Asido Notes - Mercantile Law - 2019

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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:

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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:
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:

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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.
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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 promote distributive justice and to intervene when the common good so demands.
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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.
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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.
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.
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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.
 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)
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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 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-
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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
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demonstration. LHC did not give due course to the extension of the period prayed for but referred the matter
to arbitration committee.
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
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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.
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
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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 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

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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, 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.
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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;
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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;
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
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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 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
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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 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])
I
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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 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.
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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
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 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 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.
P a g e | 20
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 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
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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.
 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
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 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.
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 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)
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
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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 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
P a g e | 25
 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.
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.
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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.
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 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.
 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.
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 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)
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
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 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, 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)
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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.
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 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.
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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.
 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.
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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;
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.
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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.
2. VALUED POLICY – the parties are bound by the valuation, in the absence of fraud or mistake.
P a g e | 35
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.
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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 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
P a g e | 37
 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.]
 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

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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 | 39
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,
P a g e | 40
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
 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.
P a g e | 41
 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)
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
P a g e | 42
 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
P a g e | 43
 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.
Life Insurance Life Annuity

The purchaser of a life insurance expects his The purchaser of a life annuity expects his
insurer to pay his beneficiary a specified sum insurer to pay him a periodic income as long as
upon his death. he lives.
 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
P a g e | 44
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.
 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
P a g e | 45
 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 | 46
PERILS OF THE SEA vs. PERILS OF THE SHIP

PERILS OF THE SEA PERILS OF THE SHIP
Includes only those casualties due to the: A loss which in the ordinary course of events,
results from the:
1. Natural and inevitable action of the sea;

1. Unusual violence
2. Ordinary wear and tear of the ship
2. Extraordinary action of the wind and wave 3. Negligent failure of the ship’s owner to
provide the vessel with the proper equipment to
3. Other extraordinary causes connected with convey the cargo under ordinary conditions
navigation
Concealment in Marine Insurance

 MATTERS ALTHOUGH CONCEALED WILL NOT VITIATE THE CONTRACT EXCEPT WHEN THEY
CAUSED THE LOSS.
Section 110 of the Insurance Code
P a g e | 47
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
P a g e | 48
DISTINCTION ON CONCEALMENT IN MARINE

INSURANCE AND OTHER INSURANCE
OTHER
MARINE
ITEM PROPERTY
INSURANCE
INSURANCE
The
The information or
information belief of a 3rd
or the belief party is not
or expection material and
of 3rd need not be
Informatio
persons in communicate
n of 3rd
reference to d unless it
persons
a material proceeds from
fact is an agent of
material and the insured
must be whose duty is
concealed. to give
information
The
concealment
of any fact
in relation to
any of the
Concealment
matters
of any
stated in
material fact
section 110
will vitiate the
Effect of does not
entire
concealme vitiate the
contract,
nt entire
whether the
contract but
loss results
merely
from the risk
exonerates
concealed
the insurer
from a risk
resulting
from the fact
concealed
P a g e | 49
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;
P a g e | 50
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)
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
P a g e | 51
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)
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
P a g e | 52
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;
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:
P a g e | 53
(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
SEC Powers and Functions (Section 5)

P a g e | 54
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
P a g e | 55
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
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
P a g e | 56
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.
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)
P a g e | 57
 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 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)
P a g e | 58
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
P a g e | 59
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 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.
P a g e | 60
(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;
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
P a g e | 61
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 of any such security shall be made until the
same is lifted or set aside by the Commission. Otherwise
such sale shall be void.
P a g e | 62
 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.
P a g e | 63
 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)
 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.
P a g e | 64
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
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;
P a g e | 65
(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.
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.
P a g e | 66
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
P a g e | 67
necessary or appropriate in the public interest for the
protection of investors.
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.
P a g e | 68
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.
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,
P a g e | 69
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 (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
P a g e | 70
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.
P a g e | 71
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 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
P a g e | 72
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 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
P a g e | 73
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
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
P a g e | 74
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
P a g e | 75
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
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
P a g e | 76
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 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
P a g e | 77
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, 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.
P a g e | 78
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
P a g e | 79
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 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
P a g e | 80
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
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
P a g e | 81
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
 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
P a g e | 82
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 | 83
Difference between an Ordinary Corporation and a
Banking Corporation
Point Ordinary Banking

Corporation Corporation
Classificati May be stock Must generally
on or non-stock be a stock
Stocks May issue par Par value
Issued value or no par stocks only
value
Registratio May be Requires
n registered certificate of
without any authority from
certificate of Monetary
authority Board
issued by
another govt
agency
Acquisitio May May not
n of purchase/acqui purchase/aqcui
Shares re its own re its shares or
shares for a accept them as
legitimate security for a
corporate loan. Except
purpose, when
provided it has authorized by
unrestricted 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
Declaratio May declare Conditional,
n of subject to
Dividends section 57 of
GBL (RA 8791)
P a g e | 84
Classification of Banks
Type of Power Authority

Bank
P a g e | 85
Commerci In addition 1. Invest in the
al Bank to the equities of allied
general enterprises as
powers may be
incident to determined by the
corporation Monetary Board;
s and those 2. purchase, hold
provided in and convey real
other laws, estate as specified
a KB shall under Sections 51
have the and 52 of R.A. No.
authority to 8791;
exercise all 3. receive in custody
such funds, documents
powers as and valuable
may be objects;
necessary 4. act as financial
to carry on agent and buy and
the sell, by order of
business of and for the
commercial account of their
banking, customers, shares,
such as evidences of
accepting indebtedness and
drafts and all types of
issuing securities;
letters of 5. make collections
credit; and payments for
discounting the account of
and others and
negotiating perform such
promissory other services for
notes, their customers as
drafts, bills are not
of incompatible with
exchange, banking business;
and other 6. upon prior
evidences approval of the
of debt; Monetary Board,
accepting act as managing
or creating agent, adviser,
demand consultant or
deposits; administrator of
receiving investment
other types management/advi
of deposits sory/-consultancy
and deposit accounts;
substitutes; 7. out safety deposit
buying and boxes; and
selling 8. engage in quasi-
foreign banking
exchange functions.
and gold or
silver
bullion;
P a g e | 86
acquiring
marketable
bonds and
other debt
securities;
and
extending
credit,
subject to
such rules
as the
Monetary
Board may
promulgate.
These rules
may
include the
determinati
on of bonds
and other
debt
securities
eligible for
investment,
the
maturities
and
aggregate
amount of
such
investment.
Typ Power Authority

e of
Ban
k
Thrif 1. grant loans, 1. open current or
t whether secured checking
Ban or unsecured; accounts;
k 2. invest in readily 2. engage in trust,
marketable bonds quasi-banking
and other debt functions and
securities, money market
commercial operations;
papers and 3. act as collection
accounts agent for
receivable, drafts, government
bills of exchange, entities, including
acceptances or but not limited to,
notes arising out the Bureau of
of commercial Internal Revenue
transactions; (BIR), Social
P a g e | 87
3. issue domestic Security System
letters of credit; (SSS) and the
4. extend credit Bureau of
facilities to Customs (BOC);
private and 4. act as official
government depository of
employees; national agencies
5. extend credit and of municipal,
against the city or provincial
security of funds in the
jewelry, precious municipality, city
stones and or province where
articles of similar the TB is located;
nature, subject to 5. issue mortgage
such rules and and chattel
regulations as the mortgage
Monetary Board certificates, buy
may prescribe; and sell them for
6. accept savings its own account or
and time for the account of
deposits; others, or accept
7. rediscount paper and receive them
with the Land in payment or as
Bank of the amortization of its
Philippines, (LBP), loan; and
Development 6. to invest in the
Bank of the equity of allied
Philippines (DBP), undertakings.
and other
government- RBs. In addition to
owned or the powers
controlled provided in other
corporations; laws, an RB may
8. accept foreign perform any or all
currency deposits of the following
as provided under services:
R.A. No. 6426, as
amended; 1. extend loans and
9. act as advances
correspondent for primarily for the
other financial purpose of
institutions; meeting the
10. purchase, normal credit
hold and convey needs of farmers,
real estate as fishermen or farm
specified under families as well as
Sections 51 and cooperatives,
52 of R.A. No. merchants,
8791; and private and public
11. offer other employees;
banking services 2. accept savings
as provided in and time
Section 53 of R.A. deposits;
No. 8791. 3. act as
correspondent of
P a g e | 88
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 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
P a g e | 89
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 No such power. Only
other than those such powers as are
authorized for necessary to carry on
commercial banks, the business of
including the power of banking.
an investment house
and the power to
invest in non-allied
enterprises
May invest in equities May only invest in
of allied, whether equities of allied
financial or non- enterprises, whether
financial and non- financial or non-
allied enterprises. financial
Highest capitalization Second highest
requirement minimum capital
(P4.9 B) requirement (P2.4 B)
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 P 500.0 M
P a g e | 90
MM P250.0 M
• head office outside
MM (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 P 5.0 M
cities 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 incorporation. Controlling
stockholders mean those who hold more than 50% of the
voting stock.
 Commercial Banks – 60% owned by Filipino citizens

P a g e | 91
 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
P a g e | 92
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.
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
P a g e | 93
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:
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
P a g e | 94
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 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
P a g e | 95
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
P a g e | 96
simply not be permitted by the Constitution. Neither by
common sense. To rule otherwise would 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.
P a g e | 97
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 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.)
P a g e | 98
 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)
 "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
P a g e | 99
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 statements in the
certificates that the same are insured by PDIC are not
binding upon the latter.
P a g e | 100
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
P a g e | 101
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.
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.
P a g e | 102
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.
 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:
P a g e | 103
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
 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.
P a g e | 104
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 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)
P a g e | 105
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 | 106
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 Copyright

Marks s
Grant issued A tool used Copyright is
by the that the legal
government differentiates protection
through the goods and extended to
Intellectual services from the owner of
Property each other. It the rights in
Office of the is a very an original
Philippines important work.
(IP marketing tool
Philippines). that makes the “Original
It is an public identify work” refers
exclusive goods and to every
right services. A production
granted for trademark can in the
a product, be one word, a literary,
process or group of words, scientific
an sign, symbol, and artistic
improvemen logo, or a domain.
t of a combination of Among the
product or any of these. literary and
process Generally, a artistic
which is trademark works
new, refers to both enumerated
inventive trademark and in the IP
and useful. service mark, Code
This although a includes
exclusive service mark is books and
right gives used to identify other
the inventor those marks writings,
the right to used for musical
exclude services only. works, films,
others from paintings
making, and other
using, or works, and
selling the computer
product of programs.
his invention
during the
life of the
patent.
P a g e | 107
Patents Trade Copyright

Marks s
A patent has In the The term of
a term of Philippines, protection
protection of a of
twenty (20) trademark copyright
years can be for original
providing an protected and
inventor through derivative
significant registration works is
commercial . the life of
gain. In Registratio the author
return, the n gives the plus fifty
patent owner trademark (50) years
must share owner the after his
the full exclusive death. The
description of right to use Code
the the mark specifies
invention. and to the terms
This prevent of
information is others from protection
made using the for the
available to same or different
the public in similar types of
the form of marks on works.
the identical or
Intellectual related
Property goods and
Official services.
Gazette and
can be The
utilized as trademark
basis for protection
future granted by
research and IP
will in turn Philippines
promote protects
innovation your mark
and only in the
P a g e | 108
development Philippines.
. If you want
your mark
protected
outside the
country,
you will
need to file
application
s in the
countries
where you
want your
mark
registered.
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
P a g e | 109
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 inventor identified in both applications
P a g e | 110
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;
P a g e | 111
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)
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
P a g e | 112
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
P a g e | 113
thereof, or parts of the claim, on any of the following
grounds:
(a) That what is claimed as the invention is not new or

Patentable;
(b) That the patent does not disclose the invention in a

manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or;
(c) That the patent is contrary to public order or morality.
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,
P a g e | 114
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)
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
P a g e | 115
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.
P a g e | 116
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)
 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.
P a g e | 117
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
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.
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 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,
P a g e | 119
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: 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
P a g e | 120
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.
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
P a g e | 121
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
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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
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.
P a g e | 123
 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 | 124
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)
P a g e | 125
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.
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
P a g e | 126
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:

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

 Right of Attribution
 Right of Alteration
 Right of Integrity (object to any prejudicial
distortion)
 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 | 127
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
P a g e | 128
 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:
 Selling or letting for hire, or by way of trade

offering or exposing for sale or hire, the article;
 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
 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 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
P a g e | 129
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)
P a g e | 130
 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 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
P a g e | 131
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 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)
P a g e | 132
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 | 133
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
1
Section 1, Negotiable Instruments Law
P a g e | 134
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 70 2 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.
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
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.
3
Article 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 | 135
• 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."
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)
P a g e | 136
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
P a g e | 137
 Sec. 26. What constitutes holder for value. - Where

value has at any time been given for the instrument, the
holder is deemed a 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
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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)
 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
P a g e | 139
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.
Defenses
PERSONAL
REAL DEFENSES
DEFENSES
Forgery Duress (intimidation)
Illegality Illegality
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Alteration (deliberate) Discharge before
maturity
Discharge after Alteration
maturity (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)
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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 that he will pay it
Maker
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 dishonored and the
Drawer 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.
Acceptor 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:
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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
 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.
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:
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(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 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.
P a g e | 144
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.
Discharge of Negotiable Instrument

P a g e | 145
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:
P a g e | 146
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.
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

 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 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.
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 But when an instrument has been materially altered and

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
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.
P a g e | 148
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.
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
P a g e | 149
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
P a g e | 150
check, is an order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity, and
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?
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 | 151
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).
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;

P a g e | 152
(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 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?
P a g e | 153
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 | 154
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.
P a g e | 155
 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.
 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.
P a g e | 156
 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 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.
P a g e | 157
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 | 158
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
P a g e | 159
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.
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
P a g e | 160
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 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
P a g e | 161
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 and its
P a g e | 162
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
P a g e | 163
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."
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
P a g e | 164
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.

 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. 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.
P a g e | 165
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)
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,
P a g e | 166
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)
P a g e | 167
 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 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.
P a g e | 168
DERIVATI INDIVIDU CLASS

VE AL SUIT SUITS
Where the Where a Where the
acts stockholde wrong is
complaine r or done to a
d of member is group of
constitute denied the stockholders
a wrong to right of , as where
the inspection, preferred
corporatio his suit stockholders'
n itself, would be rights are
the cause individual violated, a
of action because class or
belongs to the wrong representati
the is done to ve suit will
corporatio him be proper for
n and not personally the
to the and not to protection of
individual the other all
stockholde stockholde stockholders
r or rs or the belonging to
member. corporatio the same
Although n. group.
in most
every case
of wrong
to the
corporatio
n, each
stockholde
r is
necessarily
affected
because
the value
of his
interest
therein
would be
impaired,
this fact of
itself is not
sufficient
P a g e | 169
to give him
an
individual
cause of
action
since the
corporatio
n 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 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.
& 184275, April 16, 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.

& 184275, April 16, 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 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".
 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.

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 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
attacked, so that the corporate entity as to this
existence of its own.
"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.
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 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: ". . . 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 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.
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;
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;
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 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?
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;
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
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.
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.”
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?
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?
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 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

existence of its own
(B) Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s
legal right; and
(C) The aforesaid control and breach of duty must have

proximately caused the injury or unjust loss complained
of.
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
existence of its own;
2. Such control must have been used by the defendant

to commit fraud or wrong, to perpetuate the violation of
a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal 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.
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 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
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
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.
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
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

101503, 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

46558, July 31, 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
destruction of the goods happened, the transporter shall
be held responsible.
Unsworth Transport International (Phils.), Inc. vs. Court of

Appeals, et 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

101503, September 15, 1993

G.R. No. 94149, 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 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
Aboitiz Shipping Corp. vs. Insurance Company of North

America, G.R. No. 168402, August 6, 2008

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

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
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.

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 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.

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

G.R. No. 94149, 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

118126, March 4, 1996
Dangwa Transportation Co., Inc. vs. Court of Appeals,

G.R. No. 95582, October 7, 1991

G.R. No. 51165, June 21, 1990
Kapalaran Bus Line vs. Angel Coronado, G.R. No. 85331,

August 25, 1989

46558, July 31, 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.

No. 168081, October 17, 2008

22, 2008
Art. 1756 - Common carriers presumed at fault or

negligent in case of death of or injuries to passengers

G.R. No. 51165, June 21, 1990
Batangas Laguna Tayabas Bus Co. vs. Intermediate

Appellate Court, G.R. Nos. 74387-90, Nov. 14, 1988

46558, July 31, 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

March 18, 1999
Jose Pilapil vs. Court of Appeals, G.R. No. 52159.
December 22, 1989
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.

No. 168081, October 17, 2008
Art. 1764 - Damages against common carriers

22, 2008

March 18, 1999

118126, 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.
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

G.R. No. 94149, 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,
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
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;
(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.
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.
(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 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.
(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 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.
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
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.
(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 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 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 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;
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 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.
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 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 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.
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 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 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:
• “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.”
• 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
• 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.
• 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 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.
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.
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.
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.
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
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
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);
(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 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.
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.
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?)
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 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.”
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.
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, 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 -
(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.
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.

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NOTES ON MERCANTILE LAW REVIEW 2019

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.

TIPS IN RESOLVING COMMERCIAL LAW QUESTION:

1. Is there is a commercial transaction

1987 CONSTITUTIONAL PROVISIONS RELEVANT TO PHILIPPINE COMMERCIAL LAW

The following are the constitutional provisions relevant to Commercial Law:

DECLARATION OF STATE PRINCIPLES (Art. II)

ARTICLE XII (National Economy and Patrimony)

LETTERS OF CREDIT (Code of Commerce)

Parties to a Letter of Credit

Kinds of Letters of Credit

Important Doctrines in Letters of Credit

ON LETTER OF CREDIT “INDEPENDENCE PRINCIPLE”

Effect of Fraudulent Misrepresentation in applying and securing an L/C:

G.R. No. 187979. April 25, 2012.]

[G.R. No. 160732. June 21, 2004.]

Remedy for fraudulent abuse

Remedy of issuing bank after payment of the beneficiary

TRUST RECEIPTS LAW (PD 115)

Parties to a Trust Receipt

INSURANCE LAW (PD 612 as amended by RA 10607)

Nature and Definition of Insurance Contract

 Rationale for the Rule:

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION,

Other Nature of Contract of Insurance

 Consensual – Perfected by the meeting of the minds of the parties

Concealment and Representation

 Exceptions to the Exception:

 Types of Losses Compensable:

Requisites for rescission in case of alteration

Section 174 defines casualty insurance by process of elimination.

 Applies to almost any kind of insurance

Two General Divisions of Casualty Insurance

1. Accident or Health Insurance

Examples - personal accident, robbery/theft insurance

Insurable Interest in Casualty Insurance

Subject to two tests:

Compulsory Motor Vehicle Liability Insurance

 Sections 373 – 389, Insurance Code of the Philippines

Kinds of Life Insurance Policies

1. Ordinary Life Policy

2. Limited Payment Life Policy

 Payable only upon death of the insured

3. Term Payment Life Policy

 Coverage only if the insured dies during a limited period

Life Insurance Life Annuity

 Section 180 (2nd paragraph)

PERILS OF THE SEA vs. PERILS OF THE SHIP

1. Natural and inevitable action of the sea;

Concealment in Marine Insurance

DISTINCTION ON CONCEALMENT IN MARINE

IN CASE OF CONSTRUCTIVE TOTAL LOSS,

REVISED SECURITIES ACT (RA 8799)

3. Provides requirements to ensure that transactions

SEC Powers and Functions (Section 5)

Provident International Resources Corp., et al. vs.

 At the outset, it must be emphasized that pursuant to

In view of the said transfer of jurisdiction, the SEC

GD Express Worldwide N.V., et al. vs. Court of

 It is a settled rule that jurisdiction over the subject