Mercantile Reviewer 2019

P a g e
| 1
NOTES ON MERCANTILE LAW REVIEW 2019
GUILLER B. ASIDO, Ll.M.

LAWS COVERED
1. Letters of Credit (Code of Commerce Arts 567-572)

2. Trust Receipts Law (PD 115)
3. Warehouse Receipts Law (Act 2137)
4. Transportation Law:
a. Civil Code (Arts.1732-1756)
b. Warsaw Convention
5. Corporation Code (BP 68)
6. Insurance Code (PD 612 as amended by Republic Act 10607)
7. Securities Regulation Code (RA 8799)
8. Banking Laws:
a. General Banking Law (RA 8791)
b. Central Bank Law (RA 7653 as amended by RA 11211)
c. Secrecy of Bank Deposits (RA 1405)
d. Foreign Currency Deposit Law (RA 6426)
e. Anti-Money Laundering Law (RA 9160 as amended by RA 10365)
f. Philippine Deposit Insurance Corporation Act (RA 3591)
9. Intellectual Property Law (RA 8293 as amended by RA 10372)
10. Foreign Investments Act (RA 7042)
11. Financial Rehabilitation and Insolvency Law (RA 10142)
12. Negotiable Instruments Law (Act no. 2031)
13. E-Commerce Act (RA 8792)
14. Data Privacy Act (RA 10173)
DEFINITION OF COMMERCIAL LAW
Branch of private law that regulates the juridical relations arising from
commercial acts.
The sources of commercial law are:
1. Principal – Statute Law, Agreements, Customs and Court decisions.
2. Auxilliary – Natural Law, Foreign Statutory Law and Foreign Court

Decisions, and Opinions.
TIPS IN RESOLVING COMMERCIAL LAW QUESTION:
The definition of Commercial Law provides the framework for any

question relating to Commercial Law. Therefore, it is important to
KNOW AND UNDERSTAND:
P a g e | 2

1. Is there is a commercial transaction

2. What is the commercial transaction?
3. Who are the parties?
4. In what capacity are the parties involved in this commercial
transaction?
5. What are the parties’ responsibilities and liabilities, if any?
6. Do the parties have a valid defense/remedies
1987 CONSTITUTIONAL PROVISIONS RELEVANT TO PHILIPPINE

COMMERCIAL LAW
The following are the constitutional provisions relevant to

Commercial Law:
DECLARATION OF STATE PRINCIPLES (Art. II)
Section 19. The State shall develop a self-reliant and independent

national economy effectively controlled by Filipinos.
Section 20. The State recognizes the indispensable role of the private
sector, encourages private enterprise, and provides incentives to
needed investments.
ARTICLE XII (National Economy and Patrimony)
Section 1. The goals of the national economy are a more equitable

distribution of opportunities, income, and wealth; a sustained
increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity
as the key to raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full employment based

on sound agricultural development and agrarian reform, through
industries that make full of efficient use of human and natural
resources, and which are competitive in both domestic and foreign
markets. However, the State shall protect Filipino enterprises against
unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all region
s of the country shall be given optimum opportunity to develop.
Private enterprises, including corporations, cooperatives, and similar
collective organizations, shall be encouraged to broaden the base
of their ownership.
xxx
Section 6. The use of property bears a social function, and all

economic agents shall contribute to the common good. Individuals
and private groups, including corporations, cooperatives, and similar
collective organizations, shall have the right to own, establish, and
operate economic enterprises, subject to the duty of the State to
P a g e | 3

promote distributive justice and to intervene when the common

good so demands.
xxx
Section 10. The Congress shall, upon recommendation of the

economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations
at least sixty per centum of whose capital is owned by such citizens,
or such higher percentage as Congress may prescribe, certain areas
of investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises whose capital
is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the

national economy and patrimony, the State shall give preference to
qualified Filipinos.
The State shall regulate and exercise authority over foreign

investments within its national jurisdiction and in accordance with its
national goals and priorities.
Section 11. 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 sixty per centum
of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation
of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital,
and all the executive and managing officers of such corporation or
association must be citizens of the Philippines.
Section 12. The State shall promote the preferential use of Filipino
labor, domestic materials and locally produced goods, and adopt
measures that help make them competitive.
Section 13. The State shall pursue a trade policy that serves the
general welfare and utilizes all forms and arrangements of exchange
on the basis of equality and reciprocity.
Section 14. The sustained development of a reservoir of national

talents consisting of Filipino scientists, entrepreneurs, professionals,
managers, high-level technical manpower and skilled workers and
craftsmen in all fields shall be promoted by the State. The State shall
encourage appropriate technology and regulate its transfer for the
national benefit. The practice of all professions in the Philippines shall
be limited to Filipino citizens, save in cases prescribed by law.
P a g e | 4

Section 15. The Congress shall create an agency to promote the

viability and growth of cooperatives as instruments for social justice
and economic development.
Section 16. The Congress shall not, except by general law, provide for
the formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good
and subject to the test of economic viability.
Section 17. In times of national emergency, when the public interest

so requires, the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct the
operation of any privately-owned public utility or business affected
with public interest.
Section 18. The State may, in the interest of national welfare or

defense, establish and operate vital industries and, upon payment of
just compensation, transfer to public ownership utilities and other
private enterprises to be operated by the Government.
Section 19. The State shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed.
Section 20. The Congress shall establish an independent central

monetary authority, the members of whose governing board must be
natural-born Filipino citizens, of known probity, integrity, and
patriotism, the majority of whom shall come from the private sector.
They shall also be subject to such other qualifications and disabilities
as may be prescribed by law. The authority shall provide policy
direction in the areas of money, banking, and credit. It shall have
supervision over the operations of banks and exercise such
regulatory powers as may be provided by law over the operations of
finance companies and other institutions performing similar functions.
Until the Congress otherwise provides, the Central Bank of the

Philippines operating under existing laws, shall function as the central
monetary authority.
Section 21. Foreign loans may only be incurred in accordance with

law and the regulation of the monetary authority. Information on
foreign loans obtained or guaranteed by the Government shall be
made available to the public.
LETTERS OF CREDIT (Code of Commerce)
A letter of credit is 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.
P a g e | 5

• A letter of credit is one whereby one person requests some other

person to advance money or 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. Under
Art.567-568 of the Code of the Commerce, letters of credit are issued
by one merchant to another for the purpose of attending to a
commercial transaction. (BPI vs. Commissioner of Internal Revenue
[2006)
Two Essential Conditions for a Letter of Credit
1. A letter of credit is issued in favor of a definite person and not

to order. It is not a negotiable instrument governed by the
Negotiable Instruments Law.
2. It is limited to specified amount, which may be one or more

but always with a maximum amount.
If any of the two circumstances is missing, it is not a letter of credit. It

is a mere recommendation.
Parties to a Letter of Credit
1. Issuer – This is the entity that will issue the credit. It usually is a bank
but it can be any financial institution of substance. The issuer assumes
the full obligation topay the beneficiary upon the presentation of the
documents specified in the credit.
2. Applicant – The applicant is also known as the account party or

customer. He requests from the issuer the credit he wants for his
beneficiary. He pays the issuer for the credit with cash or collateral so
as to secure the issuer the funds necessary for the reimbursement
obligation to the beneficiary.
3. Beneficiary – The beneficiary is the party that will be identified in

the credit as the entity entitled to draw or demand payment under
the letter of credit.
4. Advising Bank – The role of the advising bank is to notify the

beneficiary that a credit has been issued by another bank. It
assumes no responsibility other than notifying the beneficiary.
However, its obligation is limited to accurately advising the terms of
P a g e | 6

the credit that has been issued. In this capacity it is only playing “post
office”.
5. Confirming Bank – The responsibility of the confirming bank is that

it becomes directly obligated on the credit and now assumes the
rights and obligations of the issuer. Typically, the confirming bank’s
role is one for geographic convenience, i.e., a bank located close to
the beneficiary. However, it can also be a well-known bank, that will
assume the responsibility for a lesser known bank by confirming their
credit, therefore, rendering the credit more acceptable to the
beneficiary.
Kinds of Letters of Credit
1. Commercial L/C
-‐‑ Used as a method of payment in a contract sale of goods, so that
the seller (beneficiary) can obtain payment directly from the issuer
instead of the beneficiary.
2. Stand by L/C
-‐‑ This involves non-sale transactions. The L/C is used as guarantee, or
secure either a monetary or non-monetary obligation, whereby the
issuer pays the creditor, if the debt defaults on the obligation.
Important Doctrines in Letters of Credit
1. Independence Rule – This principle of independence clearly states

that the obligation of the paying bank is in reading the text of the
credit which is wholly independent from sales or other contracts on
which the credit may be based. The issuing bank is not required to
evaluate if the beneficiary has performed under the underlying
contract or if it is contractually entitled to payment. The issuer is only
obligated to pay upon presentation of documents that conform to
the requirements of the letter of credit.
Transfield Philippines vs Luzon Hydro Electric Corp. (GR No 146717,

Nov 22, 2004, Tinga)
Transfield entered into a turn-key contract with Luzon Hydro Corp.

(LHC). Under the contract, Transfield were to construct a hydro-
electric plants in Benguet and Ilocos. The contract provides for a
period for which the project is to be completed and also allows for
the extension of the period provided that the extension is based on
justifiable grounds such as fortuitous event. In order to guarantee
performance by Transfield, two stand-by letters of credit were
required to be opened. During the construction of the plant,
Transfield requested for extension of time citing fortuitous events
brought about by typhoon, barricades and demonstration. LHC did
not give due course to the extension of the period prayed for but
referred the matter to arbitration committee.
P a g e | 7

In the meanwhile, because of the delay in the construction of the

plant, LHC called on the stand-by letters of credit because of
default. However, the demand was objected by Transfield on the
ground that there is still pending arbitration on their request for
extension of time. LHC invoked the “independence principle”. On
the other hand, Transfield claims fraud on the part of LHC on calling
the stand-by letters of credit.
Under the independence principle, a LC accommodation is entirely

distinct and separate, independent agreement. It is not supposed to
be affected by the main contract upon which it rests.
2. Strict Compliance Rule – The beneficiary must make presentment in

strict compliance with the terms, conditions and procedures of the
credit. Further to this, since the adherence of the requirements must
be strictly applied to the beneficiary, the beneficiary must know
precisely and unequivocally what those requirements are.
3. Fraud Exception Principle -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.
ON LETTER OF CREDIT “INDEPENDENCE PRINCIPLE”
Where the trial court rendered a decision finding the buyer solely
liable to pay the seller and omitted by inadvertence to insert in its
decision the phrase “without prejudice to the decision that will be
made against the issuing bank “, the bank cannot evade
responsibility based on this ground. The seller who is entitled to draw
on the credit line of the buyer from a bank against the presentation
of sales invoices and official receipts of the purchases and who
obtained a court judgment solely against the buyer even though the
suit is against the bank and the buyer may still enforce the liability of
the same bank under a letter of credit issued to secure the credit
line. The so-called "independence principle" in a letter of credit
assures the seller or the beneficiary of prompt payment independent
of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually
accomplished or not. (Philippine National Bank vs. San Miguel
Corporation. G.R. No. 186063, January 15, 2014)
Effect of Fraudulent Misrepresentation in applying and securing an

L/C:
G.R. No. 187979. April 25, 2012.]

ASIA UNITED BANK, petitioner, vs. GILBERT G. GUY, PHILIP LEUNG,
KATHERINE L. GUY, RAFAEL H. GALVEZ and EUGENIO H. GALVEZ, JR.,
respondents.
P a g e | 8

We emphasize that fraud in its general sense, is deemed to comprise

anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal duty or equitable duty,
trust, or confidence justly reposed, resulting in damage to another, or
by which an undue and unconscientious advantage is taken of
another. It is a generic term embracing all multifarious means which
human ingenuity can device and which are resorted to by one
individual to secure an advantage over another by false suggestions
or by suppression of truth and includes all surprise, trick, cunning,
dissembling and any unfair way by which another is cheated.
It is true that ordinarily, in a letter of credit transaction, the bank

merely substitutes its own promise to pay for the promise to pay of
one of its customers, who in turn promises to pay the bank the
amount of funds mentioned in the letters of credit plus credit or
commitments fees mutually agreed upon. Once the issuing bank
shall have paid the beneficiary after the latter's compliance with the
terms of the letter of credit, the issuing bank is entitled to
reimbursement for the amount it paid under the letter of credit.
In the present case, however, no reimbursement was made outright,

precisely because the letter of credit was secured by a promissory
note executed by SPI. The bank would have not agreed to this
transaction had it not been deceived by Gilbert Guy, et al. into
believing the RMSI and SPI were one and the same entity. Guy and
his cohorts' acts in (1) securing the letter of credit guaranteed by a
promissory note in behalf of SPI; and, (2) their act of representing SPI
as RMSI's Division, were indicia of fraudulent acts because they fully
well know, even before transacting with the bank, that: (a) SPI was a
separate entity from Smartnet Philippines, the RMSI's Division, which
has the Omnibus Credit Line; and (b) despite this knowledge, they
misrepresented to the bank that SPI is RMSI's division. Had it not for
this false representation, AUB would have not granted SPI's letter of
credit to be secured with a promissory note because SPI as a
corporation has no credit line with AUB and SPI by its own, has no
credit standing.
[G.R. No. 160732. June 21, 2004.]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the
Regional Trial Court of Quezon City, Branch 90 and MAYNILAD WATER
SERVICES, INC., respondents.
The concept of guarantee vis-a-vis the concept of an irrevocable

letter of credit are inconsistent with each other. The guarantee
theory destroys the independence of the bank's responsibility from
the contract upon which it was opened and 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 letter of credit, the bank undertakes a
primary obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of a
P a g e | 9

customer that the issuer shall honor drafts or other demands of

payment upon compliance with the conditions specified in the
credit.
Letters of credit were developed for the purpose of insuring to a seller

payment of a definite amount upon the presentation of documents
and is thus a commitment by the issuer that the party in whose favor
it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter.
They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory contracts
and while they are security arrangements, they are not converted
thereby into contracts of guaranty. What distinguishes letters of credit
from other accessory contracts, is the engagement of the issuing
bank to pay the seller once the draft and other required shipping
documents are presented to it. They are definite undertakings to pay
at sight once the documents stipulated therein are presented.
Remedy for fraudulent abuse
The remedy for fraudulent abuse is an injunction. However, injunction

should not be granted unless (1) There is clear proof of fraud; (b.) The
fraud constitutes fraudulent abuse of the independent purpose of
the letter of credit and not only fraud under the main agreement;
(c.) irreparable injury might follow if injunction is not granted or the
recover of damages would be seriously damaged. (See Transfield
case)
Remedy of issuing bank after payment of the beneficiary
Once the issuing bank shall have paid the beneficiary after the
latter’s compliance with the terms of the letter of credit, the issuing
bank is entitled to reimbursement for the amount it paid under the
letter of credit. (Galvez vs. Court of Appeals [2012])
TRUST RECEIPTS LAW (PD 115)
§ "Trust Receipt" shall refer to the written or printed document

signed by the entrustee in favor of the entruster containing terms and
conditions substantially complying with the provisions of Presidential
Decree no.115. No further formality of execution or authentication
shall be necessary to the validity of a trust receipt.
Parties to a Trust Receipt
§ "Entrustee" shall refer to the person having or taking possession of

goods, documents or instruments under a trust receipt transaction,
P a g e | 10

and any successor in interest of such person for the purpose or

purposes specified in the trust receipt agreement.
§ "Entruster" shall refer to the person holding title over the goods,
documents, or instruments subject of a trust receipt transaction, and
any successor in interest of such person.
A trust receipt may be denominated in the Philippine currency or any

foreign currency acceptable and eligible as part of international
reserves of the Philippines, the provisions of existing law, executive
orders, rules and regulations to the contrary notwithstanding:
Provided, however, That in the case of trust receipts denominated in
foreign currency, payment shall be made in its equivalent in
Philippine currency computed at the prevailing exchange rate on
the date the proceeds of sale of the goods, documents or
instruments held in trust by the entrustee are turned over to the
entruster or on such other date as may be stipulated in the trust
receipt or other agreements executed between the entruster and
the entrustee.
Rights of Entruster
1. The entruster shall be entitled 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;
2. or to the return of the goods, documents or instruments in case

of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt provided such are not
contrary to the provisions of this Decree
Obligations of Entrustee
§ The entrustee shall:
1. 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. 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. Insure the goods for their total value against loss from fire,
theft, pilferage or other casualties;
4. Keep said goods or proceeds thereof whether in money or

whatever form, separate and capable of identification as
property of the entruster;
P a g e | 11

5. Return the goods, documents or instruments in the event of

non-sale or upon demand of the entruster; and
6. Observe all other terms and conditions of the trust receipt not
contrary to the provisions of PD 115.
Who bears liability in case of 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.
INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE, petitioners, vs.

METROPOLITAN BANK & TRUST COMPANY, respondent. (G.r. No.
159622. July 30, 2004.)
The Trust Receipts Law was enacted to safeguard commercial

transactions and to offer an additional layer of security to the lending
bank. Trust receipts are indispensable contracts in international and
domestic business transactions. The prevalent use of trust receipts,
the danger of their misuse and/or misappropriation of the goods or
proceeds realized from the sale of goods, documents or instruments
held in trust for entruster banks, and the need for regulation of trust
receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of the Trust
Receipts Law.
The second paragraph of Section 7 provides a statutory remedy

available to an entruster in the event of 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. More specifically, the entruster “may 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”. The law
further provides that “the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less than five days
after serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a
public sale, become a purchaser. 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. The
entrustee shall receive any surplus but shall be liable to the entruster
for any deficiency.”
JESUS V. TIOMICO, petitioner, vs. THE HON. COURT OF APPEALS

(FORMER FIFTH DIVISION) and PEOPLE OF THE PHILIPPINES, respondent
(G.R. No. 122539. March 4, 1999.)
The Trust Receipts Law punishes the dishonesty and abuse of

confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner or not. The law
P a g e | 12

does not seek to enforce payment of a loan. Thus, there can be no

violation of the right against imprisonment for non-payment of a
debt."
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs.

HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES,
respondents. (G.R. No. 90828. September 5, 2000.)
There are two possible situations in a trust receipt transaction. The first
is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of
the merchandise sold. The second is covered by the provision which
refers to merchandise received under the obligation to "return" it
(devolvera) to the owner.
Hur Tin Yang vs. People of the Philippines. (G.R. No. 195117, August
14, 2013)
When both parties entered into an agreement knowing fully well that
the return of the goods subject of the trust receipt is not possible
even without any fault on the part of the trustee, it is not a trust
receipt transaction penalized under Sec. 13 of PD 115 in relation to
Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan, where the
borrower is obligated to pay the bank the amount spent for the
purchase of the goods.
Can an entrustee invoke the principle of res perit domino to evade

liability under the Trust Receipts?
Where the entrustee tendered the return of the articles to the

entrustee because they did not meet its manufacturing requirements
but the latter refused to accept and as a consequence, the
entruster stored them in its warehouse which was, however, gutted
by fire, the entrustee’s obligation was not extinguished despite the
tender and its invocation of the principle of res perit domino. Under
the Trust Receipts law, the loss of the goods under trust receipt
regardless of the cause and the period or time it occurred, does not
extinguish the civil obligation of the entrustee. A trust receipt has two
features, the loan and security features. The loan is brought about by
the fact that the entruster financed the importation or purchase of
the goods under TR. Until and unless this loan is paid, the obligation to
pay subsists. The principle of res perit domino will not apply if under
the trust receipt, the bank is made to appear as the owner, it was but
P a g e | 13

an artificial expedient, more of legal fiction than fact, for if it were

really so, it could dispose of the goods in any manner that it wants,
which it cannot do, just to give consistency with the purpose of the
trust receipt of giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the inception
of the transaction would be to disregard the loan feature thereof.
(Rosario Textiles vs. Home Bankers [2005])
f the entrustee is a corporation in violation of the Trust Receipts Law,

to whom shall the penalty be imposed?
Recognizing the impossibility of imposing the penalty of imprisonment

on a corporation, it was provided that if the entrustee is a
corporation, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons responsible for the
offense. However, the person signing the trust receipt for the
corporation is not solidarily liable with the entrustee-corporation for
the civil liability arising from the criminal offense unless he personally
bound himself under a separate contract of surety or guaranty.
May a civil case filed by the entruster against the entrustee proceed
separately from the criminal action?
Yes. A civil case filed by the entruster against the entrustees based
on the failure of the latter to comply with their obligation under the
Trust Receipt agreement is proper because this breach of obligation
is separate and distinct from any criminal liability for misuse and/or
misappropriation of goods or proceeds realized from the sale of
goods released under the trust receipts. Being based on an
obligation ex contractu and not ex delicto, the civil action may
proceed independently of the criminal proceedings instituted
against the entrustees regardless of the result of the latter. (Sarmiento
vs. Court of Appeals [2002])
May novation be invoked to reverse convictions in cases where an

underlying contract initially defined the relation of the parties such as
the contract in the sale of goods in violation of the Trust Receipts
Law?
Yes. Novation may be invoked to reverse convictions in cases where

an underlying contract initially defined the relation of parties such as
contract in sale of goods in cases of violation of the Trust Receipts
Law. Novation is not one of the modes of extinguishing criminal
liability. The role of novation may only be to either prevent the rise of
P a g e | 14

criminal liability or to cast doubt on the true nature of the original

basic transaction, whether or not it was such that its breach would
not give rise to penal responsibility. The party invoking novation must
prove that the new contract did take effect.
INSURANCE LAW (PD 612 as amended by RA 10607)
Nature and Definition of Insurance Contract
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 (Section 2 [1],
Insurance Code of 1978) [Philippine Health Care Providers Inc., vs.
Commissioner, GR no.167330, June 12, 2008)
A contract of suretyship shall be deemed to be an insurance

contract, only if made by a surety who or which, as such is doing an
insurance business as hereinafter provided.
§ “Doing an Insurance Business” - shall include (a) making or proposing

to make, as insurer, any insurance contract; (b) making or proposing
to make as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the
surety; (c) doing any kind of business, including a reinsurance
business, specifically recognized as constituting the doing of an
insurance business within the meaning of this Code; (d) doing or
proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this
Code.
In the application of the provisions of this Code the fact that no profit
is derived from the making of insurance contracts, agreements or
transactions or that no separate or direct consideration is received
therefor, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance
business. (section 2 [a], Insurance Code)
Nature of Insurance Contract
§ Contract of Adhesion
§ Contract of Indemnity
§ Consensual
§ Voluntary
§ Unilateral
§ Aleatory
§ Conditional
§ Personal
§ Property
§ A contract of insurance is a contract of adhesion, thus, any

ambiguity should be resolved against the insurer, or it should be
P a g e | 15

construed liberally in favor of the insured and strictly against the

insurer.
§ Rationale for the Rule:
Limitations of liability should be regarded with extreme jealousy and

must be construed in such a way as to preclude the insurer from non-
compliance with its obligations. (DBP Pool of Accredited Insurance
Co., vs. Radio Mindanao Network Inc., GR no. 147039, January 27,
2006)
MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON. COURT

OF APPEALS and TKC MARKETING CORPORATION, respondents. (G.R.
No. 119599. March 20, 1997)
Through the years, the courts have held that in these type of
contracts, the parties do not bargain on equal footing, the weaker
party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker
party whom the courts of justice must protect. Consequently, any
ambiguity therein is resolved against the insurer, or construed liberally
in favor of the insured.
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE

CORPORATION, respondent. (G.R. No. 156167. May 16, 2005)
While it is to be liberally construed in favor of the insured, like other

contracts, it must be construed according to the sense and meaning
of the terms which the parties themselves have used. If such terms
are clear and unambiguous, they must be taken and understood in
their plain, ordinary and popular sense.
Contracts of insurance are contracts of indemnity upon the terms

and conditions specified in the policy. The parties have the right to
impose such reasonable conditions at the time of the making of the
contract as they may deem wise and necessary.
The agreement has the force of law between the parties. The terms
of the policy constitute the measure of the insurer’s liability, and in
order to recover, the insured must show himself within those terms.
If the insured cannot comply with the terms and conditions of the
contract, he is not entitled as a rule to recover the loss or damage
suffered. This is a condition precedent to the right to recovery.
Contracts of insurance, like other contracts, are to be construed

according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and
popular sense. Accordingly, in interpreting the exclusions in an
insurance contract, the terms used specifying the excluded classes
therein are to be given their meaning as understood in common
speech. A contract of insurance is a contract of adhesion. So, when
P a g e | 16

the terms of the insurance contract contain limitations on liability,

courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation. (Alpha Insurance and
Surety Co. vs. Castor, GR No. 198174, September 2, 2013)
Other Nature of Contract of Insurance
• Consensual – Perfected by the meeting of the minds of the

parties
• Voluntary – The parties may incorporate such terms and

conditions as they may deem convenient
• Aleatory – The liability of insurer is dependent on the

happening of an event which is uncertain, or though certain, is
to occur at some future undetermined time.
Exceptions to the Rule that no insurance contract takes effect unless

premium is paid
1. In case of life or industrial life policy, whenever the grace period

provision applies, as expressly provided by section 77 itself.
2. When the insurer acknowledged in the policy or contract of

insurance itself the receipt of premium, even if premium has not
been actually paid, as expressly provided by section 78 itself.
3. Where the parties agreed that premium payments shall be in

installments and partial payment has been made at the time of loss;
4. Where the insurer granted the insured a credit term of payment of

the premium, and loss occurs before the expiration of the term;
5. Where the insurer is in estoppel as when it has consistently granted a

60 to 90 days credit term for the payment of premiums. (Gaisano vs.
Development Insurance and Surety Corporation, GR no. 190702,
February 27, 2017)
What may be insured?
Any contingent or unknown event, whether past or future, which

may damnify a person having insurable interest, or create a liability
against him, may be insured against. (section 3, Insurance Code)
An insurance for or against the drawing of any lottery, or for or

against any chance or ticket in a lottery drawing a prize is NOT
allowed. (section 4, Insurance Code)
§ Consent of the husband is not necessary for the validity of an

insurance policy taken out by a married woman on her life and that
of her children.
§ A minor of 18 years or more may contract for life, health and

accident insurance, provided that the insurance is taken on his own
life and the beneficiary is the minor’s father, mother, husband, wife,
child, brother or sister.
P a g e | 17

§ All rights, title and interest in the policy of insurance taken out by
an original owner on the life or health of a minor shall automatically
vest in the minor upon the death of the original owner.
Parties to a Contract of Insurance
§ Every person, partnership, association or corporation duly

authorized to transact insurance business may be an insurer. (section
6, Insurance Code)
§ Insurer – Party who assumes or accepts the risk of loss and

undertakes for a consideration to indemnify another on the
happening of a specified contingency or event.
§ Insurance Corporation - Corporations formed or organized to

save any person or persons or other corporations harmless from loss,
damage, or liability arising from any unknown or future or contingent
event, or to indemnify or to compensate any person or persons or
other corporations for any such loss, damage, or liability, or to
guarantee the performance of or compliance with contractual
obligations or the payment of debt of others shall be known as
"insurance corporations".
The provisions of the Corporation Law shall apply to all insurance

corporations now or hereafter engaged in business in the Philippines
insofar as they do not conflict with the provisions of this chapter
(section 185, Insurance Code)
§ SECTION 186. No person, partnership, or association of persons

shall transact any insurance business in the Philippines except as
agent of a person or corporation authorized to do the business of
insurance in the Philippines, unless possessed of the capital and
assets required of an insurance corporation doing the same kind of
business in the Philippines and invested in the same manner; nor
unless the Commissioner shall have granted to him or them a
certificate to the effect that he or they have complied with all the
provisions of law which an insurance corporation doing business in
the Philippines is required to observe.
§ Every person, partnership, or association receiving any such

certificate of authority shall be subject to the insurance laws of the
Philippines and to the jurisdiction and supervision of the
Commissioner in the same manner as if an insurance corporation
authorized by the laws of the Philippines to engage in the business of
insurance specified in the certificate.
§ SECTION 187. No insurance company shall transact any

insurance business in the Philippines until after it shall have obtained
a certificate of authority for that purpose from the Commissioner
upon application therefor and payment by the company
concerned of the fees hereinafter prescribed.
§ Insured – The person in whose favor the contract is operative and

who is indemnified against or is to receive a certain sum upon the
happening of a specified contingency or event. Anyone except a
public enemy may be insured. (section 7, Insurance Code)
P a g e | 18

A suretyship contrat is deemed an insurance only if the surety’s main

business is that of suretyship, and not where the contract is merely
incidental to another legitimate business or activity of the surety.
(Sections 2[1] and [2], Insurance Code)
§ Public Enemy
FILIPINAS COMPAÑIA DE SEGUROS, petitioner, vs. CHRISTERN,

HUENEFELD & CO., INC., respondent. (G.R. No. L-2294. May 25, 1951)
There is no question that majority of the stockholders of the

respondent corporation were German subjects. This being so, we
have to rule that said respondent became an enemy corporation
upon the outbreak of the war between the United States and
Germany.
Cestui Que Vie – Person on whose life the insurance is written.
Beneficiary – Person designated to receive the proceeds of the

policy when the risk attaches.
Kinds of Beneficiary
1 Insured himself
2 Third Person who paid consideration
- Third person through mere bounty of insured
§ SECTION 11. 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.
§ SECTION 12. 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 which event, the nearest relative of
the insured shall receive the proceeds of said
insurance if not otherwise.
§ Beneficiary acquires a vested right in the policy.
SECTION 181. A policy of insurance upon life or health may pass by

transfer, will or succession to any person, whether he has an insurable
P a g e | 19

interest or not, and such person may recover upon it whatever the
insured might have recovered.
§ Note Articles 43 (4), 50 and 64 of the Family Code – Innocent

spouse may revoke the designation of the other spouse who acted
in bad faith as beneficiary, even if such designation be stipulated as
irrevocable.
Rules in case beneficiary predeceases insured
§ Irrevocable designation of Beneficiary – Beneficiary has acquired

vested right; Legal representatives are entitled to the proceeds as
assets of his estate; Unless, the proceeds were made payable to the
beneficiary only if living.
§ Revocable – Proceeds past to the estate of the insured
§ All rights, title and interest in the policy of insurance taken out by
an original owner on the life or health of a minor shall automatically
vest in the minor upon the death of the original owner, unless
otherwise provided for in the policy.
§ SECTION 10. Every person has an insurable interest in the life

and health:
(a.) Of himself, of his spouse and of his children;
(b.) Of any person on whom he depends wholly or in part for

education or support, or in whom he has a pecuniary interest;
(c.) 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
(d.) Of any person upon whose life any estate or interest

vested in him depends.
§ An insurable interest is one of the most basic and essential

requirements in an insurance contract. 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.
P a g e | 20

3. The existence of an insurable interest gives a person the legal

right to insure the subject matter of the policy of insurance.
Section 10 of the Insurance Code indeed provides that every
person has an insurable interest in his own life. Section 19 of the
same code also states that an interest in the life or health of a
person insured must exist when the insurance takes effect but
need not exist thereafter or when the loss occurs.
Insurable Interest in Life
§ General Rule : Must exist when the insurance takes effect, but
need not exist thereafter or when the loss occurs. (section 19,
Insurance Code)
§ Exceptions:
1. When the insurance is taken by the creditor on the life of the

debtor, the creditor is required to have insurable interest not only at
the contract but also at the time of the debtor’s death.
2. When the insurance is taken by the employer on the life of the

employee.
Insurable Interest in Property
§ SECTION 13. Every interest in property, whether real or personal,

or any relation thereto, or liability in respect thereof, of such nature
that a contemplated peril might directly damnify the insured, is an
insurable interest.
§ SECTION 14. An insurable interest in property may consist in:
(a.) An existing interest;

(b.) An inchoate interest founded on an existing interest; or
(c.) An expectancy, coupled with an existing interest in that out of which
the expectancy arises.
§ SECTION 15. A carrier or depository of any kind has an insurable

interest in a thing held by him as such, to the extent of his liability but
not to exceed the value thereof.
§ SECTION 16. 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.
§ SECTION 17. The measure of an insurable interest in property is the

extent to which the insured might be damnified by loss or injury
thereof.
§ SECTION 18. No contract or policy of insurance on property shall

be enforceable except for the benefit of some person having an
insurable interest in the property insured.
P a g e | 21

§ SECTION 19. An interest in property insured must exist when the

insurance takes effect, and when the loss occurs, but need not exist
in the meantime; and interest in the life or health of a person insured
must exist when the insurance takes effect but need not exist
thereafter or when the loss occurs.
• Existing Interest – May be legal title or equitable title (e.g.

Trustee / Mortgagor / Lessor / Mortgagee)
• Inchoate Interest - Stockholder’s inchoate interest in

properties of the corporation
Inchoate – a legal right or entitlement that is only partial and

incomplete, which may later develop into a full property right.
Change of Interest
§ Sections 20 – 24, Insurance Code
§ Rules when insurable interest changes during the course of an

insurance policy
§ What may be transferred or assigned:
1. Thing insured (section 20)
2. The Policy itself (section 58)
3. The claim itself (section 83)
§ SECTION 20. Except in the cases specified in the next four

sections, and in the cases of life, accident, and health insurance, a
change of interest in any part of a thing insured unaccompanied by
a corresponding change of interest in the insurance, suspends the
insurance to an equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same person.
§ SECTION 21. A change in interest in a thing insured, after the

occurrence of an injury which results in a loss, does not affect the
right of the insured to indemnity for the loss.
Doctrine of Subrogation in Insurance
Subrogation is the substitution of one person by another with

reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities. This principle covers a situation
wherein an insurer has paid a loss under the insurance policy is
entitled to all the rights and remedies belonging to the insured
against a third party with respect to any loss covered by the policy. It
contemplates full substitution such that it places the party
subrogated in the shoes of the creditor, and he may use all means
that the creditor could employ to enforce payment. Payment by the
insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss. (Keppel
Cebu Shipyard Inc.., vs. Pioneer Insurance and Surety Corporation,
GR no. 180880-81, September 25, 2009)
P a g e | 22

Concealment and Representation
§ Concealment – There is concealment where the insured has

knowledge of facts, material to the risk, and good faith and fair
dealing require him to reveal them, and he fails to do so.
SECTION 26. A neglect to communicate that which a party knows

and ought to communicate, is called a concealment.
§ Representation – A statement incidental to the contract of

insurance relative to some fact having reference thereto and upon
the faith of which the contract is entered into.
SECTION 44. A representation is to be deemed false when the facts

fail to correspond with its assertions or stipulations.
§ Relevant Provisions of Law
Sections 26 to 48, Insurance Code
§ Both take place before the contract is entered into;
§ Both give rise to the same remedy: discovery of the

concealment or misrepresentation before loss or death will entitle the
insurer to cancel the policy, except where there is an incontestability
clause.
SECTION 27. A concealment whether intentional or unintentional

entitles the injured party to rescind a contract of insurance.
§ General Rule: If concealment or misrepresentation is

discovered before loss or death, then the insurer can cancel the
policy. If it is discovered after death or loss, the company can refuse
to pay.
SECTION 48. Whenever a right to rescind a contract of insurance is

given to the insurer by any provision of this chapter, such right must
be exercised previous to the commencement of an action onrty the
contract.
After a policy of life insurance made payable on the death of the

insured shall have been in force during the lifetime of the insured for
a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab
initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
§ Intentional or fraudulent omission to communicate information
§ Rationale: The basis of the rule vitiating the contract in cases of

concealment is that it misleads or deceives the insurer into
accepting the risk or accepting it at the rate of premium agreed
upon. The insurer, relying upon the belief that the assured will disclose
every material fact within his actual or presumed knowledge, is
misled into a belief that the circumstance withheld does not exist,
P a g e | 23

and he is thereby induced to estimate the risk upon a false basis that
it does not exist.
Bernardo Argente vs. West Coast Life Insurance Co., (G.R. No. 28499,
March 19, 1928)
§ EXCEPTION
SECTION 48 (2nd paragraph)
After a policy of life insurance made payable on the death of the

insured shall have been in force during the lifetime of the insured for
a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab
initio or is rescindable by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.
§ Incontestability clause
§ The so-called "incontestability clause" precludes the insurer from

raising the defenses of false representations or concealment of
material facts insofar as health and previous diseases are concerned
if the insurance has been in force for at least two years during the
insured's lifetime.
Emilio Tan vs. Court of Appeals (G.R. No. 48049, June 29, 1989)
§ The "Incontestability Clause" under Section 48 of the Insurance

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

(G.R. No. 175666, July 29, 2013)
§ Under Section 227 (j) of Insurance Code
The policyholder shall be entitled to have the policy reinstated at any

time within three years from the date of default of premium payment
unless the cash surrender value has been duly paid, or the extension
period has expired, upon production of evidence of insurability
satisfactory to the company and upon payment of all overdue
premiums and any indebtedness to the company upon said policy,
with interest rate not exceeding that which would have been
applicable to said premiums and indebtedness in the policy years
prior to reinstatement.
P a g e | 24

§ Exceptions to the Exception:
1. Non-Payment of premiums (Section 227)

2. Violation of condition re military/naval service in time of war
3. No insurable interest
4. Cause of death was excepted or not covered
5. Fraud of vicious type
6. Proof of death was not given
Warranties
§ A statement in the policy, part of the contract, a condition on

which the contract depends and is conclusively presumed material,
it is the essence of warranty that its breach bars recovery even
though the breach has nothing to do with the loss. (sections 67 to 76,
Insurance Code)
§ SECTION 67. A warranty is either expressed or implied.
§ SECTION 68. A warranty may relate to the past, the present, the
future, or to any or all of these.
§ SECTION 69. No particular form of words is necessary to create a

warranty.
§ SECTION 70. Without prejudice to section fifty-one, every express

warranty, made at or before the execution of a policy, must be
contained in the policy itself, or in another instrument signed by the
insured and referred to in the policy as making a part of it.
§ SECTION 71. A statement in a policy of matter relating to the

person or thing insured, or to the risk, as a fact, is an express warranty
thereof.
§ SECTION 72. A statement in a policy, which imparts that it is

intended to do or not to do a thing which materially affects the risk, is
a warranty that such act or omission shall take place.
Losses, Claims and Proceeds
§ SECTION 83. An agreement not to transfer the claim of the insured

against the insurer after the loss has happened, is void if made
before the loss except as otherwise provided in the case of life
insurance.
§ SECTION 80. If a peril insured against has existed, and the insurer
has been liable for any period, however short, the insured is not
entitled to return of premiums, so far as that particular risk is
concerned.
P a g e | 25

§ Types of Losses Compensable:
1. Actual Total Loss entitles insured to full recovery
2. Constructive Total Loss when insured exercised right of

abandonment. This right may be exercised when the
property insured suffers a damage from a marine peril of at
least ¾ if insured merely notifies insurer of his exercise of right
of abandonment, immediately ownership over damaged
property passes to insurer and it pays the insured as if there
is actual total loss.
3. Partial Loss carries with it co-insurance; owner shall bear

part of the loss.
Over Insurance
§ SECTION 82. In case of an over-insurance by several insurers, the

insured is entitled to a ratable return of the premium, proportioned to
the amount by which the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk.
§ There is over insurance when the insured insures the same

property for an amount greater than the value of the property with
the same insurance company.
In case of loss, the company is bound to pay only to the extent of the
real value of the property lost. The insured is entitled to recover the
amount of premium corresponding to the excess in value of the
property.
Double Insurance
§ SECTION 94. Where the insured is over-insured by double

insurance:
a) The insured, unless the policy otherwise provides, may claim

payment from the insurers in such order as he may select, up
to the amount for which the insurers are severally liable under their
respective contracts;
b) Where the policy under which the insured claims is a valued policy,
the insured must give credit as against the valuation for any sum
received by him under any other policy without regard to the actual
value of the subject matter insured;
c) Where the policy under which the insured claims is an unvalued

policy he must give credit, as against the full insurable value, for any
sum received by him under any policy;
d) Where the insured receives any sum in excess of the valuation in the
case of valued policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust for the insurers,
according to their right of contribution among themselves;
P a g e | 26

e) Each insurer is bound, as between himself and the other insurers, to

contribute ratably to the loss in proportion to the amount for which
he is liable under his contract.
Reinsurance
§ SECTION 95. 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.
§ REINSURANCE TREATY AND REINSURANCE POLICY, DISTINGUISHED.

— 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, while a reinsurance treaty is merely 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.
Reinsurance treaties and reinsurance policies are not synonymous.

Treaties are contracts for insurance while reinsurance policies are
contracts of insurance.
§ SECTION 96. Where an insurer obtains reinsurance, except under

automatic reinsurance treaties, he must communicate all the
representations of the original insured, and also all the knowledge
and information he possesses, whether previously or subsequently
acquired, which are material to the risk.
§ SECTION 97. A reinsurance is presumed to be a contract of

indemnity against liability, and not merely against damage.
§ SECTION 98. The original insured has no interest in a contract of

reinsurance.
Fire Insurance
§ A contract by which the insurer for a consideration agrees to

indemnify the insured against loss of, or damage to, property by
hostile fire, including lss by lighting, windstorm, tornado or
earthquake, and other allied risks, when such risks are covered by
extension to fire insurance policies or under separate policies.
(Section 167)
How do you recover from Fire Insurance
1. Provide NOTICE OF LOSS – this must be immediately given, unless

delay is waived expressly or impliedly by the insurer; and
2. Provide PROOF OF LOSS – based on best evidence obtainable,

unless delay is waived expressly or impliedly by the insurer.
Measure of Indemnity
1. OPEN POLICY – entitled to recover only the expense necessary to

replace the thing lost or injured in the condition it was at the time of
the injury.
P a g e | 27

2. VALUED POLICY – the parties are bound by the valuation, in the

absence of fraud or mistake.
X constructed a house for which he spent P300,000.00 which he

insured against fire for the same amount. When built, the house was
already worth P600,000.00. However, one day, 1/5 of the house was
destroyed by accidental fire. How much can X recover ?
§ If policy is an open policy, X can recover his actual loss of

P120,000.00, which is 1/5 of P600,000.00, the value of the property at
the time of loss.
§ If the policy is a valued policy, and the house was valued at

P300,000.00, X can recover only 1/5 of P300,000.00 or P60,000.00.
§ Alteration in the use of the thing insured made without the

consent of the insurer entitles the latter to rescind the contract of
insurance.
Requisites for rescission in case of alteration
1. The use or condition of the thing is specifically limited or stipulated

in the policy;
2. Such use or condition as limited by the policy is altered;
3. The alteration is made without the consent of the insurer;
4. The alteration is made by means within the control of the insured;
5. The alteration increases the risk; (section 168); and
6. There must be a violation of a policy provision.
§ An alteration in the risk or condition of the thing insured which does

not increase the risk will not affect a contract of fire insurance.
§ Under section 75, the insurer is given the right to insert terms and
conditions in the policy which if violated would avoid it. An alteration
made in the use or condition of the thing insured will thus avoid a
policy under the same section if such alteration is expressly
prohibited altough it does not increase the risk.
Rule on pledge, hypothecate or transfer fire policy
§ As a rule, after a loss has occured, insured may pledge,

hypothecate or transfer a fire insurance policy or rights thereunder.
This he may even do so even without the consent of or notice to the
insurer. In such case, it is not the personal contract which is being
assigned, but a claim under or a right of action on the policy against
the insurer.
§ This rule however is subject to the provisions of Section 173 of the

Insurance Code.
§ No policy of fire insurance shall be pledged, hyothecated, or

transferred to any person, firm or company who acts as agent for or
P a g e | 28

otherwise represents the issuing company, and any such pledge,

hypothecation, or transfer hereacter made shall be void and of no
effect insofar as it may affect other creditors of the insured. (section
173, Insurance Code)
OPTION TO REBUILD CLAUSE
§ Section 172 of the Insurance Code.
§ Insurer may have the option to reinstate or replace the property

damaged or destroyed any part thereof, instead of paying the
amount of the loss or damage.
§ Reserved by the insurer in order to protect himself from unfairness

in the appraisal and award rendered by arbitrators, in case of loss.
This option must be exercised within a stipulated period or within a

reasonable time.
CASUALTY INSURANCE
§ Section 174, Insurance Code
§ Casualty Insurance includes all forms of insurance against loss or

liability arising from accident or mishap which are not within the
scope of other types of insurance, namely: marine, fire, surety, ship
and life.
Example : Robbery and theft insurance, accident insurance
§ Liability Insurance is a contract of indemnity for the benefit of the

insured and those in privity with him, or those to whom the law upon
the grounds of public policy extends the indemnity against liability
Section 174 defines casualty insurance by process of elimination.
§ Applies to almost any kind of insurance
§ Includes therfore any loss or damage when an accident is the

cause of loss
§ The terms 'accident' and 'accidental', as used in insurance

contracts have not acquired any technical meaning and are
construed by the courts in their ordinary and common acceptation.
Thus, the terms have been taken to mean that which happen by
chance or fortuitously, without intention and design, and which is
unexpected, unusual, and unforeseen. An accident is an event that
takes place without one's foresight or expectation — an event that
proceeds from an unknown cause or is an unusual effect of a known
cause and, therefore, not expected." [G.R. No. 100970. September
2, 1992.] FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs.
THE HONORABLE COURT OF APPEALS and JULIA SURPOSA,
respondents.]
P a g e | 29

§ There is no accident when a deliberate act is performed unless

some additional, unexpected, independent, and unforeseen
happening occurs which produces or brings about the result of injury
or death. In other words, where the death or injury is not the natural
or probable result of the insured's voluntary act, or if something
unforeseen occurs in the doing of the act which produces the injury,
the resulting death is within the protection of the policies insuring
against death or injury from accident." [De la Cruz vs. Capital
Insurance & Surety Co., Inc., 17 SCRA 559 (1966)].
Two General Divisions of Casualty Insurance
1. Accident or Health Insurance
Insurance against specified perils which may affect the person

and/or property of the insured
Examples - personal accident, robbery/theft insurance
2. Third Party Liability – Insurance against specified perils which may

give rise to liability on the part of the insured for claims for injuries or
damage to property of others.
a. Insurance against specified perils which may affect the person

and/or property of the insured
b. Insurance against specified perils which may give rise to liability
on the part of the insured for claims for injuries to others or
damage to their property.
Insurable Interest in Casualty Insurance
The insurable interest is to be found in the interest of the insured has in

the safety of the person or property who may maintain, or in the
freedom from damage of property which may become the basis of
suits against him in case of their injury or destruction.
The insurable interest does not depend upon whether the insured has
a legal or equitable interest in property but upon whether he may be
charged at law with liability against which insurance is taken out.
§ Attaches when the liability of the insured attaches, regardless of

actual loss at that time.
§ The right of the person injured to sue the insurer of the party at
fault (insured) depends on whether the contract of insurance is
intended to benefit third persons also or only the insured.
Subject to two tests:
1. Where the contract provides for indemnity against liability to

third persons, then third persons to whom the insured is liable, can sue
the insurer.
P a g e | 30

2. Where the contract is for indemnity against actual loss or

payment then third persons cannot proceed against the insurer , the
contract being solely to reimburse the insured for liability actually
discharged by him through payment to third persons, said third
person’s recourse being limited to the insured alone.
Compulsory Motor Vehicle Liability Insurance
§ Sections 373 – 389, Insurance Code of the Philippines
§ A 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 a motor
vehicle by its owner.
§ SECTION 373. For purposes of this chapter:
(a.) "Motor Vehicle" is any vehicle as defined in section three, paragraph

(a) of Republic Act Numbered Four Thousand One Hundred Thirty-Six,
otherwise known as the "Land Transportation and Traffic Code;
RA 4136, as amended, provides:
SECTION 3. Words and phrases defined. — As used in this Act:
(b.) "Motor Vehicle" shall mean any vehicle propelled by any power
other than muscular power using the public highways, but excepting
road rollers, trolley cars, street-sweepers, sprinklers, lawn mowers,
bulldozers, graders, fork-lifts, amphibian trucks, and cranes if not used
on public highways, vehicles which run only on rails or tracks, and
tractors, trailers and traction engines of all kinds used exclusively for
agricultural purposes.
(c.) Trailers having any number of wheels, when propelled or intended to

be propelled by attachment to a motor vehicle, shall be classified as
separate motor vehicle with no power rating.
(d.) "Third Party" is any person other than a passenger as defined in this
section and shall also exclude a member of the household, or a
member of the family within the second degree of consanguinity or
affinity, of a motor vehicle owner or land transportation operator, as
likewise defined herein, or his employee in respect of death or bodily
injury, arising out of and in the course of employment”
(e.) "Owner" or "Motor Vehicle Owner" means the actual legal owner of a
motor vehicle, in whose name such vehicle is duly registered with the
Land Transportation Commission;
(f.) "Land transportation operator" means the owner or owners of motor

vehicles for transportation of passengers for compensation, including
school buses
P a g e | 31

§ The injured for whom the contract of insurance is intended can

sue directly the insurer. The general purpose of statutes enabling an
injured person to proceed directly against the insurer is to protect
injured persons against the insolvency of the insured who causes
such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy, and statutes are to be liberally
construed so that their intended purpose may be accomplished. It
has even been held that such a provision creates a contractual
relation which inures to the benefit of any and every person who
may be negligently injured by the named insured as if such injured
person were specifically named in the policy. (S 449 7 Am. Jur., 2d,
pp. 118-119)
§ SECTION 374. It shall be unlawful for any land transportation

operator or owner of a motor vehicle to operate the same in the
public highways unless there is in force in relation thereto a policy of
insurance or guarantee in cash or surety bond issued in accordance
with the provisions of this chapter.
§ SECTION 375. The Commissioner shall furnish the Land

Transportation Commissioner with a list of insurance companies
authorized to issue the policy of insurance or surety bond required by
this chapter.
§ SECTION 376. The Land Transportation Commission shall not allow

the registration or renewal of registration of any motor vehicle
without first requiring from the land transportation operator or motor
vehicle owner concerned the presentation and filing of a
substantiating documentation in a form approved by the
Commissioner evidencing that the policy of insurance or guaranty in
cash or surety bond required by this chapter is in effect.
§ [G.R. No. 60506. August 6, 1992.] FIGURACION VDA. DE

MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, LEONILA M.
MALLARI, GILDA ANTONIO and the minors LEAH, LOPE, JR., and
ELVIRA, all surnamed MAGLANA, herein represented by their mother,
FIGURACION VDA. DE MAGLANA, petitioners, vs. HONORABLE
FRANCISCO Z. CONSOLACION, Presiding Judge of Davao City,
Branch II, and AFISCO INSURANCE CORPORATION, respondents.
ISSUE: WHEN DOES THE INSURER’S LIABILITY IN A COMPREHENSIVE

MOTOR VEHICLE LIABILITY INSURANCE ACCRUE?
"[W]here an insurance policy insures directly against liability, the

insurer's liability accrues immediately upon the occurrence of the
injury or event upon which the liability depends and does not
depend on the recovery of judgment by the injured party against
the insured. The underlying reason behind the third-party liability (TPL)
of the Compulsory Motor Vehicle Liability Insurance is "to protect
injured persons against the insolvency of the insured who causes
such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy..." (Shafer vs. Judge, RTC of
Olongapo City, Br. 75, G.R. No. 78848, Nov. 14, 1988, 167 SCRA 386,
391)
P a g e | 32

Kinds of Life Insurance Policies
1. Ordinary Life Policy
§ Insured is required to pay a certain fixed premium annually or

at more frequent intervals throughout life and the beneficiary is
entitled to receive payment under the policy only after the death of
the insured
§ Also known as “whole life, regular life, or straight life policy.”
2. Limited Payment Life Policy
§ Payable only upon death of the insured

§ Premium is payable only during a limited period
3. Term Payment Life Policy
§ Coverage only if the insured dies during a limited period
4. Endowment Policy
§ Insurer binds himself to pay a fixed sum to the insured if he survives for
a specified period, or if he dies within such period, to some other
person indicated.
Scope of Life Insurance
(1.) Life Insurance
(a.) Actual death

(b.) Living Death
(c.) Retirement Death
(2.) Health Insurance – When health insurance is written by life insurers,

injury or illness are also viewed as casualties.
Contract of Life Annuity
§ Refer to Article 2021, Civil Code
§ By the aleatory contract of life annuity, the debtor binds

himself to pay an annual pension or income during the life of one or
more determinate persons in consideration of a capital consisting of
money or other property, whose ownership is transferred to him at
once with the burden of the income.
P a g e | 33

Life Insurance Life Annuity

The purchaser of a life
The purchaser of a life
insurance expects his insurer
annuity expects his insurer
to pay his beneficiary a
to pay him a periodic
specified sum upon his
income as long as he lives.
death.
§ Section 180 (2nd paragraph)
Every contract or pledge for the payment of endowments or

annuities shall be considered a life insurance contract for purpose of
this Code.
Rule on Suicide
§ Sec. 180-A. The insurer in a life insurance contract shall be

liable in case of suicides only when it is committed after the policy
has been in force for a period of two years from the date of its issue
or of its last reinstatement, unless the policy provides a shorter period:
Provided, however, that suicide committed in the state of insanity
shall be compensable regardless of the date of commission.
Insurer is liable for suicide in the following cases:
1. Suicide is committed after the policy has been in force for a

period of two (2) years from the date of its issue or of its last
reinstatement;
2. Insurance policy provides for a shorter period instead of two

years; and
3. Suicide is committed in the state of insanity regardless of the

date of commission, unless suicide is an excepted risk.
When is insurer not liable in cases of suicide
1. suicide is not by reason of insanity and is committed within the two

year period;
2. suicide is by reason of insanity but is not among the risks assumed by

the insurer regardless of the date of commission;
3. insurer can show that the policy was obtained with the intention to
commit suicide even in the absence of any suicide exclusion in the
policy.
Right of insured to assign life insurance policy
§ Sec. 181. A policy of insurance upon life or health may pass by

transfer, will or succession to any person, whether he has an insurable
interest or not, and such person may recover upon it whatever the
insured might have recovered.
§ All life insurance policies are declared by law to be assignable

regardless of whether the assignee has an insurable interest in the life
of the insured or not.
P a g e | 34

§ Sec. 182. Notice to an insurer of a transfer or bequest thereof is

not necessary to preserve the validity of a policy of insurance upon
life or health, unless thereby expressly required.
Measure of indemnity under life insurance policy
§ Sec. 183. 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.
- Valued policy
MARINE INSURANCE
§ Ship Owner
§ Cargo Owner
§ Charterer
§ Owner/Debtor
§ Creditor/Lender
Insurable Interest in Marine Insurance
§ Ship Owner
Over the vessel to the extent of its value, provided that if chartered,
the recovery is only up to the amount not recoverable from the
charterer
He also has insurable interest on the expected freightage (section

103)
No insurable interest if he will be compensated by charterer for the

value of the vessel, in case of loss.
§ Cargo Owner
Over the cargo and expected profits (section 105)
§ Creditor/Lender
Amount of the Loan
§ Only Perils of the Sea, unless in case of an All Risk Policy where
perils of the ship are covered as well.
P a g e | 35

PERILS OF THE SEA vs. PERILS OF THE SHIP
PERILS OF THE SEA PERILS OF THE SHIP

Includes only those A loss which in the ordinary
casualties due to the: course of events, results
from the:
1. Natural and inevitable

1. Unusual violence action of the sea;
2. Ordinary wear and tear

of the ship
2. Extraordinary action of
the wind and wave
3. Negligent failure of the
3. Other extraordinary ship’s owner to provide the
causes connected with vessel with the proper
navigation equipment to convey the
cargo under ordinary
conditions
Concealment in Marine Insurance
§ MATTERS ALTHOUGH CONCEALED WILL NOT VITIATE THE CONTRACT

EXCEPT WHEN THEY CAUSED THE LOSS.
Section 110 of the Insurance Code
1. National Character of the Insured;

2. Liability of the thing insured to capture or detention;
3. Liability to seizure from breach of foreign laws of trade
4. Want of necessary documents; and
5. Use of false or simulated papers
DISTINCTION ON CONCEALMENT IN MARINE INSURANCE AND OTHER

INSURANCE
OTHER
MARINE
ITEM PROPERTY
INSURANCE
INSURANCE
The The
information information or
or the belief belief of a 3rd
Information
or expection party is not
of 3rd
of 3rd material and
persons
persons in need not be
reference to communicate
a material d unless it
P a g e | 36

fact is proceeds from

material and an agent of
must be the insured
concealed. whose duty is
to give
information
The
concealmen
t of any fact
in relation to
any of the
matters Concealment
stated in of any material
section 110 fact will vitiate
Effect of does not the entire
concealmen vitiate the contract,
t entire whether the
contract but loss results from
merely the risk
exonerates concealed
the insurer
from a risk
resulting
from the fact
concealed
P a g e | 37

Implied Warranties
1. Seaworthiness of the ship
2. Against improper deviation
3. Against illegal venture
4. Warranty of neutrality
5. Presence of insurable interest
§ Seaworthiness
- ship’s fitness to perform the service and to encounter the ordinary

perils of the voyage, contemplated by the parties to the policy.
§ General Rule on Seaworthiness
The warranty of seaworthiness is complied with if the ship be

seaworthy at the time of the commencement of the risk. Prior or
subsequent unseaworthiness is not a breach of the warranty nor is it
material that the vessel arrives in safety at the end of her voyage.
§ Ex ceptions to the General Rule on seaworthiness :
1. In case of Time Policy , the ship must be seaworthy at the

commencement of every voyage she may undertake during the
period of the coverage;
2. In the case of Cargo Policy, each vessel upon which the cargo
is shipped or transhipped must be seaworthy at the commencement
of each particular voyage;
3. In the case of Voyage Policy, contemplating a voyage at

different stages, the ship must be seaworthy at the commencement
of each stage of the voyage
Deviation
§ Departure from the course of the voyage insured, or an

unreasonable delay in pursuing the voyage or, the commencement
of an entirely diffrerent voyage. (section 123)
§ Instances of Deviation
1.Deviation from the agreed voyage;
2. Departure of vessel from the course of the sailing fixed by

mercantile usage;
3. Departure of vessel from the most natural, direct and advantegous

route if not fixed by mercantile usage
4. Unreasonable delay in pursuing the voyage;
5. Commencement of an entirely different voyage. (sections 121-123,

Insurance Code)
P a g e | 38

Proper Deviation
§ When caused by circumstances outside the control of the ship

captain or ship owner
§ When necessary to comply with a warranty or to avoid a peril

(REAL PERIL)
§ When made in good faith to avoid a peril (NON-

EXISTING/ASSUMED PERIL)
§ When made in good faith to save human life or to relieve another

vessel in distress (section 124)
Effect - In case of loss, the insurer is liable.
Improper Deviation
§ Every deviation not specified in Section 124
§ Effect – In case of loss or damage subsequent to an improper

deviation, the insurer is not liable. (section 124)
Loss
Rules in case of Loss
A. Total
1. Actual
1.1. Total Destruction;
1.2. Irretrievable loss by sinking or being broken up;
1.3. Damage rendering the thing valueless to the owner for the
purpose for which he held it; or
1.4. Other event which effectively deprives the owner of the

possession, at the port of destination, of the thing insured.
2. Constructive
2.1. Actual loss of more than ¾ of the value of the object;
2.2. Damage reducing, by more than ¾ of the value of the vessel

and of the cargo; and
2.3. Expense of the transshipment exceeds ¾ of the value of the

cargo.
B. Partial – that which is not total (section 128)

P a g e | 39

IN CASE OF CONSTRUCTIVE TOTAL LOSS, INSURED’s REMEDIES ARE :
1. Abandon the goods or vessel to the insurer and claim for whole
insured value; (section 139)
2. Without abandoning the vessel, claim for partial actual loss

(section 155)
Abadonment - Act of the insured by which, after a constructive total

loss, he declared the relinquishment to the insurer of his interest in the
thing insured. (section 138)
REVISED SECURITIES ACT (RA 8799)
§ Referred to as the “Blue Sky Law”
§ State Policies (Section 2)
1. Establish a socially conscious free market that regulates itself;
2. Encourage widest participation of ownership in enterprises and

enhance democratization of wealth;
3. Promote development of the capital market;
4. Protect investors and ensure full and fair disclosure about

securities; and
5. Minimize if not totally eliminate insider trading and other

fraudulent or manipulative devices and practices which
create distortions in the free market.
Intended Effects
1. Prevention of excesses and fraudulent transactions, merely by

requirement that their details be revealed
2. Placing the market during the early stages of offering of a

security a body of information, which operating indirectly
through investment services and expert investors, will tend to
produce a more accurate appraisal of a security
Key Features
1. Requires the sale or offer for sale of any security in the

Philippines to be registered and permitted by SEC, unless such
securities are exempt securities or sold in exempt transactions;
2. Requires registration of those who participate in the offer and

sale of securities, like brokers, dealers and salesmen and
securities exchanges;
P a g e | 40

3. Provides requirements to ensure that transactions involving

securities would be pursued on sound, fair and equitable
principles and to prevent market manipulation;
4. Expanded SEC powers and functions, including the power to

promulgate rules and regulations and to exercise investigatory
powers and removed its quasi-judicial powers under PD 902-A.
Definition of securities
Securities" are shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in
character. It includes:
(a.) Shares of stocks, bonds, debentures, notes evidences of

indebtedness, asset-backed securities;
(b.) Investment contracts, certificates of interest or participation in a

profit sharing agreement, certifies of deposit for a future subscription;
(c.) Fractional undivided interests in oil, gas or other mineral rights;
(d.) Derivatives like option and warrants;
(e.) Certificates of assignments, certificates of participation, trust

certificates, voting trust certificates or similar instruments
(f.) Proprietary or nonproprietary Membership certificates in

corporations; and
(g.) Other instruments as may in the future be determined by the

Commission.
Nature and Composition of SEC (Section 4)
§ Collegial body, composed of a chairperson and (4)

Commissioners, appointed by the President for a term of (7) seven
years each and who shall serve as such until their successor shall
have been appointed and qualified.
§ The Commissioners must be natural-born citizens of the Philippines,

at least forty (40) years of age for the Chairperson and at least thirty-
five (35) years of age for the Commissioners, of good moral
character, or unquestionable integrity, of known probity and
patriotism, and with recognized competence in social and
economic disciplines: Provided, That the majority of Commissioners,
including the Chairperson, shall be members of the Philippine Bar
P a g e | 41

SEC Powers and Functions (Section 5)
A. Have jurisdiction and supervision over all corporations, partnership or

associations who are the grantees of primary franchises and/or a
license or a permit issued by the Government;
B. Formulate policies and recommendations on issues concerning the

securities market, advise Congress and other government agencies
on all aspect of the securities market and propose legislation and
amendments thereto;
C. Approve, reject, suspend, revoke or require amendments to

registration statements, and registration and licensing applications;
D. Regulate, investigate or supervise the activities of persons to ensure

compliance;
E. Supervise, monitor, suspend or take over the activities of exchanges,

clearing agencies and other SROs;
F. Impose sanctions for the violation of laws and rules, regulations and
orders, and issued pursuant thereto;
G. Prepare, approve, amend or repeal rules, regulations and orders,

and issue opinions and provide guidance on and supervise
compliance with such rules, regulation and orders;
H. Enlist the aid and support of and/or deputized any and all
enforcement agencies of the Government, civil or military as well as
any private institution, corporation, firm, association or person in the
implementation of its powers and function under its Code;
I. Issue cease and desist orders to prevent fraud or injury to the

investing public;
J. Punish for the contempt of the Commission, both direct and indirect,
in accordance with the pertinent provisions of and penalties
prescribed by the Rules of Court;
K. Compel the officers of any registered corporation or association to

call meetings of stockholders or members thereof under its
supervision;
L. Issue subpoena duces tecum and summon witnesses to appear in

any proceedings of the Commission and in appropriate cases, order
the examination, search and seizure of all documents, papers, files
and records, tax returns and books of accounts of any entity or
person under investigation as may be necessary for the proper
disposition of the cases before it, subject to the provisions of existing
laws;
M. Suspend, or revoke, after proper notice and hearing the franchise or

certificate of registration of corporations, partnership or associations,
upon any of the grounds provided by law; and
P a g e | 42

N. Exercise such other powers as may be provided by law as well as

those which may be implied from, or which are necessary or
incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
Florencio Orendain vs. BF Homes, Inc., (G.R. No. 146313, October 31,
2006)
The Commission’s jurisdiction over all cases enumerated under

section 5 of Presidential Decree No. 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise
jurisdiction over the cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payment/rehabilitation cases filed as of 30
June 2000 until finally disposed.
Juxtaposing the jurisdiction of the RTC under RA 8799 and the powers
that were retained by the SEC, it is clear that the SEC retained its
administrative, regulatory, and oversight powers over all
corporations, partnerships, and associations who are grantees of
primary franchises, and/or a license or permit issued by the
Government. However, the Securities Regulations Code (SRC) is clear
that when there is a controversy arising out of intra-corporate
relations, between and among stockholders, members or associates,
and between, any, or all of them and the corporation, it is the RTC,
not SEC, which has jurisdiction over the case.
INTRA-CORPORATE CONTROVERSY
To determine whether a case involves an intra-corporate controversy

to be heard and decided by the RTC, two elements must concur:
1. the status or relationship of the parties and
2. the nature of the question that is subject of their controversy.
The first element requires that the controversy must arise out of intra-
corporate or partnership relations: (a) between any or all of the
parties and the corporation, partnership or association of which they
are stockholders, members or associates; (b) between any or all of
them and the corporation, partnership or association of which they
are stockholders, members or associates and (c) between such
corporation, partnership or association and the State insofar as it
concerns their individual franchises. On the other hand, the second
element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. 15 If the nature of
the controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate
controversy.
P a g e | 43

Eustacio Atwel, et al. vs. Concepcion Progressive Ass'n., Inc., (G.R.

No. 169370, April 14, 2008)
§ From the above, it can be said that the SEC's regulatory authority
over private corporations encompasses a wide margin of areas,
touching nearly all of a corporation's concerns. This authority more
vividly springs from the fact that a corporation owes its existence to
the concession of its corporate franchise from the state. Under its
regulatory responsibilities, the SEC may pass upon applications for, or
may suspend or revoke (after due notice and hearing), certificates
of registration of corporations, partnerships and associations
(excluding cooperatives, homeowners' association, and labor
unions); compel legal and regulatory compliances; conduct
inspections; and impose fines or other penalties for violations of the
Revised Securities Act, as well as implementing rules and directives of
the SEC, such as may be warranted.
Provident International Resources Corp., et al. vs. Joaquin T. Venus, et

al., (G.R. No. 167041, June 17, 2008)
§ At the outset, it must be emphasized that pursuant to Section 5.2 of

Republic Act No. 8799, the SEC's jurisdiction over intra-corporate
controversies has been transferred to the RTCs or Special
Commercial Courts (SCC) designated by the Court pursuant to A.M.
No. 00-11-03-SC promulgated on 21 November 2000.
In view of the said transfer of jurisdiction, the SEC Hearing Panel

which the SEC constituted and the Interim Management Committee
which the SEC Hearing Panel appointed have become functus
officio.
GD Express Worldwide N.V., et al. vs. Court of Appeals, et al., G.R. No.
136978, May 8, 2009
§ It is a settled rule that jurisdiction over the subject matter is

conferred by law. The determination of the rights of a director and
corporate officer dismissed from his employment as well as the
corresponding liability of a corporation, if any, is an intra-corporate
dispute subject to the jurisdiction of the regular courts.
Leslie Okol vs. Slimmers World International, et al., (G.R. No. 160146,
December 11, 2009)
§ A criminal charge for violation of the Securities Regulation Code is

a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under
the doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
and expertise of said administrative tribunal to determine technical
and intricate matters of fact. The Securities Regulation Code is a
special law. Its enforcement is particularly vested in the SEC. Hence,
all complaints for any violation of the Code and its implementing
P a g e | 44

rules and regulations should be filed with the SEC. Where the
complaint is criminal in nature, the SEC shall indorse the complaint to
the DOJ for preliminary investigation and prosecution as provided in
Section 53.1 earlier quoted.
Manuel V. Baviera vs. Esperanza Paglinawan, et al., (G.R. Nos. 168380

& 170602, February 8, 2007)
SEC’s power on Securities Transactions
§ Section 8.1 Securities shall not be sold or offered for sale or

distribution within the Philippines, without a registration statement
duly filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance
as the Commission may prescribe, shall be made available to each
prospective purchaser.
§ Section 8.2. The Commission may conditionally approve the

registration statement under such terms as it may deem necessary.
§ Section 8.3. The Commission may specify the terms and conditions
under which any written communication, including any summary
prospectus, shall be deemed not to constitute an offer for sale under
this Section.
§ Section 8.4. A record of the registration of securities shall be kept

in Register Securities in which shall be recorded orders entered by the
Commission with respect such securities. Such register and all
documents or information with the respect to the securities registered
therein shall be open to public inspection at reasonable hours on
business days.
§ Section 8.5. The Commission may audit the financial statements,

assets and other information of firm applying for registration of its
securities whenever it deems the same necessary to insure full
disclosure or to protect the interest of the investors and the public in
general.
Exceptions:
§ The following securities may be sold without need of registration.
(a.) Any security issued or guaranteed by the Government of the

Philippines, or by any political subdivision or agency thereof, or by
any person controlled or supervised by, and acting as an
instrumentality of said Government.
(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.
(c.) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner therefore, or by his
representative for the owner’s account, such sale or offer for sale or
P a g e | 45

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.\
(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.
(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.
(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
(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.
(h.) Broker’s transaction, executed upon customer’s orders, on any

registered Exchange or other trading market.
(i.) Subscriptions for shares of the capitals stocks of a corporation prior

to the incorporation thereof or in pursuance of an increase in its
authorized capital stocks under the Corporation Code, when no
expense is incurred, or no commission, compensation or
remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for soliciting,
giving or taking of such subscription is to comply with the
requirements of such law as to the percentage of the capital stock
of a corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized, capital increase.
(j.) The exchange of securities by the issuer with the existing security
holders exclusively, where no commission or other remuneration is
paid or given directly or indirectly for soliciting such exchange.
(k.) The sale of securities by an issuer to fewer than twenty (20) persons in
the Philippines during any twelve-month period.
(l.) The sale of securities to any number of the following qualified buyers:
a. Bank;
b. Registered investment house;
P a g e | 46

c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of
the Philippines or any political subdivision thereof or manage by a
bank or other persons authorized by the Bangko Sentral to engage in
trust functions;
e. Investment company or;
f. Such other person as the Commission may rule by determine as
qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial
and business matters, or amount of assets under management.
§ Section 10.3. Any person applying for an exemption under this

Section, shall file with the Commission a notice identifying the
exemption relied upon on such form and at such time as the
Commission by the rule may prescribe and with such notice shall pay
to the Commission fee equivalent to one-tenth (1/10) of one percent
(1%) of the maximum value aggregate price or issued value of the
securities.
§ Section 12.1. All securities required to be registered under

Subsection 8. I shall be registered through the filing by the issuer in the
main office of the Commission, of a sworn registration statement with
the respect to such securities, in such form and containing such
information and document as the Commission prescribe. The
registration statement shall include any prospectus required or
permitted to be delivered under Subsections 8.2, 8.3, and 8.4.
§ Section 13.1. The Commission may reject a registration statement

and refuse registration of the security there-under, or revoke the
affectivity of a registration statement and the registration of the
security there-under after the due notice and hearing by issuing an
order to such effect, setting forth its finding in respect thereto, if it
finds that:
Grounds for suspension
§ Section 15.1. If at any time, the information contained in the

registration statement filed is or has become misleading, incorrect,
inadequate or incomplete in any material respect, or the sale or
offering for sale of the security registered thereunder may work or
tend to work a fraud, the Commission may require from the issuer
such further information as may in its judgement be necessary to
enable the Commission to ascertain whether the registration of such
security should be revoked on any ground specified in this Code. The
Commission may also suspend the right to sell and offer for the sale
such security pending further investigation, by entering an order
specifying the grounds for such action, and by notifying the issuer,
underwriter, dealer or broker known as participating in such offering
§ Section 15.2. The refusal to furnish information required by the

Commission may be a ground for the issuance of an order of
suspension pursuant to Subsection 15.1. Upon the issuance of any
such order and notification to the issuer, underwriter, dealer or
broken know as participating in such offering, no further offer or sale
P a g e | 47

of any such security shall be made until the same is lifted or set aside
by the Commission. Otherwise such sale shall be void.
§ 15.3. Upon issuance of an order of suspension, the Commission

shall conduct a hearing. If the Commission determines that the sale
of any security should be revoked is shall issue an order prohibiting
sale of such security.
§ 15.4. Until the issuance of a final order, the suspension of the right
to sell, though binding upon the persons notified there of, shall be
deemed confidential, and shall not be published, unless it shall
appear that the order of suspension has been violated after notice.
If, however, the Commission finds that the sale of the security will
neither be fraudulent nor result in fraud, it shall forthwith issue an
order revoking the order of suspension, and such security shall be
restored to its status as a registered security as of the date of such
order of suspension.
Protection of Shareholder Interests
1. Tender Offers (Section 19)
2. Proxy Solicitations (Section 20)
3. Internal Record Keeping and Accounting Controls (Section 22)
4. Transactions of Directors, Officers, and Principal Stockholders

(Section 23)
Tender Offer
§ The legislative intent of Section 19 of the Code is to regulate

activities relating to acquisition of control of the listed company and
for the purpose of protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a
public company is obtained, either through the direct purchase of its
stocks or through an indirect means, mandatory tender offer applies.
§ Tender offer is a publicly announced intention by a person acting

alone or in concert with other persons to acquire equity securities of
a public company. A public company is defined as a corporation
which is listed on an exchange, or a corporation with assets
exceeding P50,000,000.00 and with 200 or more stockholders, at least
200 of them holding not less than 100 shares of such company.
§ Stated differently, a tender offer is an offer by the acquiring

person to stockholders of a public company for them to tender their
shares therein on the terms specified in the offer. Tender offer is in
place to protect minority shareholders against any scheme that
dilutes the share value of their investments. It gives the minority
shareholders the chance to exit the company under reasonable
terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders.
Cemco Holdings, Inc. vs. National Life Insurance Co. of the Phil., Inc.,
(G.R. No. 171815, August 7, 2007)
P a g e | 48

§ The coverage of the mandatory tender offer rule covers not only
direct acquisition but also indirect acquisition or "any type of
acquisition".
Cemco Holdings, Inc. vs. National Life Insurance Co. of the Phil., Inc.,
(G.R. No. 171815, August 7, 2007)
§ It shall be lawful for any person to make any untrue statement of

a material fact or omit to state any material fact necessary in order
to make the statements made in the light of the circumstances
under which they are made, not mis-leading, or to engaged to any
fraudulent, deceptive or manipulative acts or practices, in
connection with any tender offer or request or invitation for tenders,
or any solicitation for any security holders in opposition to or in favor
of any such favor of any such offer, request, or invitation. The
Commission shall, for the purposes of this subsection, define and
prescribe means reasonably designed to prevent, such acts and
practices as are fraudulent, deceptive and manipulative.
Proxy Solicitation
§ Section 20. Proxy solicitations. - 20.1. Proxies must be issued and

proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly

authorized representative and file before the scheduled meeting
with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for
the meeting for which it is intended. No proxy shall be valid only for
the meting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at one time.
20.4. No broker or dealer shall 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.
20.5. A broker or dealer who holds or acquire the proxy for at least
ten percent (10%) or such percentage as the commission may
prescribe of the outstanding share of such issuer, shall 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.
Internal Record Keeping
Section 22. Internal Record Keeping and Accounting Control. - Every

issuer which has a class of securities that satisfies the requirements of
Subsection 17.2 shall:
22.1. Device and maintain a system of internal accounting controls

sufficient to provide reasonable assurance that: (a) Transactions and
access to assets are pursuant to management authorization; (b)
Financial statements are provided in conformity with generally
accepted accounting principles that are adopted by the
P a g e | 49

Accounting standards council and the rules promulgated by the

Commission with the regard to the preparation of the financial
statements; and (c) Recorded assets are compared with existing
assets at reasonable intervals and differences are reconciled.
Manipulative Practices and Insider Trading
Wash Sales
§ 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"):
(i) By effecting any transaction in such security which involves no

change in the beneficial ownership thereof;
(ii) 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
(iii) By performing similar act where there is no change in beneficial

ownership.
Marking the Close
§ Also known as “portfolio funding”
§ The practice of buying a security at the very end of the trading

day at a significantly higher price than the current price of the
security. The purpose of the practice of marking the close is to raise
the closing price of the security, making it appear to be higher-
valued than it actually is.
Painting the Tape
§ The illegal practice in which traders buy and sell a specific security
among themselves, creating the illusion of high trading volume and
significant investor interest, which can attract unsuspecting investors
who might then buy the stock and enable the traders to profit.
Squeezing the float
§ Squeezing the float – Taking advantage of a shortage of securities

in the market by controlling the demand side and exploiting market
congestion during such shortages in a way as to create artificial
prices;
§ Also known as “Pump and Dump”
§ Pump and dump is a form of stock fraud in which people

artificially inflate the price of stock in order to profit.
P a g e | 50

Hype and Dump
§ Also known as “Pump and Dump”
§ Pump and dump is a form of stock fraud in which people

artificially inflate the price of stock in order to profit.
Improper Matched Orders
§ Engaging in transactions where both the buy and sell orders are
entered at the same time with the same price and quantity by
different but colluding parties.
Boiler Room Operations
§ refers to the use of high pressure sales tactics to sell stocks to

clients who are "cold called", or called randomly, most likely after
being picked out of a phone directory.
Boiler rooms are often set up in inexpensive office spaces, where

armies of telemarketers make these cold calls. While the stock they
sell may be real (most likely an unknown micro-cap stock), the
information these salespeople use to hype their product could be
false or misleading because of their overwhelming desire to sell the
stock and claim commissions.
Scalping
§ "Scalping refers to recommending that others purchase a security

while secretly selling the same security in the market."
Daisy Chain
§ series of manipulative transactions on a security intended to

create an impression of a high trading volume, suggesting interest in
assets or securities that may not actually be there. This tends to
increase the share price, which in turn encourages other investors to
buy the security. When other investors become interested, the
manipulating traders dump the security at an artificially high price.
Flipping
§ Quick-profit strategy in which the shares of a new issue or IPO are

bought for selling immediately upon an increase in their market price
§ Section 24.2. No person shall use or employ, in connection with the

purchase or sale of any security any manipulative or deceptive
device or contrivance. Neither shall any short sale be effected nor
any stop-loss order be executed in connection with the purchase or
sale of any security except in accordance with such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest for the protection of investors.
P a g e | 51

Regulation of Option Trading
§ Section 25. Regulation of Option Trading. – No member of an

Exchange shall, directly or indirectly endorse or guarantee the
performance of any put, call, straddle, option or privilege in relation
to any security registered on a securities exchange. The terms "put",
"call", "straddle", "option", or "privilege" shall not include any
registered warrant, right or convertible security.
§ Option Trading is a contract that gives the buyer the right, but not
the obligation, to buy or sell an underlying asset at a specific price
on or before a certain date.
The danger of damage to the public consists of the fact that a

person to whom an option has been given can abuse the same and
control a large number of shares for a certain period of time and
thus, manipulate the market.
INSIDER’s TRADING
GENERAL RULE:
Section 27. It shall be unlawful for an insider 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 (ii) that he had reason to believe that the other
party otherwise is also in possession of the information.
PRESUMPTION
A purchase or sale of a security of the issuer made by an insider, or

such insider’s spouse or relatives by affinity or consanguinity within
the second degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-public
information if transacted after such information came into existence
but prior to dissemination of such information to the public and the
lapse of a reasonable time for the market to absorb such
information: Provided, however, That this presumption shall be
rebutted upon a showing by the purchaser or seller that he was not
aware of the material non-public information at the time of the
purchase or sale.
P a g e | 52

Who is an insider?
Someone who has access to material, nonpublic information about

the security.
§ The intent of the law is the protection of investors against fraud,

committed when an insider, using secret information, takes
advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from
trading the shares of his corporation. This duty to disclose or abstain
is based on two factors: first, the existence of a relationship giving
access, directly or indirectly, to information intended to be available
only for a corporate purpose and not for the personal benefit of
anyone; and second, the inherent unfairness involved when a party
takes advantage of such information knowing it is unavailable to
those with whom he is dealing.
Defense of an Insider:
Section 30 of the Revised Securities Act allows the insider the defense
that in a transaction of securities, where the insider is in possession of
facts of special significance, such information is “generally available”
to the public. Whether information found in a newspaper, a
specialized magazine, or any cyberspace media be sufficient for the
term “generally available” is a matter which may be adjudged given
the particular circumstances of the case. The standards cannot
remain at a standstill. A medium, which is widely used today was, at
some previous point in time, inaccessible to most. Furthermore, it
would be difficult to approximate how the rules may be applied to
the instant case, where investigation has not even been started.
Respondents failed to allege that the negotiations of their
agreement with GHB were made known to the public through any
form of media for there to be a proper appreciation of the issue
presented.
§ Section 56 – Civil liabilities on account of false registration

statement
§ Section 57 – Civil liabilities in connection with prospectus,
communications and reports
§ Section 58 - Civil Liability for Fraud in Connection with Securities
Transactions
§ Section 59. Civil Liability for Manipulation of Security Prices
§ Section 60. Civil Liability with Respect to Commodity Futures
Contracts and Pre-need Plans
§ Section 61. Civil Liability on account of insider trading.
§ SEC. 62. Limitation of Actions. - 62.1. No action shall be

maintained to enforce any liability created under Section 56 or 57 of
this Code unless brought within two (2) years after the discovery of
the untrue statement or the omission, or, if the action is to enforce a
liability created under Subsection 57.1(a), unless brought within two
P a g e | 53

(2) years after the violation upon which it is based. In no event shall
any such action be brought to enforce a liability created under
Section 56 or Subsection 57.1 (a) more than five (5) years after the
security was bona fide offered to the public, or under Subsection 57.1
(b) more than five (5) years after the sale.
§ 62.2. No action shall be maintained to enforce any liability

created under any other provision of this Code unless brought within
two (2) years after the discovery of the facts constituting the cause of
action and within five (5) years after such cause of action accrued.
§ SEC. 63. Amount of Damages to be Awarded. - 63.1. All suits to
recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall
be brought before the Regional Trial Court, which shall have
exclusive jurisdiction to hear and decide such suits. The Court is
hereby authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.
Exemplary damages may also be awarded in cases of bad faith,

fraud, malevolence or wantonness in the violation of this Code or the
rules and regulations promulgated thereunder.
The Court is also authorized to award attorney’s fees not exceeding

thirty percentum (30%) of the award.
May the Department of Justice immediately take cognizance and

investigate cases involving violations of the Securities Regulation
Code?
No. A criminal charge for violation of the Securities Regulation Code

is a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under
the doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
and expertise of said administrative tribunal to determine technical
and intricate matters of fact. The Securities Regulation Code is a
special law. Its enforcement is particularly vested in the SEC. Hence,
all complaints for any violation of the Code and its implementing
rules and regulations should be filed with the SEC. Where the
complaint is criminal in nature, the SEC shall indorse the complaint to
the DOJ for preliminary investigation and prosecution.
What is the Howey Test?
The Howey Test is applied to determine whether an investment

contract shall be required as a security to be registered under the
Securities Regulation Code. The Securities Regulation Code treats
investment contracts as securities that have to be registered with the
SEC before they can be distributed and sold. An investment contract
P a g e | 54

is a contract, transaction, or scheme where a person invests his

money in a common enterprise and is led to expect profits primarily
from the efforts of others.
The United States Supreme Court held in Securities and Exchange

Commission v. W.J. Howey Co.that, for an investment contract to
exist, the following elements, referred to as the Howey test must
concur: (1) a contract, transaction, or scheme; (2) an investment of
money; (3) investment is made in a common enterprise; (4)
expectation of profits; and (5) profits arising primarily from the efforts
of others
What is a public company?
A “public company,” as contemplated by the SRC is not limited to a

company whose shares of stock are publicly listed; even companies
whose shares are offered only to a specific group of people, are
considered a public company, provided they fall under Subsec. 17.2
of the SRC, which provides: “any corporation with a class of equity
securities listed on an Exchange or with assets of at least Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least one
hundred (100) shares of a class of its equity securities.” Philippine
Veterans Bank meets the requirements and as such, is subject to the
reportorial requirements for the benefit of its shareholders.
SEC vs. Prosperity (2012) in relation to Howey and Turner Test to

determine whether an investment contract is a “security”.
SEC Prosperity.Com, Inc. (PCI) sold computer software and hosted

websites without providing internet service. To make a profit, PCI
devised a scheme in which, for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire from it an internet
website of a 15-Mega Byte (MB) capacity. At the same time, by
referring to PCI his own down-line buyers, a first-time buyer could
earn commissions, interest in real estate in the Philippines and in the
United States, and insurance coverage worth P50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at
least two other buyers as his own down-lines. These second tier of
buyers could in turn build up their own down-lines. For each pair of
down-lines, the buyer-sponsor received a US$92.00 commission. But
referrals in a day by the buyer-sponsor should not exceed 16 since
the commissions due from excess referrals inure to PCI, not to the
buyer-sponsor.
PCI appears to be engaged in network marketing, a scheme

adopted by companies for getting people to buy their products
outside the usual retail system where products are bought from the
P a g e | 55

stores shelf. Under this scheme, adopted by most health product

distributors, the buyer can become a down-line seller. The latter
earns commissions from purchases made by new buyers whom he
refers to the person who sold the product to him. The network goes
down the line where the orders to buy come.
The commissions, interest in real estate, and insurance coverage

worth P50,000.00 are incentives to down-line sellers to bring in other
customers. These can hardly be regarded as profits from investment
of money under the Howey test.
The Supreme Court recognized there were two tests in determining

whether a contract was an investment contract.
The first is the Howey test, which traces its roots to the SEC v. W.J.
Howey Co. (328 US 293 [1946]) case in the United States. The decision
held that a contract, transaction or scheme is an investment
contract where a person (a) invests his money (b) in a common
enterprise (c) with an expectation of profits (d) solely from the efforts
of others.
The other test is the Turner test based on a later case at the Court of
Appeals—SEC vs. Turner (474 F.2d 476, 9th Cir. 1973)—which basically
has the same elements as the Howey test except that the profit was
described “primarily” from the efforts of others.
What is Tender Offer?
A tender offer is an offer by the acquiring person to stockholders of a

public company for them to tender their shares; it gives the minority
shareholders the chance to exit the company under reasonable
terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders. The mandatory tender
offer is still applicable even if the acquisition, direct or indirect, is less
than 35% when the purchase would result in ownership of over 51% of
the total outstanding equity securities of the public company.
FOREIGN INVESTMENTS ACT
§ Republic Act No. 8179
AN ACT TO FURTHER LIBERALIZE FOREIGN INVESTMENTS, AMENDING

FOR THE PURPOSE REPUBLIC ACT NO. 7042, AND FOR OTHER
PURPOSES
§ RA 7042, SEC. 2. Declaration of Policy. - 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
P a g e | 56

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.
§ “Investment” shall mean equity participation in any enterprise

organized or existing under the laws of the Philippines.
§ “Foreign investment” shall mean an equity investment made by a

non-Philippine 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.
§ Foreign Investments Negative List” or “Negative List” shall mean a

list of areas of economic activity whose foreign ownership is limited to
a maximum of forty percent (40%) of the equity capital of the
enterprises engaged therein.
§ “Philippine national” shall mean a citizen of the Philippines, or a

domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as
doing business in the Philippines under the Corporation Code of
which one hundred percent (100%) of the capital stock outstanding
and entitled to vote is wholly owned by Filipinos or a trustee of funds
for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and
P a g e | 57

held by citizens of the Philippines, in order that the corporation shall

be considered a Philippine national."
§ SEC. 4. Scope. – This Act shall not apply to banking and other
financial institutions which are governed and regulated by the
General Banking Act and other laws under the supervision of the
Central Bank.
§ Sec. 7. Foreign Investments in Domestic Market Enterprises. - 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 and existing law or the
Foreign Investment Negative List under Section 8 hereof."
§ SEC.9. Investment Rights of Former Natural-born Filipinos. - For

purposes of this Act, former natural born citizens of the Philippines
shall have the same investment rights of Philippine citizen in
Cooperatives under Republic Act No. 6938, Rural Banks under
Republic Act No. 7353, Thrift Banks and Private Development Banks
under Republic Act No. 7906, and Financing Companies under
Republic Act No. 5980. These rights shall not extend to activities
reserved by the Constitution including (1) the exercise of profession;
(2) in defense-related activities under Section 8 (b) hereof, unless
specifically authorized by the Secretary of National Defense; and (3)
activities covered by Republic Act No. 1180 (Retail Trade Act),
Republic Act No. 5487 (Security Agency Act), Republic Act No. 7076
(Small Scale Mining Act), Republic Act No. 3018, as amended (Rice
and Corn Industry Act), and P.D. 449 (Cockpits Operation and
Management)".
§ SEC. 10. Other Rights of natural Born Citizen Pursuant to the

Provisions of Article XII, Section 8 of the Constitution. - Any natural
born citizen who has lost his Philippine citizenship and who has the
legal capacity to enter into a contract under Philippine Laws may be
a transferee of a private land up to maximum area of five thousand
(5,000) square meters in the case of urban land or three (3) hectares
in the case of rural land to be used by him for business or other
purposes. In the case of married couples, one of them may avail of
the privilege herein granted: Provided, That If both shall avail of the
same, the total is acquired shall not exceed the maximum herein
fixed
§ In case the transferee already owns urban or rural land for

business or other purposes, he shall be entitled to be a transferee of
additional urban or rural land for business or other purposes which
when added to those already owned by him shall not exceed the
maximum areas herein authorized.
A transferee under this Act may acquire not more than two (2) lots
which should be situated in different municipalities or cities anywhere
in the Philippines: Provided, That the Total land area thereof shall not
exceed five thousand (5,000) square meters in the case of urban
land or three (3) hectares in the case of rural land for use by him for
P a g e | 58

business or other purposes. A transferee who has already acquired

urban land shall be disqualified form acquiring rural land and vice
versa.
§ Small and medium-sized domestic market enterprises with paid in

equity capital less than the equivalent of Two hundred thousands US
dollars (US$200,000.00), are reserved to Philippines nationals:
Provided, That if (1) they involve advance 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-Philippines nationals.
Negative List “A”
§ Mass Media except recording, practice of licensed profession,

retail trade, cooperative and small-scale mining, etc. where foreign
ownership is prohibited; Advertising, ownership of land, operation
and management of public utilities, etc., where only minority foreign
ownership is prohibited
Negative List “B”
§ Refers to areas that are defense-related, those with adverse

effects on public health and morals and domestic market enterprises
with paid-up capital of less than US$200,000, provided they involved
advanced technology as determined by the Department of Science
and Technology (DOST) or directly employ at least fifty (50)
employees, in which case, the paid-up capital shall be lowered to
US$100,000 only to non-Philippine nationals
Basic Rights of Foreign Investors
§ Right to REPATRIATION OF INVESTMENTS
In the case of foreign investments, the right to repatriate the entire

proceeds of the liquidation of the investments in the currency in
which the investment was originally made at the exchange rate
prevailing at the time of repatriation.
§ Right to REMITTANCE OF EARNINGS
The right to remit, at the exchange rate prevailing at the time of

remittance, such as may be necessary to meet the payment of
interest and the principal on foreign loans and foreign obligations
arising from technological assistance contracts.
§ Right to FREEDOM FROM EXPROPRIATION
There shall be no expropriation by the government of the property

represented by the investments or of the property of enterprises
except for public use or in the interest of national welfare and
defense and upon payment of just compensation. In such cases,
P a g e | 59

foreign investors or enterprises shall have the right to remit sums

received as compensation for the expropriated property in the
currency in which the investment was originally made and at the
exchange rate prevailing at the time of remittance.
GENERAL BANKING ACT AND OTHER RELATED LAWS
The banking system has become an indispensable institution in the

modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safe-
keeping and saving of money or as active instruments of business
and commerce, banks have attained an ubiquitous presence
among the people, who have come to regard them with respect
and even gratitude and, above all, trust and confidence. In this
connection, it is important that banks should guard against injury
attributable to negligence or bad faith on its part. As repeatedly
emphasized, since the banking business is impressed with public
interest, the trust and confidence of the public in it is of paramount
importance.
SECURITY BANK AND TRUST COMPANY, petitioner, vs. RIZAL

COMMERCIAL BANKING CORPORATION, respondent. (G.R. No.
170984. January 30, 2009.)
General Banking Laws
General Banking Law (RA 8791)

New Central Bank Act (RA 7653 as amended by RA 11211)
Special Banking Laws
1. Rural Bank Act (RA 7353)

2. Private Development Banks Act (RA 4093)
3. Savings and Loan Association Act (RA 3779)
4. Thrift Banks Act (RA 7906)
Other Laws affecting banks
1. Secrecy of Bank Deposits (RA 1405)

2. Unclaimed Balances Law (Act no.3936)
3. Philippine Deposit Insurance Corporation (RA 3591)
4. Special Purpose Vehicle Act (RA 9182)
5. Anti-Money Laundering Act (RA 9160 as amended by RA 9194)
6. Access Devices and Regulation Act
§ RA 8791, SECTION 2. Declaration of Policy. — The State recognizes

the vital role of banks in providing an environment conducive to the
sustained development of the national economy and the fiduciary
nature of banking that requires high standards of integrity and
performance. In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial system that is
P a g e | 60

globally competitive, dynamic and responsive to the demands of a

developing economy.
§ SECTION 3. Definition and Classification of Banks. —
"Banks" shall refer to entities engaged in the lending of funds

obtained in the form of deposits. (2a)
Nature of Banking Business
§ Debtor-Creditor Relationship
§ Fiduciary Duty
§ Not a trust agreement
§ Indispensable Institution
§ Impressed with public interest
§ Not expected to be infallible
Liability of Banks for Acts of Officers and Employees
§ Primary Liability
§ Highest Degree of Responsibility
§ Respondeat Superior
§ Negligence of Manager
§ Negligence of Officers
§ Negligence of Tellers
§ Right to recover from employees
§ Liability for Damages
Governance of BSP
§ The Monetary Board exercises the powers and functions of the

BSP, such as the conduct of monetary policy and supervision of the
financial system. Its chairman is the BSP Governor, with five full-time
members from the private sector and one member from the
Cabinet.
§ The Governor is the chief executive officer of the BSP and is

required to direct and supervise the operations and internal
administration of the BSP. A deputy governor heads each of the BSP's
operating sector as follows:
Monetary Stability Sector takes charge of the formulation and

implementation of the BSP’s monetary policy, including serving the
banking needs of all banks through accepting deposits, servicing
withdrawals and extending credit through the rediscounting facility.
Supervision and Examination Sector enforces and monitors

compliance to banking laws to promote a sound and healthy
banking system.
Resource Management Sector serves the human, financial and

physical resource needs of the BSP
P a g e | 61

Constitutional Basis: Section 20, Art. XII of 1987 Constitution
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.
Does the BSP have supervision over the operations of and exercise
regulatory powers over quasi-banks, trust entities and other financial
institutions?
The Bangko Sentral shall also have supervision over the operations of
and exercise regulatory powers over quasi-banks, trust entities and
other financial institutions which under special laws are subject to
Bangko Sentral supervision.
For the purposes of this Act, "quasi-banks" shall refer to entities

engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit
substitutes as defined in Section 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act”) for purposes of relending or
purchasing of receivables and other obligations.
• The Monetary Board may forbid a bank from doing business and
place it under receivership without prior notice and hearing it the MB
finds that a bank: (a) is unable to pay its liabilities as they become
due in the ordinary course of business; (b) has insufficient realizable
assets to meet liabilities; (c) cannot continue in business without
involving probable losses to its depositors and creditors; and (d) has
willfully violated a cease and desist order of the Monetary Board for
acts or transactions which are considered unsafe and unsound
banking practices and other acts or transactions constituting fraud or
dissipation of the assets of the institution. (Alfeo D. Vivas, vs. Monetary
Board and PDIC, G.R. No. 191424, August 7, 2013)
Policy Directions; Ratios, Ceilings and Limitations
SECTION 5. Policy Direction; Ratios, Ceilings and Limitations. — The

Bangko Sentral shall provide policy direction in the areas of money,
banking and credit.
The Monetary Board may prescribe ratios, ceilings, limitations, or

other forms of regulation on the different types of accounts and
practices of banks and quasi-banks which shall, to the extent
feasible, conform to internationally accepted standards, including
those of the Bank for International Settlements (BIS). The Monetary
Board may exempt particular categories of transactions from such
ratios, ceilings and limitations, but not limited to exceptional cases or
to enable a bank or quasi-bank under rehabilitation or during a
merger or consolidation to continue in business with safety to its
creditors, depositors and the general public
P a g e | 62

§ The BSP has the exclusive power and authority to issue the
national currency. BSP’s notes and coins are issued against, and in
amounts not exceeding, the assets of the BSP. All notes and coins
issued by the BSP are fully guaranteed by the government and are
considered legal tender for all private and public debts.
Who bears liability for banks and notes issued?
§ SECTION 51. Liability for Notes and Coins. — Notes and coins
issued by the Bangko Sentral shall be liabilities of the Bangko Sentral
and may be issued only against, and in amounts not exceeding, the
assets of the Bangko Sentral. Said notes and coins shall be a first and
paramount lien on all assets of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes and coins shall not be
considered as part of its currency issue and, accordingly, shall not
form part of the assets or liabilities of the Bangko Sentral.
Checks as Legal Tender
§ Section 60. Legal Character. – Checks representing demand

deposits do not have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option of the
creditor: Provided, however, That a check which has been cleared
and credited to the account of the creditor shall be equivalent to a
delivey to the creditor of cash in an amount equal to the amount
credited to his account.
Monetary Stabilization
SECTION 61. Guiding Principle. — The Monetary Board shall endeavor

to control any expansion or contraction in monetary aggregates
which is prejudicial to the attainment or maintenance of price
stability
The policy may mean two things:
1. Increasing money supply during recession to stimulate

spending; or
2. Restricting it during inflation to curtail spending.
P a g e | 63

Difference between an Ordinary Corporation and a Banking

Corporation
Point Ordinary Banking

Corporation Corporation
Classificatio May be stock or Must generally
n non-stock be a stock
Stocks May issue par Par value stocks
Issued value or no par only
value
Registration May be Requires
registered certificate of
without any authority from
certificate of Monetary Board
authority issued
by another govt
agency
Acquisition May May not
of Shares purchase/acquir purchase/aqcuir
e its own shares e its shares or
for a legitimate accept them as
corporate security for a
purpose, loan. Except
provided it has when authorized
unrestricted by the Monetary
retained Board
earnings
Number of 5-15 5-15. In case of
Directors merger or
consolidation,
number of
directors shall
not exceed 21
Declaration May declare Conditional,
of Dividends subject to
section 57 of GBL
(RA 8791)
P a g e | 64

Classification of Banks
Type of Power Authority

Bank
Commercia In addition to 1. Invest in the equities
l Bank the general of allied enterprises
powers as may be
incident to determined by the
corporations Monetary Board;
and those 2. purchase, hold and
provided in convey real estate
other laws, a as specified under
KB shall have Sections 51 and 52
the authority of R.A. No. 8791;
to exercise all 3. receive in custody
such powers funds, documents
as may be and valuable
necessary to objects;
carry on the 4. act as financial
business of agent and buy and
commercial sell, by order of and
banking, for the account of
such as their customers,
accepting shares, evidences of
drafts and indebtedness and all
issuing letters types of securities;
of credit; 5. make collections
discounting and payments for
and the account of
negotiating others and perform
promissory such other services
notes, drafts, for their customers
bills of as are not
exchange, incompatible with
and other banking business;
evidences of 6. upon prior approval
debt; of the Monetary
accepting or Board, act as
creating managing agent,
demand adviser, consultant
deposits; or administrator of
receiving investment
other types of management/advis
deposits and ory/-consultancy
deposit accounts;
substitutes; 7. out safety deposit
buying and boxes; and
selling foreign 8. engage in quasi-
exchange banking functions.
and gold or
silver bullion;
acquiring
marketable
bonds and
other debt
P a g e | 65

securities;
and
extending
credit,
subject to
such rules as
the Monetary
Board may
promulgate.
These rules
may include
the
determinatio
n of bonds
and other
debt
securities
eligible for
investment,
the maturities
and
aggregate
amount of
such
investment.
Type Power Authority

of
Bank
Thrift 1. grant loans, whether 1. open current or
Bank secured or checking accounts;
unsecured; 2. engage in trust,
2. invest in readily quasi-banking
marketable bonds functions and
and other debt money market
securities, operations;
commercial papers 3. act as collection
and accounts agent for
receivable, drafts, government entities,
bills of exchange, including but not
acceptances or limited to, the
notes arising out of Bureau of Internal
commercial Revenue (BIR), Social
transactions; Security System (SSS)
3. issue domestic letters and the Bureau of
of credit; Customs (BOC);
4. extend credit 4. act as official
facilities to private depository of
and government national agencies
employees; and of municipal,
5. extend credit city or provincial
against the security funds in the
of jewelry, precious municipality, city or
stones and articles province where the
of similar nature, TB is located;
P a g e | 66

subject to such rules 5. issue mortgage and

and regulations as chattel mortgage
the Monetary Board certificates, buy and
may prescribe; sell them for its own
6. accept savings and account or for the
time deposits; account of others, or
7. rediscount paper accept and receive
with the Land Bank them in payment or
of the Philippines, as amortization of its
(LBP), Development loan; and
Bank of the 6. to invest in the
Philippines (DBP), equity of allied
and other undertakings.
government-owned
or controlled RBs. In addition to
corporations; the powers provided
8. accept foreign in other laws, an RB
currency deposits as may perform any or
provided under R.A. all of the following
No. 6426, as services:
amended;
9. act as 1. extend loans and
correspondent for advances primarily
other financial for the purpose of
institutions; meeting the normal
10. purchase, hold and credit needs of
convey real estate farmers, fishermen or
as specified under farm families as well
Sections 51 and 52 as cooperatives,
of R.A. No. 8791; merchants, private
and and public
11. offer other banking employees;
services as provided 2. accept savings and
in Section 53 of R.A. time deposits;
No. 8791. 3. act as
correspondent of
other financial
institutions;
4. rediscount paper
with the LBP, DBP or
any other bank,
including its
branches and
agencies. Said
banks shall specify
the nature of paper
deemed
acceptable for
rediscount, as well
as the rediscount
rate to be charged
by any of these
banks;
5. Act as collection
agent; and
6. Offer other banking
services as provided
P a g e | 67

in Section 53 of R.A.
No. 8791.
Rural Banks
1. accept current or checking accounts: Provided, that such RB has net

assets of at least P5 million; accept savings and time deposits;
2. act as trustee over estates or properties of farmers and merchants;
3. act as official depository of municipal, city or provincial funds in the
municipality, city or province where it is located;
4. sell domestic drafts; and
5. invest in allied undertakings.
Cooperative Banks
A Coop Bank shall be organized primarily to provide financial and

credit services to cooperatives and may perform any or all of the
services offered by RBs.
Universal Banks
1. Licensed by the BSP to do both commercial and investment

bankingAuthority to exercise:
2.Powers authorized for a commercial bank
3.Powers of an investment house as provided in existing laws
4.Power to invest in non-allied enterprises
Difference between a Universal Bank (UB) and a Commercial Bank

(KB)
UB KB
Has additional power other No such power. Only such
than those authorized for powers as are necessary to
commercial banks, carry on the business of
including the power of an banking.
investment house and the
power to invest in non-allied
enterprises
May invest in equities of May only invest in equities
allied, whether financial or of allied enterprises,
non-financial and non- whether financial or non-
allied enterprises. financial
Highest capitalization Second highest minimum

requirement capital requirement (P2.4 B)
(P4.9 B)
P a g e | 68

Organization of Banks
§ Capabilities
Asessment of the following : ownership structure; directors and senior

management; operating plan, internal controls; and the projected
financial condition and capital base.
Type of Bank Capital Requirements

Universal Bank P4. 9 B
Commercial Bank P2.4 B
Thrift Bank P 1.0 B
• head office within MM P 500.0 M
• head office outside MM P250.0 M
(in Cebu and Davao)
• head office outside MM
(other areas)
Rural Bank P 100.0 M
• Within MM P 50.0 M
• Cities of Cebu and P 10.0 M
Davao P 5.0 M
• 1st, 2nd, 3rd class cities P 5.0 M
and 1st class municipalities
• 4th, 5th and 6th class
cities and in 2nd, 3rd, and
4th municipalities
• 5th and 6th class
municipalities
Type of Bank Capital Requirement
Cooperative Banks P10.0 M
Islamic Bank P 1.0 B
Rules:
1. Foreign individuals and non-bank corporations may own up to

40% of the voting stocks of a domestic bank. Provided, that
aggregate foreign voting stocks owned by them shall not exceed
40% of the outstanding voting stock.
2. A Filipino individual and a domestic non-bank corporation may
each own up to 40% of the voting stock of a domestic bank. No rule
on aggregate ceiling.
§ Foreign stockholdings (Grandfather Rule)
- In case of an individual, percentage of foreign owned voting stocks

shall be determined by citizenship of the individual stockholders in
that bank.
- In case of corporations, citizenship of corporation shall follow

citizenship of the controlling Stockholders, irrespective of the place of
P a g e | 69

incorporation. Controlling stockholders mean those who hold more

than 50% of the voting stock.
§ Commercial Banks – 60% owned by Filipino citizens

§ Thrift Banks – 40% at least owned by Filipino citizens
§ Rural Banks – wholly owned by Filipinos
§ Family Groups or related interests (sections 12 and 13, GBL)
Stockholdings of individuals related to each other within the 4th

degree of consanguinity or affinity, legitimate or common law shall
be considered family groups or related interests. Must be fully
disclosed in all transactions.
2 or more corporations owned or controlled by the same family

group or group of persons shall be considered related interests. Must
be fully disclosed.
§ There is no limit on the number of shares that can be owned by the

same family or related interest without prejudice to the 40% restriction
on nationality.
Fit and Proper Rule
Monetary Board to issue rules and regulations to determine

qualifications and disqualifications of bank directors or officers and
disqualify those unfit.
Factors to consider – integrity, experience, education, training and

competence.
Rules on disqualification
What happens when borrower submits false statements to bank?
§ Bank may terminate the loan
§ Demand immediate repayment or liquidation of the obligation
Article 1198, Civil Code of the Philippines (Debtor loses the right to
make use of the period)
The bank invests the money that it holds in trust of its depositors. For
this reason, we have held that the business of a bank is one affected
with public interest, for which reason the bank should guard against
loss due to negligence or bad faith. In approving the loan of an
applicant, the bank concerns itself with proper information regarding
its debtors. The petitioner, as a bank and a financial institution
engaged in the grant of loans, is expected to ascertain and verify
the identities of the persons it transacts business with.
P a g e | 70

UNITED COCONUT PLANTERS BANK, petitioner, vs. TEOFILO C. RAMOS,

respondent. (G.R. No. 147800. November 11, 2003)
The business of a bank is one affected with public interest, for which
reason the bank should guard against loss due to negligence or bad
faith. In approving the loan of an applicant, the bank concerns itself
with proper [information] regarding its debtors." Any investigation
previously conducted on the property offered by petitioners as
collateral did not preclude PNB from considering new information on
the same property as security for a subsequent loan.
[G.R. No. 161319. January 23, 2007.] SPS. EDGAR AND DINAH
OMENGAN, petitioners, vs. PHILIPPINE NATIONAL BANK, HENRY M.
MONTALVO AND MANUEL S. ACIERTO, * respondents.
Rule on setting interest rates
While the Court recognizes the right of the parties to enter into
contracts and who are expected to comply with their terms and
obligations, this rule is not absolute. Stipulated interest rates are illegal
if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to
determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous
and unconscionable in one case, may be just in another. In a
number of cases, this Court equitably reduced the interest rate
agreed upon by the parties for being iniquitous, unconscionable,
and/or exorbitant.
TRADE & INVESTMENT DEVELOPMENT CORPORATION OF THE

PHILIPPINES (Formerly Philippine Export & Foreign Loan Guarantee
Corporation, petitioner, vs. ROBLETT INDUSTRIAL CONSTRUCTION
CORPORATION, ROBERTO G. ABIERA and LETICIA ABIERA, and
PARAMOUNT INSURANCE CORPORATION, respondents. (G.R. No.
139290. May 19, 2006.)
Escalation clauses are not void per se. However, one "which grants
the creditor an unbridled right to adjust the interest independently
and upwardly, completely depriving the debtor of the right to assent
to an important modification in the agreement" is void. Clauses of
that nature violate the principle of mutuality of contracts. Article
1308 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the
will of one of them.
For this reason, we have consistently held that a valid escalation

clause provides:
P a g e | 71

1. That the rate of interest will only be increased if the applicable

maximum rate of interest is increased by law or by the Monetary
Board; and
2. That the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary
Board (de-escalation clause).
EQUITABLE PCI BANK, AIMEE YU and BEJAN LIONEL APAS, petitioners,

vs. NG SHEUNG NGOR ** doing business under the name and style
"KEN MARKETING," KEN APPLIANCE DIVISION, INC. and BENJAMIN E.
GO, respondents. (G.R. No. 171545. December 19, 2007.)
Restrictions on Bank Exposure to Directors, Officers, Stockholders and

their Related Interests (DOSRI)
§ SECTION 36. Restriction on Bank Exposure to Directors, Officers,

Stockholders and Their Related Interests. — No director or officer of
any bank shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall he
become a guarantor, indorser or surety for loans from such bank to
others, or in any manner be an obligor or incur any contractual
liability to the bank except with the written approval of the majority
of all the directors of the bank, excluding the director concerned:
Provided, That such written approval shall not be required for loans,
other credit accommodations and advances granted to officers
under a fringe benefit plan approved by the Bangko Sentral. The
required approval shall be entered upon the records of the bank
and a copy of such entry shall be transmitted forthwith to the
appropriate supervising and examining department of the Bangko
Sentral.
Dealings of a bank with any of its directors, officers or stockholders

and their related interests shall be upon terms not less favorable to
the bank than those offered to others.
After due notice to the board of directors of the bank, the office of
any bank director or officer who violates the provisions of this Section
may be declared vacant and the director or officer shall be subject
to the penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit

accommodations and guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers, stockholders and their
related interests, as well as investments of such bank in enterprises
owned or controlled by said directors, officers, stockholders and their
related interests. However, the outstanding loans, credit
accommodations and guarantees which a bank may extend to
each of its stockholders, directors, or officers and their related
interests, shall be limited to an amount equivalent to their respective
unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit
P a g e | 72

accommodations and guarantees secured by assets considered as

non-risk by the Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit accommodations and advances
to officers in the form of fringe benefits granted in accordance with
rules as may be prescribed by the Monetary Board shall not be
subject to the individual limit.
Banks were not created for the benefit of their directors and officers;
they cannot use the assets of the bank for their own benefit, except
as may be permitted by law. Congress has thus deemed it essential
to impose restrictions on borrowings by bank directors and officers in
order to protect the public, especially the depositors. Hence, when
the law prohibits directors and officers of banking institutions from
becoming in any manner an obligor of the bank (unless with the
approval of the board), the terms of the prohibition shall be the
standards to be applied to directors' transactions such as those
involved in the present case. (JOSE C. GO, petitioner, vs. BANGKO
SENTRAL NG PILIPINAS, respondent. (G.R. No. 178429. October 23,
2009.)
Prohibited Transactions of Banks
1. Prohibited to act as insurer

2. Conducting business in an unsafe or unsound manner
3. Prohibition on Dividend Declaration
4. Unauthorized advertisement or business representation
Prohibited acts of borrower
§ Fraudulently over valuing any property for credit facility

§ Furnishing false or make misrepresentations
§ Attempt to defraud a bank
§ Offering any director, officer or employee any gift, fee or
commission
Conservatorship in Banks
FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of

the Philippines) and MERCURIO RIVERA, petitioners, vs. COURT OF
APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO DEMETRIA,
and JOSE JANOLO, respondents. (G.R. No. 115849. January 24, 1996.)
Hence, the conservator merely takes the place of a bank's board of

directors. What the said board cannot do — such as repudiating a
contract validly entered into under the doctrine of implied authority
— the conservator cannot do either. Ineluctably, his power is not
unilateral and he cannot simply repudiate valid obligations of the
Bank. His authority would be only to bring court actions to assail such
contracts — as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by
the Constitution. Neither by common sense. To rule otherwise would
P a g e | 73

be to enable a failing bank to become solvent, at the expense of

third parties, by simply getting the conservator to unilaterally revoke
all previous dealings which had one way or another come to be
considered unfavorable to the Bank, yielding nothing to perfected
contractual rights nor vested interests of the third parties who had
dealt with the Bank.
WHEN BANK IS UNDER RECEIVERSHIP / LIQUIDATION
Upon report of the head of the supervising or examining department,

the Monetary Board finds that a bank or quasi-bank:
1. Has notified the BSP or publicly announced a closure, or has

been dormant for at least 60 days or in any manner has
suspended the payment of its deposit/deposit substitute
liabilities, or is unable to pay their liabilities as they become due
in the ordinary course of business. PROVIDED, 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;
3. Cannot continue its business without involving probable losses

to its depositors or creditors
4. Has wilfully violated a cease and desist order under section 37
of the act that has become final, involving acts or transactions
which amount to fraud or dissipation of the assets if the
institution, in which case the MB may summarily and without
need of prior hearing forbid the institution from doing business
in the Philippines and designate the PDIC as receiver and
direct the PDIC to proceed with liquidation of the closed bank
pursuant to RA 3591. The MB shall notify in writing, through the
receiver, the board of directors of the closed bank of its
decision.
ACTIONS BY THE MONETARY BOARD
The actions of the Monetary Board taken under this section or under
section 29 shall be final and executory, and may not be restrained or
set aside by the court except on petition for certiorari on the ground
that the action taken was in excess of jurisdiction or with grave abuse
of discretion as to amount to lack or excess of jurisdiction. The
petition for certiorari may only be filed by the stockholders of record
representing the majority of the capital stock within 10 days from
receipt by the board of directors of the institution of the order
directing receivership, liquidation or conservatorship. The designation
of a conservator under section 29 of this Act or the appointment of a
receiver under this section shall be vested exclusively with the
P a g e | 74

Monetary Board. Furthermore, the designation of a conservator is not

a precondition to the designation of a receiver.
§ The receiver or liquidator meanwhile acts not only for the benefit of
the bank, but for its creditors as well.
§ In Provident Savings Bank vs. Court of Appeals, we further stated

that: When a bank is prohibited from continuing to do business by
the Central Bank and a receiver is appointed for such bank, that
bank would not be able to do new business, i.e., to grant new loans
or to accept new deposits. However, the receiver of the bank is in
fact obliged to collect debts owing to the bank, which debts form
part of the assets of the bank. The receiver must assemble the assets
and pay the obligation of the bank under receivership and take
steps to prevent dissipation of such assets. Accordingly, the receiver
of the bank is obliged to collect pre-existing debts due to the bank,
and in connection therewith, to foreclose mortgages securing such
debts.
SPS. CESAR A. LARROBIS, JR. and VIRGINIA S. LARROBIS, petitioners,

vs. PHILIPPINE VETERANS BANK, respondent. (G.R. No. 135706.
October 1, 2004.)
§ The appointment of a receiver operates to suspend the authority of

the bank and of its directors and officers over its property and
effects, such authority being reposed in the receiver, and in this
respect, the receivership is equivalent to an injunction to restrain the
bank officers from intermeddling with the property of the bank in any
way. (65 Am. Jur. 2d Receivers, §146 [1963]. In a nutshell, the
insolvency of a bank and the consequent appointment of a receiver
restrict the bank's capacity to act, especially in relation to its
property.
MIGUELA R. VILLANUEVA, RICHARD R. VILLANUEVA, and MERCEDITA

VILLANUEVA-TIRADOS, petitioners, vs. COURT OF APPEALS, CENTRAL
BANK OF THE PHILIPPINES, ILDEFONSO C. ONG, and PHILIPPINE
VETERANS BANK, respondents. (G.R. No. 114870. May 26, 1995.)
§ The Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines
and designate the Philippine Deposit Insurance Corporation as
receiver of the banking institution.
§ For a quasi-bank, any person of recognized competence in banking

or finance may be designed as receiver. (Section 30, NCBA)
P a g e | 75

§ "The designation of a conservator under Section 29 of this Act or the

appointment of a receiver under this section shall be vested
exclusively with the Monetary Board. Furthermore, the designation of
a conservator is not a precondition to the designation of a receiver."
*Congress itself has recognized that a bank receiver only has powers
of administration. Section 30 of the New Central Bank Act expressly
provides that "[t]he receiver shall immediately gather and take
charge of all the assets and liabilities of the institution, administer the
same for the benefit of its creditors, and exercise the general powers
of a receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act
that will involve the transfer or disposition of any asset of the
institution . . .“
ABACUS REAL ESTATE DEVELOPMENT CENTER, INC., petitioner, vs. THE

MANILA BANKING CORPORATION, respondent. (G.R. No. 162270.
April 6, 2005.)
§ The receiver shall determine as soon as possible, but not later

than ninety (90) days from take over, 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: Provided, that any determination
for the resumption of business of the institution shall be subject to prior
approval of the Monetary Board. (section 30, NCBA)
DEPOSIT INSURANCE (RA 3591)
ROLE OF THE PDIC
1. Insure the deposits of all banks which are entitled to the benefits
of insurance and which shall have all the powers granted by law
2. It shall serve as a basic policy, promote and safeguard the

interests of the depositing public by way of providing permanent
and continuing insurance coverage on all insured deposits
§ The Philippine Deposit Insurance Corporation (PDIC) was created by

law and, as such, is governed primarily by the provisions of the
special law creating it. The liability of the PDIC for insured deposits
therefore is statutory and, under Republic Act No. 3591, as amended,
such liability rests upon the existence of deposits with the insured
bank, not on the negotiability or non-negotiability of the certificates
evidencing these deposits.
§ The authority for this conclusion finds support in decisions by

American state courts applying their respective bank guaranty laws.
The fact that the certificates state that the certificates are insured by
PDIC does not ipso facto make the latter liable for the same should
the contingency insured against arise. As stated earlier, the deposit
liability of PDIC is determined by the provisions of R.A. No. 3591, and
P a g e | 76

statements in the certificates that the same are insured by PDIC are
not binding upon the latter.
PHILIPPINE DEPOSIT INSURANCE CORPORATION, petitioner, vs. COURT

OF APPEALS, ROSA AQUERO, GERARD YU, ERIC YU, MINA YU,
ELIZABETH NGKAION, MERLY CUESCANO, LETICIA TAN, FELY RUMBANA,
LORNA ACUB, represented by their Attorney-in-Fact, JOHN FRANCIS
COTAOCO, respondents. [G.R. No. 118917. December 22, 1997.]
§ In order that a claim for deposit insurance with the PDIC may
prosper, the law requires that a corresponding deposit be placed in
the insured bank.
§ Personal Filing of claims is required by the PDIC
§ Maximum Deposit Insurance for each depositor is P500,000.00,

regardless of the number of accounts the depositor has in the closed
bank.
INSURED DEPOSIT
§ The term ‘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 date of closure,
but not to exceed P500,000.00.
§ A joint account shall be insured separately from any individually-

owned deposit account.
§ R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for
the following accounts or transactions:
1.Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and
unsound banking practices;
4. Deposits that are determined to be proceeds of an unlawful
lactivity as defined under the Anti-Money Laundering Law.
SPLITTING OF DEPOSITS
Deposits in different banking institutions are insured separately.

However, if a bank has one or more branches, the main office and
all branch offices are considered as one bank. Thus, if you have
deposits at the main office and at one or more branch offices of the
same bank, the deposits are added together when determining
deposit insurance coverage, the total of which shall not exceed
P500,000.
P a g e | 77

ANTI- MONEY LAUNDERING ACT (RA 9160)
Money Laundering is a crime whereby the proceeds of an unlawful

activity as defined in the Anti- Money Laundering Act are transacted
or attempted to be transacted to make them appear to have
originated from legitimate sources.
§ Unlawful Activity is the offense which generates dirty money. It is

commonly called the predicate crime. It refers to any act or omission
or series or combination thereof involving or having direct relation to
the following:
Predicate Crimes/Unlawful Activity
§ Kidnapping for ransom

§ Drug trafficking and related offenses
§ Graft and corrupt practices
§ Plunder
§ Robbery and Extortion
§ Jueteng and Masiao
§ Piracy
§ Qualified theft
§ Swindling
§ Smuggling
§ Violations under the Electronic Commerce Act of 2000
§ Hijacking; destructive arson; and murder, including those
perpetrated by terrorists against non-combatant persons and similar
targets
§ Fraudulent practices and other violations under the Securities
Regulation Code of 2000
§ Felonies or offenses of a similar nature that are punishable under
the penal laws of other countries.
Money Laundering Offenses and Penalties
§ Knowingly transacting or attempting to transact any monetary

instrument/property which represents, involves or relates to the
proceeds of an unlawful activity.
§ Penalty is 7 to 14 years imprisonment and a fine of not less than

P3M but not more than twice the value of the monetary
instrument/property.
§ Knowingly performing or failing to perform an act in relation to

any monetary instrument/property involving the proceeds of any
unlawful activity as a result of which he facilitated the offense of
money laundering. Penalty is 4 to 7 years imprisonment and a fine of
not less than P1.5M but not more than P3M.
P a g e | 78

§ Knowingly failing to disclose and file with the AMLC any monetary
instrument/property required to be disclosed and filed. Penalty is 6
months to 4 years imprisonment or a fine of not less than P100,000 but
not more than P500,000, or both.
Covered Institutions are those mandated by the AMLA to submit

covered and suspicious transaction reports to the AMLC. These are:
1. Banks and all other entities, including their subsidiaries and

affiliates, supervised and regulated by the Bangko Sentral ng
Pilipinas
2. Insurance companies and all other institutions supervised or
regulated by the Insurance Commission
3. Securities dealers, pre-need companies, foreign exchange
corporations and other entities supervised or regulated by the
Securities and Exchange Commission
Covered transactions are single transactions in cash or other

equivalent monetary instrument involving a total amount in excess of
Five Hundred Thousand (P500,000) Pesos within one (1) banking day
Suspicious transactions are transactions with covered institutions,

regardless of the amounts involved, where any of the following
circumstances exists:
1. there is no underlying legal/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. the transaction is structured to avoid being the subject of
reporting requirements under the AMLA;
5. there is a deviation from the client’s profile/past transactions;
6. the transaction is related to an unlawful activity/offense under the
AMLA; and
7. transactions similar or analogous to the above
Provisional Remedies
1. Freezing of Monetary Instruments or Property under Section 10

2. Authority to inquire into Bank Deposits under Section 11
§ The Court of Appeals, upon application ex parte (without notice

to the other party) 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, may issue a freeze order
which shall be effective immediately. The freeze order shall be for a
period of 20 days unless extended by the court
§ Freezing of Monetary Instruments or Property under Section 10 –

Involves physical seizure of the assets
P a g e | 79

§ Authority to inquire into Bank Deposits under Section 11 – does not

involve physical seizure of the assets
Authority to inquire into bank deposits
§ Not a search warrant

§ Right to notice and right to be heard
Related Web of Accounts
§ Provisional remedy on freeze of accounts covers as well related

web of accounts.
§ Related web of accounts is defined as those accounts, the funds
and sources of which originated from and/or materially linked to the
monetary instrument (s) or properties subject of the freeze order.
Mutual Assistance among States
1. Request for assistance from a foreign state, based on the

principles of mutuality and reciprocity.
2. AMLC may also obtain assistance from a foreign state
Prohibitions on Anti-Money Laundering Law
1. Shall not be used for political persecution or harassment;

2. Shall not be used as an instrument to hamper competition in
trade and commerce;
3. No case for money laundering may be filed to the prejudice of a
candidate for an electoral office during an election period
§ Restitution for any aggrieved party shall be governed by the

provisions of the Civil Code.
§ No person may be prosecuted under the penal provisions of the

AMLA for acts committed prior to the enactment of the law on 17
October 2001.
§ When there is a suspicious transaction report or a covered

transaction report deemed suspicious after investigation by the
AMLC and the court has, in a petition filed for the purpose, ordered
the seizure of any monetary instrument or propert, in whole or in part,
directly or indirectly, related to said report, the Revised Rules on
Court on forfeiture shall apply.
The primary objective of a freeze order is to temporarily preserve

monetary instruments or property that are in any way related to an
unlawful activity or money laundering, by preventing the owner from
utilizing them during the duration of the freeze order. The effectivity
of the freeze order was limited to a period not exceeding six months,
which may be extended by the CA should it become completely
necessary. Nonetheless, when the Republic has not offered any
explanation why it took six years before a civil forfeiture case was
P a g e | 80

filed in court, it can only be concluded that the continued extension

of the freeze order beyond the six-month period violated the party’s
right to due process. (Ret. Lt. Gen. Jacinto Ligot, et. al. vs. Republic of
the Philippines, G.R. No. 176944, March 6, 2013)
SECRECY OF BANK DEPOSITS AND FOREIGN CURRENCY DEPOSITS LAW
On the one hand, Republic Act No. 1405 provides for four (4)
exceptions when records of deposits may be disclosed. These are
under any of the following instances: a) upon written permission of
the depositor, (b) in cases of impeachment, (c) upon order of a
competent court in the case of bribery or dereliction of duty of
public officials or, (d) when the money deposited or invested is the
subject matter of the litigation, and e) in cases of violation of the
Anti-Money Laundering Act (AMLA), the Anti-Money Laundering
Council (AMLC) may inquire into a bank account upon order of any
competent court. On the other hand, the lone exception to the non-
disclosure of foreign currency deposits, under Republic Act No. 6426,
is disclosure upon the written permission of the depositor.
These two laws both support the confidentiality of bank deposits.

There is no conflict between them. Republic Act No. 1405 was
enacted for the purpose of giving encouragement to the people to
deposit their money in banking institutions and to discourage private
hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the
country. It covers all bank deposits in the Philippines and no
distinction was made between domestic and foreign deposits. Thus,
Republic Act No. 1405 is considered a law of general application. On
the other hand, Republic Act No. 6426 was intended to encourage
deposits from foreign lenders and investors. It is a special law
designed especially for foreign currency deposits in the Philippines. A
general law does not nullify a specific or special law. Generalia
specialibus non derogant. Therefore, it is beyond cavil that Republic
Act No. 6426 applies in this case.
P a g e | 81

INTELLECTUAL PROPERTY LAW
§ Intellectual property rights" have furthermore been defined under

Section 4 of the Code to consist of: a) Copyright and Related Rights;
b) Trademarks and Service Marks; c) Geographic Indications; d)
Industrial Designs; e) Patents; f) Layout-Designs (Topographies) of
Integrated Circuits; and g) Protection of Undisclosed Information.
(Coca-Cola Bottlers, Phils., Inc. vs. Quintin J. Gomez, et al., G.R. No.
154491, November 14, 2008)
Patents Trade Marks Copyrights

Grant issued A tool used that Copyright is
by the differentiates the legal
government goods and protection
through the services from extended to
Intellectual each other. It is the owner of
Property a very important the rights in an
Office of the marketing tool original work.
Philippines (IP that makes the
Philippines). It public identify “Original
is an exclusive goods and work” refers to
right granted services. A every
for a product, trademark can production in
process or an be one word, a the literary,
improvement group of words, scientific and
of a product sign, symbol, artistic
or process logo, or a domain.
which is new, combination of Among the
inventive and any of these. literary and
useful. This Generally, a artistic works
exclusive right trademark refers enumerated
gives the to both in the IP Code
inventor the trademark and includes
right to service mark, books and
exclude although a other writings,
others from service mark is musical works,
making, using, used to identify films, paintings
or selling the those marks used and other
product of his for services only. works, and
invention computer
during the life programs.
of the patent.
P a g e | 82

Patents Trade Marks Copyrights

A patent has a In the The term of
term of Philippines, a protection of
protection of trademark copyright for
twenty (20) can be original and
years providing protected derivative
an inventor through works is the
significant registration. life of the
commercial Registration author plus
gain. In return, gives the fifty (50)
the patent trademark years after
owner must owner the his death.
share the full exclusive The Code
description of right to use specifies the
the invention. the mark terms of
This information and to protection
is made prevent for the
available to others from different
the public in using the types of
the form of the same or works.
Intellectual similar marks
Property on identical
Official or related
Gazette and goods and
can be utilized services.
as basis for
future research The
and will in turn trademark
promote protection
innovation and granted by
development. IP Philippines
protects your
mark only in
the
Philippines. If
you want
your mark
protected
outside the
country, you
will need to
file
applications
in the
countries
where you
want your
mark
registered.
P a g e | 83

Patentable Inventions (Sec.21)
§ A Technical Solution to a Problem In any field of human activity;

§ It must be NEW (“novelty’)
§ It must involve an INVENTIVE STEP
§ It must be INDUSTRIALLY APPLICABLE
Statutory Classes of Invention
§ A useful machine
§ A product or composition
§ A method or process, or
§ An improvement of any of the foregoing
§ Microorganism
§ Non-biological & microbiological process
Requirements for Patentability
1. NOVELTY
2. INVENTIVE STEP
3. INDUSTRIAL APPLICABILITY
Novelty. - An invention shall not be considered new if it forms part of

a prior art. (Sec. 9, R.A. No. 165a)
§ The element of novelty is an essential requisite of the patentability

of an invention or discovery. If a device or process has been known
or used by others prior to its invention or discovery by the applicant,
an application for a patent therefor should be denied; and if the
application has been granted, the court, in a judicial proceeding in
which the validity of the patent is drawn in question, will hold it void
and ineffective. It has been repeatedly held that an invention must
possess the essential elements of novelty, originality and
precedence, and for the patentee to be entitled to the protection
the invention must be new to the world. (Angelita Manzano vs. Court
of Appeals, et al., G.R. No. 113388, September 5, 1997)
Prior Art. - 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; and
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
P a g e | 84

inventor identified in both applications are not one and

the same. (Sec. 9, R.A. No. 165a)
Novelty and utility are likewise questions of fact. The validity of

patent is decided on the basis of factual inquiries. Whether
evidence presented comes within the scope of prior art is a factual
issue to be resolved by the Patent Office. There is question of fact
when the doubt or difference arises as to the truth or falsehood of
alleged facts or when the query necessarily invites calibration of the
whole evidence considering mainly the credibility of witnesses,
existence and relevance of specific surrounding circumstances, their
relation to each other and to the whole and the probabilities of the
situation. (Angelita Manzano vs. Court of Appeals, et al., G.R. No.
113388, September 5, 1997)
"Priority date" means the date of filing of the foreign application for
the same invention referred to in Section 31 of this Act. (n)
Non-Patentable Inventions
Non-Patentable Inventions. - The following shall be excluded from

patent protection:
22.1. Discoveries, scientific theories and mathematical methods;
22.2. Schemes, rules and methods of performing mental acts, playing

games or doing business, and programs for computers;
22.3. 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;
22.4. 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.
Provisions under this subsection shall not preclude Congress to

consider the enactment of a law providing sui generis protection of
plant varieties and animal breeds and a system of community
intellectual rights protection:
22.5. Aesthetic creations; and
22.6. Anything which is contrary to public order or morality. (Sec. 8,

R.A. No. 165a)
P a g e | 85

OWNERSHIP OF PATENT
§ Section 29. 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. (3rd sentence, Sec. 10, R.A. No. 165a.)
§ Section 30. Inventions Created Pursuant to a Commission. - 30.1.

The person who commissions the work shall own the patent, unless
otherwise provided in the contract.
xxx
30.2. In case the employee made the invention in the course of his
employment contract, the patent shall belong to:
(a) 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.
(b) 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. (n)
§ Section 31. 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. 15, R.A. No. 165a)
GROUNDS FOR CANCELLATION
§ Section 61. Cancellation of Patents.
61.1. 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;
P a g e | 86

(c) That the patent is contrary to public order or morality.
61.2. Where the grounds for cancellation relate to some of the claims
or parts of the claim, cancellation may be effected to such extent
only. (Secs. 28 and 29, R.A. No. 165a)
Section 65. Cancellation of the Patent. - 65.1. If the Committee finds

that a case for cancellation has been proved, it shall order the
patent or any specified claim or claims thereof cancelled.
65.2. If the Committee finds that, taking into consideration the

amendment made by the patentee during the cancellation
proceedings, the patent and the invention to which it relates meet
the requirement of this Act, it may decide to maintain the patent as
amended: Provided, That the fee for printing of a new patent is paid
within the time limit prescribed in the Regulations.
65.3. If the fee for the printing of a new patent is not paid in due time,
the patent should be revoked.
65.4. If the patent is amended under Subsection
65.5. Thereof, the Bureau shall, at the same time as it publishes the
mention of the cancellation decision, publish the abstract,
representative claims and drawings indicating clearly what the
amendments consist of. (n)
Section 66. 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. 32, R.A. No. 165a)
Section 79. Limitation of Action for Damages. - No damages can be

recovered for acts of infringement committed more than four (4)
years before the institution of the action for infringement. (Sec. 43,
R.A. No. 165)
Section 81. 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 hereof. (Sec. 45, R.A. No. 165)
Section 82. 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. 46, R.A. No. 165a)
P a g e | 87

Patent Infringement
§ Ordinarily understood to mean as the unauthorized replication

or use of a patented invention or process. Technically, however,
patent infringement is committed either literally or by equivalents.
§ Literal infringement exists when every limitation recited in a

patent claim is found in the infringing device (or process).
Infringement by equivalents, on the other hand, happens when a
device (or process) 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.
Doctrine of Equivalents
§ Legal Basis:
Section 75.2. For the purpose of determining the extent of protection

conferred by the patent, due account shall be taken of elements
which are equivalent to the elements expressed in the claims, so that
a claim shall be considered to cover not only all the elements as
expressed therein, but also equivalents. (n)
(a)n 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." The reason for the doctrine of equivalents is that to
permit the imitation of a patented invention which does not copy
any literal detail would be to convert the protection of the patent
grant into a hollow and useless thing. Such imitation would leave
room for - indeed encourage - the unscrupulous copyist to make
unimportant and insubstantial changes and substitutions in the
patent which, though adding nothing, would be enough to take the
copied matter outside the claim, and hence outside the reach of
the law. Pascual Godines v. Court of Appeals, et al. (G.R. No. 97343),
September 13, 1993 Smith Kline Beckman Corp. v. Court of Appeals,
et al. (G.R. No. 126627), August 14, 2003)
TRADEMARKS
§ A trademark can be one word, a group of words, sign, symbol,

logo, or a combination of any of these. Generally, a trademark refers
to both trademark and service mark, although a service mark is used
to identify those marks used for services only.
§ Section 121.1. "Mark" means 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. 38, R.A. No. 166a)
P a g e | 88

§ Section 121.2. "Collective mark" means 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. 40, R.A. No. 166a)
§ Section 122. How Marks are Acquired. - The rights in a mark

shall be acquired through registration made validly in accordance
with the provisions of this law. (Sec. 2-A, R A. No. 166a)
Registration gives the trademark owner the exclusive right to use the
mark and to prevent others from using the same or similar marks on
identical or related goods and services.
The right to a trademark is granted to the one who first files a

trademark application with the IP Philippines. Before applying for
trademark registration, it would help if you conduct a search in the
trademarks database to determine if there are identical or similar
marks that would prevent the registration of your mark. This is to
prevent future conflicts with marks that are already registered or with
earlier filing dates.
What cannot be registered
DESCRIPTIVE
These are marks that describe the characteristics of the goods or

services.
MISLEADING
Marks that are likely to deceive or have the tendency to misinform

the consumers about the actual characteristics of the goods or
services.
GENERIC and customary to trade
Generic marks are names of products they seek to identify.
CONSISTS OF NAMES, PORTRAITS OF PERSONS, MAPS, FLAGS AND

OTHER POLITICAL SYMBOLS
Marks that contain names or portraits of living individuals may be

rejected unless the individual gives written consent
P a g e | 89

SHAPE AND COLOR
Shapes must be distinctive from the usual shape of goods or

containers of the goods, in order to be considered a trademark.
§ MARKS THAT MAY CAUSE CONFUSION
Your mark cannot be registered if it is identical with or similar to a

registered mark or a mark with earlier filing date for goods and
services that are exactly the same or for goods and services that are
related. Consumers should not confuse your mark with the marks of
others.
Identical with, or confusingly similar to WELL-KNOWN MARKS
Marks that are identical with or similar to marks that are known
internationally and, in the Philippines, will be refused registration
DOMINANCY AND HOLISTIC TESTS;
§ In determining similarity and likelihood of confusion, jurisprudence

has developed two tests, the dominancy test and the holistic test.
Tests are applied in cases involving INFRINGEMENT
The totality or holistic test only relies on visual comparison between

two trademarks whereas the dominancy test relies not only on the
visual but also on the aural and connotative comparisons and
overall impressions between the two trademarks
Section 155 of R.A. No. 8293 states:
Remedies; Infringement. — Any person who shall, without the

consent of the owner of the registered mark:
• 155.1. 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; or
• 155.2. 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, shall be liable in a civil action for
infringement by the registrant for the remedies hereinafter set forth:
P a g e | 90

Provided, That the infringement takes place at the moment any of

the acts stated in Subsection 155.1 or this subsection are committed
regardless of whether there is actual sale of goods or services using
the infringing material.
The Elements of infringement under R.A. No. 8293 are as follows:
1. The trademark being infringed is registered in the Intellectual Property

Office; however, in infringement of trade name, the same need not
be registered;
2. The trademark or trade name is reproduced, counterfeited, copied,

or colorably imitated by the infringer;
3. The infringing mark or trade name is used in connection with the sale,
offering for sale, or advertising of any goods, business or services; or
the infringing mark or trade name is applied to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be
used upon or in connection with such goods, business or services;
4. The use or application of the infringing mark or trade name is likely to

cause confusion or mistake or to deceive purchasers or others as to
the goods or services themselves or as to the source or origin of such
goods or services or the identity of such business; and
5. It is without the consent of the trademark or trade name owner or the

assignee thereof.
The element of likelihood of confusion is the gravamen of trademark

infringement. There are two types of confusion in trademark
infringement: confusion of goods and confusion of business. SOCIETE
DES PRODUITS NESTLE, S.A., vs. MARTIN T. DY, JR. G.R. No. 172276,
August 8, 2010.
The dominancy test focuses on the similarity of the main, prevalent or

essential features of the competing trademarks that might cause
confusion. Infringement takes place when the competing trademark
contains the essential features of another. Imitation or an effort to
imitate is unnecessary. The question is whether the use of the marks is
likely to cause confusion or deceive purchasers.
The holistic test considers the entirety of the marks, including labels
and packaging, in determining confusing similarity. The focus is not
only on the predominant words but also on the other features
appearing on the labels.
In cases involving trademark infringement, no set of rules can be

deduced. Each case must be decided on its own merits.
Jurisprudential precedents must be studied in the light of the facts of
each particular case.
P a g e | 91

Withal, the protection of trademarks as intellectual property is

intended not only to preserve the goodwill and reputation of the
business established on the goods bearing the mark through actual
use over a period of time, but also to safeguard the public as
consumers against confusion on these goods. While respondent’s
shoes contain some dissimilarities with petitioner’s shoes, this Court
cannot close its eye to the fact that for all intents and purpose,
respondent had deliberately attempted to copy petitioner’s mark
and overall design and features of the shoes. Let it be remembered,
that defendants in cases of infringement do not normally copy but
only make colorable changes. The most successful form of copying is
to employ enough points of similarity to confuse the public, with
enough points of difference to confuse the courts. SKECHERS USA,
INC., vs. INTER PACIFIC INDUSTRIAL TRADING CORPORATION, GR
no.164321 (March 2011)
Jurisprudence also formulated the following “true test” of unfair

competition: whether the acts of the defendant have the intent of
deceiving or are calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of 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, actual or probable must be shown before the right to
recover can exist. SUPERIOR COMMERCIAL ENTERPRISES INC., vs.
KUNNAN ENTERPRISES LTD. AND SPORTS CONCEPT & DISTRIBUTOR, INC.,
G.R.No.169974, April 2010
Unfair competition has been defined as the passing off (or palming
off) or attempting to pass off upon the public of the goods or
business of one person as the goods or business of another with the
end and probable effect of deceiving the public. The essential
elements of unfair competition are (1) confusing similarity in the
general appearance of the goods; and (2) intent to deceive the
public and defraud a competitor. SUPERIOR COMMERCIAL
ENTERPRISES INC., vs. KUNNAN ENTERPRISES LTD. AND SPORTS
CONCEPT & DISTRIBUTOR, INC., G.R.No.169974, April 2010
In McDonald’s Corporation v. L.C. Big Mak Burger, Inc., we held that

there can be trademark infringement without unfair competition such
as when the infringer discloses on the labels containing the mark that
he manufactures the goods, thus preventing the public from being
deceived that the goods originate from the trademark owner.
SUPERIOR COMMERCIAL ENTERPRISES INC., vs. KUNNAN ENTERPRISES
LTD. AND SPORTS CONCEPT & DISTRIBUTOR, INC., G.R.No.169974, April
2010
P a g e | 92

Hoarding is not Unfair Competition and does not fall within IP Code
§ Given the IP Code's specific focus, a first test that should be made
when a question arises on whether a matter is covered by the Code
is to ask if it refers to an intellectual property as defined in the Code.
If it does not, then coverage by the Code may be negated.
§ A second test, if a disputed matter does not expressly refer to an

intellectual property right as defined above, is whether it falls under
the general "unfair competition" concept and definition under
Sections 168.1 and 168.2 of the Code. The question then is whether
there is "deception" or any other similar act in "passing off" of goods
or services to be those of another who enjoys established goodwill.
§ Under all the above approaches, we conclude that the

"hoarding" - as defined and charged by the petitioner - does not fall
within the coverage of the IP Code and of Section 168 in particular. It
does not relate to any patent, trademark, trade name or service
mark that the respondents have invaded, intruded into or used
without proper authority from the petitioner. Nor are the respondents
alleged to be fraudulently "passing off" their products or services as
those of the petitioner. The respondents are not also alleged to be
undertaking any representation or misrepresentation that would
confuse or tend to confuse the goods of the petitioner with those of
the respondents, or vice versa. What in fact the petitioner alleges is
an act foreign to the Code, to the concepts it embodies and to the
acts it regulates; as alleged, hoarding inflicts unfairness by seeking to
limit the opposition's sales by depriving it of the bottles it can use for
these sales. (Coca-Cola Bottlers, Phils., Inc. vs. Quintin J. Gomez, et
al., G.R. No. 154491, November 14, 2008)
Who is deemed guilty of unfair competition
Essentially, what the law punishes is the act of giving one's goods the
general appearance of the goods of another, which would likely
mislead the buyer into believing that such goods belong to the latter.
Examples of this would be the act of manufacturing or selling shirts
bearing the logo of an alligator, similar in design to the open-jawed
alligator in La Coste shirts, except that the jaw of the alligator in the
former is closed, or the act of a producer or seller of tea bags with
red tags showing the shadow of a black dog when his competitor is
producing or selling popular tea bags with red tags showing the
shadow of a black cat.
P a g e | 93

Manuel C. Espiritu, Jr., et al. vs. Petron Corp., et al., (G.R. No. 170891,
November 24, 2009)
A “collective mark” as 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. (Section 122, RA 8293)
CONTINUING OFFENSE
§ Respondent's imitation of the general appearance of petitioner's

goods was done allegedly in Cavite. It sold the goods allegedly in
Mandaluyong City, Metro Manila. The alleged acts would constitute
a transitory or continuing offense. Thus, clearly, under Section 2 (b) of
Rule 126, Section 168 of Rep. Act No. 8293 and Article 189 (1) of the
Revised Penal Code, petitioner may apply for a search warrant in
any court where any element of the alleged offense was committed,
including any of the courts within the National Capital Region (Metro
Manila).
Sony Computer Entertainment, Inc. vs. Supergreen, Inc., (G.R. No.

161823, March 22, 2007)
COPYRIGHT
Copyright is the legal protection extended to the owner of the rights

in an original work.
“Original work” refers to every production in the literary, scientific and

artistic domain. Among the literary and artistic works enumerated in
the IP Code includes books and other writings, musical works, films,
paintings and other works, and computer programs.
Works are protected by the sole fact of their creation, irrespective of

their mode or form of expression, as well as their content, quality and
purpose. Thus, it does not matter if, in the eyes of some critics, a
certain work has little artistic value. So long as it has been
independently created and has a minimum of creativity, the same
enjoys copyright protection.
P a g e | 94

Section 172 of the IP Code lists the works covered by copyright

protection from the moment of their creation
There are two types of rights under copyright:
1. economic rights, so-called because they enable the creator to

obtain remuneration from the exploitation of his works by third
parties, and
2. moral rights, which makes it possible for the creator to undertake
measures to maintain and protect the personal connection between
himself and the work.
§ Economic rights include:

ú Reproduction
ú Transformation First public distribution
ú Rental
ú Public display
ú Public performance
ú Other communication to the public of the work.
§ Moral rights include:

ú Right of Attribution
ú Right of Alteration
ú Right of Integrity (object to any prejudicial distortion)
ú Right to restrain use of his name.
Related Rights in Copyright:
§ Authors create works to disseminate them to as large an

audience as possible. Obviously, they cannot do the dissemination
by themselves. They need the help of persons or entities who
contribute substantial creative, technical or organizational skill in the
process of making the works available to the public and whose
interests ought to be protected to encourage them to continue with
their work. Hence, their rights are referred to as “related rights” or
“neighboring rights” since they are related to or are neighboring on
the author’s copyright.
The related rights of: (a) performers; (b) producers of sound

recordings; and (c) broadcasting organizations.
§ The natural person who created the literary and artistic work owns
the copyright to the same.
For work created during or in the course of employment (works for

hire):
Employee - if the work is not part of his regular duties, even if he used
the time, facilities and materials of the employer;
P a g e | 95

Employer - if the work is the result of the performance of his regularly

assigned duties unless there is an express or implied agreement to
the contrary.
For commissioned works: the person who commissioned the work

owns the work but the copyright thereto remains with the creator
unless there is a written agreement to the contrary.
For audiovisual works: the producer, the author of the scenario, the
composer of the music, the film director, and the author of the work
so adapted.
In general, the term of protection of copyright for original and

derivative works is the life of the author plus fifty (50) years after his
death. The Code specifies the terms of protection for the different
types of works.
For audiovisual works: the producer, the author of the scenario, the
composer of the music, the film director, and the author of the work
so adapted.
In calculating the term of protection, 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 (i.e. death, publication, making).
§ Copyright protection is not intended to give the copyright owner

absolute control over all possible exploitation of his work. The law
provides for limitations (“statutory fair uses”) on the economic rights
of authors comprising of acts which do not constitute copyright
infringement even if done without the consent of the copyright
holder
§ Copyright infringement consists in infringing any right secured or

protected under the Code. It may also consist in aiding or abetting
such infringement.
§ The law also provides for the liability of a person who at the time
when copyright subsists in a work has in his possession an article
which he knows, or ought to know, to be an infringing copy of the
work for the purpose of:
ú Selling or letting for hire, or by way of trade offering or

exposing for sale or hire, the article;
ú Distributing the article for the purpose of trade, or for any
other purpose to an extent that will prejudice the rights of the
copyright owner in the work; or
ú Trade exhibit of the article in public.
§ Copyright, in the strict sense of the term, is purely a statutory right.

It is a new or independent right granted by the statute, and not
simply a pre-existing right regulated by it. Being a statutory grant, the
P a g e | 96

rights are only such as the statute confers, and 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.
§ A copyright certificate provides prima facie evidence of

originality which is one element of copyright validity. It constitutes
prima facie evidence of both validity and ownership and the validity
of the facts stated in the certificate.
When is there a 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 is appropriated. (Pacita
I. Habana, et al. vs. Felicidad C. Robles, et al., G.R. No. 131522, July
19, 1999; Filipino Society of Composers vs. Benjamin Tan, (G.R. No. L-
36402, March 16, 1987)
§ The essence of a copyright infringement is the similarity or at least

substantial similarity of the purported pirated works to the
copyrighted work. Hence, the applicant must present to the court
the copyrighted films to compare them with the purchased
evidence of the video tapes allegedly pirated to determine whether
the latter is an unauthorized reproduction of the former. This linkage
of the copyrighted films to the pirated films must be established to
satisfy the requirements of probable cause. Mere allegations as to
the existence of the copyrighted films cannot serve as basis for the
issuance of a search warrant.
20th Century Fox Film Corp. vs. Court of Appeals, G.R. Nos. L-76649-
51, August 19, 1988; Columbia Pictures Industries, Inc., et al. vs. Court
of Appeals, et al., (G.R. No. 97156, October 6, 1994)
Infringement of a copyright is a trespass on a private domain owned

and occupied by the owner of the copyright, and, therefore,
protected by law, and infringement of copyright, or piracy, which is
a synonymous term in this connection, consists in the doing by any
person, without the consent of the owner of the copyright, of
anything the sole right to do which is conferred by statute on the
owner of the copyright.
Pacita I. Habana, et al. vs. Felicidad C. Robles, et al., G.R. No. 131522,
July 19, 1999; Wilson Ong Ching Kian Chuan vs. Court of Appeals, et
al., (G.R. No. 130360, August 15, 2000)
§ The presentation of master tapes is not always necessary to meet

the requirement of probable cause in copyright infringement cases
§ It is true that such master tapes are object evidence, with the
merit that in this class of evidence the ascertainment of the
controverted fact is made through demonstrations involving the
P a g e | 97

direct use of the senses of the presiding magistrate. Such auxiliary

procedure, however, does not rule out the use of testimonial or
documentary evidence, depositions, admissions or other classes of
evidence tending to prove the factum probandum, especially
where the production in court of object evidence would result in
delay, inconvenience or expenses out of proportion to its evidentiary
value.
Columbia Pictures, Inc. vs. Court of Appeals, et al., G.R. No. 110318,
August 28, 1996; Columbia Pictures Entertainment, Inc., et al. vs.
Court of Appeals, et al., G.R. No. 111267, September 20, 1996; People
of the Phil., et al. vs. Christopher Choi, (G.R. No. 152950, August 3,
2006)
At most, the certificates of registration and deposit issued by the

National Library and the Supreme Court Library serve merely as a
notice of recording and registration of the work but do not confer
any right or title upon the registered copyright owner or
automatically put his work under the protective mantle of the
copyright law. It is not a conclusive proof of copyright ownership. As
it is, non-registration and deposit of the work within the prescribed
period only makes the copyright owner liable to pay a fine.
Manly Sportwear Mfg., Inc. vs. Dadodette Ent., et al., (G.R. No.
165306, September 20, 2005)
It is not the application or registration of a trademark that vests

ownership thereof, but it is the ownership of a trademark that confers
the right to register the same. Registration merely creates a prima
facie presumption of the validity of the registration, of the registrant’s
ownership of the trademark, and of the exclusive right to the use
thereof; it is rebuttable; thus, it must give way to evidence to the
contrary.
Birkenstock Orthopaedie Gmbh and Co. Kg vs. Philippine Shoe Expo

Marketing Corporation, (G.R. No. 194307, November 20, 2013)
The gravamen of the offense of infringement of a registered

trademark is the likelihood of confusion. In applying the Holistic Test,
confusion was remote because the jeans made and sold by Levi’s
Philippines were not only very popular but also quite expensive, as
opposed to Diaz’s tailored jeans which were acquired on a “made-
to-order” basis; moreover, since the jeans are expensive, the casual
buyer is predisposed to be more cautious and discriminating in and
would prefer to mull over his purchase. (Victorio Diaz vs. People of
the Philippines, G.R. No. 180677, February 18, 2013)
The mere unauthorized use of a container bearing a registered

trademark in connection with the sale, distribution or advertising of
goods or services which is likely to cause confusion among the
buyers or consumers can be considered as trademark infringement.
Petitioners’ act of refilling, without the respondents’ consent, the LPG
containers bearing the registered marks of the respondents will
P a g e | 98

inevitably confuse the consuming public, who may also be led to

believe that the petitioners were authorized refillers and distributors of
respondent’s LPG products.
Republic Gas Corporation (REGASCO), et. al. vs. Petron Corporation,

et. al., (G.R. No. 194062, June 17, 2013)
The Rules on the Issuance of the Search and Seizure in Civil ctions for
Infringement of Intellectual Property Rights are not applicable in a
case where the search warrants were applied in anticipation of
criminal actions for violation of intellectual property rights under RA
8293. Rule 126 of the Revised Rules of Court would apply and a
warrant shall be validly issued upon finding the existence of probable
cause.
Century Chinese Medicine Co., et. al. vs. People of the Philippines,
(G.R. No. 188526, November 11, 2013)
Unfair competition has been defined as the passing off (or palming
off) or attempting to pass off upon the public of the goods or
business of one person as the goods or business of another with the
end and probable effect of deceiving the public. The mere use of
the LPG cylinders for refilling and reselling, which bear the trademarks
"GASUL" and "SHELLANE" will give the LPGs sold by REGASCO the
general appearance of the products of the petitioners.
Republic Gas Corporation (REGASCO), et. al. vs. Petron Corporation,

et. al., (G.R. No. 194062, June 17, 2013)
Under the Paris Convention to which the Philippines is a signatory, a

trade name of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms part of a
trademark, is protected without the obligation of filing or registration.
It follows then that the applicant for registration of trademark is not
the lawful owner thereof and is not entitled to registration if the
trademark has been in prior use by a national of a country which is a
signatory to the Paris Convention.
EcoleDe Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs.
Renaus Cointreau & Cie and Le Cordon Bleu Int’l, B.V., (G.R. No.
185830, June 5, 2013)
P a g e | 99

NEGOTIABLE INSTRUMENTS LAW
The principal consideration always to answer any purported question

on negotiable instruments is to determine first whether indeed it is
negotiable and compliant with the provision of section 1 of the
Negotiable Instruments Law.
In the case of Rodrigo Rivera vs. Spouses Chua (GR no.184458,

January 14, 2015), the Supreme Court noted that a promissory note
made out to a specific person is not a negotiable instrument, it is not
even payable to order or bearer.
In the same case, the Supreme Court reiterated that Section 1 of the
Negotiable Instruments Law requires the concurrence of the
following elements, and that the absence of one makes the
instrument non-negotiable,1 to wit:
1. It must be in writing and signed by the maker or drawer;

2. It 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 bearer; and
5. Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
This does not mean however that, even if the instrument is not
negotiable, there is no more liability to be incurred under the terms of
the promissory note issued that remains to be unpaid.
Even if the promissory note is non-negotiable and therefore outside

of the coverage of section 702 of the law which provides that
presentment for payment is not necessary to charge the person
liable on the instrument, liability for damages, including those who
are guilty of delay in the performance of their obligation is laid down
under Article 11703 of the Civil Code of the Philippines.

1Section 1, Negotiable Instruments Law
2 Section 70, Effect of want of demand on principal debtor. – Presentment for payment is not
necessary in order to charge the person primarily liable on the instrument; but if the instrument is,
by its terms, payable at a special place, and he is able and willing to pay it there at maturity,
such ability and willingness are equivalent to tender of payment upon his part. But except as
herein otherwise provided, presentment for payment is necessary in order to charge the drawer
and indorsers.
3Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
P a g e | 100

REQUISITES OF NEGOTIABILITY:
• Note Section 1 in relation to sections 2 – 23
• Requisites
1. It must be in writing
2. It must contain an unconditional promise to pay a sum
certain money
3. It must be payable on demand, or at a fixed or
determinable future time
4. It must be payable to order or to bearer
RULE ON FORGERY:
• Liability of Bank for payment
• As a general rule, a bank or corporation who has obtained

possession of a check upon an unauthorized or forged
indorsement of the payee’s signature and who collects the
amount of the check from the drawee, is liable for the
proceeds thereof to the payee or other owner,
notwithstanding that the amount has been paid to the person
from whom the check was obtained.
• The theory of the rule is that the possession of the check on the
forged or unauthorized indorsement is wrongful and when the
money had been collected on the check, the proceeds are
held for the rightful owners who may recover them. The payee
ought to be allowed to recover directly from the collecting
bank, regardless of whether the check was delivered to the
payee or not. (Westmont Bank (formerly Associated Banking
Corp.) vs. Eugene Ong, G.R. No. 132560, January 30, 2002)
• It is a rule that when a signature is forged or made without the

authority of the person whose signature it purports to be, the
check is wholly inoperative and no right to retain the
instrument, or to give a discharge therefor, or to enforce
payment thereof against any party, can be acquired through
or under such signature.
• EXCEPTION:
However, the rule does provide for an exception, namely:

"unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority."
P a g e | 101

In the instant case, it is the exception that applies as the

petitioner is precluded from setting up the forgery, assuming
there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the
verification of his statements of account. (Ramon K. Ilusorio vs.
Hon. Court of Appeals, G.R. No. 139130, November 27, 2002)
Concept of Material Alteration
Sec. 124. Alteration of instrument; effect of. - Where a negotiable

instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself
made, authorized, or assented to the alteration and subsequent
indorsers.
But when an instrument has been materially altered and is in the

hands of a holder in due course not a party to the alteration, he may
enforce payment thereof according to its original tenor.
Sec. 125. What constitutes a material alteration. - Any alteration

which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The 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, or any other change or addition which alters the effect of
the instrument in any respect, is a material alteration
§ Deficiencies that DO NOT AFFECT the rights of a subsequent HIDC:
1. Incomplete but delivered instrument (section 14)

2. Complete but undelivered (section 16)
3. Complete and delivered issued without consideration or a
consideration consisting of a promise which was not fulfilled. (section
28)
• Deficiencies that AFFECT THE RIGHTS OF A HIDC:
1. Incomplete but undelivered instrument (sec.15)

2. Maker/Drawer’s signature forged
§ Sec. 26. What constitutes holder for value. - Where value has at
any time been given for the instrument, the holder is deemed a
P a g e | 102

holder for value in respect to all parties who become such prior to
that time.
§ Absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise. (section 28)
Absence or failure of consideration is not inadequacy of

consideration under Art. 1355 of the Civil Code.
Sec. 40. Indorsement of instrument payable to bearer. - Where an

instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as make
title through his 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.
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.
§ Sec. 47. Continuation of negotiable character. - An instrument

negotiable in its origin continues to be negotiable until it has been
restrictively indorsed or discharged by payment or otherwise.
§ Sec. 34. Special indorsement; indorsement in blank. - A special

indorsement specifies the person to whom, or to whose order, the
instrument is to be payable, and the indorsement of such indorsee is
necessary to the further negotiation of the instrument. An
indorsement in blank specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be negotiated by delivery.
5. Sec. 35. Blank indorsement; how changed to special indorsement.

- 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. 39. Conditional indorsement. - Where an indorsement is

conditional, the party required to pay the instrument may disregard
the condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not. 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. (Endorser binds himself to pay, upon no other condition
than the failure of the parties to do so, and of due notice to him of
such failure)
P a g e | 103

§ Endorser binds himself to pay, upon no other condition than the

failure of the parties to do so, and of due notice to him of such failure
§ Sec. 119. Instrument; how discharged. - A negotiable instrument is

discharged:
(a.) By payment in due course by or on behalf of the principal debtor;

(b.) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
(c.) By the intentional cancellation thereof by the holder;
(d.) By any other act which will discharge a simple contract for the
payment of money;
(e.) When the principal debtor becomes the holder of the instrument at or
after maturity in his own right.
6. Sec. 38. Qualified indorsement. - A qualified indorsement

constitutes the indorser a mere assignor of the title to the instrument.
It may be made by adding to the indorser's signature the words
"without recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the
instrument.
Has limited liability, i.e., he is liable if the instrument is dishonored by

non-acceptance or non-payment due to:
Forgery;
lack of good title on the part of endorser
• lack of capacity to endorse on the part of the prior
parties’ fact that at the time of endorsement, the instrument was
valueless, or nor valid, and he knew of the fact.
Classes of Holder
§ Simple Holder (section 51)

§ Holder for value (section 26)
§ HIDC (secs.52 and 57)
Rights of Holders in General
1. A holder:
a. May Sue thereon in his own name
b. Payment to him in due course discharges the instrument (section 88)
2. In the hands of a holder other a HIDC, a negotiable instrument is
subject to the same defenses as if it were non-negotiable
HOLDER IN DUE COURSE
§ Defined under section 52

§ Section 53 in relation to section 193
§ Section 54 “Reasonable Period” - 90 days in relation to BP 22.
P a g e | 104

Defenses
REAL DEFENSES PERSONAL DEFENSES

Forgery Duress (intimidation)
Illegality Illegality
Alteration (deliberate) Discharge before maturity
Discharge after maturity Alteration (unintentional)
Incompleteness Fraud in inducement

Fraud in Factum Incompleteness (delivered)
Incapacity No consideration
Insolvency Set-off
Real Defenses
§ Those available against ALL holders.

§ They attach to the res regardless of the merits or demerits of the
holder
§ Real defenses do not render the instrument valueless.
§ The instrument is unenforceable only against the party entitled to
set up the defense but not against those whom such a defense is not
available as such, as in the case of forgery which is not available to
persons estopped. (sec.23)
Examples of Real Defense
§ Section 15
§ Section 23
§ Section 14 (fraud in factum or fraud in esse contractus)
§ Fraudulent alteration by holder (secs.124 and 125)
§ Prescription; Discharge at or after maturity (secs.88, 118, 121 and
122)
Personal Defenses
§ Those which grow out of the agreement or the conduct of a

particular person in regard to the instrument which renders it
inequitable for him, though holding the legal title, to enforce it
against the party sought to be made liable but which h are not
available against a HIDC.
§ Filling up wrong date (sec.10, EO 173)
§ Section 14
§ Section 16
§ Section 55 (absence or failure of consideration)
§ Simple Fraud or fraud in inducement (sec.55)
§ Acquisition of instrument by unlawful means (sec. 55)
P a g e | 105

Personal Defenses
§ Negotiation in breach of faith (sec.55)

§ Negotiation under circumstances that amount to fraud (sec.55)
§ Innocent alteration or spoliation (secs.124-125)
§ Set-off between immediate parties (sec.58) Discharge by
payment or renunciation or release before maturity (Secs. 50,121,
122)
§ Discharge of party secondarily liable by discharge of prior party
(sec.20 [c])
LIABILITIES OF PARTIES
PARTY LIABILITY
Sec. 60. Liability of maker. - The maker of a
negotiable instrument, by making it, engages
Maker that he will pay it according to its tenor, and
admits the existence of the payee and his
then capacity to indorse.
Sec. 61. Liability of drawer. - The drawer by
drawing the instrument admits the existence
of the payee and his then capacity to indorse;
and engages that, on due presentment, the
instrument will be accepted or paid, or both,
according to its tenor, and that if it be
Drawer dishonored and the necessary proceedings
on dishonor be duly taken, he will pay the
amount thereof to the holder or to any
subsequent indorser who may be compelled
to pay it. But the drawer may insert in the
instrument an express stipulation negativing or
limiting his own liability to the holder.
Sec. 62. Liability of acceptor. - The acceptor,
by accepting the instrument, engages that he
will pay it according to the tenor of his
acceptance and admits:
Acceptor a. The existence of the drawer, the genuineness
of his signature, and his capacity and
authority to draw the instrument; and
b. The existence of the payee and his then
capacity to indorse.
§ Acceptor is liable only to the original tenor of the bill prior to

alteration since section 132 defines acceptance as “assent to the
order of the drawer.”
§ Sec. 63. When a person deemed indorser. - A person placing his

signature upon an instrument otherwise than as maker, drawer, or
acceptor, is deemed to be indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity.
P a g e | 106

Is there any order in which indorsers are liable?
Sec. 68. Order in which indorsers are liable. - As respect one another,
indorsers are liable prima facie in the order in which they indorse; but
evidence is admissible to show that, as between or among
themselves, they have agreed otherwise. Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally.
§ Primarily liable – Maker and Acceptor

§ Secondarily liable - Drawer and Indorser
For PNs, it is necessary that:
1. Presentment for payment must be made to the person

primarily liable (sec.71)
2. If the PN is dishonored by nonpayment, notice of dishonor
by nonpayment must be given to the person secondarily
liable (sec.80) unless excused.
3. In all other cases, it is necessary that;
4. Protest for nonpayment by drawee is necessary to charge
an acceptor for honor(sec.167); and
5. Protest for nonpayment by the acceptor for honor is also
required (sec.170)
What constitutes sufficient presentment
§ Sec. 72. What constitutes a sufficient presentment. - Presentment

for payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to receive payment on
his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined; 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. 74. Instrument must be exhibited. - The instrument must be

exhibited to the person from whom payment is demanded, and
when it is paid, must be delivered up to the party paying it.
Sec. 79. When presentment not required to charge the drawer. -

Presentment for payment is not required in order to charge the
drawer where he has no right to expect or require that the drawee or
acceptor will pay the instrument.
Sec. 80. When presentment not required to charge the indorser. -

Presentment is not required in order 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. 81. When delay in making presentment is excused. - Delay in

making presentment for payment is excused when the delay is
caused by circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When the
P a g e | 107

cause of delay ceases to operate, presentment must be made with

reasonable diligence.
The exceptions provided in secs. 79 and 80 are relative and pertain

only to the drawer and endorser involved, since as to other parties
secondarily liable, the lack of presentment discharges them.
Sec. 83. When instrument dishonored by non-payment. - The

instrument is dishonored by non-payment when:
(a.) It is duly presented for payment and payment is refused or

cannot be obtained; or
(b.) Presentment is excused and the instrument is overdue and
unpaid.
Sec. 84. Liability of person secondarily liable, when instrument

dishonored. - Subject to the provisions of this Act, when the
instrument is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues to the
holder.
NOTICE OF DISHONOR
Bringing either verbally or by writing, to the knowledge of the drawer

or endorser of an instrument, the fact that a specified negotiable
instrument, upon proper proceedings taken, has not been accepted
or has not been paid, and that the party notified is expected to pay
it.
Sec. 89. To whom notice of dishonor must be given. - Except as

herein otherwise provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor
must be given to the drawer and to each indorser, and any drawer
or indorser to whom such notice is not given is discharged.
§ Persons primarily liable need not be given notice of dishonor,

because they are the very ones who dishonored the instrument. This
is also the rule with respect to a joint maker and an accommodation
maker.
Sec. 90. By whom given. - 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. 91. Notice given by agent. - Notice of dishonor may be given by

any agent either in his own name or in the name of any party
entitled to given notice, whether that party be his principal or not.
P a g e | 108

Discharge of Negotiable Instrument
It is the release of all parties, whether primary or secondary, from the

obligation on the instrument
Discharge renders the instrument non-negotiable.
§ Sec. 119. Instrument; how discharged. - A negotiable instrument is

discharged:
a. By payment in due course by or on behalf of the principal debtor;
b. By payment in due course by the party accommodated, where the

instrument is made or accepted for his accommodation;
c. By the intentional cancellation thereof by the holder;
d. By any other act which will discharge a simple contract for the
payment of money;
e. When the principal debtor becomes the holder of the instrument at
or after maturity in his own right.
§ Sec. 120. When persons secondarily liable on the instrument are

discharged. - A person secondarily liable on the instrument is
discharged:
a. By any act which discharges the instrument;

b. By the intentional cancellation of his signature by the holder;
c. By the discharge of a prior party;
d. By a valid tender or payment made by a prior party;
e. By a release of the principal debtor unless the holder's right of
recourse against the party secondarily liable is expressly reserved;
f. 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. 121. Right of party who discharges 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 regard all prior parties, and he may strike out his own and all
subsequent indorsements and against negotiate the instrument,
except:
Where it is payable to the order of a third person and has been paid
by the drawer; and
Where it was made or accepted for accommodation and has been

paid by the party accommodated.
P a g e | 109

ALTERATION
§ Sec. 124. Alteration of instrument; effect of. - Where a negotiable

indorsers.
But when an instrument has been materially altered and is in the

§ Sec. 125. What constitutes a material alteration? - Any alteration

which changes:
a. The date;
b. The sum payable, either for principal or interest;
c. The time or place of payment:
d. The number or the relations of the parties;
e. The 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, or any other change or addition which alters the effect of
the instrument in any respect, is a material alteration
§ Sec. 124. Alteration of instrument; effect of. - Where a negotiable

indorsers.
§ But when an instrument has been materially altered and is in the

BILL OF EXCHANGE
§ Sec. 126. Bill of exchange, defined. - A bill of exchange is an

unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future
time a sum certain in money to order or to bearer.
Pay to X or order P250,000.00
To: Y
sgd. Z
P a g e | 110

Until Y accepts, he is not liable as acceptor because under sec.18,

drawee is never liable because his signature does not appear on the
face of instrument. Drawee must first accept.
§ Sec. 127. Bill not an assignment of funds in hands of drawee. - A

bill of itself does not operate as an assignment of the funds in the
hands of the drawee available for the payment thereof, and the
drawee is not liable on the bill unless and until he accepts the same.
Rules pertaining to Bill of Exchange
§ Sec. 128. Bill addressed to more than one drawee. - A bill may be
addressed to two or more drawees jointly, whether they are partners
or not; but not to two or more drawees in the alternative or in
succession.
§ Sec. 130. When bill may be treated as promissory note. - Where in a

bill the drawer and drawee are the same person or where the
drawee is a fictitious person or a person not having capacity to
contract, the holder may treat the instrument at his option either as a
bill of exchange or as a promissory note.
ACCEPTANCE
Definition
§ Sec. 132. Acceptance; how made, by and so forth. - The

acceptance of a bill is the signification by the drawee of his assent to
the order of the drawer. The acceptance must be in writing and
signed by the drawee. It must not express that the drawee will
perform his promise by any other means than the payment of
money.
§ Sec. 133. Holder entitled to acceptance on face of bill. - The holder

of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.
§ Sec. 134. Acceptance by separate instrument. - Where an

acceptance is written on a paper other 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.
§ Sec. 136. Time allowed drawee to accept. - 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.
Note: After 24 hours, drawee fails to return instrument, he will be

presumed to have impliedly accepted.
P a g e | 111

Kinds of Checks
1. Cashier’s Check - Drawn by cashier of bank, in the name of the bank

against the bank itself payable to a third person or order.
2. Manager’s Check – Drawn by the manager of a bank in the name of

the bank against the bank itself payable to a third person. Similar to
cashier’s check.
3. Memorandum Check – Check given by the borrower to a lender for

the amount of a short loan, with the understanding that it will not be
presented to a bank, but will be redeemed by maker himself when
the loan falls due and which understanding is evidenced by the
writing the word “memorandum,” “memo” on the check
Significance of the 90-day Period UNDER BP 22 For Presentment of the

Check
Arceo vs. People (2006)
Petitioner asserts that there was no violation of BP 22 because the

check was presented to the drawee bank only on December 5, 1991
or 120 days from the date thereof (August 4, 1991). He argues that
this was beyond the 90-day period provided under the law in
connection with the presentment of the check.
In Wong v. Court of Appeals, the Court ruled that the 90-day period
provided in the law is not an element of the offense. Neither does it
discharge petitioner from his duty to maintain sufficient funds in the
account within a reasonable time from the date indicated in the
check. According to current banking practice, the reasonable
period within which to present a check to the drawee bank is six
months. Thereafter, the check becomes stale and the drawer is
discharged from liability thereon to the extent of the loss caused by
the delay.
Thus, Cenizal’s presentment of the check to the drawee bank 120

days (four months) after its issue was still within the allowable period.
Petitioner was freed neither from the obligation to keep sufficient
funds in his account nor from liability resulting from the dishonor of
the check.
What are the effects of a manager’s check and a cashier’s check,

and is the payment therein subject to the condition that the payee
complies with his obligations to the purchaser of the checks?
The Supreme Court in the case of Metropolitan Bank vs. Chiok (GR
no.172652, November 26, 2014) stated that,” The legal effects of a
manager’s check and a cashier’s check are the same. A manager’s
check, like a cashier’s check, is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity, and
P a g e | 112

honor behind its issuance. By its peculiar character and general use
in commerce, a manager’s check or cashier’s check is regarded
substantially to be as good as the money it represents.”
The Supreme Court however warned that, clearing of the manager’s

check and cashier’s checks should not be confused with
acceptance. Manager’s and Cashier’s checks are still subject to the
clearing to ensure that the same have not been materially altered or
otherwise completely counterfeited. It must be clarified however,
that while they are subject to clearing, these checks cannot be
countermanded for being drawn up against a closed account, for
being drawn up against insufficient funds, or for similar reasons such
as a condition not appearing on the face of the check. The
accepted banking practice is that these checks are good as cash.
If a check is materially altered4, will the 24-hour period for clearing

apply?
In Areza vs. Express Savings Bank (GR no.176697, September 10,

2014) , the Supreme Court ruled that, “as a rule now stands, the 24
hour period is still in force, that is, any check which should be refused
by the drawee bank in accordance with the long standing and
accepted banking practices shall be returned through the
PCHC/local clearing office, as the case may be not later than the
next regular clearing (24 hour).

4 Section 125. What constitutes material alteration. Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment;
d) The number or the relation of the parties;
e) The medium or currency in which payment is to be made; Or which adds a place of

payment where no place of payment is specified, or any other change or addition which
alters the effect of the instrument in any respect is a material alteration.
xxx
Section 124. Alteration of instrument; effect of. Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized, and assented to the alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a holder in due
course not a party to the alteration, he may enforce the payment thereof according to its
original tenor. (Emphasis ours.)
P a g e | 113

The modification, however, is that items which have been the subject
of material alteration or bearing forged endorsement may be
returned even beyond the 24 hours so long that the same is returned
within the prescriptive period fixed by law. The prescriptive period is
ten (10) years because a check or endorsement thereon is a written
contract. Moreover, the item need not be returned through the
clearing house but by direct presentation to the presenting bank.”
A promissory note was indorsed to a financing company, and a

chattel mortgage over the property subject of the note was also
assigned to them. However, the actual property subject of the chattel
was never delivered to the mortgagee who decided not to pay the
principal loan as well since there was non-delivery of the property.
The Financing Company now seeks foreclosure. Is the Financing
Company who holds the promissory note a holder in due course?
Yes. The Financing Company is a holder in due course. Sec. 52 of the

Negotiable Instruments Law (NIL) provides:
Section 52. 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 had been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(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.
A holder in due course, holds the instrument free from any defect of
title of prior parties and from defenses available to prior parties
among themselves, and may enforce payment of the instrument for
the full amount. Since the Financing Company is a holder in due
course, the mortgagor cannot raise the defense of non-delivery of
the object and nullity of the sale against the corporation. The NIL
considers every negotiable instrument prima facie to have been
issued for a valuable consideration. (Spouses Pedro Violago vs. BA
Finance Corporation [2008])
Can a check be used as evidence of indebtedness?
A check "constitutes an evidence of indebtedness" and is a veritable

"proof of an obligation.” Hence, it can be used "in lieu of and for the
same purpose as a promissory note. The Supreme Court has pointed
out that a check functions more than a promissory note since it not
P a g e | 114

only contains an undertaking to pay an amount of money but is an

"order addressed to a bank and partakes of a representation that
the drawer has funds on deposit against which the check is drawn,
sufficient to ensure payment upon its presentation to the bank. (Ting
Ting Pua vs. Spouses Lo Ben Ting [2013])
This very same principle underpins Section 24 of the Negotiable

Instruments Law (NIL), which provides as follows:
Section 24. Presumption of consideration. – Every negotiable

instrument is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to
have become a party for value.
Who is an accommodation party and what is his liability, if any?
An accommodation party is one who meets all the three requisites:

(1) he must be a party to the instrument, signing as maker, drawer,
acceptor, or indorser; (2) he must not receive value therefor; and (3)
he must sign for the purpose of lending his name or credit to some
other person. An accommodation party lends his name to enable
the accommodated party to obtain credit or to raise money; he
receives no part of the consideration for the instrument but assumes
liability to the other party/ies thereto. The accommodation party is
liable on the instrument to a holder for value even though the holder,
at the time of taking the instrument, knew him or her to be merely an
accommodation party, as if the contract was not for
accommodation.
The relation between an accommodation party and the

accommodated party is one of principal and surety the
accommodation party being the surety. As such, he is deemed an
original promisor and debtor from the beginning; he is considered in
law as the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter since their liabilities
are interwoven as to be inseparable. (Eusebio Gonzales vs. PCIB
[2011])
Although a contract of suretyship is in essence accessory or collateral

to a valid principal obligation, the suretys liability to the creditor
is immediate, primary and absolute; he is directly and equally bound
with the principal. As an equivalent of a regular party to the
undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest
in the obligations nor does he receive any benefit therefrom
P a g e | 115

CORPORATION CODE
Sec. 2. Corporation defined. — 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.
Classifications
§ Municipal Corporations – corporations organized by the State for

purposes of governing portions of the State
§ Public quasi corporations - private corporations that render public
service, supply public wants, or pursue other eleemosynary
objectives. While purposely organized for the gain or benefit of its
members, they are required by law to discharge functions for the
public benefit. Examples of these corporations are utility, 22 railroads,
warehouse, telegraph, telephone, water supply corporations and
transportation companies. 23 It must be stressed that a quasi-public
corporation is a species of private corporations, but the qualifying
factor is the type of service the former renders to the public: if it
performs a public service, then it becomes a quasi-public
corporation. [G.R. No. 169752. September 25, 2007.]; PHILIPPINE
SOCIETY FOR THE PREVENTION OF CRUELTY TO ANIMALS, petitioners,
vs. COMMISSION ON AUDIT, DIR. RODULFO J. ARIESGA (in his official
capacity as Director of the Commission on Audit), MS. MERLE M.
VALENTIN and MS. SUSAN GUARDIAN (in their official capacities as
Team Leader and Team Member, respectively, of the audit Team of
the Commission on Audit), respondents.
§ The true criterion, therefore, to determine whether a corporation is

public or private is found in the totality of the relation of the
corporation to the State. If the corporation is created by the State as
the latter's own agency or instrumentality to help it in carrying out its
governmental functions, then that corporation is considered public;
otherwise, it is private. Applying the above test, provinces, chartered
cities, and barangays can best exemplify public corporations. They
are created by the State as its own device and agency for the
accomplishment of parts of its own public works.
§ The Constitution vests in the COA audit jurisdiction over

"government-owned and controlled corporations with original
charters," as well as "government-owned or controlled corporations"
without original charters. GOCCs with original charters are subject to
COA pre-audit, while GOCCs without original charters are subject to
COA post-audit. GOCCs without original charters refer to
corporations created under the Corporation Code but are owned or
controlled by the government. The nature or purpose of the
corporation is not material in determining COA's audit jurisdiction.
Neither is the manner of creation of a corporation, whether under a
general or special law.
P a g e | 116

§ Stock Corporations – capital stock divided into shares and are

authorized to distribute profits on the basis of shares held.
- par value
- no par value
§ Non-Stock – organized for non-profit purposes, do not issue stocks

and are composed of persons called as members
May no par value shares be issued by the corporation at different

prices?
Yes. "A no-par value 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. The holder of no-par shares may see from the certificate
itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a
false appearance of a given sum in money, as in the case of par
value shares. The capital stock of a corporation issuing only no-par
value shares is not set forth by a stated amount of money, but
instead is expressed to be divided into a stated number of shares,
such as, 1,000 shares. This indicates that a shareholder of 100 such
shares is an aliquot sharer in the assets of the corporation, no matter
what value they may have, to the extent of 100/1,000 or 1/10.
§ A corporation sole is "one formed by the chief archbishop, bishop,

priest, minister, rabbi or other presiding elder of a religious
denomination, sect, or church, for the purpose of administering or
managing, as trustee, the affairs, properties and temporalities of such
religious denomination, sect or church." A corporation aggregate
formed for the same purpose, on the other hand, consists of two or
more persons.
May a corporation sole convert into a corporation aggregate by

mere amendment of its articles of incorporation?
Yes. Section 109 of the Corporation Code allows the application to

religious corporations of the general provisions governing non-stock
corporations.
For non-stock corporations, the power to amend its articles of

incorporation lies in its members. The code requires two-thirds of their
votes for the approval of such an amendment. So how will this
requirement apply to a corporation sole that has technically but one
member (the head of the religious organization) who holds in his
hands its broad corporate powers over the properties, rights, and
interests of his religious organization?
Although a non-stock corporation has a personality that is distinct

from those of its members who established it, its articles of
incorporation cannot be amended solely through the action of its
board of trustees. The amendment needs the concurrence of at
P a g e | 117

least two-thirds of its membership. If such approval mechanism is

made to operate in a corporation sole, its one member in whom all
the powers of the corporation technically belongs, needs to get the
concurrence of two-thirds of its membership. The one member, here
the General Superintendent, is but a trustee, according to Section
110 of the Corporation Code, of its membership.
§ Ecclesiastical – members are spiritual persons

§ Lay – non-ecclesiastical corporations
§ Foreign corporations are further classified into (1) resident foreign

corporations and (2) non-resident foreign corporations.
A resident foreign corporation is a foreign corporation engaged in

trade or business within the Philippines or having an office or place of
business therein while a non-resident foreign corporation is a foreign
corporation not engaged in trade or business within the Philippines
and not having any office or place of business therein.
§ De Jure – corporation formed with all requirements of law

§ De Facto – defectively formed from a bona fide attempt to
incorporate under existing laws and which exercises corporate
powers
§ Can there be a municipal corporation de facto?
No. An unconstitutional act is not a law; it confers no rights; it imposes

no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed."
§ Corporation by estoppel is founded on principles of equity and is

designed to prevent injustice and unfairness. It applies when persons
assume to form a corporation and exercise corporate functions and
enter into business relations with third persons. Where there is no third
person involved and the conflict arises only among those assuming
the form of a corporation, who therefore know that it has not been
registered there is no corporation by estoppel.
Reynaldo M. Lozano vs. Eliezer R. De Los Santos, (G.R. No. 125221,

June 19, 1997); Lim Tong Lim vs. Phil. Fishing Gear Industries, (G.R. No.
136448, November 3, 1999); Merrill Lynch Futures, Inc. vs. Court of
Appeals (G.R. No. 97816, July 24, 1992): People of the Phil. vs. Patricio
Botero, (G.R. No. 117010, April 18, 1997)
Nationality of Corporations
§ DOMICILLIARY TEST - The nationality of a private corporation is

determined by the character and citizenship of its controlling
stockholders.
7. GRANDFATHER RULE - In case of an individual, percentage of

foreign owned voting stocks shall be determined by citizenship of the
individual stockholders.
P a g e | 118

In case of corporations, citizenship of corporation shall follow

citizenship of the controlling stockholders, irrespective of the place of
incorporation. Controlling stockholders mean those who hold more
than 50% of the voting stock.
Separate juridical personality
§ As a general rule, a corporation will be deemed a separate legal

entity until sufficient reason to the contrary appears. But the rule is
not absolute. A corporation's separate and distinct legal personality
may be disregarded and the veil of corporate fiction pierced when
the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime.
Siain Enterprises vs. Cupertino Realty Corp., et al., (G.R. No. 170782,
June 22, 2009)
8. It is elementary that a corporation has a personality distinct and

separate from its individual stockholders or members. Being an officer
or stockholder of a corporation does not make one's property the
property also of the corporation, for they are separate entities.
Adelio Cruz vs. Quiterio Dalisay, (A.M. No. R-181-P, July 31, 1987);
Traders Royal Bank vs. Court of Appeals, (G.R. No. 78412, September
26, 1989)
§ While a share of stock represents a proportionate or aliquot

interest in the property of the corporation, it does not vest the owner
thereof with any legal right or title to any of the property, his interest
in the corporate property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of corporate property,
which is owned by the corporation as a distinct legal person.
Concepcion Magsaysay-Labrador vs. Court of Appeals, (G.R. No.

58168, December 19, 1989); Good Earth Emporium, Inc. vs. Court of
Appeals, (G.R. No. 82797, February 27, 1991)
§ A corporation — being an artificial person which has no feelings,

emotions or senses, and which cannot experience physical suffering
or metal anguish — is not entitled to moral damages.
Solid Homes, Inc. vs. Court of Appeals, (G.R. No. 117501, July 8, 1997)
§ The Supreme Court laid down the test in determining the

applicability of the doctrine of piercing the veil of corporate fiction,
to wit:
1. Control, not mere majority or complete control, but complete

domination, not only of finances but of policy and business practice
in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence
of its own.
P a g e | 119

2. Such control must have been used by the defendant to commit

fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and, unjust act in contravention of
plaintiff’s legal rights; and,
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
Concept Builders, Inc. v. NLRC, (G.R. No. 108734, May 29, 1996); "G"
Holdings, Inc. vs. NAMAWU, et al., (G.R. No. 160236, October 16,
2009)
§ The term "capital" and other terms used to describe the capital
structure of a corporation are of universal acceptance, and their
usages have long been established in jurisprudence. Briefly, capital
refers to the value of the property or assets of a corporation.
§ 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. Gamboa vs. Teves (2011)
§ Voting rights are exercised during regular or special meetings of

stockholders; regular meetings to be held annually on a fixed date,
while special meetings may be held at any time necessary or as
provided in the by-laws, upon due notice. The Corporation Code
provides for a whole range of matters which can be voted upon by
stockholders, including a limited set on which even non-voting
stockholders are entitled to vote on. On any of these matters which
may be voted upon by stockholders, the proxy device is generally
available.
GSIS vs. Court of Appeals, et al., (G.R. Nos. 183905 & 184275, April 16,
2009)
§ A preferred share of stock is one which entitles the holder thereof

to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares
of a corporation. Preferred shares take a multiplicity of forms. The
most common forms may be classified into two: (1) preferred shares
as to assets; and (2) preferred shares as to dividends. The former is a
share which gives the holder thereof preference in the distribution of
the assets of the corporation in case of liquidation; the latter is a
share the holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all are paid
to the holders of common stock. There is no guaranty, however, that
the share will receive any dividends.
Republic Planters Bank vs. Enrique A. Agana, Sr., (G.R. No. 51765,
March 3, 199)7
§ The advantages accorded to the preferred shares are

undeniable, namely: the significant premium in the price being
P a g e | 120

offered; the preference enjoyed in the dividends as well as in the

liquidation of assets; and the voting rights still retained by preferred
shares in major corporate actions. All things considered, conversion
to preferred shares would best serve the interests and rights of the
government or the eventual owner of the CIIF SMC shares.
COCOFED, et al. vs. Republic of the Phil., (G.R. Nos. 177857-58,

September 17, 2009)
§ Redeemable shares are shares usually preferred, which by their

terms are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a certain
redemption price. A redemption by the corporation of its stock is, in a
sense, a repurchase of it for cancellation. The present Code allows
redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. This is a new provision
which in effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained earnings.
However, while redeemable shares may be redeemed regardless of
the existence of unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption, assets in
its books to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
Republic Planters Bank vs. Enrique A. Agana, (Sr., G.R. No. 51765,
March 3, 1997)
§ Treasury shares - stocks issued and fully paid for and re-acquired
by the corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares but being in the
treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by
the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share,
participates neither in 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 foregoing essential features of a treasury stock are lacking in the
questioned shares .
SAN MIGUEL CORPORATION, NEPTUNIA CORPORATION LIMITED,

ANDRES SORIANO III AND ANSCOR-HAGEDORN SECURITIES, INC.,
petitioners, vs. Sandiganbayan (G.R. Nos. 104637-38. September 14,
2000.)
§ The charter of a corporation is a contract between three parties:

(a) It is a contract between the state and the corporation to which
the charter is granted; (b) it is a contract between the stockholders
and the state and (c) it is also a contract between the corporation
P a g e | 121

and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and

cases cited.)
Government of the Phil. vs. Manila Railroad Company, (G.R. No.

30646, January 30, 1929)
§ Sec. 17 - Grounds When Articles of Incorporation or Amendment

May Be Rejected or Disapproved
The amendment of the articles of incorporation requires merely that

(a) the amendment is not contrary to any provision or requirement
under the Corporation Code, and that (b) it is for a legitimate
purpose.
IEMELIF, et al. vs. Nathanael Lazaro, et al., (G.R. No. 184088, July 6,
2010)
§ Parties organizing a corporation must choose a name at their

peril; and the use of a name similar to one adopted by another
corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a
prior right, by a suit for injunction against the new corporation to
prevent the use of the name.
Ang Mga Kaanib Sa Iglesia Ng Dios Kay Kristo Hesus vs. Iglesia Ng
Dios Kay Cristo Jesus, (G.R. No. 137592, December 12, 2001)
§ The corporation, upon such change in its name, is in no sense a

new corporation, nor the successor of the original corporation. It is
the same corporation with a different name, and its character is in
no respect changed. A change in the corporate name does not
make a new corporation, and whether effected by special act or
under a general law, has no effect on the identity of the corporation,
or on its property, rights, or liabilities. The corporation continues, as
before, responsible in its new name for all debts or other liabilities
which it had previously contracted or incurred.
Republic Planters Bank vs. Court of Appeals, (G.R. No. 93073,

December 21, 1992)
§ Organization and commencement of transaction of corporate

business are but conditions subsequent and not prerequisites for
acquisition of corporate personality. The adoption and filing of by-
laws is also a condition subsequent. Under Section 19 of the
Corporation Code, a corporation commences its corporate
existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues certificate
of incorporation under its official seal. This may be done even before
the filing of the by-laws, which under Section 46 of the Corporation
Code, must be adopted "within one month after receipt of official
notice of the issuance of its certificate of incorporation."
P a g e | 122

Chung Ka Bio vs. Intermediate Appellate Court, (G.R. No. L-71837,

July 26, 1988)
§ The word "term" has acquired a definite meaning in jurisprudence.

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.
Valle Verde Country Club, Inc., et al. vs. Victor Africa, (G.R. No.
151969, September 4, 2009)
§ 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. Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies that the
office has a fixed term, which has expired, and the incumbent is
holding the succeeding term.
151969, September 4, 2009)
§ As a general rule, officers and directors of a corporation hold over

after the expiration of their terms until such time as their successors
are elected or appointed.
The holdover doctrine has, to be sure, a purpose which is at once

legal as it is practical. It accords validity to what would otherwise be
deemed as dubious corporate acts and gives continuity to a
corporate enterprise in its relation to outsiders.
Hans Christian M. Señeres vs. COMELEC, et al., (G.R. No. 178678, April
16, 2009)
§ 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 of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law.
P a g e | 123

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.
Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, (G.R.

No. 159624, July 17, 2009)
§ A corporation, like a natural person who may authorize another to

do certain acts for and in his behalf, through its board of directors,
may legally delegate some of its functions and powers to its officers,
committees or agents appointed by it. In the absence of an
authority from the board of directors, no person, not even the officers
of the corporation, can validly bind the corporation.
Luzviminda Visayan vs. NLRC, (G.R. No. 69999, April 30, 1991)
§ Under Section 23 of the Corporation Code of the Philippines,

authority over corporate funds is exercised by the Board of Directors
who, in the absence of an appropriate delegation of authority, are
the only ones who can act for and in behalf of the corporation.
People's Broadcasting (Bombo Radyo Phils., Inc.) vs. Secretary of the

DOLE, et al., (G.R. No. 179652, May 8, 2009)
§ It must be borne in mind that Sec. 23, in relation to Sec. 25 of the

Corporation Code, clearly enunciates that all corporate powers are
exercised, all business conducted, and all properties controlled by
the board of directors. A corporation has a separate and distinct
personality from its directors and officers and can only exercise its
corporate powers through the board of directors. Thus, it is clear that
an individual corporate officer cannot solely exercise any corporate
power pertaining to the corporation without authority from the board
of directors. This has been our constant holding in cases instituted by
a corporation.
Cagayan Valley Drug Corp. vs. Commissioner of Internal Revenue,

(G.R. No. 151413, February 13, 2008)
Business Judgment Rule
§ the SEC and the courts are barred from intruding into business
judgments of corporations, when the same are made in good faith.
The said rule precludes the reversal of the decision of the PSE to deny
PALI's listing application, absent a showing of bad faith on the part of
the PSE
Philippine Stock Exchange, Inc. vs. Court of Appeals, (G.R. No.

125469, October 27, 1997)
P a g e | 124

Doctrine of apparent authority
§ The authority of a corporate officer in dealing with third persons

may be actual or apparent. The doctrine of "apparent authority,"
with special reference to banks, was laid out in Prudential Bank vs.
Court of Appeals, G.R. No. 108957, June 14, 1993, where it was held
that: "Conformably, we have declared in countless decisions that the
principal is liable for obligations contracted by the agent. The agent's
apparent representation yields to the principal's true representation
and the contract is considered as entered into between the
principal and the third person (citing National Food Authority vs.
Intermediate Appellate Court, G.R. No. 75640, April 5, 1990).”
First Philippine International Bank vs. Court of Appeals, (G.R. No.

115849, January 24, 1996)
§ Apparent authority is derived not merely from practice. Its

existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the
power to act or, in other words, the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers. It
requires presentation of evidence of similar act(s) executed either in
its favor or in favor of other parties. It is not the quantity of similar acts
which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation.
People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals,

(G.R. No. 117847, October 7, 1998); Inter-Asia Investments Industries,
Inc. vs. Court of Appeals, (G.R. No. 125778, June 10, 2003)
§ Whatever authority the officers or agents of a corporation may

have is derived from the board of directors or other governing body,
unless conferred by the charter of the corporation. A corporate
officer's power as an agent of the corporation must therefore be
sought from the statute, the charter, the by-laws, or in a delegation
of authority to such officer, from the acts of the board of directors,
formally expressed or implied from a habit or custom of doing
business.
Ignacio Vicente vs Ambrosio M. Geraldez, (G.R. No. L-32473, July 31,

1973)
§ The board of directors of a corporation is a creation of the

stockholders. The board of directors, or the majority thereof, controls
and directs the affairs of the corporation; but in drawing to itself the
power of the corporation, it occupies a position of trusteeship in
relation to the minority of the stock. The board shall exercise good
faith, care, and diligence in the administration of the affairs of the
corporation and protect not only the interest of the majority but also
that of the minority of the stock. Where the majority of the board of
directors wastes or dissipates the funds of the corporation or
P a g e | 125

fraudulently disposes of its properties, or performs ultra vires acts, the

court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the
minority members of the board of directors, for and in behalf of the
corporation, to prevent waste and dissipation and the commission of
illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in
such a case is said to be brought derivatively in behalf of the
corporation to protect the rights of the minority stockholders thereof.
Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., (G.R. Nos.
181455-56 & 182008, December 4, 2009)
§ Theory of Specific Capacity - the corporation cannot exercise

powers except those expressly/impliedly given.
§ Theory of General Capacity - a corporation is said to hold such

powers as are not prohibited/withheld from it by general law
Derivative Suit
§ It is well settled in this jurisdiction that where corporate directors

are guilty of a breach of trust — not of mere error of judgment or
abuse of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a 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.
181455-56 & 182008, December 4, 2009)
DERIVATIVE INDIVIDUAL CLASS SUITS

SUIT
Where the Where a Where the
acts stockholder or wrong is done
complained member is to a group of
of constitute denied the stockholders,
a wrong to right of as where
the inspection, his preferred
corporation suit would be stockholders'
itself, the individual rights are
cause of because the violated, a
action wrong is done class or
belongs to to him representative
the personally suit will be
corporation and not to proper for the
and not to the other protection of
the individual stockholders all
stockholder or or the stockholders
member. corporation. belonging to
Although in the same
most every group.
P a g e | 126

case of
wrong to the
corporation,
each
stockholder is
necessarily
affected
because the
value of his
interest
therein would
be impaired,
this fact of
itself is not
sufficient to
give him an
individual
cause of
action since
the
corporation is
a person
distinct and
separate from
him and can
and should
itself sue the
wrongdoer.
§ In cases of mismanagement where the wrongful acts are

committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are
vested by law with the right to decide whether or not the
corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy.
Because of the frequent occurrence of such a situation, the
common law gradually recognized the right of a stockholder to sue
on behalf of a corporation in what eventually became known as a
"derivative suit." It has been proven to be an effective remedy of the
minority against the abuses of management. Thus, an individual
stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue
or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as the nominal party,
with the corporation as the party in interest.
§ 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, bylaws, or relevant provisions of law. In the absence of
P a g e | 127

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 bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course of
business.
Violeta Tudtud Banate, et al. vs. Phil. Countryside Rural Bank (Liloan,
Cebu), Inc., et al., (G.R. No. 163825, July 13, 2010)
§ the distinction between "proxy solicitation" and "proxy validation"

cannot be dismissed offhand. The right of a stockholder to vote by
proxy is generally established by the Corporation Code, but it is the
Securities Regulation Code which specifically regulates the form and
use of proxies, more particularly the procedure of proxy solicitation,
primarily through Section 20.
2009)
§ Under Section 5 (c) of Presidential Decree No. 902-A, in relation to

the SRC, the jurisdiction of the regular trial courts with respect to
election-related controversies is specifically confined to
"controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships, or associations".
Evidently, the jurisdiction of the regular courts over so-called election
contests or controversies under Section 5 (c) does not extend to
every potential subject that may be voted on by shareholders, but
only to the election of directors or trustees, in which stockholders are
authorized to participate under Section 24 of the Corporation Code.
2009)
§ The underlying policy of the Corporation Code is that the business

and affairs of a corporation must be governed by a board of
directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis. Only
in that way can the directors' continued accountability to
shareholders, and the legitimacy of their decisions that bind the
corporation's stockholders, be assured. The shareholder vote is critical
to the theory that legitimizes the exercise of power by the directors or
officers over properties that they do not own.
§ This theory of delegated power of the board of directors similarly

explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporation's board of directors is caused
not by the expiration of a member's term, the successor "so elected
to fill in a vacancy shall be elected only for the unexpired term of his
predecessor in office". The law has authorized the remaining
P a g e | 128

members of the board to fill in a vacancy only in specified instances,

so as not to retard or impair the corporation's operations; yet, in
recognition of the stockholders' right to elect the members of the
board, it limited the period during which the successor shall serve
only to the "unexpired term of his predecessor in office".
151969, September 4, 2009)
§ It also bears noting that the vacancy referred to in Section 29

contemplates a vacancy occurring within the director's term of
office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporation's stockholders
who shall possess the authority to fill in a vacancy caused by the
expiration of a member's term.
151969, September 4, 2009)
Doctrine of corporate opportunity
§ Section 31 lays down the "doctrine of corporate opportunity" and

holds personally liable corporate directors found guilty of gross
negligence or bad faith in directing the affairs of the corporation,
which results in damage or injury to the corporation, its stockholders
or members, and other persons.
Manuel Luis S. Sanchez vs. Republic of the Phil., (G.R. No. 172885,
October 9, 2009)
§ The personal liability of corporate officers validly attaches only

when (a) they assent to a patently unlawful act of the corporation;
or (b) they are guilty of bad faith or gross negligence in directing its
affairs; or (c) they incur conflict of interest, resulting in damages to
the corporation, its stockholders or other persons.
H.L. Carlos Construction, Inc. vs. Marina Properties Corp., et al., (G.R.
No. 147614, January 29, 2004)
§ The general rule is that obligations incurred by the corporation,

acting through its directors, officers, and employees, are its sole
liabilities. However, solidary liability may be incurred, but only under
the following exceptional circumstances: (1) When directors and
trustees or, in appropriate cases, the officers of a corporation: (a)
vote for or assent to patently unlawful acts of the corporation; (b)
act in bad faith or with gross negligence in directing the corporate
affairs; (c) are guilty of conflict of interest to the prejudice of the
corporation, its stockholders or members, and other persons; (2)
When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with
the corporate secretary his written objection thereto; (3) When a
P a g e | 129

director, trustee or officer has contractually agreed or stipulated to

hold himself personally and solidarily liable with the corporation; or
(4) When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.
Andrea Uy, et al. vs. Arlene Villanueva, et al., G.R. No. 157851, June
29, 2007; Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp.,
(G.R. Nos. 168756 & 171476, December 7, 2009)
§ Section 31 makes a director personally liable for corporate debts if

he willfully and knowingly votes for or assents to patently unlawful
acts of the corporation. Section 31 also makes a director personally
liable if he is guilty of gross negligence or bad faith in directing the
affairs of the corporation. The bad faith or wrongdoing of the director
must be established clearly and convincingly. Bad faith is never
presumed.
Seaoil Petroleum Corp. vs. Autocorp Group, et al., (G.R. No. 164326,
October 17, 2008)
§ The general rule is that obligations incurred by the corporation,

acting through its directors, officers, and employees, are its sole
liabilities. However, solidary liability may be incurred, but only under
the following exceptional circumstances:
1. When directors and trustees or, in appropriate cases, the officers of a

corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing
the corporate affairs; (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or members, and other
persons;
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with
the corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.
Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., (G.R.

Nos. 168756 & 171476, December 7, 2009)
§ The mere interlocking of directors and officers does not warrant

piercing the separate corporate personalities of the two
corporations. Not only must there be a showing that there was
majority or complete control, but complete domination, not only of
finances but of policy and business practice in respect to the
transaction attacked, so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own.
P a g e | 130

"G" Holdings, Inc. vs. NAMAWU, et al., (G.R. No. 160236, October 16,
2009)
§ To validly increase its authorized capital stock, corporation must

issue at least 25% of such stock.
§ The corporation must issue at least twenty-five percent (25%) of

the newly or contemporaneously authorized capital stock in the
course of complying with the requirements of the Corporation Code
for increasing its authorized capital stock.
Nestle Philippines, Inc. vs. CA and SEC, (G.R. No. 86738, November
13, 1991)
§ The grant of preemptive rights preserves the proportionate shares

of the original partners so as not to dilute their respective interests
with the issuance of the new shares. Unlike the right of first refusal, a
preemptive right gives a partner a preferential right over the newly
issued shares only to the extent that it retains its original proportionate
share in the joint venture.
§ Notice Requirement
§ To give the stockholders knowledge of the intended sale of shares

of stock of the corporation, in order that they may exercise their
preemptive right.
§ While the Corporation Code allows the transfer of all or

substantially all the properties and assets of a corporation, the
transfer should not prejudice the creditors of the assignor. The only
way the transfer can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the assignor. The
acquisition by the assignee of all or substantially all of the assets of
the assignor necessarily includes the assumption of the assignor's
liabilities, unless the creditors who did not consent to the transfer
choose to rescind the transfer on the ground of fraud. To allow an
assignor to transfer all its business, properties and assets without the
consent of its creditors and without requiring the assignee to assume
the assignor's obligations will defraud the creditors. The assignment
will place the assignor's assets beyond the reach of its creditors.
Strategic Alliance Development Corp. vs. Radstock Securities

Limited, et al., (G.R. Nos. 178158 & 180428, December 4, 2009)
§ The requirement of unrestricted retained earnings to cover the

shares is based on the trust fund doctrine which means that the
capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors.
The reason is that creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying
corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void.
P a g e | 131

Boman Environmental Development Corporation vs. Court of

Appeals, (G.R. No. 77860, November 22, 1988)
TRUST FUND DOCTRINE
§ Is a "rule that the property of a corporation is a trust fund for the

payment of creditors, but such property can be called a trust fund
'only by way of analogy or metaphor.' As between the corporation
itself and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a fund for the
payment of its debts"
§ The "Trust Fund" doctrine considers this subscribed capital as a trust
fund for the payment of the debts of the corporation, to which the
creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends
must never impair the subscribed capital; subscription commitments
cannot be condoned or remitted; nor can the corporation buy its
own shares using the subscribed capital as the consideration
therefor.
§ Under the trust fund doctrine, a corporation has no legal capacity

to release an original subscriber to its capital stock from the
obligation of paying for his shares, in whole or in part, without a
valuable consideration, or fraudulently, to the prejudice of creditors.
The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for
the satisfaction of its debt. To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to
contribute to the payment of its debts by making good unpaid
balances upon their subscriptions, it is only necessary to establish that
the stockholders have not in good faith paid the par value of the
stocks of the corporation.
Donnina C. Halley vs. Printwell, Inc., (G.R. No. 157549, May 30, 2011)
ULTRA VIRES ACTS
§ In legal parlance, "ultra vires" act refers to one which is not within
the corporate powers conferred by the Corporation Code or articles
of incorporation or not necessary or incidental in the exercise of the
powers so conferred.
Lopez Realty, Inc. vs. Florentina Fontecha, (G.R. No. 76801, August 11,
1995)
§ A distinction should be made between corporate acts or

contracts which are illegal and those which are merely ultra vires.
The former contemplates the doing of an act which is contrary to
law, morals, or public order, or contravene some rules of public
policy or public duty, and are, like similar transactions between
P a g e | 132

individuals, void. They cannot serve as basis of a court action, nor

acquire validity by performance, ratification, or estoppel. Mere ultra
vires acts, on the other hand, or those which are not illegal and void
ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Maria Carla Pirovano vs. The De La Rama Steamship Co., (G.R. No. L-
5377, December 29, 1954)
BY LAWS
§ Non-filing of by-laws will not automatically dissolve the

corporation.
§ With the adoption of PD 902-A, it is now clear that the failure to file
by-laws within the required period is only a ground for suspension or
revocation of the certificate of registration of corporations. Non-filing
of the by-laws will not result in automatic dissolution of the
corporation.
Chung Ka Bio vs. Intermediate Appellate Court, (G.R. No. L-71837,

July 26, 1988)
VOTING TRUST AGREEMENTS
§ A voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares
as long as the voting trust agreement is not entered "for the purpose
of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud." Thus,
the traditional concept of a voting trust agreement primarily
intended to single out a stockholder's right to vote from his other
rights as such and made irrevocable for a limited duration may in
practice become a legal device whereby a transfer of the
stockholders’ shares is effected subject to the specific provision of
the voting trust agreement. The execution of a voting trust
agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other
hand.
Ramon C. Lee vs. Court of Appeals, (G.R. No. 93695, February 4, 1992)
STOCK TRANSFERS
§ The only limitation imposed by Section 63 of the Corporation

Code is when the corporation holds any unpaid claim against the
shares intended to be transferred.
§ A corporation, either by its board, its by-laws, or the act of its

officers, cannot create restrictions in stock transfers, because: ". . .
P a g e | 133

restrictions in the traffic of stock must have their source in legislative

enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the
absence of such power, cannot ordinarily inquire into or pass upon
the legality of the transactions by which its stock passes from one
person to another, nor can it question the consideration upon which
a sale is based..."
§ The right of a transferee/assignee to have stocks transferred to his

name is an inherent right flowing from his ownership of the stocks.
Thus: "whenever a corporation refuses to transfer and register stock in
cases like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock in the books of the corporation."
The corporation's obligation to register is ministerial.
Rural Bank of Salinas, Inc. vs. Court of Appeals, (G.R. No. 96674, June
26, 1992); Eric L. Lee vs. Henry J. Trocino, et al., (G.R. No. 164648, June
19, 2009)
REGISTRATION IN BOOKS
§ The corporation did not keep books and records. Perforce, no

transfer was ever recorded, much less effected as to prejudice third
parties. The transfer must be registered in the books of the
corporation to affect third persons.
Concepcion Magsaysay-Labrador vs. CA and Adelaida Rodriguez-
Magsaysay, (G.R. No. 58168, December 19, 1989)
RIGHT OF INSPECTION
§ stockholder may exercise his statutory right of inspection, the only

express limitation being that (1) the right of inspection should be
exercised at reasonable hours on business days; (2) the person
demanding to examine and copy excerpts from the corporation's
records and minutes has not improperly used any information
secured through any previous examination of the records of such
corporation; and (3) the demand is made in good faith or for a
legitimate purpose.
Rep. of the Phil. (PCGG) vs. Sandiganbayan, et al., (G.R. No. 88809,
July 10, 1991); Victor Africa vs. PCGG, (G.R. No. 83831, January 9,
1992); Ma. Belen Flordeliza C. Ang-Abaya, et al. vs. Eduardo G. Ang,
(G.R. No. 178511, December 4, 2008)
MERGER AND CONSOLIDATION
§ Consolidation is the union of two or more existing entities to form a

new entity called the consolidated corporation.
§ A merger, on the other hand, is a union whereby one or more

existing corporations are absorbed by another corporation that
P a g e | 134

survives and continues the combined business. The merger, however,

does not become effective upon the mere agreement of the
constituent corporations. Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law
authorizing them.
For a valid merger or consolidation, the approval by the Securities

and Exchange Commission (SEC) of the articles of merger or
consolidation is required. These articles must likewise be duly
approved by a majority of the respective stockholders of the
constituent corporation
§ The Corporation Code does not mandate the absorption of the

employees of the non-surviving corporation by the surviving
corporation in the case of a merger. The rule is that unless expressly
assumed, labor contracts such as employment contracts and
collective bargaining agreements are not enforceable against a
transferee of an enterprise, labor contracts being in personam, thus
binding only between the parties. A labor contract merely creates
an action in personam and does not create any real right which
should be respected by third parties. This conclusion draws its force
from the right of an employer to select his employees and to decide
when to engage them as protected under our Constitution, and the
same can only be restricted by law through the exercise of the
police power.
BPI vs. BPI Employees Union-Davao Chapter-Federation of Unions in

BPI Unibank, (G.R. No. 164301, August 10, 2010), citing Sundowner
Development Corp. v. Drilon, (G.R. No. 82341, December 6, 1989)
RIGHT OF APPRAISAL
§ [Appraisal right] means that a stockholder who dissented and

voted against the proposed corporate action, may choose to get
out of the corporation by demanding payment of the fair market
value of his shares. When a person invests in the stocks of a
corporation, he subjects his investment to all the risks of the business
and cannot just pull out such investment should the business not
come out as he expected. He will have to wait until the corporation
is finally dissolved before he can get back his investment, and even
then, only if sufficient assets are left after paying all corporate
creditors. His only way out before dissolution is to sell his shares should
he find a willing buyer. If there is no buyer, then he has no recourse
but to stay with the corporation. However, in certain specified
instances, the Code grants the stockholder the right to get out of the
corporation even before its dissolution because there has been a
major change in his contract of investment with which he does not
agree and which the law presumes he did not foresee when he
bought his shares. Since the will of two-thirds of the stocks will have to
prevail over his objections, the law considers it only fair to allow him
to get back his investment and withdraw from the corporation.
P a g e | 135

181455-56 & 182008, December 4, 2009)
Definition; Rights Foreign Corporations
§ To be doing or "transacting business in the Philippines" for purposes

of Section 133 of the Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is, perform specific
business transactions within the Philippine territory on a continuing
basis in its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine business
license. If a foreign corporation does not transact such kind of
business in the Philippines, even if it exports its products to the
Philippines, the Philippines has no jurisdiction to require such foreign
corporation to secure a Philippine business license.
B. Van Zuiden Bros., Ltd. vs. GTVL Mfg. Industries, Inc., (G.R. No.
147905, May 28, 2007)
§ A foreign corporation may sue in this jurisdiction for infringement

of trademark and unfair competition although it is not doing business
in the Philippines because the Philippines was a party to the
Convention of the Union of Paris for the Protection of Industrial
Property.
Converse Rubber Corp. vs. Universal Rubber Products, Inc., (L-27906,

January 8, 1987)
§ A foreign corporation not licensed to do business in the Philippines

is not absolutely incapacitated from filing a suit in local courts. Only
when that foreign corporation is "transacting" or "doing business" in
the country will a license be necessary before it can institute suits.
Aboitiz Shipping Corp. vs. Insurance Co. of North America, (G.R. No.
168402, August 6, 2008)
§ In the recent case of Ang-Abaya, et al. v. Ang, et al., the Court

had the occasion to enumerate the requisites before the penal
provision under Section 144 of the Corporation Code may be
applied in a case of violation of a stockholder or member's right to
inspect the corporate books/records as provided for under Section
74 of the Corporation Code.
Requisites
1. A director, trustee, stockholder or member has made a prior

demand in writing for a copy of excerpts from the corporation's
records or minutes;
2. Any officer or agent of the concerned corporation shall refuse to
allow the said director, trustee, stockholder or member of the
corporation to examine and copy said excerpts;
P a g e | 136

3. If such refusal is made pursuant to a resolution or order of the

board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for
such refusal; and,
4. Where the officer or agent of the corporation sets up the defense
that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any
information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his
demand, the contrary must be shown or proved.
Sy Tiong Shiou, et al. vs. Sy Chim, et al., (G.R. Nos. 174168 & 179438,
March 30, 2009)
§ Section 145 of the Corporation Code clearly provides 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." Even if no trustee is
appointed or designated during the three-year period of the
liquidation of the corporation, the Court has held that the board of
directors may be permitted to complete the corporate liquidation by
continuing as "trustees" by legal implication.
SUPPLEMENTAL NOTES AND QUESTIONS FOR CORPORATION LAW
ON CORPORATION LAW
X is president of AB, a family owned corporation which defrauded Y

when they failed to deliver a motor vehicle which was admittedly
previously sold and delivered already to another person instead. X
and Y are cousins and it was thru the former’s representation that the
latter decided to buy the motor vehicle from AB. X now raises the
defense that he is not a party to the contract and there is no ground
to pierce the veil of corporate fiction.
There is ground to pierce the veil of corporate fiction.
The test in determining the applicability of the doctrine of piercing

the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but

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

P a g e | 137

positive legal duty, or dishonest and unjust acts in contravention of

plaintiffs’ legal rights; and
3. The aforesaid control and breach of duty must proximately

cause the injury or unjust loss complained of.
In a dispute involving the corporation and its stockholders, how

should the articles of incorporation and by-laws be appreciated and
construed?
In the case of Forest Hills Golf and Country Club, Inc., vs. Gardpro
(GR no.164686, October 22, 2014), the Supreme Court had
emphasized that the Articles of Incorporation defines the contractual
relationship between the corporation with its stockholders, the
corporation and the state, and the stockholders and the state.
Hence, they are binding not just on the corporation but also on the
stockholders themselves. On the other hand, the by-laws are
considered to be the “private statutes” by which the corporation is
to be governed. In construing and applying the provisions of the
articles of incorporation and the by-laws of the corporation
therefore, the plain meaning or literal meaning rule embodied in
Article 1370 of the Civil Code shall apply.
May the directors of a corporation be compelled to participate in

arbitration proceedings, when they were not parties to the contract
that contained the arbitration clause?
In the case of Lanuza Jr., vs. BF Corporation (GR no.174938, October

1, 2014), the High Court stated that, while arbitration promotes the
parties’ autonomy in resolving their disputes, it also recognized the
decision made in Heirs of Augusto Salas Jr., vs. Laperal Realty
Corporation (378 Phil.Reports 369) that, an arbitration clause shall not
apply to persons who were neither parties to the contract nor
assignees of previous parties.
In Lanuza, the Court therefore ruled that, “As a general rule, a

corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate
in arbitration proceedings made pursuant to an agreement entered
into by the corporation. He or she is not a party to that agreement.”
This rule is consistent as well with the separate and juridical
personality of juridical persons vis-à-vis, their directors, officers,
stockholders and agents.
The ruling in Lanuza however should be considered as an application

of the general rule, except of course when there are ground to
pierce the veil of corporate fiction.
Can the doctrine of piercing the veil of corporate fiction be used to

establish or acquire jurisdiction over a corporation?
P a g e | 138

No. This is so because the doctrine of piercing the veil of corporate

fiction comes to play only during the trial of the case after the court
has already acquired jurisdiction over the corporation. Hence,
before this doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have jurisdiction
over the corporation.
The implication of the above comment is twofold: (1) the court must
first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and (2) the
doctrine of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly commenced
involving parties duly brought under the authority of the court by way
of service of summons or what passes as such service. (Kukan
International vs. J.Amor Reyes [2010])
Is the paid-up capital of a corporation a reflection of its financial

capacity to meet its recurrent and long-term obligations?
No. Paid-up capital is merely seed money to start a corporation or a

business entity. Paid-up capitalization of PhP 5,000 is not and should
not be taken as a reflection of the firm’s capacity to meet its
recurrent and long-term obligations. It must be borne in mind that the
equity portion cannot be equated to the viability of a business
concern, for the best test is the working capital which consists of the
liquid assets of a given business relating to the nature of the business
concern.
Neither should the level of paid-up capital of Kukan, Inc. upon its
incorporation be viewed as a badge of fraud, for it is in compliance
with Sec. 13 of the Corporation Code, which only requires a minimum
paid-up capital of PhP 5,000.
May minority stockholders file their derivative suit against the

corporation’s board of directors for acts of mismanagement?
In Ching vs. Subic Bay Golf and Country Club, Inc., (GR no.174353,
September 10, 2014), the High Court ruled that a stockholders’ right
to institute a derivative suit is not based on any express provision of
the Corporation Code or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
The following are the elements of a derivative suit, which must all
concur:
1. He was a stockholder or a member at the time the acts or

transactions subject of the action occurred and at the time the
action was filed;
P a g e | 139

2. He exerted all reasonable efforts and alleges the same with

particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
3. No appraisal rights are available for the act or acts complained of;
4. The suit is not a nuisance or harassment suit.
In corporate rehabilitation proceedings, whose rights shall prevail
over the other?
This was the issue that the Supreme Court had to confront with in the
case of Aquino vs. Pacific Plans, Inc., (GR no.193108, December 10,
2014) involving the plan holders and other creditors of pre-need
company Pacific Plans.
In this case, the Supreme Court had the opportunity to discuss the
“Cram Down”5 power of the rehabilitation court. This prerogative
given to the Rehabilitation Court maintains that the court may
approve a rehabilitation plan over the objection of the creditors if, in
its judgment, the rehabilitation of the debtors is feasible and the
opposition of creditors is manifestly unreasonable. The High Court
noted that:
“While the voice and participation of the creditors is crucial in the

determination of the viability of the rehabilitation plan, as they stand
to benefit or suffer in the implementation thereof, the interests of all
stakeholders is the ultimate and prime consideration.”

5 See section 64 of the Financial Rehabilitation and Insolvency Law (FRIA): Section 64. Creditor
Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and
stakeholders that the Plan is ready for their examination. Within twenty (2Q) days from the said
notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class,
for purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless
approved by all classes of creditors w hose rights are adversely modified or affected by the Plan.
For purposes of this section, the Plan is deemed to have been approved by a class of creditors if
members of the said class holding more than fifty percent (50%) of the total claims of the said
class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of
their respective claims based on the registry of claims submitted by the rehabilitation receiver
pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the
Rehabilitation Plan if all of the following circumstances are present:
(a)The Rehabilitation Plan complies with the requirements specified in this Act.
(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would have
received if the debtor were under liquidation.
P a g e | 140

In relation to corporate rehabilitation proceedings, the Supreme

Court in the case of Philippine Bank of Communications vs. Basic
Polyprinters and Packaging Corporation (GR no.187581, October
2014) ruled as well that the purpose of such proceedings is two-fold –
(1.) To efficiently and equitably distribute the assets of the insolvent
debtor to its creditors; and (2.) To provide the debtor with a fresh
start.
The “material financial commitment” rule was also discussed in the

same aforementioned case. This rule becomes significant in
determining the earnestness and good faith of the financially
distressed corporation in financing its proposed rehabilitation plan.
This material financial commitment may include the readiness,
willingness and ability of the corporation to contribute funds or
property to guarantee the operation of the corporation during the
period of rehabilitation.
Will the fact that a person acting as President, Chairman and

Treasurer of the corporation justify already the piercing of the veil of
corporate fiction based on the alter-ego theory?
No. In the case of WPM International Trading vs. Labayen (GR

no.182770, September 17, 2014) ruled that, “The control necessary to
invoke the instrumentality or alter ego rule is not majority or even
complete stock control but such domination of finances, policies
and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its
principal. The control must be shown to have been exercised at the
time the acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss for
which the complaint is made.”
May the Securities and Exchange Commission (SEC) issue a cease

and desist order against a corporation engaging in the sale of pre-
need plans without proper registration?
In Primamanila Plans vs. SEC (GR no.193791, August 6, 2014), the

Supreme Court upheld the authority of the SEC to issue a cease and
desist order. This may be done motu proprio, it being unnecessary
that it results from a verified complaint from an aggrieved party. A
prior hearing is also not required whenever the Commission finds it
appropriate to issue a cease and desist order that aims to curtail
fraud or grave or irreparable injury to investors.
May a Hospital Corporation be liable for negligent acts committed

by its Doctor-Consultants, who are not under their employ?
P a g e | 141

Yes. Hospitals may be found liable for the negligent acts committed
by its doctor-consultants, even if there is no employer-employee
relationship between them.
As a rule, hospitals are not liable for the negligence of its

independent contractors. However, it may be found liable if the
physician or independent contractor acts as an ostensible agent of
the hospital, under the doctrine of apparent authority, based on
proof of the existence of two important factors – (a.) The hospital’s
manifestations, and (b.) The patient’s reliance.
Is every action filed on behalf of a corporation a derivative suit?
No. Not every suit filed on behalf of the corporation is a derivative

suit. For a derivative suit to prosper, the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he
is suing on a derivative cause of action on behalf of the corporation
and all other stockholders similarly situated who may wish to join him
in the suit.
The following are the requisites for a derivative suit to prosper:
a) The party bringing suit should be a shareholder as of the time of

the act or transaction complained of, the number of his shares not
being material;
b) 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
c) 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.
In such actions, the corporation is the real party-in-interest while the suing
stockholder, on behalf of the corporation, is only a nominal party.
What is the rule on venue in derivative suits?
Derivative suits to be instituted shall be commenced and tried in the

Regional Trial Court which has jurisdiction over the principal office of
the corporation, partnership, or association concerned. Where the
principal office of the corporation, partnership or association is
registered in the Securities and Exchange Commission as Metro
Manila, the action must be filed in the city or municipality where the
head office is located.
May the doctrine of piercing the veil of corporate fiction apply to a

corporation not impleaded in the suit?
P a g e | 142

No. A corporation not impleaded in a suit cannot be subject to the

court’s process of piercing the veil of its corporate fiction. In that
situation, the court has not acquired jurisdiction over the corporation
and, hence, any proceedings taken against that corporation and its
property would infringe on its right to due process. The doctrine of
piercing the veil of corporate fiction comes to play only during the
trial of the case after the court has already acquired jurisdiction over
the corporation. Before this doctrine can be applied, the court must
first have jurisdiction over the corporation.
What is the meaning of capital in a corporation?
The term capital and other terms used to describe the capital
structure of a corporation are of universal acceptance and their
usages have long been established in jurisprudence. Briefly, capital
refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the capital
that persons (subscribers or shareholders) have agreed to take and
pay for, which need not necessarily by, and can be more than, the
par value of the shares.
In fine, it is the amount that the corporation receives, inclusive of the

premiums if any, in consideration of the original issuance of the
shares. In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital
account. It is the same amount that can be loosely termed as the
trust fund of the corporation. The Trust Fund doctrine considers this
subscribed capital as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may
be returned or released to the stockholder (except in the redemption
of redeemable shares) without violating this principle. Thus, dividends
must never impair the subscribed capital; subscription commitments
cannot be condoned or remitted; nor can the corporation buy its
own shares using the subscribed capital as the considerations
therefor.
How do you value the amount of dividends to be declared?
Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared
dividend taken from the unrestricted retained earnings of a
corporation. Thus, the value of the declaration in the case of a stock
dividend is the actual value of the original issuance of said stocks.
The Supreme Court has also said that in the case of stock dividends,
it is the amount that the corporation transfers from its surplus profit
P a g e | 143

account to its capital account or it is the amount that the

corporation receives in consideration of the original issuance of the
shares. It is the distribution of current or accumulated earnings to the
shareholders of a corporation pro rata based on the number of
shares owned. Such distribution in whatever form is valued at the
declared amount or monetary equivalent.
Is there consideration involved in the issuance of stock dividends?
Yes. The declaration of stock dividends is equivalent to a forced

purchase of stocks. By declaring stock dividends, a corporation
ploughs back a portion or its entire unrestricted retained earnings
either to its working capital or for capital asset acquisition or
investments. It is simplistic to say that the corporation did not receive
any actual payment for these. When the dividend is distributed, it
ceases to be a property of the corporation as the entire or portion of
its unrestricted retained earnings is distributed pro rata to corporate
shareholders.
WHAT IS THE CONTROVERSY TEST IN INTRACORPORATE DISPUTES?
Under the nature of the controversy test, the Incidents of that

relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra -corporate. The controversy
must not only be rooted in the existence of an intra corporate
relationship but must as well pertain to the enforcement of the
parties’ correlative rights and obligations under the Corporation
Code and the internal and intra – corporate regulatory rules of the
corporation. If the relationship and its incidents are merely incidental
to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra corporate controversy exists.
WHAT IS THE ALTER-EGO THEORY?
Case law lays down a three-pronged test to determine the

application of the alter ego theory, which is also known as the
instrumentality theory, namely:
(A) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice
in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence
of its own
(B) Such control must have been used by the defendant to commit
positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
(C) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
P a g e | 144

WHAT IS THE THREE-PRONGED TEST TO DETERMINE THE APPLICATION OF

THE ALTER EGO THEORY?
In this connection, case law lays down a three-pronged test to

determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but

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

positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and;
3. The aforesaid control and breach of duty must have proximately

caused the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test requires
that the subsidiary be completely under the control and domination
of the parent. It inquires whether a subsidiary corporation is so
organized and controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the parent corporation
such that its separate existence as a distinct corporate entity will be
ignored. In addition, the control must be shown to have been
exercised at the time the acts complained of took place.
The second prong is the "fraud" test. This test requires that the parent
corporation’s conduct in using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the relationship of the plaintiff to
the corporation. It recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that harms the
plaintiff creditor. As such, it requires a showing of "an element of
injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show
that the defendant’s control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered. A
causal connection between the fraudulent conduct committed
through the instrumentality of the subsidiary and the injury suffered or
the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant’s exercise of control
and improper use of the corporate form and, thereby, suffer
damages.
P a g e | 145

What is the role of the Corporate Secretary in a corporation?
It is the signature of the corporate secretary, as the one who is tasked

to prepare and record the minutes, that gives the minutes of the
meeting probative value and credibility.
The non-signing by the majority of the members of Board of Trustees

of the said minutes does not necessarily mean that the supposed
resolution was not approved by the board. The signing of the minutes
by all the members of the board is not required. There is no provision
in the Corporation Code of the Philippines that requires that the
minutes of the meeting should be signed by all the members of the
board.
The proper custodian of the books, minutes and official records of a

corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record
and prepare the minutes of the meeting. The signature of the
corporate secretary gives the minutes of the meeting probative
value and credibility.
Thus, without the certification of the corporate secretary, it is

incumbent upon the other directors or stockholders as the case may
be, to submit proof that the minutes of the meeting is accurate and
reflective of what transpired during the meeting. (LOPEZ REALTY, INC.
AND ASUNCION LOPEZ-GONZALES vs. SPOUSES REYNALDO
TANJANGCO AND MARIA LUISA ARGUELLES-TANJANGCO, G.R. No.
154291, November 12, 2014)
Can the refusal to inspect corporate books be the basis of a criminal

complaint?
Yes. All the rights guaranteed to corporators under Section 74 of the

Corporation Code are mandatory for the corporation to respect. All
such rights are just the same underpinned by the same policy
consideration of keeping public confidence in the corporate vehicle
thru an assurance of transparency in the corporation's operations.
(ADERITO Z. YUJUICO AND BONIFACIO C. SUMBILLA vs. CEZAR T.
QUIAMBAO AND ERIC C. PILAPIL, G.R. No. 180416, June 02, 2014)
MAY A DISSOLVED CORPORATION STILL CONTINUE TO FILE CASES?
Yes. A dissolved corporation may still continue to file cases within the
prescribed three-year period under Section 122 of the Corporation
Code.
SEC. 122. Corporate liquidation. Every corporation whose charter

expires by its own limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate
for three (3) years after the time when it would have been so
P a g e | 146

dissolved, for the purpose of prosecuting and defending suits by or

against it and enabling it to settle and close its affairs, to dispose of
and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized
and empowered to convey all of its property to trustees for the
benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of
its property in trust for the benefit of its stockholders, 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.
Upon winding up of the corporate affairs, any asset distributable to

any creditor or stockholder or member who is unknown or cannot be
found shall be escheated to the city or municipality where such
assets are located.
Will a change in corporate name result in the creation of a new

corporation?
No. A change in the corporate name does not make a new

corporation, whether effected by a special act or under a general
law. It has no effect on the identity of the corporation, or on its
property, rights, or liabilities because the corporation upon such
change in its name, is in no sense a new corporation, nor the
successor of the original corporation.
The mere change in the corporate name is not considered under the
law as the creation of a new corporation; hence, the renamed
corporation remains liable for the illegal dismissal of its employee
separated under that guise. Verily, the amendments of the articles of
incorporation of Zeta to change the corporate name to Zuellig
Freight and Cargo Systems, Inc., did not produce the dissolution of
the former as a corporation. (Zuellig Freight and Cargo Systems.
National Labor Relations Commission, et al., G.R. No. 157900, July 22,
2013)
What are the rules on corporate merger?
Merger is a re-organization of two or more corporations that results in

their consolidating into a single corporation, which is one of the
constituent corporations, one disappearing or dissolving and the
other surviving. To put it another way, merger is the absorption of one
or more corporations by another existing corporation, which retains
its identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s). The
P a g e | 147

absorbing corporation continues its existence while the life or lives of

the other corporation(s) is or are terminated.
The Corporation Code requires the following steps for merger or

consolidation:
(a.) The board of each corporation draws up a plan of merger or

consolidation. Such plan must include any amendment, if necessary,
to the articles of incorporation of the surviving corporation, or in case
of consolidation, all the statements required in the articles of
incorporation of a corporation.
(b.) Submission of plan to stockholders or members of each

corporation for approval. A meeting must be called and at least two
(2) weeks’ notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be
attached to the notice. Vote of two-thirds of the members or of
stockholders representing two thirds of the outstanding capital stock
will be needed. Appraisal rights, when proper, must be respected.
(c.) Execution of the formal agreement, referred to as the articles of

merger o[r] consolidation, by the corporate officers of each
constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation or amend the articles
of incorporation of the surviving corporation.
(d.) Submission of said articles of merger or consolidation to the SEC

for approval.
(e.) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.
(f.) Issuance of certificate of merger or consolidation.
A merger does not become effective upon the mere agreement of

the constituent corporations. All the requirements specified in the law
must be complied with in order for merger to take effect. Section 79
of the Corporation Code further provides that the merger shall be
effective only upon the issuance by the Securities and Exchange
Commission (SEC) of a certificate of merger.
IS THERE A DIFFERENCE BETWEEN PROXY SOLICITATION AND PROXY

VALIDATION?
It is plain that proxy solicitation is a procedure that antecedes proxy

validation. The former involves the securing and submission of proxies,
while the latter concerns the validation of such secured and
submitted proxies
P a g e | 148

WHEN IS PROXY AVAILABLE?
Shares of stock in corporations may be divided into voting shares

and non-voting shares, which are generally issued as preferred or
redeemable shares. Voting rights are exercised during regular or
special meetings of stockholders; regular meetings to be held
annually on a fixed date, while special meetings may be held at any
time necessary or as provided in the by-laws, upon due notice. The
Corporation Code provides for a whole range of matters which can
be voted upon by stockholders, including a limited set on which
even non-voting stockholders are entitled to vote on. On any of
these matters which may be voted upon by stockholders, the proxy
device is generally available.
Is a corporation entitled to moral damages?
As a rule, a corporation is not entitled to moral damages because,

not being a natural person, it cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety, mental anguish
and moral shock. The only exception to this rule is when the
corporation has a reputation that is debased, resulting in its
humiliation in the business realm. But in such a case, it is essential to
prove the existence of the factual basis of the damage and its
causal relation to petitioner’s acts. (Manila Electric Company vs.
T.E.A.M. Electronics Corporation, Technology Electronics Assembly
and Management Pacific Corporation; and Ultra Electronics
Instruments, Inc., G.R. No. 131723, December 13, 2007)
What is the purpose of financial rehabilitation?
Rehabilitation proceedings have a two-pronged purpose, namely:

(a) to efficiently and equitably distribute the assets of the insolvent
debtor to its creditors; and (b) to provide the debtor with a fresh start,
viz: Rehabilitation proceedings in our jurisdiction have equitable and
rehabilitative purposes. On the one hand, they attempt to provide
for the efficient and equitable distribution of an insolvent debtor's
remaining assets to its creditors; and on the other, to provide debtors
with a "fresh start" by relieving them of the weight of their outstanding
debts and permitting them to reorganize their affairs. The purpose of
rehabilitation proceedings is to enable the company to gain a new
lease on life and thereby allow creditors to be paid their claims from
its earnings.
P a g e | 149

TRANSPORTATION LAW
Laws Covered
1. Civil Code
Arts. 1732-1734 (General Provisions)

Arts.1736-1753 (Vigilance over Goods)
Arts.1754-1766 (Safety of Passengers)
2. Warsaw Convention
Civil Code Provisions
Art. 1732 - Common carriers
Vector Shipping Corp., et al. vs. Adelfo B. Macasa, et al., G.R. No.
160219, July 21, 2008
Alejandro Arada vs. Court of Appeals, G.R. No. 98243, July 1, 1992
Pedro de Guzman vs. CA and Ernesto Cendaña, G.R. No. L-47822,

December 22, 1988
Philippine Air Lines, Inc. vs. Court of Appeals, G.R. No. L-46558, July 31,
1981
The test to determine a common carrier is "whether the given

undertaking is a part of the business engaged in by the carrier which
he has held out to the general public as his occupation rather than
the quantity or extent of the business transacted." . . .
Planters Products, Inc. vs. Court of Appeals, G.R. No. 101503,

September 15, 1993
Estrellita M. Bascos vs. Court of Appeals, G.R. No. 101089, April 7, 1993
Article 1732 makes no distinction between one whose principal

business activity is the carrying of persons or goods or both, and one
who does such carrying only as an ancillary activity (in local idiom, as
"a sideline"). Article 1732 also carefully avoids making any distinction
between a person or enterprise offering transportation service on a
regular or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis. Neither does Article 1732
distinguish between a carrier offering its services to the "general
public," i.e., the general community or population, and one who
offers services or solicits business only from a narrow segment of the
general population
P a g e | 150

First Phil. Industrial Corp. vs. Court of Appeals, G.R. No. 125948,
December 29, 1998
National Steel Corp. vs. Court of Appeals, G.R. No. 112287 & 112350,
December 12, 1997
Engracio Fabre, Jr. vs. Court of Appeals, G.R. No. 111127, July 26,
1996
It is not necessary that the carrier be issued a certificate of public

convenience, and this public character is not altered by the fact
that the carriage of the goods in question was periodic, occasional,
episodic or unscheduled
Asia Lighterage and Shipping, Inc. vs. Court of Appeals, G.R. No.
147246, August 19, 2003
Philippine American General Insurance Company vs. PKS Shipping

Company, G.R. No. 149038, April 9, 2003
FGU Insurance Corp. vs. G.P. Sarmiento Trucking Corp., G.R. No.
141910. August 6, 2002
Virgines Calvo vs. UCPB General Insurance Co., G.R. No. 148496.
March 19, 2002
Loadstar Shipping Co. vs. Court of Appeals, G.R. No. 131621.

September 28, 1999
A freight forwarder's liability is limited to damages arising from its own

negligence, including negligence in choosing the carrier; however,
where the forwarder contracts to deliver goods to their destination
instead of merely arranging for their transportation, it becomes liable
as a common carrier for loss or damage to goods. A freight
forwarder assumes the responsibility of a carrier, which actually
executes the transport, even though the forwarder does not carry
the merchandise itself.
Unsworth Transport International (Phils.), Inc. vs. Court of Appeals, et

al., G.R. No. 166250, July 26, 2010
Art. 1733 - Common carriers are bound to observe extraordinary

diligence
Virgines Calvo vs. UCPB General Insurance Co., G.R. No. 148496.
March 19, 2002
Phil-Am General Insurance Co., Inc. vs. Court of Appeals, G.R. No.
116940, June 11, 1997
Trans-Asia Shipping Lines vs. Court of Appeals, G.R. No. 118126,

March 4, 1996
P a g e | 151


September 15, 1993
American Home Assurance, Co. vs. Court of Appeals, G.R. No. 94149,
May 5, 1992
Heirs of Amparo De Los Santos vs. Court of Appeals, G.R. No. 51165,
June 21, 1990
1981
Common carriers are bound to observe extraordinary diligence over

the goods they transport.
We need only to stress that from the nature of their business and for
reasons of public policy, common carriers are bound to observe
extraordinary diligence over the goods they transport according to
all the circumstances of each case. In the event of loss, destruction
or deterioration of the insured goods, common carriers are
responsible, unless they can prove that the loss, destruction or
deterioration was brought about by the causes specified in Article
1734 of the Civil Code. In all other cases, common carriers are
presumed to have been at fault or to have acted negligently, unless
they prove that they observed extraordinary diligence.
Aboitiz Shipping Corp. vs. New India Assurance Co., Ltd., G.R. No.
156978, August 24, 2007
A common carrier and, as such, is obliged to exercise extraordinary

diligence in transporting its passengers safely.
Victory Liner, Inc. vs. Pablo Race, G.R. No. 164820, December 8, 2008
A common carrier, from the nature of its business and for reasons of
public policy, is bound to observe extraordinary diligence for the
safety of the passengers it transports.
Armando G. Yrasuegui vs. Philippine Airlines, Inc., G.R. No. 168081,

October 17, 2008
A common carrier is bound by law to exercise extraordinary

diligence and utmost care in ensuring for the safety and welfare of its
passengers with due regard for all the circumstances.
Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 123238,
September 22, 2008
Mere proof of delivery of the goods in good order to a common

carrier and of their arrival in bad order at their destination constitutes
a prima facie case of fault or negligence against the carrier. If no
adequate explanation is given as to how the deterioration, loss, or
P a g e | 152

destruction of the goods happened, the transporter shall be held

responsible.

al., G.R. No. 166250, July 26, 2010
Art. 1734 - When common carriers are not responsible for loss,
destruction, or deterioration of goods
Iron Bulk Shipping Phil., Co., Ltd. vs. Remington Industrial Sales Corp.,
G.R. No. 136960, December 8, 2003
DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., G.R. No.
135377, October 7, 2003
Asia Lighterage and Shipping, Inc. vs. Court of Appeals, G.R. No.
147246, August 19, 2003
Phil. American General Insurance vs. MGG Marine Services, G.R. No.
135645, March 8, 2002
Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July
12, 1994

September 15, 1993
May 5, 1992
Though it is true that common carriers are presumed to have been at

fault or to have acted negligently if the goods transported by them
are lost, destroyed, or deteriorated, and that the common carrier
must prove that it exercised extraordinary diligence in order to
overcome the presumption, the plaintiff must still, before the burden
is shifted to the defendant, prove that the subject shipment suffered
actual shortage. This can only be done if the weight of the shipment
at the port of origin and its subsequent weight at the port of arrival
have been proven by a preponderance of evidence, and it can be
seen that the former weight is considerably greater than the latter
weight, taking into consideration the exceptions provided in Article
1734 of the Civil Code.
Asian Terminals, Inc. vs. Simon Enterprises, Inc., G.R. No. 177116,
February 27, 2013
The Berth Term Grain Bill of Lading states that the subject shipment
was carried with the qualification "Shipper's weight, quantity and
quality unknown," meaning that it was transported with the carrier
having been oblivious of the weight, quantity, and quality of the
cargo. This interpretation of the quoted qualification is supported by
P a g e | 153

Wallem Philippines Shipping, Inc. v. Prudential Guarantee &

Assurance, Inc., a case involving an analogous stipulation in a bill of
lading, wherein the Supreme Court held that:
Indeed, as the bill of lading indicated that the contract of carriage

was under a "said to weigh" clause, the shipper is solely responsible
for the loading while the carrier is oblivious of the contents of the
shipment.
The fact that the cargo was shipped with the arrangement "Shipper's
weight, quantity and quality unknown," indeed means that the
weight of the cargo could not be determined using as basis the
figures written on the Berth Term Grain Bill of Lading... Consequently,
the respondent must still prove the actual weight of the subject
shipment at the time it was loaded at the port of origin so that a
conclusion may be made as to whether there was indeed a
shortage for which petitioner must be liable. . . The respondent
having failed to present evidence to prove the actual weight of the
subject shipment when it was loaded onto the M/V "Tern," its cause
of action must then fail because it cannot prove the shortage that it
was alleging. Indeed, if the claimant cannot definitively establish the
weight of the subject shipment at the point of origin, the fact of
shortage or loss cannot be ascertained. The claimant then has no
basis for claiming damages resulting from an alleged shortage.
Asian Terminals, Inc. vs. Simon Enterprises, Inc., G.R. No. 177116,
February 27, 2013 citing Wallem Philippines Shipping, Inc. v. Prudential
Guarantee & Assurance, Inc., 445 Phil. 136, 153 (2003)
Art. 1735 - When common carriers are presumed to have been at

fault or to have acted negligently
Presumption of Fault or Negligence by Common Carriers
A business intended to serve the travelling public primarily, a

contract of carriage is imbued with public interest. The law governing
common carriers consequently imposes an exacting standard.
Article 1735 of the Civil Code provides that in case of lost or
damaged goods, common carriers are presumed to have been at
fault or to have acted negligently, unless they prove that they
observed extraordinary diligence as required by Article 1733. Thus, in
an action based on a breach of contract of carriage, the aggrieved
party does not have to prove that the common carrier was at fault or
was negligent. All that he has to prove is the existence of the
contract and the fact of its non-performance by the carrier.
Air France vs. Bonifacio H. Gillego, G.R. No. 165266, December 15,
2010
P a g e | 154

Aboitiz Shipping Corp. vs. Insurance Company of North America, G.R.

No. 168402, August 6, 2008
Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July
12, 1994
Home Insurance Corp. vs. Court of Appeals, G.R. No. 109293, August
18, 1993
Extraordinary diligence must include safeguarding the shipment from

damage coming from natural elements such as rainfall.
Aboitiz Shipping Corp. vs. Insurance Co. of North America, G.R. No.
168402, August 6, 2008
Art. 1736 - Extraordinary responsibility of common carriers
Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 80936,
October 17, 1990
Explicit is the rule under Article 1736 of the Civil Code that the
extraordinary responsibility of the common carrier begins from the
time the goods are delivered to the carrier. This responsibility remains
in full force and effect even when they are temporarily unloaded or
stored in transit unless the shipper or owner exercises the right of
stoppage in transit and terminates only after the lapse of a
reasonable time for the acceptance of the goods by the consignee
or such other person entitled to receive them. And, there is delivery
to the carrier when the goods are ready for and have been placed
in the exclusive possession, custody and control of the carrier for the
purpose of their immediate transportation and the carrier has
accepted them. Where such a delivery has thus been accepted by
the carrier, the liability of the common carrier commences eo
instanti.
Benito Macam vs. Court of Appeals, G.R. No. 125524, August 25, 1999
Aniceto G. Saludo, Jr. vs. Court of Appeals, G.R. No. 95536, March 23,
1992
Art. 1739 - Common carrier must exercise due diligence to prevent or

minimize loss before, during and after natural disaster to be exempt
from liability
Alejandro Arada vs. Court of Appeals, G.R. No. 98243, July 1, 1992
Eastern Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R. No.
L-69044. May 29, 1987
Art. 1742 - Common carrier must exercise due diligence to forestall or

lessen loss
P a g e | 155

Iron Bulk Shipping Phil., Co., Ltd. vs. Remington Industrial Sales Corp.,
G.R. No. 136960, December 8, 2003
Art. 1744 - Stipulation limiting liability of common carrier to degree

less than extraordinary diligence
Samar Mining Co., Inc. vs. Nordeutscher Lloyd, G.R. No. L-28673.
October 23, 1984
Amparo Servando vs. Phil. Steam Navigation Co., G.R. Nos. L-36481-2.
October 23, 1982
It is to be noted that 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 rights and obligations of common
carriers are governed by the Code of Commerce and special laws.
Thus, the COGSA supplements the Civil Code by establishing a
provision limiting the carrier's liability in the absence of a shipper's
declaration of a higher value in the bill of lading.

al., G.R. No. 166250, July 26, 2010
Art. 1745 - Stipulations considered unreasonable, unjust and contrary

to public policy
Valenzuela Hardwood and Industrial Supply vs. Court of Appeals,

G.R. No. 102316, June 30, 1997
Estrellita M. Bascos vs. Court of Appeals, G.R. No. 101089, April 7, 1993
Pedro de Guzman vs. CA and Ernesto Cendaña, G.R. No. L-47822,

December 22, 1988
Art. 1749 - Stipulation limiting common carrier's liability to value of the

goods appearing in bill of lading
Phil. Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R. No.
145044, June 12, 2008
Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15,
1992
A stipulation in the bill of lading limiting the common carrier's liability

for loss or destruction of a cargo to a certain sum, unless the shipper
or owner declares a greater value, is sanctioned by law.
Philippine Charter Insurance Corp. vs. Neptune Orient Lines, et al.,

G.R. No. 145044, June 12, 2008
A bill of lading is a written acknowledgement of the receipt of goods

and an agreement to transport and to deliver them at a specified
P a g e | 156

place to a person named or on his or her order. It operates both as a

receipt and as a contract. It is a receipt for the goods shipped and a
contract to transport and deliver the same as therein stipulated. As a
receipt, it recites the date and place of shipment, describes the
goods as to quantity, weight, dimensions, identification marks,
condition, quality, and value. As a contract, it names the contracting
parties, which include the consignee; fixes the route, destination, and
freight rate or charges; and stipulates the rights and obligations
assumed by the parties.

al., G.R. No. 166250, July 26, 2010
Art. 1750 - Contract fixing the sum that may be recovered by the
owner or shipper for the loss, destruction, or deterioration of the
goods, when valid
Phil. Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R. No.
145044, June 12, 2008
A stipulation in the bill of lading limiting the common carrier's liability

for loss or destruction of a cargo to a certain sum, unless the shipper
or owner declares a greater value, is sanctioned by law.
Philippine Charter Insurance Corp. vs. Neptune Orient Lines, et al.,

G.R. No. 145044, June 12, 2008
Art. 1753 - Governing law
May 5, 1992
Maritime Company of the Phils. vs. Court of Appeals, G.R. No. 47004,
March 8, 1989
Eastern Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R. No.
L-69044. May 29, 1987
Art. 1755 - Duty of common carrier for safety of passengers
Art. 1755 - Duty or common carrier for safety of passengers
Japan Airlines vs. Jesus Simangan, G.R. No. 170141, April 22, 2008
Fortune Express vs. Court of Appeals, G.R. No. 119756, March 18, 1999

March 4, 1996
Dangwa Transportation Co., Inc. vs. Court of Appeals, G.R. No.

95582, October 7, 1991
P a g e | 157

June 21, 1990
Kapalaran Bus Line vs. Angel Coronado, G.R. No. 85331, August 25,
1989
1981
A common carrier is bound by law to exercise extraordinary

diligence and utmost care in ensuring for the safety and welfare of its
passengers with due regard for all the circumstances.
Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 123238,
September 22, 2008
A common carrier is bound to carry the passengers safely as far as

human care and foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the circumstances.

October 17, 2008
Art. 1756 - Common carriers presumed at fault or negligent in case of

death of or injuries to passengers
June 21, 1990
Batangas Laguna Tayabas Bus Co. vs. Intermediate Appellate Court,

G.R. Nos. 74387-90, Nov. 14, 1988
1981
Art. 1759 - When common carriers are liable for negligence or willful
acts of its employees
Baliwag Transit, Inc. vs. Court of Appeals, G.R. No. 116110, May 15,
1996
Art. 1762 - Contributory negligence of passenger
Philippine National Railways vs. Court of Appeals, G.R. No. L-55347.

October 4, 1985
Art. 1763 - When common carrier is responsible for willful acts or

negligence of other passengers or of strangers
Jose Pilapil vs. Court of Appeals, G.R. No. 52159. December 22, 1989
P a g e | 158

A common carrier is bound to carry its passengers safely as far as

human care and foresight can provide, using the utmost diligence of
very cautious persons, with due regard for all the circumstances.

October 17, 2008
Art. 1764 - Damages against common carriers

March 4, 1996
Suplicio Lines, Inc. vs. Court of Appeals, G.R. No. 113578, July 14, 1995
Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. 54470, May 8,
1990
The "receipt by a person of a share in the profits of a business is prima

facie evidence that he is a partner in the business."
Philex Mining Corp. vs. CIR, G.R. No. 148187, April 16, 2008
As a general rule, moral damages are not recoverable in actions for

damages predicated on a breach of contract, unless there is fraud
or bad faith. As an exception, moral damages may be awarded in
case of breach of contract of carriage that results in the death of a
passenger, in accordance with Article 1764, in relation to Article 2206
(3) of the Civil Code.
[Articles 1764 and 2206] set forth the persons entitled to moral
damages. The omission from Article 2206 (3) of the brothers and
sisters of the deceased passenger reveals the legislative intent to
exclude them from the recovery of moral damages for mental
anguish by reason of the death of the deceased. Inclusio unius est
exclusio alterius.
Sulpicio Lines, Inc. vs. Domingo E. Curso, et al., G.R. No. 157009,
March 17, 2010
As a general rule, indeed, moral damages are not recoverable in an

action predicated on a breach of contract. This is because such
action is not included in Article 2219 of the Civil Code as one of the
actions in which moral damages may be recovered. By way of
exception, moral damages are recoverable in an action predicated
on a breach of contract: (a) where the mishap results in the death of
a passenger, as provided in Article 1764, in relation to Article 2206 (3),
of the Civil Code; and (b) where the common carrier has been guilty
of fraud or bad faith, as provided in Article 2220 of the Civil Code.
P a g e | 159

Philtranco Service Enterprises, Inc. vs. Felix Paras, et al., G.R. No.
161909, April 25, 2012
Art. 1766 - Code of commerce and other special laws
May 5, 1992
WARSAW CONVENTION
Warsaw Convention" means the Convention for the Unification of

Certain Rules Relating to International Carriage by Air signed at
Warsaw on 12 October 1929, or the Warsaw Convention as
amended at The Hague, 1955.
February 9, 1951
WARSAW CONVENTION FOR THE UNIFICATION OF CERTAIN RULES

RELATING TO INTERNATIONAL CARRIAGE BY AIR *
The President of the German Reich, the Federal President of the

Republic of Austria, His Majesty the King of the Belgians, the President
of the United States of Brazil, His Majesty the King of the Bulgarians,
the President of the Nationalist Government of China, His Majesty the
King of Denmark and Iceland, His Majesty the King of Egypt, His
Majesty the King of Spain, the Chief of State of the Republic of
Estonia, the President of the Republic of Finland, the President of the
French Republic, His Majesty the King of Great Britain, Ireland, and
the British Dominions beyond the Seas, Emperor of India, the
President of the Hellenic Republic, His Most Serene Highness the
Regent of the Kingdom of Hungary, His Majesty the King of Italy, His
Majesty the Emperor of Japan, the President of the Republic of
Latvia, Her Royal Highness the Grand Duchess of Luxemburg, the
President of the United Mexican States, His Majesty the King of
Norway, Her Majesty the Queen of the Netherlands, the President of
the Republic of Poland, His Majesty the King of Rumania, His Majesty
the King of Sweden, the Swiss Federal Council, the President of the
Czechoslovak Republic, the Central Executive Committee of the
Union of Soviet Socialist Republics, the President of the United States
of Venezuela, His Majesty the King of Yugoslavia:
Having recognized the advantage of regulating in a uniform manner

the conditions of international transportation by air in respect of the
documents used for such transportation and of the liability of the
carrier,
P a g e | 160

Having nominated to this end their respective Plenipotentiaries, who,

being thereto duly authorized, have concluded and signed the
following convention:
CHAPTER I
Scope of Definitions
ARTICLE 1. (1) This convention shall apply to all international

transportation of persons, baggage, or goods performed by aircraft
for hire. It shall apply equally to gratuitous transportation by aircraft
performed by an air transportation enterprise.
(2) For the purposes of this convention the expression

"international transportation" shall mean any transportation in which,
according to the contract made by the parties, the place of
departure and the place of destination, whether or not there be a
break in the transportation or a transshipment, are situated either
within the territories of two High Contracting Parties, or within the
territory of a single High Contracting Party, if there is an agreed
stopping place within a territory subject to the sovereignty,
suzerainty, mandate or authority of another power, even though that
power is not a party to this convention. Transportation without such
an agreed stopping place between territories subject to the
sovereignty, suzerainty, mandate, or authority of the same High
Contracting Party shall not be deemed to be international for the
purposes of this convention.
(3) Transportation to be performed by several successive air

carriers shall be deemed, for the purposes of this convention, to be
one undivided transportation, if it has been regarded by the parties
as a single operation, whether it has been agreed upon under the
form of a single contract or of a series of contracts, and it shall not
lose its international character merely because one contract or a
series of contracts is to be performed entirely within a territory subject
to the sovereignty, suzerainty, mandate, or authority of the same
High Contracting Party.
ARTICLE 2. (1) This convention shall apply to transportation

performed by the state or by legal entities constituted under public
law provided it falls within the conditions laid down in Article 1.
2. This convention shall not apply to transportation performed

under the terms of any international postal convention.
CHAPTER II
Transportation Documents
SECTION I
P a g e | 161

Passenger Ticket
ARTICLE 3. (1) For the transportation of passengers, the carrier must

deliver a passenger ticket which shall contain the following
particulars:
(a) The place and date of issue;
(b) The place of departure and of destination;
(c) The agreed stopping places, provided that the carrier may
reserve the right to alter the stopping places in case of necessity,
and that if he exercises that right, the alteration shall not have the
effect of depriving the transportation of its international character;
(d) The name and address of the carrier or carriers;
(e) A statement that the transportation is subject to the rules

relating to liability established by this convention.
(2) The absence, irregularity, or loss of the passenger ticket shall

not affect the existence or the validity of the contract of
transportation, which shall none the less be subject to the rules of this
convention. Nevertheless, if the carrier accepts a passenger without
a passenger ticket having been delivered he shall not be entitled to
avail himself of those provisions of this convention which exclude or
limit his liability.
SECTION II
Baggage Check
ARTICLE 4. (1) For the transportation of baggage, other than small

personal objects of which the passenger takes charge himself, the
carrier must deliver a baggage check.
(2) The baggage check shall be made out in duplicate, one part
for the passenger and the other part for the carrier.
(3) The baggage check shall contain the following particulars:
(a) The place and date of issue;
(b) The place of departure and of destination;
(c) The name and address of the carrier or carriers;
(d) The number of the passenger ticket;
(e) A statement that delivery of the baggage will be made to the

bearer of the baggage check;
(f) The number and weight of the packages;

P a g e | 162

(g) The amount of the value declared in accordance with article

22 (2);
(h) A statement that the transportation is subject to the rules

relating to liability established by this convention.
(4) The absence, irregularity, or loss of the baggage check shall

not affect the existence or the validity of the contract of
transportation which shall none the less be subject to the rules of this
convention. Nevertheless, if the carrier accepts baggage without a
baggage check having been delivered, or if the baggage check
does not contain the particulars set out at (d), (f), and (h) above, the
carrier shall not be entitled to avail himself of those provisions of the
convention which exclude or limit his ability.
SECTION III
Air Waybill
ARTICLE 5. (1) Every carrier of goods has the right to require the
consignor to make out and hand over to him a document called an
"air waybill"; every consignor has the right to require the carrier to
accept this document.
(2) The absence, irregularity, or loss of this document shall not

affect the existence or the validity of the contract of transportation
which shall, subject to the provisions of Article 9, be none the less
governed by the rules of this convention.
ARTICLE 6. (1) The air waybill shall be made out by the consignor in
three original parts and be handed over with the goods.
(2) The first part shall be marked "for the carrier” and shall be
signed by the consignor. The second part shall be marked "for the
consignee"; it shall be signed by the consignor and by the carrier and
shall accompany the goods. The third part shall be signed by the
carrier and handed by him to the consignor after the goods have
been accepted.
(3) The carrier shall sign on acceptance of the goods.
(4) The signature of the carrier may be stamped; that of the

consignor may be printed or stamped.
(5) If, at the request of the consignor, the carrier makes out the air
waybill, he shall be deemed, subject to proof to the contrary, to
have done so on behalf of the consignor.
ARTICLE 7. The carrier of goods has the right to require the

consignor to make out separate waybills when there is more than
one package.
P a g e | 163

ARTICLE 8. The air waybill shall contain the following particulars:
a. The place and date of its execution;

b. The place of departure and of destination;
c. The agreed stopping places, provided that the carrier may reserve
the right to alter the stopping places in case of necessity, and that if
he exercises that right the alteration shall not have the effect of
depriving the transportation of its international character;
d. The name and address of the consignor;
e. The name and address of the first carrier;
f. The name and address of the consignee, if the case so requires;
g. The nature of the goods;
h. The number of packages, the method of packing, and the particular
marks or numbers upon them;
i. The weight, the quantity, the volume, or dimensions of the goods;
j. The apparent condition of the goods and of the packing;
k. The freight, if it has been agreed upon, the date and place of
payment, and the person who is to pay it;
l. If the goods are sent for payment on delivery, the price of the goods,
and, if the case so requires, the amount of the expenses incurred;
m. The amount of the value declared in accordance with Article
22 (2).
n. The number of parts of the air waybill;
o. The documents handed to the carrier to accompany the air waybill;
p. The time fixed for the completion of the transportation and a brief
note of the route to be followed, if these matters have been agreed
upon;
q. A statement that the transportation is subject to the rules relating to
liability established by this convention.
ARTICLE 9. If the carrier accepts goods without an air waybill having

been made out, or if the air waybill does not contain all the
particulars set out in Article 8 (a) to (i), inclusive, and (q), the carrier
shall not be entitled to avail himself of the provisions of this
convention which exclude or limit his liability.
ARTICLE 10. (1) The consignor shall be responsible for the correctness
of the particulars and statements relating to the goods which he
inserts in the air waybill.
(2) The consignor shall be liable for all damages suffered by the
carrier or any other person by reason of the irregularity, incorrectness
or incompleteness of the said particulars and statements.
ARTICLE 11. (1) The air waybill shall be prima facie evidence of the
conclusion of the contract, of the receipt of the goods and of the
conditions of transportation.
P a g e | 164

(2) The statements in the air waybill relating to the weight,

dimensions, and packing of the goods, as well as those relating to
the number of packages, shall be prima facie evidence of the facts
stated; those relating to the quantity, volume and condition of the
goods shall not constitute evidence against the carrier except so far
as they both have been, and are stated in the air waybill to have
been, checked by him in the presence of the consignor, or relate to
the apparent condition of the goods.
ARTICLE 12. (1) Subject to his liability to carry out all his obligations
under the contract of transportation, the consignor shall have the
right to dispose of the goods by withdrawing them at the airport of
departure or destination, or by stopping them in the course of the
journey on any landing, or by calling for them to be delivered at the
place of destination, or in the course of the journey to a person other
than the consignee named in the air waybill, or by requiring them to
be returned to the airport of departure. He must not exercise this right
of disposition in such a way as to prejudice the carrier or other
consignors, and he must repay any expenses occasioned by the
exercise of this right.
(2) If it is impossible to carry out the orders of the consignor the

carrier must so inform him forthwith.
(3) If the carrier obeys the orders of the consignor for the
disposition of the goods without requiring the production of the part
of the air waybill delivered to the latter, he will be liable, without
prejudice to his right of recovery from the consignor, for any damage
which may be caused thereby to any person who is lawfully in
possession of that part of the air waybill.
(4) The right conferred on the consignor shall cease at the

moment when that of the consignee begins in accordance with
Article 13, below. Nevertheless, if the consignee declines to accept
the waybill or the goods, or if he cannot be communicated with, the
consignor shall resume his right of disposition.
ARTICLE 13. (1) Except in the circumstances set out in the preceding
article, the consignee shall be entitled, on arrival of the goods at the
place of destination, to require the carrier to hand over to him the air
waybill and to deliver the goods to him, on payment of the charges
due and on complying with the conditions of transportation set out in
the air waybill.
(2) Unless it is otherwise agreed, it shall be the duty of the carrier to

give notice to the consignee as soon as the goods arrive.
(3) If the carrier admits the loss of the goods, or if the goods have
not arrived at the expiration of seven days after the date on which
P a g e | 165

they ought to have arrived, the consignee shall be entitled to put

into force against the carrier the rights which flow from the contract
of transportation.
ARTICLE 14. The consignor and the consignee can respectively

enforce all the rights given them by Articles 12 and 13, each in his
own name, whether he is acting in his own interest or in the interest of
another, provided that he carries out the obligations imposed by the
contract.
ARTICLE 15. (1) Articles 12, 13, and 14 shall not affect either the
relations of the consignor and the consignee with each other or the
relations of third parties whose rights are derived either from the
consignor or from the consignee.
(2) The provisions of Article 12, 13, and 14 can only be varied by
express provision in the air waybill.
ARTICLE 16. (1) The consignor must furnish such information and
attach to the air waybill such documents as are necessary to meet
the formalities of customs, octroi, or police before the goods can be
delivered to the consignee. The consignor shall be liable to the
carrier for any damage occasioned by the absence, insufficiency, or
irregularity of any such information or documents, unless the damage
is due to the fault of the carrier or his agents.
(2) The carrier is under no obligation to enquire into the

correctness or sufficiency of such information or documents.
CHAPTER III
Liability of the Carrier
ARTICLE 17. The carrier shall be 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.
ARTICLE 18. (1) The carrier shall be liable for damage sustained in the
event of the destruction or loss of, or of damage to, any checked
baggage or any goods, if the occurrence which caused the
damage so sustained took place during the transportation by air.
(2) The transportation by air within the meaning of the preceding

paragraph shall comprise 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.
P a g e | 166

(3) The period of the transportation by air shall not extend to any
transportation by land, by sea, or by river performed outside an
airport. If, however, such transportation takes place in the
performance of a contract for transportation by air, for the purpose
of loading, delivery or transshipment, any damage is presumed,
subject to proof to the contrary, to have been the result of an event
which took place during the transportation by air.
ARTICLE 19. The carrier shall be liable for damage occasioned by

delay in the transportation by air of passengers, baggage, or goods.
ARTICLE 20. (1) The carrier shall not be liable if he proves that he and
his agents have taken all necessary measures to avoid the damage
or that it was impossible for him or them to take such measures.
(2) In the transportation of goods and baggage the carrier shall

not be liable if he proves that the damage was occasioned by an
error in piloting, in the handling of the aircraft, or in navigation and
that, in all other respects, he and his agents have taken all necessary
measures to avoid the damage.
ARTICLE 21. If the carrier proves that the damage was caused by or
contributed to by the negligence of the injured person the court
may, in accordance with the provisions of its own law, exonerate the
carrier wholly or partly from his liability.
ARTICLE 22. (1) In the transportation of passengers, the liability of the

carrier for each passenger shall be limited to the sum of 125,000
francs. Where, in accordance with the law of the court to which the
case is submitted, damages may be awarded in the form of
periodical payments, the equivalent capital value of the said
payments shall not exceed 125,000 francs. Nevertheless, by special
contract, the carrier and the passenger may agree to a higher limit
of liability.
(2) In the transportation of checked baggage and of goods, the

liability of the carrier shall be limited to a sum of 250 francs per
kilogram, unless the consignor has made, at the time when the
package was handed over to the carrier, a special declaration of
the value at delivery and has paid a supplementary sum if the case
so requires. In that case the carrier will be liable to pay a sum not
exceeding the declared sum, unless he proves that the sum is
greater than the actual value to the consignor at delivery.
(3) As regards objects of which the passenger takes charge

himself the liability of the carrier shall be limited to 5,000 francs per
passenger.
(4) The sums mentioned above shall be deemed to refer to the

French franc consisting of 65½ milligrams of gold at the standard of
P a g e | 167

fineness of nine hundred thousandths. These sums may be converted

into any national currency in round figures.
ARTICLE 23. Any provision tending to relieve the carrier of liability or

to fix a lower limit than that which is laid down in this convention shall
be null and avoid, but the nullity of any such provision shall not
involve the nullity of the whole contract, which shall remain subject
to the provisions of this convention.
ARTICLE 24. (1) In the cases covered by Articles 18 and 19 any action
for damages, however founded, can only be brought subject to the
conditions and limits set out in this convention.
(2) In the cases covered by Article 17 the provisions of the

preceding paragraph shall also apply, without prejudice to the
questions as to who the persons are who have the right to bring suit
and what are their respective rights.
ARTICLE 25. (1) The carrier shall not be entitled to avail himself of the
provisions of this convention which exclude or limit his liability, if the
damage is caused by his wilful misconduct or by such default on his
part as, in accordance with the law of the court to which the case is
submitted, is considered to be equivalent to wilful misconduct.
(2) Similarly, the carrier shall not be entitled to avail himself of the
said provisions, if the damage is caused under the same
circumstances by any agent of the carrier acting within the scope of
his employment.
ARTICLE 26. (1) Receipt by the person entitled to the delivery of

baggage or goods without complaint shall be prima facie evidence
that the same have been delivered in good condition and in
accordance with the document of transportation.
(2) In case of damage, the person entitled to delivery must

complain to the carrier forthwith after the discovery of the damage,
and, at the latest, within 3 days from the date of receipt in the case
of baggage and 7 days from the date of receipt in the case of
goods. In case of delay the complaint must be made at the latest
within 14 days from the date on which the baggage or goods have
been placed at his disposal.
(3) Every complaint must be made in writing-upon the document

of transportation or by separate notice in writing dispatched within
the times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie
against the carrier, save in the case of fraud on his part.
P a g e | 168

ARTICLE 27. In the case of the death of the person liable, an action
for damages lies in accordance with the terms of this convention
against those legally representing his estate.
ARTICLE 28. (1) An action for damages must be brought, at the

option of the plaintiff, in the territory of one of the High Contracting
Parties, either before the court of the domicile of the carrier or of his
principal place of business or where he has a place of business
through which the contract has been made or before the court at
the place of destination.
(2) Questions of procedure shall be governed by the law of the

court to which the case is submitted.
ARTICLE 29. (1) The right to damages shall be extinguished if an

action is not brought within 2 years, reckoned 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 transportation stopped.
(2) The method of calculating the period of limitation shall be

determined by the law of the court to which the case is submitted.
ARTICLE 30. (1) In the case of transportation to be performed by

various successive carriers and falling within the definition set out in
the third paragraph of Article 1, each carrier who accepts
passengers, baggage or goods shall be subject to the rules set out in
this convention, and shall be deemed to be one of the contracting
parties to the contract of transportation insofar as the contract deals
with that part of the transportation which is performed under his
supervision.
(2) In the case of transportation of this nature, the passenger or his

representative can take action only against the carrier who
performed the transportation during which the accident or the delay
occurred, save in the case where, by express agreement, the first
carrier has assumed liability for the whole journey.
(3) As regards baggage or goods, the passenger or consignor

shall have a right of action against the first carrier, and the passenger
or consignee who is entitled to delivery shall have a right of action
against the last carrier, and further, each may take action against
the carrier who performed the transportation during which the
destruction, loss, damage, or delay took place. These carriers shall be
jointly and severally liable to the passenger or to the consignor or
consignee.
CHAPTER IV
Provisions Relating to Combined Transportation

P a g e | 169

ARTICLE 31. (1) In the case of combined transportation performed

partly by air and partly by any other mode of transportation, the
provisions of this convention shall apply only to the transportation, by
air, provided that the transportation by air falls within the terms of
Article 1.
(2) Nothing in this convention shall prevent the parties in the case
of combined transportation from inserting in the document of air
transportation conditions relating to other modes of transportation,
provided that the provisions of this convention are observed as
regards the transportation by air.
CHAPTER V
General and Final Provisions
ARTICLE 32. Any clause contained in the contract and all special
agreements entered into before the damage occurred by which the
parties purport to infringe the rules laid down by this convention,
whether by deciding the law to be applied, or by altering the rules as
to jurisdiction, shall be null and void. Nevertheless, for the
transportation of goods arbitration clauses shall be allowed, subject
to this convention, if the arbitration is to take place within one of the
jurisdictions referred to in the first paragraph of article 28.
ARTICLE 33. Nothing contained in this convention shall prevent the

carrier either from refusing to enter into any contract of
transportation or from making regulations which do not conflict with
the provisions of this convention.
ARTICLE 34. This convention shall not apply to international

transportation by air performed by way of experimental trial by air
navigation enterprises with the view to the establishment of regular
lines of air navigation, nor shall it apply to transportation performed in
extraordinary circumstances outside the normal scope of an air
carrier's business.
ARTICLE 35. The expression "days" when used in this convention

means current days, not working days.
ARTICLE 36. This convention is drawn up in French in a single copy

which shall remain deposited in the archives of the Ministry for
Foreign Affairs of Poland and of which one duly certified copy shall
be sent by the Polish Government to the Government of each of the
High Contracting Parties.
ARTICLE 37. (1) This convention shall be ratified. The instruments of

ratification shall be deposited in the archives of the Ministry for
Foreign Affairs of Poland, which shall give notice of the deposit to the
Government of each of the High Contracting Parties.
P a g e | 170

(2) As soon as this convention shall have been ratified by five of

the High Contracting Parties it shall come into force as between
them on the ninetieth day after the deposit of the fifth ratification.
Thereafter it shall come into force between the High Contracting
Parties which shall have ratified and the High Contracting Party
which deposits its instrument of ratification on the ninetieth day after
the deposit.
(3) It shall be the duty of the Government of the Republic of

Poland to notify the Government of each of the High Contracting
Parties of the date on which this convention comes into force as well
as the date of the deposit of each ratification.
ARTICLE 38. (1) This convention shall, after it has come into force,
remain open for adherence by any state.
(2) The adherence shall be effected by a notification addressed

to the Government of the Republic of Poland, which shall inform the
Government of each of the High Contracting Parties thereof.
(3) The adherence shall take effect as from the ninetieth day after
the notification made to the Government of the Republic of Poland.
ARTICLE 39. (1) Any one of the High Contracting Parties may
denounce this convention by a notification addressed to the
Government of the Republic of Poland, which shall at once inform
the Government of each of the High Contracting Parties.
(2) Denunciation shall take effect six months after the notification
of denunciation and shall operate only as regards the party which
shall have proceeded to denunciation.
ARTICLE 40. (1) Any High Contracting Party may, at the time of
signature or of deposit of ratification or of adherence, declare that
the acceptance which it gives to this convention does not apply to
all or any of its colonies, protectorates, territories under mandate, or
any other territory subject to its sovereignty or its authority, or any
other territory under its suzerainty.
(2) Accordingly, any High Contracting Party may subsequently

adhere separately in the name of all or any of its colonies,
protectorates, territories under mandate, or any other territory
subject to its sovereignty or to its authority or any other territory under
its suzerainty which have been thus excluded by its original
declaration.
(3) Any High Contracting Party may denounce this Convention, in

accordance with its provisions, separately or for all or any of its
colonies, protectorates, territories under mandate, or any other
P a g e | 171

territory subject to its sovereignty or to its authority, or any other

territory under its suzerainty.
ARTICLE 41. Any High Contracting Party shall be entitled not earlier
than two years after the coming into force of this convention to call
for the assembling of a new international conference in order to
consider any improvements which may be made in this convention.
To this end it will communicate with the Government of the French
Republic which will take the necessary measures to make
preparations for such conference.
WARSAW CONVENTION RELATED PHILIPPINE CASES
[G.R. No. 151783. July 8, 2003.]

VICTORINO SAVELLANO, VIRGINIA B. SAVELLANO and DEOGRACIAS
B. SAVELLANO, petitioners, vs. NORTHWEST AIRLINES, respondent.
Petitioners were passengers of respondent airline and their contract

of carriage with the latter was for the San Francisco-Tokyo(Narita)-
Manila flights. Petitioners claimed, however, that this itinerary was not
followed when the aircraft used for the first segment of the journey
developed engine trouble. Petitioners likewise claimed that the
contents of their baggage which was not allowed to be placed
inside the passengers' baggage compartment were stolen.
Consequently, petitioners filed a case for damages which was
decided by the trial court in their favor. On appeal, the Court of
Appeals reversed the decision of the trial court. Hence, this petition.
The Supreme Court ruled that the change of petitioners' flight

itinerary does not fall under the situation covered by the phrase "may
alter or omit stopping places shown in the ticket in case of necessity."
A case of necessity must first be proven. The burden of proving it
necessarily fell on respondent. This responsibility it failed to discharge.
Respondent failed to show a case of necessity for changing the
stopping place from Tokyo to Los Angeles and Seoul. Thus,
respondent committed a breach of the contract of carriage.
However, the Court ruled that moral damages cannot be awarded
in the case at bar because of the absence of bad faith, ill will,
malice or wanton conduct on the part of respondent. Neither are
exemplary damages proper in the present case because
respondent has not been proven to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner. Nevertheless,
the Court awarded nominal damages to petitioners. Nominal
damages are recoverable if no actual, substantial or specific
damages were shown to have resulted from the breach, as in the
case at bar. The Court also held that the claim for the alleged lost
items from the baggage of petitioners cannot prosper because they
failed to give timely notice of the loss to respondent.
A claim for the alleged lost items from the baggage of petitioners
cannot prosper because they failed to give timely notice of the loss
to respondent. The Conditions printed on the airline ticket plainly
P a g e | 172

read: "2. Carriage hereunder is subject to the rules and limitations

relating to liability established by the Warsaw Convention unless such
carriage is not 'International carriage' as defined by that
Convention... "7. Checked baggage will be delivered to bearer of
the baggage check. In case of damage to baggage moving in
international transportation complaint must be made in writing to
carrier forthwith after discovery of damage, and at the latest, within
7 days from receipt; in case of delay, complaint must be made
within 21 days from date the baggage was delivered..." The pertinent
provisions of the Rules Relating to International Carriage by Air
(Warsaw Convention) state: "Article 26 (1) Receipt by the person
entitled to delivery of luggage or goods without complaint is prima
facie evidence that the same have been delivered in good
condition and in accordance with the document of carriage. (2) In
case of damage, the person entitled to delivery must complain to
the carrier forthwith after the discovery of the damage, and, at the
latest, within three days from the date of receipt in the case of
luggage and seven days from date of receipt in the case of goods.
In the case of delay the complaint must be made at the latest within
fourteen days from the date on which the luggage or goods have
been placed at his disposal. (3) Every complaint must be made in
writing upon the document of carriage or by separate notice in
writing dispatched within the times aforesaid. (4) Failing complaint
within the times aforesaid, no action shall lie against the carrier, save
in the case of fraud on his part."
[G.R. No. 119641. May 17, 1996.]

PHILIPPINE AIRLINES, INC., petitioner, vs. COURT OF APPEALS, DR.
JOSEFINO MIRANDA and LUISA MIRANDA, respondents.
Although the Warsaw Convention has the force and effect of law in
this country, being a treaty commitment assumed by the Philippine
government, said convention does not operate as an exclusive
enumeration of the instances for declaring a carrier liable for breach
of contract of carriage or as an absolute limit of the extent of that
liability. The Warsaw Convention declares the carrier liable in the
enumerated cases and under certain limitations. However, it must
not be construed to preclude the operation of the Civil Code and
pertinent laws. It does not regulate, much less exempt, the carrier
from liability for damages for violating the rights of its passengers
under the contract of carriage, especially if willful misconduct on the
part of the carrier's employees is found or established. (Cathay
Pacific Airways, Ltd. vs. Court of Appeals, et al., G.R. No. 60501,
March 5, 1993)
[G.R. No. 171092. March 15, 2010.]

EDNA DIAGO LHUILLIER, petitioner, vs. BRITISH AIRWAYS, respondent.
Petitioner contends that in Santos III v. Northwest Orient Airlines, the

cause of action was based on a breach of contract while her cause
of action arose from the tortious conduct of the airline personnel and
violation of the Civil Code provisions on Human Relations. In addition,
she claims that our pronouncement in Santos III v. Northwest Orient
P a g e | 173

Airlines that "the allegation of willful misconduct resulting in a tort is

insufficient to exclude the case from the comprehension of the
Warsaw Convention," is more of an obiter dictum rather than the
ratio decidendi. She maintains that the fact that said acts occurred
aboard a plane is merely incidental, if not irrelevant.
We disagree with the position taken by the petitioner. Black defines

obiter dictum as "an opinion entirely unnecessary for the decision of
the case" and thus "are not binding as precedent." In Santos III v.
Northwest Orient Airlines, Augusto Santos III categorically put in issue
the applicability of Article 28 (1) of the Warsaw Convention if the
action is based on tort.
In the said case, we held that the allegation of willful misconduct
resulting in a tort is insufficient to exclude the case from the realm of
the Warsaw Convention. In fact, our ruling that a cause of action
based on tort did not bring the case outside the sphere of the
Warsaw Convention was our ratio decidendi in disposing of the
specific issue presented by Augusto Santos III. Clearly, the contention
of the herein petitioner that the said ruling is an obiter dictum is
without basis.
Relevant to this particular issue is the case of Carey v. United Airlines,

where the passenger filed an action against the airline arising from
an incident involving the former and the airline's flight attendant
during an international flight resulting to a heated exchange which
included insults and profanity. The United States Court of Appeals
(9th Circuit) held that the "passenger's action against the airline
carrier arising from alleged confrontational incident between
passenger and flight attendant on international flight was governed
exclusively by the Warsaw Convention, even though the incident
allegedly involved intentional misconduct by the flight attendant."
In Bloom v. Alaska Airlines, the passenger brought nine causes of

action against the airline in the state court, arising from a
confrontation with the flight attendant during an international flight
to Mexico. The United States Court of Appeals (9th Circuit) held that
the "Warsaw Convention governs actions arising from international air
travel and provides the exclusive remedy for conduct which falls
within its provisions." It further held that the said Convention "created
no exception for an injury suffered as a result of intentional conduct”
which in that case involved a claim for intentional infliction of
emotional distress.
It is thus settled that allegations of tortious conduct committed

against an airline passenger during the course of the international
carriage do not bring the case outside the ambit of the Warsaw
Convention.
xxx
Under Article 28 (1) of the Warsaw Convention, the plaintiff may bring
the action for damages before —
1. the court where the carrier is domiciled;
P a g e | 174

2. the court where the carrier has its principal place of business;
3. the court where the carrier has an establishment by which the
contract has been made; or
4. the court of the place of destination.
In this case, it is not disputed that respondent is a British corporation
domiciled in London, United Kingdom with London as its principal
place of business. Hence, under the first and second jurisdictional
rules, the petitioner may bring her case before the courts of London
in the United Kingdom. In the passenger ticket and baggage check
presented by both the petitioner and respondent, it appears that the
ticket was issued in Rome, Italy. Consequently, under the third
jurisdictional rule, the petitioner has the option to bring her case
before the courts of Rome in Italy. Finally, both the petitioner and
respondent aver that the place of destination is Rome, Italy, which is
properly designated given the routing presented in the said
passenger ticket and baggage check. Accordingly, petitioner may
bring her action before the courts of Rome, Italy. We thus find that
the RTC of Makati correctly ruled that it does not have jurisdiction
over the case filed by the petitioner.
[G.R. No. 152122. July 30, 2003.]

CHINA AIRLINES, petitioner, vs. DANIEL CHIOK, respondent.
In denying the petition, the Supreme Court ruled that petitioner

cannot evade liability to respondent. even though it may have been
only a ticket issuer for the Hong Kong-Manila sector. Although the
contract of air transportation was between petitioner and
respondent, with the former endorsing to PAL the Hongkong-to-
Manila segment of the journey, such contract of carriage has always
been treated in this jurisdiction as a single operation. According to
the Court, for reasons of public interest and policy, the ticket-issuing
airline acts as principal in a contract of carriage and is thus liable for
the acts and the omissions of any errant carrier to which it may have
endorsed any sector of the entire, continuous trip. The Court likewise
affirmed the award of moral and exemplary damages. Both the trial
and appellate courts found that the respondent had satisfactorily
proven the existence of the factual basis for the damages adjudged
against petitioner CAL and PA.
[G.R. No. 122308. July 8, 1997.]

PURITA S. MAPA, CARMINA S. MAPA and CORNELIO P. MAPA,
petitioners, vs. COURT OF APPEALS AND TRANS-WORLD AIRLINES INC.,
respondents.
Petitioners filed with the trial court a complaint for damages. The trial
court dismissed the case for lack of jurisdiction in light of Article 28(1)
of the Warsaw Convention. The trial court held that the Warsaw
Convention is applicable in case at bar, since the Philippines and the
United States are parties to the convention, the contracts of
transportation come within the meaning of "International
Transportation." The trial court also held that the Philippines, not being
one of the places specified in Art. 28 (1) of the Warsaw Convention
where the complaint may be instituted then it has no jurisdiction over
P a g e | 175

the present case. On appeal to the Court of Appeals, the appellate

court affirmed the ruling of the trial court. Hence, the present
petition. The Supreme Court ruled that the contracts does not fall
under the category of international transportation as provided by the
Warsaw Convention. The only way to bring the contracts between
petitioners Purita and Carmina Mapa on the one hand, and TWA on
the other, within the category of international transportation is to link
them or to make them an integral part of the Manila — Los Angeles
travel of Purita and Carmina through Pal aircraft. However, the
alleged international tickets issued by TWA were not presented in
evidence, clearly then; there is at all no factual basis of the finding
that the TWA tickets were issued in conjunction with the international
tickets.
THIRD DIVISION
[G.R. No. 149547. July 4, 2008.]
PHILIPPINE AIRLINES, INC., petitioner, vs. HON. ADRIANO SAVILLO,
Presiding Judge of RTC Branch 30, Iloilo City, and SIMPLICIO GRIÑO,
respondents.
In determining whether PAL's Motion to Dismiss should have been

granted by the trial court, it must be ascertained if all the claims
made by the private respondent in his Complaint are covered by the
Warsaw Convention, which effectively bars all claims made outside
the two-year prescription period provided under Article 29 thereof. If
the Warsaw Convention covers all of private respondent's claims,
then Civil Case No. 23773 has already prescribed and should
therefore be dismissed. On the other hand, if some, if not all, of
respondent's claims are outside the coverage of the Warsaw
Convention, the RTC may still proceed to hear the case.
The Warsaw Convention applies to "all international transportation of

persons, baggage or goods performed by any aircraft for hire." It
seeks to accommodate or balance the interests of passengers
seeking recovery for personal injuries and the interests of air carriers
seeking to limit potential liability. It employs a scheme of strict liability
favoring passengers and imposing damage caps to benefit air
carriers. The cardinal purpose of the Warsaw Convention is to
provide uniformity of rules governing claims arising from international
air travel; thus, it precludes a passenger from maintaining an action
for personal injury damages under local law when his or her claim
does not satisfy the conditions of liability under the Convention.
Article 19 of the Warsaw Convention provides for liability on the part

of a carrier for "damages occasioned by delay in the transportation
by air of passengers, baggage or goods." Article 24 excludes other
remedies by further providing that "(1) in the cases covered by
articles 18 and 19, any action for damages, however founded, can
only be brought subject to the conditions and limits set out in this
convention." Therefore, a claim covered by the Warsaw Convention
can no longer be recovered under local law if the statute of
limitations of two years has already lapsed.
P a g e | 176

Nevertheless, this Court notes that jurisprudence in the Philippines

and the United States also recognizes that the Warsaw Convention
does not "exclusively regulate" the relationship between passenger
and carrier on an international flight. This Court finds that the present
case is substantially similar to cases in which the damages sought
were considered to be outside the coverage of the Warsaw
Convention.
In United Airlines v. Uy, this Court distinguished between the (1)

damage to the passenger's baggage and (2) humiliation he suffered
at the hands of the airline's employees. The first cause of action was
covered by the Warsaw Convention which prescribes in two years,
while the second was covered by the provisions of the Civil Code on
torts, which prescribes in four years.
Similar distinctions were made in American jurisprudence. In

Mahaney v. Air France, a passenger was denied access to an airline
flight between New York and Mexico, despite the fact that she held
a confirmed reservation. The court therein ruled that if the plaintiff
were to claim damages based solely on the delay she experienced
— for instance, the costs of renting a van, which she had to arrange
on her own as a consequence of the delay — the complaint would
be barred by the two-year statute of limitations. However, where the
plaintiff alleged that the airlines subjected her to unjust discrimination
or undue or unreasonable preference or disadvantage, an act
punishable under the United States laws, then the plaintiff may claim
purely nominal compensatory damages for humiliation and hurt
feelings, which are not provided for by the Warsaw Convention. In
another case, Wolgel v. Mexicana Airlines, the court pronounced
that actions for damages for the "bumping off" itself, rather than the
incidental damages due to the delay, fall outside the Warsaw
Convention and do not prescribe in two years.
NOTES
The diligence requirement imposed on common carriers is a constant

question in every bar exam.
In the case of Nedlloyd B.V.Rotterdam vs. Glowlaks Enterprises, Ltd.,

(GR no.156330, November 19, 2014), the Supreme Court again
repeated that, “Common carriers are responsible for the loss,
destruction or deterioration of goods unless the same is due to flood,
storm, earthquake or other natural disaster or calamity. Extraordinary
diligence is that extreme care and caution which persons of unusual
prudence and circumspection use for securing or preserving their
own property or rights.”
Thus, the High Court reiterated in the same case that, “When the
goods shipped are either lost or arrived in damaged condition, a
presumption arises against the carrier of its failure to observe that
diligence, and there not be an express finding of negligence to hold
it liable. To overcome the presumption of negligence, the common
P a g e | 177

carrier must establish by adequate proof that it exercised

extraordinary diligence over the goods. It must do more than merely
show that some other party could be responsible for the damage.”
What are the remedies of a consignee if the goods he was expecting

to be delivered are rendered useless?
This was one of the issues that the Supreme Court had to address in
the case of Loadstar Shipping Company vs. Malayan Insurance Inc.,
(GR no.185565, November 26, 2014). In this case, the High Court
stated that, “If goods are rendered useless for sale, consumption, or
for the intended purpose, the consignee may reject the goods and
demand payment of such goods at their market price on that day
pursuant to Article 365 of the Code of Commerce of the Philippines.
In case the damaged portion of the goods can be segregated from
those delivered in good condition, the consignee may reject those in
damaged condition and accept merely those which are in good
condition. But if the consignee is able to prove that it is impossible to
use those goods which were delivered in good condition without the
others, then the entire shipment may be rejected.”
What is a slot charter agreement?
It is a contract of affreightment, whereby the use of the shipping

space on vessels is leased in part or as a whole, to carry goods for
others. It may be for a determinate period of time (time charter) or
for a single or consecutive voyage (voyage charter). The charterer is
free from liability to third persons in respect of the ship.
What is a bareboat or demise charter agreement?
In a charter by demise or bareboat, the whole vessel is let to the

charterer with a transfer to him of its entire command and possession
and consequent control over its navigation, including the master
and its crew. The charterer therefore becomes the owner for the
voyage or service stipulated and hence liable for damages or loss
sustained by the goods transported.
What is the degree of diligence requirement for an arrastre operator?
In Asian Terminals Inc, vs. First Lepanto Taisho Insurance Corp. (GR
no.185964, June 16, 2014), the Supreme Court emphasized that, “The
relationship between the consignee and arrastre operator is akin to
that existing between the consignee and/or the owner of the
shipped goods and the common carrier, or that between a
depositor and a warehouseman. Hence, in the performance of its
obligations, an arrastre operator should observe the same degree of
diligence as that required of a common carrier and a
warehouseman. Being the custodian of goods discharged from a
P a g e | 178

vessel, an arrastre operator’s duty is to take care of the goods and to

turn them over to the party entitled to their possession.”
If a contract of carriage and bill of lading is silent on the computation

of damages, what contract will govern the parties?
Where a contract of carriage as well as of bill of lading is silent as

regards the computation of damages, the relevant provisions of the
Civil Code of the Philippines and the Code of Commerce shall
govern the contract between the parties.
What is the “Limited Liability Rule?”
Also called the “no vessel, no liability doctrine,” it provides that

liability of ship owner is limited to ship owner’s interest over the vessel.
Consequently, in case of loss, the ship owner’s liability is also
extinguished. Limited liability likewise extends to ship’s
appurtenances, equipment, freightage, and insurance proceeds.
The ship owner’s or agent’s liability is merely co-extensive with his
interest in the vessel, such that a total loss of the vessel results in the
liability’s extinction. The vessel’s total destruction extinguishes
maritime liens because there is no longer any res to which they can
attach. (Monarch Insurance v. CA, G.R. No. 92735, June 8, 2000)
Are there any exceptions to the “Limited Liability Rule’?
1. Repairs and provisioning of the vessel before the loss of the vessel;
(Art. 586)
2. Insurance proceeds. If the vessel is insured, the proceeds will go to

the persons entitled to claim from the shipowner; (Vasquez v. CA,
G.R. No. L-42926, Sept. 13, 1985)
3. Workmen’s Compensation cases (now Employees’ Compensation

under the Labor Code); (Oching v. San Diego, G.R. No. 775, Dec. 17,
1946)
4. When the shipowner is guilty of fault or negligence; Note: But if the

captain is the one who is guilty, doctrine may still be invoked, hence,
abandonment is still an option.
5. Private carrier; or
6.Voyage is not maritime in character.

P a g e | 179

FINANCIAL REHABILITION AND INSOLVENCY LAW
The FRIA integrates rehabilitation and restructuring along with

insolvency law. Furthermore, it moves from the debtor-controlled
process of the older system to a framework where the creditors take
the fore in determining the future of the distressed corporation.
“Section 4. Definition of Terms. – As used in this Act, the term:
xxx
“(p) Insolvent shall refer to the financial condition of a debtor that is

generally unable to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are greater than its or
his assets.”
Three modes of rehabilitation
1. Court Supervised
a. Voluntary (section 12)
b. Involuntary (section 13)
2. Pre-Negotiated (sec. 76)
3. Out of Court or Informal (sec. 83)
FIRST METHOD: COURT SUPERVISED
• In court supervised rehabilitation proceedings, the

rehabilitation of the debtor officially commences after the court
makes the finding that the Petition (whether voluntary or involuntary)
is sufficient in form or substance. More specifically, the rehabilitation
proceedings are deemed to commence on the date of the issuance
of the Commencement Order, pursuant to Sections 15 and 16 of the
law
COMMENCEMENT ORDER
• “Section 15. Action on the Petition. – If the Court finds the

petition for rehabilitation to be sufficient in form and substance, it
shall, within five (5) working days from the filing of the petition, issue a
Commencement Order. If within the same period, the court finds the
petition deficient in form and substance, the court may, in its
discretion, give the petitioner/s a reasonable time within which to
amend or supplement the petition, or to submit such documents as
P a g e | 180

may be necessary or proper to put the petition in proper order. In

such case, the five (5) working days provided above for the issuance
of the Commencement Order shall be reckoned from the date of
the filing of the amended or supplemental petition or the submission
of such documents.
• Under Section 16, the “Commencement Order” shall, among

others: (i) declare that the debtor is under rehabilitation, (ii) direct
publication of the Order and notice to creditors, (iii) appoint a
rehabilitation receiver, (iv) set the date of the initial hearing for the
determination of whether or not the debtor can be rehabilitated, (v)
direct all creditors to file their claims at least five (5) days from initial
hearing and (vi) direct the government, through the Bureau of
Internal Revenue (BIR) to either file its Comment to the Petition for
Rehabilitation or present its claims against the debtor.
SUSPENSION OR STAY ORDER
• In addition, the Commencement Order shall include a

Suspension or Stay Order prohibiting the sale or disposition of assets
of the debtor and ordering the suspension of all actions against the
debtor and/or the debtor’s estate. The scope and/or coverage of the
stay order under the FRIA remain as broad as before. However,
certain cases are allowed to proceed until the execution stage
• Section 18. Exceptions to the Stay or Suspension Order. – The

Stay or Suspension Order shall not apply:
“(a) to cases already pending appeal in the Supreme Court as of

commencement date: Provided, that any final and executory
judgment arising from such appeal shall be referred to the court for
appropriate action;
“(b) subject to the discretion of the court, to cases pending or filed

at a specialized court or quasi-judicial agency which, upon
determination by the court, is capable of resolving the claim more
quickly, fairly and efficiently than the court: Provided, that any final
and executory judgment of such court or agency shall be referred to
the court and shall be treated as a non-disputed claim
“(c) to the enforcement of claims against sureties and other persons

solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of letters of credit, unless the property
subject of the third party or accommodation mortgage is necessary
for the rehabilitation of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;
“(d) to any form of action of customers or clients of a securities

market participant to recover or otherwise claim moneys or securities
entrusted to the latter in the ordinary course of the latter’s business as
P a g e | 181

well as any action of such securities market participant or the

appropriate regulatory agency or self-regulating organization to pay
of settle such claims or liabilities;
“(f) the clearing and settlement of financial transactions through the

facilities of a clearing agency or similar entities duly authorized,
registered and/or recognized by the appropriate regulatory agency
like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any
form of actions of such agencies or entities to reimburse themselves
for any transactions settled for the debtor; and
“(g) Any criminal action against the individual debtor or owner,

partner, director or officer of a debtor shall not be affected by any
proceeding commenced under this Act.”
• Note that pursuant to sub-paragraph (c) above, the

suspension order does not cover the enforcement of claims against
“persons solidarily liable with the debtor” including “issuers of letters
of credit.”
This follows the rule in MWSS vs. Daway [GR No. 160732, 21 June 2004]
which held that a letter of credit is excluded from the jurisdiction of
the rehabilitation court.
• On the other hand, the Stay or Suspension Order applies with

equal force to the enforcement of both secured and unsecured
claims except that under Section 60 of the FRIA, the issuance of the
Stay or Suspension Order “shall not be deemed in any way to
diminish or impair the security or lien of a secured creditor, or the
value of his lien or security, except that his right to enforce said
security or lien may be suspended during the term of the Stay Order.”
Again, this paraphrases the “equality in equity” principle the effects
of which were explained in the case of Tsuneishi Heavy Industries
(Cebu), Inc. v. Negros Navigation Co., Inc. et. al. [GR 166845, 10
December 2008],
• Continuous Supply of Goods and Services
To ensure continuous delivery of goods and services necessary for

the debtor’s business, the FRIA adopts the provision under the 2008
Rules granting the rehabilitation court authority to include in the
Commencement Order a prohibition enjoining the debtor’s suppliers
from withholding supply of essential goods and services
Waiver of Taxes
• Section 19 of the law provides that from the time of the

issuance of the Commencement Order until the approval of the
Rehabilitation Plan or dismissal of the petition, the imposition of all
taxes shall be waived, thus:
P a g e | 182

• “Section 19. Waiver of Taxes and Fees Due to the National

Government and to Local Government Units. – Upon issuance of the
Commencement Order by the court, and until the approval of the
Rehabilitation Plan or dismissal of the Petition, which is earlier, the
imposition of all taxes and fees, including penalties interests and
charges thereof, due to the national government or to LGUs shall be
considered waived, in furtherance of the objectives of
rehabilitation.”
• Section 57 of the law grants the debtor the power to confirm or

cancel pre-existing contracts within ninety (90) days from the
issuance of the Commencement Order in order to weed out
extremely onerous contracts that may have been the cause of the
debtor’s predicament.
Validity of Contracts
• “Section 57. Treatment of Contracts. – Unless cancelled by

virtue of a final judgment of a court of competent jurisdiction issued
prior to the issuance of the Commencement Order, or at anytime
thereafter by the court before which the rehabilitation proceedings
are pending, all valid and subsisting contracts of the debtor with
creditors and other third parties as at the commencement date shall
continue in force: Provided, That within ninety (90) days following the
commencement of proceedings, the debtor, with the consent of the
rehabilitation receiver, shall notify each contractual counterparty of
whether it is confirming the particular contract. Contractual
obligations arising or performed during this period, and afterwards for
confirmed contracts, shall be considered administrative expenses.
Contracts not confirmed within the required deadline shall be
considered terminated. Claims for actual damages, if any, arising as
a result of the election to terminate a contract shall be considered a
pre-commencement claim against the debtor. Nothing contained
herein shall prevent the cancellation or termination of any contract
of the debtor for any ground provided by law.
• The initial appointment of the Rehabilitation Receiver (as one

of the elements of the Commencement Order under Section 16) is
subject to the discretion of the court, which may retain the original
appointee or choose another from the petitioners’ nominees.
However, this discretion is limited in the following circumstances:
• (a) In case the debtor is a securities market participant, in

which case the court shall give priority to the nominee of the
appropriate securities or investor protection fund; or
• (b) If the qualified natural or juridical person is nominated by

more than 50% of secured creditors and general unsecured creditors,
in which case the court “shall appoint the creditors’ nominee.”
P a g e | 183

• The Rehabilitation Receiver will not supplant the existing

management of the debtor corporation unless otherwise ordered by
the court on motion of any interested party, thus:
“Section 36. Displacement of Existing Management by the

Rehabilitation Receiver or Management Committee. - - Upon motion
of any interested party, the court may appoint and direct the
rehabilitation receiver to assume the powers of management of the
debtor, or appoint a management committee that will undertake
the management of the debtor, upon clear and convincing
evidence of any of the following circumstances:
a) Actual or imminent danger of dissipation, loss, wastage or

destruction of the debtor’s assets or other properties;
(b) Paralyzation of the business operations of the debtor; or
(c) Gross mismanagement of the debtor, or fraud or other wrongful

conduct on the part of, or gross or willful violation of this Act by,
existing management of the debtor or the owner, partner, director,
officer or representative/s in management of the debtor.
“In case the court appoints the rehabilitation receiver to assume the
powers of management of the debtor, the court may:
“(1) require the rehabilitation receiver to post an additional bond;
“(2) authorize him to engage the services or employ persons or

entities to assist him in the discharge of his managerial functions; and
“(3) authorize a commensurate increase in his compensation.”
• As part of its functions, the Rehabilitation Receiver retains the

authority to file an action to annul certain pre-commencement
transactions intended to defraud the creditors. Indeed, this power
can be traced back to the basic authority of the receiver to
undertake measures to preserve property under receivership under
the Rules of Court23.
• Should the receiver refuse to institute proceedings, any

creditor may take up the cudgels of the corporation with leave of
court. If successful, Section 59 of the law provides that the fruits of the
case will redound to the pro-active creditor to the extent of the
value of its credit plus costs,
Administration Proceedings
• Within forty (40) days from the issuance of the

Commencement Order, the court shall set the case for Initial Hearing
to determine whether or not there is substantial likelihood that the
debtor can be rehabilitated
P a g e | 184

• Within forty (40) days from the Initial Hearing, the Rehabilitation
Receiver is required to submit his written Report to the court, which
will include a determination of (a) whether or not there is substantial
likelihood for the debtor to be successfully rehabilitated or in the
alternative (b) whether the debtor should be dissolved or liquidated.
After submission of report, the Court shall act on the petition by: (i)
giving due course to the petition, (ii) dismissing the petition or (iii)
converting the proceedings into one for liquidation.
• In the event the court gives due course to the petition, the
court will require the Rehabilitation Receiver to review the
Rehabilitation Plan, taking into consideration the views of the debtor
and all creditor classes. While the consultation is a necessary
procedure, the Receiver is not bound by the objections of the
parties.
• Section 62 of the FRIA provides that Rehabilitation Plan must

include provisions establishing classes and subclasses of voting
creditors. After identifying the appropriate creditor classes and sub-
classes, the Plan must “specify the treatment of each class or
subclass” and “provide for equal treatment for all claims within the
same class.”
• Similar to the 2008 Rules, Section 62 grants additional

protection to secured creditors by requiring the Plan to “maintain the
security interest of secured creditors and preserve the liquidation
value of the security.”
• Once satisfied with the version of the Rehabilitation Plan, the

receiver must convene the creditors and present the plan to them
for approval. Unlike the old procedure however, the vote of the
debtor is not required for the approval of the plan.
• “Section 64. Creditor Approval of the Rehabilitation Plan. – The

rehabilitation receiver shall notify the creditors and stakeholders that
the Plan is ready for their examination. Within twenty (20) days from
the said notification, the rehabilitation receiver shall convene the
creditors, either as a whole or per class, for purposes of voting on the
approval of the Plan. The Plan shall be deemed rejected unless
approved by all classes of creditors whose rights are adversely
modified or affected by the Plan. For purposes of this section, the
Plan is deemed to have been approved by a class of creditors if
members of the said class holding more than fifty per cent (50%) of
the total claims of the said class vote in favor of the Plan. The votes of
the creditors shall be based solely on the amount of their respective
claims based on the registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof.
P a g e | 185

• Rehabilitation Court can confirm even if creditors object
Notwithstanding the rejection of the Rehabilitation Plan, the court

may confirm the Rehabilitation Plan if all of the following
circumstances are present:
“(a) the Rehabilitation Plan complies with all the requirements

specified in this Act;
“(b) the rehabilitation receiver recommends the confirmation of the

Rehabilitation Plan;
“(c) The shareholders, owners or partners of the juridical debtor lose

at least their controlling interest as a result of the Rehabilitation Plan;
and
“(d) The Rehabilitation Plan would likely provide the objecting class
of creditors with compensation which has a net present value
greater than that which they would have received if the debtor were
under liquidation.”
Cram Down Provision
Even if the Rehabilitation Plan is not approved by the creditors, the

court may still confirm the Plan if it can be shown that objecting class
of creditors shall receive a “net present value greater than that they
would have received if the debtor were under liquidation.” Under the
Interim Rules, the debtor can force court approval of a Rehabilitation
Plan over the objection of creditors by merely showing that “[t]he
plans would likely provide the objecting class of creditors with
compensation greater than that which they would have received if
the assets of the debtor were sold by a liquidator within a three-
month period.” The 2008 Rules 33 changed the basis to “present
value projected in the plan”. Requiring that the computation be
based on “net present value” is intended to prevent debtors from
railroading a rehabilitation plan disadvantageous to the creditors by
the simple expedient of stretching
• In corporate rehabilitation proceedings, whose rights shall

prevail over the other?
• This was the issue that the Supreme Court had to confront with
in the case of Aquino vs. Pacific Plans, Inc., (GR no.193108,
December 10, 2014) involving the plan holders and other creditors of
pre-need company Pacific Plans. The Supreme Court ruled that:
“While the voice and participation of the creditors is crucial in the
determination of the viability of the rehabilitation plan, as they stand
P a g e | 186

to benefit or suffer in the implementation thereof, the interests of all

stakeholders is the ultimate and prime consideration.”
• In relation to corporate rehabilitation proceedings, the

Supreme Court in the case of Philippine Bank of Communications vs.
Basic Polyprinters and Packaging Corporation (GR no.187581,
October 2014) ruled as well that the purpose of such proceedings is
two-fold – (1.) To efficiently and equitably distribute the assets of the
insolvent debtor to its creditors; and (2.) To provide the debtor with a
fresh start.
• The “material financial commitment” rule was also discussed in

the same aforementioned case. This rule becomes significant in
determining the earnestness and good faith of the financially
distressed corporation in financing its proposed rehabilitation plan.
This material financial commitment may include the readiness,
willingness and ability of the corporation to contribute funds or
property to guarantee the operation of the corporation during the
period of rehabilitation.
One Year Rule
• To prevent the debtor (or any interested party) from dragging

out the proceedings in the hopes of obtaining a settlement on the
basis of attrition, the law fixes a maximum period of one year (from
the time of the filing of the petition) within which the plan must be
confirmed. Otherwise, the proceedings will turn into one of
liquidation. This should force the parties to negotiate in earnest.
• SECOND METHOD: PRE-NEGOTIATED REHABILITATION
• Debtor by himself or jointly with Creditors
File a petition for the approval of a pre-negotiated rehabilitation

plan provided that it has been endorsed by creditors holding at least
2/3 of the total liabilities of the debtor, including secured creditors
holding more than 50 percent of the total secured claims and
unsecured creditors holding more than 50 percent of the total
unsecured claims
• The FRIA gives the parties the freedom to undertake the

proceedings without a receiver.
• The Order under Section 77 of the law which directs interested

parties to file their objections to the Pre-Negotiated Rehabilitation
Plan also requires publication and personal delivery of a copy of the
Petition to each creditor who is not a petitioner but who holds at
least 10%37 of the total liabilities of the debtor.
P a g e | 187

Grounds to object Pre-Negotiated Rehabilitation
“Section 79. Objection to the Petition or Rehabilitation Plan. – Any

creditor or other interested party may submit to the court a verified
objection to the petition or the Rehabilitation Plan not later than
eight (8) days from the date of the second publication of the Order
mentioned in Section 77 hereof. The objection shall be limited to the
following:
“(a) The allegations in the petition or the Rehabilitation Plan, or the

attachments thereto are materially false or misleading;
“(b) The majority of any class of the creditors do not in fact support
the Rehabilitation Plan;
“(c) The Rehabilitation Plan fails to accurately account for a claim

against the debtor and the claim is not categorically declared as a
contested claim; or
“(d) The support of the creditors, or any of them, was induced by

fraud.
• If, after due hearing, the courts find merit to the objection, it
will order the debtor to cure the defect.
• On the other hand, if it finds that the petitioners acted in bad

faith or that the defect is incurable, it may order the conversion of
proceedings into one for liquidation38. As in the 2008 Rules, the
Rehabilitation Plan will be deemed approved if the court fails to act
within a period of 120 days.
THIRD METHOD OF REHABILITATION: OUT OF COURT SETTLEMENT
• Pursuant to Section 89 of the Act, “[t]he insolvent debtor and

creditor may seek court assistance for the execution or
implementation” of the Rehabilitation Plan, provided that it meets
the minimum requirements of the law.
• To allow the parties to negotiate a feasible workout plan, the

debtor and creditors holding more than 50% of the debt may agree
on a standstill period pending the completion of the plan for up to
120 days, provided in addition that notice to all creditors is published
in a newspaper of general circulation once a week for two
consecutive weeks. The said notice must invite the creditors to
participate in the negotiation of the plan and inform them that the
plan will be binding on all creditors if the required votes are
obtained.
P a g e | 188

Cram down effect
• An out-of-court Rehabilitation Plan approved by at least 67%

of secured creditors, 75% of unsecured creditors, and 85% of all
creditors42 will be “crammed down” all creditors pursuant to Section
86 of the law.
• Section 86. Cram Down Effect. – A restructuring/workout

agreement or Rehabilitation Plan that is approved pursuant to an
informal workout framework referred to in this chapter shall have the
same legal effect as confirmation of a Plan under Section 69 hereof.
The notice of the Rehabilitation Plan or restructuring agreement or
Plan shall be published once a week for at least three (3)
consecutive weeks in a newspaper of general circulation in the
Philippines. The Rehabilitation Plan or restructuring agreement shall
take effect upon the lapse of fifteen (15) days from the date of the
last publication of the notice thereof.”
Cross Border Insolvency
• By virtue of Section 139 of the FRIA, the Philippines is now

deemed to adopt the provisions of the UNCITRAL Model Law on
Cross Border Insolvency (1997) subject to procedural rules to be
promulgated by the Supreme Court. Essentially, the law provides a
framework for the recognition of foreign insolvency proceedings and
grants certain parties in such proceedings access to Philippine courts
for purposes of obtaining some form of affirmative or other relief.
P a g e | 189

DATA PRIVACY LAW (RA 10173)
RA 10173, or the Data Privacy Act, protects individuals from

unauthorized processing of personal information that is (1) private,
not publicly available; and (2) identifiable, where the identity of the
individual is apparent either through direct attribution or when put
together with other available information.
1. Personal vs. Sensitive Personal Information
Under Sec. 3(g) of the Data Privacy Act, “[p]ersonal information

refers to any information whether recorded in a material form or not,
from which the identity of an individual is apparent or can be
reasonably and directly ascertained by the entity holding the
information, or when put together with other information would
directly and certainly identify an individual.”
In other words, personal information is any information which can be

linked to your identity, thus making you readily identifiable.
Under Sec. 3(k) of the Data Privacy Act, “[p]rivileged information

refers to any and all forms of data which under the Rules of Court
and other pertinent laws constitute privileged communication.” One
such example would be any information given by a client to his
lawyer. Such information would fall under attorney-client privilege
and would, therefore, be considered privileged information.
P a g e | 190

2. Scope
Data Privacy Act applies to any natural or juridical persons involved

in the processing of personal information. It also covers those who,
although not found or established in the Philippines, use equipment
located in the Philippines, or those who maintain an office, branch,
or agency in the Philippines.
3. Processing of personal information
Under Sec. 3(j) of the Data Privacy Act, “[p]rocessing refers to any
operation or any set of operations performed upon personal
information including, but not limited to, the collection, recording,
organization, storage, updating or modification, retrieval,
consultation, use, consolidation, blocking, erasure or destruction of
data.”
In other words, processing of personal information is any operation

where personal information is involved. Whenever your information is,
among other things, collected, modified, or used for some purpose,
processing already takes place.
The law treats both kinds of personal information differently. Personal

information may be processed, provided that the requirements of
the Data Privacy Act are complied with. On the other hand, the
processing of sensitive personal information is, in general, prohibited.
The Data Privacy Act provides the specific cases where processing of
sensitive personal information is allowed.
While personal information refers to information that makes you

readily identifiable, sensitive personal information, as defined in Sec.
3(l) of the Data Privacy Act, refers to personal information:
1. About an individual’s race, ethnic origin, marital status, age,

color, and religious, philosophical or political affiliations;
2. About an individual’s health, education, genetic or sexual
life of a person, or to any proceeding for any offense
committed or alleged to have been committed by such
person, the disposal of such proceedings, or the sentence
of any court in such proceedings;
3. Issued by government agencies peculiar to an individual
which includes, but not limited to, social security numbers,
previous or cm-rent health records, licenses or its denials,
suspension or revocation, and tax returns; and
P a g e | 191

Specifically established by an executive order or an act of Congress

to be kept classified.
Therefore, any information that can be categorized under any of the

enumerated items are considered sensitive personal information.
Section 13 of the Data Privacy Act enumerates the cases where

sensitive personal information and privileged information may be
processed. These are the following:
(a.) The data subject has given his or her consent,

specific to the purpose prior to the processing, or
in the case of privileged information, all parties to
the exchange have given their consent prior to
processing;
(b.) The processing of the same is provided for by

existing laws and regulations: Provided, That such
regulatory enactments guarantee the protection
of the sensitive personal information and the
privileged information: Provided, further, That the
consent of the data subjects are not required by
law or regulation permitting the processing of the
sensitive personal information or the privileged
information;
(c.) The processing is necessary to protect the life and

health of the data subject or another person, and
the data subject is not legally or physically able to
express his or her consent prior to the processing;
1. The processing is necessary to achieve the

lawful and noncommercial objectives of public
organizations and their associations: Provided,
That such processing is only confined and
related to the bona fide members of these
organizations or their associations: Provided,
further, That the sensitive personal information
are not transferred to third parties: Provided,
finally, That consent of the data subject was
obtained prior to processing;
2. The processing is necessary for purposes of

medical treatment, is carried out by a medical
practitioner or a medical treatment institution,
and an adequate level of protection of
personal information is ensured; or
P a g e | 192

3. The processing concerns such personal

information as is necessary for the protection of
lawful rights and interests of natural or legal
persons in court proceedings, or the
establishment, exercise or defense of legal
claims, or when provided to government or
public authority.
4. Exceptions
The Data Privacy Act explicitly states that its provisions are not
applicable in the following cases:
(a.) Information about any individual who is or was an officer

or employee of a government institution that relates to
the position or functions of the individual, including:
(b.) The fact that the individual is or was an officer or
employee of the government institution;
(c.) The title, business address and office telephone number
of the individual;
(d.) The classification, salary range and responsibilities of the
position held by the individual; and
(e.) The name of the individual on a document prepared by
the individual in the course of employment with the
government;
(f.) Information about an individual who is or was performing
service under contract for a government institution that
relates to the services performed, including the terms of
the contract, and the name of the individual given in the
course of the performance of those services;
(g.) Information relating to any discretionary benefit of a
financial nature such as the granting of a license or
permit given by the government to an individual,
including the name of the individual and the exact
nature of the benefit;
(h.) Personal information processed for journalistic, artistic,
literary or research purposes;
(i.) Information necessary in order to carry out the functions
of public authority which includes the processing of
personal data for the performance by the independent,
central monetary authority and law enforcement and
regulatory agencies of their constitutionally and
statutorily mandated functions. Nothing in this Act shall
be construed as to have amended or repealed Republic
Act No. 1405, otherwise known as the Secrecy of Bank
Deposits Act; Republic Act No. 6426, otherwise known as
the Foreign Currency Deposit Act; and Republic Act No.
9510, otherwise known as the Credit Information System
Act (CISA);
P a g e | 193

(j.) Information necessary for banks and other financial

institutions under the jurisdiction of the independent,
central monetary authority or Bangko Sentral ng Pilipinas
to comply with Republic Act No. 9510, and Republic Act
No. 9160, as amended, otherwise known as the Anti-
Money Laundering Act and other applicable laws; and
(k.) Personal information originally collected from residents of
foreign jurisdictions in accordance with the laws of those
foreign jurisdictions, including any applicable data
privacy laws, which is being processed in the Philippines.
5. Rights of data subject
The Data Privacy Act of 2012 was passed to extend protection to

people and their data in this modern age. It provides a regime for
regulating the processing and storage of particularly personal and
sensitive information, given the new avenues of information
exchange that have opened up and continue to open up in this era.
This regulation is achieved through the recognition of rights
accorded to data subjects and through the imposition of obligations
upon entities that deal with the information of such data subjects. In
order to understand how the Data Privacy Act provides protection—
and more importantly, in order for any individual to be able to
benefit from its protections—it is important to understand the
concept of a data subject, as well as his rights.
Under the law, a data subject is defined as “an individual whose

personal information is processed”(section 3, [c.])
Corollarily, personal information is defined as “any information

whether recorded in a material form or not, from which the identity
of an individual is apparent or can be reasonably and directly
ascertained by the entity holding the information, or when put
together with other information would directly and certainly identify
an individual.” (Section 3 [h.])
In addition to this, the law also defines sensitive personal information

(section 3 [l.]), such as one’s ethnic origin or education,
and privileged personal information.
Lastly, processing refers to “any operation or any set of operations

performed upon personal information including, but not limited to,
the collection, recording, organization, storage, updating or
modification, retrieval, consultation, use, consolidation, blocking,
erasure or destruction of data.” (section 3 [j.])
These definitions show that the coverage of the law is

comprehensive and broad, as it protects any individual or entity
P a g e | 194

whose identity-related information is collected, recorded, or used. At

a time when social media continues to flourish and expand their
presence in the daily lives of people and businesses, it is not unlikely
that information relating to their identities is disclosed. This puts a lot
of information and individuals at risk of illegitimate divulgence.
Hence, the Data Privacy Act accords data subjects several rights
enforceable against offending entities. These rights are guided by
the principles of transparency, legitimate purpose, and
proportionality.
Under Chapter IV of the Act, there are eight (8) rights that belong to
data subjects, namely: the right to be informed; the right to access;
the right to object; the right to erasure and blocking; the right to
rectify; the right to file a complaint; the right to damages; and the
right to data portability.
First, the right to be informed means that the data subject has the
right to know when his or her personal data shall be, are being, or
have been processed. Collection and processing of data without
the data subject’s knowledge and explicit consent is made unlawful,
and entities in possession of personal data is obligated to inform the
data subject of any breaches or compromises in their data.
Second, the right to access involves being able to compel any entity
possessing any personal data to provide the data subject with a
description of such data in its possession, as well as the purposes for
which they are to be or are being processed. Furthermore, other
details regarding the processing of their information may be
obtained, such as the period for which the information will be stored,
and the recipients to whom the information may be disclosed. This
must be complied with in an easy-to-access format, accompanied
by a description in plain language.
Thirdly, the right to object requires that the consent of the data
subject be secured in the collecting and processing of his or her
data. It grants the data subject the choice of refusing to consent, as
well as the choice to withdraw consent, as regards collection and
processing. As earlier stated, any activity involving a data subject’s
personal data without his or her consent is deemed illegal.
The right to erasure or blocking allows the data subject to suspend,

withdraw or order the blocking, removal, destruction of his or her
personal information from the personal information controller’s filing
system upon discovery and substantial proof that the personal
information are incomplete, outdated, false, unlawfully obtained,
used for unauthorized purposes or are no longer necessary for the
purposes for which they were collected. This is akin to the recognized
right to be forgotten.
P a g e | 195

Corollarily, the right to rectify, allows the data subject to dispute any
inaccuracy or error in the personal information processed, and to
have the personal information controller correct it immediately. In
line with this, the personal information controller must ensure that the
new and the retracted information will be accessible, and that third
parties who received the erroneous data will be informed, upon the
request of the data subject.
In line with the control given to the data subject, the right to data
portability enables the data subject to obtain and electronically
move, copy, or transfer personal data for further use. This also carries
out another policy behind the law–ensuring the free flow of personal
information.
The last two rights are related to the enforcement of the above-
discussed rights. First, the right to file a complaint with the National
Privacy Commission affords a remedy to any data subject who
“[feels] that [his or her] personal information has been misused,
maliciously disclosed, or improperly disposed,” or in case of any
violation of his or her data privacy rights. Secondly, the right to
damages entitles the aggrieved data subject to be indemnified for
any damages sustained due to inaccurate, incomplete, outdated,
false, unlawfully obtained or unauthorized use of his or her personal
information.
As can be gleaned from these rights, the Data Privacy Act of 2012 is
comprehensive in its protection to the data subject. This is even
strengthened by the fact that these rights can also be invoked by
the data subject’s lawful heirs and assigns in the event of his or her
incapacity and even after his or her death.
RELEVANT JURISPRUDENCE ON DATA PRIVACY
1. HONDA AVE S. VIVARES and SPS. MARGARITA and DAVID SUZARA,

Petitioners, VS.ST. THERESA’S COLLEGE, MYLENE RHEZA T. ESCUDERO,
and JOHN DOES, Respondents, G.R. No. 202666, September 29, 2014
FACTS:
Julia and Julienne, both minors, were graduating high school

students at St. Theresa’s College (STC), Cebu City. Sometime in
January 2012, while changing into their swimsuits for a beach
party they were about to attend, Julia and Julienne, along with
several others, took digital pictures of themselves clad only in their
undergarments. These pictures were then uploaded by Angela on
her Facebook profile.
P a g e | 196

At STC, Mylene Escudero, a computer teacher at STC’s high school

department, learned from her students that some seniors at STC
posted pictures online, depicting themselves from the waist up,
dressed only in brassieres. Escudero then asked her students if they
knew who the girls in the photos are. In turn, they readily identified
Julia and Julienne, among others.
Using STC’s computers, Escudero’s students logged in to their

respective personal Facebook accounts and showed her photos of
the identified students, which include: (a) Julia and Julienne drinking
hard liquor and smoking cigarettes inside a bar; and (b) Julia and
Julienne along the streets of Cebu wearing articles of clothing that
show virtually the entirety of their black brassieres.
Also, Escudero’s students claimed that there were times when access
to or the availability of the identified students’ photos was not
confined to the girls’ Facebook friends, but were, in fact, viewable
by any Facebook user.
Investigation ensued. Then Julia, Julienne and other students

involved were barred from joining the commencement exercises.
Petitioners, who are the respective parents of the minors, filed a

Petition for the Issuance of a Writ of Habeas Data. RTC dismissed the
petition for habeas data on the following grounds:
1. Petitioners failed to prove the existence of an actual or

threatened violation of the minors’ right to privacy, one of the
preconditions for the issuance of the writ of habeas data.
2. The photos, having been uploaded on Facebook without
restrictions as to who may view them, lost their privacy in some
ways
3. STC gathered the photographs through legal means and for a
legal purpose, that is, the implementation of the school’s
policies and rules on discipline.
ISSUE:
Whether or not there was indeed an actual or threatened violation

of the right to privacy in the life, liberty, or security of the minors
involved in this case. (Is there a right to informational privacy in online
social network activities of its users?)
P a g e | 197

HELD:
Nature of Writ of Habeas Data
It is a remedy available to any person whose right to privacy in life,

liberty or security is violated or threatened by an unlawful act or
omission of a public official or employee, or of a private individual or
entity engaged in the gathering, collecting or storing of data or
information regarding the person, family, home and correspondence
of the aggrieved party.
It is an independent and summary remedy designed to protect the

image, privacy, honor, information, and freedom of information of
an individual, and to provide a forum to enforce one’s right to the
truth and to informational privacy. It seeks to protect a person’s right
to control information regarding oneself, particularly in instances in
which such information is being collected through unlawful means in
order to achieve unlawful ends.
In developing the writ of habeas data, the Court aimed to protect

an individual’s right to informational privacy, among others. A
comparative law scholar has, in fact, defined habeas data as “a
procedure designed to safeguard individual freedom from abuse in
the information age.”
Issuance of writ of habeas data; requirements
1. The existence of a person’s right to informational privacy

2. An actual or threatened violation of the right to privacy
in life, liberty or security of the victim (proven by at least
substantial evidence)
Note that the writ will not issue on the basis merely of an alleged
unauthorized access to information about a person.
The writ of habeas data is not only confined to cases of extralegal

killings and enforced disappearances
The writ of habeas data can be availed of as an independent

remedy to enforce one’s right to privacy, more specifically the right
to informational privacy. The remedies against the violation of such
right can include the updating, rectification, suppression or
destruction of the database or information or files in possession or in
control of respondents. Clearly then, the privilege of the Writ of
P a g e | 198

Habeas Data may also be availed of in cases outside of extralegal

killings and enforced disappearances.
Meaning of “engaged” in the gathering, collecting or storing of data

or information
Habeas data is a protection against unlawful acts or omissions of

public officials and of private individuals or entities engaged in
gathering, collecting, or storing data about the aggrieved party and
his or her correspondences, or about his or her family. Such individual
or entity need not be in the business of collecting or storing data.
To “engage” in something is different from undertaking a business

endeavour. To “engage” means “to do or take part in something.” It
does not necessarily mean that the activity must be done in pursuit of
a business. What matters is that the person or entity must be
gathering, collecting or storing said data or information about the
aggrieved party or his or her family. Whether such undertaking
carries the element of regularity, as when one pursues a business,
and is in the nature of a personal endeavour, for any other reason or
even for no reason at all, is immaterial and such will not prevent the
writ from getting to said person or entity.
As such, the writ of habeas data may be issued against a

school like STC.
Right to informational privacy
Right to informational privacy is the right of individuals to control

information about themselves. Several commentators regarding
privacy and social networking sites, however, all agree that given the
millions of OSN users, “in this Social Networking environment, privacy
is no longer grounded in reasonable expectations, but rather in some
theoretical protocol better known as wishful thinking.” So the
underlying question now is: Up to what extent is the right to privacy
protected in OSNs?
Facebook Privacy Tools
To address concerns about privacy, but without defeating its

purpose, Facebook was armed with different privacy tools designed
to regulate the accessibility of a user’s profile as well as information
uploaded by the user. In H v. W, the South Gauteng High Court
recognized this ability of the users to “customize their privacy
settings,” but did so with this caveat: “Facebook states in its policies
that, although it makes every effort to protect a user’s information,
these privacy settings are not foolproof.”
P a g e | 199

For instance, a Facebook user can regulate the visibility and

accessibility of digital images (photos), posted on his or her
personal bulletin or “wall,” except for the user’s profile picture and ID,
by selecting his or her desired privacy setting:
1. Public – the default setting; every Facebook user can view the
photo;
2. Friends of Friends – only the user’s Facebook friends and their
friends can view the photo;
3. Friends – only the user’s Facebook friends can view the photo;
4. Custom – the photo is made visible only to particular friends
and/or networks of the Facebook user; and
5. Only Me – the digital image can be viewed only by the user.
The foregoing are privacy tools, available to Facebook users,

designed to set up barriers to broaden or limit the visibility of his or her
specific profile content, statuses, and photos, among others, from
another user’s point of view. In other words, Facebook extends its
users an avenue to make the availability of their Facebook activities
reflect their choice as to “when and to what extent to disclose facts
about themselves – and to put others in the position of receiving such
confidences.”
LONE ISSUE:
The Supreme Court held that STC did not violate petitioners’
daughters’ right to privacy as the subject digital photos were
viewable either by the minors’ Facebook friends, or by the public at
large.
Without any evidence to corroborate the minors’ statement that the

images were visible only to the five of them, and without their
challenging Escudero’s claim that the other students were able to
view the photos, their statements are, at best, self-serving, thus
deserving scant consideration.
It is well to note that not one of petitioners disputed Escudero’s sworn

account that her students, who are the minors’ Facebook “friends,”
showed her the photos using their own Facebook accounts. This only
goes to show that no special means to be able to view the allegedly
private posts were ever resorted to by Escudero’s students, and that
it is reasonable to assume, therefore, that the photos were, in reality,
viewable either by (1) their Facebook friends, or (2) by the public at
large.
P a g e | 200

Considering that the default setting for Facebook posts is “Public,” it

can be surmised that the photographs in question were viewable to
everyone on Facebook, absent any proof that petitioners’ children
positively limited the disclosure of the photograph. If such were the
case, they cannot invoke the protection attached to the right to
informational privacy.
US v. Gines-Perez: A person who places a photograph on the

Internet precisely intends to forsake and renounce all privacy rights
to such imagery, particularly under circumstances such as here,
where the Defendant did not employ protective measures or
devices that would have controlled access to the Web page or the
photograph itself.
United States v. Maxwell: The more open the method of transmission

is, the less privacy one can reasonably expect. Messages sent to the
public at large in the chat room or e-mail that is forwarded from
correspondent to correspondent loses any semblance of privacy.
The Honorable Supreme Court continued and held that setting a

post’s or profile detail’s privacy to “Friends” is no assurance that it
can no longer be viewed by another user who is not Facebook
friends with the source of the content. The user’s own Facebook
friend can share said content or tag his or her own Facebook friend
thereto, regardless of whether the user tagged by the latter is
Facebook friends or not with the former. Also, when the post is shared
or when a person is tagged, the respective Facebook friends of the
person who shared the post or who was tagged can view the post,
the privacy setting of which was set at “Friends.” Thus, it is suggested,
that a profile, or even a post, with visibility set at “Friends Only”
cannot easily, more so automatically, be said to be “very private,”
contrary to petitioners’ argument.
No privacy invasion by STC; fault lies with the friends of minors
Respondent STC can hardly be taken to task for the perceived

privacy invasion since it was the minors’ Facebook friends who
showed the pictures to Tigol. Respondents were mere recipients of
what were posted. They did not resort to any unlawful means of
gathering the information as it was voluntarily given to them by
persons who had legitimate access to the said posts. Clearly, the
fault, if any, lies with the friends of the minors. Curiously enough,
P a g e | 201

however, neither the minors nor their parents imputed any violation
of privacy against the students who showed the images to Escudero.
Different scenario of setting is set on “Me Only” or “Custom”
Had it been proved that the access to the pictures posted were
limited to the original uploader, through the “Me Only” privacy
setting, or that the user’s contact list has been screened to limit
access to a select few, through the “Custom” setting, the result may
have been different, for in such instances, the intention to limit
access to the particular post, instead of being broadcasted to the
public at large or all the user’s friends en masse, becomes more
manifest and palpable.
E-COMMERCE (RA 8792)
1. Legal recognition of electronic data messages, documents and

signatures
Section 5 defines the following:
c) "Electronic Data Message" refers to information generated, sent,

received or stored by electronic, optical or similar means.
(d) "Information and Communications System" refers to a system

intended for and capable of generating, sending, receiving, storing,
or otherwise processing electronic data messages or electronic
documents and includes the computer system or other similar device
by or in which data is recorded or stored and any procedures
related to the recording or storage of electronic data message or
electronic document.
(e) "Electronic Signature" refers to any distinctive mark, characteristic

and/or sound in electronic form, representing the identity of a person
and attached to or logically associated with the electronic data
message or electronic document or any methodology or procedures
employed or adopted by a person and executed or adopted by
such person with the intention of authenticating or approving an
electronic data message or electronic document.
(a) Electronic Document" refers to information or the representation of

information, data, figures, symbols or other modes of written
expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be
prove and affirmed, which is receive, recorded, transmitted, stored,
processed, retrieved or produced electronically.
Section 7. Legal Recognition of Electronic Documents - Electronic

documents shall have the legal effect, validity or enforceability as
any other document or legal writing, and -
P a g e | 202

(a) Where the law requires a document to be in writing, that

requirement is met by an electronic document if the said electronic
document maintains its integrity and reliability and can be
authenticated so as to be usable for subsequent reference, in that -
(b.) The electronic document has remained complete and unaltered,

apart from the addition of any endorsement and any authorized
change, or any change which arises in the normal course of
communication, storage and display; and
The electronic document is reliable in the light of the purpose for

which it was generated and in the light of all relevant circumstances.
(c.) Paragraph (a) applies whether the requirement therein is in the form
of an obligation or whether the law simply provides consequences
for the document not being presented or retained in its original from.
Where the law requires that a document be presented or retained in

its original form, that requirement is met by an electronic document if
-
i. There exists a reliable assurance as to the integrity of the document

from the time when it was first generated in its final form; and
ii. That document is capable of being displayed to the person to

whom it is to be presented: Provided, That no provision of this Act
shall apply to vary any and all requirements of existing laws on
formalities required in the execution of documents for their validity.
For evidentiary purposes, an electronic document shall be the

functional equivalent of a written document under existing laws.
2. Presumption relating to electronic signatures
Section 9. Presumption Relating to Electronic Signatures - In any

proceedings involving an electronic signature, it shall be presumed
that -
(a) The electronic signature is the signature of the person to whom it

correlates; and
(b) The electronic signature was affixed by that person with the
intention of signing or approving the electronic document unless the
person relying on the electronically signed electronic document
knows or has noticed of defects in or unreliability of the signature or
reliance on the electronic signature is not reasonable unde
r the circumstances.
P a g e | 203

3. Admissibility and evidential weight of electronic data message or

electronic document
Section 12. Admissibility and Evidential Weight of Electronic Data

Message or Electronic Document. - In any legal proceedings, nothing
in the application of the rules on evidence shall deny the admissibility
of an electronic data message or electronic document in evidence -
(a) On the sole ground that it is in electronic form; or
(b) On the ground that it is not in the standard written form, and the
electronic data message or electronic document meeting, and
complying with the requirements under Sections 6 or 7 hereof shall
be the best evidence of the agreement and transaction contained
therein.
In assessing the evidential weight of an electronic data message or

electronic document, the reliability of the manner in which it was
generated, stored or communicated, the reliability of the manner in
which its originator was identified, and other relevant factors shall be
given due regard.

Mercantile Reviewer 2019

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mercantile Reviewer 2019

Uploaded by

Copyright:

Available Formats

P a g e

1. Letters of Credit (Code of Commerce Arts 567-572)

DEFINITION OF COMMERCIAL LAW

The sources of commercial law are:

1. Principal – Statute Law, Agreements, Customs and Court decisions.

2. Auxilliary – Natural Law, Foreign Statutory Law and Foreign Court

TIPS IN RESOLVING COMMERCIAL LAW QUESTION:

The definition of Commercial Law provides the framework for any

1. Is there is a commercial transaction

1987 CONSTITUTIONAL PROVISIONS RELEVANT TO PHILIPPINE

The following are the constitutional provisions relevant to

DECLARATION OF STATE PRINCIPLES (Art. II)

Section 19. The State shall develop a self-reliant and independent

ARTICLE XII (National Economy and Patrimony)

Section 1. The goals of the national economy are a more equitable

The State shall promote industrialization and full employment based

Section 6. The use of property bears a social function, and all

promote distributive justice and to intervene when the common

Section 10. The Congress shall, upon recommendation of the

In the grant of rights, privileges, and concessions covering the

The State shall regulate and exercise authority over foreign

Section 11. No franchise, certificate, or any other form of

Section 14. The sustained development of a reservoir of national

Section 15. The Congress shall create an agency to promote the

Section 17. In times of national emergency, when the public interest

Section 18. The State may, in the interest of national welfare or

Section 20. The Congress shall establish an independent central

Until the Congress otherwise provides, the Central Bank of the

Section 21. Foreign loans may only be incurred in accordance with

LETTERS OF CREDIT (Code of Commerce)

A letter of credit is a written instrument whereby the writer requests or

• A letter of credit is one whereby one person requests some other

Two Essential Conditions for a Letter of Credit

1. A letter of credit is issued in favor of a definite person and not

2. It is limited to specified amount, which may be one or more

If any of the two circumstances is missing, it is not a letter of credit. It

Parties to a Letter of Credit

2. Applicant – The applicant is also known as the account party or

3. Beneficiary – The beneficiary is the party that will be identified in

4. Advising Bank – The role of the advising bank is to notify the

5. Confirming Bank – The responsibility of the confirming bank is that

Kinds of Letters of Credit

Important Doctrines in Letters of Credit

1. Independence Rule – This principle of independence clearly states

Transfield Philippines vs Luzon Hydro Electric Corp. (GR No 146717,

Transfield entered into a turn-key contract with Luzon Hydro Corp.

In the meanwhile, because of the delay in the construction of the

Under the independence principle, a LC accommodation is entirely

2. Strict Compliance Rule – The beneficiary must make presentment in

3. Fraud Exception Principle -exists when the beneficiary, for the

ON LETTER OF CREDIT “INDEPENDENCE PRINCIPLE”

Effect of Fraudulent Misrepresentation in applying and securing an

G.R. No. 187979. April 25, 2012.]

We emphasize that fraud in its general sense, is deemed to comprise

It is true that ordinarily, in a letter of credit transaction, the bank

In the present case, however, no reimbursement was made outright,

[G.R. No. 160732. June 21, 2004.]

The concept of guarantee vis-a-vis the concept of an irrevocable

customer that the issuer shall honor drafts or other demands of

Letters of credit were developed for the purpose of insuring to a seller

Remedy for fraudulent abuse

The remedy for fraudulent abuse is an injunction. However, injunction

Remedy of issuing bank after payment of the beneficiary

TRUST RECEIPTS LAW (PD 115)