INSURANCE LAW
no profit is derived from the making of insurance contracts,
 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.
"A contract of suretyship shall be deemed to be an insurance
contract, within the meaning of this Code, only if made by a surety
who or which, as such, is doing an insurance business as hereinafter
provided.
"(b) The term doing an insurance business or transacting an
insurance business, within the meaning of this Code, shall include:
"(1) Making or proposing to make, as insurer, any insurance
contract;
"(2) Making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety;
"(3) 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;
"(4) 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
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.
"WHAT MAY BE INSURED
"Section 3. Any contingent or unknown event, whether past or future,
which may damnify a person having an insurable interest, or create a
liability against him, may be insured against, subject to the provisions
of this chapter.
"The consent of the spouse is not necessary for the validity of an
insurance policy taken out by a married person on his or her life or
that of his or her children.
"All rights, title and interest in the policy of insurance taken out by an
original owner on the life or health of the person insured shall
automatically vest in the latter upon the death of the original owner,
unless otherwise provided for in the policy.
"Section 4. The preceding section does not authorize an insurance for
or against the drawing of any lottery, or for or against any chance or
ticket in a lottery drawing a prize.
"Section 5. All kinds of insurance are subject to the provisions of this
chapter so far as the provisions can apply.
"INSURABLE INTEREST
"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.
"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. Notwithstanding the foregoing, in the
event the insured does not change the beneficiary during his lifetime,
the designation shall be deemed irrevocable.
"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 such
a case, the share forfeited shall pass on to the other beneficiaries,
unless otherwise disqualified. In the absence of other beneficiaries,
the proceeds shall be paid in accordance with the policy contract. If
the policy contract is silent, the proceeds shall be paid to the estate of
the insured.
"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 any thing, not
founded on an actual right to the thing, nor upon any valid contract for
it, is not insurable.
"Section 17. The measure of an insurable interest in property is the
extent to which the insured might be damnified by loss or injury
thereof.
"Section 18. No contract or policy of insurance on property shall be
enforceable except for the benefit of some person having an
insurable interest in the property insured.
"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.
"Section 20. Except in the cases specified in the next four sections,
and in the cases of life, accident, and health insurance, a change of
interest in any part of a thing insured unaccompanied by a
corresponding change of interest in the insurance, suspends the
insurance to an equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same person.
"Section 21. A change of 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.
"Section 22. A change of interest in one or more of several distinct
things, separately insured by one policy, does not avoid the insurance
as to the others.
"Section 23. A change of interest, by will or succession, on the death
of the insured, does not avoid an insurance; and his interest in the
insurance passes to the person taking his interest in the thing
insured.
"Section 24. A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured, to the others,
does not avoid an insurance even though it has been agreed that the
insurance shall cease upon an alienation of the thing insured.
"Section 25. Every stipulation in a policy of insurance for the payment
of loss whether the person insured has or has not any interest in the
property insured, or that the policy shall be received as proof of such
interest, and every policy executed by way of gaming or wagering, is
void.
"DOUBLE INSURANCE
"Section 95. A double insurance exists where the same person is
insured by several insurers separately in respect to the same subject
and interest.
"Section 96. Where the insured in a policy other than life 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, any sum received by him under any other policy
shall be deducted from the value of the 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, any sum received by him under any policy
shall be deducted 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.
"Section 81. 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.
"Section 82. A person insured is entitled to a return of the premium
when the contract is voidable, and subsequently annulled under the
provisions of the Civil Code; or on account of the fraud or
misrepresentation of the insurer, or of his agent, or on account of
facts, or the existence of which the insured was ignorant of without
his fault; or when by any default of the insured other than actual
fraud, the insurer never incurred any liability under the policy.
"A person insured is not entitled to a return of premium if the policy is
annulled, rescinded or if a claim is denied by reason of fraud.
"Section 183. The insurer in a life insurance contract shall be liable in
case of suicide only when it 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, 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.
Under the new Civil Code, a contract is voidable if the consent by one party
is vitiated by mistake or fraud. The incontestability clause in the Insurance
Code is an exception to this Civil Code provision. The incontestability
clause provides that a life-insurance policy shall be incontestable after two
years from the date of issuance, regardless of any mistake, fraud,
concealment or misrepresentation. Under Philippine laws, it may only be
contested on the ground of nonpayment of premiums.
PERFECTION OF INSURANCE CONTRACT
VIRGINIA A. PEREZ, petitioner,
vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE
CORPORATION, 
FACTS:
On November 25, 1987, Perez died in an accident. He was riding in a
banca which capsized during a storm. At the time of his death, his
application papers for the additional insurance of P50,000.00 were
still with the Gumaca office. Lalog testified that when he went to
follow up the papers, he found them still in the Gumaca office and so
he personally brought the papers to the Manila office of BF Lifeman
Insurance Corporation. It was only on November 27, 1987 that said
papers were received in Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman
Insurance Corporation approved the application and issued the
corresponding policy for the P50,000.00 on December 2, 1987.4
When Primitivo filed an application for insurance, paid P2,075.00 and
submitted the results of his medical examination, his application was
subject to the acceptance of private respondent BF Lifeman
Insurance Corporation. The perfection of the contract of insurance
between the deceased and respondent corporation was further
conditioned upon compliance with the following requisites stated in
the application form:
there shall be no contract of insurance unless and until a policy
is issued on this application and that the said policy shall not
take effect until the premium has been paid and the policy
delivered to and accepted by me/us in person while I/We,
am/are in good health.9
Petitioner insists that the condition imposed by respondent
corporation that a policy must have been delivered to and accepted
by the proposed insured in good health is potestative being
dependent upon the will of the corporation and is therefore null and
void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the
parties. For this reason, it is considered void. Article 1182 of the New
Civil Code states: When the fulfillment of the condition depends upon
the sole will the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the
respondent company for the perfection of the contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to and accepted by the
applicant while he is in good health.
The condition imposed by the corporation that the policy must have
been delivered to and accepted by the applicant while he is in good
health can hardly be considered as a potestative or facultative
condition. On the contrary, the health of the applicant at the time of
the delivery of the policy is beyond the control or will of the insurance
company. Rather, the condition is a suspensive one whereby the
acquisition of rights depends upon the happening of an event which
constitutes the condition. In this case, the suspensive condition was
the policy must have been delivered and accepted by the applicant
while he is in good health. There was non-fulfillment of the condition,
however, inasmuch as the applicant was already dead at the time the
policy was issued. Hence, the non-fulfillment of the condition resulted
in the non-perfection of the contract.
Section 2 (1) of the Insurance Code defines a contract of insurance
as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
 2. The insured is subject to a risk of loss by the happening of
the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons
bearing a similar risk; and
5. In consideration of the insurer’s promise, the insured pays a
premium.8
A potestative condition depends upon the exclusive will of one of the
parties. For this reason, it is considered void. Article 1182 of the New
Civil Code states: When the fulfillment of the condition depends upon
the sole will the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the
respondent company for the perfection of the contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to and accepted by the
applicant while he is in good health.
The condition imposed by the corporation that the policy must have
been delivered to and accepted by the applicant while he is in good
health can hardly be considered as a potestative or facultative
condition. On the contrary, the health of the applicant at the time of
the delivery of the policy is beyond the control or will of the insurance
company. Rather, the condition is a suspensive one whereby the
acquisition of rights depends upon the happening of an event which
constitutes the condition. In this case, the suspensive condition was
the policy must have been delivered and accepted by the applicant
while he is in good health. There was non-fulfillment of the condition,
however, inasmuch as the applicant was already dead at the time the
policy was issued. Hence, the non-fulfillment of the condition resulted
in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents. So
long as an application for insurance has not been either accepted or
rejected, it is merely an offer or proposal to make a contract. The
contract, to be binding from the date of application, must have been a
completed contract, one that leaves nothing to be done, nothing to be
completed, nothing to be passed upon, or determined, before it shall
take effect. There can be no contract of insurance unless the minds
of the parties have met in agreement.11
As stated above, a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents. So
long as an application for insurance has not been either accepted or
rejected, it is merely an offer or proposal to make a contract. The
contract, to be binding from the date of application, must have been a
completed contract, one that leaves nothing to be done, nothing to be
completed, nothing to be passed upon, or determined, before it shall
take effect. There can be no contract of insurance unless the minds
of the parties have met in agreement.11
RIGHTS AND OBLIGATIONS OF PARTIES
"Section 26. A neglect to communicate that which a party knows and
ought to communicate, is called a concealment.
"Section 27. A concealment whether intentional or unintentional
entitles the injured party to rescind a contract of insurance.
"Section 28. Each party to a contract of insurance must communicate
to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and
which the other has not the means of ascertaining.
"Section 29. An intentional and fraudulent omission, on the part of
one insured, to communicate information of matters proving or
tending to prove the falsity of a warranty, entitles the insurer to
rescind.
"Section 30. Neither party to a contract of insurance is bound to
communicate information of the matters following, except in answer
to the inquiries of the other:
"(a) Those which the other knows;
"(b) Those which, in the exercise of ordinary care, the other
ought to know, and of which the former has no reason to
suppose him ignorant;
"(c) Those of which the other waives communication;
"(d) Those which prove or tend to prove the existence of a risk
excluded by a warranty, and which are not otherwise material;
and
"(e) Those which relate to a risk excepted from the policy and
which are not otherwise material.
"Section 31. Materiality is to be determined not by the event, but
solely by the probable and reasonable influence of the facts upon the
party to whom the communication is due, in forming his estimate of
the disadvantages of the proposed contract, or in making his
inquiries.
"Section 32. Each party to a contract of insurance is bound to know
all the general causes which are open to his inquiry, equally with that
of the other, and which may affect the political or material perils
contemplated; and all general usages of trade.
"Section 33. The right to information of material facts may be waived,
either by the terms of insurance or by neglect to make inquiry as to
such facts, where they are distinctly implied in other facts of which
information is communicated.
"Section 34. Information of the nature or amount of the interest of one
insured need not be communicated unless in answer to an inquiry,
except as prescribed by Section 51.
"Section 35. Neither party to a contract of insurance is bound to
communicate, even upon inquiry, information of his own judgment
upon the matters in question.
RESCISSION OF INSURANCE CONTRACT
"REPRESENTATION
"Section 36. A representation may be oral or written.
"Section 37. A representation may be made at the time of, or before,
issuance of the policy.
"Section 38. The language of a representation is to be interpreted by
the same rules as the language of contracts in general.
"Section 39. A representation as to the future is to be deemed a
promise, unless it appears that it was merely a statement of belief or
expectation.
"Section 40. A representation cannot qualify an express provision in a
contract of insurance, but it may qualify an implied warranty.
"Section 41. A representation may be altered or withdrawn before the
insurance is effected, but not afterwards.
"Section 42. A representation must be presumed to refer to the date
on which the contract goes into effect.
"Section 43. When a person insured has no personal knowledge of a
fact, he may nevertheless repeat information which he has upon the
subject, and which he believes to be true, with the explanation that he
does so on the information of others; or he may submit the
information, in its whole extent, to the insurer; and in neither case is
he responsible for its truth, unless it proceeds from an agent of the
insured, whose duty it is to give the information.
"Section 44. A representation is to be deemed false when the facts
fail to correspond with its assertions or stipulations.
"Section 45. If a representation is false in a material point, whether
affirmative or promissory, the injured party is entitled to rescind the
contract from the time when the representation becomes false.
"Section 46. The materiality of a representation is determined by the
same rules as the materiality of a concealment.
"Section 47. The provisions of this chapter apply as well to a
modification of a contract of insurance as to its original formation.
"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 on 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 (2) 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.
"Section 74. The violation of a material warranty, or other material
provision of a policy, on the part of either party thereto, entitles the
other to rescind.
"Section 113. If a representation by a person insured by a contract of
marine insurance, is intentionally false in any material respect, or in
respect of any fact on which the character and nature of the risk
depends, the insurer may rescind the entire contract.
"Section 158. A valuation in a policy of marine insurance is conclusive
between the parties thereto in the adjustment of either a partial or
total loss, if the insured has some interest at risk, and there is no
fraud on his part; except that when a thing has been hypothecated by
bottomry or respondentia, before its insurance, and without the
knowledge of the person actually procuring the insurance, he may
show the real value. But a valuation fraudulent in fact, entitles the
insurer to rescind the contract.
"FIRE INSURANCE
"Section 169. As used in this Code, the term fire insurance shall
include insurance against loss by fire, lightning, windstorm, tornado or
earthquake and other allied risks, when such risks are covered by
extension to fire insurance policies or under separate policies.
"Section 170. An alteration in the use or condition of a thing insured
from that to which it is limited by the policy made without the consent
of the insurer, by means within the control of the insured, and
increasing the risks, entitles an insurer to rescind a contract of fire
insurance.
TRANSPORTATION LAW
SECTION 4. - Common Carriers (n)
SUBSECTION 1. - General Provisions
COMMON CARRIER VS. PRIVATE CARRIER
A private carrier does not hold itself out as ready and willing to
transport for the public, transports only by special agreement, and is
not bound to serve every person who may apply. In contrast, a
common carrier is one that holds itself out to the public as ready to
carry for anyone who requests its services.
Art. 1732. Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public.
DILIGENCE REQUIRED
Art. 1733. Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence
in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further
expressed in Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while
the extraordinary diligence for the safety of the passengers is further
set forth in Articles 1755 and 1756.
OBLIGATIONS AND LIABILITIES
SUBSECTION 2. - Vigilance Over Goods

Art. 1734. Common carriers are responsible for the loss,
destruction, or deterioration of the goods, unless the same is
due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster
or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act of omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the
containers;
(5) Order or act of competent public authority.
Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3,
4, and 5 of the preceding article, if the goods are lost, destroyed
or deteriorated, common carriers are presumed to have been at
fault or to have acted negligently, unless they prove that they
observed extraordinary diligence as required in Article 1733.
Art. 1736. The extraordinary responsibility of the common carrier
lasts from the time the goods are unconditionally placed in the
possession of, and received by the carrier for transportation
until the same are delivered, actually or constructively, by the
carrier to the consignee, or to the person who has a right to
receive them, without prejudice to the provisions of Article 1738.
Art. 1737. The common carrier's duty to observe extraordinary
diligence over the goods remains in full force and effect even
when they are temporarily unloaded or stored in transit, unless
the shipper or owner has made use of the right of stoppage in
transitu.
Art. 1738. The extraordinary liability of the common carrier
continues to be operative even during the time the goods are
stored in a warehouse of the carrier at the place of destination,
until the consignee has been advised of the arrival of the goods
and has had reasonable opportunity thereafter to remove them
or otherwise dispose of them.
Art. 1739. In order that the common carrier may be exempted
from responsibility, the natural disaster must have been the
proximate and only cause of the loss. However, the common
carrier must exercise due diligence to prevent or minimize loss
before, during and after the occurrence of flood, storm or other Art. 1743. If through the order of public authority the goods are
natural disaster in order that the common carrier may be seized or destroyed, the common carrier is not responsible,
exempted from liability for the loss, destruction, or deterioration provided said public authority had power to issue the order.
of the goods. The same duty is incumbent upon the common
carrier in case of an act of the public enemy referred to in Article
1734, No. 2.
Art. 1744. A stipulation between the common carrier and the
shipper or owner limiting the liability of the former for the loss,
destruction, or deterioration of the goods to a degree less than
Art. 1740. If the common carrier negligently incurs in delay in extraordinary diligence shall be valid, provided it be:
transporting the goods, a natural disaster shall not free such
carrier from responsibility.

(1) In writing, signed by the shipper or owner;

Art. 1741. If the shipper or owner merely contributed to the loss,

destruction or deterioration of the goods, the proximate cause
thereof being the negligence of the common carrier, the latter (2) Supported by a valuable consideration other than the service
shall be liable in damages, which however, shall be equitably rendered by the common carrier; and
reduced.

(3) Reasonable, just and not contrary to public policy.

Art. 1742. Even if the loss, destruction, or deterioration of the
goods should be caused by the character of the goods, or the
faulty nature of the packing or of the containers, the common
carrier must exercise due diligence to forestall or lessen the Art. 1745. Any of the following or similar stipulations shall be
loss. considered unreasonable, unjust and contrary to public policy:
(1) That the goods are transported at the risk of the owner or
shipper;
(2) That the common carrier will not be liable for any loss,
destruction, or deterioration of the goods;
(3) That the common carrier need not observe any diligence in
the custody of the goods;
(4) That the common carrier shall exercise a degree of diligence
less than that of a good father of a family, or of a man of
ordinary prudence in the vigilance over the movables
transported;
(5) That the common carrier shall not be responsible for the acts
or omission of his or its employees;
(6) That the common carrier's liability for acts committed by
thieves, or of robbers who do not act with grave or irresistible
threat, violence or force, is dispensed with or diminished;
(7) That the common carrier is not responsible for the loss,
destruction, or deterioration of goods on account of the
defective condition of the car, vehicle, ship, airplane or other
equipment used in the contract of carriage.
Art. 1746. An agreement limiting the common carrier's liability
may be annulled by the shipper or owner if the common carrier
refused to carry the goods unless the former agreed to such
stipulation.
Art. 1747. If the common carrier, without just cause, delays the
transportation of the goods or changes the stipulated or usual
route, the contract limiting the common carrier's liability cannot
be availed of in case of the loss, destruction, or deterioration of
the goods.
Art. 1748. An agreement limiting the common carrier's liability
for delay on account of strikes or riots is valid.
Art. 1749. A stipulation that the common carrier's liability is
limited to the value of the goods appearing in the bill of lading,
unless the shipper or owner declares a greater value, is binding.

Art. 1750. A contract fixing the sum that may be recovered. by
the owner or shipper for the loss, destruction, or deterioration of
the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon.
Art. 1751. The fact that the common carrier has no competitor
along the line or route, or a part thereof, to which the contract
refers shall be taken into consideration on the question of
whether or not a stipulation limiting the common carrier's
liability is reasonable, just and in consonance with public policy.
Art. 1752. Even when there is an agreement limiting the liability
of the common carrier in the vigilance over the goods, the
common carrier is disputably presumed to have been negligent
in case of their loss, destruction or deterioration.
Art. 1753. The law of the country to which the goods are to be
transported shall govern the liability of the common carrier for
their loss, destruction or deterioration.
Art. 1754. The provisions of Articles 1733 to 1753 shall apply to
the passenger's baggage which is not in his personal custody or
in that of his employee. As to other baggage, the rules in
Articles 1998 and 2000 to 2003 concerning the responsibility of
hotel-keepers shall be applicable.
SUBSECTION 3. - Safety of Passengers
Art. 1755. 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.
Art. 1756. In case of death of or injuries to passengers, common
carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary
diligence as prescribed in Articles 1733 and 1755.
Art. 1757. The responsibility of a common carrier for the safety
of passengers as required in Articles 1733 and 1755 cannot be
dispensed with or lessened by stipulation, by the posting of
notices, by statements on tickets, or otherwise.
Art. 1758. When a passenger is carried gratuitously, a stipulation
limiting the common carrier's liability for negligence is valid, but
not for wilful acts or gross negligence.
The reduction of fare does not justify any limitation of the
common carrier's liability.
Art. 1759. Common carriers are liable for the death of or injuries
to passengers through the negligence or wilful acts of the
former's employees, although such employees may have acted
beyond the scope of their authority or in violation of the orders
of the common carriers.
This liability of the common carriers does not cease upon proof
that they exercised all the diligence of a good father of a family
in the selection and supervision of their employees.
Art. 1760. The common carrier's responsibility prescribed in the
preceding article cannot be eliminated or limited by stipulation,
by the posting of notices, by statements on the tickets or
otherwise.
Art. 1761. The passenger must observe the diligence of a good
father of a family to avoid injury to himself.
Art. 1762. The contributory negligence of the passenger does
not bar recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably reduced.
Art. 1763. A common carrier is responsible for injuries suffered
by a passenger on account of the wilful acts or negligence of
other passengers or of strangers, if the common carrier's
employees through the exercise of the diligence of a good father
of a family could have prevented or stopped the act or omission.
DEFENSES AVAILABLE TO A COMMON CARRIER
1. Proof of negligence
2. Due diligence in the selection and supervision of employees
3. Fortuitous event
4. Contributory negligence
5. Doctrine of last clear chance
PROOF OF NEGLIGENCE
Negligence is the failure to exercise the required amount of care to prevent
injury to others. For example, if you cause an accident that injures someone
or damages their vehicle because you were driving at an unsafe speed, then
you could be sued for negligence.
Before a court will award damages, the presumed negligence must satisfy 4
requirements:
1. there must be a legal duty to perform or to use reasonable care;
2. there must have been a failure to perform that duty;
3. the plaintiff must have suffered an injury or a loss;
4. and the negligent act must have been the proximate cause of the injury.
The proximate cause is a cause that directly caused the loss or suffering; if
the proximate cause didn't happen, then the harm would not have happened.
All 4 elements of negligence must be present before a court will award
damages.
ART. 1733. Common carriers, from the nature of their business and
for reasons of public policy, are bound to observe extra ordinary
diligence in the vigilance over the goods and for the safety of the
passengers transported by them according to all the circumstances of
each case.
Such extraordinary diligence in the vigilance over the goods is further
expressed in articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while
the extraordinary diligence for the safety of the passengers is further
set forth in articles 1755 and 1756.
ART. 1755. 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.
ART. 1756. In case of death of or injuries to passengers, common
carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary
diligence as prescribed in articles 1733 and 1755.
DUE DILIGENCE IN THE SELECTION AND SUPERVISION OF
EMPLOYEES
GENERAL RULE: Whoever committed the act or omission causing
damage to another is liable for such damage to the injured person.
EXCEPTION: In the doctrine of vicarious liability, another person is
made responsible for the acts or omissions of another. The essence is
the relationship between the person responsible and the one who
committed the act or omission. Under this doctrine, the employer is
presumed negligent, thus, the employer must prove that it had
exercised due diligence in the selection and supervision of its
employees in order to avoid liability.
1. Vicarious Liability – refers to a situation where someone is held
responsible for the acts or omissions of another person.
 It comes from the word vicarius or “vicar.” It means
representative, deputy or substitute; anyone acting “in the person
of” or agent of a superior.
 In the context of the workplace, the employer can be held
responsible for the acts or omission of its employees, provided it
can be shown that it took place in the course of their
employment.
  Article 2176, New Civil Code – “Whoever by act or omission
causes damage to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence, if there is no
pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter.”
 Article 2180, New Civil Code – “The obligation imposed by Article
2176 is demandable not only for one’s own acts or omissions, but
also for those of persons for whom one is responsible.
 The owners and managers of an establishment or enterprise
are likewise responsible for damages caused by their
employees in the service of the branches in which the latter are
employed or on the occasion of their functions.
 Employers shall be liable for the damages caused by their
employees and household helpers acting within the scope of
their assigned tasks, even though the former are not engaged
in any business or industry.
 The responsibility treated of in this article shall cease when the
persons herein mentioned prove that they observed all the
diligence of a good father of a family to prevent damage.
 – This article provides for the solidary liability of an employer
for the quasi-delict committed by an employee. The
responsibility of employers for the negligence of their
employees in the performance of their duties is primary and,
therefore, the injured party may recover from the employers
directly, regardless of the solvency of their employees. (Victory
Liner, GR 154278, December 27, 2002)
 Registered owner of a motor vehicle is conclusively presumed the
employer of the driver
In Filcar Transport Services vs. Jose A. Espinas, G.R. No. 174156, June
20, 2012, the registered owner was held vicariously liable for the
personal driver of its corporate secretary, to whom the vehicle was
assigned. Although the actual employer of the driver was the
corporate secretary, under the motor vehicle registration law, the
registered owner is presumed the employer.
In Mariano C. Mendoza & Elvira Lim vs. Spouses Gomez, G.R. No.
160110, June 18, 2014, between the actual owner and the registered
owner of the vehicle, the vicarious liability lies with the registered
owner. The registered owner cannot rely on the defenses available
under Article 2180, such as that the act complained of was beyond the
scope of the employee’s assigned task or that it exercised the diligence
of a good father of a family. His only recourse is to sue the actual
owner and/or the driver later on the basis of unjust enrichment.
“Article 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which, though foreseen, were
inevitable.”
The rule excepts cases specified by law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires
the assumption of risk, such as in a contract of insurance. Further,
under Article 1262 of the Civil Code, an obligation which consists in
the delivery of a determinate thing shall be extinguished if it should be
lost or destroyed without the fault of the debtor, and before he has
incurred in delay. When by law or stipulation, the obligor is liable even
for fortuitous events, the loss of the thing does not extinguish the
obligation, and he shall be responsible for damages. The same rule
applies when the nature of the obligation requires the assumption of
risk.
“Jurisprudence defines the elements of a “fortuitous event” as follows: (a)
the cause of the unforeseen and unexpected occurrence must be independent
of human will, (b) it must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be foreseen, it must be impossible to
avoid, (c) the occurrence must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner and (d) the obligor must
be free from any participation in the aggravation of the injury resulting to the
creditor.” (Emphasis and underscoring supplied)
CONTRIBUTORY NEGLIGENCE
Contributory negligence is negligence that is caused by both plaintiff
and defendant. If the plaintiff contributed to his injury, then, in some
states, the plaintiff will be prevented from collecting any damages.
"Art. 1762. The contributory negligence of the passenger does not bar recovery
of damages for his death or injuries, if the proximate cause thereof is the
negligence of the common carrier, but the amount of damages shall be
equitably reduced."
The last clear chance rule modifies comparative negligence by
allowing the plaintiff to collect damages from the defendant, even if the
plaintiff contributed to his injury, if the defendant had a last clear chance
to prevent the injury. In other words, could the defendant have
prevented the injury regardless of the plaintiff's negligence? If the
answer is yes, then the plaintiff will still be able to collect regardless of
comparative negligence.
EXTENT OF LIABILITY
Damages recoverable from Common
Carriers (MENTAL)
a. Actual or Compensatory damages – are adequate compensation
for pecuniary loss suffered by a person as he has proven (e.g. –
medicine, hospitalization expenses).
                                               
b. Moral damages – include physical suffering, mental anguish,
fright, seriouos anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury.
                                
G.R. – Moral damages are not recoverable in breach of
contract of carriage
                                                Exceptions –
a.       CC acted fraudulently or in bad faith, even if death does not result
b.      Where the  mishap results in the death of passenger
c. Exemplary or Corrective damages – are imposed, by way of
example or correction for the public good, in addition to actual or
compensatory, moral, temperate or liquidated damages.
                                               
d. Nominal damages – are adjudicated in order that a right of a
person, which has been violated or invaded by the CC, may be
vindicated or recognized, and not for the purpose of indemnifying
such person for any loss suffered by him.
e. Temperate or Moderate damages – which are more than nominal
but less than compensatory damages, may be recovered when the
court finds that some pecuniary loss has been suffered but its
amount cannot from the nature of the case, be proven with
certainty.
f. Liquidated damages – are those agreed upon by the parties to a
contract, to be paid in case of breach thereof.
                                                g. Attorney’s fees and Interest
STIPULATIONS LIMITING LIABILITY
ART. 1749. A stipulation that the common carrier's liability is limited to the value
of the goods appearing in the bill of lading, unless the shipper or owner
declares a greater value, is binding.
The Montreal Convention or the Warsaw Convention may be applicable to your
journey and these Conventions govern and may limit the liability of air carriers for
death or bodily injury, for loss of or damage to baggage, and for delay. 
Where the Montreal Convention applies, the limits of liability are as follows:
 There are no financial limits for passenger death or bodily injury, however, the
carrier shall not be liable for damages exceeding 128,821 Special Drawing
Rights (Approximately EUR160,240) if it proves that it was not negligent or at
fault or such damages is solely attributable to the negligence or fault of third
parties. The air carrier may make an advance payment to meet the immediate
economic needs of the person entitled to claim compensation.
 In the case of damage caused by delay in the carriage by air of passengers,
5,346 Special Drawing Rights (approximately EUR 6,650)
 In the case of destruction, loss of, or damage or delay to baggage, 1,288
Special Drawing Rights (approximately EUR 1,602) per passenger.
 In the case of destruction, loss of, damage or delay to cargo, 22 Special
Drawing Rights per kilogram (approximately EUR27 per kilogram) 
The Montreal Convention applies to all operations by European Union carriers and to
all operations of other, non-European Union carriers that have elected to accepts its
provisions. Check with your carrier for more information.
Where the Warsaw Convention applies, the limits of liability are as follows:
  16,600 Special Drawing Rights (approximately EUR 20,000) for death or
bodily injury if the Hague Protocol to the Convention applies, or 8,300 Special
Drawing Rights (approximately EUR 10,000) if only the Warsaw Convention
applies.  recorded as Filipino-owned thus making both the investing and investee -
 17 Special Drawing Rights (approximately EUR 20) per kg for loss of or
damage or delay to checked baggage, and 332 Special Drawing Rights
(approximately EUR 400) for unchecked baggage. 
 The carrier may also be liable for damage occasioned by delay.
Special Drawing Rights are not used to express limits of liability for all journeys to
which the Warsaw Convention applies. In those cases, the limits of liability calculated
under the Warsaw Convention may be different. Please refer to the tariffs, conditions of
carriage or related regulations of your carrier.  shareholder.” Thus, to arrive at the actual Filipino ownership and control in a
CORPORATION LAW
What is a corporation? 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 incidental to its existence.
The attributes of a corporation are drawn from its statutory definition. It is an
artificial being. It is created by operation of law. It has the right ofsuccession. It has
the powers, attributes, and properties expressly authorized by law or incidental to
its existence.
NATIONALITY OF CORPORATIONS
CONTROL TEST
Control test-It is a mode ofdetermining the nationality of a corporation engaged in
nationalized areas of activities, provided for under the Constitution and other
applicable laws, where corporate shareholders with foreign shareholdings are
present, by ascertaining the nationality of the controlling stockholder of the
corporation. If the capital ofthe investing Corporation is at least 60% owned by
Filipinos, then the entire shareholdings ofthe investing Corporation shall be
corporations Philippine national.
Grandfather rule — This is “the method by which the percentage of Filipino equity
in a corporation engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and other applicable laws, is
accurately computed, in cases where corporate shareholders with foreign
shareholdings are present, by attributing the nationality of the second or even
subsequent tier ofownership to determine the nationality ofthe corporate
corporation, both the direct and indirect shareholdings in the corporation are
determined. In the case of a multi-tiered corporation, the stock attribution rule
must be allowed to run continuously along the chain of ownership until it finally
reaches the individual stockholders.
The purpose of this rule is to trace the nationality of the stockholder of investor
corporations to ascertain the nationality of the corporation where the investment
is made.
What is the prevailing mode of determining the nationality of corporations
engaged in nationalized activities? The “control test” is the prevailing mode of
determining the nationality of corporations engaged in nationalized activities.
However, when in the mind of the Court there is doubt as to where beneficial
ownership and control reside, based on the attendant facts and circumstances of
the case, then it may apply the “grandfather rule.” In fact, the Control Test can be,
as it has been, applied jointly with the Grandfather Rule to determine the
observance of foreign ownership restriction in nationalized economic activities.
The Control Test and the Grandfather Rule are not, as it were, incompatible
ownership-determinant methods that can only be applied alternative to each
other. Rather, these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged in fully or
partly nationalized activities.203 The Grandfather Rule, standing alone, should not
be used to determine the Filipino ownership and control in a corporation, as it
could result in an otherwise foreign corporation rendered qualified to perform
nationalized or partly nationalized activities. Hence, it is only when the Control
Test is first complied with that the Grandfather Rule may be applied. Put in
another manner, if the subject corporation’s Filipino equity falls below the
threshold of 60%, the corporation is immediately considered foreign-owned, in
which case, the need to resort to the Grandfather Rule disappears.
The Supreme Court stressed, however, that when the 60% Filipino ownership, is
never in doubt, the control test prevails. In the relevant case, it was held that the
petition is severely wanting in facts and circumstances to raise legitimate
challenges to the joint venture company’s 60-40 Filipino-Foreigner ownership. The
application of the control test will already yield the result that the company is a
Philippine national. The grandfather rule no longer applies.
When is the grandfather rule applied? The grandfather rule is applied in the
following cases: Under the Grandfather Rule Proper, if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine
nationality. Under the Strict Rule or Grandfather Rule Proper, the combined totals
in the Investing Corporation and the Investee Corporation, when traced (i.e.,
“grandfathered”) to determine the total percentage of Filipino ownership, show
less than 60% requirement. If based on records, Filipinos own at least 60% of the
investing corporation but there is doubt as to where control and beneficial
ownership in the corporation really reside.
Doctrine of Separate juridical personality
 A corporation has a legal personality separate and distinct from that of people
comprising it.  By virtue of that doctrine, stockholders of a corporation enjoy the
principle of limited liability: the corporate debt is not the debt of the stockholder.
Thus, being an officer or a stockholder of a corporation does not make one's
property the property also of the corporation.
What is the doctrine of piercing the veil of corporate fiction? It is the doctrine
that allows the State to disregard, for certain justifiable reasons, the notion or
fiction that the corporation has a separate legal personality from those composing
it. The doctrine of separate legal entity is only a fiction to promote public
convenience. If this fiction is misused or abused, then the State shall pierce the
corporate veil and treat the corporation and the persons composing it as one and
the same entity.
26. In what areas does the doctrine apply? The doctrine of piercing the corporate
veil applies in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used as a vehicle
for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or
3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego
or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
Cite jurisprudence where the doctrine of piercing the corporate veil was applied
because the fiction of separate legal personality was used to defeat public
convenience.
The separate juridical personality of a corporation may be disregarded where the
majority stockholder filed a derivative suit in behalf of the corporation to declare
the sale as unenforceable against the corporation although the trial court in
another case had already ruled that the contract of sale between the corporation
and its buyer was deemed perfected. There is forum shopping where the
stockholders, in a second case, and in representation of the corporation, seek to
accomplish what the corporation itself failed to do in the original case. In this case,
the fiction was used to circumvent the rule against non-forum shopping.
Cite jurisprudence where the doctrine of piercing the corporate veil was applied
because the fiction was used to perpetuate fraud.
At the time an unfair labor practice case was pending against the corporation, its
officers and stockholders organized a run-away corporation, engaged in the same
line of business, producing the same line of products, occupying the same
compound, using the same pieces of machinery, buildings, laboratory, bodega and
sales and accounts departments used by the first corporation. It was held that this
is another instance where the fiction of separate and distinct corporate entities
should be disregarded asthe second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial obligation to its
employees.
Piercing the veil of corporate fiction is warranted when a corporation ceased to
exist only in name as it reemerged in the person of another corporation, for the
purpose of evading its unfulfilled financial obligation under a compromise
agreement. Thus, ifthe judgment for money claim could not be enforced against
the employer corporation, an alias writ may be obtained against the other
corporation considering the indubitable link between the closure of the first
corporation and incorporation of the other.
De facto corporations versus corporations by estoppel
De Facto: is one organized with colorable compliance with the requirements of a
valid law. Its existence cannot be inquired into collaterally. Such inquiry must be
by a direct attack by the State through a quo warranto proceeding.”
By Estoppel: It exists when two or more persons assume to act as a corporation
knowing it to be without authority to do so. They are liable as general partners for
all debts, liabilities, and damages incurred or arising as a result thereof: Provided,
however, that when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality. One who assumes an
obligation to an ostensible corporation as such, cannot resist performance thereof
on the ground that there was, in fact, no corporation.”
CORPORATE POWERS
What is an ultra vires act of the corporation? The term is used to describe a
corporate transaction that is outside the objects for which the corporation was
created as defined in the law of its organization, and therefore, beyond the
powers conferred upon it by law.
A corporation may exercise its powers only within those definitions. Corporate
acts that are outside those express definitions under the law or articles of
incorporation or those committed outside the object for which a corporation is
created are ultra vires. The only exception to this rule is when acts are necessary
and incidental to carry out a corporation’s purposes and to the exercise of powers
conferred by the Corporation Code and under a corporation’s articles of
incorporation.
Is ultra vires act limited to any act which is outside the express and incidental
powers of the corporation?
No, there are three (3) types of ultra vires acts;
1. Acts done beyond the powers of the corporation as
provided in the law or its articles of incorporation.
 2. Acts entered into on behalf of the corporation by persons
who have no corporate authority or exceeded the scope
of their authority.
3. Acts or contracts, which areperse illegal as being contrary
to law.
Cite jurisprudence on ultra vires acts for being outside or beyond the powers of
the corporation. Petitioner, an educational institution does not have the power to
mortgage its properties in order to secure loans of a savings and loan association
(“SLA”) even though they have common stockholders. Securing SLA’s loans by
mortgaging the school’s properties does not appear to have even the remotest
connection to its operations as an educational institution. Further, not having the
proper board resolution to authorize the signatory to execute the mortgage
contracts for the school, the contracts he executed are unenforceable against the
petitioner. While the lender’s mortgage is annotated on the certificates of titles of
petitioner’s properties, the annotations are merely claims ofinterest or claims
ofthe legal nature and incidents of the relationship between the person whose
name appears on the document and the person who caused the annotation. It
does not say anything about the validity of the claim nor convert a defective claim
or document into a valid one.
While Section 13 of DBP’s charter, exempts it from existing laws on compensation
and position classification, it concludes by expressly stating that DBP’s system of
compensation shall nonetheless conform to the principles under the Salary
Standardization Law (SSL). From this, there is no basis to conclude that the DBP’s
Board of Directors was conferred unbridled authority to fix the salaries and
allowances of its officers and employees. The authority granted DBP to freely fix its
compensation structure under which it may grant allowances and monetary
awards remains circumscribed by the SSL; it may not entirely depart from the spirit
of the guidelines therein.
The grant of a wider latitude to DBP’s Board of Directors in fixing remunerations
and emoluments does not include an abrogation of the principle that employees in
the civil service “cannot use the same weapons employed by the workers in the
private sector to secure concessions from their employees.” While employees of
chartered GFIs enjoy the constitutional right to bargain collectively, they may only
do so for non-economic benefits and those not fixed by law, and may not resort to
acts amounting to work stoppages or interruptions. There is no other way to view
the Governance Forum Productivity Award (GFPA) other than as a monetary
benefit collectively wrung by DBP’s employees under threat of disruption to the
bank’s smooth operations. All told, the grant of GFPA was indeed an ultra vires act
or beyond the authority of DBP’s Board of Directors.
Cite instances where the corporate acts are within the powers of the corporation
but are considered ultra vires because they were entered into on behalf of the
corporation by persons who have no corporate authority or have exceeded the
scope of their authority.
Another, a contract to sell cement signed by the president and chairman of the
corporation is not binding upon it where they were not authorized by the board of
directors to enter into a contract and the company board ofdirectors disapproved
the contract and the bylaws conferred the power to manage the business ofthe
corporation upon the general manager.
There is also ultra vires act on the part of the board of directors when it performs
a corporate act without the affirmative or ratificatory vote of the stockholders in
those instances where the RCC so requires.3” And there is an ultra vires act on the
part of the corporate officers when they performed acts, purportedly on behalf of
the corporation, without having been so expressly or impliedly authorized by the
bylaws or board of directors, even when the act or contract falls within the
corporation’s express, implied or incidental power, unless the acts are ratified by
the corporation.
Is an ultra vires act illegal? An illegal act, such as one that is contrary to law, is
necessarily ultra vires but an ultra vires act is not necessarily an illegal act if it only
one that is outside the conferred powers of the corporation.” The term ultra vires
should be distinguished from an illegal act for the former is merely voidable which
may be enforced by performance, ratification, or estoppel, while the latter is void
and cannot be validated. It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for taking such action.
May an ultra vires act be ratified? An act that is ultra vires for being an illegal act
cannot be ratified. If a contract is ultra vires in the strict sense of the word, it
cannot ordinarily be ratified to make it valid. As to the question of whether the
consent of all the stockholders to an act of the corporation can put such act within
the powers of the corporation, it may be stated as a general rule that the
ratification of an ultra vires act does not validate it, and this is also true as to
ratification by the stockholders. However, there is some authority tending to hold
the contrary case ofratification by stockholders, at least where the rights of the
state or creditors are not involved.
The majority of the cases though hold that acts which are merely ultra vires, or
acts which are not illegal, maybe ratified by the stockholders of a corporation. It
was held that a contract entered into by corporate officers who exceed their
authority generally does not bind the corporation except when the contract is
ratified by the Board of Directors.
In Office of the Ombudsman v. Antonio Z. De Guzman, there was no evidence
presented that the Board of Directors of the Philippine Postal Corporation
repudiated the contract with Aboitiz One for outsourcing mail deliveries. The
contract remained effective until a certain period. Considering that the Board of
Directors remained silent and the Postmaster Generals continued to approve the
payments to Aboitiz One, they are presumed to have substantially ratified the
company official’s unauthorized acts. Therefore, the official’s action is not
considered ultra vires. The foregoing case affirms that an ultra vires act, which is
not an illegal act, may be ratified by the stockholders of the corporation.
What are the consequences of ultra vires acts? If the contract is executed on both
sides, the courts will not set aside or interfere to deprive either party of what has
been acquired under them. If the contract is executory on both sides, it will not be
enforced at the suit of either party, because their enforcement is not required by
any equitable principles and will be contrary to public policy. If the contract is
executed on one side, and executory on the other, courts in some jurisdictions,
although not in all, will enforce in favor of the party who has executed the same
on his part against the other party who has received and retained the benefits on
the ground that equitable principles and outweighing considerations of public
policy, require that the latter should not be permitted, while retaining the benefits
of the contract, to escape liability on the ground that it was ultra vires. Contracts,
whether wholly executory or executed on one side, apparently authorized, but in
fact, ultra vires because they are made for a purpose not within the scope of the
business of the corporation, the ultra vires purpose being unknown to the other
party, are enforceable against the corporation.
What is the remedy of the stockholder against an ultra vires act?
If the act is yet to be done, the remedy is one of injunction to enjoin the
performance or continued performance of the ultra vires act. If the act has already
been performed, a stockholder may file a derivative suit on behalf of the
corporation to set aside the ultra vires act.
What is the trust fund doctrine?
The trust fund doctrine provides that subscriptions to the capital stock of a
corporation constitute a fund to which the creditors have a right to look for the
satisfaction of their claims. In a sense, they have to be unimpaired for the
protection of creditors. These cover the entire consideration received for the
issuance of no par value shares or the aggregate amount for the par value shares
issued by the corporation.
It must be noted, however, that the trust fund doctrine is not limited to the
stockholders’ subscriptions. The scope of the doctrine encompasses not only the
capital stock but also other property and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
The Trust Fund Doctrine is violated in the following cases:
1. The corporation has distributed its capital among the stockholders
without providing for the payment of creditors.
2. It released the subscribers to the capital stock from their unpaid
subscriptions.
3. It transferred corporate property in fraud of its creditors.
4. It distributed properties to stockholders except by way of
dissolution and liquidation, the redemption of redeemable shares,
and reduction of capital stock.
5. When it declared dividends without unrestricted retained
earnings.
6. When it acquired its shares without unrestricted retained
earnings.
Does the additional paid-in capital ("APIC"), that is, the premium above par
value, form part of the trust fund doctrine?
APIC forms part of the equity emanating from the original subscription agreement.
APIC, as a premium, forms part of the capital of the corporation and therefore,
falls within the purview of the trust fund doctrine.
There have been previous SEC Opinions” that stock dividends can be declared out
of APIC but the most recent SEC regulation, as previously pointed out, is that APIC
shall neither be declared as dividend nor shall it be reclassified to absorb
deficiency except through an organizational restructuring duly approved by the
SEC.
ABC Corporation ("ABC") obtained a loan from XYZ Bank secured by a mortgage
on its real property. ABC defaulted. To stave off foreclosure, A, the controlling
stockholder of ABC invited investor X to invest in ABC. X subscribed to shares of
stock of ABC and became a significant stockholder. In further consideration of his
investment, X and A agreed on how to manage the corporation. Unfortunately,
the two (2) stockholders had a disagreement, with each one claiming a breach of
the subscription agreement. May A rescind the subscription of X?
No, the rescission of the Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine. Rescission of a subscription agreement
is not one of the instances when the distribution of capital assets and property of
the corporation is allowed. The Trust Fund Doctrine provides that subscriptions to
the capital stock of a corporation constitute a fund to which the creditors have a
right to look for the satisfaction of their claims.
BOARD OF DIRECTORS AND TRUSTEES
What is the doctrine of centralized management?
It means that corporate powers are vested in a body, called board of directors for
a stock corporation and board of trustees for a nonstock corporation. Except in
those instances where stockholders’ or members’ approval is required for certain
acts under the RCC or the corporation’s bylaws, it is the board which exercises
corporate powers.
The stockholders or members, regardless of number, will have to delegate the
power to manage the corporation to the board. The concentration in the board of
the powers of control of the corporate business and appointment of corporate
officers and managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered, and unfamiliar with the business of a
corporation to conduct its business directly.
And so the plan of corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of corporate business. In
other words, stockholders or members periodically elect the board of directors or
trustees, who are charged with the management of the corporation. The board, in
turn, periodically elects officers to carry out management function on a day-to-day
basis. As owners though, the stockholders or members have residual powers over
fundamental and major corporate changes. Acts of management pertain to the
board; and those of ownership, to the stockholders or members.
What is the business judgment rule?
Questions of policy and management are left to the sound discretion and honest
decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board of directors.
The board is the business manager of the corporation, and so long as it acts in
good faith, its orders are not reviewable by the courts. Courts are barred from
intruding into the business judgments of the corporation when the same are made
in good faith.
Similarly, under the same business judgment rule, stockholders cannot interfere
with the board in conducting the business affairs of the corporation. They cannot,
for instance, revoke resolutions of the board or repudiate their acts on account of
mere disagreement. If the stockholders are not satisfied with the way the board
exercises its powers or manages the corporation, their remedies consist of
replacing the board members upon expiration of their term or vote for their
removal under Section 27 of the RCC or file a derivative suit on behalf of the
corporation to set aside the board’s wrongful acts but not to supplant the board’s
business judgment for their own.
To repeat, save for the authority granted to them by law and the bylaws,
stockholders cannot exercise corporate powers and have no management rights.
In the absence of gross negligence or bad faith, the board may not even be held
liable for mistakes or errors in directing the affairs of the corporation. The business
judgment rule is not absolute.
Corporate acts cannot be justified under the business judgment rule if they are
contrary to law. For instance, the board cannot invoke this rule to declare
dividends when there is no surplus profit or declare dividends out of re-appraisal
surplus, or to pay compensation to directors, as this power is lodged with the
stockholders. It cannot be relied upon to support a request for a new stock and
transfer book on the pretext that the original is lost (when in fact it is not) and
declare entries in the supposed lost stock and transfer book as invalid.
Tenure, qualifications, and disqualifications of directors
What is the distinction between term and tenure?
Term is the time during which the officer may claim to hold the office as a right
and fixes the interval after which the several incumbents shall succeed one
another. 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 his
actual incumbency. The tenure may be shorter (or, in case of holdover, longer)
than the term for reasons within or beyond the power of the incumbent. The
former is fixed while the latter extends until his successor is duly elected and
qualified.
Below are the qualifications for directors or trustees under the RCC:
a. Since any person, partnership, association or corporation, singly or
jointly with others but not more than 15 in number, may now
organize a corporation for any lawful purpose or purposes,620
directors or trustees need not be natural persons. However,
juridical persons, as directors, need to be represented by their
nominees.
If the director or trustee is a natural person, he must be of legal
age. The director must own at least one (1) share of stock of the
corporation and the trustee must be a member ofthe corporation.
In Grace Christian High School v. Court ofAppeals, et al., the
Supreme Court held that a provision in the bylaws which allots a
permanent seat in the board to a non-member of the association
is contrary to law. Similarly, the fact that said permanent seat was
held for 15 years cannot give rise to a vested right and estoppel
cannot forestall a challenge against an act that it is contrary to
law. The number of directors shall not be more than 15 while the
number of trustees may be more than 15.
Except with respect to independent trustees of nonstock
corporations vested with public interest, only a member of the
corporation shall be elected as trustee.526 Trustees of educational
institutions organized as nonstock corporations or religious
societies shall not be less than five (5) nor more than 15.626
However, with respect to educational institutions, the number of
trustees shall only be in multiples of five (5).627 On
disqualification, the RCC expanded and qualified the grounds such
that a person shall be disqualified from being a director, trustee or
officer of any corporation if, within 5 years prior to the election or
appointment as such, the person was:
a. convicted by final judgment:
i. On an offense punishable by imprisonment for a period
exceeding six (6) years;
ii. For violating RCC; and
iii. For violating Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”
b. Found administratively liable for any offense involving fraudulent
acts; and
c. By a foreign court or equivalent foreign regulatory authority for
acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other disqualifications,
which the SEC, the primary regulatory agency, or the Philippine Competition
Commission may impose in its promotion of good corporate governance or as a
sanction in its administrative proceedings.
To be a ground for disqualification, it is not enough then that the violation of the
RCC, be committed within 5 years prior to election. It is also required that there is
conviction by final judgment. Based on the language of the law, the
administrative liability may be imposed by any government agency, different
from the SEC, as long as it is an offense involving fraudulent act. The SEC, by itself,
is authorized to impose disqualification from being elected to the board, as a
sanction in its administrative proceeding.
X is a director of ABC Corporation. In the sixth month of his term, he sold all his
shares to A. A now claims that by reason of his purchase of X's shares, he should
serve the unexpired portion of X's term. X, on the other hand, insists otherwise
citing the provision of the Corporation Code that his term is one (1) year. Who
between X and A should be the director of the corporation? Neither of them
should be the director of the corporation. The director’s ownership ofat least one
(1) share ofstock and the trustee’s membership in the corporation is a continuing
qualification. If at any time, a director ceases to be a stockholder or a trustee
ceases to be a member of the corporation, he shall automatically cease to be
such director or trustee. X then ceased to be a director of the corporation after
the sale. A cannot take the place of X just because he acquired the share of the
latter unless he is appointed by the board of directors.
Is it necessary that the director be the owner of the share of the corporation in
his own right to qualify as such director? Generally, the director must have full
ownership ofthe shares, i.e. both the legal title and beneficial title. However,
based on Lee v. Court ofAppeals;629 the Supreme Court ruled that a trustee,
under a voting trust agreement, can qualify as a director, and that in order to be
eligible as a director, what is material is the legal title to, and not beneficial
ownership of, the stock as appearing on the books of the corporation. Similarly,
when a director loses his legal title over all his shares, he automatically forfeits his
director position.
Can the bylaws require that the director own more than one (1) share of stock?
Yes, the bylaws may enlarge the share ownership requirement provided that it is
not intended to deprive minority representation. As provided under Section 46 of
the RCC, additional qualifications of directors and trustees may be prescribed
under the bylaws of the corporation. In the absence of a provision in the bylaws,
a corporation cannot require additional qualifications for directors other than the
mandatory requirement under the RCC.
Are directors or trustees required to be residents of the Philippines? The
requirement of the OCC which provides that “[a] majority of the directors or
trustees of all corporations organized under this Code must be residents of the
Philippines” was removed under the RCC. As such, it is possible that a majority or
even all directors or trustees may be non-residents.
Are directors or trustees required to be Filipino citizens? Similar to the OCC, the
RCC does not require Filipino citizenship for the directors or trustees of a
corporation. However, if the corporation is engaged in nationalized activities,
citizenship becomes a qualification. Foreigners cannot be appointed to the board
of corporations engaged in wholly-nationalized activities. For partly nationalized
activities, foreigners can be elected to the board of directors in proportion to
their foreign equity, as allowed by law.
ELECTION AND REMOVAL OF DIRECTORS OR TRUSTEES
What do you understand by the provision under the RCC that each director and
trustee shall hold office until the successor is elected and qualified?
It means that if his successor is not elected and qualified, the director, or trustee
may continue to perform his duties in a hold-over capacity. The hold-over period is
not, however, part of the term of office of the director or trustee. Thus, if a hold-
over director resigns, the vacancy is due to the expiration of term and not
resignation. Accordingly, the vacancy can only be filled by the stockholders in a
meeting called for the purpose and not by the board of directors even though the
remaining directors may still constitute a quorum.
The election of the new members of the Board of Directors of the Condominium
Corporation ("CondoCor”) has been nullified duetoa.) lack of quorum and b.)
disqualification of the nomineedirectors of the developer for the position.
Consequently, it caused the nullification of the subsequent organizational
meeting and election of officers. Under the circumstances, may the incumbent
Board of Directors continuously function in a "hold-over" capacity until a new set
of members of the Board of Directors are elected and qualified? If the answer is
in the affirmative, is the authority of the Board of Directors limited only to handle
the corporation's daily operations such as payment of utilities, salaries, the
management of personnel, and other issues/problems that requires immediate
attention? The old or incumbent Board of Directors can act as a legitimate
managing body pending the election of the successor directors. Pursuant to the
hold-over principle as provided in Section 22 of the RCC the incumbent Board of
Directors shall serve as directors until their successors are elected and qualified in
accordance with the RCC or the Bylaws. On the other hand, the position that the
hold-over Board’s authority is limited only to handling the corporation’s daily
operation such as payment of utilities, salaries, the management of personnel and
other issues/problems that requires immediate attention” is mistaken. The RCC
expressly states that the “corporate powers of all corporations formed under the
Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees.” Thus, the
Board of Directors has the authority to: (1) exercise all powers provided for under
the RCC; (2) conduct all business of the corporation; and (3) control and hold all
property of the corporation.
DUTIES, RESPONSIBILITIES AND LIABILITIES FOR UNLAWFUL ACTS
Are directors, trustees, and officers liable for action they have taken on behalf of
the corporation? A corporation, as a juridical entity, may act only through its
directors, officers, and agents. Obligations incurred as a result of the directors’ and
officers’ acts as corporate agents are not their personal liability but the direct
responsibility of the corporation they represent.662 As such, as a general rule,
directors, or officers are not liable for any action taken on behalf of the
corporation.
What are the instances when personal liability may attach to directors, trustees,
or officers of the corporation?
A director, officer, or trustee may be held personally liable in the following cases:
1. Knowingly voting for or assenting to patently unlawful acts of the
corporation;
2. Gross negligence or bad faith in directing the affairs of the corporation;
3. Acquiring any personal or pecuniary interest in conflict with his duty as
director or trustee or officer resulting in damage to the corporation;
4. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
5. He agrees to hold himself personally liable with the corporation; and He is
made, by a specific provision of law, to personally answer for his corporate
action.
Explain each instance when personal liability may attach to directors, trustees,
or officers of a corporation.
Knowingly Voting or Assenting to Patent Unlawful Acts of the Corporation
It is not just to vote for, but to assent likewise to, a patently unlawful act which
makes a director, trustee, or officer personally liable. It is not enough that the act
is unlawful, it must be a patently unlawful act, meaning without doubt,
whatsoever that the act is unlawful.
In Carag v. NLRC,™ the Supreme Court ruled that what makes the act unlawful is
the existence of a law declaring the act to be unlawful. Thus, the failure of a
director or officer to inform the Department of Labor and Employment about the
termination of an employee due to authorized cause may affect the legality of the
termination but it will not make the director or officer personally liable because
there is no law declaring such act to be unlawful. The erring officer though may
be held liable though ifsuch omission amounts to gross negligence or bad faith.
The Supreme Court similarly held in Carag v. NLRC that the liability of the officers
of the corporation is not determined by the Labor Code but by the Corporation
Code, particularly, Sections 31 and 34 of the Corporation Code (now Section 30,
RCC).
 Gross Negligence or Bad Faith in Directing the Affairs of the Corporation
Directors, trustees, and officers are not liable for oversight, imprudence, or
ordinary negligence. They cannot be held liable just because they erred in their
business decision.
Under the business judgment rule, questions of business policy and management
are left to the sound discretion of the board and they cannot be held liable for
any adverse consequence of those decisions as long as they acted in good faith
and not contrary to law.“
They are not, after all, insurers of the profitability of the corporation. Their
liability will attach under this ground only if their acts amount to gross negligence
or bad faith in directing the affairs of the corporation. There is no hard and fast
rule as to when an act amounts to ordinary or gross negligence or bad faith. It
depends on the surrounding circumstances. However, before a director or officer
of a corporation can be held personally liable for corporate obligations, the
following requisites must concur:
1. The complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and
2. The complainant must clearly and convincingly prove such unlawful acts,
negligence, or bad faith.’ It should be noted that the stockholders are not
included in the enumeration of persons who may be held personally liable.
Stockholders are liable only to the extent of their subscription unless they
also act as directors, officers, or agents of the corporation.
A director, officer, or trustee may be held personally liable in the following cases:
1. Knowingly voting for or assenting to patently unlawful acts of the
corporation;
2. Gross negligence or bad faith in directing the affairs of the corporation;
3. Acquiring any personal or pecuniary interest in conflict with their duty as
directors or trustee or officer resulting in damage to the corporation;
4. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
5. He agrees to hold himself personally liable with the corporation; and He is
made, by a specific provision of law, to personally answer for his corporate
action.
Explain each instance when personal liability may attach to directors, trustees,
or officers of a corporation.
a. Knowingly Voting or Assenting to Patent Unlawful Acts of the
Corporation It is not just to vote for, but to assent likewise to, a patently
unlawful act which makes a director, trustee, or officer personally liable.
It is not enough that the act is unlawful, it must be a patently unlawful
act, meaning without doubt, whatsoever that the act is unlawful.
In Carag v. NLRC,™ the Supreme Court ruled that what makes the act
unlawful is the existence of a law declaring the act to be unlawful. Thus, the
failure of a director or officer to inform the Department of Labor and
Employment about the termination of an employee due to authorized cause
may affect the legality of the termination but it will not make the director or
officer personally liable because there is no law declaring such act to be
unlawful. The erring officer though may be held liable though if such omission
amounts to gross negligence or bad faith.
The Supreme Court similarly held in Carag v. NLRC that the liability of the
officers of the corporation is not determined by the Labor Code but by the
Corporation Code, particularly, Sections 31 and 34 of the Corporation Code
(now Section 30, RCC).
.
b. Gross Negligence or Bad Faith in Directing the Affairs of the Corporation
Directors, trustees, and officers are not liable for oversight, imprudence,
or ordinary negligence. They cannot be held liable just because they
erred in their business decision.
Under the business judgment rule, questions of business policy and
management are left to the sound discretion of the board and they
cannot be held liable for any adverse consequence of those decisions as
long as they acted in good faith and not contrary to law.5“
They are not, after all, insurers of the profitability of the corporation.
Their liability will attach under this ground only if their acts amount to
gross negligence or bad faith in directing the affairs of the corporation.
There is no hard and fast rule as to when an act amounts to ordinary or
gross negligence or bad faith. It depends on the surrounding
circumstances.
However, before a director or officer of a corporation can be held
personally liable for corporate obligations, the following requisites must
concur:
1. The complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer
was guilty of gross negligence or bad faith; and
2. The complainant must clearly and convincingly prove such unlawful acts,
negligence, or bad faith.’
It should be noted that the stockholders are not included in the
enumeration of persons who may be held personally liable. Stockholders
are liable only to the extent of their subscription unless they also act as
directors, officers, or agents of the corporation.
c. Acquiring any personal or pecuniary interest in conflict with their duty
as directors or trustees
This conflict of interest must result in damage to the corporation. In relation
thereto, the doctrine of corporate opportunity refers to a case when a director, by
virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of such
corporation. There is a responsibility not just to account but to remit to the
corporation any profit he realized from the venture.
d. Consenting to the issuance of watered stocks
Under Section 64 of the RCC, a director or officer of a corporation who:
(a) consents to the issuance of stocks for a consideration less than their par or
issued value;
(b) consents to the issuance of stocks for a consideration in any form other than
cash, valued in excess of their fair value, or
(c) having knowledge of the insufficient consideration, does not file a written
objection with the corporate secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for the difference between the
value received at the time of the issuance of the stock and the par or issued value
of the same.
e. Contractual liability
If a director or officer makes himself contractually liable with the corporation, is he
automatically liable solidarily? It depends on the nature of the agreement he
entered to secure the obligation of the corporation. Ifhe signs a surety agreement,
he is liable solidarily with the corporation. If it is a guaranty agreement, he is liable
subsidiarily with the corporation because as a guarantor, he has the right of
excussion. However, if the guaranty agreement waives the benefit of excussion,
then he is liable solidarily with the corporation. It is thus clear that the assumption
of the corporation’s liability does not always translate to solidary liability. It has to
be read in conjunction with the provisions of the Civil Code on guaranty.
f. Statutory liability for corporate act or omission
There are cases when the law makes the directors and officers liable for the
corporate act or omission.
The general rule is that directors, trustees, and officers can be held criminally
liable for acts or omission done on behalf of the corporation only when they are
made by specific provision of law to personally answer for their corporate act or
omission.
If the offender is a corporation, certain laws jimpose criminal liability on the
directors, officers, or even agents responsible for the violation or offense. An
example is Presidential Decree 115 (“P.D. No. 115”) or Trust Receipts Law.
In Ching v. Secretary of Justice™ the director/officer, who signed the trust receipt
agreement, did not receive the goods under the trust receipt. He did not get the
loan himself nor derived any personal benefit under the trust receipt transaction.
The Supreme Court said that these are not valid justifications to negate his
criminal liability because it is the law that makes him liable for the corporate act of
violating the trust receipt.
The director or officer who signed the trust receipts cannot, thus, hide behind the
cloak of the separate corporate personality of the corporation. In the words of
Chief Justice Earl Warren, a corporate officer, cannot protect himself behind a
corporation where he is the actual, present, and efficient actor. In Edward C. Ong
v. the Court of Appeals and the People of the Philippines, criminal liability was
imposed against the person who signed the trust receipt agreement on behalf of
the corporation even though he is not a director or officer of the corporation. It is
because under P.D. No. 115, or the Trust Receipts Law, if the offender is a
corporation the penalty shall be imposed upon the director, officer, or any person
responsible for the violation.
g. Responsibility for crimes
Of course, even if the law does not impose liability upon directors or officers
for the corporate act omission, the officers of the corporation, other than the
board of directors, can be made criminally liable for their criminal acts if it
can be proven that they participated therein.
Labor disputes such as that of illegal recruitment can also trigger the liability
of employees and employers. An employee of a corporation engaged in
illegal recruitment may be held liable as principal, together with his
employer, if it is shown that he actively and consciously participated in
illegal recruitment because the existence of the corporate entity does not
shield froiti prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime. The corporation
obviously acts and can act, only’ by and through its human agents, and it
istheir conduct which the law must deter.676 There is likewise jurisprudence
that not only persons who participated in the act can be made criminally
liable. Even those with power to prevent the illegal act may be held
criminally liable. Thus, to be held criminally liable for the acts of a
corporation, there must be a showing that its officers, directors, and
shareholders actively participated in or had the power to prevent the
wrongful act.