REQUISITES OF NEGOTIABILITY ..................................
9
LETTERS OF CREDIT
Definition and Nature ............. 1
DEFINITION ................................................................. 2
PURPOSE .................................................................... 2
ESSENTIAL REQUISITES .............................................. 2
NATURE ...................................................................... 2
TYPES OF LETTERS OF CREDIT ................................... 2
AS TO THE TYPE OF THE MAIN CONTRACT ................................ 2
AS TO REVOCABILITY.......................................................... 2
AS TO THE OBLIGATION ASSUMED BY CORRESPONDENT BANK ...... 2
Parties to a Letter of Credit ... 2
RIGHTS AND OBLIGATIONS OF THE PARTIES ............. 2
Basic Principles
of Letter of Credit ................... 3
DOCTRINE OF INDEPENDENCE ....................................3
FRAUD EXCEPTION PRINCIPLE ....................................3
DOCTRINE OF STRICT COMPLIANCE ............................3
TRUST RECEIPTS LAW
Concept of Trust Receipt
Transaction ............................. 6
LOAN/SECURITY FEATURE ......................................... 6
OWNERSHIP OF THE GOODS, DOCUMENTS
AND INSTRUMENTS UNDER A TRUST RECEIPT .......... 6
Rights of the Entruster .......... 6
VALIDITY OF THE SECURITY INTEREST
AS AGAINST THE CREDITORS OF THE ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE ........................ 6
Obligation and Liability
of the Entrustee ...................... 7
OBLIGATIONS OF THE ENTRUSTEE .............................. 7
LIABILITIES OF THE ENTRUSTEE .................................. 7
Remedies Available................ 7
Warehouseman’s Lien............ 7
NEGOTIABLE INTRUMENTS LAW
Definition ................................. 9
Forms and Interpretation ...... 9
IN WRITING AND SIGNED BY THE MAKER OR DRAWER ................. 9
CONTAINING AN UNCONDITIONAL PROMISE TO PAY
OR ORDER TO PAY ............................................................. 9
PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE TIME ... 10
PAYABLE TO ORDER OR TO BEARER ....................................... 11
IF BILL OF EXCHANGE, DRAWEE MUST BE NAMED
OR DESIGNATED WITH REASONABLE CERTAINTY ...................... 11
Kinds of Negotiable
Instruments............................12
PROMISSORY NOTE ....................................................12
KINDS OF PROMISSORY NOTES.............................................12
BILL OF EXCHANGE.....................................................12
KINDS OF BILLS OF EXCHANGE .............................................12
Completion and Delivery ......13
INSERTION OF DATE ................................................... 13
COMPLETION OF BLANKS........................................... 13
INCOMPLETE AND UNDELIVERED INSTRUMENTS ..... 13
COMPLETE AND UNDELIVERED INSTRUMENTS ......... 13
INCOMPLETE AND DELIVERED INSTRUMENTS .......... 13
Signature................................13
SIGNING IN TRADE NAME ........................................... 13
SIGNATURE OF AGENT ............................................... 13
SIGNATURE PER PROCURATION ........................................... 13
LIABILITY........................................................................ 13
INDORSEMENT BY MINOR OR CORPORATION .......... 14
FORGERY ................................................................... 14
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY . 14
RULES ON FORGERY ......................................................... 14
ACCEPTANCE AND PAYMENT UNDER MISTAKE ........................ 15
WHEN DRAWEE MAY RECOVER FROM DRAWED ....................... 15
WHEN DRAWEE MAY NOT RECOVER FROM HOLDER .................. 15
BETWEEN DRAWEE BANK AND COLLECTING BANK .................... 15
Consideration ....................... 16
Accommodation Party ......... 16
LIABILITY ................................................................... 16
ACCOMMODATION PARTY AS SURETY ...................... 16
Negotiation ........................... 16
NEGOTIATION DISTINGUISHED
FROM ASSIGNMENT .................................................. 16
MODES OF NEGOTIATION .......................................... 16
BY DELIVERY .................................................................. 16
BY INDORSEMENT COMPLETED BY DELIVERY............................ 17
Rights of the Holder .............. 17
HOLDER IN DUE COURSE........................................... 18
WHO ARE HDCS ............................................................... 18
REQUISITES OF A HOLDER IN DUE COURSE ............................. 18
DEFENSES AGAINST THE HOLDER ............................ 19
PRESUMPTION IN FAVOR OF DUE COURSE HOLDING ................. 19
HOLDER NOT IN DUE COURSE .............................................. 19
Liabilities of Parties .............. 19
PARTIES PRIMARILY LIABLE ..................................... 20
MAKER ......................................................................... 20
ACCEPTOR .................................................................... 20
PARTIES SECONDARILY LIABLE ................................ 20
DRAWER ...................................................................... 20
INDORSERS ................................................................... 20
WARRANTIES ............................................................ 20
Presentment for Payment ... 21
NECESSITY OF PRESENTMENT FOR PAYMENT .......... 21
PARTIES TO WHOM PRESENTMENT FOR PAYMENT
SHOULD BE MADE...................................................... 21
DISPENSATION WITH PRESENTMENT
FOR PAYMENT ........................................................... 21
DISHONOR BY NON-PAYMENT .................................. 21
Notice of Dishonor................ 21
PARTIES TO BE NOTIFIED ..........................................22
PARTIES WHO MAY GIVE NOTICE OF DISHONOR .......22
EFFECT OF NOTICE .....................................................22
FORM OF NOTICE .......................................................22
WAIVER ......................................................................22
DISPENSATION WITH NOTICE ....................................22
EFFECT OF FAILURE TO GIVE NOTICE ........................22
Discharge of
Negotiable Instrument ........22
DISCHARGE OF NEGOTIABLE INSTRUMENT .............. 23
BY PAYMENT IN DUE COURSE .............................................. 23
BY INTERNATIONAL CANCELLATION ...................................... 23
BY OTHER ACTS THAT DISCHARGE A SIMPLE CONTRACT
FOR PAYMENT OF MONEY ................................................... 23
BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT ...... 23
BY MATERIAL ALTERATION ................................................. 23
DISCHARGE OF PARTIES SECONDARILY LIABLE ........ 23
GROUNDS UNDER SEC. 120 ................................................. 23
OTHER GROUNDS............................................................. 23
RIGHT OF PARTY WHO DISCHARGED INSTRUMENT .. 23
RENUNCIATION BY HOLDER ...................................... 23
Material Alteration .............. 24
CONCEPT................................................................... 24
EFFECT OF MATERIAL ALTERATION ......................... 24
Acceptance .......................... 24
DEFINITION ............................................................... 24
MANNER ................................................................... 24
EXPRESS ACCEPTANCE ..................................................... 24
IMPLIED ACCEPTANCE ...................................................... 24
TIME FOR ACCEPTANCE ............................................ 24
RULES GOVERNING ACCEPTANCE ............................ 24
Presentment
for Acceptance ......................25
TIME/PLACE/MANNER OF PRESENTMENT ............... 25
WHEN MADE .................................................................. 25
HOW MADE .................................................................... 25
EFFECT OF FAILURE TO MAKE PRESENTMENT ......... 25
DISHONOR BY NON-ACCEPTANCE ............................ 25
Promissory Notes ................ 26
Checks .................................. 26
DEFINITION ............................................................... 26
KINDS ........................................................................ 26
PRESENTMENT FOR PAYMENT ................................. 26
TIME ............................................................................ 26
EFFECT OF DELAY ............................................................ 26
INSURANCE CODE
Concept of Insurance ...........29
CONTRACT OF INSURACE .......................................... 29
INSURANCE ................................................................... 29
DEFINITION .................................................................... 29
PRE-NEED PLANS ............................................................ 29
DOING OR TRANSACTING
AN INSURANCE BUSINESS ........................................ 29
Elements of the Contract ....29
Characteristics/Nature
of Insurance Contracts ........ 30
Classes ................................. 30
MARINE ...................................................................... 31
TWO MAJOR DIVISIONS ...................................................... 31
BOTTOMRY V. RESPONDENTIA ............................................. 31
RISKS THAT MAY BE INSURED AGAINST .................................. 31
PERILS OF THE SEA V. PERILS OF THE SHIP .............................. 31
LIABILITY OF MARINE INSURER ............................................ 31
ABANDONMENT ............................................................... 31
FIRE ........................................................................... 32
RISKS IN FIRE INSURANCE ................................................. 32
MEASURE OF INDEMNITY ................................................... 32
SURETYSHIP .............................................................. 32
DEFINITION .................................................................... 32
WHEN CONSIDERED AS INSURANCE...................................... 32
BOND NECESSARY TO SECURE PERFORMANCE OF OBLIGATION .... 32
LIFE ............................................................................ 32
TYPES OF LIFE INSURANCE ................................................. 32
VARIOUS LIFE INSURANCE PLANS ......................................... 33
RISKS IN LIFE INSURANCE .................................................. 33
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE................................................................ 33
NATURE AND PURPOSE ..................................................... 33
CLAIMS ......................................................................... 33
RELEVANT CLAUSES IN MOTOR VEHICLE INSURANCE ................ 34
CASUALTY ................................................................. 34
RISKS IN CASUALTY INSURANCE ......................................... 34
LIABILITY V. INDEMNITY .................................................... 34
NO ACTION CLAUSE ......................................................... 34
Insurable Interest .................34
DEFINITION ............................................................... 34
RATIONALE ............................................................... 34
WHEN INSURABLE INTEREST SHOULD EXIST ............35
CHANGE OF INTEREST ...............................................35
INSURABLE INTEREST IN LIFE/HEALTH ....................35
INTEREST IN ONE’S OWN LIFE ..............................................35
INTEREST IN LIFE OF ANOTHER ............................................35
BENEFICIARY ..................................................................36
INTEREST IN HEALTH ........................................................36
TRANSFER OF POLICY ........................................................36
INSURABLE INTEREST IN PROPERTY.........................36
NATURE OF INTEREST .......................................................36
MEASURE OF INSURABLE INTEREST IN PROPERTY .................... 37
TIME OF EXISTENCE .......................................................... 37
TRANSFER OF POLICY ........................................................ 37
DISTINCTIONS BETWEEN INSURABLE INTERESTS
IN PROPERTY AND IN LIFE .................................................. 37
DOUBLE INSURANCE AND OVER INSURANCE ........... 37
DOUBLE INSURANCE ......................................................... 37
RE-INSURANCE .............................................................. 38
DOUBLE INSURANCE V. REINSURANCE ................................. 38
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY ................................................ 38
OPEN MORTGAGE OR LOSS PAYABLE MORTGAGE CLAUSE .......... 38
UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE ............. 39
Perfection of the Contract
of Insurance ..........................39
FORM OF INSURANCE POLICY .................................. 39
OFFER AND ACCEPTANCE/CONSENSUAL ................ 39
DELAY IN ACCEPTANCE ..................................................... 39
DELIVERY OF POLICY ........................................................ 39
PREMIUM PAYMENT ................................................. 39
DEFINITION ................................................................... 39
AUTHORITY OF AGENT TO RECEIVE PREMIUM ......................... 40
EFFECT OF PAYMENT BY POSTDATED CHECK .......................... 40
EFFECT OF NON-PAYMENT OF PREMIUM ............................... 40
EXCUSES FOR NON-PAYMENT OF PREMIUM ........................... 40
NON-DEFAULT OPTIONS IN LIFE INSURANCE .......... 40
CASH SURRENDER VALUE ................................................. 40
ALTERNATIVE TO OBTAINING CASH SURRENDER VALUE ............ 40
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE ................................................... 41
REFUND OF PREMIUMS ............................................. 41
WHEN RETURN OF PREMIUMS CAN BE MADE ........................... 41
Rescission of Insurance
Contracts ............................... 41
CONCEALMENT ......................................................... 41
DEFINITION .................................................................... 41
PROOF OF FRAUD IN CONCEALMENT ..................................... 41
TEST OF MATERIALITY....................................................... 41
EFFECTS OF CONCEALMENT ............................................... 41
CONCEALMENT IN MARINE INSURANCE V. ORDINARY INSURANCE 42
NON-MEDICAL INSURANCE ................................................ 42
MATTERS WHICH NEED TO BE DISCLOSED
EVEN IN THE ABSENCE OF INQUIRY ....................................... 42
MATTERS WHICH DO NOT NEED TO BE DISCLOSED .................... 42
MISREPRESENTATION/OMISSIONS .......................... 42
DEFINITION .................................................................... 42
KINDS OF REPRESENTATIONS ............................................. 43
REQUISITES OF MISREPRESENTATION ................................... 43
PROOF OF FRAUD IN MISREPRESENTATION ............................ 43
TEST OF MATERIALITY....................................................... 43
WHEN MISREPRESENTATION IS MADE ................................... 43
EFFECT OF MISREPRESENTATION......................................... 43
CONCEALMENT V. MISREPRESENTATION ............................... 43
BREACH OF WARRANTIES ......................................... 43
PURPOSE OF WARRANTIES ................................................ 43
KINDS OF WARRANTIES ..................................................... 43
CHARACTERISTICS ........................................................... 44
EFFECT OF BREACH OF WARRANTY....................................... 44
WARRANTIES IN FIRE INSURANCE ........................................ 44
WARRANTY V. REPRESENTATION ........................................ 44
Claims Settlement
and Subrogation.................. 44
CONCEPT OF LOSS ..................................................... 44
DEFINITION .................................................................... 44
CAUSES OF LOSS ............................................................. 44
LIABILITY FOR LOSS .......................................................... 44
REQUISITES FOR RECOVERY FROM INSURANCE ....................... 45
NOTICE AND PROOF OF LOSS.................................... 45
NOTICE OF LOSS .............................................................. 45
FORM OF NOTICE ............................................................. 45
PROOF OF LOSS .............................................................. 45
FORM OF PROOF ............................................................. 45
GUIDELINES ON CLAIMS SETTLEMENT ..................... 45
HOW CLAIMS ARE PAID/SETTLED ........................................ 45
UNFAIR CLAIMS SETTLEMENT; SANCTIONS............................. 46
PRESCRIPTION OF ACTION ................................................. 46
SUBROGATION ................................................................ 46
THE INSURANCE COMMISSIONER ......................................... 47
TRANSPORTATION LAWS
Common Carriers ................ 49
DILIGENCE REQUIRED OF COMMON CARRIERS ........ 50
DILIGENCE REQUIRED ....................................................... 50
DEFINITION .................................................................... 50
REASONS ...................................................................... 50
LIABILITIES OF COMMON CARRIERS ........................ 50
GOODS ......................................................................... 50
PASSENGERS ................................................................. 50
PRINCIPLES AS TO THE LIABILITY OF COMMON CARRIERS ........... 51
PRESUMPTION OF NEGLIGENCE ........................................... 51
KABIT SYSTEM................................................................. 51
Vigilance Over Goods ............. 4
EXEMPTING CAUSES .................................................. 51
REQUIREMENT OF ABSENCE OF NEGLIGENCE .......................... 52
ABSENCE OF DELAY ......................................................... 52
DUE DILIGENCE TO PREVENT OR LESSEN THE LOSS .................. 52
CONTRIBUTORY NEGLIGENCE .................................. 52
DURATION OF LIABILITY ........................................... 52
DELIVERY OF GOODS TO COMMON CARRIER ............................53
ACTUAL OR CONSTRUCTIVE DELIVERY ...................................53
TEMPORARY UNLOADING OR STORAGE .................................53
STIPULATION FOR LIMITATION OF LIABILITY ............53
VOID STIPULATIONS ........................................................ 54
LIMITATION OF LIABILITY TO FIXED AMOUNT .......................... 54
LIMITATION OF LIABILITY IN ABSENCE OF DECLARATION
OF GREATER VALUE ......................................................... 54
LIABILITY FOR BAGGAGE OF PASSENGERS .............. 54
CHECKED-IN BAGGAGE ..................................................... 55
BAGGAGE IN POSSESSION OF PASSENGERS ............................ 55
Safety of Passengers ........... 55
VOID STIPULATIONS ................................................. 55
DURATION OF LIABILITY ........................................... 56
WAITING FOR CARRIER OR BOARDING OF CARRIER .................. 56
ARRIVAL AT DESTINATION ................................................. 56
LIABILITY FOR ACTS OF OTHERS .............................. 56
EMPLOYEES ................................................................... 56
OTHER PASSENGERS AND STRANGERS .................................. 57
EXTENT OF LIABILITY FOR DAMAGES ........................ 57
DAMAGES RECOVERABLE .................................................. 58
Bill of Lading ........................ 58
THREE-FOLD CHARACTER ........................................ 58
DELIVERY OF GOODS ................................................ 58
PERIOD OF DELIVERY ....................................................... 59
DELIVERY WITHOUT SURRENDER OF BILL OF LADING ................ 59
REFUSAL OF CONSIGNEE TO TAKE DELIVERY .......................... 59
PERIOD FOR FILING CLAIMS ..................................... 59
PERIOD FOR FILING ACTIONS ................................... 59
OVERLAND TRANSPORTATION AND COASTWISE SHIPPING ......... 59
INTERNATIONAL CARRIAGE OF GOODS BY SEA ........................ 59
Maritime Commerce ........... 59
CHARTER PARTIES.................................................... 59
BAREBOAT/DEMISE CHARTER ............................................ 60
TIME CHARTER ............................................................... 60
VOYAGE/TRIP CHARTER ................................................... 60
LIABILITY OF SHIP OWNERS
AND SHIPPING AGENTS ............................................ 60
LIABILITY FOR ACTS OF CAPTAIN ......................................... 60
EXCEPTIONS TO LIMITED LIABILITY ....................................... 61
ACCIDENTS AND DAMAGES
IN MARITIME COMMERCE .......................................... 61
AVERAGES ..................................................................... 61
KINDS .......................................................................... 61
SIMPLE AVERAGE ............................................................ 61
GENERAL AVERAGE .......................................................... 61
COLLISION ..................................................................... 62
CARRIAGE OF GOODS BY SEA ACT ............................ 63
APPLICATION ................................................................. 63
NOTICE OF LOSS OR DAMAGE.............................................. 63
PERIOD OF PRESCRIPTION ................................................. 63
LIMITATION OF LIABILITY ................................................... 63
The Warsaw Convention ..... 64
APPLICABILITY .......................................................... 64
INTERNATIONAL AIR TRANSPORTATION .................................. 6
PERIOD COVERED .............................................................. 6
LIABILITY OF CARRIER FOR DAMAGES ..................................... 6
LIMITATION OF LIABILITY ............................................ 5
LIABILITY TO PASSENGERS ................................................... 6
LIABILITY FOR CHECKED BAGGAGE ......................................... 6
LIABILITY FOR HAND-CARRIED BAGGAGE ................................. 6
WILLFUL MISCONDUCT ............................................... 5
CORPORATION CODE
Corporation ........................... 67
DEFINITION ............................................................... 67
ATTRIBUTES OF THE CORPORATION ........................ 67
AN ARTIFICIAL BEING ........................................................ 67
CREATED BY OPERATION OF LAW ......................................... 67
HAS THE RIGHT OF SUCCESSION .......................................... 67
HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE ............... 67
Classes of Corporations ....... 67
STOCK CORPORATION .............................................. 67
NON-STOCK CORPORATION...................................... 67
OTHER CORPORATIONS ............................................ 67
Nationality of Corporations 69
PLACE OF INCORPORATION TEST ............................. 69
CONTROL TEST .......................................................... 69
GRANDFATHER RULE ................................................ 70
Corporate Juridical
Personality ............................70
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY ... 5
LIABILITY FOR TORTS AND CRIMES ....................................... 70
RECOVERY OF MORAL DAMAGES ......................................... 70
DOCTRINE OF PIERCING THE CORPORATE VEIL ........ 70
GROUNDS FOR APPLICATION OF DOCTRINE ............................ 70
TEST IN DETERMINING APPLICABILITY .................................... 71
Incorporation
and Organization................... 71
PROMOTER................................................................. 71
LIABILITY OF PROMOTER .................................................... 71
LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACTS........ 71
NUMBER AND QUALIFICATIONS
OF INCORPORATORS ................................................. 71
CORPORATE NAME – LIMITATIONS ON USE .............. 71
CORPORATE NAME ........................................................... 71
CORPORATE TERM .................................................... 72
MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENT........................................................... 72
MINIMUM CAPITAL STOCK .................................................. 72
SUBSCRIPTION REQUIREMENT ............................................ 72
ARTICLES OF INCORPORATION ................................. 72
NATURE AND FUNCTION OF ARTICLES ................................... 72
CONTENTS ..................................................................... 72
AMENDMENT .................................................................. 73
NON-AMENABLE ITEMS ..................................................... 73
REGISTRATION AND ISSUANCE OF CERTIFICATE
OF INCORPORATION ..................................................74
REGISTRATION OF ARTICLES OF INCORPORATION.....................74
ISSUANCE OF CERTIFICATE OF INCORPORATION BY SEC..............74
GROUNDS FOR DISAPPROVING AOI .......................................74
ADOPTION OF BY-LAWS.............................................74
WHEN ADOPTION IS MADE ..................................................74
EFFECT OF FAILURE TO FILE BY-LAWS WITHIN THE PERIOD .........74
NATURE AND FUNCTION OF BY-LAWS....................................74
REQUISITES OF VALID BY-LAWS ...........................................74
BINDING EFFECTS ............................................................74
AMENDMENT OR REVISION .................................................74
Corporate Powers ................. 75
GENERAL POWERS,
THEORY OF GENERAL CAPACITY ............................... 75
SPECIFIC POWERS,
THEORY OF SPECIFIC CAPACITY................................. 75
EXTEND OR SHORTEN THE CORPORATE TERM ......................... 75
INCREASE OR DECREASE CAPITAL STOCK ............................... 75
INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS ............. 75
DENY PREEMPTIVE RIGHT................................................... 76
SELL OR DISPOSE OF SUBSTANTIALLY ALL ITS ASSETS ............... 76
ACQUIRE ITS OWN SHARES ................................................. 76
INVEST IN ANOTHER CORPORATION OR BUSINESS .................... 76
DECLARE DIVIDENDS ........................................................ 76
ENTER INTO MANAGEMENT CONTRACTS ................................ 76
ULTRA VIRES ACTS ........................................................... 77
DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION ....................... 77
HOW EXERCISED ........................................................ 77
BY THE SHAREHOLDERS..................................................... 77
BY THE BOARD OF DIRECTORS .............................................78
BY THE OFFICERS .............................................................78
TRUST FUND DOCTRINE ............................................78
Board of Directors
and Trustees ......................... 79
DOCTRINE OF CENTRALIZED MANAGEMENT ............ 79
BOARD IS SEAT OF CORPORATE POWERS ............................... 79
PRINCIPLE ON DELEGATION OF BOARD POWERS ..................... 80
BUSINESS JUDGMENT RULE ..................................... 80
CONSEQUENCES OF THE BUSINESS JUDGMENT RULE ................ 80
REMEDIES IN CASE OF MISMANAGEMENT .............................. 80
TENURE, QUALIFICATIONS AND DISQUALIFICATIONS
OF DIRECTORS OR TRUSTEES................................... 80
TENURE........................................................................ 80
QUALIFICATIONS .............................................................80
DISQUALIFICATIONS ......................................................... 81
ELECTIONS ................................................................ 81
CUMULATIVE VOTING........................................................ 81
STRAIGHT VOTING ........................................................... 81
QUORUM ....................................................................... 81
REMOVAL .................................................................. 81
FILLING OF VACANCIES ............................................. 81
VACANCY BY REMOVAL, BY EXPIRATION OF TERM,
OR WHEN THE REMAINING DIRECTORS
DO NOT CONSTITUTE A QUORUM ......................................... 81
VACANCY BY REASON OF INCREASE IN THE NUMBER
OF THE DIRECTORS/TRUSTEES ........................................... 81
VACANCY BY OTHER CAUSES............................................... 81
COMPENSATION ........................................................ 81
COMPENSATION OF DIRECTORS AS CORPORATE OFFICERS ......... 81
FIDUCIARY DUTIES AND LIABILITY RULES ................ 82
DUTIES ......................................................................... 82
SOLIDARY LIABILITY FOR DAMAGES ...................................... 82
LIABILITY FOR WATERED STOCKS ......................................... 82
PERSONAL LIABILITIES ...................................................... 82
SPECIAL FACTS DOCTRINE ................................................. 83
RESPONSIBILITY FOR CRIMES ................................... 83
INSIDE INFORMATION ............................................... 83
CONTRACTS............................................................... 83
BY SELF-DEALING DIRECTORS WITH THE CORPORATION ............ 83
BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS....... 84
MANAGEMENT CONTRACTS ................................................ 84
EXECUTIVE COMMITTEE ............................................ 84
CREATION ..................................................................... 84
LIMITATION ON ITS POWERS ............................................... 84
MEETINGS.................................................................. 84
REGULAR OR SPECIAL ....................................................... 84
WHO PRESIDES ............................................................... 84
QUORUM ....................................................................... 84
RULE ON ABSTENTION ...................................................... 84
Stockholders
and Members ....................... 85
RIGHTS OF STOCKHOLDERS AND MEMBERS ............ 85
DOCTRINE OF EQUALITY OF SHARES ..................................... 85
PARTICIPATION IN MANAGEMENT ............................ 85
PROXY .......................................................................... 85
VOTING TRUST ................................................................ 86
CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED ................ 86
PROPRIETARY RIGHTS .............................................. 88
RIGHT TO DIVIDENDS ........................................................ 88
RIGHT OF APPRAISAL ....................................................... 88
RIGHT TO INSPECT ........................................................... 89
PRE-EMPTIVE RIGHT ........................................................ 89
RIGHT TO VOTE ............................................................... 90
RIGHT OF FIRST REFUSAL .................................................. 90
REMEDIAL RIGHTS .................................................... 90
INDIVIDUAL SUIT ............................................................. 90
REPRESENTATIVE SUIT ..................................................... 90
DERIVATIVE SUIT ............................................................. 90
OBLIGATIONS OF A STOCKHOLDER .......................... 91
LIABILITY TO THE CORPORATION FOR UNPAID SUBSCRIPTION ..... 91
LIABILITY TO THE CORPORATION FOR INTEREST
ON UNPAID SUBSCRIPTION IF SO REQUIRED BY THE BY-LAWS ..... 91
LIABILITY FOR WATERED STOCKS ......................................... 91
LIABILITY FOR DIVIDENDS UNLAWFULLY PAID ......................... 92
LIABILITY FOR ASSUMING TO ACT AS A CORPORATION
KNOWING IT TO BE WITHOUT AUTHORITY .............................. 92
MEETINGS ................................................................. 92
REGULAR OR SPECIAL ...................................................... 92
WHO CALLS THE MEETINGS................................................ 92
QUORUM ...................................................................... 93
MINUTES OF THE MEETINGS ............................................... 93
Capital Structure ..................93
SUBSCRIPTION AGREEMENTS .................................. 93
CHARACTERISTICS .......................................................... 93
STATUS AS SHAREHOLDER ................................................ 93
TYPES OF SUBSCRIPTION CONTRACTS .................................. 93
INTEREST ON UNPAID SUBSCRIPTION ................................... 94
CONSIDERATION FOR STOCKS ................................. 94
LIMITATIONS ON CONSIDERATION ....................................... 94
SHARES OF STOCK .................................................... 94
NATURE OF STOCK .......................................................... 94
SUBSCRIPTION AGREEMENTS ............................................. 94
CONSIDERATION FOR SHARES OF STOCK ............................... 94
WATERED STOCK ............................................................ 94
SITUS OF THE SHARES OF STOCK ......................................... 95
CLASSES OF SHARES OF STOCK ........................................... 95
PAYMENT OF BALANCE OF SUBSCRIPTION .............. 96
CALL BY BOARD OF DIRECTORS........................................... 96
NOTICE REQUIREMENT ...................................................... 97
SALE OF DELINQUENT SHARES ............................................ 97
CERTIFICATE OF STOCK ............................................. 97
NATURE OF CERTIFICATE ................................................... 97
UNCERTIFICATED SHARES ................................................. 98
NEGOTIABILITY ............................................................... 98
ISSUANCE ..................................................................... 98
LOST OR DESTROYED CERTIFICATES..................................... 98
STOCK AND TRANSFER BOOK .................................. 99
CONTENTS .................................................................... 99
WHO MAY MAKE VALID ENTRIES.......................................... 99
DISPOSITION AND ENCUMBRANCE OF SHARES ....... 99
ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES ............... 99
SALE OF PARTIALLY PAID SHARES ....................................... 99
SALE OF A PORTION OF SHARES NOT FULLY PAID .................... 99
SALE OF ALL OF SHARES NOT FULLY PAID .............................. 99
SALE OF FULLY PAID SHARES ............................................. 99
REQUISITES OF A VALID TRANSFER ...................................... 99
INVOLUNTARY DEALINGS WITH SHARES ................................ 99
Dissolution
and Liquidation................... 100
MODES OF DISSOLUTION......................................... 100
VOLUNTARY ................................................................. 100
INVOLUNTARY .............................................................. 100
METHODS OF LIQUIDATION ......................................101
BY THE CORPORATION ITSELF ............................................101
CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD .............101
BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER ... 102
LIQUIDATION AFTER 3 YEARS ............................................ 102
Other Corporations ............ 102
CLOSE CORPORATIONS ........................................... 102
CHARACTERISTICS OF A CLOSE CORPORATION ....................... 102
VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES ............ 102
ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING CONDITIONS .............................. 103
WHEN BOARD MEETING IS UNNECESSARY
OR IMPROPERLY HELD .................................................... 103
PRE-EMPTIVE RIGHT ...................................................... 103
AMENDMENT OF ARTICLES OF INCORPORATION .................... 103
DEADLOCKS ................................................................. 104
NON-STOCK CORPORATIONS.................................. 106
DEFINITION .................................................................. 106
PURPOSES ................................................................... 106
TREATMENT OF PROFITS ................................................. 106
DISTRIBUTION OF ASSETS UPON DISSOLUTION ...................... 106
RELIGIOUS CORPORATIONS .................................... 106
CORPORATION SOLE ...................................................... 106
NATIONALITY ............................................................... 106
RELIGIOUS SOCIETIES ..................................................... 106
FOREIGN CORPORATIONS....................................... 106
BASES OF AUTHORITY OVER FOREIGN CORPORATIONS ............ 106
NECESSITY OF A LICENSE TO DO BUSINESS ............................107
PERSONALITY TO SUE ......................................................107
SUABILITY OF FOREIGN CORPORATIONS .............................. 108
INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS
MAY BE ALLOWED TO SUE ISOLATED TRANSACTIONS .............. 108
GROUNDS FOR REVOCATION OF LICENSE ............................. 108
Mergers
and Consolidations ............ 108
DEFINITION AND CONCEPT ..................................... 108
CONSTITUENT V. CONSOLIDATED CORPORATION .. 109
PLAN OF MERGER OR CONSOLIDATION .................. 109
ARTICLES OF MERGER OR CONSOLIDATION ........... 109
PROCEDURE ............................................................ 109
EFFECTIVITY ............................................................ 109
LIMITATIONS ........................................................... 109
EFFECTS ................................................................... 110
SECURITIES REGULATION CODE
State Policy .......................... 112
Securities Required
to be Registered .................. 112
Procedure for Resigtration
of Securities ......................... 113
Prohibitions on fraud,
manipulation
and insider trading .............. 114
MANIPULATION OF SECURITY PRICES ..................... 114
SHORT SALES ........................................................... 114
FRAUDULENT TRANSACTIONS ................................ 115
INSIDER TRADING .................................................... 115
Protection of Investors ........ 115
TENDER OFFER RULE ............................................... 115
RULE ON PROXY SOLICITATION ................................ 116
DISCLOSURE RULE.................................................... 116
DISCLOSURE BY THE ISSUER .............................................. 116
DISCLOSURE BY EQUITY HOLDERS ....................................... 116
DISCLOSURE BY INSIDER ................................................... 117
Civil Liability ......................... 117
CIVIL LIABILITIES ON ACCOUNT OF FALSE
REGISTRATION STATEMENT..................................... 117
WHO MAY BE LIABLE ........................................................ 117
WHO MAY SUE ................................................................ 117
CIVIL LIABILITIES ARISING IN CONNECTION WITH
PROSPECTUS, COMMUNICATIONS AND REPORTS ... 117
LIABILITY OF SELLERS/OFFERORS ....................................... 117
LIABILITY OF MAKERS OF FALSE MISLEADING STATEMENTS ....... 117
CIVIL LIABILITY OF FRAUD IN CONNECTION WITH
SECURITIES TRANSACTIONS .................................... 117
WHO MAY BE LIABLE ........................................................ 117
WHO MAY SUE ................................................................ 117
CIVIL LIABILITY FOR MANIPULATION OF SECURITY
PRICES ...................................................................... 118
WHO MAY BE LIABLE ........................................................ 118
WHO MAY SUE ................................................................ 118
CIVIL LIABILITY WITH RESPECT TO COMMODITY
FUTURES CONOTRACTS AND PRE-NEED PLANS ...... 118
WHO MAY BE LIABLE ........................................................ 118
WHO MAY SUE ................................................................ 118
CIVIL LIABILITY ON ACCOUNT
OF INSIDER TRADING ............................................... 118
LIABILITY FOR NON-DICLOSURE ......................................... 188
LIABILITY FOR COMMUNICATING NON-PUBLIC INFORMATION
ABOUT ISSUER ............................................................... 118
LIABILITY OF CONTROLLING PERSONS, AIDER
AND ABETTOR AND OTHER SECONDARY
LIABILITY ................................................................... 118
LIABILITY OF CONTROLLING PERSONS .................................. 118
LIABILITY OF DIRECTOR/OFFICER FOR DELAY IN THE FILING
OF REQUIRED DOCUMENTS................................................ 118
LIABILITY OF AIDER/ABETTOR ............................................ 118
BANKING LAWS
The New Central Bank Act 123
STATE POLICIES ....................................................... 123
SALIENT FEATURES ................................................. 123
CREATION OF THE BANGKO SENTRAL
NG PILIPINAS ........................................................... 123
NATURE OF THE BSP ....................................................... 123
RESPONSIBILITY AND PRIMARY OBJECTIVE ............ 123
PRIMARY OBJECTIVES ..................................................... 123
OTHER RESPONSIBILITIES ................................................ 123
MONETARY BOARD.................................................. 123
POWERS AND FUNCTIONS ................................................ 123
COMPOSITION ............................................................... 123
MEMBERS .................................................................... 123
QUALIFICATIONS ........................................................... 123
DISQUALIFICATIONS ....................................................... 123
PROHIBITION ON MEMBERS OF THE MB................................ 124
GROUNDS FOR REMOVAL OF ANY MEMBER OF THE MB ............
VACANCIES, HOW FILLED .................................................
124
124
SALARIES ....................................................................
124
MEETINGS ...................................................................124
CIVIL LIABILITY OF MEMBERS OF THE MB .............................. 124
HOW THE BSP HANDLES BANKS IN DISTRESS ........ 124
CONSERVATORSHIP ....................................................... 124
RECEIVERSHIP ...............................................................125
LIQUIDATION/CLOSURE ...................................................125
HOW THE BSP HANDLES EXCHANGE CRISIS ............126
LEGAL TENDER POWER ....................................................126
RATE OF EXCHANGE ........................................................126
Law on Secrecy
of Bank Deposits ................ 126
PURPOSE ..................................................................126
PROHIBITED ACTS ....................................................126
DEPOSITS COVERED .................................................126
EXCEPTIONS ............................................................. 127
OTHER EXCEPTIONS ........................................................ 127
NOT CONSIDERED AS EXCEPTIONS ...................................... 127
GARNISHMENT OF DEPOSITS .................................. 128
CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS.............................................. 128
PENALTIES FOR VIOLATION .....................................129
General Banking Law
of 2000 ............................... 129
POLICY ......................................................................129
DEFINITION AND CLASSIFICATION OF BANKS .........129
CORE BANKING FUNCTIONS...............................................129
CLASSIFICATION OF BANKS ...............................................129
DISTINCTIONS BETWEEN BANKS,
QUASI-BANKS AND TRUST ENTITIES .......................129
AS OPPOSED TO QUASI-BANKS ..........................................129
AS OPPOSED TO TRUST ENTITIES ....................................... 130
BANK POWERS AND LIABILITIES ............................. 130
BANKING AND INCIDENTAL POWERS................................... 130
DILIGENCE REQUIRED OF BANKS ............................. 131
FIDUCIARY NATURE OF BANKS ........................................... 132
STIPULATION ON INTERESTS ................................... 132
GRANT OF LOANS AND SECURITY
REQUIREMENTS ....................................................... 132
RATIO OF NET WORTH TO TOTAL RISK ASSETS........................ 132
SINGLE BORROWER’S LIMIT .............................................. 133
RESTRICTIONS ON INSIDER LENDING ...................................134
LOAN-LOSS PROVISIONING ...............................................134
RESERVES ....................................................................134
PDIC INSURANCE ............................................................134
EQUITY INVESTMENT LIMITS .............................................. 135
PENALTIES FOR VIOLATION ..................................... 135
FINE/IMPRISONMENT ...................................................... 135
ADMINISTRATIVE SANCTIONS ............................................ 135
Philippine Deposit Insurance
Corporation Act .................. 136
BASIC POLICY ........................................................... 136
CONCEPT OF INSURED DEPOSITS ............................ 136
LIABILITY OF DEPOSITORS....................................... 136
DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PDIC ....... 136
COMMENCEMENT OF LIABILITY .......................................... 136
DEPOSIT ACCOUNT NOT ENTITLED TO PAYMENT ..................... 136
EXTENT OF LIABILITY ...................................................... 137
DETERMINATION OF INSURED DEPOSIT ............................... 137
CALCULATION OF LIABILITY .............................................. 137
Foreign Currency
Deposit Act ......................... 138
CONFIDENTIALITY.................................................... 138
PRIVILEGES .............................................................. 138
INTELLECTUAL PROPERTY CODE
Intellectual Property Rights,
In General ............................ 140
STATE POLICIES ....................................................... 140
INTELLECTUAL PROPERTY RIGHTS ......................... 140
DEFINITION .................................................................. 140
INTELLECTUAL PROPERTY RIGHTS UNDER THE INTELLECTUAL
PROPERTY CODE ............................................................ 140
DIFFERENCES BETWEE COPYRIGHTS, TRADEMARKS
AND PATENTS .......................................................... 140
PATENTABLE INVENTIONS ................................................ 140
TRADEMARK ................................................................ 140
TRADE NAME ................................................................ 140
COPYRIGHT .................................................................. 140
OTHER FORMS OF INTELLECTUAL PROPERTY ......................... 140
TECHNOLOGY TRANSFER ARRANGEMENTS ............ 141
Patents ................................. 141
PATENTABLE INVENTIONS ....................................... 141
INVENTION PATENT ......................................................... 141
STATUTORY CLASSES OF UTILITY MODELS ............................. 141
GROUNDS FOR CANCELLATION OF UTILITY MODELS ................. 141
INDUSTRIAL DESIGN ........................................................ 141
LAY-OUT (TOPOGRAPHIES) OF INTEGRATED CIRCUITS.............. 142
NON-PATENTABLE INVENTIONS ............................. 142
OWNERSHIP OF A PATENT ...................................... 142
RIGHT TO A PATENT ........................................................ 142
FIRST-TO-FILE RULE ....................................................... 142
INVENTIONS CREATED PURSUANT TO A COMMISSION .............. 142
RIGHT OF PRIORITY ........................................................ 142
GROUND FOR CANCELLATION OF A PATENT .......... 143
REQUIREMENT OF THE PETITION ........................................ 143
NOTICE OF HEARING ....................................................... 143
EFFECT OF CANCELLATION OF PATENT OR CLAIM ................... 143
REMEDY OF THE TRUE AND ACTUAL INVENTOR ..... 143
TIME TO FILE ACTION IN COURT ......................................... 143
REMEDY OF PERSONS NOT HAVING THE RIGHT TO A PATENT ..... 143
RIGHTS CONFERRED BY A PATENT .......................... 143
LIMITATIONS OF PATENT RIGHTS............................ 143
PRIOR USER ................................................................. 144
USE BY THE GOVERNMENT ............................................... 144
PATENT INFRINGEMENT .......................................... 144
CONTRIBUTORY INFRINGER .............................................. 144
DOCTRINE OF PATENT EXHAUSTION .................................... 144
TESTS IN PATENT INFRINGEMENT ...................................... 144
DEFENSES IN ACTION FOR INFRINGEMENT ........................... 145
LICENSING ............................................................... 145
VOLUNTARY ................................................................. 145
COMPULSORY ............................................................... 146
ASSIGNMENT AND TRANSMISSION OF RIGHTS ....... 147
ASSIGNMENT OF RIGHTS .................................................. 147
TRANSMISSION OF RIGHTS................................................ 147
REQUIREMENTS FOR RECORDING OF ASSIGNMENT ................. 147
EFFECT OF NON-RECORDING OF ASSIGNMENT WITH THE IPO ..... 147
Trademarks ..........................147
DEFINITION OF MARKS, COLLECTIVE MARKS,
TRADE NAMES.......................................................... 147
MARKS ........................................................................ 147
COLLECTIVE MARKS ....................................................... 148
TRADE NAME................................................................ 148
FUNCTIONS OF A TRADEMARK .......................................... 148
ACQUISITION OF OWNERSHIP OF MARK ................. 148
ACQUISITION OF OWNERSHIP OF TRADENAME ...... 148
NON-REGISTRABLE MARKS .................................... 148
DOCTRINE OF SECONDARY MEANING .................................. 149
PRIOR USE OF MARK AS A REQUIREMENT ............. 149
USE OF MARK AS A REQUIREMENT ..................................... 149
NON-USE OF MARK WHEN EXCUSED ................................... 149
TESTS TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS .................................................... 149
DOMINANCY TEST .......................................................... 149
HOLISTIC TEST .............................................................. 149
AS TO THE GOODS OR SERVICES IN CONNECTION WITH WHICH THE
MARKS ARE USED (DODCTRINE OF RELATED GOODS/SERVICES) 149
WELL-KNOWN MARKS ............................................ 149
DETERMINANTS ............................................................ 149
PROTECTION EXTENDED TO WELL-KNOWN MARKS ................. 150
RIGHTS CONFERRED BY A WELL-KNOWN MARK ..................... 150
RIGHTS CONFERRED BY REGISTRATION ................. 150
LIMITATIONS ON SUCH RIGHTS .......................................... 150
ASSIGNMENT AND TRANSFER OF APPLICATION
AND REGISTRATION ....................................................... 150
PROTECTION LIMITED TO GOODS SPECIFIED
IN REGISTRATION CERTIFICATE .......................................... 151
USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR
TO REGISTERED MARK ............................................. 151
INFRINGEMENT AND REMEDIES .............................. 151
TRADEMARK INFRINGEMENT ............................................. 151
FALSE DESIGNATIONS OF ORIGIN; FALSE DESCRIPTION
OR REPRESENTATION ...................................................... 151
INFRINGEMENT OF NAME AND MARKS OF OWNERSHIP
STAMP ON CONTAINERS ...................................................152
DAMAGES .....................................................................152
REQUIREMENT OF NOTICE ................................................152
OTHER REMEDIES AVAILABLE ............................................152
LIMITATIONS TO ACTIONS FOR INFRINGEMENT .......................152
UNFAIR COMPETITION ............................................. 153
TRADE NAMES OR BUSINESS NAMES ..................... 154
WHAT MAY NOT BE USED AS TRADE NAME ........................... 154
COLLECTIVE MARKS ................................................ 154
GROUNDS FOR CANCELLATION ......................................... 154
Copyrights ........................... 154
DEFINITION ............................................................. 154
BASIC PRINCIPLES ................................................... 154
COPYRIGHTABLE WORKS ........................................ 155 FOREIGN INVESTMENTS IN EXPORT ENTERPRISE .. 168
ORIGINAL LITERARY AND ARTISTIC WORKS ........................... 155 FOREIGN INVESTMENTS
DERIVATIVE WORKS........................................................ 155 IN DOMESTIC MARKET ENTERPRISE ....................... 168
NON-COPYRIGHTABLE WORKS................................ 156 FOREIGN INVESTMENT NEGATIVE LIST ................... 168
UNPROTECTED SUBJECT MATTER ....................................... 156
WORKS OF THE GOVERNMENT OF THE PHILIPPINES................. 156
WORKS OF THE PUBLIC DOMAIN ........................................ 156
USEFUL ARTICLES .......................................................... 156
RIGHTS OF COPYRIGHT OWNER .............................. 156
COPYRIGHT OR ECONOMIC RIGHTS ..................................... 156
MORAL RIGHTS ............................................................. 157
RIGHTS TO PROCEED IN SUBSEQUENT TRANSFER ................... 157
NEIGHBORING RIGHTS ..................................................... 158
PERFORMER’S RIGHTS .................................................... 158
RIGHTS OF PRODUCERS OF SOUND RECORDING ..................... 158
RIGHTS OF BROADCASTING ORGANIZATIONS ........................ 158
RULE ON OWNERSHIP OF COPYRIGHT .................... 159
OWNERSHIP OF COPYRIGHT .............................................. 159
DURATION OF COPYRIGHT ................................................ 160
PRESUMPTION OF AUTHORSHIP ........................................ 160
TRANSFER OR ASSIGNMENT OF COPYRIGHT .......................... 160
LIMITATIONS ON COPYRIGHT ................................... 161
DOCTRINE OF FAIR USE .................................................... 161
COPYRIGHT INFRINGEMENT ............................................... 161

SPECIAL LAWS

Chattel and Real Estate

Mortgage Laws ................... 165
Anti-Money
Laundering Act ................... 165
DEFINITION .............................................................. 165
POLICY OF THE LAW ................................................. 165
COVERED INSTITUTIONS ......................................... 165
OBLIGATIONS OF COVERED INSTITUTIONS ............. 165
CUSTOMER IDENTIFICATION ............................................. 165
RECORD KEEPING .......................................................... 165
REPORTING OF COVERED AND SUSPICIOUS TRANSACTIONS ...... 165
COVERED TRANSACTIONS ....................................... 166
SUSPICIOUS TRANSACTIONS................................... 166
WHEN IS MONEY LAUNDERING COMMITTED .......... 166
UNLAWFUL ACTIVITIES OR PREDICATE CRIMES...... 166
ANTI-MONEY LAUNDERING COUNCIL...................... 166
FUNCTIONS .............................................................. 166
FREESING OF MONETARY INSTRUMENT
OR PROPERTY .......................................................... 167
AUTHORITY TO INQUIRE INTO BANK DEPOSITS ...... 167

Foreign Investments Act .... 167

POLICY OF THE LAW ................................................. 167
DEFINITION OF TERMS ............................................ 167
FOREIGN INVESTMENT .................................................... 167
DOING BUSINESS IN THE PHILIPPINES .................................. 167
EXPORT ENTERPRISE ...................................................... 168
DOMESTIC MARKET ENTERPRISE........................................ 168
REGISTRATION OF INVESTMENTS
ON NON-PHILIPPINE NATIONALS ............................ 168
UP COLLEGE OF LAW LETTERS OF CREDIT BAR OPERATIONS COMMISSION

PAGE 1
UP COLLEGE OF LAW LETTERS OF CREDIT
Definition and Nature
DEFINITION
Letters of credit (L/C) are those issued by one merchant to
another, or for the purpose of attending to a commercial
transaction. (Art. 567, Code of Commerce)
A letter of credit is one whereby one person requests some
other person to advance money or give credit to a third
person, and promises that he will repay the same to the
person making the advancement, or accept the bills drawn
upon himself for the like amount. (Campos, Notes and
Selected Cases on Negotiable Instruments Law)
A written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a
third person and assumes responsibility for payment of debt
therefor to the addressee (Transfield Philippines v. Luzon
Hydro, 2004).
An engagement by a bank or other person made at the
request of a customer that the issuer shall honor drafts or
other demands of payment upon compliance with the
conditions specified in the credit (Prudential Bank v.
Intermediate Appellate Court, 1992).
PURPOSE
Its purpose is to substitute for, and support, the agreement
of the buyer-importer to pay money under a contract or
other arrangement, but does not necessarily constitute as a
condition for the perfection of such arrangement (Reliance
Commodities, Inc. v. Daewoo Industrial Co., Ltd., 1993)
ESSENTIAL REQUISITES OF LETTERS OF CREDIT
(1) Issued in favor of a definite person and not to order.
(2) Limited to a fixed and specified amount, or to one or
more undetermined amounts, but within a maximum
the limits of which has to be stated exactly.
Those which do not have one of these conditions shall be
mere letters of recommendation. (Art. 568, Code of
Commerce)
NATURE
(1) Financial device – L/Cs are developed by merchants as a
convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to have
control of the goods before paying. (Bank of America,
NT&SA v. Court of Appeals, 1993)
A letter of credit is one of the modes of payment, set out
in Sec. 8, Central Bank Circular No. 1389, "Consolidated
Foreign Exchange Rules and Regulations," dated 13
April 1993, by which commercial banks sell foreign
exchange to service payments for, e.g., commodity
imports (Reliance Commodities v. Daewoo, 1993).
(2) Composite of three distinct contracts – An L/C
transaction involves three distinct but intertwined
relationships:
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(a) First Contract between the party applying for the L/C
(buyer/importer/account party) and the party for whose
benefit the L/C is issued (seller/exporter/beneficiary).
(b) Second Contract between the buyer and the issuing
bank. This contract is sometimes called the "Application
and Agreement" or the "Reimbursement Agreement".
(c) Third Contract between the issuing bank and the seller,
in order to support the contract, under (a) above
(Reliance Commodities v. Daewoo, 1993).
TYPES OF LETTERS OF CREDIT
AS TO THE TYPE OF THE MAIN CONTRACT
(1) Commercial L/C – The main transaction involves a
contract of sale. The credit is payable upon the
presentation by the seller of documents that show he
has taken affirmative steps to comply with the sales
agreement. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his
contract (Transfield Philippines v. Luzon Hydro, 2004).
(2) Standby L/C – Used in non-sale settings. The credit is
payable upon certification of a party's nonperformance
of the agreement. The creditor-beneficiary of the
standby credit must certify that the debtor-applicant
has not performed the principal obligation. (Transfield
Philippines v. Luzon Hydro, 2004).
AS TO REVOCABILITY
(1) Revocable L/C – One which can be revoked by the
issuing bank without the consent of the buyer and seller
(2) Irrevocable L/C – One which the issuing bank cannot
revoke without the consent of the buyer and seller (Feati
Bank and Trust Co. v. CA, 1991)
AS TO THE OBLIGATION ASSUMED BY CORRESPONDENT BANK
(1) Unconfirmed L/C – One which continues to be the
obligation of the issuing bank
(2) Confirmed L/C – One which is supported by the absolute
assurance to the beneficiary that the confirming bank
will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit
(Feati Bank and Trust Co. v. CA, 1991)
Parties to a Letter of Credit
RIGHTS AND OBLIGATIONS OF THE PARTIES
There are at least three parties to a letter of credit:
(1) Buyer/Exporter/Account Party – one who procures the
letter of credit and obliges himself to reimburse the issuing
bank upon receipt of documents of title.
(2) Issuing Bank – the bank which undertakes:
(a) to pay the seller upon receipt of the draft and proper
documents of title; and
(b) to surrender the documents to the buyer upon
reimbursement.
The obligation of the issuing bank to pay the seller is direct,
primary, absolute, definite and solidary with the buyer, in
the absence of stipulation in the letter of credit (MWSS v.
Daway, 2004)
UP COLLEGE OF LAW LETTERS OF CREDIT
(3) Seller/Importer/Beneficiary – one who ships the goods to
the buyer in compliance with a contract of sale and
delivers the documents of title and draft to the issuing
bank to recover payment.
Depending on the transaction, the number of parties to
the letter of credit may be increased. Thus, the different
types of correspondent banks:
(4) Advising/Notifying Bank – the bank which conveys to the
seller the existence of the credit.
The bank assumes no liability except to notify and/or
transmit to the seller the existence of the letter of credit.
A notifying bank is not a privy to the contract of sale
between the buyer and the seller, its relationship is only
with that of the issuing bank and not with the
beneficiary to whom he assumes no liability.
The bank may suggest to the seller its willingness to
negotiate, but this fact alone does not imply that the
notifying bank promises to accept the draft drawn under
the documentary credit (Feati Bank and Trust Co. v. CA,
1991).
(5) Confirming Bank – the bank which lends credence to the
letter of credit issued by a lesser known issuing bank.
The bank assumes a direct obligation to the seller and
its liability is a primary one as if the bank itself had
issued the letter of credit (Feati Bank and Trust Co. v. CA,
1991).
(6) Negotiating Bank – the bank which discounts the draft
presented by the seller.
The bank buys or discounts a draft under the letter of
credit. Its liability is dependent upon the stage of the
negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating
bank and the seller (Feati Bank and Trust Co. v. CA, 1991).
(7) Paying Bank – the bank which undertakes to encash the
drafts drawn by the seller.
Basic Principles
of Letter of Credit
DOCTRINE OF INDEPENDENCE
The principle of independence assures the seller or the
beneficiary of prompt payment independent of any breach
of the main contract and precludes the issuing bank from
determining whether the main contract is actually
accomplished or not.
Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents,
or for the general and/or particular conditions stipulated in
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the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value
or existence of the goods represented by any documents, or
for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or
the insurers of the goods, or any other person whomsoever
(Transfield Philippines v. Luzon Hydro, 2004; Bank of
America, NT&SA v. Court of Appeals, 1993).
The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other. In the
first place, the guarantee theory destroys the independence
of the bank's responsibility from the contract upon which it
was opened. In the second place, the nature of both
contracts is mutually in conflict with each other. In contracts
of guarantee, the guarantor's obligation is merely collateral
and it arises only upon the default of the person primarily
liable. On the other hand, in an irrevocable credit the bank
undertakes a primary obligation. (Feati v. CA, 1991)
The independent nature of the letter of credit may be:
(1) Independent in toto - the credit is independent from the
justification aspect and is a separate obligation from the
underlying agreement;
(2) Only as to the justification aspect like in a commercial
letter of credit or repayment standby, which is identical
with the same obligations under the underlying
agreement. (Transfield Philippines v. Luzon Hydro, 2004;
Bank of America, NT&SA v. Court of Appeals, 1993).
FRAUD EXCEPTION PRINCIPLE
The principle that limits the application of the
independence principle only to instances where it would
serve the commercial function of the credit and not when
fraud attends the transaction.
In the case of Transfield Philippines v. Luzon Hydro, 2004,
the petitioner alleged misrepresentation as constituting
fraud. The Court, however, made no ruling as to whether the
same indeed constitutes fraud.
The case asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents
that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In
such a situation, petitioner insists, injunction is recognized
as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues
that the independence principle is not without limits and it
is important to fashion those limits in light of the principle's
purpose, which is to serve the commercial function of the
credit. If it does not serve those functions, application of the
principle is not warranted, and the common law principles
of contract should apply. (Transfield Phils. v. Luzon Hydro,
2004)
DOCTRINE OF STRICT COMPLIANCE
The settled rule in commercial transactions involving letters
of credit requires that the documents tendered by the seller
must strictly conform to the terms of the letter of credit.
UP COLLEGE OF LAW LETTERS OF CREDIT BAR OPERATIONS COMMISSION

Otherwise, the issuing bank or the concerned correspondent

bank is not obliged to perform its undertaking under the
contract.

The tender of documents by the beneficiary (seller) must

include all documents required by the letter. A
correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not thereafter
be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary (Feati v.
CA, 1991).

PAGE 4
UP COLLEGE OF LAW TRUST RECEIPTS LAW BAR OPERATIONS COMMISSION

PAGE 5
UP COLLEGE OF LAW TRUST RECEIPTS LAW
Concept of Trust Receipt
Transaction
A Trust Receipt Transaction is any transaction by and
between an entruster and another person as entrustee,
whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the
entruster of a signed document called a trust receipt [Sec. 4,
PD 115 (Trust Receipts Law)].
A Trust Receipt is a written or printed document signed by
the entruster wherein the entrustee binds himself:
(1) to hold the designated goods, documents or
instruments in trust for the entruster; and
(2) to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed
of, in accordance with the terms and conditions
specified in the trust receipt (Sec. 4)
LOAN/SECURITY FEATURE
A letter of credit-trust receipt arrangement is endowed with
its own distinctive features and characteristics. Under that
set-up, a bank extends a loan covered by the letter of credit,
with the trust receipt as a security for the loan. In other
words, the transaction involves a loan feature represented by
the letter of credit, and a security feature which is in the
covering trust receipt. A trust receipt, therefore, is a security
agreement, pursuant to which a bank acquires a "security
interest" in the goods (Vintola v. IBAA, 1987)
A trust receipt arrangement does not involve a simple loan
transaction between a creditor and debtor-importer. Apart
from a loan feature, the trust receipt arrangement has a
security feature that is covered by the trust receipt itself.
That second feature is what provides the much needed
financial assistance to our traders in the importation or
purchase of goods or merchandise through the use of those
goods or merchandise as collateral for the advancements
made by a bank. The title of the bank to the security is the
one sought to be protected and not the loan which is a
separate and distinct agreement (People v. Nitafan, 1992)
OWNERSHIP OF THE GOODS, DOCUMENTS
AND INSTRUMENTS UNDER A TRUST RECEIPT
Entrustee is the factual owner of the goods, documents and
instruments (Prudential Bank v. NLRC). Entruster is the real
owner of the goods, documents and instruments
“A trust receipt transaction, within the meaning of this
Decree, is any transaction…whereby the entruster, who
owns or holds absolute title or security interests over certain
specified goods, documents or instruments...” (Sec. 4)
Note: “Security Interest” means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
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entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or
retained for security only.
“Accordingly, in order to secure that the banker shall be
repaid at the critical point — that is, when the imported
goods finally reach the hands of the intended vendee — the
banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are bought and
settled for by his payments or acceptances in the foreign
country, and he continues to hold that title as his
indispensable security until the goods are sold.”
“[I]n a certain manner, (trust receipt contracts) partake of
the nature of a conditional sale as provided by the Chattel
Mortgage Law, that is, the importer becomes absolute
owner of the imported merchandise as soon as he has paid
its price. The ownership of the merchandise continues to be
vested in the owner thereof or in the person who has
advanced payment, until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by his
representative or successor in interest.” (Prudential Bank v.
NLRC, 1995)
Note: In the earlier cases of Vintola v. IBAA (1987) and Abad
v. Court of Appeals (1990), the Supreme Court held that the
entrustee becomes the absolute owner of the goods,
documents and instruments, the entruster being a mere
security holder.
Rights of the Entruster
VALIDITY OF THE SECURITY INTEREST
AS AGAINST THE CREDITORS OF THE ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE
The entruster shall have the following rights:
(1a) Right to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt; OR
(1b) Right to the return of the goods, documents or
instruments in case of non-sale; AND
(2) Right to the enforcement of all other rights conferred on
him in the trust receipt provided such are not contrary to
the provisions of the TRL.
(3) Right to cancel the trust and take possession of the
goods, documents or instruments subject of the trust or
of the proceeds realized therefrom at any time upon
default or failure of the entrustee to comply with any of
the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee.
(4) Right to sell the goods, documents or instruments at
public or private sale at least five days notice to the
defaulting entrustee of the intention to sell.
(5) Right to purchase the goods, documents or instruments
at a public sale.
(6) Right to recover the deficiency from the entrustee should
the proceeds of the sale not be sufficient (Sec. 7)
UP COLLEGE OF LAW
Obligation and Liability
of the Entrustee
OBLIGATIONS OF THE ENTRUSTEE
(1) To hold the goods, documents or instruments in trust for
the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust
receipt;
(2) To receive the proceeds in trust for the entruster and turn
over the same to the entruster to the extent of the
amount owing to the entruster or as appears on the
trust receipt;
(3) To insure the goods for their total value against loss from
fire, theft, pilferage or other casualties;
(4) To keep said goods or proceeds thereof whether in
money or whatever form, separate and capable of
identification as property of the entruster;
(5) To return the goods, documents or instruments in the
event of non-sale or upon demand of the entruster; and
(6) To observe all other terms and conditions of the trust
receipt not contrary to the provisions of the TRL. (Sec. 9)
LIABILITIES OF THE ENTRUSTEE
(1) Liability for Loss - The risk of loss shall be borne by the
entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their
disposition, irrespective of whether or not it was due to
the fault or negligence of the entrustee, shall not
extinguish his obligation to the entruster for the value
thereof (Sec. 10)
(2) Liability for failure to turn over proceeds of sale or to return
– The failure shall constitute the crime of estafa,
punishable under Art. 315 (b) of the Revised Penal Code
(Sec. 13)
Note: Penal sanction if offender is a corporation: If the
violation or offense is committed by a corporation,
partnership, association or other juridical entities, the
penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities
arising from the criminal offense (Sec. 13)
Remedies Available
(1) In case of default or failure of the entrustee to comply with
the trust receipt agreement - Entruster may cancel the
trust receipt agreement, take possession of the goods,
documents, instruments, and sell the same at any
private or public sale at least five days from notice of
intention to sell to the entrustee.
The proceeds of any such sale, whether public or private,
shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's
indebtedness to the entruster (Sec. 7)
TRUST RECEIPTS LAW BAR OPERATIONS COMMISSION
(2) In case of loss of the goods, documents, instruments -
Entruster may claim damages from the entrustee
(Sec.10)
(3) In case of failure to turn over proceeds of the sale of the
goods, documents or instruments or to return the same in
case of non-sale - Entruster may file a criminal
complaint for estafa (Art. 315 (b) of the Revised Penal
Code) against the entrustee (Sec. 13)
Warehouseman’s Lien
A warehouseman shall have a lien on goods deposited or on
the proceeds thereof in his hands:
(1) For all lawful charges for storage and preservation of the
goods;
(2) For all lawful claims for money advanced, interest,
insurance, transportation, labor, weighing, coopering and
other charges and expenses in relation to such goods;
(3) For all reasonable charges and expenses for notice, and
advertisements of sale; and
(4) For sale of the goods where default had been made in
satisfying the warehouseman's lien (Sec. 27)
Notes:
(1) General rule: A warehouseman shall have lien only for
charges for storage of goods subsequent to the date of
the receipt.
(2) Exception: When the receipt expressly enumerated other
charges provided under Sec. 27 even though the
amounts thereof are not stated in the receipt. (Sec. 30)
However, whether a warehouseman has or has not a lien
upon the goods, he is entitled to all remedies allowed by law
to a creditor against a debtor for the collection from the
depositor of all charges and advances which the depositor
has expressly or impliedly contracted with the
warehouseman to pay (Sec. 32).
(1) Against what property the lien may be enforced:
(a) Against all goods, whenever deposited, belonging to the
person who is liable as debtor for the claims in regard to
which the lien is asserted, and
(b) Against all goods belonging to others which have been
deposited at any time by the person who is liable as
debtor for the claims in regard to which the lien is
asserted if such person had been so entrusted with the
possession of goods that a pledge of the same by him at
the time of the deposit to one who took the goods in
good faith for value would have been valid (Sec. 28)
(2) Satisfaction of the lien by sale: In accordance with the
terms of a notice so given, a sale of the goods by auction
may be had to satisfy any valid claim of the
warehouseman for which he has a lien on the goods.
PAGE 7
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW BAR OPERATIONS COMMISSION

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UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
Definition
Written contract for the payment of money, by its form and
on its face, intended as substitute for money and intended
to pass from hand to hand to give the holder in due course
(HDC) the right to hold the same and collect the sum due.
Instruments are negotiable when they conform to all the
requirements prescribed by the NIL (Act 2031, 03 February
1911).
Although considered as medium for payment of obligations,
negotiable instruments are not legal tender (Sec. 60, New
Central Bank Act, R.A. 7653).
Q: Can the delivery of a negotiable instrument discharge an
obligation?
A: Settled is the rule that payment must be made in legal
tender. A check is not legal tender and, therefore, cannot
constitute a valid tender of payment. Since a negotiable
instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation
is not extinguished and remains suspended until the
payment by commercial document is actually realized. (BPI
vs. Royeca, 2008, Nachura)
Notes:
(1) Negotiable instruments shall produce the effect of
payment only when they have been encashed or when
through the fault of the creditor they have been
impaired. (Art. 1249, Civil Code)
(2) BUT a CHECK which has been cleared and credited to
the account of the creditor shall be equivalent to a
delivery to the creditor of cash.
Forms and Interpretation
REQUISITES OF NEGOTIABILITY
An instrument to be negotiable must conform to the
following requirements:
(1) It must be in writing and signed by the maker or drawer;
(2) Must contain an unconditional promise or order to pay a
sum certain in money;
(3) Must be payable on demand, or at a fixed or
determinable future time;
(4) Must be payable to order or to bearer; and
(5) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with
reasonable certainty (Sec. 1).
Section 184 (defining a promissory note) and Section 126
(defining a bill of exchange) contain the same requisites in
Section 1.
IN WRITING AND SIGNED BY THE MAKER OR DRAWER
No person is liable on the instrument whose signature does
not appear thereon.
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BAR OPERATIONS COMMISSION
One who signs in a trade or assumed name will be liable to
the same extent as if he had signed in his own name (Sec.
18).
Signature of any party may be made by duly authorized
agent; no particular form of appointment necessary (Sec. 19)
"In writing" - includes print; written or typed. Section 191 of
the NIL provides that the word “’written’ includes printed,
and ‘writing’ includes print.”
Reason: Since an instrument is a document, there must be
something in written form that can be transferred from
person to person. (Abad)
Signature is binding and may be in one’s handwriting,
printed, engraved, lithographed or photographed so long as
it is intended or adopted as the signature of the signer or
made with his authority.
It may appear on any part of the instrument. However, if the
signature is so placed upon the instrument that it is not
clear in what capacity the person intended to sign, he is
deemed an indorser. (Sec. 17[f])
CONTAINING AN UNCONDITIONAL PROMISE TO PAY
OR ORDER TO PAY
An unqualified order or promise to pay is unconditional,
though coupled with:
(1) An indication of a particular fund out of which
reimbursement is to be made, or a particular account to
be debited with the amount; or
(2) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional (Sec. 3).
Unconditional
The promise or order to pay, to be unconditional, must be
unqualified.
Must not be dependent upon a contingent event that is not
certain to happen. (Abad)
Fact that the condition appearing on the instrument has
been fulfilled will not convert it into a negotiable one (see
Sec. 4)
A negotiable instrument is conditional when reference to
the fund clearly indicates an intention that such fund alone
should be the source of payment. (Metropolitan Bank vs. CA,
1991)
Fund Indicating a Particular Fund
for Reimbursement (non-negotiable)
(1) The drawee pays the There is only one act —the
payee from his own funds drawee pays directly from
afterwards. the particular fund indicated.
(2) The drawee pays himself
from the particular fund
indicated.
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
Particular fund indicated is Particular fund indicated is
not the direct source of the direct source of payment.
payment. (Sundiang and Aquino)
Order or promise to pay
As to promissory note: Promise to pay should be express on
the face of the instrument
The word "promise" is not absolutely necessary. Any
expression equivalent to a promise is sufficient.
Mere acknowledgment of a debt is insufficient
As to bill of exchange: Order – command made by the
drawer addressed to the drawee ordering the latter to pay
the payee or the holder a sum certain in money; the
instrument is, by its nature, demanding a right.
Words which are equivalent to an order are sufficient.
A mere request or authority to pay does not constitute an
order. Although the mere use of polite words like "please"
does not of itself deprive the instrument of its
characteristics as an order, its language must clearly
indicate a demand upon the drawee to pay.
Sum payable must be certain
The sum payable is a sum certain, although it is to be paid:
(1) with interest; or
(2) by stated installments; or
(3) by stated installments, with a provision that, upon
default in payment of any installment or of interest, the
whole shall become due; or
(4) with exchange, whether at a fixed rate or at the current
rate; or
(5) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity (Sec. 2).
Note: A sum is certain if from the face of the instrument it
can be determined even if it requires mathematical
computation. (Sundiang and Aquino)
Payable in money
Capable of being transformed into money, since negotiable
instruments are intended to be substitutes for money
“Money” as used in the law is not necessarily limited to
“legal tender” as defined by law but includes any particular
kind of current money. (see, Sec. 6(e) and PNB v. Zulueta)
An agreement to pay in foreign currency is valid. (RA 8183)
Non-negotiable: An instrument which contains an order or
promise to do an act in addition to the payment of money
(with the exception of certain acts enumerated in Sec. 5)
Payable in personal property like merchandise, shares of
stock or gold.
Maker or the person primarily liable has the option to
require something to be done in lieu of payment of money.
(Campos)
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Negotiable: If the option to require something to be done in
lieu of payment of money is with the holder
PAYABLE ON DEMAND OR AT FIXED OR DETERMINABLE TIME
Purpose: to inform the holder of the instrument of the date
when he may enforce payment thereof.
On demand: An instrument is payable on demand:
(1) Where it is expressed to be payable on demand, or at
sight, or on presentation; or
(2) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand (Sec. 7).
Note: Holder may call for payment any time; maker has an
option to pay at any time, and the refusal of the holder to
accept payment will terminate the running of interest, if
any, but the obligation to pay the note remains.
At a fixed time: Only on the stipulated date, and not before,
may the holder demand its payment.
Should he fail to demand payment, the instrument
becomes overdue but remains valid and negotiable. It is
merely converted to a demand instrument with respect to
the person who issued, accepted, or indorsed it when
overdue. (Sec. 7)
At a determinable future time: An instrument is payable at a
determinable future time, which is expressed to be payable:
(1) At a fixed period after date or sight; or
(2) On or before a fixed or determinable future time
specified therein; or
(3) On or at a fixed period after the occurrence of a specified
event which is certain to happen, though the time of
happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect (Sec. 4).
Note: Requires that the maturity of the instrument can be
absolutely determined with certainty. (Abad)
Examples: At a fixed period after date or sight, e.g., “30 days
after date.”
On or before a fixed or determinable future time specified
therein, e.g., “payable on or before December 1, 2000”
On or at a fixed period after the occurrence of a specified
event which is certain to happen, though the time of
happening be uncertain, e.g., “payable within 60 days after
the death of Jose”
Effect of acceleration provisions: If option (absolute or
conditional) to accelerate maturity is on the maker, still
NEGOTIABLE.
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
If option to accelerate is on the holder and can be exercised
only after the happening of a specified event/act over which
he has no control (conditional), still NEGOTIABLE
Note: If option is absolute, non-negotiable.
Insecurity Clauses: Provisions in the contract which allow the
holder to accelerate payment “if he deems himself
insecure.” The instrument is rendered non-negotiable.
(Sundiang and Aquino)
Provisions extending time of payment:
General rule: Negotiability not affected. Effect is similar with
that of an acceleration clause at the option of the maker.
Exception: Where a note with a fixed maturity provides that
the maker has the option to extend time of payment until
the happening of contingency, the instrument is NOT
negotiable. The time for payment may never come at all.
PAYABLE TO ORDER OR TO BEARER (ASKED IN 1998)
Must contain words of negotiability: For example:
(1) “Pay to the order of Juan Cruz”, or “I promise to pay to
the order of Juan Cruz”
(2) “Pay to Juan Cruz or order”, or “I promise to pay Juan
Cruz or order”
Note: Need not follow the language of the law, but any term
which clearly indicates an intention to conform to the legal
requirements is sufficient.
Negotiability determined from the face of the instrument: The
negotiability or non-negotiability of an instrument is
determined from the face of the instrument itself. Where
words "or bearer" printed on a check are cancelled by the
drawer, instrument becomes not negotiable. (Caltex vs. CA,
1992)
Payable to bearer: The instrument is payable to bearer:
(1) When it is expressed to be so payable; or
(2) When it is payable to a person named therein or bearer;
or
(3) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person
making it so payable; or
(4) When the name of the payee does not purport to be the
name of any person; or
(5) When the only or last indorsement is an indorsement in
blank (Sec. 9).
Examples:
(1) Expressed to be so payable - "I promise to pay the
bearer the sum"
(2) Payable to a person named therein or bearer -"Pay to A
or bearer"
(3) Payable to the order of a fictitious person or non-
existing person, and such fact was known to the person
making it so payable - “Pay to John Doe or order"
(4) Name of payee does not purport to be the name of any
person – "Pay to cash"; "Pay to sundries."
(5) Only or last indorsement is an indorsement in blank.
Note: May be negotiated by mere delivery
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Fictitious payee rule: It is not necessary that the person
referred to in the instrument is really non-existent or
fictitious to make the instrument payable to bearer. The
person to whose order the instrument is made payable may
in fact be existing but he is still fictitious or non-existent
under Sec. 9(c) of the NIL if the person making it so payable
does not intend to pay the specified persons.
A check drawn payable to the order of cash is a check
payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement.
(Ang Tek Lian vs. CA, 1950)
Payable to order: The instrument is payable to order where it
is drawn payable to the order of a specified person or to him
or his order. It may be drawn payable to the order of:
(1) A payee who is not maker, drawer, or drawee; or
(2) The drawer or maker; or
(3) The drawee; or
(4) Two or more payees jointly; or
(5) One or some of several payees; or
(6) The holder of an office for the time being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty (Sec. 8).
Notes: Without the words "to order" or "to the order of" the
instrument is payable only to the person designated therein
and is therefore non-negotiable. (Consolidated Plywood
Industries vs. IFC Leasing, 1987)
For order instruments - negotiation requires delivery and
indorsement of the transferor. (Sec. 30)
Where the maker is the payee:
(1) In effect making himself liable to himself. Thus, the
instrument produces no legal effect.
(2) Will produce legal effects only once the payee-maker
indorses the instrument to another person because such
indorsement will then give rise to rights and obligations.
(Abad)
IF BILL OF EXCHANGE, DRAWEE MUST BE NAMED OR DESIGNATED
WITH REASONABLE CERTAINTY
(1) Applies only to bill of exchange
(2) A bill may be addressed to 2 or more drawees jointly
whether they are partners or not, but not to 2 or more
drawees in the alternative or in succession (Sec. 128).
Examples:
(1) “To Juan Cruz and Jose Reyes” – negotiable
(2) “To Juan Cruz or Jose Reyes” – not negotiable; no
certainty as to drawee
Determination of negotiability: In determining the
negotiability of an instrument, the instrument in its entirety
and by what appears on its face must be considered. It must
comply with the requirements of Sec. 1 of the Negotiable
Instruments Law. (Caltex Phils. v. CA, 1992)
The acceptance of a bill of exchange is not important in the
determination of its negotiability. The nature of acceptance
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW BAR OPERATIONS COMMISSION

is important only on the determination of the kind of KINDS OF BILLS OF EXCHANGE

liabilities of the parties involved. (PBCOM vs. Aruego, 1993) (1) Draft – used synonymously with bill of exchange
although it normally refers to a bill of exchange used in
Omissions and Provisions Additional Provisions documentary exchange like letters of credit
That Do Not Affect That Do Not Affect transactions.
Negotiability Negotiability (2) Inland and foreign bill – an Inland bill is a bill which is, or
on its face purports to be, both drawn and payable
(1) Non-dating of the (1) Authorizes the sale of within the Philippines. Any other bill is a foreign bill.
instrument collateral securities on (3) Time draft – draft that is payable at a fixed date.
(2) Non-specification of default; (4) Sight or demand draft – payable when the holder
value given, or that any (2) Authorizes confession of presents it for payment.
value had been given judgment on default; (5) Trade acceptance – used in contracts of sale where the
(3) Non-specification of (3) Waives the benefit of law seller as drawer orders the buyer (as drawee) to pay a
place where it is drawn or intended to protect the sum certain to the same seller (payee).
place where it is payable debtor; or (6) Banker’s acceptance – a time draft across the face which
(4) Bears a seal (4) Allows the creditor the the drawee has written the word accepted. (Sundiang
(5) Designation of particular option to require and Aquino)
kind of currency in which something in lieu of (7) Check - A bill of exchange drawn on a bank payable on
payment is to be made. money. (Sec. 5) demand (Sec. 185). It is the most common form of bill of
(Sec. 6) exchange.
Note: Negotiability is
affected when instrument Instances when a bill of exchange may be treated as a
contains a promise or order promissory note:
to do any act in addition to (1) The drawer and the drawee are the same person;
the payment of money. (2) Drawee is a fictitious person;
(3) Drawee does NOT have the capacity to contract (Sec.
130)
(4) Where the bill is drawn on a person who is legally
Kinds of Negotiable absent;
(5) Where the instrument is so ambiguous that there is
Instruments doubt whether it is a bill or note, the holder may treat it
as either at his election (Sec. 17[e])

PROMISSORY NOTE (Sec. 184) Promissory Note Bill of Exchange

(1) An unconditional promise in writing
(2) Made by one person to another Unconditional promise Unconditional order
(3) Signed by the maker
Involves 2 parties Involves 3 parties
(4) Engaging to pay on demand, or at a fixed or
determinable future time Maker is primarily liable Drawer is only secondarily
(5) A sum certain in money to order or to bearer liable
(6) Where a note is drawn to the maker's own order, it is not Only one presentment: for Two presentments: for
complete until indorsed by him. payment acceptance and for payment
KINDS OF PROMISSORY NOTES
(1) Certificate of deposit – a form of promissory note which Bill of Exchange Check
is a written acknowledgment of a bank of its receipt of a
Not necessarily drawn on It is necessary that a check
certain sum with a promise to repay the same.
a deposit. The drawee need be drawn on a bank deposit.
(2) Bonds – a certificate or evidence of a debt on which the
not be a bank Otherwise, there would be
issuing company or governmental body promises to pay
fraud.
the bondholders a specified amount of interest for a
specified length of time, and to repay the loan on the Death of a drawer of a BOE, Death of the drawer of a
expiration date. with the knowledge of the check, with the knowledge of
(3) Debenture – a promissory note or bond backed by the bank, does not revoke the the bank, revokes the
general credit of a corporation and usually not secured authority of the drawee to authority of the banker to
by a mortgage or lien on any specific property. pay. pay.
(Sundiang and Aquino)
May be presented for Must be presented for
payment within reasonable payment within a reasonable
BILL OF EXCHANGE (Sec. 126)
time after its last negotiation. time after its issue.
(1) An unconditional order in writing
(2) Addressed by one person to another May be payable on demand Always payable on demand
(3) Signed by the person giving it or at a fixed or determinable
(4) Requiring the person to whom it is addressed to pay on future time
demand or at a fixed or determinable future time
(5) A sum certain in money to order or to bearer
PAGE 12
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
Completion and Delivery
Two steps involved in the execution of negotiable instruments
(1) Writing of the instrument completely in accordance with
the requisites of negotiability under Sec. 1.
(2) Delivery of the instrument by the maker or the drawer to
the payee in order to give legal effect thereto. (Abad)
INSERTION OF DATE (Sec. 13)
Any holder may insert the true date of issue or acceptance
of an instrument where:
(1) The instrument is expressed to be payable at a fixed
period after date is issued undated; or
(2) The acceptance of an instrument payable at a fixed
period after sight is undated.
The insertion of a wrong date does not avoid the instrument
in the hands of a subsequent holder in due course; but as to
him, the date so inserted is to be regarded as the true date.
The instrument is not invalid for the reason only that it is
ante-dated or post-dated, provided this is not done for an
illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as
of the date of delivery (Sec. 12).
COMPLETION OF BLANKS (Sec. 14)
Where the instrument is wanting in any material particular,
the person in possession thereof has a prima facie authority
to complete it by filling up the blanks therein.
A signature on a blank paper delivered by the person
making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima
facie authority to fill it up as such for any amount.
For such instrument to be enforceable against any person
who became a party thereto prior to its completion, it must
be filled up strictly in accordance with the authority given
and within a reasonable time.
When subsequently negotiated to a holder in due course
(HDC), there is a presumption that such instrument is filled
up strictly in accordance with the authority given and within
reasonable time.
INCOMPLETE AND UNDELIVERED INSTRUMENTS
(Sec. 15)
Where an incomplete instrument has not been delivered, it
will not be a valid contract in the hands of any holder, as
against any person whose signature was placed thereon
before delivery if completed and negotiated without
authority. Non-delivery of an incomplete instrument is a
real defense.
Note: A drawee bank whose negligent custody of the
checks, after partial execution, contributed to its escape, is
stopped from raising the real defense under Sec. 15.
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COMPLETE AND UNDELIVERED INSTRUMENTS
(Sec. 16)
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
purpose of giving effect thereto.
Between immediate parties and as regards a remote party
other than a holder in due course, the delivery, in order to be
effectual, must be made either by or under the authority of
the party making, drawing, accepting, or indorsing.
When the instrument is in the hands of HDC, a valid delivery
thereof by all parties prior to him so as to make them liable
to him is conclusively presumed.
INCOMPLETE AND DELIVERED INSTRUMENTS (Sec. 14)
(1) Holder has prima facie authority to fill up the
instrument.
(2) The instrument must be filled up strictly in accordance
with the authority given and within reasonable time
(3) HDC may enforce the instrument as if filled up
according to (2) above.
Signature
General rule: One whose signature does not appear on the
instrument shall not be liable thereon.
Exceptions:
(1) The principal who signs through an agent
(2) The forger
(3) One who indorses in a separate instrument (allonge) OR
where an acceptance is written on a separate paper
(4) One who signs his assumed or trade name
(5) A person negotiating by delivery (as in the case of a
bearer instrument) is liable to his immediate indorsee.
SIGNING IN TRADE NAME
One who signs in a trade or assumed name will be liable to
the same extent as if he had signed in his own name (Sec.
18)
SIGNATURE OF AGENT
Signature of any party may be made by duly authorized
agent, established as in ordinary agency.
SIGNATURE PER PROCURATION
Operates as notice that the agent has limited authority to
sign, and the principal is bound only in case the agent in so
signing acted within the actual limits of his authority (Sec.
21)
LIABILITY
General rule: Where a person adds to his signature words
indicating that he signs on behalf of a principal, then he is
not liable if he was duly authorized.
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW BAR OPERATIONS COMMISSION

Exceptions: General rule: When a signature is forged or made without

(1) Mere addition of words describing him as an agent
without disclosing his principal (Sec. 20)
(2) Where a broker or agent negotiates an instrument
without indorsement, he incurs all liabilities in Sec. 65,
unless he discloses name of principal and the fact that
he is only acting as an agent. (Sec. 69)
INDORSEMENT BY MINOR OR CORPORATION
The indorsement or assignment of the instrument by a
corporation or by an infant (minor) passes the property
therein, notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon (Sec. 22).
REAL defense but available only to the incapacitated party
(i.e. the minor or the corporation).
FORGERY
Counterfeit making or fraudulent alteration of any writing,
which may consist of:
(1) Signing of another’s name with intent to defraud; or
(2) Alteration of an instrument in the name, amount, name
of payee, etc. with intent to defraud.
the authority of the person, only the forged signature (not
the instrument itself and the other genuine signatures) is
wholly inoperative
Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof against any party
thereto can be acquired through or under such
signature
Exception: The party against whom it is sought to be
enforced is precluded from setting up the forgery or want of
authority as a defense (Sec. 23).
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY
(1) Those who warrant or admit the genuineness of the
signature in question. This includes indorsers, persons
negotiating by delivery and acceptors.
(2) Those who, by their acts, silence, or negligence, are
estopped from setting up the defense of forgery.

RULES ON FORGERY

Promissory note
Maker’s signature forged
Payee’s signature forged
Indorser’s signature forged
Order Instrument Bearer Instrument
(1) Maker is not liable because he never (1) Maker is not liable.
became a party to the instrument. (2) Indorsers may be made liable to those
(2) Indorsers subsequent to forgery are persons who obtain title through their
liable because of their warranties. indorsements.
(3) Party who made the forgery is liable. (3) Party who made the forgery is liable.
(1) Maker and payee are not liable. (1) Maker is liable. (REASON: Indorsement is
(2) Indorsers subsequent to forgery are not necessary to title and the maker
liable. engages to pay holder)
(3) Party who made the forgery is liable. (2) Party who made the forgery is liable
(1) Maker, payee, indorser whose (1) Maker is liable.
signature/s was/were forged, and all (2) Indorser whose signature was forged is not
indorsers preceding the forgery are not liable to one who is not a HDC provided the
liable. instrument is mechanically complete before
(2) Indorsers subsequent to forgery are the forgery.
liable. (3) Party who made the forgery is liable.
(3) Party who made the forgery is liable.

Bill of exchange
Drawer’s signature forged
Order Instrument Bearer Instrument
(1) Drawer is not liable because he was (1) Drawer is not liable.
never a party to the instrument. (2) Drawee is liable if it paid. Drawee cannot
(2) Drawee is liable if it paid (no recourse to recover from the collecting bank.
drawer) because he admitted the (3) Party who made the forgery is liable.
genuineness of the drawer’s signature.
Drawee cannot recover from the
collecting bank because there is no
privity between the collecting bank and
the drawer. The collecting bank does
not give any warranty re: the drawer’s
signature. (Associated Bank vs. CA)
(3) Indorsers subsequent to forgery liable

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(such as collecting bank or last

Payee’s signature forged
Indorser’s signature forged
endorser)
(4) Party who made the forgery is liable
(1) Drawer and payee are not liable
(2) Drawee is liable if it paid, but it may
pass liability back through the
collection chain
(3) Indorsers subsequent to forgery are
liable (such as collecting bank)
(4) Party who made the forgery is liable
(1) Drawer, payee, indorser whose
signature/s was/were forged and all
indorsers preceding the forgery are not
liable.
(2) Drawee is liable if it paid.
(3) Indorsers subsequent to forgery are
liable. (such as collecting bank)
(4) Party who made the forgery is liable.
(1) Drawer and drawee are liable.
(2) Payee is not liable.
(3) Collecting bank is liable because of
warranty.
(4) Party who made the forgery is liable.
(1) Drawer is liable.
(2) Drawee is liable.
(3) Indorser whose signature was forged is
liable because indorsement is not
necessary to title.
(4) Party who made the forgery is liable.

ACCEPTANCE AND PAYMENT UNDER MISTAKE
(1) When the drawee accepts or pays a forged instrument
A bank is bound to know the signatures of its depositors.
If a bank pays a forged check it must be considered as
making the payment out of its own funds and cannot
charge the account of the depositor whose signature
was forged. (PNB vs. Quimpo, 1988)
A bank is liable, irrespective of its good faith, in paying a
forged check. (Samsung vs. Far East Bank, 2004)
(2) Extensions of Price vs. Neal doctrine
Doctrine: As between equally innocent persons, the
drawee who pays money on a check or draft the
signature on which was forged CANNOT recover the
money from the one who received it. The drawee is
bound to know the signature of its depositor.
Notes: The bar to recovery is extended to overdrafts and
stop payment orders.
(a) Overdraft occurs when a check is issued for an amount
more than what the drawer has in deposit with the
drawee bank. Rule: The drawee who pays the holder of
the bill cannot recover from the holder what he paid
under mistake
(b) Stop Payment Order is one issued by the drawer of a
check countermanding his first order to the drawee bank
to pay the check. Rule: The drawee bank is bound to
follow the order, provided it is received prior to its
certification or payment of the check.
(3) Effects of Negligence of Depositor
If such negligence was the proximate cause of the loss,
the drawee-bank is NOT liable
It is the duty of the depositor/drawer to carefully
examine bank’s statements, cancelled checks, his check
stubs, and other pertinent records within a reasonable
time and to report any errors without unreasonable
delay.
If a drawer/depositor’s negligence and delay should
cause a bank to honor a forged check, drawer cannot
later complain should bank refuse to recredit his
account.
WHEN DRAWEE MAY RECOVER FROM DRAWER
(1) Where the instrument is originally a bearer instrument,
because the indorsement can be disregarded as being
unnecessary to the holder’s title
(2) Indorsement forged by an employee or agent of the
drawer
(3) If due to the drawer’s negligence/delay, the forgery is
not discovered until it is too late for the bank to recover
from the holder or the forger
WHEN DRAWEE MAY NOT RECOVER FROM HOLDER
(1) Where the instrument is originally a bearer instrument,
because the indorsement can be disregarded as being
unnecessary to the holder’s title
(2) If drawee fails to act promptly , if he delays in informing
the holder whom he paid
BETWEEN DRAWEE BANK AND COLLECTING BANK
Collecting bank is only liable for forged indorsements and
not forgeries of the drawer or maker’s signature (PNB v CA,
1968).
The collecting bank or last indorser generally suffers the
loss because it has the duty to ascertain the genuineness of
all prior indorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the
party making the presentment had done its duty to
ascertain the genuineness of the indorsements (BPI v CA,
1992).
In presenting the checks for clearing, the collecting agent
made an express guarantee on the validity of “all the prior
endorsements.”
The drawee bank is not similarly situated as the collecting
bank because the former makes no warranty as to the
genuineness of any indorsement. The drawee bank’s duty is
but to verify the genuineness of the drawer’s signature and
not of the indorsement because only the drawer is its client.

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Notes: However, where the negligence of the drawee bank is
the proximate cause of the collecting bank’s payment of a
check with a forged indorsement, the drawee bank may be
held liable to the collecting bank.
When both are guilty of negligence, the degree of negligence
of each will be weighed in considering the amount of loss
which each should bear (BPI v CA, 1992)
Liable on the instrument to a holder for value
notwithstanding such holder at the time of the taking of the
instrument knew him to be only an accommodation party.
th
Hence, as regards an AP, the 4 condition, i.e., lack of
notice of infirmity in the instrument or defect in the title of
the persons negotiating it, has no application. (Stelco
Marketing Corp. vs. CA,1992)
ACCOMMODATION PARTY AS SURETY
Accommodation Party (AP) is generally regarded as a surety
for the party accommodated

Consideration When the AP makes payment to holder of the note, he has

Consideration: Some right, interest, benefit, or advantage
conferred upon a promisor, to which he is otherwise not
lawfully entitled, or any detriment, prejudice, loss or
disadvantage suffered or undertaken by the promise other
than to such as he is at the time of consent bound to suffer.
(Gabriel v. Monte de Piedad)
the right to sue the accommodated party for
reimbursement. (Agro Conglomerates, Inc. v. CA)
Note: A corporation cannot act as an accommodation party.
The issue or endorsement of negotiable instruments by a
corporation without consideration and for the
accommodation of another is ultra vires (Crisologo v. CA)

Value: Any consideration sufficient to support a simple

contract.

An antecedent or pre-existing debt constitutes value; and is Negotiation

deemed such whether the instrument is payable on demand
or at a future time. (Sec. 25) NEGOTIATION DISTINGUISHED FROM ASSIGNMENT
Negotiation Assignment
Who is a Holder for Value (HFV)?
(1) A holder of an instrument for which value has been The transfer of the The transferee does not
given at any given time but only with respect to all instrument from one person become a holder and he
parties who have become parties to the instrument prior to another so as to constitute merely steps into the shoes
to the time at which value has been given. (Sec. 26) the transferee as holder of the transferor. Any
(2) A holder who as a lien on the instrument but only to the thereof (Sec.30). defense available against the
extent of his lien. (Sec. 27) transferor is available
against the transferee.
Burden of proof - presumption of consideration: Every
negotiable instrument is deemed prima facie to have been MODES OF NEGOTIATION
issued for a valuable consideration; and every person whose
signature appears thereon to have become a party thereto BY DELIVERY – IF PAYABLE TO BEARER (SEC. 30)
for value (Sec. 24). Delivery means transfer of possession of instrument by the
maker or drawer, with intent to transfer title to the payee
Effect of want of consideration: Absence or failure of and recognize him as holder thereof.
consideration is a matter of defense as against any person
not a holder in due course, hence, a personal defense. Issuance is the first delivery of the instrument complete in
form to a person who takes it as a holder (Sec. 191).

Accommodation Party
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his
name to some other person (Sec. 29).
LIABILITY
The person to whom the instrument thus executed is
subsequently negotiated has a right of recourse against the
accommodation party in spite of the former’s knowledge
that no consideration passed between the accommodation
and accommodated parties (Sec. 29).
Requisites
(1) Mechanical act of writing the instrument completely
and in accordance with the requirements of Section 1;
and
(2) The delivery of the complete instrument by the maker or
drawer to the payee or holder with the intention of
giving effect to it.
Presumption of delivery
(1) Where the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the
contrary is proved (Sec. 16)
(2) If it is in the hands of a HDC, the presumption is
conclusive (Sec. 16)

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Presumption as to date
(1) Date is not an essential element of negotiability
(2) An undated instrument is considered to be dated as of
the time it was issued
BY INDORSEMENT COMPLETED BY DELIVERY – IF PAYABLE TO
ORDER (SEC. 30)
Indorsement
(1) Where placed – The indorsement must be written (Sec.
31):
(a) On the instrument itself, or
(b) On a separate piece of paper attached to the instrument
called “allonge”
(2) Signature of the indorser, without additional words, is a
sufficient indorsement (Sec. 31)
(3) Must be of the ENTIRE instrument
(a) CANNOT indorse a part only of the amount payable;
BUT if the instrument has been paid in part, then the
instrument may be indorsed as to the residue (Sec. 32)
(b) CANNOT transfer the instrument to two or more
indorsees severally (Sec. 32)
(c) If not an indorsement of the entire instrument, the
transfer remains valid, but as a mere assignment which
subjects the holder to all defenses on the instrument
(Campos)
Kinds of indorsement
As to manner of future method of negotiation
(1) Special
(a) Specifies the person to whom/to whose order the
instrument is to be payable; indorsement of such
indorsee is necessary to further negotiation.
(b) A special indorser is liable to all subsequent holders,
unless the instrument is an originally bearer instrument,
in which case he is liable only to those who take title
through his indorsement (Sec 40).
(c) An instrument, payable to bearer, and indorsed
specially, may nevertheless be further negotiated by
delivery. (Sec 40)
Originally bearer instrument always remains a bearer
instrument (Sundiang and Aquino)
(2) Blank
(a) Specifies no indorsee, instrument so indorsed is payable
to bearer, and may be negotiated by delivery
(b) The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the
indorser in blank any contract consistent with the
character of the indorsement. (Sec 35)
(c) An order instrument may be converted into a bearer
instrument by means of a blank indorsement, and may
be later reconverted into an order instrument by a
subsequent special indorsement
As to title transferred
(1) Restrictive – Such indorsement either:
(a) Prohibits further negotiation of instrument
(b) Constitutes indorsee as agent of indorser
(c) Vests title in indorsee in trust for another (Sec 36)
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Rights of Restrictive Indorsee:
(a) Receive payment
(b) Bring any action thereon that the indorser could bring.
(c) Transfer his rights as such indorsee, but all subsequent
indorsees acquire only the title of first indorsee under
restrictive indorsement. (Sec 37)
(2) Non-restrictive
As to kind of liability assumed by indorser
(1) Qualified
(a) Constitutes indorser as mere assignor of title
(b) Made by adding the words “without recourse” (Sec. 38).
(c) But this does not mean that the transferee only has the
rights of an assignee; transfer remains a negotiation and
transferee can still be a holder capable of acquiring a
title free from defenses of prior parties.
(d) Effects:
(i) Relieves the qualified indorser of his liability to pay the
instrument should the maker be unable to pay
(ii) The qualified indorser does not guarantee the solvency
of the maker, but merely his legal title to the instrument
(iii) The instrument may still be further negotiated; no effect
on its negotiability
(2) Non-qualified
As to presence/absence of express limitations
(1) Conditional
(a) Additional condition annexed to indorser’s liability; such
condition must be expressed
(b) Where an indorsement is conditional, a party required to
pay the instrument may disregard the condition, and
make payment to the indorsee or his transferee, whether
condition has been fulfilled or not.
(c) But any person to whom an instrument so indorsed is
negotiated, will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing
conditionally. (Sec. 39)
(2) Unconditional
Other kinds of indorsement
(1) Absolute – One by which the indorser binds himself to
pay, upon no other condition than the failure of prior
parties to do so, and of due notice to him of such failure
(2) Joint – Where instrument payable to the order of two or
more payees or indorsees not partners, all must indorse,
unless the one indorsing has authority to endorse for the
others (Sec. 41)
(3) Irregular – Where a person, not otherwise a party to the
instrument, places thereon his signature in blank before
delivery, he is liable as indorser
Rights of the Holder
A holder is a payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof (Sec. 191). He has the
following rights (Sec. 51):
(1) To sue on the instrument in his own name
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
Unindorsed intruments: Sec. 49. Transfer without
indorsement; effect of. Where the holder of an instrument
payable to his order transfers it for value without indorsing
it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually
made.
Note: This section applies only to an instrument payable to
the order of the transferor. This cannot apply to bearer
instruments.
Cancellation of indorsement: Sec. 48. Striking out
indorsement. The holder may at any time strike out any
indorsement which is not necessary to his title. The indorser
whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the
instrument.
Indorsement by agent: Sec. 20. Liability of person signing as
agent, and so forth. Where the instrument contains or a
person adds to his signature words indicating that he signs
for or on behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly authorized;
but the mere addition of words describing him as an agent,
or as filling a representative character, without disclosing
his principal, does not exempt him from personal liability.
(2) Payment in due course to the holder discharges
instrument
HOLDER IN DUE COURSE (HDC)
WHO ARE HDCS
(1) HDC under Sec. 52
(2) HDC under Sec. 58: A holder who derives title to the
instrument through a HDC has all the rights of the latter
even though he himself satisfies none of the
requirements of due course holding
(3) HDC under Sec. 59 (presumption): Every holder is
deemed prima facie to be a holder in due course
Sec. 191 defines holder as the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. The
word “holder” in the first clause of Sec. 52 and in the
second subsection thereof may be replaced by the definition
in Sec. 191 so as to read a holder in due course as a payee or
an indorsee in possession, etc. (De Ocampo v. Gatchalian,
1961)
REQUISITES OF A HOLDER IN DUE COURSE
What constitutes a holder in due course. A holder in due
course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
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(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it. (Sec. 52)
That the instrument is complete and regular upon its face
(1) It is incomplete when it is wanting in any material
particular or particular proper to be inserted in a
negotiable instrument without which the same will not be
complete.
Material particulars: A change in the following is considered
a material alteration (Sec. 125):
(a) Date
(b) Sum payable, either for principal or interest
(c) Time or place of payment
(d) Number or relations of the parties
(e) Medium or currency in which payment is to be made
(f) Or which adds a place of payment where no place of
payment is specified
(g) Or any other change or addition which alters the effect
of the instrument in any respect
(2) That he became the holder of it before it was overdue and
without notice that it had been previously dishonored, if
such was the fact
“Overdue” – The following cannot be HDCs:
(a) A holder who became such after the date of maturity of
the instrument (instrument is overdue);
(b) In case of demand instruments: a holder who negotiates
it after an unreasonable length of time after its issue
(Sec. 53)
(c) Instruments with fixed maturity but subject to
acceleration: ultimate date of maturity is the date of
maturity for the purpose of determining whether a
purchaser is a HDC
(d) Undated instruments: Prima facie presumption that it
was negotiated before it was overdue (Sec. 45)
Notes:
(1) An overdue instrument is still negotiable, but it is
subject to the defense existing at the time of the
transfer.
(2) As to what constitutes a reasonable time, regard is to be
had to the nature of the instrument, the usage of trade
or business with respect to such instrument, and the
facts of the particular case. (Sec. 193)
(3) An instrument is not invalid for the reason only that it is
ANTE-DATED OR POSTDATED provided not done for
an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title
thereto as of the date of delivery (Sec. 12).
That he took it in good faith AND for value
“Value”
(1) Any consideration sufficient to support a simple
contract.
(2) An antecedent or pre-existing debt constitutes value,
whether the instrument is payable on demand or at a
future time (Sec. 25)
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
“Holder for value”
(1) Where value has at any time been given for the
instrument, the holder is deemed a HFV in respect to all
parties who become such prior to that time (Sec. 26);
and
(2) Where the holder has a lien on the instrument, he is
deemed a HFV to the extent of his lien (Sec .27).
(3) The holder is a holder for value only to the extent that
the consideration agreed upon has been paid, delivered,
or performed. (Sundiang and Aquino)
Presumption: Every negotiable instrument is deemed prima
facie issued for valuable consideration; and every person
whose signature appears thereon is deemed to have
become a party thereto for value (Sec. 24).
Such presumption cannot be overcome by the petitioner’s
bare denial of receipt of the consideration. (Bayani vs.
People, 2004)
“Good faith”
Holder must have taken the instrument in good faith and
that at the time it was negotiated to him he had no notice of
any infirmity in the instrument or defect in the title of the
person negotiating it.
“Actual knowledge”
What constitutes notice of defect. To constitute notice of an
infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated
must have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the
instrument amounted to bad faith. (Sec. 56)
That at the time it was negotiated to him he had no notice
of any infirmity in the instrument or defect in the title of the
person negotiating it
“Suspicious circumstances”
BAD FAITH - does not require actual knowledge of the exact
fraud that was practiced; knowledge that there was
something wrong about the assignor’s acquisition of title is
sufficient
A check with 2 parallel lines in the upper left hand corner
means that it could only be deposited and may not be
converted to cash. Consequently, such circumstance should
put the payee on inquiry and upon him devolves the duty to
ascertain the holders’ title to the check or the nature of his
possession. Failing in this respect, the payee is declared guilty
of gross negligence amounting to legal absence of good
faith and as such the consensus of authority is to the effect
that the holder of the check is not a holder in good faith.
(State Investment House vs. IAC, 1989)
“Defective title”
Title is NOT defective when at the time it was negotiated to
him, he had NO notice of:
(1) any infirmity in instrument
(2) any defect in title of person negotiating
Title is DEFECTIVE when (Sec. 55):
(1) instrument/signature obtained by fraud, duress, force or
fear or other unlawful means OR for an illegal
consideration; or
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(2) instrument is negotiated in breach of faith, or fraudulent
circumstances
NOTICE of infirmity or defect – actual knowledge of the
infirmity or defect OR knowledge of such facts that his
action in taking the instrument amounted to bad faith
(Sec.56)
RIGHT of a transferee who receives NOTICE of any infirmity
or defect BEFORE he has PAID THE FULL amount for the
instrument. He will be deemed a HDC only to the extent of
the amount therefore paid by him (Sec.54)
RIGHTS OF A HOLDER IN DUE COURSE
(1) To sue on the instrument in his own name (Sec. 51)
(2) To receive payment on the instrument (Sec. 51)
(3) Holds instrument free of any defect of title of prior
parties (Sec. 57)
(4) Free from defenses available to prior parties among
themselves (Sec. 57)
(5) May enforce payment of instrument for full amount,
against all parties liable (Sec. 57)
DEFENSES AGAINST THE HOLDER
PRESUMPTION IN FAVOR OF DUE COURSE HOLDING
Every holder is deemed prima facie to be a holder in due
course (Sec. 59).
(1) BURDEN SHIFTS when it is shown that the title of any
person who has negotiated the instrument was
defective. Holder MUST then PROVE that he or some
person under whom he claims acquired the title as a
holder in due course.
(2) But the last mentioned rule does not apply in favor of a
party who became bound on the instrument prior to the
acquisition of such defective title. (Sec. 59)
HOLDER NOT IN DUE COURSE
(1) One who became a holder of an instrument without any,
some or all of the requisites under Sec. 52
(2) With respect to demand instruments, if it is negotiated an
unreasonable length of time after its issue, the holder is
deemed not a holder in due course. (Sec. 53)
(3) Rights of a holder not in due course (Sec. 51):
(a) To sue on the instrument under in his own name
(b) To enforce the instrument
The only disadvantage of a holder who is not a holder in due
course is that the negotiable instrument is subject to
defenses as if it were non-negotiable. [Chan Wan vs. Tan
Kim (1960)]
Liabilities of Parties
Primary liability: The unconditional promise attaches the
moment the maker makes the instrument while the
acceptor’s assent to the unconditional order attaches the
moment he accepts the instrument. No further act is
necessary in order for the liability to accrue. Presentment for
payment is all that is necessary.
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PARTIES PRIMARILY LIABLE (Sec. 60 and 62)
Persons who by the terms of the instrument are absolutely
required to pay the same
MAKER (SEC. 60)
Promises to pay according to the tenor of the instrument
(promissory note)
ACCEPTOR (SEC. 62)
Upon acceptance of the bill of exchange, engages to pay
the bill according to the tenor of the acceptance.
Unconditionally liable; he is duty-bound to pay the holder at
date of maturity, WON holder demands payment from him,
and he is not relieved from liability even if the instrument
should become overdue due to failure of holder to make
such demand.
Note: Until he accepts the bill of exchange, the drawee
assumes no liability to pay the instrument.
PARTIES SECONDARILY LIABLE
Secondary liability: A party secondarily liable is not bound to
pay unless the following have been fulfilled:
(1) Due presentment or demand to the primary party
(2) Dishonor by such party
(3) Notice of dishonor to secondary party, and, in cases of
foreign bills of exchange, protest of the bill
General or unqualified indorser (Sec. 66)
Engages that he will pay the amount of the instrument to
the holder or to any subsequent indorser who may be
compelled to pay the same if the instrument be dishonored
upon due presentment and proceedings on dishonor be
taken.
Who is a General or Unqualified Indorser? Every person who
indorses WITHOUT qualification (Sec. 66)
A person placing his signature upon an instrument other
than as a maker, drawer, or acceptor unless he indicates by
appropriate words his intention to be bound in some other
capacity (Sec. 63).
A person, who places his signature on an instrument
negotiable by delivery, incurs all the liabilities of an indorser
(Sec. 67).
Note: A qualified indorser does not assume the liability to
pay the instrument since he is merely an assignor of the title
to the instrument. However, he becomes liable once he
breaches a warranty.
Who is a qualified indorser? One who is constituted as a
mere assignor of the title to the instrument by adding to his
signature the words "without recourse" or any words of
similar import.

DRAWER (SEC. 61) Irregular Indorser

(1) Engages that the instrument will be accepted or paid, or
both, according to its tenor on due presentment;
(2) Engages that he will pay the amount of the instrument
to the holder or to any subsequent indorser who may be
compelled to pay the same if the instrument be
dishonored upon due presentment and proceedings on
dishonor be taken,
Limiting liability: Drawer may insert in the instrument an
express stipulation negativing/limiting his own liability to
the holder.
INDORSERS
The following indorsers assume the liability to pay the
instrument:
(1) General or Unqualified Indorser; and
(2) Irregular Indorser
When a person not otherwise a party to an instrument,
places thereon his signature in blank before delivery, he is
liable as an indorser, in accordance with these rules:
(1) Instrument payable to order of 3rd person: liable to
payee and to all subsequent parties
(2) Instrument payable to the order of maker/drawer, or
payable to bearer: liable to all parties subsequent to
maker/drawer
(3) Signs for accommodation of payee: liable to all parties
subsequent to payee (Sec. 64)
Order of Liability among Indorsers (Sec. 68)
(1) Among themselves: liable prima facie in the order they
indorse, but proof of another agreement admissible
(2) As to the Holder: Holder may sue any of the indorsers,
regardless of order of indorsement
(3) Joint payees/indorsees deemed to indorse solidarily

WARRANTIES
General/ Qualified Person Negotiating
Maker Acceptor Drawer
Unqualified Indorser Indorser by Delivery
(1) Existence of the (1) Existence of the (1) Existence of the (1) Genuineness of (1) Genuineness of (1) Genuineness of
payee; payee; payee; the instrument the instrument the instrument
(2) His then (2) His then (2) His then in all respects in all respects in all respects
capacity to capacity to capacity to that it purports that it purports that it purports
indorse indorse; indorse to be; to be; to be;
(3) Existence of the (2) His good title to (2) His good title to (2) His good title to
drawer; the instrument; the instrument; the instrument;
(4) Genuineness of (3) All prior parties’ (3) All prior parties’ (3) Prior parties’
the drawer’s capacity to capacity to capacity to
signature; contract; contract; contract;

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UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW BAR OPERATIONS COMMISSION

(5) Drawer’s (4) The instrument (4) No knowledge (4) No knowledge

capacity and is valid and of any fact of any fact which
authority to subsisting at which would would impair
draw the the time of his impair the the validity of
instrument; indorsement. validity of the the instrument
instrument or or render it
render it valueless.
valueless.
Note: No. 3 does not Note: Warranty
apply to person extends only to
negotiating public immediate
or corporation transferee
securities other than
bills and notes

Presentment for Payment PARTIES TO WHOM PRESENTMENT FOR PAYMENT

Presentment means:
(1) The production of a Bill of Exchange to the drawer or
acceptor for payment; or
(2) The production of a Promissory Note to the party liable
for payment.
Date and time of presentment:
(1) Bearing fixed maturity/not payable on demand – on the
day it falls due if day of maturity falls on Sunday or a
holiday, the instruments falling due or becoming
payable on Saturday are to be presented for payment on
the next succeeding business day (Sec. 85)
(2) Payable on demand – within a reasonable time after its
issue, iv at the option of the holder, may be presented
for payment before twelve o'clock noon on Saturday
when that entire day is not a holiday (Sec. 85)
(3) Demand bill of exchange – within a reasonable time
after the last negotiation. (Sec. 71)
Note: Although presentment was made within a reasonable
time from last negotiation, it may have been made within an
unreasonable time from issuance. Thus holder may still not
be a holder in due course under Sec. 71.
NECESSITY OF PRESENTMENT FOR PAYMENT
When necessary: In order to charge the drawer and indorsers
(Sec. 70)
When NOT necessary:
(1) To charge the person primarily liable on the instrument
(Sec. 70)
(2) To charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the
instrument. (Sec. 79)
(3) To charge an indorser where the instrument was made
or accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
presented. (Sec. 80)
(4) When the bill of exchange has previously been
dishonored by non-acceptance and has not been
subsequently accepted
SHOULD BE MADE
General rule: Presentment for payment must be made to the
person primarily liable on the instrument or if he is absent
or inaccessible, to any person found at the place where the
presentment is made.
Exceptions: Where the person primarily liable is/are:
(1) Dead – presentment for payment must be made to his
personal representative
(2) Partners – presentment for payment may be made to
any one of them, even though there has been a
dissolution of the firm
(3) Several persons, not partners (joint debtors) –
presentment for payment must be made to them all
DISPENSATION WITH PRESENTMENT FOR PAYMENT
When Excused:
(1) Where, after the exercise of reasonable diligence,
presentment cannot be made;
(2) Where the drawee is a fictitious person;
(3) By waiver of presentment, express or implied. (Sec. 82)
DISHONOR BY NON-PAYMENT
The instrument is dishonored by non-payment when:
(1) It is duly presented for payment and payment is refused
or cannot be obtained; or
(2) Presentment is excused and the instrument is overdue
and unpaid (Sec. 83).
In case of waiver of protest, whether in the case of a foreign
bill of exchange or other NI – deemed to be a waiver not
only of a formal protest but also of presentment and notice
of dishonor (Sec. 111)
Notice of Dishonor
Notice given by holder or his agent to party or parties
secondarily liable that the instrument was dishonored by:
(1) Non-acceptance by the drawee of a bill; or
(2) Non-payment by the acceptor of a bill; or

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UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
(3) Non-payment by the maker of a note (Sec. 89)
Requisites:
(1) Given by holder or his agent, or by any party who may be
compelled by the holder to pay (Sec. 90)
(2) Given to secondary party or his agent (Sec. 97)
(3) Given within the periods provided by law (Sec. 102)
(4) Given at the proper place (Secs. 103 and 104)
PARTIES TO BE NOTIFIED
(1) Non-acceptance (bill) – to persons secondarily liable,
namely, the drawer and indorsers as the case may be
(2) Non-payment (both bill and note) – to indorsers
Note: Notice must be given to persons secondarily liable.
Otherwise, such parties are discharged. Notice may be given
to the party himself or to his agent.
When given
Notice may be given as soon as the instrument is
dishonored (Sec. 102)
When not necessary to give to drawer
Notice of dishonor is not required to be given to the drawer
in any of the following cases:
(1) Drawer and drawee are the same;
(2) Drawee is a fictitious person or not having the capacity
to contract;
(3) Drawer is the person to whom the instrument is
presented for payment;
(4) The drawer has no right to expect or require that the
drawee or acceptor swill honor the instrument;
(5) Where the drawer has countermanded payment (Sec.
114)
When not necessary to give to Indorser
Notice of dishonor is not required to be given to an indorser
in the following cases:
(1) Drawee is a fictitious person or does not have the
capacity to contract, and indorser was aware of that fact
at the time he indorsed the instrument;
(2) Indorser is the person to whom the instrument is
presented for payment;
(3) Instrument was made or accepted for his
accommodation. (Sec. 115)
Who will benefit
If given by or on behalf of the holder (Sec. 92):
(1) All subsequent holders
(2) All prior parties (as to holder) who have a right of
recourse against the party to whom it is given.
If given by the indorser (Sec. 93):
(1) Holder
(2) All parties subsequent to the party to whom notice is
given.
PARTIES WHO MAY GIVE NOTICE OF DISHONOR
The notice may be given by or on behalf of the holder, or by
or on behalf of any party to the instrument who might be
compelled to pay it to the holder, and who, upon taking it
up, would have a right to reimbursement from the party to
whom the notice is given. (Sec. 90)
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BAR OPERATIONS COMMISSION
Who should give (Sec. 90):
(1) Holder
(2) Agent or representative of holder.
(3) Any party who may be compelled to pay like indorsers.
(4) Agent of any party who may be compelled.
EFFECT OF NOTICE
Notice of dishonor is required to charge parties secondarily
liable.
Upon valid notice of dishonor, immediate right of recourse
against the indorser arises. It is as if the indorser becomes
primarily liable in the sense that the holder need not claim
payment from the person primarily liable (Sundiang and
Aquino).
FORM OF NOTICE (Sec. 96)
The notice may be:
(1) In writing; or
(2) Merely oral
The notice may be given in any terms which:
(1) Sufficiently identify the instrument; and
(2) Indicate that it has been dishonored by non-acceptance
or non-payment
It may in all cases be given by delivering it personally or
through the mails
WAIVER
Notice of dishonor may be waived either before the time of
giving notice has arrived or after the omission to give due
notice, and the waiver may be expressed or implied. (Sec. 109)
Where the waiver is embodied in the instrument itself, it is
binding upon all parties; but, where it is written above the
signature of an indorser, it binds him only. (Sec. 110)
DISPENSATION WITH NOTICE
(1) When party to be notified knows about the dishonor,
actually or constructively (Secs. 114-117)
(2) If waived (Sec. 109)
(3) When after due diligence, it cannot be given (Sec. 112).
EFFECT OF FAILURE TO GIVE NOTICE
Failure to give notice to parties secondarily liable discharges
such parties
An omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a holder in due course
subsequent to the omission (Sec. 117)
Discharge of
Negotiable Instrument
Discharge: The release of all parties, whether primary or
secondary, from the obligation on the instrument. It renders
the instrument without force and effect and, consequently,
non-negotiable (De Leon)
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
DISCHARGE OF NEGOTIABLE INSTRUMENT
A negotiable instrument is discharged:
(1) By payment in due course by or on behalf of the
principal debtor;
(2) By payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation;
(3) By the intentional cancellation thereof by the holder;
(4) By any other act which will discharge a simple contract
for the payment of money;
(5) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right. (Sec. 119)
BY PAYMENT IN DUE COURSE (ASKED IN 2000)
Payment is made in due course when it is made at or after
the maturity of the payment to the holder thereof in good
faith and without notice that his title is defective. (Sec. 88)
Requisites:
(1) Payment must be made at or after maturity.
(2) Payment must be made to the holder.
(3) Payment must be made in good faith and without notice
that holder’s title is defective.
If payment is made before maturity and the note is
negotiated to a HDC, the latter may recover on the
instrument.
Payment to one of several payees or indorsees in the
alternative discharges the instrument, but payment to one
of several joint payees or joint indorsers is not a discharge.
The party receiving payment must have been authorized by
others to receive payment.
By whom made:
(1) payment in due course by or on behalf of principal
debtor
(2) payment in due course by party accommodated where
party is made/ accepted for accommodation
BY INTENTIONAL CANCELLATION
A cancellation made unintentionally or under a mistake or
without the authority of the holder, is inoperative.
But where an instrument or any signature thereon appears
to have been cancelled, the burden of proof lies on the party
who alleges that the cancellation was made unintentionally
or under a mistake or without authority. (Sec. 123)
BY OTHER ACTS THAT DISCHARGE A SIMPLE CONTRACT
FOR PAYMENT OF MONEY
Any other act which discharges a simple contract for
payment of money (Art. 1231 of the Civil Code), ex. issuance
of a renewal note (novation).
BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT
Principal debtor becomes holder of instrument at or after
maturity in his own right
BY MATERIAL ALTERATION
Material alteration without assent of all parties liable avoids
instrument except as against party to alteration and
subsequent indorsers (Sec. 124)
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BAR OPERATIONS COMMISSION
DISCHARGE OF PARTIES SECONDARILY LIABLE
GROUNDS UNDER SEC. 120
A person secondarily liable on the instrument is discharged:
(1) By any act which discharges the instrument;
(2) By the intentional cancellation of his signature by the
holder;
(3) By the discharge of a prior party;
(4) By a valid tender or payment made by a prior party;
(5) By a release of the principal debtor unless the holder's
right of recourse against the party secondarily liable is
expressly reserved;
(6) By any agreement binding upon the holder to extend
the time of payment or to postpone the holder's right to
enforce the instrument unless made with the assent of
the party secondarily liable or unless the right of
recourse against such party is expressly reserved. (Sec.
120)
OTHER GROUNDS
(1) Failure to make due presentment (Secs. 70, 144)
(2) Failure to give notice of dishonor
(3) Certification of check at instance of holder
(4) Reacquisition by prior party
(5) Where instrument negotiated back to a prior party, such
party may reissue and further negotiate, but not entitled
to enforce payment against any intervening party to
whom he was personally liable
(6) Where instrument is paid by party secondarily liable, it is
not discharged, but
(a) the party so paying it is remitted to his former rights as
regard to all prior parties
(b) and he may strike out his own and all subsequent
indorsements, and again negotiate instrument, except:
rd
where it is payable to order of 3 party and has been
paid by drawer or where it’s made/accepted for
accommodation and has been paid by party
accommodated
(7) by taking a qualified acceptance
RIGHT OF PARTY WHO DISCHARGED INSTRUMENT
Where the instrument is paid by a party secondarily liable
thereon, it is not discharged; but the party so paying it is
remitted to his former rights as regards to all prior parties,
and he may strike out his own and all subsequent
indorsements, and again negotiate the instrument, except:
(1) Where it is payable to the order of a third person, and
has been paid by the drawer;
(2) Where it was made or accepted for accommodation, and
has been paid by the party accommodated. (Sec. 121)
RENUNCIATION BY HOLDER (Sec. 122)
The holder may expressly renounce his rights against any
party to the instrument before, at, or after its maturity. An
absolute and unconditional renunciation of his rights
against the principal debtor made at or after the maturity of
the instrument discharges the instrument.
Renunciation must be in writing unless the instrument is
delivered up to the person primarily liable thereon
Renunciation does not affect the rights of an HDC without
notice
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
Material Alteration
CONCEPT
Any change in the instrument which affects or changes the
liability of the parties in any way.
Any alteration which changes the date, sum payable, time
or place of payment, number of relation of the parties, or
medium of currency of payment where none is specified or
which alters the effect of the instrument in any respect (PNB
v. CA, GR No. L-26001, Oct. 21, 1968)
An alteration is said to be material if it alters the effect of
the instrument. In other words, a material alteration is one
which changes the items which are required to be stated
under Sec. 1 of the NIL (ibid.)
Changes in the following constitute material alterations (Sec.
125):
(1) Date
(2) Sum payable, either for principal or interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is to be made
(6) That which adds a place of payment where no place of
payment is specified
(7) Any other change or addition which alters the effect of
the instrument in any respect.
EFFECT OF MATERIAL ALTERATION
(1) Alteration by a party – Avoids the instrument except as
against the party who made, authorized, or assented to
the alteration and subsequent indorsers. However, if an
altered instrument is negotiated to a HDC, he may
enforce payment thereof according to its original tenor
regardless of whether the alteration was innocent or
fraudulent.
(2) Alteration by a stranger (spoliation)  the effect is the
same as where the alteration was made by a party
wherein a HDC can recover on the original tenor of the
instrument (Sec. 124).
Acceptance
DEFINITION
The signification by the drawee of his assent to the order of
the drawer (Sec. 132)
Requisites (Sec. 132):
(1) Must be in writing
(2) Signed by the drawee
(3) Must not express that the drawee will perform his
promise by any other means than the payment of money
Kinds of Acceptance:
(1) General – assents without qualification to the order of
the drawer
(2) Qualified – which in express terms varies the effect of
the bill as drawn:
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(a) Conditional – makes payment by the acceptor
dependent on the fulfillment of a condition therein
stated
(b) Partial – an acceptance to pay part only of the amount
for which the bill is drawn.
(c) Local – an acceptance to pay only at a particular place.
(d) Qualified as to time
(e) The acceptance of some one or more of the drawees but
not of all. (Sec. 141)
Proof of acceptance (Sundiang and Aquino): The written
acceptance may be in the instrument itself or in a separate
instrument. However, under Sec. 133, “the holder of a bill
presenting the same for acceptance may require the
acceptance be written on the bill, and, if such request is
refused, may treat the bill as dishonored”
Effects: When an acceptance is written on a paper than the
bill itself, it does not bind the acceptor except in favor of a
person to whom it is shown and who, on the faith thereof,
receives the bill for value.
MANNER
EXPRESS ACCEPTANCE
Must be in writing and signed by the drawee and must not
express that the drawee will perform his promise by any
other means than the payment of money. (Sec. 132) If
request for a written acceptance is refused, the holder may
treat the bill as dishonored (Sec. 133)
IMPLIED ACCEPTANCE
(1) If the drawee refuses to return the instrument within 24
hours after it was delivered for acceptance.
(2) If the drawee destroys the same.
(3) If the drawee makes an unconditional promise in writing
before the instrument is drawn, with respect to every
person who, upon the faith thereof, receives the bill for
value.
TIME FOR ACCEPTANCE (Sec. 136)
The drawee is allowed twenty-four hours after presentment
in which to decide whether or not he will accept the bill.
The acceptance, if given, dates as of the day of presentation.
RULES GOVERNING ACCEPTANCE
Q: What is the implication of payment without acceptance
by a drawee?
A: Act No. 2031, or the Negotiable Instruments Law (NIL),
explicitly provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the
tenor of his acceptance. This provision applies with equal
force in case the drawee pays a bill without having previously
accepted it. His actual payment of the amount in the check
implies not only his assent to the order of the drawer and a
recognition of his corresponding obligation to pay the
aforementioned sum, but also, his clear compliance with
that obligation. Actual payment by the drawee is greater
than his acceptance, which is merely a promise in writing to
pay. The payment of a check includes its acceptance. (FEBTC
vs. Gold Palace Jewellery Co,, Nachura, 2008)
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
Right to unqualified acceptance: The holder may refuse to
take a qualified acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as dishonored
by non-acceptance.
Where a qualified acceptance is taken, the drawers and
indorsers are discharged from liability on the bill unless they
have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto.
When the drawer or indorser receives notice of a qualified
acceptance, he must, within a reasonable time, express his
dissent to the holder or he will be deemed to have assented
thereto.
However, acceptance is presumed to be unqualified or
absolute. (Sundiang and Aquino)
Presentment for Acceptance
Requisites:
(1) By the holder, or by some person authorized to receive
payment on his behalf;
(2) At a reasonable hour on a business day;
(3) At a proper place as herein defined;
(4) To the person primarily liable on the instrument, or if he
is absent or inaccessible, to any person found at the
place where the presentment is made.
General rule: Presentment for acceptance is not necessary in
order to render any party to the bill liable. (Sec. 143, last
par.)
When presentment for acceptance necessary: Presentment
for acceptance must be made:
(1) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order
to fix the maturity of the instrument; or
(2) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(3) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.(Sec. 143)
Note: It is not necessary to present a check for acceptance
because it is not one of those required under Sec. 143.
When presentment for acceptance excused: Presentment for
acceptance is excused and a bill may be treated as
dishonored by non-acceptance in either of the following
cases:
(1) Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to
contract by bill.
(2) Where, after the exercise of reasonable diligence,
presentment cannot be made.
(3) Where, although presentment has been irregular,
acceptance has been refused on some other ground. (Sec.
148)
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TIME/PLACE/MANNER OF PRESENTMENT
WHEN MADE
A bill may be presented for acceptance on any day on which
negotiable instruments may be presented for payment
under the provisions of Sections 72 and 85 of this Act. When
Saturday is not otherwise a holiday, presentment for
acceptance may be made before twelve o'clock noon on
that day. (Sec. 146)
What constitutes sufficient presentment? Presentment for
payment, to be sufficient, must be made:
(1) By the holder, or by some person authorized to receive
payment on his behalf;
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined (see Sec. 73);
(4) To the person primarily liable on the instrument or if he
is absent or inaccessible, to any person found at the
place where the presentment is made. (Sec. 72)
Time of maturity: Every negotiable instrument is payable at
the time fixed therein without grace. When they day of
maturity falls upon Sunday, or a holiday, the instrument is
payable on the next succeeding business day. Instruments
falling due or becoming payable on Saturday are to be
presented for payment on the next succeeding business day,
except that instrument payable on demand may, at the
option of the holder be presented for payment before twelve
o’clock noon on Saturday when that entire day is not a
holiday. (Sec. 85)
HOW MADE (SEC. 145)
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
(4) Before the bill is overdue
(5) To the drawee or his agent
Where a bill is addressed to 2 or more drawees who are not
partners – presentment must be made to them all XPT. One
has authority to accept/refuse for all
Where the drawee is dead – presentment may be made to
his personal representative
Where the drawee has been adjudged a bankrupt or insolvent
or has made an assignment for the benefit of creditors –
presentment may be made to him or to his trustee or
assignee.
EFFECT OF FAILURE TO MAKE PRESENTMENT
(Sec. 144)
Failure to make presentment discharges the drawer and all
indorsers (Sec. 144).
DISHONOR BY NON-ACCEPTANCE
When dishonored by non-acceptance: A bill is dishonored by
non-acceptance:
(1) When it is duly presented for acceptance and such an
acceptance as is prescribed by this Act is refused or
cannot be obtained; or
UP COLLEGE OF LAW NEGOTIABLE INSTRUMENTS LAW
(2) When presentment for acceptance is excused and the bill
is not accepted. (Sec. 149)
Duty of holder: Where a bill is duly presented for acceptance
and is not accepted within the prescribed time, the person
presenting it must treat the bill as dishonored by non-
acceptance or he loses the right of recourse against the
drawer and indorsers. (Sec. 150)
Effect: When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and indorsers
accrues to the holder and no presentment for payment is
necessary. (Sec. 151)
Promissory Notes
A promissory note is:
(1) An unconditional promise in writing
(2) Made by one person to another
(3) Signed by the maker
(4) Engaging to pay on demand, or at a fixed or
determinable future time
(5) A sum certain in money to order or to bearer
(6) Where a note is drawn to the maker's own order, it is not
complete until indorsed by him. (Sec. 184)
There are originally 2 parties in a promissory note:
(1) Maker – party who executes the written promise to pay.
(2) Payee – party in whose favor the promissory note is
made payable.
Checks
DEFINITION
A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the
provisions of this Act applicable to a bill of exchange
payable on demand apply to a check. (Sec. 185)
KINDS
(1) Cashier’s Check – One drawn by the cashier of a bank, in
the name of the bank against the bank itself payable to
a third person. It is a primary obligation of the issuing
bank and accepted in advance upon issuance (Tan vs.
CA 1994).
(2) Manager’s Check – A check drawn by the manager of a
bank in the name of the bank itself payable to a third
person. It is similar to the cashier’s check as to the effect
and use.
In issuing a manager’s check, the bank assumed the
liabilities of the acceptor under Sec. 62, NIL (Equitable
PCI Bank v. Ong (2006)
(3) Memorandum Check – A check given by a borrower to a
lender for the amount of a short loan, with the
understanding that it is not to be presented at the bank,
but will be redeemed by the maker himself when the
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loan falls due and which understanding is evidenced by
writing the word “memorandum”, “memo” or “mem” on
the check.
(4) Certified Check – An agreement whereby the bank
against whom a check is drawn undertakes to pay it at
any future time when presented for payment (Sec. 187)
(a) Certification is equivalent to acceptance. (Sec. 187)
(b) Where the holder of a check procures it to be accepted
or certified, the drawer and all indorsers are discharged
from liability. (Sec. 188)
(c) A check of itself does not operate as an assignment of
any part of the funds to the credit of the drawer with the
bank, and the bank is not liable to the holder unless and
until it accepts or certifies the check. (Sec. 189)
(5) Crossed Check – The NIL is silent with respect to crossed
checks, although the Code of Commerce makes
reference to such instruments.
Article 541 of the Code of Commerce states: “The maker or
any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution,
which he shall do by writing across the face the name of
said banker or institution, or only the words ‛and company.”
Under usual practice, crossing a check is done by placing
two parallel lines diagonally on the left top portion of the
check (State Investment House vs. IAC, 1989).
Types: Special and General
The crossing may be special wherein between the two
parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with
the intervention of that bank or company, or crossing may
be general wherein between two parallel diagonal lines are
written the words "and Co." or none at all as in the case at
bar, in which case the drawee should not encash the same
but merely accept the same for deposit (supra).
Effects:
(1) The check may not be encashed; it may only be
deposited with the bank;
(2) The check may be negotiated only once to a person who
has an account with the bank; and
(3) It serves as a warning to a holder that the check has
been issued for a definite purpose. (Bataan Cigar vs. CA,
1994)
PRESENTMENT FOR PAYMENT
A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank.
The bank is not liable to the holder, unless and until it
accepts or certifies the check. (Sec. 189)
TIME
When to present? A check must be presented for payment
within reasonable time after its issue.
EFFECT OF DELAY
The drawer will be discharged from liability thereon to the
extent of the loss caused by the delay. (Sec. 186)
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Certification of checks: An agreement whereby the bank

against whom a check is drawn, undertakes to pay it at any
future time when presented for payment

Effects:
(1) Equivalent to acceptance (Sec. 187) and is the operative
act that makes banks liable
(2) Assignment of the funds of the drawer in the hands of
the drawee (Sec. 189)
(3) If obtained by the holder, discharges the persons
secondarily liable thereon (Sec. 188)

Refusal of drawee bank to certify: The holder has no action

against the bank but he has a right of action against the
drawer. The drawer in turn has right of action against the
bank based on the original contact of deposit between
them.

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PAGE 28
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Concept of Insurance
CONTRACT OF INSURANCE
INSURANCE
A contract of insurance is an agreement whereby one
undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or
contingent event (Sec. 2, par.1)
DEFINITION
(1) A contract of indemnity
(2) Wherein one undertakes for a consideration
(3) To indemnify another against loss, damage, or liability
(4) Arising from an unknown or contingent event.
A contingent event is one that is not certain to take place. An
unknown event is one which is certain to happen, but the
time of its happening is not known. A past event may be a
designated event only in cases where it has happened
already but the parties do not know about it, e.g., prior loss
of a ship at sea.
Regulation by the state through a license or certification of
authority is necessary since a contract of insurance involves
public interest. (White Gold Marine Services vs. Pioneer, 2005)
PRE-NEED PLANS
Pre-need plans are contracts for the benefit of the
planholders which provide for the performance of future
service/s, payment of monetary considerations or delivery of
other benefits at the time of actual need or agreed maturity
date in exchange for cash or installment amounts, with or
without, interest or insurance coverage (Sec. 4b, Pre-Need
Code).
(1) It includes life, pension, education, interment and other
plans, instruments, contracts or deeds as may in the
future be determined by the Commission
(2) Pre-need plans are not considered as insurance
contracts because even pre-need plans can be insured,
thereby implying that the two are not the same.
(3) Pre-need plans are considered as securities and used to
be governed by the SRC. They are not considered as
insurance contracts because it not an insurance for an
unknown or contingent event but an event certain
happening at a certain time.
(4) Not governed by the Insurance Code (IC)
(5) It is now governed by the Pre-Need Code of the
Philippines.
(6) Nevertheless, the Insurance Commissioner has primary
and exclusive jurisdiction over claims for benefits
involving pre-need plans where the amount of benefits
does not exceed P100,000.00 (Sec. 55, Pre-need Code)
DOING OR TRANSACTING AN INSURANCE BUSINESS
General rule: An insurance business consists in undertaking,
for a consideration, to indemnify another against loss,
damage or liability arising from an unknown or contingent
event.
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Exception: Although the business is not formally designated
as one of insurance and no profit is derived or no separate or
direct consideration is received, it is deemed to be doing an
insurance business if it undertakes any of the following
circumstances:
(1) Making or proposing to make, as insurer, any insurance
contract
(2) Making or proposing to make, as surety, any contract of
suretyship as a vocation not as a mere incident to any
other legitimate business of a surety
(3) Doing any insurance business, including a reinsurance
business
(4) Doing or proposing to do any business in substance
equivalent to any of the above (Sec. 2, par. 2).
Notes:
(1) The fact that no profit is derived from the making of
insurance contracts or that no separate or direct
consideration is received shall not be deemed conclusive
to show that the making thereof does not constitute the
doing or transacting of an insurance business (Sec. 2).
(2) According to the case of Philippine Health Care Providers,
Inc. v. CIR (2009), as cited in Sundiang and Aquino:
(a) Contracts of law firm with clients whereby in
consideration of periodical payments, the law firm
promises to represent such clients in all suits for or
against them are NOT insurance contracts.
(b) A contract by which a corporation, in consideration of a
stipulated amount, agrees at its own expense to defend
a physician against all suits for damages for malpractice
is one of insurance, and the corporation will be deemed
as engaged in the business of insurance.
Elements of the Contract
(1) Payment of Premium
(2) Assumption of Risk: Designated Peril as Cause
(3) Risk of Loss or Damage
(4) Insurable Interest
(5) Risk-Distributing Scheme
Notes:
(1) Payment of Premium
(a) The consideration of the insurance contract
(b) The premium is a ratable consideration
(c) Paid by the insured to a general insurance fund
(d) For the insurer’s assumption of risk
(2) Assumption of Risk: Designated Peril as Cause
(a) The insurer promises to pay or indemnify such loss
(b) In a fixed or ascertainable amount
(c) In order to recover from the insurance contract, the
cause of the damage or loss must be caused by the
perils expressly indicated in the contract
(3) Risk of Loss or Damage
(a) The happening of designated events,
(b) Either unknown or contingent,
UP COLLEGE OF LAW INSURANCE CODE
(c) Past or future,
(d) Will subject such interest to some kind of loss,
(e) Whether in the form of injury, damage, or liability
(4) Insurable Interest
(a) The interest of the insured in a thing or a life
(b) Such interest is susceptible of pecuniary estimation (for
non-life insurance only, does not apply to life insurance
because life does not have monetary value)
(c) Thing insured in non-life insurance must be capable of
pecuniary estimation because non-life insurance is
essentially for indemnification.
(d) Cannot be waived (Sec. 25)
5) Risk-Distributing Scheme
(a) This assumption of risk is part of a general scheme to
distribute the loss
(b) Among a large number of persons
(c) Exposed to similar risks.
(d) Losses are borne not by the insurer but proportionally by
all those who paid premiums.
Characteristics/Nature
of Insurance Contracts
(1) Consensual
(a) It is perfected by the meeting of the minds of the
parties.
(b) There must be concurrence of offer and acceptance.
(c) Unless otherwise stipulated, the policy is not essential to
the existence of the contract. It merely evidences the
terms and conditions thereof. (Campos)
(2) Voluntary
(a) General rule: It is not compulsory. Also, the parties are
free to stipulate terms provided they are not contrary to
law, morals, good customs, public order, or public
policy.
(b) Exceptions:
(i) Motor vehicles (Sec. 373-389);
(ii) Employees (Art. 168-184, Labor Code); or
(iii) As a condition to granting a license (De Leon).
(3) Contract of Adhesion (Fine Print Rule)
(a) The contract is presented to the insured already in its
printed form by which he either “takes it or leaves it.”
(b) Contracts of adhesion are valid.
(c) Ambiguity in the insurance contract shall be interpreted
liberally in favor of the insured and strictly against the
insurer.
(4) Executory
(a) Once the insured pays the premium, the contract
already takes effect.
(b) Synallagmatic and reciprocal such that even if the
contingent event does not occur, the insurer has still
provided protection against the risk.
(5) Aleatory
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(a) The obligation of the insurer to pay depends on the
happening of an event which is uncertain, or though
certain, is to occur at an indeterminate time (Art. 2010,
Civil Code)
(b) However, it cannot be considered as gambling,
wagering, or a contract of chance because the risk is
created by the contract itself.
(c) When the designated peril does not happen, the insured
nevertheless gets the protection against such risk for the
period covered by the insurance contract.
(6) Contract of Indemnity (only for non-life insurance)
(a) The insured who has insurable interest over the property
is only entitled to recover the amount of actual loss
sustained
(b) The burden is upon him to establish the amount of such
loss.
(c) Insurance contracts are not wagering contracts (Sec. 4).
(d) General rule: Applies only to property insurance. An
insurance contingent on the life of a person is not an
indemnity contract because the value of a life is
immeasurable.
(e) Exception: However, where the basis of the insurable
interest of the policy owner on the life of the insured is a
commercial relationship
mortgagor/guarantor-mortgagee,
(e.g., creditor-debtor,
support-er and
support-ee), then such contract is an indemnity
contract.
(7) Risk Distributing Device
(a) By paying a pre-determined amount into a general fund
out of which payment will be made for an economic loss
of a defined type,
(b) Each member contributes to a small degree toward
compensation for losses suffered by any member of the
group.
(8) Uberrimae Fides Contract
(a) Each party is required to disclose conditions affecting
the risk, of which he is aware, or any material fact which
the applicant knows and those which he ought to know.
(b) Violation of this duty gives the aggrieved party the right
to rescind the contract. Where the aggrieved party is the
insured, the bad faith of the insurer will preclude it from
denying liability on the policy based on breach of
warranty. (Campos)
(9) Personal Contract
(a) Each party takes into consideration the character,
conduct and/or credit of the other and in making of the
contract, each is enjoined by law to deal with the other
in utmost good faith. (Campos)
(b) So, the insured cannot assign, before the happening of
the loss, his rights under a property policy to others
without the consent of the insurer (Sec. 20, 58, 83)
Classes
(1) Marine
(2) Fire
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(3) Suretyship
(4) Life
(5) Compulsory Motor Vehicle Liability Insurance
(6) Casualty
MARINE (Secs 99-166)
(1) Insurance against the peril of property in, or incidental
to, transit
(2) Covers not only property exposed to risks of navigation
but also those which are exposed to risks not connected
with navigation (Campos).
TWO MAJOR DIVISIONS
(1) Ocean Marine Insurance insures against risk connected
with navigation, to which a ship, cargo, freightage, profits or
other insurable interest in movable property, may be
exposed during a certain voyage or a fixed period of time
(2) Inland Marine Insurance
(a) Covers the land or over the land transportation perils of
property shipped by railroads, motor trucks, airplanes,
and other means of transportation
(b) Also covers risks of lake, river or other inland waterway
transportation and other waterborne perils outside
those covered by ocean marine insurance
BOTTOMRY V. RESPONDENTIA
Bottomry loan: a loan that is obtained for the value of the
vessel on a voyage and the lender is repaid only if the vessel
subject of the loan arrives safely at its destination.
(1) What is the insurable interest of a shipowner on its
bottomed boat? ANS: The difference between the
amount of the loan and the value of the boat.
(2) Can a bottomed boat be insured by its owner? ANS: Yes
if the amount of the loan does not cover the total value
of the boat.
Respondentia loan: a loan that is obtained as security for the
value of the cargo to be transported and the lender is repaid
only if the cargo arrives safely at its destination. Also known
as transportation insurance.
RISKS THAT MAY BE INSURED AGAINST
(1) Perils of the sea includes casualties arising from the
violent action of the elements and does not cover
ordinary wear and tear or other damage usually incident
to the voyage.
(2) Barratry refers to the willful and intentional act on the
part of the master of the crew, in pursuance of some
unlawful or fraudulent purpose, without the consent of
the owner, and to the prejudice of his interest (e.g.,
burning the ship, unlawfully selling the cargo)
(Campos).
Note: Barratry may be expressly covered by the policy. When
so covered proof of willful and intentional act is necessary.
No honest error of judgment or mere negligence, unless
criminally gross, can be barratry (Roque v. IAC, 1985).
PERILS OF THE SEA V. PERILS OF THE SHIP
(1) Perils of the sea or perils of navigation include only
those casualties due to the unusual violence or
extraordinary causes connected with navigation. It has
been said to include only such losses as are of
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extraordinary nature or arise from some overwhelming
power which cannot be guarded against by the ordinary
exertion of human skill or prudence, as distinguished
from the ordinary wear and tear of the voyage and from
injuries suffered by the vessel in consequence of her not
being unseaworthy (Sundiang and Aquino)
(2) Perils of the ship is a loss which in the ordinary course of
events, results:
(a) From the ordinary, natural and inevitable action of the
sea;
(b) From ordinary wear and tear of the ship; and
(c) From the negligent failure of the ship’s owner to provide
the vessel with the proper equipment to convey the
cargo under ordinary conditions.
Notes:
(1) In the absence of stipulation, the risks insured against
are only perils of the sea (Go Tiaco Y Hermanos v. Union
Insurance Society of Canton, 40 Phil. 40).
(2) However, in an all risk policy, all risks are covered unless
expressly excepted. The burden rests on the insurer to
prove that the loss is caused by a risk that is excluded
(Filipino Merchants Insurance Co. v. CA, 179 SCRA 638,
1989)
LIABILITY OF MARINE INSURER
Loss may be total or partial. Total loss may be actual or
constructive.
(1) Actual total loss - irretrievable loss of the thing or any
damage which renders the thing valueless to the owner
for the purpose for which he held it
(2) Constructive total loss - gives the insured the right to
abandon the thing insured by relinquishing to the
insurer his interest in such thing, entitling the former to
recover for a total loss thereof. In turn, the insurer
acquires all the rights over the thing insured. (Campos)
ABANDONMENT
Definition
Abandonment is the act of the insured by which, after a
constructive total loss, he declares the relinquishment to
the insurer of his interest in the thing insured (Sec. 138)
Condition
Abandonment must be total and absolute and made within
a reasonable time so as to give the insurer the chance to
promptly save, if possible, some part of the property
abandoned by the insured.
Effects
(1) Insurer becomes the owner of the thing abandoned.
(2) If abandonment is not accepted, then the insured can
claim the proceeds or bring the matter before the court.
Characteristics of a valid abandonment
(1) There must be an actual relinquishment by the person
insured of his interest in the thing insured (Sec. 138)
(2) There must be a constructive total loss (Sec. 139)
(3) The abandonment be neither partial nor conditional
(Sec. 140)
(4) It must be made within a reasonable time after receipt
of reliable information of the loss (Sec. 141)
(5) It must be factual (Sec. 142)
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(6) It must be made by giving notice thereof to the insurer
which may be done orally or in writing (Sec 143), and
(7) The notice of abandonment must be explicit and must
specify the particular cause of the abandonment (Sec.
144) (Sundiang and Aquino)
WHEN CONSIDERED AS INSURANCE
It shall be deemed as insurance if the surety’s main
business is that of suretyship, and not where the contract is
merely incidental to any other legitimate business or activity
of the surety. (Secs. 175 par. 2 and 3)

FIRE (Secs 167-173) Notes:

(1) Insurance against loss by fire, lightning, windstorm, (1) A contract of surety becomes an insurance contract only
tornado or earthquake and other allied risks, when such when authorized to function as an insurance business.
risks are covered by extension to fire insurance policies (2) Thus, corporations organized for the purpose of
or under separate policies (Sec. 167). guaranteeing performance of contractual obligations or
(2) Fire must be the proximate cause of the damage or loss the payment of debts of others are deemed insurance
(Campos) corporations (Sec. 185) and are thus subject to all the
(3) Fire must be visible heat or light. Combustion which requirements of the Insurance Code (Campos)
produces heat but not visible glow is not fire (Campos) (3) What is unique to a contract of suretyship is that when
(4) Fire must be hostile. (Campos) the obligee accepts the bond, the bond becomes valid
and enforceable whether or not the premium has been
RISKS IN FIRE INSURANCE paid by the obligor (Sec. 177), unlike in an insurance
Hostile v. Friendly Fire contract where payment of premium is necessary for the
Hostile Fire Friendly Fire contract to be valid (Sec. 77)
(4) If the obligee has not yet accepted, then payment of
One that escapes from the One that burns in a place premium is still necessary for the contract of suretyship
place where it was intended where it is intended to burn to be valid (Sec. 177)
to burn and ought to be and ought to be
BOND NECESSARY TO SECURE PERFORMANCE OF OBLIGATION
OR Ex: fire burning in a stove or If the obligor does not perform the obligation, the bond is
lamp forfeited in favor of the obligee and there will be no more
One which remains need to go to court. (Obligee can go directly and secure
completely within its proper performance of the obligation). (NPC v. CA, 1986)
place but because of the
unsuitable materials used to LIFE
light it, it becomes inherently
dangerous and TYPES OF LIFE INSURANCE
uncontrollable
Insurer is liable Insurer is not liable Individual Life (Secs. 179-183, 227)
(1) Insurance on human lives and insurance appertaining
thereto or connected therewith (Sec. 179)
MEASURE OF INDEMNITY
(2) May be made payable on the death of the person, or on
(1) Open policy - only the expense necessary to replace the his surviving a specified period, or otherwise
thing lost or injured in the condition it was at the time of contingently on the continuation or cessation of life
the injury.
(2) Valued policy - the parties are bound by the valuation, in Group Life (Secs. 50, 228)
the absence of fraud or mistake, similar to marine (1) A blanket policy covering a number of individuals who
insurance. are usually a cohesive group (ex: employees of a
company)
Notes: (2) No medical examination is required of each person
(1) However, where the face value of the policy is less than insured (in contrast to individual life insurance) but a
the agreed valuation, then even in case of total loss, the specified number of persons is usually required before
insured can only recover up to the policy’s face value, the policy is issued
which is always the maximum limit of the insurer’s (3) Based on the theory that by the law of averages, only a
liability. determinable percentage of the members of the group
(2) In an open policy, the actual loss, as determined, will would die within the contemplated period
represent the total indemnity due the insured except (4) The policy need not be in printed form and may be
only that the total indemnity shall not exceed the total typewritten, but the law prescribes the contents of such
value of the policy (Devt. Ins. Corp. v. IAC) policy.
SURETYSHIP (Secs 175-178) Industrial Life (Secs. 229-231)
(1) It is tailored to suit the needs of the urban industrial
DEFINITION
class of blue-collar workers (Dobbyns).
An agreement whereby a surety guarantees the (2) Purpose: to cover the expenses for the last sickness of
performance by the obligor of an obligation or undertaking the insured and those for his burial
in favor of the obligee (3) Face amount is relatively small.

PAGE 32
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(4) Shall not lapse for non-payment if due to the failure of
the company to send its representative/agent to the
insured to collect such premium.
(5) A form of life insurance under which
(a) The premiums are payable either monthly or oftener;
(b) The face amount of insurance provided in any policy is
not more than 500 times that of the current statutory
minimum daily wage in the City of Manila; and
(c) The words "industrial policy" are printed upon the policy
(Sec. 229)
VARIOUS LIFE INSURANCE PLANS
(1) Ordinary or whole life policy: insurer agrees to pay the
face value of the policy upon the death of the insured
(2) Limited payment plan: insured agrees to pay premiums
only for a specified number of years. If he survives such
period, he stops paying any further premium, and when
he dies, the insurer pays the proceeds to his beneficiary.
(3) Term plan: insurer’s liability arises only upon the death
of the insured within the agreed term or period. If the
insured survives, the contract terminates and the insurer
is not liable.
(4) Pure endowment policy: insurer pays the insured if the
insured survives a specified period. If the insured dies
within the period, the insurer is released from liability
and unless the contract otherwise provides, need not
reimburse any part of the premiums paid.
(5) Endowment policy: If the insured outlives the designated
period, he is paid the face value of the policy. If the he
dies within said period, the insurer pays the proceeds to
the beneficiary. (combination of term policy and pure
endowment policy)
RISKS IN LIFE INSURANCE
(1) Death or Survival
(a) It may be made payable on the death of the person, or
on his surviving a specified period, or otherwise
contingently on the continuation or cessation of life.
(Campos)
(b) Death of the insured must be proven by the beneficiary
before the insurer can be made to pay.
(2) Suicide (Asked in ‘95)
Insurer is liable in the following cases:
(a) If committed after two years from the date of the policy’s
issue or its last reinstatement;
(b) If committed in a state of insanity regardless of the date
of the commission unless suicide is an excepted peril.
(Sec. 180-A)
(c) If committed after a shorter period provided in the
policy.
(d) Since suicide is contrary to the laws of nature and the
ordinary rules of conduct, it is never presumed. The
burden of proving lies with the insurer who seeks to
avoid liability under a life policy excepting it from
coverage (Campos)
Note: Any stipulation extending the 2-year period is void.
(3) At the hands of the law (e.g. by legal execution)
(a) It is one of the risks assumed by the insurer under a life
insurance policy in the absence of a valid policy
exception (Vance)
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(4) Killing by the beneficiary
General rule: The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the principal
accomplice or accessory in willfully bringing about the death
of the insured.
In such event, the nearest relative of the insured shall
receive the proceeds of said insurance if not otherwise
disqualified. (Sec. 12)
If there is no surviving relative of the insured, the proceeds
should be delivered to the estate of the insured subject to
the payment of his debts (Campos)
Exceptions:
(1) Accidental killing
(2) Self defense
(3) Insanity of the beneficiary at the time he killed the
insured
(4) Negligence (the Code only refers to a “willful” act)
Note: Conviction of the beneficiary is necessary before his
interest in the insurance policy is forfeited in favor of the
nearest relative of the insured.
COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
(1) A species of compulsory insurance that provides for
protection coverage that will answer for legal liability for
losses and damages for bodily injuries or property
damage that may be sustained by another arising from
the use and operation of motor vehicle by its owner.
(2) The Land Transportation Office shall NOT allow the
registration or renewal of registration of any motor
vehicle unless such insurance is obtained (Sec. 376, as
amended by PD 1455).
NATURE AND PURPOSE
(1) To the extent that motor vehicle insurance is
compulsory, it must be a LIABILITY policy (Sec. 373(f)),
and the provision making it merely an indemnity
insurance contract CANNOT have any effect (Campos)
(2) Insurer’s liability is DIRECT and PRIMARY so the insurer
need not wait for final judgment in the criminal case to
be liable. (Shafer v. Judge, RTC, 1988)
(3) Purpose: To give immediate financial assistance to
victims of motor vehicle accidents and/or their
dependents, especially if they are poor, regardless of the
financial capability of motor vehicle owners or operators
responsible for the accident sustained (Shafer v. Judge,
RTC, 1988)
CLAIMS
rd
(1) Claimants/victims may be a “passenger” or a “3
party”. The insured may be the party at fault as against
claims of third parties (third party liability) or the victim
of the contingent event.
(2) It applies to all vehicles whether public or private
vehicles.
Note: It is the only compulsory insurance coverage under the
Insurance Code.
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RELEVANT CLAUSES IN MOTOR VEHICLE INSURANCE
(1) Authorized Driver Clause – A stipulation in a motor
vehicle insurance which provides that the driver, other
than the insured owner, must be duly licensed to drive
the motor vehicle, otherwise the insurer is excused from
liability (Villacorta v. IAC, 1980)
(2) Theft Clause – the risks insured against in the policy may
include theft. If there is such a provision and the vehicle
was unlawfully taken, the insurer is liable under the
theft clause and the authorized driver clause does not
apply. The insured can recover even if the thief has no
driver’s license (Perla Compania de Seguros, Inc. v. CA,
1992).
CASUALTY (Sec. 174)
(1) Insurance covering loss or liability arising from accident
or mishap
(2) Not falling exclusively within the scope of other types of
insurance such as fire or marine
(3) Includes, but not limited to, employer’s liability
insurance, workmen’s compensation insurance, public
liability insurance, motor vehicle liability insurance, plate
glass insurance, burglary and theft insurance, personal
accident and health insurance as written by non-life
insurance companies, and other substantially similar
kinds of insurance (ex: robbery and theft insurance)
(4) Governed by the general provisions applicable to all
types of insurance plus stipulations in the insurance
contract
RISKS IN CASUALTY INSURANCE
Intentional vs. Accidental
Intentional – Implies the exercise of the reasoning faculties,
consciousness and volition.
(1) Where a provision of the policy excludes intentional
injury, it is the intention of the person inflicting the injury
that is controlling.
(2) If the injuries suffered by the insured clearly resulted
from the intentional act of the third person, the insurer
is relieved from liability as stipulated (Biagtan v. the
Insular Life Assurance Co. Ltd., 1972).
Accidental – That which happens by chance or fortuitously,
without intention or design, which is unexpected, unusual
and unforeseen. The terms do not, without qualification,
exclude events resulting in damage due to fault,
recklessness or negligence of third parties. The concept is
not necessarily synonymous with “no fault.” It may be
utilized simply to distinguish intentional or malicious acts
from negligent or careless acts of man (Pan Malayan
Insurance Corp. v. CA).
LIABILITY VS. INDEMNITY
Liability insurance
(1) Insurer assumes the obligation to pay the third party in
whose favor the liability of the insured arises.
(2) Liability of the insurer attaches as soon as the liability of
the insured to the third party is established.
(3) Insurer is liable regardless of whether or not the insured
has paid the third party (Campos)
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Indemnity insurance
(1) NO action will lie against the insurer unless brought by
the insured for loss ACTUALLY sustained and paid by
him.
(2) Liability of the insurer attaches only AFTER the insured
has paid his liability to the third party (Campos)
NO ACTION CLAUSE
A requirement in a policy of liability insurance which
provides that suit and final judgment be first obtained
against the insured; that only thereafter can the person
injured recover on the policy. (Guingon vs. Del Monte, 1967)
But, the no-action clause CANNOT prevail over the Rules of
Court provisions which are aimed at avoiding multiplicity of
suits. Parties (the insured and the insurer) may be joined as
defendants in a case commenced by the third party
claiming under a liability insurance, as the right to relief in
respect to the same transactions is alleged to exist (see Sec.
5, Rule 2, ROC; Sec. 6, Rule 3, ROC).
Insurable Interest
DEFINITION
An insurable interest is that interest which the law requires
the owner of an insurance policy to have in the person or
thing insured, the absence of which renders the contract
void.
In general, an insurable interest is that interest which a
person is deemed to have in the subject matter insured,
where he has a relation or connection with or concern in it,
such that the person will derive pecuniary benefit or
advantage from the preservation of the subject matter
insured and will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening of the
event insured against. The existence of an insurable interest
gives a person the legal right to insure the subject matter of
the policy of insurance. (Lalican v. Insular Life Insurance,
2009)
An insurable interest is one of the most basic and essential
requirements in an insurance contract. As such, it may not
be waived by stipulation.
The insurable interest need not always be pecuniary in
nature.
RATIONALE
(1) As a deterrence to the insured – A policy issued to a
person without interest is a mere wager policy or
contract and is void for illegality. A wager policy is
obviously contrary to public interest. There is a moral
hazard in removing insurable interest as a requirement
for the validity of an insurance policy in that:
(a) It allows the insured to have an interest in the
destruction of the subject matter rather than in its
preservation. (Myer vs. Grand Lodge)
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(b) It affords a temptation or an inducement to the insured,
having nothing to lose and everything to gain, to bring
to pass the event upon happening of which the
insurance becomes payable. (White vs. Equitable Nuptial
Benefit Union)
(2) As a measure of limit of recovery – The insurable interest
is the measure of the upper limit of his provable loss
under the contract. Sound public policy requires that
insurance should not provide the insured means of
making a net profit from the happening of the event
insured against.
WHEN INSURABLE INTEREST SHOULD EXIST
Existence of Insurable Interest Required
Insurable Insurance Intervening Loss Occurs
Interest Takes Effect Period
Life or Health  Every person has an insurable interest in the life and health:
Property  
Insurable interest over life/health may be lost after the
insurance takes effect as long as it exists at the time the
insurance takes effect. On the other hand insurable interest
property need not exist during the intervening period or
from the time between it the policy takes effect and the loss
occurs. The alienation of insured property will not defeat a
recovery if the insured has subsequently reacquired the
property and possesses an insurable interest at the time of
loss. (Womble vs. Dubuque Fire &Marine Insurance Co.)
CHANGE OF INTEREST
Change of interest means the absolute transfer of the
property insured.
General rule: A change of interest in the thing insured does
not transfer the policy, but suspends the insurance to an
equivalent extent until the interest in the thing and the
interest in the insurance policy are vested in the same
person. (The contract is not rendered void but is merely
suspended) (Sec. 58)
Exceptions:
(1) In life, health, and accident insurance (Sec. 20).
(2) A change of interest in the thing insured after the
occurrence of an injury which results in a loss (Sec. 21)
does not affect the policy
(3) A change in the interest in one or more of several things,
separately insured by one policy (Sec. 22.) A conveyance
of one or more things does not affect the policy with
respect to the others not so conveyed.
(4) A change of interest by will or succession on the death
of the insured (Sec. 23)
(a) The death of the insured does not avoid insurance
policy.
(b) It does not affect the policy except his interest passes to
his heir or legal representative who may continue the
insurance policy on the property by continuing paying
premiums.
(5) A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured,
to the others (Sec. 24).
(a) It does not avoid the insurance.
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(b) It will avoid the policy only as to the selling partners or
co-owners but not as to others.
(c) The rule applies even though it has been agreed that
the insurance cease upon alienation of the thing.
(6) Automatic transfers of interest in cases in which the
policy is so framed that it will inure to the benefit of
whomsoever, during the circumstance of the risk, may
become the owner of the interest insured (Sec. 57). An
exception to the general rule that upon maturity, the
proceeds of a policy shall be given exclusively to the
proper interest if the person in whose name or for whose
benefit it is made.
(7) An express prohibition against alienation in the policy.
(Art. 1306, CC). Alienation will not merely suspends the
contract but avoid it entirely.
INSURABLE INTEREST IN LIFE/HEALTH
(1) Of himself, of his spouse and of his children;
(2) Of any person on whom he depends wholly or in part for
education or support, or in whom he has a pecuniary
interest;
(3) Of any person under a legal obligation to him for the
payment of money, or respecting property or services, of
which death or illness might delay or prevent the
performance; and
(4) Of any person upon whose life any estate or interest
vested in him depends (Sec. 10).
Notes:
(1) The person whose life is insured - the cestui que vie.
(2) Unless the interest of a person insured is susceptible of
exact pecuniary measurement, the measure of
indemnity under a policy of insurance upon life or health
is the sum fixed in the policy (Sec. 183).
Life insurance policies may be divided into two (2) general
classes
(1) Insurance upon one’s life
(2) Insurance upon life of another
INTEREST IN ONE’S OWN LIFE
(1) Cestui que vie is the insured himself
(2) Insured can designate anyone to be the beneficiary of
the policy.
(3) Each has unlimited interest in his own life, whether the
insurance is for the benefit of himself or another.
(4) The beneficiary designated need NOT have any interest
in the life of the insured (when person takes out policy
on his own life)
(5) But if a person obtains a policy on the life of another and
names himself as the beneficiary, he must have
insurable interest therein (when a person takes out
policy on the life of another)
INTEREST IN LIFE OF ANOTHER
General rule:
(1) The insured must have pecuniary interest in the life of
another.
(2) In life insurance, unless based on commercial
relationship, the policy owner does not necessarily have
“pecuniary interest” on the life of the cestui que vie.
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Exception: In Sec. 10 par. (a) (spouse and children), mere
relationship is sufficient. Sec. 10(a) does not qualify so
children may be legitimate or illegitimate, minors or of legal
age, married or not, dependent or not
Notes:
(1) Insurable interest MUST be based on moral and legal
grounds
(2) Such interest exists whenever the insured has a
responsible expectation of deriving benefit from the
continuation of the life of the other person or of
suffering detriment through its termination.
(3) No insurable interest in the life of an illegitimate spouse
(4) CREDITOR may take out insurance on the life of his
debtor. BUT his insurable interest is only up to the
amount of the debt.
(5) ASSIGNEE is not required to have insurable interest in
the life of the insured, for to require such interest in him
is to diminish the investment value of the contract to the
owner. Note, however, that assignment is different from a
change in the designated beneficiary.
(6) When the beneficiary is the PRINCIPAL, ACCOMPLICE,
or ACCESSORY in willfully bringing about the death of
the insured = Interest of beneficiary in life insurance
policy is FORFEITED (Sec. 12).
BENEFICIARY
Definition
The person who is named or designated in a contract of life,
health, or accident insurance as the one who is to receive
the benefits which become payable, according to the terms
of the contract, intended to be the recipient of the proceeds
or benefits of insurance if the insured risk occurs.
General rule: A person may designate a beneficiary,
irrespective of the beneficiary’s lack of insurable interest,
provided he acts in good faith and without intent to make
the transaction merely a cover for a forbidden wagering
contract (De Leon).
Exceptions: Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of
a life insurance policy by the person who cannot make any
donation to him, according to said article (Art. 2012, Civil
Code).
(1) Those made between persons who were guilty of
adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same
criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants
and ascendants, by reason of his office.
Change in beneficiary
The insured shall have the right to change the beneficiary
he designated in the policy, unless he has expressly waived
this right in said policy (Sec. 11).
In general, the policy owner can change the beneficiary
without the consent of such beneficiary. However, when this
right to change is expressly waived, the consent of the
beneficiary is necessary. This means that despite the waiver,
he can still change the beneficiary provided he obtained the
beneficiary’s consent.
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INTEREST IN HEALTH
Nature of health care agreement
The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity. Once
the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent,
the health care provider must pay for the same to the extent
agreed upon under the contract. (Philamcare Health
Systems v. CA, 2002)
Time of existence of insurable interest
General rule: Interest in the life or health of a person must
exist when the insurance takes effect (at inception), but
need not exist thereafter or when the loss occurs. (Sec. 19)
Exceptions:
(1) Creditor’s insurance taken on the life of the debtor -
Insurable interest disappears once the debt has been
paid. At this point, the creditor/insured can no longer
recover on the policy.
(2) Company’s insurance taken on the life of an employee -
insurable interest disappears once the employee leaves
the company, in which case, the company can no longer
recover on the policy.
TRANSFER OF POLICY
Interest can be transferred even without the notice to the
insurer of such transfer or bequest, unless there is a
stipulation to the contrary (Sec. 182).
Note: There is no right of subrogation in life insurance,
because it is not a contract of indemnity.
INSURABLE INTEREST IN PROPERTY
NATURE OF INTEREST
An insurable interest in property may consist in:
(1) An existing interest;
(2) An inchoate interest founded on an existing interest; or
(3) An expectancy, coupled with an existing interest in that
out of which the expectancy arises (Sec. 14).
The insurable interest may be in the property itself (e.g.,
ownership), or any relation thereto (e.g., interest of a trustee
or a commission agent), or liability in respect thereof (e.g.,
interest of a carrier or depository of goods). The relation of
the insured to the property is such that he will be benefited
by its continued existence or will suffer a direct pecuniary
loss by its destruction.
An existing interest may be a legal title or equitable title.
Examples of those having existing interest are owners as
regards their properties, trustees in the case of the seller of
property not yet delivered, mortgagors over the property
mortgaged, and lessor, lessee and sublessee over the
property leased.
An inchoate interest MUST be founded on existing interests.
It exists but is incomplete or unripe until the happening of
an event. Examples of inchoate interests are the interest of
stockholders with respect to dividends in case of profits and
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shares in the assets, and the interest of a partner in the
properties belonging to the partnership.
An expectancy must be coupled with an existing interest in
that out of which the expectancy arises. For example, a
farmer who planted crops has insurable interest over his
harvest which can be expected.
A mere contingent or expectant interest in anything, not
founded on an actual right to the thing, nor upon any valid
contract for it, is not insurable (Sec. 16).
A mere hope or expectation of benefit which may be
frustrated by the happening of some event uncoupled with
any present legal right will not support a contract of
insurance.
The acquiring co-owner has the same interest; his
interest merely increases upon acquiring other co-
owners interest (Sec. 24).
TRANSFER OF POLICY
Interest cannot be transferred without the insurer’s consent,
because the insurer has approved the policy based on the
personal qualifications and insurable interest of the insured.
Note: When there is an express prohibition against
alienation in the policy, in case of alienation, the contract of
insurance is not merely suspended but avoided.
DISTINCTIONS BETWEEN INSURABLE INTERESTS
IN PROPERTY AND IN LIFE
Life Property

Notes: Extent
(1) A son has no insurable interest over the property of his Limited to actual value of the Unlimited (save in life
father because such is just a mere expectancy and has interest thereon insurance effected by a
no legal basis before he inherits such property. creditor on the life of the
(2) Insurable interest in property may be based on a debtor – amount of debt
perfected contract of sale, vesting an equitable title only)
even before delivery of the goods. (Filipino Merchants
Ins. Co. v. CA, 1989) Existence
(3) When the seller retains ownership only to insure that the Must exist when the Must exist at the time the
buyer will pay its debt, the risk of loss is borne by the insurance takes effect and insurance takes effect, BUT
buyer. Insurable interest in property does not imply a when the loss occurs, BUT need not exist thereafter
property interest in, or a lien upon, or possession of the need not exist in the
subject matter of the insurance, and neither ownership meantime
nor a beneficial interest is requisite to the existence of
such an interest. Anyone has an insurable interest in Expectation of benefit to be derived
property who derives a benefit from its existence or Must have legal basis Need NOT have legal basis
would suffer loss from its destruction. (Gaisano Cagayan
Interest of beneficiary
Ins. v. Insurance Co. of North America, 2006)
Must have insurable interest Need not have insurable
MEASURE OF INSURABLE INTEREST IN PROPERTY over the thing insured interest over the life of the
Being a contract of indemnity, the measure of insurable insured if the insured himself
interest in property is the extent to which the insured might secured the policy. But if the
be damnified by the loss of injury thereof (Sec. 17). The insurance was obtained by
insured cannot recover a greater value than that of his the beneficiary, the latter
actual loss because it would be a wagering policy contrary must have insurable interest
to public policy and void. over the life of the insured.
(Sundiang and Aquino)
Thus, a mortgagor has an insurable interest equal to the
value of the mortgaged property and a mortgagee, only to DOUBLE INSURANCE AND OVER INSURANCE
the extent of the credit secured by the mortgage.
DOUBLE INSURANCE
TIME OF EXISTENCE
General rule: Interest in property insured must exist BOTH at Definition
inception and at time of loss, but not in the meantime (Sec. Double insurance exists where the same person is insured
19). by several insurers separately in respect to the same subject
and interest (Sec. 93).
Exceptions (i.e., automatic transfer of interest):
(1) A change in interest over the thing insured AFTER the Requisites
loss contemplated. The insured may sell the remains (1) The same person is insured;
without prejudice to his right to recover (Sec. 21). (2) Two or more insurers insuring separately;
(2) A change of interest in one or more several distinct (3) The same subject matter;
things, separately insured by one policy. This does not (4) The same interest insured; and
avoid the insurance as to the others (Sec. 22). (5) The same risk or peril insured against
(3) A change in interest by will or succession upon the
death of the insured (Sec. 23). Notes:
(4) A transfer of interest by one of several partners, joint
owners, or owners in common who are jointly insured.
PAGE 37
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(1) It is not prohibited under the law, unless the policy
contains a stipulation to the contrary. Usually, insurance
policy contains “other insurance clause” which requires
disclosure of other existing insurance policy. In such
case, non-disclosure will avoid the policy. Such clause is
intended to prevent over insurance and thus avert the
perpetration of fraud.
(2) Double insurance is not prohibited unless specifically
excepted by an insurer. Even if not prohibited it should
not amount to over-insurance. If over-insured, then the
insurers will pay pro-rata (or whatever is stated in
contract) in case of loss.
Rules for payment of claims
Section 94 enunciates the principle of contribution which
requires each insurer to contribute RATABLY to the loss or
damage considering that the several insurances cover the
same subject matter and interest against the same peril. If
the loss is greater than the sum total of all the policies
issued, each insurer is liable for the amount of his policy.
Double Insurance Over Insurance
Amount of insurance MAY Amount of insurance
OR MAY NOT EXCEED the EXCEEDS the value of the
value of the insured’s insured’s insurable interest
insurable interest
There are always several There may be one or more
insurers insurer(s)
RE-INSURANCE
Definition
A contract of reinsurance is one by which an insurer
procures a third person to insure him against loss or liability
by reason of such original insurance (Sec. 95).
Nature
Reinsurance is a contract of indemnity (Sec. 97). It has been
referred to as “an insurance of an insurance.” There is no
relationship between the reinsurer of the reinsurance
contract and the insured under the original insurance
contract (See Sec. 98).
Original Insurance Contract vs. Reinsurance Contract
The original insurance contract is separate and distinct from
the reinsurance contract. Insurance contract is independent
from the reinsurance contract.
(1) Insurance - indemnity against damages
(2) Reinsurance- indemnity against liability
Reinsurance Treaty vs. Reinsurance Policy
A reinsurance treaty is an agreement between two
insurance companies whereby one agrees to cede and the
other to accept reinsurance business pursuant to provisions
specified in the treaty (De Leon).
A reinsurance policy is a contract of indemnity one insurer
makes with another to protect the first insurer from a risk it
has already assumed.
Reinsurance treaties and reinsurance policies are not
synonymous. Treaties are contracts for insurance; policies
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are contracts of insurance (Philamlife vs. Auditor General,
1958).
DOUBLE INSURANCE VS. REINSURANCE
Double Insurance Reinsurance
Same interest Different interest
Insurer remains as the Insurer becomes the insured
insurer in relation to the reinsurer
Insured is a party in interest The original insured is not a
in the insurance contracts party in the reinsurance
contract
Property is the subject The original insurer's risk is
matter the subject matter
Insured has to give his Insured’s consent is not
consent necessary
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY
The Insurance Code recognizes that both the mortgagor and
mortgagee have each separate and distinct insurable
interest in the mortgaged property and that they may take
out separate policies with the same or different insurance
companies. Consequently, insurance taken by one on his
own name only does not inure to the benefit of the other.
The mortgagor may insure the mortgaged property in its
full value but the mortgagee can insure it only in the extent
of the debt secured.
When a mortgagee insures his own interest in the
mortgaged property without reference to the right of the
mortgagor, mortgagee is entitled to the proceeds of the
policy in case of loss to the extent of his credit.
(1) If the proceeds are more than the total amount of credit,
then mortgagor has no right to the balance. If the
proceeds are equal to the credit, then insurer is
subrogated to the mortgagee’s rights and mortgagee
can no longer recover the mortgagor’s indebtedness.
(2) If the proceeds are less than the credit, then the
mortgagee may recover from the mortgagor the
deficiency. Upon payment, the insurer is subrogated to
the rights of the mortgagee against the mortgagor to
the extent of the amount paid.
When a mortgagor takes out an insurance for his own
benefit, he can only recover from the insurer but the
mortgagee has a lien on the proceeds by virtue of the
mortgage. A mortgagor can make the proceeds payable to
or assigned to the mortgagee.
OPEN MORTGAGE OR LOSS PAYABLE MORTGAGE CLAUSE
A mortgage that can be paid-off prior to maturity without
penalty; mortgagee is the beneficiary for insurance taken by
mortgagor (insurance taken by mortgagor but payable or
assigned to the mortgagee).
The insurance is on the interest of the mortgagor; so, he
does not cease to be a party to the contract. His acts, prior
to the loss, which would otherwise avoid the insurance,
affects the mortgagee, even if the property is in the hands of
the latter. (Secs. 8 and 9)
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In case of loss, the mortgagee is entitled to recover up to
the extent of his credit, and should the amount he recovers
be equal to the amount of his credit, then the debt is
extinguished.
UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE
The mortgagee may perform the acts of mortgagor.
Subsequent acts of the mortgagor or owner do NOT
prejudice the mortgagee's interest.
When a mortgagee insured his own interest and a loss
occurs, he is entitled to recover on the insurance. However,
he may no longer claim against the mortgagor, for his claim
is discharged up to the amount the insurer has paid him
(Palileo vs. Cosio, 1955).
Perfection of the Contract
of Insurance
A policy of insurance is different from the contract of
insurance. The policy is the formal written instrument
evidencing the contract of insurance entered into between
the insured and the insurer.
FORM OF INSURANCE POLICY
No policy, certificate or contract of insurance shall be issued
or delivered within the Philippines unless in the form
previously approved by the Commissioner.
No application form shall be used with, and no rider, clause,
warranty or endorsement shall be attached to, printed or
stamped upon such policy, certificate or contract unless the
form of such application, rider, clause, warranty or
endorsement has been approved by the Commissioner.
OFFER AND ACCEPTANCE/CONSENSUAL
An insurance contract is consensual. It is therefore
perfected by mere consent. Consent is manifested by the
meeting of the offer and the acceptance upon the object or
the cause which are to constitute the contract.
A contract of insurance must be assented to by both parties,
either in person or through their agents and so long as an
application for insurance has not been either accepted or
rejected, it is merely a proposal or an offer to make a
contract. (Perez vs. CA, 2000)
(1) Submission of application, even with premium payment
is a mere offer on the part of the applicant, and does not
bind the insurer.
(2) An insurance contract is also not perfected where the
applicant dies before the approval of his application or it
does not appear that the acceptance of the application
ever came to the knowledge of the applicant.
(3) An acceptance made by letter shall not bind the person
making the offer except from the time it came to his
knowledge. (Enriquez vs. Sun Life Assurance Co., 1920)
The parties may impose additional conditions precedent to
the validity of the policy as a contract as they see fit.
Usually, it is stipulated in the application that contract shall
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not become binding until the policy is delivered and the first
premium is paid. (De Leon)
DELAY IN ACCEPTANCE
Delay in acting on the application does not constitute
acceptance even though the insured has forwarded his first
premium with his application. (Perez v. Court of Appeals,
2000)
When there is delay in acceptance due to the negligence of
the insurance company which takes unreasonably long time
before the application is processed and the applicant dies,
the contract is not perfected. In this case, the insurer can be
liable for DAMAGES in accordance with the “TORT
THEORY”. The insurance business is imbued with public
interest, thus it is the duty of the insurer to act with
reasonable promptness in acting on applications submitted
to it.
The measure of damage is the face value of the policy. In
life insurance, the proceeds will inure to the insured’s estate
and not to the beneficiary.
Insurer is liable under the policy because its delay in
formally accepting/denying the application and payment of
premium is taken as an implied acceptance.
Offer – when the insured submits an application to the
insurer
Acceptance – when the insurer approves the application
Effectivity – upon payment of first premium, provided there
has been an approval of the application.
DELIVERY OF POLICY
Delivery is the act of putting the insurance policy (the
physical document) into the possession of the insured.
(1) The delivery can be a proof of the acceptance of the
insurer of the offer of the insured. It is not, however, a
pre-requisite of a valid contract of insurance.
(2) Actual manual delivery is not necessary for the validity
of the contract. Constructive delivery may be sufficient.
(3) The contract may be completed without delivery
depending on the intention of the parties.
Note: There are conflicting views as to whether delivery to
the agent of the insurance company can be considered
delivery to the insured. In Bradley vs. New York Life Insurance
(1921), it was held that the agent of the insurance company
is not the agent of the insured thus delivery to the agent
cannot be considered delivery to the insured. In New York
Life Insurance Co. vs. Babcock (1898), however, it was held
that actual delivery to the insured is not essential to give the
policy binding effect as long as the insured has complied
with every condition required of him.
PREMIUM PAYMENT
DEFINITION
An insurance premium is the agreed price for assuming and
carrying the risk, that is, the consideration paid an insurer
for undertaking to indemnify the insured against the
specified peril.
Where only one premium is paid for several things not
separately insured, making for only one cause or
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consideration, the insurance contract is entire or indivisible,
not severable or divisible, as to the items insured. (Oriental
Assurance Corp. vs. CA, 1991)
General rule: No insurance policy issued or renewal is valid
and binding until actual payment of the premium. Any
agreement to the contrary is void. (Sec. 77)
Exceptions:
(1) In case of life and industrial life whenever the grace
period provision applies (Sec. 77)
(2) Where there is an acknowledgment in the contract or
policy of insurance that the premium has already been
paid (Sec. 78)
(3) Where there is an agreement to grant the insured credit
extension for the payment of the premium despite full
awareness of Sec. 77 (UCPB v. Masagana Telemart,
2001)
(4) Where there is an agreement allowing the insured to
pay premium in installment and partial payment has
been made at the time of the loss (Makati Tuscany vs.
CA, 1992)
(5) Where the parties are barred by estoppel (UCPB v.
Masagana, 2001)
AUTHORITY OF AGENT TO RECEIVE PREMIUM
Where an insurer authorizes an insurance agent or broker to
deliver a policy to the insured, it is deemed to have
authorized said agent to receive the premium in its behalf.
The insurer is also bound by its agent’s acknowledgment of
receipt of payment of premium (American Home Assurance
Co. vs. Chua, 1999).
EFFECT OF PAYMENT BY POSTDATED CHECK
The payment of premium by a postdated check at a stated
maturity subsequent to the loss is insufficient to put the
insurance into effect.
But payment by a check bearing a date prior to the loss,
assuming availability of funds, would be sufficient even if it
remains unencashed at the time of the loss.
The subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor
(Vitug)
EFFECT OF NON-PAYMENT OF PREMIUM
(1) Non-payment of first premium – Nonpayment of the first
premium unless waived (Sec. 78) prevents the contract
from becoming binding notwithstanding the acceptance
of the application nor the issuance of the policy.
(2) Non-payment of subsequent premiums – Nonpayment of
subsequent premiums does not affect the validity of the
contracts unless, by express stipulation, it is provided
that the policy shall in that event be suspended or shall
lapse.
(a) In case of individual life insurance, the policy holder is
entitled a grace period of either 30 days or 1 month
within which payment of any premium after the first
may be made (Secs. 277(a), 228(a)).
(b) In cases of industrial life insurance, the grace period is 4
weeks, and where premiums are paid monthly, either 30
days or 1 month (Sec 230(a)).
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EXCUSES FOR NON-PAYMENT OF PREMIUM
(1) Fortuitous events - Fortuitous events which render
payment by the insured wholly impossible will NOT
prevent forfeiture of the policy when the premium
remains unpaid. In other words, it is NOT an excuse.
(2) War - Non-payment of premiums occasioned by war
causes an insurance to be not merely suspended, but is
completely abrogated. It would be unjust to allow the
insurer to retain the reserve value of the policy, which is
the excess of the premiums paid over the actual risk
carried during the years when the policy had been in
force in time of war (Constantino vs. Asia Life Insurance
Co., 1950).
NON-DEFAULT OPTIONS IN LIFE INSURANCE
The law requires that in case of life or endowment
insurance, the policy shall contain a provision specifying the
options to which the policy holder is entitled in the event of
default in a premium payment after 3 full annual premiums
shall have been paid (Sec 227(f)).
CASH SURRENDER VALUE (CSV)
The cash value or cash surrender value is an amount which
the insurance company holds in trust for the insured to be
delivered to him upon demand. When the company’s credit
for advances is paid out of the cash value or cash surrender
value, that value and the company’s liability is diminished
(Manufacturer’s Life Insurance v. Meer, 1951)
It is the amount that the insured is entitled to receive if he
surrenders the policy and releases his claims upon it.
The right to CSV accrues only after 3 premium payments.
The Insured is given the right to claim the amount less than the
reserve, reduced by surrender charge.
Rationale: Premium is uniform throughout your lifetime, but the
risk is varied (higher risk when you’re older, low when you’re
young) thus the cost of protection is more expensive during the
early years of the policy
ALTERNATIVES TO OBTAINING CASH SURRENDER VALUE
(1) Extended insurance/term insurance – The insured, after
having paid 3 full annual premiums, is given the right to have
the policy continued in force from date of default for a time
either stated or equal to the amount of the CSV, taken as a
single premium.
(a) Face value of the policy remains the same but only within the
term.
(b) It is also called “term insurance” where CSV is taken as a
single premium (no further payments) to extend the policy
for a fixed period of time.
(c) Reinstatement allowed if made within the term purchased;
no reinstatement after the lapse of the term purchased
(2) Paid-up insurance – Where insurance is “paid-up,” the
insured who has paid 3 full annual premiums is given the
right, upon default, to have the policy continued from the
date of default for the whole period of insurance without
further payment of premiums. It is also called “reduced paid-
up” because in effect the policy, terms and conditions are the
same but the face value is reduced to the “paid-up” value.
UP COLLEGE OF LAW INSURANCE CODE
(3) Automatic Premium Loan (APL) –Upon default, insurer
lends/advances to the insured without any need of
application on his part, amount necessary to pay overdue
premium, but not to exceed the CSV of the policy.
(a) It only applies if requested in writing by the insured either in
the application or at any time before expiration of the grace
period. In effect, the insurance policy continues in force for a
period covered by the payment.
(b) After the period, if insured still does not resume paying his
premiums, policy lapses, unless CSV still remains. If there is
still CSV, APL continues until CSV is exhausted.
(c) This is beneficial for the insured because it continues the
contract and all its features with full force and effect.
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Reinstatement of a lapsed life insurance policy is not a non-
default option. It does not create a new contract, but merely
revives the original policy so insurer cannot require a higher
premium than the amount stipulated in the contract. It does
not apply to group/industrial life insurance.
Requisites:
(1) Must be exercised within 3 years from date of default
(2) Insured must present evidence of insurability
satisfactory to the insurer
(3) Pay all back premiums and all indebtedness to the
insurer
(4) CSV must not have been duly paid to insured nor the
extension period expired
(5) Application must be filed during the insured’s lifetime
(Andres vs. Crown Life Insurance, 1958)
REFUND OF PREMIUMS
WHEN RETURN OF PREMIUMS CAN BE MADE
(1) If the thing insured was never exposed to the risks
insured against (Sec. 79(a)) – whole premium should be
refunded
(2) When the contract is voidable due to the fraud or
misrepresentation of insurer or his agent (Sec. 81) –
whole premium should be refunded
(3) When by any default of the insured other than actual
fraud, the insurer never incurred any liability under the
policy (Sec. 81) – whole premium should be refunded
(4) Contract is voidable because of the existence of facts of
which the insured was ignorant without his fault (Sec.
81) – whole premium should be refunded
(5) Where the insurance is for a definite period and the
insured surrenders his policy (Sec. 79(b)) – the portion of
the premium that corresponds to the unexpired time at
a pro rata rate, unless a short period rate has been
agreed upon and appears on the face of the policy
should be return
(6) Ratable return of the premium when there is over-
insurance by several insurers (Sec. 82) – the return
premiums should be proportioned to the amount by
which the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk
(7) When rescission is granted due to the insurer’s breach of
contract
PAGE 41
BAR OPERATIONS COMMISSION
Rescission of Insurance
Contracts
CONCEALMENT
DEFINITION
A neglect to communicate that which a party knows and
ought to communicate (Sec. 26)
Requisites:
(1) A party knows a fact which he neglects to communicate
or disclose to the other.
(2) Such party concealing is duty bound to disclose such
fact to the other.
(3) Such party concealing makes no warranty of the fact
concealed.
(4) The other party has not the means of ascertaining the
fact concealed.
(5) The fact concealed is material.
Note: May be committed by either the insurer or the insured
(Qua Chee Gan v. Law Uion & Rock Ins. Co.; Fieldmen's
Insurance Co., Omc. vs. Vda. de Songco)
PROOF OF FRAUD IN CONCEALMENT
General rule: Fraud need not be proven in order to prove
concealment. Good faith is not a defense in concealment.
Sec. 27 clearly provides that “A concealment whether
intentional or unintentional entitles the injured party to
rescind a contract of insurance.”
Exception: When the concealment is made by the INSURED
in relation to the falsity of a WARRANTY, the non-disclosure
must be intentional and fraudulent in order that the
contract may be rescinded (Sec. 29)
TEST OF MATERIALITY
Determined not by the event, but solely by the probable and
reasonable influence of THE FACTS upon the party to whom
the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his
inquiries (Sec. 31)
The test is in the effect which the knowledge of the fact in
question would have on the contract. It need not increase
the risk or contribute to any loss or damage suffered. It is
sufficient if the knowledge of it would influence the party in
making the contract (De Leon).
EFFECTS OF CONCEALMENT
General rule: Concealment vitiates the contract and entitles
the insurer to rescind (Sec. 27), EVEN IF the death or loss is
due to a cause not related to the concealed matter.
Exceptions:
(1) Incontestability Clause – The clause stipulates that the
policy shall be incontestable after a stated period.
(a) Requisites (Sec. 48):
(i) The policy is a life insurance policy
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(ii) It is payable on the death of the insured; and it has been
in force during the lifetime of the insured for at least two
years from its date of issue or of its last reinstatement.
The incontestability clause is a mandatory provision in
life policies (Sec. 227(b)).
(b) Exceptions:
(i) That the person taking the insurance lacked insurable
interest;
(ii) That the cause of the death of the insured is an
excepted risk;
(iii) That the premiums have not been paid;
(iv) That the conditions of the policy relating to military or
naval service have been violated;
(v) That the fraud is vicious;
(vi) That the beneficiary failed to furnish proof of death or to
comply with any condition imposed by the policy after
the loss has happened;
(vii) That the action was not brought within the time
specified within the policy of insurance;
(2) Concealment AFTER contract has become effective –
Concealment must take place at the time the contract is
entered into in order that the policy may be avoided.
Information obtained after the perfection of the contract
is no longer necessary to be disclosed by the insured,
even if the policy has not been issued.
(3) Waiver or estoppel
(4) Marine insurance (Sec. 110) – Concealment of certain
matters as provided in Sec. 110 will merely exonerate the
insurer from losses resulting from the risk concealed.
CONCEALMENT IN MARINE INSURANCE VS. ORDINARY INSURANCE
Marine Insurance Ordinary Private Insurance
Required disclosure
information required of the applicant concerning the
previous conditions of health and diseases suffered. (Sunlife
v. Sps. Bacani, 1995).
Where matters of opinion or judgment are called for,
answers made in good faith and without intent to deceive
will not avoid the policy even though they are untrue.
Reason: The insurer cannot simply rely on those statements.
He must make further inquiry. (Philamcare Health Systems v.
CA (2002))
The fact that the matter concealed had no bearing on the
cause of death is NOT important because it is well settled
that the insured need not die of the disease he had failed to
disclose to the insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimates of the risks of
the proposed policy or in making inquiries. (Sunlife
Assurance v. CA (1995))
MATTERS WHICH NEED TO BE DISCLOSED
EVEN IN THE ABSENCE OF INQUIRY
(1) Which are material to the contract and
(2) As to which the party with the duty to communicate
makes no warranty, and
(3) Which the other party does not have the means of
ascertaining (Sec. 28).
Note: If the applicant is aware of the existence of some
circumstance which he knows would influence the insurer in
acting upon his application, good faith requires him to
disclose that circumstance, though unasked (Vance)
The fact of being a “mongoloid” is a material fact that
needs to be disclosed. (Great Pacific Life v. CA (1979))

Stricter: state the “exact and Substantial truth MATTERS WHICH DO NOT NEED TO BE DISCLOSED
whole truth” (1) Matters already known to the insurer (Sec. 30(a)).
Effect of concealment (2) Matters each party are bound to know (Sec. 30(b); Sec.
32).
Concealment of certain Any kind of concealment will (3) Matters of which the insurer waives communication
matters as provided in Sec. not make the insurer liable. (Sec. 30(c); Sec. 33).
110 will not entirely avoid the (4) Matters which prove or tend to prove the existence of a
contract but will merely risk excluded by a warranty and which are not otherwise
exonerate the insurer from material (Sec. 30(d))
losses resulting from the risk (5) Matters which relate to a risk excepted the policy, and
concealed which are not otherwise material. (Sec. 30(e))
- national character of the (6) Information of the nature or amount of the interest of
insured one insured EXCEPT if inquired upon by the insurer,
- liability of the thing except if required by Section 51 (Sec. 34)
insured to capture and (7) Matters of opinion. (Sec. 35)
detention
- liability to seizure from Mere possibility of previous hypertension is not enough to
breach of foreign laws of establish concealment (Great Pacific Life v. CA, 1999).
trade
- want of necessary Each party to a contract of insurance is bound to know all
documents the general causes which are open to his inquiry, equally
- use of false and simulated with that of the other, and which may affect the political or
papers material perils contemplated; and all general usages of
trade (Sec. 32).

NON-MEDICAL INSURANCE MISREPRESENTATION/OMISSIONS

The waiver of medical examination in a non-medical
insurance contract renders even more material the DEFINITION
Representations are factual statements made by the
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INSURED at the time of, or prior to, the issuance of the (c) he explains to the insurer that he does so on the
policy (Sec. 37), that give information to the insurer and information of others.
induce him to enter into the insurance contract. Notes:
(1) A representation CANNOT qualify an express provision
Note: May be committed only by the insured. or an express warranty of insurance (Sec. 40) because a
representation is not part of the contract but only a
KINDS OF REPRESENTATIONS collateral inducement to it. However, it may qualify as
(1) Affirmative – Any allegation as to the existence or non- an IMPLIED WARRANTY.
existence of a fact when the contract BEGINS. (2) There is fraud and misrepresentation when another
(2) Promissory – Any promise to be fulfilled AFTER the person took the place of the insured in the medical
contract has come into existence; or any statement examination (Eguaras v. Great Eastern, 1916).
concerning what is to happen during the existence of (3) The insurer is not entitled to rescission for
the insurance (Sec. 39). A promissory representation is misrepresentation of age if the birth date on the policy
substantially a condition or warranty (De Leon). leads to the conclusion that the insured is beyond the
(3) Oral or written (Sec. 36) age covered and yet insurer continued to accept
payment and had issued the policy. Insurer deemed
REQUISITES OF MISREPRESENTATION estopped (Edillon v. Manila Bankers Life, 1982).
(1) The insured stated a fact which is untrue.
(2) Such fact was stated with knowledge that it is untrue CONCEALMENT VS. MISREPRESENTATION
and with intent to deceive or which he states positively as
Life Property
true without knowing it to be true and which has a
tendency to mislead.
Who may commit
(3) Such fact in either case is material to the risk.
May be committed by either Committed only by insured.
PROOF OF FRAUD IN MISREPRESENTATION insured or insurer
Like in concealment, fraud or intent is not essential to
entitle the insurer to rescind on the ground of Act involved
misrepresentation (Sec. 45). Passive form Active form
TEST OF MATERIALITY Insured withholds Insured makes erroneous
Same as in concealment (Sec. 46). information of material facts statements of facts with the
from the insurer; he intent of inducing the insurer
WHEN MISREPRESENTATION IS MADE maintains silence when he to enter into the insurance
(1) There is false representation if the matter is true at the ought to speak contract
time it was made/represented but false at the time the Materiality
contract takes effect. (Sec. 44)
(2) Corollarily, there is no false representation if the matter Determined by the same rules
is true at the time the contract takes effect although
Effect
false at the time it was made/represented.
(3) A representation is false when the facts fail to Same effects on the part of the insured; insurer has right to
correspond with its assertions or stipulations (Sec. 44). rescind
(4) A representation must be presumed to refer to the date
on which the contract goes into effect (Sec.42). Thus, a Injured party is entitled to rescind a contract of insurance
representation may be altered or withdrawn before the on ground of concealment or false representation, whether
insurance is effected but not afterwards (Sec. 41) intentional or not.

EFFECT OF MISREPRESENTATION BREACH OF WARRANTIES

General rule: The injured party is entitled to rescind from the
time when the representation BECOMES false. (Sec. 45)
Exceptions:
(1) Incontestability clause;
(2) Misrepresentation AFTER contract takes effect;
(3) Waiver, made by acceptance of insurer of premium
payments despite knowledge of the ground for
rescission (Sec. 45);
(4) A representation of the expectation, belief, opinion, or
judgment of the insured, although false, and even if
material to the risk (Philamcare Health Systems, Inc. v.
CA, 2002).
(5) Representation by insured based on information
obtained from third persons (not his agent), PROVIDED:
(a) the insured has no personal knowledge of the facts;
(b) he believes them to be true; and
PAGE 43
PURPOSE OF WARRANTIES
To eliminate potentially increasing hazards which may
either be due to the acts of the insured or to the change of
the condition of the property.
KINDS OF WARRANTIES
(1) Express – contained in the policy or clearly incorporated
therein as part thereof; warranty as a fact (Sec. 71).
(2) Implied – deemed included in the contract although not
expressly mentioned; applicable in marine insurance
only (ex: implied warranty of seaworthiness of the
vessel)
(3) Affirmative warranty – one which asserts the existence of
a fact or condition at the time it is made (Sec. 68).
(4) Promissory warranty or executory warranty – one where
the insured stipulates that certain facts or conditions
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pertaining to the risk shall exist or that certain things (out of the 11 hydrants required), it still issued the
with reference thereto shall be done or omitted. It is in insurance policies and received the premiums (Qua Chee
the nature of a condition subsequent (Secs.72, 73). Gan v. Law Union, 1955).

CHARACTERISTICS WARRANTY VS. REPRESENTATION

A warranty may relate to the past, the present, the future, or
Warranty Representation
to all of these (Sec. 68).
Nature
No particular form of words is necessary to create a
warranty (Sec. 69). Part of the contract Mere collateral inducement
Form
EFFECT OF BREACH OF WARRANTY
Written on the policy, May be written in the policy
Material warranty actually or by reference or may be oral
General rule: Violation of a material warranty, or other
material provision of the policy, on the part of EITHER the Materiality
insured or insurer, entitles the other to RESCIND (Sec. 74). Presumed material Must be proved to be
material
Breach of a material warranty may either be:
(1) Without fraud: Compliance
(a) If breach without fraud is made by the insured after the Must be strictly complied Requires only substantial
inception of the contract, the insurer will be exonerated with truth and compliance
from the time it occurs.
(b) If breach without fraud is made during the inception, it Applicability of incontestability clause
will prevent the policy from taking effect (Sec. 76). Does not apply Applies
(2) With fraud: The policy is avoided ab initio.

Exceptions:
(1) Loss occurs BEFORE the time of performance of the
warranty (Sec. 73)
(2) The performance becomes UNLAWFUL (Sec. 73)
Claims Settlement
(3) Performance becomes IMPOSSIBLE (Sec. 73)
(4) Waiver or estoppel (Pioneer Insurance & Surety Corp. v.
and Subrogation
Yap, 1974; Prudential Guarantee and Assurance, Inc. v.
Trans-Asia Shipping Lines, 2006) CONCEPT OF LOSS

Immaterial warranty DEFINITION

General rule: Breach of an immaterial provision does not Loss in insurance law embraces injury or damage (Bonifacio
avoid the policy (Sec. 75). Bros v. Mora, 1967).

Exception: When the parties STIPULATE that violation of a CAUSES OF LOSS

particular provision (though immaterial) shall avoid the Remote Cause Proximate Cause Immediate Cause
policy. In effect, the parties converted the immaterial
provision into a material one (Sundiang and Aquino). An event “that cause, which, The cause, NOT
preceding another in natural and the proximate
WARRANTIES IN FIRE INSURANCE
in a causal chain, continuous cause,
Entitles the insurer to rescission if: but separated sequence, immediately
(1) Use or condition of a thing insured is limited by the from it by other unbroken by any preceding the loss.
policy events efficient
(2) Insured alters the use of condition without the consent intervening cause,
of the insurer produces the
(3) Alteration is by means within the control of the insured injury, and without
(4) Alteration increased the risk (increase of hazard or which the result
chance of loss). would not have
(5) Alteration is actual and substantial (Sec. 168) occurred” (Vda. De
Bataclan v. Medina
Notes: (1957))
(1) A condition in the policy which requires insured to
disclose to the insurer of any insurance that, if violated LIABILITY FOR LOSS
by the insured, would ipso facto avoid the contract Loss for which the insurer Loss for which the insurer
(Pioneer v. Yap, 1974). is liable is not liable
(2) Insurer is barred by waiver (or estoppel) to claim
violation of the so-called hydrants warranty when, Loss the proximate cause of Loss by insured’s willful act
which is the peril insured
despite knowing fully that only 2 fire hydrants existed
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against (Sec. 84) full details of the loss, computations of the amounts
claimed, and supporting evidence, together with a
demand or request for payment (De Leon).
Loss the immediate cause of Loss due to connivance of
which is the peril insured the insured (Sec. 87)
against EXCEPT where the In fire insurance In other types of insurance
proximate cause is an Required Not required
excepted peril;
Loss through negligence of Loss where the excepted Failure to give notice will Failure to give notice will not
insured EXCEPT where there peril is the proximate cause. defeat the right of the exonerate the insurer,
was gross negligence insured to recover. UNLESS there is a
amounting to willful acts; stipulation in the policy
and requiring the insured to do
Loss caused by efforts to so.
rescue the thing from peril
insured against if, during the PROOF OF LOSS
course of the rescue, the (1) The formal evidence given the insurance company by
thing is exposed to a peril the insured or claimant, under a policy, of: the
not insured against, which occurrence of the loss, the particulars thereof, and the
permanently deprives the data necessary to enable the company to determine its
insured of its possession in liability and the amount.
whole or in part (Sec. 85) (2) Purpose: To give the insurer information by which he
may determine the extent of his liability but also; to
REQUISITES FOR RECOVERY FROM INSURANCE afford him a means of detecting any fraud that may
(1) The insured must have insurable interest in the subject have been practiced upon him, and to operate as a
matter; check upon extravagant claims.
(2) That interest is covered by the policy;
(3) There must be a loss; and FORM OF PROOF
(4) The loss must be one for which the insurer is liable. (1) Like a notice of loss, in the absence of any stipulation in
(5) Notice and proof of loss must be given if policy is fire the policy, proof may be given orally or in writing.
insurance or when the same is stipulated in the policy. (2) The insured is not bound to give such proof as would be
necessary in a court of justice; but it is sufficient for him
NOTICE AND PROOF OF LOSS to give the best evidence which he has in his power at
the time (Sec. 89).
NOTICE OF LOSS
(1) The formal notice given the insurer by the insured or General rule: Timely compliance with the notice and proof of
claimant under a policy of the occurrence of the loss loss is a condition precedent to the right to recover if the
insured against. policy is fire insurance, or when the same is stipulated in the
(2) Purpose: To apprise the insurance company so that it policy.
may make proper investigation and take such action as
may be necessary to protect its interest. Exceptions:
(3) In fire insurance, an insurer is exonerated, if notice (1) For both notice and proof of loss, waiver of:
thereof be not given to him by an insured, or some (a) Defects – Defects in a notice or proof of loss may be
person entitled to the benefit of the insurance, waived when such defects, which the insured might
WITHOUT UNNECESSARY DELAY (Sec. 88). remedy, are not specified, without unnecessary delay, to
(4) However, it has been held that formal notice of loss is him as ground of objection by the insurer (Sec. 90).
not necessary if insurer has actual notice of loss already. (b) Delay in presentation – Delay in the presentation to an
insurer of notice or proof of loss is waived if caused by
FORM OF NOTICE any act of his, or if he omits to take objection promptly
(1) In the absence of any stipulation in the policy, notice and specifically upon that ground.
may be given orally or in writing. (2) For notice of loss, a formal notice of loss is not necessary
(2) The notice of loss may be in the form of an informal or if insurer has actual notice of loss already.
provisional claim containing a minimum of information
as distinguished from a formal claim which contains the

GUIDELINES ON CLAIMS SETTLEMENT

HOW CLAIMS ARE PAID/SETTLED

Claims Life Insurance Non-Life Insurance
Maturity Either (Sec. 180): (1) Upon happening of event insured
(1) Upon death of the person insured; against
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Delivery of Proceeds
Effect of Refusal or Failure to pay claim
within time prescribed:
(1) In case of litigation, it is the duty of the
Commissioner or the Court to
determine whether the claim has been
unreasonably denied or withheld.
(2) Failure to pay any such claim within
the time prescribed shall be considered (2) In case damages are awarded, this
prima facie evidence of unreasonable
delay in payment.
(2) Upon his surviving a specific period; (2) Event must occur within the period
(3) Otherwise contingently on the specified in policy, otherwise insurer has
continuance or cessation of life no liability
General rule: Immediately upon maturity (1) Within 30 days after:
of policy. (a) Proof of loss is received by insurer; and
(b) Ascertainment of loss or damage is
Exception: If payable in INSTALLMENTS made either by agreement between
or as an ANNUITY, when such the insured and insurer or by
installments or annuities become due arbitration
(2) If ascertainment is not made within 60
IF MATURITY IS UPON DEATH: days after such receipt by insurer of
Within 60 days after presentation of claim proof of loss, then loss or damage
and filing of proof of death of insured. shall be paid within 90 days after such
receipt.
(1) Entitles beneficiary to COLLECT Same as in life insurance
INTEREST on the proceeds of policy
for the duration of the delay at rate of
TWICE ceiling prescribed by the
monetary board (unless refusal to pay
is based on ground that claim is
fraudulent)
includes attorney’s fees and other
expenses incurred due to delay (plus
the interest)

UNFAIR CLAIMS SETTLEMENT; SANCTIONS
No insurance company doing business shall refuse, without
just cause, to pay or settle claims arising under coverages
provided by its policies, nor shall any such company engage
in unfair claim settlement practices (Sec. 241).
Instances of unfair claims settlement done by an insurance
company (Sec. 241 (1)):
(1) KNOWINGLY misrepresenting to claimants pertinent
facts or policy provisions regarding coverage;
(2) FAILING to acknowledge with reasonable promptness
pertinent communications regarding claims arising
under its policies;
(3) FAILING to adopt and implement reasonable standards
for the prompt investigation of claims arising under its
policies;
(4) NOT attempting in good faith to effectuate prompt, fair
and equitable settlement of claims submitted in which
liability has become reasonably clear;
(5) COMPELLING policyholders to institute suits to recover
amounts due under its policies by offering without
justifiable reason substantially less than the amounts
eventually recovered in suits brought by them.
PRESCRIPTION OF ACTION
Rules:
(1) In the ABSENCE of an express stipulation in the policy, it
being based on a written contract, the action prescribes
in 10 years (Article 1144, Civil Code).
(2) However, the parties may validly agree on a shorter
period provided it is not less than one year from the time
the cause of action accrues (Sec. 63).
Note: In motor vehicle insurance, action prescribes in one
year.
(3) The cause of action accrues from the rejection of the
claim of the insured and not from the time of loss.
Notes:
(1) The period for filing claim is not merely a procedural
requirement.
(a) It is essential for the prompt settlement of claims as it
demands for suits to be brought while the evidence as
to the origin and cause of the loss or destruction has not
yet disappeared.
(b) It is a condition precedent to the insurer’s liability or a
resolutory cause in case the action is not filed by the
insured within the stipulated period.
(2) The Insurance Commissioner has the power to
adjudicate disputes relating to an insurance company’s
liability to an insured under a policy. A complaint or
claim filed with such official is considered an “action” or
“suit” the filing of which would have the effect of tolling
the suspending the running of the prescriptive period.
(3) A stipulation stating that the prescriptive period for
filing an action is 1 year from the happening of loss is
void (it should be from the time of rejection). As the
stipulation is void and is upon a written contract, the
time limit is 10 years from the time the cause of action
accrues.
SUBROGATION
Definition
Subrogation is a process of legal substitution; the insurer,
after paying the amount covered by the insurance policy,
steps into the shoes of the insured and avails himself of the
latter's rights that exist against the wrongdoer at the time
of loss.
The insurer becomes entitled to recover from the wrongdoer
the amount of the loss it may have paid to the insured.

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Note: Subrogation applies only to property insurance and
non-life insurance.
Rights transferred
(1) The rights to which the subrogee succeeds are the same
as, but not greater than, those of the person for whom
he is substituted (Sulpicio Lines, Inc. v. First Lepanto-
Taisho Insurance Corporation, 2005; Lorenzo Shipping
Corporation v. Chubb and Sons, Inc., 2004).
(2) He cannot acquire any claim, security, or remedy the
subrogor did not have. In other words, a subrogee
cannot succeed to a right not possessed by the
subrogor. A subrogree in effect steps into the shoes of
insured and can recovery only if the insured likewise
could have recovered (Sulpicio Lines, Inc. v. First
Lepanto-Taisho Insurance Corporation, 2005; Lorenzo
Shipping Corporation v. Chubb and Sons, Inc., 2004)
Rules:
(1) Subrogation does NOT require a formal assignment or
an express stipulation in the policy, because it is a legal
effect of payment by the insurer.
(2) The insurer can only recover from the third person what
the insured COULD HAVE recovered. Thus, there can be
no recovery if the insurer voluntarily paid even if the loss
is not covered by the policy.
(3) The insured can no longer recover from the offended
party what was paid to him by the insurer but he can
recover any deficiency IF the damages suffered are more
than what was paid. The deficiency is not covered by the
right of subrogation.
(4) The insurer must present the policy as evidence to
determine the extent of its coverage (Wallen Phil.
Shipping v. Prudential Guarantee, 2003).
Instances where there is no right of subrogation
(1) Where the insured by his own act releases the wrongdoer or
third party liable for the loss or damage;
(2) Where the insurer pays the insured the value of the loss without
notifying the carrier who has in good faith settled the insured’s
claim for loss;
(3) Where the insurer pays the insured for a loss or risk not covered
by the policy (Pan Malayan Insurance Company v. CA, 1997).
(4) In life insurance
(5) For recovery of loss in excess of insurance coverage (De Leon).
By the act of Manila Mahogany issuing a release claim to
SMC, the right of Zenith against SMC is nullified since the
insurer can be subrogated to only such rights as the
insured may have, should the insured, after receiving
payment from the insurer, release the wrongdoer who causes
the loss, the insurer loses his rights against him. But in such
a case the insurer will be entitled to recover from the
insured whatever it has paid, unless it was made with the
consent of the insurer. (Manila Mahogany v. CA).
THE INSURANCE COMMISSIONER
Jurisdiction and adjudicatory or quasi-judicial powers
(1) Concurrent jurisdiction (with regular civil courts) – cases
where any single claim does not exceed P100,000
involving liability arising from the following:
(a) Insurance Contract
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(b) Contract of Suretyship
(c) Reinsurance Contract
(d) Membership Certificate issued by members of mutual
benefit association (Sec. 416)
(2) Primary and Exclusive Jurisdiction – claim for benefits
involving pre-need plans where the amount of benefits
does not exceed P100,000 (Sec. 55, Pre-Need Code)
(3) For the purpose of proceeding under Sec. 416, the
Commissioner or any officer thereof designated by him,
is empower to administer oaths and affirmation,
subpoena witnesses, compel their attendance, take
evidence and require the production of any books,
papers, documents or contracts or other records which
are relevant or material to the inquiry (Sec. 416, par. 9)
Note: However, the Insurance Commission has no
jurisdiction to decide the legality of a contract of agency
entered into between an insurance company and its agent.
The same is not covered by the term “doing or transacting
insurance business” under Section 2, neither is it covered by
Sec. 416 which grants the Commissioner adjudicatory
powers (Sundiang and Aquino).
Revocation of certificate of authority
The Certificate of Authority issued to the domestic or foreign
company by the Commission may be revoked or suspended
by the Insurance Commissioner for any of the following
grounds (Sec. 247):
(1) The company is in an unsound condition;
(2) That it has failed to comply with the provisions of law or
regulations obligatory upon it;
(3) That its condition or method of business is such as to
render its proceedings hazardous to the public or its
policyholders;
(4) That its paid-up capital stock, in the case of a domestic
stock corporation, or its available cash assets, in the
case of a domestic mutual company, or its security
deposits, in the case of a foreign company, is impaired
or deficient;
(5) That the margin of solvency required of such company is
deficient.
Note: The Commissioner is authorized to suspend or revoke
all certificates of authority granted to such insurance
company, its officers and agents, and no new business shall
thereafter be done by such company or for such company by
its agents in the Philippines while such suspension,
revocation, or disability continues or until its authority to do
business is restored by the Commissioner.
Before restoring such authority, the Commissioner shall
require the company concerned to submit to him a business
plan showing the company’s estimated receipts and
disbursements, as well as the basis therefor, for the next
succeeding three years.
Liquidation of insurance company
If the company is determined by the Commissioner to be
insolvent or cannot resume business, he shall, if public
interest requires, order its liquidation (Sec. 249).
Note: This should be distinguished from a situation where a
conservator is appointed when the Commissioner finds that
a company is in a state of continuing inability or
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unwillingness to maintain a condition of solvency or liquidity

adequate to protect the policyholders and creditors. The
conservator will take charge of the management of the
insurance company (Sec. 248).

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Common Carriers
Art. 1732, Civil Code. Common carriers are persons,
corporations, firms or associations engaged in the business
of carrying or transporting passengers or goods or both, by
land, water, or air, for compensation, offering their services to
the public.
Elements of a common carrier (Art 1732):
(1) Persons, corporations, firms, associations
(2) Engaged in the business of carrying or transporting
(3) Passengers, goods, OR both
(4) By land, water, air
(5) For compensation
(6) Offering their services to the public
The provision (Art. 1732) makes no distinction between one
whose principal business activity is the carrying of persons
or goods or both, and one who does such carrying only as
an ancillary activity (in local idiom, as “a sideline”) (Fabre v.
CA, 1996).
Private respondent is properly characterized as a common
carrier even though he merely "back-hauled" goods for
other merchants from Manila to Pangasinan, although such
back-hauling was done on a periodic or occasional rather
than regular or scheduled manner, and even though private
respondent's principal occupation was not the carriage of
goods for others. There is no dispute that private
respondent charged his customers a fee for hauling their
goods; that fee frequently fell below commercial freight
rates is not relevant here (De Guzman v. CA, 1988).
Art. 1732 makes no distinction:
(1) Between one whose principal business activity is the
carrying of persons or goods or both, and one who does
such carrying only as an ancillary activity (Fabre vs. CA)
(2) Between a person or enterprise offering transportation
service on a regular or scheduled basis and one offering
such service on an occasional, episodic, or unscheduled
basis
(3) Between a carrier offering its services to the general
public and who offers services or solicits business only
from a narrow segment of the general population (De
Guzman vs. CA)
There is no doubt that petitioner, engaged in the business of
transporting petroleum products from the Batangas
refineries via pipeline, is a common carrier. It is engaged in
the business of transporting or carrying goods, i.e.
petroleum products, for hire as a public employment. It
undertakes to carry for all persons indifferently, that is, to all
persons who choose to employ its services, and transports
the goods by land and for compensation. The fact that
petitioner has a limited clientele does not exclude it from
the definition of a common carrier. (First Phil. Industrial v.
CA, 1998)
The true test for a common carrier is not the quantity or
extent of the business actually transacted, or the number
and character of the conveyances used in the activity, but
whether the undertaking is a part of the activity engaged in
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by the carrier that he has held out to the general public as
his business or occupation. If the undertaking is a single
transaction, not a part of the general business or occupation
engaged in, as advertised and held out to the general
public, the individual or the entity rendering such service is a
private, not a common, carrier. The question must be
determined by the character of the business actually carried
on by the carrier, not by any secret intention or mental
reservation it may entertain or assert when charged with the
duties and obligations that the law imposes.
Applying these considerations to the case before us, there is
no question that the Pereñas as the operators of a school
bus service were: (a) engaged in transporting passengers
generally as a business, not just as a casual occupation; (b)
undertaking to carry passengers over established roads by
the method by which the business was conducted; and (c)
transporting students for a fee. Despite catering to a limited
clientèle, the Pereñas operated as a common carrier
because they held themselves out as a ready transportation
indiscriminately to the students of a particular school living
within or near where they operated the service and for a fee.
(Sps. Teodoro v. Sps. Nicolas, 2012)
What are the elements of a common carrier?
(1) It is engaged in the business of carrying or transporting
goods for others as a public employment, or passengers,
or both
(2) It is for compensation or for hire
(3) It is operated generally as a business and not as a
casual occupation
(4) It holds out to the public as ready to engage in the
transportation of goods of the kind to which his business is
confined (cf. First Phil. Industrial v. CA)
A public carrier shall remain as such, notwithstanding the
charter of the whole or portion of a vessel by one or more
persons, provided the charter is limited to the ship only, as
in the case of a time-charter or voyage-charter. It is only
when the charter includes both the vessel and its crew, as in
a bareboat or demise, that a common carrier becomes
private, at least insofar as the particular voyage covering the
charter-party is concerned. Indubitably, a shipowner in a
time or voyage charter retains possession and control of the
ship, although her holds may, for the moment, be the
property of the charterer. (Planters Products v CA, 1993)
Carriers: Persons or corporations who undertake to
transport or convey goods, property or persons, from one
place to another, gratuitously or for hire, and are classified
as private or special carriers, and common or public carriers
(Agbayani, Commercial Laws of the Philippines)
Private Carriers: Those who transport or undertake to
transport in a particular instance for hire or reward
(Agbayani)
Differences between a Common Carrier and a Private Carrier
(Agbayani):
Life Property
Availability
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Holds himself out in Agrees in some special case cautious persons, with a due regard for all the
common, that is, to all with some private individual circumstances (Art 1755)
(3) Does not require common carriers to exercise all the
persons who choose to to carry for hire
care, skill, and diligence of which the human mind can
employ him, as ready to carry conceive. Nor such as will free the transportation of
for hire passengers from all possible perils.
Binding effect
Note: A common carrier is not an insurer of the safety of the
Bound to carry all who offer Not bound to carry for any passengers and is not absolutely and at all events to carry
and tender reasonable reason, such goods as it is them safely and without injury
compensation for carrying accustomed to carry, unless
REASONS
them it enters into a special
Nature of business of common carriers and the exigencies
agreement to do so of public policy
Diligence required
LIABILITIES OF COMMON CARRIERS
Extraordinary diligence Ordinary diligence GOODS
General rule:
Governing law
(1) Common carriers are responsible for the loss,
(1) Civil Code Obligations and contracts destruction, or deterioration of the goods. (Art. 1734) In
(2) Code of Commerce and fact, they are liable even in those cases where the cause
special laws: If not of the loss or damage is unknown. (Agbayani)
regulated by the Civil (2) Cause of action: breach of contract (culpa contractual)
Code, rights and (3) Moreover, if the goods are lost, destroyed, or
obligations of common deteriorated, common carriers are presumed to have
carriers shall be governed been at fault or to have acted negligently. (Art 1735)
by the Code of
Commerce and by Exceptions (common carrier not liable):
special laws (Art.1766 (1) If loss, destruction, or deterioration of goods is due to
Civil Code). any of the following causes:
(3) Law of the country to (a) Flood, storm, earthquake, lightning, or other natural
which the goods are to disaster or calamity;
be transported, IF (b) Act of the public enemy in war, whether international or
regarding liability for civil;
loss, destruction, or (c) Act of omission of the shipper or owner of the goods;
deterioration of goods (d) The character of the goods or defects in the packing or
in the containers;
Regulation (e) Order or act of competent public authority (Art. 1734).
A public service, therefore Not subject to regulation as
subject to regulation a common carrier Note: The presumption of negligence DOES NOT apply in
these cases.
DILIGENCE REQUIRED OF COMMON CARRIERS (2) If it exercised extraordinary diligence.
Art. 1733, Civil Code. Common carriers, from the nature of
their business and for reasons of public policy, are bound to PASSENGERS
observe extraordinary diligence in the vigilance over the General rule:
goods and for the safety of the passengers transported by Art. 1755, Civil Code. A common carrier is bound to carry the
them, according to all the circumstances of each case. passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious persons,
Such extraordinary diligence in the vigilance over the goods with a due regard for all the circumstances.
is further expressed in Articles 1734, 1735, and 1745, Nos. 5,
6, and 7, while the extraordinary diligence for the safety of
the passengers is further set forth in Articles 1755 and 1756. Art. 1756, Civil Code. In case of death of or injuries to
passengers, common carriers are presumed to have been at
DILIGENCE REQUIRED fault or to have acted negligently, unless they prove that they
Extraordinary diligence observed extraordinary diligence as prescribed in Arts 1733
and 1755.
DEFINITION
(1) Rendering service with the greatest skill and utmost Common carriers are also responsible for the safety of the
foresight (Agbayani) following persons (even though they are not passengers):
(2) Carrying passengers safely as far as human care and (1) For the safety of members of the crew or the
foresight can provide, using the utmost diligence of very complement operating the carrier since any omission,
lapse, or neglect on the part of the common carrier will
certainly result to the damage, prejudice, injuries, and
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even death to all aboard, passengers and crew
members alike. (PAL v. CA)
(2) For the safety of stevedores if their presence onboard
was called for by the contract of carriage. It is liable if it
knew and consented to the stevedores’ presence. (Sulpicio
v. CA (1995))
Exception (common carrier not liable): If accident was caused
by force majeure AND the common carrier exercised
extraordinary diligence in safeguarding the passengers (or
goods) (Bachelor Express v. CA)
PRINCIPLES AS TO THE LIABILITY OF COMMON CARRIERS
(1) The liability of a carrier is contractual and arises upon
breach of its obligation. There is breach if it fails to exert
extraordinary diligence according to all circumstances of
each case;
(2) A carrier is obliged to carry its passenger with the
utmost diligence of a very cautious person, having due
regard for all the circumstances;
(3) A carrier is presumed to be at fault or to have acted
negligently in case of death of, or injury to, passengers,
it being its duty to prove that it exercised extraordinary
diligence; and
(4) The carrier is not an insurer against all risks of travel.
(Isaac v. A.L. Ammen)
PRESUMPTION OF NEGLIGENCE
The mere proof of delivery of goods in good order to a
carrier, and of their arrival at the place of destination in bad
order, makes out a prima facie case against the carrier, so
that if no explanation is given as to how the injury occurred,
the carrier must be held responsible. It is incumbent upon
the carrier to prove that the loss was due to accident or
some other circumstance inconsistent with its
liability. (Ynchausti Steamship v Dexter and Unson, 1920)
KABIT SYSTEM
A person who has been granted a certificate of public
convenience allows another person who owns motor
vehicles to operate under such franchise for a fee.
Thus, for the safety of passengers and the public who may
have been wronged and deceived through the
baneful kabit system, the registered owner of the vehicle is
not allowed to prove that another person has become the
owner so that he may be thereby relieved of responsibility.
(Lim v. CA, 2002)
Vigilance over Goods
EXEMPTING CAUSES
(1) Natural disaster
Requisites:
(a) The natural disaster must have been the proximate and
only cause of the loss (Art 1739)
(b) The common carrier must exercise DUE diligence to
prevent or minimize the loss before, during and after the
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occurrence of the flood, storm or natural disaster (Art
1739)
(c) The common carrier must not have negligently incurred
delay (Art 1740)
(d) The shipment was at shipper’s risk (Art 361, Code of
Commerce)
The master is responsible for the safe & proper stowage of
the cargo, & there is no doubt that by the general maritime
law he is bound to secure the cargo safely under deck. If the
master carries goods on deck without the consent of the
shipper, he does it at his own risk. If they are damaged or
lost in consequence of their being thus exposed, he cannot
protect himself from responsibility by showing that they
were damaged or lost by the dangers of the seas. But, when
the shipper consents to his goods being carried on deck, he
takes the risks of any damage or loss sustained as a
consequence of their being so carried. (Martini v. Macondray,
1919).
Fire may not be considered a natural disaster/calamity. This
must be so as it arises almost invariably from some act of
man or by human means. It does not fall within the category
of an act of God unless caused by lightning or by other
natural disaster/calamity. It may even be caused by the
actual fault or privity of the carrier. (Eastern Shipping Lines
v. IAC, 1987)
If between the delay or refusal of the common carrier to
transport the goods and the loss of the goods due to an act
of God there intervened the shipper’s negligence, thus
causing a break in the chain of causation between the act of
God which caused the loss and the common carrier’s fault,
the act of God is the proximate cause of the loss and the
carrier’s delay or refusal is merely the remote cause.
(Agbayani) (In this case, the natural disaster is not the only
cause, therefore, not an exempting cause)
(2) Act of public enemy
Requisites:
(a) The act of the public enemy was committed either in an
international or civil war. (Art. 1734)
(b) The act of the public enemy must have been the
proximate and only cause (Art. 1739)
(c) The common carrier must exercise due diligence to
prevent or minimize the loss before, during and after the
act of the public enemy causing the loss, destruction or
deterioration of the goods. (Art. 1739)
(3) Act or omission of shipper
Requisites:
The act or omission of the shipper must have been the
proximate and only cause of the loss, destruction, or
deterioration of the goods (Art 1741)
If the shipper owner merely contributed to the loss,
destruction or deterioration of the goods, the proximate
cause being the negligence of the common carrier, then the
common carrier shall be liable for the damages, which shall,
however, be equitably reduced. (Art 1741)
(4) Character of goods
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Requisites:
(1) The loss, destruction, or deterioration of the goods is
due to the character of the goods or defects in the
packing or in the containers (Art 1739)
(2) The common carrier must exercise due diligence to
forestall or lessen the loss (Art 1739)
Damage When to Claim
Ascertainable from package Upon receipt of goods
Not ascertainable from Within 24 hours upon receipt
package
What happens if no claim has been brought after the lapse of
the periods mentioned or after payment of transportation
charges? NO claim shall be admitted against the carrier
with regard to the condition in which the goods transported
were delivered. (Art 366, Code of Commerce)
If the fact of improper packing is known to the carrier or its
servants or apparent upon ordinary observation, but (the
carrier) accepts the goods notwithstanding such condition,
it is not relieved of liability for loss or injury resulting
therefrom. (Southern Lines v. CA, 1962)
(5) Order of competent authority
Requisites:
(1) There must be an order or act of competent public
authority (Art. 1734)
(2) The said public authority must have had the power to
issue the order. (Art. 1743)
The intervention of the municipal officials was not of a
character that would render impossible the fulfillment by
the carrier of the obligation. The petitioner was not duty
bound to obey the illegal order (of the mayor) to dump into
the sea the scrap iron. There is absence of sufficient proof
that the issuance of the order was attended with such force
or intimidation as to completely overpower the will of
petitioner’s employees. The mere difficulty in the fulfillment
of the obligation is not force majeure. (Ganzon v. CA, 1988)
J. Melencio-Herrera, Dissent: Through the “order or act” of
“competent public authority,” the performance of the
contractual obligation was rendered impossible.
Apparently, the seizure and destruction of the goods was
done under legal process or authority so that petitioner
should be freed from responsibility.
REQUIREMENT OF ABSENCE OF NEGLIGENCE
Art. 1739, Civil Code. In order that the common carrier may be
exempted from responsibility, the natural disaster must have
been the proximate and only cause of the loss.
Loss of a ship and of its cargo, in a wreck due to accident or
force majeure must, as a general rule, fall upon their
respective owners, except in cases where the wrecking or
stranding of the vessel occurred through the malice,
carelessness, or lack of skill on the part of the captain or
because the vessel put to sea is insufficiently repaired and
prepared.
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The carrier is exempt from liability if he is able to prove that
the loss or destruction of the merchandise was due to
accident and force majeure and not to fraud, fault, or
negligence on the part of the captain or owner of the ship.
(Tan Chiong Sian v Inchausti, 1912)
ABSENCE OF DELAY
Art. 1740, Civil Code. If the common carrier negligently incurs
in delay in transporting the goods, a natural disaster shall
not free such carrier from responsibility.
DUE DILIGENCE TO PREVENT OR LESSEN THE LOSS
Art. 1739, Civil Code. In order that the common carrier may be
exempted from responsibility, the natural disaster must have
been the proximate and only cause of the loss. However, the
common carrier must exercise due diligence to prevent or
minimize loss before, during and after the occurrence of
flood, storm or other natural disaster in order that the
common carrier may be exempted from liability for the loss,
destruction, or deterioration of the goods. The same duty is
incumbent upon the common carrier in case of an act of the
public enemy referred to in Article 1734, No. 2.
Art. 1742, Civil Code. Even if the loss, destruction or
deterioration of the goods should be caused by the character
of the goods or the faulty nature of the packing or of the
containers the common carrier must exercise due diligence
to forestall or lessen the loss.
(1) For natural disasters and acts of public enemy, the
common carrier must have exercised due diligence to
prevent or minimize loss, before, during and after the
occurrence of flood, storm, or other natural disaster to
be exempted from liability. (Art. 1739)
(2) For faulty nature of packing or loss due to the character
of the goods, the common carrier must have exercised
due diligence to forestall or lessen the loss. (Art. 1742)
CONTRIBUTORY NEGLIGENCE
Art. 1741, Civil Code. If the shipper or owner merely contributed
to the loss destruction or deterioration of the goods the
proximate cause thereof being the negligence of the
common carrier the latter shall be liable in damages which
however shall be equitably reduced.
DURATION OF LIABILITY
When is the contract of transportation perfected? A contract
of transportation is consensual in nature; therefore it is
perfected upon the meeting of the minds of the parties.
(Art. 1305)
But, when does the carrier’s extraordinary responsibility
begin? It only begins from the time the goods are
unconditionally placed in the possession of and received by
the carrier for transportation. (Art 1736)
When does carrier’s extraordinary responsibility terminate?
(1) Until the same are delivered actually or constructively by
the carrier to the consignee or to the person who has a
right to receive them (without prejudice to the provisions
of Article 1738) (Art. 1736)
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(2) When the goods are temporarily unloaded or stored in
transit by reason of the exercise of the shipper or owner
of his right of stoppage in transitu.
(3) Until the consignee has been advised of the arrival of
the goods at the place of destination and has had
reasonable opportunity to remove them or dispose of
them from the warehouse of the carrier at the place of
destination (Art. 1738)
DELIVERY OF GOODS TO COMMON CARRIER
The liability of the carrier as common carrier begins with the
actual delivery of the goods for transportation and not
merely with the formal execution of a receipt or bill of lading;
the issuance of a bill of lading is not necessary to complete
delivery and acceptance. Even where it is provided by
statute that liability commences with the issuance of the bill
of lading actual delivery and acceptance are sufficient to
bind the carrier. (Compania Maritima v. Insurance Company
of North America, 1964).
The liability and responsibility of the carrier commence on
their actual delivery to, or receipt by the carrier or an
authorized agent, of the goods. (Cia. Maritima v. Insurance
Co. of NA)
ACTUAL OR CONSTRUCTIVE DELIVERY
Art. 1736, Civil Code. The extraordinary responsibility of the
common carrier lasts from the time the goods are
unconditionally placed in the possession of and received by
the carrier for transportation until the same are delivered
actually or constructively by the carrier to the consignee or to
the person who has a right to receive them without prejudice
to the provisions of Article 1738.
Delivery: Unconditionally placing the goods in the
possession of the carrier AND the carrier receiving them for
transportation
What if the goods are only for safekeeping? If the common
carrier received the goods not for transportation but only for
safekeeping, where the goods have already been purchased
by the shipper and ready for transportation, then the duty of
extraordinary diligence has not yet started.
What does “unconditionally placed” in Art. 1736 mean? It
means that the shipper cannot get the goods back from the
common carrier at will.
To whom should the goods be delivered?
(1) Consignee
(2) Person who has a right to receive them - includes
agents, brokers, and the like.
Delivery of the cargo to the customs authorities is not delivery
to the consignee or “to the person who has a right to receive
them” as contemplated in Article 1736 because in such case
the goods are still in the hands of the Government and the
owner cannot exercise dominion over them. However, the
parties may agree to limit the liability of the carrier
considering that the goods still have to go through the
inspection of the customs authorities before they are
actually turned over to the consignee. This is a situation
where we may say that the carrier losses control of the goods
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because of a custom regulation and it is unfair that it be
made responsible for what may happen during the
interregnum. (Lu Do v. Binamira, 1957)
TEMPORARY UNLOADING OR STORAGE
Art. 1737, Civil Code. The common carrier's duty to observe
extraordinary diligence over the goods remains in full force
and effect even when they are temporarily unloaded or stored
in transit unless the shipper or owner has made use of the
right of stoppage in transitu.
General rule: Extraordinary diligence over the goods remains
even when the goods are temporarily unloaded or stored in
transit.
Exception: Shipper or owner made use of the right of
stoppage in transit.
What is stoppage in transitu? Act by which the unpaid
vendor of goods stops their progress and resumes
possession of them constructively while they are in the
course of transit from him to the purchaser, and not yet
actually delivered to the latter (Agbayani)
Basis: Art. 1530, Civil Code. When the buyer of the goods
becomes insolvent, the unpaid seller who has parted with
the possession of the goods at any time while they are in
transit, may resume the possession of the goods as he
would have had if he had never parted with the possession.
When the right of stoppage in transitu is exercised, the
common carrier holds the goods in the capacity of an
ordinary bailee or warehouseman upon the theory that the
exercise of the right of stoppage in transitu terminates the
contract of carriage. Hence, only ordinary diligence is
required. (Agbayani)
STIPULATION FOR LIMITATION OF LIABILITY
Art. 1747, Civil Code. If the common carrier, without just
cause, delays the transportation of the goods or changes the
stipulated or usual route, the contract limiting the common
carrier's liability cannot be availed of in case of the loss,
destruction, or deterioration of the goods.
Can limitation on liability be availed of by a common carrier
which delayed the transportation of the goods or changed the
stipulated or usual route?
(1) If with just cause, YES.
(2) If without just cause, NO.
Art. 1748, Civil Code. An agreement limiting the common
carrier's liability for delay on account of strikes or riots is
valid.
Art. 1752, Civil Code. Even when there is an agreement
limiting the liability of the common carrier in the vigilance
over the goods, the common carrier is disputably presumed
to have been negligent in case of their loss, destruction or
deterioration.
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VOID STIPULATIONS
Art. 1744, Civil Code. A stipulation between the common
carrier and the shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration of the goods
to a degree less than extraordinary diligence shall be valid,
provided it be:
(1) In writing, signed by the shipper or owner;
(2) Supported by a valuable consideration other than the
service rendered by the common carrier; and
(3) Reasonable, just and not contrary to public policy.
Art. 1745, Civil Code. Any of the following or similar
stipulations shall be considered unreasonable, unjust and
contrary to public policy:
(1) That the goods are transported at the risk of the owner
or shipper;
(2) That the common carrier will not be liable for any loss,
destruction, or deterioration of the goods;
(3) That the common carrier need not observe any diligence
in the custody of the goods;
(4) That the common carrier shall exercise a degree of
diligence less than that of a good father of a family, or of
a man of ordinary prudence in the vigilance over the
movables transported;
(5) That the common carrier shall not be responsible for the
acts or omission of his or its employees;
(6) That the common carrier's liability for acts committed by
thieves, or of robbers who do not act with grave or
irresistible threat, violence or force, is dispensed with or
diminished;
(7) That the common carrier is not responsible for the loss,
destruction, or deterioration of goods on account of the
defective condition of the car, vehicle, ship, airplane or
other equipment used in the contract of carriage.
Art. 1751, Civil Code. The fact that the common carrier has no
competitor along the line or route, or a part thereof, to which
the contract refers shall be taken into consideration on the
question of whether or not a stipulation limiting the common
carrier's liability is reasonable, just and in consonance with
public policy.
Kinds of Stripulations Limiting Liability
(Heacock v. Macondray, 42 Phil 205)
Exempting the common carrier from any Void
and all liability for loss or damage
occasioned by its own negligence
Providing for an unqualified limitation of Void
such liability to an agreed stipulation
Limiting the liability of the common carrier Valid
to an agreed valuation unless the shipper
declares a higher value and pays a higher
rate of freight
Stipulations on Degree of Diligence
No diligence to be observed Void
Less than Diligence of a good father of a Void
family
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Less than Extraordinary diligence Valid, if 3
requisites in
Art. 1744 are
satisfied
LIMITATION OF LIABILITY TO FIXED AMOUNT
Art. 1749, Civil Code. A stipulation that the common carrier's
liability is limited to the value of the goods appearing in the
bill of lading, unless the shipper or owner declares a greater
value, is binding.
Art. 1734, Civil Code. A contract fixing the sum that may be
recovered by the owner or shipper for the loss, destruction or
deterioration of the goods is VALID if it is reasonable and just
under the circumstances and has been fairly and freely agreed
upon.
There are two requisites that must be fulfilled in order that
the liability of PAL be limited according to the stipulations
behind the ticket stub:
(1) That the contract is just and reasonable under the
circumstances
(2) That the contract was fairly and freely agreed upon (Art.
1750)
The fact that the conditions are printed at the back of the
ticket stub in letters so small that they are hard to read would
not warrant the presumption that plaintiff was aware of
those conditions such that he had “fairly and freely agreed”
to those conditions. (Shewaram v. PAL, 1966)
While the passenger had not signed the plane ticket, he is
nevertheless bound by the provision thereof; such provisions
have been held to be part of the contract of carriage and
valid and binding upon the passenger regardless of the
latter’s lack of knowledge or assent to the regulation. It is
what is known as a contract of adhesion wherein one party
imposes a ready-made form of contract on the other. The
one who adheres to the contract is in reality free to reject it
entirely. A contract limiting liability upon an agreed
valuation does not offend against the policy of the law
forbidding one from contracting against his own
negligence. (Ong Yiu v. CA, 1979)
LIMITATION OF LIABILITY IN ABSENCE OF DECLARATION
OF GREATER VALUE
Art. 1749, Civil Code. A stipulation that the common carrier's
liability is limited to the value of the goods appearing in the
bill of lading unless the shipper or owner declares a greater
value is binding.
LIABILITY FOR BAGGAGE OF PASSENGERS
(Asked in 1997 and 1998)
What is a passenger baggage? Things that a passenger will
bring with him consistent with a temporary absence from
where he lives. Passenger baggage must have a direct
relationship with the passenger who is traveling.
UP COLLEGE OF LAW TRANSPORTATION LAWS
E.g., A balikbayan box or suitcase is passenger baggage.
However, “10,000 cans of corned beef”, for example, is not
considered as passenger baggage. They are considered as
goods. If you carry goods with you, you cannot bring them
with you as part of your (passenger) contract of carriage.
You will need to get a separate contract of carriage (“bill of
lading”) in order to transport them. These goods will then
be transported whether or not you are physically traveling
with them. (Agbayani)
What are the kinds of passenger baggage and the laws
applicable to them?
(1) Passenger baggage in the custody of the passenger (e.g.
carry-on luggage): These are considered as necessary
deposits. Arts. 1998, 2000-2003 apply.
(2) Passenger baggage not in the custody of the passenger
(e.g. checked-in luggage): Arts. 1733-1753 on
extraordinary diligence apply.
The liability is greater for baggage that is in the custody of
the carrier in contrast if such is in the possession of the
passenger.
CHECKED-IN BAGGAGE
Art. 1754, Civil Code. The provisions of Articles 1733 to 1753
shall apply to the passenger's baggage which is not in his
personal custody or in that of his employee. As to other
baggage, the rules in Articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers shall be
applicable.
BAGGAGE IN POSSESSION OF PASSENGERS
Art. 1998, Civil Code. The deposit of effects made by the
travellers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be responsible
for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the
guests and that, on the part of the latter, they take the
precautions which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their effects.
Under Art. 1998, the baggage of passengers in their
personal custody or in that of their employees while being
transported shall be regarded as necessary deposits. The
common carrier shall be responsible for such baggage as
depositaries (i.e. like hotel-keepers), provided that:
1) Notice was given to them or to their employees, AND that
2) The passengers take the precautions which said carriers
advised relative to the care and vigilance of their baggage.
(Agbayani)
Art. 2000, Civil Code. The responsibility referred to in the two
preceding articles shall include the loss of, or injury to the
personal property of the guests caused by the servants or
employees of the keepers of hotels or inns as well as
strangers; but not that which may proceed from any force
majeure. The fact that travellers are constrained to rely on
the vigilance of the keeper of the hotels or inns shall be
considered in determining the degree of care required of
him.
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Art. 2001, Civil Code. The act of a thief or robber, who has
entered the hotel, is not deemed force majeure, unless it is
done with the use of arms or through an irresistible force.
Art. 2002, Civil Code. The hotel-keeper is not liable for
compensation if the loss is due to the acts of the guest, his
family, servants or visitors, or if the loss arises from the
character of the things brought into the hotel.
Art. 2003, Civil Code. The hotel-keeper cannot free himself
from responsibility by posting notices to the effect that he is
not liable for the articles brought by the guest. Any
stipulation between the hotel-keeper and the guest whereby
the responsibility of the former as set forth in articles 1998 to
2001 is suppressed or diminished shall be void.
In case of loss or injury to the baggage of passengers in their
personal custody or in that of their employees while being
transported:
(1) The carrier is LIABLE if the loss or injury is caused by:
(a) his servants OR
(b) employees OR
(c) strangers (Art. 2000)
(d) thief or robber done without the use of arms or
irresistible force (Art 2001)
(2) The carrier is NOT LIABLE, if loss or injury is caused by:
(a) force majeure (Art. 2000),
(b) theft or robbery by a stranger with the use of arms or
irresistible force (Art 2001),
(c) the acts of the guests, his family, servants, or visitors
(Art 2002)
(d) the character of the things brought into the hotel (Art
2002)
Safety of Passengers
(Asked in 1997 and 2001)
VOID STIPULATIONS
Art. 1757, Civil Code. The responsibility of a common carrier
for the safety of passengers as required in Articles 1733 and
1755 cannot be dispensed with or lessened by stipulation by
the posting of notices, by statements on tickets, or otherwise.
Art. 1758, Civil Code. When a passenger is carried
gratuitously, a stipulation limiting the common carrier's
liability for negligence is valid, but not for willful acts or gross
negligence.
The reduction of fare does not justify any limitation of the
common carrier's liability.
General rule: Stipulations limiting liability are void.
Exception: Gratuitous carriage except for willful acts or
gross negligence.
UP COLLEGE OF LAW TRANSPORTATION LAWS
Under Art. 1758, the common carrier and the passenger
may validly stipulate to limit the carrier’s liability for
negligence in cases of gratuitous carriage, but the parties
cannot stipulate to entirely eliminate liability of common
carrier. (Agbayani)
DURATION OF LIABILITY
Art. 17, Warsaw Convention. The carrier is liable for damage
sustained in the event of the death or wounding of a
passenger or any other bodily injury suffered by a passenger,
if the accident which caused the damage so sustained took
place on board the aircraft or in the course of any of the
operations of embarking or disembarking.
Art. 698, Code of Commerce. In case a voyage already begun
should be interrupted, the passengers shall be obliged to pay
the fare in proportion to the distance covered, without right
to recover for losses and damages if the interruption is due
to fortuitous event or to force majeure, but with a right to
indemnity if the interruption should have been caused by the
captain exclusively. If the interruption should be caused by
the disability of the vessel, and a passenger should agree to
await the repairs, he may not be required to pay any
increased price of passage, but his living expenses during the
stay shall be for his own account. In case of delay in the
departure of the vessel, the passengers have the right to
remain on board and to be furnished with food for the
account of the vessel unless the delay is due to fortuitous
events or to force majeure. If the delay should exceed ten
days, passengers requesting the same shall be entitled to
the return of the fare; and if it is due exclusively to the fault
of the captain or ship agent, they may also demand
indemnity for losses and damages. A vessel exclusively
devoted to the transportation of passengers must take them
directly to the port or ports of destination, no matter what
the number of passengers may be, making all the stops
indicated in its itinerary.
Does the duty of extraordinary diligence occur right at the
perfection of the contract of transportation? The perfection of
the contract of carriage does not necessarily coincide with
the commencement of the duty of extraordinary diligence. It
may occur at the same time or later.
WAITING FOR CARRIER OR BOARDING OF CARRIER
It is the duty of common carriers of passengers to stop their
conveyances at a reasonable length of time in order to afford
passengers an opportunity to board and enter, and they are
liable for injuries suffered by boarding passengers resulting
from the sudden starting up or jerking of their conveyances
while they are doing so. (Dangwa Transportation v. CA (1991)
A person boarding a moving car must be taken to assume
the risk of injury from boarding the car under the conditions
open to his view, but he cannot fairly be held to assume the
risk that the motorman, having the situation in view, will
increase the peril by accelerating the speed of the car
before he is planted safely on the platform.
The duty that the carrier of passengers owes to its patrons
extends to persons boarding the cars as well as those
alighting therefrom. (Del Prado v. Manila Railroad, 1929)
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ARRIVAL AT DESTINATION
When does relationship of common carrier and passenger
terminate? It does not cease at the moment that the
passenger alights from the common carrier’s vehicle at a
place selected by the carrier at the point of destination, but
continues until the passenger has had reasonable time or a
reasonable opportunity to leave the carrier’s premises. What
is a reasonable time or a reasonable delay within this rule is
to be determined from all the circumstances. (La Mallorca v.
CA, 1966)
The reasonableness of time should be made to depend on
the attending circumstances of the case, such as the kind of
common carrier, the nature of its business, the customs of the
place, and so forth, and therefore precludes a consideration
of the time element per se without taking into account such
other factors. The primary factor to be considered is the
existence of a reasonable cause as will justify the presence of
the victim on or near the petitioner’s vessel.
It is of common knowledge that by the very nature of
petitioner's business as a shipper, the passengers of vessels
are allotted a longer period of time to disembark from the
ship than other common carriers such as a passenger bus.
Such vessels are capable of accommodating a bigger
volume of both passenger and baggage as compared to the
capacity of a regular commuter bus (as in the La Mallorca
case). Consequently, a ship passenger will need at least an
hour as is the usual practice, to disembark from the vessel
and claim his baggage whereas a bus passenger can easily
get off the bus and retrieve his luggage in a very short
period of time. (Aboitiz v. CA)
Does the duty of extraordinary diligence get interrupted?
What we said in one case once again must be stressed, i.e.,
the relation of carrier and passenger continues until the latter
has been landed at the port of destination and has left the
carrier's premises. Hence, PAL necessarily would still have
to exercise extraordinary diligence in safeguarding the
comfort, convenience and safety of its stranded passengers
until they have reached their final destination. (PAL v CA,
1993)
LIABILITY FOR ACTS OF OTHERS
EMPLOYEES
Art. 1759, Civil Code. Common carriers are liable for the death
of or injuries to passengers through the negligence or willful
acts of the former's employees, although such employees
may have acted beyond the scope of their authority or in
violation of the orders of the common carriers. This liability of
the common carriers does not cease upon proof that they
exercised all the diligence of a good father of a family in the
selection and supervision of their employees.
Art. 1760, Civil Code. The common carrier's responsibility
prescribed in the preceding article cannot be eliminated or
limited by stipulation, by the posting of notices, by
statements on the tickets or otherwise.
It is enough that the assault happens within the course of
the employee's duty. It is no defense for the carrier that the
UP COLLEGE OF LAW TRANSPORTATION LAWS
act was done in excess of authority or in disobedience of the
carrier's orders. The carrier's liability here is absolute in the
sense that it practically secures the passengers from
assaults committed by its own employees. (Note: The
employee must be on duty at the time of the act.)
Accordingly, it is the carrier’s strict obligation to select its
drivers and similar employees with due regard not only to
their technical competence and physical ability, but also, no
less important, to their total personality, including their
patterns of behavior, moral fibers, and social attitude.
(Maranan v. Perez, 1967)
Reason for making the common carrier liable for acts of
employees: The servant is clothed with delegated authority
and charged with the duty to execute the carrier’s
undertaking to carry the passenger safely. (Agbayani)
Diligence in the selection and supervision of employees: NOT
a defense. Liability is based on culpa contractual.
What is the common carrier’s responsibility for acts of
employees? The common carrier is responsible even beyond
the scope of authority and in violation of orders, different
from the rule in quasi-delicts under Art. 2180, which
exempts the employer if it was done outside of
employment. However, there must be a reasonable
connection between the act and the contract of carriage.
OTHER PASSENGERS AND STRANGERS
Art. 1763, Civil Code. A common carrier is responsible for
injuries suffered by a passenger on account of the willful acts
or negligence of other passengers or of strangers, if the
common carrier's employees through the exercise of the
diligence of a good father of a family could have prevented or
stopped the act or omission.
Notice that the law speaks of injuries suffered by the
passenger but not his death. However, there appears to be
no reason why the common carrier should not be held liable
under such circumstances. The word “injuries” should be
interpreted to include death. (Agbayani)
In consideration of the right granted to it by the public to
engage in the business of transporting passengers and
goods, a common carrier does not give its consent to
become an insurer of any and all risks to passenger and
goods. It merely undertakes to perform certain duties to the
public as the law imposes, and holds itself liable for any
breach thereof.
Under Art. 1763, a tort committed by a stranger which
causes injury to a passenger does not accord the latter a
cause of action against the carrier. The negligence for which
a common carrier is held responsible is the negligent omission
by the carrier's employees to prevent the tort from being
committed when the same could have been foreseen and
prevented by them. Further, when the violation of the
contract is due to the willful acts of strangers, as in the
instant case, the degree of care essential to be exercised by
the common carrier for the protection of its passenger is
only that of a good father of a family. (Pilapil v. CA, 1989)
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What is the common carrier’s responsibility for acts of
strangers? In Pilapil v. CA (1989), referring to the act of a
stranger causing the death of a passenger, the standard of
diligence is only ordinary diligence. In Bachelor Express v. CA
(1990), the Court held that the common carrier has a duty of
extraordinary diligence for the injury caused by the act of a
co-passenger.
Culpa Aquiliana
Culpa Contractual
(Quasi-Delict)
Art. 1759 Art. 2180
Carrier is directly and Carrier and employee are
primarily liable solidarily liable as joint tort-
feasors
No defense of due diligence Defense of due diligence in
in the selection and the selection and supervision
supervision of employees of employees is available
EXTENT OF LIABILITY FOR DAMAGES
Art. 1761, Civil Code. The passenger must observe the
diligence of a good father of a family to avoid injury to
himself.
Art. 1762, Civil Code. The contributory negligence of the
passenger does not bar recovery of damages for his death or
injuries, if the proximate cause thereof is the negligence of
the common carrier, but the amount of damages shall be
equitably reduced.
When a passenger dies or is injured, the presumption is that
the common carrier is at fault or that it acted negligently
(Article 1756). This presumption is only rebutted by proof on
the carrier's part that it observed the "extraordinary
diligence" required in Article 1733 and the "utmost diligence
of very cautious persons" required in Article 1755 (Article
1756). (Spouses Landingin v. PANTRANCO, 1970)
It is negligence per se for a passenger on a railroad
voluntarily or inadvertently to protrude his arm, hand,
elbow, or any other part of his body through the window of a
moving car beyond the outer edge of the window or outer
surface of the car, so as to come in contact with objects or
obstacles near the track; no recovery can be had for an injury
which but for such negligence would not have been sustained.
(Isaac v. A. L. Ammen Transportation, 1975)
While the carrier is not an insurer of the safety of the
passengers, it should nevertheless be held answerable for
the flaws of its equipment, if such flaws were discoverable.
The rationale for the common carrier’s liability for
manufacturing defects is the fact that the passenger has
neither choice nor control over the carrier in the selection
and use of the equipment and appliances in use by the
carrier. Having no privity whatever with the manufacturer or
vendor of the defective equipment, the passenger has no
remedy against him. (Necesito v. Paras, 1958)
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Art. 1764, Civil Code. Damages in cases comprised in this What this Court considers as bad faith is the willful and
Section shall be awarded in accordance with Title XVIII of this deliberate overbooking on the part of the airline carrier. The
Book, concerning Damages. Article 2206 shall also apply to above-mentioned law (Sec. 3, Economic Regulations No. 7
the death of a passenger caused by the breach of contract by of the Civil Aeronautics Board) clearly states that when the
a common carrier. overbooking does not exceed ten percent (10%), it is not
considered as deliberate and therefore does not amount to
DAMAGES RECOVERABLE bad faith. (United Airlines v. CA, 2001)
(1) Actual or compensatory damages – adequate
compensation for such pecuniary loss suffered as duly (3) Exemplary damages – if the defendant acted in a
proved. wanton, fraudulent, reckless, oppressive, or malevolent
manner (Art. 2232)
General rule: Recoverable
(4) Nominal, temperate, and liquidated
Exception: Not recoverable by law or stipulation (Art. 2199) (a) Nominal – to vindicate or recognize a right that has
been violated or invaded
Actual Damages include: (b) Temperate – for pecuniary loss suffered, the amount of
(1) Loss of earning capacity (Art. 2206) which, from the nature of the case, cannot be provided
(2) Support (Art. 2206) with certainty
(c) Liquidated – agreed upon by the parties to a contract
Art. 2201:
Act Done Liability of Obligor (5) Attorney’s Fees and Interest

In good faith Only natural and probable

consequences of the breach,
which have could have
reasonably been foreseen Bill of Lading
In bad faith, fraud, malice or All damages which may be
wanton attitude reasonably attributed to Definition: It is a written acknowledgement, signed by the
breach master of a vessel or other authorized agent of the carrier,
that he has received the described goods from the shipper,
to be transported on the expressed terms to the described
In the absence of a showing that petitioner's attention was place of destination, and to be delivered there to the
called to the special circumstances requiring prompt designated consignee or parties. (70 Am Jur 2d 924)
delivery of private respondent Pangan's luggage, petitioner-
carrier cannot be held liable for the cancellation of private It is not indispensable for the creation of a contract of
respondents' contracts as it could not have foreseen such an carriage. (Compania Maritima v. Insurance Company of
eventuality when it accepted the luggage for transit. (Pan- North America, 12 SCRA 213)
Am World Airways v. IAC, 1988)
When effective: Usually upon its delivery to and acceptance
(2) Moral damages - incapable of pecuniary estimation;
by the shipper (Aquino, Essentials of Transportation &
should be proximate result of wrongful act or omission (Art.
Public Utilities Law)
2217)
It is presumed that the stipulations of the bill are, in the
General rule: NOT recoverable
absence of fraud, concealment, or improper conduct, known
to the shipper, and he is generally bound by his acceptance
Exceptions:
whether he reads the bill or not. (Magellan Mfg. Marketing
(1) Defendant acted fraudulently (Art. 2220)
Corp. v. CA (1991))
(2) Defendant acted in bad faith (Art. 2220)
THREE-FOLD CHARACTER
Note: Bad faith – a state of mind affirmatively operating
(1) Receipt as to the quantity and description of the goods
with furtive design or with some motive of self-interest or
shipped;
will or for ulterior purpose; must be established by clear and
(2) Contract to transport and deliver the goods to the
convincing evidence
consignee or other person therein designated, on the
terms specified in such instrument; and
(3) Mishap resulted in death of a passenger (Art. 2206)
(3) Document of title, which makes it a symbol of the goods
When it comes to contracts of common carriage, inattention DELIVERY OF GOODS
and lack of care on the part of the carrier resulting in the The goods should be delivered to the consignee or any
failure of the passenger to be accommodated in the class other person to whom the bill of lading was validly
contracted for amounts to bad faith or fraud which entitles transferred or negotiated.
the passenger to the award of moral damages in
accordance with Article 2220 of the Civil Code. (Ortigas v.
Lufthansa, 1975)

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PERIOD OF DELIVERY
Rule: Period fixed for the delivery of the goods as stipulated
in the Bill of Lading. (Art. 370, Code of Commerce)
If there is no stipulation:
(1) Within a reasonable time (Art. 370, Code of Commerce)
(2) Carrier is bound to forward the goods in the first
shipment of the same or similar goods which he may
make to the point of delivery (Art. 358, Code of
Commerce)
Effect of non-compliance: The carrier shall pay the indemnity
agreed upon in the bill of lading. If no indemnity is fixed, the
carrier shall be liable for the damages which may have been
caused by the delay. (Art. 370, Code of Commerce)
DELIVERY WITHOUT SURRENDER OF BILL OF LADING
If in case of loss or for any other reason whatsoever, the
consignee cannot return, upon receiving the merchandise,
the bill of lading subscribed by the carrier, he shall give said
carrier a receipt for the goods delivered, this receipt
producing the same effects as the return of the bill of
lading. (Art. 353. (2) (3), Code of Commerce)
REFUSAL OF CONSIGNEE TO TAKE DELIVERY
When consignee may refuse to receive goods
(1) When the consignee proves that he cannot make use of
the goods without the others (partial delivery) (Art. 363,
Code of Commerce)
(2) When goods are rendered useless for purposes of sale
or consumption in the use for which they are properly
destined. (Effect: consignee may demand payment of
the goods at current market prices) (Art. 365, Code of
Commerce)
(3) In case part of the goods is in good condition, the
consignee may refuse to receive only the damaged
goods if separation is possible. (Art. 365, Code of
Commerce)
(4) Where the delay is through the fault of the carrier. (Art.
371, Code of Commerce)
In case of dispute as to the condition of the goods, the same
shall be examined by experts appointed by the parties, and
the third one, in case of disagreement, appointed by the
judicial authority.
If the persons interested should not agree with the report,
said judicial authority shall order the deposits of the
merchandise in a safe warehouse, and the parties interested
shall make use of their rights in the proper manner. (Art.
367, Code of Commerce)
PERIOD FOR FILING CLAIMS
Damage When to Claim
Patent damage
(Ascertainable from
Claim for damages must be
made upon receipt of
package) delivery (oral or written)
Latent damage Claim for damages may be
(Only upon opening the made within 24 hours upon
package) receipt of delivery.
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After such periods OR transportation charges have been
paid, no more claims for damages will be entertained. (Art.
366, Code of Commerce)
Non-filing of the claim bars recovery. (Aquino)
Art. 366 is limited to cases of claims for damage to goods
actually turned over by the carrier and received by the
consignee. It does not apply to misdelivery of goods.
(Aquino)
Purpose: The rule protects the carrier by affording it an
opportunity to make an investigation of a claim while the
matter is still fresh and easily investigated so as to
safeguard itself from false and fraudulent claims. (UCPB
General Insurance Co., Inc. vs. Aboitiz Shipping, 2009)
The period prescribed in Art. 366 may be subject to
modification by agreement of the parties. (PHILAMGEN v.
Sweetlines, Inc.)
Commencement of period: Upon delivery of cargo to the
consignee at the place of destination. (Aquino)
PERIOD FOR FILING ACTIONS
OVERLAND TRANSPORTATION AND COASTWISE SHIPPING
The general rule under the Civil Code on extinctive
prescription applies. Action for damages must be filed in
court:
(1) Within 6 years, if bill of lading was not issued (Art. 1145,
Civil Code)
(2) Within 10 years, if bill of lading was issued (Art. 1146,
Civil Code)
INTERNATIONAL CARRIAGE OF GOODS BY SEA
In any event, the carrier and the ship shall be discharged
from all liability in respect of loss or damage unless suit is
brought within one year after delivery of the goods or the date
when the goods should have been delivered.
The absence of a notice shall not affect or prejudice the
right of the shipper to bring suit within one year after the
delivery of the goods or the date when the goods should
have been delivered. (Sec. 3 (6), Carriage of Goods by Sea
Act)
The period for filing the claim is one year, in accordance
with the Carriage of Goods by Sea Act. This was adopted
and embodied by our legislature in Com. Act No. 65 which,
as a special law, prevails over the general provisions of the
Civil Code on prescription of actions. (Maritime Agencies &
Services, Inc. v. CA)
Maritime Commerce
CHARTER PARTIES
What is a charter party? A charter party is a contract by
virtue of which the owner or agent of a vessel binds himself
to transport merchandise or persons for a fixed price.
UP COLLEGE OF LAW TRANSPORTATION LAWS
It is a contract by which the owner or agent of the vessel
leases for a certain price the whole or portion of a vessel for
the transportation of the goods or persons from one port to
another.
Is towage considered a charter party? Towage is not a charter
party. It is a contract for the hire of services by which a
vessel is engaged to tow another vessel from one port to
another for consideration.
A contract whereby the whole or part of the ship is let by the
owner to a merchant or other person for a specified time or
use for the conveyance of goods, in consideration of the
payment of freight. (Caltex v. Sulpicio Lines, 1999)
BAREBOAT/DEMISE CHARTER
In a bareboat or demise charter, the shipowner leases to the
charterer the whole vessel, transferring to the latter the
entire command, possession and consequent control over
the vessel's navigation, including the master and the crew,
who thereby become the charterer's "servants." (Aquino)
To create a demise, the owner of a vessel must completely
and exclusively relinquish possession, command and
navigation thereof to the charterer, anything short of such a
complete transfer is a contract of affreightment (time or
voyage charter party) or not a charter party at all.
(Puromines v. CA)
Although a charter party may transform a common carrier
into a private one, the same however is not true in a
contract of affreightment on account of the distinctions
between a contract of affreightment and a demise or
bareboat charter. (Puromines, Inc. v. Court of Appeals)
Note: In a bareboat or demise charter, the common carrier is
converted to private carrier.
Owner Pro Hac Vice – demise charter to whom the owner of
the vessel has completely and exclusively relinquished
possession, command and navigation of the vessel. In this
kind of charter, the charterer mans and equips the vessel
and assumes all responsibility for navigation, management
and operation. He thus acts as the owner of the vessel in all
important aspects during the duration of the charter.
TIME CHARTER
A time charter is a contract for the use of a vessel for a
specified period of time or for the duration of one or more
specified voyages.
In this case, the owner of a time-chartered vessel retains
possession and control through the master and crew, who
remain his employees. What the time charterer acquires is
the right to utilize the carrying capacity and facilities of the
vessel and to designate her destinations during the term of
the charter. (Litonjua Shipping Co., Inc. vs. National Seamen
Board (1989))
VOYAGE/TRIP CHARTER
In a voyage charter, the vessel is leased for a single or
particular voyage. The master and crew remain the employ
of the owner of the vessel. (Litonjua Shipping Co., Inc. vs.
National Seamen Board)
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Note: Both time and voyage charters are said to be
contracts of affreightment.
A contract of affreightment is one in which the owner of the
vessel leases part or all of its space to haul goods for others.
It is a contract for special service to be rendered by the
owner of the vessel and under such contract the general
owner retains the possession, command and navigation of
the ship, the charterer or freighter merely having use of the
space in the vessel in return for his payment of the charter
hire. (Puromines vs. CA)
Note: In a contract of affreightment, the common carrier is
NOT converted into a private carrier.
LIABILITY OF SHIP OWNERS AND SHIPPING AGENTS
The shipowner has possession, control and management of
the vessel and the consequent right to direct her navigation
and receive freight earned and paid, while his possession
continues; he is the person who is primarily liable for
damages sustained in the operation of the vessel, based on
the provisions of the Code of Commerce. (Aquino)
Ship agent is the person entrusted with the provisioning of a
vessel, or who represents her in the port in which she
happens to be. (Art. 595, Code of Commerce)
Extent of Liability: The ship agent, even though he is not the
owner, is liable in every way to the creditor for losses and
damages, without prejudice to his right against the owner,
the vessel and its equipment and freight. (Aquino)
LIABILITY FOR ACTS OF CAPTAIN
(1) The owner of a vessel and the agent shall be civilly liable
for the acts of the captain and for the obligations
contracted by the latter to repair, equip, and provision
the vessel. (Art. 586, Code of Commerce)
(2) The agent shall also be civilly liable for the indemnities
in favor of third persons which arise from the conduct of
the captain in the care of the goods which the vessel
carried.
(3) Damages to vessel and to cargo due to lack of skill and
negligence.
(4) Losses, fines, and confiscations imposed an account of
violation of customs, police, health, and navigation laws
and regulations.
(5) Those caused by the misuse of the powers.
(6) For those arising by reason of his voluntarily entering a
port other than that of his destination.
(7) For those arising by reason of non-observance of the
provisions contained in the regulations on situation of
lights and maneuvers for the purpose of preventing
collisions. (Art. 618)
Exception: Abandonment of the vessel (Art. 587, Code of
Commerce)
Note: The owner or agent shall not be liable for the
obligations contracted by the captain if the latter exceeds
his powers and privileges. However, if the amounts claimed
were made use of for the benefit of the vessel, the owner or
agent shall be liable. (Art. 588, Code of Commerce)
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EXCEPTIONS TO LIMITED LIABILITY
Doctrine of limited liability (Hypothecary Rule)
The real and hypothecary nature of maritime law simply
means that the liability of the carrier in connection with
losses related to maritime contracts is confined to the
vessel, which is hypothecated for such obligations or which
stands as the guaranty for their settlement.
It has its origin by reason of the conditions and risks
attending maritime trade in its earliest years when such
trade was replete with innumerable and unknown hazards
since vessels had to go through largely uncharted waters to
ply their trade. It was designed to offset such adverse
conditions and to encourage people and entities to venture
into maritime commerce despite the risks and the
prohibitive cost of shipbuilding.
Thus, the liability of the vessel owner and agent arising from
the operation of such vessel were confined to the vessel
itself, its equipment, freight, and insurance, if any, which
limitation served to induce capitalists into effectively
wagering their resources against the consideration of the
large profits attainable in the trade. (Aboitiz Shipping Corp.
vs. General Accident Fire and Life Assurance Corp. (1993))
Applicable in the following cases: The agent shall be civilly
liable for the indemnities in favor of third persons which
arise from the conduct of the captain in the care of the
goods which the vessel carried; but he may exempt himself
therefrom by abandoning the vessel with all her equipment
and the freight he may have earned during the voyage. (Art.
587, Code of Commerce)
The owners of a vessel shall be civilly liable in the proportion
of their contribution to the common fund, for the results of
the acts of the captain, referred to in Article 587.
Each part owner may exempt himself from this liability by
the abandonment before a notary of the part of the vessel
belonging to him. (Art. 590, Code of Commerce)
In case of collision, the liability of the shipowner shall be
understood as limited to the value of the vessel with all her
appurtenances and all the freight earned during the voyage.
(Art. 837, Code of Commerce)
Liability for wages of the captain and the crew and for
advances made by the ship agent if the vessel is lost by
shipwreck or capture (Art. 643, Code of Commerce)
If the shipowner or agent may in any way be held civilly
liable at all for injury to or death of passengers arising from
the negligence of the captain in cases of collisions or
shipwrecks, his liability is merely co-extensive with his
interest in the vessel such that a total loss thereof results in
its extinction. In arriving at this conclusion, the fact is not
ignored that the ill-fated S.S. Negros, as a vessel engaged
in interisland trade, is a common carrier, and that the
relationship between the petitioner and the passengers who
died in the mishap rests on a contract of carriage. But
assuming that petitioner is liable for a breach of contract of
carriage, the exclusively "real and hypothecary nature" of
maritime law operates to limit such liability to the value of the
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vessel, or to the insurance thereon, if any. In the instant case
it does not appear that the vessel was insured. (Yangco v.
Laserna et al., 1941)
Exceptions to the Doctrine of Limited Liability
(1) Claims under the Workmen’s Compensation (Abueg vs.
San Diego)
(2) Expenses for repairing, provisioning and equipping the
vessel
(3) There is an actual finding of negligence on the part of
the vessel owner or agent (Aboitiz Shipping vs. General
Accident Fire and Life Assurance Corp.)
(4) Vessel is insured (Vasquez vs. CA)
(5) Vessel is not abandoned or there was no total loss.
(6) Collision between two negligent vessels
ACCIDENTS AND DAMAGES IN MARITIME COMMERCE
AVERAGES
The following shall be considered averages:
1. All extraordinary or accidental expenses incurred during
the navigation for the preservation of the vessel or
cargo, or both.
2. All damages or deterioration the vessel may suffer from
the time she puts to sea from the port of departure until
she casts anchor in the port of destination, and those
suffered by the merchandise from the time it is loaded in
the port of shipment until it is unloaded in the port of
consignment. (Art. 806, Code of Commerce)
KINDS
(1) Particular or Simple Average
(2) Gross or General Average
SIMPLE AVERAGE
Particular or simple Averages shall include all damages and
expenses caused to the vessel or cargo that did not inure to
the common benefit and profit of all persons interested in
the vessel and her cargo. (Art. 809, Code of Commerce)
The owner of the goods which gave rise to the expense or
suffered the damage shall bear this average. (Art. 810,
Code of Commerce)
GENERAL AVERAGE
General or gross averages shall include all the damages
and expenses which are deliberately caused in order to save
the vessel, her cargo, or both at the same time, from a real
and known risk. (Art. 811, Code of Commerce)
Requisites for general average
1. There must be a common danger. This means, that both
the ship and the cargo, after it has been loaded, are
subject to the same danger, whether during the voyage,
or in the port of loading or unloading, that the danger
arises from the accidents of the sea, dispositions of the
authority, or faults of men, provided that the
circumstances producing the peril should be
ascertained and imminent or may rationally be said to
be certain and imminent. This last requirement excludes
measures undertaken against a distant peril.
2. That for the common safety, part of the vessel or of the
cargo or both is sacrificed deliberately.
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3. That from the expenses or damages caused follows the
successful saving of the vessel and cargo.
4. That the expenses or damages should have been
incurred or inflicted after taking proper legal steps and
authority. (Magsaysay, Inc. v. Agan, 1955)
The gross or general average shall be borne by those who
benefited from the sacrifice. These include the shipowner
and the owners of the cargoes that were saved.
Contribution may also be imposed on the insurers of the
vessel or cargoes that were saved, as well as lenders on
bottomry or respondentia. (PD 1460, as amended)
Cases of general average
(1) The goods or cash invested in the redemption of the
vessel or cargo captured by enemies, privateers, or
pirates, and the provisions, wages, and expenses of the
vessel detained during the time the arrangement or
redemption is taking place.
(2) The goods jettisoned to lighten the vessel, whether they
belong to the vessel, to the cargo, or to the crew, and
the damage suffered through said act by the goods
kept.
(3) The cables and masts which are cut or rendered useless,
the anchors and the chains which are abandoned in
order to save the cargo, the vessel, or both.
(4) The expenses of removing or transferring a portion of
the cargo in order to lighten the vessel and place her in
condition to enter a port or roadstead, and the damage
resulting therefrom to the goods removed or
transferred.
(5) The damage suffered by the goods of the cargo through
the opening made in the vessel in order to drain her and
prevent her sinking.
(6) The expenses caused through floating a vessel
intentionally stranded for the purpose of saving her.
(7) The damage caused to the vessel which it is necessary
to break open, scuttle, or smash in order to save the
cargo.
(8) The expenses of curing and maintaining the members of
the crew who may have been wounded or crippled in
defending or saving the vessel.
(9) The wages of any member of the crew detained as
hostage by enemies, privateers, or pirates, and the
necessary expenses which he may incur in his
imprisonment, until he is returned to the vessel or to his
domicile, should he prefer it.
(10) The wages and victuals of the crew of a vessel chartered
by the month during the time it should be embargoed or
detained by force majeure or by order of the
Government, or in order to repair the damage caused for
the common good.
(11) The loss suffered in the value of the goods sold at
arrivals under stress in order to repair the vessel
because of gross average.
(12) The expenses of the liquidation of the average. (Art. 811,
Code of Commerce)
(13) If in lightening a vessel on account of a storm, in order
to facilitate her entry into a port or roadstead, part of her
cargo should be transferred to lighters or barges and be
lost, the owner of said part shall be entitled to
indemnity, as if the loss has originated from a gross
average (Art. 817, Code of Commerce)
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(14) If, as a necessary measure to extinguish a fire in a port;
roadstead; creek, or bay, it should be decided to sink any
vessel, this loss shall be considered gross average, to
which the vessels saved shall contribute.
Procedure for recovery
1. Assembly and deliberation with the sailing mate and
other officers
2. Resolution of the captain adopted
2. Hearing of the persons interested. In case an interested
person should not be heard, he shall not contribute to
the gross average. (Art. 813, Code of Commerce)
3. Resolution to be entered in the log book, stating the
motives and reasons therefore as well as the votes and
reason for disagreement. (Art. 814, Code of Commerce)
4. Minutes to be signed by all the persons present or in
urgent cases, the captain.
5. Captain shall deliver one copy of the minutes to the
maritime judicial authority of the first port he may
make within 24 hours (Art. 814, Code of Commerce)
6. Captain shall ratify the minutes under oath. (Art. 814,
Code of Commerce)
COLLISION (ASKED IN 1995, 1998)
Collision is an impact or sudden contact between two
moving vessels. (Aquino)
Allision is the striking of a moving vessel against one that is
stationary.
Zones in collision
(1) First Division covers all the time up to the moment when
the risk of collision may be said to have begun. Here,
each vessel is free to direct its course as it deems best.
(2) Second Division covers the time between the moment
when the risk of collision begins and the moment when
it has become a practical certainty. Burden is on the
vessel required to keep away and avoid the danger.
(3) Third Division covers the time of actual contact. The
vessel which has forced the privileged vessel into danger is
responsible even if the privileged vessel has committed an
error within that zone. (A. Urrutia & Co. vs. Baco River
Plantation Co.)
NOTE: Liability in collision cases is negligence-based. The
person who caused the injury is both civilly and criminally
liable. (Aquino)
Specific rules under the Code of Commerce
(1) One vessel at fault. The owner of the vessel at fault shall
indemnify the losses and damages suffered, after an
expert appraisal. (Art. 826, Code of Commerce)
(2) Both vessels at fault. Each shall suffer its own damages,
and both shall be solidarily responsible for the losses
and damages occasioned to their cargoes. (Art. 826,
Code of Commerce)
(3) Inscrutable fault. (If it cannot be decided which of the
two vessels was the cause of the collision). Each shall
bear his own damage and both shall be jointly
responsible for the losses and damages suffered by their
cargoes. (Art. 828, Code of Commerce) (Asked in the ‘97)
(4) Due to fortuitous event. Each vessel and its cargo shall
bear its own damages. (Art. 830, Code of Commerce)
UP COLLEGE OF LAW TRANSPORTATION LAWS
(5) By reason of fortuitous event, vessel properly anchored
and moored collides with another. The injury occasioned
shall be looked upon as particular average to the vessel
run into. (Article 832, Code of Commerce)
(6) Third vessel at fault. The owner of the third vessel shall
indemnify the losses and damages caused, the captain
thereof being civilly liable to said owner. (Art. 831, Code
of Commerce)
What is arrival under stress? Arrival under stress is the arrival
of a vessel at the nearest and most convenient port instead
of the port of destination, if during the voyage the vessel
cannot continue the trip to the port of destination.
It is lawful when the inability to continue voyage is due to
lack of provisions, well-founded fear of seizure, privateers,
pirates, or accidents of the sea disabling it to navigate. (Art.
819, Code of Commerce)
It is unlawful when:
(1) Lack of provisions due to negligence to carry according
to usage and customs;
(2) Risk of enemy not well known or manifest
(3) Defect of vessel due to improper repair; and
(4) Malice, negligence, lack of foresight or skill of captain.
(Art. 820, Code of Commerce)
What is shipwreck? Shipwreck denotes loss/wreck of a vessel
at sea as a consequence of running against another vessel
or thing at sea or on coast where the vessel is rendered
incapable of navigation.
If the wreck was due to malice, negligence or lack of skill of
the captain, the owner of the vessel may demand indemnity
from said captain. (Art. 841)
CARRIAGE OF GOODS BY SEA ACT (COGSA)
(COMMONWEALTH ACT No. 65)
APPLICATION
COGSA is a special law that governs all contracts of
carriage of goods by sea between or to and from the
Philippine ports.
Application of laws
(1) If the common carrier is coming to the Philippines:
First: Civil Code
Second: COGSA (in foreign trade)
Third: Code of Commerce
(2) If the private carrier is coming to the Philippines:
First: COGSA
Second: Code of Commerce
Third: Civil Code (excluding rules on common carriers)
(3) If the private or common carrier is from the Philippines
to a foreign country: Apply the law of the foreign country
(Art. 1753, CC) UNLESS the parties make COGSA
applicable.
Hierarchy of laws
(1) Art. 1766, CC (COGSA as only in matters not regulated
by this Code) this notwithstanding the fact that COGSA
is a special law. Goods in a foreign country shipped to
the Philippines are governed by the Civil Code.
(2) Art. 1753, CC
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NOTICE OF LOSS OR DAMAGE
Notice of claim and the general nature of the loss or
damage must be given in writing to the carrier or his agent
at the port of discharge before or at the time of the removal
of the goods. (Sec. 3 (6), COGSA)
If damage is not patent or cannot be ascertained from the
package, the shipper should file the claim with the carrier
within three days from delivery (compare with Code of
Commerce rules, see discussion on Period for Filing Claims
above).
First, the provision of COGSA provides that the notice of
claim need not be given if the state of the goods, at the time
of their receipt, has been the subject of a joint inspection or
survey. Prior to unloading the cargo, an Inspection Report
as to the condition of the goods was prepared and signed by
representatives of both parties. Second, as stated in the
same provision, a failure to file a notice of claim within three
days will not bar recovery if it is nonetheless filed within one
year. This one-year prescriptive period also applies to the
shipper, the consignee, the insurer of the goods or any legal
holder of the bill of lading. "Inasmuch as the neither the
Civil Code nor the Code of Commerce states a specific
prescriptive period on the matter, the COGSA—which
provides for a one-year period of limitation on claims for
loss of, or damage to, cargoes sustained during transit--
may be applied suppletorily to the case at bar." (Belgian
Overseas v. Philippine First Insurance, 2002)
PERIOD OF PRESCRIPTION (ASKED IN 1992, 1995, 2000, 2004)
In any event the carrier and the ship shall be discharged
from all liability in respect of loss or damage unless suit is
brought within one year after delivery of the goods or the
date when the goods should have been delivered.
The absence of a notice shall not affect or prejudice the
right of the shipper to bring suit within one year after the
delivery of the goods or the date when the goods should
have been delivered. (Sec. 3 (6))
Clearly, the coverage of the Act includes the insurer of the
goods. Otherwise, what the Act intends to prohibit after the
lapse of the one-year prescriptive period can be done
indirectly by the shipper or owner of the goods by simply
filing a claim against the insurer even after the lapse of one
year. (Filipino Merchants Insurance, Inc. v. Alejandro, 1986):
The period for filing the claim is one year, in accordance
with the Carriage of Goods by Sea Act. This was adopted
and embodied by our legislature in Com. Act No. 65 which,
as a special law, prevails over the general provisions of the
Civil Code on prescription of actions. (Maritime Agencies &
Services, Inc. v. CA, 1990)
LIMITATION OF LIABILITY
Under Sec. 4(5), the limit is set at a maximum of $500 per
package or customary freight unit.
The declaration made by the shipper stating an amount
bigger than $500 per package will make the carrier liable
for such bigger amount, but only if the amount so declared
is the real value of goods. (Aquino)
UP COLLEGE OF LAW TRANSPORTATION LAWS
Under the Sec. 4(5), the liability limit is set at $500 per
package or customary freight unit unless the nature and
value of such goods is declared by the shipper. This is
deemed incorporated in the bill of lading even if not
mentioned in it. (Eastern Shipping vs. IAC, 150 SCRA 463).
The Civil Code does not limit the liability of the common
carrier to a fixed amount per package. In all matters not
regulated by the Civil Code, the right and the obligations of
common carriers shall be governed by the Code of
Commerce and special laws. Thus, the COGSA, which is
suppletory to the provisions of the Civil Code, supplements
the latter by establishing a statutory provision limiting the
carrier's liability in the absence of a shipper's declaration of
a higher value in the bill of lading. In the case before us,
there was no stipulation in the Bill of Lading limiting the
carrier's liability. Neither did the shipper declare a higher
valuation of the goods to be shipped. Petitioners' liability
should be computed based on US$500 per package and
not on the per metric ton price declared in the Letter of
Credit. (Belgian Overseas v. Philippine First Insurance, 2002)
The Warsaw Convention
APPLICABILITY
(1) All international carriage of persons, baggage, or cargo
performed by aircraft for reward.
(2) Gratuitous carriage by aircraft performed by an air
transport undertaking (Art. 1, No. 1, WC)
INTERNATIONAL AIR TRANSPORTATION
Transportation by air between points of contact of two high
contracting parties, or those countries that have acceded to
the Convention, wherein the place of departure and the
place of destination are situated:
(1) Within the territories of two High Contracting Parties
regardless of whether or not there be a break in the
transportation or a transshipment; OR
(2) Within the territory of a single High Contracting Party if
there is an agreed stopping place within a territory
subject to the sovereignty, mandate or authority of
another power, even though the power is not a party to
the Convention. (Sec. 1, No. 2, WC)
A carriage to be performed by several successive air carriers is
deemed, for the purposes of this Convention, to be one
undivided carriage, if it has been regarded by the parties as a
single operation, whether it had been agreed upon under
the form of a single contract or of a series of contracts. (Sec.
1, No. 3, WC)
PERIOD COVERED
The period during which the baggage or goods are in
charge of the carrier, whether in an airport or on board an
aircraft, or, in the case of a landing outside an airport, in any
place whatsoever. (Sec. 18, WC)
LIABILITY OF CARRIER FOR DAMAGES
(1) Death or injury of a passenger if the accident causing it
took place
(a) on board the aircraft,
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(b) in the course of the operations of embarking,
(c) in the course of disembarking, or
(d) when there was delay (Sec. 17 and 19, WC);
(2) Destruction, loss, or damage to any baggage or goods
that are checked in, if damage occurred
(a) during the transportation by air, or
(b) when there was delay (Sec. 18 and 19, WC)
Transportation by air is the period during which the baggage
or goods are in the charge of the carrier whether in an
airport or on board an aircraft, or in case of a landing
outside an airport, in any place whatsoever. (Sec. 18, WC)
(3) Delay in the transport by air of passengers, baggage or
goods.
LIMITATION OF LIABILITY
LIABILITY TO PASSENGERS
General rule: 250,000 francs per passenger
Exception: Agreement to a higher limit (Art. 22(1), WC)
LIABILITY FOR CHECKED BAGGAGE
General rule: 250 francs per kg
Exception: In case of special declaration of value and
payment of a supplementary sum by consignor, carrier is
liable to not more than the declared sum unless it proves
the sum is greater than actual value. (Art. 22(2), WC)
LIABILITY FOR HAND-CARRIED BAGGAGE
General rule: 5,000 francs per passenger (Art. 22(3), WC)
(1) An agreement relieving the carrier from liability or fixing
a lower limit is null and void. (Art. 23, WC)
(2) Carrier is not entitled to the foregoing limit if the
damage is caused by willful misconduct or default on its
part. (Art. 25)
(3) The right to damages under the WC is extinguished
after 2 years from the date of arrival at the destination
or from the date on which the aircraft ought to have
arrived, or from the date on which the carriage stopped.
(Art. 29(1), WC)
Note: The Guatemala Protocol of 1971 increased the limit for
passengers to $100,000 and $1,000 for baggage. However,
the Supreme Court noted in Santos III v. Northwest Orient
Airlines, G.R. No. 101538, June 23, 1992, that the Guatemala
Protocol is still ineffective. (Sundiang and Aquino)
The WC should be deemed a limit of liability only in those
cases where the cause of death or injury to person, or
destruction, loss or damage to property or delay in its
transport is not attributable to or attended by any willful
misconduct, bad faith, recklessness, or otherwise improper
conduct on the part of any official or employee for which the
carrier is responsible; and there is otherwise no special or
extraordinary form of resulting injury. (Alitalia v. CA)
WILLFUL MISCONDUCT
When can a common carrier not avail itself of this limitation?
(1) Willful misconduct (Art. 25, WC)
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(2) Default amounting to willful misconduct (Art. 25, WC)

(3) Accepting passengers without ticket (Art. 3, No. 2, WC)
(4) Accepting goods without airway bill or baggage without
baggage check. Carrier guilty of willful misconduct
cannot avail of the provisions limiting liability but may
still invoke other provisions of the WC. (see Art. 25)

Receipt by the person entitled to the delivery of baggage or

cargo without complaint is prima facie evidence that the
same have been delivered in good condition and in
accordance with the document of carriage. (Art. 26, WC).

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PAGE 67
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Corporation
DEFINITION
A corporation is an artificial being created by operation of
law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or
incident to its existence. (Sec. 2, unless otherwise indicated,
all sections cited herein are from B.P. 68, or the Corporation
Code)
ATTRIBUTES OF THE CORPORATION
AN ARTIFICIAL BEING
A corporation exists by fiction of law. Hence, it can act only
through its directors, officers and employees.
Being only a juridical entity, the physical acts of the
corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a special act of the
Board of Directors (Shipside, Inc. v. Court of Appeals, 2001).
Notes:
(1) Moral Damages – cannot be awarded in favor of
corporations because they do not have feelings and
mental state. They may not even claim moral damages
for besmirched reputation (NAPOCOR v. Philipp Brothers
Oceanic, 2001).However, a corporation can recover
moral damages under Art 2219 (7) if it was the victim of
defamation (Pilipinas Broadcasting Network v. Ago
Medical and Educational Center, 2005).
(2) Criminal Liability – Since a corporation as a person is a
mere legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime in which
personal violence or malicious intent is required.
Criminal action is limited to the corporate agents guilty
of an act amounting to a crime and never against the
corporation itself (West Coast Life Ins. Co. v. Hurd [1914],
Time Inc. v. Reyes, 1971)
(2) Doctrine of Separate Personality: A corporation, upon
coming into existence, is invested by law with a
personality separate and distinct from those persons
composing it as well as from any other legal entity to
which it may be related. (Yutivo Sons Hardware v. CTA,
1961)
CREATED BY OPERATION OF LAW
Mere consent of the parties to form a corporation is not
sufficient. The State must give its consent either through a
special law (in case of government corporations) or a
general law (i.e., Corporation Code in case of private
corporations).
A corporation comes into existence upon the issuance of the
certificate of incorporation. Then and only then will it
acquire juridical personality to sue and be sued, enter into
contracts, hold or convey property or perform any legal act
in its own name (Ladia)
HAS THE RIGHT OF SUCCESSION
Its continued existence during its stated term cannot be
affected by any change in the members or stockholders or
rd
by any transfer of shares by a stockholder to a 3 person.
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HAS THE POWERS, ATTRIBUTES AND PROPERTIES
EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE
A corporation has no power except those expressly
conferred on it by the Corporation Code and by its articles of
incorporation, those which may be incidental to such
conferred powers, those that are implied from its existence,
and those reasonably necessary to accomplish its purposes.
In turn, a corporation exercises said powers through its
Board of Directors and/or its duly authorized officers and
agents. (Monfort Hermanos Agricultural Dev. Corp. v.
Monfort III, 2004).
Classes of Corporations
STOCK CORPORATION (Asked in 2001 and 2004)
Corporations which have capital stock divided into shares
and are authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the
basis of shares held (Sec. 3)
It is organized for profit.
The governing body of a stock corporation is usually the
Board of Directors (except in certain instances, e.g. close
corporations).
NON-STOCK CORPORATION (Asked in 2004)
All other corporations are non-stock corporations (Sec. 3)
One where no part of the income is distributable as
dividends to its members, trustees, or officers, subject to the
provisions of the Code on dissolution(Sec. 87).
Not organized for profit.
Its governing body is usually the Board of Trustees.
There are two elements for a stock corporation to exist:
(1) Capital stock divided into shares, and
(2) An authority to distribute to the holders of such shares,
dividends or allotments of the surplus profits on the
basis of shares held. (Test of WON a stock corporation)
Even if there is a statement of capital stock, the corporation
is still NOT a stock corporation if dividends are NOT
supposed to be declared, that is, there is no distribution of
retained earnings. (CIR v. Club Filipino de Cebu, 1962)
Note: Under Sec. 43 of the Corporation Code, a corporation is
deemed to have the power to declare dividends. Thus, so
long as the corporation has capital stock and there is no
prohibition in its Articles of Incorporation or in its by-laws
for it to declare dividends, such corporation is a stock
corporation.
OTHER CORPORATIONS
PUBLIC CORPORATION (ASKED IN 2004)
One formed or organized for the government of a portion of
the state. Its purpose is for the general good and welfare
(Sec. 3, Act 1456).
UP COLLEGE OF LAW CORPORATION CODE
Beyond cavil, a government-owned and controlled
corporation has a personality of its own, distinct and
separate from that of the government, and the intervention
in a transaction of the Office of the President through the
Executive Secretary does not change the independent
existence of a government entity as it deals with another
government entity (Polytechnic University of the Phils. V.
Court of Appeals, 2001).
PRIVATE CORPORATION (ASKED IN 2004)
One formed for some private purpose, benefit, aim or
end(Sec. 3, Act 1456); it may be either stock or non-stock,
government-owned or controlled or quasi-public.
The test to determine whether a corporation is government-
owned or –controlled, or private in nature, is if a corporation
is created by its own charter for the exercise of a public
function, or by incorporation under the general corporation
law (Baluyot v. Holganza, 2000).
CLOSE CORPORATION
One whose articles of incorporation provide that: (1) All the
corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (2)
all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of
any class (see Sec. 96).
Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3)
of its voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation within
the meaning of this Code.
EDUCATIONAL CORPORATION
One organized for educational purposes (Sec. 106).
RELIGIOUS CORPORATIONS
Corporation sole is one formed for the purpose of
administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination,
sect, or church, by the chief archbishop, bishop, priest, rabbi,
or other presiding elder of such religious denomination, sect
or church (Sec.110)
A corporation sole has no nationality (Roman Catholic
Apostolic, etc v. Register of Deeds of Davao City, 1957).
Corporation aggregate is a religious corporation
incorporated by more than one person.
ELEEMOSYNARY CORPORATION
One organized for a charitable purpose
DOMESTIC CORPORATION
One formed, organized, or existing under the laws of the
Philippines.
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FOREIGN CORPORATION
One formed, organized or existing under any laws other
than those of the Philippines and whose law allows Filipino
citizens and corporations to do business in its own country
and state (Sec. 123).
CORPORATION CREATED BY SPECIAL LAWS OR CHARTER
Corporations which are governed primarily by the provisions
of the special law or charter creating them. Corporation
Code has suppletory application. (Sec. 4)
SUBSIDIARY CORPORATION
One in which control, usually in the form of ownership of
majority of its shares, is in another corporation (the parent
corporation).
PARENT CORPORATION
Its control lies in its power, directly or indirectly, to elect the
subsidiary’s directors thus controlling its management
policies.
CORPORATION DE JURE
A corporation organized in accordance with the
requirements of the law.
DE FACTO CORPORATION
A corporation where there exists a flaw in its incorporation
Rule on De Facto Corporations
The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation
may be a party. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding (Sec. 20).
Grant of juridical personality is an exercise of State power
and not a matter of private affair. Consequently, under the
de facto corporation doctrine, the defect in the juridical
personality of a corporation cannot be inquired into by
private individuals, much less used as a defense to avoid
claims, except in quo warranto proceedings brought on
behalf of the State where the main action is to question the
validity or existence of such juridical personality (Villanueva)
Requisites of De Facto Corporation
(1) Organized under a valid law
(2) Bona fide compliance with formalities of law
(3) User of corporate powers
(4) SEC issuance of certificate of incorporation (Hall v.
Piccio, 86 Phil 603 [1950])
CORPORATION BY ESTOPPEL
Where a group of persons misrepresent themselves as a
corporation, they are subsequently estopped from claiming
lack of corporate life in order to avoid liability
All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or
arising as a result thereof.
UP COLLEGE OF LAW CORPORATION CODE
Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation (Sec. 21).
Nationality of Corporations
PLACE OF INCORPORATION TEST
The corporation is a national of the country under whose
laws it is organized or incorporated (Sec. 123).
Domestic corporations – organized and governed under
and by Philippine laws
Foreign Corporations – organized under laws other than
those of the Philippines and can operate only in the territory
of the state under whose laws it was formed. However, they
may be licensed to do business here (Campos).
CONTROL TEST
A corporation shall be considered a Filipino corporation if
the Filipino ownership of its capital stock is at least 60%,
and where the 60-40 Filipino-alien equity ownership is NOT
in doubt (SEC Opinion dated 6 November 1989; DOJ Opinion
No. 18, s. 1989).
Therefore, its shareholdings in another corporation shall be
considered to be of Filipino nationality when computing the
percentage of Filipino equity of that second corporation
(SEC Opinion dated 23 November 1993).
Control test is applied in the following:
(1) Exploitation of natural resources - “Only Filipino citizens
or corporations whose capital stock are at least 60%
owned by Filipinos can qualify to exploit natural
resources.” (Sec. 2, Art. XII, Consti.)
(2) Public Utilities - “xxx no franchise, certificate or any
other form of authorization for the operation of a public
utility shall be granted except to citizens of the
Philippines or to corporations or associations organized
under the laws of the Philippines at least 60% of whose
capital is owned by such citizens. “ (Sec. 11, Art. XII,
Consti.)
Note: In the recently decided case of Gamboa vs. Teves (G.R.
No. 176579, June 28, 2011), the SC ruled as follows:
“The term "capital" in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in
the election of directors, and thus in the present case only to
common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares).
The 60 percent of the "capital" assumes, or should result in,
"controlling interest" in the corporation. Compliance with
the required Filipino ownership of a corporation shall be
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determined on the basis of outstanding capital stock
whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough
to meet the required Filipino equity. Full beneficial ownership
of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held
by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals.”
In the later 2012 case of Gamboa v. Teves, (G.R. No. 176579,
October 9, 2012) The SC reversed the previous ruling and
held that:
“Since the constitutional requirement of at least 60 percent
Filipino ownership applies not only to voting control of the
corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category,
comprising the capital of a corporation. Under the
Corporation Code, capital stock consists of all classes of
shares issued to stockholders, that is, common shares as
well as preferred shares, which may have different rights,
privileges or restrictions as stated in the articles of
incorporation.
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of the shares
in a corporation, the 60-40 ownership requirement in favor
of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting
rights but also to shares without voting rights. Preferred
shares, denied the right to vote in the election of directors,
are anyway still entitled to vote on the eight specific
corporate matters mentioned above under Section 6 of the
Corporation Code. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of common
and preferred non-voting shares, at least 60 percent of the
common shares and at least 60 percent of the preferred non-
voting shares must be owned by Filipinos. Of course, if a
corporation issues onlya single class of shares, at least 60
percent of such shares must necessarilybe owned by
Filipinos.
In short, the 60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of shares,
whether common, preferred non-voting, preferred voting or
any other class of shares. This uniform application of the 60-
40 ownership requirement in favor of Filipino citizens clearly
breathes life to the constitutional command that the
ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of
whosecapital is Filipino-owned. Applying uniformly the 60-
40 ownership requirement in favor of Filipino citizens to
each class of shares, regardless ofdifferences in voting
rights, privileges and restrictions, guarantees effective
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Filipino control of public utilities, as mandated by the
Constitution.”
GRANDFATHER RULE
Method used to determine the nationality of a corporation,
in cases where corporate shareholders are present in the
situation, by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly
nationalized areas of activities, is computed by attributing
the nationality of second or even subsequent tier ownership
to determine the nationality of the corporate shareholder
(Villanueva).
It involves the computation of Filipino ownership of a
corporation in which another corporation of partly Filipino
and partly foreign equity owns capital stock. The
percentage of shares held by the second corporation in the
first is multiplied by the latter’s own Filipino equity, and the
product of these percentages is determined to be the
ultimate Filipino ownership of the subsidiary corporation
(SEC Opinion re; Silahis Intl Hotel May 4, 1987).
The Grandfather Rule must be applied to accurately
determine the actual participation, both direct and indirect,
of foreigners in a corporation engaged in a nationalized
activity or business.
Compliance with the constitutional limitation(s) on
engaging in nationalized activities must be determined by
ascertaining if 60% of the investing corporation’s
outstanding capital stock is owned by “Filipino citizens”, or
as interpreted, by natural or individual Filipino citizens. If
such investing corporation is in turn owned to some extent
by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of
investing corporations have been established, the very
essence of the Grandfather Rule (Redmont Consolidated
Mines, Corp v. McArthur Mining, Inc., et al., 2010).
Corporate Juridical Personality
A private corporation formed or organized under this code
commences to have corporate existence and juridical
personality and is deemed incorporated from the date the
SEC issues a certificate of incorporation under its official
seal(Sec. 19)
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
(Asked in 1995, 1996, 1999, 2000)
Concept: A corporation has a personality separate and
distinct from that of its stockholders and members and is
not affected by the personal rights, obligations, and
transactions of the latter.
Merely a legal fiction for purposes of convenience and to
sub-serve the ends of justice
Property: SHs have no claim on corporate property as
owners, but mere expectancy or inchoate right to the same
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upon dissolution of the corporation after all corporate
creditors have been paid. Such right is limited only to their
equity interest (doctrine of limited liability). Although a
stockholder’s interest in the corporation may be attached by
his personal creditor, corporate property cannot be used to
satisfy his claim (Wise & Co. v. Man Sun Lung, 1940).
LIABILITY FOR TORTS AND CRIMES
As a separate juridical personality, a corporation can be
held liable for torts committed by its officers for corporate
purpose (PNB v. CA, 1978).
RECOVERY OF MORAL DAMAGES
General rule: A corporation has the power to sue in its
corporate name. (Sec. 36)
Exception: Moral Damages cannot be awarded in favor of
corporations because they do not have feelings and mental
state. They may not even claim moral damages for
besmirched reputation (NAPOCOR v. Philipp Brothers
Oceanic, 2001).
However, a corporation can recover moral damages under
Art 2219 (7) if it was the victim of defamation (Pilipinas
Broadcasting Network v. Ago Medical and Educational
Center, 2005).
Constitutional rights: Corporate entities are entitled to due
process, equal protection, and protection against
unreasonable searches and seizures. However, a
corporation is not entitled to the privilege against self-
incrimination (Bataan Shipyard &Eng’g Co. v. PCGG, 1987)
DOCTRINE OF PIERCING THE CORPORATE VEIL
Piercing the veil of corporate entity is merely an equitable
remedy, and may be granted only in cases when the
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime (Yutivo Sons v. CTA,
1961) or where the corporation is a mere alter ego or
business conduit of a person. (Koppel Phil v. Yatco)
GROUNDS FOR APPLICATION OF DOCTRINE
(1) If done to defraud the government of taxes due it.
(2) If done to evade payment of civil liability.
(3) If done by a corporation which is merely a conduit or
alter ego of another corporation.
(4) If done to evade compliance with contractual
obligations.
(5) If done to evade financial obligation to its employees.
Only in these and similar instances may the veil be pierced
and disregarded: to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the
decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives to cover up an
otherwise blatant violation of the prohibition against forum
shopping (PNB v. Andrada Electric & Engineering Co., 2002).
Q: Is a corporation liable for the individual acts of its
stockholders or members? Is there an exception to the
general rule?
A: It is settled that a corporation has a personality separate
and distinct from its individual stockholders or members,
UP COLLEGE OF LAW CORPORATION CODE
and is not affected by the personal rights, obligations and
transactions of the latter. The corporation may not be held
liable for the obligations of the persons composing it, and
neither can its stockholders be held liable for its obligation.
Of course, this Court has recognized instances when the
corporation’s separate personality may be disregarded.
However, we have also held that the same may only be
done in cases where the corporate vehicle is being used to
defeat public convenience, justify wrong, protect fraud, or
defend crime. Moreover, the wrongdoing must be clearly
and convincingly established. It cannot be presumed.
(Seaoil vs Autocorp Group, 2008, Nachura)
TEST IN DETERMINING APPLICABILITY
General rule: The mere fact that a corporation owns all or
substantially all of the stocks of another corporation is NOT
sufficient to justify their being treated as one entity.
Exception: The subsidiary is a mere instrumentality of the
parent corporation.
Circumstances rendering subsidiary an instrumentality
(PNB v. Ritratto Group, 2001):
(1) The parent corporation owns all or most of the
subsidiary’s capital stock.
(2) The parent and subsidiary corporations have common
directors or officers.
(3) The parent corporation finances the subsidiary.
(4) The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
incorporation.
(5) The subsidiary has grossly inadequate capital.
(6) The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
(7) The subsidiary has substantially no business except with
the parent corporation or no assets except those
conveyed to or by the parent corporation.
(8) In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described as a
department or division of the parent corporation or its
business or financial responsibility is referred to as the
parent corporation’s own.
(9) The parent corporation uses the property of the
subsidiary as its own.
(10) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take
their orders from the parent corporation in the latter’s
interest.
(11) The formal ledger requirements of the subsidiary are
not observed.
Incorporation
and Organization
PROMOTER
Promoters are persons who, acting alone or with others,
take initiative in founding and organizing the business or
enterprise of the issuer and receives consideration therefor
(RA 8799, The Securities Regulation Code).
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LIABILITY OF PROMOTER
General rule: The promoter binds himself PERSONALLY &
assumes the responsibility of looking to the proposed
corporation for reimbursement.
Exceptions:
(1) Express or implied agreement to the contrary
(2) Novation, not merely adoption or ratification of the
contract
LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACTS
General rule: A corporation is NOT bound by the contract. A
corporation, until organized, has no life and no legal
existence. It could not have had an agent (the promoter)
who could legally bind it. (Cagayan Fishing Development
Co., Inc. v. Sandiko)
Exceptions: A corporation may be bound by the contract if it
makes the contract its own by:
(1) Adoption or ratification of the ENTIRE contract after
incorporation.
Notes:
(a) Power of the corporation to adopt a contract must be
understood to be limited to such contracts as the
corporation itself, after its organization, would be
authorized to make. (Builders’ Duntile Co. v. Dunn Mfg.
Co.)
(b) Novation or the intent to novate the original contract is
required to adopt or ratify the pre-incorporation
contract. (Campos, 1990)
(2) Acceptance of benefits under the contract with
knowledge of the terms thereof.
(3) Performance of its obligation under the contract
NUMBER AND QUALIFICATIONS OF INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber to at
least 1 share of the capital stock of the corporation (Sec.
10)
CORPORATE NAME – LIMITATIONS ON USE
CORPORATE NAME (SEC. 18)
(1) Must not be identical or deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law
(2) Not patently deceptive, confusing or contrary to existing
laws
Required by law to include the word “Corporation” or “Inc.”
(Campos, 1990)
Change of corporate name requires the amendment of the
AOI: majority vote of the board and the vote or written
assent of stockholders holding 2/3 of the outstanding
capital stock (Sec. 16).
Amendment of a corporation’s AOI changing its corporate
name does not extinguish the personality of the original
corporation. It is the same corporation with a different
UP COLLEGE OF LAW CORPORATION CODE
name, and its character is not changed. Consequently, the
“new” corporation is still liable for the debts and obligations
of the “old” corporation. Republic Planters Bank v. CA (1992)
(3) After the submission of the AOI to the SEC.
CORPORATE TERM (Sec. 11)
General rule: A corporation shall exist for a period not
exceeding 50 years from the date of incorporation
Exceptions:
(1) Sooner dissolved
(2) Period extended
(a) For periods not exceeding 50 years in any single
instance by an amendment of the AOI
(b) Extensions may not be made earlier than 5 years prior to
the original or subsequent expiry date(s) EXCEPT if the
SEC determines that there are justifiable reasons for an
earlier extension
Rationale: Corporations are creatures of the law through the
State legislature, the State is therefore concerned that this
privilege be enjoyed by corporations only “under the
conditions and not beyond the period that it sees fit to
grant; and particularly, that it not be abused in fraud and to
the detriment of other parties; and for this reason, it has
been ruled that the limitation to a definite period is an
exercise of control in the interest of the public.” (Benguet
Consolidated Mining Co. v. Pineda98 Phil. 711 Smith v.
Eastwood Wine Manufacturing Co., 43 Atl. 568 cited in
Lopez, 1994)
MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENT (Sec. 12)
MINIMUM CAPITAL STOCK
Stock corporations incorporated under the Corporation
Code shall not be required to have a minimum authorized
capital stock
Exception: As provided for by special law and subject to the
provisions of Sec. 13
SUBSCRIPTION REQUIREMENT
The amount of capital stock to be subscribed and paid for
the purposes of incorporation (Sec. 13):
(1) At the time of incorporation, at least 25% of the
authorized capital stock stated in the AOI should be
subscribed;
(2) At least 25% of the said 25% above, must be paid upon
subscription;
(3) The balance to be payable on
(a) Dates fixed in the subscription contract or
(b) Upon call by the BOD in the absence of fixed dates
(4) The paid-up capital can in no case be lower than
P5,000.00
ARTICLES OF INCORPORATION
NATURE AND FUNCTION OF ARTICLES
(1) Constitutes the charter of the corporation and sets forth
the rules and conditions upon which the association or
corporation is founded
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(2) Defines the contractual relationships between the State
and the corporation, the stockholders and the State, and
the corporation and the stockholders
The Articles must be filed with the SEC for the issuance of
the Certificate of Incorporation.
CONTENTS
(1) Corporate Name
(a) Must not be identical or deceptively or confusingly
similar to that of any existing corporation or to any other
name already protected by law
(b) Not patently deceptive, confusing or contrary to existing
laws
Required by law to include the word “Corporation” or “Inc.”
(Campos, 1990)
Change of corporate name requires the amendment of the
AOI: majority vote of the board and the vote or written
assent of stockholders holding 2/3 of the outstanding
capital stock (Sec. 16).
Amendment of a corporation’s AOI changing its corporate
name does not extinguish the personality of the original
corporation. It is the same corporation with a different
name, and its character is not changed. Consequently, the
“new” corporation is still liable for the debts and obligations
of the “old” corporation. (Republic Planters Bank v. CA, 1992)
(2) Purpose Clause
(a) Must indicate the PRIMARY and SECONDARY purposes
if there is more than one purpose, which should not
contradict or change the nature of the corporation (Sec.
14(2))
(b) Must not be patently unconstitutional, illegal, immoral,
and contrary to government rules and regulations (Sec.
17 (2)).
(c) Must not be for the purpose of practicing a profession
(People v. United Medical Service, 200 N.E. 157, cited in
Campos)
(3) Principal Office
(a) Must be within the Philippines (Sec. 14 (3))
(b) AOI must specify both province or city or town where it is
located
(c) A specific address is now required; Metro Manila is no
longer allowed (Sundiangand Aquino citing SEC
Circular No. 3-2006).
Important for:
(a) determining venue in an action by or against the
corporation, and
(b) determining the province where a chattel mortgage of
shares should be registered (Chua Gan vs. Samahang
Magsasaka, 1935).
(4) Corporate Term
(a) Maximum life of 50 years.
(b) Extendible for a period not exceeding 50 years at any
one instance. No extension, however, can be made
earlier than 5 years before the end of the term. (Sec. 11)
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Extension requires an amendment of the AOI subject to
the exercise of appraisal right by the dissenting
stockholder (Sec. 37).
(5) Names, citizenship and residences of incorporators
(6) Number, names, citizenship and residences of directors/
trustees (Asked in 2005 and 2008)
Stock corporations: Directors
Non-stock corporations: Trustees
General rule: Not less than 5 but not more than 15
directors/ trustees
Exception: Non-stock corporations whose articles or by-
laws may provide for more than 15 trustees (Sec. 92)
Educational non-stock corporations:
(a) trustees may NOT be less than 5 NOR exceed 15
(b) number of trustees shall be in multiples of 5 (Sec.
108)
Nationalized or partially-nationalized industries:
Aliens may be directors but only in such number as may
be proportional to their allowable ownership of shares
(7) If stock corporation
(a) authorized capital stock in lawful money of the
Philippines
(b) the number of shares into which the ACS is divided
(c) if with par value shares, the par value of each share (Sec.
14(8), Sec. 15(7)).
(d) names, citizenship and residences of original
subscribers
(e) amount subscribed and paid on each subscription
(f) fact that some or all shares are without par value
(8) If non-stock corporation
(a) amount of capital
(b) names, nationalities & residences of contributors
(c) amount contributed by each
(9) Amount paid by each subscriber on their subscription,
which shall not be less than 25% of subscribed capital
and shall not be less than P5,000 (Sec. 15 (8 & 9)
(10) Name of treasurer elected by the subscribers (Sec. 15 (10)
(11) Other matters
(a) Classes of shares, as well as preferences or restrictions
on any such class (Sec. 6).
(b) Denial or restriction of pre-emptive right (Sec.39).
(c) Prohibition against transfer of stock which would reduce
stock ownership to less than the required minimum in
the case of a nationalized business or activity (Sec.
15(11)).
AMENDMENT
Amendment of the Articles of Incorporation
Any provision or matter stated in the articles of
incorporation may be amended
(1) By a majority vote of the board of directors or trustees
(2) And the vote or written assent of:
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(a) 2/3 of the outstanding capital stock, without prejudice
to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code,
(b) 2/3 of the members if it be a non-stock corporation.
(Sec. 16)
Limitations
(1) Cannot effect amendment when it will contravene any
provision of requirement imposed by the Code or by
special laws
(2) The amendment must be for a legitimate purpose
(3) Must be approved by the directors/trustees and the
stockholders/members through the vote requirement
(4) Appraisal Right
(5) Both the original and the amended articles together
must contain all the provisions required by law to be set
out in the articles.
(6) If the corporation is governed by a special law the
amended articles must be accompanied by a favorable
recommendation of the appropriate government agency
to the effect that such amendment is in accordance with
law (Lopez, 2004)
(7) Will take effect only
(a) Upon their approval by the SEC by the issuance of a
certificate of amended articles
(b) Or from the date of filing with the SEC if not acted upon
within 6 months from the date of filing for a cause not
attributable to the corporation
Procedure
(1) The original and amended articles together shall
contain all provisions required by law to be set out in the
articles of incorporation
(2) The articles, as amended shall be indicated by
underscoring the change or changes made
(3) A copy shall be submitted to the SEC
(a) Duly certified under oath by the corporate secretary and
a majority of the directors or trustees
(b) Stating the fact that the amendment or amendments
have been duly approved by the required vote of the
stockholders or members
The following items are amendable under Sec. 16:
(1) Change of name of the Corporation
(2) Adding to or changing the purpose/s
(3) Change of principal office
(4) Change in the number of directors or trustees
(5) Increase or decrease in authorized capital stock (subject
to Sec. 38)
NON-AMENABLE ITEMS
The following items state accomplished facts, therefore,
cannot be amended:
(1) The names, nationalities and residences of the
incorporators (Otherwise, an amendment would go
against the definition of “incorporators” in Sec. 5)
(2) First set of directors or trustees
(3) Original stock subscriptions and paid-in capital
(4) Treasurer-in-trust
(5) Place and date of execution
(6) Witnesses (De Leon)
Notes: AOI must be accompanied by Treasurer’s sworn
statement of compliance with Sec. 13 on amount of capital
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to be subscribed and paid for the purposes of incorporation;
otherwise, SEC shall not accept the AOI. (Sec. 14)
REGISTRATION AND ISSUANCE OF CERTIFICATE
OF INCORPORATION
REGISTRATION OF ARTICLES OF INCORPORATION
Documents to be filed with SEC (Asked in 2002):
[BAT-LaNG]
(1) Articles of Incorporation
(2) Treasurer’s Affidavit certifying that 25% of the total
authorized capital stock has been subscribed and at
least 25% of such has been fully paid in cash or
property.
(3) Bank certificate covering the paid-up capital.(Note:
Current SEC rules no longer require this if payment for
shares is made in cash)
(4) Letter authority authorizing the SEC to examine the
bank deposit and other corporate books and records to
determine the existence of paid-up capital.
(5) Undertaking to change the corporate Name in case
there is another person or entity with same or similar
name that was previously registered.
(6) Certificate of authority from proper Government agency
whenever appropriate like BSP for banks and Insurance
Commission for insurance corporations. (Sundiang and
Aquino)
ISSUANCE OF CERTIFICATE OF INCORPORATION BY SEC
Effect: Commencement of corporate existence and juridical
personality (Sec. 19)
Revocation of certificate of incorporation: If incorporators are
found guilty of fraud in procuring the same after due notice
and hearing (Sec. 6(i), PD 902-A)
GROUNDS FOR DISAPPROVING AOI (SEC. 17) (F2P2)
(1) AOI does not SUBSTANTIALLY comply with the form
prescribed
(2) Purpose is patently unconstitutional, illegal, immoral,
contrary to government rules and regulations
(3) Treasurer’s Affidavit concerning the amount of capital
subscribed and or paid is false
(4) Required percentage of ownership of Filipino citizens
has not been complied with.
Remedy in case of rejection of AOI: Petition for review in
accordance with the Rules of Court (Sec. 6, last par., PD
902-A)
SEC shall give the incorporators reasonable time to correct
or modify objectionable portions of the articles or
amendment (Sec. 17).
ADOPTION OF BY-LAWS
WHEN ADOPTION IS MADE (SEC. 46)
(1) Prior to incorporation – approved and signed by all the
incorporators & submitted to SEC together with AOI
(2) After incorporation – within 1 month after receipt of
official notice of the issuance of its certificate of
incorporation by the SEC.
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EFFECT OF FAILURE TO FILE THE BY-LAWS WITHIN THE PERIOD
Does not imply the "demise" of the corporation. By-laws may
be required by law for an orderly governance and
management of corporations but they are not essential to
corporate birth. Therefore, failure to file them within the
period required by law by no means tolls the automatic
dissolution of a corporation (Loyola Grand Villas
Homeowners Assn. v. CA (1997)
Note: Section 22 on the effect of failure to formally organize
within 2 years from incorporation, the corporation’s
corporate powers cease and the corporation is deemed
dissolved. Organization includes: the filing & approval of by-
laws with the SEC and the election of directors and officers
(Campos).
NATURE AND FUNCTION OF BY LAWS
(1) Product of agreement of the stockholders/members
and establish the rules for internal government of the
corporation (Campos
(2) “A rule or law of a corporation for its government” (13
Am. Jur., 283)
(3) Mere internal rules among stockholders and cannot
affect or prejudice 3rd persons who deal with the
corporation unless they have knowledge of the same
(China Banking Corp v CA, 1997)
(4) “According to its function, by-laws may be defined as
the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own
actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto
and among themselves in their relation to it.” (9
Fletcher Cyc. Corp., 1963 rev. ed., Sec. 4166 at 622 cited
in Lopez, 1994)
REQUISITES OF VALID BY-LAWS
(1) Must be approved by the affirmative vote of the
stockholders representing MAJORITY of the outstanding
capital stock or majority of members (If filed pre-
incorporation: must be approved and signed by all
incorporators)
(2) Must be kept in the principal office of the corporation,
subject to inspection of stockholders or members during
office hours (Sec. 74)
BINDING EFFECTS
ONLY from date of issuance of SEC of certification that by-
laws are not inconsistent with the Code
Pending approval, they CANNOT bind stockholders or
corporation
AMENDMENT OR REVISION
Effected by: Majority vote of the members of the Board and
majority vote of the owners of the OCS or members, in a
meeting duly called for the purpose.
Delegation to the BOD of the power to amend or repeal by-
laws: by vote of stockholders representing 2/3 of the OCS or
2/3 of the members
How delegation is revoked: Any power delegated to the
board of directors or trustees to amend or repeal any by-
laws or adopt new by-laws shall be considered as revoked
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whenever stockholders owning or representing a majority of
the outstanding capital stock or a majority of the members
in non-stock corporations, shall so vote at a regular or
special meeting.
Corporate Powers
GENERAL POWERS, THEORY OF GENERAL CAPACITY
(Sec. 36)
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt by-laws;
(6) For stock corporations - issue or sell stocks to
subscribers and sell treasury stocks; for non-stock
corporation - admit members to the corporation;
(7) Purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and
personal property, pursuant to its lawful business;
(8) Enter into merger or consolidation with other
corporations as provided in the Code;
(9) Make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity;
(10) Establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees;
and
(11) Exercise such other powers as may be essential or
necessary to carry out its purposes
Note: The Corporation has implied powers which are
deemed to exist because of the following provisions:
(1) “Except such as are necessary or incidental to the
exercise of the powers so conferred” (Sec. 45)
(2) “Such powers as are essential or necessary to carry out
its purpose or purposes as stated in the AOI” – catch-all
phrase (Sec. 36(11)).
SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY
(Sec. 37-44) (BADD PIT MC)
(1) Power to Extend or Shorten Corporate Term
(2) Power to Increase or Decrease Capital Stock or Incur,
Create, Increase Bonded Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in Another Corporation
or Business
(7) Power to Declare Dividends
(8) Power to Enter Into Management Contract
EXTEND OR SHORTEN THE CORPORATE TERM (SEC. 37)
(1) Must be approved by majority vote of the Board of
Directors/ Board of Trustees (BOD/BOT)
(2) Ratified at a meeting by 2/3 of SH representing the
outstanding capital stock/ 2/3 of members of non-stock
corporations
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(3) Written notice of meeting (includes proposed action, time
and place of meeting) shall be addressed to each
SH/member at his place of residence and deposited to the
addressee in the post office, or served personally
(4) In case of extension of corporate term, appraisal right may
be exercised by the dissenting stockholder
INCREASE OR DECREASE CAPITAL STOCK (SEC. 38)
INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS (SEC. 38)
(1) Same requirements above from 1-3
(2) A certificate in duplicate must be signed by a majority of
the directors of the corporation (countersigned by the
chairman and the secretary of the SH meeting), setting
forth:
(a) That requirements of this section have been complied
with
(b) The amount of the increase or diminution of the capital
stock
(c) In case of increase,
(i) the amount of capital stock or number of shares of no-
par stock actually subscribed
(ii) names, nationalities and residences of the persons
subscribing
(iii) the amount of no-par stock subscribed by each
(iv) the amount paid by each on his subscription, or the
amount of capital stock or number of shares of no-par
stock allotted to each stockholder if such increase is for
the purpose of making effective stock dividend
(d) any bonded indebtedness to be incurred, created or
increased
(e) the actual indebtedness of the corporation on the day of
the meeting
(f) the amount of stock represented at the meeting
(g) the vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness
(3) prior approval of SEC is required
(4) duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the SEC,
attached in the original articles of incorporation.
(a) From and after approval of the SEC of its certificate of
filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of
any bonded indebtedness authorized
(b) SEC shall not accept for filing any certificate of increase
unless accompanied by the sworn statement of the
treasurer of the corporation showing:
(i) That at least 25% of such increased capital stock have
been subscribed and
(ii) that at least 25% of the amount subscribed has been
paid or that there has been transferred to the
corporation property the value is equivalent to 25% of
the subscription
(c) SEC shall not approve any decrease in the capital stock
if its effect shall prejudice the rights of corporate
creditors
(5) Bonds issued by a corporation shall be registered with the
SEC
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DENY PREEMPTIVE RIGHT (SEC. 39)
(1) All SH of a Stock Corporation have preemptive right to
subscribe to all issues or disposition of shares of any class,
in proportion to their respective shareholdings
(2) Except if such right is denied by the AOI or an amendment
thereto
(3) Pre-emptive right shall not extend to:
(a) shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
public
(b) shares to be issued in good faith with the approval of
2/3 of the stockholders representing outstanding
capital stock, in exchange for property needed for
corporate purposes or in payment of a previously
contracted debt
SELL OR DISPOSE OF SUBSTANTIALLY ALL ITS ASSETS (SEC. 40)
(1) Same requirements from 1-3 as Sec. 37 above
(2) Any dissenting SH may exercise his appraisal right
(3) Deemed to cover substantially all the corporate property
and assets
(4) After authorization by the SH/members, the BOD/BOT
may abandon such sale, lease, exchange, mortgage,
pledge or other disposition, subject to the rights of third
parties under any contract relating thereto, without further
action or approval by the SH/ members
(5) Corporation is not restricted in its power to dispose assets:
(a) if the same is necessary in the usual and regular course
of business of the corporation or
(b) if the proceeds of the sale will be appropriated for the
conduct of its remaining business
ACQUIRE ITS OWN SHARES (SEC. 41)
(1) For a legitimate corporate purpose/s, including but not
limited to the following:
(a) To eliminate fractional shares arising out of stock
dividends
(b) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and
(c) To pay dissenting or withdrawing stockholders
(2) Provided there are unrestricted retained earnings (URE) in
the corporate books to cover the shares purchased or
acquired
INVEST IN ANOTHER CORPORATION OR BUSINESS (SEC. 42)
(1) Same requirements from 1-3 as Sec. 37 above
(2) Any dissenting SH shall have appraisal right
(3) Where the investment is reasonably necessary to
accomplish the corporation’s primary purpose, the
approval of the SH/ members is not necessary
Notes:
(a) If it is for the same purpose, or incidental, or related to
its PRIMARY purpose, the board can invest the
corporate fund WITHOUT the consent of the
stockholders. No appraisal right.
(b) If the investment is in another corporation of different
business or purpose BUT in pursuance of the
SECONDARY purpose, the affirmative vote of majority of
the board consented by stockholders/ members is
required.
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(c) If the investment is OUTSIDE the purpose/s for which
the corporation was organized, AOI must be amended
first, otherwise it will be an Ultra Vires act.
DECLARE DIVIDENDS (SEC. 43)
(1) Out of URE
(2) Payable in cash, in property, or in stock to all SH on the
basis of outstanding stock held by them
(3) Any cash dividend due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus
costs and expenses
(4) Stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid
(5) Should be approved by 2/3 of SH representing the
outstanding capital stock at a regular/special meeting
called for that purpose
(6) Stock corporations- prohibited from retaining surplus
profits in excess of 100% of their paid-in capital stock,
except:
(a) When justified by definite corporate expansion projects
or programs approved by the BOD
(b) When the corporation is prohibited under any
loanagreement with any financial institution or creditor
from declaring dividends without its consent, and such
consent has not yet been secured
(c) When it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation
ENTER INTO MANAGEMENT CONTRACTS (SEC. 44)
(1) Should be approved by the BOD and by SH owning at
least the majority of the outstanding capital stock or at
least a majority of the members of both the managing
and the managed corporation at a meeting duly called
for that purpose
(2) Should be approved by the 2/3 of stockholders owning
outstanding capital stock/members of the managed
corporation when:
(a) A stockholder or stockholders representing the same
interest of both the managing and managed
corporations own more than 1/3 of the total outstanding
capital stock entitled to vote of the managing
corporation; or
(b) A majority of the members of the BOD of the managing
corporation also constitute a majority of the BOD of the
managed corporation
(3) No management contract shall be entered into for a
period longer than 5 years for any one term
(4) 1-3 above applies to any contract whereby a corporation
undertakes to manage or operate all or substantially all
of the business of another corporation, whether such are
called service contracts, operating agreements or
otherwise
(5) Service contracts or operating agreements which relate
to exploration, development, exploitation or utilization
of natural resources may be entered into for such
periods as may be provided in the pertinent laws and
regulations
Notes: Two general restrictions on the power of the
corporation to acquire and hold properties:
(1) property must be reasonably and necessarily required by
the business
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(2) that the power shall be subject to the limitations
prescribed by other special laws and the Constitution
(corporation may not acquire more than 30% of voting
stocks of a bank; corporations are restricted from
acquiring public lands except by lease of not more than
1000 hectares)
ULTRA VIRES ACTS
Definition: Ultra vires acts are those acts which a
corporation is not empowered to do or perform because
they are not conferred by its AOI or by the Corporation
Code, or not necessary or incidental to the exercise of the
powers so conferred (Sec. 45).
Types of ultra vires Acts:
(1) Acts done beyond the powers of the corporation as
provided in the law or its articles of incorporation;
(2) Acts or contracts entered into in behalf of a corporation
by persons who have no corporate authority (Note: This
is technically ultra vires acts of officers and not of the
corporation);
(3) Acts or contracts, which are per se illegal as being
contrary to law. (Villanueva)
Applicability of ultra vires doctrine
It is a question, therefore, in each case of the logical relation
of the act to the corporate purpose expressed in the charter.
If that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate
ends, and is reasonably tributary to the promotion of those
ends, in a substantial, and not in a remote and fanciful
sense, it may fairly be considered within the charter powers.
The test to be applied is whether the act in question is in
direct and immediate furtherance of the corporation’s
business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation
has the power to do it; otherwise, not. (Montelibano v.
Bacolod-Murcia Milling Co., Inc., G.R. No. 15092, May 18,
1962)
Consequences of ultra vires Acts
(1) Executed contract – courts will not set aside or interfere
with such contracts;
(2) Executory contracts – no enforcement even at the suit of
either party (void and unenforceable);
(3) Partly executed and partly executory – principle of “no
unjust enrichment at expense of another” shall apply;
(4) Executory contracts apparently authorized but ultra vires
– the principle of estoppel shall apply.
Ultra Vires Acts Illegal Acts
Not necessarily unlawful, but Unlawful; against law,
outside the powers of the morals, public policy, and
corporation public order
Can be ratified Cannot be ratified
Can bind the parties if wholly Cannot bind the parties
or partly executed
An ultra vires act is distinguished from illegal act, the former
being voidable which may be enforced by performance,
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ratification, or estoppel, while the latter is void and cannot
be validated. (Seaoilvs. Autocorp Group, 2008, Nachura)
Remedies in Case of Ultra Vires Acts
(1) State:
(a) Forfeiture by judgment of Court
(b) Suspension or revocation of the certificate of registration
by the SEC
(2) Stockholders:
(a) Injunction
(b) Derivative suit
(3) Creditors: Nullification of contract in fraud of creditors
DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION
Section 64 of the Corporation Code implicitly sets forth the
doctrine that subscription is one entire and indivisible
contract. Thus, if the stockholder has not paid the full
amount of his subscription, he cannot transfer part of it in
view of the indivisible nature of subscription contract. It is
only upon full payment of the whole subscription that a
stockholder can transfer a portion of his subscription.
However, the entire subscription although not yet fully paid,
may be transferred to a single transferee. It is necessary,
however, to secure the consent of the corporation since the
transfer of subscription right contemplates a novation of
contract which, under Article 1293 of the Civil Code of the
Philippines, cannot be made without the consent of the
creditor. Likewise, it has to be emphasized that under
Section 63 of the Corporation Code, no transfer shall be
valid, except as between the parties, until the transfer is
recorded in the books of the corporation. (SEC Opinion,
August 7, 1991)
The transferee must also undertake to pay the balance of
the subscription amount when due or upon call by the BOD.
DOCTRINE OF EQUALITY OF SHARES
Each share shall be EQUAL in ALL respects to every other
share, except as otherwise provided in the AOI and stated in
the certificate of stock (Sec. 6)
HOW (CORPORATE POWERS) EXERCISED
BY THE SHAREHOLDERS
Corporate acts requiring approval of stockholders
or members (voting and non-voting shares)
General rule: Vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights (Sec. 6)
Exceptions (Sec. 6): Voting and non-voting shares shall be
entitled to vote in the following cases:
(1) Amendment of AOI
(2) Adoption, Amendment and Repeal of By-Laws (Sec. 48)
(3) Sale, Lease, Mortgage or Other Disposition of
Substantially all corporate assets (Sec. 40)
(4) Incurring, Creating or Increasing Bonded Indebtedness
(Sec. 38)
(5) Increase or Decrease of Capital Stock (Sec. 38)
(6) Merger and Consolidation(Sec. 76-80)
(7) Investment of funds in another corporation or business
or for any purpose other than the primary purpose for
which it was organized (Sec. 42)
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Requisites (Sec. 42) (Asked in 95):
(a) Approval of majority of the board of directors or
trustees
(b) Ratification by the stockholders representing at least
2/3 of the OCS or the members at a meeting duly
called for the purpose
(c) Written notice addressed to each stockholder or
member at his place of residence as shown on the
books of the corporation
(d) Appraisal right available to dissenting stockholders
or members
(8) Dissolution of the Corporation (Sec. 118-121)
Corporate acts requiring approval of stockholders
or members (voting shares only)
(1) Declaration of Stock Dividends (Sec. 43)
(2) Management Contracts (Sec. 44)
(3) Fixing the Consideration of No-Par shares (Sec. 62)
(4) Fixing the Compensation of Directors (Sec. 30)
BY THE BOARD OF DIRECTORS
Board as repository of corporate powers
General rule (doctrine of centralized management): The
corporate powers of the corporation shall be exercised, all
business conducted and all property of such corporation
controlled and held by the board of directors or trustees.
(Sec. 23)
Exceptions:
(1) Executive Committee duly authorized in the by-laws
(Sec. 35);
(2) A contracted manager which may be an individual, a
partnership, or another corporation.
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
(3) In case of close corporations, the stockholders may
manage the business of the corporation rather than by a
board of directors, if the AOI so provide (Sec. 97)
The power to purchase real property is vested in the board
of directors or trustees. While a corporation may appoint
agents to negotiate for the purchase of real property
needed by the corporation, the final say will have to be with
the board, whose approval will finalize the transaction.
(Spouses Constantine Firme v. Bukal Enterprises and
Development Corporation, 2003)
Requisites of a valid corporate act by the Board of Directors
(Sec. 25)
(1) The Board must act as a BODY in a meeting. (Note:
Current SEC regulations allow BOD meetings by
teleconferencing or videoconferencing
(2) There must be a VALIDLY constituted meeting.
(3) Their act must be supported by a MAJORITY OF THE
QUORUM duly assembled (Exception: Election of
officers requires a vote of majority of ALL the members
of the board)
(4) The act must be within the powers conferred to the
Board.
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BY THE OFFICERS
Corporate Officer Corporate Employee
Position is provided for in the Employed through the action
by-laws or under the of the managing officer of
Corporation Code the corporation
RTC has jurisdiction in case NLRC has jurisdiction in case
of labor dispute of labor disputes
Who are corporate officers (POST) (Sec. 25)
(1) President – must be a director;
(2) Treasurer – may or may not be a director; as a matter of
sound corporate practice, must be a resident and citizen
of the Phil (SEC opinion)
(3) Secretary – need not be a director unless required by the
by-laws; must be a resident and citizen of the
Philippines; and
(4) Other officers as may be provided in the by-laws.
Note: Any two (2) or more positions may be held
concurrently by the same person, EXCEPT that no one shall
act as president and secretary or as president and treasurer
at the same time.
Additional qualifications of officers may be provided for in
the by-laws (Sec. 47(5)).
Disqualifications (Sec. 27)
(1) Convicted by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years
(2) Convicted by final judgment of a violation of the
Corporation Code committed within 5 years prior to the
date of his election or appointment. This includes
violations of rules and regulations issued by the SEC to
implementthe provisions of the Corporation Code.
Authority of Corporate Officers
A person dealing with a corporate officer is put on inquiry as
to the scope of the latter’s authority but an innocent person
cannot be prejudiced if he had the right to presume under
the circumstances the authority of the acting officers.
Q: What is the doctrine of apparent authority?
A: If a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the
power to do those acts; the corporation will, as against
anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority.
(Associated Bank v. Pronstroller, 2008, Nachura)
TRUST FUND DOCTRINE
Under Sec. 43 of Code, the corporation can declare
dividends only out of "unrestricted retained earnings;" and
that under Sec. 122, no corporation shall distribute any of its
assets or property except upon lawful dissolution and after
payment of all its debts and liabilities. These provisions in
essence provide for the "trust fund doctrine" where the
"subscription to the capital of a corporation constitute a
fund to which creditors have a right to look for satisfaction
of their claims." Philippine Trust Co. v. Rivera, 44 Phil. 469
(1923) (cited in Villanueva)
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The Trust Fund Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. v. Rivera, provides that
subscriptions to the capital stock of a corporation constitute
a fund to which the creditors have a right to look for the
satisfaction of their claims.
This doctrine is the underlying principle in the procedure for
the distribution of capital assets, embodied in Corporation
Code, which allows the distribution of corporate capital only
in three instances:
(1) amendment of the Articles of Incorporation to reduce
the authorized capital stock,
(2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained
earnings, and
(3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Sec. 41 on the
power of a corporation to acquire its own shares and in Sec.
122 on the prohibition against the distribution of corporate
assets and property unless the stringent requirements
therefore are complied with. (Ong Yong v. Tiu, 2003)
Trust Fund Doctrine means that the capital stock,
properties and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors.
Stated simply, the trust fund doctrine states that all funds
received by the corporation in payment of the shares of
stock shall be held in trust for the corporate creditors and
other stockholders of the corporation. Under such doctrine
no fund shall be used to buy back the issued shares of stock
except only in instances specifically allowed by the
Corporation Code. (Boman Environmental Development
Corporation v. CA, 1988):
The creditors of a corporation have the right to assume that
so long as there are debts and liabilities, the Board of
Directors will not use corporate assets to purchase its own
shares of stock or to declare dividends to its stockholders
when the corporation is insolvent. (Steinberg v. Velasco,
1929)
Board of Directors
and Trustees
DOCTRINE OF CENTRALIZED MANAGEMENT
BOARD IS SEAT OF CORPORATE POWERS
General rule: Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of
such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members
of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified. (Sec. 23)
Exceptions:
(1) In case of an Executive Committee duly authorized in
the by-laws; (Sec. 35)
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(2) In case of a contracted manager which may be an
individual, a partnership, or another corporation
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
(3) In case of close corporations, the stockholders may
manage the business of the corporation rather thanby a
board of directors, if the AOI so provide. (Sec. 97)
The power to purchase real property is vested in the board
of directors or trustees. While a corporation may appoint
agents to negotiate for the purchase of real property
needed by the corporation, the final say will have to be with
the board, whose approval will finalize the transaction.
(Spouses Constantine Firme v. Bukal Enterprises and
Development Corporation, 2003)
The Corporation Code of the Philippines vests in the board
of directors the exercise of the corporate powers of the
corporation, save in those instances where the Code
requires stockholders’ approval for certain specific acts.
(Great Asian Sales Center Corp v. CA, 2002)
Indisputably, one of the rights of a stockholder is the right to
participate in the control or management of the
corporation. This is exercised through his vote in the
election of directors because it is the board of directors that
controls or manages the corporation. (Gamboa v. Teves,
2011)
Section 23 of the Corporation Codeexpressly provides that
the corporate powers of all corporations shall be exercised
by the board of directors. The power and the responsibility
to decide whether the corporation should enter into a
contract that will bind the corporation are lodged in the
board, subject to the articles of incorporation, by-laws, or
relevant provisions of law. In the absence of authority from
the board of directors, no person, not even its officers, can
validly bind a corporation.
However, just as a natural person may authorize another to
do certain acts for and on his behalf, the board of directors
may validly delegate some of its functions and powers to its
officers, committees or agents. The authority of these
individuals to bind the corporation is generally derived from
law, corporate by-laws or authorization from the board,
either expressly or impliedly by habit, custom or
acquiescence in the general course of business. (Banate v.
Philippine Countryside Rural Bank, 2010)
Requisites of a valid corporate act by the Board of Directors
(1) The Board must act as a BODY in a meeting
(2) There must be a VALIDLY constituted meeting
(3) There act must be supported by a MAJORITY OF THE
QUORUM duly assembled (Exception: Election of
officers requires a vote of majority of ALL the members
of the board
(4) The act must be within the powers conferred to the
Board.
Limitations on powers of Board of Directors/Trustees
(1) Limitations imposed by the Constitution, statutes,
articles of incorporation or by-laws
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(2) Certain acts of the corporation that require joint action
of the stockholders and board of directors:
(a) Removal of director (Sec. 28)
(b) Amendments of AOI (Sec. 16)
(c) Fundamental changes (Sec. 6)
(d) Declaration of stock dividends (Sec. 43)
(e) Entering into management contracts (Sec. 44)
(f) Fixing of consideration of non-par shares (Sec. 62)
(g) Fixing of compensation of directors (Sec. 30)
(3) Cannot exercise powers not possessed by the
corporation.
PRINCIPLE ON DELEGATION OF BOARD POWER
Under Sec 23, the power and the responsibility to decide
whether the corporation should enter into a contract that
will bind the corporation is lodged in the board, subject to
the articles of incorporation, by-laws, or relevant provisions
of law.However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of
such individuals to bind the corporation is generally derived
from law, corporate by-laws or authorization from the
board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. (People’s
Aircargo v. CA, 1998)
BUSINESS JUDGMENT RULE
General rule: Directors cannot be held liable for mistakes or
errors in the exercise of their business judgment if they
acted in good faith, with due care & prudence. Contracts
intra vires entered into by the board of directors are binding
upon the corporation & courts will not interfere.
Exception: If the contracts are so unconscionable &
oppressive as to amount to a wanton destruction of the
rights of the minority or if they violate their duties under
Sections 31 & 34.
CONSEQUENCES OF THE BUSINESS JUDGMENT RULE
Sec. 23 embodies the essence of the “Business Judgment
Rule,” that unless otherwise provided in the Code, all
corporate powers and prerogatives are vested directly in the
Board of Directors. Consequently:
(1) The resolution, contracts and transactions of the board
cannot be overturned or set aside by the stockholders or
members and not even by the courts under the principle
that the business of the corporation has been left to the
hands of the board
(2) Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the
exercise of their business judgment.
Exceptions:
(1) When the Corporation Code expressly provides
otherwise
(2) When the Directors or officers acted with fraud, gross
negligence or in bad faith.
(3) When Directors or officers act against the corporation in
conflict of interest situation.(Villanueva)
REMEDIES IN CASE OF MISMANAGEMENT
(1) Receivership
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(2) Injunction if the act has not yet been done
(3) Dissolution if abuse amounts to a ground for quo
warranto but Solicitor General Refuses to act
(4) Derivative suit or complaint filed with the SEC (now the
RTC) (PD 902-A)
Note: Dean Villanueva opined that a derivative suit may be
an exception to such Rule: this occurs when it is apparent
that the Board is not in a position to validly exercise its
business judgment for the protection of the corporation,
e.g., when the Board itself has committed an act causing
damage to the corporation or when the Board is placed in a
conflict of interests scenario whereby it is unlikely that it
would use such business discretion to file such suit for the
best interest of the corporation.
TENURE, QUALIFICATIONS AND DISQUALIFICATIONS
OF DIRECTORS OR TRUSTEES
TENURE
Directors shall hold office for one (1) year until their
successors are elected and qualified (Sec. 23).
Term: One (1) year
Tenure: The period within which the director actually holds
office, including the holdover period after the end of his
term.
In several cases, we have defined "term" as the time during
which the officer may claim to hold the office as of right,
and fixes the interval after which the several incumbents
shall succeed one another. The term of office is not affected
by the holdover. The term is fixed by statute and it does not
change simply because the office may have become vacant,
nor because the incumbent holds over in office beyond the
end of the term due to the fact that a successor has not
been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s
"tenure" represents the term during which the incumbent
actually holds office. The tenure may be shorter (or, in case
of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.
Based on the above discussion, when Section 23 of the
Corporation Code declares that "the board of
directors…shall hold office for one (1) year until their
successors are elected and qualified," we construe the
provision to mean that the term of the members of the
board of directors shall be only for one year; their term
expires one year after election to the office. The holdover
period – that time from the lapse of one year from a
member’s election to the Board and until his successor’s
election and qualification – is not part of the director’s
original term of office, nor is it a new term; the holdover
period, however, constitutes part of his tenure. (Valle Verde
Country Club v. Africa, 2009)
QUALIFICATIONS
(1) If STOCK, director must own at least 1 share of the
capital stock, which stock shall stand in his own name
(Sec. 23).Exception: Trustee in a voting trust may be
elected director/trustee.
(2) If NON-STOCK, trustee must be a member.
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(3) Majority of the directors/trustees must be residents of
the Philippines.
(4) Natural person
(5) Of Legal Age
(6) Other qualifications as may be prescribed in the by-laws
of the corporation.
DISQUALIFICATIONS (SEC. 27)
(1) Convicted by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years; or
(2) A violation of the Corporation Code, committed within
five years from the date of his election. This includes
violations of rules and regulations issued by the SEC to
implement the provisions of the Corporation Code.
ELECTIONS
CUMULATIVE VOTING
Cumulative voting for one candidate
A stockholder is allowed to concentrate his votes and give
one candidate as many votes as the number of directors to
be elected multiplied by the number of his shares shall
equal.
Illustration: If there are 5 directors to be elected and Pedro,
as shareholder, has 100 shares, Pedro can give 500 (5 x 100
shares) votes to just one candidate.
Cumulative voting by distribution
A stockholder may cumulate his shares by multiplying the
number of his shares by the number of directors to be
elected and distribute the same among as many candidates
as he shall see fit.
Illustration: In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100 votes to
candidate 2, 100 votes to candidate 3, 150 votes to
candidate 4, and 50 votes to candidate 5.
STRAIGHT VOTING
Every stockholder may vote such number of shares for as
many persons as there are directors to be elected.
QUORUM
There must be present, in person or by representative
authorized to act by written proxy, the owners of majority of
the OCS or majority of the members entitled to vote in the
meeting.
Election must be by ballot if requested.
A stockholder cannot be deprived in the articles of
incorporation or in the by-laws of his statutory right to use
any of the methods of voting in the election of directors.
No delinquent stock shall be voted.
The candidates receiving the highest number of votes shall
be declared elected.
REMOVAL
General rule: Any Director or Trustee of a corporation may be
removed from office, with or without cause. (Sec. 28)
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Exception: Directors who have been elected by minority
stockholders exercising cumulative voting can only be
removed for cause. Removal without cause may not be used
to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section
24.
Other requisites:
(1) by a vote of the stockholders holding or representing
2/3 of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of 2/3
of the members entitled to vote
(2) at a regular or special meeting after proper notice is
given
FILLING OF VACANCIES
VACANCY (1) BY REMOVAL, (2) BY EXPIRATION OF TERM, OR
(3) WHEN THE REMAINING DIRECTORS
DO NOT CONSTITUTE A QUORUM
Vacancy/ies must be filled by the stockholders in a regular
or special meeting called for that purpose.
A director or trustee elected to fill a vacancy in shall be
elected only for the unexpired term of his predecessor in
office.
VACANCY BY REASON OF INCREASE IN THE NUMBER
OF THE DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the stockholders:
(1) in a regular or special meeting called for that purpose;
or
(2) in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the
meeting.
VACANCY BY OTHER CAUSES
Vacancy/ies may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a
quorum.
A director or trustee elected to fill a vacancy in shall be
elected only for the unexpired term of his predecessor in
office.
COMPENSATION (Sec. 30)
General rule: Directors are only entitled to reasonable per
diems. They are not entitled to compensation as directors.
Exception:
(1) When AOI, by-laws, or an advance contract provides for
compensation.
(2) Compensation other than per diems may also be
granted to directors by the vote of the stockholders
representing at least a majority of the OCS at a regular
or special stockholders’ meeting.
The total yearly compensation of directors shall not exceed
10% of the net income before income tax of the corporation
during the preceding year.
COMPENSATION OF DIRECTORS AS CORPORATE OFFICERS
The position of being chairman and Vice-Chairman, like that
of treasurer and secretary, are not considered directorship
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positions but officership positions that would entitle the
occupants to compensation. Likewise, the limitation placed
under Sec. 30 of the Corporation Code that directors cannot
receive compensation exceeding 10% of the net income of
the corporation would not apply to the compensation given
to such positions since it is being given in their capacity as
officers of the corporation and not as board members.
(Western Institute of Technology v. Salas, 1997)
FIDUCIARY DUTIES AND LIABILITY RULES
DUTIES
In this jurisdiction, the members of the board of directors
have a three-fold duty: duty of obedience, duty of diligence,
and duty of loyalty. Accordingly, the members of the board
of directors (1) Duty of Obedience - shall direct the affairs of
the corporation only in accordance with the purposes for
which it was organized; (2)Duty of Diligence - shall not
willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad faith or with
gross negligence in directing the affairs of the corporation;
and (3) Duty of Loyalty - shall not acquire any personal or
pecuniary interest in conflict with their duty as such
directors or trustees. (Strategic Alliance Development
Corpv.Radstock Securities Ltd., 2009)
Duty of obedience
The Directors or Trustees and Officers to be elected shall
perform the duties enjoined on them by law and by the by-
laws of the corporation (Sec. 25).
Duty of diligence
Directors or trustees who (1) willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or (2)
who are guilty of gross negligence or (3) bad faith in
directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally
for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons. (Sec 31)
Duty of loyalty
Directors and trustees should not acquire any personal or
pecuniary interest in conflict with their duty as such
directors or trustees, otherwise they shall be held liable
jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members
and other persons. (Sec. 31)
Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of
such corporation, he must account to the latter for all such
profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing
at least two-thirds (2/3) of the outstanding capital stock
(Sec. 34)
Doctrine of corporate opportunity
Unless his act is ratified, a director shall refund to the
corporation all the profits he realizes on a business
opportunity which:
(1) corporation is financially able to undertake
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(2) from its nature, is in line with corporation’s business and
is of practical advantage to it; and
(3) one in which the corporation has an interest or a
reasonable expectancy.
The rule shall be applied notwithstanding the fact that the
director risked his own funds in the venture. (Sec. 34)
By embracing the opportunity, the self-interest of the officer
or director will be brought into conflict with that of his
corporation. Hence, the law does not permit him to seize
the opportunity even if he will use his own funds in the
venture. (Sundiangand Aquino)
Note: Differences between Section 31 and Section 34:
(1) While both involve the same subject matter (business
opportunity) they concern different personalities; Sec.
34 is applicable only to directors and not to officers,
whereas Sec. 31 applies to directors, trustees and
officers.
(2) Sec. 34 allows a ratification of a transaction by a self-
dealing director by vote of stockholders representing at
least 2/3 of the outstanding capital stock. (Villanueva)
SOLIDARY LIABILITY FOR DAMAGES
(1) Willfully and knowingly voting for and assenting to
patently unlawful acts of the corporation; (Sec. 31)
(2) Gross negligence or bad faith in directing the affairs of
the corporation; (Sec. 31)
(3) Acquiring any personal or pecuniary interest in conflict
of duty; (Sec. 31)
(4) Consenting to the issuance of watered stocks, or, having
knowledge thereof, failing to file objections with
secretary; (Sec. 65)
(5) Agreeing or stipulating in a contract to hold himself
liable with the corporation; or
(6) By virtue of a specific provision of law
LIABILITY FOR WATERED STOCKS
Watered Stocks – stocks issued for a consideration less than
its par or issued value or for a consideration in any form
other than cash, valued in excess of its fair value.
Any director or officer of a corporation consenting to the
issuance of watered stocks or who, having knowledge
thereof, does not forthwith express his objection in writing
and file the same with the corporate secretary shall be
solidarily liable with the stockholder concerned to the
corporation and its creditors for the difference in value (Sec.
65).
PERSONAL LIABILITIES
General rule: Members of the Board, who purport to act in
good faith for and in behalf of the corporation within the
lawful scope of their authority, are not liable for the
consequences of their acts. When the acts are of such
nature and done under those circumstances, they are
attributed to the corporation alone and no personal liability
is incurred. (Price v. Innodata Phils., Inc., 2008)
The provisions on seizing corporate opportunity and
disloyalty (Secs. 31 and 34) shall also apply to corporate
officers.
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Note: Members of the BOD who are also officers are held to
a more stringent liability because they are in-charge of day-
to-day activities (Campos)
Doctrine of Limited Liability Doctrine of Immunity
Shields the corporators from Protects a person acting for
corporate liability beyond and in behalf of the
their agreed contribution to corporation from being
the capital or shareholding in himself personally liable for
the corporation. his authorized actions
Liability of Director, Trustee or Officer (Asked in 96 and 97)
Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may
so validly attach, as a rule, only when:
(1) He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders or other
persons;
(2) He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily
liable with the corporation; or
(4) He is made, by a specific provision of law, to personally
answer for his corporate action (Tramat Mercantile, Inc.
vs. CA, 1994, reiterated in Atrium Management Corp. v.
CA, 2001)
SPECIAL FACTS DOCTRINE
Even though a director may not be under the obligation of a
fiduciary nature to disclose to a shareholder his knowledge
affecting the value of the shares, that duty may exist in
special cases. (Strong v. Rapide, 1909)
General rule: (Majority view) Directors only owe its duty to
the corporation. They owe no fiduciary duty to stockholders
but they may deal with each other at fair and reasonable
terms, as if they were unrelated. No duty to disclose facts
known to the director or officer.
Exception: Special Facts Doctrine: Conceding the absence of
a fiduciary relationship in the ordinary case, courts
nevertheless hold that where special circumstances or facts
are present which make it inequitable for the director to
withhold information from the stockholder, the duty to
disclose arises and concealment is fraud. (Strong v. Rapide,
1909)
RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere legal fiction, it
cannot be proceeded against criminally because it cannot
commit a crime in which personal violence or malicious
intent is required.
Criminal action is limited to the corporate agents guilty of an
act amounting to a crime and never against the corporation
itself (West Coast Life Ins. Co. v. Hurd,1914; Time Inc. v.
Reyes,1971).
CORPORATION CODE BAR OPERATIONS COMMISSION
Since the BOD is the repository of corporate powers and
acts as the agent of the corporation, the directors may be
held criminally liable.
The Trust Receipts Law recognizes the impossibility of
imposing the penalty of imprisonment on a corporation.
Hence, if the entrustee is a corporation, the law makes the
officers or employees or other persons responsible for the
offense liable to suffer the penalty of imprisonment. The
reason is obvious: corporations, partnerships, associations
and other juridical entities cannot be put to jail. Hence, the
criminal liability falls on the human agent responsible for
the violation of the Trust Receipts Law. (Ong v. CA, 2003)
INSIDE INFORMATION
The fiduciary position of insiders, directors, and officers
prohibits them from using confidential information relating
to the business of the corporation to benefit themselves or
any competitor corporation in which they may have a mere
substantial interest.
Note: “Insider” means: (a) the issuer; (b) a director or officer
(or person performing similar functions) of, or a person
controlling the issuer; (c) a person whose relationship or
former relationship to the issuer gives or gave him access to
material information about the issuer or the security that is
not generally available to the public; (d) a government
employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access
to material information about an issuer or a security that is
not generally available to the public; or (e) a person who
learns such information by a communication from any of
the foregoing insiders (§3.8, Sec Regulations Code)
Since loss and prejudice to the corporation is not a
requirement for liability, the corporation has a cause of
action as long as there is unfair use of inside information
It is inside information if it is not generally available to
others and is acquired because of the close relationship of
the director or officer of the corporation
CONTRACTS
BY SELF-DEALING DIRECTORS WITH THE CORPORATION
General rule: A contract of the corporation with one or more
of its directors or trustees is VOIDABLE, at the option of
such corporation. (Sec. 32)
Exception: Such contract is VALID if all of the following
conditions are present:
(1) That the presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
(2) That the vote of such director or trustee was not
necessary for the approval of the contract
(3) That the contract is fair and reasonable under the
circumstances; and
(4) That in case of an officer, the contract has been
previously authorized by the board of directors.
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Ratification: In case of absence of the first two conditions
above, contract may be ratified if:
(1) Stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the members
in a meeting called for the purpose voted to ratify the
contract.
(2) Full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting.
(3) Contract is fair and reasonable under the circumstances
BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS
If the interests of the interlocking director in the corporations
are both substantial (stockholdings exceed 20% of
outstanding capital stock).
General rule: A contract between two or more corporations
having interlocking directors shall not be invalidated on that
ground alone. (Sec. 32)
Exception: If contract is fraudulent or not fair and
reasonable under the circumstances
If the interest of the interlocking director in one of the
corporations is nominal (stockholdings 20% or less) while
substantial in the other, the contract shall be VALID, if the
following conditions are met:
(1) The presence of such director or trustee in the board
meeting in which the contract was approved was NOT
necessary to constitute a quorum for such meeting
(2) That the vote of such director or trustee was not
necessary for the approval of the contract
(3) That the contract is fair and reasonable under the
circumstances.
Where (1) and (2) are absent, the contract can be ratified by
the vote of the stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the members in
a meeting called for the purpose voted to ratify the contract,
provided that:
(a) Full disclosure of the adverse interest of the
directors/trustees involved is made on such meeting;
(b) The contract is fair and reasonable under the
circumstances.
MANAGEMENT CONTRACTS (SEC. 44)
See: Corporate Powers (2)(h) above
EXECUTIVE COMMITTEE
CREATION
The by-laws of a corporation may create an executive
committee, composed of not less than three members of
the board, to be appointed by the board.
Said committee may act, by majority vote of all its
members, on such specific matters within the competence
of the board, as may be delegated to it in the by-laws or on
a majority vote of the board (Sec. 35).
LIMITATION ON ITS POWERS
Cannot act on the following:
(1) Matters needing stockholder approval (Sec. 35);
(2) Filling up of board vacancies;
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(3) Amendment, repeal or adoption of by-laws (Sec. 35);
(4) Amendment or repeal of any resolution of the Board
which by its express terms is not amendable or
repealable (Sec. 35);
(5) Cash dividend distribution (Sec. 35); and
(6) Acts which would render the BOD powerless and free
from all responsibilities imposed on it by law (Campos)
MEETINGS
REGULAR OR SPECIAL
Who may attend? The members of the Board themselves;
directors in Board meetings cannot be represented or voted
by proxies.
In the Philippines, teleconferencing and videoconferencing
of members of board of directors of private corporations is a
reality, in light of Republic Act No. 8792. The Securities and
Exchange Commission issued SEC Memorandum Circular
No. 15, on November 30, 2001, providing the guidelines to
be complied with related to such conferences. (Expertravel&
Tours, Inc. v.CA, May 26, 2005)
When and Where
When? (Sec.53)
(1) Regular meetings of directors or trustees shall be held
monthly, unless the by-laws provide otherwise.
(2) Special meetings of the board of directors or trustees
may be held at any time upon the call of the president
or as provided in the by-laws.
Where? (Sec. 53)
Meetings of directors or trustees of corporations may be
held anywhere in or outside of the Philippines, unless the
by-laws provide otherwise.
Notice
Notice of regular or special meetings stating the date, time
and place of the meeting must be sent to every director or
trustee at least one (1) day prior to the scheduled meeting,
unless otherwise provided by the by-laws.
A director or trustee may waive this requirement, either
expressly or impliedly
WHO PRESIDES
The president presides, unless the by-laws provide
otherwise. (Sec. 54)
QUORUM
General rule: Majority of the number of directors or trustees
as fixed in the articles of incorporation.(Sec. 25)
Exceptions:
(1) Unless the articles of incorporation or the by-laws
provide for a greater majority, or
(2) In case of election of officers where a vote of a majority
of all the members of the board is needed.
RULE ON ABSTENTION
A vote of abstention is considered to be a vote in itself.
Abstentions will not be counted towards the affirmative and
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such refusal to vote does not indicate acquiescence in the
action of those who vote.
Stockholders and Members
RIGHTS OF STOCKHOLDER AND MEMBERS
(1) Direct or indirect participation in management (Sec. 6)
(2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and 71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock certificate for fully paid shares
(Sec. 64)
(d) Proportionate participation in the distribution of assets
in liquidation (Sec. 122)
(e) Right to transfer of stocks in corporate books (Sec. 63)
(f) Pre-emptive right (Sec. 39)
(5) Right to inspect books and records (Sec. 74)
(6) Right to be furnished with the most recent financial
statements/reports (Sec. 75)
(7) Right to recover stocks unlawfully sold for delinquent
payment of subscription (Sec. 69)
(8) Right to file individual suit, representative suit and
derivative suits
DOCTRINE OF EQUALITY OF SHARES
All stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. (CIR v.
CA, CTA, and A. Soriano Corporation, 1999)
Doctrine of Equality of Shares provides that where the
Articles of Incorporation do not provide for any distinction of
the shares of stock, all shares issued by the corporation are
presumed to be equal and enjoy the same rights and
privileges and are also subject to the same liabilities.
(Sundiang and Aquino)
The default rule is that all stockholders have equal right
and obligations, expressed in the last paragraph of Section
6 of the Corporation Code which provides, “each share shall
be equal in all respects to every other share.” (Villanueva)
Note: However, when preferences or restrictions are made to
apply to a class of shares, then such preferences on
restrictions shall exist and be valid only when “provided in
the articles of incorporation and stated in the certificate of
stock.” (Villanueva)
Section 6 of the Corporation Code also contains a “Board-
enabling” clause that although the default rule is that all
shareholders have equal rights and obligations,
nevertheless, when authorized by the articles of
incorporation, the Board of Directors, may fix the terms and
conditions of preferred shares of stock or any series thereof,
or to classify its shares for the purpose of insuring
compliance with constitutional or legal requirements; but
such terms and conditions shall be effective upon filing of a
certificate thereof with the SEC. Thus, a preference or
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restriction on shares may be valid and effective only if the
same has formally been registered with the SEC and
thereby becomes public records binding on the public.
(Villanueva)
Nature of the Rights of Members: The eleemosynary nature
of every non-stock corporation defines the characteristic of
membership therein as being essentially personal in
character and therefore essentially non-transferable in
nature.
Section 89 of the Corporation Code specifically provides
that in a non-stock corporation, the right of members of any
class or classes to vote “may be limited, broadened or
denied to the extent specified in the articles of incorporation
or the by-laws.”
The SEC has opined that the rule in Section 6 allowing non-
voting shares to vote on specified fundamental matters
does not apply to non-voting members of a non-stock
corporation; that insofar as members of a non-stock
corporation, the applicable provision is Section 89, which
specifically provides that members may be denied entirely
their voting rights in the articles of incorporation or by-laws
of the corporation (Villanueva, citing SEC Opinion, 4
September 1995)
PARTICIPATION IN MANAGEMENT
PROXY
Stockholders and members may vote in person or by proxy
in all meetings of stockholders or members (Sec. 58).
The right to issue a proxy is vested with public interest when
it comes to stock corporations; although it may be regulated
under the by-laws, it cannot be denied, since it is an aspect
of ownership interest of stockholders.
However, the right of members to vote by proxy may be
denied under the articles of incorporation or by-laws of a
non-stock corporation (Sec. 89)
Requisites for a valid and enforceable proxy
(1) It must be in writing
(2) Signed by the stockholder or member of record; and
(3) Filed with the corporation before the scheduled meeting
with the Corporate Secretary
Procedural matters relating to proxies
(1) “Proxy solicitation” involves the securing and submission
of proxies, while “proxy validation” concerns the
validation of such secured and submitted proxies;
(2) The SEC’s power to pass upon the validity of proxies in
relation to election controversies has effectively been
withdrawn, tied as it is to its abrogated quasi-judicial
powers, and has been transferred to the RTC Special
Commercial Courts pursuant to the terms of Section 5.2
of the Securities Regulation Code;
(3) Nevertheless, although an intra-corporate controversy
may animate a disgruntled shareholder to complain to
the SEC a corporation’s violations of SEC rules and
regulations, but that motive alone should not be
sufficient to deprive the SEC of its investigatory and
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regulatory powers, especially so since such powers are
exercisable on a motu proprio basis.
The fact that the jurisdiction of the RTC Special Commercial
Courts is confined to the voting on election of officers, and
not all matter which may be voted upon by stockholders,
elucidates that the power of the SEC to regulate proxies
remains extant and could very well be exercised when
stockholders vote on matters other than the election of
directors. (GSIS v. CA, 2009)
VOTING TRUST
An arrangement created by one or more stockholders for
the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any time (Sec. 59).
Under a voting trust arrangement, a stockholder of a stock
corporation parts with the naked or legal title, including the
power to vote, of the shares and only retains the beneficial
ownership of the stock. A voting trustee is a share owner
vested with colorable and naked title of the shares covered
for the primary purpose of voting upon stocks that he does
not own.
A voting trust agreement shall be ineffective and
unreasonable unless:
(1) It is in writing and notarized;
(2) Specify the terms and conditions thereof; and
(3) A certified copy of such agreement shall be filed with
the corporation and with the SEC.
CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED
By a majority vote
(a) Power to enter into management contracts (Sec. 44)
General rule: Requires approval by majority of the BOD/BOT
and approval by stockholders owning at least the majority
of the outstanding capital stock/majority of members of
both the managing and the managed corporation
Exceptions:
(1) Where a stockholder/s 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
(2) Where a majority of the members of the managing
corporation’s BOD also constitute a majority of the
managed corporation’s BOD
Requires at least 2/3 votes of the outstanding capital
stock/membership of the managed corporation.
BUT only majority vote is required for the managing
corporation.
(b) Amendments to by-laws (Sec. 48)
Requires approval by majority of the BOD/BOT and
approval by stockholders owning at least the majority of the
outstanding capital stock/majority of members

Corporate Officer Corporate Employee Includes all stockholders/members with or without voting
rights
Principal–agent Trustee-beneficiary
(c) Revocation of delegation to the BOD of the power to
Proxy cannot exceed The only limit to authority is
amend or repeal or adopt by-laws (Sec. 48)
delegated authority. that the act must be for the
benefit of trustee. (fiduciary
Requires approval by majority of the BOD/BOT and
obligation)
approval by stockholders owning at least the majority of the
Must be in writing Must be in writing and outstanding capital stock/majority of members
notarized
Copy must be filed with the Copy must be filed with SEC (d) Calling a meeting to remove directors (Sec. 28)
corporation. and the corporation.
Meeting for the removal of directors or trustees, or any of
No transfer. Transfer of legal title to them, must be called by the secretary on order of the
trustee. president or on the written demand of the stockholders
Proxy exercises voting rights Trustee exercises absolute representing or holding at least a majority of the
only for a specific meeting voting rights continuously, outstanding capital stock/majority of members
(unless otherwise provided) subject only to fiduciary duty.
(e) Granting compensation other than per diems to directors
Proxy cannot be director Trustee can be director (Sec. 30)
because he holds legal title
over the shares Compensation other than per diems may be granted to
Revocable at will in any Irrevocable, as long as no directors by the vote of the stockholders representing at
manner, EXCEPT if coupled misconduct or fraud. least a majority of the outstanding capital stock
with an interest.
(f) Consideration for no-par shares (Sec. 62)
Max of 5 yrs at a time Max of 5 yrs at a time (unless
the voting trust is specifically
required as a condition in a
loan agreement)
SEC can pass on validity

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When the AOI or the BOD does not provide for the value of
no-par shares, the value of such shares shall be determined
by the stockholders representing at least a majority of the
outstanding capital stock
By a two-thirds vote
(a) Amendment of Articles of Incorporation (Sec. 16)
Amendment of the AOI may be made by a majority vote of
the BOD/BOT and the vote or written assent of the
stockholders representing at least two-thirds 2/3 of the
outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders.
Includes all stockholders/members with or without voting
rights
(b) Amendment of AOI of close corporations (Sec 103)
Amendment to the AOI which seeks to delete or remove any
provision required to be contained in the AOI of Close
Corporations or to reduce a quorum or voting requirement
stated in said AOI requires the affirmative vote of at least
2/3 of the outstanding capital stock, whether with or without
voting rights, or of such greater proportion of shares as may
be specifically provided in the AOI at a meeting duly called.
(c) Delegating the power to amend or repeal by-laws or
adopt new by-laws (Sec. 48)
Delegation to the BOD/BOT of the power to amend or
repeal by-laws or adopt new by-laws requires approval by at
least two-thirds (2/3) of the outstanding capital
stock/membership.
Revocation of the delegation requires only majority vote of
the outstanding capital stock/membership.
(d) Extending/shortening corporate term (Sec. 37)
Requires approval by a majority vote of the BOD/BOT and
approval by at least two-thirds (2/3) of the outstanding
capital stock/membership.
Includes all stockholders/members with or without voting
rights
(e) Increasing/decreasing capital stock (Sec. 38)
Requires approval by a majority vote of the BOD and
approval by at least two-thirds (2/3) of the outstanding
capital stock.
Includes all stockholders/members with or without voting
rights
(f) Incurring, creating, increasing bonded indebtedness(Sec.
38)
Requires approval by a majority vote of the BOD and
approval by at least two-thirds (2/3) of the outstanding
capital stock.
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Includes all stockholders/members with or without voting
rights
(g) Issuance of shares not subject to pre-emptive right (Sec.
39)
Shares issued in good faith in exchange for property or
previously incurred indebtedness with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock are not subject to pre-emptive
rights.
(h) Sale/disposition of all or substantially all of corporate
assets(Sec. 40)
Requires approval by a majority vote of the BOD/BOT and
approval by at least two-thirds (2/3) of the outstanding
capital stock/membership.
Includes all stockholders/members with or without voting
rights
Note: In non-stock corporations where there are NO
members with voting rights, the vote of at least the majority
of the BOT will be sufficient authorization for any sale or
disposition of all or substantially all of corporate assets.
(Sec. 40)
(i) Investment of funds in another business (Sec. 42)
Requires approval by a majority vote of the BOD/BOT and
approval by at least two-thirds (2/3) of the outstanding
capital stock/membership.
Includes all stockholders/members with or without voting
rights
(j) Dividend declaration (Sec. 43)
No stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock.
(k) Power to enter into management contracts (Sec. 44)
Please see discussion under By a Majority Vote
(l) Removal of directors or trustees (Sec. 28)
Any director or trustee may be removed from office by a vote
of the stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock/membership.
(m) Ratifying contracts with respect to dealings with
directors/ trustees (Sec. 32)
A contract of the corporation with one or more of its
directors is voidable, at the option of such corporation,
unless all the following conditions are present:
(1) The director’s presence in the BOD meeting in which the
contract was approved was not necessary to constitute a
quorum
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(2) The vote of such director was not necessary for the
approval of the contract
(3) The contract is fair and reasonable under the
circumstances
(4) In case of an officer, the contract has been previously
authorized by the BOD.
Where any of the first two conditions is absent, but
necessary that the contract be fair and reasonable, in the
case of a contract with a director, such contract may be
ratified by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock.
(n) Ratifying acts of disloyalty of a director (Sec. 34)
General rule: Where a director, by virtue of his office,
acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits, he
must account to the corporation for all such profits by
refunding it.
Exception: His act may be ratified by a vote of the
stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock.
(o) Stockholders’ approval of the plan of merger or
consolidation (Sec. 77)
Requires approval by majority of each of the BOD/BOT of
the constituent corporations of the plan of merger or
consolidation and approval by at least two-thirds (2/3) of
the outstanding capital stock/membership of each
corporation at separate corporate meetings duly called.
Amendments to the plan of merger or consolidation also
requires approval by majority vote of each of the BOD and
two-thirds (2/3) vote of the outstanding capital
stock/membership of each corporation voting separately.
Includes all stockholders/members with or without voting
rights
(p) Distribution of assets in non-stock corporations (Sec. 96)
The BOT shall, by majority vote, adopt a resolution
recommending a plan of distribution which shall be
approved by at least two-thirds (2/3) of the members with
voting rights.
(q) Incorporation of a religious society (Sec. 116)
Any religious society or religious order, or any diocese,
synod, or district organization of any religious
denomination, sect or church, unless forbidden by the
constitution, rules, regulations, or discipline of the religious
denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by
an affirmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the management
of its affairs, properties and estate.
(r) Voluntary dissolution of a corporation (Sec. 118-119)
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Requires a resolution adopted by a majority vote of the
BOD/BOT, and by a resolution duly adopted by the
affirmative vote of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock/membership of
a meeting to be held upon call for such purpose.
By cumulative voting
Election of Directors or Trustees (Sec. 24) - A stockholder may
vote such number of shares for as many persons as there
are directors to be elected or he may cumulate said shares
and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit:
Provided, That the total number of votes cast by him shall
not exceed the number of shares owned by him as shown in
the books of the corporation multiplied by the whole
number of directors to be elected.
PROPRIETARY RIGHTS
RIGHT TO DIVIDENDS
General rule: The right to dividends vests upon lawful
declaration by the BOD. From that time, dividends become
a debt owing to the SH. No revocation can be made.
Exceptions:
(1) Dividends are revocable if NOT yet announced or
communicated to the stockholders.
(2) Stock dividends, even if already declared, may be
revoked prior to actual issuance since these are not
distributions but merely representations of changes in
the capital structure.
Note: Right to dividends vests upon declaration so whoever
owns the stock at such time also owns the dividends.
Subsequent transfer of stock would not carry with it right to
dividends UNLESS agreed upon by the parties.
RIGHT OF APPRAISAL
Right to withdraw from the corporation and demand
payment of the fair value of the shares after dissenting from
certain corporate acts involving fundamental changes in
corporate structure (Sec. 81).
Instances of appraisal right
(1) Extension or reduction or corporate term (Sec. 81)
(2) Amendment to AOI - Change in the rights of
stockholders, authorize preferences superior to those
stockholders, or restrict the right of any stockholder
(Sec. 81)
(3) Investment of corporate funds in another business or
purpose (Sec. 42)
(4) Sale or disposal of all or substantially all assets of the
corporation (Sec. 81)
(5) Merger or consolidation (Sec. 81)
Requirements for exercise of appraisal right (Secs. 82, 86)
(1) Stockholder must have voted against the corporate act.
(2) Stockholder must make a written demand on the
corporation within 30 days after the vote was taken for
payment of the fair value of his shares on the said date.
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(3) Stockholder must submit the certificates to the
corporation for notation within ten (10) days after
demand for payment. Otherwise, right to appraisal may
be terminated at the option of corporation.
Effect of demand (Sec. 83)
ALL rights accruing to such shares, including voting and
dividend rights, shall be suspended
EXCEPT the right of such stockholder to receive payment of
the fair value thereof
Immediate RESTORATION of voting and dividend rights if
the dissenting stockholder is not paid the value of his shares
within 30 days after the award.
Extinguishment of appraisal right (Sec. 84)
(1) Withdrawal of demand by the stockholder WITH
CONSENT of the corporation
(2) Abandonment of the proposed action
(3) Disapproval by SEC of the proposed action
RIGHT TO INSPECT
Basis of right
As the beneficial owners of the business, the stockholders
have the right to know the financial condition and
management of corporate affairs.
A stockholder’s right of inspection is based on his ownership
of the assets and property of the corporation. Therefore, it is
an incident of ownership of the corporate property, whether
this ownership or interest is termed an equitable ownership,
a beneficial ownership, or quasi-ownership. Such right is
predicated upon the necessity of self-protection.
(Gokongwei Jr. v. SEC, 1979)
Records/books to be kept (Sec. 74)
(1) Books that record all business transactions of the
corporation which shall include contract, memoranda,
journals, ledgers, etc;
(2) Minute book for meetings of the stockholders/members;
(3) Minute book for meetings of the board/trustees;
(4) Stock and transfer book
Stock transfer agent – One engaged principally in the
business of registering transfers of stocks in behalf of a
stock corporation (licensed by the SEC).
The corporate secretary is the one duly authorized to make
entries in the stock and transfer book.
It is the corporate secretary's duty and obligation to register
valid transfers of stocks and if said corporate officer refuses
to comply, the transferor-stockholder may rightfully bring
suit to compel performance. (Torres et al. v. CA , 1997)
Financial statements (Sec. 75)
Within 10 days from written request, the corporation shall
furnish its most recent financial statement (balance sheet
and profit or loss statement as of last taxable year)
At a regular meeting, the Board shall present a financial
report of the operations of the corporation for the preceding
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year, which shall include financial statements duly signed
and certified by an independent CPA.
Exception: If the paid-up capital is less than P50,000 – the
financial statements may be certified under oath by the
treasurer or any responsible officer of the corporation
(instead of an independent CPA).
Requirements for the exercise of the right of inspection
(Sec. 74)
(1) It must be exercised at reasonable hours on business
days and in the place where the corporation keeps all its
records (i.e., principal office).
(2) The stockholder has not improperly used any
information he secured through any previous
examination.
(3) Demand is made in good faith or for a legitimate
purpose. If the corporation or its officers contest such
purpose or contend that there is evil motive behind the
inspection, the burden of proof is with the corporation or
such officer to show the same.
Test to determine whether the purpose is legitimate – A
legitimate purpose is one which is germane to the interests
of the stockholder as such and not contrary to the interests
of the corporation (Gokongwei v. SEC, 1979)
Remedies when inspection is refused
(1) Mandamus
(2) Injunction
(3) Action for damages
(4) File an action under Sec. 144 to impose a penal offense
by fine and/or imprisonment
PRE-EMPTIVE RIGHT
Definition and distinguished from right of first refusal
Pre-emptive right is an option privilege of an existing
stockholder to subscribe to a proportionate part of shares
subsequently issued by the corporation before the same can
be disposed of in favor of others; this right includes all
issues and disposition of shares of any class. It is a common
law right and may be exercised by stockholders even
without legal provision. On the other hand, a right of first
refusal arises only by virtue of contract stipulations, by
which the right is strictly construed against the right of
person to dispose or deal with their property.
Stockholders of a corporation shall enjoy pre-emptive right
to subscribe to ALL ISSUES OR DISPOSITIONS OF SHARES
OF ANY CLASS, in proportion to their respective
shareholdings. The purpose is to enable the shareholder to
retain his proportionate control in the corporation and to
retain his equity in the surplus.
Note: The broad phrase “all issues or disposition of shares of
any class is construed to include not only new shares issued
in pursuance of an increase in capital stock or from the
unissued shares which form part of the ACS, but also covers
“treasury shares.” Treasury shares would come under the
term “disposition.” Likewise considering that it is not
included among the exceptions enumerated therein, where
pre-emptive right shall not extend, the intention is to
include it in its application. (SEC Opinion, 14 January 1993)
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A pre-emptive right is a right claimed against the
corporation on unissued shares of its capital stock, and
likewise on treasury shares held by the corporation; while
the right of first refusal is a right exercisable against
another stockholder on his shares of stock. (Villanueva)
Basis of Preemptive Right: to preserve the existing
proportional rights of the stockholders (Campos)
Limitations to exercise of pre-emptive right (Sec. 39)
(1) Such pre-emptive right shall NOT extend to shares to be
issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public;
(2) It shall also NOT extend to shares to be issued in good
faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or
in payment of a previously contracted debt
(3) It shall not take effect if denied in the AOI or an
amendment thereto.
(4) If one shareholder does not want to exercise his pre-
emptive right, the other shareholders are not entitled to
purchase the corresponding shares of the shareholder
who declined. But if nobody purchased the same and
later on the board re-issued the shares, the pre-emptive
right applies. (Sundiang and Aquino)
Remedies in case of unwarranted denial
(1) Injunction
(2) Mandamus
(3) The suit should be individual and not derivative because
the wrong done is to the stockholders individually
(4) SEC can cancel shares if the third party is not innocent
Waiver/ denial of preemptive right
(1) Allowed by the Code provided that it is made in the AOI
(a) Waiver made through AOI – would bind present and
subsequent SH
(b) 2/3 vote of the outstanding capital stock is necessary
before waiver is binding
(c) Result of Non-placement of waiver clause in AOI: waiver
shall not bind future stockholders but only those who
agreed to it
(2) The SH must be given reasonable time within which to
exercise their pre-emptive rights. Upon expiration of
such period, any SH who did not exercise such will be
deemed to have waived it
(3) May be necessary so as to not hinder future financing
plans of the corporation
(4) Because some new investors may be willing only to
invest ONLY if all the new shares will be issued to them
(Campos)
RIGHT TO VOTE
(1) Non-voting shares are not entitled to vote except as
provided for in the last paragraph of Sec. 6.
(2) Preferred or redeemable shares may be deprived of the
right to vote
(3) Fractional shares of stock cannot be voted
(4) Treasury shares have no voting rights as long as they
remain in the treasury.
(5) No delinquent stock shall be voted (Sec. 71)
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(6) A transferee of stock cannot vote if his transfer is not
registered in the stock and transfer book of the
corporation.
RIGHT OF FIRST REFUSAL
The right of first refusal provides that a stockholder who
may wish to sell or assign his shares must first offer the
shares to the corporation or to the other existing
stockholders under terms and conditions which are
reasonable; and that only when the corporation or the other
stockholders do not or fail to exercise their option, is the
offering stockholder at liberty to dispose of his shares to
third parties.
An agreement entered into between the two majority
stockholders of a corporation whereby they mutually agreed
not to sell, transfer, or otherwise dispose of any part of their
shareholdings till after one year from the date of the
agreement. (Lambert v. Fox, 1914)
The right of first refusal is primarily an attribute of
ownership, and consequently can be effected only through a
contractual commitment by the owner of the shares;
consequently, the waiver of a right of first refusal when duly
constituted can be effected only by the registered owner
(PCGG v. SEC, unreported, 1988)
REMEDIAL RIGHTS
INDIVIDUAL SUIT
A suit brought by the shareholder in his own name against
the corporation when a wrong is directly inflicted against
him.
REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of himself and
all other stockholders similarly situated when a wrong is
committed against a group of stockholders.
DERIVATIVE SUIT
It is a suit by a shareholder to enforce a corporate cause of
action. The corporation is a necessary party to the suit, and
the relief which is granted is a judgment against a third
person in favor of the corporation (Chua v. CA, 2004)
It is a suit brought by one or more stockholders/members in
the name and on behalf of the corporation to redress
wrongs committed against it, or protect/vindicate corporate
rights whenever the officials of the corporation refuse to
sue, or the ones to be sued, or has control of the
corporation. (Sundiang and Aquino)
Suits of stockholders based on wrongful or fraudulent acts
of directors or other persons.
Requisites of derivative actions
(1) That the person instituting the action be a stockholder
or member at the time the acts or transactions subject
of the action occurred and the time the action was filed;
(2) That the stockholder or member exerted all reasonable
efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the
Articles of Incorporation, by-laws, laws or rules
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governing the corporation or partnership to obtain the
relief he desires.
(3) That there is no appraisal right available for the act(s)
complained of; and
(4) That the suit is not a nuisance or harassment suit. (Rule
8, Interim Rules of Procedure for Intra-Corporate
Controversies)
Requisites of a derivative suit according to jurisprudence
(1) the party bringing the suit should be a shareholder as of
the time of the act or transaction complained of, the
number of his shares not being material;
(2) he has tried to exhaust intra-corporate remedies, i.e.,
has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to
heed his plea; and
(3) the cause of action actually devolves on the corporation,
the wrongdoing or harm having been, or being caused
to the corporation and not to the particular stockholder
bringing the suit. (Lisam Enterprises, Inc., represented by
Lolita A. Soriano and Lolita A. Soriano v. Banco de Oro
Unibank, Inc., et al., 2012)
Note: The “wrong” contemplated in a derivative suit is on in
which the injury alleged be indirect as far as the
stockholders are concerned and direct only insofar as the
corporation is concerned. (De Leon)
BUT the personal injury suffered by the stockholder cannot
disqualify him from filing a derivative suit in behalf of the
corporation. It mere gives rise to an additional cause of
action for damages against the erring corporate officers.
(Gochan v. Young)
Requisites based on jurisprudence
(1) The cause of action actually devolves on the corporation,
the wrong or harm having been, or being caused to it
and not the shareholder filing the suit. (Evangelista vs.
Santos, 1950; SMC v. Kahn, 1989).
(2) The reliefs sought pertain to the corporation. (Symaco
Trading Corp. v. Santos, 2005).
Recent rulings on the matter
(1) Status of heirs as co-owners of shares before partition of
estate does not make them shareholders until there is
compliance with Sec. 63 on the manner of transferring
shares, thus the heirs are not automatically registered
shareholders of the corporation. (Reyes v. RTC of Makati,
2008)
(2) Stockholder may commence a derivative suit “for
mismanagement, waste or dissipation of corporate
assets because of a special injury to him for which he is
otherwise without redress. In effect, the suit is an action
for specific performance of an obligation owed by the
corporation to the stockholders to assist its right of
action when the corporation is put on default by the
wrongful refusal of the directors or management to
make suitable measures for its protection.” (Yu v.
Yukayguan, June 18, 2009)
The power to sue and be sued in any court by a corporation
even as a stockholder is lodged in the BOD that exercises its
corporate powers and not in the president or officer thereof.
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But where corporate directors are guilty of a breach of trust,
not of mere error of judgment or abuse of discretion, and
intra-corporate remedy is futile or useless, a SH may
institute a derivative suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. (Bitong v.
CA, 1998)
Jurisdiction over derivative suits lies with the RTC (Sec. 5.2,
Securities Regulation Code)
OBLIGATIONS OF A STOCKHOLDER
LIABILITY TO THE CORPORATION FOR UNPAID SUBSCRIPTION
(SEC. 67)
A subscription contract is unconditional (i.e., obligation to
pay is not be subject to any contingency) and indivisible (as
to the amount and transferability— FuaCun v. Summers,
1923). Hence, if the subscriber paid 20% of his subscription,
he is not entitled to the issuance of certificates
corresponding to 20% of the shares.
Unpaid claim refers to any unpaid subscription and not to
any indebtedness which a subscriber may owe the
corporation rising from any other transaction (China
Banking Corp. v. CA, 1997)
LIABILITY TO THE CORPORATION FOR INTEREST ON UNPAID
SUBSCRIPTION IF SO REQUIRED BY THE BY -LAWS (SEC. 66)
General rule: Subscribers for stock are NOT liable to pay
interest on his unpaid subscription
Exception: If so required in the by-laws at the rate fixed in
the by-laws. If no rate is fixed in the by-laws, such rate shall
be deemed to be the legal rate (Sec. 66)
Notes:
(1) Transfer for consideration of treasury shares is a sale (or
disposition) by the corporation (not subscription). A
transfer of previously issued shares by a stockholder to a
third person is a sale (or disposition). Transfer of
unissued shares is subscription.
(2) Shareholders are not creditors of the corporation with
respect to their shareholdings thereto and the principle
of compensation or set-off has no application.
(3) Subscription contract is NOT required to be in writing.
LIABILITY FOR WATERED STOCKS (SEC. 65)
Definition
These are shares issued as fully paid when in truth no
consideration is paid, or the consideration received is known
to be less than the par value or issued value of the shares.
(Sec. 65)
These include the following:
(1) Issued without consideration (bonus share)
(2) Issued as fully paid when the corporation has received
less sum of money than its par or issued value
(discounted share)
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(3) Issued for consideration other than actual cash (i.e.,
property or services), the fair valuation of which is less
than its par or issued value
(4) Issue stock dividend when there are no sufficient
retained earnings or surplus to justify it.
Note: Subsequent increase in the value of the property used
in paying the stock does not do away with the watered
stocks. Subsequent increase in the value of the property
used in paying the stock does not cure the defect in
issuance. The existence of watered stocks is determined at
the time of issuance of the stock.
Liability of directors or officers
Any director or officer of a corporation consenting to the
issuance of stocks or who, having knowledge thereof, does
not forthwith express his objection in writing and file the
same with the corporate secretary shall be SOLIDARILY
liable with the stockholder concerned to the corporation
and its creditors for the difference in value (Sec. 65).
LIABILITY FOR DIVIDENDS UNLAWFULLY PAID
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the
corporation (Sec. 31).
Violations of any of the provisions of the Corporation Code
not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for not less than
thirty (30) days but not more than five (5) years, or both, in
the discretion of the court (Sec. 144).
LIABILITY FOR ASSUMING TO ACT AS A CORPORATION
KNOWING IT TO BE WITHOUT AUTHORITY
All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or
arising as a result thereof.
When any such ostensible corporation is sued on any
transaction entered or on any tort committed by it as a
corporation, it shall not be allowed to use as a defense its
lack of corporate personality.
On who assumes an obligation to an ostensible corporation
cannot resist performance thereof on the ground that there
was in fact no corporation (Sec. 21).
MEETINGS
General rule: Stockholders’ or members’ approval is
expressed in a meeting duly called and held for the
purpose.
Exception: In case of amendment of AOI, approval may be
expressed by referendum or written assent of the
stockholders or members (Sec. 16)
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Who May Attend and Vote?
(1) Stockholders, either in person or by proxy
(2) Pledgors or mortgagors (Sec. 55)
(3) Pledgee or mortgagee, IF expressly given such right by
the pledgor or mortgagor in writing which is recorded on
the corporate books(Sec. 55)
(4) Executors, administrators, receivers, and other legal
representatives duly appointed by the court, without
need of any written proxy(Sec. 55)
(5) ALL joint owners of stocks, or any one of them with the
consent of ALL the co-owners, unless there is a written
proxy, signed by all the co-owners(Sec. 56)
(6) Any one of the joint owners of shares owned in an
"and/or" capacity or a proxy thereof(Sec. 56)
REGULAR OR SPECIAL
When and Where
When? (Sec. 50)
Regular meetings of stockholders or members shall be held
annually on a date fixed in the by-laws, or if not so fixed, on
any date in April of every year as determined by the board of
directors or trustees.
Where?
(1) Stock: City or municipality where the principal office of
the corporation is located, or, if practicable, in the
principal office of the corporation: Provided, Metro
Manila shall be considered a city or municipality. (Sec.
51)
(2) Non-stock: Any place even outside the place where the
principal office is located, within the Philippines (Sec.
93)
Notice
Nature of notice (Sec. 50)
(1) Regular Meeting—written notice sent to all SH or
members at least 2 weeks prior to the meeting, unless a
different period is required by the by-laws
(1) Special Meeting—written notice sent at least 1 week prior
to the meeting, unless otherwise provided in the by-
laws.
Subject to waiver, expressly or impliedly (i.e., attendance
despite no notice)
Effect of Failure to Give Notice
Failure to give notice would render a meeting VOIDABLE at
the instance of an absent stockholder, who was not notified
of the meeting (Board v. Tan, 1959).
WHO CALLS THE MEETINGS
The president, unless the by-laws provide otherwise.(Sec.
54)
Any petitioning stockholder or member upon order of the
SEC when there is no person authorized to call a meeting.
Such petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or
members present have chosen one of them as presiding
officer. (Sec. 50)
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QUORUM
General rule: Stockholders representing majority of the OCS
or majority of the members
Exception: The Code or the by-laws provide otherwise
Where quorum is present at the start of a lawful meeting,
stockholders present cannot without justifiable cause break
the quorum by walking out from said meeting so as to
defeat the validity of any act proposed and approved by the
majority. (However, stockholders can break the quorum for
justifiable causes.) (Johnston vs. Johnston, 1965, CA decision)
MINUTES OF THE MEETINGS
A record of all the minutes of all meetings of stockholders
or members, or of the board of directors or trustees shall be
kept and preserved at the principal office of every
corporation.
1.
Contents
(1) time and place of holding the meeting; 2.
(2) how the meeting was authorized;
(3) the notice given; 3.
(4) whether the meeting was regular or special, if special its
object;
(5) those present and absent; and
(6) every act done or ordered done at the meeting.
Upon demand by any director/trustee or SH/member,
the following shall also be noted in the minutes
(1) the time when any director, trustee, stockholder or
member entered or left the meeting;
(2) the yeas and nays on any motion or proposition;
(3) the protest of any director/trustee or
stockholder/member on any action or proposed action.
Notes: The minutes of any meetings shall be open to
inspection by any director/trustee or stockholder/member
at reasonable hours on business days.
The director/trustee or stockholder/member may demand,
in writing, for a copy of excerpts from said records or
minutes, at his expense.
Any officer or agent of the corporation refusing to allow the
examination and copying of the minutes shall be:
(1) liable to the director/trustee or stockholder/ member;
and
(2) guilty of an offense punishable under Sec. 144 (Sec. 74)
HOWEVER, the officer of agent may use as a defense that:
(1) the person demanding examination or copy thereof
made improper use of any information secured through
any prior examination of the records or minutes of such
corporation or of any other corporation thereby;
(2) the person demanding examination or copy acts in bad
faith or has no legitimate purpose in making his demand.
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Capital Structure
SUBSCRIPTION AGREEMENTS
Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall
be deemed a subscription contract.(Sec. 60).
CHARACTERISTICS
A subscription is a contract for the acquisition of unissued
stock of a corporation whether existing or still to be formed,
and is in the effect the contribution or promised
contribution of a person to the capital of a corporation
(Campos).
There can be a subscription only with reference to unissued
shares of the Authorized Capital Stock (ACS), in the
following cases:
The original issuance of the ACS at the time of
incorporation.
The opening, during the life of the corporation, of the
portion of the original ACS previously unissued; or
The increase in ACS achieved through a formal amendment
of the Articles and registration thereof with the SEC.
(Villanueva)
STATUS AS SHAREHOLDER
One may become a shareholder in a corporation in either of
two ways:
(1) By entering into a SUBSCRIPTION CONTRACT with an
existing or still to be formed corporation (he becomes a
stockholder upon acceptance of the corporation of his
offer to subscribe whether the consideration is fully paid
or not). Once a subscription contract is perfected, the
stockholder becomes a debtor to the corporation and
may be liable to pay any unpaid portion thereof upon
call by the board of directors.
(2) By acquisition of already issued shares through:
(a) purchase of TREASURY SHARES from the corporation
(b) acquisition of shares from existing shareholders by
SALE OR ANY OTHER CONTRACT (Sundiang and
Aquino)
Notes:
(1) Transfer of unissued shares = SUBSCRIPTION
(2) Transfer of already issued shares = NOT
SUBSCRIPTION; can either be:
(a) SALE/DISPOSITION BY CORPORATION of treasury
shares
(b) SALE/DISPOSITION BY STOCKHOLDER TO A THIRD
PERSON
TYPES OF SUBSCRIPTION CONTRACTS
Pre-incorporation subscription (Sec. 61)
It is a subscription for shares of stock of a corporation still to
be formed.
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When pre-incorporation subscription is IRREVOCABLE:
(1) For a period of at least 6 months from the date of
subscription, UNLESS (a) all of the other subscribers
consent to the revocation, or (b) the incorporation fails
to materialize within six (6) months or within a longer
period as may be stipulated in the contract of
subscription; or
(2) After the submission of the AOI to the SEC.
Post-incorporation subscription
It is entered into after incorporation.
INTEREST ON UNPAID SUBSCRIPTION
General rule: Stockholder is NOT liable to pay interest on his
unpaid subscription.
Exception: If so required by the by-laws
Rate: That fixed in the by-laws, otherwise, the legal rate
(Sec. 66)
Notes:
(1) Shareholders are NOT creditors of the corporation with
respect to their shareholdings thereto and the principle
of compensation or set-off has no application.
(2) Subscription contract is NOT required to be in writing.
CONSIDERATION FOR STOCKS
FORMS OF CONSIDERATION (SEC. 62)
(1) Actual cash
(2) Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or
issued value of the stock issued.
(a) Property should NOT be encumbered. Otherwise, it
would impair the consideration
(b) Valuation is initially determined by the incorporators or
the board of directors, subject to approval by the SEC.
(3) Labor performed for or services actually rendered to the
corporation;
(4) Amounts transferred from unrestricted retained
earnings to stated capital (declaration of stock
dividends); and
(5) Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
(6) Previously incurred indebtedness of the corporation;
LIMITATIONS ON CONSIDERATION
Stocks shall NOT be issued:
(1) for a consideration less than the par or issued price
thereof
(2) in exchange for promissory notes or future service
Note: Promissory notes and future service may be used as
consideration provided that certificates of stock will be
issued ONLY AFTER actual encashment of promissory note
or performance of such services.
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SHARES OF STOCK
NATURE OF STOCK
Shares of stock are units into which the capital stock is
divided. A share of stock represents interest of the holder
thereof to participate in the management of the
corporation, to share proportionally in the profits of the
business and, upon liquidation, to obtain an aliquot part of
corporate assets after all corporate debts have been paid.
(Campos)
A stockholder may own the share even if he is not holding a
certificate of stock.
Share of Stock Certificate of Stock
Unit of interest in a Evidence of the holder’s
corporation ownership of the stock and of
his right as a shareholder
and up to the extent
specified therein.
An incorporeal or intangible Concrete and tangible
property
May be issued by the May be issued only if the
corporation even if the subscription is fully paid
subscription is not fully paid
A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds
to that extent when distributed according to law and equity,
but its holder is not the owner of any part of the capital of
the corporation. Nor is the shareholder entitled to the
possession of any definite portion of its property or assets.
The stockholder is not a co-owner or tenant in common of
the corporate property (Stockholders of F. Guanzon and
Sons, Inc. v Register of Deeds of Manila).
SUBSCRIPTION AGREEMENTS (SEE ABOVE)
CONSIDERATION FOR SHARES OF STOCK (SEE ABOVE)
WATERED STOCK
Definition
These are shares issued as fully paid when in truth no
consideration is paid in any form, or the consideration
received is known to be less than the par value or issued
value of the shares. (Sec. 65)
These include the following:
(1) Issued without consideration (bonus share)
(2) Issued as fully paid when the corporation has received
less sum of money than its par or issued value
(discounted share)
(3) Issued for consideration other than actual cash (i.e.,
property or services), the fair valuation of which is less
than its par or issued value
(4) Issue stock dividend when there are no sufficient
retained earnings or surplus to justify it.
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Note: Subsequent increase in the value of the property used
in paying the stock does not do away with the watered
stocks. Subsequent increase in the value of the property
used in paying the stock does not cure the defect in
issuance. The existence of watered stocks is determined at
the time of issuance of the stock.
Liability of Directors for Watered Stocks
Any director or officer of a corporation consenting to the
issuance of stocks or who, having knowledge thereof, does
not forthwith express his objection in writing and file the
same with the corporate secretary shall be solidarily liable
with the stockholder concerned to the corporation and its
creditors for the difference in value (Sec. 65).
Trust Fund Doctrine for Liability for Watered Stocks
Where the corporation issues watered stock and thereby
assumes an ostensible capitalization in excess of its real
assets, the transaction necessarily involves the misleading
of subsequent creditors, and whether done with that
purpose actually in mind or not, is at least a constructive
fraud upon creditors. Hence, it is held that recovery may be
had by a creditor in such case, even though the corporation
itself has no cause of action against the stockholders. Some
of the earlier decisions put the right of recovery in such a
case upon the so-called “trust fund doctrine.” In any view of
the matter, however, the creditors’ right of action to compel
the making good of the representation as to the
corporation’s capital is based on fraud, and the trust fund
doctrine is only another way of expressing the same
underlying idea. (De Leon)
Despite the view of foreign authors that the fraud theory is
the prevailing view, it would seem that in the Philippine
jurisdiction, the trust fund doctrine on watered stock
prevails. In Philippine Trust Corp. v. Rivera, the Supreme
Court held –
It is established doctrine that subscription to the capital of a
corporation constitute a fund to which creditors have a right
to look for satisfaction of their claims and that the assignee
in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its
debts. A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying
for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital
stock can take place only in the manner an under the
conditions prescribed by the statute or the charter or the
articles of incorporation. Moreover, strict compliance with
the statutory regulations is necessary. (Villanueva)
SITUS OF THE SHARES OF STOCK
It is a general rule that for purposes of execution,
attachment and garnishment, it is not the domicile of the
owner of a certificate but the domicile of the corporation
which is decisive. (Chua Guan v. Samahang Magsasaka, Inc.,
G.R. No. 42091, November 2, 1935)
CLASSES OF SHARES OF STOCK
Shares of stock of stock corporations may be divided into
classes or series of shares or both. Each class or series of
shares may have rights, privileges or restrictions, as stated
in the AOI.
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Classification of shares:
(1) Common shares
(2) Preferred shares
(3) Par value shares
(4) No-par value shares
(5) Founder’s shares
(6) Redeemable shares
(7) Treasury shares
(8) Convertible shares
(9) Non-voting shares
General rule: No share may be deprived of voting rights (Sec.
6)
Exceptions:
(1) Preferred or
(2) Redeemable shares,
(3) Provided by the Code (e.g., Treasury shares)
There shall always be a class/series of shares which have a
COMPLETE VOTING RIGHTS (Sec. 6)
Doctrine of Equality of Shares: Each share shall be EQUAL in
ALL respects to every other share, except as otherwise
provided in the AOI and stated in the certificate of stock
(Sec. 6)
Common shares
The most common type of shares, which enjoy no
preference but the owners thereof are entitled to
management of the corporation and to equal pro-rata
division of profits after preference. It represents a residual
ownership interest in the corporation.
Preferred shares
Stocks which are given preference by the issuing
corporation in dividends and the distribution of assets of the
corporation in case of liquidation or such other preferences
as may be stated in the AOI which do not violate the
Corporation Code.
Limitations:
(1) Preferred shares can only be issued with par value.
(2) Preferred shares must be stated in the Articles of
Incorporation and in the certificate of stock.
(3) The BOD may fix the terms and conditions only when so
authorized by the AOI and such terms and conditions
shall be effective upon filing a certificate thereof with
the SEC.
Par value shares
These are shares with a stated value set out in the AOI. This
remains the same regardless of the profitability of the
corporation. This gives rise to financial stability and is the
reason why banks, trust corporations, insurance companies
and building and loan associations must always be
organized with par value shares.
Par value is minimum issue price of such share in the AOI
which must be stated in the certificate
No-par value shares
These are shares without a stated value.
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“A no par share does not purport to represent any stated
proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such
shares of the issuing corporation” (Agbayani)
Limitations:
(1) No-par value shares cannot have an issue price of less
than P5.00 per share (Sec. 6).
(2) They shall be deemed fully paid and non-assessable
and the holders of such shares shall not be liable to the
corporation or to its creditors in respect thereto (Sec. 6).
(3) Entire consideration received by the corporation for its
no-par value shares shall be treated as capital and shall
not be available for distribution as dividends (Sec. 6).
(4) AOI must state the fact that the corporation issues no-
par shares and the number of shares.
(5) Banks, insurance companies, trust companies, building
and loan associations, and public utilities cannot issue
no-par value shares (Sec. 6).
(6) The issued price may be fixed in the AOI, or by the BOD
pursuant to authority conferred upon it by the AOI, or, in
the absence thereof, by majority vote of the outstanding
shares in a meeting called for the purpose (Sec. 62).
Founder’s shares (Sec. 7)
These are shares, classified as such in the AOI, which are
given certain rights and privileges not enjoyed by the
owners of other stocks.
Where exclusive right to vote and be voted for in the
election of directors is granted, such right must be for a
limited period not to exceed 5 years subject to approval by
SEC. The 5 year period shall commence from date of
approval by SEC.
Redeemable shares (Sec. 8)
These are shares which permit the issuing corporation to
redeem or purchase its shares.
Limitations:
(1) Redeemable shares may be issued only when expressly
provided for in the AOI (Sec. 8).
(2) The terms and conditions affecting said shares must be
stated both in the AOI and in the certificate of stock(Sec.
8).
(3) Redeemable shares may be deprived of voting rights in
the AOI.
(4) The corporation is required to maintain a sinking fund to
answer for redemption price if the corporation is
required to redeem.
(5) The redeemable shares are deemed retired upon
redemption unless otherwise provided in the AOI (i.e., if
the AOI allows for reissuance of such shares).
(6) URE is NOT necessary before shares can be redeemed
but there must be sufficient assets to pay the creditors
and to answer for operations (Republic Planters Banks v.
Agana, 1997). Redemption cannot be made if such
redemption will result in insolvency or inability of the
corporation to meet its obligations (SEC Opinion, 24 Aug
1987).
Note: Redeemable shares reacquired shall be considered
retired and no longer issuable, unless otherwise provided in
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the Articles of the redeeming corporation (SEC Rules
Governing Redeemable and Treasury Shares, 26 April 1982).
Treasury shares (Sec. 9)
These are shares which have been issued and fully paid for,
but subsequently re-acquired by the issuing corporation by
purchase, redemption, donation or through some other
lawful means. Such shares may again be disposed of for a
reasonable price fixed by the BOD.
Treasury shares are therefore issued shares, but being in the
treasury, do not have the status of outstanding shares.
Consequently, although a treasury share, not retired by
reacquisition, may be re-issued or resold, such share, as
long as it is held by the corporation as a treasury share,
participates neither in the dividends, because dividends
cannot be declared by the corporation to itself nor in the
meetings of the corporation as voting stock, for otherwise
equal distribution of voting powers among stockholders will
be effectively lost and the directors will be able to
perpetuate their control of the corporation, though it still
represents a paid for interest in the property of the
corporation. (CIR v. Manning, 1975)
Note: Delinquent stocks, which are stocks that have not
been fully paid, may become treasury stocks upon bid of the
corporation in absence of other bidders (Sec.68).
Convertible shares
A type of preferred stock that the holder can exchange for a
predetermined number of common shares at a specified
time
Non-voting shares (Sec. 6)
General rule: Non-Voting Shares are not entitled to vote.
Exceptions:
(1) Amendment of the AOI
(2) Adoption and amendment of by-laws
(3) Sale, lease, exchange, other disposition of all or
substantially all of the corporate property
(4) Incurring, creating or increasing bonded indebtedness
(5) Increase or decrease of capital stock
(6) Merger and consolidation
(7) Investment of corporate funds in another corporation or
business
(8) Dissolution of the corporation
PAYMENT OF BALANCE OF SUBSCRIPTION
(Sec. 66 & 67)
CALL BY BOARD OF DIRECTORS
The board of directors of any stock corporation may at any
time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same
or such percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment shall be made on the date specified in the contract
of subscription or on the date stated in the call. Failure to
pay on such date shall render the entire balance due and
payable and shall make the stockholder liable for interest at
the legal rate on such balance, unless a different rate of
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interest is provided for in the by-laws. If within 30 days from
said date no payment is made, all stocks covered by said
subscription shall become delinquent and subject to sale
under Sec. 68 unless the BOD orders otherwise.
There are two (2) instances when call is not necessary to
make the subscriber liable for payment of the unpaid
subscription:
(1) When, under the terms of the subscription contract,
subscription is payable, not upon call, but immediately,
or on a specified day, or when it is payable in
installments at specified times; and
(2) If the corporation becomes insolvent, which makes the
liability on the unpaid subscription due and
demandable, regardless of any stipulation to the
contrary in the subscription agreement (Villanueva)
NOTICE REQUIREMENT
Where call is necessary, notice must be given to the
stockholder concerned. A call without notice to the
subscriber is practically no call at all.
The notice is regarded as a condition precedent to the right
of recovery. It must, therefore, be alleged and proved to
maintain an action for the call (Baltazar v. Lingayen Gulf
Electric Power Co., Inc.). The right to notice of call, however,
may be waived by the subscriber. (De Leon)
SALE OF DELINQUENT SHARES (SEC. 68)
Delinquent Shares - These are shares for which the
corresponding subscription or balance remains unpaid after
a grace period of 30 days from the date specified in the
contract of subscription or from the date stated in the call
made by the BOD. (Sec. 67)
Effect of delinquency (Sec. 71)
No delinquent stock shall be voted for or be entitled to vote
or to representation at any stockholders’ meeting
The holder thereof shall NOT be entitled to any of the rights
of a stockholder except the right to dividends. But the
dividends it will receive will be subject to Sec. 43, that is,
cash dividends shall first be applied to the unpaid balance
on the subscription plus costs and expenses, and stock
dividends shall be withheld until the unpaid subscription is
fully paid.
Such shares shall be subject to delinquency sale.
Call by resolution of the Board of Directors (Sec. 68)
The board of directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due
on each subscription plus all accrued interest, and the date,
time and place of the sale which shall not be less than 30
days nor more than 60 days from the date the stocks
became delinquent, which is 30 days after the date
specified in the contract of subscription or on the date
stated in the call.
Notice of sale
If the BOD resolves to proceed with the sale:
(1) Notice of sale and a copy of the resolution shall be sent
to every delinquent stockholder either personally or by
registered mail.
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(2) Notice of sale shall furthermore be published once a
week for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the
principal office of the corporation is located.
Auction Sale and the Highest Bidder
Procedure for delinquency sale (Sec. 68)
(1) Call for payment made by the BOD.
(2) Notice of call served on each stockholder.
(3) Notice of delinquency issued by the BOD upon failure of
the stockholder to pay within 30 days from date
specified.
(4) Service of notice of delinquency on the non-paying
subscriber, PLUS publication in a newspaper of general
circulation in the province or city where the principal
office of the corporation is located, once a week for two
(2) consecutive weeks.
Notes:
(1) Requirements on notice and publication are mandatory.
Lacking such requirements, the stockholder may
question the sale as provided under Sec. 69.
(2) Public auction – the highest bidder is one who is willing
to pay the balance of the subscription for the least
number of shares. If there are no bidders, the
corporation must bid for the whole number of shares
regardless of how much the SH has paid. Such stocks
will pertain to the corporation as fully paid treasury
stocks.
(3) The delinquent stockholder may stop the auction by
paying to the corporation or before the date specified for
the sale the balance due on his subscription, plus
accrued interest, costs of advertisement and expenses of
the sale.
(4) Otherwise, the public auction shall proceed and be sold
to the bidder that will pay the full amount of the
balance of subscription with accrued interest, costs and
expenses of the sale, for the smallest number of shares
or fraction of a share. The stock so purchased shall be
transferred to such purchases in the books of the
corporation and a certificate of such stock shall be
issued in his favor. The remaining shares, if any,shall be
credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of
stock covering such shares.
Irregularities in the delinquency sale (Sec. 69)
(1) Action to recover delinquent stock must be on the
ground of irregularity or defect in the notice of sale.
(2) Party seeking to recover must first pay or tender to the
party holding the stock the sum for which the same was
sold, with interest from the date of sale at the legal rate.
(3) The action shall be commenced within six months from
the date of sale.
CERTIFICATE OF STOCK
NATURE OF THE CERTIFICATE
A certificate of stock is an instrument formally issued by the
corporation with the intention that the same constitute the
best evidence of the rights and status of a SH (not a
condition precedent to the acquisition of such rights).
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UNCERTIFICATED SHARES
Uncertificated Shares/Securities: Security evidenced by
electronic or similar records (Sec. 3.14, Securities Regulation
Code)
Notwithstanding Sec. 63 of the Corporation Code (certificate
of stock and transfer of shares), a corporation whose
securities are registered pursuant to the SRC or listed on
securities exchange may:
(1) If so resolved by the Board of Directors and agreed by a
shareholder, investor or securities intermediary, issue
shares to, or record the transfer of some or all its shares
into the name of such shareholders, investors or,
securities intermediary in the form of uncertified
securities. The use of uncertified securities in these
circumstances shall be without prejudice to the rights of
the securities intermediary subsequently to require the
corporation to issue a certificate in respect of any shares
recorded in its name; and
(2) If so provided in its articles of incorporation and by-laws,
issue all of the shares of a particular class in the form of
uncertificated securities and subject to a condition that
investors may not require the corporation to issue a
certificate in respect of any shares recorded in their
name.
Transfers of uncertificated securities, how made
(1) Valid as between parties – validly made and
consummated by appropriate book-entries in the
securities intermediaries, or in the stock and transfer
book held by the corporation or the stock transfer agent.
A transfer made pursuant to the foregoing has the effect
of delivery of a security in bearer form or duly indorsed in
blank representing the amount of security or right
transferred, including the unrestricted negotiability of
that security by reason of such delivery.
(2) Valid as to corporation – when the transfer is recorded in
the books of the corporation so as to show the names of
the parties to the transfer and the number of shares
transferred (Sec. 43, Securities Regulation Code).
NEGOTIABILITY
Theory of quasi-negotiability
A stock certificate is regarded as quasi-negotiable only in
the sense that it may be transferred by endorsement,
coupled with delivery.
This notwithstanding, it is well-known that the instrument is
non-negotiable, because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner or
creditor may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed by
the principles governing estoppel. Certificates of stock are
not negotiable instruments. Consequently, a transferee
under a forged assignment acquires no title which can be
asserted against the true owner, unless the latter’s
negligence has been such as to create an estoppel against
him. If the owner of the certificate has endorsed it in blank,
and it is stolen from him, no title is acquired by on innocent
purchaser for value (De los Santos v. Republic, 1955).
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Requirements for valid transfer of stocks
For a valid transfer of stocks, the requirements are as
follows:
(1) There must be delivery of the stock certificate;
(2) The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to
make the transfer; and
(3) To be valid against third parties, the transfer must be
recorded in the books of the corporation. (Bitong v. Court
of Appeals, G.R. No. 123553, July 13, 1998)
No shares of stock against which the corporation holds an
unpaid claim shall be transferable in the books of the
corporation(Sec. 63).
ISSUANCE
Full payment
General rule: No certificate of stock shall be issued to a
subscriber until the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if
any is due, has been paid (Sec. 64)
Exception: In Baltazar v Lingayen Gulf Electric Power
Company, 1965, where it was the practice of the corporation
since its inception to issue certificates of stock to its
individual SHs for unpaid shares of stock and to give full
voting power to shares fully paid.
Payment Pro-Rata
The entire subscription must be paid first before the
certificates of stock can be issued. Partial payments are to
be applied pro rata to each share of stock subscribed. (Nava
Peers Mktg. Corp. and Fua Cun v. Summers, 1923)
LOST OR DESTROYED CERTIFICATES
Procedure for re-issuance in case of loss, stolen or destroyed
certificates:
(1) Registered owner to file an affidavit of loss with the
corporation.
(2) Publication of notice of loss in a newspaper of general
circulation published in the place where the corporation
has its principal office, once a week for 3 consecutive
weeks at the expense of the owner of the certificate of
stock
(3) Cancellation of the certificate in the books of the
corporation and issuance of new certificates, after the
expiration of 1 year from the date of the last publication
and there is no contest. The right to make such contest
shall be barred after the expiration of the one-year
period.
(4) Issuance of new certificates before 1 year period if the
registered owner files a bond and there is no pending
contest regarding the ownership of said certificates.
Note: Except in cases of fraud, bad faith, or negligence on
the part of the corporation and its officers, no action may be
brought against the corporation which shall have issued
certificates of stock in lieu of those lost, stolen or destroyed
pursuant to the above procedure.
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STOCK AND TRANSFER BOOK
CONTENTS
(1) a record of all stocks in the names of the stockholders
alphabetically arranged;
(2) the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment of
any installment;
(3) a statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made; and
(4) such other entries as the by-laws may prescribe.
WHO MAY MAKE VALID ENTRIES
(1) a SEC-licensed stock transfer agent; or
(2) the Corporate Secretary of the stock corporation
provided all rules and regulations imposed on stock
transfer agents shall be applicable, except payment of
license fee.
DISPOSITION AND ENCUMBRANCE OF SHARES
ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES
General rule: Shares of stock so issued are personal property
and may be transferred (Sec. 63). (FREE TRANSFERABILITY
OF SHARES)
Exception: In CLOSE corporations, restrictions on the right
to transfer shares may be provided in the AOI, by-laws and
certificates (Sec. 98).
SALE OF PARTIALLY PAID SHARES
Under Section 63 of the Corporation Code, no shares of
stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.
Therefore, a corporation may refuse to acknowledge and
register a sale or assignment of shares which are not fully
paid, and may continue to hold the original subscriber liable
on the payment of the subscription.
However, in China Banking Corp. v. CA, the court said that
the above principle in section 63 cannot be utilized by the
corporation to refuse to recognize ownership over pledged
shares purchased at public auction. The term “unpaid
claims” refers to “any unpaid claims arising from unpaid
subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising
from any other transactions. Obligations arising from
unpaid monthly dues do not fall within the coverage of
Section 63.”(Villanueva)
SALE OF A PORTION OF SHARES NOT FULLY PAID
The SEC has opined on several occasions that a stockholder
who has not paid the full amount of his subscription cannot
transfer part of his subscription in view of the indivisible
nature of a subscription contract. The reason behind the
principle of disallowing transfer of not fully paid
subscription to several transferee is that it would be difficult
to determine whether or not the partial payments made
should be applied as full payment for the corresponding
number of shares which can only be covered by such
payment or as proportional payment to each and all of the
entire number of subscribed shares, and it would be difficult
to determine the unpaid balance to be assumed by each
transferee. (Villanueva)
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SALE OF ALL OF SHARES NOT FULLY PAID
On the other hand, the SEC has opined that the entire
subscription, although not yet fully paid, may be transferred
to a single transferee, who as a result of the transfer must
assume the unpaid balance. It is necessary, however, to
secure the consent of the corporation since the transfer of
subscription rights and obligations contemplates a novation
of contract which under Article 1293 of the Civil Code
cannot be made without the consent if the creditor.
(Villanueva)
SALE OF FULLY PAID SHARES
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer
however shall be valid except as between the parties until
the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or
certificates and the number of shares transferred (Sec. 63)
REQUISITES OF A VALID TRANSFER
Same as requirements for valid transfer of stocks
INVOLUNTARY DEALINGS WITH SHARES
The right of a stockholder to pledge, mortgage or otherwise
encumber his shares is recognized under Section 55 of the
Corporation Code, which regulates the manner of voting on
pledged or mortgaged shares.
If the restriction on the right to pledge or mortgage shares
of stock absolutely prohibits the stockholders from pledging
or mortgaging their shares without the consent of the board
of directors, it would be violative of the statutory right of the
stockholders to encumber shares of stock as allowed in
Section 55. However, when the restriction merely allows the
corporation or existing stockholders to accept the offer
within the option period, and thereafter, if no one accepts
the offer, the stockholder is free to pledge or mortgage his
shares in favor of any third party, such provision is
reasonable, valid and binding.
By the strict application of Section 63 of the Corporation
Code to cover only the sale, assignment or absolute
disposition of shares of stock, the Supreme Court has
placed a bias against voluntary sales, assignments or
dispositions of shares of stock vis-à-vis pledges, mortgages,
attachment or levy thereof. To be valid and binding on third
parties, the voluntary sale, assignment or disposition of
shares requires the essential element of registration in the
stock and transfer book; otherwise the sale, assignment or
disposition is considered void as to third parties, even when
they have actual notice. Whereas, when it comes to pledge,
mortgage, encumbrance, attachment or levy of shares,
registration thereof in the stock and transfer book is not
essential either for validity or as a species of notifying third
parties. (Villanueva)
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Dissolution and Liquidation
Dissolution of a corporation is the extinguishment of its
franchise and the termination of its corporate existence or
business purpose.
MODES OF DISSOLUTION
According to some decisions, the method of effecting
dissolution as prescribed by law are exclusive, and a
corporation cannot be dissolved except in the manner
prescribed by law (De Leon)
VOLUNTARY
Note: If no dissolution papers are filed with the SEC by a
corporation claiming dissolution voluntarily, such
corporation is still deemed legally existing, notwithstanding
the fact that it has ceased to operate (De Leon)
Where no creditors are affected (Sec. 118)
Notice of the meeting should be given to the stockholders
or members by personal delivery or registered mail at least
30 days prior to the meeting.
The notice of meeting should also be published for 3
consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located. If
no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines.
The resolution to dissolve must be approved by the majority
of the directors/trustees and approved by the stockholders
representing at least 2/3s of the OCS or 2/3 of members.
Non-voting shares are entitled to vote in this matter (Sec. 6.
Par 6(8))
A copy of the resolution shall be certified by the majority of
the directors or trustees and countersigned by the secretary.
The signed and countersigned copy will be filed with the
SEC and the latter will issue the certificate of dissolution.
Note: Thus, except for the expiration of its term, no
dissolution can be effective without some act of the State
(Daguhoy Enterprises v. Ponce, 1954)
Where creditors are affected
A petition shall be signed by a majority of its board of
directors or trustees or other officers having management of
its affairs.
The petition must be verified by its president, or secretary or
one of its director or trustees.
Approval of the stockholders representing at least 2/3 of
the OCS or 2/3 of members in a meeting called for that
purpose.
Filing of a petition with the SEC signed by majority of
directors or trustees or other officers having the
management of its affairs verified by the President or
Secretary or Director. Claims and demands must be stated
in the petition.
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If the petition is sufficient in form and substance, the SEC
shall issue an order fixing a hearing date for objections.
A copy of the order shall be published at least once a week
for 3 consecutive weeks in a newspaper of general
circulation, or if there is no newspaper in the city or
municipality of the principal office, posting for 3 consecutive
weeks in 3 public places is sufficient.
Objections must be filed no less than 30 days nor more
than 60 days after the entry of the Order.
After the expiration of the time to file objections, a hearing
shall be conducted upon prior 5 day notice to hear the
objections.
Judgment shall be rendered dissolving the corporation and
directing the disposition of assets. The judgment may
include appointment of a receiver.
As long as 2/3 vote is obtained, no member/ stockholder
can prevent such dissolution unless the majority
stockholders acted in bad faith. The latter may be held
liable for damages. (Campos)
By shortening of corporate term
A voluntary dissolution may be effected by amending the
AOI. Upon approval of the amended AOI or the expiration of
the shortened term, as the case may be, the corporation
shall be deemed dissolved without any further proceedings.
A publication of notice of dissolution is required and cannot
be dispensed with by alleging that it was not required in
Section 120 and that no creditors will be prejudiced by its
dissolution (SEC Opinion, August 30, 1988)
SEC Opinion No. 06-20, March 13, 2006:
(1) If the shortened term expires before the SEC approval-
the corporation will be dissolved upon the SEC approval
(2) If the shortened term expires after the SEC approval -
the corporation will be dissolved upon the expiration of
the shortened term
According to Campos:
(1) If SEC fails to act within 6 months from filing of the
amended AOI and shortened term expires after the 6-
month period - the corporation will be dissolved upon
the expiration of the shortened term.
(2) If SEC fails to act within 6 months from filing of the
amended AOI and shortened term expires before the 6-
month period- the corporation will be dissolved at the
end of the 6-month period.
INVOLUNTARY
By expiration of corporate term
Once the period expires, the corporation is automatically
dissolved without any other proceeding and it cannot
thereafter be considered a de facto corporation.
Failure to organize and commence business within 2 years
from incorporation
Failure to formally organize and commence the transaction
of its business or construction of its works within two years -
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its corporate powers shall cease and the corporation shall
be deemed dissolved (Sec. 22).
According to Campos, dissolution in this case is automatic.
However, a contrary view states: Since there is a defense
available to the corporation, that is, if its failure to organize
and commence its business is due to causes beyond the
control of the corporation as may be determined by the
SEC, therefore, the dissolution is not automatic.
Transacting business implies a continuity of acts or dealings
in the accomplishment of the purpose for which the
corporation was formed (Mentholatum v. Mangaliman, 1946)
Formal organization includes not only the adoption of the
by-laws but also the establishment of the body which will
administer the affairs of the corporation and exercise its
powers.
By-laws should be adopted within one month of receipt of
official notice of the issuance of the certificate of
incorporation, otherwise the certificate may be suspended
or revoked (PD 902-A, Sec. 6 (i)(5))
Failure to operate for at least 5 consecutive years after
commencement of business - ground for suspension or
revocation of its corporate franchise or certificate of
incorporation.
Note: Dissolution in this case is not automatic. (Campos)
The corporation may show that the failure to commence its
business or to continuously operate is due to causes beyond
its control (Sec. 22).
Legislative dissolution
The inherent power of Congress to make laws carries with it
the power to amend or repeal them. Involuntary corporate
dissolution may be effected through the amendment or
repeal of the Code. (implied from Section 145, De Leon)
The limitations on the power to dissolve corporations by
legislative enactment are as follows:
(1) Under the Constitution, the amendment, alteration, or
repeal of the corporate franchise of a public utility shall
be made only “when the common good so requires”;
(2) Under Section 145 of the Code, it is provided that: “No
right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers,
nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part
thereof”;
(3) While Congress may provide for the dissolution of a
corporation, it cannot impair the obligation of existing
contracts between the corporation and third persons, or
take away the vested rights of its creditors. (De Leon)
Dissolution by the SEC on grounds under existing laws
A corporation may be dissolved by the SEC, upon a verified
complaint and after proper notice and hearing, on the
following grounds (Sec. 6, par. i, PD 902-A):
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(1) Fraud in procuring its certificate of registration
(2) Serious misrepresentation as to what the corporation
can or is doing to the great prejudice of or damage to
the general public
(3) Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which
would amount to a grave violation of its franchise
(4) Continuous inoperation for a period of at least five years
(5) Failure to file by-laws within the required period
(6) Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
period
(7) Other grounds
(a) Violation by the corporation of any provision of the
Corporation Code (Sec. 144 BP 68)
(b) In case of a deadlock in a close corporation, and the SEC
deems it proper to order the dissolution of the
corporation as the only practical solution to the dispute
(Sec. 104 BP 68)
METHODS OF LIQUIDATION
Liquidation is the process by which all the assets of the
corporation are converted into liquid assets (cash) in order
to facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the
stockholders. It is a proceeding in rem.
BY THE CORPORATION ITSELF
Under Section 122 of the Corporation Code, a corporation
whose corporate existence is terminated in any manner
continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits
by and against it and to enable it to settle and close its
affairs, culminating in the disposition and distribution of its
remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that
period.
The termination of the life of a corporate entity does not by
itself cause the extinction or diminution of the rights and
liabilities of such entity. If the three-year extended life has
expired without a trustee or receiver having been expressly
designated by the corporation, within that period, the board
of directors (or trustees) itself, may be permitted to so
continue as "trustees" by legal implication to complete the
corporate liquidation. (Pepsi-Cola Products Philippines, Inc.
v. Court of Appeals, G.R. No. 145855, November 24, 2004)
CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD
From and after any such conveyance by the corporation of
its property in trust for the benefit of its
SH/members/creditors and others in interest, all interest
which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other
persons in interest.
The trustee (of a dissolved corporation) may commence a
suit which can proceed to final judgment even beyond the
three-year period (of liquidation) . . . , no reason can be
conceived why a suit already commenced by the corporation
itself during its existence, not by a mere trustee who, by
fiction, merely continues the legal personality of the
dissolved corporation, should not be accorded similar
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treatment — to proceed to final judgment and execution
thereof. (Reburiano v. Court of Appeals, G.R. No. 102965,
January 21, 1999)
Unless the trusteeship is limited in its duration by the deed of
trust, there is no time limit within which the trustee must
finish liquidation. (Board of Liquidators v Kalaw G.R. No. L-
18805, August 14, 1967)
BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER
However, the mere appointment of a receiver, without
anything more does not result in the dissolution of the
corporation nor bar it from the existence of its corporate
rights (Leyte Asphalt & Mineral Oil Co. Ltd., v. Block Johnston
&Breenbrawn, 1928)
Upon five (5) day's notice, given after the date on which the
right to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any
issue made by the objections filed; and if no such objection
is sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires,
and may appoint a receiver to collect such assets and pay
the debts of the corporation (Sec. 119)
LIQUIDATION AFTER THREE YEARS
Q: What is the difference between liquidation and
Rehabilitation?
A: Liquidation is the winding up of a corporation so that
assets are distributed to those entitled to receive them. It is
the process of reducing assets to cash, discharging
liabilities and dividing surplus or loss. On the other hand,
rehabilitation contemplates a continuance of corporate life
and activities in an effort to restore and reinstate the
corporation to its former position of successful operation
and solvency. Both cannot be undertaken at the same time.
(Phil. Veterans Bank v. Employees Union, 2001)
If full liquidation can only be effected after the 3-year period
and there is no trustee, the directors may be permitted to
complete the liquidation by continuing as trustees by legal
implication (Rebuirano v CA, 301 SCRA 342, January 21,
1999)
A corporation’s board of directors is not rendered functus
officio by its dissolution. Since Section 122 allows a
corporation to continue its existence for a limited purpose,
necessarily there must be a board that will continue acting
for and on behalf of the dissolved corporation for that
purpose. (Aguirre vs. FQB+, Inc. G.R. No. 170770. January 9,
2013)
Other Corporations
CLOSE CORPORATIONS
A close corporation is one whose articles of incorporation
provide that:
(1) All the corporation's issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more
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than a specified number of persons, not exceeding
twenty (20);
(2) All the issued stock of all classes shall be subject to one
or more specified restrictions on transfer permitted by
this Title; and
(3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class
(Sec. 96).
Notes: A corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock
or voting rights is owned or controlled by another
corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation,
except mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational
institutions and corporations declared to be vested with
public interest.
The AOI must state that the number of stockholders shall
not exceed 20.
The AOI must contain restriction on the transfer of issued
stocks (which must appear in the AOI, by-laws and
certificate of stock)
General rule: Free transferability of shares - Shares of stock
so issued are personal property and may be transferred
Exception: In close corporations: Considering the special
circumstances attending a close corporation (e.g. formed by
persons who know each other well, thus they would want to
choose the persons who will be allowed in their group), it is
justifiable and even imperative for its stockholders to
protect themselves from future conflicts by placing
restrictions on the right of each one of them to transfer his
shares to an outsider.
Restriction on the transfer must NOT be more onerous than
granting the existing SH or corporation the option to
purchase the shares (Right of First Refusal).
The stocks cannot be listed in the stock exchange nor be
publicly offered.
CHARACTERISTICS OF A CLOSE CORPORATION
The stockholders themselves can directly manage the
corporation and perform the functions of directors without
need of election (Sec. 97):
(1) When they manage, stockholders are liable as directors;
(2) There is no need to call a meeting to elect directors;
(3) The stockholders are liable for tort.
VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES
Validity of Restrictions (Sec. 98)
Restrictions must appear in the articles of incorporation and
in the by-laws as well as in the certificate of stock; otherwise,
the same shall not be binding on any purchaser thereof in
good faith.
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Restrictions shall not be more onerous than granting the
existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with
such reasonable terms, conditions or period stated therein.
After expiration of said period and upon failure of the
existing stockholders or the corporation to purchase said
shares, the transferring stockholder may sell his shares to
any third person.
Presumptions (Sec. 99)
(1) If the stock certificate CONSPICUOUSLY shows the
restriction, the purchaser or transferee is
CONCLUSIVELY presumed to have notice of the
restriction, provided this appears in the AOI.
(2) Where a conclusive presumption of notice arises, the
corporation may, at its option, refuse to register the
transfer, unless
(a) all the stockholders have consented to the transfer, or
(b) the AOI has been properly amended to remove the
restriction.
(3) If it appears in the certificate, but NOT
CONSPICUOUSLY, then although he may be presumed
to have notice of the restriction, he can prove the
contrary.
ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING CONDITIONS
If stock of a close corporation is issued or transferred to any
person who is not entitled under any provision of the articles
of incorporation to be a holder of record of its stock, and if
the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have notice
of the fact of his ineligibility to be a stockholder.
If the articles of incorporation of a close corporation states
the number of persons, not exceeding twenty (20), who are
entitled to be holders of record of its stock, and if the
certificate for such stock conspicuously states such number,
and if the issuance or transfer of stock to any person would
cause the stock to be held by more than such number of
persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this
fact.
If a stock certificate of any close corporation conspicuously
shows a restriction on transfer of stock of the corporation,
the transferee of the stock is conclusively presumed to have
notice of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
Whenever any person to whom stock of a close corporation
has been issued or transferred has, or is conclusively
presumed under this section to have, notice either (a) that
he is a person not eligible to be a holder of stock of the
corporation, or (b) that transfer of stock to him would cause
the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation
to hold stock of the corporation, or (c) that the transfer of
stock is in violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the transfer of
stock in the name of the transferee.
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The provisions of subsection (4) shall not applicable if the
transfer of stock, though contrary to subsections (1), (2) of
(3), has been consented to by all the stockholders of the
close corporation, or if the close corporation has amended
its articles of incorporation in accordance with this Title.
The term "transfer", as used in this section, is not limited to
a transfer for value.
The provisions of this section shall not impair any right
which the transferee may have to rescind the transfer or to
recover under any applicable warranty, express or implied
(Sec. 99)
WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD
When unnecessary
Any action by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
(1) Before or after such action is taken, written consent
thereto is signed by all the directors; or
(2) All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in
writing; or
(3) The directors are accustomed to take informal action
with the express or implied acquiescence of all the
stockholders; or
(4) All the directors have express or implied knowledge of
the action in question and none of them makes prompt
objection thereto in writing (Sec. 101)
When improperly held
When a director’s meeting is held without proper call or
notice, an action taken therein within the corporate powers
is deemed ratified by a director who failed to attend.
UNLESS he promptly files his written objection with the
secretary of the corporation after having knowledge thereof
(Sec. 101)
PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in close corporations
shall extend to all stock to be issued, including reissuance of
treasury shares, whether for money, property or personal
services, or in payment of corporate debts, UNLESS the
articles of incorporation provide otherwise (Sec. 102).
AMENDMENT OF ARTICLES OF INCORPORATION
Amendment to the AOI which seeks to:
(1) delete or remove any provision required to be contained
in the AOI of Close Corporations (under the Title on
Close Corporations); or
(2) reduce a quorum or voting requirement stated in said
AOI
Requires the affirmative vote of at least 2/3 of the
outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be
specifically provided in the AOI at a meeting duly called.
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DEADLOCKS (2) Cancel, alter or enjoin any resolution of the corporation

Requisites
(1) The directors or stockholders are so divided respecting
the management of the corporation's business and
affairs
(2) The votes required for any corporate action cannot be
obtained that the business and affairs of the corporation
can no longer be conducted to the advantage of the
stockholders generally
Powers of the SEC in case of deadlock in close corporations
(1) Cancel or alter any provision in the articles of
incorporation or by-laws
(3) Direct or prohibit any act of the corporation
(4) Require the purchase at their fair value of shares of any
stockholder either by any stockholder or by the
corporation regardless of the availability of unrestricted
retained earnings.
(5) Appoint a provisional director
(6) Dissolve the corporation
Granting such other relief as the circumstances may
warrant.

Close Corporations Regular Corporations

Management/board authority
There can be classification of directors into one or more classes,
each of whom may be voted for and elected solely by a There are no classification of board of directors
particular class of stock; and
The articles of incorporation 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. So long as this provision continues in effect: Corporate Powers devolved upon board of directors whose
powers are executed by officers. Cannot provide that it be
No meeting of stockholders need be called to elect directors. managed by stockholders

Unless the context clearly requires otherwise, the stockholders Board of directors must be elected in a stockholders meeting
of the corporation shall be deemed to be directors for the
purpose of applying the provisions of this Code.
Stockholders of a corporation are separate and distinct from
The stockholders of the corporation shall be subject to all directors
liabilities of directors.
The articles of incorporation may likewise provide that all
officers or employees or that specified officers or employees Officers must be elected by the Board of Directors
shall be elected or appointed by the stockholders, instead of by
the board of directors.
Meetings
Unless the by-laws provide otherwise, any action by the The directors or trustees shall not act individually nor
directors of a close corporation without a meeting shall separately but as a body in a lawful meeting. They will act only
nevertheless be deemed valid if: after discussion and deliberation of matters before them.
Contracts entered into without a formal board resolution does
1. Before or after such action is taken, written consent not bind the corporation except when ratified or when majority
thereto is signed by all the directors; or of the board has knowledge of the contract and the contract
benefited the corporation.
2. All the stockholders have actual or implied knowledge of
the action and make no prompt objection thereto in Absence of a prompt objection in writing does not ratify acts
writing; or done by directors without a valid meeting. There must be
express or implied ratification.
3. The directors are accustomed to take informal action with
the express or implied acquiescence of all the Express ratification may consist of a Board Resolution to that
stockholders; or effect

4. All the directors have express or implied knowledge of the Implied ratification may consist of acceptance of benefits from
action in question and none of them makes prompt said unauthorized act while having knowledge of said act
objection thereto in writing.
Failure to give notice would render a meeting voidable.
If a director's meeting is held without proper call or notice, an

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UP COLLEGE OF LAW CORPORATION CODE BAR OPERATIONS COMMISSION

action taken therein within the corporate powers is deemed Attendance to a meeting despite want of notice will be deemed
ratified by a director who failed to attend, unless he promptly implied waiver
files his written objection with the secretary of the corporation
after having knowledge thereof. All proceedings had and any business transacted at any
meeting of the stockholders or members, if within the powers or
authority of the corporation, shall be valid even if the meeting
be improperly held or called, provided all the stockholders or
members of the corporation are present or duly represented at
the meeting. (§51)
Voting/quorum
No share may be deprived of voting rights, except Preferred or
Redeemable shares, unless otherwise provided by the Code

The AOI may provide for a classification of directors into one or There shall always be a class/series of shares which have a
more classes, each of which may be voted for and elected solely COMPLETE VOTING RIGHTS
by a particular class of stock.
EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY
OTHER SHARE, except as otherwise provided in the AOI
For Board of directors, the by-laws or AOI can provide for a
The AOI may provide for a greater quorum or voting greater majority in quorum
requirements in meetings of stockholders or directors than
those provided in this Code. For stockholders, the AOI can provide for a different percentage
in quorum
Pre-emptive right
Limitations on the exercise of pre-emptive right:
a. Such pre-emptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings or
The pre-emptive right of stockholders in close corporations minimum stock ownership by the public;
shall extend to all stock to be issued, including reissuance of b. Not extend to shares to be issued in good faith with the
treasury shares, whether for money, property or personal approval of the stockholders representing two-thirds (2/3)
services, or in payment of corporate debts, unless the articles of of the outstanding capital stock, in exchange for property
incorporation provide otherwise. needed for corporate purposes or in payment of a
previously contracted debt
c. Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
Transferability
Restrictions on the right to transfer shares must appear in the
AOI and in the by-laws as well as in the certificate of stock
otherwise the same shall not be binding on any purchaser Restrictions on the right to transfer not allowed
thereof in good faith
Withdrawal right
Any stockholder of a close corporation may, for any reason, Stockholders may require the corporation to buy-back their
compel the said corporation to purchase his shares at their fair shares at fair value when the Corporation has unrestricted
value, which shall not be less than their par or issued value, Retained Earnings:
when the corporation has sufficient assets in its books to cover a. In case any amendment to the articles of incorporation
its debts and liabilities exclusive of capital stock which has the effect of:
i. changing or restricting the rights of any
Any stockholder of a close corporation may, by written petition stockholder or class of shares, or
to the SEC, compel the dissolution of such corporation ii. authorizing preferences in any respect superior
whenever: to those of outstanding shares of any class, or
a. Any of acts of the directors, officers or those in control iii. extending or shortening the term of corporate
of the corporation is illegal, or fraudulent, or existence
dishonest, or oppressive or unfairly prejudicial to the b. In case of sale, lease, exchange, transfer, mortgage,
corporation or any stockholder, or pledge or other disposition of all or substantially all of the
b. Corporate assets are being misapplied or wasted. corporate property and assets as provided in the Code; and
c. In case of merger or consolidation
d. Extension or shortening of the term of the corporation
(§37)

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NON-STOCK CORPORATIONS
DEFINITION
One where no part of its income is distributable as
dividends to its members, trustees, or officers, subject to the
provisions of this Code on dissolution. (Sec.87)
PURPOSES
(1) Charitable
(2) Religious
(3) Educational
(4) Professional
(5) Cultural
(6) Fraternal
(7) Literary
(8) Scientific
(9) Social
(10) Civic services
(11) Similar purposes, such as chambers or combinations
trade, industry or agriculture
TREATMENT OF PROFITS
Any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized. (Sec.
nd
87,2 sentence)
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Order of distribution
(1) All its creditors shall be paid.
(2) Assets held subject to return on dissolution shall be
delivered back to the givers.
(3) Assets held for charitable, religious purposes, etc.,
without a condition for their return on dissolution, shall
be conveyed to one or more organizations engaged in
similar activities as dissolved corporation
(4) All other assets shall be distributed to members, as
provided in the AOI or by-laws (Sec. 94)
Procedure for the plan for distribution
(1) Board of Trustees, by majority vote in a resolution, shall
adopt a plan for distribution of the assets of the
corporation
(2) Written notice for a meeting must be sent to all
members entitled to vote, stating the time and place of
such meeting and the purpose thereof
(3) At such meeting, the plan must be approved by 2/3
votes of the members having the right to vote, who are
present or represented by proxy (Villanueva)
CORPORATION CODE BAR OPERATIONS COMMISSION
e. Diversion of funds of corporation from primary purpose to
secondary purpose (§41)
The corporation may buy-back shares of stockholders subject to
the following limitations (Treasury shares):
a. There must be unrestricted retained earnings
b. Must be for a legitimate purpose
RELIGIOUS CORPORATIONS
CORPORATION SOLE (SEC. 110)
A special form of corporation, usually associated with clergy
and consists of one person only and his successors, who are
incorporated by law to give some legal capacities and
advantages.
A registered corporation sole can acquire land if its
members constitute at least 60% Filipinos (SEC Opinion, 8
August 1994).
NATIONALITY
A corporation sole does not have any nationality but for
purposes of applying our nationalizations laws, nationality is
determined by the nationality of the members (Roman
Catholic Apostolic Church v. Land Registration Commission,
1957).
RELIGIOUS SOCIETIES
Non-stock corporation formed by a religious society, group,
diocese, synod, or district of any religious denomination,
sect, or church after getting the approval of 2/3 of its
members.
FOREIGN CORPORATIONS
Foreign corporations are those formed, organized, or
existing under any laws other than those of the Philippines
and whose laws allow Filipino citizens and corporations to
do business in its own country or state (Sec. 123).
BASES OF AUTHORITY OVER FOREIGN CORPORATIONS
Consent
As a rule, a foreign corporation can have no legal existence
or status beyond the bounds of the State or sovereignty by
which it is created or incorporated and organized. It exists
only in contemplation of law and by force of the law and
where that law ceases to operate, the corporation can have
no existence. This principle, however, does not prevent a
corporation from acting in another State or country with the
latter’s express or implied consent. This is the “consent
doctrine” which is provided in Sections 125 and 126. But
every power which a corporation exercises as such in
another State depends for its validity upon the laws of the
sovereignty in which it is exercised. A corporation can
exercise none of the functions and privileges conferred by its
charter in another State or country except by the comity and
consent of such State or country. (De Leon)
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Doctrine of “Doing Business” (relate to definition under the
Foreign Investments Act, R.A. No. 7042)
Tests of “Doing Business in the Philippines”
(Asked in ‘98 and ‘02)
(1) Twin Characterization Test
(a) Under the Continuity Test, doing business implies a
continuity of commercial dealings and arrangements, or
performance of acts normally incidental to the purpose
and object of the organization.
(b) Under the Substance Test, a foreign corporation is doing
business in the country if it is continuing the body or
substance of the enterprise of business for which it was
organized (Mentholatum v. Mangaliman, 1941)
(2) Contract test – A foreign corporation is doing business in
the Philippines if the contracts entered into by the
foreign corporation or by an agent acting under the
control and direction of the foreign corporation are
consummated in the Philippines (Pacific Vegetable Oil v.
Singson, 1955).
“Doing Business” Under the Foreign investment Act of 1991
(Sec. 3(d), RA 7042) (Asked in ‘98 and ‘02)
Doing Business
(1) Soliciting orders, service contracts, or opening offices;
(2) Appointing representatives, distributors domiciled in the
Philippines or who stay for a period or periods totaling
180 days or more;
(3) Participating in the management, supervision, or control
of any domestic business, firm, entity, or corporation in
the Philippines;
(4) Any act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to some
extent the performance of acts or works or the exercise
of some functions, normally incident to and in
progressive prosecution of the purpose and object of its
organization.
Not Doing Business
(1) Mere investment as shareholder and exercise of rights
as investor;
(2) Having a nominee director or officer to represent its
interest in the corporation;
(3) Appointing a representative or distributor which
transacts business in its own name and for its own
account.
Jurisprudential Rules on “Not Doing Business in the
Philippines”
(1) Products manufactured off-shore and returned back to
foreign corporation (Agilent Tech. Singapore Ltd. v.
Integrated Silicon Tech. Phils. Corp., 2004)
(2) Single isolated transaction (Marshall-Wells Co. v. Henry
Eiser& Co, 1924). Multiple transactions are still
considered a single transaction where there are
constantly failed attempts in complying with the
contract by one of the contracting parties (Antam
Consolidated v. CA, 1986).
(3) Trademark protection; foreign corporations not doing
business are merely protecting their property rights
(General Garments v. Director of Patents, 1971).
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(4) A foreign firm which does business through middlemen
acting on their own namesshall not be deemed doing
business in the Philippines.(Le Chemise Lacoste v.
Fernandez, 1984).
NECESSITY OF A LICENSE TO DO BUSINESS
Requisites for issuance of a license
(1) The foreign corporation should file a copy of its articles
of incorporation and by-laws, and a verified application
(See Sec. 125) accompanied by the following:
(a) Name and address of its designated resident agent who
will receive summons and notices for the corporation; a
special power of attorney should also be submitted for
such purpose
(b) An agreement that if it ceases to transact business or if
there is no more resident agent, summons shall then be
served through the SEC
(c) Oath of Reciprocity stating that the foreign corporation’s
country allows Filipino citizens and corporations to do
business in said country
(2) Within 60 days from issuance of license, the corporation
should deposit at least P100,000 (cash, property, bond)
for the benefit of creditors subject to further deposit
every six months (See Sec. 126).
Resident agent
Resident agent is an individual, who must be of good moral
character and of sound financial standing, residing in the
Philippines, or a domestic corporation lawfully transacting
business in the Philippines, designated in a written power of
attorney by a foreign corporation authorized to do business
in the Philippines, on whom any summons and other legal
processes may be served in all actions or other legal
proceedings against the foreign corporation (Sec. 127-128).
PERSONALITY TO SUE
A foreign corporation transacting business in the
Philippines is required to secure a license to have the
personality to sue before, or intervene in, any court or
administrative proceeding. (Campos; Sec. 133)
The principles regarding the right of a foreign corporation to
bring suit in Philippine courts may thus be condensed in
four statements:
(1) if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine
courts (Sec. 133, Corporation Code);
(2) if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action
entirely independent of any business transaction
(Eastboard Navigation, Ltd. v. Juan Ysmael & Company,
Inc., 102 Phil. 1, 1957);
(3) if a foreign corporation does business in the Philippines
without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate
personality in a suit brought before Philippine courts
(Merrill Lynch Futures v. Court of Appeals, G.R. No. 97816,
24 July 1992, 211 SCRA 824); and
(4) if a foreign corporation does business in the Philippines
with the required license, it can sue before Philippine
UP COLLEGE OF LAW CORPORATION CODE
courts on any transaction. (Agilent Technologies
Singapore v. Integrated Silicon Technologies, 2004)
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation whether or not doing business in the
Philippines may be sued for acts done against persons in the
Philippines.
Indeed if a foreign corporation, not engaged in business in
the Philippines, is not barred from seeking redress from
courts in the Philippines, a fortiori, that same corporation
cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the
Philippines. (Facilities Management Corporation v. De La
Osa, 1979)
INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS
MAY BE ALLOWED TO SUE ISOLATED TRANSACTIONS
(1) Isolated transactions, i.e. not ‘doing business’ in the
Philippines, (Sec. 133, Corporation Code);
(2) Action to protect good name, goodwill, and reputation
of a foreign corporation;
(3) The subject contracts provide that Philippine courts will
be the venue to controversies;
(4) A license subsequently granted enables the foreign
corporation to sue on contracts executed before the
grant of the license;
(5) Recovery of misdelivered property;
(6) Where the unlicensed foreign corporation has a
domestic corporation.
(7) When the Philippine citizen or entity is estopped from
challenging the foreign corporation’s personality to sue
(Merrill Lynch Futures v. Court of Appeals, G.R. No. 97816,
24 July 1992, 211 SCRA 824)
Status Consequence
Doing Business in the PH, May be sued an can be sued
WITH a license
Doing Business in the PH, Cannot sue, but may be sued
WITHOUT a license in the PH
NOT doing business in the May sue;
PH, on isolated transactions may be sued (Facilities
Management v. Dela Osa 89
SCRA 131)
GROUNDS FOR REVOCATION OF LICENSE
Under the Corporation Code
(1) Failure to file its annual report or pay any fees as
required by this Code;
(2) Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
(3) Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as required by
this Title;
(4) Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment
to its articles of incorporation or by laws or of any
articles of merger or consolidation within the time
prescribed by this Title;
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(5) A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
(6) Failure to pay any and all taxes, imposts, assessments
or penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions;
(7) Transacting business in the Philippines outside of the
purpose or purposes for which such corporation is
authorized under its license;
(8) Transacting business in the Philippines as agent of or
acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the Philippines;
or
(9) Any other ground as would render it unfit to transact
business in the Philippines (Sec. 134)
Under special laws
Insurance Code
The Insurance Commissioner is authorized to suspend or
revoke all certificates of authority granted to an insurance
company, whether domestic or foreign, when:
(1) it is in unsound condition; or
(2) it has failed to comply with the provisions of law or
regulations obligatory upon it; or
(3) its condition or method of business is such as to render
its proceedings hazardous to the public or to its
policyholders; or
(4) its paid-up capital stock, in the case of a foreign
company, is impaired or deficient, or that the margin of
solvency required of such company is deficient (Sec. 247,
Insurance Code)
General Banking Act
The Monetary Board may revoke the license to transact
business in the Philippines of any foreign bank, if it finds
that:
(1) the foreign bank is insolvent; or
(2) in imminent danger thereof; or
(3) its continuance in business will involve probable loss to
those transacting business with it.
Mergers and Consolidations
DEFINITION AND CONCEPT
Merger – a corporation absorbs the other and remains in
existence while the others are dissolved. (Sec.76)
One of the constituent corporations remains as an existing
juridical person, whereas the other corporation shall cease
to exist. Merger is the disappearance of one of the
corporations [generally by amending the articles of
incorporation and shortening its term of existence (Sec.40)]
with the other corporation acquiring all the assets, rights of
action, and assuming all the liabilities of the disappearing
corporation.
Consolidation – a new corporation is created, and
consolidating corporations are extinguished (Sec.76)
UP COLLEGE OF LAW CORPORATION CODE
If there is consolidation, there will be disappearance of both
the constituent corporations with the emergence of a new
corporate entity which shall obtain all the assets of the
disappearing corporations, and likewise shall assume all
their liabilities.
CONSTITUENT VS. CONSOLIDATED CORPORATION
Constituent corporations – the parties to a merger or
consolidation
Consolidated corporation – the new single corporation
created through consolidation.
Surviving corporation – one of the constituent corporations
which remain in existence after the merger
PLAN OF MERGER OR CONSOLIDATION (Sec. 76)
Each of the constituent corporations must draw up a Plan of
Merger or Consolidation which shall set forth:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
(3) Statement of changes, if any, in the present articles of
the surviving corporation to be formed in the case of
merger; and with respect to the consolidated
corporation in case of consolidation
ARTICLES OF MERGER OR CONSOLIDATION
Each of the constituent corporation shall execute Articles of
Merger or Consolidation signed by the president/vice-
president, and certified by the secretary/assistant secretary
setting forth:
(1) Plan of merger or consolidation;
(2) For stock corporation, the number of shares
outstanding; for non-stock, the number of members;
(3) As to each corporation, number of shares or members
voting for and against such plan respectively.
The Articles of Merger or Consolidation:
(1) take the place of the Articles of Incorporationof the
consolidated corporation; or
(2) amend the Articles of Incorporation of the surviving
corporation.
PROCEDURE
(1) The board of each corporation shall draw up a plan of
merger or consolidation.
(2) The plan of merger or consolidation shall be approved
by majority vote of each of the board of the concerned
corporations at separate meetings, and a vote of 2/3 of
the members or of stockholders representing 2/3 of the
outstanding capital stock. Holders of non-voting shares
or non-voting members are entitled to vote on the plan
(Sec. 6, par. 6(6))
Any amendment to the plan must be approved by the
majority vote of the board members or trustees of the
constituent corporations and affirmative vote of 2/3 of
the outstanding capital stock or members.
(3) Articles of Merger or Articles of Consolidation shall be
executed by each of the constituent corporations.
(4) Submission of Four (4) copies of the Articles of Merger
or Articles of Consolidation to the SEC for approval.
Mergers and consolidations of corporations governed by
special laws requires a recommendation from the
appropriate government agency (Sec. 79 (1))
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(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two (2) weeks before.
(6) Issuance of certificate of merger or consolidation.
Procedure under Sec. 77:
(1) Approval by majority vote of each of the board of
directors or trustees of the constituent corporations of
the plan of merger or consolidation.
(2) Approval by the stockholders or members of each of
such corporations. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members
in the case of non-stock corporations shall be necessary
for the approval of such plan
(3) Notice of such meetings shall be given to all
stockholders or members of the respective corporations,
at least two (2) weeks prior to the date of the meeting,
either personally or by registered mail. Said notice shall
state the purpose of the meeting and shall include a
copy or a summary of the plan of merger or
consolidation.
(4) Any dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with the Code.
Provided, that if after the approval by the stockholders
of such plan, the board of directors decides to abandon
the plan, the appraisal right shall be extinguished.
(5) Amendment to the plan of merger or consolidation may
be made by approved of the majority vote of the
respective boards of directors or trustees of all the
constituent corporations and ratified by the affirmative
vote of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of two-thirds
(2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment,
shall be considered as the agreement of merger or
consolidation.
EFFECTIVITY
Upon issuance of the certificate of merger or consolidation,
such merger or consolidation shall become effective (Sec.
79).
Merger or consolidation does not become effective by mere
agreement of the constituent corporations. The approval of
the SEC is required. (PNB v. Andrada Electric & Engr. Co.,
Inc., 2002)
NothwithstandingSection79, parties may stipulate a specific
effective date of merger (or consolidation) where no third
party will be prejudiced (SEC Opinion No. 09-13, July 1,
2009).
LIMITATIONS
In the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust
companies, insurance companies, public utilities,
educational institutions and other special corporations
governed by special laws, the favorable recommendation of
the appropriate government agency shall first be obtained
(Sec. 79)
UP COLLEGE OF LAW CORPORATION CODE BAR OPERATIONS COMMISSION

EFFECTS (Sec. 80)

(1) The constituent corporations shall become a single
corporation.
(2) The separate existence of the constituents shall cease,
except that of the surviving or the consolidated
corporation. The absorbed or constituent corporations
are ipso facto dissolved by operation of law (SEC
Opinion, July 16, 1981); there is no liquidation of the
assets of the dissolved corporations (Campos).
(3) The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and powers
and shall be subject to all the duties and liabilities of a
corporation.
(4) The surviving or the consolidated corporation shall
possess all rights, privileges, immunities and franchises
of each constituent corporation and the properties shall
be deemed transferred to and vested in the surviving or
consolidated corporation without further act or deed.
(5) All liabilities of the constituents shall pertain to the
surviving or the consolidated corporation [assumption of
liability is automatic (De Leon; Campos)].
(6) Any claim, action or proceeding pending by or against
any of the constituent corporations may be prosecuted
by or against the surviving or consolidated corporation;
and
(7) The rights of the creditors or lien upon the property of
any of each constituent corporation shall not be
impaired by such merger or consolidation.

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PAGE 112
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State Policy
Purpose. The establishment of a socially conscious, free
market that:
(1) Regulates itself;
(2) Encourage the widest participation of ownership in
enterprises;
(3) Enhance the democratization of wealth;
(4) Promote the development of the capital market;
(5) Protect investors;
(6) Ensure full and fair disclosure about securities;
(7) Minimize if not totally eliminate insider trading and
other fraudulent or manipulative devices and practices
which create distortions in the free market (Sec. 2).
Securities Required
to be Registered
General rule: Securities shall not be sold or offered for sale
or distribution to the public within the Philippines, without a
registration statement duly filed with and approved by the
Commission (Sec. 8.1) [N.B. The Securities Regulation Code
(SRC) regulates public offering within the Philippines.]
Exceptions:
(1) Exempt securities (Sec. 9)
(a) Any security issued or guaranteed by the Government of
the Philippines/ its political subdivision or agency/its
instrumentality/ or any person controlled or supervised
thereby; [N.B. Rationale for the exception: The public does
not need protection from the government itself. The
government will always be solvent to pay its obligations
because of its ability to raise revenues through taxation.]
(b) Any security issued or guaranteed by the government of
any country with which the Philippines maintains
diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided,
That the Commission may require compliance with the
form and content for disclosures the Commission may
prescribe; [Rationale for the exception: This is rooted in
comity among nations.]
(c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body; [Rationale: This is not a public offering. Besides,
protection is already afforded by that “proper adjudicatory
body” and additional SEC protection is not necessary.]
(d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of
the Office of the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the Bureau of
Internal Revenue. [Rationale: The issuers are
governmental agencies covered by exception (a) above.
SEC protection would be a duplication.]
(e) Any security issued by a bank except its own shares of
stock (Sec. 9.1) [Rationale: Banks are under the
supervision of the Bangko Sentral. SEC protection is a
duplication.]
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(f) Any class of security with respect to which the SEC finds
that registration is not necessary in the public interest
and for the protection of investors (Sec. 9.2)
Note: The exemption of securities by the SEC must be made
through the issuance of a rule or regulation (Sec. 9.2)
(2) Exempt transactions
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy. [Rationale for exclusion: A
court will presumably not order the sale if the public will
be prejudiced thereby.]
(b) By or for the account of a pledge holder, or mortgagee
or any of a pledge lien holder selling of offering for sale
or delivery in the ordinary course of business and not for
the purpose of avoiding the provision of this Code, to
liquidate a bona fide debt, a security pledged in good
faith as security for such debt. [Rationale: This is not a
voluntary sale contemplated by the SRC.]
(c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s account,
such sale or offer for sale or offer for sale, subscription
or delivery not being made in the course of repeated and
successive transaction of a like character by such owner,
or on his account by such representative and such owner
or representative not being the underwriter of such
security. [Rationale: Isolated and not meant to be an
ongoing public offering.]
(d) The distribution by a corporation actively engaged in the
business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as
a stock dividend or other distribution out of surplus.
[Rationale: The offerees are not the public but
shareholders already familiar with their company.]
(e) The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
[Rationale: Same as (d) above.]
(f) The issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property, when the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a
single sale. [Rationale: This is not a public sale.]
(g) The issue and delivery of any security in exchange for
any other security of the same issuer pursuant to a right
of conversion entitling the holder of the security
surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
from the provision of this Code, and that the security
issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion
fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value of
the security surrendered in such exchange shall be
deemed the price at which the securities issued and
delivered in such exchange are sold. [Rationale: The
SEC has already registered the convertible security and
presumably also passed upon the security to be issued
upon conversion.]
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(h) Broker’s transaction, executed upon customer’s orders,

on any registered Exchange or other trading market. Procedure for Registration
[Rationale: If broker’s transactions are registered each
time, the transactions on the exchange will be unduly of Securities
hampered. Besides, the brokers are subject to a “code of
conduct” protective of the interest of the investors.] (1) Filing of a sworn registration statement with the SEC (Sec.
(i) Subscriptions for shares of the capitals stocks of a 12.1), which:
corporation prior to the incorporation thereof or in (a) Shall include any prospectus required or permitted to be
pursuance of an increase in its authorized capital stocks delivered under Subsections 8.2, 8.3, and 8.4 (Sec. 12.1)
under the Corporation Code, when no expense is
incurred, or no commission, compensation or Chapter III, Sec. 8. Requirement of Registration of Securities
remuneration is paid or given in connection with the sale xxx
or disposition of such securities, and only when the 8.2 The Commission may conditionally approve the
purpose for soliciting, giving or taking of such registration statement under such terms as it may deem
subscription is to comply with the requirements of such necessary.
law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be 8.3 The Commission may specify the terms and conditions
registered and duly incorporated, or its authorized, under which any written communication, including any
capital increase. [Rationale: This is not a public offering. summary prospectus, shall be deemed not to constitute an
Besides, the SEC is involved in the subscription process, as offer for sale under this Section.
a regulator.]
(j) The exchange of securities by the issuer with the existing 8.4. A record of the registration of securities shall be kept in
security holders exclusively, where no commission or Register Securities in which shall be recorded orders entered
other remuneration is paid or given directly or indirectly by the Commission with respect such securities. Such
for soliciting such exchange. [Rationale: This is not a register and all documents or information with the respect to
public offering.] the securities registered therein shall be open to public
(k) The sale of securities by an issuer to fewer than twenty inspection at reasonable hours on business days.
(20) persons in the Philippines during any twelve-month
period. [Rationale: This is not a public offering but a
(b) Shall include the effect of the securities issue on
private placement.]
ownership, on the mix of ownership, especially foreign
(l) The sale of securities to any number of the following
and local ownership (Sec. 12.3)
qualified buyers:
(c) Shall be signed by the issuer’s executive officer, its
(i) Bank;
principal operating officer, its principal financial officer,
(ii) Registered investment house;
its comptroller, its principal accounting officer, its
(iii) Insurance company;
corporate secretary, or persons performing similar
(iv) Pension fund or retirement plan maintained by the
functions accompanied by a duly verified resolution of
Government of the Philippines or any political
the board of directors of the issuer corporation (Sec.
subdivision thereof or manage by a bank or other
12.4)
persons authorized by the Bangko Sentral to engage in
(d) Shall be accompanied by: (a) written consent of the
trust functions;
expert named as having certified any part of the
(v) Investment company or;
registration statement or any document used in
(vi) Such other person as the Commission may rule by
connection therewith; and (b) Where the registration
determine as qualified buyers, on the basis of such
statement shares to be sold by selling shareholders, a
factors as financial sophistication, net worth, knowledge,
written certification by such selling shareholders as to
and experience in financial and business matters, or
the accuracy of any part of the registration statement
amount of assets under management. (Sec. 10.1)
contributed to by such selling shareholders (Sec. 12.4).
[Rationale: These are sophisticated investors that could
fend for themselves.]
(2) Payment to the SEC a fee of not more than one-tenth
(m) Any transaction with respect to which the SEC finds that
(1/10) of one per centum (1%) of the maximum aggregate
registration is not necessary in the public interest and
price at which such securities are proposed to be offered
protection of investors such as by the reason of the small
(Sec. 12.5a)
amount involved or the limited character of the public
offering (Sec. 10.2)
(3) Publication of the notice of the filing of registration
statement. The publication must be in two (2) newspapers
Note: Application for exemption under this Section must be
of general circulation in the Philippines, once a week for
accompanied by: (1) notice of the exemption relied upon; (2)
two (2) consecutive weeks, or in such other manner as the
payment of fee equivalent to 1/10 of 1% of the maximum
Commission by the rule shall prescribe (Sec. 12.5b)
value aggregate price or issued value of the securities.

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(4) Declaration by the SEC whether the registration statement
is effective or rejected, Declaration is made within 45 days
from filing of the registration statement or on such later
date to which the issuer has consented unless applicant
has been allowed to amend the registration statement
under Sec. 14 (Sec. 12.6).
Notes: Grounds for: (1) rejection/revocation of registration
statement and (2) refusal of registration/revocation of
securities thereunder:
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provision of this Code, the rules
promulgate pursuant thereto, or any order of the
Commission of which the issuer has notice in connection
with the offering for which a registration statement has
been filed
(iii) Has been or is engaged or is about to engage in
fraudulent transactions;
(iv) Has made any false or misleading representation of
material facts in any prospectus concerning the issuer or
its securities;
(v) Has failed to comply with any requirements that the
Commission may impose as a condition for registration
of the security for which the registration statement has
been filed; or
(b) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any
untrue statements of a material fact required to be
stated therein or necessary to make the statement
therein not misleading; or
(c) The issuer, any officer, director or controlling person
performing similar functions, or any under writer has
been convicted, by a competent judicial or
administrative body, upon plea of guilty, or otherwise, of
an offense involving moral turpitude and /or fraud or is
enjoined or restrained by the Commission or other
competent or administrative body for violations of
securities, commodities, and other related laws (Sec.
13.1)
(d) If any issuer shall refuse to permit an examination to be
made by the Commission (Sec. 13.3)
Note: A registration statement may be withdrawn by the
issuer only with the consent of the Commission (Sec. 13.6).
(5) Statement under oath by the issuer in all prospectus that
registration requirements have been met and that all
information are true and correct as represented by the
issuer or the one making the statement. Statement under
oath must be made upon effectivity of the registration
statement. (Sec. 12.7)
Prohibitions on fraud, mani-
pulation and insider trading
MANIPULATION OF SECURITY PRICES
It shall be unlawful for any person acting for himself or
through a dealer or broker, directly or indirectly:
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(1) To create a false or misleading appearance of active
trading in any listed security traded in an Exchange of
any other trading market (hereafter referred to purposes
of this Chapter as "Exchange"):
(a) By effecting any transaction in such security which
involves no change in the beneficial ownership thereof;
(b) By entering an order or orders for the purchase or sale of
such security with the knowledge that a simultaneous
order or orders of substantially the same size, time and
price, for the sale or purchase of any such security, has
or will be entered by or for the same or different parties;
or
(c) By performing similar act where there is no change in
beneficial ownership.
(2) To affect, alone or with others, securities or transactions
in securities that:
(a) Raises their price to induce the purchase of a security,
whether of the same or a different class of the same
issuer or of controlling, controlled, or commonly
controlled company by others; or
(b) Creates active trading to induce such a purchase or sale
through manipulative devices such as marking the
close, painting the tape, squeezing the float, hype and
dump, boiler room operations and such other similar
devices.
(3) To circulate or disseminate information that the price
of any security listed in an Exchange will or is likely to
rise or fall because of manipulative market operations
of any one or more persons conducted for the purpose
of raising or depressing the price of the security for the
purpose of inducing the purpose of sale of such
security.
(4) To make false or misleading statement with respect to
any material fact, which he knew or had reasonable
ground to believe was so false or misleading, for the
purpose of inducing the purchase or sale of any
security listed or traded in an Exchange.
(5) To effect, either alone or others, any series of
transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose of
pegging, fixing or stabilizing the price of such security;
unless otherwise allowed by this Code or by rules of the
Commission (Sec. 24.1)
SHORT SALES
[N.B. The SEC is regulating transactions wherein the seller
does not yet own or have the securities he is selling. He is
required to show that he has made arrangements to effect
delivery of such securities on settlement date; otherwise, the
sale will not be allowed.]
(1) No person shall use or employ, in connection with the
purchase or sale of any security any manipulative or
deceptive device or contrivance.
(2) No short sale shall be effected nor any stop-loss order
be executed in connection with the purchase or sale of
any security except if allowed by the SEC (Sec. 24.2)
Note: The SEC may allow certain acts or transactions under
Sec. 24 (on Manipulation of Security Prices and Short
UP COLLEGE OF LAW SECURITIES REGULATION CODE
Sales), for public interest and protection of investors (Sec.
24.3)
FRAUDULENT TRANSACTIONS
It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of any securities to:
(1) Employ any device, scheme, or artifice to defraud; (Sec.
26.1)
(2) Obtain money or property by means of any untrue
statement of a material fact of any omission to state a
material fact necessary in order to make the statements
made, in the light of the circumstances under which
they were made, not misleading (Sec. 26.2)
(3) Engage in any act, transaction, practice or course of
business which operates or would operate as a fraud or
deceit upon any person (Sec. 26.3)
INSIDER TRADING
[N.B. What is sought to be addressed here is the asymmetry
in information about a “public company” (such as a
company listed on the Philippine Stock Exchange) between
insiders and outsiders. Insiders could have material
information not yet known to the public about the company,
and they might use this information to benefit themselves
at the expense of the outsiders or the public. Therefore, they
must not trade in the shares of the company pending the
disclosure of such information to the public.]
Notes:
(1) An insider means:
(a) The issuer;
(b) A director or officer (or any person performing similar
functions) of, or a person controlling the issuer; gives or
gave him access to material information about the
issuer or the security that is not generally available to
the public;
(c) A government employee, director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
(d) A person who learns such information by a
communication from any foregoing insiders (Sec. 3.8)
(2) Material non-public information means:
(a) It has not been generally disclosed to the public and
would likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or
(b) Would be considered by a reasonable person important
under the circumstances in determining his course of
action whether to buy, sell or hold a security (Sec. 27.2)
It shall be unlawful for an insider:
(1) To sell or buy a security of the issuer, while in possession
of material information with respect to the issuer or the
security that is not generally available to the public,
unless:
(a) The insider proves that the information was not gained
from such relationship; or
(b) If the other party selling to or buying from the insider (or
his agent) is identified, the insider proves:
(i) That he disclosed the information to the other party, or
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(ii) That he had reason to believe that the other party
otherwise is also in possession of the information (Sec.
27.1)
Note: Presumption that purchase or sale is effected while in
possession of material non-public information arises:
(1) If the purchase or sale is transacted after such
information came into existence but prior to
dissemination of such information to the public; and
(2) The lapse of a reasonable time for market to absorb
such information.
Presumption may be rebutted by showing of purchaser’s or
seller’s awareness of the material non-public information at
the time of purchase or sale (Sec. 27.1)
(2) To communicate material nonpublic information about
the issuer or the security to any person who, by virtue of
the communication, becomes an insider where the insider
communicating the information knows or has reason to
believe that such person will likely buy or sell a security of
the issuer whole in possession of such information (Sec.
27.3)
Protection of Investors
TENDER OFFER RULE
[N.B. This protects the minority shareholders. If a person or
a group of persons (acting in concert) intends and is in
discussion with certain shareholders of a public company
(normally, the controlling shareholders) to acquire a
substantial stake in such company (now, the threshold is
35% of the outstanding class of shares in a public
company), the acquirer must make an offer to all the
shareholders of the company to tender their shares at the
price being offered to the controlling shareholders. Before,
the minority shareholders are left out; so, the acquirer only
dealt with the controlling shareholders and disregarded the
minority.]
When a tender offer has commenced or is about to
commence, It shall be unlawful for:
(a) Any person (except the tender offeror) who is in
possession of material nonpublic information relating to
such tender offer, to buy or sell the securities of the
issuer that are sought or to be sought by such tender
offer if such person knows or has reason to believe that
the information is nonpublic and has been acquired
directly or indirectly from the tender offeror, those
acting on its behalf, the issuer of the securities sought or
to be sought by such tender offer, or any insider of such
issuer
(b) Any tender offeror, those acting on its behalf, the issuer
of the securities sought or to be sought by such tender
offer, and any insider of such issuer to communicate
material nonpublic information relating to the tender
offer to any other person where such communication is
likely to result in a violation of (a) (Sec. 27.4).
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RULES ON PROXY SOLICITATION
Proxies shall be:
(1) Issued in accordance with SEC rules and regulations;
Proxy solicitations shall also be made in accordance
with the said rules and regulations (Sec. 20.1)
(2) In writing (Sec. 20.2)
(3) Signed by the stockholder or his duly authorized
representatives (Sec. 20.2)
(4) Filed before the scheduled meeting with the corporate
secretary (Sec. 20.2)
(5) Valid only for the meeting for which it is intended unless
otherwise provided in the proxy (Sec. 20.3)
Note: No proxy shall be valid and effective for a period
longer than five (5) years at one time (Sec. 20.3)
A broker or dealer shall:
(1) Not give any proxy, consent or any authorization, in
respect of any security carried for the account of the
customer, to a person other than the customer, without
written authorization of such customer (Sec. 20.4)
(2) If he holds or acquires the proxy for at least ten percent
(10%) or such percentage as the commission may
prescribe of the outstanding share of such issuer, submit
a report identifying the beneficial owner of ten days after
such acquisition, for its own account or customer, to the
issuer of security, to the exchange where the security is
traded and to the Commission (Sec. 20.5)
DISCLOSURE RULE
DISCLOSURE BY THE ISSUER
To the SEC
Every issuer shall file with the Commission:
(1) Annual Report within one hundred thirty-five (135) days,
after the end of the issuer’s fiscal year, or such other
time as the Commission may prescribe
(2) Such other periodical reports for interim fiscal periods
and current reports on significant developments of the
issuer as the Commission may prescribe as necessary to
keep current information on the operation of the
business and financial condition of the issuer (Sec. 17.1)
Note: Under this Section, ‘issuer’ includes:
(a) An issuer which has sold a class of its securities pursuant
to a registration under section 12 hereof.
BUT the requirement shall be suspended for any fiscal
year if such issuer, as of the first day of any such fiscal
year, has less than one hundred (100) holder of such
class securities or such other number as the
Commission shall prescribe and it notifies the
Commission of such;
(b) An issuer with a class of securities listed for trading on
an Exchange; and
(c) An issuer with assets of at least Fifty million pesos
(50,000,000.00) or such other amount as the
Commission shall prescribe, and having two hundred
(200) or more holder each holding at least one hundred
(100) share of a class of its equity securities.
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The obligation of such issuer to file report shall be
terminate ninety (90) days after notification to the
Commission by the issuer that the number of its holders
holding at least one hundred (100) share reduced to less
than one hundred (100) (Sec. 17.2)
To the equity holders
An annual report shall be furnished by every issuer which
has a class of equity securities satisfying any of the
requirements in Subsection 17.2 to each holder of such
equity security (Sec. 17.5)
DISCLOSURE BY EQUITY HOLDERS
Any person who acquires directly or indirectly the beneficial
ownership of more than five of per centum (5%) of such
class or in excess of such lesser per centum as the
Commission by rule may prescribe, shall, within ten (10)
days after such acquisition or such reasonable time as fixed
by the Commission, submit to: (1) the issuer of the securities;
(2) to the Exchange where the security is traded; and (3) to
the Commission, the following information:
(1) The personal background, identity, residence, and
citizenship of, and the nature of such beneficial
ownership by, such person and all other person by
whom or on whose behalf the purchases are effected; in
the event the beneficial owner is a juridical person, the
of business of the beneficial owner shall also be
reported;
(2) If the purpose of the purchases or prospective purchases
is to acquire control of the business of the issuer of the
securities, any plans or proposals which such persons
may have that will effect a major change in its business
or corporate structure;
(3) The number of shares of such security which are
beneficially owned, and the number of shares
concerning which there is a right to acquire, directly or
indirectly, by; (i) such person, and (ii) each associate of
such person, giving the background, identity, residence,
and citizenship of each such associate; and
(4) Information as to any contracts, arrangements, or
understanding with any person with respect to any
securities of the issuer including but not limited to
transfer, joint ventures, loan or option arrangements,
puts or call guarantees or division of losses or profits, or
proxies naming the persons with whom such contracts,
arrangements, or understanding have been entered
into, and giving the details thereof.
Note: If it appears to the SEC that securities were acquired
by person in the ordinary course of his business and were
not acquired for the purpose of and do not have the effect of
changing or influencing the control of the issuer nor in
connection with any transaction having such purpose or
effect it may permit any person to file in lieu of the
statement required by subsection 17.1 hereof, a notice
stating:
(a) The name of such person;
(b) The shares of any equity securities subject to Subsection
17.1 which are owned by him;
(c) The date of their acquisition; and
(d) Such other information as the commission may specify
(Sec. 18.3)
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DISCLOSURE BY INSIDER
An insider has the duty to disclose material information with
respect to the issuer or the security that is not generally
available to the public (Sec. 27.1) (See definitions of ‘insider’
and ‘material non-public information’ at pp. 132-133)
A beneficial owner of 10% of a public company becomes a
“principal shareholder” required to disclose his interest to
the SEC, the company, and the Philippine Stock Exchange
(if the company is listed there).
Civil Liability
CIVIL LIABILITIES ON ACCOUNT OF FALSE
REGISTRATION STATEMENT (SEC. 56)
Civil liabilities arise when the registration statement or any
part thereof contains on its effectivity:
(1) An untrue statement of a material fact; or
(2) Omission to state a material fact required to be stated
therein or necessary to make such statements not
misleading
WHO MAY BE LIABLE? (NUPSAID)
(1) Issuer and every person who signed the registration
statement;
(2) Director of/partner in the issuer at the time of the filing
of the registration statement or any part, supplement or
amendment thereof;
(3) One who is named in the registration statement as
being or about to become (b);
(4) Auditor/auditing firm named as having certified any
financial statements used in connection with the
registration statement or prospectus;
(5) One who, with his written consent filed with the
registration statement, has been named as having
prepared or certified any part of the registration
statement/any report or valuation which is used in
connection with the registration statement;
(6) Selling shareholder who contributed to and certified as
to the accuracy of a portion of the registration
statement;
(7) Underwriter with respect to such security (Sec. 56.1)
WHO MAY SUE?
Any person who acquires the security and who suffers
damage unless it is proved that at the time of such
acquisition he knew of such untrue statement or omission
(Sec. 56.1)
Note: When the security is acquired after the issuer has
made generally available to its security holders an income
statement covering a period of at least twelve (12) months
beginning from the effective date of the registration
statement, the right of recovery under this subsection shall
be conditioned on proof that such person acquired the
security relying upon such untrue statement in the
registration statement or relying upon the registration
statement and not knowing of such income statement (Sec.
56.2)
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CIVIL LIABILITIES ARISING IN CONNECTION WITH
PROSPECTUS, COMMUNICATIONS AND REPORTS
(SEC. 57)
LIABILITY OF SELLERS/OFFERORS
Who may be liable?
(1) Offeror or seller of a security in violation of Chapter on
Registration of Securities;
(2) Offeror or seller of a security, whether or not exempted
by the provisions of this Code, by means of a prospectus
or other written or oral communication which includes
an untrue statement of a material fact or omits to state
a material fact necessary in order to make the
statements, in the light of the circumstances under
which they were made, not misleading (the purchaser
not knowing of such untruth or omission).
Defense: No knowledge of untruth or omission, despite the
exercise of reasonable care (Sec. 57.1).
Who may sue? Purchaser of the security may sue to recover:
(1) Consideration paid for such security with interest
thereon, less the amount of any income received
thereon, upon the tender of such security; or
(2) For damages if he no longer owns the security (Sec.
57.1).
LIABILITY OF MAKERS OF FALSE MISLEADING STATEMENTS
Who may be liable? Any person who shall make or cause to
be made any statement in any report, or document filed
pursuant to this Code or any rule or regulation thereunder,
which statement as at the time and in the light of the
circumstances under which it was made false or misleading
with respect to any material fact, shall be liable to.
Defense: Good faith and lack of knowledge of the false and
misleading statement (Sec. 57.2).
Who may sue? Purchaser or seller of security who purchased
or sold at a price which was affected by such statement
knowing that such statement was false or misleading, and
relying upon such statement may sue for damages caused
by such reliance (Sec. 57.2).
CIVIL LIABILITY OF FRAUD IN CONNECTION WITH
SECURITIES TRANSACTIONS (SEC. 58)
WHO MAY BE LIABLE?
Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26, or any rule or regulation
of the Commission thereunder.
WHO MAY SUE?
Any other person who purchases or sells any security, grants
or refuses to grant any proxy, consent or authorization, or
accepts or declines an invitation for tender of a security who
sustained damages as a result of the transaction.
UP COLLEGE OF LAW SECURITIES REGULATION CODE
CIVIL LIABILITY FOR MANIPULATION OF SECURITY
PRICES (SEC. 59)
WHO MAY BE LIABLE?
Any person who willfully participates in any act or
transaction in Section 24 (Manipulation of Security Prices).
WHO MAY SUE?
Any person who shall purchase or sell any security at a price
which was affected by such act or transaction.
CIVIL LIABILITY WITH RESPECT TO COMMODITY
FUTURES CONTRACTS AND PRE-NEED PLANS
(SEC. 60)
WHO MAY BE LIABLE?
Any person who engages in any act or transactions in willful
violation of any rule or regulation promulgated by the
Commission under Section 11 (on Commodity Future
Contracts) or 16 (on Pre-Need Plans) (Sec. 60.1)
WHO MAY SUE?
Any person sustaining damages as a result of such act or
transaction (Sec. 60.1)
CIVIL LIABILITY ON ACCOUNT OF INSIDER TRADING
LIABILITY FOR NON-DISCLOSURE
Who may be liable?
(1) Any insider who violates Subsection 27.1; and
(2) Any person in the case of a tender offer who violates
Subsection 27.4 (a)(I), or any rule or regulation
thereunder, by purchasing or selling a security while in
possession of material information not generally
available to the public (Sec. 61.1)
Who may sue? Any investor who, contemporaneously with
the purchase or sale of securities that is the subject of the
violation, purchased or sold securities of the same class
unless such insider, or such person in the case of a tender
offer, proves that such investor knew the information or
would have purchased or sold at the same price regardless
of disclosure of the information to him (Sec. 61.1)
LIABILITY FOR COMMUNICATING NON-PUBLIC INFORMATION
ABOUT ISSUER
Who may be liable?
(1) An insider who violates Subsection 27.3; or
(2) Any person in the case of a tender offer who violates
Subsection 27.4 (a), or any rule or regulation thereunder
communicating material nonpublic information shall be
jointly and severally liable under Subsection 61.1 with,
and to the same extent as, the insider, or person in the
case of a tender offer, to whom the communication was
directed and who is liable under Subsection 61.1 by
reason of his purchase or sale of a security (Sec. 61.2).
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LIABILITY OF CONTROLLING PERSONS, AIDER
AND ABETTOR AND OTHER SECONDARY LIABILITY
LIABILITY OF CONTROLLING PERSONS
Who may be liable? Every person who controls any person
liable under this Code or the rules or regulations of the
Commission thereunder, shall also be liable jointly and
severally with and to the same extent as such controlled
persons to any person to whom such controlled person is
liable (Sec. 51.1)
Note: ‘Control’ may be by or through stock ownership,
agency, or otherwise, or in connection with an agreement or
understanding with one or more other persons (Sec. 51.1)
Defense: Lack of knowledge of the existence of facts by
reason of which the liability of the controlled person is
alleged to exist (Sec. 51.1)
LIABILITY OF DIRECTOR/OFFICER FOR DELAY IN THE FILING
OF REQUIRED DOCUMENTS
It shall be unlawful for any director or officer of, or any
owner of any securities issued by, any issuer required to file
any document, report or other information under this Code
or any rule or regulation of the Commission thereunder,
without just cause, to hinder, delay or obstruct the making
or filing of any such document, report, or information (Sec.
51.2)
LIABILITY OF AIDER/ABETTOR
It shall be unlawful for any person to aid, abet, counsel,
command, induce or procure any violation of this Code, or
any rule, regulation or order of the Commission thereunder
(Sec. 51.3)
Every person who substantially assists the act or omission of
any person primarily liable under Sections 57, 58, 59 and
60 of this Code, with knowledge or in reckless disregard
that such act or omission is wrongful, shall be jointly and
severally liable as an aider and abettor for damages
resulting from the conduct of the person primarily liable
(Sec. 51.4)
BUT an aider and abettor shall be liable only to the extent
of his relative contribution in causing such damages in
comparison to that of the person primarily liable, or the
extent to which the aider and abettor was unjustly enriched
thereby, whichever is greater (Sec. 51.4)
Note: It shall be unlawful for any person, directly, or
indirectly, to do any act or thing which it would be unlawful
for such person to do under the provisions of this Code or
any rule or regulation thereunder (Sec. 51.2)
UP LAW BAR OPERATIONS COMMISSION SECURITIES REGULATION CODE
Civil Liability
Who May Be Liable?
When the registration statement or any (a) Issuer and every person who signed
part thereof contains on its effectivity: the registration statement;
(a) An untrue statement of a material (b) Director of/partner in the issuer at the
fact; or time of the filing of the registration
(b) Omission to state a material fact statement or any part, supplement or
required to be stated therein or necessary amendment thereof;
to make such statements not misleading (c) One who is named in the registration
statement as being or about to
become (b);
(d) Auditor/auditing firm named as
having certified any financial
statements used in connection with
the registration statement or
prospectus;
(e) One who, with his written consent
filed with the registration statement,
has been named as having prepared
or certified any part of the registration
statement/any report or valuation
which is used in connection with the
registration statement;
(f) Selling shareholder who contributed
to and certified as to the accuracy of a
portion of the registration statement;
(g) Underwriter with respect to such
security (Sec. 56.1)
In Connection With Prospectus, (a) Offeror or seller of a security in
Communications and Reports (Sec. 57) violation of Chapter on Registration
of Securities;
A. Liability of Sellers/Offerors (b) Offeror or seller of a security,
whether or not exempted by the
provisions of this Code, by means of
a prospectus or other written or oral
communication which includes an
untrue statement of a material fact
or omits to state a material fact
necessary in order to make the
statements, in the light of the
circumstances under which they
were made, not misleading (the
purchaser not knowing of such
untruth or omission).
Defense: No knowledge of untruth or
omission, despite the exercise of
reasonable care (Sec. 57.1).
In Connection With Prospectus, Any person who shall make or cause to be
Communications and Reports (Sec. 57) made any statement in any report, or
document filed pursuant to this Code or
any rule or regulation thereunder, which
B. Liability of Makers of False Misleading statement as at the time and in the light
Statements of the circumstances under which it was
made false or misleading with respect to
any material fact, shall be liable to
Defense: Good faith and lack of
knowledge of the false and misleading
statement (Sec. 57.2).
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MERCANTILE LAW REVIEWER
Who May Sue?
Any person who acquires the security and
who suffers damage unless it is proved
that at the time of such acquisition he
knew of such untrue statement or
omission (Sec. 56.1)
Note: When the security is acquired after
the issuer has made generally available to
its security holders an income statement
covering a period of at least twelve (12)
months beginning from the effective date
of the registration statement, the right of
recovery under this subsection shall be
conditioned on proof that such person
acquired the security relying upon such
untrue statement in the registration
statement or relying upon the registration
statement and not knowing of such
income statement (Sec. 56.2)
Purchaser of the security may sue to
recover:
(1) consideration paid for such security
with interest thereon, less the
amount of any income received
thereon, upon the tender of such
security; or
(2) for damages if he no longer owns the
security (Sec. 57.1).
Purchaser or seller of security who
purchased or sold at a price which was
affected by such statement knowing that
such statement was false or misleading,
and relying upon such statement may sue
for damages caused by such reliance (Sec.
57.2).
UP LAW BAR OPERATIONS COMMISSION SECURITIES REGULATION CODE MERCANTILE LAW REVIEWER

Fraud in Connection with Securities Any person who engages in any act or
Transactions (Sec. 58) transaction in violation of Sections 19.2,
20 or 26, or any rule or regulation of the
Commission thereunder
Any other person who purchases or sells
any security, grants or refuses to grant
any proxy, consent or authorization, or
accepts or declines an invitation for
tender of a security who sustained
damages as a result of the transaction.

Manipulation of Security Prices (Sec. 59) Any person who willfully participates in Any person who shall purchase or sell any
any act or transaction in Section 24 security at a price which was affected by
(Manipulation of Security Prices). such act or transaction

With Respect to Commodity Futures Any person who engages in any act or Any person sustaining damages as a
Contracts and Pre-need Plans (Sec. 60) transactions in willful violation of any rule result of such act or transaction (Sec. 60.1)
or regulation promulgated by the
Commission under Section 11 (on
Commodity Future Contracts) or 16 (on
Pre-Need Plans) (Sec. 60.1)

On Account of Insider Trading
A. Liability for non-disclosure
(a) Any insider who violates Subsection
27.1;
(b) and any person in the case of a tender
offer who violates Subsection 27.4 (a)(I),
or any rule or regulation thereunder, by
purchasing or selling a security while in
possession of material information not
generally available to the public (Sec. 61.1)
Any investor who, contemporaneously
with the purchase or sale of securities
that is the subject of the violation,
purchased or sold securities of the same
class unless such insider, or such person
in the case of a tender offer, proves that
such investor knew the information or
would have purchased or sold at the
same price regardless of disclosure of the
information to him (Sec. 61.1)

On Account of Insider Trading (a) An insider who violates Subsection

27.3;
OR
B. Liability for communicating non- (b) any person in the case of a tender offer
public information about issuer who violates Subsection 27.4 (a), or any
rule or regulation thereunder
communicating material nonpublic
information shall be jointly and severally
liable under Subsection 61.1 with, and to
the same extent as, the insider, or person
in the case of a tender offer, to whom the
communication was directed and who is
liable under Subsection 61.1 by reason of
his purchase or sale of a security (Sec.
61.2).

Of Controlling Persons, Aider and Abettor Every person who controls any person
and Other Secondary Liability liable under this Code or the rules or
regulations of the Commission
A. Liability of Controlling Persons thereunder, shall also be liable jointly and
severally with and to the same extent as
such controlled persons to any person to
whom such controlled person is liable
(Sec. 51.1)

NOTE: ‘Control’ may be by or through

stock ownership, agency, or otherwise, or
in connection with an agreement or
understanding with one or more other
persons (Sec. 51.1)

PAGE 121
UP LAW BAR OPERATIONS COMMISSION SECURITIES REGULATION CODE MERCANTILE LAW REVIEWER

Defense: Lack of knowledge of the

existence of facts by reason of which the
liability of the controlled person is alleged
to exist (Sec. 51.1)

Of Controlling Persons, Aider and Abettor It shall be unlawful for any director or
and Other Secondary Liability officer of, or any owner of any securities
issued by, any issuer required to file any
B. Liability of Director/Officer for Delay document, report or other information
in the Filing of Required Documents under this Code or any rule or regulation
of the Commission thereunder, without
just cause, to hinder, delay or obstruct the
making or filing of any such document,
report, or information (Sec. 51.2)

Of Controlling Persons, Aider and Abettor It shall be unlawful for any person to aid,
and Other Secondary Liability abet, counsel, command, induce or
procure any violation of this Code, or any
C. Liability of Aider/Abettor rule, regulation or order of the
Commission thereunder (Sec. 51.3)

Every person who substantially assists the

act or omission of any person primarily
liable under Sections 57, 58, 59 and 60 of
this Code, with knowledge or in reckless
disregard that such act or omission is
wrongful, shall be jointly and severally
liable as an aider and abettor for
damages resulting from the conduct of
the person primarily liable (Sec. 51.4)

BUT an aider and abettor shall be liable

only to the extent of his relative
contribution in causing such damages in
comparison to that of the person
primarily liable, or the extent to which the
aider and abettor was unjustly enriched
thereby, whichever is greater (Sec. 51.4)

Note: It shall be unlawful for any person,

directly, or indirectly, to do any act or
thing which it would be unlawful for such
person to do under the provisions of this
Code or any rule or regulation thereunder
(Sec. 51.2)

PAGE 122
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PAGE 123
UP COLLEGE OF LAW BANKING LAWS
The New Central Bank Act
(R.A. No. 7653)
STATE POLICIES
The State shall maintain a central monetary authority that
shall function and operate as an independent and
accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and
credit. (Sec. 1)
SALIENT FEATURES
(1) Assurance of BSP independence by providing for the
majority of the members of the Monetary Board to come
from the private sector. (Sec. 6, NCBA)
(2) The BSP may now concentrate on monetary policy, and
will shed itself of fiscal agency functions and its
responsibilities in respect of finance companies without
quasi-banking functions, which in the past, had
distracted it from its primary function. (Secs. 3, 129, &
130, NCBA)
(3) Provides safeguards to ensure that unlike the old
Central Bank which sustained huge losses, the BSP
would have a positive net income position by the
following provisions:
(a) Capitalization of P50B ; (Sec.2, NCBA)
(b) Maintenance of positive net foreign asset position;
(Sec.71, NCBA)
(c) Charging interests on all loans and advances to banks;
(Sec. 85, NCBA)
(d) Authority to collect interests on loans and advances to
closed financial institutions; and
(e) BSP can’t acquire shares in banking enterprise, in
development banking and financing (Sec. 128, NCBA)
CREATION OF THE BANGKO SENTRAL
NG PILIPINAS (BSP)
NATURE OF THE BSP
(1) A central monetary authority;
(2) An independent and accountable body; and
(3) A government-owned corporation but enjoys fiscal and
administrative autonomy. (Secs. 1 & 2, NCBA)
The BSP shall have a capitalization of P50B to be fully
subscribed by the Government. (Sec. 2)
RESPONSIBILITY AND PRIMARY OBJECTIVE
PRIMARY OBJECTIVES
(1) To maintain price stability conducive to a balanced and
sustainable growth of the economy.
(2) To promote and maintain monetary stability and the
convertibility of the peso.
OTHER RESPONSIBILITIES
(1) To provide policy directions in the areas of money,
banking, and credit
(2) To supervise operations of banks (Sec. 3, NCBA)
All powers, duties and functions vested by law in the Central
Bank of the Philippines not inconsistent with the NCBA
shall be deemed transferred to the BSP. All references to
the Central Bank of the Philippines in any law or special
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BAR OPERATIONS COMMISSION
charters shall be deemed to refer to the BSP. (Sec. 136,
NCBA)
MONETARY BOARD
The body through which the powers and functions of the
Bangko Sentral are exercised (Sec 6, NCBA)
POWERS AND FUNCTIONS
(1) Issue rules and regulations it considers necessary for the
effective discharge of the responsibilities and exercise of
the powers vested in it;
(2) Direct the management, operations, and administration
of Bangko Sentral, organize its personnel and issue such
rules and regulations as it may deem necessary or
desirable for this purpose;
(3) Establish a human resource management system which
governs the selection, hiring, appointment, transfer,
promotion, or dismissal of all personnel;
(4) Adopt an annual budget for and authorize such
expenditures by Bangko Sentral as are in the interest of
the effective administration and operations of Bangko
Sentral in accordance with applicable laws and
regulations; and
(5) Indemnify its members and other officials of Bangko
Sentral, including personnel of the departments
performing supervision and examination functions,
against all costs and expenses reasonably incurred by
such persons in connection with any civil or criminal
action, suit or proceeding, to which any of them may be
made a party by reason of the performance of his
functions or duties, unless such members or other
officials is found to be liable for negligence or
misconduct. (Sec. 15, NCBA)
COMPOSITION
The MB shall be composed of 7 members appointed by the
President with a 6-year term. (Sec. 6, NCBA)
MEMBERS
(1) The BSP Governor or his designated alternate (a deputy
governor);
(2) A Cabinet member to be designated by the President or
his designated alternate (an Undersecretary in his
department); and
(3) 5 members from the private sector (Sec. 6, NCBA)
No member of the MB may be reappointed more than once.
QUALIFICATIONS
(1) Natural-born citizens of the Philippines;
(2) At least 35 years old (the Governor must be at least 40
years old);
(3) Of good moral character;
(4) Of unquestionable integrity;
(5) Of known probity and patriotism; and
(6) With recognized competence in social and economic
disciplines. (Sec. 8, NCBA)
DISQUALIFICATIONS
In addition to the disqualifications under the Code of
Conduct and Ethical Standards for Public Officials and
Employees (RA 6713), a member of the Monetary Board is
disqualified:
UP COLLEGE OF LAW BANKING LAWS
(1) Direct connection with any multilateral banking or
financial institution; or
(2) Substantial interest in any private bank in the
Philippines, within 1 year prior to his appointment (Sec.
9, NCBA)
PROHIBITION ON MEMBERS OF THE MB
(1) To be a director, officer, employee, consultant, lawyer,
agent or stockholder of any bank, quasi-bank, or any
other institution which is subject to supervision or
examination by the BSP;
(2) To hold any other public office or public employment
during their tenure; and
(3) To be employed in any multilateral banking or financial
institution within 2 years after the expiration of his term.
Exception: When he serves as an official representative of
the government to such institution. (Sec. 9, NCBA)
GROUNDS FOR REMOVAL OF ANY MEMBER OF THE MB
(1) If the member is subsequently disqualified under Sec. 8;
(2) If he is physically or mentally incapacitated that he
cannot properly discharge his duties and responsibilities
and such incapacity has lasted for more than 6 months;
(3) If he is guilty of acts or operations which are of
fraudulent or illegal character or which are manifestly
opposed to the aims and interests of the BSP; and
(4) If he no longer possesses the qualifications under Sec.
8. (Sec. 10, NCBA)
VACANCIES, HOW FILLED
Cause: death, resignation, or removal of any member
Effect: a new member will be appointed to complete the
unexpired period of the term of the member concerned.
(Sec. 7, NCBA)
SALARIES
Fixed by the Phil. President at a sum commensurate to the
importance and responsibility attached (Sec. 13, NCBA)
MEETINGS
(1) Held at least once a week;
(2) Called by the Governor or by 2 MB members;
(3) The complete records of the proceedings and
deliberations of the MB including the tapes and
transcripts of stenographic notes are to be maintained
and preserved;
(4) Four (4) members constitute a quorum; and
(5) All decisions by the MB shall require the concurrence of
four (4) of its members unless otherwise provided by the
NCBA (Sec. 11, NCBA);
(a) Deputy governors may attend (Sec. 12, NCBA).
(b) Any member with personal or pecuniary interest in any
matter in the agenda shall disclose his interest and shall
retire from the meeting when the matter is taken up
(Sec. 14, NCBA).
CIVIL LIABILITY OF MEMBERS OF THE MB
Members of the MB, officials, examiners, and employees of
the BSP are liable when:
(1) They willfully violate the provisions of the NCBA;
(2) They are guilty of negligence, abuses or acts of
malfeasance or misfeasance; or
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(3) Fail to exercise extraordinary diligence in the
performance of his duties. (Sec. 16, NCBA)
HOW THE BSP HANDLES BANKS IN DISTRESS
Liquidity – Ability of an asset to be converted into cash. An
entity is liquid when it is able to pay its liabilities when they
fall due.
Solvency – When current assets are more than current
liabilities, providing the ability to pay debts. An entity is
solvent when it is able to meet its long term
obligations/liabilities.
Insolvency – When the actual market value of assets are
insufficient to pay its liabilities, not considering capital stock
and surplus which are not liabilities for such purpose. An
entity is insolvent when it is unable to meet current and
long-term obligations.
CONSERVATORSHIP
Applicability
(1) When a bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition of
liquidity deemed adequate to protect the interest of
depositors and creditors (Sec. 29)
(2) Determination is to be made by the MB on the basis of a
report submitted by the appropriate supervising or
examining department (Sec. 29)
Period and termination
(1) Period: shall not exceed 1 year (Sec. 29)
(2) The expenses attendant to the conservatorship shall be
borne by the bank or quasi-bank concerned (Sec. 29)
(3) Grounds for termination of conservatorship by MB:
(a) When it is satisfied that the institution can continue to
operate on its own and the conservatorship is no longer
necessary
(b) When, on the basis of the report of the conservator or of
its own findings, the MB determines that the
continuance in business of the institution would involve
probable loss to its depositors or creditors (the bank or
quasi-bank would then be placed under receivership)
(Sec. 29)
Effects of conservatorship
(1) Bank/Quasi-bank retains juridical personality
(2) Not a precondition to the designation of a receiver, and;
(3) Perfected transactions cannot be repudiated
Qualifications of a conservator
The conservator should be competent and knowledgeable
in bank operations and management. (Sec. 29)
The appointment of a conservator shall be vested
exclusively in the MB. (Sec. 30)
Powers and duties of a conservator
(1) To take charge of the assets, liabilities, and the
management thereof
(2) To reorganize the management
(3) To collect all monies and debts due said institution, and
(4) To exercise all powers necessary to restore its viability
(5) To report and be responsible to the MB
UP COLLEGE OF LAW BANKING LAWS
(6) To overrule or revoke the actions of the previous
management and board of directors of the bank or
quasi-bank. (Sec. 29)
While the Central Bank law gives vast and far reaching
powers to the conservator of a bank, such powers must be
related to the preservation of the assets of the bank, the
reorganization of the management and the restoration of
viability. Such powers cannot extend to the post-facto
repudiation of perfected transactions, otherwise they would
infringe against the non-impairment clause of the
Constitution. (First Philippine International Bank v. CA, 1996)
Remunerations
General rule: The conservator shall receive remuneration in
an amount not to exceed 2/3 of the salary of the president
of the institution in 1 year, payable in 12 equal monthly
payments.
Exception: A conservator connected with the BSP, in which
case said conservator shall not be entitled to receive any
remuneration or emolument. (Sec. 29, NCBA)
RECEIVERSHIP
Grounds
Whenever the MB finds that a bank or quasi-bank:
(1) Is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, That this shall not
include inability to pay caused by extraordinary
demands induced by financial panic in the banking
community;
(2) Has insufficient realizable assets, as determined by the
BSP, to meet its liabilities; or
(3) Cannot continue in business without involving probable
losses to its depositors or creditors; or
(4) Has willfully violated a cease-and-desist order under
Sec. 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of
the assets of the institution
Receiver
(1) If a banking institution: the PDIC
(2) If a quasi-bank: any person of recognized competence in
banking or finance
The appointment of a receiver shall be vested exclusively in
the MB. And the designation of a conservator is not a
precondition to the designation of a receiver.
Powers and duties of a receiver
(1) Immediately gather and take charge of all the assets
and liabilities of the institution
(2) Administer the assets for the benefit of the creditors
(3) Exercise the general powers of a receiver under the
Revised Rules of Court
(4) Not to pay or commit any act that will involve the
transfer or disposition of any asset of the institution,
except:
(a) Administrative expenditures
(b) Receiver may deposit or place funds in non-speculative
investments
(5) Subject to prior approval of the MB, determine, as soon
as possible, but not later than 90 days from take-over,
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whether the institution may be rehabilitated or
otherwise placed in such a condition so that it may be
permitted to resume business with safety to its
depositors and creditors and the general public.
The assets of the institution under receivership and
liquidation shall be deemed in custodia legis and shall be
exempt from any order of garnishment, levy, attachment, or
execution.
Close now, hear later scheme
Sec. 29 of the Central Bank Act does NOT contemplate prior
notice and hearing before a bank may be directed to stop
operations and placed under receivership. It is enough that
such action is made subject of a subsequent judicial review.
When the law provides for the filing of a case within 10 days
after the receiver takes charge of the assets of the bank, it is
unmistakable that the assailed actions should precede the
filing of the case. The legislature could not have intended to
authorize “no prior notice and hearing” in the bank’s closure
and at the same time allow a suit to annul it on the basis of
absence thereof (Central Bank vs. Cam GR No. 76118, March
30, 1993)
LIQUIDATION/CLOSURE
Should the determination be that the institution cannot be
rehabilitated or permitted to resume business, the MB shall
notify in writing the board of directors of the institution of its
findings and direct the receiver to proceed with the
liquidation of the institution.
Procedure
(1) The receiver shall file ex parte with the proper RTC, and
without requirement of prior notice or any other action,
a petition for assistance in the liquidation of the
institution pursuant to the liquidation plan adopted by
the PDIC (if quasi-bank, liquidation plan adopted by the
MB)
(2) Upon acquiring jurisdiction, the court shall, upon motion
by the receiver after due notice,
(a) Adjudicate disputed claims against the institution,
(b) Assist the enforcement of individual liabilities of the
stockholders, directors, and officers, and
(c) Decide on other issues as may be material to implement
the liquidation plan
(3) The receiver shall convert the assets of the institutions
to money, dispose of the same to creditors and other
parties, for the purpose of paying the debts of such
institution in accordance with the rules on concurrence
and preference of credit under the Civil Code
The assets of the institution under receivership and
liquidation shall be deemed in custodia legis and shall be
exempt from any order of garnishment, levy, attachment, or
execution.
Dispositions
In case of a liquidation of a bank or quasi-bank, after
payment of the cost of proceedings, including reasonable
expenses and fees of the receiver to be allowed by the court,
the receiver shall pay the debts of such institution, under
order of the court, in accordance with the rules on
concurrence and preference of credit in the Civil Code. (Sec.
31, NCBA)
UP COLLEGE OF LAW BANKING LAWS
All revenues and earnings realized by the receiver in
winding up the affairs and administering the assets of any
bank or quasi-bank shall be used to pay the costs of
proceedings, salaries of such personnel whose employment
is rendered necessary in the discharge of the liquidation
together with other additional expenses caused thereby.
The balance of revenues and earnings, after the payment of
all said expenses, shall form part of the assets available to
creditors. (Sec. 32, NCBA)
Effects of Appointment of Receiver/Liquidation
(1) Retention of juridical personality
(2) Suspension of operations/ Stoppage of business
(3) Assets are deemed in custodial legis, i.e., exempt from
garnishment, levy or execution
(4) Stay of execution of judgment to prevent depletion of
bank assets
(5) Bank is not liable to pay interest on deposits which
accrued during the period of suspension of operation
(6) Restriction of bank’s capacity to do new business (new
loans, deposits) but with obligation to collect pre-
existing debts
HOW THE BSP HANDLES EXCHANGE CRISIS
LEGAL TENDER POWER
All notes and coins issued by the BSP shall be fully
guaranteed by the Government of the Republic of the
Philippines and shall be legal tender in the Philippines for
all debts, both public and private.
Limitation: Coins shall be legal tender in amounts not
exceeding P50 for denominations of 25 centavos and
above, and in amounts not exceeding P20 for
denominations of 10 centavos or less unless otherwise fixed
by the MB.
The maximum amount of coins to be considered as legal
tender is: [BSP Circular 537 (2006) ]
1. P1,000.00 for denominations of 1-Piso, 5-Piso and 10-
Piso coins; and
2. P100.00 for denominations of 1-sentimo, 5-sentimo,
10-sentimo, and 25-sentimo coins. (Sec. 52)
RATE OF EXCHANGE
The MB shall:
(1) Determine the exchange rate policy of the country;
(2) Determine the rates at which the Bangko Sentral shall
buy and sell spot exchange;
(3) Establish deviation limits from the effective exchange
rate or rates as it may deem proper.
(4) Determine the rates for other types of foreign exchange
transactions by the BSP, including purchases and sales
of foreign notes and coins.
Limitation: The margins between the effective exchange
rates and the rates established by the MB may not exceed
the corresponding margins for spot exchange transactions
by more than the additional costs or expenses involved in
each type of transactions. (Sec. 74)
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Law on Secrecy
of Bank Deposits
(R.A. No. 1405, as amended)
PURPOSE
(1) To give encouragement to the people to deposit their
money in banking institutions and to discourage private
hoarding; and
(2) So that the people’s money may be properly utilized by
banks in authorized loans to assist in the economic
development of the country. (Sec. 1)
The absolute confidentiality rule in R.A. No. 1405 actually
aims at protection from unwarranted inquiry or
investigation if the purpose of such inquiry or investigation
is merely to determine the existence and nature, as well as
the amount of the deposit in any given bank account. (China
Banking Corp. v. Ortega, 1973)
PROHIBITED ACTS
(1) No person, government official, bureau or office may
examine, inquire into or look into such deposits; and
(2) No official or employee of any banking institution may
disclose to any unauthorized person any information
concerning said deposits. (Sec. 3)
DEPOSITS COVERED
All peso-denominated deposits of whatever nature with banks
or banking institutions in the Philippines are hereby
considered as of an absolutely confidential nature and may
not be examined. [N.B. The confidentiality of foreign-
currency deposits is governed by the Foreign Currency
Deposit Act.]
Includes investments in bonds issued by the Philippine
Government, its political subdivisions and its
instrumentalities, regardless of the currency of
denomination. (Sec. 2)
Under the RA 1405, bank deposits are statutorily protected
or recognized zones of privacy. (People v. Estrada, G.R. No.
164368, April 2, 2009; Marquez v. Desierto, G.R. No. 135882,
June 27, 2001, 359 SCRA 772; Ople v. Torres, G.R. No. 107737.
October 1, 1999, 316 SCRA 43)
The term deposits as used in RA 1405 is to be understood
broadly and not limited only to accounts which give rise to a
creditor-debtor relationship between the depositor and the
bank.
If the money deposited under an account may be used by
banks for authorized loans to third persons, then such
account, regardless of whether it creates a creditor-debtor
relationship between the depositor and the bank, falls
under the category of accounts which the law precisely
seeks to protect for the purpose of boosting the economic
development of the country.
UP COLLEGE OF LAW BANKING LAWS
Considering the use of the phrase “of whatever nature” RA
1405 applies not only to money which is deposited but also
to those which are invested. Thus, the protection afforded
by RA 1405 extends to trust accounts. (Ejercito v.
Sandiganbayan (Special Division), 2006)
EXCEPTIONS
(1) Upon written permission of the depositor;
(2) In cases of impeachment;
(3) Upon order of a competent court in cases of:
(a) Bribery;
(b) Dereliction of duty of public officials; or
(4) Where the money deposited or invested is the subject
matter of the litigation. (Sec. 2)
By the phrase "subject matter of the action" is meant "the
physical facts, the things real or personal, the money, lands,
chattels, and the like, in relation to which the suit is
prosecuted, and not the delict or wrong committed by the
defendant. (Mathay v. Consolidated Bank and Trust
Company, 1974).
We note with approval the difference between the "subject
of the action" from the "cause of action." We also find
petitioner's definition of the phrase "subject matter of the
action" is consistent with the term "subject matter of the
litigation," as the latter is used in the Bank Deposits Secrecy
Act.
Where the plaintiff is fishing for information so it can
determine the culpability of private respondent and the
amount of damages it can recover from the latter. It does
not seek recovery of the very money contained in the
deposit. The subject matter of the dispute may be the
amount of P999,000.00 that petitioner seeks from private
respondent as a result of the latter's alleged failure to
inform the former of the discrepancy; but it is not the
P999,000.00 deposited in the drawer's account. By the
terms of R.A. No. 1405, the "money deposited" itself should
be the subject matter of the litigation. (Union Bank v. Court
of Appeals, 1999)
The exception applies to cases of concealment of illegally
acquired property in anti-graft cases. The inquiry into
illegally acquired property – or property NOT "legitimately
acquired" – extends to cases where such property is
concealed by being held by or recorded in the name of other
persons. (Banco Filipino v. Purisima, 1988)
The exception even extends to cases of concealment of
illegally acquired property not involving anti-graft cases as
long as money deposited was the subject matter of
litigation. (Mellon Bank, N.A. v. Magsino, 1990)
OTHER EXCEPTIONS
(1) Upon order of a competent court in cases of
unexplained wealth under Sec. 8 of RA 3019 or the Anti-
Graft and Corrupt Practices Act (PNB v. Gancayco, 1965;
Banco Filipino v. Purisima, 1988; Marquez v. Desierto,
2001)
(2) When inquiry is conducted under the authority of the
Commissioner of Internal Revenue into the bank
accounts of the following:
(a) A decedent in order to determine his gross estate
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(b) Any taxpayer who has filed an application for
compromise of his tax liability, which application shall
include a written waiver of his privilege under RA 1405
or under other general or special laws
Note: Information obtained from banks and financial
institutions may be furnished to a foreign tax authority
pursuant to an existing convention or agreement. (Sec.
6(F), NIRC, as amended by RA 10021)
(3) Upon order of a competent court in cases under the
Anti-Money Laundering Act of 2001 (RA 9160,
hereinafter “AMLA”), when there is probable cause that
the deposits or investments involved are in any way
related to an unlawful activity or a money laundering
offense, except that no court order required if:
(a) Funds or property involved consists of investments; or
(b) Said investments are related to:
(i) Kidnapping for ransom
(ii) Unlawful activities under Comprehensive Drugs Act of
2002 (RA 9165);
(iii) Hijacking and other violations under RA 6235; and
(iv) Destructive arson and murder, including those
perpetrated by terrorists against non-combatants and
similar targets.
(4) BSP inquiry or examination in the course of its periodic
or special examination of the bank (Sec. 11, AMLA).
(5) Disclosure of certain information about bank deposits
which have been dormant for at least 10 years, to the
Treasurer of the Philippine in a sworn statement, a copy
of which is posted in the bank premises. (Sec. 2,
Unclaimed Balances Law [Act No. 3926, as amended])
(6) The PDIC and/or the BSP can inquire into or examine
deposit accounts and all information related thereto in
case there is a finding of unsafe and unsound banking
practice (Sec. 8, paragraph 8, R.A. 3591, as amended by
R.A. 9576).
NOT CONSIDERED AS EXCEPTIONS
(1) In 1981, PD 1792 added the following grounds when the
bank can be compelled to reveal the amount of a
depositor:
(a) “made in the course of a special or general examination
of a bank and is specifically authorized by the Monetary
Board after being satisfied that there is reasonable
ground to believe that a bank fraud or serious
irregularity has been or is being committed and that it is
necessary to look into the deposit to establish such
fraud or irregularity,” or
(b) “made by an independent auditor hired by the bank to
conduct its regular audit provided that the examination
is for audit purposes only and the results thereof shall
be for the exclusive use of the bank.” However, Sec. 135
of RA 7653 or the New Central Bank Act expressly
repealed PD 1792 thereby reverting RA 1405 to its
version prior to the promulgation of the Decree.
(i) Thus, Villanueva says that these two instances are
excluded from the enumeration of exceptions to the
secrecy of bank deposits (VILLANUEVA, Commercial Law
Review, opinion).
(ii) Morales, however, notes that with the enactment of the
AMLA, exception (i) has been substantially resurrected
(see items 4 and 6 of “Other exceptions” above). While
there is no similar development of exception (ii), the
UP COLLEGE OF LAW BANKING LAWS
exclusion of independent auditors from the coverage of
the Secrecy of Bank Deposits Law finds basis in Opinion
No. 243 (s. 1975) of then Secretary of Justice Pedro
Tuason. (MORALES, The Philippine General Banking Law,
opinion)
(2) It used to be believed that the RA 1405 did not apply to
the Ombudsman, on account of his authority under Sec.
15(8) of RA 6770 or the Ombudsman Act of 1989 to
“examine and have access to bank accounts and
records.” However, the SC in Marquez v. Desierto (G.R.
No.135882, June 27, 2001) and Ombudsman v. Ibay (G.R.
No. 137538, September 3, 2001) restricted the
Ombudsman’s power as follows:
“[B]efore an in camera inspection may be allowed, there
must be a pending case before a court of competent
jurisdiction. Further, the account must be clearly
identified, the inspection limited to the subject matter of
the pending case before the court of competent
jurisdiction. The bank personnel and the account holder
must be notified to be present during the inspection,
and such inspection may cover only the account
identified in the pending case.” (Morales, The Philippine
General Banking Law)
“Further, it is interesting to note that the Secretary of
Justice in his Opinion No. 13 (s. 1987) concluded that the
Presidential Commission on Good Government can
compel banks to disclose or produce bank records
without violating the bank secrecy laws.” (Morales, The
Philippine General Banking Law)
“Moreover, under Sec. 1(d) of RA 6382 (1990), which
created the Davide Commission that conducted a fact
finding investigation of the failed coup d’ etat of
December 1989, the commission had the power to ‘ask
the Monetary board to disclose information on and/or
grant authority to examine bank deposits, trust finds, or
banking transactions in the name of and/or utilized by a
person, natural or juridical, under investigation by the
Commission, in any bank or banking institution in the
Philippines, when the Commission has reasonable
ground to believe that said deposits, trust or investment
funds, or banking transactions have been used in
support of furtherance of the objectives of the coup d’
etat.’” (Morales, The Philippine General Banking Law)
Notwithstanding the exceptions enumerated by law, the
prevailing policy on the matter is to preserve the absolute
confidentiality enjoyed by bank deposits.
Indeed, by force of statute, all bank deposits are absolutely
confidential, and that nature is unaltered even by the
legislated exceptions referred to above. There is disfavor
towards construing these exceptions in such a manner that
would authorize unlimited discretion on the part of the
government or of any party seeking to enforce those
exceptions and inquire into bank deposits. If there are
doubts in upholding the absolutely confidential nature of
bank deposits against affirming the authority to inquire into
such accounts, then such doubts must be resolved in favor
of the former. Such a stance would persist unless Congress
passes a law reversing the general state policy of preserving
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the absolutely confidential nature of Philippine bank
accounts. (Republic v. Eugenio, 2008)
It is conceded that while the fundamental law has not
bothered with the triviality of specifically addressing privacy
rights relative to banking accounts, there, nevertheless,
exists in our jurisdiction a legitimate expectation of privacy
governing such accounts. The source of this right of
expectation is statutory, and it is found in R.A. No. 1405,
otherwise known as the Bank Secrecy Act of 1955. (BSB
Group, Inc., v. Go, 2010)
Subsequent statutory enactments have expanded the list of
exceptions to this policy yet the secrecy of bank deposits
still lies as the general rule, falling as it does within the
legally recognized zones of privacy. There is, in fact, much
disfavor to construing these primary and supplemental
exceptions in a manner that would authorize unbridled
discretion, whether governmental or otherwise, in utilizing
these exceptions as authority for unwarranted inquiry into
bank accounts. It is then perceivable that the present legal
order is obliged to conserve the absolutely confidential
nature of bank deposits.
GARNISHMENT OF DEPOSITS
General rule: The prohibition against examination of or
inquiry into a bank deposit under Republic Act 1405 does
not preclude its being garnished to insure satisfaction of a
judgment (China Banking Corporation v. Ortega, 1973;
Philippine Commercial and Industrial Bank v. Court of
Appeals, 1991)
“…the prohibition against examination of or inquiry into a
bank deposit under Republic Act 1405 does not preclude its
being garnished to insure satisfaction of a judgment. Indeed
there is no real inquiry in such a case, and if the existence of
the deposit is disclosed the disclosure is purely incidental to
the execution process. It is hard to conceive that it was ever
within the intention of Congress to enable debtors to evade
payment of their just debts, even if ordered by the Court,
through the expedient of converting their assets into cash
and depositing the same in a bank.” (China Banking
Corporation v. Ortega, 1973)
Exception: Foreign Currency Deposits – The foreign currency
deposits shall be exempt from attachment, garnishment, or
any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
(Sec. 8, Foreign Currency Deposit Act)
CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS
General rule: Foreign currency deposits are confidential.
Exceptions:
(1) Upon written permission of the depositor (Sec. 8,
Foreign Currency Deposit Act ; Intengan vs CA ; 2002)
(2) Upon order of a competent court in cases of violation of
the Anti-Money Laundering Act of 2001 [as in the case
of peso deposits, supra]
(3) During Bangko Sentral’s periodic or special
examinations [as in the case of peso deposits, supra],
and
UP COLLEGE OF LAW BANKING LAWS
(4) Disclosure of the Treasurer of the Philippines when the
unclaimed balances law applies (Act 3936, as amended
by PD 679)
(5) BSP/PDIC inquiry if there is a finding of unsafe and
unsound banking practice (as in the case of peso
deposits, supra)
(6) In Salvacion vs. CB (1997), where a Filipino child was
raped by a foreigner, the SC allowed, pro hac vice,
garnishment of foreign currency deposits stating: “If we
rule that the questioned Section 113 of CB Circular No.
960 which exempts from attachment, garnishment, or
any other order or process of any court, legislative body,
government agency or any administrative body
whatsoever, is applicable to a foreign transient, injustice
would result especially to a citizen aggrieved by a
foreign guest.”
PENALTIES FOR VIOLATION OF R.A. No. 1405
Imprisonment of not more than 5 years or a fine of not more
than P20,000 or both, in the discretion of the court. (Sec. 5)
General Banking Law of 2000
(R.A. No. 8791)
POLICY
To promote and maintain a stable and efficient banking and
financial system that is globally competitive, dynamic and
responsive to the demands of a developing economy. (Sec.
2)
DEFINITION AND CLASSIFICATION OF BANKS
Banks shall refer to entities engaged in the lending of funds
obtained in the form of deposits. (Sec. 3.1, GBL)
CORE BANKING FUNCTIONS
(1) Taking of deposits from the public
(2) Lending out these funds (Morales, The Philippine GBL
Annotation).
CLASSIFICATION OF BANKS
(1) Universal Banks (UB) – These used to be called
expanded commercial banks and their operations are
primarily governed by the GBL. They can exercise the
powers of an investment house and invest in non-allied
enterprises. They have the highest capitalization
requirement.
(2) Commercial Banks (KB) – These are ordinary or regular
commercial banks, as distinguished from a universal
bank. They have a lower capitalization requirement
than a UB and cannot exercise the powers of an
investment house and invest in non-allied enterprises.
(3) Thrift Banks – These are:
(a) Savings and mortgage banks;
(b) Stock savings and loan associations; and
(c) Private development banks (Sec. 3.2)
Note: The term ‘thrift banks’ also refers to any banking
corporation organized for the following purposes:
(i) Accumulating the savings of depositors and investing
them, together with capital loans secured by bonds,
mortgages in real estate and insured improvements
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thereon, chattel mortgage, bonds and other forms of
security or in loans for personal or household finance,
whether secured or unsecured, or in financing for
homebuilding and home development; in readily
marketable and debt securities; in commercial papers
and accounts receivables, drafts, bills of exchange,
acceptances or notes arising out of commercial
transactions; and in such other investments and loans
which the Monetary Board may determine as necessary
in the furtherance of national economic objectives;
(ii) Providing short-term working capital, medium- and
long-term financing, to businesses engaged in
agriculture, services, industry and housing; and
(iii) Providing diversified financial and allied services for its
chosen market and constituencies especially for small
and medium enterprises and individuals. (Sec.3(a), R.A.
7906)
(4) Cooperative Banks – These are banks organized
primarily to make financial and credit services available
to cooperatives and their members. It may perform any
or all of the services offered by a rural bank, including
the operation of an FCDU subject to certain conditions.
(Morales, The Philippine GBL Annotation)
Note: A cooperative bank is one organized for the primary
purpose of providing a wide range of financial services to
cooperatives and their members. (Art. 23(i), R.A. 9520)
(5) Islamic Banks – These are banks the business dealings
and activities of which are subject to the basic principles
and rulings of Islamic Shari’a. The Al Amanah Islamic
Investment Bank of the Philippines, which was created
by RA 6848, is the only Islamic bank in the country at
this time.
Note: Islamic Bank refers to the Al-Amanah Islamic
Investment Bank of the Philippines, created under R.A.
6848. (See Sec. 44(1) and Sec. 2, R.A. 6848)
(6) Rural Banks – Mandated to make needed credit
available and readily accessible in the rural areas on
reasonable terms and which are primarily governed by
the Rural Banks Act of 1992 (RA 7353)
(7) Other Classifications of Banks – As determined by the
Monetary Board, i.e., Philippine Veterans Bank (RA
3518), Landbank of the Philippines (RA 3844),
Development Bank of the Philippines (RA 85)
DISTINCTIONS BETWEEN BANKS,
QUASI-BANKS AND TRUST ENTITIES
AS OPPOSED TO QUASI-BANKS
Quasi-banks (QB) refer to entities engaged in the borrowing
of funds through the issuance, endorsement or assignment
with recourse or acceptance of deposit-substitute
instruments, for purposes of relending the funds so
borrowed or using them to purchase receivables and other
obligations. (last paragraph of Sec. 4)
The term “deposit substitutes” is defined as funds obtained
from the public, other than deposits, through the issuance,
endorsement, or acceptance of deposit-substitute
instruments for the borrower's own account, for the purpose
UP COLLEGE OF LAW
of relending or purchasing of receivables and other
obligations. It includes bankers acceptances, promissory
notes, participations, certificates of assignment and similar
instruments with recourse, and repurchase agreements.
(Sec. 95, New Central Bank Act, hereinafter “NCBA”)
AS OPPOSED TO TRUST ENTITIES
A Trust Entity is a stock corporation or a person duly
authorized by the Monetary Board to engage in trust
business. (Sec. 79, GBL)
A Trust Business is any activity resulting from trusteeship
involving the appointment of a trustee by a trustor for the
administration, holding, management of funds and/or
properties of the trustor by the trustee for the use, benefit or
advantage of the trustor or of beneficiaries.
BANK POWERS AND LIABILITIES
Apart from its general powers as a stock corporation, it can:
(1) Exercise all the powers specified in Sec. 29
(2) Provide the other banking services in Sec 53
(3) Purchase, hold, and convey real estate under Secs. 51
and 52 (Morales, The Philippine GBL Annotation)
Commercial Bank Universal Bank
Powers
(a) Corporate Powers (Sec. (a) Corporate Powers (Sec.
29, GBL) 29, GBL)
(b) Banking and Incidental (b) Banking and Incidental
Powers (Sec. 29, GBL) Powers (Sec. 23, GBL)
(c) Power to Invest in Allied (c) Power to invest in Allied
enterprises (financial or (financial or non-
non-financial) (Sec. 30, financial) (Sec. 24, GBL)
GBL) (d) Power to invest in Non-
allied enterprises – (Sec.
24, GBL)
(e) Powers of an investment
house (Sec. 23, GBL)
CORPORATE POWERS
General powers incident to corporations
(1) To sue and be sued in its corporate name;
(2) Succession by its corporate name for the period stated
in the AOI and the certificate of incorporation
(3) To adopt and use a corporate seal
(4) To amend its AOI
(5) To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal them
(6) To issue or sell stocks to subscribers and to sell treasury
stocks.
(7) To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and
bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution
(8) To enter into merger or consolidation
(9) To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
BANKING LAWS BAR OPERATIONS COMMISSION
scientific, civic, or similar purposes: provided that no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity
(10) To establish pension, retirement, and other plans for
the benefit of its directors, trustees, officers and
employees
(11) To exercise such other powers as may be essential or
necessary to carry out its purposes as stated in the AOI.
(Sec. 36, Corporation Code)
BANKING AND INCIDENTAL POWERS
All such powers as may be necessary to carry on the
business of commercial banking (Sec. 29)
(1) Accepting drafts – By accepting a draft, a bank creates a
“banker’s acceptance”, which is a negotiable time draft
or bill of exchange drawn on and accepted by a
commercial bank. This is different from “trade
acceptance”, which is accepted by the buyer. (Morales,
The Philippine GBL Annotation)
(2) Issuing letters of credit
(3) Discounting and negotiating promissory notes, drafts,
bills of exchange, and other evidence of debt
(4) Accepting or creating demand deposits
Deposit function
General rule: Only a Universal Bank (UB) Commercial Bank
(KB) can accept or create demand deposits.
Exception: Banks other than a UB or KB with prior approval
of, and subject to such conditions and rules as may be
prescribed by the Monetary Board (Sec. 33, GBL)
Presumption of ownership of deposits
It is presumed that money deposited in a bank account
belongs to the person in whose name the deposit account is
opened.
A depositor is presumed to be the owner of funds standing
in his name in a bank deposit; and where a bank is not
chargeable with notice that the money deposited in such
account is the property of some other person than the
depositor, the bank is justified in paying out the money to
the depositor or upon his order, and cannot be liable to any
other person as the true owner. (Fultron Iron Works Co. v.
China Banking Corporation, 1930)
A bank is under no duty or obligation to make an
application or set-off against the deposit accounts of a
borrower. To apply the deposit to the payment of a loan is a
privilege, a right of set-off which the bank has the option
(but not the obligation) to exercise. (BPI v. CA, 1994)
The rent of safety deposit boxes is a special kind of deposit
and cannot be characterized as an ordinary contract of
lease because the full and absolute possession and control
of the deposit box is not given to the renters. The prevailing
rule is that the relation between the bank renting out and
the renter is that of bailor and bailee the bailment being for
hire and mutual benefit. (CA Agro-industrial Dev. Corp. v.
CA, 1983)
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(5) Receiving other types of deposits and deposit substitutes
Types of Deposits
(a) Time Deposit – Interest rate stipulated depending on
the number of days. During this period, the money
deposited may not be withdrawn without incurring
penalty. High interest rates.
(b) Savings Deposit – Bank pays an interest rate, but not as
high as time deposits.
(c) Demand Deposits/Current Accounts - No interest is
paid by the bank because the depositor can take out his
funds any time. It is called demand deposit because the
depositor can withdraw the money he deposited on the
very same day when he deposited it or at any time
thereafter. (Villanueva, Commercial Law Review, opinion)
(6) Buying and selling foreign exchange and gold or silver
bullion
(7) Acquiring marketable bonds and other debt securities
(8) Extending credit
Loan Function
“Know your customer” rule
Before granting a loan or other credit accommodation, a
bank must ascertain that the debtor is capable of fulfilling
its commitments to the bank. (Sec. 40)
The bank may demand from its credit applicants a
statement of their assets and liabilities and of their income
and expenditure and such information as may be prescribed
by law or by rules and regulations of MB to enable the bank
to properly evaluate the credit application which includes
the corresponding financial statements submitted for
taxation purposes to the BIR. (Sec. 40)
Credit enhancement
If the borrower is less than creditworthy, third persons may
enhance his credit by providing guarantees and other
security devices in favor of the bank. (Morales, The Philippine
General Banking Law, opinion)
A bank cannot lend pesos to a nonresident (BSP Circular
No. 22; Sec. 22, Manual of Regulations on Foreign
Exchange Transactions). (Morales, The Philippine GBL
Annotation)
If there is material misrepresentation, the bank may:
(a) Terminate any loan or other credit accommodation
granted on the basis of said statements; and
(b) Shall have the right to demand immediate repayment or
liquidation of the obligation (Sec. 40)
Limit on loans, credit accommodations and guarantees
Real estate General rule: Shall not exceed
75% of the appraised value
of the respective real estate
security, plus 60% of the
appraised value of the
insured improvements, and
such loans may be made to
the owner of the real estate
or to his assignees
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Exception: The Monetary
Board otherwise prescribes
(Sec. 37)
Security of chattels and General rule: Shall not exceed
intangible properties 75% of the appraised value
(patents, trademarks, trade of the security, and such
names, and copyrights) loans and other credit
accommodations may be
made to the title-holder of
the chattels and intangible
properties or his assignees
Exception: The Monetary
Board otherwise prescribes
(Sec. 38)
Grant of loans
(a) Only in amounts and for the periods of time essential for
the effective completion of the operations to be
financed; and
(b) Consistent with safe and sound banking practices. (Sec.
39)
Purpose of loans
Purpose must be stated in the application and in the
contract between the bank and the borrower. (Sec. 39)
Effect of usage of loan proceeds for purposes other than those
agreed upon with the bank
The bank shall have the right to terminate the loan or other
credit accommodation and demand immediate repayment
of the obligation. (Sec. 39)
Amortization on loans and other credit accommodations
(a) In case of loans and other credit accommodations with
maturities of more than 5 years, provisions must be
made for periodic amortization payments, but such
payments must be made at least annually: Provided,
however, That when the borrowed funds are to be used
for purposes which do not initially produce revenues
adequate for regular amortization payments therefrom,
the bank may permit the initial amortization payment to
be deferred until such time as said revenues are
sufficient for such purpose, but in no case shall the
initial amortization date be later than 5 years from the
date on which the loan or other credit accommodation is
granted.
(b) In case of loans and other credit accommodations to
microfinance sectors, the schedule of loan amortization
shall take into consideration the projected cash flow of
the borrower and adopt this into the terms and
conditions formulated by banks. (Sec. 44)
All are subject to such rules as the Monetary Board may
promulgate. (Sec. 29, GBL)
DILIGENCE REQUIRED OF BANKS
Banks should observe diligence that is higher than that
expected from a good father of a family.
Notwithstanding the degree of diligence required, a bank is
not expected to be infallible (Prudential Bank vs. CA, 2000).
UP COLLEGE OF LAW BANKING LAWS
FIDUCIARY NATURE OF BANKS
(1) Failure on the part of the bank to satisfy the degree of
diligence required of banks may warrant the award of
damages.
(2) Under Sec. 2, the degree of diligence is “high standards
of integrity and performance” and no longer “highest
degree of diligence” as was decided prior to the
effectivity of the General Banking Law of 2000 but also
(mistakenly) even thereafter. In numerous cases, the
Supreme Court has held that the highest degree of
diligence and care is expected from banks (Simex
International v. CA [1990]; Philippine Bank of Commerce
v. CA [1997]; Westmont Bank v. Ong [2002]; Solidbank v.
Spouses Tan [2003]; Samsung Construction v. FEBTC
[2004]; Citibank, N.A. v. Spouses Cabamongan [2006];
Philippine Savings Bank v. Chowking Food Corporation
[2008]; Bank of America NT &SA v. Philippine Racing
Club [2009].
As a business affected with public interest and because of
the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their
relationship.
In every case, the depositor expects the bank to treat his
account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The
bank must record every single transaction accurately, down
to the last centavo, and as promptly as possible. This has to
be done if the account is to reflect at any given time the
amount of money the depositor can dispose as he sees fit,
confident that the bank will deliver it as and to whomever
he directs. A blunder on the part of the bank, such as the
failure to duly credit him his deposits as soon as they are
made, can cause the depositor not a little embarrassment if
not financial loss and perhaps even civil and criminal
litigation (Simex International v. CA, 1990).
Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees
(PCI Bank v. CA, 2001).
It cannot be over emphasized that the banking business is
impressed with public interest. Of paramount importance is
the trust and confidence of the public in general in the
banking industry. Consequently, the diligence required of
banks is more than that of a Roman pater familias or a
good father of a family. The highest degree of diligence is
expected (Phil. Savings Bank v. Chowking Food Corporation,
2008).
The banking business is so impressed with public interest
where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard
of diligence must be a high degree of diligence, if not the
utmost diligence (Bank of America NT&SA v. Phil. Racing
Club, 2009).
Under the doctrine of last clear chance, a bank may be held
liable for loss despite the negligence of a depositor.
Examples of these cases are the following:
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(1) For disbursing funds to a dishonest employee despite
the employee’s failure to strictly abide with the bank’s
internal procedure. (PBC v. CA, 1997)
(2) Allowing the execution of a mortgage on parcels of land
as security for a loan not owned by the prospective
borrower. (Canlas v. Court of Appeals, 2000)
(3) Crediting the deposit in favor of another depositor, a
check where the signature of the drawer was forged.
(Westmont Bank v. Ong, 2002)
(4) Encashing pre-signed checks of the depositor which
were stolen by its employee. (Bank of America NT & SA v.
Philippine Racing Club, 2009)
A bank is liable to a depositor when it honored and paid on
a forged check against the depositor’s account even if the
bank followed its internal procedure in preventing a faulty
discharge. (Samsung Construction v. FEBTC, 2004)
In Gempesaw v. Court of Appeals (1993), a bank was held
liable for damages for failing to follow its internal
procedures in paying on a forged check despite the gross
negligence on the part of the depositor.
STIPULATION ON INTERESTS
The Monetary Board may prescribe the maturities, as well
as related terms and conditions for various types of bank
loans and other credit accommodations.
Any change by the Board in the maximum maturities shall
apply only to loans and other credit accommodations made
after the date of such action.
The Monetary Board shall regulate the interest imposed on
micro finance borrowers by lending investors and similar
lenders such as, but not limited to, the unconscionable
rates of interest collected on salary loans and similar credit
accommodations (Sec. 43, GBL)
GRANT OF LOANS AND SECURITY REQUIREMENTS
(PRUDENTIAL MEASURES)
RATIO OF NET WORTH TO TOTAL RISK ASSETS
Risk-based capital ratio
The minimum ratio which the net worth of a bank must bear
to its total risk assets which may include contingent
accounts [i.e. net worth: total risk assets] (Sec. 34, GBL)
General rule: A bank must conform to the risk-based capital
ratio prescribed by the MB
Exceptions: The MB may alter or suspend compliance with
such ratio whenever necessary for a maximum period of 1
year.
(1) In case of a bank merger or consolidation; OR
(2) When a bank is under rehabilitation under a program
approved by the BSP; (Sec. 34, GBL)
Purpose
A bank must not be allowed to expand the volume of its
loans and investments in a manner that is disproportionate
to its net worth. (MORALES, Phil. Gen. Banking Law)
UP COLLEGE OF LAW BANKING LAWS
Effect of non-compliance
(1) The MB may limit or prohibit the distribution of net
profits by such bank and may require that part or all of
the net profits be used to increase the capital accounts
of the bank until the minimum requirement has been
met.
(2) The MB may restrict or prohibit the acquisition of major
assets and the making of new investments by the bank,
with the exception of purchases of readily marketable
evidences of indebtedness of the RP and the BSP and
any other evidences of indebtedness or obligations the
servicing and repayment of which are fully guaranteed
by the RP, until the minimum required capital ratio has
been restored. (Sec. 34, GBL)
SINGLE BORROWER’S LIMIT
General rule: The total loans, credit accommodations and
guarantees that may be extended by a bank to any person,
partnership, association, or corporation or other entity shall
at no time exceed 20% of the net worth of such bank. (Sec.
35.1,GBL)
Exceptions:
(1) The Monetary Board otherwise prescribes for reasons of
national interest. (Sec. 35.1, GBL) Now, the single
borrower’s limit is 25% of the net worth of the lending
bank.
(2) Wholesale lending activities of government banks to
participating institutions for relending to end-user
borrowers: separate limit of 35% net worth. (BSP
Circular No. 425 dated March 25, 2004)
Increase of limit
The Monetary Board may increase the limit prescribed by an
additional 10% of the net worth, when:
(1) The additional liabilities of any borrower are adequately
secured by trust receipts, shipping documents,
warehouse receipts or other similar documents
transferring or securing title;
(2) Covering readily marketable, non-perishable goods; and
(3) Which must be fully covered by insurance (Sec. 35.2,
GBL)
Purpose
To prevent the bank from making excessive loans and other
credit accommodations to a single borrower or corporate
group, including guarantees for the account of such
borrower or group. The bank is prohibited from… placing
many eggs in the basket of one client. [It] is a damage-
control mechanism [and] a device for risk amelioration.
(MORALES, The Philippine General Banking Law, Opinion)
Basis for determining compliance
The basis for determining compliance with the SBL is the
total credit commitment of the bank to the borrower. (Sec.
35.1, GBL)
Inclusions in the ceiling
(1) The direct liability of the maker or acceptor of paper
discounted with or sold to such bank and the liability of
a general indorser, drawer or guarantor who obtains a
loan or other credit accommodation from or discounts
paper with or sells papers to such bank;
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(2) In the case of an individual who owns or controls a
majority interest in a corporation, partnership,
association or any other entity, the liabilities of said
entities to such bank;
(3) In the case of a corporation, all liabilities to such bank of
all subsidiaries in which such corporation owns or
controls a majority interest; and
(4) In the case of a partnership, association or other entity,
the liabilities of the members thereof to such bank. (Sec.
35.3, GBL)
Guidelines on the wholesale lending of government banks
(1) It shall apply only to loans granted by participating
financial institutions (PFIs) on a wholesale basis for on-
lending to end-user borrowers;
(2) It shall apply only to loan programs funded by
multilateral, international, or local development
agencies, organizations, or institutions, especially
designed for wholesale lending activities of government
banks;
(3) The end-user borrowers of the PFIs shall be subject to
the 25% SBL, not the increased ceiling of 35%; and
(4) Government banks shall observe appropriate criteria for
accrediting PFIs and for the grant/renewal of credit
lines to accredited PFIs. (BSP Circular No. 425 dated
March 25, 2004)
Exclusions from the ceiling
Loans and other credit accommodations
(1) Secured by obligations of the BSP or of the Philippine
Government;
(2) Fully guaranteed by the government as to the payment
of principal and interest;
(3) Covered by assignment of deposits maintained in the
lending bank and held in the Philippines;
(4) Under letters of credits to the extent covered by margin
deposits; and
(5) Specified by the Monetary Board as non-risk items (Sec.
35.5, GBL)
Combination of liabilities
The MB may prescribe the combination of the liabilities of
subsidiary corporations or members of the partnership,
association, entity or such individual under certain
circumstances, including but not limited to any of the
following situations:
(1) The parent corporation, partnership, association, entity
or individual guarantees the repayment of the liabilities;
(2) The liabilities were incurred for the accommodation of
the parent corporation or another subsidiary or of the
partnership or association or entity or such individual; or
(3) The subsidiaries though separate entities operate
merely as departments or divisions of a single entity.
(Sec. 35.4, GBL)
Loans and other credit accommodations, deposits
maintained with, and usual guarantees by a bank to any
other bank or non-bank entity, whether locally or abroad,
shall be subject to the prescribed limits. (Sec. 35.6, GBL)
UP COLLEGE OF LAW BANKING LAWS
RESTRICTIONS ON INSIDER LENDING:
BANK EXPOSURE TO DIRECTORS, OFFICERS, STOCKHOLDERS
AND THEIR RELATED INTERESTS (DOSRI)
General rule: No director or officer of any bank:
(1) Shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such
bank, nor
(2) Shall he become a guarantor, endorser or surety for
loans from such bank to others, or in any manner be an
obligor or incur any contractual liability to the bank
Exceptions:
(1) Valid insider lending (Sec. 36, GBL)
(2) Loans, credit accommodations and guarantees
extended by a cooperative bank to its cooperative
shareholders (Sec. 36, GBL)
Requirements for valid insider lending
(1) In the regular course of business;
(2) Upon terms not less favorable to the bank than those
offered to others;
(3) There is a written approval of the majority of all the
directors of the bank, excluding the director concerned;
(Except: granted to officers under a fringe benefit plan
approved by the BSP;
(4) The required approval shall be entered upon the record
of the bank and a copy of such entry shall be
transmitted forthwith to the appropriate supervising
and examining department of the BSP;
(5) Limited to an amount equivalent to the DOSRI
borrower’s unencumbered deposits and book value of
his paid-in capital contribution in the bank (Sec. 36,
GBL)
Exceptions:
(1) Non-risk items; and
(2) Loans in the form of fringe benefits.
A DOSRI borrower is required to waive the secrecy of his
“deposits of whatever nature in all banks in the Philippines.”
(Sec. 26, NCBA)
Purpose
The general policy behind DOSRI rules is to level the
lending field between the “insiders” and the “outsiders”.
The objective is to prevent the bank from becoming a
captive source of finance for DOSRI. (Morales, The Philippine
General Banking Law, Opinion)
LOAN-LOSS PROVISIONING
The following are subject to regulation by the Monetary
Board:
(1) The amount of reserves for bad debts or doubtful
accounts or other contingencies; and
(2) The writing off of loans, other credit accommodations,
advances and other assets. (Sec. 49, GBL)
Purpose
For effective banking supervision. There is a problem of
mismatch when a loan becomes non-performing. The bank
is paying interest on the money it borrowed from the
depositors or other placers of funds, but is not recouping
that interest from the loan it made. Eventually, the bank
may have to write off loan losses against profits. To cushion
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BAR OPERATIONS COMMISSION
this eventuality, the bank is required to set aside reserved
for bad debts and other doubtful accounts or contingencies.
(Morales, The Philippine General Banking Law, Opinion)
To address the non-performing asset problem, RA 9182
Special Purpose Vehicle Act was passed. The Monetary Board
approved certain accounting guidelines on the sale by banks
and other financial institutions for housing under the said Act.
MORALES, The Philippine GBL Annotation) [N.B. RA 9182 is
no longer in effect.]
RESERVES
Purposes
(1) To control the volume of money created by the credit
operations of the banking system, the BSP requires all
banks to maintain reserves against their deposit and
deposit-substitute liabilities.
(2) As a ready source of funds that will respond to unusually
large number of withdrawals or preterminations of
deposits or deposit-substitutes, taking in the shape of a
bank run. (Morales, The Philippine General Banking Law,
Opinion)
Unified reserve
(1) Statutory or legal and liquidity reserve [N.B. The two
reserves have been combined or unified: 18% for
deposits and deposit substitutes (BSP Circular No. 753
dated March 29, 2012)
(a) For deposit-substitutes evidenced by repurchase
agreements covering government securities: 2% (BSP
Circular No. 444 dated August 18, 2004)
(b) For foreign currency deposit units: 100% (BSP Circular
No. 1389 dated April 13, 1993, as amended); 30% of this
cover must be in the form of liquid assets (BSP Circular-
Letter dated June 6, 1997, as cited in MORALES)
(2) Reserve: The required reserves are to be kept in the form
of deposits placed in the banks’ Demand Deposit
Account with the BSP (BSP Circular No. 753 dated March
29, 2012)
The BSP shall not pay interest on the reserves maintained
with it unless the Monetary Board decides otherwise as
warranted by circumstances. (Sec. 94, NCBA)
PDIC INSURANCE
Banks are required to insure their deposit liabilities with the
PDIC.
Partial Insurance
Each depositor is a beneficiary of the insurance for a
maximum amount of P500,000, or its foreign currency
equivalent in the case of an FCDU deposit. (RA 9576, 2009)
Note: PDIC only insures deposit (not deposit substitute)
liabilities of a bank or banking institution (Sec.5, RA 3591, as
amended)
Purpose
Full insurance might encourage risky banking activities. A
limited insurance of bank deposits serves to limit moral
hazard.
UP COLLEGE OF LAW BANKING LAWS BAR OPERATIONS COMMISSION

EQUITY INVESTMENT LIMITS (a) Fine: Not less than Fifty thousand pesos (P50,000) nor
(ALLIED V. NON-ALLIED ENTERPRISES) more than One hundred thousand pesos (P100,000); or
This is a prudential measure by limiting the exposure of (b) Imprisonment: Not less than one (1) year nor more than
banks in different businesses for the purpose of control, five (5) years; or
affiliation or other continuing business advantage. (c) Both fine and imprisonment: in the discretion of the
General Rule UB (Sec. 24) KB (Sec. 30) Court.

Total investment (allied & non-allied (of allied (2) Willful making of a false or misleading statement on a
in equities: enterprises) enterprises) material fact to the Monetary Board or to the examiners of
Not exceeding Not exceeding the Bangko Sentral (Sec. 35, NCBA)
50% of the net 35% of the net (a) Fine: Not less than One hundred thousand pesos
worth of the bank worth of the bank (P100,000) nor more than One hundred thousand pesos
(P200,000); or
The equity (allied/non-allied) (allied) (b) Imprisonment: Not more than five (5) years; or
investment in any Not exceeding Not exceeding (c) Both fine and imprisonment, in the discretion of the
one enterprise: 25% of the net 25% of the net Court.
worth of the bank worth of the bank
(3) Willful violation of the NCBA and other pertinent banking
Net Worth – the total of the unimpaired paid-in capital laws (including the GBL) being enforced or implemented
including paid-in surplus, retained earnings and undivided by the Bangko Sentral or any order, instruction, rule or
profit, net of valuation reserves and other adjustments regulation issued by the Monetary Board (Sec. 36, NCBA)
(a) Fine: Not less than Fifty thousand pesos (P50,000) nor
The acquisition of such equity is subject to the prior more than One hundred thousand pesos (P200,000); or
approval of the MB. (b) Imprisonment: Not less than two (2) years nor more than
ten (10) years; or
The equity investment of a Universal Bank in: (c) Both fine and imprisonment, in the discretion of the
(1) Financial Allied Enterprises – 100% of the equity in a Court.
thrift bank, rural bank, or financial allied enterprise. (Sec
25 GBL). A publicly-listed UB or KN may own up to ADMINISTRATIVE SANCTIONS
100% of the voting stock of only one other UB or KB. (1) Willful violation of its charter or by-laws; willful delay in
(2) Non-Financial Allied Enterprises – 100% of the equity of the submission of reports or publications thereof as
that enterprise (Sec 26 GBL) required by law, rules and regulations; Criminal Acts in
(3) Non-Allied Enterprises – Not exceeding 35% of the total Nos. 1 to 3 above; and/or conducting business in an
equity in a single non-allied enterprise not shall it unsafe or unsound manner as may be determined by the
exceed 35% of the voting stock in that enterprise. (Sec Monetary Board
27 GBL) (a) Fine not exceeding Thirty thousand pesos (P30,000) a
(4) Quasi-banks – 40% of the equity of quasi-banks (Sec 28 day for each violation, taking into consideration the
GBL) attendant circumstances, such as the nature and gravity
of the violation or irregularity and the size of the bank or
The equity investment of Commercial Banks in: quasi-bank; or
(1) Financial Allied enterprises – 100% of the equity of a (b) Suspension of rediscounting privileges or access to
thrift or rural bank. (Sec 31 GBL). Where the equity Bangko Sentral credit facilities;
investment of a KB is in other financial allied (c) Suspension of lending or foreign exchange operations or
enterprises, including other KBs, such investment shall authority to accept new deposits or make new
remain a minority holding in that enterprise. investments;
(2) Non-Financial Allied enterprises – 100% of the equity of (d) Suspension of interbank clearing privileges; and/or
said enterprises. (Sec 32 GBL) (e) Revocation of quasi-banking license.
(3) Quasi-banks – 40% of the equity of quasi-banks. (Sec
28 GBL) (2) Suspension or Removal of Director
(a) If the offender is a director or officer of a bank, quasi-
PENALTIES FOR VIOLATION bank or trust entity, the Monetary Board may also
Violation of any of the provisions of the GBL shall be subject suspend or remove such director or officer (Sec. 66,
to Sections 34, 35, 36 and 37 of the New Central Bank Act, GBL).
unless otherwise provided under therein. (b) Resignation or termination from office shall not exempt
such director or officer from administrative or criminal
FINE/IMPRISONMENT sanctions. (Sec. 37, NCBA)

Criminal sanctions (3) Dissolution of Bank

(1) Refusal by an institution subject to examination and (a) If the violation is committed by a corporation, such
supervision by the Monetary Board to file the required corporation may be dissolved by quo warranto
report or permit any lawful examination into its affairs proceedings instituted by the Solicitor General (Sec. 66,
(Sec. 34, NCBA) GBL)

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UP COLLEGE OF LAW
(b) Whenever a bank or quasi-bank persists in carrying on
its business in an unlawful or unsafe manner, the
Monetary Board may commence proceedings in
liquidation. (Sec. 36, NCBA in relation to Sec. 30, NCBA)
Philippine Deposit Insurance
Corporation Act
(R.A. No. 3591, as amended)
BASIC POLICY
Promote and safeguard the interests of the depositing
public by way of providing permanent and continuing
insurance coverage on all insured deposits (Sec. 1, as
amended)
CONCEPT OF INSURED DEPOSITS
Insured deposit means the amount due to any bona fide
depositor for legitimate deposits in an insured bank net of
any obligation of the depositor to the insured bank as of the
date of closure, but not to exceed 500,000 or its equivalent
in foreign currency (Sec. 4(g), as amended)
LIABILITY OF DEPOSITORS
DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PDIC
The deposit liabilities of any bank or banking institution,
which is engaged in the business of receiving deposits on
the effective date of this Act, or which thereafter may
engage in the business of receiving deposits, shall be
insured with the PDIC (Sec. 5)
Notes:
(1) ’Bank’ and ‘Banking Institution’ shall include banks,
commercial banks, savings bank, mortgage banks, rural
banks, development banks, cooperative banks, stock
savings and loan associations and branches and
agencies in the Philippines of foreign banks and all
other corporations authorized to perform banking
functions in the Philippines (Sec. 4(b), as amended)
(2) ‘Deposit’ means the unpaid balance of money or its
equivalent received by a bank in the usual course of
business and for which it has given or is obliged to give
credit to a commercial, checking, savings, time or thrift
account, or issued in accordance with Bangko Sentral
rules and regulations and other applicable laws,
together with such other obligations of a bank, which,
consistent with banking usage and practices, the Board
of Directors shall determine and prescribe by
regulations to be deposit liabilities of the bank (Sec. 4(f),
as amended).
(3) What is not considered a deposit? Any obligation of a
bank which is payable at the office of the bank located
outside of the Philippines (Sec. 4(f), as amended).
COMMENCEMENT OF LIABILITY
Liability commences upon the approval of application.
BANKING LAWS BAR OPERATIONS COMMISSION
DEPOSIT ACCOUNT NOT ENTITLED TO PAYMENT
The PDIC shall not pay deposit insurance for the following
accounts or transactions, whether denominated,
documented, recorded or booked as deposit by the bank:
(1) Investment products such as bonds and securities, trust
accounts, and other similar instruments;
(2) Unfunded, fictitious or fraudulent deposit accounts or
transactions;
(3) Deposits accounts or transactions constituting, and/or
emanating from, unsafe and unsound banking
practice/s, as determined by the PDIC, in consultation
with the BSP, after due notice and hearing, and
publication of a cease and desist order issued by the
PDIC against such deposit accounts or transactions; and
(4) Deposits that are determined to be the proceeds of an
unlawful activity as defined under Republic Act 9160, as
amended.
Notes: ‘Unlawful Activity’ refers to any act or omission or
series or combination thereof involving or having direct
relation to following:
(1) Kidnapping for ransom under Article 267 of Act No.
3815, otherwise known as the Revised Penal Code, as
amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic
Act No. 9165, otherwise known as the Comprehensive
Dangerous Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act
No. 3019, as amended, otherwise known as the Anti-
Graft and Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as amended;
(5) Robbery and extortion under Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised Penal Code, as
amended;
(6) Jueteng and Masiao punished as illegal gambling under
Presidential Decree No. 1602;
(7) Piracy on the high seas under the Revised Penal Code, as
amended and Presidential under the Revised Penal
Code, as amended and Presidential Decree No. 532;
(8) Qualified theft under Article 310 of the Revised penal
Code, as amended;
(9) Swindling under Article 315 of the Revised Penal Code,
as amended;
(10) Smuggling under Republic Act Nos. 455 and 1937;
(11) Violations under Republic Act No. 8792, otherwise
known as the Electronic Commerce Act of 2000;
(12) Hijacking and other violations under Republic Act No.
6235; destructive arson and murder, as defined under
the Revised Penal Code, as amended, including those
perpetrated by terrorists against non-combatant
persons and similar targets;
(13) Fraudulent practices and other violations under
Republic Act No. 8799, otherwise known as the
Securities Regulation Code of 2000;
(14) Felonies or offenses of a similar nature that are
punishable under the penal laws of other countries (Sec.
3(i) of R.A. 9160, as amended).
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UP COLLEGE OF LAW BANKING LAWS
EXTENT OF LIABILITY
The liability of the Corporation is to the extent of the insured
deposit (Sec.14).
Whenever an insured bank shall have been closed by the
Monetary Board pursuant to Section 30 of R.A. 7653,
payment of the insured deposits on such closed bank shall
be made by the PDIC as soon as possible either (1) by cash
or (2) by making available to each depositor a transferred
deposit in another insured bank in an amount equal to
insured deposit of such depositor (Sec. 14).
Note: Insured deposit shall not exceed 500,000 (Sec. 4(g), as
amended).
DETERMINATION OF INSURED DEPOSIT
The determination of insured deposits shall commence
upon the PDIC’s actual takeover of the closed bank (Sec.
16(a), as amended).
The amount of the insured deposit shall be determined
according to such regulations as the Board of Directors may
prescribe, In determining such amount due to any
depositor, there shall be added together all deposits in the
bank maintained in the same right and capacity for his
benefits either in his own name or in the name of others (Sec.
4(g), as amended).
Note: The PDIC may require proof of claims to be filed
before paying the insured deposits, and that in any case
where the PDIC is not satisfied as to the viability of a claim
for an insured deposit, it may require final determination of
a court of competent jurisdiction before paying such claim
(Sec. 14)
Notice and publication requirement
(1) The PDIC shall give notice to the depositors of the
closed bank of the insured deposits due them by
whatever means deemed appropriate by the Board of
Directors.
(2) The PDIC shall publish the notice once a week for at
least three (3) consecutive weeks in a newspaper of
general circulation or, when appropriate, in a newspaper
circulated in the community or communities where the
closed bank or its branches are located (Sec. 16(a), as
amended).
CALCULATION OF LIABILITY
Per depositor, per capacity rule
In determining the amount due to any depositor, there shall
be added together all deposits in the bank maintained in
the same right and capacity for his benefits either in his own
name or in the name of others (Sec. 4(g), as amended)
Joint accounts
A joint account regardless of whether the conjunction 'and,'
'or,' 'and/or' is used, shall be insured separately from any
individually-owned deposit account (Sec. 4(g), as amended).
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BAR OPERATIONS COMMISSION
If the account is held by two or more natural persons or two or
more juridical persons
General rule: The maximum insured deposit shall be divided
into as many equal shares as there are individuals or
juridical persons (Sec. 4(g), as amended).
Exception: Unless a different sharing is stipulated in the
document of deposit (Sec. 4(g), as amended).
If the account is held by a juridical person or entity jointly with
one or more natural persons
The maximum insured deposits shall be presumed to
belong entirely to such juridical person or entity (Sec. 4(g),
as amended).
Note: The aggregate of the interest of each co-owner over
several joint accounts, whether owned by the same or
different combinations of individuals, juridical persons or
entities, shall likewise be subject to the maximum insured
deposit of P500,000.00 (Sec. 4(g), as amended).
Mode of payment
Payment of the insured deposits on such closed bank shall
be made by the PDIC as soon as possible either:
(1) by cash;
(2) by making available to each depositor a transferred
deposit in another insured bank in an amount equal to
insured deposit of such depositor (Sec. 14)
Note: ‘Transfer Deposit’ means a deposit in an insured bank
made available to a depositor by the PDIC as payment of
insured deposit of such depositor in a closed bank and
assumed by another insured bank (Sec. 4(h), as amended).
Effect of Payment of Insured Deposit
Discharge from liability to the depositor
The PDIC shall be discharged from liability upon payment
under Sec. 14, i.e.:
(1) Payment of an insured deposit to any person by the
PDIC;
(2) Payment of a transferred deposit to any person by the
new bank or by an insured bank in which a transferred
deposit has been made available (Sec.16(b), as
amended)
Subrogation to all the rights of the depositor
The PDIC, upon payment of any depositor as provided for in
Section 14 shall be subrogated to all rights of the depositor
against the closed bank to the extent of such payment. Such
subrogation shall include the right on the part of the PDIC
to receive the same dividends and payments from the
proceeds of the assets of such closed bank and recoveries
on account of stockholders liability as would have been
payable to the depositor on a claim for the insured deposits.
BUT the depositor shall retain his claim for any uninsured
portion of his deposit (Sec. 15).
UP COLLEGE OF LAW BANKING LAWS
Payment of insured deposits as preferred credit under Art.
2244 of the Civil Code
All payments by the PDIC of insured deposits in closed
banks partake of the nature of public funds, and as such,
must be considered a preferred credit similar to taxes due to
the National Government in the order of preference under
Article 2244 of the New Civil Code (Sec. 15)
Failure to settle claim of insured depositor
General rule: Failure to settle the claim within six (6) months
from the date of filing of claim for insured deposit shall, upon
conviction, subject the directors, officers or employees of the
PDIC responsible for the delay to imprisonment from six (6)
months to one (1) year.
Exceptions:
(1) Such failure was not due to grave abuse of discretion,
gross negligence, bad faith, or malice of the directors,
officers or employees; or
(2) The validity of the claim requires the resolution of issues
of facts and or law by another office, body or agency
including the case mentioned in the first proviso or by
PDIC together with such other office, body or agency.
Failure of depositor to claim insured deposits
All rights of the depositor against the PDIC with respect to
the insured deposit shall be barred:
(1) If he fails to claim the insured deposits within two (2)
years from actual takeover of the closed bank by the
receiver; or
(2) If he does not enforce his claim filed with the
corporation within two (2) years after the two-year
period to file a claim.
BUT all rights of the depositor against the closed bank and
its shareholders or the receivership estate to which the PDIC
may have become subrogated, shall thereupon revert to the
depositor.
Thereafter, the PDIC shall be discharged from any liability
on the insured deposit (Sec. 16(e), as amended).
Foreign Currency Deposit Act
(R.A. No. 6426)
The FCDA allows any person to deposit, and banks to
accept deposit, any foreign currency acceptable as part of
the Philippines’ international reserve.
CONFIDENTIALITY
All foreign currency deposits are declared as and considered
of an absolutely confidential nature and, except upon the
written permission of the depositor, in no instance shall be
examined, inquired or looked into by any person,
government official, bureau or office, whether judicial or
administrative, or legislative or any other entity whether
public or private. (Sec. 8)
The foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or process of
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any court, legislative body, government agency or any
administrative body whatsoever. (Sec. 8)
Exceptions:
(1) Upon written permission of the depositor (Sec. 8,
Foreign Currency Deposit Act ; Intengan vs CA, 2002)
(2) Upon order of a competent court in cases of violation of
the Anti-Money Laundering Act of 2001 [as in the case
of peso deposits, supra]
(3) During Bangko Sentral’s periodic or special
examinations [as in the case of peso deposits, supra],
and
(4) Disclosure of the Treasurer of the Philippines when the
unclaimed balances law applies (Act 3936, as amended
by PD 679)
(5) BSP/PDIC inquiry if there is a finding of unsafe and
unsound banking practice (as in the case of peso
deposits, supra)
(6) In Salvacion vs. CB (1997), where a Filipino child was
raped by a foreigner, the SC allowed, pro hac vice,
garnishment of foreign currency deposits stating : If we
rule that the questioned Section 113 of CB Circular No.
960 which exempts from attachment, garnishment, or
any other order or process of any court, legislative body,
government agency or any administrative body
whatsoever, is applicable to a foreign transient, injustice
would result especially to a citizen aggrieved by a
foreign guest.
PRIVILEGES
(1) Tax exemption – the FCD, including interests and all
other income or earnings of such deposits, are exempt
from any and all taxes whatsoever if these deposits are
made by non-residents and irrespective of whether or
not the non-residents are engaged in trade or business
in the Philippines (Sec. 6 as amended). Interests on
FCDs of residents are subject to 7.5% withholding tax.
(2) Exemption from attachment, garnishment or any other
order or process of any court, legislative or
administrative body, or government agency whatsoever
(Sec. 8)
Exception: The CA, upon application ex parte by the AMLC
and after determination that a probable cause exists that
any monetary instrument or property is in any way related to
an “unlawful activity”, the AMLC, may freeze the account
(Sec. 10, RA 9160).
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PAGE 140
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Intellectual Property Rights,
In General
STATE POLICIES
(1) To protect and secure the exclusive rights of scientists,
inventors, artists and other gifted citizens to their
intellectual property and creations, particularly when
beneficial to the people, for such periods as provided in
this Act.
(2) To promote the diffusion of knowledge and information
for the promotion of national development and
progress and the common good.
(3) To streamline administrative procedures of registering
patents, trademarks and copyright, to liberalize the
registration on the transfer of technology, and to
enhance the enforcement of intellectual property rights
in the Philippines. [Sec. 2, RA 8293]
INTELLECTUAL PROPERTY RIGHTS
DEFINITION:
Those property rights which result from the physical
manifestation of original thought. [Ballantine’s Law
Dictionary]
Note: There are no property rights protected by law in
mere ideas or mental conceptions. When creations of mind
are put in tangible form, there is appropriate subject of
property that is protected by law. [63A Am Jur 3rd Property,
Section 5]
INTELLECTUAL PROPERTY RIGHTS UNDER THE INTELLECTUAL
PROPERTY CODE
(1) Copyright;
(2) Related Rights of copyright;
(3) Trademarks and Service Marks;
(4) Geographic Indications;
(5) Industrial Designs;
(6) Patents;
(7) Layout-Designs (Topographies) of Integrated Circuits;
[Sec. 4, RA 8293]
(8) Protection of Undisclosed Information (TRIPS
Agreement).
DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS
AND PATENT
PATENTABLE INVENTIONS
Refer to any technical solution of a problem in any field of
human activity, which is new, involves an inventive step
and is industrially applicable. It may be, or refer to, any
product, process, or an improvement of any of the
foregoing. [Sec. 21, RA 8293] It is vested from the issuance
of letters of patent.
TRADEMARK
any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and
shall include a stamped or marked container of goods.
[Kho v. CA, et al. (2002)] It is vested from registration.
TRADE NAME: the name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA 8293]
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MERCANTILE LAW REVIEWER
COPYRIGHT: right granted by statute to the author or
originator of literary, scholarly, scientific, or artistic
productions, including computer programs. A copyright
gives him the legal right to determine how the work is used
and to obtain economic benefits from the work. For
example, the owner of a copyright for a book or a piece of
software has the exclusive rights to use, copy, distribute,
and sell copies of the work, including later editions or
versions of the work. If another person improperly uses
material covered by a copyright, the copyright owner can
obtain legal relief. [Rule 2, Copyright Safeguards and
Regulations]
Copyright is confined to literary and artistic works which
are original intellectual creations in the literary and artistic
domain protected from the moment of their creation. [Kho
v. CA, et al. (2002)] It is vested from the moment of
creation.
OTHER FORMS OF INTELLECTUAL PROPERTY
Geographic Indication
One which identifies a good as originating in the territory
of a TRIPS member, or a region or locality in that territory
where a given quality, reputation or other characteristic of
a good is essentially attributable to its geographical origin
[Art. 22, TRIPS Agreement]
Industrial Design
Any composition of lines or colors or any three-
dimensional form, whether or not associated with lines or
colors: Provided, that such composition or form gives a
special appearance to and can serve as pattern for an
industrial product or handicraft. (Sec. 112.1, RA 8293)
Layout Design (Topography) of an Integrated Circuit
Layout Design (Topography). — The three-dimensional
disposition, however expressed, of the elements, at least
one of which is an active element, and of some or all the
interconnections of an integrated circuit, or such a three-
dimensional disposition prepared for an integrated circuit
intended for manufacture. (Sec. 112.3, RA 8293)
Integrated Circuit. — a product, in its final form, or an
intermediate form, in which the elements, at least one of
which is an active element and some or all of the
interconnections are integrally formed and/or on a piece of
material, and which is intended to perform an electronic
function. (Sec. 112.2, RA 8293)
Undisclosed Information
Information which:
(1) Is a secret in a sense that it is not, as a body or in the
precise configuration and assembly of components,
generally known among or readily accessible to
persons within the circles that normally deal with the
kind of information in question;
(2) Has a commercial value because it is secret; and
(3) Has been subject to reasonable steps under the
circumstances, by the person lawfully in control of the
information, to keep it secret [Art. 39, TRIPS]
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TECHNOLOGY TRANSFER ARRANGEMENTS
Refers to contracts or agreements involving:
(1) the transfer of systematic knowledge for the
manufacture of a product;
(2) the application of a process, or rendering of a service
including management contracts;
(3) The transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of
computer software except computer software
developed for mass market. [Sec. 4.2, RA 8293]
Patents
PATENTABLE INVENTIONS
A patentable invention is any technical solution of a
problem in any field of human activity which is new,
involves an inventive step and is industrially applicable
shall be Patentable. It may be, or may relate to, a product,
or process, or an improvement of any of the
foregoing. [Sec. 21, RA 8293]
INVENTION PATENT
Standards:
Novelty. —An invention shall not be considered new if it
forms part of a prior art. [Sec. 23, RA 8293]
Prior art shall consist of:
(1) Everything which has been made available to the
public anywhere in the world, before the filing date or
the priority date of the application claiming the
invention; [Sec. 24.1, RA 8293]
(2) The whole contents of an application for a patent,
utility model, or industrial design registration,
published in accordance with this Act, filed or effective
in the Philippines, with a filing or priority date that is
earlier than the filing or priority date of the application:
Provided, That the application which has validly
claimed the filing date of an earlier application under
Section 31 of this Act, shall be prior art with effect as of
the filing date of such earlier application: Provided
further, That the applicant or the inventor identified in
both applications are not one and the same. [Sec. 24.2,
RA 8293]
Non-Prejudicial Disclosures: This is an exception to the
General Rule on Prior Art under Sec. 24. It provides that
the disclosure of the information contained in the
application during the 12 months preceding the filing date
or the priority date of the application shall not prejudice
the applicant on the ground of lack of novelty if such
disclosure was made by:
(1) The inventor
(2) A patent office and the information contained (1) in
another application filed by the inventor and should
not have been disclosed by the office, or (2) in an
application filed without the knowledge or consent of
the inventor by a third party which obtained the
information directly or indirectly from the inventor
(3) A third party which obtained the information directly or
indirectly from the inventor [Sec. 25, RA 8293]
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MERCANTILE LAW REVIEWER
(a) Inventive Step. — An invention involves an inventive
step if, having regard to prior art, it is not obvious to
a person skilled in the art at the time of the filing
date or priority date of the application claiming the
invention. [Sec. 26.1, RA 8293, as amended by RA
9502]
Cheaper Medicines Act: In case of drugs and
medicines, there is no inventive step if the invention
results from the mere discovery of a new form or
new property of a known substance which does not
result in enhancement of the known efficacy of
that substance, or the mere discovery of any new
property or new use of a known substance or the
mere use of a known process unless such known
process results in a new product that employs at
least one reactant. [Sec. 26.2, RA 8293 as amended
by RA 9502]
(b) Industrial Applicability. —An invention that can be
produced and used in any industry shall be
industrially applicable. [Sec. 27, RA 8293]
Utility
It is any technical solution of a problem in any field of
human activity which is new and industrially applicable.
Unlike an invention patent, a utility model need not be
inventive. The law merely requires that it be novel and
industrially applicable. [Sec. 109.1, RA 8293]
A utility model registration shall expire, without any
possibility of renewal, at the end of the seventh year after
the date of the filing of the application. [Sec. 109.3, RA
8293]
STATUTORY CLASSES OF UTILITY MODELS
A Utility Model may be, or may relate to:
(a) A useful machine;
(b) An implement or tool;
(c) A product or composition;
(d) A method or process; or
(e) An improvement of any of the foregoing. [Rule 201,
Rules and Regulations on Utility Models and Industrial
Designs as amended]
GROUNDS FOR CANCELLATION OF UTILITY MODELS
(a) That the claimed invention does not qualify for
registration as a utility model and does not meet the
requirements of registrability;
(b) That the description and the claims do not comply with
the prescribed requirements;
(c) That any drawing which is necessary for the
understanding of the invention has not been furnished;
(d) That the owner of the utility model registration is not
the inventor or his successor in title [Sec 109.4, RA
8293]
INDUSTRIAL DESIGN
An industrial design is any composition of lines or colors or
any three-dimensional form, whether or not associated
with lines or colors: Provided that such composition or
form gives a special appearance to and can serve as
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
pattern for an industrial product or handicraft. [Sec. 112.1,
RA 8293 as amended by RA 9150]
LAY-OUT DESIGNS (TOPOGRAPHIES) OF INTEGRATED CIRCUITS
Integrated Circuit means a product, in its final form, or an
intermediate form, in which the elements, at least one of
which is an active element and some or all of the
interconnections are integrally formed in and/or on a piece
of material, and which is intended to perform an electronic
function. [Sec. 112.2, RA 8293 as amended by RA 9150]
Layout-Design is synonymous with 'Topography' and
means the three-dimensional disposition, however
expressed, of the elements, at least one of which is an
active element, and of some or all of the interconnections
of an integrated circuit, or such a three-dimensional
disposition prepared for an integrated circuit intended for
manufacture. [Sec. 112.3, RA 8293 as amended by RA 9150]
NON-PATENTABLE INVENTIONS
The following shall be excluded from patent protection:
(1) Discoveries, scientific theories and mathematical
methods, and in the case of drugs and medicines, the
mere discovery of a new form or new property of a
known substance which does not result in the
enhancement of the known efficacy of that substance,
or the mere discovery of any new property or new use
for a known substance, or the mere use of a known
process unless such known process results in a new
product that employs at least one new reactant.
Salts, esters, ethers, polymorphs, metabolites, pure
form, particle size, isomers, mixtures of isomers,
complexes, combinations, and other derivatives of a
known substance shall be considered to be the same
substance, unless they differ significantly in properties
with regard to efficacy; [Sec. 22.1, RA 8293 as amended
by RA 9502]
(2) Schemes, rules and methods of performing mental
acts, playing games or doing business, and programs
for computers; [Sec. 22.2, RA 8293]
(3) Methods for treatment of the human or animal body by
surgery or therapy and diagnostic methods practiced
on the human or animal body. This provision shall not
apply to products and composition for use in any of
these methods; [Sec. 22.3, RA 8293]
(4) Plant varieties or animal breeds or essentially
biological process for the production of plants or
animals. This provision shall not apply to micro-
organisms and non-biological and microbiological
processes; [Sec. 22.4, RA 8293]
(5) Aesthetic creations; [Sec. 22.5, RA 8293]
(6) Anything which is contrary to public order or morality.
[Sec. 22.6, RA 8293]
Cheaper Medicines Act: In addition to discoveries, scientific
theories and mathematical methods, the IP Code now
includes, in case of drugs and medicines:
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MERCANTILE LAW REVIEWER
(1) The mere discovery of a new form or new property of a
known substance which does not result in the
enhancement of the known efficacy of that substance
(2) the mere discovery of any new property or new use of a
known substance
(3) the mere use of a known process unless such known
process results in a new product that employs at least
one reactant (Sec. 26.2, RA 8293 as amended by RA
9502)
OWNERSHIP OF A PATENT
RIGHT TO A PATENT
General Rule: The right to patent belongs to the inventor,
his heirs, or assigns. When two (2) or more persons have
jointly made an invention, the right to a patent shall
belong to them jointly. (Sec.28, RA 8293)
Exception: Inventions created pursuant to a commission
(Work for Hire Doctrine)
(1) The employer has the right to the patent if the
invention is the result of the performance of the
employee’s regularly assigned duties [Sec. 30.2, RA
8293]
(2) In case of inventions created pursuant to a commission,
the person who commissions the work shall own the
patent [Sec. 30.1, RA 8293]
FIRST-TO-FILE RULE
If two (2) or more persons have made the invention
separately and independently of each other, the right to
the patent shall belong to the person who filed an
application for such invention, or where two or more
applications are filed for the same invention, to the
applicant who has the earliest filing date or, the earliest
priority date. [Sec. 29, RA 8293]
INVENTIONS CREATED PURSUANT TO A COMMISSION
Commission: Person who commissions the work shall own
the patent, unless otherwise provided in the contract [Sec.
30.1, RA 8293)
Employment Contract: Patent belongs to the employee if
the inventive activity is not a part of his regular duties even
if the employee uses the time, facilities and materials of
the employer. [Sec. 30.2 (a), RA 8293]
Patent belongs to the employer if the invention is the
result of the performance of his regularly-assigned duties,
unless there is an agreement, express or implied, to the
contrary. [Sec. 30.2 (b), RA 8293]
RIGHT OF PRIORITY
An application for patent filed by any person who has
previously applied for the same invention in another
country which by treaty, convention, or law affords similar
privileges to Filipino citizens, shall be considered as filed
as of the date of filing the foreign application: Provided,
That: (a) the local application expressly claims priority; (b)
it is filed within twelve (12) months from the date the
earliest foreign application was filed; and (c) a certified
copy of the foreign application together with an English
translation is filed within six (6) months from the date of
filing in the Philippines. [Sec. 31, RA 8293]
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GROUNDS FOR CANCELLATION OF A PATENT
Any interested person may, upon payment of the required
fee, petition to cancel the patent or any claim thereof, or
parts of the claim, on any of the following grounds:
(a) That what is claimed as the invention is not new or
patentable;
(b) That the patent does not disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or
(c) That the patent is contrary to public order or morality.
[Sec. 61.1, RA 8293]
Where the grounds for cancellation relate to some of the
claims or parts of the claim, cancellation may be effected
to such extent only. [Sec. 61.2, RA 8293]
REQUIREMENT OF THE PETITION
The petition for cancellation shall be in writing, verified by
the petitioner or by any person in his behalf who knows the
facts, specify the grounds upon which it is based, include a
statement of the facts to be relied upon, and filed with the
Office. Copies of printed publications or of patents of other
countries, and other supporting documents mentioned in
the petition shall be attached thereto, together with the
translation thereof in English, if not in English language.
[Sec. 62, RA 8293]
NOTICE OF HEARING
Upon filing of a petition for cancellation, the Director of
Legal Affairs shall forthwith serve notice of the filing
thereof upon the patentee and all persons having grants or
licenses, or any other right, title or interest in and to the
patent and the invention covered thereby, as appears of
record in the Office, and of notice of the date of hearing
thereon on such persons and the petitioner. Notice of the
filing of the petition shall be published in the IPO Gazette.
[Sec. 63, RA 8293]
EFFECT OF CANCELLATION OF PATENT OR CLAIM
The rights conferred by the patent or any specified claim or
claims cancelled shall terminate. Notice of the
cancellation shall be published in the IPO Gazette. Unless
restrained by the Director General, the decision or order to
cancel by Director of Legal Affairs shall be immediately
executory even pending appeal. [Sec. 66, RA 8293]
REMEDY OF THE TRUE AND ACTUAL INVENTOR
If a person, who was deprived of the patent without his
consent or through fraud is declared by final court order or
decision to be the true and actual inventor, the court shall
order for his substitution as patentee, or at the option of
the true inventor, cancel the patent, and award actual and
other damages in his favor if warranted by the
circumstances. [Sec. 68, RA 8293]
TIME TO FILE ACTION IN COURT
The action shall be filed within one (1) year from the date of
publication made in accordance with Sections 44 and 51,
respectively. (Sec. 70, RA 8293)
REMEDY OF PERSONS NOT HAVING THE RIGHT TO A PATENT
If a person other than the applicant, is declared by final
court order or decision as having the right to the patent,
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MERCANTILE LAW REVIEWER
such person may, within three (3) months after the
decision has become final:
(1) Prosecute the application as his own application in
place of the applicant;
(2) File a new patent application in respect of the same
invention;
(3) Request that the application be refused; or
(4) Seek cancellation of the patent, if one has already been
issued. [Sec. 67, RA 8293]
RIGHTS CONFERRED BY A PATENT
A patent shall confer on its owner the following exclusive
rights:
(1) Where the subject matter of a patent is a product, to
restrain, prohibit and prevent any unauthorized person
or entity from making, using, offering for sale, selling or
importing that product. [Sec. 71.1(a), RA 8293]
(2) Where the subject matter of a patent is a process, to
restrain, prevent or prohibit any unauthorized person or
entity from using the process, and from manufacturing,
dealing in, using, selling or offering for sale, or
importing any product obtained directly or indirectly
from such process. [Sec. 71.1(b), RA 8293]
(3) Patent owners shall also have the right to assign, or
transfer by succession the patent, and to conclude
licensing contracts for the same. [Sec. 71.2, RA 8293]
To be able to effectively and legally preclude others from
copying and profiting from the invention, a patent is a
primordial requirement. No patent, no protection. The
ultimate goal of a patent system is to bring new designs
and technologies into the public domain through
disclosure. Ideas, once disclosed to the public without the
protection of a valid patent, are subject to appropriation
without significant restraint. [Pearl Dean, Inc. v. Shoemart,
Inc. (2003)]
LIMITATIONS OF PATENT RIGHTS
The owner of a patent has no right to prevent third parties
from performing, without his authorization, the acts
referred to in Section 71 hereof in the following
circumstances:
(a) Using a patented product which has been put on the
market in the Philippines by the owner of the product,
or with his express consent, insofar as such use is
performed after that product has been so put on the
said market: Provided, That, with regard to drugs and
medicines, the limitation on patent rights shall apply
after a drug or medicine has been introduced in the
Philippines or anywhere else in the world by the patent
owner, or by any party authorized to use the invention:
Provided, further, That the right to import the drugs
and medicines contemplated in this section shall be
available to any government agency or any private
third party; [Sec. 72.1, RA 8293 as amended by RA
9502]
(b) Where the act is done privately and on a non-
commercial scale or for a non-commercial purpose:
Provided, That it does not significantly prejudice the
economic interests of the owner of the patent; [Sec.
72.2, RA 8293 as amended by RA 9502]
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(c) Where the act consists of making or using exclusively
for experimental use of the invention for scientific
purposes or educational purposes and such other
activities directly related to such scientific or
educational experimental use; [Sec. 72.3, RA 8293 as
amended by RA 9502]
(d) In the case of drugs and medicines, where the act
includes testing, using, making or selling the invention
including any data related thereto, solely for purposes
reasonably related to the development and submission
of information and issuance of approvals by
government regulatory agencies required under any
law of the Philippines or of another country that
regulates the manufacture, construction, use or sale of
any product: Provided, That, in order to protect the
data submitted by the original patent holder from
unfair commercial use provided in Article 39.3 of the
Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS Agreement), the Intellectual
Property Office, in consultation with the appropriate
government agencies, shall issue the appropriate rules
and regulations necessary therein not later than one
hundred twenty (120) days after the enactment of this
law; (Sec. 72.4, RA 8293 as amended by RA 9502)
(e) Where the act consists of the preparation for individual
cases, in a pharmacy or by a medical professional, of a
medicine in accordance with a medical shall apply after
a drug or medicine has been introduced in the
Philippines or anywhere else in the world by the patent
owner, or by any party authorized to use the invention:
Provided, further, That the right to import the drugs
and medicines contemplated in this section shall be
available to any government agency or any private
third party; (Sec. 72.5, RA 8293 as amended)
There shall be no infringement of trademarks or
tradenames of imported or sold drugs and medicines
allowed as well as imported or sold off-patent drugs
and medicines: Provided, That said drugs and
medicines bear the registered marks that have not
been tampered, unlawfully modified, or infringed.
(Sec.159.4 RA 8293 as amended by RA 9502)
PRIOR USER
Notwithstanding Section 72 hereof, any prior user, who, in
good faith was using the invention or has undertaken
serious preparations to use the invention in his enterprise
or business, before the filing date or priority date of the
application on which a patent is granted, shall have the
right to continue the use thereof as envisaged in such
preparations within the territory where the patent
produces its effect. [Sec. 73.1, RA 8293]
The right of the prior user may only be transferred or
assigned together with his enterprise or business, or with
that part of his enterprise or business in which the use or
preparations for use have been made. [Sec. 73.2, RA 8293]
USE BY THE GOVERNMENT
A Government agency or third person authorized by the
Government may exploit the invention even without
agreement of the patent owner where:
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MERCANTILE LAW REVIEWER
(a) The public interest, in particular, national security,
nutrition, health or the development of other sectors,
as determined by the appropriate agency of the
government, so requires; [Sec. 74.1(a), RA 8293]
(b) A judicial or administrative body has determined that
the manner of exploitation, by the owner of the patent
or his licensee, is anti-competitive. [Sec. 74.1(b), RA
8293]
The use by the Government, or third person authorized by
the Government shall be subject, mutatis mutandis, to the
conditions set forth in Sections 95 to 97 and 100 to 102 on
compulsory licensing. [Sec. 74.2, RA 8293]
All cases arising from the implementation of this provision
shall be cognizable by courts with appropriate jurisdiction
provided by law. No court except the Supreme Court of the
Philippines, shall issue any temporary restraining order or
preliminary injunction or such other provisional remedies
that will prevent its immediate execution. [Sec. 74.3, RA
8293 as amended by RA 9502]
PATENT INFRINGEMENT
It is the making, using, offering for sale, selling, or
importing a patented product or a product obtained
directly or indirectly from a patented process, or the use of
a patented process without the authorization of the
patentee. [Sec 76.1, RA 8293 as amended by RA 9502]
CONTRIBUTORY INFRINGER
One who actively induces the infringement of a patent or
provides the infringer with a component of a patented
product or of a product produced because of a patented
process knowing it to be especially adopted for infringing
and not suitable for substantial non-infringing. He is jointly
and severally liable with the infringer. [Sec. 76.6, RA 8293]
DOCTRINE OF PATENT EXHAUSTION
It espouses that the patentee who has already sold his
invention and has received all the royalty and
consideration for the same will be deemed to have
released the invention from his monopoly. The invention
thus becomes open to use of the purchaser without further
restriction. [Adams v. Burke, in Notes on Selected
Commercial Laws, Catindig 2003 ed.]
TESTS IN PATENT INFRINGEMENT
Literal infringement
In using literal infringement as a test, resort must be had in
the first instance to the words of the claim. To determine
whether the particular item falls within the literal meaning
of the patent claims, the court must juxtapose the claims
of the patent and the accused product within the overall
context of the claims and specifications, to determine
whether there is exact identity of all material elements.
[Godinez v. CA (1993)]
Doctrine of equivalents
Under the doctrine of equivalents, an infringement also
occurs when a device appropriates a prior invention by
incorporating its innovative concept and, albeit with some
modification and change, performs substantially the same
function in substantially the same way to achieve
substantially the same result. [Godinez v. CA (1993)]
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
In order to infringe a patent, a machine or device must
perform the same function, or accomplish the same result
by identical or substantially identical means and the
principle or mode of operation must be substantially the
same. [Del Rosario v. CA (1996)]
The doctrine of equivalents provides that an infringement
also takes place when a device appropriates a prior
invention by incorporating its innovative concept and,
although with some modification and change, performs
substantially the same function in substantially the same
way to achieve substantially the same result. The principle
or mode of operation must be the same or substantially
the same. The doctrine of equivalents thus requires
satisfaction of the function-means-and-result test, the
patentee having the burden to show that all three
components of such equivalency test are met. [Smith Klein
Beckman Corp. v. CA (2003)]
DEFENSES IN ACTION FOR INFRINGEMENT
In an action for infringement, the defendant, in addition to
other defenses available to him, may show the invalidity of
the patent, or any claim thereof, on any of the grounds on
which a petition of cancellation can be brought under
Section 61. [Sec 81, RA 8293]
Patent found invalid may be cancelled:
In an action for infringement, if the court shall find the
patent or any claim to be invalid, it shall cancel the same,
and the Director of Legal Affairs upon receipt of the final
judgment of cancellation by the court, shall record that
fact in the register of the Office and shall publish a notice
to that effect in the IPO Gazette. [Sec 82, RA 8293]
Doctrine of File Wrapper Estoppel
Patentee is precluded from claiming as part of patented
product that which he had to excise or modify in order to
avoid patent office rejection, and he may omit any
additions he was compelled to add by patent office
regulations. [Advance Transformer Co. v. Levinson 837 F.2d
1081(1988)]
LICENSING
VOLUNTARY
Voluntary Licensing is the grant by the patent owner to a
third person of the right to exploit the patented invention.
[Sec. 85, RA 8293]
Mandatory Provisions
The following provisions shall be included in voluntary
license contracts:
(1) That the laws of the Philippines shall govern the
interpretation of the same and in the event of litigation,
the venue shall be the proper court in the place where
the licensee has its principal office; [Sec. 88.1, RA 8293]
(2) Continued access to improvements in techniques and
processes related to the technology shall be made
available during the period of the technology transfer
arrangement; [Sec. 88.2, RA 8293]
(3) In the event the technology transfer arrangement shall
provide for arbitration, the Procedure of Arbitration of
the Arbitration Law of the Philippines or the Arbitration
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MERCANTILE LAW REVIEWER
Rules of the United Nations Commission on
International Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the venue
of arbitration shall be the Philippines or any neutral
country; [Sec. 88.3, RA 8293]
(4) The Philippine taxes on all payments relating to the
technology transfer arrangement shall be borne by the
licensor. [Sec. 88.4, RA 8293]
Prohibited clauses
The following provisions shall be deemed prima facie to
have an adverse effect on competition and trade:
(a) Those which impose upon the licensee the obligation
to acquire from a specific source capital goods,
intermediate products, raw materials, and other
technologies, or of permanently employing personnel
indicated by the licensor; [Sec. 87.1, RA 8293]
(b) Those pursuant to which the licensor reserves the right
to fix the sale or resale prices of the products
manufactured on the basis of the license; [Sec. 87.2, RA
8293]
(c) Those that contain restrictions regarding the volume
and structure of production; [Sec. 87.3, RA 8293]
(d) Those that prohibit the use of competitive technologies
in a non-exclusive technology transfer agreement; [Sec.
87.4, RA 8293]
(e) Those that establish a full or partial purchase option in
favor of the licensor; (Sec. 87.5, RA 8293)
(f) Those that obligate the licensee to transfer for free to
the licensor the inventions or improvements that may
be obtained through the use of the licensed
technology; (Sec. 87.6, RA 8293)
(g) Those that require payment of royalties to the owners
of patents for patents which are not used; (Sec. 87.7,
RA 8293)
(h) Those that prohibit the licensee to export the licensed
product unless justified for the protection of the
legitimate interest of the licensor such as exports to
countries where exclusive licenses to manufacture
and/or distribute the licensed product(s) have already
been granted; (Sec. 87.8, RA 8293)
(i) Those which restrict the use of the technology supplied
after the expiration of the technology transfer
arrangement, except in cases of early termination of
the technology transfer arrangement due to reason(s)
attributable to the licensee; (Sec. 87.9, RA 8293)
(j) Those which require payments for patents and other
industrial property rights after their expiration,
termination arrangement; (Sec. 87.10, RA 8293)
(k) Those which require that the technology recipient shall
not contest the validity of any of the patents of the
technology supplier; (Sec. 87.11, RA 8293)
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
(l) Those which restrict the research and development
activities of the licensee designed to absorb and adapt
the transferred technology to local conditions or to
initiate research and development programs in
connection with new products, processes or
equipment; (Sec. 87.12, RA 8293)
(m) Those which prevent the licensee from adapting the
imported technology to local conditions, or introducing
innovation to it, as long as it does not impair the quality
standards prescribed by the licensor; (Sec. 87.13, RA
8293)
(n) Those which exempt the licensor for liability for non-
fulfillment of his responsibilities under the technology
transfer arrangement and/or liability arising from third
party suits brought about by the use of the licensed
product or the licensed technology; (Sec. 87.14, RA
8293)
(o) Other clauses with equivalent effects. (Sec. 87.15, RA
8293)
Effect of Non-compliance with any provisions of Secs. 87
and 88
The technology transfer arrangement shall automatically
be rendered unenforceable, unless said technology transfer
arrangement is approved and registered with the
Documentation, Information and Technology Transfer
Bureau under the provisions of Section 91 on exceptional
cases. [Sec. 92, RA 8293]
Right of Licensor. —Unless otherwise provided in the
technology transfer agreement, the licensor shall have the
right to:
(a) Grant further licenses to third person
(b) Exploit the subject matter of the technology transfer
agreement [Sec. 89, RA 8293]
Right of the Licensee. — To exploit the subject matter of
the technology transfer agreement during the whole term
of the agreement. [Sec. 90, RA 8293]
Exceptional cases
(a) In exceptional or meritorious cases where substantial
benefits will accrue to the economy, such as high
technology content, increase in foreign exchange
earnings, employment generation, regional dispersal of
industries and/or substitution with or use of local raw
materials
(b) The case of BOI-registered companies with pioneer
status [Sec. 91, RA 8293]
COMPULSORY
Compulsory Licensing is the grant of the Director of Legal
Affairs of a license to exploit a patented invention, even
without the agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
invention. (Sec. 93, Ra 8293 as amended by RA 9502)
Grounds
The Director General of the Intellectual Property Office
may grant a license to exploit a patented invention, even
without the agreement of the patent owner, in favor of any
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MERCANTILE LAW REVIEWER
person who has shown his capability to exploit the
invention, under any of the following circumstances:
(a) National emergency or other circumstances of extreme
urgency; [Sec. 93.1, RA 8293 as amended by RA 9502]
(b) Where the public interest, in particular, national
security, nutrition, health or the development of other
vital sectors of the national economy as determined by
the appropriate agency of the Government, so requires;
[Sec. 93.2, RA 8293 as amended by RA 9502]
(c) Where a judicial or administrative body has determined
that the manner of exploitation by the owner of the
patent or his licensee is anti-competitive; [Sec. 93.3, RA
8293 as amended by RA 9502]
(d) In case of public non-commercial use of the patent by
the patentee, without satisfactory reason; [Sec. 93.4,
RA 8293 as amended by RA 9502]
(e) If the patented invention is not being worked in the
Philippines on a commercial scale, although capable of
being worked, without satisfactory reason: Provided,
That the importation of the patented article shall
constitute working or using the patent; [Sec. 93.5, RA
8293 as amended by RA 9502]
(f) Where the demand for patented drugs and medicines
is not being met to an adequate extent and on
reasonable terms, as determined by the Secretary of
the Department of Health. [Sec. 93.6, RA 8293 as
amended by RA 9502]
(g) If the invention protected by a patent, hereafter
referred to as the "second patent," within the country
cannot be worked without infringing another patent,
hereafter referred to as the "first patent," granted on a
prior application or benefiting from an earlier priority, a
compulsory license may be granted to the owner of the
second patent to the extent necessary for the working
of his invention, subject to certain conditions. [Sec. 97,
RA 8293]
(h) Manufacture and export of drugs and medicines to any
country having insufficient or no manufacturing
capacity in the pharmaceutical sector to address public
health problems: Provided, That, a compulsory license
has been granted by such country or such country has,
by notification or otherwise, allowed importation into
its jurisdiction of the patented drugs and medicines
from the Philippines in compliance with the TRIPS
Agreement. [Sec. 93-A.2, RA 8293 as amended by RA
9502]
Period of filing a Petition for Compulsory License: At any time
after the grant of patent. However, a compulsory license
may not be applied for on the ground stated in Sec. 93.5
before the expiration of a period of four (4) years from the
date of filing of the application or three (3) years from the
date of the patent whichever period expires last. [Sec. 94,
RA 8293 as amended by RA 9502]
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
Requirement to Obtain a License on Reasonable
Commercial Terms
General Rule: The license will only be granted after the
petitioner has made efforts to obtain authorization from
the patent owner on reasonable commercial terms and
conditions but such efforts have not been successful within
a reasonable period of time. [Sec. 95.1, RA 8293 as
amended by RA 9502]
Exceptions: The requirement of authorization shall not
apply in the following cases:
(a) Where the petition for compulsory license seeks to
remedy a practice determined after judicial or
administrative process to be anti-competitive;
(b) In situations of national emergency or other
circumstances of extreme urgency;
(c) In cases of public non-commercial use.
(d) In cases where the demand for the patented drugs and
medicines in the Philippines is not being met to an
adequate extent and on reasonable terms, as
determined by the Secretary of the Department of
Health. [Sec. 95.2, RA 8293 as amended by RA 9502]
Terms and Conditions of Compulsory License
(a) The scope and duration of such license shall be limited
to the purpose for which it was authorized; [Sec. 100.1,
RA 8293]
(b) The license shall be non-exclusive; [Sec. 100.2, RA
8293]
(c) The license shall be non-assignable, except with that
part of the enterprise or business with which the
invention is being exploited; ; [Sec. 100.3, RA 8293]
(d) Use of the subject matter of the license shall be
devoted predominantly for the supply of the Philippine
market: Provided, that this limitation shall not apply
where the grant of the license is based on the ground
that the patentee's manner of exploiting the patent is
determined by judicial or administrative process, to be
anti-competitive. ;[Sec. 100.4, RA 8293]
(e) The license may be terminated upon proper showing
that circumstances which led to its grant have ceased
to exist and are unlikely to recur: Provided, That
adequate protection shall be afforded to the legitimate
interest of the licensee; ; [Sec. 100.5, RA 8293]
(f) The patentee shall be paid adequate remuneration
taking into account the economic value of the grant or
authorization, except that in cases where the license
was granted to remedy a practice which was
determined after judicial or administrative process, to
be anti-competitive, the need to correct the anti-
competitive practice may be taken into account in
fixing the amount of remuneration. [Sec. 100.6]
ASSIGNMENT AND TRANSMISSION OF RIGHTS
ASSIGNMENT OF RIGHTS
The assignment may be of the entire patent or a portion
thereof, or be limited to a specified territory. [Sec. 104, RA
8293]
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MERCANTILE LAW REVIEWER
TRANSMISSION OF RIGHTS:
Patents or applications for patents and invention to which
they relate, shall be protected in the same way as the
rights of other property under the Civil Code. [Sec. 103.1, RA
8293]
Inventions and any right, title or interest in and to patents
and inventions covered thereby, may be assigned or
transmitted by inheritance or bequest or may be the
subject of a license contract. (Sec. 103.2, RA 8293)
REQUIREMENTS FOR RECORDING OF ASSIGNMENT
(a) It must be in writing and accompanied by an English
translation, if it is in a language other than English or
Filipino
(b) It must be notarized
(c) It must be accompanied by an appointment of a
resident agent, if the assignee is not residing in the
Philippines
(d) It must identify the letters patent involved by number
and date and give the name of the owner of the patent
and the title of the invention. In the case of an
application for a patent, it should state the application
number and the filing date of the application and give
the name of the applicant and the title of the invention.
If the assignment was executed concurrently with or
subsequent to the execution of the application but
before the application is filed or before its application
number is ascertained, it should adequately identify
the application by its date of execution, the name of
the applicant, and the title of the invention.
(e) It must be accompanied by the required fees. [Sec. 105;
Rules and Regulations on Inventions, Rule 1200]
EFFECT OF NON-RECORDING OF ASSIGNMENT WITH THE IPO
The non-recording will not affect the binding agreement
between the assignor and assignee. However, such
registration would be necessary to bind third parties. An
assignment would be void as against any subsequent
purchaser or mortgagee for valuable consideration and
without notice unless recorded in the IPO within 3 months
from the date of the assignment or prior to the subsequent
purchase or mortgage. (Sec. 106, RA 8293)
Trademarks
DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE
NAMES
MARKS
Any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and
shall include a stamped or marked container of goods
(Sec. 121.1, RA 8293)
Trademark Service Mark
Any visible sign which is Any visible sign capable of
adopted and used to identify distinguishing the services
the source of origin of goods, of an enterprise from the
and which is capable of
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
distinguishing them from service of other enterprises.
goods emanating from a
competitor.
COLLECTIVE MARKS
Any visible sign designated as such in the application for
registration and capable of distinguishing the origin or any
other common characteristic, including the quality of
goods or services of different enterprises which use the
sign under the control of the registered owner of the
collective mark. (Sec. 121.2, RA 8293)
TRADE NAME
The name or designation identifying or distinguishing an
enterprise (Sec. 121.3, RA 8293).
Any individual name or surname, firm name, device or
word used by manufacturers, industrialists, merchants,
and others to identify their businesses, vocations or
occupations. [Converse Rubber Corp. v. Universal Rubber
Products, Inc. (1980)]
FUNCTIONS OF A TRADEMARK
(1) To point out distinctly the origin or ownership of the
goods and to which it is affixed;
(2) To secure him, who has been instrumental in bringing
into the market a superior article of merchandise, the
fruit of his industry and skill;
(3) To assure the public that they are producing the
genuine article;
(4) To prevent fraud and imposition; and
(5) To protect the manufacturer against substitution and
sale of an inferior and different article as its product
[Mirpuri v. CA (1998)]
ACQUISITION OF OWNERSHIP OF MARK
The rights to a mark shall be acquired through registration
made validly in accordance with law. [Sec. 122, RA 8293]
A certificate of registration shall remain in force for 10
years (Sec. 145, RA 8293) and may be renewed for periods
of 10 years at its expiration upon payment of the prescribed
fee and upon filing of a request. [Sec 146, RA 8293]
ACQUISITION OF OWNERSHIP OF TRADE NAME
Notwithstanding any laws or regulations providing for any
obligation to register trade names, such names shall be
protected, even prior to or without registration, against any
unlawful act committed by third parties. [Sec. 165.2 (a), RA
8293) The ownership of a trade name is acquired through
adoption and use.
A name or designation may not be used as a trade name if
by its nature or the use to which such name or designation
may be put, it is contrary to public order or morals and if, in
particular, it is liable to deceive trade circles or the public
as to the nature of the enterprise identified by that name.
[Sec. 165.1, RA 8293]
Any change in the ownership of a trade name shall be
made with the transfer of the enterprise or part thereof
identified by that name. [Sec. 165.4, RA 8293]
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MERCANTILE LAW REVIEWER
NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(1) Consists of immoral, deceptive or scandalous matter,
or matter which may disparage or falsely suggest a
connection with persons, living or dead, institutions,
beliefs, or national symbols, or bring them into
contempt or disrepute; [Sec 123.1(a), RA 8293]
(2) Consists of flags, coat of arms or other insignia of the
Philippines or any foreign country; [Sec 123.1(b), RA
8293]
(3) Consists of a name, portrait or signature identifying a
particular living individual except by his written
consent, or of a deceased President of the Philippines,
during the life of his widow, except by written consent
of the widow; [Sec 123.1(c), RA 8293]
(4) Is identical with a registered mark of another or a mark
with an earlier filing or priority date, in respect of:
(a) The same goods or services, or
(b) Closely related goods or services, or
(c) If it nearly resembles such a mark as to be likely to
deceive or cause confusion; [Sec 123.1(d), RA 8293]
(5) Is identical with, or confusingly similar to, or constitutes
a translation of a well-known mark, whether or not
registered in the Philippines, and used for identical or
similar goods or services; [Sec 123.1(e), RA 8293]
(6) Is identical with, or confusingly similar to, or constitutes
a translation of a well-known mark which is registered
in the Philippines, and used for goods or services which
are not similar; [Sec 123.1(f), RA 8293]
(7) Likely to mislead the public, particularly as to the
nature, quality, characteristics or geographical origin of
the goods or services; [Sec 123.1(g), RA 8293]
(8) Consists exclusively of signs that are generic for the
goods or services that they seek to identify; [Sec
123.1(h), RA 8293]
(9) Consists exclusively of signs or of indications that have
become customary or usual to designate the goods or
services in everyday language or in a bona fide and
established trade practice; [Sec 123.1(i), RA 8293]
(10)Consists exclusively of signs or of indications that may
serve in trade to designate the kind, quality, quantity,
intended purpose, value, geographical origin, time or
production of the goods or rendering of the services, or
other characteristics of the goods or services; [Sec
123.1(j), RA 8293]
(11) Consists of shapes that may be necessitated by
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value;
[Sec 123.1(k), RA 8293]
(12) Consists of color alone, unless defined by a given form;
[Sec 123.1(l), RA 8293]
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
(13) Is contrary to public order or morality. [Sec 123.1(m), RA
8293]
DOCTRINE OF SECONDARY MEANING
When the marks referred to in nos. 10, 11 and 12 has
become distinctive, because of its long, continuous and
exclusive use for 5 years, as used in connection with the
applicant’s goods or services in commerce and in the mind
of the public indicates a single source to consumers, it may
be registered. The Office may accept as prima facie
evidence that the mark has become distinctive, as used in
connection with the applicant's goods or services in
commerce, proof of substantially exclusive and continuous
use thereof by the applicant in commerce in the
Philippines for five (5) years before the date on which the
claim of distinctiveness is made. [Sec 123.2, RA 8293]
The nature of the goods to which the mark is applied will
not constitute an obstacle to registration. [Sec 123.3, RA
8293]
PRIOR USE OF MARK AS A REQUIREMENT
USE OF MARK AS A REQUIREMENT
The applicant or the registrant shall file a declaration of
actual use of the mark with evidence to that effect, as
prescribed by the Regulations within three (3) years from
the filing date of the application. Otherwise, the
application shall be refused or the mark shall be removed
from the Register by the Director. [Sec. 124.2, RA 8293]
For the requirement of “actual use in commerce in the
Philippines” before one may register a trademark, trade
name and service mark under the law pertains to the
territorial jurisdiction of the Philippines and is not only
confined to a certain region, province, city or barangay.
[McDonald’s Corporation v. MacJoy Fastfood (2007)]
Trademark is a creation of use and, therefore, actual use is
a pre-requisite to exclusive ownership; registration is only
an administrative confirmation of the existence of the right
of ownership of the mark, but does not perfect such right;
actual use thereof is the perfecting ingredient. [Shangri-La
International Hotel v. DCC (2006)]
NON-USE OF MARK WHEN EXCUSED
(1) If caused by circumstances arising independently of the
will of the trademark owner. Lack of funds shall not
excuse non-use of a mark; [Sec. 152.1, RA 8293]
(2) A use which does not alter its distinctive character
though the use is different from the form in which it is
registered. [Sec. 152.2, RA 8293]
(3) Use of a mark in connection with one or more of the
goods/services belonging to the class in which the
mark is registered. [Sec. 152.3, RA 8293]
(4) The use of mark by a company related to the applicant
or registrant
(5) The use of mark by a person controlled by the
registrant. [Sec. 152.4, RA 8293]
The use of a mark by a company related with the registrant
or applicant shall inure to the latter's benefit, and such use
shall not affect the validity of such mark or of its
registration: Provided, that such mark is not used in such
manner as to deceive the public. [Sec.152.4, Ra 8293]
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MERCANTILE LAW REVIEWER
TESTS TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS
DOMINANCY TEST
Infringement is determined by the test of “dominancy”
rather than by differences or variations in the details of one
trademark and of another. Similarity in size, form and
color, while relevant is not conclusive. If the competing
trademark contains the main or essential or dominant
features of another, and confusion is likely to result,
infringement takes place. [Asia Brewery v. CA and San
Miguel (1993)]
HOLISTIC TEST
To determine whether a trademark has been infringed, we
must consider the mark as a whole and not as dissected. If
the buyer is deceived, it is attributable to the marks as a
totality, not usually to any part of it. The court therefore
should be guided by its first impression, for the buyer acts
quickly and is governed by a casual glance, the value of
which may be dissipated as soon as the court assumed to
analyze carefully the respective features of the mark. [Del
Monte Corporation, et al. v. CA (1990)]
The dominancy test considers the dominant features in the
competing marks in determining whether they are
confusingly similar. Under the dominancy test, courts give
greater weight to the similarity of the appearance of the
product arising from the adoption of the dominant
features of the registered mark, disregarding minor
differences. Courts will consider more the aural and visual
impressions created by the marks in the public mind,
giving little weight to factors like prices, quality, sales
outlets and market segments. [McDonald’s Corporation v.
L.C. Big Mak Burger, Inc., et al. (2004)]
AS TO THE GOODS OR SERVICES IN CONNECTION WITH WHICH THE
MARKS ARE USED (DOCTRINE OF RELATED GOODS/SERVICES)
(1) Goods are related when they belong to the same class
or have the same descriptive properties or physical
attributes, or they serve the same purpose or flow
through the same channel of trade.
(2) The use of identical marks on non-competing but
related goods may likely cause confusion.
(3) Corollarily, the use of identical marks on non-
competing and unrelated goods is not likely to cause
confusion.
WELL-KNOWN MARKS
A well-known mark is a mark which a competent authority
of the Philippines has designated to be well-known
internationally and in the Philippines.
In determining whether a mark is well-known, account
shall be taken of the knowledge of the relevant sector of
the public, rather than the public at large, including
knowledge in the Philippines which has been obtained as a
result of the promotion of the mark. (Sec 123.1(e), RA 8293)
DETERMINANTS (NEED NOT CONCUR)
(a) The duration, extent and geographical area of any use
of the mark;
(b) The market share in the Philippines and other countries
of the goods/services to which the mark applies;
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
(c) The degree of the inherent or acquired distinction of
the mark;
(d) The quality-image or reputation acquired by the mark;
(e) The extent to which the mark has been registered in
the world;
(f) The exclusivity of the registration attained by the mark
in the world;
(g) The extent of use of the mark in the world;
(h) The exclusivity of use in the world;
(i) The commercial value attributed to the mark in the
world;
(j) The record of successful protection of the rights in the
mark;
(k) The outcome of litigations dealing with the issue of
whether the mar is well-known; and
(l) The presence or absence of identical or similar
testmarks validly registered or used on other similar
goods [Rule 102, Rule on Trademarks]
PROTECTION EXTENDED TO WELL-KNOWN MARKS
If not registered in the Philippines
A mark cannot be registered if it is identical with or
confusingly similar to, or constitutes a translation of a
mark which is considered by the competent authority of
the Philippines to be well-known internationally and in the
Philippines, whether or not it is registered here, as being
already the mark of a person other than the applicant for
registration and used for identical goods or services. [(Sec
123.1(e), RA 8293]
If registered in the Philippines
A mark cannot be registered if it is identical with or
confusingly similar to, or constitutes a translation of a
mark considered well-known in accordance with the Sec.
123.1 (e), which is registered in the Philippines with respect
to goods or services which are not similar to those with
respect to which registration is applied for. [Sec 123.1(f), RA
8293]
Priority Right.
An application for registration of a mark filed in the
Philippines by a person referred to in Section 3, and who
previously duly filed an application for registration of the
same mark in one of those countries, shall be considered
as filed as of the day the application was first filed in the
foreign country. [Sec. 131.1, RA 8293]
No registration of a mark in the Philippines by a person
described in this section shall be granted until such mark
has been registered in the country of origin of the
applicant. [Sec. 131.2, RA 8293]
Significance of Priority Right
A Philippine application filed by another applicant after
the priority date but earlier than the foreign applicant’s
actual filing may be refused registration if it is identical to
the mark with a priority date. [The Law on Trademark,
Infringement and Unfair Competition, Agpalo]
RIGHTS CONFERRED BY A WELL-KNOWN MARK
(1) Right to be protected whether or not it is registered in
the Philippines;
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MERCANTILE LAW REVIEWER
(2) If registered under Sec 123.1(e), extension of protection
to goods and services which are not similar to those in
respect of which the mark is registered, provided that:
(a) The use of the mark in relation to unrelated or
dissimilar goods or services would indicate a
connection between those goods or services and
the owner of the mark; and
(b) The interests of the owner of the registered mark
are likely to be damaged by such use. [Sec. 147.2,
RA 8293]
RIGHTS CONFERRED BY REGISTRATION
Except in cases of importation of drugs and medicines
allowed under Section 72.1 of this Act and of off-patent
drugs and medicines, the owner of a registered mark shall
have the exclusive right to prevent all third parties not
having the owner's consent from using in the course of
trade identical or similar signs or containers for goods or
services which are identical or similar to those in respect of
which the trademark is registered where such use would
result in a likelihood of confusion. In case of the use of an
identical sign for identical goods or services, a likelihood of
confusion shall be presumed. [Sec. 147.1, RA 8293 as
amended by RA 9502]
LIMITATIONS ON SUCH RIGHTS
(1) Duration (except that, inasmuch as the registration of a
trademark could be renewed every 10 years, a
trademark could conceivably remain registered
forever);
(2) Territorial (except well-known marks).
Registration of the mark shall not confer on the registered
owner the right to preclude third parties from using bona
fide their names, addresses, pseudonyms, a geographical
name, or exact indications concerning the kind, quality,
quantity, destination, value, place of origin, or time of
production or of supply, of their goods or services:
Provided, That such use is confined to the purposes of
mere identification or information and cannot mislead the
public as to the source of the goods or services. [Sec. 148,
RA 8293]
ASSIGNMENT AND TRANSFER OF APPLICATION AND REGISTRATION
(1) An application for registration of a mark, or its
registration, may be assigned or transferred with or
without the transfer of the business using the mark.
[Sec. 149.1, RA 8293]
(2) Such assignment or transfer shall, however, be null
and void if it is liable to mislead the public, particularly
as regards the nature, source, manufacturing process,
characteristics, or suitability for their purpose, of the
goods or services to which the mark is applied. [Sec.
149.2, RA 8293]
(3) The assignment of the application for registration of a
mark, or of its registration, shall be in writing and
require the signatures of the contracting parties.
Transfers by mergers or other forms of succession may
be made by any document supporting such transfer.
[Sec. 149.3, RA 8293]
(4) Assignments and transfers of registrations of marks
shall be recorded at the Office on payment of the
prescribed fee; assignment and transfers of
applications for registration shall, on payment of the
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
same fee, be provisionally recorded, and the mark,
when registered, shall be in the name of the assignee
or transferee. [Sec. 149.4, RA 8293]
(5) Assignments and transfers shall have no effect against
third parties until they are recorded at the Office. [Sec.
149.5, RA 8293]
Any license contract concerning the registration of a mark,
or an application therefor, shall provide for effective
control by the licensor of the quality of the goods or
services of the licensee in connection with which the mark
is used. If the license contract does not provide for such
quality control, or if such quality control is not effectively
carried out, the license contract shall not be valid. [Sec.
150.1, RA 8293]
PROTECTION LIMITED TO GOODS SPECIFIED IN REGISTRATION
CERTIFICATE
The certificate of registration can confer upon the
petitioner the exclusive right to use its own symbol only to
those goods specified in the certificate, subject to any
conditions a limitations stated therein. One who has
adopted and used a trademark on his goods does not
prevent the adoption and use of the same trademark by
others for products which are of a different description.
[Faberge, Inc. v. IAC and Co Beng Kay (1992)]
USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO
REGISTERED MARK
The IPC deems unlawful any subsequent use of the trade
name by a third party, whether as a trade name or a mark
or collective mark, or any such use of a similar trade name
or mark, likely to mislead the public. [Sec. 165.2 (b), RA
8293]
INFRINGEMENT AND REMEDIES
TRADEMARK INFRINGEMENT
Any person who shall, without the consent of the owner of
the registered mark:
(1) Use in commerce any reproduction, counterfeit, copy,
or colorable imitation of a registered mark or the same
container or a dominant feature thereof in connection
with the sale, offering for sale, distribution, advertising
of any goods or services including other preparatory
steps necessary to carry out the sale of any goods or
services on or in connection with which such use is
likely to cause confusion, or to cause mistake, or to
deceive; [Sec. 155.1, RA 8293]
(2) Reproduce, counterfeit, copy or colorably imitate a
registered mark or a dominant feature thereof and
apply such reproduction, counterfeit, copy or colorable
imitation to labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used in
commerce upon or in connection with the sale, offering
for sale, distribution, or advertising of goods or services
on or in connection with which such use is likely to
cause confusion, or to cause mistake, or to deceive.
[Sec. 155.2, RA 8293]
Mighty Corporation v. E. & J. Gallo Winery (2004): A crucial
issue in any trademark infringement case is the likelihood
of confusion, mistake or deceit as to the identity, source or
origin of the goods or identity of the business as a
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MERCANTILE LAW REVIEWER
consequence of using a certain mark. Likelihood of
confusion is admittedly a relative term, to be determined
rigidly according to the particular (and sometimes
peculiar) circumstances of each case. In determining
likelihood of confusion, the court must consider: (a) the
resemblance between the trademarks; (b) the similarity of
the goods to which the trademarks are attached; (c) the
likely effect on the purchaser; and (d) the registrant’s
express or implied consent and other fair and equitable
considerations.
McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al.,
(2004): To establish trademark infringement, the following
elements must be shown: (1) the validity of the mark; (2)
the plaintiff’s ownership of the mark; and (3) the use of the
mark or its colorable imitation by the alleged infringer
results in “likelihood of confusion.” Of these, it is the
element of likelihood of confusion that is the gravamen of
trademark infringement. Two types of confusion arise from
the use of similar or colorable imitation marks, namely,
confusion of goods (product confusion) and confusion of
business (source or origin confusion). While there is
confusion of goods when the products are competing,
confusion of business exists when the products are non-
competing but related enough to produce confusion or
affiliation.
In order to bring a civil action for infringement, it is not
required that there is an actual sale of the goods or
services using the infringing material. [Sec. 155.2, RA 8293]
Infringement takes place upon the mere use or
reproduction of the registered mark.
No article of imported merchandise which shall copy or
simulate the name of any domestic product, or
manufacturer, or dealer, or which shall copy or simulate a
mark registered in accordance with the provisions of this
Act, or shall bear a mark or trade name calculated to
induce the public to believe that the article is
manufactured in the Philippines, or that it is manufactured
in any foreign country or locality other than the country or
locality where it is in fact manufactured, shall be admitted
to entry at any customhouse of the Philippines. [Sec. 166,
RA 8293]
A mere distributor and not the owner cannot assert any
protection from trademark infringement as it had no right
in the first place to the registration of the disputed
trademarks. [Superior Commercial Enterprises v. Kunnan
Enterprises (2010)]
FALSE DESIGNATIONS OF ORIGIN; FALSE DESCRIPTION OR
REPRESENTATION
Any person who, on or in connection with any goods or
services, or any container for goods, uses in commerce any
word, term, name, symbol, or device, or any combination
thereof, or any false designation of origin, false or
misleading description of fact, or false or misleading
representation of fact, which:
(a) Is likely to cause confusion, or to cause mistake, or to
deceive as to the affiliation, connection, or association
of such person with another person, or as to the origin,
sponsorship, or approval of his or her goods, services,
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
or commercial activities by another person; [Sec.
169.1(a), RA 8293]
(b) In commercial advertising or promotion, misrepresents
the nature, characteristics, qualities, or geographic
origin of his or her or another person's goods, services,
or commercial activities, shall be liable to a civil action
for damages and injunction [Sec. 169.1 (b), RA 8293]
Any goods marked or labeled in contravention of the
provisions of this Section shall not be imported into the
Philippines or admitted entry at any customhouse of the
Philippines. The owner, importer, or consignee of goods
refused entry at any customhouse under this section may
have any recourse under the customs revenue laws or may
have the remedy given by this Act in cases involving goods
refused entry or seized. [Sec. 169.2, RA 8293]
INFRINGEMENT OF NAME AND MARKS OF OWNERSHIP STAMP ON
CONTAINERS
General Rule: It is unlawful for any person, without the
consent of the manufacturer, bottler or seller who has
registered the mark of ownership to fill such bottles, boxes,
kegs, barrels or other containers so marked and stamped,
for the purpose of sale, dispose of, or wantonly destroy the
same, whether filled or not, to use the same for drinking
vessels or drain pipes, foundation pipes, for any other
purpose than that registered. [Sec. 2, RA 623 as amended
by RA 5700]
The use of the same without apparent permission from the
trademark owners thereof shall be prima facie
presumption that such possession or use is unlawful. [Sec.
3, RA 623 as amended by RA 5700]
Exceptions:
(1) Use of the bottles as containers for sisi, bagoong, patis,
and similar native products [Sec. 6 RA 623 as amended
by RA 5700]
(2) Persons in whose favor the containers were sold
[Distelleria Washington v. LA Tondena Distillers (1997)]
DAMAGES
The owner of a registered mark may recover damages from
any person who infringes his rights, and the measure of the
damages suffered shall be either the reasonable profit
which the complaining party would have made, had the
defendant not infringed his rights, or the profit which the
defendant actually made out of the infringement, or in the
event such measure of damages cannot be readily
ascertained with reasonable certainty, then the court may
award as damages a reasonable percentage based upon
the amount of gross sales of the defendant or the value of
the services in connection with which the mark or trade
name was used in the infringement of the rights of the
complaining party. [Sec. 156.1, RA 8293]
The owner of the registered mark shall not be entitled to
recover profits or damages unless the acts have been
committed with knowledge that such imitation is likely to
cause confusion, or to cause mistake, or to deceive. Such
knowledge is presumed if the registrant gives notice that
his mark is registered by displaying with the mark the
words '"Registered Mark" or the letter R within a circle or if
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MERCANTILE LAW REVIEWER
the defendant had otherwise actual notice of the
registration. [Sec. 158, RA 8293]
Should damages be recoverable, the measure of the
damages suffered shall be either:
(a) The reasonable profit which the complaining party
would have made, had the defendant not infringed his
rights; or
(b) The profit which the defendant actually made out of the
infringement; or
(c) A reasonable percentage based upon the amount of
gross sales of the defendant or the value of the services
in connection with which the mark or trade name was
used in the infringement of the rights of the
complaining party if such measure of damages cannot
be readily ascertained with reasonable certainty. [Sec.
156.1, RA 8293]
REQUIREMENT OF NOTICE
Notice of registration of trademark is necessary for an
owner of a trademark to recover damages in an action for
infringement since knowledge that such imitation is likely
to cause confusion, or to cause mistake, or to deceive is an
element of infringement. Requirement of notice may be
complied by displaying with the mark the words
'"Registered Mark" or the letter R within a circle. [Sec. 158,
RA 8293]
OTHER REMEDIES AVAILABLE:
(1) Injunction [Sec. 156.4];
(2) Impounding of sales invoices and other documents
[Sec. 156.2];
(3) Double damages in case of actual intent to defraud or
to mislead [Sec. 156.3];
(4) Court order for the disposal or destruction of the
infringing goods [Sec. 157];
(5) Criminal Action;
(6) Administration sanctions
Any foreign national, who qualifies under the principle on
reciprocity and does not engage in business in the
Philippines, whether or not it is licensed to do business in
the Philippines, may bring civil or administrative action for:
(1) Opposition
(2) Cancellation
(3) Infringement
(4) Unfair Competition
(5) False designation of origin or false description (Sec.
160. RA 8293)
LIMITATIONS TO ACTIONS FOR INFRINGEMENT
The remedies given to the owner of a right infringed shall
be limited as follows:
(a) Registered mark shall have no effect against any
person who, in good faith, before the filing date or the
priority date, was using the mark for the purposes of his
business or enterprise: Provided, That his right may
only be transferred or assigned together with his
enterprise or business or with that part of his enterprise
or business in which the mark is used. [Sec. 159.1, RA
8293]
(b) Where an infringer who is engaged solely in the
business of printing the mark or other infringing
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
materials for others is an innocent infringer, the owner
of the right infringed shall be entitled as against such
infringer only to an injunction against future printing.
[Sec. 159.2, RA 8293]
(c) Where the infringement complained of is contained in
or is part of paid advertisement in a newspaper,
magazine, or other similar periodical or in an electronic
communication, the remedies of the owner of the right
infringed as against the publisher or distributor of such
newspaper, magazine, or other similar periodical or
electronic communication shall be limited to an
injunction against the presentation of such advertising
matter in future issues of such newspapers, magazines,
or other similar periodicals or in future transmissions of
such electronic communications.
The limitations shall apply only to innocent infringers:
Provided, That such injunctive relief shall not be
available to the owner of the right infringed with
respect to an issue of a newspaper, magazine, or other
similar periodical or an electronic communication
containing infringing matter where restraining the
dissemination of such infringing matter in any
particular issue of such periodical or in an electronic
communication would delay the delivery of such issue
or transmission of such electronic communication is
customarily conducted in accordance with the sound
business practice, and not due to any method or device
adopted to evade this section or to prevent or delay the
issuance of an injunction or restraining order with
respect to such infringing matter. [Sec. 159.3, RA 8293]
(d) There shall be no infringement of trademarks or
tradenames of imported or sold drugs and medicines
allowed under Section 72.1 as well as imported or sold
off-patent drugs and medicines: Provided, That said
drugs and medicines bear the registered marks that
have not been tampered, unlawfully modified, or
infringed upon as defined under Section 155. [Sec. 159.4
RA 8293 as amended by RA 9502]
UNFAIR COMPETITION
A person who has identified in the mind of the public the
goods he manufactures or deals in, his business or services
from those of others, whether or not a registered mark is
employed, has a property right in the goodwill of the said
goods, business or services so identified, which will be
protected in the same manner as other property rights.
[Sec. 168.1, RA 8293]
Any person who shall employ deception or any other
means contrary to good faith by which he shall pass off the
goods manufactured by him or in which he deals, or his
business, or services for those of the one having
established such goodwill, or who shall commit any acts
calculated to produce said result, shall be guilty of unfair
competition, and shall be subject to an action therefor.
[Sec. 168.2, RA 8293]
The following shall be deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them
the general appearance of goods of another
manufacturer or dealer, either as to the goods
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MERCANTILE LAW REVIEWER
themselves or in the wrapping of the packages in which
they are contained, or the devices or words thereon, or
in any other feature of their appearance, which would
be likely to influence purchasers to believe that the
goods offered are those of a manufacturer or dealer,
other than the actual manufacturer or dealer, or who
otherwise clothes the goods with such appearance as
shall deceive the public and defraud another of his
legitimate trade, or any subsequent vendor of such
goods or any agent of any vendor engaged in selling
such goods with a like purpose; [Sec. 168.3(a), RA 8293]
(b) Any person who by any artifice, or device, or who
employs any other means calculated to induce the
false belief that such person is offering the services of
another who has identified such services in the mind of
the public; [Sec. 168.3(b), RA 8293]
(c) Any person who shall make any false statement in the
course of trade or who shall commit any other act
contrary to good faith of a nature calculated to
discredit the goods, business or services of another.
(Sec. 168.3(c), RA 8293)
McDonald’s Corporation v. L.G. Big Mak Burger, Inc., et al.
(2004): The elements of an action for unfair competition
are: (1) confusing similarity in the general appearance of
the goods, and (2) intent to deceive the public and defraud
a competitor. The confusing similarity may or may not
result from similarity in the marks, but may result from
other external factors in the packaging or presentation of
the goods. The intent to deceive and defraud may be
inferred from the similarity in appearance of the goods as
offered for sale to the public. Actual fraudulent intent need
not be shown.
Caterpillar, Inc v. Samson (2006): An action for unfair
competition is based on the proposition that no dealer in
merchandise should be allowed to dress his goods in
simulation of the goods of another dealer, so that
purchasers desiring to buy the goods of the latter would be
induced to buy the goods of the former. The most usual
devices employed in committing this crime are the
simulation of labels and the reproduction of form, color
and general appearance of the package used by the
pioneer manufacturer or dealer.
Coca-Cola v. Gomez (2008): Articles 168.1 and 168.2
provide the concept and general rule on the definition of
unfair competition. The law does not thereby cover every
unfair act committed in the course of business; it covers
only acts characterized by “deception or any other means
contrary to good faith” in the passing off of goods and
services as those of another who has established goodwill
in relation with these goods or services, or any other act
calculated to produce the same result.
What unfair competition is, is further particularized under
Section 168.3 when it provides specifics of what unfair
competition is “without in any way limiting the scope of
protection against unfair competition.” Part of these
particulars is provided under Section 168.3(c) which
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
provides the general “catch-all” phrase that the petitioner
cites. Under this phrase, a person shall be guilty of unfair
competition “who shall commit any other act contrary to
good faith of a nature calculated to discredit the goods,
business or services of another.”
From jurisprudence, unfair competition has been defined
as the passing off (or palming off) or attempting to pass off
upon the public the goods or business of one person as the
goods or business of another with the end and probable
effect of deceiving the public. It formulated the “true test”
of unfair competition: whether the acts of defendant are
such as are calculated to deceive the ordinary buyer
making his purchases under the ordinary conditions which
prevail in the particular trade to which the controversy
relates. One of the essential requisites in an action to
restrain unfair competition is proof of fraud; the intent to
deceive must be shown before the right to recover can
exist. The advent of the IP Code has not significantly
changed these rulings as they are fully in accord with what
Section 168 of the Code in its entirety provides. Deception,
passing off and fraud upon the public are still the key
elements that must be present for unfair competition to
exist.
Infringement of Trademark Unfair Competition
Unauthorized use of a Passing off of one’s goods as
trademark those of another
Fraudulent intent is Fraudulent intent is essential
unnecessary
Prior registration of the Registration is not necessary
trademark is a prerequisite
to the action
[Del Monte Corporation, et al. v. CA (1990)]
The law on unfair competition is broader and more
inclusive than the law on trademark infringement. The
latter is more limited but it recognizes a more exclusive
right derived from the trademark adoption and registration
by the person whose goods or business is first associated
with it. Hence, even if one fails to establish his exclusive
property right to a trademark, he may still obtain relief on
the ground of his competitor’s unfairness or fraud. Conduct
constitutes unfair competition if the effect is to pass off on
the public the goods of one man as the goods of another.
[Mighty Corporation v. E. & J. Gallo Winery (2004)]
TRADE NAMES OR BUSINESS NAMES
It is the name or designation identifying or distinguishing
an enterprise. [Sec. 121.3, RA 8293]
Any individual name or surname, firm name, device or
word used by manufacturers, industrialists, merchants,
and others to identify their businesses, vocations or
occupations [Converse Rubber Corp. v. Universal Rubber
Products, Inc. (1980)]
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MERCANTILE LAW REVIEWER
WHAT MAY NOT BE USED AS TRADE NAME
(1) If by its nature or the use to which the name or
designation may be put, it is contrary to public order or
morals.
(2) If it is liable to deceive trade circles or the public as to
the nature of the enterprise identified by the name
(3) If the trade name is similar to a mark or a trade name
owned by another person and its use would likely
mislead the public. [Sec.165.1, RA 8293]
Acquisition of ownership: Trade names are protected even
prior to or without registration. The ownership of a trade
name is acquired through adoption and use.
Right of owner: The IPC deems unlawful any subsequent
use of the trade name by a third party, whether as a trade
name or a mark or collective mark, or any such use of a
similar trade name or mark, likely to mislead the public.
[Sec. 165.2 (b), RA 8293]
Trade names, unlike trademarks, need not be registered
with the IPO before an infringement suit may be filed by its
owner against the owner of an infringing trademark. All
that is required is that the trade name is previously used in
trade or commerce in the Philippines. [Prosource
International v. Horphag Research Management (2009)]
COLLECTIVE MARKS
A Collective mark is any visible sign designated as such in
the application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or services of
different enterprises which use the sign under the control
of the registered owner of the collective mark [Sec. 121.2]
An application for registration of a collective mark shall
designate the mark as a collective mark and shall be
accompanied by a copy of the agreement, if any, governing
the use of the collective mark. [Sec. 167.2, Ra 8293]
GROUNDS FOR CANCELLATION
In addition to the grounds under Section 149, the Court
shall cancel the registration of a collective mark if the
person requesting the cancellation proves:
(1) That only the registered owner uses the mark; or
(2) That he uses or permits its use in contravention of the
agreements referred to in Subsection 166.2; or
(3) That he uses or permits its use in a manner liable to
deceive trade circles or the public as to the origin or any
other common characteristics of the goods or services
concerned. [Sec. 167.3, RA 8293]
The registration of a collective mark, or an application
therefor shall not be the subject of a license contract. [Sec.
167.4, RA 8293]
Copyrights
DEFINITION
Is that system of legal protection an author enjoys of the
form of expression of ideas. [Aquino, Intellectual Property
Law]
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
BASIC PRINCIPLES, SECTIONS 172.2, 175 AND 181
WORKS ARE PROTECTED BY THE SOLE FACT OF THEIR
CREATION
Principle of Automatic Protection: Copyright is vested from
the very moment of creation. [Sec. 172.2, RA 8293]
The enjoyment and exercise of copyright, including moral
rights, shall not be the subject of any formality; such
enjoyment and such exercise shall be independent of the
existence of protection in the country of origin of the work.
[Article 5(2), Berne Convention for the Protection of Literary
and Artistic Works]
The Denicola Test in intellectual property law states that if
design elements of an article reflect a merger of aesthetic
and functional considerations, the artistic aspects of the
work cannot be conceptually separable from the utilitarian
aspects; thus, the article cannot be copyrighted.
PROTECTION EXTENDS ONLY TO THE EXPRESSION OF
AN IDEA, NOT THE IDEA ITSELF.
No protection shall extend, under this law, to any idea,
procedure, system method or operation, concept, principle,
discovery or mere data as such, even if they are expressed,
explained, illustrated or embodied in a work. [Sec 175, RA
8293]
THE COPYRIGHT IS DISTINCT FROM THE PROPERTY IN THE MATERIAL
OBJECT SUBJECT TO IT. [Sec 181, RA 8293]
COPYRIGHT IS A STATUTORY RIGHT.
Copyright, in the strict sense of the term is purely a
statutory right. Being a mere statutory grant, the rights are
limited to what the statute confers. It may be obtained and
enjoyed only with respect to the subjects and by the
persons, and on terms and conditions specified in the
statute. Accordingly, it can cover only the works falling
within the statutory enumeration or description. [Pearl and
Dean vs. Shoemart (2003)]
COPYRIGHTABLE WORKS
ORIGINAL LITERARY AND ARTISTIC WORKS
Sec. 172.1, RA 8293. Literary and artistic works, hereinafter
referred to as "works", are original intellectual creations in
the literary and artistic domain protected from the
moment of their creation and shall include in particular:
(a) Books, pamphlets, articles and other writings;
(b) Periodicals and newspapers;
(c) Lectures, sermons, addresses, dissertations prepared
for oral delivery, whether or not reduced in writing or
other material form;
(d) Letters;
(e) Dramatic or dramatico-musical compositions;
choreographic works or entertainment in dumb shows;
(f) Musical compositions, with or without words;
(g) Works of drawing, painting, architecture, sculpture,
engraving, lithography or other works of art; models or
designs for works of art;
(h) Original ornamental designs or models for articles of
manufacture, whether or not registrable as an
industrial design, and other works of applied art;
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MERCANTILE LAW REVIEWER
(i) Illustrations, maps, plans, sketches, charts and three-
dimensional works relative to geography, topography,
architecture or science;
(j) Drawings or plastic works of a scientific or technical
character;
(k) Photographic works including works produced by a
process analogous to photography; lantern slides;
(l) Audiovisual works and cinematographic works and
works produced by a process analogous to
cinematography or any process for making audio-visual
recordings;
(m) Pictorial illustrations and advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and artistic works
When a work is considered original:
(1) The work is an independent creation of the author; and
(2) It must not be copied from the work of another.
A person to be entitled to a copyright must be the original
creator of the work. He must have created it by his own
skill, labor and judgment without directly copying or
evasively imitating the work of another. [Ching Kian Chuan
vs. CA (2001)]
By originality is meant that the material was not copied,
and evidences at least minimal creativity; that it was
independently created by the author and that it possesses
at least some minimal degree of creativity. Copying is
shown by proof of access to copyrighted material and
substantial similarity between the two works. The
applicant must thus demonstrate the existence and
validity of copyright because in the absence of copyright
protection, even the original creation may be freely copied.
[Ching v. Salinas (2005)]
Originality is not determined by novelty, aesthetic merit or
ingenuity but that it is an independent creation.
The requirement in US Law that the expression should be
fixed in a tangible medium is not applicable here since our
law expressly provides that works are protected
irrespective of their mode or form of expression. [Sec. 172.2,
RA 8293]
DERIVATIVE WORKS
The following derivative works shall also be protected by
copyright:
(a) Dramatizations, translations, adaptations,
abridgments, arrangements, and other alterations of
literary or artistic works; and
(b) Collections of literary, scholarly or artistic works, and
compilations of data and other materials which are
original by reason of the selection or coordination or
arrangement of their contents. [Sec. 173.1, RA 8293]
Derivative works are protected as new works provided they
shall not:
(a) Affect the force of any subsisting copyright upon the
original works employed or any part thereof; or
(b) Be construed to imply any right to such use of the
original works, or to secure or extend copyright in such
original works. [Sec. 173.2, RA 8293]
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NON-COPYRIGHTABLE WORKS
UNPROTECTED SUBJECT MATTER
(a) Any idea, procedure, system method or operation,
concept, principle, discovery or mere data as such, even
if they are expressed, explained, illustrated or
embodied in a work;
(b) News of the day and other miscellaneous facts having
the character of mere items of press information;
(c) Any official text of a legislative, administrative or legal
nature, as well as any official translation thereof;
(d) Pleadings;
(e) Original decisions of courts and tribunals (This pertains
to the “original decisions” not the SCRA published
volumes since these are protected under derivative works
under Sec 173.1) [Sec. 175, RA 8293]
The format or mechanics of a TV show is not copyrightable
as copyright does not extend to ideas, procedures,
processes, systems, methods of operation, concepts,
principles or discoveries regardless of the form in which
they are described, explained, illustrated or embodied.
[Joaquin Jr. et al vs. Drilon, et al (1999)]
No one may claim originality as to facts as these do not
owe their origin to an act of authorship. The first person to
find and report a particular fact has not created the same;
he has merely discovered its existence. [Feist Publication v
Rural Telephone Services (1991)]
WORKS OF THE GOVERNMENT OF THE PHILIPPINES
Work of the Government of the Philippines: Is a work
created by an officer or employee of the Philippine
Government or any of its subdivisions and
instrumentalities, including government-owned or
controlled corporations as a part of his regularly prescribed
official duties. [Sec. 171.11, RA 8293]
General Rule: Government cannot own copyright
Exceptions:
(1) When copyright is assigned or bequested in favor of the
government [Sec 176.3];
(2) Author of speeches, lectures, sermons, addresses and
dissertations shall have exclusive right of making a
collection of his work.
However, prior approval of the government agency or the
office wherein the work is created shall be necessary for
the exploitation of such work for profit. [Sec. 176.1]
Notwithstanding the foregoing provisions, the Government
is not precluded from receiving and holding copyrights
transferred to it by assignment, bequest or otherwise; nor
shall publication or republication by the Government in a
public document of any work in which copyright is
subsisting be taken to cause any abridgment or annulment
of the copyright or to authorize any use or appropriation of
such work without the consent of the copyright owner.
[Sec. 176.3, RA 8293]
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MERCANTILE LAW REVIEWER
In writing judicial decisions, a judge should make the
proper attribution in copying passages from any judicial
decision, statute, regulation, or other Works of the
Government. However, the failure to make such attribution
does not violate the Law on Copyright. The law expressly
provides that Works of the Government are not subject to
copyright. This means that there is neither a legal right by
anyone to demand attribution, nor any legal obligation
from anyone to make an attribution, when Works of the
Government are copied. The failure to make the proper
attribution of a Work of the Government is not actionable
but is merely a case of sloppy writing. Clearly, there is
no legal obligation, by a judge or by any person, to make
an attribution when copying Works of the Government.
However, misquoting or twisting, with or without
attribution, any judicial decision, statute, regulation or
other Works of the Government in judicial writing, if done
to mislead the parties or the public, is actionable. [J. Carpio
Dissenting Opinion, In The Matter Of the Charges of
Plagiarism, Etc., Against Assoc. Justice Mariano Del Castillo,
A.M. 10-7-17-SC (2011)]
WORKS OF THE PUBLIC DOMAIN
These include works whose term of copyright has expired.
USEFUL ARTICLES
Useful Article Doctrine: Works whose sole purpose is
utilitarian have no separate artistic value. This can be
distinguished from a work of applied art, which has
utilitarian functions but there is an identifiable artistic work
or creation incorporated thereto.
RIGHTS OF COPYRIGHT OWNER
COPYRIGHT OR ECONOMIC RIGHTS
Copyright or economic rights shall consist of the exclusive
right to carry out, authorize or prevent the following acts:
(a) Reproduction of the work or substantial portion of the
work; [Sec. 177.1, RA 8293]
(b) Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work; [Sec.
177.2, RA 8293]
(c) The first public distribution of the original and each
copy of the work by sale or other forms of transfer of
ownership; [Sec. 177.3, RA 8293]
(d) Rental of the original or a copy of an audiovisual or
cinematographic work, a work embodied in a sound
recording, a computer program, a compilation of data
and other materials or a musical work in graphic form,
irrespective of the ownership of the original or the copy
which is the subject of the rental; [Sec. 177.4, RA 8293]
(e) Public display of the original or a copy of the work; [Sec.
177.5, RA 8293]
(f) Public performance of the work; [Sec. 177.6, RA 8293]
(g) Other communication to the public of the work [Sec.
177.7, RA 8293]
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
Economic rights also give the author the right to assign the
copyright and/or the material object in whole or in part,
and they allow the owner to derive financial reward from
the use of his works by others. [Sec. 180.1, RA 8293]
Copyright in a work of architecture: shall include the right
to control the erection of any building which reproduces
the whole or a substantial part of the work either in its
original form or in any form recognizably derived from the
original: Provided, That the copyright in any such work
shall not include the right to control the reconstruction or
rehabilitation in the same style as the original of a building
to which that copyright relates. [Sec. 186, RA 8293]
Communication to the Public of Copyrighted Works:
Includes point-to-point transmission of a work, including
video on demand, and providing access to an electronic
retrieval system, such as computer databases, servers, or
similar electronic storage devices. Broadcasting,
rebroadcasting, retransmission by cable, and broadcast
and retransmission by satellite are all acts of
“communication to the public” within the meaning of the
IPC. [Rule 11, Copyright Safeguards and Regulations]
First Public Distribution of Work: An exclusive right of first
distribution of work includes all acts involving distribution,
specifically including the first importation of an original
and each copy of the work into the jurisdiction of the
Republic of the Philippines. [Rule 12, Copyright Safeguards
and Regulations]
Civil Code Provisions on Ownership of Intellectual Creation:
Article 721. By intellectual creation, the following persons
acquire ownership:
(1) The author with regard to his literary, dramatic,
historical, legal, philosophical, scientific or other work;
(2) The composer; as to his musical composition;
(3) The painter, sculptor, or other artist, with respect to the
product of his art;
(4) The scientist or technologist or any other person with
regard to his discovery or invention.
Article 722. The author and the composer, mentioned in
Nos. 1 and 2 of the preceding article, shall have the
ownership of their creations even before the publication of
the same. Once their works are published, their rights are
governed by the Copyright laws.
The painter, sculptor or other artist shall have dominion
over the product of his art even before it is copyrighted.
The scientist or technologist has the ownership of his
discovery or invention even before it is patented.
Article 723. Letters and other private communications in
writing are owned by the person to whom they are
addressed and delivered, but they cannot be published or
disseminated without the consent of the writer or his heirs.
However, the court may authorize their publication or
dissemination if the public good or the interest of justice so
requires.
PAGE 158
MERCANTILE LAW REVIEWER
MORAL RIGHTS [SEC. 193]
The author of a work shall, independently of the economic
rights in Section 177 or the grant of an assignment or
license with respect to such right, have the right:
(1) To require that the authorship of the works be
attributed to him, in particular, the right that his name,
as far as practicable, be indicated in a prominent way
on the copies, and in connection with the public use of
his work; [Sec. 193.1, RA 8293]
(2) To make any alterations of his work prior to, or to
withhold it from publication; [Sec. 193.2, RA 8293]
(3) To object to any distortion, mutilation or other
modification of, or other derogatory action in relation
to, his work which would be prejudicial to his honor or
reputation; [Sec. 193.3, RA 8293]
(4) To restrain the use of his name with respect to any
work not of his own creation or in a distorted version of
his work. [Sec. 193.4, RA 8293]
In addition to the right to publish granted by the author,
his heirs, or assigns, the publisher shall have a copyright
consisting merely of the right of reproduction of the
typographical arrangement of the published edition of the
work. [Sec.174, RA 8293]
The author of speeches, lectures, sermons, addresses, and
dissertations mentioned in the preceding paragraphs shall
have the exclusive right of making a collection of his works.
[Sec. 176.2, Ra 8293]
WAIVER OF MORAL RIGHTS
General Rule: Moral rights can be waived in writing,
expressly stating such waiver [Sec. 195, RA 8293] or by
contribution to a collective work unless such is expressly
reserved [Sec. 196, RA 8293].
Exceptions:
Even if made in writing, waiver is still not valid if:
(a) Use of the name of the author, title of his work, or his
reputation with respect to any version or adaptation of
his work, which because of alterations substantially
tends to injure the literary or artistic reputation of
another author; [Sec. 195.1, RA 8293]
(b) It uses the name of the author in a work that he did not
create. [Sec. 195.1, RA 8293]
Moral rights are not assignable or subject to license. [Sec.
198, RA 8293]
RIGHTS TO PROCEEDS IN SUBSEQUENT TRANSFERS (DROIT DE SUITE
OR FOLLOW UP RIGHTS)
In every sale or lease of an original work of painting or
sculpture or of the original manuscript of a writer or
composer, subsequent to the first disposition thereof by
the author, the author or his heirs shall have an inalienable
right to participate in the gross proceeds of the sale or
lease to the extent of five percent (5%). This right shall
exist during the lifetime of the author and for fifty (50)
years after his death. [Sec. 200, RA 8293]
UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE
Works not covered: Prints, etchings, engravings, works of
applied art, or works of similar kind wherein the author
primarily derives gain from the proceeds of reproductions.
(Sec. 201, RA 8293)
First Sale Doctrine: After the first sale of the lawfully made
copy of the copyrighted work, anyone who is the owner of
that copy can sell or dispose of that copy in any way
without any liability for copyright infringement. The first
sale of an authorized copy of the work exhausts the
author’s right to control distribution of copies.
NEIGHBORING RIGHTS
PERFORMER’S RIGHTS
(1) As regards their performances, the right of authorizing:
(a) The broadcasting and other communication to the
public of their performance; and
(b) The fixation of their unfixed performance. [Sec.
203.1, RA 8293]
Such right shall be maintained and exercised fifty (50)
years after his death, by his heirs, and in default of
heirs, the government, where protection is claimed.
[Sec. 204.2, RA 8293]
(2) The right of authorizing the direct or indirect
reproduction of their performances fixed in sound
recordings, in any manner or form; [Sec. 203.2, RA
8293]
(3) Subject to the provisions of Section 206, the right of
authorizing the first public distribution of the original
and copies of their performance fixed in the sound
recording through sale or rental or other forms of
transfer of ownership; [Sec. 203.3, RA 8293]
(4) The right of authorizing the commercial rental to the
public of the original and copies of their performances
fixed in sound recordings, even after distribution of
them by, or pursuant to the authorization by the
performer; [Sec. 203.4, RA 8293]
(5) The right of authorizing the making available to the
public of their performances fixed in sound recordings,
by wire or wireless means, in such a way that members
of the public may access them from a place and time
individually chosen by them. [Sec. 203.5, RA 8293]
(6) Independently of a performer's economic rights, the
performer, shall, as regards his live aural performances
or performances fixed in sound recordings, have the
right to claim to be identified as the performer of his
performances, except where the omission is dictated by
the manner of the use of the performance, and to
object to any distortion, mutilation or other
modification of his performances that would be
prejudicial to his reputation. [Sec. 204.1, RA 8293]
(7) Unless otherwise provided in the contract, in every
communication to the public or broadcast of a
performance subsequent to the first communication or
broadcast thereof by the broadcasting organization,
the performer shall be entitled to an additional
PAGE 159
MERCANTILE LAW REVIEWER
remuneration equivalent to at least five percent (5%) of
the original compensation he or she received for the
first communication or broadcast. [Sec. 206, RA 8293]
RIGHTS OF PRODUCERS OF SOUND RECORDING
(1) The right to authorize the direct or indirect
reproduction of their sound recordings, in any manner
or form; the placing of these reproductions in the
market and the right of rental or lending; [Sec. 208.1,
RA 8293]
(2) The right to authorize the first public distribution of the
original and copies of their sound recordings through
sale or rental or other forms of transferring ownership;
[Sec. 208.2, RA 8293]
(3) The right to authorize the commercial rental to the
public of the original and copies of their sound
recordings, even after distribution by them by or
pursuant to authorization by the producer. [Sec. 208.3,
RA 8293]
(4) If a sound recording published for commercial
purposes, or a reproduction of such sound recording, is
used directly for broadcasting or for other
communication to the public, or is publicly performed
with the intention of making and enhancing profit, a
single equitable remuneration for the performer or
performers, and the producer of the sound recording
shall be paid by the user to both the performers and
the producer, who, in the absence of any agreement
shall share equally. [Sec. 209, RA 8293]
RIGHTS OF BROADCASTING ORGANIZATIONS
(1) The rebroadcasting of their broadcasts; [Sec. 211.1, RA
8293]
(2) The recording in any manner, including the making of
films or the use of video tape, of their broadcasts for
the purpose of communication to the public of
television broadcasts of the same; [Sec. 211.2, RA 8293]
(3) The use of such records for fresh transmissions or for
fresh recording. [Sec. 211.3, RA 8293]
Must-Carry Rule: Prevents cable television companies from
excluding broadcasting organization especially in those
places not reached by signal. Also, the rule prevents cable
television companies from depriving viewers in far-flung
areas the enjoyment of programs available to city viewers.
[ABS-CBN Broadcasting vs. Philippine Multi-Media System
(2009)]
Limitations on Protection
Sections 203, 208 and 209 shall not apply where the acts
referred to in those Sections are related to:
(1) The use by a natural person exclusively for his own
personal purposes;
(2) Using short excerpts for reporting current events;
(3) Use solely for the purpose of teaching or for scientific
research; and
(4) Fair use of the broadcast subject to certain conditions.
(Sec. 212, RA 8293)
 UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE MERCANTILE LAW REVIEWER

Term of Protection
Works Term

For performances not Fifty (50) years from the end

incorporated in recordings of the year in which the
performance took place
[Sec. 215.1(a), RA 8293]

For sound or image and sound Fifty (50) years from the end
recordings and for performances of the year in which the
incorporated therein recording took place. [Sec.
215.1(b), RA 8293]

Broadcasts Twenty (20) years from the

date the broadcast took
place [Sec. 215.2, RA 8293]

RULES ON OWNERSHIP OF COPYRIGHT

OWNERSHIP OF COPYRIGHT
Work Ownership

Single Creator of an Original Work Belongs to the author of the work [Sec. 178.1, RA 8293]

Belongs of the co-authors; in the absence of agreement, their rights

shall be governed by the rules on co-ownership. However, if the
Works of Joint Authorship work consists of parts that can be used separately and identified,
the author of each part owns the copyright of the part he has
created. [Sec. 178.2, RA 8293; Asked in ‘95, ‘04]

Belongs to the employee if the creation is not a part of his regular

duties, even if he used the time, facilities and materials of the
Work created during the course of employment employer. However, belongs to the employer if the work is in the
performance of the employee’s regular duties unless there is an
agreement to the contrary. [Sec. 178.3, RA 8293; Asked in ‘08]

The person who commissioned the work holds ownership of the

work per se, but copyright remains with the creator unless there
Work commissioned by a person other than the employer
was a stipulation to the contrary. [Sec. 178.4, RA 8293; Asked in ‘95,
‘04]

Belongs to the producer, author of the scenario, composer of the

music, film director, and author of the adapted work. However,
subject to stipulations, the producers shall exercise the copyright as
Audio visual works
may be required for the exhibition of the work, except for the right
to collect license fees for the performance of musical compositions
in the work. [Sec. 178.5, RA 8293]

Belongs to the writer, but the court may authorize their publication
Letters or dissemination of the public good or interest of justice requires,
pursuant to Art. 723, New Civil Code. [Sec. 178.6, RA 8293]

PAGE 160
 UP LAW BAR OPERATIONS COMMISSION INTELLECTUAL PROPERTY CODE MERCANTILE LAW REVIEWER

Publishers are deemed to represent the authors, unless the

contrary appears, the pseudonyms or adopted names leave no
Anonymous and pseudonymous works
doubt as to the author’s identity or if the author discloses his
identity. [Sec. 179, RA 8293]

A contributor is deemed to have waived his right unless he

Collective works
expressly reserves it. [Sec. 196, RA 8293]

DURATION OF COPYRIGHT
Works Term

Original Literary and Artistic Works including Posthumous Works Lifetime of author and for fifty (50) years after his death (Sec
213.1, RA 8293)

Derivative Works including Posthumous Works Lifetime of author and for fifty (50) years after his death [Sec
213.1, RA 8293]

Joint Authorship Lifetime of the last surviving author and for fifty (50) years after
his death (Sec 213.2, RA 8293)

Anonymous or Pseudonymous Works Fifty (50) years from date of first lawful publication [Sec. 213.3,
RA 8293]

Applied Art Twenty-five (25) years from date of making [Sec. 213.4, RA 8293]

Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA 8293]

Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA 8293]

Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA 8293]

Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA 8293]

PRESUMPTION OF AUTHORSHIP
The natural person whose name is indicated on a work in
the usual manner as the author shall, in the absence of
proof to the contrary, be presumed to be the author of the
work. This provision shall be applicable even if the name is a
pseudonym, where the pseudonym leaves no doubt as to
the identity of the author. The person or body, corporate
whose name appears on an audio-visual work in the usual
manner shall, in the absence of proof to the contrary, be
presumed to be the maker of said work. [Sec. 219, RA 8293]
The term of protection subsequent to the death of the
author shall run from the date of his death or of publication,
but such terms shall always be deemed to begin on the first
day of January of the year following the event which gave
rise to them. [Sec. 214, RA 8293]
TRANSFER OR ASSIGNMENT OF COPYRIGHT
The copyright may be assigned in whole or in part. Within
the scope of the assignment, the assignee is entitled to all
the rights and remedies which the assignor had with respect
to the copyright. [Sec. 180.1, RA 8293]
The copyright is not deemed assigned inter vivos in whole or
in part unless there is a written indication of such intention.
[Sec. 180.2, RA 8293]
The submission of a literary, photographic or artistic work to
a newspaper, magazine or periodical for publication shall
constitute only a license to make a single publication unless
a greater right is expressly granted. If two (2) or more
persons jointly own a copyright or any part thereof, neither
of the owners shall be entitled to grant licenses without the
prior written consent of the other owner or owners. [Sec.
180.3, RA 8293]
The transfer or assignment of copyright shall not itself
constitute a transfer of the materials object. A transfer or
assignment of the copyright of the sole copy or one of the

PAGE 161
UP COLLEGE OF LAW INTELLECTUAL PROPERTY CODE
several copies of the work shall not imply transfer or
assignment of copyright [Sec. 181, RA 8293]
The copyright owners or their heirs may designate a society
of artists, writers or composers to enforce their economic
rights and moral rights on their behalf. [Sec. 183, RA 8293]
LIMITATIONS ON COPYRIGHT
DOCTRINE OF FAIR USE
The fair use of copyrighted work for criticism, news
reporting, teaching (including multiple copies for classroom
use), research and similar purposes is not an infringement
of copyright.
A PRIVILEGE, IN PERSONS OTHER THAN THE OWNER OF
THE COPYRIGHT, TO USE THE COPYRIGHTED MATERIAL
IN A REASONABLE MANNER WITHOUT HIS CONSENT,
NOTWITHSTANDING THE MONOPOLY GRANTED TO THE
OWNER BY THE COPYRIGHT. IT IS MEANT TO BALANCE
THE MONOPOLIES ENJOYED BY THE COPYRIGHT OWNER
WITH THE INTERESTS OF THE PUBLIC AND OF SOCIETY.
DECOMPILATION: REFERS TO THE REPRODUCTION OF
THE CODE AND TRANSLATION OF THE FORMS OF THE
COMPUTER PROGRAM TO ACHIEVE THE INTER-
OPERABILITY OF AN INDEPENDENTLY CREATED
COMPUTER PROGRAM WITH OTHER PROGRAMS. THIS
MAY ALSO CONSTITUTE FAIR USE [SEC. 185.1, RA 8293].
The fact that a work is unpublished shall not by itself bar a
finding of fair use if such finding is made upon consideration
of all the above factors. [Sec 185.2, RA 8293]
Factors to consider in determining Fair Use
(1) The purpose and character of the use, including whether
such use is of a commercial nature or is for non-profit
educational purposes;
(2) The nature of the copyrighted work;
(3) The amount and substantiality of the portion used in
relation to the copyrighted work as a whole; and
(4) The effect of the use upon the potential market for or
value of the copyrighted work [Sec. 185.1, RA 8293;
(Harper & Row v. Nation Enterprise, 471 US 539, 105 S.Ct.
2218, 85 L.Ed.2d 588]
COPYRIGHT INFRINGEMENT
Infringement of Copyright and Related Rights: means any
violation of the rights under the Intellectual Property Code
and/or the applicable Intellectual Property Law, including
the act of any person who at the time when copyright
subsists in a work has in his possession an article which he
known, or ought to know, to be an infringing copy of the
work f or the purpose of:
(a) Selling, letting for hire, or by way of trade offering or
exposing for sale, or hire, the article
(b) Distributing the article for purpose of trade, or for any
other purpose to an extent that will prejudice the rights
of the copyright owner in the work; or
(c) Trade exhibit of the article in public. [Sec. 1(l), Rule 1,
Rules and Regulations on Administrative Complaints for
Violation of Laws involving Intellectual Property Rights]
Habana et al vs. Robles et al. (1999): Infringement consists in
the doing by any person, without the consent of the owner
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of the copyright, of anything the sole right to do which is
conferred by statute on the owner of the copyright. For
there to be substantial reproduction of a book, it does not
necessarily require that the entire copyrighted work, or even
a large portion of it, be copied. If so much is taken that the
value of the original work is substantially diminished, there
is an infringement of copyright and to an injurious extent,
the work appropriated. It is no defense that the pirate did
not know whether or not he was infringing any copyright; he
at least knew that what he was copying was not his, and he
copied at his peril. In cases of infringement, copying alone is
not what is prohibited. The copying must produce an
“injurious effect.”
Copyright infringement and unfair competition are not
limited to the act of selling counterfeit goods. They cover a
whole range of acts from copying, assembling, packaging to
marketing, including the mere offering for sale of
counterfeit goods. [Microsoft Corp vs. Maxicorp Inc. (2004)]
Columbia Pictures v. CA (1996): A copy of a piracy is an
infringement of the original, and it is no defense that the
pirate, in such cases, did not know what works he was
indirectly copying, or did not know whether or not he was
infringing any copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In
determining the question of infringement, the amount of
matter copied from the copyrighted work is an important
consideration. To constitute infringement, it is not necessary
that the whole or even a large portion of the work shall have
been copied. If so much is taken that the value of the
original is sensibly diminished, or the labors of the original
author are substantially and to an injurious extent
appropriated by another, that is sufficient in point of law to
constitute a piracy.
THE FOLLOWING SHALL NOT CONSTITUTE INFRINGEMENT OF
COPYRIGHT:
(a) Recitation or performance of a work once it has been
made accessible to the public if (1) privately done AND
free of charge OR (2) strictly for a charitable or religious
institution; [Sec. 184.1(a), RA 8293]
(b) Making of quotations from a published work: (i)
compatible with fair use, (ii) extent is justified by the
purpose, (iii) source and name of the author, appearing
on work, must be mentioned; [Sec. 184.1(b), RA 8293]
(c) Reproduction or communication to the public by mass
media of articles on current political, social, economic,
scientific or religious topic, lectures, addresses and other
works, delivered in public: (i) for information purposes,
(ii) not expressly reserved, and (iii) source is already
indicated; [Sec. 184.1(c), RA 8293]
(d) Reproduction and communication to the public of
literary, scientific or artistic works as part of reports of
current events by means of photography,
cinematography or broadcasting to the extent necessary
for the purpose; [Sec. 184.1(d), RA 8293]
UP COLLEGE OF LAW INTELLECTUAL PROPERTY CODE
(e) Inclusion of a work in a publication, broadcast or other
communication to the public, sound recording or film if
made by way of illustration for teaching purposes
compatible with fair use and the source and the name of
the author appearing on work, must be mentioned; [Sec.
184.1(e), RA 8293]
(f) Recording made in schools, universities, or educational
institutions of a work included in a broadcast for the use
of schools, universities or educational institutions. Such
recording must be deleted within a reasonable period;
such recording may not be made from audio-visual
works which are part of the general cinema, repertoire of
feature films except of brief excerpts of the work; [Sec.
184.1(f), RA 8293]
(g) Making of ephemeral recordings; (i) by a broadcasting
organization, (ii) by means of its work or facilities, (iii) for
use in its own broadcast; [Sec. 184.1(g), RA 8293]
(h) Use made of a work by or under the direction or control
of the government for public interest compatible with
fair use; [Sec. 184.1(h), RA 8293]
(i) Public performance or the communication to the public
of a work in a place where no admission fee is charged
by a club on institution for charitable or educational
purpose only and the aim is not profit-making; [Sec.
184.1(i), RA 8293]
(j) Public display of the original or a copy of the work not
made by means of a film, slide, television, image or
otherwise on screen or by means of any other device or
process either the work has been published, sold, given
away, or transferred to another person by the author or
his successor in title; [Sec. 184.1(j), RA 8293]
(k) Use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a
legal practitioner. [Sec. 184.1(k), RA 8293]
Reproduction of Published Work
General Rule: The private reproduction of a published work
in a single copy, where the reproduction is made by a
natural person exclusively for research and private study,
shall be permitted, without the authorization of the owner
of copyright in the work. [Sec. 187.1, RA 8293]
Exceptions: Such permission shall not extend to:
(a) A work of architecture in the form of building or other
construction;
(b) An entire book, or a substantial part thereof, or of a
musical work in graphic form by reprographic means;
(c) A compilation of data and other materials;
(d) A computer program except as provided in Section 189;
and
(e) Any work in cases where reproduction would
unreasonably conflict with a normal exploitation of the
work or would otherwise unreasonably prejudice the
legitimate interests of the author. [187.2, RA 8293]
Reprographic Reproduction by Libraries
Any library or archive whose activities are not for profit may,
without the authorization of the author of copyright owner,
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make a single copy of the work by reprographic
reproduction:
(a) Where the work by reason of its fragile character or
rarity cannot be lent to user in its original form;
(b) Where the works are isolated articles contained in
composite works or brief portions of other published
works and the reproduction is necessary to supply them,
when this is considered expedient, to persons
requesting their loan for purposes of research or study
instead of lending the volumes or booklets which
contain them; and
(c) Where the making of such a copy is in order to preserve
and, if necessary in the event that it is lost, destroyed or
rendered unusable, replace a copy, or to replace, in the
permanent collection of another similar library or
archive, a copy which has been lost, destroyed or
rendered unusable and copies are not available with the
publisher. [Sec. 188.1, RA 8293]
It shall not be permissible to produce a volume of a work
published in several volumes or to produce missing tomes
or pages of magazines or similar works, unless the volume,
tome or part is out of stock: Provided, That every library
which, by law, is entitled to receive copies of a printed work,
shall be entitled, when special reasons so require, to
reproduce a copy of a published work which is considered
necessary for the collection of the library but which is out of
stock. [Sec. 188.2, RA 8293)]
Reproduction of Computer Program
The reproduction in one (1) back-up copy or adaptation of a
computer program shall be permitted, without the
authorization of the author of, or other owner of copyright
in, a computer program, by the lawful owner of that
computer program: Provided, That the copy or adaptation is
necessary for:
(a) The use of the computer program in conjunction with a
computer for the purpose, and to the extent, for which
the computer program has been obtained; and
(b) Archival purposes, and, for the replacement of the
lawfully owned copy of the computer program in the
event that the lawfully obtained copy of the computer
program is lost, destroyed or rendered unusable. [Sec.
189.1, RA 8293]
No copy or adaptation mentioned in this Section shall be
used for any purpose other than the ones determined in this
Section, and any such copy or adaptation shall be destroyed
in the event that continued possession of the copy of the
computer program ceases to be lawful. [Sec. 189.2, RA
8293]
Importation for Personal Purposes
The importation of a copy of a work by an individual for his
personal purposes shall be permitted without the
authorization of the author of, or other owner of copyright
in, the work under the following circumstances:
(a) When copies of the work are not available in the
Philippines and:
(1) Not more than one (1) copy at one time is imported
for strictly individual use only; or
(2) The importation is by authority of and for the use of
the Philippine Government; or
(3) The importation, consisting of not more than three
(3) such copies or likenesses in any one invoice, is not
UP COLLEGE OF LAW INTELLECTUAL PROPERTY CODE
for sale but for the use only of any religious,
charitable, or educational society or institution duly
incorporated or registered, or is for the
encouragement of the fine arts, or for any state
school, college, university, or free public library in the
Philippines.
(b) When such copies form parts of libraries and personal
baggage belonging to persons or families arriving from
foreign countries and are not intended for sale:
Provided, that such copies do not exceed three (3). [Sec.
190.1, RA 8293]
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Copies imported as allowed by this Section may not lawfully
be used in any way to violate the rights of owner the
copyright or annul or limit the protection secured by this
Act, and such unlawful use shall be deemed an
infringement and shall be punishable as such without
prejudice to the proprietor's right of action. [Sec. 190.2, RA
8293]
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Chattel and Real Estate
Mortgage Laws
[Excluded and made part of the Civil Law coverage.]
Anti-Money Laundering Act
(R.A. No. 9160, as amended by R.A. No. 9194)
DEFINITION
Money laundering is a crime whereby the proceeds of an
unlawful activity are transacted, thereby making them
appear to have originated from legitimate sources. (Sec. 4,
RA 9160)
POLICY OF THE LAW
It is the policy of the State to protect and preserve the
integrity and confidentiality of bank accounts and to ensure
that the Philippines shall not be used as a money
laundering site for the proceeds of any unlawful activity.
Consistent with its foreign policy, the State shall extend
cooperation in transnational investigations and
prosecutions of persons involved in money laundering
activities whenever committed. (Sec. 2, RA 9160)
COVERED INSTITUTIONS
(1) banks, non-banks, quasi-banks, trust entities, and all
other institutions and their subsidiaries and affiliates
supervised or regulated by the Bangko Sentral ng
Pilipinas (BSP);
(2) Insurance companies and all other institutions
supervised or regulated by the Insurance Commission;
and
(3) (i) securities dealers, brokers, salesmen, investment
houses and other similar entities managing securities or
rendering services as investment agent, advisor, or
consultant,
(ii) mutual funds, close and investment companies,
common trust funds, pre-need companies and other
similar entities,
(iii) foreign exchange corporations, money changers, money
payment, remittance, and transfer companies and other
similar entities, and
(iv) other entities administering or otherwise dealing in
currency, commodities or financial derivatives based
thereon, valuable objects, cash substitutes and other
similar monetary instruments or property supervised or
regulated by Securities and Exchange Commission. (Sec.
3[a], RA 9160)
OBLIGATIONS OF COVERED INSTITUTIONS
CUSTOMER IDENTIFICATION
Covered institutions shall establish and record the true
identity of its clients based on official documents. They shall
maintain a system of verifying the true identity of their
clients and, in case of corporate clients, require a system of
verifying their legal existence and organizational structure,
as well as the authority and identification of all persons
purporting to act on their behalf.
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The provisions of existing laws to the contrary
notwithstanding, anonymous accounts, accounts under
fictitious names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign currency non-
checking numbered accounts shall be allowed. The BSP
may conduct annual testing solely limited to the
determination of the existence and true identity of the
owners of such accounts.
RECORD KEEPING
All records of all transactions of covered institutions shall
bemaintained and safely stored for five (5) years from the
dates of transactions. With respect to closed accounts, the
records on customer identification, account files and
businesscorrespondence, shall be preserved and safely
stored for at least five (5) years from the dates when they
were closed.
REPORTING OF COVERED AND SUSPICIOUS TRANSACTIONS
Covered institutions shall report to the AMLC all covered
transactions and suspicious transactions within five (5)
working days from occurrence thereof, unless the
Supervising Authority prescribes a longer period
notexceeding ten (10) working days.
Should a transaction be determined to be both a covered
transaction and a suspicious transaction, the covered
institution shall be required to report the same as a
suspicious transaction.
When reporting covered or suspicious transactions to the
AMLC, covered institutions and their officers and
employees [,representatives, agents, advisors, consultants
or associates] shall not be deemed to have violated
Republic Act No. 1405, as amended, Republic Act No. 6426,
as amended, Republic Act No. 8791 and other similar laws,
but are prohibited from communicating, directly or
indirectly, in any manner or by any means, to any person,
the fact that a covered or suspicious transaction report was
made, the contents thereof, or any other information in
relation thereto. In case of violation thereof, the concerned
officer and employee [, representative, agent, advisor,
consultant or associate] of the covered institution shall be
criminally liable. However, no administrative, criminal or
civil proceedings, shall lie against any person for having
made a covered or suspicious transaction report in the
regular performance of his duties in good faith, whether or
not such reporting results in any crimina l prosecution under
this Act or any other law.
When reporting covered or suspicious transactions to the
AMLC, covered institutions and their officers and
employees [,representatives, agents, advisors, consultants
or associates] are prohibited from communicating directly
or indirectly, in any manner or by any means, to any person
or entity, the media, the fact that a covered or suspicious
transaction report was made, the contents thereof, or any
other information in relation thereto. Neither may such
reporting be published or aired in any manner or form by
the mass media, electronic mail, or other similar devices. In
case of violation thereof, the concerned officer and
employee [, representative, agent, advisor, consultant or
associate] of the covered institution and media shall be
held criminally liable.(Sec. 9, RA 9160)
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COVERED TRANSACTIONS
'Covered transaction' is a transaction in cash or other
equivalent monetary instrument involving a total amount in
excess of Five hundred thousand pesos (P500,000.00)
within one (1) banking day. (Sec. 3[b], RA 9160)
SUSPICIOUS TRANSACTIONS
'Suspicious transaction' are transactions with covered
institutions, regardless of the amounts involved, where any
of the following circumstances exist:
(1) there is no underlying legal or trade obligation, purpose
or economic justification;
(2) the client is not properly identified;
(3) the amount involved is not commensurate with the
business or financial capacity of the client;
(4) taking into account all known circumstances, it may be
perceived that the client’s transaction is structured in
order to avoid being the subject of reporting
requirements under the Act;
(5) any circumstance relating to the transaction which is
observed to deviate from the profile of the client and/or
the client’s past transactions with the covered
institution;
(6) the transaction is in any way related to an unlawful
activity or offense under this Act that is about to be, is
being or has been committed; or
(7) any transaction that is similar or analogous to any of the
foregoing. (Sec. 3[b-1], RA 9160 as amended)
WHEN IS MONEY LAUNDERING COMMITTED
Money laundering is a crime whereby the proceeds of an
unlawful activity are transacted, thereby making them
appear to have originated from legitimate sources. It is
committed by the following:
(1) Any person knowing that any monetary instrument or
property represents, involves, or relates to the proceeds
of any unlawful activity, transacts or attempts to transact
said monetary instrument or property.
(2) Any person knowing that any monetary instrument or
property involves the proceeds of any unlawful activity,
performs or fails to perform any act as a result of which
he facilitates the offense of money laundering referred
to in paragraph (a) above.
(3) Any person knowing that any monetary instrument or
property is required under this Act to be disclosed and
filed with the Anti-Money Laundering Council (AMLC),
fails to do so. (Sec. 4, RA 9160)
UNLAWFUL ACTIVITIES OR PREDICATE CRIMES
Unlawful activity' refers to any act or omission or series or
combination thereof involving or having direct relation to
the following:
(1) Kidnapping for ransom under Article 267 of Act No.
3815, otherwise known as the Revised Penal Code, as
amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic
Act No. 9165, otherwise known as the Comprehensive
Dangerous Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act
No. 3019, as amended; otherwise known as the Anti-
Graft and Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as amended;
SPECIAL LAWS BAR OPERATIONS COMMISSION
(5) Robbery and extortion under Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised Penal Code, as
amended;
(6) Jueteng and Masiao punished as illegal gambling under
Presidential Decree No. 1602;
(7) Piracy on the high seas under the Revised Penal Code,
as amended and Presidential Decree No. 532;
(8) Qualified theft under Article 310 of the Revised Penal
Code, as amended;
(9) Swindling under Article 315 of the Revised Penal Code,
as amended;
(10) Smuggling under Republic Act Nos. 455 and 1937;
(11) Violations under Republic Act No. 8792, otherwise
known as the Electronic Commerce Act of 2000;
(12) Hijacking and other violations under Republic Act No.
6235; destructive arson and murder, as defined under
the Revised Penal Code, as amended, including those
perpetrated by terrorists against non-combatant
persons and similar targets;
(13) Fraudulent practices and other violations under Republic
Act No. 8799, otherwise known as the Securities
Regulation Code of 2000;
(14) Felonies or offenses of a similar nature that are
punishable under the penal laws of other countries.
(Sec. 3[i], RA 9160)
ANTI-MONEY LAUNDERING COUNCIL
The Anti-Money Laundering Council shall be composed of
the Governor of the Bangko Sentral ng Pilipinas as
chairman, the Commissioner of the Insurance Commission
and the Chairman of the Securities and Exchange
Commission as members. (Sec. 7, RA 9160)
FUNCTIONS
The AMLC shall act unanimously in the discharge of its
functions as defined hereunder:
(1) to require and receive covered or suspicious transaction
reports from covered institutions;
(2) to issue orders addressed to the appropriate Supervising
Authority or the covered institution to determine the
true identity of the owner of any monetary instrument or
property subject of a covered transaction or suspicious
transaction report or request for assistance from a
foreign State, or believed by the Council, on the basis of
substantial evidence, to be, in whole or in part, wherever
located, representing, involving, or related to, directly or
indirectly, in any manner or by any means, the proceeds
of an unlawful activity.
(3) to institute civil forfeiture proceedings and all other
remedial proceedings through the Office of the Solicitor
General;
(4) to cause the filing of complaints with the Department of
Justice or the Ombudsman for the prosecution of money
laundering offenses;
(5) to [initiate investigations of] investigate suspicious
transactions and covered transactions deemed
suspicious after an investigation by AMLC, money
laundering activities, and other violations of this Act;
(6) to apply before the Court of Appeals, ex parte, for the
freezing of any monetary instrument or property alleged
to be the proceeds of any unlawful activity as defined in
Section 3(i) hereof;
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(7) to implement such measures as may be necessary and
justified under this Act to counteract money laundering;
(8) to receive and take action in respect of, any request from
foreign states for assistance in their own anti-money
laundering operations provided in this Act;
(9) to develop educational programs on the pernicious
effects of money laundering, the methods and
techniques used in money laundering, the viable means
of preventing money laundering and the effective ways
of prosecuting and punishing offenders;
(10) to enlist the assistance of any branch, department,
bureau, office, agency or instrumentality of the
government, including government-owned and -
controlled corporations, in undertaking any and all anti-
money laundering operations, which may include the
use of its personnel, facilities and resources for the more
resolute prevention, detection and investigation of
money laundering offenses and prosecution of
offenders; and
(11) to impose administrative sanctions for the violation of
laws, rules, regulations and orders and resolutions
issued pursuant thereto. (Sec. 9, RA 9160)
FREEZING OF MONETARY INSTRUMENT
OR PROPERTY
The Court of Appeals, upon application ex parte by the
AMLC and after determination that probable cause exists
that any monetary instrument or property is in any way
related to an unlawful activity as defined in Section 3(i)
hereof, may issue a freeze order which shall be effective
immediately. The freeze order shall be for a period not
exceeding six (6) months depending upon the
circumstances of the case. No court can issue a temporary
restraining order or a writ of injunction against any freeze
order, except the Supreme Court. (Sec. 10, RA 9160, as
amended by RA 10365)
AUTHORITY TO INQUIRE INTO BANK DEPOSITS
Notwithstanding the provisions of Republic Act No. 1405, as
amended[;], Republic Act No. 6426, as amended[;],
Republic Act No. 8791, and other laws, the AMLC may
inquire into or examine any particular deposit or investment
with any banking institution or non-bank financial
institution upon order of any competent court in cases of
violation of this Act when it has been established that there
is probable cause that the deposits or investments involved
are [in any way] related to an unlawful activity as defined in
Section 3(i) hereof or a money laundering offense under
Section 4 hereof; except that no court order shall be
required in cases involving unlawful activities defined in
Sections 3(i)(1), (2) and (12) [:Provided, That this provision
shall not apply to deposits and investments made prior to
the effectivity of this Act].
To ensure compliance with this Act, the
BangkoSentralngPilipinas (BSP) may inquire into or
examine any deposit or investment with any banking
institution or non-bank financial institution when the
examination is made in the course of a periodic or special
examination, in accordance with the rules of examination of
the BSP. (Sec. 11, RA 9160)
SPECIAL LAWS BAR OPERATIONS COMMISSION
Foreign Investments Act
(R.A. No. 7042)
POLICY OF THE LAW
It is the policy of the State to attract, promote and welcome
productive investments from foreign individuals,
partnerships, corporations, and governments, including
their political subdivisions, in activities which significantly
contribute to national industrialization and socio-economic
development to the extent that foreign investment is
allowed in such activity by the Constitution and relevant
laws. Foreign investments shall be encouraged in
enterprises that significantly expand livelihood and
employment opportunities for Filipinos; enhance economic
value of farm products; promote the welfare of Filipino
consumers; expand the scope, quality and volume of
exports and their access to foreign markets; and/or transfer
relevant technologies in agriculture, industry and support
services. Foreign investments shall be welcome as a
supplement to Filipino capital and technology in those
enterprises serving mainly the domestic market.
As a general rule, there are no restrictions on extent of
foreign ownership of export enterprises. In domestic market
enterprises, foreigners can invest as much as one hundred
percent (100%) equity except in areas included in the
negative list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to undertake
measures that will gradually increase Filipino participation
in their businesses by taking in Filipino partners, electing
Filipinos to the board of directors, implementing transfer of
technology to Filipinos, generating more employment for
the economy and enhancing skills of Filipino workers. (Sec.
2, RA 7092)
DEFINITION OF TERMS
FOREIGN INVESTMENT
“Foreign investment” shall mean an equity investment
made by a nonPhilippine national in the form of foreign
exchange and/or other assets actually transferred to the
Philippines and duly registered with the Central Bank which
shall assess and appraise the value of such assets other
than foreign exchange; (Sec. 3[c], RA 7092)
DOING BUSINESS IN THE PHILIPPINES
“Doing business” shall include soliciting orders, service
contracts, opening offices, whether called “liaison” offices or
branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay
in the country for a period or periods totaling one hundred
eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and
object of the business organization: Provided, however, That
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the phrase “doing business” shall not be deemed to include
mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its
own name and for its own account; (Sec. 3[d], RA 7092)
EXPORT ENTERPRISE
“Export enterprise” shall mean an enterprise wherein a
manufacturer, processor or service (including tourism)
enterprise exports sixty percent (60%) or more of its output,
or wherein a trader purchases products domestically and
exports sixty percent (60%) or more of such purchases; (Sec.
3[e], RA 7092)
DOMESTIC MARKET ENTERPRISE
“Domestic market enterprise” shall mean an enterprise
which produces goods for sale, or renders services to the
domestic market entirely or if exporting a portion of its
output fails to consistently export at least sixty percent
(60%) thereof; (Sec. 3[e], RA 7092)
REGISTRATION OF INVESTMENTS
ON NON-PHILIPPINE NATIONALS
Without need of prior approval, a non-Philippine national,
as that term is defined in Section 3 a), and not otherwise
disqualified by law may, upon registration with the
Securities and Exchange Commission (SEC), or with the
Bureau of Trade Regulation and Consumer Protection
(BTRCP) of the Department of Trade and Industry in the
case of single proprietorships, do business as defined in
Section 3 d) of this Act or invest in a domestic enterprise up
to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the enterprise is
prohibited or limited to a smaller percentage by existing law
and/or under the provisions of this Act. The SEC or BTRCP,
as the case may be, shall not impose any limitations on the
extent of foreign ownership in an enterprise additional to
those provided in this Act: Provided, however, That any
enterprise seeking to avail of incentives under the Omnibus
Investment Code of 1987 must apply for registration with
the Board of Investments (BOI), which shall process such
application for registration in accordance with the criteria
for evaluation prescribed in said Code: Provided, finally,
That a non-Philippine national intending to engage in the
same line of business as an existing joint venture, in which
he or his majority shareholder is a substantial partner, must
disclose the fact and the names and addresses of the
partners in the existing joint venture in his application for
registration with SEC. During the transitory period as
provided in Section 15 hereof, SEC shall disallow
registration of the applying non-Philippine national if the
existing joint venture enterprise, particularly the Filipino
partners therein, can reasonably prove they are capable to
make the investment needed for the domestic market
activities to be undertaken by the competing applicant.
Upon effectivity of this Act, SEC shall effect registration of
any enterprise applying under this Act within fifteen (15)
days upon submission of completed requirements. (Sec. 5,
RA 7092)
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FOREIGN INVESTMENTS IN EXPORT ENTERPRISE
Foreign investment in export enterprises whose products
and services do not fall within Lists A and B of the Foreign
Investment Negative List provided under Section 8 hereof is
allowed up to one hundred percent (100%) ownership.
Export enterprises which are non-Philippine nationals shall
register with BOI and submit the reports that may be
required to ensure continuing compliance of the export
enterprise with its export requirement. BOI shall advise SEC
or BTRCP, as the case may be, of any export enterprise that
fails to meet the export ratio requirement. The SEC or
BTRCP shall thereupon order the non-complying export
enterprise to reduce its sales to the domestic market to not
more than forty percent (40%) of its total production; failure
to comply with such SEC or BTRCP order, without justifiable
reason, shall subject the enterprise to cancellation of SEC or
BTRCP registration, and/or the penalties provided in
Section 14 hereof. (Sec. 6, RA 7092)
FOREIGN INVESTMENTS
IN DOMESTIC MARKET ENTERPRISE
Non-Philippine nationals may own up to one hundred
percent (100%) of domestic market enterprises unless
foreign ownership therein is prohibited or limited by the
Constitution existing law or the Foreign Investment
Negative List under Section 8 hereof. (Sec. 7, RA 7092, as
amended by R.A. 8179)
FOREIGN INVESTMENT NEGATIVE LIST
The Foreign Investment Negative List shall have two (2)
components lists; A, and B.
(1) List A shall enumerate the areas of activities reserved to
Philippine nationals by mandate of the Constitution and
specific laws.
(2) List B shall contain the areas of activities and enterprises
regulated pursuant to law:
(a) which are defense-related activities, requiring prior
clearance and authorization from Department of
National Defense (DND) to engage in such activity, such
as the manufacture, repair, storage and/or distribution
of firearms, ammunition, lethal weapons, military
ordinance, explosives, pyrotechnics and similar
materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export
component, to a non-Philippine national by the
Secretary of National Defense; or
(b) which have implications on public health and morals,
such as the manufacture and distribution of dangerous
drugs; all forms of gambling; nightclubs, bars,
beerhouses, dance halls; sauna and steam bathhouses
and massage clinics.
“Small and medium-sized domestic market enterprises,
with paid-in equity capital less thanthe equivalent two
hundred thousand US dollars (US$200,000) are reserved
to Philippine nationals, Provided that if: (1) they involve
advanced technology as determined by the Department of
Science and Technology or (2) they employ at least fifty (50)
direct employees,then a minimum paid-in capital of one
hundred thousand US dollars (US$100,000.00) shall be
allowed to non-Philippine nationals.
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Amendments to List B may be made upon recommendation

of the Secretary of National Defense, or the Secretary of
Health, or the Secretary of Education, Culture and Sports,
endorsed by the NEDA, approved by the President, and
promulgated by a Presidential Proclamation.

“Transitory Foreign Investment Negative List” established in

Sec. 15 hereof shall be replaced at the end of the transitory
period by the first Regular Negative List to be formulated
and recommended by NEDA, following the process and
criteria provided in Sections 8 of this Act.

The first Regular Negative List shall be published not later

than sixty (60) days before the end of the transitory period
provided in said section, and shall become immediately
effective at the end of the transitory period. Subsequent
Foreign Investment Negative Lists shall become effective
fifteen (15) days after publication in a newspaper of general
circulation in the Philippines: Provided, however, That each
Foreign Investment Negative List shall be prospective in
operation and shall in no way affect foreign investment
existing on the date of its publication.

“Amendments to List B after promulgation and publication

of the first Regular Foreign Investment Negative List at the
end of the transitory period shall not be made more often
than once every two (2) years”. (Sec. 8, RA 7092, as
amended by R.A. 8179)

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