That both the transferor and the trustee or
minority stockholder.
trustees may exercise the right of Q: Whose cause of action?
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A: It is the corporation’s cause of action. *Subscription is unique because it involves


Q: Are we in violation of the Code? unissued shares.
A: No. Because the power to sue lies on
the board thus when the board refuses to B. Concept of Subscription Contract
take action in order to protect the Subscription Contract is, under Sec. 60
corporation derivative suit may be of the Corporation Code, “any contract
allowed. for the acquisition of unissued stock in an
Compelling Reason: Inaction of the existing corporation or a corporation still
officers. Failure to discharge their to be formed shall be deemed a
responsibilities. Requisites: subscription within the meaning of this
1. The stockholder bringing the suit must Title, notwithstanding the fact that the
be one of record as of the time the parties refer to it as a purchase or some
cause of action accrues as well as of other contract.”
the time the action is brought unless *This is strictly regulated by the
the cause of action is a continuing Corporation Code.
offer.
*The stockholder must implead the C. Kinds of Subscription
real party in interest, i.e. the 1. Pre-incorporation subscription –
corporation. one entered into before incorporation.
*In Chua v CA, the SC held that the Sec. 61 of the Corporation Code
corporation must be impleaded since it provides that: “A subscription for
is the real party in interest. shares of stock of a corporation still to
2. The action must be named under the be formed shall be irrevocable for a
corporation’s name period of at least 6 months from the
3. General Rule: The stockholder date of subscription, unless all of the
bringing the suit must have exhausted other subscribers consent to the
intra-corporate remedies within the revocation, or unless the incorporation
corporation. of said corporation fails to materialize
Exception: If the very person to be within said period or within a longer
sued is the responsible officers period as may be stipulated in the
themselves. contract of subscription: Provided, That
**This is a condition precedent. no pre-incorporation subscription may
4. The suit is not intended to harass the
be revoked after the submission of the
defendant, not a nuisance or
articles of incorporation to the SEC.”
harassment suit. *Contracts between the subscribers.
5. Appraisal right must not be an 2 Fold Characteristics:
available remedy. a. It is a contract between
subscribers.
Individual suit is a suit filed by the b. May be regarded as continuing
stockholder because his personal right has offer on the part of the subscriber
been violated. The cause of action is concerned which the corporation
personal to the stockholder. The party may accept upon acquisition of
injured is the stockholder himself. juridical personality.
Reason: The corporation is not yet
Representative suit is a suit filed by a
in existence.
group of stockholders that suffered 2. Post incorporation subscription –
common injury. one entered into after the
incorporation for the acquisition of
SUBSCRIPTION CONTRACT:
unissued stock.
*Contracts between the subscribers
A. Ways to become a Stockholder of a
and the corporation.
Corporation
*Creates a creditor-debtor relationship.
1. Subscription contract with the
corporation. D. Consideration for the Issuance of Shares
2. Purchase or acquisition of shares from Sec. 62 of the Corporation Code
existing stockholders. provides that: “Stocks shall not be issued
3. Purchase of treasury shares from the
for a consideration less than the par or
corporation.
issued price thereof. Consideration for the
*All of them involve shareholdings.
issuance of stock may be any or a
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combination of any two or more of the  Remedies to enforce payment of


following: 1. Actual cash paid to the subscription
corporation; 2. Property, tangible or 1. By Extra-judicial sale at public
intangible, actually received by the auction.
corporation and necessary or convenient 2. By judicial action.
for its use and lawful purposes at a fair 3. Collection from cash dividends and
valuation equal to the par or issued value withholding of stock dividends.
of the stock issued; 3. Labor performed for  When shares are considered
or services actually rendered to the delinquent
Sec. 67 of the Corporation Code
corporation; 4. Previously incurred
provides that: “Subject to the
indebtedness of the corporation; 5.
provisions of the contract of
Amounts transferred from unrestricted
subscription, the board of directors of
retained earnings to stated capital; and 6.
any stock corporation may at any time
Outstanding shares exchanged for stocks
declare due and payable to the
in the event of reclassification of
corporation unpaid subscriptions to the
conversion. Where the consideration is
capital stock and may collect the same
other than actual cash, or consists of
or such percentage thereof, in either
intangible property such as patents of
case with accrued interest, if any, as it
copyrights, the valuation thereof shall
may deem necessary. Payment of any
initially be determined by the
unpaid subscription or any percentage
incorporators or the board of directors,
thereof, together with the interest
subject to the approval by the SEC. Shares
accrued, if any, shall be made on the
of stock shall not be issued in exchange
date specified in the contract of
for promissory notes or future service. The
subscription or on the date stated in
same considerations provided for in this
the call made by the board. Failure to
section, insofar as they may be applicable,
pay on such date shall render the
may be used for the issuance of bonds by
entire balance due and payable and
the corporation. The issued price of no-par
shall make the stockholder liable for
value shares may be fixed in the articles
interest at the legal rate on such
of incorporation or by the board of
balance, unless a different rate of
directors pursuant to authority conferred
interest is provided in the by-laws,
upon it by the articles of incorporation or
computed from such date until full
the by-laws, or in the absence thereof, by
payment. If within 30 days from the
the stockholders representing at least a
said date no payment is made, all
majority of the outstanding capital stock
stocks covered by said subscription
at a meeting duly called for the purpose.”
Valid considerations for the shall thereupon become delinquent
subscription agreements: and shall be subject to sale as
1. Cash hereinafter provided, unless the board
2. Property of directors orders otherwise.”
3. Labor or services actually rendered to *If there was no date as to payment of
the corporation subscription stated in the subscription
4. Prior corporate obligations agreement, the board may call on all
5. Amounts transferred from unrestricted the unpaid subscribers to pay the
retained earnings to stated capital remaining balance of their
6. Outstanding shares in exchange for subscription. Failure to pay within 30
stocks in the event of reclassification days from the said date, all stocks
or conversion. covered by said subscription shall
thereupon become delinquent and
E. Payment of Subscription
Q : When payment of the subscription is shall be subject to sale unless the
made? board of directors orders otherwise.
A: Look into the subscription agreement. If
F. Certificate of Stock
subscription agreement is silent as to
Certificate of Stock is a written
when the amount of subscription to be
evidence of the shares of stock but it is
paid, the board of directors may call on all
not the share itself.
the unpaid subscribers to pay the *Does not represent credit.
remaining balance of their subscription. Q: How important is a stock certificate?
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A: It is an evidence of ownership of stocks. *The title over the share can be


Q: Who issue stock certificate? assigned, transferred by indorsement
A: Stock certificates must be signed by and delivery.
the president or vice-president, *Due course holding is not applicable.
countersigned by the secretary or
assistant secretary. G. Transfer of Shares
Q: When certificate of stock may be If represented by a certificate, the
issued? following must be strictly complied
A: Sec. 64 of the Corporation Code with:
states that: “No certificate of stock shall 1. Delivery of the certificate;
be issued to a subscriber until the full 2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer
amount of his subscription together with
must be recorded in the books of the
interest and expenses (in case of
corporation.
delinquent shares), if any is due, has been
*If not represented by the certificate, the
paid.”
shares may be transferred by means of a
 Doctrine of Indivisibility of Subscription
deed of assignment and such is duly
Contract
Doctrine of Indivisibility of recorded in the books of the corporation.
*To make the transfer binding to the
Subscription Contract: Failure to
corporation and third person, the transfer
pay any of the installments due would
must be recorded in the stock and transfer
necessarily affect all the other
book of the corporation.
installments because the subscription
Q: Who is the owner of the share?
is to be treated as one, whole, entire, A: The stockholder of record.
indivisible contract. Upon default of
payment on any of the installment H. Lost and Destroyed Certificate of Stock
results to entire subscription due and Sec. 73 of the Corporation Code
demandable. provides that: “The following procedure
*The Certificate of Stock cannot be shall be followed for the issuance by a
divided into portions. corporation of new certificates of stock in
*No certificate of stock shall be issued lieu of those which have been lost, stolen
until the full payment of the or destroyed: 1. The registered owner of a
subscription. certificate of stock in a corporation or his
*The corporation has an automatic lien legal representative shall file with the
over the shares. corporation an affidavit in triplicate setting
Q: What will happen to the payment
forth, if possible, the circumstances as to
already made by the subscriber?
how the certificate was lost, stolen or
A: The payment partially made shall
destroyed, the number of shares
be applied proportionately to all the
represented by such certificate, the serial
shares covered by the subscription.
Example: number of the certificate and the name of
P10 per share; payment made is P6000 the corporation which issued the same. He
covering 1000 shares. The P6000 shall shall also submit such other information
be allocated equally to all shares. P6 and evidence which he may deem
per share has been paid. P4 per share necessary; 2. After verifying the affidavit
is the liability. and other information and evidence with
 Certificate of Stock, quasi-negotiable the books of the corporation, said
Q: can the stock certificate be treated corporation shall publish a notice in a
as negotiable instrument under NIL? newspaper of general circulation published
A: No. The requisites are not complied in the place where the corporation has its
with. There is no engagement to pay in principal office, once a week for 3
sum certain in money. consecutive weeks at the expense of the
*Negotiable instrument represents registered owner of the certificate of stock
credit. Creditor-debtor relationship which has been lost, stolen or destroyed.
arises. The notice shall state the name of said
Q: Are certificates of stock negotiable? corporation, the name of the registered
A: They are negotiable in certain
owner and the serial number of said
extent. That is why they are quasi-
certificate, and the number of shares
negotiable.
represented by such certificate, and that

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after the expiration of 1 year from the demand, the yeas and nays must be taken
date of the last publication, if no contest on any motion or proposition, and a record
has been presented to said corporation thereof carefully made. The protest of any
regarding said certificate of stock, the director, trustee, stockholder or member
right to make such contest shall be barred on any action or proposed action must be
and said corporation shall cancel in its recorded in full on his demand. The
books the certificate of stock which has records of all business transactions of the
been lost, stolen or destroyed and issue in corporation and the minutes of any
lieu thereof new certificate of stock, unless meetings shall be open to inspection by
the registered owner files a bond or other any director, trustee, stockholder or
security in lieu thereof as may be member of the corporation at reasonable
required, effective for a period of 1 year, hours on business days and he may
for such amount and in such form and with demand, writing, for a copy of excerpts
such sureties as may be satisfactory to the from said records or minutes, at his
board of directors, in which case a new expense. Any officer or agent of the
certificate may be issued even before the corporation who shall refuse to allow any
expiration of the 1 year period provided director, trustee, stockholder or member
herein: Provided, That if a contest has of the corporation to examine and copy
been presented to said corporation or if an excerpts from its records or minutes, in
action is pending in court regarding the accordance with the provisions of this
ownership of said certificate of stock Code, shall be liable to such director,
which has been lost, stolen or destroyed, trustee, stockholder or member for
the issuance of the new certificate of stock damages, and in addition, shall be guilty
in lieu thereof shall be suspended until the of an offense which shall be punishable
final decision by the court regarding the under Section 144 of this Code: Provided,
ownership of said certificate of stock That if such refusal is made pursuant to a
which has been lost, stolen or destroyed. resolution or order of the board of
Except in case of fraud, bad faith, or directors or trustees, the liability under
negligence on the part of the corporation this section for such action shall be
and its officers, no action may be brought imposed upon the directors or trustees
against any corporation which shall have who voted for such refusal: and Provided,
issued certificate of stock in lieu of those further, That it shall be a defense to any
lost, stolen or destroyed pursuant to the action under this section that the person
procedure above-described.” demanding to examine and copy excerpts
from the corporation’s records and
CORPORATE BOOKS AND RECORDS: minutes has improperly used any
information secured through any prior
A. Books required to be kept by a
examination of the records or minutes of
Corporation
such corporation or of any other
Sec. 74 of the Corporation Code
provides that: “Every corporation shall corporation, or was not acting in good
faith or for a legitimate purpose in making
keep and carefully preserve at its principal
office a record of all business transactions his demand. Stock corporations must also
keep a book to be known as the “stock
and minutes of all meetings of
stockholders or members, or of the board and transfer book,” in which must be kept
a record of all stocks in the names of the
of directors or trustees, in which shall be
set forth in detail the time and place of stockholders alphabetically arranged; the
installments paid and unpaid on all stock
holding the meeting, how authorized, the
notice given, whether the meeting was for which subscription has been made, and
the date of payment of any installment; a
regular or special, if special its object,
those present and absent, and every act statement of every alienation, sale or
transfer of stock made, the date thereof,
done or ordered done at the meeting.
Upon the demand of any director, trustee, and by and to whom made; and such
other entries as the by-laws may
stockholder or member, the time when
any director, trustee, stockholder or prescribe. The stock and transfer book
shall be kept in the principal office of the
member entered or left the meeting must
be noted in the minutes; and on a similar corporation or in the office of its stock

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transfer agent and shall be open for concerned may file an action for
inspection by any director or stockholder mandamus before the RTC.
of the corporation at reasonable hours on *Can also claim damages.
business days. No stock transfer agent or
MERGER AND CONSOLIDATION:
one engaged principally in the business of
registering transfers of stocks in behalf of A. Concept of Merger and Consolidation
a stock corporation shall be allowed to Merger is one where a corporation
operate in the Philippines unless he absorbs the other and remains in
secures a license from the SEC and pays a existence while the others are dissolved.
fee as may be fixed by the Commission, *There is a continuous flow of juridical
which shall be renewable annually: personality.
Provided, That a stock corporation is not Examples:
precluded from performing or making A+B=B
transfer of its own stocks, in which case all A+B+C=C
A+B+C=A
the rules and regulations imposed on
A+B+C=B
stock transfer agents, except the payment Consolidation is one where a new
of a license fee herein provided, shall be corporation is created, and consolidating
applicable.” corporations are extinguished.
*Keeping of books and records are Examples:
mandatory. A+B=C
Books required to be kept: A+B+C=D
1. Book of minutes – reflects the A + B + C = ABC
decisions and actions of the Board of A + B + C = XYZ
Directors/Stockholders.
2. Record of all business transactions B. Requisites of and Procedure for Merger
3. Stock and Transfer Book/Membership and Consolidation
Book 1. Approval by majority vote of the Board
4. Books of Proceedings of Directors of each corporation.
2. Approval of the stockholders of each
B. Right to Inspect Corporate Books corporation representing 2/3 of the
 Basis and Extent of the Right of outstanding capital stock.
Inspection 3. Approval of SEC
Q: Is the keeping of these books Cases: Associated Bank v CA; Polyan
mandatory? v CA
A: YES. Section 144 of the Corporation Procedure:
Code provides penalty for any violation 1. The Board of each corporation shall
of the provision of the Code. draw up a plan of
Rationale: Right of inspection would
merger/consolidation.
be futile. Right of inspection would not 2. The plan of merger or consolidation
be exercised. shall be approved by majority vote of
 Limitations on the Right of Inspection
each board of the concerned
1. The books and records shall be
corporations at separate meetings.
open to inspection at reasonable
3. The plan of merger/consolidation shall
hours on business days.
be approved by the majority vote of
2. The books and records shall not be
the 2/3 of the shareholders of the
improperly used any information
outstanding capital stock or members
secured through any prior
in case of a non-stock corporation.
examination of the books or
4. Articles of Merger/Consolidation shall
records.
be executed by each of the constituent
3. The stockholder’s demand must be
corporators, signed by the President or
in good faith or for a legitimate
Vice-President and certified by the
purpose.
secretary or assistant secretary.
*Inspection can be done personally or
5. Four copies of the Articles of Merger or
through agent.
Consolidation together with favorable
 Remedies to Enforce Right of recommendation of a pertinent
Inspection government agency in certain cases
*In case of refusal to exercise the right
shall be submitted to the SEC for
of inspection, the stockholder
approval.
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6. The SEC shall issue a certificate or 3. There must have an unrestricted


merger if it is satisfied that the merger retained earnings,
or consolidation of the corporations *It is not a matter of right.
concerned is not inconsistent with the Reason: If it is a matter of right it shall
provisions of this Code and existing lead to the diminution or depletion of
laws. corporate assets which is violative of the
Trust Fund Doctrine.
C. Effects of Merger or Consolidation
1. All property, real or personal, and all B. Instances of Appraisal Right
receivables due to, and all other Sec. 81 of the Corporation Code
interest of each constituent provides that: “Any stockholder of a
corporation, shall be deemed corporation shall have the right to dissent
transferred to and vested in such and demand payment of the fair value of
surviving or consolidated corporation his shares in the following instances: 1. In
without further act or deed. case any amendment to the articles of
2. The surviving or consolidated incorporation has the effect of changing or
corporation shall be responsible for all restricting the rights of any stockholder or
the liabilities and obligations of each of class of shares, or of authorizing
the constituent corporations. preferences in any respect superior to
3. Any claim, action or proceeding those of outstanding shares of any class,
pending by or against any of the or of extending or shortening the term of
constituent corporations may be corporate existence; 2. In case of sale,
prosecuted by or against the surviving lease, exchange, transfer, mortgage,
or consolidated corporations. pledge or other disposition of all or
4. The rights of the creditors or lien upon substantially all of the corporate property
the property of any of each constituent and assets as provided in the Code; and 3.
corporation shall not be impaired by In case of merger or consolidation.”
such merger or consolidation.
5. Dissolution of other corporation C. Requirements for a Valid Exercise of
leaving the surviving or consolidated Appraisal Right
corporation exists. Sec. 82 of the Corporation Code
Remedy of the dissenting provides that: “The appraisal right may be
stockholder: The dissenting stockholder exercised by any stockholder who shall
may exercise his appraisal right. have voted against the proposed
corporate action, by making a written
RIGHT OF APPRAISAL: demand on the corporation within 30 days
after the date on which the vote was taken
A. Concept of Appraisal Right for payment of the fair value of his shares:
Appraisal Right is the right to withdraw
Provided, That failure to make the demand
from the corporation and demand
within such period shall be deemed a
payment of the fair value of his shares
waiver of the appraisal right. If the
after dissenting from certain corporate
proposed corporate action is implemented
acts involving fundamental changes in
or affected, the corporation shall pay to
corporate structure.
*Demanding for the reasonable return of such stockholder, upon surrender of the
certificate or certificates of stock
investment.
*Stockholders cannot exercise this right at representing his shares, the fair value
his pleasure. thereof as of the day prior to the date on
Requisites: which the vote was taken, excluding any
1. The Stockholder has dissented appreciation or depreciation in anticipation
2. Corporate change must have been of such corporate action. If within a period
approved by the SEC. of 60 days from the date the corporate
*Any changes that affect the action was approved by the stockholders,
stockholders’ right. the withdrawing stockholder and the
*Any changes that concern the
corporation cannot agree on the fair value
corporation’s existence.
of the shares, it shall be determined and
*Corporate changes that appraisal
appraised by 3 disinterested persons, one
right can be availed of.
of whom shall be named by the

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stockholder, another by the corporation, Effects:


and the third by the two thus chosen. The 1. All rights accruing to such shares shall
findings of the majority of the appraisers be suspended from the time of
shall be final, and their award shall be paid demand for payment of the fair value
by the corporation within 30 days after of the shares until either the
such award is made: Provided, That no abandonment of the corporate action.
payment shall be made to any dissenting 2. The dissenting stockholder shall be
stockholder unless the corporation has entitled to receive payment of the fair
unrestricted retained earnings in its books value of his shares as agreed upon
to cover such payment: and Provided, between him and the corporation or as
further, That upon payment by the determined by the appraisers chosen
corporation of the agreed or awarded by them.
price, the stockholder shall forthwith *Sec. 86. The dissenting stock can be sold
transfer his shares to the corporation.” during the pendency of its payment.
Requisites: Remedy in case appraisal right
1. Any of the instances set forth by law cannot be exercised: Dispose the
must be present. shareholdings.
2. Dissenting stockholder must have
voted against the proposed action. NON-STOCK CORPORATIONS:
*Abstaining stockholder cannot claim
or exercise his appraisal right. A. Definition and Purposes of a Non-Stock
3. Demand for payment must be made Corporation
within 30 days from the date vote is Sec. 87 of the Corporation Code states
taken thereon. Failure to make demand that: “For the purposes of this Code, a
shall be deemed a waiver. non-stock is one where no part of its
4. Price must be based on fair value as of income is distributable as dividends to its
day prior to date on which vote was members, trustees, or officers, subject to
taken the provisions of this Code on dissolution:
5. Submission by withdrawing Provided, That any profit which a non-
stockholder of his shares to the stock corporation may obtain as an
corporation for notation of being a incident to its operations shall, whenever
dissenting stockholder within 10 days necessary or proper, be used for the
from written demand. furtherance of the purpose or purposes for
6. Payment must be made only when the which the corporation was organized,
corporation has unrestricted retained subject to the provisions of this Title. The
earnings in its books. provisions governing stock corporations,
7. Stockholder must transfer his shares to when pertinent, shall be applicable to non-
the corporation upon payment by the stock corporations, except as may be
corporation. covered by specific provisions of this
Title.”
D. Effects of Exercising Appraisal Right
*Sec. 87 should be read in harmony with
Sec. 83 of the Corporation Code
Sec. 94.
provides that: “From the time of demand
*A Non-stock corporation is not precluded
for payment of the fair value of a
from engaging in profit-business related.
stockholder’s shares until either the Sec. 88 of the Corporation Code
abandonment of the corporate action provides that: “Non-stock corporations
involved or the purchase of the said may be formed or organized for charitable,
shares by the corporation, all rights religious, educational, professional,
accruing to such shares, including voting cultural, fraternal, literary, scientific,
and dividend rights, shall be suspended in social, civic service, or similar purposes,
accordance with the provisions of this like trade, industry, agricultural and like
Code, except the right of such stockholder chambers, or any combination thereof,
to receive payment of the fair value subject to the special provisions of this
thereof: Provided, That if the dissenting Title governing particular classes of non-
stockholder is not paid the value of his stock corporations.”
shares within 30 days after the award, his *The purpose of a non-stock
voting and dividend rights shall corporation is related to public welfare.
immediately be restored.”
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B. Distinguished from Stock Corporation denied in the Articles of Incorporation or


By-Laws. Thus, the By-laws of a non-stock
Non- stock Stock Corporation corporation may provide for the desired
Corporation voting rights of members including the
Public welfare For profit
number of votes.
Board of Trustees Board of directors
Sec. 90 of the Corporation Code
Generally, the term 1 year subject to
of office of trustees hold-over principle provides that: “Membership in a non-stock
is 3 years corporation and all rights arising
By-laws can provide City or municipality therefrom are personal and non-
for a different venue where the principal transferable, unless the articles of
as long as it is office is located incorporation or the by-laws otherwise
within the provide.”
Philippines
General Rule: Membership is non-
Member may be Proxy is allowed
deprived of their transferable.
right to designate Exception: If the Articles of Incorporation
proxies by or the By-laws provide otherwise.
provisions in the Sec. 91 of the Corporation Code
articles of provides that: “Membership shall be
incorporation or by- terminated in the manner and for the
laws
causes provided in the articles of
Reason: To
promote incorporation or the by-laws. Termination
camaraderie, of membership shall have the effect of
togetherness, unity extinguishing all rights of a member in the
and familiarity. corporation or in its property, unless
Generally, members Election is vested otherwise provided in the articles of
could directly elect upon Board of incorporation or the by-laws.”
officers. Except Directors
Rules on Place of Meeting:
unless AOI provides
otherwise. General Rule: Sec. 51
Exception: Sec. 93

C. Membership in a Non-Stock Corporation D. Rule on Distribution of Assets


Sec. 94 of the Corporation Code
Sec. 89 of the Corporation Code provides that: “In case dissolution of a
provides that: “The right of the non-stock corporation in accordance with
membership of any class or classes to the provisions of this Code, its assets shall
vote may be limited, broadened or denied be applied and distributed as follows: 1. All
to the extent specified in the articles of liabilities and obligations of the
incorporation or the by-laws. Unless so corporation shall be paid, satisfied and
limited, broadened or denied, each discharged, or adequate provision shall be
member, regardless of class, shall be made therefor; 2. Assets held by the
entitled to one vote. Unless otherwise corporation upon a condition requiring
provided in the articles of incorporation of return, transfer or conveyance, and which
the by-laws, a member may vote by proxy condition occurs by reason of the
in accordance with the provisions of this dissolution, shall be returned, transferred
Code. Voting by mail or other similar or conveyed in accordance with such
means by members of non-stock requirements; 3. Assets received and held
corporations may be authorized by the by- by the corporation subject to limitations
laws of non-stock corporations with the permitting their use only for charitable,
approval of, and under such conditions religious, benevolent, educational or
which may be prescribed by, the SEC.” similar purposes, but not held upon a
General Rule: Sec. 58 condition requiring return, transfer or
Exception: Sec. 89. This provision allows conveyance by reason of the dissolution,
denial of proxy. shall be transferred or conveyed to one or
Reason: To promote camaraderie, more corporations, societies or
togetherness, unity and familiarity. organizations engaged in activities in the
*A member is entitled to 1 vote. However, Philippines substantially similar to those of
such right may be limited, broadened or the dissolving corporation according to a
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plan of distribution adopted pursuant to A: NO. Because it would violate Section


this Chapter; 4. Assets other than those 87 of the Corporation Code which prohibits
mentioned in the preceding paragraphs, if distribution of income as dividends to
any, shall be distributed in accordance members.
with the provisions of the articles of Reason: Fraudulent to donors
incorporation or the by-laws, to the extent Q: Can a stock corporation be converted
that the articles of incorporation or the by- to a non-stock corporation by mere
laws, determine the distributive rights of amendment of the Articles of
members, or any class or classes of Incorporation?
A: YES.
members, or provide for distribution; and
Requirements:
5. In any other case, assets may be 1. Approval of 2/3 of the members
distributed to such persons, societies, 2. Approval of the SEC
organizations or corporations, whether or Q: What was relinquished?
not organized for profit, as may be A: Proprietary rights.
specified in a plan of distribution adopted *Appraisal right is available.
pursuant to this Chapter.”
Order of distribution: CLOSE CORPORATIONS:
1. All its creditors shall be paid;
2. Assets held subject to return on A. Concept; Distinguished from Open
dissolution, shall be delivered back to Corporations
their givers; Sec. 96 of the Corporation Code states
3. Assets held for charitable, religious that: “A corporation, within the meaning of
purposes, etc., without a condition for this Code, is one whose articles of
their return on dissolution, shall be incorporation provide that: (1) All the
conveyed to one or more organizations corporation’s issued stock of all classes,
engaged in similar activities as exclusive of treasury shares, shall be held
dissolved corporation; and of record by not more than a specified
4. All other assets shall be distributed to number of persons, not exceeding 20; (2)
members, as provided for in the all the issued stock of all classes shall be
Articles or By-Laws. subject to one or more specified
Sec. 95 of the Corporation Code restrictions on transfer permitted by this
provides that: “A plan providing for the Title; and (3) The corporation shall not list
distribution of assets, not inconsistent with in any stock exchange or make any public
the provisions of this Title, may be offering of any of its stock of any class.
adopted by a non-stock corporation in the Notwithstanding the foregoing, a
process of dissolution in the following corporation shall not be deemed a close
manner: The board of trustees shall, by corporation when at least 2/3 of its voting
majority vote, adopt a resolution stock or voting rights is owned or
recommending a plan of distribution and controlled by another corporation which is
directing the submission thereof to a vote not a close corporation within the meaning
at a regular or special meeting of of this Code. Any corporation may be
members having voting rights. Written incorporated as a close corporation,
notice setting forth the proposed plan of except mining or oil companies, stock
distribution or a summary thereof and the exchanges, banks, insurance companies,
date, time and place of such meeting shall public utilities, educational institutions and
be given to each member entitled to vote, corporations declared to be vested with
within the time and in the manner public interest in accordance with the
provided in this Code for the giving of provisions of this Code. The provisions of
notice of meetings to members. Such plan this Title shall primarily govern close
of distribution shall be adopted upon corporations: Provided, That the provisions
approval of at least 2/3 of the members of other Titles of this Code shall apply
having voting rights present or suppletorily except insofar as this Title
represented by proxy at such meeting.” otherwise provides.”
Q: Would it be possible for a non-stock *Whether open or close corporation
corporation to be converted into a stock depends on its charter.
corporation by mere amendment of the Case: San Juan Structural
Articles of Incorporation?

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The following must be stated in the Code


Articles of Incorporation: The appraisal right The appraisal right
1. Membership is limited to 20 may be exercised may be exercised
2. Transfer or disposition of shares is by a stockholder and compelled
subject to specified restrictions only in the cases against the
3. Prohibition against offering to the provided in Sections corporation by a
public of the shares or listing in the 81 and 42 of the stockholder for any
Corporation Code reason
stock exchange.
Except as regards In case of an
General Rule: Any corporation may be
redeemable shares, arbitration of an
incorporated as close corporation. the purchase by the intracorporate
Exceptions: corporation of its deadlock by the
1. Mining or oil companies own stock must SEC, the
2. Stock exchanges always be made corporation may be
3. Banks from the ordered to purchase
4. Insurance companies unrestricted its own shares from
5. Public utilities retained earnings the stockholders
6. Educational institutions regardless of the
7. Corporations declared to be vested availability of
with public interest unrestricted
retained earnings
Distinctions from Open Corporations: Arbitration of Arbitration of
intracorporate intracorporate
Open Corporation Close Corporation deadlock by the deadlock by the SEC
Its articles of Its articles must SEC is not a remedy is an available
incorporation need contain the special in case the directors remedy in case the
only contain the matters prescribed or stockholders are directors or
general matters by Section 97 aside so divided stockholders are so
enumerated in from the general respecting the divided respecting
Section 14 of the matters in Section management of the the management of
Corporation Code 14. Failure to do so corporation. the corporation.
precludes a de jure
close corporation
status *In San Juan Structural Steel
Its status as an 2/3 of its voting Fabricators v CA, the SC held that the
ordinary stock stock or voting
circumstance that around 99.86% of the
corporation is not rights must not be
affected by the owned or controlled total share holding of petitioner belongs to
ownership of its by another respondent would not justify classification
voting stock or corporation which is of the corporation as close.
voting rights not a close
corporation B. Permissive Provisions in the Articles of
Its articles cannot Its articles may Incorporation
classify its directors classify its directors Sec. 97 of the Corporation Code
Business of the Business of the provides that: “The articles of
corporation is corporation may be incorporation of a close corporation may
managed by the managed by the
provide: 1. For a classification of shares or
board of directors stockholders if the
articles so provide, rights and the qualifications for owning or
but they are liable holding the same and restrictions on their
as directors transfers as may be stated therein,
The corporate Its articles may subject to the provisions of the following
officers and provide that any or section; 2. For a classification of directors
employees are all of the corporate into one or more classes, each of whom
elected by a officers or may be voted for and elected solely by a
majority vote of all employees may be
particular class of stock; and 3. For a
the members of the elected or
board of directors appointed by the greater quorum or voting requirements in
stockholders meetings of stockholders or directors than
The pre-emptive The pre-emptive those provided in this Code. The articles of
right is subject to right is subject to no incorporation of a close corporation may
the exceptions exceptions unless provide that the business of the
found in Section 39 denied in the corporation may provide that the business
of the Corporation articles
of the corporation shall be managed by
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the stockholders of the corporation rather Dissolution refers to the extinguishment


than by a board of directors. So long as of franchise or termination of corporate
this provision continues in effect: 1. No existence.
meeting of stockholders need be called to Modes of Dissolution:
elect directors; 2. Unless the context 1. Voluntary dissolution
2. Involuntary dissolution
clearly requires otherwise, the
Methods of Voluntary Dissolution:
stockholders of the corporation shall be
1. Voluntary dissolution where no
deemed to be directors for the purpose of
creditors are affected
applying the provisions of this Code; and
2. Voluntary dissolution where creditors
3. The stockholders of the corporation
are affected
shall be subject to all liabilities of 3. Shortening of the corporate term by
directors. The articles of incorporation amending the articles of incorporation
may likewise provide that all officers or *Dissolution takes effect upon the
employees or that specified officers or coming of the shortened term.
employees shall be elected or appointed 4. Expiration of corporate term
by the stockholders, instead of by the
board of directors.”  Voluntary dissolution where no
creditors are affected
C. Restrictions on Transfer of Shares Sec. 118 of the Corporation Code
Sec. 98 of the Corporation Code provides that: “If dissolution of a
provides that: “Restrictions on the right to corporation does not prejudice the
transfer shares must appear in the articles rights of any creditor having a claim
of incorporation and in the by-laws as well against it, the dissolution may be
as in the certificate of stock; otherwise, effected by majority vote of the board
the same shall not be binding on any of directors or trustees, and by a
purchaser thereof in good faith. Said resolution duly adopted by the
restrictions shall not be more onerous than affirmative vote of the stockholders
granting the existing stockholders or the owning at least 2/3 of the outstanding
corporation the option to purchase the capital stock or of at least 2/3 of the
shares of the transferring stockholder with members of a meeting to be held upon
such reasonable terms, conditions or call of the directors or trustees after
period stated therein. If upon the publication of the notice of time, place
expiration of said period, the existing and object of the meeting for 3
stockholders or the corporation fails to consecutive weeks in a newspaper
exercise the option to purchase, the published in the place where the
transferring stockholder may sell his principal office of said corporation is
shares to any third person.” located; and if no newspaper is
Option Restriction – this restriction published in such place, then in a
provides that no disposition of shares will newspaper of general circulation in the
be made unless the shares are offered first Philippines, after sending such notice
to the corporation or the stockholders. to each stockholder or member either
*Pre-emptive right is exercisable or
by registered mail or by personal
available.
delivery at least 30 days prior to said
*This restriction is valid and allowed.
Reason: it is the one contemplated by meeting. A copy of the resolution
law. authorizing the dissolution shall be
*Restriction derogates private rights. certified by a majority of the board of
Consent Restriction – this restriction directors or trustees and
provides that no disposition of shares will countersigned by the secretary of the
be made without the consent of directors. corporation. The SEC shall thereupon
*This restriction is not valid. issue the certificate of dissolution.”
Reason: It is more onerous and Requisites:
burdensome. 1. A meeting must be held on the call
of the directors or trustees;
CORPORATE DISSOLUTION/LIQUIDATION: 2. Notice of the meeting should be
given to the stockholders by
A. Methods of Voluntary Corporate personal delivery or registered mail
Dissolution and the Requirements therefor

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at least 30 days prior to the consecutive weeks in three (3) public


meeting; places in such municipality or city.
3. The notice of meeting should also Upon five (5) day's notice, given after
be published for 3 consecutive the date on which the right to file
objections as fixed in the order has
weeks in a newspaper published in
expired, the Commission shall proceed
the place; to hear the petition and try any issue
4. The resolution to dissolve must be made by the objections filed; and if no
approved by the majority of the such objection is sufficient, and the
directors/trustees and approved by material allegations of the petition are
the stockholders representing at true, it shall render judgment
least 2/3 of the outstanding capital dissolving the corporation and
stock or 2/3 of members; directing such disposition of its assets
5. A copy of the resolution shall be as justice requires, and may appoint a
receiver to collect such assets and pay
certified by the majority of the
the debts of the corporation.”
directors or trustees and Requisites:
countersigned by the secretary; 1. Approval of the stockholders
6. The signed and countersigned copy representing at least 2/3 of the
will be filed with the SEC and the outstanding capital stock or 2/3 of
latter will issue the certificate of members in a meeting called for
dissolution that purpose;
2. Filing of a Petition with the SEC
 Voluntary dissolution where creditors signed by majority of directors or
trustees or other officers having
are affected
the management of its affairs
Sec. 119 of the Corporation Code
verified by President or Secretary
provides that: “Where the dissolution
or Director. Claims and demands
of a corporation may prejudice the
must be stated in the petition;
rights of any creditor, the petition for
3. If petition is sufficient in form and
dissolution shall be filed with the
substance, the SEC shall issue an
Securities and Exchange Commission.
Order fixing a hearing date for
The petition shall be signed by a
objections;
majority of its board of directors or
4. A copy of the Order shall be
trustees or other officers having the
published at least once a week for
management of its affairs, verified by
3 consecutive weeks in a
its president or secretary or one of its
newspaper of general circulation or
directors or trustees, and shall set
if there is no newspaper in the
forth all claims and demands against
municipality or city of the principal
it, and that its dissolution was resolved
office, posting for 3 consecutive
upon by the affirmative vote of the
weeks in 3 public places is
stockholders representing at least two-
sufficient;
thirds (2/3) of the outstanding capital
5. Objections must be filed no less
stock or by at least two-thirds (2/3) of
than 30 days nor more than 60
the members at a meeting of its
days after the entry of the order;
stockholders or members called for
6. After the expiration of the time to
that purpose. If the petition is
file objections, a hearing shall be
sufficient in form and substance, the
conducted upon prior 5 day notice
Commission shall, by an order reciting
to hear the objections;
the purpose of the petition, fix a date
7. Judgment shall be rendered
on or before which objections thereto
dissolving the corporation and
may be filed by any person, which date
directing the disposition of assets;
shall not be less than thirty (30) days
the judgment may include
nor more than sixty (60) days after the
appointment of a receiver.
entry of the order. Before such date, a
copy of the order shall be published at
least once a week for three (3)  Shortening of term of existence
consecutive weeks in a newspaper of Sec. 120 of the Corporation Code
general circulation published in the provides that: “A voluntary dissolution
municipality or city where the principal may be effected by amending the
office of the corporation is situated, or articles of incorporation to shorten the
if there be no such newspaper, then in corporate term pursuant to the
a newspaper of general circulation in provisions of this Code. A copy of the
the Philippines, and a similar copy
amended articles of incorporation shall
shall be posted for three (3)
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be submitted to the Securities and as a body corporate for three (3) years
Exchange Commission in accordance after the time when it would have been so
with this Code. Upon approval of the dissolved, for the purpose of prosecuting
amended articles of incorporation of and defending suits by or against it and
the expiration of the shortened term, enabling it to settle and close its affairs, to
as the case may be, the corporation dispose of and convey its property and to
shall be deemed dissolved without any distribute its assets, but not for the
further proceedings, subject to the purpose of continuing the business for
provisions of this Code on liquidation.” which it was established. At any time
during said three (3) years, the
B. Concept of Involuntary Dissolution and the corporation is authorized and empowered
Grounds therefor to convey all of its property to trustees for
Sec. 121 of the Corporation Code
the benefit of stockholders, members,
provides that: “A corporation may be
creditors, and other persons in interest.
dissolved by the Securities and Exchange
From and after any such conveyance by
Commission upon filing of a verified
the corporation of its property in trust for
complaint and after proper notice and
the benefit of its stockholders, members,
hearing on the grounds provided by
creditors and others in interest, all interest
existing laws, rules and regulations.”
which the corporation had in the property
*This must be done with substantive and
terminates, the legal interest vests in the
procedural due process.
Grounds: trustees, and the beneficial interest in the
1. Failure to submit by-laws within the stockholders, members, creditors or other
prescribed period persons in interest. Upon the winding up
2. Fraud in the procurement of Certificate of the corporate affairs, any asset
of Registration distributable to any creditor or stockholder
3. Misrepresentation as to the activities or member who is unknown or cannot be
that the corporation will undertake found shall be escheated to the city or
4. Treasurer’s affidavit is false municipality where such assets are
5. Continued inoperation for 5 years located. Except by decrease of capital
6. Failure to commence business
stock and as otherwise allowed by this
transactions within 2 years from
Code, no corporation shall distribute any
issuance of certificate of registration
of its assets or property except upon
7. To some cases, performance of ultra
lawful dissolution and after payment of all
vires act since it is a violation to the
its debts and liabilities.”
franchise but depending on the
seriousness or gravity of the offense D. Methods of Liquidation or Winding Up
8. Issuance of watered stocks 1. By Board of Directors
9. De facto status 2. Through a trustee to whom the
10. Failure to keep corporate books and
properties are conveyed
records depending on the gravity or 3. By management committee or
seriousness of the offense rehabilitation receiver
11. Violation of its charter
Q: Can the 3 year period be extended?
C. Corporate Liquidation A: NO.
Liquidation is a process by which all the
Reason: Beyond the 3 year period, there
assets of the corporation are converted
is no corporate existence for all purposes
into liquid assets in order to facilitate the
subject to doctrine of relation.
payment of obligations to creditors, and
Remedy: Before the expiration of the 3
the remaining balance if any is to be
year period, appoint a trustee/receiver.
distributed to the stockholders.
*Liquidation takes place after dissolution. Q: During the 3 year period, does the
Sec. 122 of the Corporation Code corporation enjoy corporate existence?
provides that: “Every corporation whose A: YES. But for limited purpose only, i.e.,
charter expires by its own limitation or is for liquidation purposes only. (Limited
annulled by forfeiture or otherwise, or existence)
whose corporate existence for other Q: May such corporation sue during the 3
purposes is terminated in any other year period?
manner, shall nevertheless be continued

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A: YES. But only when the subject matter otherwise whether enforcement is by
is related to liquidation and winding up of court or not, until rehabilitation
its remaining affairs. proceedings are terminated.
*In case trustee/receiver is appointed, he Cases: PAL v Garcia; Sobrejuanite;
is not bound by the 3 year period. Lingkod Manggagawa ng
*In Gelano v CA, the SC held that the Rubberworld v Rubberworld
lawyer of the corporation can be Philippines; RCBC v IAC
considered as trustee. The term trustee *In PAL v Garcia, the SC held that stay
must be considered in its generic sense. order suspends all enforcement in all
Anyone who has been designated by the stages of the proceedings.
corporation to act on its behalf could be *In Lingkod Manggagawa sa
considered as trustee for purposes of Rubberworld v Rubberworld
pursuing a claim for and on behalf of the Philippines, the SC held that labor claims
corporation. A lawyer falls within the ambit are likewise affected by the Stop order.
of the word “trustee.” *In RCBC v IAC, the SC held that whether
*Appointment of trustee can be inferred creditors are secured or not, stay order
from the conduct of the corporation. This will still affect them. The preference still
is by Implication. remains it is just the enforcement that is
*If the corporation is the creditor appoint a suspended.
trustee. If the corporation is the debtor
appoint a receiver. FOREIGN CORPORATIONS:
Q: What if the corporate properties have
A. Concept of Foreign Corporation
already been distributed among the Foreign Corporation is a corporation
shareholders without trustee/receiver? formed, organized or existing under any
A: Remedy: Run after the erring directors law other than those of the Philippines,
and officers. and whose laws allow Filipino citizens and
corporations to do business in its own
E. Concept of Rehabilitation; Effects of
country or state.
Appointment of Management Committee
Sec. 123 of the Corporation Code
or Receiver
provides that: “For the purposes of this
Rehabilitation connotes a reopening or
Code, a foreign corporation is one formed,
reorganization. Contemplates a
organized or existing under any laws other
continuance of corporate existence in an
than those of the Philippines and whose
effort to restore the corporation to its
laws allow Filipino citizens and
former successful operation.
*This is a remedy expressly allowed under corporations to do business in its own
Section 6 of PD 902-A. country or state. It shall have the right to
Purpose: To make the corporation transact business in the Philippines after it
financially viable again. shall have obtained a license to transact
Substantive Grounds: business in this country in accordance
1. When there is imminent danger of with this Code and a certificate of
dissipation or wastage of corporate authority from the appropriate
assets government agency.”
2. Serious paralyzation of business which Reciprocity Clause provides that the
would work to the prejudice of the foreign laws allow Filipino citizens and
stockholders and creditors of the corporations to do business in its own
corporation country or state.
*Mere misconduct of an officer is not a
ground for corporate rehabilitation. B. Tests to Determine Nationality of a
*A corporation cannot ask for corporate Corporation
rehabilitation and at the same time 1. Incorporation Test – when the
dissolution. corporation is incorporated, organized
*With the passage of RA8799, the remedy under the law of other country.
2. Control Test – for purposes of
could now be instituted with the proper
investment; the citizenship of a
RTC.
particular corporation is to be
Effect: Stay Order - stops or suspends
determined by the citizenship of the
the enforcement of all claims for money or
controlling stockholders.
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transaction was made it does not have the


C. Concept of “Doing Business” and the requisite of a license to do so, the
License Requirement therefor remedial defect is cured.
Substance Test provides that: a foreign Cases: Japan Airlines v CA
corporation is doing business in the *In Japan Airlines v CA, the SC held that
country if it is continuing the body or the selling of tickets though there is no
substance of the enterprise of business for aircraft landing in the Philippines
which it was organized. constitute doing business in the
Continuity Test provides that: doing
Philippines.
business implies a continuity of
*In Ericks v CA, the SC held that license
commercial dealings and arrangements,
is necessary in order the foreign
and contemplates to some extent the
corporation may sue. In this case, the
performance of acts or works or the
court considered the continuity test, they
exercise of some functions normally
found out that the foreign corporation has
incident to and in progressive prosecution
the intent to continue business in the
of, the purpose and object of its
Philippines.
organization.
*Credit is obtained to maintain longer
*Foreign Corporation is required to obtain
transactions.
license from the SEC to enable them to do
business in the Philippines. D. Effects of Being Issued a License
*The foreign corporation must appoint a 1. They are placed under the jurisdiction
resident agent so that court may acquire of the Philippine courts
jurisdiction over the foreign corporation 2. They are placed under the same
*License is essential if there is an intention footing as domestic corporations
to maintain main or substance of the 3. The public is protected in dealing with
business in the Philippines or to continue foreign corporations.
the same.
*Lack of license does not affect the E. Revocation and Withdrawal of License
validity of the transaction. Grounds for Revocation:
*License is for regulatory purposes. 1. Failure to file its annual report or pay
*License requirement does not prevent any fees as required by the
performance of acts that are isolated from Corporation Code
the main business of the corporation and 2. Failure to appoint and maintain a
there is no intent to continue the same in resident agent in the Philippines as
the Philippines. required by the Corporation Code
*If the foreign corporation is not licensed 3. Failure, after change of its resident
to do business in the Philippines, General agent or his address, to submit to the
Rule: they have no access in Philippine SEC a statement of such change as
Courts required by the Corporation Code
Exceptions: 4. Failure to submit to the SEC an
1. Isolated transactions authenticated copy of any amendment
2. Infringement of trademark to its articles of incorporation or by-
*International offense can be sued laws or of any articles of merger or
anywhere. consolidation within the time
Cases: Expert Travel Tours v CA; prescribed by the Corporation Code
Home Insurance v Eastern Shipping 5. A misrepresentation of any material
Lines matter in any application, report
*In Expert Travel Tours v CA, the SC affidavit or other document submitted
held that resident agent is not with by such corporation pursuant to the
authority to execute a certification of provisions of the Corporation Code
Forum shopping following Sec. 23 of the 6. Failure to pay any and all taxes,
Corporation Code. imposts, assessments or penalties, if
*In Home Insurance v Eastern any, lawfully due to the Philippine
Shipping Lines, the SC held that if at the Government or any of its agencies or
time the suit was brought, the suing political subdivision
foreign entity already have license to do 7. Transacting business in the Philippines
business in the Philippines, the suit will be outside of the purpose or purposes for
allowed although at the time the

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which such corporation is authorized Applicable Laws:


under its license
8. Transacting business in the Philippines 1. Code of Commerce of Letters of Credit
as agent of or acting for and in behalf Article 568 of the Code of Commerce
of any foreign corporation or entity not provides that: “A letter of credit shall: 1.
duly licensed to do business in the Be issued in favor of a definite person and
Philippines not to orders; and 2. Be limited to a fixed
9. Any other ground as would render it and specified amount or to one or more
unfit to transact business in the undetermined amount but with maximum
Philippines. limit stated exactly.”
*Letter of credit is not a negotiable
instrument.
2. Customs, primarily those embodied in the
Uniform Customs and Practice for
Documentary Credits which was adopted
by the International Chamber of
Commerce

Parties to a Letter of Credit:

1. Buyer – one who procures the letter of


credit and obliges himself to reimburse the
issuing bank upon receipt of the document
of title.
2. Issuing Bank – one which undertakes to
pay the seller upon receipt of the draft and
proper documents of titles and to
surrender the documents to the buyer
upon reimbursement.
3. Seller – one who in compliance with the
LETTERS OF CREDIT
contract of sale ships the goods to the
Definition: buyer and delivers the documents of title
and draft to the issuing bank to recover
Q: What is a letter of credit? payment.
A: Letters of Credit is an engagement by a 4. Advising (notifying) Bank – may be utilized
bank or other person made at the request of a to convey to the seller the existence of the
customer that the issuer will honor drafts or other credit.
demands for payment upon compliance with the 5. Confirming Bank – which will lend
conditions specified in the credit. credence to the letter of credit issued by a
Example: importation of purchase of goods lesser known issuing bank; the confirming
Q: Are you applying a loan when you open a bank is directly liable to pay the seller-
letter of credit? beneficiary.
A: YES. 6. Paying Bank – which undertakes to encash
Reasons why businessmen open letter of the drafts drawn by the exporter/seller.
7. Negotiating Bank
credit:
*Most common parties are the buyer, seller and
1. Lack of funds
2. Security purposes issuing bank.
3. Don’t want to part his money until the
Transactions involved in a Letter of Credit:
goods are received
Q: What are the relationships may arise in a a. Independence Principle
letter of credit? This principle provides that the three
A: General Rule: Three relationships they are: 1. contracts entered into in this transaction,
Buyer-seller (contract of sale); 2. Issuing bank- the contracts are: 1. Contract of sale
beneficiary; and 3. Issuing bank-buyer (contract between the buyer and seller; 2. Contract
of loan) of the buyer with the issuing bank; and 3.
Usual conditions imposed by the bank: 1. Letter of Credit proper, are separate from
Financial capacity; 2. collateral each other thus any infirmity from one

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contract does not affect the other bank that the drafts already drawn by the
contracts. beneficiary have been reimbursed to the
A direct consequence of this principle is opening bank by the buyer.
the rule that banks only deal with e. Back-to-Back Letter of Credit – a credit
documents and not with goods, services or with identical documentary requirements
obligations to which they relate. and covering the same merchandise as
*In BPI v De Reny, the SC held that the another letter of credit, except for a
bank has no obligation to inquire the difference in the price of the merchandise
specifications of the goods. as shown by the invoice and the draft. The
b. Fraud Exception Principle second letter of credit can be negotiated
c. Rule of Strict Compliance
only after the first is negotiated.
This rule provides that the documentary
requirements imposed by the issuing bank
must be strictly complied with by the
beneficiary otherwise the issuing bank
cannot ask for reimbursement.
Usual documents submitted to the
bank:
1. Vouchers;
2. Contract of sale; and
3. Purchase orders

Types of Letters of Credit:

a. Irrevocable Letter of Credit – is a


definite undertaking on the part of the
issuing bank and constitutes the
engagement of that bank to the
beneficiary and bona fide holders of drafts
drawn and or documents presented
thereunder, that the provisions for
payment, acceptance or negotiation
contained in the credit will be duly
fulfilled, provided that all the terms and
conditions of the credit are complied with.
b. Confirmed Letter of Credit – whenever
the beneficiary stipulates that the
obligation of the opening bank shall also
be made the obligation of another bank
(also bank that notifies) to himself.
c. Standby Letter of Credit – a security
arrangement for the performance of
certain obligations. It can be drawn
against only if another business
transaction is not performed. It may also
be issued in lieu of a performance bond.
*This type of letter of credit involves an
obligation to do.
*In Transfield v Luzon, the SC held that
Luzon can ran after the Letter of Credit
despite the pending arbitration of before
the Commission because of the
independence principle.
*Upon default, the bank pay the
beneficiary.
d. Revolving Letter of Credit – one that
provides for renewed credit to become
available as soon as the opening bank has
advised that the negotiating or paying
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opinions and provide guidance on and


supervise compliance with such rules,
regulation and orders;
(h) Enlist the aid and support of and/or
deputized any and all enforcement
agencies of the Government, civil or
military as well as any private institution,
corporation, firm, association or person in
the implementation of its powers and
function under its Code;
(i) Issue cease and desist orders to
prevent fraud or injury to the investing
public;
(j) Punish for the contempt of the
Commission, both direct and indirect, in
accordance with the pertinent provisions
SECURITIES REGULATION CODE (R.A. 8799) of and penalties prescribed by the Rules of
Court;
SEC JURISDICTION: (k) Compel the officers of any registered
corporation or association to call meetings
A. Powers and Functions of the of stockholders or members thereof under
Securities and Exchange Commission: its supervision;
Section 5 of RA 8799 states that: “The (l) Issue subpoena duces tecum and
commission shall act with transparency summon witnesses to appear in any
and shall have the powers and functions proceedings of the Commission and in
provided by this code, Presidential Decree appropriate cases, order the examination,
No. 902-A, the Corporation Code, the search and seizure of all documents,
Investment Houses law, the Financing papers, files and records, tax returns and
Company Act and other existing laws. books of accounts of any entity or person
Pursuant thereto the Commission shall under investigation as may be necessary
have, among others, the following powers for the proper disposition of the cases
and functions: before it, subject to the provisions of
(a) Have jurisdiction and supervision over existing laws;
all corporations, partnership or (m) Suspend, or revoke, after proper
associations who are the grantees of notice and hearing the franchise or
primary franchises and/or a license or a certificate of registration of corporations,
permit issued by the Government; partnership or associations, upon any of
(b) Formulate policies and
the grounds provided by law; and
recommendations on issues concerning (n) Exercise such other powers as may be
the securities market, advise Congress provided by law as well as those which
and other government agencies on all may be implied from, or which are
aspect of the securities market and necessary or incidental to the carrying out
propose legislation and amendments of, the express powers granted the
thereto; Commission to achieve the objectives and
(c) Approve, reject, suspend, revoke or purposes of these laws.
require amendments to registration The Commission’s jurisdiction over all
statements, and registration and licensing cases enumerated under section 5 of
applications; Presidential Decree No. 902-A is hereby
(d) Regulate, investigate or supervise the transferred to the Courts of general
activities of persons to ensure compliance;
jurisdiction or the appropriate Regional
(e) Supervise, monitor, suspend or take
Trial Court: Provided, That the Supreme
over the activities of exchanges, clearing
Court in the exercise of its authority may
agencies and other SROs;
(f) Impose sanctions for the violation of designate the Regional Trial Court
laws and rules, regulations and orders, branches that shall exercise jurisdiction
and issued pursuant thereto; over the cases. The Commission shall
(g) Prepare, approve, amend or repeal retain jurisdiction over pending cases
rules, regulations and orders, and issue involving intra-corporate disputes

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submitted for final resolution which should itself, etc. in order to ensure compliance
be resolved within one (1) year from the with pertinent laws and regulations.
enactment of this Code. The Commission d. Prohibiting and penalizing different
fraudulent practices and transactions.
shall retain jurisdiction over pending
e. Providing the SEC with powers and
suspension of payment/rehabilitation functions.
cases filed as of 30 June 2000 until finally
disposed.” Definition of terms:
B. Cases transferred to the RTC:
Sec. 5. In addition to the regulatory and a. Securities – are share, participation or
adjudicative functions of the Securities interests in a corporation or in a
and Exchange Commission over commercial enterprise or profit-making
corporations, partnerships and other forms venture and evidenced by a certificate,
of associations registered with it as contract, instrument, whether written or
expressly granted under existing laws and electronic in character. It includes: a.
decrees, it shall have original and shares of stocks, bonds, debentures,
exclusive jurisdiction to hear and decide notes, evidences of indebtedness, asset-
cases involving: backed securities; b. investment
(a) Devices or schemes employed by or contracts, certificates of interest or
any acts, of the board of directors, participation in a profit sharing
business associates, its officers or agreement, certificates of deposit for a
partnership, amounting to fraud and future subscription; c. fractional undivided
misrepresentation which may be interests in oil, gas or other mineral rights;
detrimental to the interest of the public d. derivatives like option and warrants; e.
and/or of the stockholder, partners, certificates of assignments, certificates of
members of associations or organizations participation, trust certificates, voting
registered with the Commission; trust certificates or similar instruments; f.
(b) Controversies arising out of intra- proprietary or non-proprietary
corporate or partnership relations, membership certificates in corporations;
between and among stockholders, and other instruments as may in the
members, or associates; between any or future be determined by the Commission.
all of them and the corporation, b. Issuer – is the originator, maker, obligor,
partnership or association of which they or creator of the security.
are stockholders, members or associates, c. Broker – is a person engaged in the
respectively; and between such business of buying and selling securities
corporation, partnership or association for the account of others.
and the state insofar as it concerns their d. Dealer – means any person who buys and
individual franchise or right to exist as sells securities for his/her own account in
such entity; and the ordinary course of business.
(c) Controversies in the election or e. Clearing Agency – is any person who
appointments of directors, trustees, acts as intermediary in making deliveries
officers or managers of such corporations, upon payment to effect settlement in
partnerships or associations. securities transactions.
(d) Appointment of Rehabilitation Receiver f. Exchange – is an organized marketplace
or Management Committee. or facility that brings together buyers and
sellers and executes trades of securities
*Judico v Quiambao and/or commodities.
g. Pre-Need Plans – are contracts which
Q: How does the SRC protect the public who provide for the performance of future
wishes to invest in securities? services or the payment of future
A: The law protects the public as follows: monetary considerations at the time of
a. The law requires full disclosure of actual need, for which planholders pay in
information to the public regarding the cash or installment at stated prices, with
securities that are being offered and the or without interest or insurance coverage
issuers, including the filing of and approval and includes life, pension, education,
of the registration statement and the interment, and other plans which the
approval of the prospectus. Commission may from time to time
b. A continuing duty to regularly submit approve.
material information to the SEC. h. Promoter – is a person who, acting alone
c. Close monitoring of the securities and or with others, takes initiative in founding
other circumstances that may affect the and organizing the business or enterprise
same as well as the persons involved of the issuer and receives consideration
including brokers, issuers, the exchange therefore.

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i. Prospectus – is the document made by v. Call – is transferable option to buy a


or on behalf of an issuer, underwriter or specified number of shares at a stated
dealer to sell or offer securities for sale to price.
the public through a registration w. Straddle – is a combination put and call.
statement filed with the Commission. x. Insider – means (a) the issuer; (b) a
j. Registration statement – is the director or officer (or person performing
application for the registration of similar functions) of, or a person
securities required to be filed with the controlling the issuer; (c) a person whose
Commission. relationship or former relationship to the
k. Uncertificated security – is a security issuer gives or gave him access to
evidenced by electronic or similar records. material information about the issuer or
l. Underwriter – is a person who the security that is not generally available
guarantees on a firm commitment and/or to the public; (d) a government employee,
declared best effort basis the distribution or director, or officer of an exchange,
and sale of securities of any kind by clearing agency and/or self-regulatory
another company. organization who has access to material
m. Investment contracts – a contract, information about an issuer or a security
transaction or scheme (collectively that is not generally available to the
“contract”) whereby a person invests his public; or (e) a person who learns such
money in a common enterprise and is led information by a communication from any
to expect profits primarily from the efforts of the foregoing insiders.
of others. y. Material non-public information – An
n. Derivatives – financial investment, information is “material non-public” if: (a)
including options and warrants whose it has not been generally disclosed to the
value depends on the interest in or public and would likely affect the market
performance of an underlying security, but price of the security after being
which does not require any investment of disseminated to the public and the lapse
principal in the underlying security. of a reasonable time for the market to
o. Options – are contracts that give the absorb the information; or (b) would be
buyer the right, but not the obligation, to considered by a reasonable person
buy or sell an underlying security at a important under the circumstances in
predetermined price, called the exercise or determining his course of action whether
strike price, on or before a predetermined to buy, sell or hold a security.
date, called the expiry date, which can
only be extended in accordance with *Q: When SEC can suspend or cancel certificate
Exchange rules. of registration?
p. Call options – are rights to buy. A: 1. Fraud in procuring registration;
q. Put options – are rights to sell. 2. Serious misrepresentation as to objectives of
r. Warrants – are rights to subscribe or corporation;
purchase new shares or existing shares in 3. Refusal to comply with lawful order of SEC;
a company, on or before a predetermined 4. Continuous inoperation for at least 5 years;
date, called the expiry date, which can 5. Failure to file by-laws within required period;
only be extended in accordance with 6. Failure to file reports;
Exchange rules. Warrants generally have a 7. Other similar grounds
longer exercise period than options.
s. Commodity futures contract – means a Basic rules regarding registration of
contract providing for the making or securities:
taking delivery at a prescribed time in the Sec. 8.1 of the Securities Regulation Code
future of a specific quantity and quality of provides that: “Securities shall not be sold or
a commodity or the cash value thereof, offered for sale or distribution within the
which is customarily offset prior to the Philippines, without a registration statement duly
delivery date, and includes standardized filed with and approved by the Commission. Prior
contracts having the indicia of to such sale, information on the securities, in
commodities futures, commodity options such form and with such substance as the
and commodity leverage, or margin Commission may prescribe, shall be made
contracts. available to each prospective purchaser.”
t. Commodity – means any goods, articles, Sec. 8.2 of the Securities Regulation Code
services, rights and interests, including states that: “The Commission may conditionally
any group or index of any of the foregoing, approve the registration statement under such
in which commodity interests contracts terms as it may deem necessary.”
are presently or in the future dealt in. Sec. 8.3 of the Securities Regulation Code
u. Put – is a transferable option or offer to states that: “The Commission may specify the
deliver a given number of shares of stock terms and conditions under which any written
at a stated price at any given time during communication, including any summary
a stated period.
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prospectus, shall be deemed not to constitute an regulation after public hearing, add to the
offer for sale under this Section.” foregoing any class of securities if it finds that the
Sec. 8.4 of the Securities Regulation Code enforcement of this Code with respect to such
states that: “A record of the registration of securities is not necessary in the public interest
securities shall be kept in Register Securities in and for the protection of investors.”
which shall be recorded orders entered by the
Commission with respect such securities. Such *Reason: The issuer is a trusted and regulated
register and all documents or information with officer.
the respect to the securities registered therein
shall be open to public inspection at reasonable *Q: What transactions are exempt from the
hours on business days. registration requirement under Securities
Sec. 8.5 of the Securities Regulation Code Regulation Code?
states that: “The Commission may audit the A: Sec. 10.1 of the Securities Regulation
financial statements, assets and other Code provides that: “The requirement of
information of firm applying for registration of its registration under Subsection 8.1 shall not apply
securities whenever it deems the same necessary to the sale of any security in any of the following
to insure full disclosure or to protect the interest transactions: (a) At any judicial sale, or sale by an
of the investors and the public in general.” executor, administrator, guardian or receiver or
*In approving the registration of the securities, trustee in insolvency or bankruptcy. (b) By or for
the SEC is not only concerned with the the account of a pledge holder, or mortgagee or
requirement that full disclosure of information is any of a pledge lien holder selling of offering for
given to the public. The SEC is also concerned sale or delivery in the ordinary course of business
with the merit of the securities themselves and and not for the purpose of avoiding the provision
the issuer. of this Code, to liquidate a bonafide debt, a
security pledged in good faith as security for such
*Baviera v Paglinawan debt. (c) An isolated transaction in which any
security is sold, offered for sale, subscription or
*There is no assurance on the part of the SEC delivery by the owner therefore, or by his
that the securities presented are valid and good representative for the owner’s account, such sale
for investors. However, there is a penal sanction or offer for sale or offer for sale, subscription or
in case the securities are not what were delivery not being made in the course of repeated
disclosed. and successive transaction of a like character by
such owner, or on his account by such
representative and such owner or representative
*Q: What securities are exempt from the not being the underwriter of such security. (d)
requirement of registration? The distribution by a corporation actively
A: Sec. 9.1 of the Securities Regulation engaged in the business authorized by its articles
Code provides that: “The requirement of of incorporation, of securities to its stockholders
registration under Subsection 8.1 shall not as a or other security holders as a stock dividend or
general rule apply to any of the following classes other distribution out of surplus. (e) The sale of
of securities: (a) Any security issued or capital stock of a corporation to its own
guaranteed by the Government of the Philippines, stockholders exclusively, where no commission or
or by any political subdivision or agency thereof, other remuneration is paid or given directly or
or by any person controlled or supervised by, and indirectly in connection with the sale of such
acting as an instrumentality of said Government. capital stock. (f) The issuance of bonds or notes
(b) Any security issued or guaranteed by the secured by mortgage upon real estate or tangible
government of any country with which the personal property, when the entire mortgage
Philippines maintains diplomatic relations, or by together with all the bonds or notes secured
any state, province or political subdivision thereof thereby are sold to a single purchaser at a single
on the basis of reciprocity: Provided, That the sale. (g) The issue and delivery of any security in
Commission may require compliance with the exchange for any other security of the same
form and content for disclosures the Commission issuer pursuant to a right of conversion entitling
may prescribe. (c) Certificates issued by a the holder of the security surrendered in
receiver or by a trustee in bankruptcy duly exchange to make such conversion: Provided,
approved by the proper adjudicatory body. (d) That the security so surrendered has been
Any security or its derivatives the sale or transfer registered under this Code or was, when sold,
of which, by law, is under the supervision and exempt from the provision of this Code, and that
regulation of the Office of the Insurance the security issued and delivered in exchange, if
Commission, Housing and Land Use Rule sold at the conversion price, would at the time of
Regulatory Board, or the Bureau of Internal such conversion fall within the class of securities
Revenue. (e) Any security issued by a bank entitled to registration under this Code. Upon
except its own shares of stock.” such conversion the par value of the security
surrendered in such exchange shall be deemed
Sec. 9.2 of the Securities Regulation Code the price at which the securities issued and
provides that: “The Commission may, by rule or delivered in such exchange are sold. (h) Broker’s
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transaction, executed upon customer’s orders, on *Q: What are the grounds for revocation and/or
any registered Exchange or other trading market. rejection of the registration of
(i) Subscriptions for shares of the capitals stocks securities/statement?
of a corporation prior to the incorporation thereof A: Sec. 13.1 of the Securities Regulation
or in pursuance of an increase in its authorized Code provides that: “The Commission may reject
capital stocks under the Corporation Code, when a registration statement and refuse registration of
no expense is incurred, or no commission, the security there-under, or revoke the affectivity
compensation or remuneration is paid or given in of a registration statement and the registration of
connection with the sale or disposition of such the security there-under after the due notice and
securities, and only when the purpose for hearing by issuing an order to such effect, setting
soliciting, giving or taking of such subscription is forth its finding in respect thereto, if it finds that:
to comply with the requirements of such law as to (a) The issuer: (i) Has been judicially declared
the percentage of the capital stock of a insolvent; (ii) Has violated any of the provision of
corporation which should be subscribed before it this Code, the rules promulgate pursuant thereto,
can be registered and duly incorporated, or its or any order of the Commission of which the
authorized, capital increase. (j) The exchange of issuer has notice in connection with the offering
securities by the issuer with the existing security for which a registration statement has been filed;
holders exclusively, where no commission or (iii) Has been or is engaged or is about to engage
other remuneration is paid or given directly or in fraudulent transactions; (iv) Has made any
indirectly for soliciting such exchange. (k) The false or misleading representation of material
sale of securities by an issuer to fewer than facts in any prospectus concerning the issuer or
twenty (20) persons in the Philippines during any its securities; (v) Has failed to comply with any
twelve-month period. (l) The sale of securities to requirements that the Commission may impose
any number of the following qualified buyers: (i) as a condition for registration of the security for
Bank; (ii) Registered investment house; (iii) which the registration statement has been filed;
Insurance company; (iv) Pension fund or or (b) The registration statement is on its face
retirement plan maintained by the Government of incomplete or inaccurate in any material respect
the Philippines or any political subdivision thereof or includes any untrue statements of a material
or manage by a bank or other persons authorized fact required to be stated therein or necessary to
by the Bangko Sentral to engage in trust make the statement therein not misleading; or (c)
functions; (v) Investment company or; (vi) Such The issuer, any officer, director or controlling
other person as the Commission may rule by person performing similar functions, or any under
determine as qualified buyers, on the basis of writer has been convicted, by a competent
such factors as financial sophistication, net worth, judicial or administrative body, upon plea of
knowledge, and experience in financial and guilty, or otherwise, of an offense involving moral
business matters, or amount of assets under turpitude and /or fraud or is enjoined or
management.” restrained by the Commission or other competent
or administrative body for violations of securities,
*Reasons: 1. Limited character of offering; 2. commodities, and other related laws.”
Mandated by law; 3. Stock dividends declared; 4.
Transaction is such that registration of the Devices and practices on manipulation of
securities is unwarranted. security prices identified under the
Securities Regulation Code:
Sec. 10.2 of the Securities Regulation Code
provides that: “The Commission may exempt Sec. 24.1 of the Securities Regulation Code
other transactions, if it finds that the provides that: “It shall be unlawful for any person
requirements of registration under this Code is acting for himself or through a dealer or broker,
not necessary in the public interest or for the directly or indirectly: (a) To create a false or
protection of the investors such as by the reason misleading appearance of active trading in any
of the small amount involved or the limited listed security traded in an Exchange of any other
character of the public offering.” trading market (hereafter referred to purposes of
this Chapter as "Exchange"): (i) By effecting any
Sec. 10.3 of the Securities Regulation Code transaction in such security which involves no
provides that: “Any person applying for an change in the beneficial ownership thereof; (ii) By
exemption under this Section, shall file with the entering an order or orders for the purchase or
Commission a notice identifying the exemption sale of such security with the knowledge that a
relied upon on such form and at such time as the simultaneous order or orders of substantially the
Commission by the rule may prescribe and with same size, time and price, for the sale or
such notice shall pay to the Commission fee purchase of any such security, has or will be
equivalent to one-tenth (1/10) of one percent entered by or for the same or different parties; or
(1%) of the maximum value aggregate price or (iii) By performing similar act where there is no
issued value of the securities.” change in beneficial ownership. (b) To affect,
alone or with others, a securities or transactions
in securities that: (I) Raises their price to induce

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the purchase of a security, whether of the same Sec. 27.1 of the Securities Regulation Code
or a different class of the same issuer or of states that: “It shall be unlawful for an insider to
controlling, controlled, or commonly controlled sell or buy a security of the issuer, while in
company by others; or (iii) Creates active trading possession of material information with respect to
to induce such a purchase or sale through the issuer or the security that is not generally
manipulative devices such as marking the close, available to the public, unless: (a) The insider
painting the tape, squeezing the float, hype and proves that the information was not gained from
dump, boiler room operations and such other such relationship; or (b) If the other party selling
similar devices. (c) To circulate or disseminate to or buying from the insider (or his agent) is
information that the price of any security listed in identified, the insider proves: (I) that he disclosed
an Exchange will or is likely to rise or fall because the information to the other party, or (ii) that he
of manipulative market operations of any one or had reason to believe that the other party
more persons conducted for the purpose of otherwise is also in possession of the information.
raising or depressing the price of the security for A purchase or sale of a security of the issuer
the purpose of inducing the purpose of sale of made by an insider defined in Subsection 3.8, or
such security. (d) To make false or misleading such insider’s spouse or relatives by affinity or
statement with respect to any material fact, consanguinity within the second degree,
which he knew or had reasonable ground to legitimate or common-law, shall be presumed to
believe was so false or misleading, for the have been effected while in possession of
purpose of inducing the purchase or sale of any material non-public information if transacted after
security listed or traded in an Exchange. (e) To such information came into existence but prior to
effect, either alone or others, any series of dissemination of such information to the public
transactions for the purchase and/or sale of any and the lapse of a reasonable time for market to
security traded in an Exchange for the purpose of absorb such information: Provided, however, That
pegging, fixing or stabilizing the price of such this presumption shall be rebutted upon a
security; unless otherwise allowed by this Code or showing by the purchaser or seller that he was
by rules of the Commission.” aware of the material non-public information at
the time of the purchase or sale.”
Sec. 24.2 of the Securities Regulation Code
provides that: “No person shall use or employ, in *Q: What is the prohibition imposed on insiders
connection with the purchase or sale of any regarding material non-public information?
security any manipulative or deceptive device or A: Sec. 27.3 of the Securities Regulation
contrivance. Neither shall any short sale be Code states that: “It shall be unlawful for any
effected nor any stop-loss order be executed in insider to communicate material non-public
connection with the purchase or sale of any information about the issuer or the security to
security except in accordance with such rules and any person who, by virtue of the communication,
regulations as the Commission may prescribe as becomes an insider as defined in Subsection 3.8,
necessary or appropriate in the public interest for where the insider communicating the information
the protection of investors.” knows or has reason to believe that such person
will likely buy or sell a security of the issuer whole
in possession of such information.”
Acts that are considered unlawful with
respect to the purchase and sale of Tender Offer
securities:
Sec. 19 of the Securities Regulation Code
Sec. 26 of the Securities Regulation Code provides that: “Any person or group of persons
states that: “It shall be unlawful for any person, acting in concert who intends to acquire at least
directly or indirectly, in connection with the 15% of any class of any equity security of a listed
purchase or sale of any securities to: 1. Employ corporation of any class of any equity security of
any device, scheme, or artifice to defraud; 2. a corporation with assets of at least fifty million
Obtain money or property by means of any pesos (50,000,000.00) and having two
untrue statement of a material fact of any hundred(200) or more stockholders at least one
omission to state a material fact necessary in hundred shares each or who intends to acquire at
order to make the statements made, in the light least thirty percent(30%) of such equity over a
of the circumstances under which they were period of twelve months(12) shall make a tender
made, not misleading; or 3. Engage in any act, offer to stockholders by filling with the
transaction, practice or course of business which Commission a declaration to that effect; and
operates or would operate as a fraud or deceit furnish the issuer, a statement containing such of
upon any person.” the information required in Section 17 of this
Code as the Commission may prescribe. Such
Duties of an insider in case of trading person or group of persons shall publish all
securities: request or invitations or tender offer or
requesting such tender offers subsequent to the
initial solicitation or request shall contain such

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information as the Commission may prescribe, 35% or more of equity shares of a


and shall be filed with the Commission and sent public company pursuant to an
to the issuer not alter than the time copies of agreement made between or among
such materials are first published or sent or given the person and one or more sellers;
to security holders. (a) Any solicitation or b. The person or a group of persons
recommendation to the holders of such a security acting in concert, intends to acquire
to accept or reject a tender offer or request or 35% or more of the equity shares of a
invitation for tenders shall be made in public company within a period of 12
accordance with such rules and regulations as months;
may be prescribe. (b) Securities deposited c. If any acquisition of even less than
pursuant to a tender offer or request or invitation 35% would result in ownership of over
for tenders may be withdrawn by or on behalf of 51% of the total outstanding equity
the depositor at any time throughout the period securities of a public company, the
that tender offer remains open and if the acquirer shall be required to make a
securities deposited have not been previously tender offer for all the outstanding
accepted for payment, and at any time after sixty equity securities to all remaining
(60) days from the date of the original tender stockholder.
offer to request or invitation, except as the 2. In all cases when the rules provide for
Commission may otherwise prescribe. (c) Where mandatory tender offer, the following
the securities offered exceed that which person rules on sales be complied with:
or group of persons is bound or willing to take up a. If there is mandatory tender offer, the
and pay for, the securities that are subject of the sale of the shares pursuant to the
tender offers shall be taken up us nearly as may private transaction shall not be
be pro data, disregarding fractions, according to completed prior to the closing and
the number of securities deposited to each completion of the tender offer.
depositor. The provision of this subject shall also b. Transactions with any of the seller/s of
apply to securities deposited within ten (10) days significant blocks of shares with whom
after notice of increase in the consideration the acquirers may have been in private
offered to security holders, as described in negotiations shall close at the same
paragraph (e) of this subsection, is first published time and upon the same terms as the
or sent or given to security holders. (d) Where tender offer made to the public.
any person varies the terms of a tender offer or c. For paragraph (b) above where the
request or invitation for tenders before the 35% is within a period of 12 months,
expiration thereof by increasing the consideration the last sale meeting the threshold
offered to holders of such securities, such person shall not be consummated until the
shall pay the increased consideration to each closing and completion of the tender
security holder whose securities are taken up and offer.
paid for whether or not such securities have been
taken up by such person before the variation of *Q: When may the SEC exempt a person from the
the tender offer or request or invitation.” mandatory tender offer requirement?
A: Upon written application, the SEC may exempt
*Cemco Holdings, Inc. v National Life Insurance, from the requirement to make a mandatory
the SC held that tender offer rule is applicable in tender offer the following proposed purchases of
this case. Rationale: 1. The statute covers not equity shares of a public company:
only direct acquisition but also indirect acquisition a. The purchase of newly issued shares from
or “any type of acquisition”; 2. The legislative unissued capital stock
intent of Sec. 19 of the Code is to regulate b. In connection with foreclosure proceeding
activities relating to acquisition of control of the involving a duly constituted pledge or
listed company and for the purpose of protecting security arrangement where the
the minority stockholders of a listed corporation. acquisition is made by the debtor or
Whatever may be the method by which control of creditor
a public company is obtained, either through the c. Purchases in connection with privatization
direct purchase of its stocks or through indirect undertaken by the government of the
means, mandatory tender offer rule applies. Philippines
d. Purchases in connection with corporate
*Q: When is tender offer mandatory? rehabilitation under court supervision.
A: It is mandatory when:
1. A person is required to make a tender *Q: When is a person presumed to be making
offer for equity shares of a public company voluntary tender offer?
in an amount equal to the number of A: A person will be presumed to be making a
shares that the person intends to acquire voluntary tender offer where some or all of the
in the following circumstances: following factors are present:
a. Any person or a group of persons a. Active and widespread solicitation of
acting in concert, intends to acquire public shareholders for the shares of a
public company
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b. Solicitation made for a substantial


percentage of the issuer’s stock
c. Offer to purchase is made at a premium
over the prevailing market price, at firm
rather than negotiable terms
d. An offer is contingent on the tender of a
fixed number of shares; and/or
e. Offer is only open for a limited period of
time.

Any person making a tender offer shall make a


public announcement of his intention, prior to the
commencement of the offer; Provided, however,
such announcement shall not be made until the
bidder has the resources to implement the offer
in full.

NEGOTIABLE INSTRUMENTS LAW (Act No.


2031)

PRELIMINARY CONSIDERATIONS:

A. Governing Laws
1. The Negotiable Instruments Law
2. The Code of Commerce
3. The New Civil Code

B. Concept of Negotiable Instrument


Negotiable Instruments is a written
contract for the payment of the money
which is intended as a substitute for
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money and passes from one person to check may pass from hand to hand
another as money, in such a manner as to similar to money, so as to give the
give a holder in due course the right to holder in due course the right to hold
hold the instrument free from defenses the instrument and to collect the sum
available to prior parties. payable for himself free from defenses.
*This attribute is very important.
C. Classes of Negotiable Instrument 2. Accumulation of secondary
1. Promissory Note contracts – secondary contracts are
Sec. 184 of the Negotiable picked up and carried along with them
Instruments Law provides that: “A as they are negotiated from one
negotiable promissory note within the person to another, or in the course of
meaning of this Act is an unconditional negotiation of a negotiable instrument,
promise in writing made by one person a series of juridical ties between the
to another, signed by the maker, parties thereto arise either by law or
engaging to pay on demand, or at a by privity.
fixed or determinable future time, a *There must be further negotiation for
sum certain in money to order or to secondary contracts exist.
bearer. Where a note is drawn to the *Converted to obligors because of their
maker’s own order, it is not complete indorsements
until indorsed by him.”
*Personal engagement on the part of F. Negotiable Instruments compared with
the maker. other papers (document of title, letter of
2. Bill of Exchange credit, certificate of stock, pawn ticket,
Sec. 126 of the Negotiable postal money order, treasury warrant)
Instruments Law provides that: “A Document of title includes any bill of
bill of exchange is an unconditional lading, dock warrant, quedan, or
order in writing addressed by one warehouse receipt or order for delivery of
person to another, signed by the goods, or any other document used in the
person giving it, requiring the person ordinary course of business in the sale or
to whom it is addressed to pay on transfer of goods, as proof of possession
demand or at a fixed or determinable or control of goods, or authorizing or
future time a sum certain in money to purporting to authorize the possessor of
order or to bearer.” the document to transfer or receive either
*There is only an order directing other by indorsement or by delivery, goods
party to pay the instrument. represented by such document (Article
1636 of the New Civil Code)
D. Functions of Negotiable Instrument Letter of Credit is an engagement by a
1. It operates as a substitute of money
bank or other person made at the request
*This is the main function of negotiable
of a customer that the issuer will honor
instruments.
*Either negotiable or non-negotiable drafts or other demands for payment upon
instrument, it is a substitute for money. compliance with the conditions specified
Both are in lieu of money. in the credit.
*relate this with legal tender Certificate of Stock is a non-negotiable
2. It is a means of creating and instrument because it does not contain an
transferring credit unconditional promise or order to pay a
3. It facilitates the sale of goods sum certain in money.
4. It increases the purchasing medium in Pawn Ticket is a non-negotiable
circulation document because it does not represent
Q: Which one is the best or better money but the pawned articles.
substitute for money? Why? Postal Money Order is a non-negotiable
A: Negotiable instrument. instrument because it is governed by
Reasons: postal rules and regulations which may be
1. Negotiability and inconsistent with the Negotiable
2. Accumulation of secondary contracts. Instruments Law and it can only be
negotiated once.
E. Characteristics of Negotiable Instrument Treasury Warrant is a non-negotiable
1. Negotiability – it is that attribute or instrument because it is payable out of a
property whereby a bill or note or particular fund.
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will defeat the very purpose of the


G. Legal tender character negotiable instrument law, i.e.,
Q: Does negotiable instrument has legal substitute for money.
tender power? *Mere recital does not negate
A: NO. negotiability of the instrument.
Q: What is legal tender? Q: What is a condition?
A: Legal tender is that kind of money that A: A contingent event, happening of
the law compels a creditor to accept in which is uncertain, event which may or
payment of his debt when tendered by the may not happen.
debtor in the right amount. *In alternative obligation, for
*Coins/notes circulated by the Bangko negotiability purposes, the option must
Sentral ng Pilipinas. be left in the hands of the creditor for
Q: What attribute that legal tender has
it to be negotiable.
that negotiable instrument do not have? *If the option is left in the hands of the
A: Element of compulsion.
debtor, it is non-negotiable.
a. Promise or order to pay must be
FORM AND INTERPRETATION OF
unconditional
NEGOTIABLE INSTRUMENTS:
i. Reference to transaction
Sec. 3 of the Negotiable
A. Requisites of negotiability
Sec. 1 of the Negotiable Instruments Instrument Law provides
that: “An unqualified order
Law provides that: “An instrument to be
negotiable must conform to the following or promise to pay is
unconditional within the
requirements: (a) It must be in writing and
signed by the maker or drawer; (b) must meaning of this Act though
coupled with: (a) An
contain an unconditional promise or order
to pay a sum certain in money; (c) must indication of a particular
fund out of which
be payable on demand, or at a fixed or
determinable future time; (d) must be reimbursement is to be
made or a particular
payable to order or to bearer; and (e)
where the instrument is addressed to a account to be debited with
the amount; or (b) A
drawee, he must be named or otherwise
indicated therein with reasonable statement of the transaction
which gives rise to the
certainty.”
Q: What principle do we follow in instrument. But an order or
determining the instrument as negotiable promise to pay out of a
or not? particular fund is not
A: Negotiability is shown on the face of unconditional.”
the instrument. ii. Source or payment or
Requisites: account to be debited
1. Must be in writing and signed by the
Fund for Particular
maker or drawer
Reimburseme Fund for
Q: Why should it be in writing?
nt Payment
A: In order for the instrument to be
The drawee There is only
used for negotiation. pays the payee one act – the
Rationale: For the achievement of the from his own drawee pays
purpose of the negotiable instrument funds directly from
law. afterwards the the particular
*It must be signed by the maker or drawee pays fund indicated
drawer. Rationale: To be bound by the himself from
contract. the particular
2. Must contain an unconditional promise fund
or order to pay a sum certain in money Particular fund Particular fund
Rationale why the law requires indicated is not indicated is the
the direct direct source of
that the promise or order be
source of payment
unconditional: Because no one will payment
accept the same if the transferee does *Particular fund for payment
not know the certainty of the event depends on the sufficiency
that will happen. Hence, uncertainty of the funds
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*Extrinsic and collateral *It must be the prevailing


matter negates rate of conversion or fixed
negotiability. rate that is well known.
b. Payable in sum certain in money *Does not affect the
i. Provisions which do not negotiability of the
affect certainty of sum instrument because the sum
payable remains certain.
Sec. 2 of the Negotiable vi. Payment of attorney’s fees
Instrument Law provides *Due to the default of the
that: “The sum payable is a obligor, obligee was forced
sum certain within the to engage the services of a
meaning of this Act, lawyer.
although it is to be paid: (a) 3. Payable on demand or at a fixed or
With interest; or (b) By determinable future time
stated installments; or (c) a. When payable on demand
Sec. 7 of the Negotiable
By stated installments, with
Instruments Law provides that:
a provision that, upon
“An instrument is payable on
default in payment of any
demand: (a) When it is so
installment or of interest,
expressed to be payable on
the whole shall become
demand, or at sight, or on
due; or (d) With exchange,
presentation; or (b) In which no
whether at a fixed rate or at
time for payment is expressed.
the current rate; or (e) With
Where an instrument is issued,
costs of collection or an
accepted, or indorsed when
attorney’s fee, in case
overdue, it is, as regards the
payment shall not be made
person so issuing, accepting, or
at maturity.”
ii. Payment of interest indorsing it, payable on demand.”
Q: Why is there a need to *It is the holder of the instrument
pay interest? that has the call in case the
A: For the consumption of negotiable instrument is silent, i.e.,
the money owned by a it stated no maturity date.
person but was not used by b. When payable at determinable
him. future time
iii. Payment by installments Sec. 4 of the Negotiable
Stated Installments – the Instruments Law provides that:
dates of each installment “An instrument is payable at a
must be fixed or at least determinable future time, within
determinable and the the meaning of this Act, which is
amount to be paid for each expressed to be payable: (a) At a
installment must be stated. fixed period after date or sight; or
Things to be written in (b) On or before a fixed or
the negotiable determinable future time specified
instrument regarding therein; or (c) On or at a fixed
payment by installments: period after the occurrence of a
1. Amount of each specified event which is certain to
instalments happen, though the time of
*must be determinable happening be uncertain. An
2. Maturity Date
instrument payable upon a
iv. Acceleration clause
Acceleration clause contingency is not negotiable, and
renders whole debt due and the happening of the event does
demandable upon failure of not cure the defect.”
the obligor to comply with
With a With a Period
certain conditions. Condition
*relate to doctrine of Uncertain to Certain to
indivisibility of contract. happen happen though
v. Payment with exchange the date of

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happening is *The payee of instrument payable


uncertain to order must be a person in being,
*If the instrument is demandable natural or legal, and ascertained at
based on period the negotiability of the time of issue.
the instrument is still not affected. i. To whose order the
*Paragraph (c) is one with a period. instrument may be made
4. Payable to order or bearer payable
*These are words of negotiability Sec. 8 of the Negotiable
Q: What is the implication of these
Instrument Law provides
words?
that: “The instrument is
A: There is a proper authorization for
payable to order where it is
further negotiation by the maker or
drawn payable to the order
drawer.
a. When payable to bearer of a specified person or to
Sec. 9 of the Negotiable him or his order. It may be
Instrument Law provides that: drawn payable to the order
“The instrument is payable to of: (a) A payee who is not
bearer: (a) When it is expressed to maker, drawer, or drawee;
be so payable; or (b) When it is or (b) The drawer or maker;
payable to a person named therein or (c) The drawee; or (d)
or bearer; or (c) When it is payable Two or more payees jointly;
to the order of a fictitious or non- or (e) One or some of
existing person, and such fact was several payees; or (f) The
known to the person making it so holder of an office for the
payable; or (d) When the name of time being. Where the
the payee does not purport to be instrument is payable to
the name of any person; or (e) order, the payee must be
When the only or last indorsement named or otherwise
is an indorsement in blank.” indicated therein with
Principle: Once a bearer always a reasonable certainty.”
bearer instrument.  A payee who is not
*This principle applies only to an maker, drawer, or
instrument that was originally drawee
issued as bearer instrument. *The payee may be a
i. Rule when instrument is juridical person.
payable to a fictitious Q: How can it be
person negotiated further?
*Upon its face, it is an order A: By indorsement of
instrument but because it is the person authorized by
named to fictitious or non- the corporation.
existing person it is  The holder of an office
converted to a bearer for the time being
instrument. *It is not necessary to
*Fictitious person or non- name the person holding
existing person cannot the position since it is
endorse. payable to the office
*The person to whose order itself and not to the
the instrument is made person holding it.
payable may in fact be 5. Omissions that do not affect
existing but he is still negotiability Sec. 6 of the
fictitious or non-existent Negotiable Instrument Law
under Sec. 9(c) of the provides that: “The validity and
negotiable instrument law if negotiable character of an instrument
the person making it so are not affected by the fact that: (a) it
payable does not intend to is not dated; or (b) does not specify
pay the specified person. the value given, or that any value had
b. When payable to order been given therefor; or (c) does not
specify the place where it is drawn or

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the place where it is payable; or (d) Q: Is the authority to sale includes


bears a seal; or (e) designates a the authority to appropriate for
particular kind of current money in himself?
which payment is to be made. But A: NO. It constitutes pactum
nothing in this section shall alter or commissorium. It is an unjust
repeal any statute requiring in certain enrichment.
cases the nature of the consideration Q: What is the meaning of sale of
to be stated in the instrument.” collateral securities?
 Does not specify the value given or A: Contemplates securities added
that any value had been given therefor to the obligation to pay.
*Consideration is always presumed. b. Confession of judgment
*This is void by reason of public
Basis: Sec. 24 of the Negotiable
policy but still it is negotiable.
Instrument Law provides that:
*In effect, such provision is
“Every negotiable instrument is
considered not existing.
deemed prima facie to have been *It waives his right to due process;
issued for a valuable consideration; his right of a day in court.
and every person whose signature Case: PNB v Manila Oil Refinery
appears thereon to have become a c. Waiver of benefit
party thereto for value.” *Pertains to benefits granted by the
 Does not specify the place where it Negotiable Instrument Law.
is drawn or the place where it is Q: What are the benefits that can
payable be waived but the negotiability of
*The New Civil Code is applied the instrument is not affected?
suppletorily. A: 1. Presentment for payment; 2.
 Bears a seal Notice of dishonor; 3. Protest
*This is for authentication purposes. d. Holder is given the option to do
 A particular kind of current money something in lieu of payment of
in which payment is to be made money
*It is still negotiable because it would *If it is the obligor or debtor is
still be considered payable in money. given the option to choose what to
Foreign currency is convertible to be done it is not negotiable
Philippine money which is legal tender because it is conditional thus
in the Philippines. requisites for negotiability is not
6. Additional provisions not affecting complied with.
negotiability
Sec. 5 of the Negotiable B. Rules to be followed in interpreting
Instrument Law provides that: “An negotiable instruments
instrument which contains an order or Sec. 17 of the Negotiable Instrument
promise to do any act in addition to Law provides that: “Where the language
the payment of money is not of the instrument is ambiguous or there
negotiable. But the negotiable are omissions therein, the following rules
character of an instrument otherwise of construction apply: (a) Where the sum
negotiable is not affected by a payable is expressed in words and also in
provision which: (a) authorizes the sale figures and there is a discrepancy between
of collateral securities in case the the two, the sum denoted by the words is
instrument be not paid at maturity; or the sum payable; but if the words are
(b) authorizes a confession of ambiguous or uncertain, reference may be
judgment if the instrument be not paid had to the figures to fix the amount; (b)
at maturity; or (c) waives the benefit of Where the instrument provides for the
any law intended for the advantage or payment of interest, without specifying
protection of the obligor; or (d) gives the date from which interest is to run, the
the holder an election to require interest runs from the date of the
something to be done in lieu of instrument, and if the instrument is
payment of money. But nothing in this undated, from the issue thereof; (c) Where
section shall validate any provision or the instrument is not dated, it will be
stipulation otherwise illegal.” considered to be dated as of the time it
a. Sale of collateral securities was issued; (d) Where there is a conflict
between the written and printed
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provisions of the instrument, the written assignor and merely a better right than
provisions prevail; (e) Where the acquires whatever the right of the
instrument is so ambiguous that there is rights the assignor transferor
doubt whether it is a bill or note, the may have
Governed by the Governed by the
holder may treat it as either at his
Civil Code Negotiable
election; (f) Where a signature is so placed Instrument Law
upon the instrument that it is not clear in
what capacity the person making the
same intended to sign, he is to be deemed C. Ways of negotiation (in case of order or
an indorser; (g) Where an instrument bearer instrument)
containing the word "I promise to pay" is 1. If payable to bearer, it is negotiated by
signed by two or more persons, they are mere delivery
deemed to be jointly and severally liable 2. If payable to order, it is negotiated by
thereon. “ indorsement and delivery
*This rule is applicable only in case of Q: Why can’t indorsement be avoided by
ambiguity and there is doubt. original payee?
A: Because by indorsement, it is the
NEGOTIATION: original payee’s order to the maker to pay
the transferee.
A. Modes of transfer Q: Why indorsement is not necessary in
1. Negotiation – an instrument is
bearer instrument?
negotiated when it is transferred from
A: Because the engagement is to pay the
one person to another in such manner
amount of the instrument to holder or to
as to constitute the transferee the
any subsequent holders.
holder thereof.
Q: If the instrument is originally issued as
2. Assignment – a method of
an order instrument and was subsequently
transferring a non-negotiable
negotiated, does it always require
instrument whereby the assignee is
indorsement and delivery?
merely placed in the position of the
A: IT DEPENDS. If the indorsement is
assignor and acquires the instrument
special, it is necessary that there is
subject to all defenses that might have
indorsement and delivery, however, if the
been set up against the original payee.
indorsement is blank, delivery alone is
*If the instrument is a non-negotiable the
sufficient.
only transfer that can be made is by
assignment.
D. Concept of delivery
Sec. 16 of the Negotiable Instrument
B. Concept of negotiation; distinguished from
Law provides that: “Every contract on a
assignment
negotiable instrument is incomplete and
Sec. 30 of the Negotiable Instrument
revocable until delivery of the instrument
Law provides that: “An instrument is
for the purpose of giving effect thereto. As
negotiated when it is transferred from one
between immediate parties and as regards
person to another in such manner as to
a remote party other than a holder in due
constitute the transferee the holder
course, the delivery, in order to be
thereof. If payable to bearer, it is
effectual, must be made either by or
negotiated by delivery; if payable to order,
under the authority of the party making,
it is negotiated by the indorsement of the
drawing, accepting, or indorsing, as the
holder and completed by delivery.”
case may be; and, in such case, the
Assignment Negotiation delivery may be shown to have been
Pertains to Pertains to conditional, or for a special purpose only,
contracts in general negotiable and not for the purpose of transferring the
instruments property in the instrument. But where the
Assignee takes the Holder in due instrument is in the hands of a holder in
instrument subject course takes it free due course, a valid delivery thereof by all
to the defenses from personal
obtaining among defenses available parties prior to him so as to make them
the original parties among the parties liable to him is conclusively presumed.
Assignee steps into Holder in due And where the instrument is no longer in
the shoes of the course may acquire the possession of a party whose signature
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appears thereon, a valid and intentional person to whom, or to whose order,


delivery by him is presumed until the the instrument is to be payable,
contrary is proved.” and the indorsement of such
Delivery is the transfer of possession of indorsee is necessary to the further
the instrument by the maker or drawer negotiation of the instrument. An
with the intention to transfer title to the indorsement in blank specifies no
payee and recognize him as holder indorsee, and an instrument so
thereof. indorsed is payable to bearer, and
*Delivery is always a common may be negotiated by delivery.”
requirement. *In special indorsement,
indorsement and delivery is
E. Indorsement
necessary.
1. Concept
Example:
Indorsement is a legal transaction
effected by the writing of one’s name FFr
at the back of the instrument or upon Front (Back) Pay to
a paper (allonge) attached thereto with C
or without additional words specifying b. Blank
the person whom or to whose order Sec. 35 of the Negotiable
the instrument is to be payable Instrument Law provides that:
whereby one not only transfers legal “The holder may convert a blank
title to the paper transferred but indorsement into a special
likewise enters into an implied indorsement by writing over the
guaranty that the instrument will be signature of the indorser in blank
duly paid. any contract consistent with the
*This is a mechanical act character of the indorsement.”
2. How made *In blank indorsement, only
Sec. 31 of the Negotiable delivery is necessary.
Instrument Law provides that: “The Example”
indorsement must be written on the
Back
instrument itself or upon a paper
Front (Back)
attached thereto. The signature of the
indorser, without additional words, is a  When is the indorsement effective:
sufficient indorsement.” a. Conditional Sgd B
Sec. 32 of the Negotiable Sec. 39 of the Negotiable
Instrument Law provides that: “The Instrument Law provides that:
indorsement must be an indorsement “Where an indorsement is
of the entire instrument. An conditional, the party required to
indorsement which purports to transfer pay the instrument may disregard
to the indorsee a part only of the the condition and make payment to
amount payable, or which purports to the indorsee or his transferee
transfer the instrument to two or more whether the condition has been
indorsees severally, does not operate fulfilled or not. But any person to
as a negotiation of the instrument. But whom an instrument so indorsed is
where the instrument has been paid in negotiated will hold the same, or
part, it may be indorsed as to the the proceeds thereof, subject to the
residue.” rights of the person indorsing
3. Kinds conditionally.”
*These words: specified, restrictive, Q: What is suspended?
conditional, qualified are associated A: The very indorsement is
words; they can be used suspended thus the right of the
interchangeably. indorsee is made to depend on the
 How further negotiation of an order happening of the event.
instrument be made: Example:
a. Special A → B ----› C
Sec. 34 of the Negotiable b. Unconditional
Instrument Law provides that: “A  What are the liabilities of an
special indorsement specifies the indorser:

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a. Qualified -The relationship exists is a trustee-


Sec. 38 of the Negotiable trustor relationship.
Instrument Law provides that: “A Sec. 37 of the Negotiable
qualified indorsement constitutes Instrument Law provides that: “A
the indorser a mere assignor of the restrictive indorsement confers
title to the instrument. It may be upon the indorsee the right: (a) to
made by adding to the indorser's receive payment of the instrument;
signature the words "without (b) to bring any action thereon that
recourse" or any words of similar the indorser could bring; (c) to
import. Such an indorsement does transfer his rights as such indorsee,
not impair the negotiable character where the form of the indorsement
of the instrument.” authorizes him to do so. But all
*This indorsement is confined to subsequent indorsees acquire only
warranties. the title of the first indorsee under
*In this kind of indorsement, Sec. the restrictive indorsement.”
65 of the Negotiable Instrument is *It does not follow that if the
applicable. instrument is restrictively indorsed
b. Unqualified the liability is qualified.
*Indorsement of this kind makes b. Unrestrictive
the indorsee liable for warranties 4. Other rules on indorsement
and held the indorsee secondarily a. in a representative capacity
liable in case of dishonor. Sec. 44 of the Negotiable
*Sec. 66 of the Negotiable Instrument Law provides that:
Instrument Law is applicable in this “Where any person is under
kind of consideration. obligation to indorse in a
 What are the rights of indorsee: representative capacity, he may
a. Restrictive indorse in such terms as to
Sec. 36 of the Negotiable negative personal liability.”
Instrument Law provides that: b. Presumption as to time of
“An indorsement is restrictive indorsement
which either: (a) Prohibits the Sec. 45 of the Negotiable
further negotiation of the Instrument Law provides that:
instrument; or (b) Constitutes the “Except where an indorsement
indorsee the agent of the indorser; bears date after the maturity of the
or (c) Vests the title in the indorsee instrument, every negotiation is
in trust for or to the use of some deemed prima facie to have been
other persons. But the mere effected before the instrument was
absence of words implying power overdue.”
to negotiate does not make an c. Place of indorsement
indorsement restrictive.” Sec. 46 of the Negotiable
*Prohibits the further negotiation of Instrument Law provides that:
the instrument “Except where the contrary
- the beneficial and legal title is appears, every indorsement is
both on the indorser. presumed prima facie to have been
*Constitutes the indorsee the agent made at the place where the
of the indorser instrument is dated.”
- the indorser has the legal title d. Striking out of indorsement
while the beneficial title remains Sec. 48 of the Negotiable
with the principal. Instrument Law states that: “The
-the relationship exists here is holder may at any time strike out
principal-agent relationship. any indorsement which is not
*Vests the title in the indorsee in necessary to his title. The indorser
trust for or to the use of some whose indorsement is struck out,
other persons and all indorsers subsequent to
-the beneficial title belongs to other
him, are thereby relieved from
person whereas the legal title
liability on the instrument.”
remains with the beneficiary.

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*The striking of indorsement is Sec. 41 of the Negotiable


under the discretion of the holder Instrument Law states that:
and not of the indorser. “Where an instrument is payable to
e. Transfer indorsement of an the order of two or more payees or
instrument payable to bearer indorsees who are not partners, all
Sec. 40 of the Negotiable must indorse unless the one
Instrument Law states that: indorsing has authority to indorse
“Where an instrument, payable to for the others.”
bearer, is indorsed specially, it may g. Instrument is drawn or indorsed to
nevertheless be further negotiated a person as cashier
by delivery; but the person Sec. 42 of the Negotiable
indorsing specially is liable as Instrument Law states that:
indorser to only such holders as “Where an instrument is drawn or
make title through his indorsed to a person as "cashier" or
indorsement.” other fiscal officer of a bank or
Example: corporation, it is deemed prima
Note payable to bearer facie to be payable to the bank or
A → B → C → D
corporation of which he is such
B indorsed the instrument to C
Q: Does the indorsement affect the officer, and may be negotiated by
instrument? either the indorsement of the bank
A: NO. Even if there is an or corporation or the indorsement
indorsement, it does not change of the officer.”
the fact that the instrument is a h. Where name of payee or indorsee
bearer one thus it can be is misspelled
Sec. 43 of the Negotiable
negotiated by mere delivery.
Q: Is the indorser of the bearer Instrument Law states that:
instrument liable? What is his “Where the name of a payee or
liability? indorsee is wrongly designated or
A: YES. He is liable in case of misspelled, he may indorse the
breach of warranty. He is liable as instrument as therein described
indorser for the fact that he adding, if he thinks fit, his proper
indorses a bearer instrument. signature.”
*Indorsement on a bearer i. Indorsement of an order of
instrument does not affect the instrument without indorsement
nature of the instrument because a Sec. 49 of the Negotiable
bearer instrument is always a Instrument Law provides that:
bearer instrument. “Where the holder of an instrument
*This section applies only to payable to his order transfers it for
instruments which are originally value without indorsing it, the
payable to bearer. transfer vests in the transferee
Example: A issued to B a bearer such title as the transferor had
note, B wants to negotiate it to C. B therein, and the transferee
asked you how he can validly acquires in addition, the right to
negotiate the bearer instrument? have the indorsement of the
The answer is by mere delivery. transferor. But for the purpose of
Q: Is there a change in the determining whether the transferee
liabilities of a person who indorses is a holder in due course, the
a bearer instrument? negotiation takes effect as of the
A: YES. He is liable as an indorser time when the indorsement is
under Sec. 67 of the Negotiable actually made.”
Instrument Law. Q: A issued an instrument payable
Q: Is there any liability attaches to to the order of B, B wants to
the person who negotiates the negotiate it to C. How negotiation
instrument by mere delivery? be validly made?
A: YES. Sec 65 second paragraph A: Indorsement and delivery
but confined to warranties only. Q: A issued an order instrument to
f. Where instrument is payable to 2 B, B transferred it to C only by
or more persons delivery without indorsing it. Is
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there any legal implication on the Sec. 52 of the Negotiable Instrument


gesture made by B? Law provides that: “A holder in due
A: YES. Under Sec. 49 of the course is a holder who has taken the
Negotiable Instrument, there is an instrument under the following conditions:
equitable assignment. (a) That it is complete and regular upon its
Q: Does the holder of the face; (b) That he became the holder of it
instrument has any other right? before it was overdue, and without notice
A: YES. He has the right to have
that it has been previously dishonored, if
the indorsement of the transferor.
such was the fact; (c) That he took it in
This right is applicable only if the
good faith and for value; (d) That at the
instrument is negotiable. He can
time it was negotiated to him, he had no
file a case for specific performance.
notice of any infirmity in the instrument or
Q: Why is the date of indorsement
defect in the title of the person
material?
A: To determine the date of due negotiating it.”
*Requisites on Sec. 52 boils down to good
course holding.
Q: A issued a negotiable faith and innocence of the holder.
*This is equivalent to innocent buyer in
instrument to B, B negotiated it to
good faith under New Civil Code.
C. The delivery took effect on May
1. Instrument complete and regular
1, 2008 and the indorsement took *Complete: all necessary details that
effect on June 1, 2008. When was define the necessary rights thereto
there a valid negotiation? and all the requisites of Sec. 1 must be
A: At the time indorsement was
present.
made. There is no retroactive *Regular: there must be no visible
effect. alterations/changes upon the face of
*The requisites of a holder in due
the instrument.
course must be present up to the *These are alterations that are obvious
actual and valid negotiation took in the naked eye.
place. 2. Taken before overdue
5. Negotiation by a prior party *If the instrument is overdue, it is also
Sec. 50 of the Negotiable a notice that it has been dishonored.
Instrument Law states that: “Where *An instrument is overdue after the
an instrument is negotiated back to a date of maturity.
prior party, such party may, subject to *It is very unusual to negotiate an
the provisions of this Act, reissue and instrument that has been matured
further negotiable the same. But he is because such instrument should have
not entitled to enforce payment been discharged.
thereof against any intervening party a. Rule in case of installment
to whom he was personally liable.” instruments
*When the instrument contains an
HOLDERS: acceleration clause, knowledge of
the holder at the time of
A. General concept of holder acquisition thereof that one
Sec. 191 of the Negotiable installment or interest, or both, as
Instrument Law states that: “"Holder" the case may be, is unpaid, is
means the payee or indorsee of a bill or notice that the instrument is
note who is in possession of it, or the overdue.
bearer thereof.” *One who purchases in good faith
*If payable to bearer, “holder” means the an instrument upon which the
person who is in possession thereof. interest is overdue is a holder in
Q: Can a named payee be called a holder?
due course. But where, by the
A: YES. If the instrument is in his
possession. terms of the instrument, the
Presumption: There was a valid delivery. principal was to become due upon
Advantage of being a holder in due default of the payment of interest,
course: Can give shelter/protection to the one who takes the instrument upon
subsequent holders. which the interest is overdue is not
a holder in due course.
B. Holder in due course

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b. Rule in case of demand On the part of A, the issuance of the


instruments instrument is involuntary because of
Sec. 53 of the Negotiable the presence of any circumstances
Instrument Law provides that: mentioned in Sec. 55. thus making B’s
“Where an instrument payable on title defective.
demand is negotiated on an Q: Can C still be called a holder in due
unreasonable length of time after course?
its issue, the holder is not deemed A: YES. As long as he has no
a holder in due course.” knowledge of the defect in the title of
*In demand instrument, the person negotiating it to him.
reasonableness test is applied. It is Sec. 56 of the Negotiable
the usage of trade or business Instrument Law provides that: “To
practice (if any), with respect to constitutes notice of an infirmity in the
such instruments, and the facts of instrument or defect in the title of the
the particular case. person negotiating the same, the
3. Notice of infirmity or defect person to whom it is negotiated must
Sec. 54 of the Negotiable have had actual knowledge of the
Instrument Law provides that: infirmity or defect, or knowledge of
“Where the transferee receives notice such facts that his action in taking the
of any infirmity in the instrument or instrument amounted to bad faith.”
defect in the title of the person *Infirmities must include things that
negotiating the same before he has are wrong with the instrument itself.
paid the full amount agreed to be paid These are infirmities not visible to the
therefor, he will be deemed a holder in naked eye.
due course only to the extent of the *As long as he has knowledge of the
amount therefore paid by him.” infirmity due course holding is not
*There is defective in the title when present.
there is error in the indorsement Q: How can we reconcile the 1 st
and/or in delivery. requirement and the 4th requirement?
Q: Even if the instrument suffer A: The first requirement pertains to
infirmities, is there a possibility that infirmities visible to the naked eye
the holder be a holder in due course? whereas the fourth requirement
A: YES. If he has no knowledge of the pertains to infirmities not visible to the
infirmity. naked eye.
Sec. 55 of the Negotiable Example:
Instrument Law provides that: “The The instrument contains
title of a person who negotiates an
instrument is defective within the
meaning of this Act when he obtained
the instrument, or any signature all
thereto, by fraud, duress, or force and necessary details except
fear, or other unlawful means, or for an for the amount, A
illegal consideration, or when he instructed B to fill the
negotiates it in breach of faith, or instrument of the any
under such circumstances as amount amount but upto
to a fraud.” P50,000 only. B inserted
Q: What are the circumstances that
P80,000. B negotiated it
render title defective?
to C.
A: When he obtained the instrument
Q: Can C detect the infirmity upon its
or any signature thereto by: 1. Fraud;
face?
2. Duress; 3. Force and fear; 4. Other A: NO
unlawful means; 5. For an illegal 4. Good faith
consideration; 6. Negotiate it in breach 5. Holder for value
of faith; and 7. Under such
circumstances as amount to a fraud. C. Presumption of due course holding
Example: Sec. 59 of the Negotiable Instrument
A → B → C Law provides that: “Every holder is
deemed prima facie to be a holder in due
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course; but when it is shown that the title To subsequent holder, F is considered to
of any person who has negotiated the be a holder in due course because he was
instrument was defective, the burden is on sheltered by E who is a holder in due
the holder to prove that he or some course.
person under whom he claims acquired *The determination of whether there is
the title as holder in due course. But the due course holding or not is material only
last-mentioned rule does not apply in when there is a personal defense.
favor of a party who became bound on the Q: Is it worth comparing the holders in
instrument prior to the acquisition of such due course and the one who derived title
defective title.” from the holder in due course?
*The presumption expressed in this A: YES.
section arises only in favor of a person Advantages:
who is a holder in the sense defined in
Holder in due A person derived
Sec. 191 of the Negotiable Instrument
course title from a holder
Law, i. e., a payee or indorsee who is in in due course
possession of the draft, or the bearer Always a holder in Holder in due
thereof. due course to all course to all prior
Q: How important is the statutory prior parties. parties except to
presumption? Always with the person who
A: The holder of the instrument need not freedom against negotiated the
prove that he is a holder in due course. defenses and instrument to him
*The burden to prove shifted to the other defective title
party. Shelter rule is Shelter rule is not
applicable applicable
D. Rights of holders in due course General Rule: Equitable defenses can be
Sec. 57 of the Negotiable Instrument interposed against a person not a holder
Law provides that: “A holder in due in due course.
course holds the instrument free from any Exception: Shelter rule, i. e., Section 58
defect of title of prior parties, and free of the Negotiable Instrument Law.
from defenses available to prior parties
LIABILITY OF PARTIES:
among themselves, and may enforce
payment of the instrument for the full Q: What is your understanding of parties liable?
amount thereof against all parties liable When do you say a party is liable?
thereon.” A: A person is liable when he in obligated to
perform a particular prestation.
E. Shelter Rule
Sec. 58 of the Negotiable Instrument Q: What are the liabilities of the parties according
Law provides that: “In the hands of any to its nature?
holder other than a holder in due course, a A: 1. Warranties; 2. Engagement to pay
negotiable instrument is subject to the ( primary; secondary)
same defenses as if it were non-
A. Primary and secondary liability,
negotiable. But a holder who derives his
distinguished
title through a holder in due course, and Distinction:
who is not himself a party to any fraud or
illegality affecting the instrument, has all Primary Liability Secondary
the rights of such former holder in respect Liability
of all parties prior to the latter.” The engagement of An engagement by
Requisites: a party to an a party to an
1. That the holder derived his title from a instrument that on instrument that on
holder in due course. its due date he will its due presentment
2. That he himself is not a party to any accept or pay, or it shall be accepted
both, the or paid or both as
fraud or illegality affecting the
instrument to the the case may be
instrument. payee or to any one according to its
Example: to whom it is tenor and that if it
A → B → C → D → E → F negotiated be dishonored and
E is a holder in due course according to its the necessary
E negotiated the instrument to F who is tenor. proceedings on
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taken he will pay Promissory Note Bill of Exchange


the amount thereof Maker (Sec. 60) Drawer (Sec. 61)
to the payee or to Acceptor (Sec.
whom it is 62)
negotiated or to any Indorser Indorser
subsequent indorser a. General a. General
who may be (Sec. 66) b. Qualified
compelled to pay it. b. Qualified
Absolutely liable Conditionally liable (Sec. 65)
Persons Persons
B. Liability distinguished from warranty negotiating by negotiating by
Warranty consists of a party’s delivery (Sec. delivery
undertaking that at the time of his 65)
negotiation he had title to the instrument Q: Can the drawee be forced to be
and it is valid and subsisting. held liable?
-This is an affirmation/assertion/admission A: NO. As long as he do not
that certain things are true. accepts the instrument.
Q: Are all parties had warranties? *The drawee cannot be compelled
A: YES. to accept the negotiable
Q: Is engagement to pay common to all instrument.
parties? *If the refusal amounted to tortious
A: NO.
act, the drawee may be held liable
Distinction:
but not based on contract.
Liability Warranties
It is material to It is immaterial to 1. Maker
determine whether know whether the Sec. 60 of the Negotiable
the person is person is primarily Instrument Law provides that: “The
primarily or or secondarily liable maker of a negotiable instrument, by
secondarily liable making it, engages that he will pay it
according to its tenor, and admits the
C. Liability and/or warranty of parties existence of the payee and his then
Liability in general
capacity to indorse.”
a. Warranty
*Maker is primarily liable
b. Engagement to pay
2. Drawer
Sec. 61 of the Negotiable
Promissory Bill of
Instrument Law provides that: “The
Note Exchange
Primary Maker Acceptor drawer by drawing the instrument
Secondary General General admits the existence of the payee and
Indorser Indorser his then capacity to indorse; and
and engages that, on due presentment, the
drawer instrument will be accepted or paid, or
*If the holder’s cause of action is both, according to its tenor, and that if
primary engagement, due it be dishonored and the necessary
presentment and dishonor proceedings on dishonor be duly taken,
proceedings are irrelevant. he will pay the amount thereof to the
*If the holder’s cause of action is
holder or to any subsequent indorser
breach of warranty, due
who may be compelled to pay it. But
presentment and dishonor
the drawer may insert in the
proceedings are irrelevant.
instrument an express stipulation
*If the holder’s cause of action is
negativing or limiting his own liability
secondary engagement to pay, due
to the holder.”
presentment and dishonor
*Due presentment means not only any
proceedings are relevant.
presentment but presentment in
Q: Is liability on warranties
accordance with law.
common to all?
*Necessary proceedings on dishonor
A: YES.
Persons that had no means proceedings must be one within
engagement to pay: accordance with law.
1. Qualified Indorsers *Drawer is conditionally liable
2. Persons negotiating by delivery a. Relationship with drawee

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b. Relationship with collecting bank it; (c) That all prior parties had
3. Acceptor capacity to contract; (d) That he
Sec. 62 of the Negotiable has no knowledge of any fact which
Instrument Law states that: “The would impair the validity of the
acceptor, by accepting the instrument, instrument or render it valueless.
engages that he will pay it according But when the negotiation is by
to the tenor of his acceptance and delivery only, the warranty extends
admits: (a) The existence of the in favor of no holder other than the
drawer, the genuineness of his immediate transferee. The
signature, and his capacity and provisions of subdivision (c) of this
authority to draw the instrument; and section do not apply to a person
(b) The existence of the payee and his negotiating public or corporation
then capacity to indorse.” securities other than bills and
*Acceptor is primarily liable
notes.”
Sec. 127 of the Negotiable
*Qualified indorsers are liable for
Instrument Law states that: “A bill of
warranties
itself does not operate as an c. Order of liability
assignment of the funds in the hands Sec. 68 of the Negotiable
of the drawee available for the Instrument Law states that: “As
payment thereof, and the drawee is respect one another, indorsers are
not liable on the bill unless and until he liable prima facie in the order in
accepts the same.” which they indorse; but evidence is
4. Indorsers admissible to show that, as
a. General indorsers
between or among themselves,
Sec. 66 of the Negotiable
they have agreed otherwise. Joint
Instrument Law states that:
payees or joint indorsees who
“Every indorser who indorses
indorse are deemed to indorse
without qualification, warrants to
jointly and severally.”
all subsequent holders in due
5. Parties negotiating by mere
course: (a) The matters and things
delivery
mentioned in subdivisions (a), (b), Sec. 65 of the Negotiable
and (c) of the next preceding Instrument Law provides that:
section; and (b) That the “Every person negotiating an
instrument is, at the time of his instrument by delivery or by a
indorsement, valid and subsisting; qualified indorsement warrants: (a)
And, in addition, he engages that, That the instrument is genuine and in
on due presentment, it shall be all respects what it purports to be; (b)
accepted or paid, or both, as the That he has a good title to it; (c) That
case may be, according to its all prior parties had capacity to
tenor, and that if it be dishonored contract; (d) That he has no knowledge
and the necessary proceedings on of any fact which would impair the
dishonor be duly taken, he will pay validity of the instrument or render it
the amount thereof to the holder, valueless. But when the negotiation is
or to any subsequent indorser who by delivery only, the warranty extends
may be compelled to pay it.” in favor of no holder other than the
*General indorsers are liable for
immediate transferee. The provisions
warranties and they are
of subdivision (c) of this section do not
secondarily liable for engagement
apply to a person negotiating public or
to pay.
corporation securities other than bills
b. Qualified indorsers
Sec. 65 of the Negotiable and notes.”
6. Other cases
Instrument Law states that:
a. Irregular indorser
“Every person negotiating an Sec. 64 of the Negotiable
instrument by delivery or by a Instrument Law states that:
qualified indorsement warrants: (a) “Where a person, not otherwise a
That the instrument is genuine and party to an instrument, places
in all respects what it purports to thereon his signature in blank
be; (b) That he has a good title to
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before delivery, he is liable as Stronger defense Weakest defense


indorser, in accordance with the Those that attach to Those which are
following rules: (a) If the the instrument itself available only
instrument is payable to the order and are available against a person
against all holders, not a holder in due
of a third person, he is liable to the
whether in due course or a
payee and to all subsequent course or not but subsequent holder
parties. only by the parties who stands in
(b) If the instrument is payable to entitled to raise privity with him
the order of the maker or drawer, them (Absolute (Equitable
or is payable to bearer, he is liable defense) defense)
to all parties subsequent to the Cannot be enforced Can be enforced
by the holder because there is an
maker or drawer. (c) If he signs for
because there is no existing contract
the accommodation of the payee, contract to enforce but subject to
he is liable to all parties defense
subsequent to the payee.” The following are The following are
b. Indorser of bearer instrument real defenses: personal defences:
Sec. 67 of the Negotiable 1. Material 1. Absence or
Instrument Law provides that: alteration failure of
“Where a person places his 2. Want of consideratio
indorsement on an instrument delivery of n
incomplete 2. Want of
negotiable by delivery, he incurs all
instrument delivery of
the liability of an indorser.” 3. Duress complete
c. Accommodation party amounting instrument
Sec. 29 of the Negotiable to forgery 3. Insertion of
Instrument Law states that: “An 4. Fraud in wrong date
accommodation party is one who factum or in an
has signed the instrument as fraud in esse instrument
maker, drawer, acceptor, or contractus 4. Filling up of
indorser, without receiving value 5. Minority blank
6. Insanity contrary to
therefor, and for the purpose of
7. Ultra vires authority
lending his name to some other acts of a given or not
person. Such a person is liable on corporation within
the instrument to a holder for 8. Want of reasonable
value, notwithstanding such holder, authority of time
at the time of taking the agent 5. Fraud in
instrument, knew him to be only an 9. Illegality inducement
10. Forgery 6. Duress or
accommodation party.”
11. Prescription fear
*The liability of an accommodation
7. Illegal
party depends on how they consideratio
participate in the instrument. n
d. Agents signing in behalf of the 8. Negotiation
principal in breach of
Sec. 19 of the Negotiable faith
Instrument Law provides that: 9. Mistake
“The signature of any party may be 10. Ante-dating
made by a duly authorized agent. or post
dating for
No particular form of appointment
illegal or
is necessary for this purpose; and fraudulent
the authority of the agent may be purposes
established as in other cases of 11. Abuse of
agency.” authority
12. Conditional
DEFENSES: delivery of
complete
A. Real and Personal Defenses, distinguished instrument
Distinctions: Q: In a creditor-debtor relationship, who is
interested in the existence of a defense?
Real Defense Personal Defense

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A: Debtor. Reason: Presence of a defense without the authority of the person


exonerate the liability of the debtor. whose signature it purports to be, it is
Kinds: wholly inoperative, and no right to
1. Real defense retain the instrument, or to give a
2. Personal defense discharge therefor, or to enforce
Q: Why are real defenses stronger than payment thereof against any party
the personal defense? thereto, can be acquired through or
A: Because there is no contract exists on under such signature, unless the party
his part. against whom it is sought to enforce
such right is precluded from setting up
B. Real defenses the forgery or want of authority.”
1. Minority and ultra vires acts (Sec 22) *What is inoperative is only the
Sec. 22 of the Negotiable signature and not the instrument.
Instrument Law provides that: “The Parties precluded from raising
indorsement or assignment of the forgery as defense:
instrument by a corporation or by an 1. Person negotiating by delivery
infant passes the property therein, 2. Prior parties/indorsers
notwithstanding that from want of
a. Forgery of maker’s signature
capacity, the corporation or infant may
*Maker cannot be held liable by
incur no liability thereon.”
any holder.
Examples:
Reason: The purported maker is
a. A, a minor, issued a promissory
not a party to the instrument as his
note to B; B negotiated it to C; C to
forged instrument is inoperative
D then D to E.
Q: What defense is available to A? and no right to retain, enforce or
A: Minority discharge the note may be
Q: Why is it a real defense? acquired against him.
A: Because of his lack of capacity. b. Of indorser’s signature
Q: What recourse is available to the *The indorsement is inoperative
holder? thus it cannot effect any transfer of
A: Go after the indorsers any rights to the holder.
b. A issued a negotiable instrument to Example:
B, a minor. A (maker) → B → C → D → E
Q: Can A use minority as a defense? B’s signature was forged
A: NO. As maker, he admits the Q: Can A raise the defense of
existence of the payee and his then Forgery?
A: YES.
capacity to indorse.
Q: Can E go after B?
2. Non-delivery of an incomplete A: NO.
instrument Recourse: Go after C or D
Sec. 15 of the Negotiable *Cut-off rule is applicable.
Instrument Law provides that: Indorsement is necessary for the
“Where an incomplete instrument has transfer of title.
not been delivered, it will not, if Example:
completed and negotiated without X→A→B→C→D→E
authority, be a valid contract in the Q: Can the acceptor admits the
hands of any holder, as against any genuineness of the signature of the
person whose signature was placed payee?
thereon before delivery.” A: NO.
3. Fraud in factum Q: Can a drawee refuse payment of
*The person who signs the instrument a bill of exchange bearing a forged
lacks knowledge of the character or indorsement?
essential terms of the instrument. But A: YES. Cut-off rule applies
Cases: Associated Bank v CA;
the defense is not available if the party
PNB v CA; Republic v Ebrada
involved had reasonable opportunity to
c. Of drawer’s signature
obtain such knowledge. *In cases involving a forged check,
4. Forgery and want of authority
where the drawer’s signature is
Sec. 23 of the Negotiable
forged, the drawer can recover
Instrument Law provides that:
from the drawee bank. No drawee
“When a signature is forged or made
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bank has a right to pay a forged payment thereof according to its


check. If it does, it shall have to re- original tenor.”
credit the amount of the check to Q: Why is this a partial defense only?
the account of the drawer. A: Because the holder in due course
Reason: The drawee bank is may still demand payment but
bound to know the signature of the according to its original tenor.
drawer since the drawer is its Sec. 125 of the Negotiable
customer. Instrument Law states that: “Any
Example: alteration which changes:
X → A (drawer) → B → C → D → E (a) The date;
(holder) (b) The sum payable, either for
Drawer’s signature was forged principal or interest;
Q: Can drawee accept a bill of (c) The time or place of payment:
exchange bearing forged signature (d) The number or the relations of the
of the drawer? parties;
A: NO. (e) The medium or currency in which
Q: What is the implication of payment is to be made;
accepting bill of exchange bearing (f) Or which adds a place of payment
a forged signature of the drawer? where no place of payment is
A: Sec. 62 of the Negotiable specified, or any other change or
Instrument Law. Once accepted, addition which alters the effect of the
drawee cannot raise forgery as a instrument in any respect, is a material
defense. alteration.”
Recourse: Go after the last *The underlined phrase is what we call
holder/collecting bank. “catch-all clause”
*Collecting bank assumes the role Q: What is the condition/term of the
of an indorser. instrument at the time it was altered?
Case: Gempesaw v CA A: The instrument is materially
*Cut-off rule is not applicable complete.
General Rule: Drawee bank is 6. Extinctive prescription
liable for the loss.
Exception: There is C. Personal defenses
fault/negligence on the part of the *Determination of whether the person is a
drawer holder in due course or not is material.
d. Forgery of bearer instruments Q: Why this defense is treated as a weak
*In bearer instruments, the defense?
signature of the payee or holder is A: Because only holders not in due course
unnecessary to pass title to the can raise these defenses.
1. Ante-dating or post dating
instrument. Hence, where the
Sec. 12 of the Negotiable
indorsement is a forgery, only the
Instrument Law provides that: “The
person whose signature is forged
instrument is not invalid for the reason
can raise the defense of forgery
only that it is ante-dated or post-dated,
against a holder in due course.
provided this is not done for an illegal
5. Material alteration (partial real
or fraudulent purpose. The person to
defense)
Sec. 124 of the Negotiable whom an instrument so dated is
Instrument Law provides that: delivered acquires the title thereto as
“Where a negotiable instrument is of the date of delivery.”
2. Insertion of wrong date
materially altered without the assent
Sec. 13 of the Negotiable
of all parties liable thereon, it is
Instrument Law provides that:
avoided, except as against a party who
“Where an instrument expressed to be
has himself made, authorized, or
payable at a fixed period after date is
assented to the alteration and
issued undated, or where the
subsequent indorsers.
acceptance of an instrument payable
But when an instrument has been
at a fixed period after sight is undated,
materially altered and is in the hands
any holder may insert therein the true
of a holder in due course not a party to
date of issue or acceptance, and the
the alteration, he may enforce
instrument shall be payable

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accordingly. The insertion of a wrong *It is inequitable for a person to set up


date does not avoid the instrument in this defense against more innocent
the hands of a subsequent holder in party.
due course; but as to him, the date so Q: Is there any recourse to the holder?
inserted is to be regarded as the true A: YES. To ran against the indorsers
*Subsequent indorsers cannot put up
date.”
Principle: One who made possible to the defense of good faith.
Example:
the infirmity shall bear the loss
Example:
The amount
The
is authority to fill the amount is upto
P50,000 only
___________
_______ A→B→C→D→E
The true date is June 1, 2008 maturity B inserted an amount of P80,000
10 days after Q: Is there a defense?
date will be June 11, 2008
A: YES.
The date inserted is May 25, 2008 the
Q: Can it be used?
maturity date will be June 4, 2008 A: IT DEPENDS. Depending whether
A→B→C→D→E
the holder is a holder in due course or
If E is a holder in due course and A is
not.
the maker, though both E and A are
*If holder in due course the defense
innocent, A shall suffer the
cannot be raised.
consequence for he made possible to *If holder not in due course he can use
the loss it as a defense.
If E is not a holder in due course and A Reason: The holder not in due course
is the maker, E is not innocent but A is is not an innocent party as far as the
innocent thus E cannot held A liable. maker is concern thus the contract is
3. Filling up blanks beyond authority
avoided.
(Abuse of Authority) Recourse: Go after the immediate
Sec. 14 of the Negotiable
transferor in case of bearer instrument
Instrument Law states that: “Where
or the indorsers in case of order
the instrument is wanting in any
instrument.
material particular, the person in 4. Want of delivery of a complete
possession thereof has a prima facie instrument
authority to complete it by filling up Sec. 16 of the Negotiable
the blanks therein. And a signature on Instrument Law states that: “Every
a blank paper delivered by the person contract on a negotiable instrument is
making the signature in order that the incomplete and revocable until
paper may be converted into a delivery of the instrument for the
negotiable instrument operates as a purpose of giving effect thereto. As
prima facie authority to fill it up as between immediate parties and as
such for any amount. In order, regards a remote party other than a
however, that any such instrument holder in due course, the delivery, in
when completed may be enforced order to be effectual, must be made
against any person who became a either by or under the authority of the
party thereto prior to its completion, it party making, drawing, accepting, or
must be filled up strictly in accordance indorsing, as the case may be; and, in
with the authority given and within a such case, the delivery may be shown
reasonable time. But if any such to have been conditional, or for a
instrument, after completion, is special purpose only, and not for the
negotiated to a holder in due course, it purpose of transferring the property in
is valid and effectual for all purposes in the instrument. But where the
his hands, and he may enforce it as if instrument is in the hands of a holder
it had been filled up strictly in in due course, a valid delivery thereof
accordance with the authority given by all parties prior to him so as to
and within a reasonable time.” make them liable to him is conclusively
presumed. And where the instrument
is no longer in the possession of a
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party whose signature appears A: YES. As long as he has no


thereon, a valid and intentional knowledge of the fact that there was
delivery by him is presumed until the infirmity in the instrument.
contrary is proved.” Q: Is a defense exists in favor of A?
Example: What kind of defense?
A issued a complete instrument but he A: YES. It is a personal defense
has no intention of negotiating it yet Q: Can A successfully raise it? Why?
B got the instrument accidentally A: NO. One who made the infirmity
B negotiated it to C then C to D and D possible shall bear the loss.
to E 6. Simple fraud, duress, intimidation,
E is a holder in due course force or fear, illegality of consideration,
Q: Can C be a holder in due course? breach of faith
A: YES. As long as he has no Sec. 55 of the Negotiable
knowledge of the infirmity Instrument Law provides that: “The
Q: Between E and A, can A raise the title of a person who negotiates an
defense? instrument is defective within the
A: NO. Because the defense is a meaning of this Act when he obtained
personal defense. the instrument, or any signature
Principle: One who makes the
thereto, by fraud, duress, or force and
infirmity possible shall bear the loss.
fear, or other unlawful means, or for an
Recourse: Go after the indorsers
Reason: Breach of warranty, i.e., that illegal consideration, or when he
they had good title to the instrument. negotiates it in breach of faith, or
5. Absence or failure of consideration under such circumstances as amount
Sec. 28 of the Negotiable to a fraud.”
Instrument Law provides that: Sec. 56 of the Negotiable
“Absence or failure of consideration is Instrument Law states that: “To
a matter of defense as against any constitutes notice of an infirmity in the
person not a holder in due course; and instrument or defect in the title of the
partial failure of consideration is a person negotiating the same, the
defense pro tanto, whether the failure person to whom it is negotiated must
is an ascertained and liquidated have had actual knowledge of the
amount or otherwise.” infirmity or defect, or knowledge of
*Defense pro tanto means that the such facts that his action in taking the
person is not totally exonerated from instrument amounted to bad faith.”
liability; he is liable upto the amount Sec. 57 of the Negotiable
he benefited. Instrument Law provides that: “A
*Partial failure of consideration is a holder in due course holds the
personal defense and can be raised instrument free from any defect of title
against a holder not in due course. of prior parties, and free from defenses
*The general indorser is liable for available to prior parties among
breach of warranty, i.e., his warranty themselves, and may enforce payment
that at the time of his indorsement the of the instrument for the full amount
instrument is valid and existing. thereof against all parties liable
*With regard to person negotiating by thereon.”
delivery and qualified indorser, his
liability depends on whether or not he ENFORCEMENT OF LIABILITY:
has knowledge of the invalidity of the
instrument. A. Parties primarily liable and parties
Example: secondarily liable
A issued a promissory note sans
consideration to B. Primarily Liable Secondarily Liable
Q: Can B collect to A? Maker Drawer
A: NO. Acceptor General Indorsers
B indorsed the note to C then C to D Qualified Indorsers
and D to E.
B. General steps in enforcing liability
Q: Could C be a holder in due course?
1. Presentment
2. Dishonor
 Promissory Note
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1. Presentment for payment must be liable on the instrument, or if he is


made within the required period to absent or inaccessible, to any person
the maker (Sec. 70) found at the place where the
2. Notice of Dishonor (Sec. 89) presentment is made.”
Example: a. Date of presentment
M→A→B→C→D→E Sec. 71 of the Negotiable
Q: In a case where the cause of action Instrument Law states that:
is for payment, is presentment and “Where the instrument is not
dishonor essential? payable on demand, presentment
A: YES. must be made on the day it falls
Q: If the holder is running after the due. Where it is payable on
indorsement for breach of warranty, is demand, presentment must be
presentment and dishonour essential? made within a reasonable time
A: NO. after its issue, except that in the
 Bill of Exchange case of a bill of exchange,
1. Presentment for acceptance or presentment for payment will be
negotiation within a reasonable sufficient if made within a
time after it was acquired (Sec. reasonable time after the last
143) negotiation thereof.”
2. If dishonored by non-acceptance: i. Rule in determining
2.1. Notice of dishonor should be maturity date
given to the indorsers and Sec. 85 of the Negotiable
drawer Instrument Law provides
2.2. If the bill is a foreign bill, that: “Every negotiable
there must be a protest for instrument is payable at the
dishonor by non-acceptance time fixed therein without
3. If the bill is accepted: grace. When the day of
3.1. Presentment for payment to maturity falls upon Sunday
the acceptor should be made or a holiday, the
3.2. If the bill is dishonored upon
instruments falling due or
presentment for payment:
becoming payable on
3.2.1. Notice of dishonor upon
Saturday are to be
presentment for
presented for payment on
payment
3.2.2. If the bill is a foreign bill, the next succeeding
protest for dishonor by business day except that
non-acceptance must be instruments payable on
made demand may, at the option
of the holder, be presented
C. Presentment for payment for payment before twelve
1. Concept of presentment o'clock noon on Saturday
Presentment is the production of a when that entire day is not
bill of exchange to the drawee for his a holiday.”
acceptance or to the drawee or ii. Rule in computing time
acceptor for payment or the Sec. 86 of the Negotiable
production of a promissory note to the Instrument Law provides
party liable for the payment of the that: “When the instrument
same. is payable at a fixed period
2. Requisites for sufficiency after date, after sight, or
Sec. 72 of the Negotiable after that happening of a
Instrument Law provides that: specified event, the time of
“Presentment for payment, to be payment is determined by
sufficient, must be made: (a) By the excluding the day from
holder, or by some person authorized which the time is to begin to
to receive payment on his behalf; (b) run, and by including the
At a reasonable hour on a business date of payment.”
day; (c) At a proper place as herein iii. Rule in if payable at a bank
defined; (d) To the person primarily

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Sec. 75 of the Negotiable order to charge the drawer


Instrument Law states and indorsers.”
that: “Where the instrument c. Presentment to the party primarily
is payable at a bank, liable
presentment for payment i. How presentment made
Sec. 74 of the Negotiable
must be made during
Instrument Law states
banking hours, unless the
that: “The instrument must
person to make payment
be exhibited to the person
has no funds there to meet
from whom payment is
it at any time during the
demanded, and when it is
day, in which case
paid, must be delivered up
presentment at any hour
to the party paying it.”
before the bank is closed on
ii. Rule in case party primarily
that day is sufficient.”
liable is already dead
b. Place of presentment
Sec. 76 of the Negotiable
Sec. 73 of the Negotiable
Instrument Law states
Instrument Law provides that:
that: “Where the person
“Presentment for payment is made
primarily liable on the
at the proper place: (a) Where a
instrument is dead and no
place of payment is specified in the
place of payment is
instrument and it is there
specified, presentment for
presented; (b) Where no place of
payment must be made to
payment is specified but the
his personal representative,
address of the person to make
if such there be, and if, with
payment is given in the instrument
the exercise of reasonable
and it is there presented; (c) Where
diligence, he can be found.”
no place of payment is specified
iii. Presentment to partners
and no address is given and the Sec. 77 of the Negotiable
instrument is presented at the Instrument Law provides
usual place of business or that: “Where the persons
residence of the person to make primarily liable on the
payment; (d) In any other case if instrument are liable as
presented to the person to make partners and no place of
payment wherever he can be payment is specified,
found, or if presented at his last presentment for payment
known place of business or may be made to any one of
residence.” them, even though there
i. Rule in if payable at a
has been a dissolution of
special place
the firm.”
Sec. 70 of the Negotiable
iv. Presentment to joint debtors
Instrument Law states Sec. 78 of the Negotiable
that: “Presentment for Instrument Law states
payment is not necessary in that: “Where there are
order to charge the person several persons, not
primarily liable on the partners, primarily liable on
instrument; but if the the instrument and no place
instrument is, by its terms, of payment is specified,
payable at a special place, presentment must be made
and he is able and willing to to them all.”
pay it there at maturity, 3. Instances where presentment is
such ability and willingness excused
are equivalent to a tender of Sec. 79 of the Negotiable
payment upon his part. But Instrument Law provides that:
except as herein otherwise “Presentment for payment is not
provided, presentment for required in order to charge the drawer
payment is necessary in where he has no right to expect or

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require that the drawee or acceptor bill is dishonored by non-


will pay the instrument.” acceptance: (a) When it is duly
Sec. 80 of the Negotiable presented for acceptance and such
Instrument Law states that: an acceptance as is prescribed by
“Presentment is not required in order this Act is refused or can not be
to charge an indorser where the obtained; or (b) When presentment
instrument was made or accepted for for acceptance is excused and the
his accommodation and he has no bill is not accepted.”
reason to expect that the instrument 2. Who should give notice
will be paid if presented.” a. Holder
Sec. 82 of the Negotiable Sec. 90 of the Negotiable
Instrument Law states that: Instrument Law provides that:
“Presentment for payment is excused: “The notice may be given by or on
(a) Where, after the exercise of behalf of the holder, or by or on
reasonable diligence, presentment, as behalf of any party to the
required by this Act, cannot be made; instrument who might be
(b) Where the drawee is a fictitious compelled to pay it to the holder,
person; (c) By waiver of presentment, and who, upon taking it up, would
express or implied.” have a right to reimbursement
4. When delay in presentment excused from the party to whom the notice
Sec. 81 of the Negotiable is given.”
Instrument Law provides that: b. Agent
“Delay in making presentment for Sec. 91 of the Negotiable
payment is excused when the delay is Instrument Law states that:
caused by circumstances beyond the “Notice of dishonor may be given
control of the holder and not imputable by any agent either in his own
to his default, misconduct, or name or in the name of any party
negligence. When the cause of delay entitled to given notice, whether
ceases to operate, presentment must that party be his principal or not.”
be made with reasonable diligence.” c. Party who may be compelled to pay
Sec. 90 of the Negotiable
D. Notice of dishonor Instrument Law provides that:
1. When dishonor of the instrument “The notice may be given by or on
occurs: behalf of the holder, or by or on
a. Dishonor by non-payment behalf of any party to the
Sec. 83 of the Negotiable instrument who might be
Instrument Law states that: “The compelled to pay it to the holder,
instrument is dishonored by non- and who, upon taking it up, would
payment when: (a) It is duly have a right to reimbursement
presented for payment and from the party to whom the notice
payment is refused or cannot be is given.”
obtained; or (b) Presentment is 3. Form of Notice
excused and the instrument is Sec. 96 of the Negotiable
overdue and unpaid.” Instrument Law states that: “The
Q: What are the implications of the notice may be in writing or merely oral
notices sent to drawer/general and may be given in any terms which
indorsers? sufficiently identify the instrument,
A: Secondary liability and indicate that it has been
Example:
dishonored by non-acceptance or non-
A→B→C→D→E
E sent notice of dishonor to D alone payment. It may in all cases be given
Q: What is the effect of notice by delivering it personally or through
given to D? the mails.”
A: Others are discharge. 4. To whom notice is given
Principle: Parties not given a a. Party secondarily liable or agent
notice are discharge. Sec. 97 of the Negotiable
b. Dishonor by non-acceptance Instrument Law provides that:
Sec. 149 of the Negotiable “Notice of dishonor may be given
Instrument Law provides that: “A
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either to the party himself or to his of a foreign bill of exchange or other


agent in that behalf.” negotiable instrument, is deemed to
b. Notice where party is dead be a waiver not only of a formal
Sec. 98 of the Negotiable protest but also of presentment and
Instrument Law states that: notice of dishonor.”
“When any party is dead and his Sec. 112 of the Negotiable
death is known to the party giving Instrument Law states that: “Notice
notice, the notice must be given to of dishonor is dispensed with when,
a personal representative, if there after the exercise of reasonable
be one, and if with reasonable diligence, it cannot be given to or does
diligence, he can be found. If there not reach the parties sought to be
be no personal representative, charged.”
notice may be sent to the last Sec. 114 of the Negotiable
residence or last place of business Instrument Law provides that:
of the deceased.” “Notice of dishonor is not required to
c. Notice to partners be given to the drawer in either of the
Sec. 99 of the Negotiable following cases:
Instrument Law provides that: (a) Where the drawer and drawee are
“Where the parties to be notified the same person;
are partners, notice to any one (b) When the drawee is fictitious
partner is notice to the firm, even person or a person not having capacity
though there has been a to contract;
dissolution.” (c) When the drawer is the person to
d. Notice to persons jointly liable whom the instrument is presented for
Sec. 100 of the Negotiable payment;
Instrument Law provides that: (d) Where the drawer has no right to
“Notice to joint persons who are expect or require that the drawee or
not partners must be given to each acceptor will honor the instrument;
of them unless one of them has (e) Where the drawer has
authority to receive such notice for countermanded payment.”
the others.” Sec. 115 of the Negotiable
e. Notice to bankrupt Instrument Law provides that:
Sec. 101 of the Negotiable “Notice of dishonor is not required to
Instrument Law states that: be given to an indorser in either of the
“Where a party has been adjudged following cases:
a bankrupt or an insolvent, or has (a) When the drawee is a fictitious
made an assignment for the person or person not having capacity
benefit of creditors, notice may be to contract, and the indorser was
given either to the party himself or aware of that fact at the time he
to his trustee or assignee.” indorsed the instrument;
5. When notice is excused (b) Where the indorser is the person to
Sec. 109 of the Negotiable whom the instrument is presented for
Instrument Law provides that: payment;
“Notice of dishonor may be waived (c) Where the instrument was made or
either before the time of giving notice accepted for his accommodation.”
has arrived or after the omission to 6. When there is delay in giving notice
Sec. 113 of the Negotiable
give due notice, and the waiver may
Instrument Law states that: “Delay
be expressed or implied.”
Sec. 110 of the Negotiable in giving notice of dishonor is excused
Instrument Law states that: “Where when the delay is caused by
the waiver is embodied in the circumstances beyond the control of
instrument itself, it is binding upon all the holder and not imputable to his
parties; but, where it is written above default, misconduct, or negligence.
the signature of an indorser, it binds When the cause of delay ceases to
him only.” operate, notice must be given with
Sec. 111 of the Negotiable reasonable diligence.”
Instrument Law states that: “A
DISCHARGE OF INSTRUMENTS:
waiver of protest, whether in the case
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A. Concept of Discharge inoperative but where an


Discharge means a release of all parties, instrument or any signature
whether primary or secondary, from the thereon appears to have been
obligations arising thereunder. It renders cancelled, the burden of proof lies
the instrument without force and effect on the party who alleges that the
and consequently, it can no longer be cancellation was made
negotiated. unintentionally or under a mistake
*Applies to the instrument or to the source or without authority.”
of liability. 3. Any act that discharge simple
contracts
B. How instrument is discharge *The law on Obligations and Contracts
Sec. 119 of the Negotiable
will apply.
Instrument Law provides that: “A Article 1231 of the New Civil Code
negotiable instrument is discharged: (a) provides that: “Obligations are
By payment in due course by or on behalf extinguished: (1) By payment or
of the principal debtor; (b) By payment in performance: (2) By the loss of the
due course by the party accommodated, thing due: (3) By the condonation or
where the instrument is made or accepted remission of the debt; (4) By the
for his accommodation; (c) By the confusion or merger of the rights of
intentional cancellation thereof by the creditor and debtor; (5) By
holder; (d) By any other act which will compensation; (6) By novation. Other
discharge a simple contract for the causes of extinguishment of
payment of money; (e) When the principal obligations, such as annulment,
debtor becomes the holder of the rescission, fulfillment of a resolutory
instrument at or after maturity in his own condition, and prescription, are
right.” governed elsewhere in this Code.”
1. Payment in due course *Although these ways discharge the
Sec. 88 of the Negotiable
instrument as between immediate
Instrument Law provides that:
parties, they will not do so in the
“Payment is made in due course when
hands of a holder in due course.
it is made at or after the maturity of 4. Principal debtor becomes a holder
the payment to the holder thereof in
good faith and without notice that his C. Discharge of persons secondarily liable
title is defective.” Sec. 120 of the Negotiable
a. By the principal debtor Instrument Law provides that: “A person
Sec. 119 (a) of the Negotiable secondarily liable on the instrument is
Instrument Law states that: “A discharged: (a) By any act which
negotiable instrument is discharges the instrument; (b) By the
discharged: (a) By payment in due intentional cancellation of his signature by
course by or on behalf of the the holder; (c) By the discharge of a prior
principal debtor; x x x” party; (d) By a valid tender or payment
b. By the accommodated party made by a prior party; (e) By a release of
Sec. 119 (b) of the Negotiable
the principal debtor unless the holder's
Instrument Law provides that: “A
right of recourse against the party
negotiable instrument is
secondarily liable is expressly reserved; (f)
discharged: x x x (b) By payment in
By any agreement binding upon the holder
due course by the party
to extend the time of payment or to
accommodated, where the
postpone the holder's right to enforce the
instrument is made or accepted for
instrument unless made with the assent of
his accommodation; x x x”
the party secondarily liable or unless the
2. Intentional cancellation
a. Rule in case of unintentional right of recourse against such party is
cancellation expressly reserved.”
Sec. 123 of the Negotiable
CHECKS:
Instrument Law states that: “A
cancellation made unintentionally A. Checks defined
or under a mistake or without the Sec. 185 of the Negotiable
authority of the holder, is Instrument Law provides that: “A check
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is a bill of exchange drawn on a bank instrument and admits the existence of


payable on demand. Except as herein the payee and his capacity to indorse.
otherwise provided, the provisions of this Payee – the person who is named to
Act applicable to a bill of exchange received the payment. The one who can
payable on demand apply to a check.” indorse for further negotiation.
*Checks need not be presented for
D. Kinds of check
acceptance
1. Cashier’s and manager’s check a
*Checks are always payable on demand
bill of exchange drawn by a bank upon
*Checks are always drawn against a bank
itself, and is accepted by its issuance.
*In case of refusal by drawee bank, payee *Treated as good as cash.
or holder cannot compel drawee bank to *The drawee and the drawer are one
pay because there is no privity of contract. and the same.
Recourse: Serve notice of dishonour to BSP Circular 259 series of 2000
drawer; ran after the drawer provides that: “Pursuant to Monetary
B. Distinguished from Draft Board Resolution No. 1494 dated 1
September 2000, additional anti-
Other Bill of Check money laundering rules and
Exchange regulations for banks are hereby
Not drawn on a It is necessary that
issued as follows: Section 1. Issuance
deposit. It is not a check is drawn on
necessary that a a previous deposit. of Cashier’s, Manager’s or Certified
drawer of a Bill of Otherwise, there Checks. Banks shall not issue
Exchange should would be fraud. cashier’s, manager’s or certified
have funds in the Always bank as a checks or other similar instruments
hands of the drawee, need not payable to cash, bearer, fictitious
drawee. be presented for payee or numbered account. When the
Exist for circulation acceptance. Exist
person purchasing the above-
for immediate
payment mentioned instruments is not a regular
Death of the drawer Death of the drawer bank client, the issuing bank shall
of a Bill of Exchange of a check, with the require the purchaser to present
with the knowledge knowledge by the his/her proof of residence together
of the bank, does bank, revokes the with his/her driver’s license, passport,
not revoke the authority of the employment I.D. or other photo
authority of the banker to pay.
identification card. A register for
banker to pay.
May be presented Must be presented cashier’s, manager’s or certified
for payment within for payment within checks issued shall be maintained by
a reasonable time a reasonable time the bank. Section 2. Sanction. Any
after its last after its issue. violations of the provision of this
negotiation. Checks become Circular shall be subject to a fine of
stale after 6 months P30,000 per transaction.”
from issue. BSP Circular No. 291 series 2001
provides that: “The Monetary Board, in
C. Relationship between drawer, drawee and
its Resolution No. 707 dated 10 May
payee
2001 decided to authorize the
Drawer – is a secondarily liable; admits
issuance of cashier’s, manager’s or
the existence of a payee and his capacity
certified checks or other similar
to indorse and engages that the
instruments in blank or payable to
instrument will be accepted or paid by the
cash, bearer or numbered account as
party primarily liable and engages that if
an exception from the provisions of
the instrument is dishonored and proper
Circular no. 259, subject to the
proceedings are brought he will pay to the
following conditions: a. That the
party entitled to be paid.
Drawee – primarily liable; engages to pay amount of each check shall not exceed
according to the tenor of his acceptance; P10,000.00; b. That the buyer of the
admits the existence of the drawer, the check is properly identified as required
genuineness of his signature and his under Circular No. 259 dated 29
capacity and authority to draw the September; c. That a register of said
checks shall be maintained with the

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following minimum information: 1. and the bank is not liable to the holder
Date issued; 2. Amount; 3. Name of unless and until it accepts or certifies
buyer; 4. Date paid; 5. If the aggregate the check.”
instruments purchased by the same 3. Crossed Check done by writing two
person within any thirty (30) day parallel lines diagonally on the left top
period amounts to at least fifty portion of the checks.
thousand pesos (P50,000), the purpose Article 541 of the Code of
of the buyer should be stated.; d. That Commerce provides that: “The maker
banks which issue as well as those of any legal holder of a check shall be
which accept as deposits, said entitled to indicate therein that it be
cashier’s, manager’s or certified paid to a certain banker or institution,
checks or other similar instruments which he shall do by writing across the
issued in blank or payable to cash, face the name of said banker or
bearer or numbered account shall take institution, or only the words "and
such measure(s) as may be necessary company".
a. Effects of crossing a check
to ensure that said instruments are not
1. The check may not be
being used/resorted to by the buyer or
encashed but only deposited in
depositor in furtherance of a money-
the bank
laundering activity; e. That the 2. The check may be negotiated
deposit of said instruments shall be only once – to one who has an
subject to the same account with the bank
requirements/scrutiny applicable to 3. The act of crossing serves as a
cash deposits; f. That transactions warning to the holder that the
involving said instruments should be check has been issued for a
accordingly reported to the Bangko definite purpose so that he may
Sentral ng Pilipinas if there is inquire if he has received the
reasonable ground to suspect that said check pursuant to that purpose.
transactions are being used to launder 4. Memorandum and traveller’s check
funds of illegitimate origin.” Memorandum Check is in the form of
2. Certified check one drawn by a an ordinary check, with the word
depositor upon funds to his credit in a “memorandum”, “memo” or “mem”
bank which a proper officer of the bank written across its face, signifying that
certifies will be paid when duly the maker or drawer engages to pay
presented for payment. the bona fide holder absolutely,
*There is a guarantee that upon without any condition concerning its
presentment it will be accepted. presentment. Such check is an
*It is accepted in advance. evidence of debt against the drawer,
*Certification is equivalent to
and although it may not be intended to
acceptance.
be presented, has the same effect as
*It is forbidden to issue a stop order
an ordinary check, and if passed to a
payment.
Sec. 187 of the Negotiable third person, will be valid in his hands
Instrument Law provides that: like any other check.
Traveller’s Check instruments
“Where a check is certified by the bank
purchased from banks, express
on which it is drawn, the certification is
companies, or the like, in various
equivalent to an acceptance.”
Sec. 188 of the Negotiable denominations, which can be used like
Instrument Law provides that: cash upon second signature by the
“Where the holder of a check procures purchaser. It has the characteristics of
it to be accepted or certified, the a cashier’s check of the issuer. It
drawer and all indorsers are requires the signature of the purchaser
discharged from liability thereon.” at the time he buys it and also at the
Sec. 189 of the Negotiable time he uses it – that is when he
Instrument Law provides that: “A obtains the check from the bank and
check of itself does not operate as an also at the time he delivers the same
assignment of any part of the funds to to the establishment that will be paid
the credit of the drawer with the bank, thereby.

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E. When required to be presented for imported and warehoused on the dock,


payment upon the faith of the bills of lading, as a
Sec. 186 of the Negotiable recognition of his title to the goods.
Instrument Law provides that: “A check
must be presented for payment within a CONCEPT OF WAREHOUSING BUSINESS
reasonable time after its issue or the
Main transaction: For deposit
drawer will be discharged from liability
*Warehousing is for safe keeping; storage and
thereon to the extent of the loss caused preservation of goods.
by the delay.” Q: What does warehousing business consists of?
A: An establishment with facilities used for
F. Effect of death of drawer safekeeping
*In case of death of the drawer, the bank Q: What relationship is created?
may refuse payment provided that there A: Bailor-bailee relationship
was a proper notice of the death of the Purposes:
drawer given to bank. 1. To regulate the business of receiving
commodities for storage in order;
G. Pertinent Philippine Clearing House 2. To protect persons who may want to avail
Corporation rules themselves of warehouse facilities; and
3. To encourage the establishment of more
warehouses.
 To achieve this purpose, any person who
wants to engage in the business of
receiving commodities for storage is
required by the Act to first secure a
license therefore from the Department of
Trade and Industry.

WAREHOUSE RECEIPTS LAW Any warehouseman receiving commodities for


storage, milling, or commingling must:
Document of Title to Goods includes any bill of 1. obtain prior license from the Bureau of
lading, dock warrant, ‘quedan’, or warehouse Commerce;
receipt or order for delivery of goods, or any 2. file a bond in an amount equivalent to 33 1/3%
other document used in the ordinary course of of the capacity of the warehouse against
business in the sale or transfer of goods, as proof which bond depositors may sue directly (pour
of possession or control of the goods, or autrui);
3. open to the public; no discrimination allowed;
authorizing or purporting to authorize the 4. liable for double market value should he
possessor of the document to transfer or receive accept if goods are damaged or destroyed.
either by indorsement or by delivery, goods  a warehouse accepting tobacco for flueing
represented by such document. is covered by law.
*This document of title to goods is issued by  Itinerant miller of palay who keeps palay
operator of warehousing business. in process of milling under a camalig falls
*Civil Code is applied in suppletory manner. within the law.
*Document of title to goods facilitates sale of  A mill which must store palay temporarily
goods; it also facilitates the transfer of title to must still get the license from the Bureau.
goods.
DUTIES OF A WAREHOUSEMAN
*It is the delivery of the thing that transfers
ownership to the buyer. Warehouseman means a person lawfully
Principle: Title follows where the document is. engaged in the business of storing goods for
profit.
Kinds:
Duties:
1. Bill of Lading is a document that serves
1. Included in the business of receiving
as evidence of receipt of goods for commodity for storage (Sec. 2)
shipment issued by a common carrier. 2. It includes entering into any contract or
2. Warehouse Receipt is a document of transaction wherein:
title which is issued by a warehouseman. a. the warehouseman is obligated to
3. Quedan is a warehouse receipt that return the very same commodity
covers sugar. delivered to him or to pay its value;
4. Dock Warrant is a warrant given by b. commodity delivered to him or to pay
dock-owners to the owner of merchandise its value;

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c. the commodity delivered is to be warehouseman or to his agent who issues


milled for the owner thereof; it, a statement of the fact that advances
d. the commodity delivered is have been made or liabilities incurred and
commingled with the commodity
the purpose thereof is sufficient.
belonging to other persons, and the
A warehouseman shall be liable to any
warehouseman is obligated to return
commodity of the same kind or to pay person injured thereby for all damages
its value. caused by the omission from a negotiable
receipt of any of the terms herein
WAREHOUSE RECEIPTS required.”
*The date of the issue of the receipt
A. Functions pertains to the time when the contract
1. It is a contract was perfected.
2. Evidence of receipt of goods – proof of
*The purpose for the description of the
title/document of title
goods or of the packages containing them
3. Represents the goods and therefore
is for identification.
operates as transferable document
Sec. 3 of the Warehouse Receipt Law
that carries with it control over the
states that: “A warehouseman may insert
goods. It is used to pass title to the
in a receipt issued by him any other terms
goods.
and conditions provided that such terms
Q: May warehouse receipts be treated as
and conditions shall not: (a) Be contrary
negotiable instrument? Why?
to the provisions of this Act.
A: NO. Because it is not payable in sum
(b) In any wise impair his obligation to
certain in money. Warehouse receipts
exercise that degree of care in the safe-
represent goods.
keeping of the goods entrusted to him
Commercial Value: Transfer of title is
which is reasonably careful man would
possible
exercise in regard to similar goods of his
*Delivery of warehouse receipt represents
own.”
constructive delivery.
C. Kinds of Warehouse receipts
Controlling element: warehouse receipt
1. Negotiable
B. Forms of Receipts Sec. 5 of the Warehouse Receipt
Sec. 2 of the Warehouse Receipt Law
Law states that: “A receipt in which it
states that: “Warehouse receipts need not
is stated that the goods received will
be in any particular form but every such
be delivered to the bearer or to the
receipt must embody within its written or
order of any person named in such
printed terms: (a) The location of the
receipt is a negotiable receipt.
warehouse where the goods are stored,
No provision shall be inserted in a
(b) The date of the issue of the receipt,
negotiable receipt that it is non-
(c) The consecutive number of the
negotiable. Such provision, if inserted
receipt, (d) A statement whether the
shall be void.”
goods received will be delivered to the *Goods are deliverable to order or
bearer, to a specified person or to a bearer.
specified person or his order, (e) The 2. Non-negotiable
rate of storage charges, (f) A description Sec. 4 of the Warehouse Receipt
of the goods or of the packages containing Law states that: “A receipt in which it
them, (g) The signature of the is stated that the goods received will
warehouseman which may be made by his be delivered to the depositor or to any
authorized agent, (h) If the receipt is other specified person is a non-
issued for goods of which the negotiable receipt.”
warehouseman is owner, either solely or *Goods are deliverable to the
jointly or in common with others, the fact depositor or specified person.
of such ownership, and (i) A statement Example: consignee
of the amount of advances made and of
liabilities incurred for which the Distinction between Negotiable and
warehouseman claims a lien. If the Non-negotiable Warehouse Receipts:
precise amount of such advances made or
Non-Negotiable
of such liabilities incurred is, at the time of
Negotiable Warehouse
the issue of, unknown to the Warehouse Receipt
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Negotiation by Delivery (Bearer


Receipt Receipt)
Negotiation (Sec. Transfer or Sec. 37 of the Warehouse Receipt
41) Assignment Law provides that: “A negotiable receipt
Title to the goods Title of the may be negotiated by delivery: (a)
of the person goods, as against Where, by terms of the receipt, the
negotiating the the transferor
warehouseman undertakes to deliver the
receipt and title of (merely steps
the person to into the shoes) goods to the bearer, or (b) Where, by
whose order the Transferee the terms of the receipt, the
goods were to be acquires title warehouseman undertakes to deliver the
delivered. The title is goods to the order of a specified person,
conditional and such person or a subsequent indorsee
Direct obligation of Right to notify of the receipt has indorsed it in blank or to
the warehouseman the
bearer.
to hold possession warehouseman of
Where, by the terms of a negotiable
of the goods for the transfer and
him as if the acquire the direct receipt, the goods are deliverable to
warehouseman obligation of the bearer or where a negotiable receipt has
directly contracted warehouseman to been indorsed in blank or to bearer, any
with him (Sec. 41) hold the goods holder may indorse the same to himself or
for him. (Sec. 42) to any other specified person, and, in such
Negotiation defeats In case of double case, the receipt shall thereafter be
the lien of the seller sale or lien on the
negotiated only by the indorsement of
of the goods. (Sec. supply, before
25) notification, title such indorsee.”
of the transferee *Sec. 37 (a) where, by terms of the
may still be receipt, the warehouseman undertakes to
defeated deliver the goods to the bearer;
Cannot unless in Can be subject to negotiation takes place by mere delivery.
proper circumstances such Example: Q: W, warehouseman, issued a
warehouse receipt to A or bearer. A wants
Q: Regardless of the forms of the warehouse to negotiate it to B. How can A negotiate it
receipt, are the functions of the warehouse to B?
receipts still applicable? A: By delivery since it is a bearer
A: YES. warehouse receipt.
*The importance of knowing whether the Q: B wants to negotiate it to C, how can
warehouse receipt is a negotiable one or not lies negotiation be made? And C wants to
to what kind of protection is given to the buyer. negotiate it further to D, how can C
Example: negotiate it to D?
W → A(depositor) → B(buyer) A: By delivery.
W issued a negotiable warehouse receipt to *Sec. 37 (b) where, by the terms of the
depositor receipt, the warehouseman undertakes to
Q: What are the legal contemplations of the deliver the goods to the order of a
issuance of such warehouse receipt? specified person, and such person or a
A: 1. Transfer of title is possible assuming that subsequent indorsee of the receipt has
the transferor has legal title to the goods; 2. indorsed it in blank or to bearer;
Warehouseman’s direct obligation; 3. those Indorsement is essential in transferring
provided in Sec. 25 of the Warehouse Receipts title to the transferee and then delivery
Example: Q: W, warehouseman, issued a
Law; and Sec. 49 of the Warehouse Receipt Law.
warehouseman to A or order. A wants to
*By negotiation, transferee acquires title to the
negotiate it to B, how can he effectively
goods.
negotiate it to B?
*Sec. 49 of the Warehouse Receipts Law
A: A must indorse and deliver it to B
substantially provides that the seller’s recourse is Q: B wants to negotiate it further to C,
to look for any other properties in case the goods how can he do it?
is not sufficient to cover his lien. A: It depends on what kind of indorsement
was made by A. If the indorsement made
NEGOTIATION OF RECEIPTS by A was a special indorsement, then B
can negotiate it to C by indorsing the
a. Bearer and order receipts
warehouse receipt and coupled with
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delivery. If the indorsement was blank, he W → A (depositor) → B (buyer)


can negotiate it by delivery. A negotiates the warehouse receipt to B
*A bearer document of title is not always Q: Is A still liable to B?
a bearer document in the sense that a A: YES. A is still liable to B. He is liable in
special indorsement has the effect of case of breach of warranties.
Recourse: In case there is breach of
converting the bearer instrument into an
warranty, the buyer can always go after
order instrument.
Example: A negotiable document of title the depositor.
3. Sec. 45 of the Warehouse Receipt
states that the goods are to be delivered
Law states that: “The indorsement of a
to “A or bearer”. A delivered the document
receipt shall not make the indorser liable
to B, who in turn specially indorsed the
for any failure on the part of the
same to C. C cannot negotiate the
warehouseman or previous indorsers of
document by mere delivery thereafter and
the receipt to fulfill their respective
indorsement is necessary for its
obligations.”
negotiation.
4. Sec. 49 of the Warehouse Receipt
b. Effects of negotiation
1. Sec. 41 of the Warehouse Receipt Law states that: “Where a negotiable
Law states that: “A person to whom a receipt has been issued for goods, no
negotiable receipt has been duly seller's lien or right of stoppage in transitu
negotiated acquires thereby: (a) Such shall defeat the rights of any purchaser for
title to the goods as the person value in good faith to whom such receipt
negotiating the receipt to him had or had has been negotiated, whether such
ability to convey to a purchaser in good negotiation be prior or subsequent to the
faith for value, and also such title to the notification to the warehouseman who
goods as the depositor or person to whose issued such receipt of the seller's claim to
order the goods were to be delivered by a lien or right of stoppage in transitu. Nor
the terms of the receipt had or had ability shall the warehouseman be obliged to
to convey to a purchaser in good faith for deliver or justified in delivering the goods
value, and (b) The direct obligation of to an unpaid seller unless the receipt is
the warehouseman to hold possession of first surrendered for cancellation.”
5. Sec. 25 of the Warehouse Receipt
the goods for him according to the terms
Law states that: “If goods are delivered
of the receipt as fully as if the
to a warehouseman by the owner or by a
warehouseman and contracted directly
person whose act in conveying the title to
with him.”
2. Sec. 44 of the Warehouse Receipt them to a purchaser in good faith for value
Law states that: “A person who, for value, would bind the owner, and a negotiable
negotiates or transfers a receipt by receipt is issued for them, they can not
indorsement or delivery, including one thereafter, while in the possession of the
who assigns for value a claim secured by a warehouseman, be attached by
receipt, unless a contrary intention garnishment or otherwise, or be levied
appears, warrants: (a) That the receipt is upon under an execution unless the
genuine, (b) That he has a legal right to receipt be first surrendered to the
negotiate or transfer it, (c) That he has warehouseman or its negotiation
knowledge of no fact which would impair enjoined. The warehouseman shall in no
the validity or worth of the receipt, and case be compelled to deliver up the actual
(d) That he has a right to transfer the possession of the goods until the receipt is
title to the goods and that the goods are surrendered to him or impounded by the
merchantable or fit for a particular court.”
c. Negotiation by fraud, mistake or duress
purpose whenever such warranties would
Sec. 47 of the Warehouse Receipt
have been implied, if the contract of the
Law provides that: “The validity of the
parties had been to transfer without a
negotiation of a receipt is not impaired by
receipt of the goods represented thereby.”
the fact that such negotiation was a
*Sec. 44 of the Warehouse Receipt Law is
breach of duty on the part of the person
similar to Sec. 65 of the Negotiable
making the negotiation or by the fact that
Instrument Law on warranties of a
the owner of the receipt was induced by
qualified indorser.
Example: fraud, mistake or duress or to entrust the
possession or custody of the receipt to
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such person, if the person to whom the LIABILITIES OF INDORSER OR TRANSFEROR


receipt was negotiated or a person to
whom the receipt was subsequently Sec. 44 of the Warehouse Receipt Law
provides that: “A person who, for value,
negotiated paid value therefor, without
negotiates or transfers a receipt by indorsement
notice of the breach of duty, or fraud, or delivery, including one who assigns for value a
mistake or duress.” claim secured by a receipt, unless a contrary
Article 1518 of the New Civil Code intention appears, warrants: (a) That the receipt
states that: “The validity of the is genuine, (b) That he has a legal right to
negotiation of a negotiable document of negotiate or transfer it, (c) That he has
title is not impaired by the fact that the knowledge of no fact which would impair the
negotiation was a breach of duty on the validity or worth of the receipt, and (d) That he
has a right to transfer the title to the goods and
part of the person making the negotiation,
that the goods are merchantable or fit for a
or by the fact that the owner of the particular purpose whenever such warranties
document was deprived of the possession would have been implied, if the contract of the
of the same by loss, theft, fraud, accident, parties had been to transfer without a receipt of
mistake, duress, or conversion, if the the goods represented thereby.”
person to whom the document was *Sec. 44(b) of the Warehouse Receipt Law
negotiated or a person to whom the provides that: “That he has a legal right to
negotiate or transfer it” example of which is if the
document was subsequently negotiated
receipt was stolen by someone.
paid value therefor in good faith without *Sec. 44(c) of the Warehouse Receipt Law
notice of the breach of duty, or loss, theft, provides that: “That he has knowledge of no fact
fraud, accident, mistake, duress or which would impair the validity or worth of the
conversion.” receipt” example of which is the absence or
illegality of consideration.
TRANSFER OF RECEIPTS AND EFFECTS *Sec. 44(c) of the Warehouse Receipt Law
THEREOF guarantees that the goods are merchantable and
fit.
Sec. 39 of the Warehouse Receipt Law states *Transferor has the same liabilities as if there was
that: “A receipt which is not in such form that it a valid negotiation.
Sec. 45 of the Warehouse Receipt Law
can be negotiated by delivery may be transferred
provides that: “The indorsement of a receipt shall
by the holder by delivery to a purchaser or not make the indorser liable for any failure on the
donee. A non-negotiable receipt can not be part of the warehouseman or previous indorsers
negotiated, and the indorsement of such a receipt of the receipt to fulfill their respective
gives the transferee no additional right.” obligations.”
Sec. 42 of the Warehouse Receipt Law *Under the General Bonded Warehouse Law,
provides that: “A person to whom a receipt has warehouseman is mandated to post a bond for
purposes of security in case there was damage to
been transferred but not negotiated acquires
the goods.
thereby, as against the transferor, the title of the
goods subject to the terms of any agreement with WAREHOUSEMAN’S LIEN AND ITS
the transferor. If the receipt is non-negotiable, ENFORCEMENT
such person also acquires the right to notify the
warehouseman of the transfer to him of such Sec. 27 of the Warehouse Receipt Law
receipt and thereby to acquire the direct provides that: “Subject to the provisions of
obligation of the warehouseman to hold section thirty, a warehouseman shall have a lien
possession of the goods for him according to the on goods deposited or on the proceeds thereof in
terms of the receipt. Prior to the notification of his hands, for all lawful charges for storage and
the warehouseman by the transferor or preservation of the goods; also for all lawful
transferee of a non-negotiable receipt, the title of claims for money advanced, interest, insurance,
the transferee to the goods and the right to transportation, labor, weighing, coopering and
acquire the obligation of the warehouseman may other charges and expenses in relation to such
be defeated by the levy of an attachment or goods, also for all reasonable charges and
execution upon the goods by a creditor of the expenses for notice, and advertisements of sale,
transferor or by a notification to the and for sale of the goods where default had been
warehouseman by the transferor or a subsequent made in satisfying the warehouseman's lien.”
purchaser from the transferor of a subsequent Sec. 29 of the Warehouse Receipt Law
sale of the goods by the transferor.” provides that: “A warehouseman loses his lien
upon goods: (a) By surrendering possession
thereof, or (b) By refusing to deliver the goods
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when a demand is made with which he is bound nature, will be liable to injure other property , the
to comply under the provisions of this Act.” warehouseman may give such notice to the
Sec. 33 of the Warehouse Receipt Law states owner or to the person in whose names the goods
that: “A warehouseman's lien for a claim which are stored, as is reasonable and possible under
has become due may be satisfied as follows: (a) the circumstances, to satisfy the lien upon such
An itemized statement of the warehouseman's goods and to remove them from the warehouse
claim, showing the sum due at the time of the and in the event of the failure of such person to
notice and the date or dates when it becomes satisfy the lien and to receive the goods within
due, (b) A brief description of the goods against the time so specified, the warehouseman may
which the lien exists, (c) A demand that the sell the goods at public or private sale without
amount of the claim as stated in the notice of advertising. If the warehouseman, after a
such further claim as shall accrue, shall be paid reasonable effort, is unable to sell such goods, he
on or before a day mentioned, not less than ten may dispose of them in any lawful manner and
days from the delivery of the notice if it is shall incur no liability by reason thereof. The
personally delivered, or from the time when the proceeds of any sale made under the terms of
notice shall reach its destination, according to the this section shall be disposed of in the same way
due course of post, if the notice is sent by mail, as the proceeds of sales made under the terms of
(d) A statement that unless the claim is paid the preceding section.”
within the time specified, the goods will be Sec. 35 of the Warehouse Receipt Law states
advertised for sale and sold by auction at a that: “The remedy for enforcing a lien herein
specified time and place. In accordance with the provided does not preclude any other remedies
terms of a notice so given, a sale of the goods by allowed by law for the enforcement of a lien
auction may be had to satisfy any valid claim of against personal property nor bar the right to
the warehouseman for which he has a lien on the recover so much of the warehouseman's claim as
goods. The sale shall be had in the place where shall not be paid by the proceeds of the sale of
the lien was acquired, or, if such place is the property.”
manifestly unsuitable for the purpose of the claim Warehouseman’s defences for non-delivery
specified in the notice to the depositor has or misdelivery:
elapsed, and advertisement of the sale, 1. Loss or destruction of the goods without
describing the goods to be sold, and stating the the fault of the bailee.
name of the owner or person on whose account 2. Failure to surrender the negotiable
the goods are held, and the time and place of the document of title.
sale, shall be published once a week for two 3. Lack of willingness to sign
consecutive weeks in a newspaper published in acknowledgment.
the place where such sale is to be held. The sale 4. Receipt by the bailee of a request by or on
shall not be held less than fifteen days from the behalf of the person lawfully entitled to a
time of the first publication. If there is no right of property or possession in the
newspaper published in such place, the goods, not to make such delivery.
advertisement shall be posted at least ten days 5. The bailee has information that the
before such sale in not less than six conspicuous delivery about to be made was to one not
places therein. From the proceeds of such sale, lawfully entitled to the possession of the
the warehouseman shall satisfy his lien including goods.
the reasonable charges of notice, advertisement 6. Delivery to a claimant with better right.
and sale. The balance, if any, of such proceeds 7. Attachment or levy of the goods by a
shall be held by the warehouseman and delivered creditor where the document is
on demand to the person to whom he would have surrendered or its negotiation is enjoined
been bound to deliver or justified in delivering or the document is impounded.
goods. At any time before the goods are so sold, 8. Where the document of title is attached by
any person claiming a right of property or a creditor.
possession therein may pay the warehouseman
the amount necessary to satisfy his lien and to ADVERSE CLAIMS
pay the reasonable expenses and liabilities
incurred in serving notices and advertising and Sec. 17 of the Warehouse Receipt Law
preparing for the sale up to the time of such provides that: “If more than one person claims
payment. The warehouseman shall deliver the the title or possession of the goods, the
goods to the person making payment if he is a
warehouseman may, either as a defense to an
person entitled, under the provision of this Act, to
the possession of the goods on payment of action brought against him for non-delivery of the
charges thereon. Otherwise, the warehouseman goods or as an original suit, whichever is
shall retain the possession of the goods according appropriate, require all known claimants to
to the terms of the original contract of deposit.” interplead.”
Sec. 34 of the Warehouse Receipt Law states Sec. 18 of the Warehouse Receipt Law
that: “If goods are of a perishable nature, or by provides that: “If someone other than the
keeping will deteriorate greatly in value, or, by
depositor or person claiming under him has a
their order, leakage, inflammability, or explosive
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claim to the title or possession of goods, and the


warehouseman has information of such claim, the
warehouseman shall be excused from liability for
refusing to deliver the goods, either to the
depositor or person claiming under him or to the
adverse claimant until the warehouseman has
had a reasonable time to ascertain the validity of
the adverse claim or to bring legal proceedings to
compel claimants to interplead.”
Sec. 19 of the Warehouse Receipt Law
provides that: “Except as provided in the two
preceding sections and in sections nine and
thirty-six, no right or title of a third person shall
be a defense to an action brought by the
depositor or person claiming under him against
the warehouseman for failure to deliver the goods
according to the terms of the receipt.”

TRUST RECEIPTS LAW

Trust Receipt is a security transaction intended


to aid in financing importers or dealers in
merchandize by allowing them to obtain delivery
of goods under certain covenants.
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Q: Who executes trust receipt? collection or renewal. The sale of goods,


A: Buyer/Entrustee (Borrower) in favor of the documents or instruments by a person in the
lender /entrustor (Bank) business of selling goods, documents or
Q: What are the relationships created? instruments for profit who, at the outset of the
A: 1. Entruster-entrustee; 2. Seller-buyer transaction, has, as against the buyer, general
Q: What is the objective of the trust receipts? property rights in such goods, documents or
A: To release the goods in favor of the entruster. instruments, or who sells the same to the buyer
*Trust Receipt Law does not infringe the on credit, retaining title or other interest as
Philippine Constitution on non-imprisonment for security for the payment of the purchase price,
non-payment of contractual debt because what does not constitute a trust receipt transaction
the trust receipt law punishes is the abuse made and is outside the purview and coverage of this
by the entrustee. Decree. “

TRUST RECEIPT TRANSACTION FORM OF TRUST RECEIPT

Sec. 4 of the Trust Receipt Law provides that: Sec. 5 of the Trust Receipt Law provides that:
“A trust receipt transaction, within the meaning “A trust receipt need not be in any particular
of this Decree, is any transaction by and between form, but every such receipt must substantially
a person referred to in this Decree as the contain (a) a description of the goods, documents
entruster, and another person referred to in this or instruments subject of the trust receipt; (2) the
Decree as entrustee, whereby the entruster, who total invoice value of the goods and the amount
owns or holds absolute title or security interests of the draft to be paid by the entrustee; (3) an
over certain specified goods, documents or undertaking or a commitment of the entrustee (a)
instruments, releases the same to the possession to hold in trust for the entruster the goods,
of the entrustee upon the latter's execution and documents or instruments therein described; (b)
delivery to the entruster of a signed document to dispose of them in the manner provided for in
called a "trust receipt" wherein the entrustee the trust receipt; and (c) to turn over the
binds himself to hold the designated goods, proceeds of the sale of the goods, documents or
documents or instruments in trust for the instruments to the entruster to the extent of the
entruster and to sell or otherwise dispose of the amount owing to the entruster or as appears in
goods, documents or instruments with the the trust receipt or to return the goods,
obligation to turn over to the entruster the documents or instruments in the event of their
proceeds thereof to the extent of the amount non-sale within the period specified therein. The
owing to the entruster or as appears in the trust trust receipt may contain other terms and
receipt or the goods, documents or instruments conditions agreed upon by the parties in addition
themselves if they are unsold or not otherwise to those hereinabove enumerated provided that
disposed of, in accordance with the terms and such terms and conditions shall not be contrary
conditions specified in the trust receipt, or for to the provisions of this Decree, any existing
other purposes substantially equivalent to any of laws, public policy or morals, public order or good
the following: 1. In the case of goods or customs.”
documents, (a) to sell the goods or procure their
sale; or (b) to manufacture or process the goods PARTIES TO A TRUST RECEIPT TRANSACTION
with the purpose of ultimate sale: Provided, That,
1. Entruster – release the possession of the
in the case of goods delivered under trust receipt
goods to the entrustee upon the latter’s
for the purpose of manufacturing or processing
execution of the trust receipt.
before its ultimate sale, the entruster shall retain 2. Entrustee – Sec. 9 of the Trust Receipt
its title over the goods whether in its original or Law provides that: “The entrustee shall
processed form until the entrustee has complied (1) hold the goods, documents or
fully with his obligation under the trust receipt; or instruments in trust for the entruster and
(c) to load, unload, ship or tranship or otherwise shall dispose of them strictly in
deal with them in a manner preliminary or accordance with the terms and conditions
necessary to their sale; or 2. In the case of of the trust receipt; (2) receive the
instruments, (a) to sell or procure their sale or proceeds in trust for the entruster and
exchange; or (b) to deliver them to a principal; or turn over the same to the entruster to the
(c) to effect the consummation of some extent of the amount owing to the
transactions involving delivery to a depository or entruster or as appears on the trust
register; or (d) to effect their presentation, receipt; (3) insure the goods for their total
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value against loss from fire, theft, *In Rosario Textile v Home Banker’s, the SC
pilferage or other casualties; (4) keep said held that ownership of the entruster of the goods
goods or proceeds thereof whether in is only a fiction. The one really owns the goods
money or whatever form, separate and are the entrustee.
capable of identification as property of the *Entruster is entitled to deficiency.
entruster; (5) return the goods, documents *Entrustee is entitled to receive surplus.
or instruments in the event of non-sale or Sec. 8 of the Trust Receipt Law provides that:
upon demand of the entruster; and (6) “The entruster holding a security interest shall
observe all other terms and conditions of not, merely by virtue of such interest or having
the trust receipt not contrary to the given the entrustee liberty of sale or other
provisions of this Decree.” disposition of the goods, documents or
3. Seller of the Goods - Not strictly and instruments under the terms of the trust receipt
actually a party to the trust receipt transaction be responsible as principal or as
transaction; but merely a party to the vendor under any sale or contract to sell made by
contract of sale with the buyer/importer the entrustee.”
(entrustee). Sec. 12 of the Trust Receipt Law provides
that: “The entruster's security interest in goods,
RIGHTS OF THE ENTRUSTER
documents, or instruments pursuant to the
written terms of a trust receipt shall be valid as
Sec. 7 of the Trust Receipt Law provides that:
“The entruster shall be entitled to the proceeds against all creditors of the entrustee for the
duration of the trust receipt agreement.”
from the sale of the goods, documents or
instruments released under a trust receipt to the
OBLIGATIONS/LIABILITIES OF THE
entrustee to the extent of the amount owing to ENTRUSTEE
the entruster or as appears in the trust receipt, or
to the return of the goods, documents or Sec. 9 of the Trust Receipt Law states that:
instruments in case of non-sale, and to the “The entrustee shall (1) hold the goods,
enforcement of all other rights conferred on him documents or instruments in trust for the
in the trust receipt provided such are not contrary entruster and shall dispose of them strictly in
to the provisions of this Decree. The entruster accordance with the terms and conditions of the
may cancel the trust and take possession of the trust receipt; (2) receive the proceeds in trust for
goods, documents or instruments subject of the the entruster and turn over the same to the
trust or of the proceeds realized therefrom at any entruster to the extent of the amount owing to
time upon default or failure of the entrustee to the entruster or as appears on the trust receipt;
comply with any of the terms and conditions of (3) insure the goods for their total value against
the trust receipt or any other agreement between loss from fire, theft, pilferage or other casualties;
the entruster and the entrustee, and the (4) keep said goods or proceeds thereof whether
entruster in possession of the goods, documents in money or whatever form, separate and capable
or instruments may, on or after default, give of identification as property of the entruster; (5)
notice to the entrustee of the intention to sell, return the goods, documents or instruments in
and may, not less than five days after serving or the event of non-sale or upon demand of the
sending of such notice, sell the goods, documents entruster; and (6) observe all other terms and
or instruments at public or private sale, and the conditions of the trust receipt not contrary to the
entruster may, at a public sale, become a provisions of this Decree.”
purchaser. The proceeds of any such sale, *Failure to return the proceeds or failure to return
whether public or private, shall be applied (a) to the goods in case of non-sale is equivalent to
the payment of the expenses thereof; (b) to the estafa.
payment of the expenses of re-taking, keeping Sec. 10 of the Trust Receipt Law states that:
and storing the goods, documents or instruments; “The risk of loss shall be borne by the entrustee.
(c) to the satisfaction of the entrustee's Loss of goods, documents or instruments which
indebtedness to the entruster. The entrustee shall are the subject of a trust receipt, pending their
receive any surplus but shall be liable to the disposition, irrespective of whether or not it was
entruster for any deficiency. Notice of sale shall due to the fault or negligence of the entrustee,
be deemed sufficiently given if in writing, and shall not extinguish his obligation to the entruster
either personally served on the entrustee or sent for the value thereof.”
by post-paid ordinary mail to the entrustee's last *In Landl & Co. (Phil.) v Metrobank, the SC held
known business address.” that the entrustee is still liable to pay the
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entruster (bank) even if the goods were returned


to the latter.
Reason why entrustee is obligated to return
the goods to the entruster: To put the goods
in the disposal of the entruster (bank)

RIGHTS OF PURCHASER

Sec. 11 of the Trust Receipt Law provides


that: “Any purchaser of goods from an entrustee
with right to sell, or of documents or instruments
through their customary form of transfer, who
buys the goods, documents, or instruments for
value and in good faith from the entrustee,
acquires said goods, documents or instruments
free from the entruster's security interest.”

PENALTIES

Sec. 13 of the Trust Receipt Law provides


that: “The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as
appears in the trust receipt or to return said
goods, documents or instruments if they were not
sold or disposed of in accordance with the terms
of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article
Three hundred and fifteen, paragraph one (b) of
Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is
committed by a corporation, partnership,
association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon
the directors, officers, employees or other INSURANCE CODE (P.D. 1460 as amended)
officials or persons therein responsible for the
offense, without prejudice to the civil liabilities INTRODUCTION:
arising from the criminal offense.”
A. Laws governing Insurance
*The criminal liability does not infringe the Insurance Code – primary law
Constitution because what the law punishes is the New Civil Code – applied suppletorily
abuse in the use of the commercial facility made specifically on law on obligations and
by the entrustee. contracts
*This is not a dacion en pago because the liability GSIS Act
of the entrustee is not extinguished from the Property Insurance Law
moment the goods are returned to the entruster. Act 1498

B. General Concept of Insurance


Contract of Insurance is an agreement
whereby one undertakes for a
consideration to indemnify another
against loss, damage or liability arising
from an unknown or contingent event.
(Sec. 2 par. 2)
*It is a contract of assumption of risk
Q: Who will take the risk?
A: Insurer

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Q: Who will be exposed to the risk? the burden is upon him to establish the
A: Insured amount of such loss.
*It is the basis of all property
C. Characteristics insurance.
1. Risk Distributing Device – the *Life insurance is not a contract of
device of insurance serves to distribute indemnity. Life is not subject to
the risk of economic loss among as pecuniary estimation; Life is precious.
many as possible to those who are General Rule: Insurance contract is a
subject to the same kind of risk. contract of indemnity.
*The risk is distributed to the group of Exception: Life insurance
persons having the same risk. 5. Uberrimae Fides Contract/Utmost
Q: Why is it a risk distribution device? Good Faith – The contract of
A: Insurer has different policyholders insurance is one of perfect good faith
that contribute to a common fund for not for the insured alone but equally so
the same risk. The common fund will for the insurer; in fact, it is more so for
indemnify the person who suffers loss the latter since its dominant
for the same risk. bargaining position carries with it
Catch: not all policyholders will suffer stricter responsibility.
the same risk at the same time. *Since there was an assumption of risk
2. Contract of Adhesion – Insurance is on the part of the insurer, it is their
a contract of adhesion considering that duty to make an intelligent estimates
most of the terms of the contract do that is the reason why it requires the
not result from mutual negotiations parties to the contract of insurance to
between the parties as they are disclose conditions affecting the risk of
prescribed by the insurer in printed which he is aware, or material fact,
form to which the insured may which the applicant knows, and those,
“adhere” if he chooses but which he which he ought to know.
cannot change. *Material facts are facts needed by the
*Insurer always comes up with already insurer for the determination of
made contract. whether he will assume or not the risk.
Q: Is there a contract?
A: YES. D. Elements of Insurance
Importance of knowing whether 1. Existence of an insurable interest
the contract is one of adhesion: In Sec. 12 of the Insurance Code
case of doubt, the contract shall be provides that: “The interest of a
interpreted strictly against the insurer beneficiary in a life insurance policy
and liberally in favor of the insured. shall be forfeited when the beneficiary
Q: is this rule unfair? is the principal, accomplice, or
A: NO. Because the contract was
accessory in willfully bringing about
already prepared by the insurer, the
the death of the insured; in which
only thing that the insured can do is
event, the nearest relative of the
either take it wholly or leave it.
insured shall receive the proceeds of
3. Aleatory – The obligation of the
said insurance if not otherwise
insurer to pay the proceeds of the
disqualified.”
insurance arises only upon the
Sec. 13 of the Insurance Code
happening of an event which is
provides that: “Every interest in
uncertain, or which is to occur at an
property, whether real or personal, or
indeterminate time. (Article 2010 NCC)
any relation thereto, or liability in
*The insurer becomes liable upon the
respect thereof, of such nature that a
happening of the peril insured against.
*One or both parties are reciprocally contemplated peril might directly
bound to give or do something for damnify the insured, is an insurable
consideration upon the happening of interest.”
Sec. 14 of the Insurance Code
an event which is uncertain or to which
provides that: “An insurable interest in
is to occur at an indeterminate time.
4. Contract of Indemnity - The insured property may consist in:
(a) An existing interest;
who has insurable interest over a
(b) An inchoate interest founded on an
property is only entitled to recover the
existing interest; or
amount of actual loss sustained and
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(c) An expectancy, coupled with an 1. The insured by his own act releases
existing interest in that out of which the wrongdoer/third person liable for
the expectancy arises.” the loss
2. Risk of loss 2. Where the insurer pays the insured for
Sec. 51 paragraph g of the a loss or risk not covered by the policy
Insurance Code provides that: “ A 3. In life insurance
policy of insurance must specify: x x x 4. For recovery of loss in excess of
(g) The period during which the insurance coverage
insurance is to continue.”
3. Assumption of risks CONTRACT OF INSURANCE:
Sec. 2 of the Insurance Code states
A. Requisites of a contract of Insurance
that: “xxx (1) A “contract of insurance”
1. A subject matter in which the insured
is an agreement whereby one
has an insurable interest
undertakes for a consideration to 2. Event or peril insured against which
indemnify another against loss, may be any future contingent or
damage or liability arising from an unknown event, past or future and a
unknown or contingent event.” duration for the risk thereof
4. Scheme to distribute losses 3. A promise to pay or indemnify in a
5. Payment of premiums
fixed or ascertainable amount
Sec. 77 of the Insurance Code
4. A consideration known as premium
states that: “An insurer is entitled to 5. Meeting of the minds of the parties
payment of the premium as soon as
the thing insured is exposed to the B. Perfection
peril insured against. Notwithstanding *An insurance contract is consensual
any agreement to the contrary, no contract and is therefore perfected the
policy or contract of insurance issued moment there is a meeting of minds with
by an insurance company is valid and respect to the object and the cause or
binding unless and until the premium consideration.
thereof has been paid, except in the *What is being followed in insurance
case of a life or an industrial life policy contracts is what is known as the
whenever the grace period provision Cognition Theory.
applies.” Q: What is the crucial point?
A: The point wherein there must be an
E. Right of Subrogation actual communication to the insured of
*This principle is a normal incident of the approval of the application.
indemnity property insurance as a legal *In Great Pacific Life Assurance
effect of payment; it inures to the insurer Corporation v CA, the SC held that the
without any formal assignment or any insured is the one making the offer by
express stipulation to that effect in the submitting an application to the insurer
policy. Said right is not dependent upon and the latter accepts the offer by
nor does it grow out of any privity of approving the application. Thus, mere
contract. Payment to the insured makes submission of the application without the
the insurer an assignee in equity. corresponding approval of the policy does
*The insurer can only recover from the not result in the perfection of the contract
third person what the insured could have of insurance.
recovered. Thus, there can be no recovery
if the insurer voluntarily paid even if the C. Parties to a contract of Insurance
Sec. 6 of the Insurance Code states
loss is not covered by the policy.
*The insured can no longer recover from that: “Every person, partnership,
the offending party what was paid to him association, or corporation duly authorized
by the insurer but he can recover any to transact insurance business as
deficiency, that is, if his damages is more elsewhere provided in this code, may be
than what was paid. The deficiency is not an insurer.”
Sec. 7 of the Insurance Code states
covered by the right of subrogation.
Cases when there is no right of that: “Anyone except a public enemy may
subrogation: be insured.”

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Beneficiary – person designated to own life and the beneficiary appointed


receive proceeds of policy when risk is the minor's estate or the minor's
attaches. father, mother, husband, wife, child,
General Rule: When one insures his own brother or sister.”
life, he may designate any person as the *This portion is repealed by RA 6809.
beneficiary, whether or not the beneficiary Under RA 6809, minors are no longer
has an insurable interest in the life of the allowed to enter into insurance
insured. contracts. This rule is absolute.
Exceptions: Persons specified in Article 2. Rule on married women
739 in re Article 2012 of the New Civil Sec. 3 of the Insurance Code
Code. provides that: “The married woman or
*The designation of persons mentioned in the minor herein allowed to take out
Article 739 is void but the policy is an insurance policy may exercise all
binding. the rights and privileges of an owner
*In property insurance, the beneficiary under a policy.”
must have insurable interest on the *Under RA 7192, married women can
property. enter into insurance contracts without
Sec. 11 of the Insurance Code states the assistance of their husbands.
that: “The insured shall have the right to
change the beneficiary he designated in D. Subject matter of Insurance
the policy, unless he has expressly waived Sec. 3 of the Insurance Code states
this right in said policy.” *The designation that: “Any contingent or unknown event,
is revocable unless the right to revoke is whether past or future, which may
expressly waived in the policy. damnify a person having an insurable
Sec. 12 of the Insurance Code states interest, or create a liability against him,
that: “The interest of a beneficiary in a life may be insured against, subject to the
insurance policy shall be forfeited when provisions of this chapter.”
the beneficiary is the principal, Sec. 4 of the Insurance Code states
accomplice, or accessory in willfully that: “The preceding section does not
bringing about the death of the insured; in authorize an insurance for or against the
which event, the nearest relative of the drawing of any lottery, or for or against
insured shall receive the proceeds of said any chance or ticket in a lottery drawing a
insurance if not otherwise disqualified.” prize.”
*In life or health insurance, the insured
E. Insurance not a wagering contract
cannot assign the policy if the designation
Sec. 4 of the Insurance Code states
of the beneficiary is irrevocable. Reason:
that: “The preceding section does not
The irrevocable beneficiary has vested
authorize an insurance for or against the
right.
drawing of any lottery, or for or against
*If the insured refuses to pay the
any chance or ticket in a lottery drawing a
premiums, the designated irrevocable
prize.”
beneficiary may continue the policy by
*Wagering contract is not allowed because
paying premiums that are due. (Article
it is against public policy.
1236 NCC) Reason: The insured should not be happy
Q: Despite irrevocable designation, may
because of the loss he suffered.
the insured revoke the beneficiary? Q: What prevents insurance policy from
A: YES. Under Article 42 of the Family
being a wagering contract?
Code, Article 43 (4) of the Family Code, A: Insurable interest.
Article 50 of the Family Code and Article
64 of the Family Code. INSURABLE INTEREST:
1. Rule on minors
Sec. 3 of the Insurance Code states A. Concept of Insurable Interest in
that: “Any minor of the age of eighteen General
years or more, may, notwithstanding *A person has an insurable interest in the
such minority, contract for life, health subject matter if he is so connected, so
and accident insurance, with any situated, so circumstanced, so related,
insurance company duly authorized to that by the preservation of the same he
do business in the Philippines, shall derive pecuniary benefit, and by its
provided the insurance is taken on his
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destruction he shall suffer pecuniary loss, damnify the insured, is an insurable


damage or prejudice.” interest. “
*Insurable interest does not exist by legal Sec. 14 of the Insurance Code states
relationship or by virtue of law. that: “An insurable interest in property
may consist in:
B. Reason for the requirement of (a) An existing interest;
insurable interest (b) An inchoate interest founded on an
*A policy issued to a person without the existing interest; or
requisite insurable interest in the subject (c) An expectancy, coupled with an
matter is a mere wager policy or contract, existing interest in that out of which the
hence, it is VOID. expectancy arises.”
Evil sought to be avoided: Temptation *In general, a person has an insurable
to destroy the thing insured. interest in the property, if he derives
Reason: He has nothing to lose but pecuniary benefit or advantage from its
everything to gain. preservation or would suffer pecuniary
loss, damage or prejudice by its
C. Insurable interest in Life Insurance
destruction whether he has or has no title
Sec. 10 of the Insurance Code provides
in, or lien upon, or possession of the
that: “Every person has an insurable
property.
interest in the life and health:
*Existence of insurable interest is a matter
(a) Of himself, of his spouse and of his
of public policy, hence, the principle of
children; (b) Of any person on whom he
estoppels cannot be invoked.
depends wholly or in part for education or
*In order for hope or expectancy to be
support, or in whom he has a pecuniary
insurable, it must be coupled with existing
interest;
interest out of which the expectancy
(c) Of any person under a legal obligation
arises. It must be founded on an actual
to him for the payment of money, or
right to the thing or upon a valid contract.
respecting property or services, of which
Sec. 19 of the Insurance Code states
death or illness might delay or prevent the
that: “An interest in property insured must
performance; and
exist when the insurance takes effect, and
(d) Of any person upon whose life any
when the loss occurs, but not exist in the
estate or interest vested in him depends.”
Q: May warehouseman insure the goods meantime; and interest in the life or
deposited in his warehouse? health of a person insured must exist
A: YES. In case of loss of the goods the when the insurance takes effect, but need
warehouseman is liable to the owner of not exist thereafter or when the loss
the goods. occurs.”
Q: May bottomry lender insures the Sec. 20 of the Insurance Code states
hypothecated vessel? that: “Except in the cases specified in the
A: YES. There is an insurable interest up next four sections, and in the cases of life,
to the amount covered by the bottomry. accident, and health insurance, a change
Q: Who gets the proceeds of the of interest in any part of a thing insured
insurance? unaccompanied by a corresponding
A: The insured and the beneficiary. change in interest in the insurance,
*In life insurance, persons prohibited to suspends the insurance to an equivalent
make donation to each other are also extent, until the interest in the thing and
prohibited to become beneficiaries of each the interest in the insurance are vested in
other. the same person.”
*For disqualification purposes, what is Sec. 25 of the Insurance Code states
needed is only a preponderance of that: “Every stipulation in a policy of
evidence. insurance for the payment of loss whether
the person insured has or has not any
D. Insurable interest in Property
interest in the property insured, or that
Insurance
Sec. 13 of the Insurance Code states the policy shall be received as proof of
that: “Every interest in property, whether such interest, and every policy executed
real or personal, or any relation thereto, or by way of gaming or wagering, is void.”
1. Insurable interest in case of
liability in respect thereof, of such nature
mortgaged property
that a contemplated peril might directly

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Sec. 8 of the Insurance Code states a mortgagor to a mortgagee, and,


that: “Unless the policy otherwise at the time of his assent, imposes
provides, where a mortgagor of further obligation on the assignee,
property effects insurance in his own making a new contract with him,
name providing that the loss shall be the act of the mortgagor cannot
payable to the mortgagee, or assigns a affect the rights of said assignee.”
policy of insurance to a mortgagee, the 2. Effect of change of interest in the
insurance is deemed to be upon the thing insured
interest of the mortgagor, who does Sec. 20 of the Insurance Code
not cease to be a party to the original states that: “Except in the cases
contract, and any act of his, prior to specified in the next four sections, and
the loss, which would otherwise avoid in the cases of life, accident, and
the insurance, will have the same health insurance, a change of interest
effect, although the property is in the in any part of a thing insured
hands of the mortgagee, but any act unaccompanied by a corresponding
which, under the contract of insurance, change in interest in the insurance,
is to be performed by the mortgagor, suspends the insurance to an
may be performed by the mortgagee equivalent extent, until the interest in
therein named, with the same effect as the thing and the interest in the
if it had been performed by the insurance are vested in the same
mortgagor.” person.”
a. Standard or Union Mortgage Sec. 21 of the Insurance Code
Clause – subsequent acts of the states that: “A change in interest in a
mortgagor cannot affect the rights thing insured, after the occurrence of
of the assignee. an injury which results in a loss, does
b. Open or Loss Payable Clause – not affect the right of the insured to
acts of the mortgagor affect the indemnity for the loss.”
mortgagee. Sec. 22 of the Insurance Code
Reason: Mortgagor does not cease states that: “A change of interest in
to be a party to the contract. one or more several distinct things,
Basis: Sec. 8 of the Insurance separately insured by one policy, does
Code states that: “Unless the not avoid the insurance as to the
policy otherwise provides, where a others.”
mortgagor of property effects *This is a divisible policy.
insurance in his own name Sec. 23 of the Insurance Code
providing that the loss shall be states that: “A change on interest, by
payable to the mortgagee, or will or succession, on the death of the
assigns a policy of insurance to a insured, does not avoid an insurance;
mortgagee, the insurance is and his interest in the insurance
deemed to be upon the interest of passes to the person taking his
the mortgagor, who does not cease interest in the thing insured.”
*This is by operation of law.
to be a party to the original
Sec. 24 of the Insurance Code
contract, and any act of his, prior
states that: “A transfer of interest by
to the loss, which would otherwise
one of several partners, joint owners,
avoid the insurance, will have the
or owners in common, who are jointly
same effect, although the property
insured, to the others, does not avoid
is in the hands of the mortgagee,
an insurance even though it has been
but any act which, under the
agreed that the insurance shall cease
contract of insurance, is to be
upon an alienation of the thing
performed by the mortgagor, may
insured.”
be performed by the mortgagee Sec. 57 of the Insurance Code
therein named, with the same provides that: “A policy may be so
effect as if it had been performed framed that it will inure to the benefit
by the mortgagor.” of whomsoever, during the
Sec. 9 of the Insurance Code
continuance of the risk, may become
states that: “If an insurer assents
the owner of the interest insured.”
to the transfer of an insurance from
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*The policy follows where the interest be derived basis. benefit to


is. be derived
Sec. 58 of the Insurance Code need not
provides that: “The mere transfer of a have any
thing insured does not transfer the legal basis.
As to the The General
policy, but suspends it until the same
beneficiary’ beneficiar Rule: The
person becomes the owner of both the s interest y must beneficiary
policy and the thing insured.” have need not
Article 1306 of the New Civil Code insurable have
provides that: “The contracting parties interest insurable
may establish such stipulations, over the interest
clauses, terms and conditions as they thing over the
may deem convenient, provided they insured. life of the
The policy insured if
are not contrary to law, morals, good
is still the insured
customs, public order, or public policy. valid, only himself
the secured the
designatio policy.
Insurable Insurable n was Exception:
Interest Interest in avoided If the life
in Life because insurance
Property the was
As to Limited to General beneficiar obtained
measure the actual Rule: y has no by the
value of Insurable insurable beneficiary,
the Interest in interest. the latter
interest in life is must have
the unlimited. insurable
property. Exception: interest
In life over the
insurance life of the
effected by insured.
a creditor Q: In case where the designated
on the life beneficiary cannot claim the proceeds
of the
debtor. due to the fact that such designation
As to time The General was void, who can claim the proceeds?
when insurable Rule: It is A: Insured.
insurable interest enough
interest exists that the DEVICES FOR ASCERTAINING AND
must exist when the insurable CONTROLLING RISK AND LOSS:
insurance interest
takes exists at *Concealment and representation are devices
effect and the time that are related to the formation of the contract
when the the policy whereas warranties and condition are devices
loss occurs takes effect that are related to the execution of the contract.
but not and need
need exist not exist at A. Concealment
in the the time of 1. Concept
meantime. the loss. Q: When is there concealment?
Exception: Sec. 26 of the Insurance Code
Obligee provides that: “A neglect to
must have
communicate that which a party knows
insurable
interest at and ought to communicate, is called a
the time concealment.”
the policy 2. Duty to Communicate
took effect Sec. 28 of the Insurance Code
and at the states that: “Each party to a contract
time of of insurance must communicated to
loss. the other, in good faith, all facts within
As to There The his knowledge which are material to
expectation must be a expectation
the contract and as to which he makes
of benefit to legal of the
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no warranty, and which the other has contract of insurance is bound to know
not the means of ascertaining.” all the general causes which are open
3. Test of Materiality to his inquiry, equally with that of the
Sec. 31 of the Insurance Code other, and which may affect the
provides that: “Materiality is to be political or material perils
determined not by the event, but contemplated; and all general usages
solely by the probable and reasonable of trade.”
influence of the facts upon the party to Sec. 34 of the Insurance Code
whom the communication is due, in provides that: “Information of the
forming his estimate of the nature or amount of the interest of one
disadvantages of the proposed insured need not be communicated
contract, or in making his inquiries.” unless in answer to an inquiry, except
*The fact disclosed may not be the as prescribed by section fifty-one.”
proximate cause of the loss still there Sec. 35 of the Insurance Code
is breach because there is a vitiation of provides that: “Neither party to a
consent, the contract is voidable. contract of insurance is bound to
4. Effect of Concealment communicate, even upon inquiry,
Sec. 27 of the Insurance Code
information of his own judgment upon
provides that: “A concealment whether
the matters in question. “
intentional or unintentional entitles the 6. Waiver of Information
injured party to rescind a contract of Sec. 33 of the Insurance Code
insurance.” provides that: “The right to information
Sec. 29 of the Insurance Code of material facts may be waived, either
provides that: “An intentional and by the terms of the insurance or by
fraudulent omission, on the part of one neglect to make inquiry as to such
insured, to communicate information facts, where they are distinctly implied
of matters proving or tending to prove in other facts of which information is
the falsity of a warranty, entitles the communicated.”
insurer to rescind.”
*It vitiates the contract and entitles B. Representation
the insurer to rescind, even if the 1. Concept
death or loss is due to a cause not Representations are factual
related to the concealed matter. statements made by the insured at the
5. Matters which need not be time of or prior to the issuance of the
communicated policy to give information to the
Sec. 30 of the Insurance Code insurer and otherwise induce him to
provides that: “Neither party to a enter into the insurance contract.
contract of insurance is bound to *Representation per se is not wrong as
communicate information of the long as such representation is true.
matters following, except in answer to *The false representation may still be
the inquiries of the other: corrected as long as it is made before
(a) Those which the other knows; the issuance of the policy.
(b) Those which, in the exercise of 2. Kinds of Representation
ordinary care, the other ought to know, Sec. 36 of the Insurance Code
and of which the former has no reason provides that: “A representation may
to suppose him ignorant; be oral or written.”
(c) Those of which the other waives Sec. 37 of the Insurance Code
communication; provides that: “representation may be
(d) Those which prove or tend to prove made at the time of, or before,
the existence of a risk excluded by a issuance of the policy.”
warranty, and which are not otherwise Sec. 39 of the Insurance Code
material; and provides that: “A representation as to
(e) Those which relate to a risk the future is to be deemed a promise,
excepted from the policy and which unless it appears that it was merely a
are not otherwise material.” statement of belief or expectation. “
*Things need not be disclosed. Sec. 42 of the Insurance Code
Sec. 32 of the Insurance Code provides that: “. A representation must
provides that: “Each party to a

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be presumed to refer to the date on C. Remedies available in case of


which the contract goes into effect.” Concealment or False Representation
3. Test of Materiality 1. When rescission by the insurer
Sec. 46 of the Insurance Code may be exercised
provides that: “The materiality of a Sec. 48 of the Insurance Code
representation is determined by the states that: “Whenever a right to
same rules as the materiality of a rescind a contract of insurance is given
concealment.” to the insurer by any provision of this
*Facts that may probably and chapter, such right must be exercised
reasonably influence the other party in previous to the commencement of an
forming his estimate. action on the contract.
4. Effect of Alteration or Withdrawal After a policy of life insurance made
Sec. 41 of the Insurance Code payable on the death of the insured
provides that: “A representation may shall have been in force during the
be altered or withdrawn before the lifetime of the insured for a period of
insurance is effected, but not two years from the date of its issue or
afterwards.” of its last reinstatement, the insurer
5. Time to which representation
cannot prove that the policy is void ab
refers
initio or is rescindible by reason of the
Sec. 42 of the Insurance Code
fraudulent concealment or
states that: “A representation must be
misrepresentation of the insured or his
presumed to refer to the date on which
agent.”
the contract goes into effect.”
General Rule: Prescriptive period:
6. Effect when representation is
Any time before the commencement of
obtained from third persons
Sec. 43 of the Insurance Code a court action on the contract.
Exception: In case of life insurance
provides that: “When a person insured
made payable on the death of the
has no personal knowledge of a fact,
insured.
he may nevertheless repeat
Q: How rescission is made?
information which he has upon the A: By sending notice of cancellation or
subject, and which he believes to be rescission to the insured.
true, with the explanation that he does Even if there is a court action, the
so on the information of others; or he insurer may raise concealment or
may submit the information, in its representation as an affirmative
whole extent, to the insurer; and in defense.
neither case is he responsible for its 2. When Life insurance policy
truth, unless it proceeds from an agent becomes incontestable
of the insured, whose duty it is to give Sec. 48 of the Insurance Code
the information.” states that: “Whenever a right to
7. When presumed false; effect of rescind a contract of insurance is given
falsity to the insurer by any provision of this
Sec. 44 of the Insurance Code chapter, such right must be exercised
provides that: “A representation is to previous to the commencement of an
be deemed false when the facts fail to action on the contract.
correspond with its assertions or After a policy of life insurance made
stipulations.” payable on the death of the insured
Sec. 45 of the Insurance Code shall have been in force during the
states that: “If a representation is false lifetime of the insured for a period of
in a material point, whether affirmative two years from the date of its issue or
or promissory, the injured party is of its last reinstatement, the insurer
entitled to rescind the contract from cannot prove that the policy is void ab
the time when the representation initio or is rescindible by reason of the
becomes false. The right to rescind fraudulent concealment or
granted by this Code to the insurer is misrepresentation of the insured or his
waived by the acceptance of premium agent.”
payments despite knowledge of the a. Requisites for incontestability
ground for rescission.”

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1. The insurance is a life insurance Warranty is a statement or promise


policy payable on the death of set forth in the policy or by reference
the insured. incorporated therein, the untruth or
2. It has been in force during the non-fulfillment of which in any respect,
lifetime of the insured for at and without reference to whether
least 2 years from its date of insurer was in fact prejudiced by such
issue or of its last untruth or non-fulfillment , renders the
reinstatement. The period of 2 policy voidable.
years may be shortened but it Condition is a provision wherein
cannot be extended by certain things are mandated by the
stipulation. insurer to be complied with by the
*The defense should be insured in order for the latter to
misrepresentation or concealment recover.
only. Examples:
*If the insured dies within 2 year 1. Filing of the claim on time
2. Notice of loss
period, the insurer may still rescind the
3. Proof of loss
contract. If the insured died after the 2
*The condition may be complied with
year period, the insurer cannot rescind
before or after the loss.
the contract.
b. Theory and Object of
Warranty Representation
incontestability
Part of the A collateral
After a policy of life insurance
contract inducement
made payable on the death of the Written on the Need not be
insured shall have been in force policy or in a written
during the lifetime of the insured valid rider or
for a period of 2 years from the attachment
date of its issue or of its last Generally Should be
reinstatement, the insurer cannot conclusively established to be
presumed to be material
prove that the policy is void ab
material
initio or is rescindable by reason of
The fact Requires only to be
the fraudulent concealment or warranted must substantially true
misrepresentation of the insured or be strictly
his agent. complied with
c. Defenses not barred by
incontestability 2. Kinds of Warranties
1. The person taking the 1. Express
insurance lacked insurable 2. Implied – warranties that are
interest as required by law deemed included in the contract
2. The cause of the death of the although not expressly mentioned.
insured is an excepted risk 3. Affirmative – asserts the
3. The premiums have not been existence of a fact or condition at
paid the time it is made.
4. The conditions of the policy 4. Promissory – the insured
relating to military or naval stipulates that certain facts or
service have been violated conditions shall exists or thing shall
5. The fraud is of a particularly be done or omitted.
vicious type 3. Time to which warranty refers
6. The beneficiary failed to furnish Sec. 68 of the Insurance Code
proof of death or to comply with provides that: “A warranty may relate
any condition imposed by the to the past, the present, the future, or
policy after the loss has to any or all of these.”
happened 4. Effect of Breach
7. The action was not brought Sec. 74 of the Insurance Code
within the time specified. states that: “The violation of a material
8. warranty, or other material provision of
D. Warranties a policy, on the part of either party
1. Concept; distinguished from thereto, entitles the other to rescind.”
representation

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Sec. 75 of the Insurance Code form to which the insured may “adhere” if
states that: “A policy may declare that he chooses but which he cannot change.
a violation of specified provisions
thereof shall avoid it, otherwise the C. Contents of the Policy
Sec. 51 of the Insurance Code provides
breach of an immaterial provision does
that: “A policy of insurance must specify:
not avoid the policy.”
(a) The parties between whom the
Sec. 76 of the Insurance Code
contract is made;
states that: “A breach of warranty
(b) The amount to be insured except in the
without fraud merely exonerates an
cases of open or running policies;
insurer from the time that it occurs, or (c) The premium, or if the insurance is of a
where it is broken in its inception, character where the exact premium is only
prevents the policy from attaching to determinable upon the termination of the
the risk.” contract, a statement of the basis and
rates upon which the final premium is to
POLICY OF INSURANCE:
be determined;
A. Definition and Form (d) The property or life insured;
Sec. 49 of the Insurance Code states (e) The interest of the insured in property
that: “The written instrument in which a insured, if he is not the absolute owner
contract of insurance is set forth, is called thereof;
(f) The risks insured against; and
a policy of insurance.”
(g) The period during which the insurance
Sec. 50 of the Insurance Code provides
is to continue.”
that: “The policy shall be in printed form
which may contain blank spaces; and any D. Papers attached to the policy and
word, phrase, clause, mark, sign, symbol, their binding effect (rider, warranties,
signature, number, or word necessary to clause, endorsement)
complete the contract of insurance shall Rider is an attachment to an insurance
be written on the blank spaces provided policy that modifies the conditions of the
therein. Any rider, clause, warranty or policy by expanding or restricting its
endorsement purporting to be part of the benefits or excluding certain conditions
contract of insurance and which is pasted from the coverage.
or attached to said policy is not binding on *Riders, together with other attachments
the insured, unless the descriptive title or to the policy like clause, warranty or
name of the rider, clause, warranty or endorsements, are not binding on the
endorsement is also mentioned and insured unless the descriptive title or
written on the blank spaces provided in name thereof is mentioned and written on
the policy. Unless applied for by the the blank spaces provided in the policy.
insured or owner, any rider, clause, Purpose: To modify the conditions or
warranty or endorsement issued after the provisions.
original policy shall be countersigned by Interpretation: In case of doubt, riders
the insured or owner, which prevail over the policy.
countersignature shall be taken as his *Riders and the like shall be countersigned
agreement to the contents of such rider, by the insured or owner unless he was the
clause, warranty or endorsement. Group one who applied for the rider, clause, and
insurance and group annuity policies, warranty.
*When the requirements for a rider are
however, may be typewritten and need
complied with including clause, warranty
not be in printed form.”
*Contract of insurance may be made in or endorsement, it is considered part of
any form but the policy of insurance must the policy.
*It is a part of the original policy which is
be in writing.
in the nature of a conditional obligation.
B. Fine Print Rule
Insurance is a contract of adhesion E. Kinds of Policy
1. Open
considering that most of the terms of the
Sec. 60 of the Insurance Code
contract do not result from mutual
states that: “An open policy is one in
negotiations between the parties as they
which the value of the thing insured is
are prescribed by the insurer in printed

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not agreed upon, but is left to be governing such extensions for the purpose
ascertained in case of loss.” of preventing such violations and may by
*To put a threshold for purposes of such rules and regulations dispense with
premium. the requirement of written approval by
Advantage: actual valuation; the final him in the case of extension in compliance
valuation is accurate value of the with such rules and regulations. “
property *This is a preliminary contract of
Disadvantage: hassle insurance.
Example: *The protection is temporary; limited to 60
Warehouse valued for P1M
days only
At the time of loss the actual valuation
*In Pacific Timber Export Corporation
of the warehouse is P800,000
v CA, the SC held that no separate
The insured can only recover P800,000
2. Valued premium is required for the cover note. As
Sec. 61 of the Insurance Code an exception, the parties may agree
provides that: “A valued policy is one otherwise.
which expresses on its face an
G. Cancellation of Policy
agreement that the thing insured shall
Sec. 64 of the Insurance Code states
be valued at a specific sum.”
that: “No policy of insurance other than
Example:
a. Warehouse valued for P1M life shall be cancelled by the insurer
Agreed valuation is P1M except upon prior notice thereof to the
The insured can recover the whole P1M insured, and no notice of cancellation shall
without proving the actual value of the be effective unless it is based on the
property. occurrence, after the effective date of the
b. Warehouse valued for P1.5M policy, of one or more of the following:
Agreed valuation is P1M (a) non-payment of premium;
The insurer can only recover P1M (b) conviction of a crime arising out of acts
3. Running increasing the hazard insured against;
Sec. 62 of the Insurance Code (c) discovery of fraud or material
provides that: “A running policy is one misrepresentation;
which contemplates successive (d) discovery of willful or reckless acts or
insurances, and which provides that omissions increasing the hazard insured
the object of the policy may be from against;
(e) physical changes in the property
time to time defined, especially as to
insured which result in the property
the subjects of insurance, by additional
becoming uninsurable; or
statements or indorsements.”
(f) a determination by the Commissioner
*Usually covers stock and goods in
that the continuation of the policy would
warehouse
Purpose: Avoidance of over and under violate or would place the insurer in
insurance. violation of this Code.”
Prescriptive Period:
F. Cover Notes Oral = 6 years; written= 10 years
Sec. 52 of the Insurance Code provides Sec. 65 of the Insurance Code states
that: “Cover notes may be issued to bind that: “All notices of cancellation
insurance temporarily pending the mentioned in the preceding section shall
issuance of the policy. Within sixty days be in writing, mailed or delivered to the
after the issue of the cover note, a policy named insured at the address shown in
shall be issued in lieu thereof, including the policy, and shall state (a) which of the
within its terms the identical insurance grounds set forth in section sixty-four is
bound under the cover note and the relied upon and (b) that, upon written
premium therefor. Cover notes may be request of the named insured, the insurer
extended or renewed beyond such sixty will furnish the facts on which the
days with the written approval of the cancellation is based.”
Commissioner if he determines that such Sec. 66 of the Insurance Code states
extension is not contrary to and is not for that: “In case of insurance other than life,
the purpose of violating any provisions of unless the insurer at least forty-five days
this Code. The Commissioner may in advance of the end of the policy period
promulgate rules and regulations mails or delivers to the named insured at

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the address shown in the policy notice of binding, notwithstanding any stipulation
its intention not to renew the policy or to therein that it shall not be binding until the
condition its renewal upon reduction of premium is actually paid.”
limits or elimination of coverages, the General Rule: No insurance policy issued
named insured shall be entitled to renew or renewal is valid and binding until actual
the policy upon payment of the premium payment of premium. Any agreement to
due on the effective date of the renewal. the contrary is void. (Cash and Carry Rule)
Any policy written for a term of less than Exceptions:
1. In case of life and industrial life
one year shall be considered as if written
whenever the grace period provision
for a term of one year. Any policy written
applies (Sec. 77);
for a term longer than one year or any
Requisites:
policy with no fixed expiration date shall a. Life and industrial life insurance
be considered as if written for successive b. There is a grace period
policy periods or terms of one year.” c. Grace period still exists
2. Where there is an acknowledgment in
H. Time to commence action on the the contract or policy of insurance that
policy; effect of stipulation the premium had already been paid
Q: When cause of action accrues? (Sec. 78);
A: From the denial of the claim. Conclusive effect: the validity of the
Sec. 63 of the Insurance Code provides
contract/policy and its binding effect.
that: “A condition, stipulation, or *No conclusive effect as to the
agreement in any policy of insurance, payment of premium.
limiting the time for commencing an *Acknowledgment results to estoppel
action thereunder to a period of less than 3. The rule laid down in Makati Tuscany
one year from the time when the cause of Condominium v CA to the effect that
action accrues, is void.” Sec. 77 may not apply if the parties
have agreed to the payment of the
PREMIUM: premium in installments and partial
payment has been made at the time of
A. Concept
Premium is the consideration paid to an the loss;
*By express agreement
insurer for undertaking to indemnify the
Q: What was agreed upon?
insured against a specified peril. A: Payment by instalment plan
Q: Who pays the premium? 4. Where a credit term was agreed upon
A: Insured like the agreement in UCPB General
Q: What is the consideration?
Insurance, Inc. v Masagana
A: Insured: premium; Insurer: Assumption
Telemart where the insurer granted a
of risk
60-90 day credit term for the payment
B. Effect of non-payment of premium; of the premiums despite full awareness
exceptions Sec. 77 of the Insurance of Sec.77;
*By previous conduct/practice
Code states that: “. An insurer is entitled
*Insured = principle of equity; insurer
to payment of the premium as soon as the
= estoppel.
thing insured is exposed to the peril 5. Where the parties are barred by
insured against. Notwithstanding any estoppels
agreement to the contrary, no policy or Article 1306 of the : “New Civil Code
contract of insurance issued by an states that: “The contracting parties may
insurance company is valid and binding establish such stipulations, clauses, terms
unless and until the premium thereof has and conditions as they may deem
been paid, except in the case of a life or convenient, provided they are not contrary
an industrial life policy whenever the to law, morals, good customs, public
grace period provision applies.” order, or public policy.”
*This is called as Cash and Carry Rule
Sec. 78 of the Insurance Code states
C. When insured entitled to return of
that: “An acknowledgment in a policy or
premiums Sec. 79 of the Insurance
contract of insurance or the receipt of
Code states that: “A person insured is
premium is conclusive evidence of its
entitled to a return of premium, as follows:
payment, so far as to make the policy

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(a) To the whole premium if no part of his bringing about the death of the insured; in
interest in the thing insured be exposed to which event, the nearest relative of the
any of the perils insured against; insured shall receive the proceeds of said
(b) Where the insurance is made for a insurance if not otherwise disqualified.”
definite period of time and the insured Sec. 53 of the Insurance Code states
surrenders his policy, to such portion of that: “The insurance proceeds shall be
the premium as corresponds with the applied exclusively to the proper interest
unexpired time, at a pro rata rate, unless a of the person in whose name or for whose
short period rate has been agreed upon benefit it is made unless otherwise
and appears on the face of the policy, specified in the policy.”
after deducting from the whole premium Sec. 56 of the Insurance Code states
any claim for loss or damage under the that: “When the description of the insured
policy which has previously accrued; in a policy is so general that it may
Provided, That no holder of a life insurance comprehend any person or any class of
policy may avail himself of the privileges persons, only he who can show that it was
of this paragraph without sufficient cause intended to include him can claim the
as otherwise provided by law.” benefit of the policy.”
Sec. 57 of the Insurance Code provides
Sec. 80 of the Insurance Code states
that: “A policy may be so framed that it
that: “If a peril insured against has
will inure to the benefit of whomsoever,
existed, and the insurer has been liable for
during the continuance of the risk, may
any period, however short, the insured is
become the owner of the interest
not entitled to return of premiums, so far
insured.”
as that particular risk is concerned.”
Q: Who receives the proceeds?
Sec. 81 of the Insurance Code states
A: General Rule: Beneficiary
that: “A person insured is entitled to Exception: In case the designated
return of the premium when the contract beneficiary is disqualified, it is the insured
is voidable, on account of fraud or who receive the proceeds.
misrepresentation of the insurer, or of his General Rule: The designation of the
agent, or on account of facts, the beneficiary is revocable.
existence of which the insured was Exception: Irrevocable
ignorant without his fault; or when by any In irrevocable designation, the general
default of the insured other than actual rule is that the designated beneficiary
fraud, the insurer never incurred any cannot be changed.
liability under the policy.” Exceptions:
Sec. 82 of the Insurance Code states 1. The beneficiary consented to the
that: “In case of an over-insurance by change
several insurers, the insured is entitled to 2. Under Art. 45 of the Family Code which
a ratable return of the premium, substantially provides that the
proportioned to the amount by which the innocent spouse has the authority to
aggregate sum insured in all the policies revoke the designation of his
exceeds the insurable value of the thing at beneficiary
3. In cases where the marriage is
risk.”
declared void ab initio
PERSONS ENTITLED TO RECOVER ON THE 4. In cases of annulment
5. In cases of legal separation
POLICY AND CONDITIONS TO RECOVERY:
B. Limitations on the appointment of
A. Beneficiary
Sec. 11 of the Insurance Code provides beneficiary Article 2012 of the New
that: “The insured shall have the right to Civil Code states that: “Any person who
change the beneficiary he designated in is forbidden from receiving any donation
the policy, unless he has expressly waived under Article 739 cannot be named
this right in said policy.” beneficiary of a life insurance policy by the
Sec. 12 of the Insurance Code provides person who cannot make any donation to
that: “The interest of a beneficiary in a life him, according to said article.”
insurance policy shall be forfeited when *The prohibition applies only to life
the beneficiary is the principal, insurance policy.
accomplice, or accessory in willfully

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*Under Article 1236 of the New Civil Code, sufficient for him to give the best evidence
the beneficiary may pay the premium which he has in his power at the time.”
even against the will of the insurer. Sec. 90 of the Insurance Code provides
Reason: Beneficiary has interest over the that: “All defects in a notice of loss, or in
insurance policy. preliminary proof thereof, which the
Article 739 of the New Civil Code insured might remedy, and which the
states that: ”The following donations shall insurer omits to specify to him, without
be void: unnecessary delay, as grounds of
(1) Those made between persons who objection, are waived.”
were guilty of adultery or concubinage at Sec. 91 of the Insurance Code provides
the time of the donation; that: “Delay in the presentation to an
(2) Those made between persons found insurer of notice or proof of loss is waived
guilty of the same criminal offense, in if caused by any act of him, or if he omits
consideration thereof; to take objection promptly and specifically
(3) Those made to a public officer or his
upon that ground.”
wife, descendants and ascendants, by Sec. 92 of the Insurance Code provides
reason of his office. that: “If the policy requires, by way of
In the case referred to in No. 1, the action
preliminary proof of loss, the certificate or
for declaration of nullity may be brought
testimony of a person other than the
by the spouse of the donor or donee; and
insured, it is sufficient for the insured to
the guilt of the donor and donee may be
use reasonable diligence to procure it, and
proved by preponderance of evidence in
in case of the refusal of such person to
the same action.”
give it, then to furnish reasonable
C. Rule where insurance is made by an evidence to the insurer that such refusal
agent or trustee was not induced by any just grounds of
Sec. 54 of the Insurance Code provides disbelief in the facts necessary to be
that: “When an insurance contract is certified or testified.”
executed with an agent or trustee as the
DOUBLE INSURANCE:
insured, the fact that his principal or
beneficiary is the real party in interest A. Definition and requisites
may be indicated by describing the Sec. 93 of the Insurance Code provides
insured as agent or trustee, or by other that: “A double insurance exists where the
general words in the policy.” same person is insured by several insurers
separately in respect to the same subject
D. Rule where insurance if made by
and interest.”
partner or part owner Requisites:
Sec. 55 of the Insurance Code provides 1. The person insured is the same
that: “To render an insurance effected by 2. There are two or more insurers
one partner or part-owner, applicable to insuring separately
the interest of his co-partners or other 3. The subject matter is the same
part-owners, it is necessary that the terms 4. The interest insured is also the same
of the policy should be such as are 5. The risk or peril insured against is
applicable to the joint or common interest. likewise the same

B. Distinguished from Over-insurance
E. Notice and proof of loss
Distinctions:
Sec. 88 of the Insurance Code states
that: “In case of loss upon an insurance
against fire, an insurer is exonerated, if Double Insurance Over-Insurance
notice thereof be not given to him by an When the amount of
insured, or some person entitled to the There may be no the insurance is
benefit of the insurance, without over-insurance as beyond the value of
unnecessary delay.” when the sum total the insured’s
Sec. 89 of the Insurance Code states of the amounts of insurable interest
that: “When a preliminary proof of loss is the policies issued
does not exceed the
required by a policy, the insured is not
insurable interest of
bound to give such proof as would be the insured
necessary in a court of justice; but it is There are always There may only be
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several insurers one insurer involved Formula:


Insurance Policy
*There is over-insurance if the total --------------------------- x Amount of loss
amount exceeds the value of the thing Total of Policy taken
insured.
Example: 500000
In Fire Insurance, A insured his property to X = --------- x 1M = 200,000
2.5M
X for 500,000, to Y for 1M and to Z for 1M
totalling to P2.5M. The property valued
only for 1M. In this situation there is over- 1M
insurance. Y = -------- x 1M = 400,000
2.5M
C. Stipulation against double insurance
Q: Is double insurance legally prohibited? 1M
A: General Rule: NO. Z = -------- x 1M = 400,000
Exception: If prohibited by an “other 2.5M
insurance clause.”
Basis: Sec. 75 of the Insurance Code *The balance shall be returned.
which provides that: “A policy may declare *As far as the excess payment is concern,
that a violation of specified provisions the excess shall be held in trust by the
thereof shall avoid it, otherwise the breach insured.
of an immaterial provision does not avoid
the policy.” REINSURANCE:

D. Rules for payment where there is *This is called a Liability Insurance


over-insurance by double insurance
A. Definition
Sec. 94 of the Insurance Code states
Sec. 95 of the Insurance Code provides
that: “Where the insured is over-insured
that: “A contract of reinsurance is one by
by double insurance:
which an insurer procures a third person to
(a) The insured, unless the policy
insure him against loss or liability by
otherwise provides, may claim payment
reason of such original insurance.”
from the insurers in such order as he may
Example:
select, up to the amount for which the In fire insurance, A insured his property
insurers are severally liable under their against fire to X, X reinsured his obligation
respective contracts; to Y.
(b) Where the policy under which the Q: Can A recover to the reinsurer?
insured claims is a valued policy, the A: General Rule: NO
insured must give credit as against the Reason: No privity of contract
valuation for any sum received by him Exception: Stipulation stating that the
under any other policy without regard to policy is taken for the benefit of the
the actual value of the subject matter insured of the first contract of insurance.
insured; (Stipulation pour autrui)
(c) Where the policy under which the Q: Can X recover from Y even if X has not
insured claims is an unvalued policy he yet pay A?
must give credit, as against the full A: YES. Immediately arises from the time
insurable value, for any sum received by the liability of X has occur.
him under any policy;
(d) Where the insured receives any sum in B. Nature
Sec. 97 of the Insurance Code states
excess of the valuation in the case of
that: “A reinsurance is presumed to be a
valued policies, or of the insurable value in
contract of indemnity against liability, and
the case of unvalued policies, he must
not merely against damage.”
hold such sum in trust for the insurers,
Sec. 98 of the Insurance Code provides
according to their right of contribution
that: “The original insured has no interest
among themselves;
in a contract of reinsurance.”
(e) Each insurer is bound, as between
Q: Is reinsurance mandatory?
himself and the other insurers, to A: General Rule: NO
contribute ratably to the loss in proportion Exceptions:
to the amount for which he is liable under 1. Sec. 215 of the Insurance Code
his contract.” which provides that: “No insurance
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company other than life, whether is the original insurance is


foreign or domestic, shall retain any insurer’s risk property
risk on any one subject of insurance in Consent of original Insured has to give
an amount exceeding twenty per insured, not his consent
necessary
centum of its net worth. For purposes
of this section, the term "subject of D. Duty of reinsured to disclose facts
insurance" shall include all properties Sec. 96 of the Insurance Code provides
or risks insured by the same insurer that: “Where an insurer obtains
that customarily are considered by reinsurance, except under automatic
non-life company underwriters to be reinsurance treaties, he must
subject to loss or damage from the communicate all the representations of
same occurrence of any hazard insured the original insured, and also all the
against. knowledge and information he possesses,
Reinsurance ceded as authorized whether previously or subsequently
under the succeeding title shall be acquired, which are material to the risk.“
deducted in determining the risk
retained. As to surety risk, deduction MARINE INSURANCE:
shall also be made of the amount
assumed by any other company A. Definition
authorized to transact surety business Marine Insurance includes policies that
and the value of any security covers risks connected with navigation, to
mortgage, pledged, or held subject to which a ship, cargo, freightage, profits or
the surety's control and for the surety's other insurable interest in movable
protection.” property, may be exposed during a certain
2. Sec. 275 of the Insurance Code voyage or a fixed period of time.
which provides that: “Every foreign Basis: Sec. 99 of the Insurance Code.
insurance company desiring to
B. Scope of marine insurance
withdraw from the Philippines shall, Sec. 99 of the Insurance Code provides
prior to such withdrawal, discharge its that: “Marine Insurance includes:
liabilities to policyholders and creditors (1) Insurance against loss of or damage to:
in this country. In case of its policies (a) Vessels, craft, aircraft, vehicles, goods,
insuring residents of the Philippines, it freights, cargoes, merchandise, effects,
shall cause the primary liabilities under disbursements, profits, moneys, securities,
such policies to be reinsured and choses in action, evidences of debts,
assumed by another insurance valuable papers, bottomry, and
company authorized to transact respondentia interests and all other kinds
business in the Philippines. In the case of property and interests therein, in
of such policies as are subject to respect to, appertaining to or in
cancellation by the withdrawing connection with any and all risks or perils
company, it may cancel such policies of navigation, transit or transportation, or
pursuant to the terms thereof in lieu of while being assembled, packed, crated,
such reinsurance and assumption of baled, compressed or similarly prepared
liabilities.” for shipment or while awaiting shipment,
or during any delays, storage,
C. Distinguished from double insurance transhipment, or reshipment incident
Distinctions:
thereto, including war risks, marine
Reinsurance Double Insurance builder's risks, and all personal property
Insurance of Involves same floater risks;
different interests interest (b) Person or property in connection with
Insurer becomes an Insurer remains in or appertaining to a marine, inland
insured in relation to such capacity marine, transit or transportation
reinsurer insurance, including liability for loss of or
Original insured has Insured in the 1st damage arising out of or in connection
no interest in contract is a party with the construction, repair, operation,
reinsurance contract in interest in the 2nd
maintenance or use of the subject matter
contract
Subject of insurance Subject of of such insurance (but not including life
insurance or surety bonds nor insurance
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against loss by reason of bodily injury to overwhelming 3. From the


any person arising out of ownership, power which negligent
maintenance, or use of automobiles); cannot be failure of
(c) Precious stones, jewels, jewelry, guarded against the ship’s
precious metals, whether in course of by the ordinary owner to
exertion of provide the
transportation or otherwise;
human skill or vessel with
(d) Bridges, tunnels and other
prudence, as the proper
instrumentalities of transportation and distinguished equipment
communication (excluding buildings, their from the ordinary to convey
furniture and furnishings, fixed contents wear and tear of the cargo
and supplies held in storage); piers, the voyage and under
wharves, docks and slips, and other aids from injuries ordinary
to navigation and transportation, including suffered by the conditions.
vessel in
dry docks and marine railways, dams and
consequence of
appurtenant facilities for the control of her not being
waterways. unseaworthy.
(2) "Marine protection and indemnity Extraordinary Usual perils
insurance," meaning insurance against, or perils attendant to
against legal liability of the insured for navigation
loss, damage, or expense incident to *Only perils of the sea are assumed by
ownership, operation, chartering, the insurer.
maintenance, use, repair, or construction 2. “all risks” marine insurance policy
of any vessel, craft or instrumentality in means that all risks are covered unless
use of ocean or inland waterways, expressly excepted. The burden rests
including liability of the insured for on the insurer to prove that the loss is
personal injury, illness or death or for loss caused by a risk that is excluded.
of or damage to the property of another
D. Insurable interest in marine
person.”
insurance
*In Roque v IAC, the SC held that cargo
1. Ship owner’s insurable interest
can be the subject of marine insurance, Sec. 100 of the Insurance Code
and once it is entered into, the implied provides that: “The owner of a ship has
warranty of seaworthiness immediately in all cases an insurable interest in it,
attaches to whoever is insuring the cargo, even when it has been chartered by
whether he be the shipowner or not. one who covenants to pay him its
Although he has no control over the value in case of loss: Provided, That in
vessel, the shipper has control in the this case the insurer shall be liable for
choice of vessel. only that part of the loss which the
insured cannot recover from the
C. Risks or losses covered in marine
charterer.“
insurance
*The insurable interest of the
1. Perils of the sea vs. perils of the
shipowner is over the value of the
ship
vessel and over expected freightage.
Perils of the Perils of the Ship Measurement: Ownership
Sea *It does not matter whether the ship
Include only Is a loss which is in was mortgaged or chartered.
those casualties the ordinary course a. Rule where vessel is chartered
due to the of events, results: Sec. 100 of the Insurance Code
unusual violence 1. From the states that: “The owner of a ship
or extraordinary ordinary, has in all cases an insurable
causes natural and interest in it, even when it has
connected with inevitable been chartered by one who
navigation. It has action of covenants to pay him its value in
been said to the sea;
include only such 2. From case of loss: Provided, That in this
losses as are of ordinary case the insurer shall be liable for
extraordinary wear and only that part of the loss which the
nature or arise tear of the insured cannot recover from the
from some ship; and charterer.”

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Q: What is a charter party? *Definition of concealment in marine


A: A contract where the owner insurance is the same as what defined
lends his whole vessel to a in Sec. 26 of the Insurance Code.
charterer for a particular voyage. *However, concealment under the
*Indemnity Principle applies marine insurance is more strict than
b. Rule where vessel the ordinary insurance
hypothecated by bottomry Reason: Unpredictable risk
Sec. 101 of the Insurance Code *In marine insurance, opinions and
which provides that: “The insurable expectations of third persons are
interest of the owner of the ship considered, whereas in ordinary
hypothecated by bottomry is only insurance as a general rule, opinions
the excess of its value over the of third persons are not necessary.
amount secured by bottomry.” Exception: expert opinion.
*Principle of Indemnity applies. 2. Duty to communicate
Q: What is bottomry? Sec. 107 of the Insurance Code
A: it is a contract of loan which which provides that: “In marine
said loan is used for the repair of insurance each party is bound to
the vessel. The payment of which is communicate, in addition to what is
conditional. required by section twenty-eight, all
*The owner’s insurable interest is
the information which he possesses,
the amount in excess of the value
material to the risk, except such as is
of the ship over the amount
mentioned in Section thirty, and to
secured by the bottomry
state the exact and whole truth in
*Owner incurs loss due to the
relation to all matters that he
damage of the vessel but at the
represents, or upon inquiry discloses or
same time he receives gain due to
assumes to disclose.”
the extinguishment of his loan
3. Opinions or expectations of third
obligation.
c. Insurable interest in freightage persons
Sec. 102 of the Insurance Code Sec. 108 of the Insurance Code
states that: “Freightage, in the which provides that: “In marine
sense of a policy of marine insurance, information of the belief or
insurance, signifies all the benefits expectation of a third person, in
derived by the owner, either from reference to a material fact, is
the chartering of the ship or its material.”
4. When concealment does not
employment for the carriage of his
vitiate the entire contract
own goods or those of others.”
Sec. 110 of the Insurance Code
Sec. 103 of the Insurance Code
states that: “A concealment in a
provides that: “The owner of a ship
marine insurance, in respect to any of
has an insurable interest in
the following matters, does not vitiate
expected freightage which
the entire contract, but merely
according to the ordinary and
exonerates the insurer from a loss
probable course of things he would
resulting from the risk concealed:
have earned but for the
(a) The national character of the
intervention of a peril insured
insured;
against or other peril incident to (b) The liability of the thing insured to
the voyage.” capture and detention;
*Supposed earnings may be (c) The liability to seizure from breach
subject to marine insurance. of foreign laws of trade;
2. Charterer’s insurable (d) The want of necessary documents;
Sec. 106 of the Insurance Code (e) The use of false and simulated
provides that: “The charterer of a ship papers.”
has an insurable interest in it, to the
extent that he is liable to be damnified F. Representations
by its loss.” 1. Effect of false representation by
the insured
E. Concealment Sec. 111 of the Insurance Code
1. Meaning of concealment in marine states that: “If a representation by a
insurance
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person insured by a contract of marine seaworthiness extends not only to


insurance, is intentionally false in any the condition of the structure of the
material respect, or in respect of any ship itself, but requires that it be
fact on which the character and nature properly laden, and provided with a
of the risk depends, the insurer may competent master, a sufficient
rescind the entire contract.” number of competent officers and
2. Effect of false representation as to seamen, and the requisite
expectation appurtenances and equipment,
Sec. 112 of the Insurance Code such as ballasts, cables and
provides that: “The eventual falsity of anchors, cordage and sails, food,
a representation as to expectation water, fuel and lights, and other
does not, in the absence of fraud, necessary or proper stores and
avoid a contract of marine insurance.” implements for the voyage.”
G. Implied warranties in marine Requisites:
insurance 1. Condition of the structure of the
1. Seaworthiness ship
Sec. 113 of the Insurance Code 2. Properly laden and provided
provides that: “In every marine with a competent master
insurance upon a ship or freight, or 3. Sufficient number of competent
freightage, or upon any thing which is officers and seamen
the subject of marine insurance, a 4. Requisite appurtenances and
warranty is implied that the ship is equipment
seaworthy.” *In Delsan Transport case, the
*Charterer is also subject to warranty SC held that the issuance of
on seaworthiness because he has certificate of seaworthiness is not
control in the selection of the ship to enough to prove seaworthiness of
be leased. the ship.
*Bottomry lender is also subject to Example:
warranty on seaworthiness because he Cargo owner insured his cargo
has also the control in the selection of Q: Does that implied warranty on
the vessel. seaworthiness apply to cargo
a. What constitutes
owner?
seaworthiness
A: YES. The cargo owner has the
Sec. 114 of the Insurance Code
control in the selection of the
states that: “A ship is seaworthy
vessel where his cargoes to be
when reasonably fit to perform the
shipped.
service and to encounter the
Sec. 119 of the Insurance Code
ordinary perils of the voyage
provides that: “A ship which is
contemplated by the parties to the
seaworthy for the purpose of an
policy.”
Q: What makes a vessel insurance upon the ship may,
seaworthy? nevertheless, by reason of being
A: Sec. 114. Fitness of the vessel is unfitted to receive the cargo, be
the general test. unseaworthy for the purpose of the
*Warranty on the condition of the insurance upon the cargo.”
ship b. When complied with;
Example: exceptions
Shipowner insured his vessel with X Sec. 115 of the Insurance Code
insurer. provides that: “An implied warranty
On the part of the insurer, the of seaworthiness is complied with if
inured warrants that his vessel is the ship be seaworthy at the time
ship worthy. The burden falls on the of the of commencement of the
shipowner/insured of proving risk, except in the following cases:
otherwise. (a) When the insurance is made for
*Seaworthiness depends on the a specified length of time, the
transaction entered into or implied warranty is not
undertaken by the ship. complied with unless the ship
Sec. 116 of the Insurance Code be seaworthy at the
states that: “A warranty of
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commencement of every *In voyage policy, no transhipment.


voyage it undertakes during The voyage has different stages to
that time; (Time Policy) go through. Every stage of voyage
Example: the ship must be seaworthy.
The transaction is covered for c. Rule where ship becomes
one year from January 1, 2007 unseaworthy in the course of
to December 31, 2007. the voyage
The ship will undertake 5 Sec. 118 of the Insurance Code
different voyages. provides that: “When the ship
The ship must be seaworthy at becomes unseaworthy during the
the commencement of each voyage to which an insurance
and every voyage. relates, an unreasonable delay in
(b) When the insurance is upon the
repairing the defect exonerates the
cargo which, by the terms of
insurer on ship or shipowner's
the policy, description of the
interest from liability from any loss
voyage, or established custom
arising therefrom.”
of the trade, is to be 2. Warranty that necessary
transhipped at an intermediate documents are carried
port, the implied warranty is not Sec. 120 of the Insurance Code
complied with unless each states that: “Where the nationality or
vessel upon which the cargo is neutrality of a ship or cargo is
shipped, or transhipped, be expressly warranted, it is implied that
seaworthy at the the ship will carry the requisite
commencement of each documents to show such nationality or
particular voyage. (Cargo neutrality and that it will not carry any
Policy)” documents which cast reasonable
Controlling: There must be suspicion thereon.”
transhipment 3. Warranty against improper
*The ship must be seaworthy in deviation
each particular voyage. a. Meaning of deviation
Sec. 117 of the Insurance Code Sec. 123 of the Insurance Code
provides that: “Where different states that: “Deviation is a
portions of the voyage departure from the course of the
contemplated by a policy differ in voyage insured, mentioned in the
respect to the things requisite to last two sections, or an
make the ship seaworthy therefor, unreasonable delay in pursuing the
a warranty of seaworthiness is voyage or the commencement of
complied with if, at the an entirely different voyage.”
commencement of each portion, *Deviation is either proper or
the ship is seaworthy with improper.
reference to that portion.” (Voyage *There is breach of warranty if the
Policy) deviation is improper.
*There is a single ship that b. When proper
completes the voyage however, Sec. 124 of the Insurance Code
the ship will undergo different provides that: “A deviation is
degree of perils. proper:
*The ship must be seaworthy upon (a) When caused by circumstances
commencement of each level of over which neither the master nor
peril. the owner of the ship has any
General Rule: The ship must be control;
seaworthy at the time of the (b) When necessary to comply with
commencement of the risk. a warranty, or to avoid a peril,
Exceptions: whether or not the peril is insured
1. Time policy against;
2. Cargo policy *Whether or not the peril is
3. Voyage policy covered by the policy is immaterial.
*In time policy, seaworthiness
commenced in every voyage.

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(c) When made in good faith, and 3. Scope of insurance against actual
upon reasonable grounds of belief total loss
in its necessity to avoid a peril; or Sec. 137 of the Insurance Code
(d) When made in good faith, for states that: “An insurance confined in
the purpose of saving human life or terms to an actual loss does not cover
relieving another vessel in a constructive total loss, but covers
distress.” any loss, which necessarily results in
*Warranty is against improper depriving the insured of the
deviation. possession, at the port of destination,
*Whether or not improper deviation of the entire thing insured.”
contributed to the loss is 4. When constructive total
immaterial because there was loss/partial loss exists
already a breach of implied Sec. 139 of the Insurance Code
warranty. provides that: “A person insured by a
Sec. 126 of the Insurance Code contract of marine insurance may
states that: “An insurer is not liable abandon the thing insured, or any
for any loss happening to the thing particular portion thereof separately
insured subsequent to an improper valued by the policy, or otherwise
deviation.” separately insured, and recover for a
total loss thereof, when the cause of
H. Loss
the loss is a peril insured against:
1. Kinds of losses
(a) If more than three-fourths thereof
a. Actual
Sec. 130 of the Insurance Code in value is actually lost, or would have
provides that: “An actual total loss to be expended to recover it from the
is cause by: peril;
(a) A total destruction of the thing (b) If it is injured to such an extent as
insured; to reduce its value more than three-
(b) The irretrievable loss of the fourths;
thing by sinking, or by being (c) If the thing insured is a ship, and
broken up; the contemplated voyage cannot be
(c) Any damage to the thing which lawfully performed without incurring
renders it valueless to the owner either an expense to the insured of
for the purpose for which he held more than three-fourths the value of
it; or the thing abandoned or a risk which a
(d) Any other event which prudent man would not take under the
effectively deprives the owner of circumstances; or
the possession, at the port of (d) If the thing insured, being cargo or
destination, of the thing insured.” freightage, and the voyage cannot be
Sec. 132 of the Insurance Code performed, nor another ship procured
states that: “An actual loss may be by the master, within a reasonable
presumed from the continued time and with reasonable diligence, to
absence of a ship without being forward the cargo, without incurring
heard of. The length of time which the like expense or risk mentioned in
is sufficient to raise this the preceding sub-paragraph. But
presumption depends on the freightage cannot in any case be
circumstances of the case.” abandoned unless the ship is also
b. Constructive abandoned.”
Sec. 131 of the Insurance Code Test: The loss is more than ¾ but less
provides that: “A constructive total than 1.
loss is one which gives to a person *If there is partial loss, only partial can
insured a right to abandon, under be claimed.
Section one hundred thirty-nine. “ *The extent of damage in constructive
2. Right to payment upon an actual loss is so severe.
total loss *This is not automatic.
Sec. 135 of the Insurance Code *There is an option either to abandon it
states that: “Upon an actual total loss, or to recover only the partial loss.
a person insured is entitled to payment 5. Concept of abandonment and its
without notice of abandonment.” requisites

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Definition: not liable for any particular


Sec. 138 of the Insurance Code average loss not depriving
states that: “Abandonment, in marine the insured of the
insurance, is the act of the insured by possession, at the port of
which, after a constructive total loss, destination, of the whole of
he declares the relinquishment to the such thing, or class of
insurer of his interest in the thing things, even though it
insured.” becomes entirely worthless;
*It is necessary to abandon the but such insurer is liable for
surviving part of the thing. his proportion of all general
Formula:
average loss assessed upon
Constructive total loss + Abandonment
the thing insured.”
= Total loss
- Includes all damages
If there is only constructive total loss
and expenses caused to
there is only partial loss.
Requisites: the vessel or to her
1. There must be an actual cargo which have not
relinquishment by the person inured to the common
insured of his interest in the thing benefit and profit of all
insured. persons interested in the
2. There must be a constructive total vessel and her cargo.
loss - It refers to those losses
3. The abandonment be neither which occur under such
partial nor conditional circumstances as do not
4. It must be made within a entitle the unfortunate
reasonable time after receipt of owners to receive
reliable information of the loss contribution from other
5. It must be factual and reasonable owners concerned in the
6. It must be made by giving notice venture as where a
thereof to the insurer which may be vessel accidentally runs
done orally or in writing aground and goes to
7. The notice of abandonment must
pieces after the cargo is
be explicit and must specify the
saved.
particular cause of the
Recourse: Go after the insurer
abandonment
*Stipulation exempting the insurer
*The residual part is abandoned.
for a particular average loss is
Reason: Principle of Indemnity
possible and valid.
*If the requisites are satisfied the
ii. General
insurance company cannot refuse to - Includes damages and
accept the abandonment. expenses which are
6. Average deliberately caused by
Average is any extraordinary or
the master of the vessel
accidental expense incurred during the
or upon his authority, in
voyage for the preservation of the
order to save the vessel,
vessel, cargo, or both, and all damages
her cargo, or both at the
to the vessel and cargo from the time
same time from a real or
it is loaded and the voyage
known risk.
commenced until it ends and the cargo - It must be borne equally
unloaded. by all of the interests
*Expenses for maritime transaction.
concerned in the
a. Kinds of average:
i. Particular venture.
Sec. 136 of the Insurance b. Requisites of general average
1. There must be a common
Code provides that: “Where
danger to the vessel or cargo
it has been agreed that an
2. Part of the vessel or cargo was
insurance upon a particular
sacrificed deliberately
thing, or class of things,
shall be free from particular
average, a marine insurer is
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3. The sacrifice must be for the Computation:


common safety of for the 300,000
benefit of all ----------- x 300,000 = 180,000
4. It must be made by the master 500,000
or upon his authority If the loss is 500,000, the insured can recover the
5. It must be successful, i.e., whole 300,000 because there is a total loss and
resulted in the saving of the not partial loss.
vessel or cargo *In fire insurance, there has to be an express
6. It must be necessary
stipulation to that effect.
c. Insurer’s liability for general
average
The insurer of the vessel or cargo FIRE INSURANCE:
that are saved is liable for general
A. Definition and scope of fire insurance
average contribution and not for Sec. 167 of the Insurance Code
particular average. Only the insurer provides that: “As used in this Code, the
of the damaged cargo or vessel is term "fire insurance" shall include
liable for particular average if insurance against loss by fire, lightning,
covered by the policy. windstorm, tornado or earthquake and
Q: If there is a stipulation
other allied risks, when such risks are
exempting the insurer for a
covered by extension to fire insurance
particular average loss, does it
policies or under separate policies.”
extend to general average loss?
A: NO. B. Risks or losses covered
Basis: Article 859 of the Code of Q: What are allied risks?
Commerce; Article 812 of the Code A: lightning, windstorm, tornado or
of Commerce earthquake, tsunami.
Reason: Equity Q: What are direct losses?
Q: Are there a mandatory co-insurance in marine A: Direct losses are losses that pertain to
insurance? the physical destruction of the thing
A: YES. insured.
Basis: Sec. 157 of the Insurance Code Q: What are indirect losses?
A: Indirect losses pertain to consequential
provides that: “A marine insurer is liable upon a
losses.
partial loss, only for such proportion of the
Q: Are consequential losses compensable?
amount insured by him as the loss bears to the
A: General Rule: NO in standard fire
value of the whole interest of the insured in the
policy
property insured.” Except: If there is an agreement
*There is a co-insurance when the property is *The liability of the insurer is to pay for
insured for less than its value, the insured is direct losses only
considered a co-insurer for the difference Friendly Fire – fire that burns in a place
between the amount of insurance and the value where it is supposed to burn.
of the property. Hostile Fire – fire that escapes and burns
Requisites: in a place where it is not supposed to be.
1. The loss is partial
2. The amount of insurance is less than the C. Effect of alteration in the thing
value of the property insured. Sec. 168 of the Insurance Code
Formula: provides that: “An alteration in the use or
Loss condition of a thing insured from that to
------- x Insurance = Insurer’s Liability which it is limited by the policy made
Value without the consent of the insurer, by
Example: means within the control of the insured,
A’s insurable interest = P500,000 and increasing the risks, entitles an
Insured Amount = P300,000 insurer to rescind a contract of fire
Loss = P300,000 insurance.”
Sec. 169 of the Insurance Code states
Q: Would the whole P300,000 be recovered from
that: “An alteration in the use or condition
the insurer?
of a thing insured from that to which it is
A: NO. Only 180,000 will be recovered and the
limited by the policy, which does not
balance of 120,000 will be suffered by the insured
as a co-insurer.
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increase the risk, does not affect a


contract of fire insurance.” B. Third Party Liability Insurance
Q: If the policy is silent as to the use or *Casualty insurance ay provide for third
condition of the thing insured, are there party liability in the nature of stipulation
implied warranty in fire insurance? pour autrui for personal injury and even
A: General Rule: YES. The insured has damage to property, in which case, the
the insurable interest in the thing insured. third party may directly sue the insurer
Exception: If the policy expressly upon the occurrence of the loss. However,
provides for the use of condition of the the insurer is not solidarily liable with the
thing insured. insured or the tortfeasor for the latter’s
obligation.
D. Measure of indemnity *Insurance against specified perils which
Sec. 171 of the Insurance Code
may give rise to liability on the part of the
provides that: “If there is no valuation in
insured for claims for injuries to or
the policy, the measure of indemnity in an
damage to property of others.
insurance against fire is the expense it *If there is no stipulation in favor of third
would be to the insured at the time of the person but the insurance is an insurance
commencement of the fire to replace the against liability to third persons, any third
thing lost or injured in the condition in person who might be injured may not sue
which at the time of the injury; but if there the insurer.
is a valuation in a policy of fire insurance, - Liable for actual loss, the third party has
the effect shall be the same as in a policy no direct recourse with the insurer but
of marine insurance.” only to the insured. The insured has
1. Open Policy: only the expense recourse to the insurer.
necessary to replace the thing lost or
injured in the condition it was at the C. Insurable interest
time of the injury. *Insurable interest is based on the interest
2. Valued Policy: the parties are bound by of the insured in the safety of persons and
the valuation, in the absence of fraud their property, who may maintain an
or mistake. action against him in case of their injury or
destruction, respectively.
E. Co-insurance clause
General Rule: Applies primarily to marine D. Meaning of “accident” and
insurance. “accidental” in casualty insurance
Exception: Co-insurance applies to fire *The terms “accident” and “accidental” as
insurance if expressly agreed upon. used in insurance contracts, have not
acquired any technical meaning. They are
CASUALTY INSURANCE:
construed by the courts in the ordinary
and common acceptation. Thus, the terms
A. Concept
Sec. 174 of the Insurance Code states have been taken to mean that which
that: “Casualty insurance is insurance happens by chance or fortuitously, without
covering loss or liability arising from intention or design, which is unexpected,
accident or mishap, excluding certain unusual and unforeseen. The terms do
types of loss which by law or custom are not, without qualification, exclude events
considered as falling exclusively within the resulting in damage or loss due to fault,
scope of other types of insurance such as recklessness or negligence of third parties.
*It is something that the insured did not
fire or marine. It includes, but is not
limited to, employer's liability insurance, foresee or though foreseen cannot be
avoided.
motor vehicle liability insurance, plate
*Accident or not, it must be taken from the
glass insurance, burglary and theft
viewpoint of the victim.
insurance, personal accident and health
insurance as written by non-life insurance E. Basis and extent of insurer’s liability
companies, and other substantially similar *The beneficiary is not designated, the
kinds of insurance.” proceeds will be given to the victims.
Q: What is the subject matter of the *The third party has direct recourse
casualty insurance? against the insurer. The insurer is purely
A: Life, property, liability and health liable.
brought by accident.
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SURETYSHIP: insurance on human lives and insurance


appertaining thereto or connected
A. Definition therewith.”
Sec. 175 of the Insurance Code states Sec. 180 of the Insurance Code states
that: “A contract of suretyship is an that: “An insurance upon life may be
agreement whereby a party called the made payable on the death of the person,
surety guarantees the performance by or on his surviving a specified period, or
another party called the principal or otherwise contingently on the continuance
obligor of an obligation or undertaking in or cessation of life.
favor of a third party called the obligee. It Every contract or pledge for the payment
includes official recognizances, of endowments or annuities shall be
stipulations, bonds or undertakings issued considered a life insurance contract for
by any company by virtue of and under purpose of this Code.
the provisions of Act No. 536, as amended In the absence of a judicial guardian, the
by Act No. 2206.” father, or in the latter's absence or
incapacity, the mother, or any minor, who
B. Nature of Liability of surety is an insured or a beneficiary under a
Sec. 176 of the Insurance Code
contract of life, health or accident
provides that: “The liability of the surety insurance, may exercise, in behalf of said
or sureties shall be joint and several with
minor, any right under the policy, without
the obligor and shall be limited to the necessity of court authority or the giving
amount of the bond. It is determined
of a bond, where the interest of the minor
strictly by the terms of the contract of in the particular act involved does not
suretyship in relation to the principal
exceed twenty thousand pesos. Such right
contract between the obligor and the may include, but shall not be limited to,
obligee.”
obtaining a policy loan, surrendering the
C. Distinctions between suretyship and policy, receiving the proceeds of the
property insurance policy, and giving the minor's consent to
any transaction on the policy.”
Suretyship Property
Insurance B. Kinds of Life Insurance
Accessory contract Principal Contract 1. Ordinary Life, General Life or Old
There are three There are two Line Policy – insured pays a fixed
parties: surety, parties: insurer and premium every year until he dies.
obligor and oblige insured Surrender value after 3 years.
Credit Contract of 2. Group Life – essentially a single
accommodation indemnity insurance contract that provides
Surety can recover Insurer has no such courage for money individuals.
from principal right; only right of 3. Limited Payment Policy – insured
subrogation pays premium for a limited period. If
Bond can be May be cancelled
he dies within the period, his
cancelled only with unilaterally either
consent of obligee, by insured or beneficiary is paid; if he outlives the
Commissioner, or insurer on grounds period, he does not get anything.
court provided by law 4. Endowment Policy – pays premium
Requires acceptance No need of for specified period. If he outlives the
of obligee to be acceptance by any period, the face value of the policy is
valid third party paid to him; if not, his beneficiaries
Risk-shifting device, Risk-distributing receive the benefit.
premium paid being device, premium 5. Term Insurance – insurer pays once
in the nature of a paid as a ratable only, and he is insured for a specified
service fee contribution to a
period. If he dies within the period, his
common fund
beneficiaries benefits. If he outlives the
period, no person benefits from the
LIFE INSURANCE: insurance.
6. Industrial Life – life insurance
A. Definition entitling the insured to pay premiums
Sec. 179 of the Insurance Code weekly, or where premiums are
provides that: “. Life insurance is payable monthly or oftener.
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owners or operators responsible for the


C. Liability of insurer in case of suicide accident sustained.
Sec. 180-A of the Insurance Code Q: What is the mandatory reason for this
states that: “The insurer in a life insurance type of insurance?
contract shall be liable in case of suicides A: To allow the registration or renewal of
only when it is committed after the policy registration of any motor vehicle.
has been in force for a period of two years
from the date of its issue or of its last B. Scope of coverage required
reinstatement, unless the policy provides Sec. 374 of the Insurance Code states
a shorter period: Provided, however, That that: “It shall be unlawful for any land
suicide committed in the state of insanity transportation operator or owner of a
shall be compensable regardless of the motor vehicle to operate the same in the
date of commission.” public highways unless there is in force in
*Recovery of the proceeds depends on the relation thereto a policy of insurance or
commission of the suicide. guaranty in cash or surety bond issued in
*In case of suicide, the insured may accordance with the provisions of this
recover only after two years from the date chapter to indemnify the death, bodily
the policy was issued or last injury, and/or damage to property of a
reinstatement. third-party or passenger, as the case may
*In case of suicide committed in the state be, arising from the use thereof.”
of insanity, it is compensable regardless of Sec. 376 of the Insurance Code states
the date of the commission. that: “The Land Transportation
Commission shall not allow the
D. Right to assign life insurance policy registration or renewal of registration of
Sec. 181 of the Insurance Code states
any motor vehicle without first requiring
that: “A policy of insurance upon life or
from the land transportation operator or
health may pass by transfer, will or
motor vehicle owner concerned the
succession to any person, whether he has
presentation and filing of a substantiating
an insurable interest or not, and such
documentation in a form approved by the
person may recover upon it whatever the
Commissioner evidencing that the policy
insured might have recovered. “
of insurance or guaranty in cash or surety
Sec. 182 of the Insurance Code states
bond required by this chapter is in effect.”
that: “Notice to an insurer of a transfer or
bequest thereof is not necessary to C. Persons subject to the requirement
preserve the validity of a policy of Sec. 377 of the Insurance Code
insurance upon life or health, unless provides that: “Every land transportation
thereby expressly required.“ operator and every owner of a motor
vehicle shall, before applying for the
E. Measure of indemnity
registration or renewal of registration of
Sec. 183 of the Insurance Code states
any motor vehicle, at his option, either
that: “Unless the interest of a person
secure an insurance policy or surety bond
insured is susceptible of exact pecuniary
issued by any insurance company
measurement, the measure of indemnity
authorized by the Commissioner or make
under a policy of insurance upon life or
a cash deposit in such amount as herein
health is the sum fixed in the policy.”
General Rule: Life policy is always valued required as limit of liability for purposes
Exception: If the creditor insured the life specified in section three hundred
of the debtor. seventy-four.
(1) In the case of a land transportation
COMPULSORY MOTOR VEHICLE LIABILITY operator, the insurance guaranty in cash
INSURANCE: or surety bond shall cover liability for
death or bodily injuries of third-parties
A. Reason for the requirement and/or passengers arising out of the use of
Purpose: To give immediate financial such vehicle in the amount not less than
assistance to victims of motor vehicle twelve thousand pesos per passenger or
accidents and/or their dependents, third party and an amount, for each of
especially if they are poor regardless of such categories, in any one accident of not
the financial capability of motor vehicle less than that set forth in the following
scale:
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(a) Motor vehicles with an authorized Sec. 378 of the Insurance Code
capacity of twenty-six or more provides that: “Any claim for death or
passengers: Fifty thousand pesos; injury to any passenger or third party
(b) Motor vehicles with an authorized pursuant to the provisions of this chapter
capacity of from twelve to twenty-five shall be paid without the necessity of
passengers: Forty thousand pesos; proving fault or negligence of any kind;
(c) Motor vehicles with an authorized Provided, That for purposes of this section:
capacity of from six to eleven passengers: (i) The total indemnity in respect of
Thirty thousand pesos; any person shall not exceed fifteen
(d) Motor vehicles with an authorized thousand pesos;
capacity of five or less passengers: Five (ii) The following proofs of loss, when
thousand pesos multiplied by the submitted under oath, shall be
authorized capacity. sufficient evidence to substantiate
Provided, however, That such cash deposit the claim: (a) Police report of
made to, or surety bond posted with, the accident; and
Commissioner shall be resorted to by him (b) Death certificate and evidence
in cases of accidents the indemnities for sufficient to establish the proper
which to third-parties and/or passengers payee; or (c) Medical report and
are not settled accordingly by the land evidence of medical or hospital
transportation operator and, in that event, disbursement in respect of which
the said cash deposit shall be replenished refund is claimed;
or such surety bond shall be restored with (iii) Claim may be made against one
sixty days after impairment or expiry, as motor vehicle only. In the case of
the case may be, by such land an occupant of a vehicle, claim
transportation operator, otherwise, he shall lie against the insurer of the
shall secure the insurance policy required vehicle in which the occupant is
by this chapter. The aforesaid cash deposit riding, mounting or dismounting
may be invested by the Commissioner in from. In any other case, claim shall
readily marketable government bonds lie against the insurer of the
and/or securities. directly offending vehicle. In all
(2) In the case of an owner of a motor cases, the right of the party paying
vehicle, the insurance or guaranty in cash the claim to recover against the
or surety bond shall cover liability for owner of the vehicle responsible for
death or injury to third parties in an the accident shall be maintained.“
amount not less than that set forth in the Q: How does the law protects the victim?
following scale in any one accident: A: By the provision under the NO FAULT
I. Private Cars INDEMNITY CLAUSE.
(a) Bantam : Twenty thousand pesos;
*No fault clause applies only to bodily
(b) Light : Twenty thousand pesos;
(c) Heavy : Thirty thousand pesos; physical injuries or death not to property
II. Other Private Vehicles damage.
(a) Tricycles, motorcyles, and scooters : Q: From whom should the injured recover?
Twelve thousand pesos; A: (a) In the case of an occupant of a
(b) Vehicles with an unladen weight of vehicle, claim shall lie against the insurer
2,600 kilos or less : Twenty thousand of the vehicle in which the occupant is
pesos; riding, mounting or dismounting from; (b)
(c) Vehicles with an unladen weight of If not an occupant, claim shall lie against
between 2,601 kilos and 3,930 kilos : the insurer of the directly offending
Thirty thousand pesos; vehicle; (c) In all cases, the right of the
(d) Vehicles with an unladen weight over party paying the claim to recover against
3,930 kilos : Fifty thousand pesos. the owner of the vehicle responsible for
The Commissioner may, if warranted, set
the accident shall be maintained.
forth schedule of indemnities for the
Examples:
payment of claims for death or bodily
a. A passenger rode Y taxi cab. The taxi
injuries with the coverages set forth
cab is insured by X company under the
herein.”
compulsory motor vehicle liability
D. No-Fault indemnity claim insurance. The taxi collided against a
MERALCO post.
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The passenger can claim against X investigation of claims arising under its
company without proving fault or policies;
negligence. Only documents that (d) not attempting in good faith to
prove the happening of the incident. effectuate prompt, fair and equitable
b. Passenger 1 received P15,000 under settlement of claims submitted in which
the no fault clause. His actual liability has become reasonably clear; or
expenses amount to P50,000. (e) compelling policyholders to institute
Q: Can he still recover the balance? suits to recover amounts due under its
From whom? policies by offering without justifiable
A: YES. Against the offending vehicle reason substantially less than the amounts
but this time he is required to prove ultimately recovered in suits brought by
fault or negligence. them.
(2) Evidence as to numbers and types of
E. Notice of claim valid and justifiable complaints to the
Sec. 384 of the Insurance Code states
Commissioner against an insurance
that: “Any person having any claim upon
company, and the Commissioner's
the policy issued pursuant to this Chapter
complaint experience with other insurance
shall, without any unnecessary delay,
companies writing similar lines of
present to the insurance company
insurance shall be admissible in evidence
concerned a written notice of claim setting
in an administrative or judicial proceeding
forth the nature, extent and duration of
brought under this section.
the injuries sustained as certified by a duly (3) If it is found, after notice and an
licensed physician. Notice of claim must opportunity to be heard, that an insurance
be filed within six months from date of company has violated this section, each
accident, otherwise, the claim shall be instance of non-compliance with
deemed waived. Action or suit for recovery paragraph (1) may be treated as a
of damage due to loss or injury must be separate violation of this section and shall
brought, in proper cases, with the be considered sufficient cause for the
Commissioner or the Courts within one suspension or revocation of the company's
year from denial of the claim, otherwise, certificate of authority.”
the claimant's right of action shall General Rule: Upon maturity of the
prescribe.” policy
Exception: Annuities payment
CLAIMS SETTLEMENT:
B. Claims for life insurance policies
A. Unfair claim settlement practices Sec. 242 of the Insurance Code
Sec. 241 of the Insurance Code states provides that: “The proceeds of a life
that: “(1) No insurance company doing insurance policy shall be paid immediately
business in the Philippines shall refuse, upon maturity of the policy, unless such
without just cause, to pay or settle claims proceeds are made payable in
arising under coverages provided by its installments or as an annuity, in which
policies, nor shall any such company case the installments, or annuities shall be
engage in unfair claim settlement paid as they become due: Provided,
practices. Any of the following acts by an however, That in the case of a policy
insurance company, if committed without maturing by the death of the insured, the
just cause and performed with such proceeds thereof shall be paid within sixty
frequency as to indicate a general days after presentation of the claim and
business practice, shall constitute unfair filing of the proof of the death of the
claim settlement practices: insured. Refusal or failure to pay the claim
(a) knowingly misrepresenting to within the time prescribed herein will
claimants pertinent facts or policy entitle the beneficiary to collect interest
provisions relating to coverage at issue; on the proceeds of the policy for the
(b) failing to acknowledge with reasonable
duration of the delay at the rate of twice
promptness pertinent communications
the ceiling prescribed by the Monetary
with respect to claims arising under its
Board, unless such failure or refusal to pay
policies;
(c) failing to adopt and implement is based on the ground that the claim is
fraudulent.
reasonable standards for the prompt

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The proceeds of the policy maturing by facie evidence of unreasonable delay in


the death of the insured payable to the payment.”
beneficiary shall include the discounted
value of all premiums paid in advance of
their due dates, but are not due and
payable at maturity.”

C. Claims for non-life insurance policies


Sec. 243 of the Insurance Code states
that: “The amount of any loss or damage
for which an insurer may be liable, under
any policy other than life insurance policy,
shall be paid within thirty days after proof
loss is received by the insurer and
TRANSPORTATION LAW
ascertainment of the loss or damage is
made either by agreement between the PRELIMINARY CONSIDERATIONS:
insured and the insurer or by arbitration;
but if such ascertainment is not had or A. Governing Laws
made within sixty days after such receipt 1. New Civil Code – Primary law
by the insurer of the proof of loss, then the 2. Warsaw Convention – for international
loss or damage shall be paid within ninety transportation by air
days after such receipt. Refusal or failure 3. Code of Commerce – governs
to pay the loss or damage within the time suppletorily; it governs maritime
prescribed herein will entitle the assured transaction
4. Carriage of Goods by Sea Act – for
to collect interest on the proceeds of the
transportation by sea; governs
policy for the duration of the delay at the
suppletorily
rate of twice the ceiling prescribed by the
5. Salvage Law
Monetary Board, unless such failure or 6. Public Service Act
refusal to pay is based on the ground that 7. Article XII Sec 11 on operation of public
the claim is fraudulent.” convenience of the 1987 Philippine
Constitution
D. Delay in payment of claims
Sec. 244 of the Insurance Code B. Concept of Public Utility & public
provides that: “In case of any litigation for service
the enforcement of any policy or contract Sec. 13 (b) of the Public Service Act
of insurance, it shall be the duty of the provides that: “The term 'public service'
Commissioner or the Court, as the case includes every person that now or
may be, to make a finding as to whether hereafter may own, operate, manage, or
the payment of the claim of the insured control in the Philippines, for hire or
has been unreasonably denied or compensation, with general or limited
withheld; and in the affirmative case, the clientele, whether permanent, occasional
insurance company shall be adjudged to or accidental, and done for general
pay damages which shall consist of business purposes, any common carrier,
attorney's fees and other expenses railroad, street railway, traction railway,
incurred by the insured person by reason sub-way motor vehicle, either for freight or
of such unreasonable denial or withholding passenger, or both with or without fixed
of payment plus interest of twice the route and whatever may be its
ceiling prescribed by the Monetary Board classification, freight or carrier service of
of the amount of the claim due the any class, express service, steamboat, or
insured, from the date following the time steamship line, pontines, ferries, and
prescribed in section two hundred forty- water craft, engaged in the transportation
two or in section two hundred forty-three, of passengers or freight or both, shipyard,
as the case may be, until the claim is fully marine railway, marine repair shop, wharf
satisfied; Provided, That the failure to pay or dock, ice plant, ice-refrigeration plant,
any such claim within the time prescribed canal, irrigation system, gas electric light,
in said sections shall be considered prima heat and power, water supply and power,
petroleum, sewerage system, wire or
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wireless communications system, wire or Sec. 18 of Article XII of the 1987


wireless broadcasting stations and other Constitution provides that: “The State
similar public services: Provided, however, may, in the interest of national welfare or
That a person engaged in agriculture, not defense, establish and operate vital
otherwise a public service, who owns a industries and, upon payment of just
motor vehicle and uses it personally compensation, transfer to public
and/or enters into a special contract ownership utilities and other private
whereby said motor vehicle is offered for enterprises to be operated by the
hire or compensation to a third party or Government.”
third engaged in agriculture, not itself or Q: What are the bases/reasons for
themselves a public service, for operation regulation of public utilities?
by the latter for a limited time and for a A: Basis: Police Power
Justification: Common good
specific purpose directly connected with
the cultivation of his or their farm, the D. Regulatory agencies
transportation, processing, and marketing 1. Land Transportation Franchising
of agricultural products of such third party Regulatory Board (LTFRB) – land
or third parties shall not be considered as transportation
operating a public service for the purposes 2. Land Transportation Office – issue
of this Act.” license to drivers
Public utilities are privately owned and 3. Maritime Industry Authority (MARINA) –
operated business whose services are water transportation
essential to the general public. 4. National Telecommunications
Case: National Development Company Commission – communication utilities
v CA and services, radio communications
systems, wire or wireless telephone
C. Constitutional limitations on and telegraph systems, radio and
operation of public utilities television broadcasting systems and
Sec. 11 of Article XII of the 1987
other similar public utilities
Constitution states that: “No franchise, 5. Energy Regulatory Board – electric or
certificate, or any other form of power companies
authorization for the operation of a public 6. National Water Resources Council –
utility shall be granted except to citizens water resources
of the Philippines or to corporations or 7. Civil Aeronautics Board – air
associations organized under the laws of transportation
the Philippines, at least sixty per centum Q: What conditions must concur in the
of whose capital is owned by such citizens; grant of certificate of public convenience
nor shall such franchise, certificate, or and necessity?
authorization be exclusive in character or A: 1. The grantee must be a citizen of the
for a longer period than fifty years. Neither Philippines or a corporation or entity 60%
shall any such franchise or right be of which is owned by such citizens; 2. The
granted except under the condition that it grantee must have sufficient financial
shall be subject to amendment, alteration, capability to undertake the service; and 3.
or repeal by the Congress when the The service will promote public interest
common good so requires. The State shall and convenience in a proper and suitable
encourage equity participation in public manner.
utilities by the general public. The *In Tatad v Garcia, the SC held that the
participation of foreign investors in the controlling factor is the citizenship of the
governing body of any public utility person operating a common carrier.
enterprise shall be limited to their Guiding Principles:
proportionate share in its capital, and all 1. Prior or Old Operator Rule – the first
the executive and managing officers of licensee will be protected in his
such corporation or association must be investment and will not be subjected
citizens of the Philippines.” to ruinous competition.
*The corporation must be a domestic *No certificate of public convenience
corporation and that 60% of the capital and necessity will be issued to other
must be owned by Filipino citizens. operator as long as the prior operator
still in operation and can satisfy the

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public and that it still has the capacity Implications being a common
to do so. carrier:
2. Protection Investment Rule – protects a. extraordinary diligence must be
from unfair competition exercised
3. Prior Applicant Rule – protects the first b. in case of damage, presumption of
applicant. Principle: all things being negligence on the part of the
equal common carrier
*Public interest is the first and paramount *It is the activity of the carrier that is
consideration. controlling.
Cases: A.F. Sanchez Brokerage, Inc
E. Concept of franchise and certificate v CA; Asia Lighterage v CA; De
of public convenience Guzman v CA
Franchise is a grant or privilege from the *The fact that there is no license at the
sovereign power. time of the incident happen is of no
Certificate of Public Convenience is a
moment for liability purposes.
form of regulation through an
2. Distinguished from private carrier
administrative agency.
Common Private
Q: Is a legislative franchise necessary
Carrier Carrier
before a public utility can be allowed to As to holds Contracts
secure a certificate of public convenience? availabilit himself out with
A: General Rule: NO. y: for all particular
Exception: If a pertinent law requires people individual
such legislative franchise. indiscriminat s or
Factors: ely groups
1. Public interest only
2. Public convenience As to Extraordinar Ordinary
3. Public necessity required y diligence diligence
diligence: is required is required
GENERAL CONCEPTS: As to Subject to Not
regulatio state subject to
A. Contract of transportation in general n: regulation state
Transportation is a contract whereby a regulation
person, natural or juridical, obligates to Stipulatio Parties may Parties
n limiting not agree on may limit
transport persons, goods, or both, from
liability: limiting the the
one place to another, by land, air, or carrier’s carrier’s
water, for a price or commission. liability liability,
*Importance: For liability purposes except when provided
provided by it is not
B. Perfection law contrary
There is a perfected contract when there to law,
was a meeting of the minds as to the morals or
subject matter and consideration. good
customs
C. Common Carrier Exemptin Prove Caso
1. Statutory definition g extraordinar fortuito,
Article 1732 of the New Civil Code circumsta y diligence Article
provides that: “Common carriers are nce: and Article 1174 NCC
persons, corporations, firms or 1734 NCC
Presumpti There is a No
associations engaged in the business
on of presumption presumpti
of carrying or transporting passengers Negligenc of fault or on of fault
or goods or both, by land, water, or air, e: negligence or
for compensation, offering their negligenc
services to the public.” e
- one that holds itself out as ready to Governing Law on Law on
engage in the transportation of law: common obligation
goods for hire as a public carriers s and
contracts
employment and not as a casual
occupation.
3. Distinguished from towage,
arrastre and stevedoring
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Distinctions: company like MERALCO distributing


electricity is a common carrier.
Towage Arrastre Stevedor 5. Parties to the contract of carriage
ing a. Carriage of passengers:
1. Common carrier
One vessel The The 2. Passengers
is hired to functions of function b. Carriage of goods:
bring an arrastre of 1. Shipper
another operator has stevedore 2. Carrier
vessel to nothing to s involves
another do with the the D. Registered owner rule and Kabit
place; trade and loading system
refers to a business of and General Rule: Registered owner rule is
service navigation, unloading
applicable in this jurisdiction.
rendered to nor to the of
Registered owner rule states that the
a vessel by use or coastwise
towing for operation of vessels person who is the registered owner of a
the mere vessels. He calling at vehicle is liable for any damages caused
purpose of is no the port. by the negligent operation of the vehicle
expediting different although the same was already sold or
her voyage from that of conveyed to another person at the time of
without a depositary the accident. The registered owner is
reference or
liable to the injured party subject to his
to any warehousem
circumstan an. right of recourse against the transferee or
ces of the buyer.
danger. Purpose of this rule: easy identification
*The SC held that the following services are not of the owner to be sued for liability.
considered a common carrier: Recourse: Registered owner may bring
1) purely arrastre services; the case to the court to sue the buyer or
*comparable to that as warehouseman and operator of the vehicle at fault.
depositor Exception: in case of stolen vehicle
2) purely stevedoring services; and registered owner is not liable.
*In the case of Duavit v CA, the SC held
3) purely towage services.
that the registered owner is not liable if
*In Crisostomo v CA, the SC held that the
the vehicle was taken from his garage
respondent being a travel agency is not a
without his knowledge or consent. To hold
common carrier because the services offered is
the registered owner liable would be
not one that carries passenger from one place to
absurd as it would be holding liable the
another.
owner of a stolen vehicle for an accident
4. Tests to determine common carrier
Tests: caused by the person who stole such
a. He must engaged in the business vehicle.
of carrying goods for others as a Kabit System is an arrangement
public employment and must hold whereby a person who has been granted a
himself out as ready to engage in certificate of public convenience allows
the transportation of goods for other persons who own motor vehicles to
person generally as a business and operate them under his license,
not as a casual occupation; sometimes for a fee or percentage of the
b. He must undertake to carry goods earnings.
of the kind to which his business is *Kabit system is invariably recognized as
confined; being contrary to public policy and
c. He must undertake to carry by the therefore void and inexistent under Article
method by which his business is 1409 of the New Civil Code.
conducted and over his established *If the registered owner and the buyer
roads; entered into this transaction they are In
d. The transportation must be for hire pari delicto thus, in case something
Case: First Philippine Industrial happen the court will not aid them. The
Corporation v CA court will leave them as they were.
*Under Sec. 22 of the Electric *This arrangement is a circumvention of
Power Distribution Reform Act, the the requirement for license.

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OBLIGATIONS OF THE COMMON CARRIER IN judgment of experts, constitutes such


A CONTRACT OF CARRIAGE OF GOODS: difference in value.”
Article 365 of the Code of
A. Vigilance over the goods Commerce provides that: “If, in
1. Duty to exercise extraordinary consequence of the damage, the
diligence Article 1733 of the New goods are rendered useless for sale
Civil Code states that: “Common and consumption for the purposes for
carriers, from the nature of their which they are properly destined, the
business and for reasons of public consignee shall not be bound to
policy, are bound to observe receive them, and he may have them
extraordinary diligence in the vigilance in the hands of the carrier, demanding
over the goods and for the safety of of the latter their value at the current
the passengers transported by them, price on that day. If among the
according to all the circumstances of damaged goods there should be some
each case. pieces in good condition and without
Such extraordinary diligence in the
any defect, the foregoing provision
vigilance over the goods is further shall be applicable with respect to
expressed in Articles 1734, 1735, and
those damaged and the consignee
1745, Nos. 5, 6, and 7, while the shall receive those which are sound,
extraordinary diligence for the safety
this segregation to be made by distinct
of the passengers is further set forth in and separate pieces and without
Articles 1755 and 1756.”
dividing a single object, unless the
Reason: The nature of the business is
consignee proves that impossibility of
imbued with public interest and public
conveniently making use of them in
policy; because of the exigencies of
this form. The same rule shall be
the business. The public has no choice
applied to merchandise in bales or
but to trust on the skills of the
packages, separating those parcels
employees of the common carrier. The
which appear sound.”
goods and the life of the passenger are Presumption of negligence
placed in the hands of the common Article 1735 of the New Civil Code
carrier. provides that: “In all cases other than
Article 363 of the Code of
those mentioned in Nos. 1, 2, 3, 4, and
Commerce provides that: “Outside of 5 of the preceding article, if the goods
the cases mentioned in the second
are lost, destroyed or deteriorated,
paragraph of Article 361, the carrier common carriers are presumed to
shall be obliged to deliver the goods
have been at fault or to have acted
shipped in the same condition in negligently, unless they prove that
which, according to the bill of lading,
they observed extraordinary diligence
they were found at the time they were as required in Article 1733.”
received, without any damage or 2. Duration of liability
impairment, and failing to do so, to Article 1736 of the New Civil Code
pay the value which those not states that: “The extraordinary
delivered may have at the point and at responsibility of the common carrier
the time at which their delivery should lasts from the time the goods are
have been made. If those not delivered unconditionally placed in the
form part of the goods transported, the possession of, and received by the
consignee may refuse to receive the carrier for transportation until the
latter, when he proves that he cannot same are delivered, actually or
make use of them independently of the constructively, by the carrier to the
others.” consignee, or to the person who has a
Article 364 of the Code of right to receive them, without
Commerce provides that: “If the prejudice to the provisions of Article
effect of the damage referred to in 1738.”
Article 361 is merely a diminution in Article 1737 of the New Civil Code
the value of the gods, the obligation of states that: “The common carrier's
the carrier shall be reduced to the duty to observe extraordinary
payment of the amount which, in the diligence over the goods remains in full

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force and effect even when they are Article 1739 of the New Civil
temporarily unloaded or stored in Code provides that: “In order that
transit, unless the shipper or owner the common carrier may be
has made use of the right of stoppage exempted from responsibility, the
in transitu.” natural disaster must have been
Article 1738 of the New Civil Code the proximate and only cause of
provides that: “The extraordinary the loss. However, the common
liability of the common carrier carrier must exercise due diligence
continues to be operative even during to prevent or minimize loss before,
the time the goods are stored in a during and after the occurrence of
warehouse of the carrier at the place flood, storm or other natural
of destination, until the consignee has disaster in order that the common
been advised of the arrival of the carrier may be exempted from
goods and has had reasonable liability for the loss, destruction, or
opportunity thereafter to remove them deterioration of the goods. The
or otherwise dispose of them.” same duty is incumbent upon the
3. Defenses of common carriers common carrier in case of an act of
Article 1734 of the New Civil Code
the public enemy referred to in
provides that: “Common carriers are
Article 1734, No. 2.”
responsible for the loss, destruction, or *Fire is not within the ambit of
deterioration of the goods, unless the natural disaster or calamity.
same is due to any of the following *Calamity includes thunderstorm.
causes only: *mechanical defect is not within
(1) Flood, storm, earthquake, lightning, the ambit of the natural disaster; it
or other natural disaster or calamity; is within the control of the common
(2) Act of the public enemy in war, carrier.
whether international or civil; Requisites:
(3) Act of omission of the shipper or 1. Proximate cause is the natural
owner of the goods; calamity
(4) The character of the goods or 2. Absence of negligence on the
defects in the packing or in the part of the common carrier
containers; 3. The common carrier must
(5) Order or act of competent public exercise due diligence to
authority.” prevent loss before, during and
*The enumeration is exclusive or a after the occurrence of the
closed list. disaster
General Rule: Common carriers are 4. Free from unreasonable delay
responsible for the loss, destruction or by the common carrier or
deterioration of the goods. unreasonable deviation
Exceptions: b. Public enemy
1. Flood, storm, earthquake, Article 1739 of the New Civil
lightning or other natural Code states that: “In order that the
disaster or calamity; common carrier may be exempted
2. Act of the public enemy in war
from responsibility, the natural
whether international or civil;
disaster must have been the
3. Act of omission of the shipper
proximate and only cause of the
or owner of the goods;
4. The character of the goods or loss. However, the common carrier
defects in the packaging or in must exercise due diligence to
the containers; and prevent or minimize loss before,
5. Order or act of the competent during and after the occurrence of
public authority flood, storm or other natural
Article 1740 of the New Civil Code disaster in order that the common
states that: “If the common carrier carrier may be exempted from
negligently incurs in delay in liability for the loss, destruction, or
transporting the goods, a natural deterioration of the goods. The
disaster shall not free such carrier from same duty is incumbent upon the
responsibility.” common carrier in case of an act of
a. Fortuitous event
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the public enemy referred to in e. Order of public authority


Article 1734, No. 2.” Article 1743 of the New Civil
*Public enemy includes pirates Code states that: “If through the
however it does not include order of public authority the goods
robbery and thief. are seized or destroyed, the
*Pirates are enemies of all civilized common carrier is not responsible,
nation. provided said public authority had
General Rule: rebels and power to issue the order.”
insurreccion is not included. *The important requisite is that the
Exception: If it they are cast of public authority has the power to
and took allegiance a hostile issue an order.
manner territory Case: Ganzon v CA
*Existence of actual war is 4. Contributory negligence of the
imperative. shipper
c. Act of omission on the part of Article 1741 of the New Civil Code
the shipper or owner of the states that: “If the shipper or owner
goods merely contributed to the loss,
*There must be no fault or destruction or deterioration of the
contributory negligence on the part goods, the proximate cause thereof
of the carrier. being the negligence of the common
*In Compania Maritima v CA, the
carrier, the latter shall be liable in
SC held that the common carrier is
damages, which however, shall be
also at fault; the common carrier
equitably reduced.”
should have exercise extraordinary 5. Stipulation limiting liability of
diligence by not relying solely on carrier
the statement of the shipper; it Article 1744 of the New Civil Code
should have conducted its own states that: “A stipulation between the
weighing. In this case the common common carrier and the shipper or
carrier is not totally absolved from owner limiting the liability of the
its liability. former for the loss, destruction, or
d. Improper packing deterioration of the goods to a degree
Article 1742 of the New Civil
less than extraordinary diligence shall
Code states that: “Even if the loss,
be valid, provided it be:
destruction, or deterioration of the (1) In writing, signed by the shipper or
goods should be caused by the owner;
character of the goods, or the (2) Supported by a valuable
faulty nature of the packing or of consideration other than the service
the containers, the common carrier rendered by the common carrier; and
must exercise due diligence to (3) Reasonable, just and not contrary
forestall or lessen the loss.” to public policy.”
*If the defect is apparent, the *This is for the benefit of the carrier.
carrier may refuse to accept the Consideration: Reduction of fare
goods for carriage; if the shipper *The stipulation must be in writing for
insists, the remedy is to make a the purpose of preventing abuse from
protestation; make a foul bill of the carrier.
Article 1748 of the New Civil Code
lading.
*In Iron Bulk v CA (Dec. 8, 2003), provides that: “An agreement limiting
carrier issued pro forma bill of the common carrier's liability for delay
lading stated where in that it on account of strikes or riots is valid.”
Article 1749 of the New Civil Code
accepted goods in good condition.
states that: “A stipulation that the
The goods arrived defective. The
common carrier's liability is limited to
SC held that the carrier is not
the value of the goods appearing in
exempt from liability because it
the bill of lading, unless the shipper or
accepted the goods without
owner declares a greater value, is
protestation.
*Foul Bill of Lading preserves the binding.”
Article 1750 of the New Civil Code
right of the carrier to use the
provides that: “A contract fixing the
excuse provided in 1734.

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sum that may be recovered by the family, or of a man of ordinary


owner or shipper for the loss, prudence in the vigilance over the
destruction, or deterioration of the movables transported; (5) That the
goods is valid, if it is reasonable and common carrier shall not be
just under the circumstances, and has responsible for the acts or omission
been fairly and freely agreed upon.” of his or its employees;
a. Requisites (6) That the common carrier's
Article 1744 of the New Civil liability for acts committed by
Code states that: “A stipulation thieves, or of robbers who do not
between the common carrier and act with grave or irresistible threat,
the shipper or owner limiting the violence or force, is dispensed with
liability of the former for the loss, or diminished;
destruction, or deterioration of the (7) That the common carrier is not
goods to a degree less than responsible for the loss,
extraordinary diligence shall be destruction, or deterioration of
valid, provided it be: goods on account of the defective
(1) In writing, signed by the shipper condition of the car, vehicle, ship,
or owner; airplane or other equipment used
(2) Supported by a valuable in the contract of carriage.”
consideration other than the *Even if they agreed with regard to
service rendered by the common numbers 1,2 and 3, the stipulation
carrier; and is void because it is contrary to
(3) Reasonable, just and not public policy because all these
contrary to public policy.” stipulations exempt the carrier
Article 1751 of the New Civil
from liability.
Code provides that: “The fact that General Rule: The degree of
the common carrier has no diligence may be lowered
competitor along the line or route, Exception: Not lower than that of
or a part thereof, to which the a good father of a family.
contract refers shall be taken into General Rule: stipulations
consideration on the question of exempting from liability acts
whether or not a stipulation limiting committed by robbers and thieves
the common carrier's liability is who do not act with grave threat or
reasonable, just and in consonance irresistible threats are not valid.
with public policy.” Exception: In case the robbers or
*Liability can be limited but cannot thieves used grave threat or
be totally exempted. irresistible threats.
*Stipulations reducing diligence or *In this case, the presumption of
limiting liability must be in writing negligence is still applicable, the
to be enforceable. stipulation only affects the
b. Invalid stipulations outcome of the case.
Article 1745 of the New Civil c. Effect of delay
Code states that: “Any of the Article 1747 of the New Civil
following or similar stipulations Code states that: “If the common
shall be considered unreasonable, carrier, without just cause, delays
unjust and contrary to public policy: the transportation of the goods or
(1) That the goods are transported changes the stipulated or usual
at the risk of the owner or shipper; route, the contract limiting the
(2) That the common carrier will common carrier's liability cannot be
not be liable for any loss, availed of in case of the loss,
destruction, or deterioration of the destruction, or deterioration of the
goods; goods.”
(3) That the common carrier need *Delay will prevent the carrier from
not observe any diligence in the raising natural disaster as a
custody of the goods; defense and that the agreement
(4) That the common carrier shall
limiting its liability cannot be raised
exercise a degree of diligence less
as a defense.
than that of a good father of a

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d. Rule on presumption of *When a common carrier


negligence despite stipulation undertakes to convey goods, the
Article 1752 of the New Civil law implies a contract that they
Code states that: “Even when shall be delivered at destination
there is an agreement limiting the within a reasonable time, in the
liability of the common carrier in absence of any agreement as to
the vigilance over the goods, the the time of delivery.
common carrier is disputably *Mercantile usage or practice
presumed to have been negligent
in case of their loss, destruction or With Without
deterioration.” stipulation stipulation
B. Other obligations Carrier is 1. Within a
1. Duty to accept goods bound to fulfil reasonable
a. Grounds for valid refusal to the contract time.
and is liable 2. Carrier is
accept goods
for any delay; bound to
i. General Rule: Goods sought
no matter forward
to be transported are from what them in the
dangerous objects or cause it may first
substances including dynamite have arisen shipment of
and other explosives; the same or
Exception: Carriers that are similar
permitted or allowed to goods
transport dangerous objects or which he
may make
substances for the reason that
to the point
it is their function to do so or it of delivery
is their operation.
ii. Goods are unfit for b. Consequences of delay
transportation; Article 1740 of the New Civil
*This can be found under Article Code provides that: “If the
356 of the Code of Commerce common carrier negligently incurs
iii. Acceptance would result in
in delay in transporting the goods,
overloading;
a natural disaster shall not free
iv. Contrabands or illegal goods;
v. Goods are injurious to health; such carrier from responsibility.”
vi. Goods will be exposed to Article 1747 of the New Civil
untoward danger like flood, Code provides that: “If the
capture by enemies and the common carrier, without just
like; cause, delays the transportation of
vii. Goods like livestock will be the goods or changes the
exposed to disease; stipulated or usual route, the
viii.Strike; and contract limiting the common
ix. Failure to tender goods on time carrier's liability cannot be availed
2. Duty to deliver goods of in case of the loss, destruction,
a. Time of delivery or deterioration of the goods.”
General Rule: It is by stipulation Article 370 of the Code of
Exception: In the absence of
Commerce provides that: “If a
stipulation Code of Commerce
period has been fixed for the
governs.
delivery of the goods, it must be
Article 358 of the Code of
made within such time, and, for
Commerce provides that: “If there
failure to do so, the carrier shall
is no period fixed for the delivery of
pay the indemnity stipulated in the
the goods the carrier shall be
bill of lading, neither the shipper
bound to forward them in the first
nor the consignee being entitled to
shipment of the same or similar
anything else. If no indemnity has
goods which he may make to the
been stipulated and the delay
point where he must deliver them;
exceeds the time fixed in the bill of
and should he not do so, the
lading, the carrier shall be liable for
damages caused by the delay
should be for his account.”
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the damages which the delay may conveyance, reserving his right to
have caused.” proceed against the latter if he was
Article 371 of the Code of not the party directly responsible
Commerce provides that: “In case for the fault which gave rise to the
of delay through the fault of the claim of the shipper or consignee.
carrier, referred to in the preceding The carrier who makes the delivery
articles, the consignee may leave shall likewise acquire all the actins
the goods transported in the hands and rights of those who preceded
of the former, advising him thereof him in the conveyance. The shipper
in writing before their arrival at the and the consignee shall have an
point of destination. When this immediate right of action against
abandonment takes place, the the carrier who executed the
carrier shall pay the full value of transportation contract, or against
the goods as if they had been lost the other carriers who may have
or mislaid. If the abandonment is received the goods transported
not made, the indemnification for without reservation. However, the
losses and damages by reason of reservation made by the latter shall
the delay cannot exceed the not relieve them from the
current price which the goods responsibilities which they may
transported would have had on the have incurred by their own acts.”
day and at the place in which they Article 374 of the Code of
should have been delivered; this Commerce states that: “The
same rule is to be observed in all consignees to whom the shipment
other cases in which this indemnity was made may not defer the
may be due.” payment of the expenses and
Article 372 of the Code of transportation charges of the goods
Commerce states that: “The value they receive after the lapse of 24
of the goods which the carrier must hours following their delivery; and
pay in cases of loss or in case of delay in this payment,
misplacement shall be determined the carrier may demand the judicial
in accordance with that declared in sale of the goods transported in an
the bill of lading, the shipper not amount necessary to cover the
being allowed to present proof that cost of transportation and the
among the goods declared therein expenses incurred.”
there were articles of greater value Effects of delay:
and money. Horses, vehicles, 1. Excusable delay in carriage
vessels, equipment and all other merely suspends and generally
principal and accessory means of does not terminate the contract
transportation shall be especially of carriage. When the cause is
bound in favour of the shipper, removed, the master must
although with respect to railroads proceed with the voyage and
said liability shall be subordinated make delivery;
to the provisions of the laws of 2. Carrier remains duty bound to
concession with respect to the exercise extraordinary
property, and to what this Code diligence;
3. Natural disaster shall not free
established as to the manner and
the carrier from responsibility;
form of effecting seizures and
4. If delay is without just cause,
attachments against said
the contract limiting the
companies.”
common carrier’s liability
Article 373 of the Code of
cannot be availed of in case of
Commerce states that: “The
loss or deterioration of the
carrier who makes the delivery of
goods.
the merchandise to the consignee
c. Place of Delivery
by virtue of combined agreements Article 360 of the Code of
or services with other carriers shall Commerce provides that: “The
assume the obligations of those shipper, without changing the
who preceded him in the
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place where the delivery is to be damages; and the SC said that these
made, may change the claims can still prosper in because
consignment of the goods which he there is still a breach of contract of
delivered to the carrier, provided carriage.
that at the time of ordering the *Behavior of the employees towards to
change of consignee the bill of passengers is also a factor considered
lading signed by the carrier, if one by the court to rule against a common
has been issued, be returned to carrier.
him, in exchange for another *In CAL v PAL, the SC held that
wherein the novation of the hijacking of the airplane is considered
contract appears. The expenses to be a force majeure thus cannot held
which this change of consignment the carrier liable.
Case: Singapore Airline v Andion
occasions shall be for the account
Fernandez
of the shipper.”
*In Japan Airlines v Asuncion
d. To whom delivery shall be
(January 28, 2005), the SC held that
made
Article 368 of the Code of the things invoked by the respondent
Commerce provides that: “The do not fall within the ambit of
carrier must deliver to the extraordinary diligence. Though it is
consignee, without any delay or the duty of the carrier to check that
obstruction, the goods which he travel documents are with the
may have received, by the mere passengers but it is not under the
fact of being named in the bill of obligation of the carrier to check the
lading to receive them; and if he veracity of the information in the travel
does not do so, he shall be liable document; it also held that the
for the damages which may be obligation of the carrier is limited to
caused thereby.” endorsing and not to influence. The
Article 369 of the Code of issue of whether or not an alien be
Commerce provides that: “If the admitted entrance to a country is a
consignee cannot be found at the sovereign act and such cannot be
residence indicated in the bill of interfered by the petitioner.
lading, or if he refuses to pay the 2. Duration of liability
*The carrier is bound to exercise
transportation charges and
utmost diligence with respect to
expenses, or if he refuses to
passengers the moment the person
receive the goods, the municipal
who purchases the ticket or token from
judge, where there is none of the
the carrier presents himself at the
first instance, shall provides for
proper place and in a proper manner to
their deposit at the disposal of the
be transported. Such person must
shipper, this deposit producing all
have a bona fide intention to use the
the effects of delivery without
facilities of the carrier, possess
prejudice to third parties with a
sufficient fare with which to pay for his
better right.”
passage, and present himself to the
OBLIGATIONS OF THE COMMON CARRIER IN carrier for transportation in the place
A CONTRACT OF CARRIAGE OF PASSENGERS: and manner provided.
*In LRTA v Navidad, the SC held the
A. Safety of Passengers petitioner carrier liable for breach of
1. Duty to observe utmost diligence contract. The SC held that Nicanor
Article 1755 of the New Civil Code Navidad was a passenger when he
provides that: “A common carrier is died after he fell on the LRT tracks and
bound to carry the passengers safely was struck by a moving train. He was
as far as human care and foresight can considered a passenger because he
provide, using the utmost diligence of entered the LRT station after having
very cautious persons, with a due purchased a token and he fell while he
regard for all the circumstances.” was on the platform waiting for a train.
*There are claims not really focused on Thus, he was where he was supposed
death, injuries, loss or damage of
goods but concentrates on moral
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to be with the intention of boarding a Article 1759 of the New Civil Code
train. provides that: “Common carriers are
*Once created, the relationship will not liable for the death of or injuries to
ordinarily terminate until the passengers through the negligence or
passenger has, after reaching his wilful acts of the former's employees,
destination, safely alighted from the although such employees may have
carrier’s conveyance or has had a acted beyond the scope of their
reasonable opportunity to leave the authority or in violation of the orders of
carrier’s premises. All persons who the common carriers.
remain on the premises within a This liability of the common carriers
reasonable time after leaving the does not cease upon proof that they
conveyance are to be deemed exercised all the diligence of a good
passengers, and what is a reasonable father of a family in the selection and
time or a reasonable delay within this supervision of their employees.”
rule is to be determined from all the Case: Maranan v Perez
circumstances, and includes 5. Liability for acts of strangers
Article 1763 of the New Civil Code
reasonable time to look after his
provides that: “A common carrier is
baggage and prepare for his
responsible for injuries suffered by a
departure.
*In La Mallorca v CA, the SC held passenger on account of the wilful acts
that there was a breach of duty to or negligence of other passengers or of
exercise extraordinary diligence with strangers, if the common carrier's
respect to the 4 year old child and the employees through the exercise of the
carrier is liable as a consequence. The diligence of a good father of a family
presence of passengers near the bus could have prevented or stopped the
was not unreasonable and they were, act or omission. “
Case: Bachelor Express v CA
therefore, to be considered still as
6. Effect of stipulation on liability
passengers of the carrier, entitled to Article 1757 of the New Civil Code
the protection under their contract. provides that: “The responsibility of a
*In Aboitiz Shipping Corporation v
common carrier for the safety of
CA, the SC held that extraordinary
passengers as required in Articles
diligence was still owed to AV at the
1733 and 1755 cannot be dispensed
time of the accident. It was ruled that
with or lessened by stipulation, by the
AV’s presence in the premises was not
posting of notices, by statements on
without cause. The victim had to claim
tickets, or otherwise.”
his baggage which was possible only Article 1758 of the New Civil Code
one hour after the vessel arrived since provides that: “When a passenger is
it was the standard procedure in the carried gratuitously, a stipulation
case of petitioner’s vessels that the limiting the common carrier's liability
unloading operation shall start only for negligence is valid, but not for
after that time. wilful acts or gross negligence.
*The differences between the La The reduction of fare does not justify
Mallorca case and Aboitiz Shipping any limitation of the common carrier's
Corporation are: 1. The business is liability.”
different from that of La Mallorca case; Article 1760 of the New Civil Code
and 2. The capacity of passengers and states that: “The common carrier's
baggages are different responsibility prescribed in the
3. Presumption of negligence preceding article cannot be eliminated
Article 1756 of the New Civil Code
or limited by stipulation, by the posting
states that: “In case of death of or
of notices, by statements on the
injuries to passengers, common
tickets or otherwise.”
carriers are presumed to have been at
fault or to have acted negligently, B. Passenger’s Baggages
unless they prove that they observed Article 1754 of the New Civil Code
extraordinary diligence as prescribed provides that: “The provisions of Articles
in Articles 1733 and 1755.” 1733 to 1753 shall apply to the
4. Liability for acts of employees passenger's baggage which is not in his

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personal custody or in that of his shall be responsible for the baggage as


employee. As to other baggage, the rules depositaries, provided that notice was
in Articles 1998 and 2000 to 2003 given to them or its employees, and the
concerning the responsibility of hotel- passenger took the necessary precaution,
keepers shall be applicable.” which the carrier has advised them
Article 1998 of the New Civil Code relative to the care and vigilance of their
states that: “The deposit of effects made baggage. In case of loss due to the fault
by the travellers in hotels or inns shall also of the passenger the carrier will not be
be regarded as necessary. The keepers of liable.
hotels or inns shall be responsible for *They are not absolutely responsible as
them as depositaries, provided that notice depository because the law requires
was given to them, or to their employees, notice.
of the effects brought by the guests and *It is also required to declare the value of
that, on the part of the latter, they take the baggage.
the precautions which said hotel-keepers *The carrier who has in his custody the
or their substitutes advised relative to the baggage of the passenger to be carried
care and vigilance of their effects.” like any other goods is required to observe
Article 2000 of the New Civil Code extraordinary diligence. In case of loss or
states that: “The responsibility referred to damage the carrier is presumed negligent.
in the two preceding articles shall include
OBLIGATIONS OF THE SHIPPER, CONSIGNEE
the loss of, or injury to the personal
AND PASSENGER:
property of the guests caused by the
servants or employees of the keepers of A. Effect of negligence of shipper or
hotels or inns as well as strangers; but not passenger Article 1741 of the New
that which may proceed from any force Civil Code states that: “If the shipper or
majeure. The fact that travellers are owner merely contributed to the loss,
constrained to rely on the vigilance of the destruction or deterioration of the goods,
keeper of the hotels or inns shall be the proximate cause thereof being the
considered in determining the degree of negligence of the common carrier, the
care required of him.” latter shall be liable in damages, which
Article 2001 of the New Civil Code
however, shall be equitably reduced.”
provides that: “The act of a thief or robber, Article 1761 of the New Civil Code
who has entered the hotel is not deemed provides that: “The passenger must
force majeure, unless it is done with the observe the diligence of a good father of a
use of arms or through an irresistible family to avoid injury to himself.”
force.” Article 1762 of the New Civil Code
Article 2002 of the New Civil Code states that: “The contributory negligence
provides that: “The hotel-keeper is not of the passenger does not bar recovery of
liable for compensation if the loss is due to damages for his death or injuries, if the
the acts of the guest, his family, servants proximate cause thereof is the negligence
or visitors, or if the loss arises from the of the common carrier, but the amount of
character of the things brought into the damages shall be equitably reduced.”
hotel.” *The shipper is also obliged to exercise
Article 2003 of the New Civil Code due diligence in avoiding damage or injury.
provides that: “The hotel-keeper cannot *With respect to carriage of passengers,
free himself from responsibility by posting the said passengers are likewise bound to
notices to the effect that he is not liable observe due diligence to avoid injury.
for the articles brought by the guest. Any *The contributory negligence on the part
stipulation between the hotel-keeper and of the passenger is not a defense that will
the guest whereby the responsibility of the excuse the carrier from liability. It will only
former as set forth in articles 1998 to mitigate such liability.
2001 is suppressed or diminished shall be *The carrier may be able to prove that the
void.” only cause of the loss of the goods is any
*The baggage in the personal custody of of the following acts of the shipper:
the passenger or his employee in that the 1. failure of the shipper to disclose the
baggage in transit will be considered as nature of the goods;
necessary deposits. The common carrier

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2. improper marking or direction as to Article 375 of the Code of Commerce


destination; and provides that: “The goods transported
3. improper loading when he assumed shall be especially bound to answer for the
such responsibility. cost of transportation and for the
*The shipper must likewise see to it that expenses and fees incurred for them
the goods are properly packed; otherwise, during their conveyance and until the
liability of the carrier may be mitigated or moment of their delivery. This special right
barred depending on the circumstances. shall prescribe 8 days after the delivery
has been made, and once prescribed, the
B. Payment of freight
Who will pay: carrier shall have no other action than that
Shipper - before or at the time he delivers corresponding to him as an ordinary
the goods to the carrier for shipment. creditor.”
Consignee - if agreed upon by the parties
at the point of destination is bound by C. Liability for demurrage
Demurrage is the compensation provided
such stipulation the moment he accepts
for in the contract of affreightment for the
the goods.
Passengers - they are contractually bound detention of the vessel beyond the time
to pay the fare within such time as agreed on for loading and unloading. It is a
prescribed by regulations or by the carrier. claim for damages for failure to accept
Time to pay: delivery.
Tickets are purchased in advance from *Liability for demurrage exists only when
ticket outlets. expressly stipulated in the contract.
Consignees to whom the shipment was
made may not defer the payment of the EXTRAORDINARY DILIGENCE:
expenses and transportation charges of
A. Underlying reason
the goods they receive after the lapse of Reasons:
24 hours following their delivery. 1. From the nature of the business
*In case of delay in payment, the carrier and for reasons of public policy;
may demand the judicial sale of the goods 2. Relationship of trust;
transported in an amount necessary to 3. Business is impressed with a
cover the cost of transportation and the special public duty;
expenses incurred. 4. Possession of the goods;
Article 374 of the Code of Commerce 5. Preciousness of human life
provides that: “The carrier who makes the
B. Effect of Stipulation
delivery of the merchandise to the
Article 1744 of the New Civil Code
consignee by virtue of combined
states that: “A stipulation between the
agreements or services with other carriers
common carrier and the shipper or
shall assume the obligations of those who
owner limiting the liability of the
preceded him in the conveyance,
former for the loss, destruction, or
reserving his right to proceed against the
deterioration of the goods to a degree
latter if he was not the party directly
less than extraordinary diligence shall
responsible for the fault which gave rise to
be valid, provided it be:
the claim of the shipper or consignee. The (1) In writing, signed by the shipper or
carrier who makes the delivery shall owner;
likewise acquire all the actions and rights (2) Supported by a valuable
of those who preceded him in the consideration other than the service
conveyance. The shipper and the rendered by the common carrier; and
consignee shall have an immediate right (3) Reasonable, just and not contrary
of action against the carrier who executed to public policy.”
the transportation contract, or against the Article 1757 of the New Civil Code
other carriers who may have received the states that: “The responsibility of a
goods transported without reservation. common carrier for the safety of
However, the reservation made by the passengers as required in Articles
latter shall not relieve them from the 1733 and 1755 cannot be dispensed
responsibilities which they may have with or lessened by stipulation, by the
incurred by their own acts.” posting of notices, by statements on
tickets, or otherwise.”

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Article 1758 of the New Civil Code limit himself to the financial
states that: “When a passenger is administration of the vessel, and
carried gratuitously, a stipulation shall intrust the navigation to a
limiting the common carrier's liability person possessing the
for negligence is valid, but not for qualifications required by said
wilful acts or gross negligence. ordinances and regulations.”
The reduction of fare does not justify *Extraordinary diligence requires
any limitation of the common carrier's that the ship which will transport
liability.” the passengers and goods is
Article 1760 of the New Civil Code seaworthy.
states that: “The common carrier's *The carriers are deemed to
responsibility prescribed in the warrant impliedly the
preceding article cannot be eliminated seaworthiness of the ship. The
or limited by stipulation, by the posting failure of a common carrier to
of notices, by statements on the maintain in seaworthy condition
tickets or otherwise.” the vessel involved in its contract
of carriage is a clear breach of its
C. Extraordinary diligence in carriage duty prescribed in Article 1755 of
by sea the NCC.
1. Seaworthiness of the vessel *Shippers of goods are not
Sec. 3 [1] of the COGSA
expected to inquire into the
provides that: “The carrier shall be
vessel’s seaworthiness and
bound before and at the beginning
compliance with all maritime laws.
of the voyage to exercise due *The unseaworthiness can be
diligence to — established by the fact that it did
(a) Make the ship seaworthy;
not withstand the natural and
(b) Properly man,equip, and supply
inevitable action of the sea.
the ship;
2. Overloading
(c) Make the holds, refrigerating
*Duty to exercise due diligence
and cooling chambers, and all
includes the duty to take
other parts of the ship in which
passengers or cargoes that are
goods are carried, fit and safe for
within the carrying capacity of the
their reception, carriage, and
vessel.
preservation.” 3. Proper storage
Sec. 3 [2] of the COGSA provides *The ship must not be only
that: “The carrier shall properly and seaworthy but it must also be
carefully load, handle, stow, carry, cargoworthy. The ship must be an
keep, care for, and discharge the efficient storehouse for her cargo.
goods carried.” *The vessel must be adequately
Sec. 116 of the IC equipped and properly manned.
Sec. 119 of the IC 4. Obligation of captain and crew
Article 609 of the Code of *If the negligence of the captain
Commerce states that: “Captains, and crew can be traced to the fact
masters or patrons of vessels must that they are really incompetent,
be Filipinos, have legal capacity to the Limited Liability Rule cannot be
contract in accordance with this invoked because the ship owner
code, and prove the skill, capacity, may be deemed negligent.
and qualifications necessary to 5. Rule on deviation and
command and direct the vessel, as transhipment Deviation
established by marine or *If route is stipulated upon by the
navigation laws, ordinances, or shipper and carrier, carrier can’t
regulations, and must not be change unless due to force
disqualified according to the same majeure.
for the discharge of the duties of *Carrier shall be liable for all losses
the position. If the owner of a suffered from any other cause,
vessel desires to be the captain beside the sum stipulated for such
thereof, without having the legal case.
qualifications therefor, he shall

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*If due to said force majeure he packages or bags particularly those


took another route and incurred hand carried. Airline companies
expenses by reason thereof, he are required to inspect each and
shall be reimbursed for such every cargo brought into the
increase upon formal proof thereof aircraft (RA 6235).
(Art. 359, Code of Commerce). E. Extraordinary diligence in carriage
Transshipment is the act of taking by air
cargo out of one ship and loading it 1. Airworthiness - an aircraft, its
in another. engines, propellers and other
*When done without legal excuse, components and accessories are of
however competent and safe the proper design and construction, and
vessel into which the transfer is are safe for air navigation purposes,
made, is a violation of the contract such design and construction being
and an infringement of the right of consistent with accepted engineering
the shipper and subjects the carrier practice and in accordance with
to liability if the freight is lost even aerodynamic laws and aircraft science
by a cause otherwise excepted (RA 779).
(Magellan Manufacturing Corp. v. 2. Competent and well trained crew
CA). 3. To take the required and prescribed
Article 359 of the Code of route
Commerce provides that: “If there 4. Adverse weather conditions or
is an agreement between the extreme climatic changes are some of
shipper and the carrier as to the the perils involved in air travel
road over which the conveyance is consequence of which the passenger
to be made, the carrier may not must assume or expect.
5. RA 6235 (An Act Prohibiting
change the route, unless it be by
Certain Acts Inimical to Civil Aviation
reason of force majeure; and
and for Other Purposes) - acts
should he do so without this cause,
punishable:
he shall be liable for all the losses
a. to compel a change in the course
which the goods he transports may
or destination of an aircraft of
suffer from any other cause, beside
Philippine registry; or
paying the sum which may have b. to seize or usurp control of the
been stipulated for such case. aircraft while in flight.
When on account of said cause of
force majeure, the carrier had to ACTIONS IN CASE OF BREACH OF CONTRACT
take another route which produced OF CARRIAGE:
an increase in transportation
charges, he shall be reimbursed for A. Causes of action and
such increase upon formal proof nature/extent of liability (culpa
thereof.” contractual, culpa aquiliana and
culpa delictual)
D. Extraordinary diligence in carriage Culpa contractual only the carrier is
by land primarily liable and not the driver.
1. Vehicle’s condition Reason: There is no privity between
*Owners are required to make sure the driver and the passenger.
that the vehicles they are using are *The party to be impleaded is the
in good order and condition. carrier itself.
2. Traffic rules (RA 4136) Basis: Article 1759 of the New Civil
*In cases involving breach of Code
contract of carriage, proof of Culpa delictual/criminal the driver is
violation of traffic rules confirms primarily liable. The carrier is
that the carrier failed to exercise subsidiarily liable only if the driver is
extraordinary diligence. convicted and declared insolvent.
3. Obligation to Inspect Basis: Article 100 of the Revised Penal
*in overland transportation, Code
common carrier is not bound nor Culpa aquiliana the carrier and the
empowered to make an driver are solidarily liable as joint
examination of the contents of tortfeasor.
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Basis: Article 2180 of the New Civil *One year period applies to
Code shipper, assignee, insurer,
subrogees, and successor in
B. Prescriptive period and conditions interest.
precedent *One year period does not apply in
1. Overland transportation of
cases of delay or misdelivery.
goods and coastwise shipping
(Domestic) International Carriage of Goods
Article 366 of the Code of by Sea Sec. 3 [6] of the COGSA
Commerce provides that: “Within substantially provides that in case
the 24 hours following the receipt of patent damage, the shipper
of the merchandise, the claim should file a claim with the carrier
against the carrier for damage or immediately upon delivery. In case
average which may be found of latent damage, the shipper
therein upon opening the should file a claim with the carrier
packages, may be made, provided within 3 days from delivery. Action
that the indications of the damage for loss or damage to the cargo
or average which gives rise to the should be brought within one year
claim cannot be ascertained from after: delivery of the goods
the outside part of such packages, (delivered but damaged goods); or
in which case the claim shall be the date when the goods should
admitted only at the time of have been delivered (loss).
receipt. After the periods *The filing of a notice of claim is
mentioned have elapsed, or the not a condition precedent.
transportation charges have been
paid, no claim shall be admitted Recoverable Damages
against the carrier with regard to The court may award the following
the condition in which the goods damages:
transported were delivered.” 1. Actual/Compensatory Damages
*Prior notice of claim does not 2. Temperate Damages
apply to misdelivery of goods. 3. Liquidated Damages
Purpose of notice: To inform the 4. Exemplary Damages
5. Moral Damages
carrier that the shipment has been
6. Nominal Damages
damaged and that it is charged
with liability therefor, and to give it
Actual/Compensatory damages are
an opportunity to make an
those awarded to the aggrieved party as
investigation and fix responsibility
adequate compensation only for such
while the matter is fresh.
pecuniary loss suffered by him as he has
*The filing of notice of claim is a
alleged and duly proved.
condition precedent for recovery in
Article 2199 of the Civil Code states
case of damage condition of the
that: “Except as provided by law or by
goods.
*Not provided by Article 366 of the stipulation, one is entitled to an adequate
Code of Commerce. Thus, in such compensation only for such pecuniary loss
absence, the New Civil Code rules suffered by him as he has duly proved.
on prescription apply. Such compensation is referred to as actual
Prescriptive period: or compensatory damages.”
General Rule: If written, 10 years, *To claim this award, proving the amount
if not written, 6 years is necessary.
Exceptions: *Procedures or plastic surgeries performed
1. COGSA – 1 year to restore the part of the body injured are
2. Warsaw Convention – 2 years
included as a component of actual
Example: Q: In case of pending damages.
extrajudicial claim, does it suspend Temperate damages or moderate
the one year period? damages these are damages the amount
A: NO of which is left to the sound discretion of
the court, but it is necessary that there be
some injury or pecuniary loss established,
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the exact amount of which, could not be *This is awarded to prevent other carrier
determined by the plaintiff by reason of to commit oppressive acts.
the nature of the case. *This cannot be awarded unless the
Article 2224 of the New Civil Code plaintiff is entitled to moral at the same
provides that: “Temperate or moderate time actual or temperate damages.
damages, which are more than nominal Article 2231 of the New Civil Code
but less than compensatory damages, states that: “In quasi-delicts, exemplary
may be recovered when the court finds damages may be granted if the defendant
that some pecuniary loss has been acted with gross negligence.”
Article 2232 of the New Civil Code
suffered but its amount can not, from the
states that: “In contracts and quasi-
nature of the case, be provided with
contracts, the court may award exemplary
certainty.”
*The court is convinced that there is damages if the defendant acted in a
pecuniary loss. wanton, fraudulent, reckless, oppressive,
*There is no actual certainty of the actual or malevolent manner.”
amount loss. The court is allowed to Article 2233 of the New Civil Code
calculate the amount. states that: “Exemplary damages cannot
*This is in the form of actual damages be recovered as a matter of right; the
Liquidated damages are fixed damages court will decide whether or not they
previously agreed by the parties to the should be adjudicated.”
contract and payable to the innocent Article 2234 of the New Civil Code
party in case of breach by the other. states that: “While the amount of the
Article 2226 of the New Civil Code exemplary damages need not be proved,
provides that: “Liquidated damages are the plaintiff must show that he is entitled
those agreed upon by the parties to a to moral, temperate or compensatory
contract, to be paid in case of breach damages before the court may consider
thereof.” the question of whether or not exemplary
*This is in the form of actual damages but damages should be awarded In case
a stipulated one. liquidated damages have been agreed
*Proving the amount is not necessary. upon, although no proof of loss is
*In this kind of damages, estoppel applies.
necessary in order that such liquidated
General Rule: The court cannot change
damages may be recovered, nevertheless,
the amount.
Exception: If the amount stipulated is before the court may consider the
excessive the court may disregard said question of granting exemplary in addition
amount and may compute the actual to the liquidated damages, the plaintiff
damages. must show that he would be entitled to
*The only thing to be proved is the fact of moral, temperate or compensatory
loss. damages were it not for the stipulation for
Exemplary damages are mere liquidated damages.”
accessories to other forms of damages Article 2235 of the New Civil Code
except nominal damages. They are mere states that: “A stipulation whereby
additions to actual, moral, temperate and exemplary damages are renounced in
liquidated damages which may or may not advance shall be null and void.”
be granted at all depending upon the Nominal damages are not for
necessity of setting an example for the indemnification of loss but for vindication
public good as a form of deterrent to the of a right violated.
Article 2221 of the New Civil Code
repetition of the same act by any one.
Article 2229 of the New Civil Code provides that: “Nominal damages are
provides that: “Exemplary or corrective adjudicated in order that a right of the
damages are imposed, by way of example plaintiff, which has been violated or
or correction for the public good, in invaded by the defendant, may be
addition to the moral, temperate, vindicated or recognized, and not for the
liquidated or compensatory damages.” purpose of indemnifying the plaintiff for
*Awarded because of the wanton, any loss suffered by him.”
fraudulent, malevolent, oppressive acts of Article 2222 of the New Civil Code
the carrier. states that: “The court may award nominal
damages in every obligation arising from
any source enumerated in Article 1157, or
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in every case where any property right has maritime lien as there is no longer any
been invaded.” res to which it can attach.
Article 2223 of the New Civil Code Q: Is this rule applies in the handling of
states that: “The adjudication of nominal the passengers?
damages shall preclude further contest A: YES
upon the right involved and all accessory Q: Whose liability is this?
A: Shipowner or Agents.
questions, as between the parties to the
Article 586 2nd paragraph states
suit, or their respective heirs and assigns.”
that: “By ship agent is understood the
*In Japan Airlines v CA, JAL failed to give
person entrusted with provisioning or
the plaintiff the priority for the first
representing the vessel in the port in
available flight. The SC awarded nominal
which it may be found.”
damages.
*Ship agent is the only person that can
Moral damages are in the category of an
be sued directly.
award designed to compensate the
Reason: Article 618 of the Code of
claimant for actual injury suffered and not
Commerce provides so.
to impose a penalty on the wrongdoer. Article 618 1st paragraph states
Article 2217 of the New Civil Code
that: “The ship captain shall be civilly
provides that: “Moral damages include
liable to the ship agent, and the latter
physical suffering, mental anguish, fright,
to the third persons who may have
serious anxiety, besmirched reputation,
made contracts with the former; x x
wounded feelings, moral shock, social
x.”
humiliation, and similar injury. Though Q: What kind?
incapable of pecuniary computation, moral A: Maritime in nature; marine
damages may be recovered if they are the transactions connected with maritime
proximate result of the defendant's law; maritime trade and commerce
wrongful act for omission.” Purpose: To encourage shipbuilding
Q: When moral damages may be and maritime transactions
awarded? Article 587 of the Code of
A: 1. Death of a passenger; 2. Carrier is Commerce provides that: “The ship
guilty of fraud, malice, bad faith even if agent shall also be civilly liable for the
there is no death of a passenger (Case: indemnities in favor of third persons
Lopez v Pan-American); 3. In Air which may arise from the conduct of
France case the captain in the care of the goods
which he loaded on the vessel; but he
MARITIME LAW:
may exempt himself therefrom by
Source: Code of Commerce abandoning the vessel with all her
equipments and the freight it may
A. Concept of Maritime Law have earned during the voyage.”
Maritime Law is the system of laws Article 590 of the Code of
which particularly relates to the affairs and Commerce provides that: “The co-
business of the sea, to ships, their crews owners of a vessel shall be civilly liable
and navigation, and to maritime in the proportion of their interests in
conveyance of persons and property. the common fund, for the results of the
*Apply only to maritime trade and sea acts of the captain, referred to in
voyages. Article 587. Each co-owner may
exempt himself from this liability by
B. Limited Liability Rule the abandonment, before a notary, of
1. Concept
the part of the vessel belonging to
The exclusively real and hypothecary
him.”
nature of maritime law operates to
Article 837 of the Code of
limit the liability of the shipowner to
Commerce provides that: “The civil
the value of the vessel, earned
liability incurred by the shipowners in
freightage and proceeds of the
the case prescribed in this section,
insurance, if any. “NO VESSEL NO
shall be understood as limited to the
LIABILITY” expresses in a nutshell the
value of the vessel with all its
limited liability rule. The total
appurtenances and freightage earned
destruction of the vessel extinguishes
during the voyage.”

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When applicable: remains of the insurance proceeds and


The Code of Commerce sanctions the freightage at the time of the loss. No
application of the doctrine in the claimant should be given preference
following cases: 1. Civil liability for over the others by the simple
indemnities in favor of third persons expedience of having filed or
which arise from the conduct of the completed its action earlier than the
captain in the case of the goods which rest. Thus, the execution of judgment
the vessel carried; 2. Civil liability in earlier completed cases, even those
arising from collisions; 3. Unpaid already final and executory, must be
wages of the captain and the crew if stayed pending completion of all cases
the vessel and its cargo are totally lost occasioned by the subject sinking.
by reason of capture of shipwreck. Then and only then can all such claims
2. Exceptions to the rule be simultaneously settled, either
Exceptions:
completely or pro-rata should the
1. When the injury to or death of a
insurance proceeds and freightage be
passenger is due either to the fault
not enough to satisfy the claim.
of the shipowner, or to the
Case: Aboitiz Shipping Co. v
concurring negligence of the
General Accident Fire and Life
shipowner and the captain;
Insurance Corporation
2. When the vessel is insured to the
extent of the insurance proceeds; C. Vessels
and - Those engaged in navigation,
*Freightage collectible whether coastwise or on the high
Q: How come insurance is an
seas, including floating docks,
exception?
pontoons, dredges, scows and any
A: Because there is no loss. The
other floating apparatus destined
loss was compensated by the
for the services of the industry or
insurance company
3. In Workmen’s Compensation claims maritime commerce. Excluded are
Q: Why is an exception? local and foreign military vessels,
A: Because not maritime in nature bancas and other watercrafts of
*In Yangco v Laserna case, the less than 3 tons gross capacity and
SC held that it covers anything that small watercrafts engaged in river
is connected with maritime and bay traffic.
transactions 1. Acquisition
3. Abandonment a. By prescription
Q: If there’s partial loss can the Article 573 of the Code of
shipowner/agent be exempted from Commerce states that: “Merchant
liability? vessels constitute property which
A: YES. If there is abandonment. may be acquired and transferred
Q: If there is total loss, is it necessary by any of the means recognized by
to abandon? law. The acquisition of a vessel
A: NO. There is nothing to abandon. must appear in a written
Case: Luzon Stevedoring
instrument, which shall not
Article 587 of the Code of
produce any effect with respect to
Commerce states that: “The ship
third persons if not inscribed in the
agent shall also be civilly liable for the
registry of vessels. The ownership
indemnities in favor of third persons
of a vessel shall likewise be
which may arise from the conduct of
acquired by possession in good
the captain in the care of the goods
faith, continued for three years,
which he loaded on the vessel; but he
with a just title duly recorded. In
may exempt himself therefrom by
the absence of any of these
abandoning the vessel with all her
requisites, continuous possession
equipments and the freight it may
for ten years shall be necessary in
have earned during the voyage.”
Q: How claims are satisfied under the order to acquire ownership. A
Limited Liability Rule? captain may not acquire by
A: All claims should be collated before prescription the vessel of which he
they can be satisfied from what is in command.”

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Requisites: complement for the same voyage


1. Acquisition must appear in a shall be for his account. If the sale
written instrument is made after the vessel has arrived
2. Such shall not produce any at the port of its destination, the
effect to third persons if not freightage shall pertain to the
inscribed in the registry of vendor, and the payment of the
vessels crew and other individuals who
3. Shall be acquired by possession
make up its complement shall be
in good faith, continued for 3
for his account, unless the contrary
years
is stipulated in either case.
4. With a just title duly recorded
*If made while it is on voyage, the
5. In the absence of any of there,
freightage which it earns from the
continuous possession for 10
time it receives its last cargo shall
years shall be necessary to
pertain entirely to the purchaser,
acquire ownership
and the payment of the crew and
Q: Can the ship captain acquire
other persons who make up its
vessel by prescription?
complement shall be for his
A: NO. The character of possession
account.
he has is not those for acquisitive
*If made after vessel arrived at
possession. The requisite for
port of its destination, freightage
acquisitive possession is that
shall pertain to the vendor, and the
possession as an owner.
payment of the crew and other
Article 575 of the Code of
individuals who make up its
Commerce states that: “Co-
complement shall be for his
owners of vessels shall have the
account, unless the contrary is
right of repurchase and redemption
stipulated in either case.
in sales made to strangers, but Article 578 of the Code of
they may exercise the same only Commerce states that: “If the
within the 9 days following the vessel being on a voyage or in a
inscription of the sale in the foreign port, its owner or owners
registry, and by depositing the should voluntarily alienate it, either
price at the same time.” to Filipinos or to foreigners
b. By sale
domiciled in the capital or in a port
Article 576 of the Code of
of another country, the bill of sale
Commerce states that: “In the
shall be executed before the consul
sale of a vessel it shall always be
of the Republic of the Philippines at
understood as included the rigging,
the port where it terminates its
masts, stores and engine of a
voyage and said instrument shall
steamer appurtenant thereto,
produce no effect with respect to
which at the time belongs to the
third persons if it is not inscribed in
vendor. The arms, munitions of
the registry of the consulate. The
war, provisions and fuel shall not
consul shall immediately forward a
be considered as included in the
true copy of the instrument of
sale. The vendor shall be under the
purchase and sale of the vessel to
obligation to deliver to the
the registry of vessels of the port
purchaser a certified copy of the
where said vessel is inscribed and
record sheet of the vessel in the
registered. In every case the
registry up to the date of sale.”
Article 577 of the Code of alienation of the vessel must be
Commerce states that: “If the made to appear with a statement
alienation of the vessel should be of whether the vendor receives its
made while it is on voyage, the price in whole or in part, or
freightage which it earns from the whether he preserves in whole or in
time it receives its last cargo shall part any claim on said vessel. In
pertain entirely to the purchaser, case the sale is made to a Filipino,
and the payment of the crew and this fact shall be stated in the
other persons who make up its certificate of navigation. When a
vessel, being in a voyage, shall be
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rendered useless for navigation, matter of convenience by virtue of


the captain shall apply to the a contract.
competent judge or court of the
port of arrival, should it be in the D. Persons who take part in Maritime
Philippines; and should it be in a Commerce
1. Shipowners and shipagents
foreign country, to the consul of
Article 586 of the Code of
the Republic of the Philippines,
Commerce provides that: “The
should there be one, or, where
shipowner and the ship agent shall be
there is none, to the judge or court
civilly liable for the acts of the captain
or to the local authority; and the
and for the obligations contracted by
consul, or the judge or court, shall
the latter to repair, equip, and
order an examination of the vessel
provision the vessel, provided the
to be made. If the consignee or the
creditor proves that the amount
insurer should reside at said port,
claimed was invested for the benefit of
or should have representatives
the same. By ship agent is understood
there, they must be cited in order
the person entrusted with provisioning
that they may take part in the
or representing the vessel in the port
proceedings on behalf of whoever
in which it may be found.”
may be concerned.” Article 587 of the Code of
c. Registration
Commerce provides that: “The ship
Section 810 of the Tariff and
agent shall also be civilly liable for the
Customs Code provides that:
indemnities in favor of third persons
“The Bureau of Customs is vested
which may arise from the conduct of
with exclusive authority over the
the captain in the care of the goods
registration and documentation of
which he loaded on the vessel; but he
Philippine vessels. By it shall be
may exempt himself thereform by
kept and preserved the records of
abandoning the vessel with all her
registration and of transfers and
equipments and the freight it may
encumbrances of vessels; and by it
have earned during the voyage.”
shall be issued all certificates,
Article 588 of the Code of
licenses or other documents
Commerce provides that: “Neither the
incident to registration and
shipowner nor the ship agent shall be
documentation, or otherwise
liable for the obligations contracted by
requisite for Philippine vessels.”
the captain, if the latter exceeds the
*Through the MARINA
d. Ship’s manifest powers and privileges pertaining to
Sec. 906 of the Tariff and him by reason of his position or
Customs Code provides that: conferred upon him by the former.
“Manifests shall be required for Nevertheless, if the amounts claimed
cargo and passengers transported were invested for the benefit of the
from one place or port in the vessel, the responsibility therefor shall
Philippines to another only when devolve upon its owner or agent.”
one or both of such places is a port a. Rules in case of part-owners
Article 589 of the Code of
of entry.”
Commerce provides that: “If two
*Declaration of the entire cargo.
or more persons should be part
The object is to furnish customs
owners of a merchant vessel, a
officers with a list to check against,
partnership shall be presumes as
to inform the revenue officers what
estrablished by the co-owners. This
goods are brought into a port of the
partnership shall be governed by
country on a vessel. Hence, the
the resolution of the majority of the
requirement that a vessel must
members. If the part-owners should
carry a manifest is not complied
not be more than two, the
with even if a bill of lading can be
disagreement of views, if any, shall
presented.
be decided by the vote of the
*A bill of lading is just a declaration
member having the largest
of a specific cargo rather than the
interest. If the interests are equal,
entire cargo. It is issued as a
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it should be decided by lot. The of repurchase and redemption


person having the smallest share in provided for in Article 575.”
the ownership shall have one vote; Article 593 of the Code of
and proportionately the other part Commerce provides that: “The
owners as many votes as they owners of a vessel shall have
have parts equal to the smallest preference in her charter over
one. A vessel may not be detained, other persons, under the same
attached or levied upon in conditions and price. If two or more
execution in its entirety, for the of them should claim this right, the
private debts of a part owner, but one having the greater interest
the proceedings shall be limited to shall be preferred; and should they
the interest which the debtor may have equal interests, the matter
have in the vessel, without shall be decided by lot.”
interfering with the navigation.” Article 594 of the Code of
Article 590 of the Code of Commerce states that: “The co-
Commerce provides that: “The co- owners shall elect the manager
owners of a vessel shall be civilly who is to represent them in the
liable in the proportion of their capacity of ship agent. The
interests in the common fund, for appointment of director or ship
the results of the acts of the agent shall be revocable at the will
captain, referred to in Article 587.” of the members.”
Article 591 of the Code of b. Rules in case of shipagents
Commerce provides that: “All the Article 595 of the Code of
part owners shall be liable, in Commerce states that: “The ship
proportion to their respective agent, whether he is at the same
ownership, for the expenses for time the owner of the vessel, or a
repairing the vessel, and for other manager for an owner or for an
expenses which are incurred by association of co-owners, must
virtue of a resolution of the have the capacity to trade and
majority. They shall likewise be must be recorded in the merchant’s
liable in the same proportion for registry of the province. The ship
the expenses for the maintenance, agent shall represent the
equipment, and provisioning of the ownership of the vessel, and may,
vessel, necessary for navigation.” in his own name and in such
Article 592 of the Code of capacity, take judicial and
Commerce provides that: “The extrajudicial steps in matters
resolution of the majority with relating to commerce.”
regard to the repair, equipment, Article 596 of the Code of
and provisioning of the vessel in Commerce provides that: “The
the port of departure shall bind the ship agent may discharge the
minority, unless the minority duties of captain of the vessel,
members renounce their interests, subject in every case to the
which must be acquired by the provision of Article 609. If two or
other co-owners, after a judicial more co-owners apply for the
appraisement of the value of the position of captain, the
portion or portions assigned. The disagreement shall be decided by a
resolutions of the majority relating vote of the members; and if the
to the dissolution of the vote should result in a tie, it shall
partnership and sale of the vessel be decided in favor of the co-owner
shall also be binding on the having the larger interest in the
minority. The sale of the vessel vessel. If the interests of the
must be made at public auction, applicants should be equal, and
subject to the provisions of the law there should be a tie, the matter
of civil procedure, unless the co- shall be decided by lot.”
Article 597 of the Code of
owners unanimously agree
Commerce states that: “The ship
otherwise, saving always the right
agent shall designate and come to

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terms with the captain, and shall executor action (‘accion ejecutiva’),
contract in the name of the owners, without any other requisite than
who shall be bound in all that refer the acknowledgment of the
to repairs, details equipment, signatures on the instrument
armament, provisions of food and approving the account.”
fuel, and freight of the vessel, and, Article 602 of the Code of
in general, in all that relate to the Commerce states that: “The ship
requirements of navigation.” agent shall indemnify the captain
Article 598 of the Code of for all the expenses he may have
Commerce states that: “The ship incurred with funds of his own or of
agent may not order a new voyage, others, for the benefit of the
or make contracts for a new vessel.”
charter, or insure the vessel, *The ship agent is entrusted with
without the authorization of its the provisioning and representing
owner or resolution of the majority the vessel in the port in which it
of the co-owners, unless these may be found. His liability to
powers were granted him in the passengers and cargo owners for
certificate of his appointment. If he loss or injury is the same as the
insures the vessel without shipowner.
authorization therefore, he is *He is solidarily liable with the
subsidiarily liable for the solvency owner for such loss or damage
of the insurer.” subject to his right to claim
Article 599 of the Code of reimbursement from the shipowner.
Commerce states that: “The ship *Only agent that can be sued
agent managing for an association directly.
2. Captains and masters of vessels
shall render to his associates an
a. Qualifications
account of the results of each Article 609 of the Code of
voyage of the vessel, without Commerce states that: “Captains,
prejudice to always having the masters or patrons of vessels must
books and correspondence relating be Filipinos, have legal capacity to
to the vessel and to its voyages at contract in accordance with this
their disposal.” code, and prove the skill, capacity,
Article 600 of the Code of
and qualifications necessary to
Commerce states that: “After the
command and direct the vessel, as
account of the managing agent has
established by marine or
been approved by a relative
navigation laws, ordinances, or
majority, the co-owners shall pay
regulations, and must not be
the expenses in proportion to their
disqualified according to the same
interest, without prejudice to the
for the discharge of the duties of
civil or criminal actions which the
the position. If the owner of a
minority may deem fit to institute
vessel desired to be the captain
afterwards. In order to enforce the
thereof, without having the legal
payment, the managing agent shall
qualifications therefor, he shall
be entitled to an executor action
limit himself to the financial
(‘accion ejecutiva’), which shall be
administration of the vessel, and
instituted by virtue of a resolution
shall intrust the navigation to a
of the majority, and without further
person possessing the
proceedings than the
qualifications required by said
acknowledgment of the signatures
ordinances and regulations.”
of the persons who voted for the b. Powers and functions
resolution.” Article 610 of the Code of
Article 601 of the Code of Commerce states that: “The
Commerce states that: “Should following powers shall be inherent
there be any profits, the co-owners in the position of captain, master or
may demand of the managing patron of a vessel: 1. To appoint or
agent the amount corresponding to make contracts with the crew in
their interests by means of an the absence of the ship agent, and
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to propose said crew, should said vessel or correspondents of the


agent be present; but the ship ship agent; 2. By applying to the
agent may not employ any consignees of the cargo or to those
member against the captain’s interested therein; 3. By drawing
express refusal; 2. To command the on the ship agent; 4. By borrowing
crew and direct the vessel to the the amount required by means of a
port of its destination, in loan on bottomry; and 5. By selling
accordance with the instructions he a sufficient amount of the cargo to
may have received from the ship cover the sum absolutely
agent; 3. To impose, in accordance indispensable for the repair of the
with the contracts and with the vessel and to enable it to continue
laws and regulations of the its voyage. In these two last cases
merchant marine, and when on he must apply to the judicial
board the vessel, correctional authority of the port, if in the
punishment upon those who fail to Philippines, and to the consul of the
comply with his orders or are Republic of the Philippines if in a
wanting in discipline, holding a foreign country, and where there is
preliminary hearing on the crimes none, to the local authority,
committed on board the vessel on proceeding in accordance with the
the seas, which crimes shall be provisions of Article 583, and with
turned over to the authorities the provisions of the law of civil
having jurisdiction over the same procedure.”
at the first port touched; 4. To Article 612 of the Code of
make contracts for the charter of Commerce states that: “The
the vessel in the absence of the following obligations shall be
ship agent or of its consignee, inherent in the office of the
acting in accordance with the captain:
instructions received and 1. To have on board before starting
protecting the interests of the on a voyage a detailed inventory of
owner with utmost care; 5. To the hull, engines, rigging, spare-
adopt all proper measures to keep masts, tackle, and other equipment
the vessel well supplied and of the vessel; the royal or the
equipped, purchasing all that may navigation certificate; the roll of
be necessary for the purpose, the persons who make up the crew
provided there is no time to of the vessel, and the contracts
request instruction from the ship entered into with them; the lists of
agent; and 6. To order, in similar passengers; the bill of health; the
urgent cases while on a voyage, certificate of the registry proving
the repairs on the hull and engines the ownership of the vessel and all
of the vessel and in its rigging and the obligations which encumber
equipment, which are absolutely the same up to that date; the
necessary to enable it to continue charter parties or authenticated
and finish its voyage; but if he copies thereof; the invoices or
should arrive at a point where manifests of the cargo, and the
there is a consignee of the vessel, memorandum of the visit or
he shall act in concurrence with the inspection by experts, should it
latter.” have been made at the port of
Article 611 of the Code of departure;
Commerce states that: “In order 2. To have a copy of this code on
to comply with the obligations board; 3. To have thee folioed and
mentioned in the preceding article, stamped books, placing at the
the captain, when he has no funds beginning of each one a
and does not expect to receive any memorandum of the number of
from the ship agent, shall obtain folios it contains, signed by the
the same in the successive order maritime authority, and in his
stated below: 1. By requesting said absence by the competent
funds from the consignee of the authority. In the first book, which
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shall be called “log book,” he shall shippers and passengers, an


enter day by day the condition of examination of the vessel, in order
the atmosphere, the prevailing to ascertain whether it is water-
winds, the courses taken, the tight, with the rigging and engines
rigging carried, the power of the in good condition, and with the
engines used in navigation, the equipment required for good
distances covered, the maneuvers navigation, preserving under his
executed, and other incidents of responsibility a certificate of the
navigation; he shall also enter the memorandum of his inspection,
damage suffered by the vessel in signed by all those who may have
her hull, engines, rigging, and taken part therein. The experts
tackle, no matter what its cause shall be appointed, one by the
may be, as well as the impairment captain of the vessel and another
and damage suffered by cargo, and by those who request its
the effect and importance of the examination, and in case of
jettison, should there be any; and disagreement a third shall be
in cases of serious decisions which appointed by the marine authority
require the advice or a meeting of of the port or by the authority
the officers of the vessel, or even exercising his functions;
of the crew and passengers, he 5. To remain constantly on board
shall record the decisions adopted. the vessel with the crew while the
For the information indicated he cargo is being taken on board and
shall make use of the binnacle to carefully watch the stowage
book and of the steam of engine thereof; not to consent to the
book kept by the engineer. In the loading of any merchandise or
second book called the “accounting matter of a dangerous character,
book,” he shall record all the such as inflammable or explosive
amounts collected and paid for the substances, without the
account of the vessel, entering precautions which are
specifically the article by article, recommended for their packing,
the source of the collection and the handling and isolation; not to
amounts spent for provisions, permit the carriage on deck of any
repairs, acquisitions of equipment cargo which by reason of its
or goods, fuel, food, outfits, wages, arrangement, volume, or weight
and other expenses of whatever makes the work of the sailors
nature they may be. He shall