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GN Mercantile Law 2014 PDF
GN Mercantile Law 2014 PDF
DEFINITION AND NATURE OF LETTER OF CREDIT 1. Contract of Sale between the buyer and seller
2. Application for L/C by the buyer with the bank
Letter of Credit (L/C) 3. Issuance of L/C by the bank
4. Shipping of goods by the seller
It is any arrangement, however named or described, 5. Execution of draft and tender of documents by
whereby a bank (issuing bank), acting at the request the seller
and on the instructions of a customer (applicant) or 6. Redemption of draft (payment) and obtaining of
on its own behalf, binds itself to: (PAN) documents by the issuing bank
7. Reimbursement to the bank and obtaining of
1. Pay to the order of, or accept and pay drafts documents by the buyer
drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept Essential conditions of a Letter of Credit
and pay such drafts, or
3. Authorizes another bank to Negotiate, against 1. Issued in favor of a definite person.
stipulated documents 2. Limited to a fixed or specified amount, or to one
or more amounts, but with a maximum stated limit
Provided, the terms and conditions of the credit are (Art. 568, Ibid.).
complied with (Art. 2, Uniform Customs & Practice for
NOTE: If any of these essential conditions is not present,
Documentary Credits).
the instrument is merely considered as a letter of
recommendation.
Purpose of Letter of Credit
Q: Letters of Credit are financial devices in
The purpose of a letter of credit is to ensure certainty commercial transactions which will ensure that the
of payment. The bank makes the commitment to pay. seller of the goods is sure to be paid when he parts
This addresses problems arising from seller’s refusal with the goods and the buyer of the goods gets
to part with his goods before being paid and the control of the goods upon payment. Which
buyer’s refusal to part with his money before statement is most accurate? (2012 Bar Question)
acquiring the goods, thus, facilitating commercial a. The use of the Letter of Credit serves to reduce
transactions. the risk of nonpayment of the purchase price in a
sale transaction.
Laws governing Letters of Credit b. The Letters of Credit can only be used
exclusively in a sales transaction.
Letter of credit is governed by the Uniform Customs c. The Letters of Credit are issued for the benefit
and Practice (UCP) for documentary Credits issued by of the seller only.
the International Chamber of Commerce d. (a), (b) and (c) are all correct
(Metropolitan Waterworks vs. Daway, G.R. No.
160723, July 21, 2004). A: A. The use of the Letter of Credit serves to reduce
the risk of nonpayment of the purchase price in a sale
NOTE: The law on contracts and damages shall also transaction
apply to provide remedies to the party aggrieved by
the breach of the main contract although such breach Kinds of Letter of Credit
will not affect the obligation of the bank to pay the
beneficiary or its right to obtain reimbursement from
COMMERCIAL L/C STANDBY L/C
the applicant of the letter of credit if the terms of the
Involves the payment of
letters of credit have been complied with. Involves non-sale
money under a contract
transactions.
of sale.
Duration of Letters of Credit
Payable upon the Payable upon
presentation by the certification by the
1. Upon the period fixed by the parties; or
seller-beneficiary of beneficiary of the
2. If none is fixed, one year from the date of
documents that show he applicant’s
issuance
has taken affirmative non-performance of the
steps to comply with the agreement. The
sales agreement documents that
The opening of a L/C does not vest ownership of the b. Confirming bank – bank which, upon the request of
the beneficiary, confirms the L/C issued.
goods in the bank in the absence of a trust receipt
agreement. A letter of credit is a mere financial c. Paying bank – bank on which the drafts are to be
device developed by merchants as a convenient and drawn, which may be the issuing bank or another bank
relatively safe mode of dealing with the sales of not in the city of the beneficiary.
goods to satisfy the seemingly irreconcilable interests
d. Negotiating bank – bank in the city of the beneficiary
of a seller, who refuses to part with his goods before
which buys or discounts the drafts contemplated by the
he is paid, and a buyer, who wants to have control of L/C, if such draft is to be drawn on the opening bank not
the goods before paying (Transfield Philippines, Inc. v. in the city of the beneficiary.
Luzon Hydro Corporation, G.R. No. 146717, Nov. 22,
2004).
Different roles and liabilities of the banks involved in Letter of Credit transactions
Negotiating Buys the seller’s draft and later on Depends on the stage of negotiation, thus:
Bank sells the draft to the issuing bank.
1. Before negotiation – No liability with respect to the
seller. Merely suggests its willingness to negotiate.
2. After negotiation – A contractual relationship will
then arise, making the bank liable. As holder, it has
the right to payment from the bank primarily liable
on the draft (either the issuing or confirming bank). If
the party primarily liable on the l/c refuses to honor
the draft, the negotiating bank has the right to
proceed against the drawer thereof.
Paying Bank May either be the issuing bank or Direct obligation.
any other bank in the place of the
issuing bank to facilitate payment to
the beneficiary.
Letters of Credit are not considered as Negotiable 1. Independence in toto where the credit is
Instruments independent from the justification aspect and is a
separate obligation from the underlying agreement.
A L/C is not considered a negotiable instrument. This principle is illustrated by standby L/C; or
However, drafts issued in connection with L/C’s can 2. Independence only as to the justification aspect
be considered negotiable instruments. The which is identical with the same obligations under the
presumption that the drafts drawn in connection with underlying agreement. This principle is illustrated by
the L/C’s have sufficient consideration applies (Lee v. a commercial L/C or repayment standby (Transfield v.
CA, G.R. No. 117913, Feb. 1, 2002). Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).
Stay order issued by the rehabilitation court does Effect of the buyer’s failure to procure a Letter of
not preclude the beneficiary from collecting on the Credit to the main contract
Letter of Credit
The L/C is independent from the contract of sale.
The stay order issued by the rehabilitation court Failure of the buyer to open the L/C does not prevent
enjoining the enforcement of claims against the the birth of the contract of sale. The opening of the
principal debtor, its guarantor, surety not liable LC is only a mode of payment. The LC is not an
solidarily with the principal debtor does not preclude essential requisite to the contract of sale (Reliance
the beneficiary from collecting on the letter of credit. Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R.
No. 100831, Dec. 17, 1993). He will be liable for fraud
DOCTRINE OF INDEPENDENCE of creditor.
Doctrine of Independence/ Independence Principle Partial payments on the loan cannot be added in
computing the issuing bank’s liability under its own
The relationship of the buyer and the bank is Standby Letter of Credit
separate and distinct from the relationship of the
buyer and seller in the main contract; the bank is not Although these payments could result in the
required to investigate if the contract underlying the reduction of the actual amount, which could
L/C has been fulfilled or not because in transactions ultimately be collected from the issuing bank, the
involving L/C, banks deal only with documents and latter’s separate undertaking under its letters of
not goods (BPI v. De Reny Fabric Industries, Inc., credit remain. The letter of credit is an absolute and
L-2481, Oct. 16, 1970). In effect, the buyer has no primary undertaking which is separate and distinct
course of action against the issuing bank. from the contract underlying it (Insular Bank of Asia
& America v. IAC, Nov. 17, 1988).
Two views regarding Trust Receipt 3. Where the proceeds of the sale are insufficient to
satisfy the loan executed by the entrustee, the
1. As a commercial document - the entrustee binds entruster bank can institute an action to collect
himself to hold the designated GDI in trust for the deficiency (Landl Co. v Metropolitan Bank
the entruster and to sell or otherwise dispose of and Trust Co. G.R. No. 159622, July 30, 2004).
GDI with the obligation to turn over to the 4. Repossession by the entruster of the GDI does
entruster the proceeds if they are unsold or not not amount to dacion en pago. The repossession
otherwise disposed of, in accordance with the of the goods by the entrustee was merely to
terms and conditions specified in the TR (Sec. 4, secure the payment of its obligation to the
P.D. 115). entrustor and not for the purpose of transferring
2. As a commercial transaction – It is a separate and ownership in satisfaction of the obligation (PNB
independent security transaction intended to aid vs. Pineda, G.R. No. L-46658 May 13, 1991).
in financing importers and retail dealers who do
not have sufficient funds (Nacu v. CA, G.R. No. OWNERSHIP OF THE GOODS, DOCUMENTS, AND
108638, Mar. 11, 1994). INSTRUMENTS UNDER A TRUST RECEIPT
Trust Receipt is not a negotiable instrument Real owner of the articles subject of the Trust
Receipt transaction
Like L/C’s, TR’s are not negotiable instruments. The
presumption of consideration under the negotiable The real owner of the articles subject of the Trust
instrument law may not necessarily be applicable to Receipt is the entrustee who binds himself to hold the
trust receipts (Lee v. CA, supra). designated GDI. The entruster merely holds a security
interest. If under the trust receipt, the bank is made
LOAN/SECURITY FEATURE to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it
Two features of a Trust Receipt transaction were really so, it could dispose of the goods in any
manner it wants, which it cannot do, just to give
1. Loan feature - is brought about by the fact that consistency with purpose of the trust receipt of giving
the entruster financed the importation or a stronger security for the loan obtained by the
purchase of the goods under TR (Sps. Vintola vs. importer. To consider the bank as the true owner
Insular Bank of Asia and America, G.R. No. from the inception of the transaction would be to
73271, May 29, 1987). disregard the loan feature thereof (Rosario Textile
Mills Corp. v. Home Bankers Savings and Trust
Company, G.R. No. 137232. June 29, 2005).
GR: Warehouseman shall be liable for damages for 1. The transferee ACquires title against the transferor
non-existence or misdescription of goods at the time 2. There is no Direct obligation of the WHM; and
of its issue. 3. The transferee can Compel the transferor to
complete the negotiation by indorsing the
XPN: When the goods are described based on: instrument. Negotiation takes effect as of the time
1. Series or labels upon them when the indorsement is actually made.
2. Statement that the goods are of certain kind.
Rights of the owner of the Negotiable Warehouse
Person to whom the goods should be delivered Receipt in case the signature of an owner was forged
(PDO) and the forger was able to withdraw the goods from
the Warehouseman
1. To the person lawfully entitled to the Possession of
the goods, or his agent; 1. If under WHR, the goods are deliverable to the
2. To the person entitled to Delivery under a depositor or to his order, the owner of the said
non-negotiable instrument or with written authority; negotiable receipt may proceed against the WHM
or and/or the holder.
3. To the lawful Order of a negotiable receipt (person 2. Without the valid indorsement of the owner to the
in possession of a negotiable receipt) (Sec. 9, WHR holder or in blank, the WHM is liable to the owner for
Law). conversion in the misdelivery.
,
3. If the goods are deliverable to bearer, the owner
KINDS may only proceed against the holder. The WHM is not
liable for conversion where the goods are delivered
Kinds of Warehouse Receipt to a person in possession of a bearer negotiable
instrument.
1. Negotiable warehouse receipt
2. Non-negotiable warehouse receipt Duplicate receipts must be so marked in case one
negotiable receipt is issued for the same goods
Negotiable WHR
A WHM shall be liable for all damages caused by his
It is a receipt in which it states that the goods failure to do so to anyone who purchased the
received will be delivered to the bearer or to the subsequent receipt for value supposing it to be an
order of any person named in such receipt (Sec. 5, original, even though the purchase be after the
WHR Law). It is negotiated by delivery or delivery of the goods by the WHM to the holder of
indorsement plus delivery. the original receipt (Sec. 6, WHR Law).
NOTE: No provision shall be inserted in a negotiable receipt NOTE: The word “duplicate” shall be plainly placed upon
that it is non-negotiable. Such provision, if inserted, shall be the face of every such receipt, except the first one issued
void, and the receipt shall remain negotiable. A negotiable (ibid.).
warehouse receipt cannot be converted into
non-negotiable (Sec. 5, WHR Law). Non-Negotiable Warehouse Receipt
Person who may negotiate a Negotiable Warehouse It is a receipt in which it is stated that the goods
Receipt received will be delivered to the depositor or to any
other specified person (Sec. 4, WHR Law).
Breach of duty on the part of the person making the The pledgee or mortgagee does not automatically
negotiation or fraud, mistake or duress on the become the owner of the goods but merely retains
owner of the receipt to entrust possession or the right to keep, and with the consent of the owner
custody DOES NOT impair the validity of negotiation to sell them so as to satisfy the obligation from the
of a Warehouse Receipt proceeds for the simple reason that the transaction is
not a sale but only a mortgage or pledge. Likewise, if
a. the warehouse receipt covering the goods is 1. Where the warehouse receipt contains a
not presented. Representation to that effect.
b. the lien of the warehouseman is not satisfied. 2. Where it was an Inducement for the depositor to
c. the said holder presents a materially altered enter into the contract;
warehouse receipt. 3. Established practice; or
d. All of the above. 4. Where the Law provides
1. Issuance of warehouse receipts for Good not 1. By Refusing to deliver the goods until the lien is
received (Sec. 50, WHR Law). satisfied
2. Issuance of receipt containing False statement 2. By causing the Extrajudicial sale of the property
(Sec. 51, WHR Law). and applying the proceeds of the value of the lien
3. Issuance of Duplicate negotiable warehouse 3. By filing a civil action for Collection of the unpaid
receipt not marked as such (Sec. 52, WHR Law). charges or by way of counterclaim in an action to
4. Issuance of a negotiable warehouse receipt of recover the property from him or such other
which he is an Owner without stating such fact of remedies allowed by law for the enforcement of
ownership (Sec. 53, WHR Law). a lien against personal property or to a creditor
5. Delivery of goods without Obtaining negotiable against his debtor, for the collection from the
warehouse receipt (Sec. 54, WHR Law). depositor of all the charges which the depositor
6. Negotiation of receipt for Mortgaged goods (Sec. has bound himself to pay.
55, WHR Law).
7. Commingling of goods (Sec. 24, WHR Law). Lien over the goods does not preclude the WHM to
avail all other remedies
Other acts for which Warehouse Man is liable
(DuMP-SICC) Whether a warehouseman has or has not a lien upon
the goods, he is entitled to all remedies allowed by
1. Failure to stamp “Duplicate” on copies of law to a creditor against a debtor for the collection
negotiable receipt (Sec.6, WHR Law). from the depositor of all charges and advances which
2. Misdelivery of goods (Sec. 10, WHR Law). the depositor has expressly or impliedly contracted
3. Failure to Place “non-negotiable” or with the warehouseman to pay (Sec 32, WHR Law).
“not-negotiable” on a non-negotiable receipt
(Sec. 7, WHR Law). Enforcement of a Lien
4. Failure to give notice in case of Sale of goods to
satisfy lien (Sec. 33, WHR Law) or because the The lien may be enforced against the goods of the
goods are perishable or hazardous (Sec. 34, WHR following:
Law). 1. Goods belonging to the person who is liable as
5. Issuing receipt for non-existing goods or debtor; and
misdescribed goods (Sec.20, WHR Law). 2. Goods belonging to others which have been
6. Failure to take Care of the goods (Sec. 21, WHR deposited at any time by the debtor with
Law). authority to make a valid pledge (Sec. 28, WHR
7. Failure to effect Cancellation of a negotiable Law).
receipt upon delivery of the goods (Sec. 11, WHR
Law). Effect of sale made to satisfy a warehouseman’s lien
or in case when the goods are perishable or
WAREHOUSEMAN’S LIEN hazardous in nature
Charges covered by a Warehouseman’s lien (PMA) The WHM shall not thereafter be liable for failure to
deliver the goods to the depositor or owner of the
1. Charges for storage and Preservation of the goods or to a holder of the receipt given for the
goods (insurance and others may be included as goods when they were deposited, even if such receipt
long as it is stipulated) be negotiable (Sec. 36, WHR Law).
2. Money advanced, interest, insurance,
transportation, labor, weighing, coopering and Manner of conducting the execution sale to satisfy
other charges and expenses in relation to such the warehouseman’s lien
goods
3. Charges and expenses for notice, and 1. Notice of the sale
Advertisements of sale, and for sale of the goods a. published once a week for two consecutive
where default had been made in satisfying the weeks in a newspaper published in the place
WHM’s lien (Sec. 27, WHR Law). where such sale is to be held; or
b. If there is no newspaper published in such
place, the advertisement shall be posted at
Negotiable instrument v. Non-negotiable instrument Negotiable instruments are not legal tender
The requirements stated in Sec. 1 must appear on the face Factors to determine the negotiability (FRI)
of the instrument otherwise the instrument would not be
negotiable.
1. Words that appear on the Face of negotiable
instrument
Rules governing the use of phrases in the negotiable
2. Requirements enumerated in Section 1 of NIL
instruments
3. Intention of the parties by considering the whole
of the instrument.
1. As to promissory note
a. The word “promise” need not be used. Any NOTE: In determining the negotiability of an instrument,
expression equivalent to a promise is sufficient. consider the instrument in its entirety and only what
b. Mere acknowledgment of a debt is not a appears on its face. It must comply with the requirements
promissory note. under Section 1 of the NIL (Sundiang, 2014 citing Caltex
c. Language used must indicate a written Phils. v. CA, 212 SCRA 448).
undertaking to pay
2. As to bill of exchange The instrument must be in writing
a. It must contain an order for payment as
distinguished from a mere request. It must be reduced in writing or in tangible form. The
b. The order is not invalidated because it contains negotiability or non-negotiability of an instrument is
words of civility. Thus, insertion of polite words determined from the writing on the face of the
like “please” does not alter the character of the instrument itself (De Leon, 2010).
instrument; as long as the language expresses the
drawer’s will that the money be paid.
FUND FOR FUND FOR PAYMENT Payment by installment is certain if the dates of each
REIMBURSEMENT installment is fixed and the amount to be paid for
1. The drawee pays the There is only one act - each installment is stated (NIL, Sec. 2; Sundiang,
payee from his own the drawee pays 2009).
funds. directly from the
2. The drawee pays particular fund Payment with an acceleration clause
himself from the indicated.
particular fund Acceleration clause is a provision, that upon default
indicated. in payment of any installment or interest, the whole
Particular fund Particular fund shall become due (NIL, Sec.2[c]).
indicated is not the indicated is the direct 1. If the option to accelerate the maturity is on the
direct source of source of payment. maker, whether such option is absolute or
payment. conditional, it is negotiable.
(Sundiang, 2014). 2. Where acceleration is at the option of the holder
and can only be exercised upon the happening of
NOTE: An instrument which mentions a particular fund out the specified event, still negotiable.
of which reimbursement is to be made is negotiable. But an 3. But where the holder’s right to accelerate is
Extension Clauses are provisions extending the time XPNs: Negotiability is not affected if the note
of payment. contains an additional provision which: (SECo Law)
1. Authorizes the sale of collateral Securities in
GR: An extension clause does not affect the case the instrument be not paid at maturity;
negotiability of the instrument. or
2. Gives the holder an Election to require
XPN: Where a note with a fixed maturity provides something to be done in lieu of payment of
that the maker has the option to extend time of money; or
payment until the happening of a contingency, the 3. Authorizes a Confession of judgment if the
date is uncertain and the instrument is instrument be not paid at maturity; or
non-negotiable. 4. Waives the benefit of any Law intended for
the advantage or protection of the obligor
Sum to be paid with exchange (NIL, Sec. 5).
Payable on demand or at a fixed or determinable
The exchange is the charge for the expense of
providing funds at the place where the instrument is future time
payable to cover such instrument which is issued at
1. Payable on demand – The holder may call for
another place. It may be at a fixed rate or at the payment any time, likewise, the maker may also pay
current rate. It is applicable only to foreign bills (De any time and the refusal of the holder to accept
Leon, 2010).
payment shall stop the running of interest should
there be any, but obligation to pay the note subsist.
Inland bill of exchange v. Foreign bill of exchange
An instrument is payable on demand:
An inland BOE is one which is, or on its face purports a. When it is so expressed to be payable on
to be, both drawn and payable within the Philippines demand, or at sight, or on presentation; or
and any other bill is a foreign bill. b. In which no time for payment is expressed (NIL,
Sec 7).
NOTE: Unless the contrary appears on the face of the bill,
c. Where an instrument is issued, accepted, or
the holder may treat it as an inland bill (Sec. 109, NIL).
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
Sum to be paid with costs of collection and/or
payable on demand (ibid).
attorney’s fees
2. At a fixed time – A term or time instrument is
It does not affect the certainty of the amount payable
payable only upon the arrival of the time for
at maturity since the increase in the amount due,
payment.
even if uncertain, takes place after maturity when the
instrument ceases to be negotiable in the full
3. At a determinable future time - An instrument is
commercial sense (De Leon, 2010).
payable at a determinable future time which is
expressed to be payable:
Payable in Philippine Peso
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future
The “money” referred into may be our legal tender or
time specified therein; or
foreign currency. An instrument is still negotiable
c. On or at a fixed period after the occurrence of a
although the amount to be paid is expressed in
specified event which is certain to happen, though
currency that is not legal tender so long as it is
the time of happening be uncertain (NIL, Sec. 4).
expressed in money (PNB v Zulueta, 101 Phil 1071).
The instrument is payable to order where it is drawn A check is a “bill of exchange” (BOE) drawn on a bank
payable to the order of a specified person or to him payable on demand. It is either an order or a bearer
or to his order. It may be drawn payable to the order instrument but when the payee is fictitious or not
of: (PaDD JoinSH) intended to be the true recipient of the proceeds of
1. A Payee who is not a maker, drawer, or drawee; the check, the check is considered as a bearer
2. The Drawer or maker; or instrument and as such it does not require
3. The Drawee; or indorsement to be validly negotiated. It is negotiable
4. Two or more payees Jointly; or by mere delivery (Divina, 2010, citing PNB v.
5. One or some of Several payees; or Rodriguez, 566 SCRA 513).
6. The Holder of an office for the time being (Sec.
8, NIL). Application of the fictitious-payee rule
Payable to bearer (ENaF PaLa) A “fictitious payee” is not limited to person having no
real existence. An actual, existing, and living payee
1. When it is Expressed to be so payable; (e.g. I may also be “fictitious” if the maker of the check did
promise to pay to bearer P10,000.00) not intend for the payee to in fact receive the
2. When it is payable to a person Named therein or proceeds of the check (Ibid., pg. 10, PNB case citing
bearer; (e.g. Pay to P or bearer P10,000.00) Sec. 9[c], NIL).
3. When it is payable to the order of a Fictitious
person or non-existing person, and such fact was Who bears the loss in a fictitious-payee situation
known to the person making it so payable; (e.g.
Pay to John Doe or order) In a fictitious-payee situation, the drawee bank is
4. When the name of the Payee does not purport to absolved from liability and the drawer bears the loss.
be the name of any person; (Pay to cash) When faced with a check payable to a fictitious
5. When the only or the Last indorsement is an payee, it is treated as a bearer instrument that can be
indorsement in blank (NIL, Sec 9). negotiated by delivery. The underlying theory is that
one cannot expect a fictitious payee to negotiate the
Illustration check by placing his indorsement thereon. And since
the maker knew this limitation, he must have
Back of NI (indorsement) intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of
Pay to A Sgd. P the check will bear the loss (Ibid).
Pay to B Sgd. A
Sgd. B Exception to the fictitious-payee rule
Difference between having a check payable to a A showing of commercial bad faith on the part of the
fictitious payee and payable to a specified payee drawee or any transferee of the check for that
matter, will work to strip it of this defense (Ibid).
If a check is payable to a specified payee, it is an
order instrument, which requires indorsement from When drawee must be named with reasonable
the payee or holder before it may be validly certainty
negotiated; but it may nevertheless be considered as
a bearer instrument if it is payable to the order of a 1. In a BOE, the drawee must be named or
fictitious or non-existing person, and such fact is otherwise designated with reasonable certainty
known to the person making it so payable. Thus, (NIL, Sec. 1).
checks issued to “Prinsipe Abante” or “Si Malakas at 2. A bill may be addressed to two or more drawees
si Maganda,” who are well-known characters in jointly, but not to two or more drawees in the
Philippine mythology, are bearer instruments alternative or in succession (NIL, Sec. 127). Eg.
because the named payees are fictitious and An instrument may be addressed “to A and B”
non-existent (ibid., pg. 9-10). but not “to A or B”.
3. An instrument payable “to the order of the
bearer” has been held to be an instrument
payable to “order” (10 C.J.S. 575-576).
1. Promissory notes (PN) – An unconditional promise 1. Where in a bill the drawer and the drawee are the
in writing made by one person to another, signed same person (Sec. 130, NIL)
NOTE: If the negotiable instrument is dated, such date is NOTE: In order, however, that any such instrument when
deemed a prima facie proof that it is the true date of the completed may be enforced against any person who
making, drawing, acceptance or indorsement of the became a party thereto prior to its completion, it must be
instrument (NIL, Sec. 11). filled up strictly in accordance with the authority given and
within a reasonable time (ibid).
XPNs: Date is important to determine maturity:
1. Where the instrument is payable within a specified Effect if a completed instrument was negotiated to a
period after date, or after sight. holder in due course
2. When the instrument is payable on demand, date
is necessary to determine whether the instrument After completion, the completed instrument which
was presented within a reasonable time from issue, was subsequently negotiated to a HIDC, is valid and
or from the last negotiation. effectual for all purposes in his hands, and he may
3. When the instrument is an interest-bearing one, to enforce it as if it had been filled up strictly in
determine when the interest starts to run. accordance with the authority given and within a
reasonable time (ibid).
Instance when a holder may insert the date in an
instrument NOTE: Hence, the defense that the blanks were filled up
beyond the authority given and/ or beyond the reasonable
time, is not available as against a HIDC. This defense is
1. Where an instrument expressed to be payable at a
merely a personal one.
fixed period after date is issued undated, or
2. Where the acceptance of an instrument payable at
a fixed period after sight is undated (NIL, Sec. 13). INCOMPLETE BUT DELIVERED INSTRUMENTS
(Sec. 14)
Effect of insertion of a wrong date
Person authorized to fill up the blanks in an
The insertion of a wrong date does not avoid the incomplete but undelivered instrument
instrument in the hands of a subsequent holder in
due course, but as to a HIDC, the date so inserted is The holder has a prima facie authority to complete it
to be regarded as the true date (ibid.). (NIL, Sec. 14).
Conditional delivery or delivery for a special purpose GR: Only persons whose signatures appear on an
instrument are liable thereon (NIL, Sec. 18).
The delivery is made conditional or for a special
purpose if it was made not for the purpose of XPNs: Notwithstanding the absence of their
transferring the property (title) to the instrument. In signatures in their own names, the following persons
such case, if the instrument lands in the hands of a are deemed liable: (TraP FAP)
HIDC (one who does not know of the conditional 1. Person who signs in Trade or assumed name (Sec.
delivery or of its special purpose), the instrument is 18, NIL.) – Party who signed must have intended to
treated as if there is no condition. be bound by his signature.
2. Principal who signs through a duly authorized
if such delivery was made to a holder not in due agent and such agent discloses the name of his
course, prior parties are not bound by the instrument principal and adding words to show he is merely
(NIL, Sec. 16). signing in a representative capacity (NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23)
NOTE: The law contemplates that the condition is orally or 4. Acceptor, who makes his acceptance of a bill on
verbally conveyed to the holder upon delivery, because of a separate paper (NIL, Sec. 134)
the rule that the negotiability is determined only upon the 5. Person, who makes a written Promise to accept the
face of the instrument.
bill before it is drawn (NIL, Sec. 135)
Presumption as to delivery NOTE: Where a signature is so placed upon the instrument
that it is not clear in what capacity the person signed, he is
If the instrument is in the possession of a HIDC, valid deemed to be an indorser (NIL, Sec. 17[f]), not a maker or
delivery is conclusively presumed. drawer.
If the instrument is in the possession of a party other Q: Juan borrowed P10,000 from Joe as evidenced by
than a HIDC, possession of such party constitutes only a promissory note. All other requisites of
prima facie presumption of delivery. negotiability are present except that Juan did not
affix his usual signature thereon as he was ailing at
that time and was only able to put “X” in the blank
space meant for the signature of the maker. Is the
Requisites for an agent to be exempt from liability Minor can be bound by his representation that he is
of legal age
1. He is duly authorized
2. He adds words to his signature indicating that he Where he committed actual fraud by specifically
signs as an agent/representative and stating that he is of legal age, a minor can be bound
3. He discloses the name of his principal (NIL, Sec. by his signature in an instrument (PNB v. CA, G.R. No.
20). L-34404, June 25, 1980).
Burden of proof in proving forgery GR: It does not avoid the instrument but only the
forged signature. The signature is wholly inoperative.
Forgery, as any other mechanism of fraud must be In other words, rights may still exist and be enforced
proven clearly and convincingly, and the burden of by virtue of such instrument as to those signatures
proof lies on the party alleging forgery (Chiang Yia thereto are found to be genuine.
Min v. CA, G.R. No. 137932, Mar. 28, 2001).
However, a forged indorsement prevents any
Extent and effects of forgery subsequent parties from acquiring any right against
any party prior to the forgery. Such forged
1. Only the signature forged or made without indorsement cuts off the rights against prior parties
authority is the one inoperative, the instrument to the forger (Cut-off rule).
itself and the genuine signatures are valid.
2. An instrument indorsed which on its face is XPNs:
payable to bearer may be enforced by the holder 1. If the party against whom it is sought to enforce
to whose title over the instrument the forged such right is precluded from setting up forgery or
signature is not necessary. want of authority (NIL, Sec. 23).
3. The instrument can be enforced against those 2. Where the forged signature is not necessary to the
who are precluded from setting up forgery. holder’s title, in which case, the forgery may be
disregarded (NIL, Sec. 48).
Illustration
Persons precluded from setting up the defense of
Pay to P or order P10,000 30 days after sight. forgery
NOTE: For the purpose of determining whether the 4. Qualified (NIL, Sec. 38) – Constitutes the indorser
transferee is a HIDC, the negotiation takes effect at the a mere assignor of the title to the instrument
time when the indorsement is actually made. made by adding to the indorser’s signature
words like, without recourse, sans recourse or at
KINDS OF INDORSEMENTS the indorsee’s own risk (this serves as an
ordinary equitable assignment) (NIL, Sec. 38).
Indorsement 5. Absolute – The indorser binds himself to pay:
a. Upon no other condition than failure of prior
It is the signing of the name of the indorser on the parties to do so
instrument with the intent to transfer title to the b. Upon due notice to him of such failure
same.
6. Conditional – Right of the indorsee is made to
Where the indorsement should be placed depend on the happening of a contingent event.
Party required to pay may disregard the
1. On the instrument itself; or conditions (NIL, Sec. 39).
2. On a separate piece of paper attached to the
NOTE: The condition refers to the indorsement not on
instrument called “allonge” (NIL, Sec. 31)
the instrument itself.
Rules on indorsement
7. Joint – Indorsement made payable to 2 or more
persons who are not partners (NIL, Sec. 41).
GR: Indorsement must be of the entire instrument
(NIL, Sec. 32). NOTE: All of them must indorse unless the one
indorsing has authority to indorse for the others.
XPN: When the instrument has been paid in part. 1. Irregular (NIL, Sec. 64) – A person who,
not otherwise a party to an instrument,
NOTE: Indorsement to two or more indorsees severally places thereon his signature in blank
does NOT operate as a negotiation of the instrument. before delivery.
1. To receive payment of the instrument; GR: Every negotiation is deemed prima facie to have
2. To bring any action thereon that the indorser been effected before the instrument was overdue.
could bring; and
3. To transfer his rights as such indorsee, where the XPN: Except where an indorsement bears date after
form of the indorsement authorizes him to do so the maturity of the instrument (Sec. 45).
(Sec. 37, NIL).
Continuation of negotiable character
NOTE: All subsequent indorsees acquire only the title of the
1st indorsee under the restrictive indorsement (Sec. 37, GR: An instrument negotiable in origin is always
NIL). negotiable until paid, which is still true even if the NI
was dishonored or is already overdue.
Effect of a qualified indorsement
XPNs:
A qualified indorsement does NOT destroy the 1. When the instrument has been restrictively
negotiability of the instrument. It only means that the indorsed;
qualified indorser is NOT liable when the maker is 2. When discharged by payment or otherwise
insolvent. A qualified indorser is liable only if the (NIL, Sec. 47)
instrument is dishonored by non-acceptance or
non-payment due to: Striking out of an indorsement
1. Forgery;
2. Lack of good title on the part of the indorser; The holder may, at any time, strike out any
3. Lack of capacity to indorse on the part of the indorsement which is not necessary to his title.
prior parties; or Indorser whose indorsement is struck out, and all
4. The fact that at the time of the indorsement, indorsers subsequent to him, are relieved from
the instrument was valueless or not valid at the liability on the instrument (Sec. 48).
time of the indorsement which fact was known to
him. Negotiation by a prior party
NOTE: Presence or absence of defect or infirmity must be DEFENSES AGAINST THE HOLDER
determined at the time the instrument was negotiated to
the holder. Defenses against the holder
Payee as holder in due course The defenses available against the holder are
classified as follows:
There can be no doubt that a proper interpretation of 1. Real or Absolute Defenses – those that are
NIL as a whole leads to the conclusion that a payee attached to the instrument itself and are available
may be a holder in due course under the against all parties, both immediate and remote,
circumstances in which he meets the requirements of including holders in due course.
Sec. 52 (De Ocampo v. Gatchalian, supra).
2. Personal or Equitable Defenses –defenses which
Drawee as holder in due course are only available against a holder not in due course.
Those which grow out of the agreement or conduct
A drawee does not become a HIDC by simply paying a of a particular person which renders it inequitable for
bill. A holder refers to one who has taken the him, though holding the legal title, to enforce it
instrument as it passes along in the course of against the party sought to be made liable.
negotiation; whereas a drawee, upon acceptance and
GR: Only the drawee may accept. A stranger or General Indorser Irregular Indorser
volunteer is not bound by acceptance. Makes either a blank or Always makes a blank
special indorsement indorsement
XPN: In case of a bill which is accepted for honor
supra protest (Sec. 161, NIL). Indorses the Indorses before its
instrument after its delivery to the payee
NOTE: Drawee does not become liable until he accepts the delivery to the payee
instrument in which case he becomes an acceptor. An
acceptor engages to pay according to the tenor of his Liable only to parties Liable to the payee and
acceptance, which may not be the same as the tenor of the
subsequent to him subsequent parties
bill itself because the acceptance may be qualified.
unless he signs for the
accommodation of the
Difference between the liability of an acceptor or
payee in which case he
drawee-acceptor and a maker
is liable only to all
parties subsequent to
While both are primarily liable, the acceptor engages
the payee (Sec. 64, 66,
to pay the negotiable instrument according to the
NIL; De Leon, supra)
tenor of his acceptance. On the other hand, the
Instance when presentment for payment is not NOTE: “Last negotiation” means the
necessary to charge persons secondarily liable Bill of last transfer for value. Subsequent
exchange transfers between banks for
1. As to drawer, where he has no right to expect or payable on purposes of collection are not
negotiations within Sec. 71.
require that the drawee or acceptor will pay the demand
instrument (Sec. 79, NIL). “Reasonable time” means not more
2. As to indorser where the instrument was made or than 6 months from the date of
accepted for his accommodation and he has no issue. Beyond said period, the check
reason to expect that the instrument will be paid becomes stale and valueless and
if presented (Sec. 80, NIL). thus, should not be paid.
Rules on presentment for payment when maturity Time of presentment where the instrument is
date is fixed payable at a bank
TIME OF MATURITY WHEN TO PRESENT Presentment must be made during banking hours,
OF INSTRUMENT FOR PAYMENT unless the person to make payment has no funds
On a Sunday or On the next there to meet it at any time during the day, in which
holiday succeeding business case presentment at any hour before the bank is
day closed on that day is sufficient (Sec. 75, NIL.)
On a Saturday On the next
succeeding business Requisites of payment in due course
day
If instrument which Before 12:00 noon on Payment is made in due course when (MHG)
falls due on a Saturday Saturday, or on 1. It is made at or after the date of Maturity;
is payable on demand Monday, at the option 2. To the Holder thereof;
of the holder 3. In Good faith and without notice that holder’s
title is defective (Sec. 88, NIL).
Instances when delay in making presentment is
excused NOTE: The term “in good faith” refers to the maker or
acceptor and not to the holder.
1. When caused by circumstances beyond the
control of the holder; and PARTIES TO WHOM PRESENTMENT FOR PAYMENT
2. Not imputable to his default, misconduct, or SHOULD BE MADE
negligence (Sec. 81, NIL).
Parties to whom presentment for payment should
NOTE: Only the delay in presentment is excused and not be made
the presentment itself. Hence, as soon as the cause of delay
ceases to operate, presentment must be made with GR: Presentment for payment must be made to the
reasonable diligence (ibid.). primary party; to the:
1. The maker in case of a promissory note, or
Q: Is the bank liable to the payee for depositing and 2. The acceptor in case of an accepted bill. If the
encashing the crossed checks to an unauthorized bill of exchange or check is payable on demand,
person? the presentment must be made to the drawee
although he is not automatically liable on the
A: Yes, the effects of crossing a check relate to the bill.
mode of its presentment for payment. Under Sec. 72
of the NIL, presentment for payment, to be sufficient, XPNs: Where the person/s primarily liable is/are:
must be made by the holder or by some person 1. Dead – payment must be made to his personal
authorized to receive on his behalf. The checks here representative (Sec. 76, NIL).
had been crossed and issued “for payee’s account 2. Liable as partners and no place of payment
only.” This only signifies that the drawer had specified – payment may be made to any of them
intended the same for deposit only by the person though there has been a dissolution of the firm (Sec.
indicated (Associated Bank v. CA, G.R. No. 89802, 77, NIL).
May 7, 1992). 3. Several persons, not partners, and no place of
payment is specified – payment must be made to all
Order of preference with regard to the place of of them (Sec. 78, NIL).
presentment 4. If the person primarily liable is absent or
inaccessible, then presentment must be made to any
1. Specified place in the instrument person of sufficient discretion at the proper place of
2. Address of the person to make the payment if presentment (Sec. 72[d], NIL).
given in the instrument
3. Usual place of business or residence of the
person to make the payment
4. Wherever he can be found; or
GR: Drawer and the indorsers are discharged from It is a notice given by the holder to the parties
their secondary liability. secondarily liable, drawer and each indorser, that the
instrument was dishonored by non-payment or
XPNs: non-acceptance by the drawee/maker.
1. Presentment for payment is not required to charge
drawer and indorser when: NOTE: Persons primarily liable need not be given notice of
a. Drawer- when he has no right to expect or dishonor because they are the ones who dishonored the
instrument.
require that the drawee or acceptor will pay the
instrument (Sec. 79, NIL).
b. Indorser – When the NI was made or accepted Purposes for requiring notice of dishonor
for his accommodation and he has no reason to
1. To inform parties secondarily liable that the
expect that the instrument will be paid if
presented (Sec. 80, NIL). maker or acceptor has failed to meet his
engagement.
2. To advise them that they are required to make
2. When presentment for payment is dispensed with
payment.
under Sec. 82, NIL
3. When the BOE has been dishonored by
non-acceptance, since no PP for is necessary (Sec. Q: Notice of dishonor is not required to be made in
all cases. One instance where such notice is not
151, NIL).
necessary is when the indorser is the one to whom
the instrument is supposed to be presented for
Instances when presentment for payment may be
payment. The rationale here is that the indorser
dispensed with
(2011 Bar Question)
1. Where, after the exercise of reasonable
A: Already knows of the dishonor and it makes no
diligence, presentment cannot be made;
sense to notify him of it.
2. Where the drawee is a fictitious person; or
3. By waiver of presentment, express or implied
Time and place of giving the notice of dishonor
(Sec. 82, NIL).
1. GR: As soon as instrument was dishonored (Sec.
DISHONOR BY NON-PAYMENT
102, NIL.)–Party is allowed one entire day for the
purpose of giving notice.
Instances when an instrument is dishonored by
non-payment
XPN: Delay is excused (Sec. 113, NIL).
NON-PAYMENT UPON NON-PAYMENT
NOTE: An instrument cannot be dishonored by
DUE PRESENTATION W/OUT non-payment until after the maturity.
PRESENTATION
The instrument is duly Presentment is 2. Parties reside in the same place
presented for excused and the a. Place of business – Before close of business
payment to party instrument is overdue hours on the day following
primarily liable and it and unpaid (Sec. 83, b. Residence – Before the usual hours of rest on
is either refused or NIL). the day following
cannot be obtained c. By mail – Deposited in the post office in time
to reach him in the usual course on the day
Effect of dishonor by non-payment following (Sec. 103, NIL)
Subject to the provisions of the law, when the 3. Parties reside in different places
instrument is dishonored by non-payment, an a. By mail – Deposited in the post office in time
immediate right of recourse to all parties secondarily to go by mail (actual departure in the course of
liable thereon accrues to the holder (Sec. 84, NIL). mail from the post office in which the notice was
deposited) the day following the day of
dishonor.
Liability of a person secondarily liable when the Effect of notice of dishonor if given by or on behalf
instrument is dishonored of the holder
After the necessary proceedings for dishonor had Notice of dishonor inures to the benefit of:
been duly taken, an immediate right of recourse to all 1. All holders subsequent to the holder who has
parties secondarily liable thereon accrues to the given notice; and
holder (Sec. 84). 2. All parties prior to the holder but subsequent to
the party to whom notice has been given and
PARTIES TO BE NOTIFIED against whom they may have a right of recourse
(Sec. 92, NIL)
Parties to whom notice must be given
Effect of notice of dishonor if given by party entitled
Notice of dishonor should be given to: thereto
1. The drawer; or
2. Indorser; or Notice of dishonor inures to the benefit of:
3. His agent (Sec. 97, NIL) 1. The holder; and
4. Where party is dead – to a personal 2. All parties subsequent to the party to whom
representative or sent to the last residence or notice is given (Sec. 93, NIL).
last place of business of the deceased (Sec. 98,
NIL) Effect of failure to give notice of dishonor
5. When the parties to be notified are partners –
notice to any one partner though there has been Any drawer or indorser to whom such notice is not
a dissolution (Sec. 99, NIL) given is discharged (Sec. 89, NIL)
A: No, since the drawer and drawee are the same 1. No acceleration clause – Failure to give notice of
person. dishonor on a previous installment does not
discharge drawers and indorsers as to succeeding
Q: Juben issued to Y two post-dated checks as installments.
security for pieces of jewelry to be sold. Y
negotiated the check to S. When Juben failed to sell 2. With acceleration clause – It depends upon
the jewelry, he withdrew all his funds from the whether the clause is automatic or optional.
drawee bank. After dishonor, Juben contends that a. Automatic – failure to give notice of dishonor as
the holder failed to give him a notice of dishonor. Is to a previous installment will discharge the
notice of dishonor necessary? persons secondarily liable as to the succeeding
installments;
A: No, Juben was responsible for the dishonor of his b. Optional – if not exercised, the rule would be
checks, hence, there was no need to serve him notice the same as if there is no acceleration clause. If
of dishonor (State Investment House, Inc. v. CA, G.R. exercised, the rule would be the same as if the
No. 101163, Jan. 11, 1993). installment contains an automatic acceleration
clause (Town Savings Bank v. CA, G.R. No. 106011,
Instances when it is not necessary to give a notice of June 17, 1993).
dishonor to the indorser
DISCHARGE OF NEGOTIABLE INSTRUMENT
1. Drawee is fictitious or has no capacity to
contract, and indorser was aware of these facts It is the release of all parties, whether primary or
at the time he indorsed the instrument; secondary, from the obligations arising thereunder. It
2. Indorser is person to whom the instrument is renders the instrument without force and effect, and
presented for payment; or consequently, it can no longer be negotiated.
3. Instrument was made or accepted for his
accommodation (Sec. 115, NIL). DISCHARGE OF NEGOTIABLE INSTRUMENT
It is any change in the instrument which affects or There is no material alteration when the serial
changes the liability of the parties in any way. number of a check had been altered
Instances that constitute material alteration An alteration is said to be material if it alters the
effect of the instrument. It means an unauthorized
Any alteration which changes: change in an instrument that purports to modify in
1. Date any respect the obligation of a party or an
2. Sum payable, either for principal or interest unauthorized addition of words or numbers or other
3. The time or place of payment change to an incomplete instrument relating to the
4. Number or the relations of the parties obligation of a party. The alteration of the serial
5. Currency in which payment is to be made number of a check did not change the relations
6. Adds a place of payment where no place is between the parties nor the effect of the instrument.
specified Hence, the alteration on the serial number of a check
7. Any other change or addition which alters the is not a material alteration (International Corporate
effect of the instrument (Sec. 125, NIL.) Bank vs. CA, G.R. No. 141968, Feb. 12, 2001).
NOTE: The change in the date of indorsement is not Q: A material alteration of an instrument without
material where the date is not necessary to fix the maturity the assent of all parties liable thereon results in its
of the instrument. avoidance, except against: (2011 Bar Question)
GR: It is not necessary to render any party to the Effect of failure to make presentment for payment
bill liable (par. 2, Sec. 143, NIL). of a check within a reasonable time
Duty of the holder where bill is not accepted Special types of promissory notes
If within 24 hours after due presentment, the bill is 1. Certificate of deposit – a written
not accepted, the person presenting it must treat the acknowledgment by a bank of the receipt of money
bill as dishonored by non-acceptance otherwise he on deposit on which the bank promises to pay to the
will lose the right of recourse against the drawer and depositor or to him or his order or to some other
indorsers (Sec. 150, NIL). person or to him or his order, or to a specified person
or bearer, on demand or on a fixed date, often with
Rules when a bill is dishonored by non-acceptance interest.
2. Bonds – an evidence of indebtedness issued by a
1. Right of recourse against all secondary party public or private corporation which constitutes a
accrues to the holder. promise, under seal, to pay money. It runs for a
2. No presentment for payment is necessary since longer period of time than a PN.
dishonor of the instrument by non-payment is to be 3. Registered bond – one payable only to the
expected. person whose name appears on the face of the
3. If the instrument is accepted after it has been certificate.
dishonored by non-acceptance, presentment for 4. Coupon bond – one to which are attached
payment is necessary upon maturity. coupons which entitle the holder to interest when
4. In case of non-payment, holder must give the due.
corresponding notice of dishonor; otherwise, 5. Bank Note – instrument issued by a bank for
secondary parties are discharged. circulation as money payable to bearer on demand.
Memorandum check
TIME
Time
EFFECTS OF DELAY
Effects of delay
NOTE: A contract of insurance, to be binding from the date Insurance as contracts of adhesion (Fine Print Rule)
of application, must have been a completed contract (Perez
vs. CA, GR No. 112329, January 28, 2000). Thus, it must While generally, stipulations in a contract come about
have all the essential elements of a valid contract as after deliberate drafting by the parties thereto, there
enumerated in Art. 1318 of the New Civil Code:
are certain contracts almost all the provisions of
1. Subject matter in which the insured has an insurable
interest;
which have been drafted only by one party, usually a
2. Consideration, which is the premium paid by the insured, corporation. Such contracts are called contracts of
for the insurer’s promise to indemnify the former upon the adhesion, because the only participation of the other
happening of the event or peril insured against; party is the signing of his signature or his 'adhesion'
3. Meeting of minds of the parties. thereto. Insurance contracts fall into this category
(Sweet Lines, Inc. vs. Teves, GR No. L-37750, May 19,
“Doing an insurance business” or “transacting an 1978). An illustration of a contract of adhesion is
insurance business” when the insurer used “fine print” letters in
conditions stated in a contract of insurance (Ibid).
The term “doing an insurance business” or
“transacting an insurance business” means: (ISRA) Rules in the construction or interpretation of
1. Making or proposing to make, as Insurer, any insurance contracts
insurance contract;
2. Making or proposing to make, as Surety, any By reason of the exclusive control of the insurance
contract of suretyship as a vocation and not as company over the terms and phraseology of the
merely incidental to any other legitimate business contract, the ambiguity must be held strictly against
or activity of the surety; the insurer and liberally in favor of the insured (Qua
3. Doing any kind of business, including a Chee Gan v Law Union and Rock Insurance, supra).
reinsurance business, specifically Recognized as However, if the terms, which the parties themselves
constituting the doing of an insurance business. have used, are clear and unambiguous, they must be
4. Doing or proposing to do any business in taken and understood in their plain, ordinary and
substance equivalent to Any of the foregoing in a popular sense (Sun Life Office, Ltd. vs. CA, 195 SCRA
manner designed to evade the provisions of the 193).
Insurance Code.(Sec. 2[b], ibid).
Parties to the contract of insurance
NOTE: In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the making of 1. Insurer – party who assumes or accepts the risk of
the insurance contracts, agreements or transactions or that loss and undertakes for a consideration to indemnify
no separate or direct consideration is received therefor,
the insured on the happening of a specified
shall NOT be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an contingency or event.
insurance business (Ibid).
Event or peril insured against NOTE: In general (except in life insurance policies), a
person is deemed to have an insurable interest in the
It is any contingent or unknown event, whether past subject matter insured where he has a relation or
connection with or concern in it that he will derive
or future, which may damnify a person having an
pecuniary benefit or advantage from its preservation
insurable interest, or create a liability against him
and will suffer pecuniary loss from its destruction or
subject to the provisions of Chapter I of the Insurance injury by the happening of the event insured against.
Code (Sec. 3, Insurance Code).
A life insurance policy may be taken by the creditor on
Consent of spouse not necessary the life of the debtor to the extent of the debt owed
by the debtor.
The consent of the spouse is not necessary for the
validity of an insurance policy taken out by a married On the other hand, no contract of policy of insurance
on property shall be enforceable except for the
person on his or her life or that of his or her children
benefit of some person having an insurable interest in
(Sec. 3, Insurance Code). the property insured. The lessor cannot be validly a
beneficiary of an insurance policy taken by a lessee
NOTE: Prior to the effectivity of the Insurance Code of over his merchandise, and the provision in the lease
2013, the term used was “husband” instead of “spouse” contract for such automatic assignment is void for
(Sec. 3, Insurance Code). being contrary to law and/or public policy – the insurer
cannot be compelled to pay the proceeds of the policy
Effect of death of policy’s original owner to a person who has no insurable interest in the
property insured (Cha v. Court of Appeals, 277 SCRA
All rights, title and interest in the policy of insurance 690 [1997]).
taken out by an original owner on the life or health of
the person insured shall automatically vest in the 4. Assumption of Risk – The insurer assumes that
latter upon the death of the original owner, unless risk of loss for a consideration.
otherwise provided for in the policy (Sec. 3, Insurance 5. Risk of loss – The insured is subject to a risk of
Code). loss through the destruction or impairment of that
interest by the happening of designated peril.
NOTE: Prior to the effectivity of the Insurance Code of
2013, the term used was “minor” instead of “the person NOTE: The inherent uncertainty of events is normally
insured.” A minor cannot enter into any contract of described in terms of risk. A contract possessing only the
insurance with any insurance company. last three elements enumerated above is a risk-shifting
device, but NOT a contract of insurance which is a
Games of chances cannot be insured risk-distributing device (De Leon, 2006).
An insurance for or against the drawing of any Consequently, however, the existence of insurance could
have the perverse effect of increasing the probability of
lottery, or for or against any chance or ticket in a
loss. This is when the insured, having in mind the
lottery drawing a prize is not authorized (Sec. 4, indemnification for loss or damage caused by the
Insurance Code). happening of the event insured against, would have
reduced incentive to take steps to protect himself or his
ELEMENTS OF CONTRACT OF INSURANCE property, subject of insurance. This phenomenon is called
moral hazard (ibid, pg. 28.).
Elements of contract of insurance (SPEAR)
CHARACTERSITICS AND NATURE OF AN INSURANCE
1. Scheme to distribute losses – Such assumption of CONTRACT
risk is part of a general scheme to distribute
actual losses among a large group or substantial Characteristics of an insurance contract
number of persons bearing a similar risk.
2. Payment of premium – As consideration for the 1. Consensual – It is perfected by the meeting of the
insurer’s promise, the insured makes a ratable minds of the parties as to the object, cause and
contribution called “premium,” to a general consideration of the insurance contract. There should
insurance fund. be acceptance of the application for insurance.
3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible of
“Perils of the ship” GR: It is that which insures against all causes of
conceivable loss or damage.
It is a loss which, in the ordinary course of events,
results from the (NON): XPNs:
1. Natural and inevitable action of the sea; 1. As otherwise excluded in the policy; or
2. Ordinary wear and tear of the ship; 2. Due to fraud or intentional misconduct on the
3. Negligent failure of the ship’s owner to part of the insured (Choa Tiek Seng v. CA, G.R. No.
provide the vessel with proper equipment 84507 March 15, 1990).
to convey the cargo under ordinary
conditions. NOTE: An “all risks” policy grants greater protection than
that afforded by the “perils clause” (De Leon, supra, pg.
Q: Remington Industrial Sales Corporation 313). The insured under an "all risks insurance policy" has
the initial burden of proving that the cargo was in good
(Remington) shipped on board a vessel seamless
condition when the policy attached and that the cargo was
steel pipes from Japan to the Philippines and insured damaged when unloaded from the vessel; thereafter, the
the shipment with Cathay Insurance Co. (Cathay). burden then shifts to the insurer to show the exception to
Upon receipt of said shipment, losses and damages the coverage (Filipino Merchants Insurance Co. vs. CA, 179
were discovered. Upon demand under the insurance SCRA 638).
contract, it was denied by Cathay. Remington
contends that the rust on the seamless still pipes is Extent of the insurable interest
not an inherent vice of the shipment, thus the same
is considered as a peril of the sea. Cathay, on the 1. Ship owner
other hand claims that the loss was occasioned by a. Over the value of the vessel, even when it has
an inherent defect or vice in the insured article. Is been chartered by one who covenants to pay him
the “rusting” of the seamless steel pipes considered its value in case of loss. In such a case, the insurer
as a “peril of the sea”? shall be liable for only that part of the loss which
the insured cannot recover from the charterer
A: Yes. The rusting of steel pipes in the course of a (Sec. 102, Insurance Code).
voyage is a “peril of the sea” in view of the toll on the b. If hypothecated by a bottomry loan, the
cargo of wind, water, and salt conditions. Moreover, insurable interest is only the excess of the value of
it is a cardinal rule in the interpretation of contracts the vessel over the amount secured by bottomry
that any ambiguity therein should be construed (Sec. 103, Insurance Code).
against the maker/issuer/drafter thereof, namely, the c. He also has an insurable interest on expected
insurer. Besides the precise purpose of insuring cargo freightage (Sec. 104, Insurance Code).
during a voyage would be rendered fruitless (Cathay
Insurance Co., v. CA, et al., G.R. No. L-76145, June 30, 2. Cargo owner – over the cargo and expected profits
1987). (Sec. 107, Insurance Code).
NOTE: Information of the belief or expectation of a third Effect of falsity of a representation by the insured
person, in reference to a material fact, is material (Sec. 110,
Insurance Code). 1. Promissory Representation - If a representation
by the insured is intentionally false in any material
Presumption of knowledge of prior loss in marine respect or in respect of any fact on which the
insurance character and nature of the risk depends, the insurer
may rescind the entire contract (Sec. 113, Insurance
A person insured by a contract of marine insurance is Code).
presumed to have knowledge, at the time of insuring, 2. Representation of Expectation - The eventual
of a prior loss, if the information might possibly have falsity of a representation as to expectation does not,
reached him in the usual mode of transmission and at in the absence of fraud, avoid a contract of marine
the usual rate of communication (Sec. 111, Insurance insurance (Sec. 114, Insurance Code).
Code). The presumption, however, is rebuttable.
Implied warranties in marine insurance (SINAI)
Concealment in respect to any of the following
matters does not vitiate the entire contract but 1. Seaworthiness (Sec. 115 to 121, Insurance Code).
merely exonerates the insurer from a loss resulting 2. Non-engagement from Illegal venture.
from the risk concealed 3. Warranty of Neutrality – The ship will carry the
requisite documents too show the nationality or
1. National character of the insured; neutrality of the ship or its cargo and will not
2. The liability of the thing insured to capture and carry any documents that cast reasonable
detention; suspicion on it if the nationality or neutrality of
3. The liability to seizure from breach of foreign the ship or its cargo is expressly warranted (Sec.
laws of trade; 122, Insurance Code).
4. The want of necessary documents; and 4. Non-deviation from the Agreed voyage (Secs.
5. The use of false and simulated papers (Sec. 112, 125, 126, 127, Insurance Code).
Insurance Code). 5. Presence of Insurable interest.
If the policy provides that the seaworthiness of the When the voyage contemplated by a marine
vessel as between insured and insurer is admitted, insurance policy is described by the places of
the issue of seaworthiness cannot be raised by the beginning and ending, the voyage insured is one
insurer without showing concealment or which conforms to the course of sailing fixed by
misrepresentation by the insured (Phil. American mercantile usage between those places (Sec. 123,
General Insurance Co. v. CA, G.R. No. 116940, June 11, Insurance Code).
1997).
NOTE: If the course of sailing is not fixed by mercantile
Effect if unseaworthiness is unknown to the owner usage, the voyage insured is that way between the places
of the cargo specified, which to a master of ordinary skill and discretion,
would mean the most natural, direct and advantageous
(Sec. 124, Insurance Code).
It is immaterial in ordinary marine insurance and may
not be used by him as a defense in order to recover
Deviation
on the marine insurance policy. It becomes the
obligation of a cargo owner to look for a reliable
It is a departure from the course of the voyage
common carrier, which keeps its vessels in seaworthy
insured, mentioned in Sec. 123 and Sec. 124, or an
conditions. The shipper may have no control over the
unreasonable delay in pursuing the voyage or the
vessel but he has control in the choice of the
commencement of an entirely different voyage (Sec.
common carrier that will transport his goods (Roque
125, Insurance Code).
v. IAC, G.R. No. L- 66935, Nov. 11, 1985).
Instances when deviation is proper
Effect of payment made by the insurer to the
insured for the latter’s lost cargo in case the ship is
1. When caused by circumstances over which
unseaworthy
neither the master nor the owner of the ship has
any control;
The marine insurer is bound for: NOTE: This kind of average is suffered by and borne
1. Damages; alone by the owner of the cargo or of the vessel, as
the case may be (De Leon, 2010).
2. Expenses of discharging;
3. Storage;
Liability of the insurer as to averages
4. Reshipment;
5. Extra freightage; and
6. All other expenses incurred in saving cargo GR: The marine insurer is liable both for general
reshipped, up to the amount insured (Sec. 136, average and particular average loss.
Insurance Code).
XPN: When there is “Free From Particular Average”
NOTE: Nothing in Sec. 136 and Sec. 135 shall render a Clause in the policy making the insurer liable only for
marine insurer liable for any amount in excess of the general average.
insured value or, if there be none, of the insurable value.
NOTE: Free From Particular Average Clause (FFPA Clause) -
Average A clause agreed upon in a policy of marine insurance in
which it is stated that the insurer shall not be liable for a
particular average.
It is any extraordinary or accidental expense incurred
during the voyage for the preservation of the vessel,
XPN to XPN: When particular average loss has the
cargo, or both and all damages to the vessel and
effect of depriving the insured of the possession at
cargo from the time it is loaded and the voyage
the port of destination of the whole of the thing
commenced until it ends and the cargo unloaded (Art.
insured (Sec. 138, Insurance Code).
806, Code of Commerce).
Abandonment
Kinds of average
It is the act of the insured by which, after a
1. Gross or general averages – damages or expenses
constructive total loss he declared the relinquishment
which are deliberately caused by the master of
to the insurer of his interest in the thing insured (Sec.
the vessel or upon his authority, in order to save
140, ibid).
the vessel, her cargo or both at the same time
from a real and known risk (Art. 811, ibid).
Effect of a valid abandonment
Requisites to the right to claim general average
It is equivalent to a transfer by the insured of his
contribution
interest, to the insurer, with all the chances of
recovery and indemnity (Sec. 148, ibid).
a. There must be a common danger to the vessel
or cargo;
Requisites of valid abandonment
b. Part of the vessel or cargo was sacrificed
deliberately;
1. There must be an actual relinquishment by the
c. The sacrifice must be for the common safety
person insured of his interest in the thing insured
or for the benefit of all;
(Sec. 140, ibid).
d. It must be made by the master or upon his
2. There must be a constructive total loss (Sec. 141,
authority;
ibid).
e. It must be successful, i.e. Resulted in the
3. The abandonment must neither be partial nor
saving of the vessel or cargo; and
f. It must be necessary (Sundiang, 2014). conditional (Sec. 142, ibid).
4. It must be made within a reasonable time after
NOTE: This kind of average must be borne equally by receipt of reliable information of the loss (Sec.
all of the interests concerned in the venture (De Leon, 143, ibid).
2010). 5. It must be factual (Sec. 144, ibid).
6. It must be made by giving notice thereof to the
2. Simple or particular averages – they include all insurer which may be done orally or in writing;
damages and expenses caused to the vessel or to Provided, that if the notice be done orally, a
her cargo which have not inured to the common written notice of such abandonment shall be
Person to whom notice of abandonment may be Effect of insured’s failure to make abandonment
made
The insured has an election to abandon or not, and
To the insurer or his authorized agent or the broker cannot be compelled to abandon although
who is the agent for both parties (ibid). abandonment is proper. If the insured fails to
abandon, he may nevertheless recover his actual loss
Forms of acceptance of abandonment (Sec. 157, Insurance Code).
1. Express
2. Implied from the conduct of the insurer Measure of indemnity
NOTE: Mere silence of the insurer for unreasonable length 1. Valued policy – the parties are bound by the
of time after notice shall be construed as an acceptance valuation, if the insured had some interest at risk and
(Sec. 152, Insurance Code). there is no fraud (Sec. 158, ibid).
These are the additional expenses incurred in OCEAN MARINE FIRE INSURANCE
repairing the damages suffered by a vessel because of A policy of insurance on Where the hazard is fire
the perils insured against as well as those incurred for a vessel engaged in alone and the subject is
saving the vessel from such perils, such as the navigation is a contract an unfinished vessel,
expense of launching or raising the vessel or of of marine insurance never afloat for a voyage,
towing or navigating it into port for her safety. These although it insures the contract to insure is a
are items to be borne by the insurer in addition to a against fire risks only. fire risk, especially in the
total loss if that afterwards takes place (Sec. 165, absence of an express
Insurance Code). agreement that it shall
have the incidents of
FIRE INSURANCE marine policy, or where it
insures materials in a
Fire insurance shipyard for use in
constructing vessels.
It is a contract of indemnity by which the insurer, for
a consideration, agrees to indemnify the insured Also where a policy
against loss of or damage by fire, lightning, insures against fire, a
windstorm, tornado or earthquake and other allied vessel while moored and
risks, when such risks are covered by extension to fire in use as a hospital.
insurance policies or under separate policies (Sec. (De Leon, supra, pg. 380).
169, ibid).
Distinction between marine and fire insurance
NOTE: The liability of an insurer is to pay for direct loss
only. The insurer may be liable to pay for consequential or 1. In marine insurance, the rules on constructive
indirect losses if covered by extension to such fire policies
total loss (Secs. 133, 141, Insurance Code) and
or insured under separate policy (De Leon, 2010).
abandonment (Sec. 140, ibid) apply but not in fire
insurance;
Indirect losses
2. In case of partial loss of a thing insured for less
than its actual value, the insured in a marine
The following are indirect losses:
policy is a co-insurer of the uninsured portion
1. Physical damage caused to other property.
(Sec. 159, ibid), while the insured may only
2. Loss of earnings due to the interruption of
become a co-insurer in fire insurance if expressly
business by damage to the insured’s property.
agreed upon by the parties (Sec. 174, ibid) (De
3. Additional expenses incurred by the insurer
Leon, 2010).
following the damage to the property or
contents by an insured peril (De Leon, 2010).
Requisites in order that the insurer may rescind a
fire insurance policy on the ground of alteration
Friendly fire v. Hostile fire
made in the use or condition of the thing insured
FRIENDLY FIRE HOSTILE FIRE
1. The use or condition of the thing is specially
Fire that burns in a place Fire that escapes and limited or stipulated in the policy;
where it is supposed to burns in a place where it 2. Such use or condition is altered;
burn. is not supposed to be. It 3. The alteration is made without the consent of
E.g. Gas stove, fire place may also refer to fire that the insurer;
started out as a friendly 4. The alteration is made by means within the
fire but escapes from its control of the insured; and
original place or it 5. The alteration increases the risk (Sec. 170,
becomes too strong as it Insurance Code).
becomes out of control 6. There must be a violation of a material policy
(Sundiang, 2014). provision (Sundiang,2014).
It is an insurance covering loss or liability arising from “Accidental” v. “Intentional” as used in insurance
accident or mishap, excluding certain types of loss
which by law or custom are considered as falling ACCIDENTAL INTENTIONAL
exclusively within the scope of other types of
The terms “accident” and Intentional as used in an
insurance such as fire or marine (Sec. 176, Insurance
“accidental” have been accident policy excepting
Code).
taken to mean that which intentional injuries
happens by chance or inflicted by the insured or
Coverage of casualty insurance
fortuitously, without any other person, implies
intention or design, which the exercise of the
1. Employer's liability and workmen’s insurance –
is unexpected, unusual or reasoning faculties,
the risk insured against is the liability of the
unforeseen. The term consciousness, and
assured to make compensation or pay damages
does not, without volition. Where a
for an accident, injury, or death, occurring to a
qualification, exclude provision of the policy
servant or other employee, in the course of his
events resulting in excludes intentional
employment under statutes imposing such
damage or loss due to injury, it is the intention of
liability on employers.
fault, recklessness or the person inflicting the
2. Public utility insurance – indemnifies against
negligence of third parties injury that is controlling. If
liability on account of injuries to the person or
(Sundiang, 2014 citing Pan the injuries suffered by
property of another. It may extend to
Malayan Insurance Corp. the insured clearly
automobiles, elevators, fly wheels, libel,
V. CA, 184 SCRA 54). resulted from the
theaters, and vessels.
intentional act of a third
3. Motor vehicle liability insurance – is a contract of
person, the insurer is
insurance against passenger and third-party
relieved from liability as
liability for death or bodily injuries and damage
stipulated (Sundiang,
to property arising from, motor vehicle accidents.
2014 citing Biagtan v. The
4. Plate glass insurance – an insurance against loss
Insular Life Assurance Co.
from accidental breaking of plate-glass windows,
Ltd, 44 SCRA 58 [1972]).
doors, showcases, etc.
5. Burglary and theft insurance – an insurance Rules on Third party liability insurance
against loss of property by the depredations of
1. Insurable interest is based on the interest of the
burglars and thieves.
insured in the safety of the persons, and their
6. Personal accident insurance – a form of insurance
property, who may maintain an action against him in
which undertakes to indemnify the assured
case of their injury or destruction respectively (De
against the expense, loss of time, and suffering
Leon, 2010).
resulting from accidents causing him physical
injury, usually by payment at a fixed rate per 2. In a TPL insurance contract, the insurer assumes
week while the consequent disability lasts, and the obligation by paying the injured third party to
sometimes including the payment of a fixed sum whom the insured is liable. Prior payment by the
to his heirs in case of his death by accident within insured to the injured third person is not necessary in
the term of the policy. order that the obligation of the insurer may arise. The
Source of liability of a Third party liability insurance Liability of insurer if the insured was committing a
felony
The insurer’s liability is based on contract; that of the
insured is based on tort (Malayan Insurance Co. vs. Liabilities arising out of acts of negligence, which are
CA, 165 SCRA 136 [1988]). also criminal, are also insurable on the ground that
such acts are accidental. Thus, a motor insurance
Q: Lawrence, a boxer, is a holder of an accident policy covering the insured’s liability for accidental
insurance policy. In a boxing match, he died after injury caused by his negligence, even though gross
being knocked out by the opponent. Can his father and attended by criminal consequences such as
who is a beneficiary under said insurance policy homicide through reckless imprudence, will not be
successfully claim indemnity from the insurance void as against public policy. But liability
company? (1990 Bar Question) consequences of deliberate criminal acts are not
insurable (Sundiang, 2014).
To give immediate financial assistance to victims of Actual legal owner of a motor vehicle, whose name
motor vehicle accidents and/or their dependents, such vehicle is duly registered with the Land
especially if they are poor regardless of financial Transportation Office (Sec. 386, [d], ibid).
capability of motor vehicle owners or operators
responsible for the accident sustained (First 5. Land transportation operator (LTO)
Integrated Bonding Insurance Co., Inc. v. Hernando,
G.R. No. L-51221, July 31, 1991). The owner or owners of motor vehicles for
transportation of passengers for compensation,
NOTE: The insurer’s liability accrues immediately upon the including school buses (Sec. 386, [e], ibid).
occurrence of the injury or event upon which the liability
depends, and does not depend on the recovery of Persons required to maintain a compulsory motor
judgment by the injured party against the insured (Shafer v.
vehicle liability insurance (CMVLI) policy to operate
Judge, RTC, 167 SCRA 386).
motor vehicle/s in public highways
Definitions
1. Motor vehicle owner (MVO)
2. Land transportation operator (LTO) (Sec. 387,
1. Motor vehicle
ibid).
Any vehicle propelled by any power other than
Scope of coverage required for compulsory motor
muscular power using the public highways, but
vehicle liability insurance
excepting road rollers, trolleys cars, street sweepers,
sprinklers, lawn mowers, bulldozers, graders, forklifts,
1. For MVOs, the coverage must be comprehensive
amphibian trucks, and cranes if not used in public
against third party liability for death or bodily
highways, vehicles which run only on rails or tracks,
injuries. If the private motor vehicle is being used
and tractors, trailers and traction engines of all kinds
to transport passengers for compensation, the
used exclusively for agricultural purposes (Sec. 3[a] of
coverage shall include passenger liability.
RA 4136).
2. For LTOs, coverage must be comprehensive
NOTE: Trailers having any number of wheels, when
against both passenger and third-party liabilities
propelled or intended to be propelled by attachment to a for death or bodily injuries (Ins. Memo. Cir. No.
motor vehicle shall be classified as separate motor vehicle 3-81).
with no power rating (ibid).
Substitutes for a compulsory motor vehicle liability
2. Passenger insurance policy
Any fare-paying person being transported and Instead of a CMVLI policy, MVOs or LTOs may either:
conveyed in and by a motor vehicle for transportation 1. Post a surety bond with the Insurance
of passengers for compensation, including persons Commissioner who shall be made the obligee or
expressly authorized by law or by the vehicle’s creditor in the bond in such amount or amounts
operator or his agents to ride without fare (Sec. 386, required as limits of indemnity to answer for the
[b], Insurance Code). same losses sought to be covered by a CMLVI
policy; or
3. Third-party 2. Make a cash deposit with the Insurance
Commission in such amount or amounts required
Any person other than a passenger as defined in this as limits of indemnity for the same purpose (Sec.
section (ibid.) and shall also exclude a member of the 390, ibid).
household, or a member of the family within the
second degree of consanguinity or affinity, of a motor NOTE: After the cash deposit or surety bond has been
vehicle owner or land transportation operator, as proceeded against by the Insurance Commissioner, such
likewise defined herein, or his employee in respect of cash deposit shall be replenished or such surety bond shall
be restored by the MVO or LTO in the right amount/s
death, bodily injury, or damage to property arising
required as limit of liability within 60 days after impairment
out of and in the course of employment (Sec. 386, [c], or expiry, otherwise, he shall secure a CMLVI required
ibid). (ibid).
It simply meant that the insurer had assumed to This no-fault claim does NOT apply to property damage. If
reimburse the costs for repairing the damage to the the total indemnity claim exceeds P15, 000 and there is
controversy in respect thereto, the finding of fault may be
insured vehicle, as opposed to damage to third party
availed of by the insurer only as to the excess. The first P15,
vehicle/property. The phrase “own damage” does not 000 shall be paid without regard to the fault (CMVLI, supra,
mean damage to the insured car caused by the pg.13).
assured itself, instead, of third parties (Pan Malayan
Insurance Corporation v. Court of Appeals, 184 SCRA Q: X is a passenger of a jeepney for hire being driven
54 [1990]). by Y. The jeepney collided with another passenger
jeepney being driven by Z who was driving
recklessly. As a result of the collision, X suffered
injuries. Both passenger jeepneys are covered by
Comprehensive Motor Vehicular Insurance
NOTE: The insured need not prove that he has a 1. No government office or agency having the duty
driver’s license at the time of the accident if he was of implementing the provisions of the Insurance
the driver (Sundiang, 2014). Code on CMVLI shall act as agent in procuring the
insurance policy or surety bond required;
2. Any person who drives on his order or with his 2. No official or employee of such office or agency
permission; provided, that the person driving is shall similarly act as such agent; and
permitted to drive the motor vehicle in accordance 3. The commission of an agent procuring the
with the law, and is not disqualified (Villacorta v. corresponding insurance policy or surety bond
Insurance Commissioner, G.R. No. 54171, October 28, shall in no case exceed 10% of the amount of
1980). premiums therefore (Sec. 400, Insurance Code).
For both life and property insurance, the insurable The insured cannot assign the policy if the
interest is required to exist at the time of perfection designation of the beneficiary is irrevocable. The
of the policy. For property insurance, the insurable irrevocable beneficiary has a vested right (Sundiang,
interest must also exist at the time of loss, however, 2014).
in case of life insurance, the insurable interest need
to exist only at the time of perfection and not When designation of beneficiary is deemed
thereafter (Sec. 19, ibid). irrevocable
Q: X owned a house and lot. X insured the house. The insured shall have the right to change the
The house got burned. Then he sold the partially beneficiary he designated in the policy, unless he has
burnt house and the lot to Y. Which statement is expressly waived this right in said policy.
most accurate? (2012 Bar Question) Notwithstanding the foregoing, in the event the
a. X is not anymore entitled to the proceeds of the insured does not change the beneficiary during his
insurance policy because he already sold the lifetime, the designation shall be deemed irrevocable
partially burnt house and lot. (Sec. 11, Insurance Code).
b. X is still entitled to the proceeds of the insurance
policy because what is material is that at the time of NOTE: The foregoing provision is an amendment
the loss, X is the owner of the house and lot. incorporated in the Insurance Code of 2013.
c. No one is entitled to the proceeds because
ownership over the house and lot was already Void stipulations in an insurance contract
transferred.
d. Y will be the one entitled to the proceeds because Every stipulation in an insurance contract:
he now owns the partially burnt house and lot. 1. For the payment of loss whether the person
insured has or does not have any insurable
A: B. X is still entitled to the proceeds of the interest in the subject-matter of insurance, or
insurance policy because what is material is that at 2. That the policy shall be received as proof of
the time of the loss, X is the owner of the house and such interest, and
lot. After the loss occurs, the right of the insured 3. Every policy executed by way of gaming or
under the policy becomes fixed and a subsequent wagering is VOID (Sec. 25, ibid).
conveyance by the insured cannot affect the insurer’s
liability (Perez, supra, pg. 43, citing Florea vs. Iowa IN LIFE/ HEALTH
State Ins. Co., 32 SW 2d 11, 225 Mo. App. 49).
Two general classes of life policies
Mere hope or expectancy is not insurable
1. Insurance upon one’s life – are those taken out
A mere contingent or expectant interest in any thing, by the insured upon his own life (Section 10[a],
not founded on an actual right to the thing, nor upon Insurance Code) for the benefit of himself, or of his
any valid contract for it, is not insurable (Sec. 16, estate, in case it matures only at his death, for the
ibid). benefit of third person who may be designated as
beneficiary.
Right of the insured to change the beneficiary he
designated The question of insurable interest is immaterial
where the policy is procured by the person whose life
GR: The insured shall have the right to change the is insured. A person who insures his own life can
beneficiary he designated in the policy designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
XPN: If the insured expressly waived this right in the life of the insured subject to the limits under Articles
said policy. 739 and 2012 of the New Civil Code (De Leon, 2010).
NOTE: Under Sec. 64 of the Family Code, the innocent 2. Insurance upon life of another – are those taken
spouse is allowed to revoke the designation of the other out by the insured upon the life of another. Where a
spouse as irrevocable beneficiary after legal separation. person names himself beneficiary in a policy he takes
on the life of another, he must have insurable
Double insurance exists where the same person is Rules when the insured in a policy other than life is
insured by several insurers separately, in respect to over insured by double insurance
the same subject and interest (Sec. 95, ibid).
1. The insured, unless the policy otherwise
provides, may claim payment from the insurers
Additional or other insurance clause The insurer may insert an “other insurance clause”
which will prohibit double insurance. The rationale is
A clause in the policy that provides that the policy to prevent the danger that the insured will over
shall be void if the insured procures additional insure his property and thus avert the possibility of
insurance without the consent of the insurer (Pioneer perpetration of fraud (ibid). It is lawful and
Insurance and Surety Corp vs. Yap, 61 SCRA 426). specifically allowed under Sec. 75 of the Insurance
Code which provides that “a policy may declare that a
Q: Wyeth Philippines, Inc. (Wyeth) procured a violation or a specified provision thereof shall avoid
marine policy from Philippines First Insurance Co., it, otherwise the breach of an immaterial provision
Inc. (Philippines First) to secure its interest over its does not avoid it.”
own products while the same were being
transported or shipped in the Philippines. Absence of notice of existence of other insurance
Thereafter, Wyeth executed its annual contract of constitutes fraud
carriage with Reputable Forwarder Services, Inc.
(Reputable). Under the contract, Reputable When the insurance policy specifically requires that
undertook to answer for all risks with respect to the notice should be given by the insured of the existence
goods and shall be liable to Wyeth, for the loss, of other insurance policies upon the same property,
destruction, or damage of the goods/products due the total absence of such notice nullifies the policy.
to any and all causes whatsoever, including theft, Such failure to give notice of the existence of other
robbery, flood, storm, earthquakes, lightning, and insurance on the same property when required to do
other force majeure while the goods/products are in so constitutes deception and it could be inferred that
transit and until actual delivery to the customers, had the insurer known that there were many other
salesmen, and dealers. The contract also required insurance policies on the same property, it could have
Reputable to secure an insurance policy on Wyeth’s hesitated or plainly desisted from entering into such
goods. Thus, Reputable signed a Special Risk contract (Perez, 2006).
Insurance Policy (SR Policy) with Malayan Insurance
Co., Inc., (Malayan) for the amount of Cancellation of policy of insurance by reason of over
P1,000,000.00. Is there is double insurance (as insurance
prohibited in Section 5 of the SR policy between
Malayan and Reputable) so as to preclude Philippine Sec. 64 of the Insurance Code of 2013 provides that
First from claiming indemnity from Malayan? upon discovery of other insurance coverage that
makes the total insurance in excess of the value of
the property insured, the insurer may cancel such
1. Mortgagor – The mortgagor of property, as owner, NOTE: The rule on subrogation by the insurer to the right of
has an insurable interest to the extent of its the mortgagee does not apply in this case.
value even though the mortgage debt equals
such value. Assignment of policy to mortgagee is not a payment
2. Mortgagee –The mortgagee as such has an
insurable interest in the mortgaged property to The assignment is merely to afford the mortgagee a
the extent of the debt secured; such interest greater security for the settlement of the mortgagor’s
continues until the mortgage debt is extinguished obligation and should not be construed as payment in
(Sundiang, 2014). just the same way that delivery of negotiable
The contract of insurance is perfected when the Kind of acceptance that must be given
assent or consent is manifested by the meeting of the
offer and the acceptance upon the thing and the The acceptance of an insurance policy must be
cause which are to constitute the contract. Mere unconditional, but it need not be by a formal act (De
offer or proposal is not contemplated (De Lim v. Sun Leon, 2010).
Life Assurance Co., G.R. No. L-15774, Nov. 29, 1920).
Importance of delivery NOTE: This is a new provision under the Insurance Code of
2013.
1. It becomes the evidence of the making of a
contract and of its terms; Non-payment of balance of premiums does not
2. It is considered as communication of the cancel the policy
insurer’s acceptance of the insured’s offer;
3. It becomes the determination of policy period; A contrary rule would place exclusively in the hands
4. It marks the end of insurer’s opportunity to of the insured the right to decide whether the
decline coverage (De Leon, 2010). contract should stand or not (Philippine Phoenix
Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R.
No. L-22684, Aug. 31, 1967).
NON-DEFAULT OPTIONS IN LIFE INSURANCE The purpose of the provision is to clarify the
requirements for restoring a policy to
Devices used to prevent the forfeiture of a life premium-paying status after it has been permitted
insurance after the payment of the first premium to lapsed.
1. Grace period – After the payment of the first Period within which the holder of the policy is
premium, the insured is entitled to a grace entitled to reinstatement of the contract
period of 30 days within which to pay the
succeeding premiums (Sec. 233 [a], ibid). The law requires that the policy owner be permitted
2. Cash surrender value – The amount the insurer to reinstate the policy, subject to the violations
agrees to pay to the holder of the policy if he specified, any time within three (3) years from the
surrenders it and releases his claim upon it date of default of premium payment. A longer
(Cyclopedia Law Dictionary, 3rd ed., pg. 1077). period, being more favorable to the insured, may be
3. Extended insurance – It is where the insured is used.
given a right, upon default, after payment of at
least three full annual premiums (see Sec. 233 [f], Reinstatement of a lapsed policy is not an absolute
Insurance Code) to have the policy continued in right of the insured
force from the date of default for a time either
stated or equal to the amount as the net value of Reinstatement is not an absolute right of the
the policy taken as a single premium, will insured, but discretionary on the part of the insurer,
purchase (De Leon, 2010). which has the right to deny reinstatement if it were
4. Paid up Insurance – The insured is given a right, not satisfied as to the insurability of the insured, and
upon default, after the payment of at least three if the latter did not pay all overdue premiums and
annual premiums to have the policy continued in other indebtedness to the insurer (McGuire vs.
force from the date of default for the whole Manufacturer’s Life Ins. Co., 87 Phil. 370).
period of the insurance without further payment
of premiums (ibid). It results to a reduction of the Evidence of insurability
original amount of insurance, but for the same
period originally stipulated (6 Couch 2d., 355; 37 Evidence of Insurability is broader phrase than
C.J.S. 364). “Evidence of Good Health” and includes such other
5. Automatic Loan Clause – A stipulation in the policy factors as the insured’s occupation, habits, financial
providing that upon default in payment of condition, and other risk selection factors.
premium, the same shall be paid from the loan
value of the policy until that value is consumed. Q: A life insurance policy lapsed. The insured
In such a case, the policy is continued in force as applied for reinstatement of the policy and paid
fully and effectively as though the premiums had only a part of the overdue premiums. Subsequently,
been paid by the insured from funds derived the insured died. Was the insurer liable?
from other sources (6 Couch 2d., 383).
6. Reinstatement – Provision that the holder of the A. The insurer is not liable as the policy was not
policy shall be entitled to reinstatement of the reinstated. The failure to pay the balance of the
contract at anytime within 3 years from the date overdue premiums prevented reinstatement and
of default in the payment of premium, unless the recovery of the face value of the policy (Andres vs.
cash surrender value has been paid, or the Crown Life Ins. Co., 55 O.G. 3483).
extension period expired, upon production of
evidence of insurability satisfactory to the Q: Eulogio took out a life insurance policy which
company and the payment of all overdue contained a provision which allows for
premiums and any indebtedness to the company reinstatement any time within three years after it
upon said policy (Sec. 233 [j], Insurance Code). lapsed. Eulogio paid the premiums due on the first
two months. However, he failed to pay subsequent
premiums. One month after the policy lapsed, he
filed an application for the reinstatement of his
Any promise to be fulfilled after the contract has It is to be determined not by the event, but solely by
come into existence or any statement concerning the probable and reasonable influence of the facts
what is to happen during the existence of the upon the party to whom the representation is made,
insurance. in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries (similar
Misrepresentation with concealment) (Sec. 46, ibid).
XPN: The incontestability clause under paragraph 2 of If there is misrepresentation, the injured party is
Section 48. entitled to rescind from the time when the
representation becomes false.
XPN to XPN: (i.e., when the contract may be
rescinded even beyond the incontestability period) Exercise of the right to rescind the contract
Incontestability clause
1. The insured or some person entitled to the benefit Instances when delay in the presentation of notice
of the insurance, without unnecessary delay, must or proof of loss deemed waived
give written notice to the insurer (Sec. 90, ibid);
2. When required by the policy, insured must present If caused by:
a preliminary proof loss which is the best evidence he 1. Any act of the insurer; and
has in his power at the time (Sec. 91, ibid). 2. By failure to take objection promptly and
specifically upon that ground (Sec. 93, ibid).
NOTE: For other non-life insurance, the Commissioner may
specify the period for the submission of the notice of loss Proof of loss
(Sec. 90, Insurance Code).
It is the more or less formal evidence given the
Notice of loss company by the insured or claimant under a policy of
the occurrence of the loss, the particulars thereof and
It is the more or less formal notice given the insurer the data necessary to enable the company to
by the insured or claimant under a policy of the determine its liability and the amount thereof.
occurrence of the loss insured against.
Time for payment of claims
Purposes of notice of loss LIFE POLICIES NON-LIFE POLICIES
1. Maturing upon the
1. To give insurer information by which he may expiration of the term–
determine the extent of his liability; the proceeds are
2. To afford the insurer a means of detecting any immediately payable to
fraud that may have been practiced upon him; and the insured, except if
3. To operate as a check upon extravagant claims. proceeds are payable The proceeds shall be paid
in installments or within 30 days after the
Effect of failure to give notice of loss annuities which shall receipt by the insurer of
be paid as they become proof of loss and
FIRE INSURANCE OTHER TYPES OF INSURANCE due. ascertainment of the loss or
Failure to give notice will not damage by agreement of
Failure to give 2. Maturing at the the parties or by arbitration
exonerate the insurer, unless
notice defeats the death of the insured, but not later than 90 days
there is a stipulation in the
right of the insured occurring prior to the from such receipt of proof of
policy requiring the insured to
to recover. expiration of the term loss, whether or not
do so.
stipulated – the ascertainment is had or
proceeds are payable made (Sec. 249, Insurance
to the beneficiaries Code).
within 60 days after
presentation of claim
and filing of proof of
death (Sec. 248,
Insurance Code).
Claim settlement is the indemnification of the The following constitutes unfair settlement practices:
suffered by the insured. The claimant may be the 1. Knowingly misrepresenting to claimants
insured or reinsured, the insurer who is entitled to pertinent facts or policy provisions relating to
subrogation, or a third party who has a claim against coverage at issue;
the insured. 2. Failing to acknowledge with reasonable
promptness pertinent communications with
Purpose of the rule respect to claims arising under its policies;
3. Failing to adopt and implement reasonable
To eliminate unfair claim settlement practices. standards for the prompt investigation of claims
arising under its policies;
Rules in claim settlement 4. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of claims
1. No insurance company doing business in the submitted in which liability has become
Philippines shall refuse, without justifiable cause, reasonably clear; or
to pay or settle claims arising under coverages 5. Compelling policyholders to institute suits to
provided by its policies, nor shall any such recover amounts due under its policies by
company engage in unfair claim settlement offering without justifiable reason substantially
practices. less than the amounts ultimately recovered in
2. Evidence as to numbers and types of valid and suits brought by them.
justifiable complaints to the Commissioner
against an insurance company, and the Sanction for the insurance companies which
Commissioner’s complaint experience with other engaged to unfair settlement practices
insurance companies writing similar lines of
insurance shall be admissible in evidence in an The suspension or revocation of an insurance
administrative or judicial proceeding brought company’s certificate of authority (Sec 247).
under this section (Sec. 247 (b), ibid).
Effect of refusal or failure to pay the claim within
Claims settlement in life insurance the time prescribed
1. The proceeds shall be paid immediately upon the The insurer shall be liable to pay interest twice the
maturity of the policy if there is such a maturity ceiling prescribed by the Monetary Board on the
date. proceeds of the insurance from the date following
2. If the policy matures by the death of the insured, the time prescribed under the Insurance Code, until
within sixty (60) days after presentation of the the claim is fully satisfied (Prudential Guarantee and
claim and filing of the proof of the death of the Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R.
insured (Sundiang, 2014; Section 248, ibid). No. 151890, June 20, 2006).
Claims settlement in property insurance NOTE: Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS such refusal
1. Proceeds shall be paid within thirty (30) days or failure to pay is based on the ground that the claim is
after proof of loss is received by the insurer and fraudulent.
ascertainment of the loss or damage is made
Where the mortgagor and the mortgagee were both
either by agreement or by arbitration. claiming the proceeds of a fire insurance policy and the
2. If no ascertainment is made within sixty (60) days creditors of the mortgagor also attached the proceeds, the
after receipt of proof of loss, the shall be paid insurance company cannot be held liable for damages for
within ninety (90) days after such receipt withholding payment since the delay was not malevolent
(Sundiang, 2014; Sec. 249, ibid). (Rizal Commercial Bank Corporation v. Court of Appeals,
289 SCRA 293).
Rules on the prescriptive period for filing an It is one year from denial of the claim and not from
insurance claim the date of the accident.
Name two (2) characteristics which differentiate business purposes, any common carrier, with or
a common carrier from a private carrier (2002 without fixed route and whatever may be its
Bar Exam Question) classification, engaged in the transportation of
passengers or freight or both, canal, irrigation system,
Two (2) characteristics that differentiate a gas, electric light, heat and power, water supply
common carrier from a private carrier are: power, petroleum, sewerage system, wire or wireless
1. A common carrier offers its service to the communication systems, wire or wireless
public; a private carrier does not. broadcasting stations and stations and other similar
2. A common carrier is required to observe public services (Public Service Act [PSA], Sec. 13 [b]).
extraordinary diligence; a private carrier is not
so required. A casual or incidental service devoid of public
character and interest is not brought within the
Public utility category. The question depends on such factors as
the extent of services, whether such person or
A business or service engaged in supplying the public company has held himself or itself out as ready to
with some commodity or service of public serve the public or a portion of the public generally
consequence, or essential to the general public (Luzon Stevedoring v. PSC, G.R. L-5458, September 16
(Perez, 2006, citing Albano vs. Reyes, 175 SCRA 264; 1953).
KMU Labor Center vs. Garcia, 239 SCRA 386).
NOTE: The terms “public utility” and “public service” are
Public service used interchangeably (Perez, 2006).
Every person that may own, operate, manage, control Certificate of public convenience (CPC)
in the Philippines, for hire/compensation, with
general/limited clientele whether permanent, It is an authorization issued for the operation of
occasional or accidental, and done for general public services for which no franchise, either
1. Applicant must be a Citizen of the Philippines. If 3. Interpose an objection stating that the grant of
the applicant is a Corporation, 60% of its capital the application would result to a ruinous competition
must be owned by Filipinos. (Halili vs. Ice and Cold Storage Industries, Inc., 77 Phil.
823). One of the purposes of PSA is to protect and
conserve the investments which have already been
4. Attack the citizenship of the applicant (Sec. 11, A: No, Bayan Bus Lines Inc. cannot invoke the prior
Art. XII of the 1987 Constitution prohibits the granting operator rule. As a general principle, public utility
of franchise or certificate for the operation of public operators must be protected from ruinous
utility in favor of non-Filipino citizens); or competition, such that before permitting a new
5. The applicant does not have the necessary operator to serve in a territory already served by
financial capacity (KMU Labor Center vs. Garcia, another operatior, the latter should first be given an
supra). opportunity to improve his equipment and service.
This principle, however, is subject to justifiable
Exceptions to the application of Prior operator rule exceptions. The primary consideration in the grant of
or Protection of investment rule a certificate of public convenience must always be
public convenience. (Fortunato F. Halili v. Ruperto
1. Where public interest would be better served by Cruz, G.R. No. L-21061) In this case, Bayan Bus Lines
the new operator (Intestate Estate of Teofilo had been given an opportunity to improve its service
Tiongson vs. Commission, 36 SCRA 241). but despite its efforts, its services still proved
2. Where the old operator has failed to make an inadequate which rendered the need to avail of the
offer to meet the increase in traffic (Manila services of Pasok Transportation, Inc. as the addition
Yellow Taxicab Co., Inc. vs. Castelo, GR No. would better serve public convenience, which is the
L-131910, May 30, 1960). paramount consideration in the granting of a
3. Where the certificate of public convenience certificate of public convenience.
granted to the new operator is a maiden
certificate, which does not overlap with the 100% foreign corporation may own facilities and
entire route of the old operator but only a short equipment of a public utility such as EDSA LRT III
portion thereof as a convergence point
(Mandbusco, Co. vs. Francisco, supra). While the Constitution requires that a franchise is
4. If the application of the rule will be conducive to needed for the operation of public utility and that no
monopoly of the service, and contrary to the franchise shall be granted to corporation without at
principle that promotes healthy competition least 60% of its capital owned by Filipinos, it does not
(Villa Rey Transit, Inc. vs. Pangasinan Trans. Inc., require however, a franchise before one can own the
5 SCRA 234). facilities needed to a public utility. The right to
5. If the old operator unjustifiably abandoned his operate a public utility may exist independently and
service for two or three years by not registering separately from the ownership of the facilities
the necessary equipment forfeits his right to said thereof. One can own facilities without operating
equipment and the service authorized to him them as a public utility, or conversely one may
(Fariñas vs. Estate of Florencio Buan, GR No. operate a public utility without owning the facilities
12306-7, November 29, 1961). (Tatad et al. v Sec. Garcia and EDSA LRT Corp Ltd.,
6. The service of the prior operator is inefficient. April 16, 1995).
7. The prior operator denies that there is a need to
expand his service. Certificate of public convenience does not confer
8. The prior operator has abandoned his service. upon the holder any proprietary right or interest in
9. The prior operation is operating less units than the route covered thereby
he was authorized.
10. The prior operator was given the opportunity to A CPC does not confer upon the holder any
expand his service and failed to do so. proprietary right in the route covered thereby (Luque
Q: X, while driving his Toyota Altis, tried to cross the Against the common Subsidiary liability
railway tract of Philippine (xxx line 2 unread text carrier at fault
xxx) approached Blumentritt Avenida Ext., applied
its horn as a warning to all the vehicles that might Note: The liability of the
be crossing the railway tract, but there was really common carrier and his
nobody manning the crossing. X was listening to his driver as well as the operator
lpod touch, hence, he did not hear the sound of the of the other vehicle and his
horn of the train and so his car was hit by the train. driver is joint and several (J.
Dimaampao, citing Tiu vs.
As a result of the accident, X suffered some injuries
Arriesgado [2004]).
and his car was totally destroyed as a result of the
impact. Is PNR liable? (2012 Bar Question)
LIABILITIES OF COMMON CARRIER
A: PNR is liable because Railroad companies owe to
Presumption of negligence in the carriage of goods
the public a duty of exercising a reasonable degree of
care to avoid injury to person and property at railroad
In all cases other than those mentioned in Nos. 1, 2,
crossings which means a flagman or a watchman
3, 4, and 5 of Article 1734 of the NCC, if the goods are
should have been posted to warn the public at all
lost, destroyed or deteriorated, common carriers are
times.
presumed to have been at fault or to have acted
negligently (Art. 1735, NCC).
Causes of action for failure to observe diligence
required
Presumption of negligence in the transportation of
passengers
PERSON WHO HAS BASIS OF CAUSE OF ACTION
CAUSE OF ACTION AGAINST THE COMMON
In case of death of or injuries to passengers, common
CARRIER
carriers are presumed to have been at fault or to
Third person who Tort (extra-contractual have acted negligently (Art. 1756, NCC).
suffered damages negligence)
Shipper of the goods Breach of the contract of Presumption of negligence is rebuttable
damaged carriage (Culpa Contractual)
Heir/s of the Breach of the contract of Both articles 1735 and 1756 of the NCC provides that
deceased passengers carriage (Culpa Contractual) such presumption may be refuted by proving
or the passenger observance of extraordinary diligence as prescribed
himself for the by article 1733 of the NCC.
injuries sustained by
him Q: Peter so hailed a taxicab owned and operated
by Jimmy Cheng and driven by Hermie Cortez.
Peter asked Cortez to take him to his office in
CAUSE OF ACTION OF Malate. On the way to Malate, the taxicab
THE INJURED BASIS OF CAUSE OF collided with a passenger jeepney, as a result of
PASSENGER OR HIS ACTION which Peter was injured, i.e., he fractured his left
HEIRS, IF THE leg. Peter sued Jimmy for damages, based upon a
PASSENGER DIES: contract of carriage, and Peter won. Jimmy
Against the negligent Culpa criminal wanted to challenge the decision before the SC on
driver the ground that the trial court erred in not making
Note: If the driver is an express finding as to whether or not Jimmy was
The owner of the public vehicle operating under the A: C. X will not be exempt from liability because he
boundary system is not exempt from liability in a remains to be the registered owner and the boundary
case of injury to or death of passengers system will not allow the circumvention of the law to
avoid liability.
To exempt from liability the owner of a public vehicle
who operates it under the “boundary system” on the Kabit system
ground that he is a mere lessor would be not only to
abet flagrant violations of the PSA, but also to place The kabit system is an arrangement whereby a
the riding public at the mercy of reckless and person who has been granted a CPC allows other
irresponsible drivers. Moreover, due care in the persons who own motor vehicles to operate them
selection of employees is called for by Article 2180 of under his license, sometimes for a fee or percentage
the Civil Code. Failing on this, the owner of the of the earnings (Lim v CA, G.R. No. 125817, January
vehicle, who is likewise the employer, shall not be 16, 2002).
exempt from liability (Hernandez vs. Dolor, 435 SCRA
668, July 30, 2004). NOTE: Although not outrightly penalized as a criminal
offense, the kabit system is invariably recognized as being
Q: Baldo is a driver of Yellow Cab Company under contrary to public policy and therefore, void and inexistent
under Art. 1409 of the New Civil Code. It is a fundamental
the boundary system. While cruising along the
principle that the court will not aid either party to enforce
South Expressway, Baldo‘s cab figured in a collision,
an illegal contract, but will leave them both where it finds
killing his passenger, Pietro. The heirs of Pietro them (Lita Enterprises, Inc. v. IAC, G.R. No. 64693, April 27,
sued Yellow Cab Company for damages, but the 1984).
latter refused to pay the heirs, insisting that it is
not liable because Baldo is not its employee. The registered owner of the vehicle may not be
Resolve with reasons. (2005 Bar Exam Question) allowed to prove that there is already a transfer of
ownership to another person under the kabit system
A: Yellow Cab Company shall be liable with Baldo,
on a solidary basis, for the death of passenger One of the primary factors considered in the granting
Pietro. Baldo is an employee of Yellow Cab under of a CPC for the business of public transportation is
the boundary system. As such, the death of the financial capacity of the holder of the license, so
passenger Pietro is breach of contract of carriage, that liabilities arising from accidents may be duly
making both the common carrier Yellow Cab and compensated. The kabit system renders illusory such
its employee, Baldo, solidarily liable (Hernandez v. purpose and, worse, may still be availed of by the
Dolor, G.R, No. 160286, July 30, 2004). grantee to escape civil liability caused by a negligent
use of a vehicle owned by another and operated
Q: X owns a fleet of taxicabs. He operates it through under his license.
what is known as boundary system. Y drives one of
such taxicabs and pays X a fixed amount of Php1 If a registered owner is allowed to escape liability by
,000 daily under the boundary system. This means proving who the supposed owner of the vehicle is, it
that anything above Php1 ,000 would be the would be easy for him to transfer the subject vehicle
earnings of Y. Y, driving recklessly, hit an old lady to another who possesses no property with which to
crossing the street. Which statement is most respond financially for the damage done (Lim v. CA,
accurate? (2012 Bar Question) supra).
The Sheriff levied on the jeepney belonging to Q: X owns a passenger jeepney covered by
Johnny but registered in the name of Van. Johnny Certificate of Public Convenience. He allowed Y to
filed a 3rd party claim with the Sheriff alleging use its Certificate of Convenience for a
ownership of the jeepney levied upon and stating consideration. Y therefore was operating the
that the jeepney was registered in the name of Van passenger jeepney under the same Certificate of
merely to enable Johnny to make use of Van‘s Public Convenience (Kabit System) under the name
certificate of public convenience. May the Sheriff of X. The passenger jeepney met an accident. Who
proceed with the public auction of Johnny‘s jeepney. will be liable? (2012 Bar)
Discuss with reasons. (1990 Bar Exam Question)
A: X and Y will be jointly and severally liable.
A: Yes, the Sheriff may proceed with the auction sale
of Johnny‘s jeepney. In contemplation of law as VIGILANCE OVER GOODS
regards the public and third persons, the vehicle is
considered the property of the registered operator EXEMPTING CAUSES
(Santos v Sibug 104 S 520).
Presumption on the loss, destruction, or
Q: Procopio purchased an Isuzu passenger jeepney deterioration of goods
from Enteng, a holder of a certificate of public
convenience for the operation of public utility GR: The common carrier is presumed to have been at
vehicle plying the Calamba-Los Baños route. While fault or to have acted negligently when the goods
Procopio continued offering the jeepney for public transported are lost, destroyed or deteriorated (Art.
transport services, he did not have the registration 1735, NCC).
of the vehicle transferred in his name. Neither did
he secure for himself a certificate of public XPNs: When the same is due to any of the following
convenience for its operation. Thus, per the causes only: (FA2 – C O)
Duty of the common carrier before, during and after DURATION OF LIABILITY
a natural disaster or acts of a public enemy as
contemplated under Article 1734 of the NCC DELIVERY OF GOODS TO A COMMON CARRIER
The common carrier must exercise due diligence to Duration of the extraordinary responsibility of the
prevent or minimize loss before, during and after the common carrier
occurrence of flood, storm or other natural disaster
or an act of a public enemy in order that the common It lasts from the time the goods are unconditionally
carrier may be exempted from liability for the loss, placed in the possession of, and received by the
destruction or deterioration of the goods (Art. 1739, carrier for transportation until the same are
NCC). delivered, actually or constructively, by the carrier to
the consignee or to the person who has a right to
NOTE: This exemption from liability also requires that the receive them (NCC, Art. 1736).
common carrier must prove that the natural disaster or the
act of the public enemy is the proximate and only cause of Meaning of the phrasse “Unconditionally placed in
the loss (ibid.). Further, if the common carrier negligently
the possession of, and received by the carrier for
incurs delay in transporting the goods, a natural disaster
transportation”
shall not free such carrier from responsibility (Art. 1740,
NCC).
It is the delivery of the goods to the carrier for
Duty of the common carrier if the loss, destruction, immediate transportation, that is, as soon as the
or deterioration of the goods was caused by the delivery is complete so as to place on the carrier the
character of the goods, or the faulty nature of the exclusive duty of seeing after their safety (Perez, 2006
packing or the containers citing Charles J. Webb & Sons vs. Central R. Co. of NJ,
36 F. 2d 702).
If the loss, destruction, or deterioration of the goods
NOTE: When the goods are unconditionally placed in the
was caused by the character of the goods, or the
possession and control of the common carrier, and upon
faulty nature of the packing or the containers, The their receipt by the carrier for transportation, the contract
of carriage was deemed perfected. The fact that part of the
The liability of a shipping company for damage to It is the right exercised by the seller by stopping the
cargo it shipped to Davao City is governed by delivery of the goods to a certain buyer or consignee
Philippine law even if the cargo was transshipped to (because of insolvency) when such goods are already
the United States, because as against the first in transit (Art. 1530, NCC).
shipping company, Davao City was the destination
(Lorenzo Shipping Corporation v. Chubb and Sons, NOTE: The seller may exercise this right either by obtaining
Inc., 431 SCRA 266). actual possession of the goods or by giving notice of his
claim to the carrier or other bailee in whose possession the
goods are. Such notice may be given either to the person in
The execution of a receipt or bill of lading is not actual possession of the goods or to his principal. In the
required for the commencement of the latter case, the notice, to be effectual, must be given at
responsibility to observe extraordinary diligence such time and under such circumstances that the principal,
by the exercise of reasonable diligence, may prevent a
The requirement to observe extraordinary diligence delivery to the buyer (Art. 1532, NCC).
begins with the actual delivery of the goods for
transportation, and not merely with the formal Rule as to unloading, storage and stoppage in
execution of a receipt or bill of lading; the issuance of transitu
a bill of lading is not necessary to complete delivery
and acceptance by the carrier (Compania Maritima v. GR: The common carrier’s duty to observe
Insurance Co. of North America, G.R. No. L-18965, extraordinary diligence in the vigilance over the
October 30, 1964). goods remains in full force and effect even when they
are temporarily unloaded or stored in transit.
ACTUAL OR CONSTRUCTIVE DELIVERY
XPN: When the shipper or owner has made use of the
Party to whom delivery should be made right of stoppage in transitu (Art. 1737, NCC).
It must be delivered, actually or constructively, to the Diligence required to be exercised by the carrier if
consignee or to the person who has a right to receive the right of stoppage in transitu was exercised
them (Art.1736, NCC).
The diligence required is ordinary diligence because
NOTE: Delivery of the cargo to the customs authorities is of the following:
not delivery to the consignee, or to the person who has a a. It is holding the goods in the capacity of an
right to receive them (Lu Do & Lu Ym Corp. v. Binamira, GR ordinary bailee or warehouseman and not as a carrier
No. L-9840, April 22, 1957). b. There is a change of contract from a contract of
carriage to a contract of deposit (Art. 1737, NCC).
Constructive delivery
Obligation required of the common carrier in case of
There is constructive delivery when delivery is stoppage in transitu
effected not by actually transferring the possession of
thing to the vendee (in this case, the other party, When notice of stoppage in transitu is given by the
either the carrier or the consignee) but by legal seller to the carrier, he must redeliver the goods to,
formalities or by symbolic tradition (Pineda, 2010). or according to the directions of, the seller. The
expenses of such delivery must be borne by the seller
Party liable for the misdelivery by a carrier who was (Art. 1532, NCC).
chosen by the buyer
NOTE: If the seller instructs to deliver it somewhere else, a
Misdelivery of the goods is attributable to the carrier new contract of carriage is formed and the carrier must be
and not to the seller. And, since the carrier was paid accordingly.
chosen and authorized to make the delivery by the
buyer itself, the seller cannot be held responsible for
Void stipulations in a contract of carriage of goods Requirements in order that a stipulation which
(CR2UELED) limits the liability of common carriers in the carriage
of goods be valid
1. That the common carrier need not observe any
diligence in the Custody of the goods A contract fixing the sum that may be recovered for
2. That the goods are transported at the Risk of the the loss, destruction, and deterioration of goods is
owner or shipper binding provided that it is:
3. That the common carrier’s liability for acts 1. Just and reasonable under the circumstances and
committed by thieves, or of Robbers who do not 2. It has been fairly and freely agreed upon (Art.
act with grave or irresistible threat, violence or 1750, NCC).
force, is dispensed with or diminished
4. Any similar stipulation that is Unreasonable, LIMITATION OF LIABILITY IN ABSENCE OF
unjust and contrary to public policy DECLARATION OF GREATER VALUE
5. That the common carrier shall Exercise a degree
of diligence less than that of a good father of a Extent of the liability of the common carrier in case
family, or a man of ordinary prudence in the there is a stipulation fixing specified amount
vigilance over the movables transported
6. That the common carrier will not be liable for any GR: The liability of the common carrier shall not
Loss, destruction, or deterioration of the goods exceed the stipulation in a contract of carriage even if
7. That the common carrier shall not be responsible the loss or damage results from3 the carrier's
for the acts or omissions of his or its Employees negligence (Eastern and Australian Shipping Co. v
8. That the common carrier is not responsible for Great American Insurance Co., GR No. L-37604,
the loss, destruction or deterioration of goods on October 23, 1981).
account of the Defective condition of the car,
vehicle, ship, airplane or other equipment used XPN: Where the shipper or owner of the goods
in the contract of carriage (Art. 1745, NCC). declares a greater value and pays corresponding
freight (NCC, Art. 1749).
Discuss whether or not the following stipulations in a
contract of carriage of a common carrier are valid: The liability of an airline company for lost baggage is
1. A stipulation limiting the sum that may be limited to the amount stated in the ticket unless the
recovered by the shipper or owner to 90% of the passenger declared a higher valuation and paid
value of the goods in case of loss due to theft. additional fare (Pan American World Airways, Inc. v.
2. A stipulation that in the event of loss, Appellate Court, 164 SCRA 268).
destruction or deterioration of goods on account
of the defective condition of the vehicle used in But when the goods being shipped are packed in
the contract of carriage, the carrier‘s liability is cartons placed in containers supplied by the carrier
limited to the value of the goods appearing in and the number of cartons is disclosed in the shipping
the bill of lading unless the shipper or owner documents, it is the number of cartons and not of the
declares a higher value. (2002 Bar Exam containers that should be used in computing the
Question) liability of the carrier for the loss of the goods, as it is
the cartons that constitute the packages (Eastern
A: Shipping Lines, Inc. v. Intermediate Appellate Court,
1. The stipulation is considered unreasonable, 150 SCRA 464).
unjust and contrary to public policy under
Article 1745 of the Civil Code. Requirements in order that a common carrier’s
2. The stipulation limiting the carrier‘s liability to the extent of liability may be increased
value of the goods appearing in the bill of lading
unless the shipper or owner declares a higher The common carrier’s liability may be extended
value, is expressly recognized in Article 1749 of beyond the specified amount mentioned if;
the Civil Code. 1. The shipper or owner of the goods declares a
greater value and
2. Pays corresponding freight (Art. 1749, NCC).
When the bus is not in motion there is no necessity A person who is merely stepping on the platform of
for a person who wants to ride the same to signal his a bus is already considered a passenger
intention to board. A public utility bus, once it stops,
is in effect making a continuous offer to bus riders. A person, by stepping and standing on the platform of
Hence, it becomes the duty of the driver and the the bus, is already considered a passenger and is
conductor, every time the bus stops, to do no act that entitled all the rights and protection pertaining to
would have the effect of increasing the peril to a such a contractual relation. Hence, it has been held
passenger while he was attempting to board the that the duty which the carrier owes to its patrons
same. The premature acceleration of the bus in this extends to persons boarding cars as well as to those
case was a breach of such duty (ibid). alighting therefrom (Dangwa vs. CA,G.R. No. 95582,
October 7, 1991).
Q: A bus of GL Transit on its way to Davao stopped
to enable a passenger to alight. At that moment, The passenger is not considered negligent if the bus
Santiago, who had been waiting for a ride, boarded started moving slowly when the passenger is
the bus. However, the bus driver failed to notice boarding the same
Santiago who was still standing on the bus
platform, and stepped on the accelerator. Because Further, even assuming that the bus had "just
of the sudden motion, Santiago slipped and fell started" and "was still in slow motion" at the point
down suffering serious injuries. May Santiago hold where the victim had boarded and was on its
GL Transit liable for breach of contract of carriage? platform, the victim cannot be considered negligent
Explain. under the said circumstances (Dangwa vs. CA, G.R.
No. 95582, October 7, 1991).
A: Santiago may hold GL Transit liable for breach of
contract of carriage. It was the duty of the driver, Q: P, a sales girl in a flower shop at the Ayala Station
when he stopped the bus, to do no act that would of the Metro Rail Transit (MRT) bought two tokens
have the effect of increasing the peril to a passenger or tickets, one for her ride to work and another for
such as Santiago while he was attempting to board her ride home. She got to her flower shop where she
the same. When a bus is not in motion there is no usually worked from 8 a.m. to 5 p.m. At about 3
necessity for a person who wants to ride the same to p.m., while P was attending to her duties at the
signal his intention to board. A public utility bus, flower shop, two crews of the MRT got into a fight
once it stops, is in effect making a continuous offer near the flower shop, causing injuries to P in the
to bus riders. It is the duty of common carriers of process. Can P sue the MRT for contractual breach
passengers to stop their conveyances for a as she was within the MRT premises where she
reasonable length of time in order to afford would shortly take her ride home? (2011 Bar
passengers an opportunity to board and enter, and Question)(
they are liable for injuries suffered by boarding
passengers resulting from the sudden starting up or A: No, since P had no intention to board an MRT train
jerking of their conveyances while they are doing so. coach when the incident occurred.
Santiago, by stepping and standing on the platform
of the bus, is already considered a passenger and is ARRIVAL AT DESTINATION
entitled to all the rights and protection pertaining to
a contract of carriage. Liability for death or injury to passengers upon
arrival at destination
Common carrier may be held liable to a passenger
who died while trying to board their vehicle Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
It is the duty of common carriers of passengers to destination, safely alighted from the carrier's
afford passengers an opportunity to board and enter, conveyance or had a reasonable opportunity to leave
and they are liable for injuries suffered by boarding the carrier's premises. All persons who remain on the
The victim’s presence in a vessel after 1 hour from Rationale behind the carrier’s liability
his disembarkation is not enough in order to absolve
the carrier from liability in his death The basis of the carrier's liability for assaults on
passengers committed by its drivers rests on the
Carrier-passenger relationship continues until the principle that it is the carrier's implied duty to
passenger has been landed at the port of destination transport the passenger safely. As between the
and has left the vessel-owner’s premises (Aboitiz carrier and the passenger, the former must bear the
Shipping Corporation vs. CA, GR No. 84458, November risk of wrongful acts or negligence of the carrier's
6, 1989). employees against passengers, since it, and not the
passengers, has power to select and remove them
Q: Robert De Alban and his family rode a bus owned (Maranan v. Perez, GR No. L-22272, June 26, 1967).
by Joeben Bus Company. Upon reaching their
desired destination, they alighted from the bus but Q: The AAA Bus Company picks up passengers along
Robert returned to get their baggage. However, his EDSA. X, the conductor, while on board the bus,
youngest daughter followed him without his drew his gun and randomly shot the passengers
knowledge. When he stepped into the bus again, the inside. As a result, Y, a passenger, was shot and died
bus accelerated that resulting to Robert’s daughter instantly. Is AAA Bus Company liable? (2012 Bar
death. The bus ran over her. Is the bus company Question)
liable?
A: Yes. The bus company is liable because common
A: Yes. The relation of carrier and passenger does not carriers are liable for the negligence or willful act of
cease at the moment the passenger alights from the its employees even though they acted beyond the
carrier’s vehicle at a place selected by the carrier at scope of their responsibility.
the point of destination, but continues until the
passenger has had a reasonable time or reasonable OTHER PASSENGERS AND STRANGERS
opportunity to leave the current premises (La
Mallorca vs. CA,GR L-20761, 27 July 1966). Extent of liability of common carriers for acts of
co-passengers or strangers
LIABILITY FOR ACTS OF OTHERS
A common carrier is responsible for injuries suffered
EMPLOYEES by a passenger on account of the willful acts or
negligence of other passengers or of strangers, if the
Common carriers are liable for the acts of their carrier’s employees through the exercise of the
employees diligence of a good father of a family would have
prevented or stopped the act or omission (Art. 1763,
Common carriers are liable for the death of or injuries NCC).
to passengers through the negligence or willful acts
of the former’s employees, although such employees Q: P rode a Sentinel Liner bus going to Baguio from
may have acted beyond the scope of their authority Manila. At a stop-over in Tarlac, the bus driver, the
or in violation of the orders of the common carriers. conductor, and the passengers disembarked for
The liability of the common carriers does not cease lunch. P decided, however, to remain in the bus, the
upon proof that they exercised all the diligence of a door of which was not locked. At this point, V, a
good father of a family in the selection and vendor, sneaked into the bus and offered P some
supervision of their employees (Art. 1759, NCC). refreshments. When P rudely declined, V attacked
him, resulting in P suffering from bruises and
NOTE: The liability of the common carrier to the personal contusions. Does he have cause to sue Sentinel
violence of its employees or agents upon its passengers Liner? (2011 Bar Question)
extends only to those acts which the carrier could foresee
or avoid through the exercise of the diligence required.
A: No. There is no showing that any such incident Also, the liability of the registered owner of a public
previously happened so as to impose an obligation on service vehicle for damages arising from the tortious
the part of the personnel of the bus company to warn acts of the driver is primary, direct, and joint and
the passengers and to take the necessary precaution. several or solidary with the driver (Philtranco Service
Such hurling of a stone constitutes fortuitous event in Enterprises, Inc. v. CA, G.R. No. 120553).
this case. The bus company is not an insurer of the
absolute safety of its passengers (Pilapil v. CA, G.R. EXTENT OF LIABILITY FOR DAMAGES
No. 52159, Dec. 22, 1989).
Kinds of damages that may be recovered in case of
The registered owner of the vehicle may be held death of a passenger (DEMEx-AIH)
liable for damages suffered by a third person in the
course of the operation of the vehicle 1. An indemnity for the Death of the victim
2. An indemnity for loss of Earning capacity of the
The registered owner of a public service vehicle is deceased
responsible for damages that may arise from 3. Moral damages
consequences incident to its operation or that may 4. Exemplary damages
be caused to any of the passengers therein (Gelisan v. 5. Attorney's fees and expenses of litigation
Alday, G.R. No. L-30212, Sept 30, 1987). 6. Interest in proper cases (Briñas v. People,G.R. No.
L-30309, Nov. 25, 1983).
Also, the liability of the registered owner of a public 7. Hospital and funeral expenses
service vehicle for damages arising from the tortious
acts of the driver is primary, direct, and joint and NOTE: Carrier is not liable for exemplary damages where
there is no proof that it acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
1. Civil liability of the Ship agent or shipowner for the GENERAL AVERAGE
indemnities in favor of third persons; (Art. 587, Code
of Commerce) Averages
2. Civil liability of the co-Owners of the vessel for the
results of the acts of the captain; (Art. 590, Code of All extraordinary or accidental expenses which may
Commerce) be incurred during the voyage for the preservation of
3. If the vessel and her cargo be totally Lost, by the vessel or cargo or both.
reason of capture or shipwreck, all the rights shall be
extinguished, both as regards the right of the crew to Kinds of averages
demand wages and the right of the ship agent to
recover the advances made; (Code of Commerce, Art. 1. General average – Damages or expenses
643) or deliberately caused in order to save the vessel, its
4. Extinction of civil liability incurred by the cargo or both from real and known risk.
shipowner or agent in cases of maritime collisions 2. Particular average – Damages or expenses caused
(Code of Commerce, Art. 837). to the vessel or cargo that did not inure to the
common benefit, and borne by respective owners.
Exceptions to the doctrine of limited liability
General average v. Particular average
1. Repairs and provisioning of the vessel before the
loss of the vessel; (Art. 586) GENERAL AVERAGE PARTICULAR AVERAGE
2. Insurance proceeds. If the vessel is insured, the
proceeds will go to the persons entitled to claim from Both the ship and cargo No common danger to
the shipowner; (Vasquez v. CA, G.R. No. L-42926, are subject to the same both the vessel and the
Sept. 13, 1985) danger cargo
3. When the shipowner is guilty of fault or negligence; There is a deliberate Expenses and damages
NOTE: But if the captain is the one who is guilty,
sacrifice of part of the are not deliberately made
doctrine may still be invoked, hence, abandonment is vessel, cargo, or both
still an option. Damage or expenses Did not inure to common
incurred to the vessel, its benefit and profit of all
4. Private carrier; or cargo, or both, persons interested in the
5. Voyage is not maritime in character. redounded to the vessel and her cargo.
benefit of the respective
Q: A cargo ship of X Shipping, Co. ran aground off owners.
the coast of Cebu during a storm and lost all its All those who have Only the owner of the
cargo amounting to Php50 Million. The ship itself benefited shall satisfy goods benefiting from the
suffered damages estimated at Php80 Million. the average. damage shall bear the
expense of average.
The cargo owners filed a suit against X Shipping but
it invoked the doctrine of limited liability since its Requisites of general average (CD-PS)
vessel suffered an Php80 Million damage, more than
the collective value of all lost cargo. Is X Shipping 1. Common danger present;
correct? (2011 Bar Question) 2. Deliberate sacrifice of part of the vessel or cargo;
3. Successful saving of vessel and/or cargo; and
NOTE: An error at this point no longer bears any Q: Two vessels figured in a collision resulting in
consequence. considerable loss of cargo. The damaged vessels
were safely conducted to a port. Kim, a passenger
Even if a collision which resulted in the damage to the and Ruby, a shipper who suffered damage to his
cargoes of a vessel was due to the fault of the other cargo, did not file maritime protest. Can Kim and
vessel, the shipowner is still liable where the vessel Ruby successfully maintain an action to recover
did not exercise due diligence to avoid collision losses and damages arising from the collision? (2007
(Maritime Company of the Philippines v. CA, 171 SCRA Bar Question)
61).
A: Ruby, the shipper can successfully maintain an
A vessel is guilty of negligence even if it correctly action to recover losses and damages arising from the
navigated to the right to avoid the collision where it collision notwithstanding his failure to file a maritime
did not make such maneuver at an early stage and protest since the filing thereof is required only on the
allowed the two vessels to come to close quarters part of Kim, who, being a passenger of the vessel at
(Mecenas v. CA, 180 SCRA 83). the time of the collision, was expected to know the
circumstances of the collision. Kim's failure to file a
Role of a “protest” with respect to collisions maritime protest will therefore prevent him from
successfully maintaining an action to recover his
The action for recovery of damages arising from losses and damages (Code of Commerce, Art 836).
collisions cannot be admitted if a protest or
declaration is not presented within twenty-four hours Shipwreck
before the competent authority of the point where
the collision took place, or that of the first port of The loss of the vessel at sea as a consequence of its
arrival of the vessel, if in Philippine territory, and to grounding, or running against an object in sea or on
the Filipino consul if it occurred in a foreign country the coast. If the wreck was due to malice, negligence,
(Art. 835). or lack of skill of the captain, the owner of the vessel
may demand indemnity from said captain.
NOTE: Failure to make a protest is not an impediment to
the maintenance of a civil action based on quasi-delict. Person who shall bear the losses in shipwreck
Instances when a protest is required GR: The loss of a ship and her cargo shall fall upon
their respective owners (Code of Commerce, Art. 840)
1. Arrival under stress; (Code of Commerce, Art. 612
[8]) XPN: If the wreck was due to malice, negligence, or
2. Shipwreck; (Code of Commerce, Arts. 601 [15], lack of skill of the captain, or because the vessel put
843) to sea was insufficiently repaired and equipped, the
3. If the vessel has gone through a hurricane or ship agent or the shippers may demand indemnity
where the captain believes that the cargo has from the captain for the damage caused to the vessel
suffered damages or averages; (Code of or to the cargo by the accident (Code of Commerce,
Commerce, Art. 642) and Art. 841)
4. Maritime collision (Code of Commerce, Art. 835).
Arrival under stress
Persons who can file a maritime protest
It is the arrival of a vessel at the nearest and most
1. In case of maritime collision, the passenger or convenient port, if during the voyage the vessel
other persons interested who may be on board the
1. Lack of provisions is due to negligence to carry There is also no consequence if the transportation
according to usage and customs charges and expenses are paid unlike under the Code
2. Risk of enemy not well known of manifest of Commerce.
3. Defect of vessel is due to improper repair; or
4. Malice, negligence, lack of foresight or skill of Time when suits for loss or damage of cargo should
captain (Art. 820). be brought
CARRIAGE OF GOODS BY SEA ACT (COGSA) The suit should be brought within one year from:
1. Delivery of the goods, in case of damage; or
Application of COGSA 2. The date when the goods should have been
delivered, in case of loss.
It will only be applied in terms of loss or damage of
goods transported to and from Philippine ports in NOTE: The parties may agree to extend the one-year period
foreign trade. It may also apply to domestic trade to file a case under the Carriage of Goods by Sea (Universal
when there is a paramount clause in the contract. Shipping Lines, Inc. v. Intermediate Appellate Court, 188
SCRA 170).
Paramount Clause – it is a stipulation or clause either
on the bill of lading or charter party stipulating the Q: To whom should such delivery be made as basis
laws that the parties agreed to be used of that of the computation of the one-year period?
particular transport. In the event that there will be a
breach, the parties shall follow the law stipulated in A: The one-year period is computed from the delivery
the paramount clause (Martin, 1989, Ed.). of goods to the operator and not to the consignee.
The Carriage of Goods by Sea Act applies up to the Instances when the one-year period apply (AFLS)
final port of destination even if the transhipment was
made on an inter-island vessel (Sea Land Service Inc. 1. Amendment of pleadings for suing the wrong
V. Intermediate Appellate Court, 153 SCRA 552). party
2. Filing of third party complaint
Cases covered under the COGSA 3. Loss or damage to cargo, excluding delay or
misdelivery
It applies only in case of non-delivery or damage, and 4. Subrogation (NCC, Art 2207).
not to misdelivery or conversion of goods (Ang v.
American Steamship Agencies, Inc., G.R. No. L-22491, Time when the one year period in the COGSA is
Jan. 27, 1967). interrupted
Also, the deterioration of goods due to delay in their 1. When an action is filed in court; or
transportation is not covered by Sec. 6 of COGSA 2. When there is an agreement between the parties
(Mitsui O.S.K. Lines Ltd. v. CA, G.R. No. 119571, Mar. to extend it.
11, 1998).
Art. 1155 of the Civil Code (providing that the
prescription of actions is interrupted by the making
of an extrajudicial written demand by the creditor)
is not applicable to actions brought under the
COGSA
The one-year prescriptive period within which to file 1. If the nature or value of goods knowingly and
a case against the carrier also applies to a claim filed Fraudulently misstated by shipper
by an insurer who stands as a subrogee to the 2. If damage resulted from Dangerous nature of
insured. Also, whether the insurer files a third party shipment loaded without consent of carrier
complaint or maintains an independent action is of 3. If Unseaworthiness not due to negligence
no moment (Filipino Merchants Insurance Co., Inc. v. 4. If Deviation was to save life or property at sea.
Alejandro, G.R. No. L-54140,Oct. 14, 1986).
Q: Clause 18 of the bill of lading provides that the
Where an insurer was sued by the consignee of imported owner should not be liable for loss or damage of
goods filed a third-party complaint against the carrying cargo unless written notice thereof was given to the
vessel more than a year after the delivery of the goods, the
carrier within 30 days after receipt of the goods.
third party complaint is barred by the one-year prescriptive
However, Section 3 of the COGSA provides that even
period under the Carriage of Goods by Sea Act, as
otherwise the prescriptive period can be avoided by the if a notice of loss or damage is not given, "that fact
consignee by filing a claim against the insurer (Filipino shall not affect or prejudice the right of the shipper
Merchant Insurance Co., Inc. v. Alejandro, 145 SCRA 42). to bring suit within one year after the delivery of the
goods." Which of these two provisions should
NOTE: The ruling in the above-cited case should apply only prevail?
to suits against the carrier filed either by the shipper, the
consignee or the insurer, not to suits by the insured against A: Section 3 will prevail. Any clause, Sec. 3 of the
the insurer. The basis of the insurer’s liability is the COGSA provides that any covenant, or agreement in a
insurance contract and such claim prescribes in 10 years, in
contract of carriage relieving the carrier or the ship
accordance with Art. 1144 of the Civil Code (Mayer Steel
from liability for loss or damage to or in connection
Pipe Corporation v. CA, G.R. No. 124050, June 19, 1997).
with the goods or lessening such liability otherwise
Prescriptive period in case of misdelivery and than as provided, shall be null and void and of no
conversion of goods effect." (E. E. Elser, Inc. v. CA, G.R. No. L-6517, Nov.
29, 1954).
In case of misdelivery or conversion, the proper
periods are: THE WARSAW CONVENTION
1. If there is a written contract – 10 years (Civil
Code, Art. 1144) Warsaw Convention (WC) for Unification of Certain
2. Oral contract – 6 years (Art. 1145) Rules Relating to International Carriage by Air
3. For quasi-delict – 4 years (Art. 1146) provides for rules applicable to international
transportation by air. The Philippines is one of the
signatories to WC (Santos III vs. Northwest Orient
1. Willful misconduct
2. Default amounting to willful misconduct
3. Accepting passengers without ticket
4. Accepting goods without airway bill or baggage
without baggage check
Willful misconduct
A corporation has a capacity of continuous existence XPN: The SEC allowed corporations to enter into
irrespective of the death, withdrawal, insolvency, or partnerships with other corporations and
incapacity of the individual stockholders or members individuals provided:
and regardless of the transfer of their interest or 1. The authority to enter into partnership relation is
shares of stock (De Leon, 2010). A corporation may expressly conferred by the Charter or the Articles of
exist up to the period stated in the articles of Incorporation (AOI) and the nature of the business
incorporation as long as not exceeding 50 years from venture to be undertaken by the partnership is in line
the date of incorporation, unless sooner dissolved or with the business authorized by the charter or the
unless said period is extended (Sec. 11, CC). AOI (SEC Opinions, Feb. 29, 1980, Dec. 1, 1993, and
Feb. 23, 1994).
Powers that a corporation can exercise 2. The partnership must be a limited partnership and
the corporation must be a limited partner
The powers that a corporation can exercise are only 3. If it is a foreign corporation, it must obtain a license
those which are granted by the law of its creation. All to transact business in the country.
powers which may be implied from those expressly Joint Account v. Partnership
provided by law and those which are incidental or
essential to the corporation’s existence may also be JOINT ACCOUNT PARTNERSHIP
exercised (Sec. 36, CC). Has no firm name and is Has a firm name.
conducted In the name
The power to institute expropriation proceedings is of the ostensible
not granted to all corporations partner.
Has no juridical Has juridical personality
Only quasi-public corporations or those affected with personality and can sue and may sue or be sued
public interest are given the power to institute or be sued only in the under its firm name
condemnation proceedings against owners of private name of the ostensible
property. To grant the right of eminent domain to partner.
purely private entities exercising functions, which are Has no common fund. Has a common fund.
not public in nature, would be using the right to take The ostensible partner All general partners have
property for private use (De Leon, 2010 citing SEC manages its business the right of
Opinion, Oct. 28, 1968). operations. management.
Liquidation thereof can Liquidation may, by
only be done by the agreement, be entrusted
ostensible partner. to a partner or partners.
From the moment of meeting of /minds of Existence of the corporation commences from the
the partners date of issuance of the Certificate of
Incorporation by the Securities and Exchange
Commission (SEC).
Commencement of
The term of a partnership may be
juridical
established for any period of time stipulated Existence can NOT be for a term in excess of 50
personality and
by the partners years. The term of a corporation may be extended
term of existence
to not more than 50 years at any single instance.
May be organized by at least 2 persons GR: Requires at least 5 incorporators but not
Number of more than 15.
incorporators
XPN: Corporation sole
GR: May exercise any power authorized by May exercise only such powers as may be granted
the partners. by law and its articles of incorporation, implied
Powers therefrom or incidental thereto.
XPN: Acts which are contrary to law, morals,
good customs, public order, public policy
When management is not agreed upon, GR: Power to do business and manage its affairs is
every partner is an agent of the partnership vested in the Board of Directors (BOD) / Board of
Trustees (BOT).
XPNs:
Management 1) Executive Committee (Sec. 35, CC)
2) Management Contract (Sec. 44, CC)
3) The AOI of a close corporation may provide
that the business of the corporation shall be
managed by the stockholders of the corporation
rather than by a board of directors (Sec. 97, CC).
A partner as such can sue a co-partner who The suit against a member of the BOD or BOT
Effect of
mismanages. who mismanages must be brought in the name of
mismanagement
the corporation (Derivative suit).
GR: Partners are liable personally and Stockholders are liable only to the extent of the
subsidiarily(sometimes solidarily) for shares subscribed by them whether paid or not.
Extent of liability
partnership debts to third persons
to third persons
XPN: Limited partner
Right of Succession No right of succession Has right of succession
Partner cannot transfer his interest in the Stockholder has the right to transfer his shares
Transferability of
partnership without the consent of all the without prior consent of the other stockholders
Share Holder’s
other existing partners. unless the right of first refusal is embodied in the
interest
articles of incorporation.
May be dissolved any time by the will of any Can only be dissolved with the consent of the
or all of the partners. State.
Dissolution
Death, civil interdiction and insolvency of a Death or insolvency of shareholders can’t dissolve
partner dissolve the partnership. the corporation.
Application of the Grandfather Rule in determining NATIONALIZED ACTIVITIES RESERVED FOR FILIPINOS
the nationality of a corporation
UNDER THE CONSTITUTION AND SPECIAL LAW
To ensure compliance with the constitutional
limitation(s) of corporations engaging in nationalized
100% Filipino Owned
activities, the nationality of a corporation must be
determined by ascertaining if 60% of the investing (Zero percent (0%) foreign equity)
corporation’s outstanding capital stock is owned by (Code: CoFi AMMaN Co. – ProMiSe- US$2.5M)
“Filipino citizens”, or as interpreted, by natural or
individual Filipino citizens. If such investing
1. COoperatives (Art. 26, Ch. III, R.A. 6938);
corporation is in turn owned to some extent by
another investing corporation, the same process 2. Manufacture of FIrecrackers and other
must be observed (Redmont Consolidated Mines pyrotechnic devices (Sec. 5, R.A. 7183).
Corporation vs. McArthur Mining Corporation, SEC 3. Manufacture, repair, stockpiling and/or
En Banc Case No. 09-09-177, March 25, 2010). distribution of biological, chemical and
radiological weapons and Anti-personnel
Reason: One must not stop until the citizenships of mines (Various treaties to which the
the individual or natural stockholders of layer after
Philippines is a signatory and conventions
layer of investing corporations have been established,
for this is the very essence of the Grandfather Rule supported by the Philippines).
(ibid). 4. Mass media except recording
5. Utilization of MArine resources (Sec. 2, Art.
Rules governing the application of the Grandfather XII, Constitution);
Rule 6. Manufacture, repair, stockpiling and/or
distribution of Nuclear weapons (Sec. 8, Art.
1. The grandfather rule should be used in
II, Constitution);
determining the nationality of a corporation
engaged in a partly nationalized activity 7. COckpits (Sec. 5, P.D. 449);
(SEC-OGC Opinion No. 10-31, December 9, 2010). 8. Practice of all PROfessions
This applies in cases where the stocks of a 1. Law
corporation are owned by another corporation 2. Medicine and allied professions
with foreign stockholders exceeding 40% of the 3. Accountancy, etc.
capital stock of the corporation.
9. Small-scale MIning (Sec. 3, R.A. 7076);
2. The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity ownership 10. Private SEcurity agencies (Sec. 4, R.A. 5487);
in a particular natural resource corporation is not
LIABILITY FOR TORTS AND CRIMES 2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
A corporation may be held liable for torts realm (Manila Electric Company v. T.E.A.M.
Electronics Corporation, et. al., G.R. No. 131723, Dec.
The corporation is liable for every tort which it 13, 2007).
expressly directs or authorizes (PNB v. CA, G.R. No.
L-27155, May 18, 1978). Q: "Exposé" is a radio documentary program hosted
by Rima and Alegre. It is aired every morning over
Reason for liability in cases of torts DZRC-AM which is owned by FBNI. One morning,
Rima and Alegre exposed various alleged complaints
A corporation is civilly liable in the same manner as from students, teachers and parents against AMEC
natural persons for torts, because generally speaking, and its administrators. Claiming that the broadcasts
A promoter is a person who, acting alone or with The promoter occupies a fiduciary or quasi-trust
others, takes initiative in founding and organizing the relation toward the corporation when it comes into
business or enterprise of the issuer and receives existence and towards the subscribers prior to its
consideration therefor (Sec.3.10, SRC). organization, as long as they are acting as promoters
(ibid., pg. 122-123). This fiduciary relation imposes
Specifically, a promoter is a person who brings about upon the promoter to act in good faith in all dealings
or cause to bring about the formation and in behalf of the corporation to protect the
organization of a corporation by: corporation from dishonest promoters (ibid).
1. Bringing together the incorporators or the
persons interested in the enterprise, Promoter is not an agent of the corporation
2. Procuring subscriptions or capital for the
corporation and The promoters are not in any sense agents of the
3. Setting in motion the machinery which leads corporation before it comes into existence for there
to the incorporation of the corporation itself. cannot be an agency unless there is a principal. But,
they may become the agents of the corporation after
Promotional activities it has been formed provided there is assent, express
or implied, on the part of the corporation (ibid).
Promotional activities includes: (DIA)
1. Discovery – consists of finding a business Promoter as agent of an incorporator/ corporator/
opportunity to be developed. subscriber before the commencement of the
2. Investigation – entails an analysis of the proposed corporate existence
business to determine whether or not it is
economically feasible. Before the corporation is formed, the promoters are
3. Assembly – Includes the bringing together of the considered agents of the subscribers, the
necessary personnel, property or money to set incorporators or corporators.
the business in motion as well as secondary
details of setting up the corporation itself (De NOTE: The subscribers for stock in a proposed corporation
do not, without agreement to such effect, become partners
Leon, supra, pg. 122).
with the promoters of it (ibid).
GR: If the contract is partly to be performed before Stockholders cannot be held personally liable for the
incorporation, the promoters solely are liable even if compensation for services performed by promoters in
the promoter signed "on behalf of corporation to be the organization of the corporation in the absence of
formed, who will be obligor" (Stanley J. How & Assoc., any showing that said stockholders contracted such
Inc. v. Boss, 222 F. Supp. 936,1963 U.S. Dist. 1963). services. The fact that they benefited from such
services is no justification to hold them personally
XPN: The promoter may be absolved from liability by liable therefore (Ibid., citing Caram, Jr. vs. CA, 151
the adoption of the corporation of the contract. The SCRA 372 [1987]).
adoption must be expressed in a novation or
agreement to the effect:
1. That the creditor agreed to look solely to the new
corporation for payment; or
2. That the promoter did not have any duty toward
the creditor to form the corporation and give the
Limitations on the use of corporate name NOTE: Priority of adoption determines the right to the
exclusive use of a corporate name with freedom from
infringement. Further, to determine whether a given
1. No corporate name may be allowed by the SEC if
corporate name is “identical” or “confusingly or deceptively
the proposed name is identical or deceptively or similar” with another entity’s corporate name, the
confusingly similar to that of any existing corporate names must be evaluated in their entirety
corporation (Sec. 18, CC). (Lyceum of the Philippines vs. CA, 219 SCRA 610 [1993]).
2. No corporate name may be allowed by the SEC if
the proposed name is identical or deceptively or Q: Refractories Corporation of the Philippines (RCP)
confusingly similar to any other name already is a corporation for the purpose of engaging in the
protected by law (Sec. 18, CC). business of manufacturing, producing, selling,
3. The proposed name is patently deceptive, exporting and otherwise dealing in any and all
confusing or contrary to existing laws (Sec. 18, refractory bricks, its by-products and derivatives. On
CC). June 22, 1977, it registered its corporate and
4. If the name applied for is similar to the name of a business name with the Bureau of Domestic Trade.
registered firm, the applicant shall at least Industrial Refractories Corporation of the Philippines
contain one or more distinctive words to the (IRCP) on the other hand, was incorporated
proposed name to remove the similarity or originally under the name Synclaire Manufacturing
differentiate it from the registered name. Corporation. It amended its AOI on August 23, 1985
However, the addition of these distinctive words to change its corporate name to Industrial
shall not be allowed if the registered name is Refractories Corp. of the Philippines. It is engaged in
GR: The period stated in the AOI which in no case GR: There is no minimum authorized capital stock as
shall exceed 50 years. long as the paid-up capital is not less than P5,000.00.
XPN: Unless sooner dissolved or unless said period is XPN: As provided by special law.
extended (Sec. 11, CC).
Minimum stock subscription and paid-up capital
NOTE: Extension may be made for periods not exceeding 50 requirements
years in any single instance by an amendment of the
articles of incorporation. However, extension must be made
within 5 years before the expiry date of the corporate term, At least 25% of the authorized capital stock as stated
unless there are justifiable reasons for an earlier extension in the AOI must be subscribed at the time of
as may be determined by the SEC (Sec. 11, CC). incorporation, and at least 25% of the total
subscription must be paid upon subscription (Sec 13,
Extension must also comply with procedural requirements CC).
for amendment of AOI.
Each subscriber is not required to pay 25% of each
Doctrine of Relation or Relating Back Doctrine subscribed share
GR: The filing and recording of a certificate of It is not required that each subscriber pay 25% of
extension after the term cannot relate back to the each subscribed share. It is only required that at least
date of the passage of the resolution of the 25% of the total subscribed capital must be paid.
stockholders to extend the life of the corporation.
Paid-up capital
XPNs: The doctrine of relation applies if the failure to
file the application for extension within the term of Paid-up capital forms part of the authorized capital
the corporation is due to: stock of the corporation, subscribed and then actually
1. The neglect of the SEC officer with whom the paid for. The assets transferred and the loans
certificate is required to be filed; or extended to a corporation should not be considered
2. A wrongful refusal on his part to receive it (Aquino, in computing the paid-up capital of the corporation
Philippine Corporate Law Compendium, 2006). (MISCI-NACUSIP Local Chapter v. National Wages and
Productivity Commission 269 SCRA 173).
Q: The term GGG Corporation in accordance with its
Articles of Incorporation ended last January 30, Time when the unpaid subscription is payable
2012. The term was not extended. What will happen
to the corporation? (2012 Bar) The balance or the unpaid subscription shall be
payable:
a. The corporation is dissolved ipso facto. 1. On a date or dates fixed in the contract of
b. There is a need to pass a board resolution to subscription without need of call;, or
formally dissolve the corporation. 2. In the absence of a fixed date or dates, upon
c. The Board of Directors must pass a resolution call for payment by the BOD (Sec. 13, CC).
for the corporation to formally go into
liquidation.
All corporations organized under the Code shall file 1. If there is more than one stated purpose, specify
with the SEC an AOI in any of the official languages which is the main or primary purpose and which is or
duly signed and acknowledged by all of the are the secondary or subsidiary purpose/s (Sec. 14[2],
incorporators, containing substantially the following CC).
matters, except as otherwise prescribed by the Code NOTE: This specification is important in the
or by special law: (NaP- PlaTINum-ASONO) application of the prohibition under Sec. 42 of the CC
which states that the corporation is prohibited from
1. NAme of corporation
investing corporate funds “for any purpose other than
2. Purpose/s, indicating the primary and secondary the primary purpose for which it was organized”
purposes (Purpose Clause) unless such investment is approved by both majority
3. PLAce of principal office of the BOD or BOT and ratified by the stockholders
4. Term of existence representing at least 2/3 of the outstanding capital
5. Names, nationalities and residences of stock or by at least 2/3 of the members in the case of
Incorporators a non-stock corporation.
6. NUMber of directors or trustees, which shall not
be less than 5 nor more than 15, except for 2. The purposes must be capable of being lawfully
corporation sole combined.
7. Names, nationalities, and residences of the 3. A non-stock corporation may not include a purpose
persons who shall Act as directors or trustees which would change or contradict its nature as such
until the first regular ones are elected and (ibid).
qualified
8. If a Stock corporation, the amount of its Requirements of the SEC as regards the address
authorized capital stock, number of shares and in specification of the corporation in the AOI
case the shares are par value shares, the par
value of each share; SEC requires that the applicant corporation must
9. Names, nationalities, number of shares, and the state in its AOI the
amounts subscribed and paid by each of the 1. Specific address of their principal office, which shall
Original subscribers which shall not be less than include, if feasible, the street name, barangay, city or
25% of authorized capital stock; municipality; and
GR: The duty of the SEC to file the AOI and to issue a Time when the amendment of the AOI takes effect
certificate of incorporation is ministerial provided
that the AOI substantially comply with the statute. The amendment of the AOI takes effect either:
The SEC’s discretion can only be exercised on matters 1. Upon approval by the SEC, that is, upon issuance of
of form and does not extend to the merits of an amended certificate of incorporation or
application for incorporation (Asuncion vs. De Yriarte, 2. From the date of filing with the SEC:
GR No. 9321, Sept. 24, 1914). a. If not acted upon within 6 months from the
date of filing; and
NOTE: If the SEC refuses to file the AOI, which substantially b. For a cause not attributable to the
complied with the statute, the remedy of the applicant is to corporation.
file a petition for mandamus (ibid).
XPN: However, SEC has authority to pass upon the NOTE: The provision on automatic approval in Sec. 16 does
lawfulness of the object or purpose of the not apply to the dissolution of the corporations in the light
corporation as expressed in the AOI. Such of Sec. 120, CC (SEC Opinion, Mar. 30, 1982).
determination is an exercise of judgment, that is,
judicial function on a question of law (ibid). NON-AMENDABLE ITEMS
NOTE: If the SEC errs in the determination of the lawfulness Non-amendable items in the AOI
of the purpose of the corporation stated in the AOI and
refuses to file the said AOI, its decision is subject to review
Those matters referring to accomplished facts, except
and correction by the court (ibid).
to correct mistakes.
AMENDMENT
E.g.
1. Names of incorporators
Limitations in the amendment of AOI
2. Names of original subscribers to the capital stock of
the corporation and their subscribed and paid up
1. The amendment must be for legitimate purposes
capital
and must not be contrary to other provisions of the
3. Names of the original directors
CC and special laws;
4. Treasurer elected by the original subscribers
2. Approved by majority of BOD/BOT;
5. Members who contributed to the initial capital of
3. Vote or written assent of stockholders representing
the non‐stock corporation
2/3 of the outstanding capital stock or 2/3 of
6. Witnesses to and acknowledgment with AOI
members;
4. The original and amended articles together shall
contain all provisions required by law to be set out
NOTE: The above grounds are not exclusive. The grounds Basic requirements for the registration and issuance
according to PD No. 902‐A are: of a certificate of incorporation of a stock
1. Fraud in procuring its certificate of incorporation; corporation
2. Serious misrepresentation as to what the
corporation can do or its doing to the great
1. Name verification slip;
prejudice of, or damage to, the general public;
3. Refusal to comply with, or defiance or a lawful 2. AOI and by-laws;
order of the SEC restraining the commission of 3. Treasurer’s affidavit;
acts which would amount to a grave violation of
its franchise; NOTE: Content of a treasurer’s affidavit
4. Continuous inoperation for a period of at least
five (5) years after commencing the transaction of That at least 25% of the authorized capital stock of the
its business (Sec. 22, CC.); corporation has been subscribed, and at least 25% of the
5. Failure to file the by‐laws within the required total subscription has been fully paid in actual cash and/or
period; property; such paid-up capital being not less than P5,000
6. Failure to file required reports. (Sec. 14, 15, CC).
NATURE AND FUNCTIONS OF BY-LAWS 1. Time, place and manner of calling and
conducting regular or special meetings of
Nature and functions of by-laws directors or trustees
2. Time and manner of calling and conducting
The corporate power to adopt by-laws is inherent in regular or special meetings of the stockholder or
every corporation. However, to give emphasis to such members
necessary corporate incident, said power is expressed 3. The required quorum in meeting of stockholders
in Sec. 36(5) and Sec. 46 of the CC. or members and the manner of voting therein
4. The form for proxies of stockholders and
The by-laws supplement the AOI. The function of members and the manner of voting them
by-laws is to define the rights and duties of corporate 5. The qualification, duties and compensation of
officers and directors or trustees, and of stockholders directors or trustees, officers and employees
or members towards the corporation and among 6. Time for holding the annual election of directors
themselves with reference to the management of or trustees and the mode or manner of giving
corporate affairs and to regulate transaction of the notice thereof
business of the corporation in a particular way (De 7. Manner of election or appointment and the term
Leon, 2010). of office of all officers other than directors or
trustees
A corporation sole is not governed by by-laws 8. Penalties for violation of the by-laws
9. In case of stock corporations, the manner of
A corporation sole is not govered by by-laws. It is issuing certificates
instead governed by Rules, Regulations and Discipline 10. Such other matters as may be necessary for the
of its religious denomination which already contain proper or convenient transaction of its corporate
the provisions embodied in the by-laws of ordinary business and affairs (Sec. 47, CC).
corporations.
Procedures in adopting by-laws
REQUISITES OF VALID BY-LAWS
The by-laws may be adopted before or after
Requisite of valid by-laws incorporation. In all cases, the By-laws shall be
effective only upon the issuance by the SEC of a
The following are the requisites for the validity of certification that the by-laws are not inconsistent
by-laws: (CoMorO-RAG) with the AOI.
1. Must be consistent with the COrporation Code, 1. Pre - incorporation – It shall be approved and
other pertinent laws and regulations signed by all the incorporators and submitted to the
2. Must not be contrary to MORals and public SEC, together with AOI.
policy 2. Post – incorporation
3. Must not impair Obligations and contracts or a. Vote of the majority of the stockholders
property rights of stockholders representing the outstanding capital stock or
4. Must be Reasonable members;
5. Must be consistent with the charter or AOI b. By-laws shall be signed by the stockholders
6. Must be of General application and not directed or members voting for them
against a particular individual. c. It shall be kept in the principal office of the
corporation and subject to the inspection of the
Rule in case of conflict between the by-laws and the stockholders ore members during office hours
AOI d. Copy thereof, duly certified by the BOD or
BOT countersigned by the secretary of the
In case of conflict between the by-laws and the AOI, corporation, shall be filed with the SEC and shall
the AOI prevails because the by-laws are intended be attached with the original AOI (Sec. 46, CC).
merely to supplement the former.
SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY 1. Majority vote of the BOD or BOT;
2. Ratification by 2/3 of the SH representing
Theory of Specific Capacity outstanding capital stock or by at least 2/3 of the
members in case of non-stock corporation;
The specific powers of a corporation also called 3. Written notice of the proposed action and of the
Theory of Specific Capacity are the following: time and place of the meeting shall be addressed to
(ESB-PA-SIDE-A) each stockholder or member at his place of residence
1. Power to Extend or shorten corporate term (Sec. as shown on the books of the corporation and
37, CC). deposited to the addressee in the post office with
2. Increase or decrease corporate Stock (Sec. 38, CC). postage prepaid, or served personally;
3. Incur, create, or increase Bonded indebtedness 4. Copy of the amended AOI shall be submitted to
(Sec. 38, CC). the SEC for its approval; and
4. Deny Pre-emptive right (Sec. 39, CC). 5. In case of special corporation, a favorable
5. Sell, dispose, lease, encumber all or substantially recommendation of appropriate government agency
all of corporate Assets (Sec. 40, CC). (Sec. 37, CC).
6. Purchase or acquire Shares (Sec. 41, CC). 6. The extension must be done during the lifetime
7. Invest corporate funds in another corporation or of the corporation not earlier than 5 years prior to
business for other purpose other than primary the expiry date unless exempted. The extension must
purpose (Sec. 42, CC). not exceed 50 years (Sec 16, CC).
8. Declare Dividends out of unrestricted retained
earnings (Sec. 43, CC). NOTE: After the term had expired without extension, the
9. Enter into management contract with another corporation is deemed ipso facto dissolved. The remedy of
corporation (not with an individual or a the stockholders is reincorporation. Any dissenting
stockholder may exercise his appraisal right in case of
partnership – within general powers) whereby
shortening or extending corporate term (Sec. 37, CC).
one corporation undertakes to manage all or
substantially all of the business of the other
Q: T Corp. has a corporate term of 20 years under its
corporation for a period not longer than five (5)
Articles of Incorporation or from June 1, 1980 to
years for any one term (Sec. 44, CC).
June 1, 2000. On June 1, 1991 it amended its Articles
10. Amend Articles of Incorporation (Sec. 16, CC).
of Incorporation to extend its life by 15 years from
June 1, 1980 to June 1, 2015. On June 1, 2011,
Corporate powers which are exercised by the BOD
however, T Corp decided to shorten its term by 1
and stockholders jointly (ASIA-IDEA- MC)
year or until June 1, 2014. Both the 1991 and 2011
amendments were approved by majority vote of its
1. Amendments to by-laws
Board of Directors and ratified in a special meeting
2. Extending or Shortening the corporate term
by its stockholders representing at least 2/3 of its
3. Increase or decrease of capital stock
outstanding capital stock. The SEC, however,
4. The sale or other disposition of All or substantially
disapproved the 2011 amendment on the ground
all of the corporate assets
that it cannot be made earlier than 5 years prior to
5. Investment of corporate funds in another
the expiration date of the corporate term, which is
corporation or business or for any other purpose
June 1, 2014. Is this SEC disapproval correct? (2011
6. Issuance of stock Dividends
Bar Question)
7. Entering into management contract
8. Amendment to Articles of incorporation
A: No, since the 5-year rule on amendment of
9. Merger or consolidation
corporate term applies only to extension, not to
10. Grant of Compensation to directors
shortening, of term.
Procedural requirements in increasing or decreasing NOTE: A corporation is not prohibited from increasing its
capital stock authorized capital stock even if the same has not yet been
fully subscribed. Once an increase in authorized capital
stock is effected, it may be necessarily accompanied by an
1. Majority vote of the BOD;
actual increase in the assets and additional subscriptions in
2. Ratification by stockholders representing 2/3 of
order to comply with the 25% subscription requirement.
the outstanding capital stock; However, if such increase is for the purpose of effecting a
3. Written notice of the proposed increase or stock dividend previously authorized, then additional
diminution of the capital stock and of the time and subscriptions are NOT urgent.
place of the stockholder’s meeting at which the
proposed increase or diminution of the capital stock Reason: The actual capital is increased by accumulated
must be addressed to each stockholder at his place of profits and such profits are distributed to the stockholders
residence as shown on the books of the corporation in the form of stock dividends, the capital stock is
increased, for the profits are reinvested in the corporation
and deposited to the addressee in the post office
by transferring the same from surplus account to a capital
with postage prepaid, or served personally; account. The amount corresponding to the stock dividends
4. A certificate in duplicate must be signed by a declared may be used to cover the required 25%
majority vote of the directors of the corporation and subscription to increase the authorized capital stock and, if
countersigned by the chairman and the secretary of sufficient, will obviate the necessity of taking in new
the stockholder’s meeting, setting forth: subscription (De Leon, supra, pg. 350).
a. That the foregoing requirements have been
complied with; Basis of the required 25% subscription
b. The amount of increase or diminution of the
capital stock; The 25% subscription shall be based on the additional
c. If an increase of the capital stock, the amount amount by which the capital stock increased and not
of capital stock or number of shares of no par on the total capital stock as increased.
stock actually subscribed, the names,
nationalities and residences of the persons NOTE: Treasurer’s affidavit is required in increasing capital
subscribing, the amount of capital stock or stock, NOT in decreasing capital stock.
number of no par stock subscribed by each, and
the amount paid by each on his subscription in Additional requirement with respect to the decrease
cash or property, or the amount of capital stock of capital stock
or number of shares of no par stock allotted to
each stockholder if such increase is for the In case of decrease in capital stock, the same must
purpose of making effective stock dividend not prejudice the right of the creditors.
authorized;
d. The amount of stock represented at the Ways of increasing or decreasing the capital stock
meeting; and
e. The vote authorizing the increase or By increasing or decreasing the:
diminution of the capital stock, or the incurring, 1. Number of shares and retaining the par
creating or increasing of any bonded value;
indebtedness. 2. Par value of existing shares and retaining the
number of shares;
NOTE: The increase or decrease in the capital stock or the 3. Number of shares and increasing or
incurring, creating or increasing bonded indebtedness shall decreasing the par value.
require prior approval of the SEC.
NOTE: In decreasing the capital stock, resorting to
Additional requirement with respect to increase of reduction of number of shares may also be done through:
capital stock 1. Redeeming redeemable shares (Sec. 8,CC); or
2. purchasing of own shares(Sec. 41,CC); or
3. Cancelling or retiring the shares, including the
The application to be filed with the SEC shall be
treasury shares (Sec. 9,CC); or
accompanied by the sworn statement of the 4. The corporation may accept a surrender of shares
treasurer of the corporation, showing that at least and give the holders in exchange therefor a
25% of the increase in the capital stock was proportionate amount of its assets, provided no rights
subscribed and 25% of the said amount has been paid of creditors are involved; or
NOTE: The requirements for the power to incur, create or Pre-emptive right may be waived
increase bonded indebtedness is also the same with the
power to increase or decrease capital stock. Pre-emptive right may be waived either expressly or
impliedly as when the stockholder fails to exercise his
Registration of the bonds issued by the corporation pre-emptive right after being notified and given an
opportunity to avail of such right.
Bonds issued by a corporation shall be registered with
the SEC which shall have the authority to determine Transferability of pre-emptive right of a stockholder
the sufficiency of the terms thereof (Sec. 38, CC).
The pre-emptive right of a stockholder is transferable
Stockholders’ approval is not required for all unless there is an express restriction in the AOI.
borrowings of the corporation
Q: Suppose that X Corporation has already issued
Not all borrowings of the corporation need the 1000 originally authorized shares of the
stockholders’ approval. Only bonded indebtedness corporation so that its Board of Directors and
requires such approval. stockholders wish to increase X's authorized capital
stock. After complying with the requirements of the
POWER TO DENY PRE-EMPTIVE RIGHTS law on increase of capital stock, X issued an
additional 1000 shares of the same value. Assume
Pre-emptive right that stockholder A presently holds 200 out of the
1000 original shares. Would A have a pre‐emptive
It is the preferential right of shareholders to subscribe right to 200 of the new issue of 1000 shares? Why?
to all issues or disposition of shares of any class in
proportion to their present shareholdings (Sec. 39, A: Yes, A would have a pre‐emptive right to 200 of
CC). the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. According
NOTE: The stockholder must exercise his pre-emptive right to the Corporation Code, each stockholder has the
within the time fixed in the resolution authorizing the pre‐emptive right to all issues of shares made by the
increase of capital stock. corporation in proportion to the number of shares he
holds on record in the corporation.
Purpose of pre-emptive right
Q: Assuming a stockholder disagrees with the
The purpose of pre-emptive right is to enable the issuance of new shares and the pricing for the
shareholder to retain his proportionate control in the shares, may the stockholder invoke his appraisal
corporation and to retain his equity in the surplus. rights and demand payment for his shareholdings?
Exercise of pre-emptive right (1999 Bar Question)
Pre-emptive right must be exercised within the A: No, the stockholder may not exercise appraisal
period stated in the AOI or the By-Laws. When the right because the matter that he dissented from is
AOI and the By-Laws are silent, the Board may fix a not one of those where right of appraisal is available
reasonable time within which the stockholders may under the Corporation Code.
exercise the right.
The BOD, in its discretion, may abandon the plan for GR: The corporation may only acquire its own stocks
SLEMPAD even after such authorization or approval in the presence of unrestricted retained earnings
by the stockholders, subject to the rights of third (URE)
parties under any contract relating thereto, without
further action or approval by the stockholders or XPNs: (RDC)
members (ibid). 1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
Effect of sale of all or substantially all of assets of result to the insolvency of the Corporation
one corporation to another corporation 2. In cases that the corporation conveys its stocks in
payment of a Debt
GR: The corporation who acquired all or substantially 3. In a Close corporation, a stockholder may
all of the assets of the selling corporation shall not be demand the payment of the fair value of shares
liable for the debts of the latter. regardless of existence of retained earnings for
as long as it will not result to the insolvency of
XPNs: the corporation.
1. Express or implied assumption of liabilities;
2. Merger or consolidation; Unrestricted retained earnings (URE)
3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the It represents the surplus profits of the corporation. It
seller; is determined by subtracting the liabilities (L), the
5. If there is violation of the Bulk Sales Law. Capital Stock (CS) and the Restricted Retained
Earnings (RRE) from the assets (A) of the corporation
POWER TO ACQUIRE OWN SHARES (URE = A – (L + CS+ RRE)).
Instances when a corporation may acquire its own Unrestricted Retained Earnings shall include
shares accumulated profits and gains realized out of the
normal and continuous operations of the company
1. To eliminate fractional shares out of stock after deducting therefrom distributions of
dividends (Sec. 41,CC); stockholders and transfers to capital stock or other
2. To collect or compromise an indebtedness to the accounts. It does NOT include:
corporation, arising out of unpaid subscription, in 1. Funds appropriated by its BOD for corporate
a delinquency sale and to purchase delinquent expansion projects or programs;
shares sold during said sale (ibid.); 2. Funds covered by a restriction for dividend
3. To pay dissenting or withdrawing stockholders (in declaration under a loan agreement;
the exercise of the stockholder’s appraisal right) 3. Funds required to be retained under special
(ibid.); circumstances obtaining in the corporation such
4. To acquire treasury shares (Sec. 9, CC); as when there is a need for a special reserve for
5. Redeemable shares regardless of existence of probable circumstances.
retained earnings (Sec 8, CC);
6. To effect a decrease of capital stock(Sec. 38,CC); Guidelines for the acquisition of its own shares
7. In close corporations, when there is a deadlock in
the management of the business, the SEC may 1. The capital of the corporation must not be
order the purchase at their fair value of the impaired. There shall be URE’s to purchase the
shares of any stockholder by a corporation shares;
regardless of the availability of unrestricted 2. Legitimate or proper corporate objective is
retained earnings (URE’s) in its books (par. 1 [4], advanced;
Sec. 104, CC). 3. Condition of the corporate affairs warrants it;
4. Transaction is designed and carried out in good
NOTE: Where a corporation reacquires its own shares, it faith;
does not thereby become a subscriber thereof. 5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine
(Sec. 41, SEC Opinions, Oct. 12, 1992, Sept. 11,
1985, and April 11, 1994).
Q: PPI, a fertilizer manufacturer, entered into an These are the effects for the specific acts:
arrangement with Janet Layson for the delivery of 1. Executed contract – courts will not set aside or
fertilizers to her, payable from the proceeds of the interfere with such contracts;
loan that UCPB extended to her. Layson executed a 2. Executory contracts – no enforcement even at the
document called “pagares,” written on the dorsal suit of either party (void and unenforceable);
side of a UCPB promissory note. The pagares stated
that Layson had an approved loan with UCPB-Iloilo
Q: Ricardo Coros was dismissed by Matling Industrial The subscribed capital stock of the corporation is a
and Commercial Corporation (Matling) as its Vice trust fund for the payment of debts of the
President for Finance and Administration. Because corporation which the creditors have the right to look
of this, Coros filed a complaint for illegal suspension up to satisfy their credits, and which the corporation
and illegal dismissal against Matling and some of its may not dissipate. The creditors may sue the
corporate officers with the NLRC. Matling, et al., stockholders directly for the latter’s unpaid
moved to dismiss the complaint, raising the ground, subscription.
among others, that the complaint pertained to the
jurisdiction of the SEC due to the controversy being Effects of the trust fund doctrine
intra-corporate inasmuch as Coros was a member of
Matling’s Board of Directors aside from being its 1. Dividends must never impair the subscribed capital
Vice-President for Finance and Administration prior stock and must only be declared out of URE’s
to his termination. It further argues that the power 2. Subscription commitments cannot be condoned or
to create corporate offices and to appoint the remitted
individuals to assume the offices was delegated by 3. GR: The corporation cannot buy its own shares
Matling’s Board of Directors to its President through using the subscribed capital as the consideration
its By-Laws; and that any office the President therefore (NTC v. Court of Appeals, G.R. No.
created, like the position of the Coros, was as valid 127937. July 28, 1999).
and effective a creation as that made by the Board
of Directors, making the office a corporate office. Is XPN: (RDC)
Coros a corporate officer of Matling? a. Redeemable shares may be acquired even
without 0o]surplus profit for as long as it will not
A: No. Pursuant to Section 25 of the Corporation result to the insolvency of the Corporation
Code, whoever are the corporate officers b. In cases that the corporation conveys its stocks in
enumerated in the by-laws are the exclusive officers payment of a Debt
of the corporation and the Board has no power to c. In a Close corporation, a stockholder may
create other offices without amending first the demand the payment of the fair value of shares
corporate By-laws. However, the Board may create regardless of existence of retained earnings for
appointive positions other than the positions of as long as it will not result to the insolvency of
corporate officers, but the persons occupying such the corporation
positions are not considered as corporate officers
within the meaning of Section 25 of the Corporation 4. Rescission of a subscription agreement is not
Code and are not empowered to exercise the allowed since it will effectively result in the
functions of the corporate officers, except those unauthorized distribution of the capital assets
functions lawfully delegated to them. Their functions and property of the corporation (Ong v Tiu, ibid).
and duties are to be determined by the Board of
Doctrine of Centralized Management XPNs: Courts can inquire unto contracts which are:
1. Unconscionable and oppressive as to amount to
The Doctrine of Centralized Management states that wanton destruction to the rights of the minority (Ong
all corporate powers are exercised by the BOD or BOT v Tiu, ibid).
(Sec. 23, CC). However, this doctrine is not applicable 2. Bad faith or gross negligence by the directors
to the following instances: (Republic Communications Inc v CA, G.R. No. 135074,
1. In case of delegation to the Executive Committee January 29, 1999).
duly authorized in the by-laws;
2. Authorization pursuant to a contracted manager Consequences of Business Judgment Rule
which may be an individual, a partnership, or another
corporation. 1. Resolutions and transactions entered into by the
3. In case of close corporations, the stockholders may Board within the powers of the corporation
manage the business of the corporation instead by a cannot be reversed by the courts not even on the
board of directors, if the articles of incorporation so behest of the stockholders.
provide. 2. Directors and officers acting within such business
judgment cannot be held personally liable for
Independent director such acts.
3. If the cause of the losses is merely error in
For this purpose, an “independent director” shall business judgment, not amounting to bad faith
mean a person other than an officer or employee of or negligence, directors and/or officers are not
the corporation, its parent or subsidiaries, or any liable (Filipinas Port Services v Go, G.R. No.
other individual having a relationship with the 161886, March 16, 2007).
corporation, which would interfere with the exercise 4. The Board of Directors has the power to create
of independent judgment in carrying out the positions not provided for in the corporation's
responsibilities of a director. bylaws since the board is the corporation’s
governing body, clearly upholding the power of
Cases where independent directors are required its board to exercise its prerogatives in managing
the business affairs of the corporation (Filipinas
At least two (2) independent directors are required in Port Services v Go, ibid).
the following companies; 5. Directors and officers who purport to act for the
1. Any corporation with a class of equity securities corporation, keep within the lawful scope of their
listed for trading on an Exchange (Publicly traded authority and act in good faith, do not become
companies); liable, whether civilly or otherwise, for the
2. Banks; consequences of their acts, which are properly
3. Corporations with secondary franchise. attributed to the corporation alone (Benguet
Electric Cooperative, Inc. v. NLRC,GR 89070,
Required number of independent directors for the May 18, 1992).
corporations covered by the Revised Code of
Corporate Governance (RCCG)
The ordinary trust relationship of directors of a GR: The officers of a corporation are not personally
corporation and stockholders springs from the fact liable for their official acts.
that directors have the control and guidance of
corporate affairs and property and hence of the XPNs: If it is shown that they exceeded their
property interests of the stockholders. Equity authority. In the following instances, the directors/
recognizes that stockholders are the proprietors of trustees may be held personally liable for damages:
the corporate interests and are ultimately the only 1. They willfully and knowingly vote for or assent to
beneficiaries thereof (Gokongwei vs. SEC, supra). patently unlawful acts of the corporation; or
2. They are guilty of gross negligence or bad faith in
Majority Rule Doctrine in the dealings of directors directing the affairs of the corporation; or
with stockholders NOTE: Bad faith or negligence is a question of
fact. Bad faith does not simply mean bad
The majority rule, states that a director has a judgment or negligence. It imparts a dishonest
fiduciary duty with respect to the corporation as an purpose or some moral obliquity and conscious
entity, and not to the stockholders as individuals. doing of wrong. It means breach of a known
Consequently, he is subject to the duty to disclose all duty through some motive or interest or ill-will;
material facts only to the corporation and not to the it partakes of the nature of fraud (Ford Phils.,
Inc., et al. vs. CA, GR 99039, Feb. 3, 1997).
stockholders (American T. Co. v. California etc. Ins.
Co. , 15 Cal.2d 42, 1940). 3. They acquire any personal or pecuniary interest
in conflict with their duty as such directors or
trustees (Sec. 31, CC); or
Doctrine of Corporate Opportunity In October 2003, Schiera informed Malyn that she
found a location for a second cafe in Taguig City.
Where a director, by virtue of his office, acquires for Malyn objected because of the dire financial
himself a business opportunity which should belong condition of the corporation.
to the corporation, thereby obtaining profits to the
prejudice of such corporation (Sec. 34, CC). Sometime in April 2004, Malyn learned about Fort
Patio Cafe located in Taguig City and that its
A director shall refund to the corporation all the development was undertaken by a new corporation
profits he realizes on a business opportunity which: known as Fort Patio, Inc., whereboth Schiera and Jaz
1. The corporation is financially able to undertake; are directors. Malyn also found that Schiera and Jaz,
2. From its nature, is in line with corporations on behalf of Patio Investments, had obtained a loan
business and is of practical advantage to it; and of P500, 000.00, from PBCom Bank, for the purpose
3. The corporation has an interest or a reasonable of opening Fort Patio Cafe. This loan was secured by
expectancy (ibid). the assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
NOTE: The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture (ibid). Malyn then filed a corporate derivative action
before the Regional Trial Court of Makati City
However, if such act is ratified by a vote of the stockholders
against Schiera and Jaz, alleging that the two
representing at least 2/3 of the outstanding capital stock,
the director is excused from remitting the profit realized
directors had breached their fiduciary duties by
(ibid). misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Non-applicability of the Doctrine of Corporate
Opportunity Did Schiera and Jaz violate the principle of corporate
opportunity? Explain. (2005 Bar Question)
The doctrine is not applicable to the following
instances: A: Yes, Shciera and Jaz violated the Principle of
1. When a director engages in a distinct enterprise Corporate Opportunity, because they used Patio
of the same general class of business as that Investments to obtain a loan, mortgaged its assets
which his corporation is engaged in, so long as he and used the proceeds of the loan to acquire a coffee
acts in good faith. shop through a corporation they formed (Sec. 34, CC).
2. The opportunity is one which is not essential to
the corporation’s business, or employment of RESPONSIBILITY FOR CRIMES
company’s resources, or where the director or
officer embracing opportunity personally is not Where a law requires a corporation to do a particular
brought into direct competition with the act, failure of which on the part of the responsible
corporation. officer to do so constitutes an offense, the
responsible officer is criminally liable therefore. The
Stockholdings exceeding 20% of the outstanding A foreigner can be allowed representation in the
capital stock shall be considered substantial for executive committee since he can be allowed in the
purposes of interlocking directors (ibid). BOD. An Executive Committee is a governing body
which functions as the board itself. Thus,
MANAGEMENT CONTRACTS membership therein shall be governed by the same
law/ rules applicable to the BOD as provided in Sec.
Management contract 35 (SEC Opinion, June 3, 1998).
A management contract is any contract whereby a Executive committees provided in the Revised Code
corporation undertakes to manage or operate all or of Corporate Governance
substantially all of the business of another
corporation, whether such contracts are called 1. Audit Committee
service contracts, operating agreements or 2. Nomination Committee
otherwise. A corporation under management is 3. Compensation and Remuneration Committee
bound by the acts of the managing corporation and is
estopped to deny its authority (National Bank vs. Limitations on the powers of the executive
Producers’ Warehouse Association, 42 Phil. 609). committee
Decisions of the executive committee are not subject A director or trustee may
to appeal to the board. However, if the resolution of waive this requirement,
the Executive Committee is invalid, i.e. not one of the either expressly or
powers conferred to it, it may be ratified by the board impliedly.
(SEC Opinion, July 29, 1995).
Meeting held in the absence of some of the directors
MEETINGS and without any notice given to them is illegal
VOTE REQUIREMENT
CORPORATE ACT
BOARD OF DIRECTORS STOCKHOLDERS
1. Amendments, repeal, or Majority vote of the BOD GR: Majority vote of the outstanding
adoption of new by-laws capital stock
XPN: If delegated by the stockholders to
the board
2. Entering into management contr Majority of the quorum of GR: Vote of the majority of the
act the BOD outstanding shares of stock or members
of both the managing and the managed
corporation.
1. A stockholder or stockholders
representing the same interest of
both the managing and the
managed corporations own or
control more than one-third (1/3)
of the total outstanding capital
stock entitled to vote of the
managing corporation; or
PROPRIETARY RIGHTS
Entitlement to receive dividends
The following are the proprietary rights of the
stockholders: GR: Those stockholders at the time of declaration are
1. Right to Dividend entitled to dividends (Sundiang, supra, 2009, pg. 211
2. Right of First Refusal citing SEC Opinion, July 15, 1994).
3. Preemptive Right
NOTE: Dividends declared before the transfer of shares
RIGHT TO DIVIDENDS belong to the transferor and those declared after the
transfer belong to the transferee (ibid).
Right to dividend of a stockholder
XPNs:
It is the right of the stockholder to demand payment 1. In case a record date is provided for.
of dividends after board declaration. Stockholders are
NOTE: A record date is the date fixed in the resolution
entitled to dividends pro rata based on the total
declaring dividends, when the dividend shall be payable to
number of shares that they own and not on the those who are stockholders of record on a specified future
amount paid for the shares (SEC Opinion, October 10, date or as of the date of the meeting declaring said
1992 and July 16, 1996). dividend (De Leon, supra, pg. 419, footnote no. 50.)
Cash Cash dividends due on delinquent 1. Any of the instances provided by law for the
stock shall first be applied to the exercise of the right by a dissenting stockholder must
unpaid balance on the subscription be present (Secs. 81, 42, CC);
plus cost and expenses.
2. The dissenting stockholder must have voted
Stock Stock dividends are withheld from the against the proposed corporate action (Sec. 82, CC);
delinquent stockholder until his
unpaid subscription is fully paid. NOTE: The right is not available to a stockholder who
was either absent at the meeting where the corporate
action was approved, or was present at such meeting
RIGHT TO APPRAISAL but abstained from casting his vote;
A: The right of the dissenting stockholder to be paid The right to inspect is the right of a stockholder to
the fair value of his shares shall cease, his status as a inspect the books of the corporation is subject to the
stockholder shall thereupon be restored, and all following limitations:
dividend distributions which would have accrued on 1. The right must be exercised during reasonable
his shares shall be paid to him if: hours on business days
2. The person demanding the right has not improperly
1. Demand for payment is withdrawn with the used any information obtained through any
consent of the corporation or previous examination of the books and records of
2. The proposed corporate action is abandoned by the corporation
the corporation or 3. The demand is made in good faith or for legitimate
3. The proposed corporate action is rescinded by purpose germane to his interest as a stockholder
the corporation or (Sec. 74, CC).
4. The proposed corporate action is disapproved by 4. It should follow the formalities that may be
the SEC where such approval is necessary or required in the by-laws
5. The SEC determines that the dissenting 5. The right does not extend to trade secrets
stockholder is not entitled to the appraisal right 6. It is subject to limitations under special laws, e.g.
(Sec. 84, CC). Secrecy of Bank Deposits and FCDA or the Foreign
Currency Deposits Act.
RIGHT TO INSPECT
NOTE: The right extends, in compliance with equity, good
Books and records required to be kept by the faith, and fair dealing, to a foreign subsidiary wholly-owned
corporation by the corporation.
To enable the shareholder to retain his proportionate The corporation can deny pre-emptive right if the
control in the corporation and to retain his equity in articles of incorporation or amendment thereto
the surplus. denies such right.
Instances when pre-emptive right is not available
Exercise of pre-emptive right
1. Shares to be issued to comply with laws requiring
Pre-emptive right must be exercised in accordance stock offering or minimum stock ownership by the
with the Articles of Incorporation or the By-Laws. public;
When the Articles of Incorporation and the By-Laws 2. Shares issued in good faith with the approval of the
are silent, the Board may fix a reasonable time within stockholders representing 2/3 of the outstanding
which the stockholders may exercise the right. capital stock in exchange for property needed for
corporate purposes;
Pre-emptive right on the re-issuance of treasury 3. Shares issued in payment of previously contracted
shares debts;
4. In case the right is denied in the Articles of
When a corporation reacquires its own shares which Incorporation; (Sec. 39, CC)
thereby become treasury shares, all shareholders are 5. Waiver of the right by the stockholder.
entitled to pre-emptive right when the corporation
reissues or sells these treasury shares. The Q: A special meeting of the Board of Directors of
re-issuance of treasury shares is not among the LIMPAN approved a resolution making a partial
exception provided by Sec. 39 when pre-emptive payment for the legal services of Gilda C. Lim in the
right does not exist. handling of various cases on behalf of, or involving
the corporation to be paid in equivalent value in
Transferability of pre-emptive right shares of stock of the corporation. Patricia Lim Yu, a
sister of the Lim filed a complaint against the
Pre-emptive right is transferable unless there is an members of the Board of Directors of LIMPAN who
express restriction in the AOI. approved the resolution. In their answer, the Board
of Directors and Lim asserted that Yu had no legal
Waiver of pre-emptive right by the stockholder capacity to sue and that the issuance of the shares in
LIM’s favor was bona fide and valid pursuant to law
The stockholder may waive his pre-emptive right and LIMPAN’s By-Laws. In support of their ground
either expressly or impliedly as when the stockholder that Yu had no legal capacity to sue, the Lim pointed
fails to exercise his pre-emptive right after being out that she had previously filed a petition for
notified and given an opportunity to avail of such guardianship praying for the issuance of letters of
right. guardianship over Yu. The judge issued an order,
enjoining Yu from entering into, or signing, contracts
Q: Suppose that X Corporation has already issued or documents on her behalf or on behalf of others. Is
the 1000 originally authorized shares of the Yu capacitated to file the complaint before the SEC?
corporation so that its Board of Directors and
stockholders wish to increase X's authorized capital A: Yes. Yu has the legal capacity. Simply put, the TRO
stock. After complying with the requirements of the allows Respondent Patricia Lim-Yu to act for herself
law on increase of capital stock, X issued an and to enter into any contract on her own
additional 1000 shares of the same value. Assume behalf. However, she cannot transact in
that stockholder A presently holds 200 out of the representation of or for the benefit of her parents,
1000 original shares. Would A have a pre-emptive brothers or sisters, or the Limpan Investment
right to 200 of the new issue of 1000 shares? Why? Corporation. Contrary to what Lim suggest, all that is
prohibited is any action that will bind them. In short,
A: Yes, A would have a pre-emptive right to 200 of she can act only on and in her own behalf, not that of
the new issue of 1000 shares. A is a stockholder of petitioners or the Corporation. There appears to be a
record holding 200 shares in X Corporation. According confusion on the nature of the suit initiated before
The non-voting shares may still vote in the following Right of first refusal is not a substantive right under
matters: the Corporation Code
1. Amendment of the articles of incorporation
2. Adoption and amendment of by-laws GR: The right of first refusal can only arise by means
3. Sale, lease, exchange, mortgage, pledge or other of a contractual stipulation, or when it is provided for
disposition of all or substantially all of the in the AOI
corporate property.
4. Incurring, creating or increasing bonded
indebtedness
INDIVIDUAL SUIT
The “call” for a meeting is exercised by the person To have probative value and credibility, the minutes
who has the power to call the meeting. must be signed by the corporate secretary,
notwithstanding that the one taking the minutes was
The following persons may exercise the power to a mere clerk (Union of Supervisors [RB]-NATU vs. Sec.
“call” for a meeting: of Labor, 109 SCRA 139 [1981]).
1. The person or persons designated in the by-laws to
have the authority to call stockholders’/ members’ CAPITAL STRUCTURE
meeting;
2. In the absence of such provision in the by-laws, the SUBSCRIPTION AGREEMENTS
director/trustee or officer entrusted with the
management of the corporation unless otherwise Subscription contract
provided by law;
3. A stockholder/ member may make the call on It is a contract for the acquisition of unissued stock in
order of the SEC whenever for any cause, there is no an existing corporation or a corporation still to be
person authorized to call a meeting (Sec. 50, last par., formed. It is considered as such notwithstanding the
CC) or the officers authorized fail or refuse to call a fact that the parties refer to it as purchase or some
meeting. other contract (Sec. 60, CC).
NOTE: SEC may compel the officers of any corporation Nature of a subscription contract
registered by it to call meetings of stockholders/members
thereof under its supervision (Sec. 6[f] A, PD No. 902-A). A subscription contract is indivisible. Consequently,
where stocks were subscribed and part of the
4. Corporate Secretary or a stockholder/member for a subscription contract price was not paid, the whole
special meeting intended for the removal of directors subscription shall be considered delinquent and not
or trustees (Sec. 28, CC).
The ownership of share of stock confers no A watered stock is a stock issued in exchange for
immediate legal right or title to any of the property of cash, property, share, stock dividends, or services
the corporation. Each share merely represents a lesser than its par value or issued value (Sec. 65, CC).
distinct undivided share or interest in the common
property of the corporation (De Leon, ibid., pg. 80, Watered Stocks include stocks:
citing 18 Am. Jur. 2d 737). 1. Issued without consideration (bonus share)
2. Issued for a consideration other than cash, the fair
The interest over the share is purely inchoate, or a valuation of which is less than its par or issued value;
mere expectancy of a right in the management of the 3. Issued as stock dividend when there are no
corporation and to share in the profits thereof and in sufficient retained earnings to justify it; and
the properties and assets thereof on dissolution, after 4. Issued as fully paid when the corporation has
payment of the corporate debts and obligations received a lesser sum of money than its par or issued
(ibid., citing Saw vs. CA, 195 SCRA 740 [1991]). value (discount share) (De Leon, supra, pg. 605-606).
Further, the stockholder’s interest in the corporate
property is merely equitable or beneficial in nature; NOTE: Both par and no par value shares can be watered
hence he cannot be said to be a co-owner of the stocks.
corporate property (ibid., citing Stockholders of F.
Guanzon & Sons , Inc. vs. Register of Deeds). Reason behind the prohibition on the issuance of
watered stocks
Shares of stocks are personal property
It is to protect persons who may acquire stock and
Shares of stock are personal property. They are the creditors of the corporation particularly those
incorporeal in nature (Art. 417 and 2095 of the Civil who may become such on the faith of its outstanding
Code). capital stock being fully paid. The prohibition secures
equality among subscribers and prevents
Share of stock does not constitute an indebtedness discriminations against those who have paid in full
of the corporation to the shareholder the par or issued value of their shares (ibid., pg. 606).
They are in the nature of choses in action but are not Not all exchanges of stocks worth less than their
in a strict sense. They do not constitute an value are considered watered stock
indebtedness of the corporation to the shareholder
and are therefore, not credits as to make the The watered stocks refer only to original issue of
stockholder a creditor of the corporation (De Leon, stocks but not to a subsequent transfer of such stocks
supra, pg. 81). by the corporation, for then it would no longer be an
“issue” but a sale thereof (De Leon, supra, pg. 607,
SUBSCRIPTION AGREEMENTS citing Rochelle Roofing Co. vs. Burley, 115 NE 478).
*Please refer to page 197 for the extensive discussion Treasury shares are not subject to the prohibition on
of this topic. the issuance of watered stocks
CONSIDERATION FOR SHARES OF STOCK Treasury shares are not original issuances. They are
shares of stocks which have been issued and fully
*Please refer to the previously discussed topic on paid for, but subsequently reacquired by the issuing
Consideration for Stocks found on the previous page. corporation by purchase, redemption, donation, or
through some other lawful means (Sec. 9, CC). Since
WATERED STOCK they do not lose their status as issued shares, they
cannot be treated as new issues when disposed of or
reissued.
The issuance of watered stock cannot be ratified by The subscribed capital stock of the corporation is a
the stockholders trust fund for the payment of debts of the
corporation which the creditors have the right to look
It is not merely ultra vires, but is illegal per se as it is a up to satisfy their credits, and which the corporation
violation of Sec. 62, CC. may not dissipate. The creditors may sue the
stockholders directly for the latter’s unpaid
LIABILITY OF DIRECTORS FOR WATERED STOCKS subscription.
Liability of directors for watered stocks There is a violation of the trust fund doctrine when
stocks of the corporation are issued less than the
Any director or officer of a corporation shall be par value
solidarily liable with stockholder concerned to the
corporation and its creditors for difference between GR: The trust fund doctrine is violated where stocks
the fair value received at the time of the issuance of are issued by the corporation for a consideration
the stock and the par or issued value of the same, if: which is less than its par value.
1. He consents to the issuance of stocks for
consideration less than its par or issued value; or XPN: Trust fund doctrine is not violated in case
2. He consents to the issuance of stocks for a treasury shares are reacquired and subsequently
consideration in any form other than cash, valued re-issued for a lesser consideration by the
in excess of its fair value; or corporation. The only limitation for the reissuance of
3. Who, having knowledge thereof, does not treasury shares is that their price must be reasonable.
forthwith express his objection in writing and file
the same with the corporate secretary (Sec. 65, SITUS OF SHARES OF STOCK
CC).
Situs of shares of stock
Basis for the solidary liability of directors consenting
to the issuance of watered stock Generally, the situs of shares of stock is the country
where the corporation is domiciled (Wells Fargo Bank
The solidary liability of the directors emanates from v CIR, G.R. No. L-46720, June 28, 1940).
the fiduciary character of the position of director or
corporate officer. Domicile of the corporation
Defenses that can be invoked in order that a director The residence of the corporation is the place where
or an officer can escape liability for the issuance of the principal office of the corporation is located as
watered stocks stated in its AOI even though the corporation has
closed its office therein and relocated to another
1. The director or officer did not consent and did not place (Hyatt Elevators and Escalators Corp. vs.
have knowledge in the issuance of the watered stock. Goldstar Elevator Phils., Inc., supra.).
2. The director or officer objected to its issuance
a. Objection must be directed to the issuance of Exception to the situs of shares
the watered stocks
b. In writing The exception is when the case involves property
c. File the same with the corporate secretary taxation. For that purpose, the situs of intangible
d. Such objection must be done before the sale property, such as shares of stocks, is at the domicile
of stocks (Sec. 65, CC). or residence of the owner. However, this exception
admits of its own exceptions, i.e.—
1. When a nonresident alien has shares of stock in a
domestic corporation, then the situs will be in the
Philippines.
2. For purposes of the estate tax, the gross estate of a
resident decedent, whether citizen or alien, or a
1. Compulsory - the corporation is required to Shares that have been earlier issued as fully paid and
redeem the shares. have thereafter been acquired by the corporation by
2. Optional - the corporation is not mandated to purchase, donation, and redemption or through some
redeem the shares. lawful means (Sec. 9, CC).
Limitations on redeemable shares (ATVI) Rights that can be denied to treasury shares
NOTE: When treasury shares are sold below its par or These redeemable and preferred shares, when such
issued value, there can be no watering of stock because voting rights are denied, shall nevertheless be
such watering of stock contemplates an original issuance of entitled to vote on the following fundamental
shares.
matters:
1. Amendment of articles of incorporation
2. Adoption and amendment of by-laws
Treasury shares v. Redeemable shares 3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
TREASURY SHARES REDEEMABLE SHARES corporate property
Shares so acquired by 4. Incurring, creating or increasing bonded
Issued by the
the corporation indebtedness
corporation when
through purchase, 5. Increase or decrease of capital stock
expressly so provided
donation, redemption 6. Merger or consolidation of the corporation with
in the articles of
or any other lawful another corporation or other corporations
incorporation.
means 7. Investment of corporate funds in another
Redeemable shares corporation or business in accordance with this
may be acquired even Code
Can only be acquired without unrestricted 8. Dissolution of the corporation (par. 6, Sec. 6, CC).
in the presence of retained earnings for
Unrestricted retained as long as it will not Convertible shares
earnings result to the
insolvency of the A share that is changeable by the stockholder from
Corporation. one class to another at a certain price and within a
Must comply with the Is an exception to the certain period.
trust fund doctrine trust fund doctrine
GR: Stockholder may demand conversion at his
Founders' shares pleasure.
Shares classified as such in the articles of XPN: Otherwise restricted by the articles of
incorporation which may be given special preference incorporation.
in voting rights and dividend payments.
Fractional share
Limitations in the issuance of founders' shares
A fractional share is a share of equity that is less than
The exclusive right to vote and be voted for as one full share.
director is granted, this privilege is subject to
approval by the SEC, and cannot exceed 5 years from Shares in escrow
the date of approval (Sec. 7, CC).
Subject to an agreement by virtue of which the share
Voting shares is deposited by the grantor or his agent with a third
person to be kept by the depositary until the
Shares with a right to vote. If the stock is originally performance of certain condition or the happening of
issued as voting stock, it may not thereafter be a certain event contained in the agreement.
deprived of the right to vote without the consent of
the holder. Over-issued stock
Accrual of interest on unpaid balance A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and
Unpaid balance will accrue interest if so required by payable and the same or such percentage thereof
the by‐laws and at the rate of interest fixed in the shall be collected, together with all accrued interest,
by‐laws. If no rate of interest is fixed in the by‐laws, on a specified date and that if no payment is made
such rate shall be deemed to be the legal rate (Sec. within 30 days from said date, all stocks covered by
66, CC). said subscription shall thereupon become delinquent
and shall be subject to public auction sale.
The above interest is different from the interest
contemplated by Sec. 67, the unpaid balance involved Unpaid claim
in which, will only accrue interest, by way of penalty,
on the date specified in the contract of subscription It refers to any unpaid subscription, and not to any
or on the date stated in the call made by the board. indebtedness which a subscriber or stockholder may
owe the corporation arising from any other
Notice of call is necessary to bind the stockholders The delinquency is automatic after said 30 day period
(ibid., citing Baltazar vs. Lingayen Gulf Electric Power, and does not need a declaration by the board making
14 SCRA 522). the stock delinquent.
If within 30 days from expiry of the date of payment The notice of sale and copy of the board resolution
or from the date stated in the call made by the board, ordering the sale shall be:
and no payment is made, all stocks covered by said 1. Sent to every delinquent stockholder either
subscription shall thereupon become delinquent and personally or by registered mail or;
shall be subject to delinquency sale unless the BOD 2. Published once a week for 2 consecutive weeks
orders otherwise (Sec. 67, CC). in a newspaper of general circulation in the province
or city where the principal office of the corporation is
EFFECT OF DELINQUENCY located (Sec. 68, CC)
Discontinuance or cancellation of delinquency sale For stock corporations, the action prescribes 6
months from such sale. However, in case of non-stock
Delinquency sale may be discontinued or canceled if corporations, the applicable period is 4 years under
the delinquent stockholder pays the unpaid balance the Civil Code.
plus interest, costs and expenses on or before the
date specified for the sale or when the BOD orders CERTIFICATE OF STOCK
otherwise (Sec. 68, CC). Certificate of stock
Winning bidder in a delinquency sale It is a written evidence of the shares of stock but it is
not the share itself (Sundiang, supra, 2009, pg. 235,
1. The person participating in the delinquency sale citing Lincoln Phils. Life vs. CA, 293 SCRA 92).
who offers to pay the full amount of the balance of
the subscription together with the accrued interest, Shares of stock v. Certificates of stock
costs of advertisement and expenses of sale, for the SHARE OF STOCK CERTIFICATE OF STOCK
smallest number of shares;
Evidence of the holder’s
2. If there is no bidder as mentioned above, the
ownership of the stock
corporation, subject to the provisions of Sec. 68, CC, Unit of interest in a
and of his right as a
may bid for the same, and the total amount due shall corporation
shareholder and of his
be credited as paid in full in the books of the
extent specified therein.
corporation. The purchase by the corporation must
It is an incorporeal or It is concrete and
be made out of net earnings in view of the trust fund
intangible property tangible
doctrine. Thereafter, the reacquired shares shall be
It may be recognized
considered as treasury shares (Sec. 41; De Leon,
by the corporation It may be issued only if
supra, pg. 622).
even if the the subscription is fully
subscription is not paid.
NOTE: The board is not bound to accept the highest bid
unless the contrary appears. The bidder is the one making fully paid.
An uncertificated share is a subscription duly A: No. Since the shares were already transferred to
recorded in the corporate books but has no "B", "A" cannot claim the shares of stock from "X".
corresponding certificate of stock yet issued. The certificate of stock covering said shares have
been duly endorsed by "A" and entrusted by him to
Stockholder may alienate his shares even if there is "B". By his said acts, "A" is now estopped from
no certificate of stock issued by the corporation claiming said shares from "X", a bona fide purchaser
who relied on the endorsement by “A” of the
The absence of a certificate of stock does not certificate of stock.
preclude the stock holder from alienating or
transferring his shares of stock. REQUIREMENTS FOR VALID TRANSFER OF STOCK
Transfers of fully paid subscription but the Requirements for valid transfer of stocks
corporations has not yet issued a certificate of stock
The following are the requirements for valid transfer
In case of a fully paid subscription, without the of stocks:
corporation having issued a certificate of stock, the 1. If represented by a certificate, the following must
transfer may be effected by the subscriber or be strictly complied with:
stockholder executing a contract of sale of deed of a. Indorsement by the owner and his agent
assignment covering the number of shares sold and b. Delivery of the certificate
submitting said contract or deed to the corporate c. To be valid to third parties and to the
secretary for recording. corporation, the transfer must be recorded in the
books of the corporation (Rural Bank of Lipa v. CA,
Transfers of subscription not fully paid G.R. No. 124535, Sept 28, 2001).
2. If NOT represented by a certificate (such as when
In case of subscription not fully paid, the corporation the certificate has not yet been issued or where for
may record such transfer, provided that the transfer some reason is not in the possession of the
is approved by the board of directors and the stockholder):
transferee executes a verified assumption of ` a. By means of deed of assignment; and
obligation to pay the unpaid balance of the b. Such is duly recorded in the books of the
subscription. corporation (Sundiang, supra, 2009, pg. 236).
Procedure for the issuance of a new stock certificate Oppositions on the issuance of new certificates
in lieu of those which have been lost, stolen or
destroyed If there are oppositions on the issuance of new
certificates, the corporation may file an interpleader
1. The registered owner of a certificate of stock in a proceeding to compel the parties to litigate among
corporation or his legal representative shall file with themselves.
the corporation an affidavit in triplicate setting forth:
a. If possible, the circumstances as to how the Liability of the corporation for the issuance of new
certificate was lost, stolen or destroyed, certificates of stock in case of lost or destroyed
b. The number of shares represented by such certificate
certificate,
c. The serial number of the certificate and the GR: No action may be brought against any
name of the corporation which issued the same. corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
NOTE: He shall also submit such other information and pursuant to the procedure above-described.
evidence which he may deem necessary.
The stock and transfer book is the best evidence of The incomplete payment of the subscription does not
the transactions that must be entered or stated preclude the subscriber from alienating his shares of
therein. However, the entries are considered prima stock. However, the transfer shall be valid only
facie evidence only and may be subject to proof to between the parties.
the contrary (Bitong vs. CA, supra.).
A transferee of the partially paid shares cannot
DISPOSITION AND ENCUMBRANCE OF SHARES compel the corporation to record the transfer of
shares in its books, even though he has no
Registration by the corporation of the transfer of knowledge that they are not fully paid
shares in case of alienation
Shares of stock against which the corporation holds
As between the parties to the contract of sale, any unpaid claim shall not be transferable in the
registration of the transfer of shares is not required. books of the corporation. Hence, a transferee of the
However, until the shares are fully paid, such transfer partially paid shares cannot compel the corporation
cannot be recorded in the books of the corporation. to record the transfer of shares in its books, even
Consequently, the transferee will not be considered though he has no knowledge that they are not fully
as a stockholder. paid (Sec. 63, CC).
Reasons for the recording of the alienation of shares SALE OF A PORTION OF SHARES NOT FULLY PAID
1. To enable the corporation to know at all times Stockholder cannot sell a portion of the shares not
their actual stock holders; fully paid
2. To afford the corporation the opportunity to object
or refuse its consent to the transfer in case it has any A stockholder who has not paid the full amount of his
claim against the stock; and subscription cannot transfer a portion of his
3. To avoid fictitious and fraudulent transfer. subscription in view of the indivisible nature of the
subscription contract (Villanueva, Phil. Corporation
ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES Law, pg. 240).
Requisites for a restriction to be valid Liability of the transferee for the balance of the
purchase price in case the stockholder on record
1. Restrictions are provided in the articles of fails to pay the same
incorporation and
2. It must be printed at the back of the certificate of In case the stockholder on record fails to pay the pay
stock. the balance of the purchase price, he is still liable for
3. Must not be more onerous than the right of first the balance of the purchase price. Unless the transfer
refusal of the shares are recorded, the stockholder is still the
owners of the shares as far as the corporation is
Corporation can provide regulations to the concerned.
sale/transfer of the shares of stockholders
Reason: The subscriber is as much bound to pay his
Corporation can provide regulations to the subscription as he would be to pay any other debt. (Nava v
sale/transfer of the shares of stockholders but the Peers Marketing Corporaiton, G.R. No. L-28120 November
25, 1976)
authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict
Sale of fully paid shares is allowed even without the Examples of involuntary dealings of a share
consent of the corporation as long as the requisites
for the valid transfer of shares are complied. 1. Attachment
2. Sale on execution of judgment or sales for taxes
Q: Four months before his death, PX assigned 100 3. Adverse claims
shares of stock registered in his name in favor of his 4. Foreclosure of mortgage of stocks
wife and his children. They then brought the deed of
assignment to the proper corporate officers for Involuntary dealings must be registered
registration with the request for the transfer in the
corporation's stock and transfer books of the It is the act of registration which creates a
assigned shares, the cancellation of the stock constructive notice to the whole world of such
certificates in PX's name, and the issuance of new instrument or court writ or process and is the
stock certificates in the names of his wife and his operative act that conveys ownership (Aquino,
children as the new owners. The officers of the Corporation Law, p. 185, 2007).
Corporation denied the request on the ground that
another heir is contesting the validity of the deed of
assignment. May the Corporation be compelled by
mandamus to register the shares of stock in the DISSOLUTION AND LIQUIDATION
names of the assignees? (2004 Bar Question)
Dissolution
A: Yes. The corporation may be compelled by
mandamus to register the shares of stock in the name It is the extinguishment of the franchise of a
of the assignee. The only legal limitation imposed by corporation and the termination of its corporate
Section 63 of the Corporation Code is when the existence (Sundiang, supra, 2009).
Corporation holds any unpaid claim against the
shares intended to be transferred. The alleged claim
Where no time limit has been fixed with respect to The appointment of a receiver for a going corporation
the existence of the trusteeship, the trustee has is a last resort remedy, and should not be employed
authority to close the affairs of the corporation even when another remedy is available. Relief by
after the expiration of the statutory 3-year period and receivership is an extraordinary remedy and is never
claims not barred by the statute of limitations can exercised if there is an adequate remedy at law or if
be presented and allowed until the liquidation is the harm can be prevented by an injunction or a
terminated (National Abaca & Other Fibers Corp. vs. restraining order. Bad judgment by directors, or even
Pore, 2 SCRA 989 [1961]). unauthorized use and misapplication of the
company’s funds, will not justify the appointment of a
Suits brought by the corporation within the 3-year receiver for the corporation if appropriate relief can
period but remained pending beyond said period otherwise be had (Rev. Ao-As vs. CA, GR 128464, June
20, 2006).
A corporation that has a pending action and which
cannot be terminated within the 3 year period after The corporation, through its president cannot
its dissolution is authorized under Sec. 122 of the CC condone penalties and charges after it had been
to convey all its property to a trustee to enable it to placed under receivership
prosecute and defend suits by or against the
corporation beyond the 3-year period. The trustee The appointment of a receiver operates to suspend
may commence a suit which can proceed to final the authority of a corporation and of its directors and
judgment even beyond the 3-year period. The officers over its property and effects, such authority
director may be permitted to continue as trustees to being reposed in the receiver (Yam v. CA, G.R. No.
complete the liquidation (Clemente vs. CA, 242 SCRA 104726 Feb 11, 1999).
717 [1995]). .
LIQUIDATION AFTER 3 YEARS
Suits brought by the corporation beyond the 3-year
period are not barred If the 3-year extended life has expired without a
receiver or trustee having been expressly designated
The trustee of a dissolved corporation may by the corporation within that period:
commence a suit which can proceed to final 1. The BOT/BOT itself may be permitted to so
judgment even beyond the 3-year period. The continue as ‘trustees” by legal implication to
expiration of 3 years after the dissolution of a complete the liquidation.
corporation does not affect its right to enforce a 2. Still, in the absence of BOD/BOT, those having a
favorable judgment, because under Sec. 145 of the pecuniary interest in the corporate assets,
CC, no right or remedy in favor or against any including not only the stockholders but likewise
corporation shall be removed or impaired either by the creditors of the corporation, acting for and in
subsequent dissolution of said corporation or by any its behalf, may make proper representations with
subsequent amendment or repeal of the CC or any the SEC which has primary and sufficiently broad
part thereof (Knecht vs. United Cigarette Corp., 384 jurisdiction in matters of this nature, for working
SCRA 48 [2002]). out a final settlement of the corporate concerns.
3. The only surviving stockholder or director of a
BY MANAGEMENT COMMITTEE OR REHABILITATION corporation whose term of existence has expired
RECEIVER may act as trustee-in-liquidation after the 3-year
period to liquidate has expired without the
Liquidation by a receiver appointment of a trustee-in-liquidation.
4. The counsel who prosecuted and defended the
In the case of a dissolution order where creditors are interest of the corporation and who, in fact,
affected, the SEC may appoint a receiver to take appeared in behalf of the corporation, may be
considered a trustee of the corporation at least
with respect to the matter in litigation only (De
Not all corporations with 20 or less stockholders are CHARACTERISTICS OF A CLOSE CORPORATION
close corporations
Nature of a close corporation
The Corporation is not a close corporation even if the
shares belong to only twenty or less stockholders if A close corporation is essentially an incorporated
not all the requisites (under Sec. 96) are present (San partnership in which the stockholders consider each
Juan Structural and Steel Fabricators, Inc. v. CA, G.R. other as partners but which the law treats as a
No. 129459, Sept. 29, 1998). corporation. Thus, stockholders in a close corporation
are very much like members in a partnership. They
Q: San Juan Structural and Steel Fabricators, Inc.’s owe to one another the same duty of utmost good
(San Juan) entered into an agreement with Motorich faith and diligence that partners owe one another.
Sales Corporation (Motorich) for the transfer to it of This strict duty applies particularly to controlling
a parcel of land which was still in the name of ACL stockholders (De Leon, 2010).
Development Corporation. Motorich despite
Conditions for validity of restrictions on transfer of The term “transfer” as used in Sec. 99, is not limited
shares to a transfer for value. This therefore include
donations (Sec. 99[6], CC).
1. Restrictions on the right to transfer shares must
appear in the AOI and in the by-laws as well as in the Refusal to register the transfer of stock by a close
certificate of stock, otherwise they shall not be corporation
binding on any purchaser thereof in good faith; and
2. They shall not be more onerous than granting the A close corporation may, at its option, refuse to
existing stockholders or the corporation the option to register the transfer of stock in the name of the
purchase the shares of the transferring stockholders transferee if the person is not qualified to be a
with such reasonable terms, conditions, or period stockholder and has notice thereof.
stated therein (Sec. 98, CC).
Any person to whom stock of a close corporation has
NOTE: Any transfer made should not result in exceeding the been issued or transferred has, or is conclusively
number of stockholders as allowed by the Code. presumed to have notice:
a. That he is a person not eligible to be a holder of
Exercise of right of first refusal exercised in Sec. 98 stock of the corporation,
b. The transfer of stock to him would cause the stock
The corporation or the stockholders have the right of of the corporation to be held by more than the
first refusal, that is, the stockholder who wants to sell number of persons permitted by its articles of
his shares to any third person must first offer it either incorporation to hold stock of the corporation,
to the corporation or to the other existing c. The transfer of stock is in violation of a restriction
stockholders usually under the same terms and on transfer of stock (Sec. 99 [4], CC).
conditions. The right pertains to shares already issued
to stockholders. If the existing stockholders or the Conclusive presumption of knowledge of restrictions
corporation fails to exercise the option to purchase
within the period stated, the transferring stockholder There is a conclusive presumption of knowledge of
may sell his shares to any third person. restrictions when the stock certificate issued or
transferred conspicuously shows the qualifications of
Option period to exercise the right of first refusal persons entitled to be holders of record; number of
persons, not exceeding 20 allowed to be
The option period to exercise the right of first refusal stockholders; and other restrictions as provided in
is that period stated in the AOI, By-laws and the AOI of the close corporation (Sec. 99 [1],[2],[3],
Certificate of Stock. The SEC likewise limits the period CC).
to 1 month which is deemed sufficient for the
stockholders or for the corporation to signify their Stock transfers in violation of the restrictions can
desire to buy the shares of stock being offered for still be registered in the books of the Corporation
sale by any stockholder (SEC Opinion, Oct. 13, 1964).
Stock transfers in violation of the restrictions can still
AOI cannot provide that the consent of the be registered in the books of the Corporation in the
corporation shall be obtained in case the following cases:
stockholder sells his shares 1. If all the stockholders consent;
2. If the AOI of the close corporation was duly
The AOI cannot provide that the consent of the amended (Sec. 99 [5], CC).
corporation shall be obtained in case the stockholder
sells his shares because such restriction is more NOTE: In both the above cases, the corporation will no
onerous than the right of first refusal. longer be a close corporation if the conditions under Sec.
96 will no longer be present, as in the case where the
transfer results in the presence of more than 20
stockholders.
Only preferred and redeemable shares Right to vote may be limited, broadened or
can be denied the right to vote except denied by the AOI and by-laws (Sec. 89, CC).
those matters in Sec. 6.
Voting of directors may be made only Regional or district voting of trustees is
through general voting. Regional or allowed.
district voting of directors is not allowed.
Transferability of Shares may be transferred by the Membership is personal in character and is
Shares/ stockholder with or without the consent not transferable unless allowed by the AOI
Membership of the corporation. or by-laws (Sec. 90, CC).
Right to expel Stockholders may be expelled only for Membership shall be terminated in the
members grounds provided by law. manner and for the causes provided in the
articles of incorporation or the by-laws
(Sec. 91, CC).
Distribution of Assets of stock corporation shall be Assets of non-stock corporation shall be
Assets in case of distributed in the following order: distributed as follows:
dissolution 1. Payment of claims of creditors
1.Payment of claims of creditors who are 2. Assets held on condition of return
not stockholders (based on preference of or subject to limitation of use shall be
credit) returned, transferred or conveyed.
2.Payment of claims of stockholders as 3. Distribution to member based on
creditors distributive rights stated in AOI or
3.Residual balance is distributed by-law.
proportionately to preferred shares, if 4. In case of default, distribution
any, then to common stock. pursuant to Plan of Distribution of
Assets.
Conversion for the cause provided for in the by-laws are not
to be counted in determining the requisite vote
1. A non-stock corporation cannot be converted into in corporate matters or the requisite quorum for
a stock corporation through mere amendment of its the annual member’s meeting (Tan v. Sycip, G.R.
AOI. This would violate Section 87 which prohibits No. 153468, Aug. 17, 2006).
distribution of income as dividends to members.
Giving the members shares is tantamount to PURPOSES
distribution of its assets or income (Sundiang, 2014
citing SEC Opinion, March 1995). Purposes for which a non-stock corporation may be
2. A non-stock corporation can be converted into a organized
stock corporation only if the members dissolve it first
and then organize a stock corporation. However, Non-stock corporations may be formed or organized
there is a resulting new corporation (Sundiang, 2014 for: (CREP-CFLSS)
citing SEC Opinion, May 13, 1992). 2. Charitable,
3. A stock corporation may be converted into a 3. Religious,
non-stock corporation by mere amendment provided 4. Educational,
all the requirements are complied with. Its rights and 5. Professional,
liabilities will remain (Sundiang, 2014). 6. Cultural,
7. Fraternal,
Termination of Membership 8. Literary,
9. Scientific,
The power to admit members pertains to the Board 10. Social,
in the absence of any contrary provisions on the AOI 11. Civic service, or
and by-laws. Consistently, it is also the Board who has 12. Similar purposes, like trade, industry, agriculture
the power to terminate membership. and like chambers, or any combination thereof (Sec.
1. Standards - A non-stock corporation is authorized 88, CC).
to terminate the membership in accordance with
the standards fixed in the AIO or the by-laws NOTE: A non-stock corporation organized to promote
(Sec. 91). educational objectives may not be an educational
2. When property rights are involved - Membership corporation as contemplated in Secs. 106 to 108, CC.
may involve property rights. Example:
Membership in a golf club where the purchase of The formation of a non-stock corporation for
the share is a sine qua non (Valley Golf & Country political purpose is not allowed
Club Inc. v. Caram, G.R. No. 158805, April 16,
2009). Political purpose is not included on the purposes for
3. Lien -Non payment of dues may be a ground for which a non-stock corporation may be established.
termination or suspension of membership. The SEC may reject the AOI if the purpose of the
AOI or the by-laws of a non-stock corporation corporation is to engage in election campaign or
may provide that unpaid dues shall constitute a partisan political activity (SEC Opinion, April 10,
lien on the member’s share. However, Section 68 1985).
of the Corporation Code does not apply if the
membership shares are sold under the provisions TREATMENT OF PROFITS
that provide for the constitution of lien
(Calatagan Golf & Country Club Inc. V. Caram, Non‐stock corporation may earn profit
G.R. No. 165443, April 16, 2009).
4. Notice - For the termination of membership to be Mere intangible or pecuniary benefit to the members
valid, there should be reasonable notice to the does not change the nature of the corporation. The
member concerned and he must be given a fair fact that a non‐stock corporation earns a profit does
opportunity to be heard in his defense. not make it a profit‐making corporation where such
5. Effect of death of a member - Membership in and profit or income is used for purposes set forth in its
all rights arising from a non-stock corporation are articles of incorporation and is not distributed to its
personal and non-transferable, unless the AOI or incorporators, members or officers.
the by-laws of the corporation provide
otherwise. Deceased members who are dropped
from the membership roster in the manner and
Under Sec. 123, CC, foreign corporations shall not be Acts which are considered as doing or transacting
permitted to transact or do business in the business in the Philippines for foreign corporations
Philippines until they have secured a license for that
purpose from the SEC and certificate of authority 1. Soliciting orders, entering into service contracts,
from the appropriate government agency. and opening offices, whether called “liason”
offices or branches.
DOCTRINE OF DOING BUSINESS 2. Appointing representatives, distributors
domiciled in the Philippines or who stay for a
Doing business in the Philippines period or periods totaling 180 days or more.
3. Participating in the management, supervision or
To be doing or “transacting business in the control of any domestic business, firm, entity, or
Philippines” for purposes of Section 133 of the corporation in the Philippines.
Corporation Code, the foreign corporation must 4. Any act or acts that imply a continuity of
actually transact business in the Philippines, that is, commercial dealings or arrangements, and
perform specific business transactions within the contemplate to some extent the performance of
Philippine territory on a continuing basis in its own acts or works or the exercise of some functions
name and for its own account (Cargill Inc. v Intra normally incident to and in progressive
Strata Assurance Corporation, G.R. No. 168266, prosecution of, the purpose and object of its
March 15, 2010). organization (Sec. 3[d], RA 7042).
Jurisdictional tests of “doing or transacting Acts which are not considered doing business under
business” in the Philippines for foreign corporations the Foreign Investment Act
Q: Cargill is a corporation organized and existing Requisites for the issuance of license to a foreign
under the laws of the State of Delaware, United corporation
States of America. Cargill and Northern Mindanao
Corporation (NMC) executed a contract whereby The foreign corporation will submit to SEC the
NMC agreed to sell to Cargill molasses provided that following:
Cargill would open a Letter of Credit with the BPI. 1. Copy of its articles of incorporation and by-laws,
The amended contract required NMC to put up a certified in accordance with law and their translation
performance bond which represents the value of to an official language of the Philippines, if necessary.
10,500 metric tons of molasses. The performance 2. The application, which shall be under oath.
bond was intended to 3. Attached to the application for license shall be a
guarantee NMC’s performance to deliver the duly executed certificate under oath by the
molasses during the prescribed shipment periods authorized official or officials of the jurisdiction of its
according to the terms of the amended contract. In incorporation, attesting to the fact that:
compliance with the terms of the third amendment a. The laws of the country or state of the
of the contract, respondent Intra Strata Assurance applicant allow Filipino citizens and corporations to
Corporation (Intra Strata) issued a performance do business therein
bond to guarantee NMC’s delivery of the 10,500
tons of molasses, and a surety bond. NMC was only NOTE: This oath of reciprocity is one of the
able to deliver 219.551 metric tons of molasses out requirements to secure a license under Sec. 123, CC,
of the agreed 10,500 metric tons. Thus, Cargill sent which defines a foreign corporation.
demand letters to NMC claiming payment under the
performance and surety bonds. When NMC refused b. The applicant is an existing corporation in
to pay, Cargill filed a complaint for sum of money good standing.
against NMC and Intra Strata. Does Cargill, an c. If such certificate is in a foreign language, a
unlicensed foreign corporation, has legal capacity to translation thereof in English under oath of the
sue before Philippine courts? translator shall be attached thereto.
4. Statement under oath by the President or other
A: Yes, it has the capacity to sue. In this case, Cargill person authorized by the Corporation showing to the
and NMC amended their contract three times to give satisfaction of the SEC and other governmental
a chance to NMC to deliver to Cargill the molasses, agency in the proper cases that the
considering that NMC already received the minimum a. applicant is solvent and in sound financial
price of the contract. There is no showing that the condition
transactions between Cargill and NMC signify the b. the assets and liabilities of the corporation as
intent of Cargill to establish a continuous business or of the date not exceeding one (1) year immediately
extend its operations in the Philippines. An exporter prior to the filing of the application.
in one country may export its products to many 5. An agreement or stipulation stating the designated
foreign importing countries without performing in the resident agent who will receive summons and other
importing countries specific commercial acts that legal processes for the corporation together with a
would constitute doing business in the importing Special Power of Attorney.
countries. The mere act of exporting from one’s own 6. An agreement that if it ceases to transact business
country, without doing any specific commercial act or if there is no more resident agent, summons shall
within the territory of the importing country, cannot then be served through SEC; and
be deemed as doing business in the importing 7. Deposit securities for the benefit of present and
country. The importing country does not require future creditors, within 60 days after the issuance of
jurisdiction over the foreign exporter who has not yet license.
performed any specific commercial act within the
NOTE: Foreign banking, financial and insurance
territory of the importing country. Without
corporations shall, in addition to the above requirements,
jurisdiction over the foreign exporter, the importing
comply with the provisions of existing laws applicable to
country cannot compel the foreign exporter to secure them.
a license to do business in the importing country
The appointment of a resident agent is required for 1. If a foreign corporation, previously granted a
the purpose of accepting and receiving, on behalf of license, ceases to transact business in the
the foreign corporation: Philippines, or
1. Notice affecting the corporation pending the 2. Shall be without any resident agent in the
establishment of its local office and Philippines on whom any summons or other legal
2. Summons and other legal processes in all processes may be served,
proceedings for or against the corporation.
then in any action or proceeding arising out of any
Effect of service of summons and notices to the business or transaction which occurred in the
resident agent Philippines, service of any summons or other legal
process may be made upon the SEC (ibid.)
Service upon any agent of a foreign corporation,
whether or not engaged in business in the Effect of service made upon the SEC
Philippines, constitutes personal service upon the
corporation (Sec. 128, CC; Facilities Management Such service made upon the SEC shall have the same
Corp. vs. Dela Rosa 89 SCRA 131 [1979]). force and effect as if made upon the duly authorized
officers of the corporation at its home office (ibid).
Resident agent cannot sign the certificate of
non-forum shopping Whenever such service shall be made upon the SEC, it
must, within 10 days thereafter, transmit by mail a
While a resident agent may be aware of the actions copy of such summons or other legal process to the
filed against the principal, he may not be aware of the corporation at its home or principal office. The
actions initiated by the principal, therefore he cannot sending of such copy by the Commission shall be a
sign the certificate of non-forum shopping that is a necessary part of and shall complete such service.
requirement for filing of an initiatory pleading in
court (Expert Travel & Tours Inc. v. CA, G.R. No. PERSONALITY TO SUE
152392, May 26, 2005).
Personality to sue by foreign corporations
SUABILITY OF FOREIGN CORPORATIONS The Court has not construed the term “isolated
transaction” to literally mean “one” or a mere single
A foreign corporation, which was granted a license act. The phrase “isolated transaction” has a definite
to transact business in the Philippines, is suable and fixed meaning, i.e., a transaction or series of
before local courts or administrative agencies transaction set apart from the common business of a
foreign enterprise in the sense that there is no
It is suable since any foreign corporation lawfully intention to engage in progressive pursuit of the
doing business in the Philippines shall be bound by all purpose and object of the business organization
laws, rules and regulations applicable to domestic (Lorenzo Shipping Corp., vs. Chubb and Sons, 431
corporations of the same class, save and except: SCRA 266 [2004]).
1. Such only as provide for the creation, formation,
organization or dissolution of the corporations or Q: May a foreign corporation not engaged in
2. Such as fix the relations, liabilities, responsibilities, business in the Philippines and a national of a
or duties of stockholders, members or officers of country which is a party to any convention, treaty,
corporations to each other or to the corporation (Sec. or agreement relating to intellectual property rights
129, CC). or the repression of unfair competition, to which the
Philippines is also a party or extend reciprocal rights
NOTE: Matters relating to the organization or internal sue in trademark or service mark enforcement
affairs of the corporation are governed by the laws of the action?
home or incorporating State unless they offend any public
policy of the Philippines.
A: Yes, the foreign corporation mentioned above may
sue in trademark or service mark enforcement action.
A foreign corporation without any license, engaged
This is in accordance with Section 160, in relation to
in doing business in the Philippines, may be sued in
Section 3 of R.A. No. 8393, The Intellectual Property
the country
Code (Sehwani Inc. v. In‐n‐Out Burger, G.R. No.
171053, Oct. 15, 2007).
EFFECTS
A: No. The merger was not valid. Merger, does not
become effective upon the mere agreement of the Effects of a merger or consolidation
constituent corporations. Since a merger or
consolidation involves fundamental changes in the The effects of merger or consolidation are:
corporation, as well as in the rights of stockholders 1. The constituent corporations shall become a single
and creditors, there must be an express provision of corporation which:
2. In case of merger, shall be the surviving
law authorizing them. The merger shall only be
corporation designated in the plan of merger
effective upon the issuance of a certificate of merger 3. In case of consolidation, shall be the consolidated
by the SEC, subject to its prior determination that the corporation designated in the plan of consolidation
merger is not inconsistent with the Corporation Code 4. The separate existence of the constituent
or existing laws. In this case, it is undisputed that the corporations shall cease, except that of the surviving
articles of merger between FISLAI and DSLAI were not or the consolidated corporation
registered with the SEC due to incomplete 5. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
documentation. Consequently, the SEC did not issue
powers and shall be subject to all the duties and
the required certificate of merger. Even if it is true liabilities of a corporation organized under this Code
that the Monetary Board of the Central Bank of 6. The surviving or the consolidated corporation shall
the Philippines recognized such merger, the fact thereupon and thereafter possess:
remains that no certificate was issued by the SEC. 7. All the rights, privileges, immunities and franchises
Such merger is still incomplete without of each of the constituent corporations
the certification. The issuance of the certificate of 8. All property, real or personal, and all receivables
due on whatever account, including subscriptions to
merger is crucial because not only does it bear out
shares and other choses in action, and all and every
SEC’s approval but it also marks the moment when other interest of, or belonging to, or due to each
the consequences of a merger take place. By constituent corporation
operation of law, upon the effectivity of the merger, 9. These shall be deemed transferred to and vested in
the absorbed corporation ceases to exist but its rights such surviving or consolidated corporation without
and properties, as well as liabilities, shall be taken further act or deed
10. The surviving or consolidated corporation shall:
and deemed transferred to and vested in the
a. Be responsible and liable for all the liabilities
surviving corporation (Mindanao Savings and Loan and obligations of each of the constituent
Association, Inc., et al., v. Edward Willkom, et al., G.R. corporations in the same manner as if such surviving
No. 178618, October 11, 2010). or consolidated corporation had itself incurred such
liabilities or obligations
Nature of the Securities Regulation Code (SRC) 2. Other instruments as may in the future be
determined by the SEC.
The SRC is the law that regulates securities (its 3. Derivatives– options and warrants
issuance, distribution and sale) and the person who
NOTE: Options - are contracts that give the buyer the right,
deals with such securities. It is enacted to protect the but not the obligation, to buy or sell an underlying security
public from unscrupulous promoters, who stake at a predetermined price called the exercise or strike price,
business or venture claims which have really no basis, on or before a predetermined date, called the expiry date,
and sell shares or interests therein to investors. The which can only be extended in accordance with Exchange
SRC also serves to protect investors, promote rules (Sundiang, 2014).
investor confidence, and stabilize the financial
markets. Kinds of Options
Securities are shares, participation or interests in a Network marketing, a scheme adopted by companies for
corporation or in a commercial enterprise or getting people to buy their products outside the usual retail
profit-making venture and evidenced by a certificate, system where products are brought from the store’s shelf
contract, instrument, whether written or electronic in and where the buyer can become a down-line seller,
character. It includes: (DO DIET) earning commissions from purchases made by new buyers
whom he refers to the person who sold the product to him,
is not an investment contract. The commissions are
1. Debt instruments – bonds, debentures, notes,
incentives to down-line sellers to bring in other customers.
evidence of indebtedness, asset-backed securities These can hardly be regarded as profits from investment of
money under the Howey Test (SEC v. Prosperity.Com, Inc.,
NOTE: Asset-backed securities (ABS) - These are financial 664 SCRA 28, 2012).
securities the value of which depends on the assets
underlying it. For investors, ABS are alternative to investing
5. Equity instruments – Shares of stock, certificates of
in corporate debt. An ABS is essentially the same thing as a
interest or participation in a profit sharing
mortgage-backed security, except that the securities
A: Yes. The checks issued constitutes securities, Reason for registration requirement
hence, the non-registration thereof is a violation of
the Revised Securities Act. It is one thing for a The reason for the registration requirement is to
corporation to issue checks to satisfy isolated protect the public from fraud.
individual obligations, and another for a corporation
to execute an elaborate scheme where it would Exceptions to the registration requirement
comport itself to the public as a pseudo-investment
house and issue postdated checks instead of stocks or The following need not be registered:
traditional securities to evidence the investments of 1. Exempt securities
its patrons. The Revised Securities Act was geared 2. Securities sold in exempt transactions.
towards maintaining the stability of the national
investment market against activities such as those However, as an exception to the above exceptions,
apparently engaged in by ASBHI. ASBHI adopted this SRC provides that the resale of securities previously
scheme in an attempt to circumvent the Revised sold in an exempt transaction must be registered.
Securities Act, which requires a prior license to sell or
deal in securities. Effect of non-registration
It bears pointing out that the definition of “securities” The issuer would be penalized. Issuers of securities
set forth in Section 2 of the Revised Securities Act not registered shall be subjected to criminal, civil and
includes “commercial papers evidencing administrative charges.
indebtedness of any person, financial or non-financial
entity, irrespective of maturity, issued, endorsed, Q: Timeshare Corp. sold to Spouses Cortez, one
sold, transferred or in any manner conveyed to timeshare of Laguna de Boracay. After sometime,
another.” A check is a commercial paper evidencing the SEC issued a resolution to the effect that
indebtedness of any person, financial or non-financial Timeshare Corp. was without authority to sell
Rationale behind exempt transactions NOTE: It shall be accompanied by a duly verified resolution
of the Board of Directors of the issuer corporation.
Although the securities themselves must still be
registered, the sale or issue need not be registered 5. Written consent of Expert – The written consent of
because the investors involved herein are considered the expert named as having certified any part of the
as highly sophisticated investors or specialized registration statement or any document used in
investors and as such, have a greater risk tolerance or connection therewith shall also be filed
do not need strict protection from the Commission. 6. Certification by Selling stockholders– Where the
registration statement includes shares to be sold by
List of exempt transactions under SRC is not the selling shareholders, a written certification by
exclusive such selling shareholders as to the accuracy of any
part of the registration statement contributed by
The list of exempt transaction under the SRC is not such selling shareholders shall also be filed
exclusive because under Section 10.2 of Republic Act 7. Fees – Upon filing of the registration statement,
8799, the Commission may exempt other the issuer shall pay to the SEC a fee of not more than
transactions, if it finds that the requirements of one tenth of one percent (1/10 of 1%) of the
registration under the Code is not necessary in the maximum aggregate price at which such securities
public interest or for the protection of the investors are proposed to be offered; the SEC shall prescribe by
such as by reason of the small amount involved or the rule, diminishing the fees in inverse proportion, the
limited character of the public offering. value of the aggregate price of the offering
1. That the information was acquired not on account The following are considerer as public company:
of his relationship with the issuer; or 1. Those listed on an exchange; or
2. That he disclosed the information to the other 2. Those with assets of at least PHP 50M and having
party who knew or had the reason to believe he knew 200 shareholders owning at least 100 shares each.
the material information; 3. Those companies that have an effective
3. That the purchaser or seller was not aware of the registration statement under Section 12 of the SRC.
material, non-public information at the time of the
purchase or the sale. Mandatory tender offer
TENDER OFFER RULE NOTE: In the event that the tender offer is oversubscribed,
the aggregate amount of securities to be acquired at the
Tender offer close of such tender offer shall be proportionately
distributed across both selling shareholder with whom the
acquirer may have been in private negotiations and the
It is the publicly declared intention by a person alone
minority shareholders.
or in concert with others to buy securities of a public
corporation. It is an invitation by the acquirer of 2. Any person or group of persons acting in concert
shares of a company for other stockholders to tender who intends to acquire 35% or more of any class of
their shares to the acquirer so that they may sell their equity shares of a public company (corporation with
shares in the same price and conditions as the assets of at least P 50,000,000.00 and having 200 or
previously acquired shares. more stockholders with at least 100 shares for each
stock holder) pursuant to an agreement made
It is given to all stockholders by: between or among the person or group of persons
1. Filing with the SEC a declaration to that effect, and and one or more sellers.
paying the filing fee. 3. Any person or group of persons acting in concert
2. Furnishing the issuer a statement containing the intends to acquire 35% or more of equity shares of a
information required of the issuers as SEC may public company in one or more transactions within a
prescribe, including subsequent or additional period of 12 months shall be required to make a
materials. tender offer to all holders of such class for the
3. Publishing all requests or invitations for tender, or number of shares so acquired within the same period.
materials making a tender offer or requesting or 4. If any acquisition of even less than 35% would
inviting letters of such security. result in ownership of over 51% of the total
outstanding equity securities of a public company,
Purpose of tender offer the acquirer shall be required to make a tender offer
under this Rule for all the outstanding equity
Tender offer is in place to protect the interest of securities to all remaining stockholders of the said
minority stockholders of a target company against company at a price supported by a fairness opinion
any scheme that dilutes the share value of their provided by an independent financial advisor or
investments. It affords such minority shareholders equivalent third party. The acquirer in such tender
the opportunity to withdraw or exit from the offer shall be required to accept any and all securities
company under reasonable terms or a chance to sell thus tendered.
their shares at the same price as those of the majority 5. In any transaction covered by this Rule, the sale of
stockholders. shares pursuant to the private transaction shall not
be completed prior to the closing and completion of
the tender offer. Transactions with any of the seller/s
of significant block of shares with whom the acquirers
The brokers and dealers have the burden of It may be suspended for any fiscal year after the year
compliance with margin requirements. such registration became effective if such issuer as of
the first day of any such fiscal year, has less than 100
Note: In securities trading, the brokers are essentially the shareholders of such class of securities and it notifies
counterparties to the stock transactions at the Exchange. the Commission of such (Rule 17.1, SRC IRR).
Since the principals of the broker are generally undisclosed,
the broker is personally liable for the contracts thus made.
End of disclosure requirement
Brokers have a right to be reimbursed for sums advanced
by them with the express or implied authorization of the
principal (Abacus Securities Corporation v. Ampil, G.R. No. GR: Disclosure does not end because once an issuer
160016, Feb. 27, 2006). becomes a reporting company, it remains as such
even when the registration of securities has been
RULES ON PROXY SOLICITATION revoked (Rule 13 SCR IRR).
Requisite for valid proxy solicitation XPN: If the primary license is revoked.
Prescriptive period for filing of action A: B. He must be nominated and elected by the
minority shareholders
Two years after the discovery of the facts constituting
the cause of action and within five years after such
cause of action accrued
Policy of the state with respect to the creation of the 1. Banker of the government – the BSP shall be the
Bangko Sentral ng Pilipinas official depository of the Government and shall
represent it in all monetary fund dealings (Secs.
The State shall maintain a central monetary authority 110- 116, NCBA).
that shall function and operate as an independent 2. Custodian of Reserves (Secs. 64-66, 94, 103,
and accountable body corporate in the discharge of NCBA)
its mandated responsibilities concerning money, 3. Financial Advisor of the government (Secs.
banking and credit (Sec 2, New Central Bank Act 123-124) – Under Article VII, Sec. 20 of the 1987
[NCBA]). While it is a government owned corporation Constitution, the President may contract or
it enjoys fiscal and administrative autonomy. guarantee foreign loans but with the prior
concurrence of the Monetary Board.
CREATION OF THE BANGKO SENTRAL NG PILIPINAS 4. Government agent (Secs. 117-122, NCBA)
(BSP) 5. Source of credit (Secs. 61-63, 81-89, 109, NCBA)
6. Issuer of Currency (Sec. 49-60, NCBA)
Salient considerations on the creation of Bangko 7. Clearing channel or House; especially where the
Sentral ng Pilipinas PCHC does not operate (Sec. 102, NCBA)
8. Supervisor of the Banking system (Sec. 25, NCBA)
1. It is established as an independent central – shall include the power to:
monetary authority. a. Examine, which power extends to
2. Its capital shall be P50,000,000,000, to be fully enterprises wholly or majority-owned or
subscribed by the Philippine Government. controlled by the bank (Sec. 7, General
3. The P10,000,000,000 of the capital shall be fully Banking Law [GBL]); this power may not be
paid for by the Government upon the effectivity restrained by a writ of injunction unless
of NCBA and the balance to be paid for within a there is convincing proof that the action of
period of 2 years from the effectivity of NCBA the BSP is plainly arbitrary (Sec. 25, NCBA)
in such manner and form as the Government, b. Place a bank under receivership or
through the Secretary of Finance and the liquidation (Sec. 30, NCBA)
Secretary of Budget and Management, may c. Initiate criminal prosecution of erring
thereafter determine (ibid). officers of banks
It is the body through which the powers and In case of a distressed bank, the BSP appoints a
functions of the BSP are exercised (Sec 6, NCBA). conservator or receiver or closure of the bank.
a. ABC Bank can set-off the loan from the savings 1. All deposits of whatever nature with banks or
account being maintained by X with ABC Bank. banking institutions found in the Philippines; or
b. Set-off is not possible because legal 2. Investments in bonds issued by the Philippine
compensation is not allowed in banking government, its branches, and institutions.(Sec. 2,
transaction. R.A. 1405)
c. Deposit accounts are usually earmarked for 3. Trust accounts are included in the scope of the law.
specific purpose hence offsetting is not legally
possible. Meaning of the phrase "of whatever nature and
d. Off -setting is not possible because the kind"
obligation of X is a "simple loan".
RA 1405 is no longer limited to deposits governed by
A: A. The relationship between a bank and its the law on loans giving rise to creditor-debtor
depositor is that of creditor and debtor. For this relationship but it covers fund of whatever nature so
reason, a bank has the right to set-off the deposits in long as the bank may use and utilize it in authorized
its hands for the payment of a depositor’s loans.
indebtedness (Equitable PCI Bank vs. Ng Sheung
Ngor, et al., 171545, Dec. 19, 2007). Trust funds covered by the term “deposit”
Garnishment of a bank deposit does not violate the Policy of the state behind the General Banking Act
law (RA 8791)
The prohibition against examination or inquiry does The State recognizes the vital role of banks in
not preclude its being garnished for satisfaction of providing an environment conducive to the sustained
judgment. The disclosure is purely incidental to the development of the national economy and the
execution process and it was not the intention of the fiduciary nature of banking that requires high
legislature to place bank deposits beyond the reach standards of integrity and performance. In
of judgment creditor (PCIB v. CA, G.R. No. 84526, Jan. furtherance thereof, the State shall promote and
28, 1991). maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and
Garnishment of foreign currency deposits responsive to the demands of a developing economy
(Sec 2, RA 8791).
GR: Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or DEFINITION AND CLASSIFICATION OF BANKS
process of any court, legislative body, government
agency or any administrative body whatsoever (Sec 8. Bank
R.A. 6426).
A bank is an entity engaged in the lending of funds
XPN:The application of Section 8 of R.A. 6426 obtained from the public in the form of deposits.
depends on the extent of its justice. The garnishment
of a foreign currency deposit should be allowed to Elements for an entity to be considered doing
prevent injustice and for equitable grounds, business as a bank
otherwise, it would negate Article 10 of the New Civil
Code which provides that “in case of doubt in the 1. The entity is engaged in the lending of funds
DISTINCTION OF BANKS FROM QUASI-BANKS AND in trust or on deposit for the use, benefit, or behalf of
TRUST ENTITIES others (Sec. 79). A bank does not act as a trustee.
These are entities engaged in the borrowing of funds Persons or entities whose principal functions include
through the issuance, endorsement or assignment the lending, investing, or placement of funds on
with recourse or acceptance of deposit substitutes for pieces of evidence of indebtedness or equity
purposes of re-lending or purchasing of receivables deposited with them, acquired by them or otherwise
and other obligations (Sec 4). Unlike banks, coursed through them, either for their own account
quasi-banks do not accept deposits. Neither are funds or for the account of others.
obtained insured with the PDIC.
Deposit substitutes
Trust entities
It is an alternative form of obtaining funds from the
These are entities engaged in trust business that act public, other than deposits, through the issuance,
as a trustee or administer any trust or hold property endorsement, or acceptance of debt instruments, for
the borrower's own account, for the purpose of
Section 16 of the GBL provides for two (2). The diligence more than that of a Roman pater
familias only applies only to cases where banks act
Effect of merger or consolidation of banks to the under their fiduciary capacity, that is, as depositary of
number of directors allowed the deposits of their depositors. The same degree of
diligence is not expected to be exerted by banks in
The number of directors may be more than 15 but commercial transactions (Reyes v CA G.R. No. 118492.
should not exceed 21 (Sec. 17, GBL). August 15, 2001).
Q: XXX Bank Corporation and ZZZ Corporation were Effect when the teller gave the passbook to a wrong
merged into XX ZZ Bank Corporation. So as not to person
create any unnecessary conflict, all the former
directors of both banks wanted to be appointed Banks must exercise a high degree of diligence in
/elected as members of the Board of Directors of the insuring that they return the passbook only to the
merged bank. Each bank used to have eleven (11) depositor of his authorized representative. For failing
members of the board. The maximum number of to return the passbook to authorized representative
directors of the merged bank is - (2012 Bar of the depositor, the bank presumptively failed to
Question) observe such high degree of diligence in safeguarding
a. 15; the passbook and insuring its return to the party
b. 22; authorized to receive the same.
c. 21;
d. 11. However, a bank’s liability may be mitigated by the
depositor’s contributory negligence such as allowing
A: C. In case of a merged bank, the maximum number a withdrawal slip signed by authorized signatories to
of directors is 21. fall into the hands of an impostor (Consolidated Bank
and Trust Corporation vs. CA, GR No, 138569,
Limitation on the grant of compensation to the September 11, 2003).
directors by the Monetary Board
Bank is liable when an employee encashed a check
The Monetary Board may limit the grant of without the required indorsement
compensation to the directors of a bank only in
The contract for the use of a safety deposit box Through Circular No. 799, the Monetary Board
should be governed by the law on lease. declared that effective July 1, 2013 the rate of
interest for the loan or forbearance of any money,
In the case of Sia vs. CA and Security Bank and Trust goods or credits and the rate allowed in judgments, in
Company and under the old banking law, a safety the absence of an express contract as to such rate of
deposit box is a special deposit. However, the new interest, shall be 6 percent per annum (Section 1,
General Banking Law, while retaining the renting of Circular 799, Seies of 2013 amending Section 2 of
safe deposit box as one of the services that the bank Circular No. 905, Series of 1982).
may render, deleted reference to depository function
(Divina, Handbook on Philippine Commercial Law). This means that if the parties fail to state in writing
the interest payable on any of the transactions
Q: After procuring a checking account, the depositor mentioned, or on account of a court judgment
issued several checks. He was surprised to learn involving a related money claim, the imposable
later that they had been dishonored for insufficient interest is 6 percent every year.
funds. Investigation disclosed that deposits made by
the depositor were not credited to its account. Is the A bank was forbidden by Central Bank to do
bank liable for damages? business is NOT obligated to pay interest on deposit
A: Yes, the depositor expects the bank to treat his A bank lends money, engages in international
account with utmost fidelity, whether such account transactions, acquires foreclosed mortgaged
consist only of a few hundred pesos or of millions. properties or their proceeds and generally engages in
The bank must record every single transaction other banking and financing activities in order that it
accurately, down to the last centavo, and as promptly can derive income therefrom. Therefore, unless a
as possible. This has to be done if the account is to bank can engage in those activities from which it can
reflect at any given time the amount of money the derive income, it is inconceivable how it can carry on
depositor can dispose of as he sees fit, confident that as a depository obligated to pay interest on money
the bank will deliver it as and to whomever he deposited with it (Fidelity & Savings and Mortgage
directs. A blunder on the part of the bank, such as the Bank v. Cenzon, G.R. No. L-46208, Apr. 5, 1990).
dishonor of the check without good reason, can cause
the depositor not a little embarrassment if not also GRANT OF LOANS AND SECURITY REQUIREMENTS
financial loss and perhaps even civil and criminal
litigation (Simex Intl. v. CA, G.R. No. 88013, Mar. 19, RATIO OF NET WORTH TO TOTAL RISK ASSETS
1990).
Net worth
STIPULATION ON INTERESTS
The total of the unimpaired paid-in surplus, retained
Rules on stipulation of interests earnings and undivided profit, net of valuation
reserves and other adjustments as may be required
Old rule by the BSP (Sec. 24.2).
1. Central Bank Circular 416 – 12% per annum in Risked based capital
cases of:
a. Loans The minimum ratio prescribed by the Monetary
b. Forbearance of money, goods and credits Board which the net worth of a bank must bear to its
c. Judgment involving such loan or forbearance, in the total risk assets which may include contingent
absence of express agreement as to such rate of accounts.
interest
NOTE: The Monetary Board may require or suspend
2. Interest accruing from unpaid interest– interest compliance with such ratio whenever necessary for a
due shall earn interest from the time it is judicially maximum period of one year and that such ratio shall be
applied uniformly to banks of the same category (Sec. 34).
Arms-length rule
1. Everything which has been made available to the The burden of proving want of novelty is on him who
public anywhere in the world, before the filing date avers it and the burden is a heavy one which is met
or the priority date of the application claiming the only by clear and satisfactory proof which overcomes
invention every reasonable doubt (Manzano v. CA, G.R. No.
2. The whole contents of a published application, 113388, Sept. 5, 1997).
filed or effective in the Philippines, with a filing or
priority date that is earlier than the filing or priority
2. Integrated circuit – A product, in its final form, or GR: Computer programs are not patentable but are
an intermediate form, in which the elements, at least copyrightable.
one of which is an active elements and some of all of
the interconnections are integrally formed in and or XPN: They can be patentable if they are part of a
on a piece of material, and in which is intended to process (e.g. business process with a step involving
perform an electronic function. the use of a computer program).
If a person, who was deprived of the patent without Rights conferred by a patent
his consent or through fraud is declared by final court
order or decision to be the true and actual inventor, 1. Subject matter is a product – Right to restrain,
the court shall order for his substitution as patentee, prohibit and prevent any unauthorized person or
or at the option of the true inventor, cancel the entity from making, using, offering for sale, selling or
patent, and award actual damages in his favor if importing the product.
warranted by the circumstances (Sec. 68, IPC). 2. Subject matter is a process – Right to restrain
prohibit and prevent any unauthorized person or
Publication of the court order entity from manufacturing, dealing in, using, offering
for sale, selling or importing any product obtained
In the two circumstances aforementioned, the court directly or indirectly from such process (Sec. 71, IPC).
shall furnish the Office a copy of the order or decision 3. Right to assign the patent, to transfer by
which shall be published in the IPO Gazette within succession, and to conclude licensing contracts (Sec.
three (3) months from the date such order or 71.2, IPC).
decision became final and executor, and shall be
recorded in the register of the Office (Sec. 69, IPC). Effectivity of the rights conferred by a patent
Time to file action in court The rights conferred by a patent application take
effect after publication in the Official Gazette (Sec 46,
The actions indicated in Sections 67 and 68 shall be IPC).
filed within one (1) year from the date of publication
made in accordance with Sections 44 and 51, LIMITATIONS OF PATENT RIGHTS
respectively (Sec. 70, IPC).
Limitations
Q: Cezar works in a car manufacturing company
owned by Joab. Cezar is quite innovative and loves 1. In general
to tinker with things. With the materials and parts of
the car, he was able to invent a gas-saving device a. GR: If put on the market in the Philippines by the
that will enable cars to consume less gas. Francis, a owner of the product, or with his express
co-worker, saw how Cezar created the device and consent.
likewise, came up with a similar gadget, also using
scrap materials and spare parts of the company. XPN: Drugs and medicines - introduced in the
Thereafter, Francis filed an application for Philippines or anywhere else in the world by the
registration of his device with the Bureau of Patents. patent owner, or by any party authorized to use
Eighteen months later, Cezar filed his application for the invention (Sec. 72.1, as amended by R.A.
the registration of his device with the Bureau of 9502)
Patents.
b. Where the act is done privately and on a
a. Is the gas-saving device patentable? Explain. non-commercial scale or for a non-commercial
purpose. (Sec. 72.2, IPC)
f. Where the invention is used in any ship, vessel, Also known as the doctrine of first sale, it provides
aircraft, or land vehicle of any other country that the patent holder has control of the first sale of
entering the territory of the Philippines his invention. He has the opportunity to receive the
temporarily or accidentally. (Sec. 72.5, IPC) full consideration for his invention from his sale.
Hence, he exhausts his rights in the future control of
2. Prior user– Person other than the applicant, who in his invention.
good faith, started using the invention in the
Philippines, or undertaken serious preparations to It espouses that the patentee who has already sold
use the same, before the filing date or priority date his invention and has received all the royalty and
of the application shall have the right to continue consideration for the same will be deemed to have
the use thereof, but this right shall only be released the invention from his monopoly. The
transferred or assigned further with his enterprise invention thus becomes open to the use of the
or business. (Sec. 73, IPC) purchaser without further restriction. (Adams v.
Burke, 84 U.S. 17, 1873)
3. Use by Government– A government agency or third
person authorized by the government may exploit Application of the doctrine of exhaustion in the
invention even without agreement of a patent Philippine jurisdiction
owner where:
GR: Patent rights are exhausted by first sale in the
a. Public interest, as determined by the appropriate Philippines (Domestic exhaustion).
agency of the government, so requires; or
b. A judicial or administrative body has determined XPN: On drugs and medicines: first sale in any
that the manner of exploitation by owner of jurisdiction exhausts the rights of the owner thereof
patent is anti-competitive. (Sec. 74, IPC) (International exhaustion) (R.A. 9502).
This doctrine balances the doctrine of equivalents. Limitations to the civil/criminal action
Patentee is precluded from claiming as part of
patented product that which he had to excise or 1. No damages can be recovered for acts of
modify in order to avoid patent office rejection, and infringement committed more than four (4) years
Exception on prohibited clauses 1. The Director of Legal Affairs may grant a license
to exploit a patented invention, even without the
In exceptional or meritorious cases where substantial agreement of the patent owner, in favor of any
benefits will accrue to the economy, such as high person who has shown his capability to exploit
technology content, increase in foreign exchange the invention (Sec. 93, IPC).
earnings, employment generation, regional dispersal 2. R.A. 9502 (Universally Accessible Cheaper and
of industries and/or substitution with or use of local Quality Medicines Act of 2008) however
raw materials, or in the case of Board of Investments, amended Sec. 93 so that it is the Director
registered companies with pioneer status, exemption General of the IPO who may grant a license to
from any of the above requirements may be allowed exploit patented invention under the grounds
by the Documentation, Information and Technology enumerated therein.
Transfer Bureau after evaluation thereof on a case by
case basis (Sec. 91, IPC). NOTE: Clarification either by legislation of judicial
interpretation as to who has jurisdiction should be made to
Mandatory provisions avoid confusion (Salao, 2012).
1. That the laws of the Philippines shall govern the Grounds for compulsory licensing and the period for
interpretation of the same and in the event of filing a petition
litigation, the venue shall be the proper court in
the place where the licensee has its principal 1. National emergency or other circumstances of
office; extreme urgency
2. Continued access to improvements in techniques 2. Where the public interest, in particular, national
and processes related to the technology shall be security, nutrition, health or the development of
made available during the period of the other vital sectors of the national economy as
technology transfer arrangement; determined by the appropriate agency of the
3. In the event the technology transfer Government, so requires; at any time after the
arrangement shall provide for arbitration, the grant of the patent
Procedure of Arbitration of the Arbitration Law 3. Where a judicial or administrative body has
of the Philippines or the Arbitration Rules of the determined that the manner of exploitation by
United Nations Commission on International the owner of the patent or his licensee is
Trade Law (UNCITRAL) or the Rules of anti-competitive at any time after the grant of
Conciliation and Arbitration of the International the patent
Chamber of Commerce (ICC) shall apply and the 4. In case of public non-commercial use of the
venue of arbitration shall be the Philippines or patent by the patentee, without satisfactory
any neutral country; and reason at any time after the grant of the patent
4. The Philippine taxes on all payments relating to 5. If the patented invention is not being worked in
the technology transfer arrangement shall be the Philippines on a commercial scale, although
borne by the licensor (Sec. 88, IPC). capable of being worked, without satisfactory
reason after the expiration of 4 years from the
Effect of non-conformance with the prohibited date of filing of the application or 3 years from
clauses and mandatory provisions the date of the patent whichever is later (Sec. 93
in relation to Sec. 94)
GR: Non-conformance shall automatically render the 6. Where the demand for patented drugs and
technology transfer arrangement unenforceable. medicines is not being met to an adequate
extent and on reasonable terms, as determined
XPN: Unless said technology transfer arrangement is by the Secretary of the Department of Health
approved and registered with the Documentation, (Sec. 10, RA 9502).
Information and Technology Transfer Bureau under
the provisions of Section 91 on exceptional cases
(Sec. 92, IPC).
1. Where the petition for compulsory license seeks to Cancellation of complusory license
remedy a practice determined after judicial or
administrative process to be anti-competitive; Upon the request of the patentee, the
2. In situations of national emergency or other Director may cancel the compulsory license:
circumstances of extreme urgency; (a) If the ground for the grant of the
3. In cases of public non-commercial use; and compulsory license no longer exists and is
4. In cases where the demand for the patented drugs unlikely to recur;
and medicines in the Philippines is not being met (b) If the licensee has neither begun to
to an adequate extent and on reasonable terms, supply the domestic market nor made
as determined by the Secretary of the serious preparation therefor;
Department of Health (R.A. 8293, Sec. 95 as (c) If the licensee has not complied with the
amended by R.A. 9502). prescribed terms of the license;
1. The scope and duration of such license shall be The licensee may surrender the license by a
limited to the purpose for which it was written declaration submitted to the Office.
authorized;
2. The license shall be non-exclusive; NOTE: The said Director shall cause the
3. The license shall be non-assignable, except with amendment, surrender, or cancellation in the
that part of the enterprise or business with which Register, notify the patentee, and/or the licensee,
the invention is being exploited; and cause notice thereof to be published in the
IPO Gazette.
4. Use of the subject matter of the license shall be
devoted predominantly for the supply of the
Philippine market: Provided, That this limitation Licensee’s exemption from liability
shall not apply where the grant of the license is
based on the ground that the patentee's manner Any person who works a patented product,
of exploiting the patent is determined by judicial substance and/or process under a license
or administrative process, to be anti-competitive. granted under this Chapter, shall be free
5. The license may be terminated upon proper from any liability for infringement: Provided
showing that circumstances which led to its grant however, That in the case of voluntary
have ceased to exist and are unlikely to recur: licensing, no collusion with the licensor is
Provided, That adequate protection shall be proven. This is without prejudice to the right
afforded to the legitimate interest of the of the rightful owner of the patent to
licensee; and recover from the licensor whatever he may
6. The patentee shall be paid adequate have received as royalties under the license
remuneration taking into account the economic (Sec. 102, IPC).
value of the grant or authorization, except that in .
cases where the license was granted to remedy a ASSIGNMENT AND TRANSMISSION OF RIGHTS
practice which was determined after judicial or
administrative process, to be anti-competitive, Forms of assignment
the need to correct the anti-competitive practice
may be taken into account in fixing the amount 1. Total – assignment of entire right, title or interest
of remuneration. in and to the patent and the invention covered
thereby.
NOTE: The patent owner receive royalties in losing his 2. Partial
property rights because of the compulsory licensing. a. Separate rights – assignment of a specific right
(ex: right to sell)
Amendment of compulsory license b. Pro Indiviso – assignment of an aliquot part
which results in co-ownership
Upon the request of the patentee or the
licensee, the Director of Legal Affairs may
amend the decision granting the compulsory
GR: A licensee may NOT maintain a suit for 1. To point out distinctly the origin or ownership of
infringement. Only the patentees, his heirs, assignee, the articles to which it is affixed.
grantee or personal representatives may bring an 2. To secure to him who has been instrumental in
action for infringement. bringing into market a superior article or
merchandise the fruit of his industry and skill
XPN: If the licensing agreement provides that the 3. To prevent fraud and imposition (Etepha v. Director
licensee may bring an action for infringement or if he of Patents, G.R. No. L-20635, Mar. 31, 1966).
was authorized to do so by the patentee through a
special power of attorney. Salient features of the Paris convention for the
protection of industrial property
TRADEMARKS
1. National Treatment Principle– foreign nationals are
DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE to be given the same treatment in each of the
NAMES member countries as that country makes
available in its own citizens.
Trademark 2. Right of Priority –any person who has duly filed
registration for trademark shall enjoy a right of
Any visible sign capable of distinguishing the goods priority of 6 months (Rule 203, Trademark Rules)
(trademark) or services (service mark) of an 3. Protection against Unfair Competition
enterprise (Sec 121.1, IPC). A trade name is a name or 4. Protection of Tradenames –protected in all
designation identifying or distinguishing an countries without obligation of filing or
enterprise. registration.
5. Protection of Well-Known Marks
Prior use of the mark is NOT a requirement for Totality or holistic test
registration
Confusing similarity is to be determined on the basis
Actual prior use in commerce in the Philippines has of visual, aural, connotative comparisons and
been abolished as a condition for the registration of a overall impressions engendered by the marks in
trademark (RA 8293). controversy as they are encountered in the
marketplace.
Instances when non-use is excused
NOTE: The dominancy test only relies on visual
1. If caused by circumstances arising independently comparisons between two trademarks whereas the totality
of the will of the owner. Lack of funds is not an or holistic test relies not only on the visual but also on the
excuse. aural and connotative comparisons and overall impressions
between the two trademarks (Societe Des Produits Nestl,
2. A use which does not alter its distinctive character
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
though the use is different from the form in which
it is registered.
Q: N Corporation manufactures rubber shoes under
3. Use of mark in connection with one or more of the
the trademark “Jordann” which hit the Philippine
goods/services belonging to the class in which the
market in 1985, and registered its trademark with
mark is registered.
the Bureau of Patents, Trademarks and Technology
4. The use of a mark by a company related to the
in 1990. PK Company also manufactures rubber
applicant/registrant.
shoes with the trademark “Javorski” which it
5. The use of a mark by a person controlled by the
registered with BPTTT in 1978. In 1992, PK Co
registrant (Section 152, IPC).
adopted and copied the design of N Corporation’s
“Jordann” rubber shoes, both as to shape and color,
TEST TO DETERMINE CONFUSING SIMILARITY
but retained the trademark “Javorski” on its
BETWEEN MARKS
products. May PK Company be held liable to N Co?
Explain. (1996 Bar Question)
Test to determine confusing similarity between
marks
A: PK Co may be liable for unfairly competing against
N Co. By copying the design, shape and color of N
The tests in determining trademark infringement are
Corporation’s “Jordann” rubber shoes and using the
the following:
same in its rubber shoes trademarked “Javorski,” PK
1. Dominancy and
is obviously trying to pass off its shoes for those of N.
2. Holistic Test
It is of no moment that the trademark “Javorski” was
registered ahead of the trademark “Jordann.”
Dominancy Test
Priority in registration is not material in an action for
Dominancy test unfair competition as distinguished from an action for
infringement of trademark. The basis of an action for
Focuses on the similarity of the prevalent features of unfair competition is confusing and misleading
the competing marks. If the competing trademark similarity in general appearance, not similarity of
contains the main or essential or dominant features trademarks. (Converse Rubber Co. v. Jacinto Rubber &
of another, and confusion is likely to result, Plastics Co., G.R. Nos. 27425, 30505, Apr. 28, 1980)
infringement takes place (Asia Brewery v. CA, G.R. No.
103543, 5 July 1993). Q: The “Test of Dominancy” in the Law on
Trademarks, is a way to determine whether there
Duplication or imitation is not necessary; nor is it exist an infringement of a trademark by --- (2012
necessary that the infringing label should suggest an MCQ Bar Question)
effort to imitate. The question is whether the use of
marks involved is likely to cause of confusion or A: Focusing on the similarity of the prevalent features
mistake in the mind of the public or deceive of the competing trademarks that might cause
confusion (Amador, 2007)
1. Belong to the same class or have the same Rules regarding internationally-well known marks
descriptive properties; or
2. When they possess the same physical attributes or GR: Prohibition on subsequent registration does not
essential characteristics with reference to their include services and goods of different nature or kind.
form, composition, texture or quality.
XPNs:
Rule of idem sonans 1. If the internationally well-known mark is not
registered in the Philippines, the application for
Two names are said to be "idem sonantes" if the registration of a subsequent or similar mark can be
attentive ear finds difficulty in distinguishing them rejected only if the goods or services specified in the
when pronounced (Martin v. State, 541 S.W. 2d 605). application are similar to those of the internationally
well-known mark.
Applicability of idem sonans rule 2. If the internationally well-known mark is registered
in the Philippines, the application for registration of a
Similarity of sound is sufficient to rule that the two psubsequent or similar mark can be refused even if
marks are confusingly similar when applied to the goods or services specified in the application are
merchandise of the same descriptive properties not identical or similar to those of the internationally
(Marvex Commercial v. Director of Patent, G.R. No. well-known mark.
L-19297, Dec. 22, 1966).
Criteria for well-known brands
Types of confusion that arise from the use of similar
or colorable imitation marks 1. The duration, extent and geographical area of any
use of the mark, in particular, the duration, extent
1. Confusion of goods/product confusion - there is and geographical area of any promotion of the mark,
confusion of goods when the products are competing including advertising or publicity and the
2. Confusion of business/source or origin confusion - presentation, at fairs or exhibitions, of the goods
the products are non-competing but related enough and/or services to which the mark applies.
to produce confusion of affiliation (McDonald’s Corp. 2. The market share, in the Philippines and in other
v. L.C. Big Mak Burger, Inc., G.R. No. 143993, Aug. countries, of the goods and/or services to which the
18, 2004). mark applies
3. The degree of the inherent or acquired distinction
Colorable imitation of the mark
4. The quality-image or reputation acquired by the
Such a close or ingenious imitation as to be calculated mark
to deceive ordinary persons, or such a resemblance 5. The extent to which the mark has been registered
to the original as to deceive an ordinary purchaser in the world
giving such attention as a purchaser usually gives, as 6. The exclusivity of use attained by the mark in the
to cause him to purchase the one supposing it to be world
the other (Societe des Produits Nestlé, S.A. v. CA, G.R. 7. The commercial value attributed to the mark in the
No. 112012, Apr. 4, 2001). world
8. The record of successful protection of the rights in
WELL-KNOWN MARKS the mark
9. The outcome of litigations dealing with the issue of
Internationally well-known mark whether the mark is a well-known mark
10. The presence of absence of identical or similar
The following constitutes internationally marks validly registered for or used on identical or
well-known mark similar goods or services and owned by persons other
than the person claiming that his mark is well-known
1. Considered by the competent authority of the mark.
Philippines to be “well-known” internationally and in Provided further, that the mark is well-known
the Philippines as the mark of a person other than the both internationally and in the Philippines (A.M. No.
applicant or registrant 10-3-10-SC)
In a later case, in defining trademark infringement, The owner of a trademark which has been infringed is
Section 22 of RA 166 deleted the requirement in entitled to actual damages:
question and expanded its scope to include such use 1. The reasonable profit which the complaining
of the mark or its colorable imitation that is likely to party would have made, had the defendant not
result in confusion on "the source or origin of such infringed his said rights; or
goods or services, or identity of such business." Thus, 2. The profit which the defendant actually made
while there is confusion of goods when the products out of infringement; or
are competing, confusion of business exists when the 3. The court may award as damages a reasonable
products are non-competing but related enough to percentage based upon the amount of gross
produce confusion of affiliation. sales of the defendant or the value of the
services in connection with which the mark or
Modern law recognizes that the protection to which trade name was issued.
the owner of a trademark is entitled is not limited to
guarding his goods or business from actual market NOTE: In cases where actual intent to mislead the public or
competition with identical or similar products of the to defraud the complainant is shown, in the discretion of
parties, but extends to all cases in which the use by a the court, the damages may be doubled (Sec. 156.3, IPC).
junior appropriator of a trade-mark or trade-name is
likely to lead to a confusion of source, as where Court which has jurisdiction over violations of
prospective purchasers would be misled into thinking intellectual property rights
that the complaining party has extended his business It is properly lodged with the Regional Trial Court
into the field or is in any way connected with the even if the penalty therefore is imprisonment of less
activities of the infringer; or when it forestalls the than six years, or from 2 to 5 years and a fine ranging
normal potential expansion of his business from P50,000 to P200,000.
(Mcdonald’s Corporation v. L & C Big Mak Burger, Inc.
August 18, 2004). NOTE: R.A. 8293 and R.A. 166 are special laws conferring
jurisdiction over violations of intellectual property rights to
Remedies of the owner of the trademark against the Regional Trial Court. They should therefore prevail over
infringers R.A. No. 7691, which is a general law (Samson v. Daway,
G.R. No. 160054-55, July 21, 2004).
1. Civil —filed with the Regional Trial Courts. The Limitations on the actions for infringement
owner of the registered mark may ask the court
to issue a preliminary injunction to quickly 1. Right of prior user– registered mark shall be
prevent infringer from causing damage to his without affect against any person who, in good
business. Furthermore, the court will require faith, before filing or priority date, was using
infringer to pay damages to the owner of the the mark for purposes of his business (Sec
mark provided defendant is shown to have had 159.1, IPC).
notice of the registration of the mark (which is 2. Relief against publisher– injunction against future
presumed if a letter R within a circle is appended) printing against an innocent infringer who is
and stop him permanently from using the mark. engaged solely in the business of printing the
2. Criminal— the owner of the trademark may ask the mark (Sec. 159.2, IPC).
court to issue a search warrant and in 3. Relief against newspaper – injunction against the
appropriate cases, remedies available shall also presentation of advertising matter in future
include the seizure, forfeiture and destruction of issues of the newspaper, magazine or in
the infringing goods and of any materials and electronic communications in case the
implements the predominant use of which has infringement complained of is contained in or
been in the commission of the offense. is part of paid advertisement in such materials
(Sec. 159.3, IPC).
Limitations on use of trade name or business name 1. The Court shall cancel the registration of a
collective mark if the person requesting the
A person may not: cancellation proves that only the registered owner
1. Use a name if the word is generic ( Lyceum of the uses the mark,
Philippines v. CA, 219 SCRA 610). 2. Or that he uses or permits its use in contravention
2. Use any name indicating a geographical locations ( of the agreements referred to in Subsection 166.2,
Ang Si Heng vs. Wellington Department Store 92 3. Or that he uses or permits its use in a manner liable
Phil. 448). to deceive trade circles or the public as to the origin
3. Use any name or designation contrary to public or any other common characteristics of the goods or
order or morals services concerned (Sec 167.3, IPC).
4. Use a name if it is liable to deceive trade circles or
the public as to the nature of the enterprise NOTE: The registration of a collective mark, or an
identified by that name ( Sec. 165.1, IPC). application therefor shall not be the subject of a license
5. Subsequently use a trade name likely to mislead contract.
the public as a third party (Sec. 165.2, b, IPC).
Criminal penalties under the Intellectual Property
6. Copy or simulate the name of any domestic
Code for unfair competition, infringement, false
product (for imported products).
designation of origin and false representations
7. Copy or simulate a mark registered in accordance
with the provisions of IPC (for imported products).
A criminal penalty of imprisonment from two (2)
8. Use mark or trade name calculated to induce the
years to five (5) years and a fine ranging from Fifty
public to believe that the article is manufactured in
thousand pesos (P50,000) to Two hundred thousand
the Philippines, or that it is manufactured in any
pesos (P200,000), shall be imposed on any person
foreign country or locality other than the country
who is found guilty of committing any of the acts. The
or locality where it is in fact manufactured.
penalty shall be independent of the civil and
NOTE: Items 4, 5 and 6 only applies to imported products
administrative sanctions imposed by law (Sec 170,
and those imported articles shall not be admitted to entry IPC).
at any customhouse of the Philippines (Sec. 166, IPC).
Cancellation of trademark registration
Change in the ownership of a trade name
A: A trademark registration may be cancelled by any
The change in the ownership of a trade name is made person who believes that he will be damaged by the
with the transfer of the enterprise or part thereof registration of the mark:
identified by that name (Sec. 165.4, IPC). 1. Within 5 years, from the date of the registration
of the mark; or
2. At any time;
NOTE: If in a petition for cancellation of a trademark, it was 1. Literary and Artistic Works
established that the petitioner was not its owner, prior (BOLD-MAN-GAS-PAP-CO)
registration can be cancelled without need of filing a
separate petition (E.Y. Industrial Sales, Inc. V Shen Dar
a. Books, pamphlets, articles and other writings
Electricity and Machinery Co. Ltd. 634 SCRA 363).
b. Lectures, sermons, addresses, dissertations
Transliteration v. Translation of mark prepared for Oral delivery, whether or not
reduced in writing or other material form
Transliteration is an act, process or instances of c. Letters
representing or spelling of words, letters or d. Dramatic, choreographic works
characters of one language in the letters and e. Musical compositions
characters of another language or alphabet f. Works of Art
g. Periodicals and Newspapers
Translation is an act, process or instance of h. Works relative to Geography, topography,
translating as rendering from one language or architecture or science
representational system into another. i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
COPYRIGHTS l. Audiovisual works and cinematographic works
m. Pictorial illustrations and advertisements
Copyright n. Computer programs; and
o. Other literary, scholarly, scientific and artistic
A right over literary and artistic works which are works (Sec. 172.1, IPC).
original intellectual creations in the literary and
artistic domain protected from the moment of 2. Derivative Works
creation (Sec. 171.1, IPC).
a. Dramatizations, translations, adaptations,
BASIC PRINCIPLES abridgements, arrangements, and other alterations of
literary or artistic works;
Elements of copyright-ability b. Collections of literary, scholarly, or artistic works
and compilations of data and other materials which
1. Originality – Must have been created by the are original by reason of the selection or coordination
author’s own skill, labor, and judgment without or arrangement of their contents (Sec. 173, IPC).
directly copying or evasively imitating the work of
NOTE: Derivative works shall be protected as new works,
another (Ching Kian Chuan v. CA, G.R. No. 130360,
provided that such new work shall not affect the force of
Aug. 15, 2001). any subsisting copyright upon the original works employed
2. Expression – Must be embodied in a medium or any part thereof, or be construed to imply any right to
sufficiently permanent or stable to permit it to be such use of the original works, or to secure or extend
perceived, reproduced or communicated for a period copyright in such original works (Sec. 173.2, IPC).
more than a transitory duration.
Q: P&D was granted a copyright on the technical
drawings of light boxes as "advertising display
Q: Juan Xavier wrote and published a story similar to 7. TV programs, format of TV programs (Joaquin v.
an unpublished copyrighted story of Manoling Drilon, G.R. No. 108946, Jan. 28, 1999)
Santiago. It was, however, conclusively proven that 8. Systems of bookkeeping; and
Juan Xavier was not aware that the story of 9. Statutes.
Manoling Santiago was protected by copyright.
Manoling Santiago sued Juan Xavier for Q: BJ Productions, Inc. (BJPI) is the holder/grantee of
infringement of copyright. Is Juan Xavier liable? a copyright of “Rhoda and Me”, a dating game show
(1998 Bar Question) aired from 1970 to 1977. Subsequently, however,
RPN aired the game show “It’s a Date”, which was
A: Yes. Juan Xavier isliable for infringement of produced by IXL Productions, Inc. (IXL). As such, an
copyright. It is not necessary that Juan Xavier is aware information for copyright infringement was filed
that the story of Manoling Santiago was protected by against RPN. The DOJ Secretary directed the
copyright. The work of Manoling Santiago is prosecutor to dismiss the case for lack of probable
protected from the time of its creation (Habana v. cause. Was the decision of the DOJ Secretary
Robles, 310 SCRA 511). correct?
NOTE: There will still be originality sufficient to warrant A: Yes, the format of a show is not copyrightable. The
copyright protection if “the author, through his skill and copyright law enumerates the classes of work entitled
effort, has contributed a distinguishable variation from the to copyright protection. The format or mechanics of a
older works.” In such a case, of course, only those parts
television show is not included in the list of protected
which are new are protected by the new copyright. Hence,
works. For this reason, the protection afforded by the
in such a case, there is no case of infringement. Juan Xavier
is no less an “author” because others have preceded him. law cannot be extended to cover them. Copyright, in
the strict sense of the term, is purely a statutory
NON-COPYRIGHTABLE WORKS right. It is a new or independent right granted by the
statute, and not simply a pre-existing right
Non-copyrightable works (INOD-PGTSS) regulated by the statute. Being a statutory grant,
the rights are only such as the statute confers, and
1. Idea, procedure, system, method or operation, may be obtained and enjoyed only with respect to
concept, principle, discovery or mere data as such the subjects and by the persons, and on terms and
2. News of the day and other items of press conditions specified in the statute (Joaquin v. Drilon,
information G.R. No. 108946, Jan. 28, 1999).
3. Any Official text of a legislative, administrative or
legal nature, as well as any official translation thereof Q: Rural is a certified public utility providing
4. Pleadings telephone service to several communities in Manila.
5. Decisions of courts and tribunals – this refers to It obtains data for the directory from subscribers,
original decisions and not to annotated decisions who must provide their names and addresses to
The natural person whose name is indicated on a Rights which are not covered under a Droit de suite
work in the usual manner as the author shall, in the (PEEWS)
absence of proof to the contrary, presumed to be the
author of the work. This is applicable even if the 1. Prints
name is a pseudonym, where the pseudonym leaves 2. Etchings
no doubt as to identity of the author (Sec. 219.1, IPC). 3. Engravings
4. Works of applied art
The person or body corporate, whose name appears 5. Similar works wherein the author primarily derives
on the audio-visual work in the usual manner shall, in gain from the proceeds of reproductions (Sec. 201,
the absence of proof to the contrary, be presumed to IPC).
be the maker of said work ( Sec. 219.2, IPC).
Q: ABC is the owner of certain musical compositions
Note: Copyright protection commences from the time of among which are the songs entitled: "Dahil Sa Iyo",
creation. "Sapagkat Ikaw Ay Akin," "Sapagkat Kami Ay Tao
Lamang" and "The Nearness Of You.” Soda Fountain
Rights of an author Restaurant hired a combo with professional singers
to play and sing musical compositions to entertain
1. Economic rights – The right to carry out, authorize and amuse customers. They performed the
or prevent the following acts: above-mentioned compositions without any license
or permission from ABC to play or sing the same.
a. Reproduction of the work or substantial portion Accordingly, ABC demanded from Soda Fountain
thereof payment of the necessary license fee for the playing
and singing of aforesaid compositions but the
A: Yes. The patrons of the Soda Fountain pay only for The right of an author under Section 193.1. shall last
the food and drinks and apparently not for listening during the lifetime of the author and in perpetuity
to the music, but the music provided is for the after his death while the rights under Sections 193.2.
purpose of entertaining and amusing the customers 193.3. and 193.4. shall be coterminous with the
in order to make the establishment more attractive economic rights, the moral rights shall not be
and desirable. For the playing and singing the musical assignable or subject to license (Sec. 193, IPC as
compositions involved, the combo was paid as amended by R.A. No. 10372).
independent contractors by Soda Fountain. It is
therefore obvious that the expenses entailed thereby NOTE: The person or persons to be charged with the
are added to the overhead of the restaurant which posthumous enforcement of these rights shall be named in
are either eventually charged in the price of the food a written instrument which shall be filed with the National
Library. In default of such person or persons, such
and drinks or to the overall total of additional income
enforcement shall devolve upon either the author’s heirs,
produced by the bigger volume of business which the
and in default of the heirs, the Director of the National
entertainment was programmed to attract. Library.
Consequently, it is beyond question that the playing
and singing of the combo in defendant-appellee's Exceptions to moral rights
restaurant constituted performance for profit
(FILSCAP v. Tan, G.R., No. L-36402, Mar. 16, 1987). 1. Absent any special contract at the time creator
licenses/permits another to use his work, the
An author cannot be compelled to perform his following are deemed not to contravene creator’s
contract moral rights, provided they are done in accordance
with reasonable customary standards or requisites of
An author cannot be compelled to perform his the medium:
contract to create a work or for the publication of his a. Editing
work already in existence. However, he may be held b. Arranging
liable for damages for breach of such contract (Sec. c. Adaptation
195, IPC). d. Dramatization
e. Mechanical and electric reproduction
Q: X, an amateur astronomer, stumbled upon what
appeared to be a massive volcanic eruption in 2. Complete destruction of work unconditionally
Jupiter while peering at the planet through his transferred by creators (Sec. 197, IPC).
telescope. The following week, X, without notes,
presented a lecture on his findings before the Waiver of moral rights
Association of Astronomers of the Philippines. To his
dismay, he later read an article in a science journal GR: Moral rights can be waived in writing, expressly
written by Y, a professional astronomer, repeating so stating such waiver.
exactly what X discovered without any attribution to
him. Has Y infringed on X's copyright, if any? (2011 XPN: Even in writing, waiver is not valid if:
Bar Question) 1. Use the name of the author, title of his work, or his
reputation with respect to any version/adaptation of
A: No, since no protection extends to any discovery, his work, which because of alterations, substantially
even if expressed, explained, illustrated, or embodied tend to injure literary/artistic reputation of another
in a work. author
2. Use name of author in a work that he did not
Nature of moral rights create
A:
1. For literary and artistic works and derivative works
a. Works of authors who are nationals of, or have
their habitual residence in, the Philippines;
b. Audio-visual works the producer of which has
his headquarters or habitual residence in the
Philippines;
c. Works of architecture erected in the
Philippines or other artistic works incorporated
in a building or other structure located in the
Philippines;
d. Works first published in the Philippines; and
e. Works first published in another country but
also published in the Philippines within thirty
days, irrespective of the nationality or
residence of the authors (Sec. 221, IPC).
2. For performers
a. Performers who are nationals of the
Philippines;
b. Performers who are not nationals of the
Philippines but whose performances:
i. Take place in the Philippines; or
ii. Are incorporated in sound recordings that
are protected under IPC; or
iii. Which has not been fixed in sound
recording but are carried by broadcast
qualifying for protection under IPC (Sec. 222,
IPC)
3. Of sound recordings
a. Sound recordings the producers of which are
nationals of the Philippines; and
NOTE: If work of joint authorship consists of parts that can be used separately, then
the author of each part shall be the original owner of the copyright in the part that
he has created (Sec. 178.2, IPC).
AUDIOVISUAL WORK GR: Producer, the author of the scenario, the composer of the music, the
film director, and the author of the work so adapted
XPN:The producers shall exercise the copyright to an extent required for
the exhibition of the work in any manner (Sec. 178.5, IPC).
COMMISSIONED WORK The person who commissioned the work shall own the work but the
copyright thereto shall remain with the creator, unless there is a written
stipulation to the contrary (Sec. 178.4, IPC).
COLLECTIVE WORKS Contributor is deemed to have waived his right unless he expressly reserves
it (Sec. 196, IPC).
IN THE COURSE OF GR: The employee, if not a part of his regular duties even if the employee
EMPLOYMENT uses the time, facilities and materials of the employer (Sec. 178.3, IPC).
XPN: The employer, if the work is the result of the performance of his
regularly-assigned duties, unless there is an agreement, express or implied,
to the contrary.
LETTERS Writer –provisions of Article 723, Civil Code govern [ownership shall pertain
to the person to whom they are addressed and delivered] (Sec. 178.6, IPC).
In determining the number of years of imprisonment Infringement in this context refers to the economic
and the amount of fine, the court shall consider the rights of the copyright owner. Transferring music
value of the infringing materials that the defendant from a lawfully acquired CD into a computer, then
has produced or manufactured and the damage that downloading it to a portable device for personal use,
the copyright owner has suffered by reason of the is not infringement. But if, multiple copies of the CD
infringement: Provided, That the respective maximum were reproduced for sale, then infringement occurs
penalty stated in Section 217.1. (a), (b) and (c) herein (Ibid).
for the first, second, third and subsequent offense,
shall be imposed when the infringement is committed Possession of a music file procured through an
by: infringing activity is a violation of the law
(a) the circumvention of effective
technological measures; The possession of a music file procured through an
(b) the removal or alteration of any infringing activity is a violation of the law only if it can
electronic rights management information be proven that the person benefitting from the music
from a copy of a work, sound recording, or file has knowledge of the infringement, and the
fixation of a performance, by a person, power and ability to control the person committing
knowingly and without authority; or the infringement (Ibid).
(c) the distribution, importation for
distribution, broadcast, or communication to Jailbreaking or rooting a phone or device
the public of works or copies of works, by a
person without authority, knowing that Jailbreaking or rooting by themselves are not illegal.
electronic rights management information However, downloading pirated material, or
has been removed or altered without committing infringement with a “jailbroken” phone
authority. (Sec. 217.2, IPC, as amended by increases the penalty and damages imposed on the
R.A. No. 10372). person found guilty of infringement (Ibid).
SPECIAL LAWS
OVERVIEW OF THE RECENT AMENDMENTS AS INTRODUCED BY RA 10365 TO AMLA OF 2001 (RA 9160)
WHEN IS MONEY Money laundering is a crime whereby the Money laundering is committed by any
LAUNDERING proceeds of an unlawful activity as herein person who, knowing that any monetary
COMMITTED defined are transacted, thereby making instrument or property represents, involves,
(DEFINITION OF them appear to have originated from or relates to the proceeds of any unlawful
MONEY legitimate sources. It is committed by the activity:
LAUNDERING) following:
(a) transacts said monetary instrument or
(a) Any person knowing that any monetary property;
instrument or property represents, involves,
or relates to, the proceeds of any unlawful (b) converts, transfers, disposes of, moves,
activity, transacts or attempts to transacts acquires, possesses or uses said monetary
said monetary instrument or property. instrument or property;
(b) Any person knowing that any monetary (c) conceals or disguises the true nature,
instrument or property involves the source, location, disposition, movement or
proceeds of any unlawful activity, performs ownership of or rights with respect to said
or fails to perform any act as a result of monetary instrument or property;
which he falicitates the offense of money
laundering referred to in paragraph (a) (d) attempts or conspires to commit money
laundering offenses referred to in
(c) Any person knowing that any monetary (e) aids, abets, assists in or counsels the
instrument or property is required under commission of the money laundering
this Act to be disclosed and filed with the offenses referred to in paragraphs (a), (b) or
Anti-Money Laundering Council (AMLC), fails (c) above; and
to do so."(Sec. 4, RA 9160, as amended by
RA 9194). (f) performs or fails to perform any act as a
result of which he facilitates the offense of
money laundering referred to in paragraphs
(a), (b) or (c) above.
(1) Kidnapping for ransom under Article 267 (1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the of Act No. 3815, otherwise known as the
Revised Penal Code, as amended; Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, (2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous Act known as the Comprehensive Dangerous
of 2002; Drugs Act of 2002;
(13) Fraudulent practices and other (14) Financing of terrorism under Section 4
violations under Republic Act No. 8799, and offenses punishable under Sections 5, 6,
otherwise known as the Securities 7 and 8 of Republic Act No. 10168, otherwise
Regulation Code of 2000; known as the Terrorism Financing
Prevention and Suppression Act of 2012:
(14) Felonies or offenses of a similar nature
that are punishable under the penal laws of (15) Bribery under Articles 210, 211 and
other countries." 211-A of the Revised Penal Code, as
amended, and Corruption of Public Officers
under Article 212 of the Revised Penal Code,
as amended;
(5) to investigate suspicious transactions and (12) to require the Land Registration
covered transactions deemed suspicious Authority and all its Registries of Deeds to
after an investigation by AMLC, money submit to the AMLC, reports on all real
laundering activities and other violations of estate transactions involving an amount in
this Act; excess of Five hundred thousand pesos
(P500,000.00) within fifteen (15) days from
The report to AMLC will not violate the law on 1. RTC – all cases on money laundering
Secrecy of Bank Deposits, Foreign Currency Deposit 2. Sandiganbayan – Those committed by public
Act and General Banking Law officers and private persons in conspiracy with them.
(Sec. 5 R.A. 9160, as amended)
The report to AMLC will not violate the law on
Secrecy of Bank Deposits, Foreign Currency Deposit Party entitled to file freeze order
Act and General Banking Law but it cannot otherwise
communicate to any person or media, fact of report The AMLC, through the OSG, may file an ex-parte
of covered transaction or contents of the said report verified petition for freeze order on any monetary
nor can the fact of reporting be published or aired in instrument, property or proceeds relating to or
mass media, electronic mail or similar devices (Sec. involving an unlawful activity.
11, RA 9160 as amended by RA 10167).
Jurisdiction to issue a freeze order
Q: Alvin is jobless but is reputed to be a jueteng
operator. He has never been charged or convicted of It is solely the CA which has the authority to issue a
any crime. He maintains several bank accounts freeze order upon application ex parte by the AMLC
amounting to P100 Million. AMLC charged Alvin and after determination that probable cause exists.
with violation of the Anti-Money Laundering Law. It also has the exclusive jurisdiction to extend existing
Can Alvin move to dismiss the case on the ground freeze orders previously issued by the AMLC vis-à-vis
that he has no criminal record? accounts and deposits related to money-laundering
activities. (Republic v. Cabrini Green & Ramos, G.R.
A: No. The contention of Alvin is not tenable because No. 154522, May 5, 2006)
under AMLA, "money laundering crime" committed
Related accounts
Foreign Investment
It is an enterprise which produces goods for sale, or GR: The SEC or BTRCP, as the case may be, shall not
renders services to the domestic market entirely or if impose any limitations on the extent of foreign
exporting a portion of its output fails to consistency ownership in an enterprise additional to those
export at least 60% thereof (Sec 3 [f], R.A. 7042). provided in R.A. 7042.
Rules regarding foreign registration in export (Code: CoFi AMMaN Co. – ProMiSe- US$2.5M)
enterprises
9. COoperatives (Art. 26, Ch. III, R.A. 6938);
5. Foreign investment in export enterprises whose 10. Manufacture of FIrecrackers and other
products and services do not fall within Lists A and B
pyrotechnic devices (Sec. 5, R.A. 7183).
of the Foreign Investment Negative List is allowed up
11. Manufacture, repair, stockpiling and/or
to 100% ownership.
6. Export enterprises which are non-Philippine distribution of biological, chemical and
nationals shall register with BOI and submit the radiological weapons and Anti-personnel
reports that may be required to ensure continuing mines (Various treaties to which the
compliance of the export enterprise with its export Philippines is a signatory and conventions
requirement. supported by the Philippines).
7. BOI shall advise SEC or BTRCP, as the case may be,
12. Mass media except recording
of any export enterprise that fails to meet the export
ratio requirement. 13. Utilization of MArine resources (Sec. 2, Art.
8. The SEC or BTRCP shall thereupon order the XII, Constitution);
non-complying export enterprise to reduce its sales 14. Manufacture, repair, stockpiling and/or
to the domestic market to not more than 40% of its distribution of Nuclear weapons (Sec. 8, Art.
total production; failure to comply with such SEC or II, Constitution);
BTRCP order, without justifiable reason, shall subject 15. COckpits (Sec. 5, P.D. 449);
the enterprise to cancellation of SEC or BTRCP
16. Practice of all PROfessions
registration, and/or the penalties provided in this law
(Sec 6, R.A. 7042). 1. Law
2. Medicine and allied professions
FOREIGN INVESTMENT DOMESTIC MARKET 3. Accountancy, etc.
ENTERPRISES 17. Small-scale MIning (Sec. 3, R.A. 7076);
18. Private SEcurity agencies (Sec. 4, R.A. 5487);
A domestic market enterprise may change its status
19. Retail trade enterprises with paid-up capital
to export enterprise if the Domestic market
enterprise consistently exports in each year thereof of less than US$2.5 M (Sec. 5, R.A. 8762);
sixty per cent (60%) or more of its output over a three
(3) year period (Sec. 7, RA 7042). 80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
FOREIGN INVESTMENT NEGATIVE LIST (Code: Prc)
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Compendium. Manila: Rex Book Store. Fundamental. Manila: Rex Bookstore, Inc.
De Leon, H. S. & De Leon, H. M., Jr. (10th Ed.). (2010). Negotiable Instruments Law
The Corporation Code of the Philippines Annotated.
Manila: Rex Book Store. De Leon, H.S. and De Leon, Jr., H.M. (Eds.). (2010).
The Philippine Negotiable Instruments Law,
Divina, N. (2nd Ed.). (2010). Handbook on Philippine Annotated. Manila: Rex Bookstore, Inc.
Commercial Law. Manila: Central Lawbook
Publishing Company. Divina, N.T. (Eds.). (2010). Handbook on Philippine
Commercial Law. Makati City: CIBI Information, Inc.
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Foreign Corporations: The Interrelation of Sundiang, Sr., J.R. and Aquino, T.B. (2014). Reviewer
Jurisdiction and Qualification. Indiana Law Journal, on Commercial Law. Manila: Rex Bookstore, Inc.
20, 358-377.
Villanueva, C.L. (2009). Commercial Law Reviewer.
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Corporations. Manila: Central Lawbook Publishing
Company. Securities Regulation Code
Sundiang, J. R. Sr. & Aquino, T. (4th Ed.). (2009). Sundiang, J. R. Sr. (7th Ed.). (2014). Reviewer on
Reviewer on Commercial Law. Manila: Rex Book Commercial Law. Manila: Rex Book Store.
Store.
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The Insurance Code of the Philippines, Annotated. Quezon City: Central Book Supply, Inc.
Manila: Rex Bookstore, Inc.
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