We humbly ask for peace

in our hearts, our bodies, our minds, and our

souls, as we wait patiently and confidently.

Not once did you leave us despite our failures and sins.
We recognize and accept the death of your Son, Jesus on the
cross, as a symbol of your unconditional love for us. We thank
you for the assurance of eternal life upon acceptance of Jesus
as our Savior.

Father, we humbly come before you as one family to ask that for your
Divine providence we implore the help of the Holy Spirit to work in
the hearts of those who are preparing for the 2021 Bar
Examination, especially members of our Bedan family.
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 COMMERCIAL LAW

I. BUSINESS ORGANIZATIONS ........................................................................................1

A. PARTNERSHIPS ...........................................................................................................1
B. CORPORATIONS ...................................................................................................... 10
II. BANKING LAWS ............................................................................................................ 39
A. NEW CENTRALBANKACT
(R.A. NO. 7653, AS AMENDED BY R.A. NO. 11211) ........................................... 39
B. GENERAL BANKING LAW OF 2000 (R.A. NO. 8791) .......................................... 41
C. SECRECY OF BANK DEPOSITS
(R.A. NO. 1405, AS AMENDED, AND R.A. NO. 6426, AS AMENDED) ............. 43
D. ANTI-MONEY LAUNDERING ACT (R.A. NO. 9160, AS AMENDED BY
R.A. NO. 9194, 10167, 10365, 10927, AND 11521) .......................................... 44
III. INSURANCE LAW ......................................................................................................... 51
A. BASIC CONCEPTS .................................................................................................... 51
B. PERFECTION OF THE INSURANCE CONTRACT ................................................. 59
C. RIGHTS AND OBLIGATIONS OF THE PARTIES .................................................... 61
D. RESCISSION OF INSURANCE CONTRACTS ......................................................... 61
IV. TRANSPORTATION LAW ............................................................................................ 62
A. COMMON CARRIERS .............................................................................................. 62
B. VIGILANCE OVER GOODS...................................................................................... 63
C. SAFETY OF PASSENGERS ....................................................................................... 64
D. THE MONTREAL CONVENTION OF 1999 ........................................................... 65
V. INTELLECTUAL PROPERTY CODE (R.A. NO. 8293) ............................................ 66
A. PATENTS ................................................................................................................... 66
B. TRADEMARKS .......................................................................................................... 72
C. COPYRIGHT .............................................................................................................. 78
VI. ELECTRONIC COMMERCE ACT (R.A. NO. 8792) ................................................... 83
A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES,
DOCUMENTS, AND SIGNATURES ......................................................................... 83
B. PRESUMPTION RELATING TO ELECTRONIC SIGNATURES............................... 84
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC DATA MESSAGE
OR ELECTRONIC DOCUMENT ............................................................................... 85
D. OBLIGATION OF CONFIDENTIALITY .................................................................... 85
VII. FOREIGN INVESTMENTS ACT (R.A. NO. 7042, AS AMENDED BY
R.A. NO. 11647) ............................................................................................................ 86
A. POLICY OF THE LAW .............................................................................................. 86
B. DEFINITION OF TERMS .......................................................................................... 86
C. REGISTRATION OF INVESTMENT OF NON-PHILIPPINE NATIONALS ............. 87
D. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES ......................................... 87
E. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES ................... 88
F. FOREIGN INVESTMENT NEGATIVE LIST .............................................................. 88
VIII. PUBLIC SERVICE ACT (COMMONWEALTH ACT NO. (CA) 146,
AS AMENDED BY R.A. NO. 11659) .......................................................................... 88
A. CRITICAL INFRASTRUCTURE ................................................................................ 88
B. FOREIGN STATE-OWNED ENTERPRISE................................................................ 88
C. PUBLIC SERVICE AS PUBLIC UTILITY .................................................................. 89
D. UNLAWFUL ACTS ................................................................................................... 90
E. POWERS OF THE PRESIDENT TO SUSPEND OR
PROHIBIT TRANSACTION OR INVESTMENT ...................................................... 90
F. INVESTMENTS BY AN ENTITY CONTROLLED BY OR ACTING ON BEHALF OF
THE FOREIGN GOVERNMENT, OR FOREIGN STATE-OWNED ENTERPRISES 91
G. RECIPROCITY CLAUSE ........................................................................................... 91
 1

I. BUSINESS ORGANIZATIONS

A. Partnerships

General Provisions
a) Definition, Elements, and Characteristics
(1) What is Partnership?
A business arrangement where two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves (Civil Code, Art. 1767).

(2) Does a partnership have its own separate personality?

A partnership has a juridical personality separate and distinct from that of each of the partners
even in case of failure to comply with the requirements of Article 1772, first paragraph (Civil
Code, Art. 1768).

(3) What are the characteristics of a partnership?

1. Principal
2. Preparatory
3. Profit-oriented
4. Commutative
5. Consensual
6. Capable of suit
7. Bilateral
8. Onerous
9. Nominate (De Leon, Partnership, Agency, & Trusts, supra at 11-12; Pineda,
Partnership, Agency & Trusts (2006) p.8-9)

(4) What are the essential requisites of a partnership?

1. There must be a valid contract;
2. The parties must have legal capacity to enter into the contract;
3. There must be a mutual contribution of money, property, or industry to a common fund;
4. The object or purpose must be lawful;
5. The primary purpose must be to obtain profits to divide the same among the parties;
6. There must be at least one general partner;
7. There must be affection societatis; and
8. The articles of partnership must not be kept secret among the members

(5) What comprises a partner’s contribution in a contract of partnership?

A partner’s contribution can be money, property, or industry, or any combination thereof.
(Note: In a partnership, it is necessary to prove that there was a contribution of money,
property, or industry to a common fund made by two or more persons with the intention of
dividing the profits obtained therefrom among themselves) (Civil Code, Art.1767).

(6) May the delivery of checks, drafts, or promissory notes payable to order be considered
as contributions of money?
No. They are only representatives of money and produce the effect of payment only when
they have been cashed. Accordingly, there is no contribution of money until they have been
cashed (Civil Code, Art. 1249 par. 2).

b) Rules to Determine Existence

(1) What are the rules to determine the existence of a partnership?
1. Persons who are not partners as to each other are not partners as to third persons (Civil
Code, Art. 1769, par. 1). The exception is partnership by estoppel (Civil Code, Art. 1825).
 2

2. Co-ownership or co-possession of a property does not of itself establish a partnership,

whether such co-owners or co-possessors do or do not share any profits made by the
use of the property (Civil Code, Art. 1769, par. 2).
3. Sharing of gross returns alone does not of itself indicate a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which
the returns are derived (Civil Code, Art. 1769, par. 3).
4. Receipt by a person of share on the profits is a prima facie evidence that he is a partner
in the business; sharing in the net profits presupposes sharing in the losses (Civil Code,
Art. 1769, par. 4). However, no such inference will be drawn if such profits were received
in payment:
a. As a debt by installments or otherwise;
b. As interest on a loan, though the amount of payment varies with the profits of the
business;
c. As wages of an employee or rent to a landlord;
d. As an annuity to a widow or representative of a deceased partner; and as the
consideration for the sale of a goodwill of a business or other property by
installments or otherwise (Civil Code, Art. 1769, par. 4).

c) Partnership Term
(1) When does a partnership commence?
Generally, a partnership begins from the moment of the execution of the contract (Civil Code,
Art. 1784). As an exception, partners may stipulate some other date for the commencement
of the partnership (Civil Code, Art. 1784).

(2) How long is the duration of a partnership?

When a partnership for a fixed term or particular undertaking is continued after the termination
of such term or particular undertaking without any express agreement, the rights and duties
of the partners remain the same as they were at such termination, so far as is consistent with
a partnership at will. A continuation of the business by the partners or such of them as
habitually acted therein during the term, without any settlement or liquidation of the
partnership affairs, is prima facie evidence of a continuation of the partnership (Civil Code,
Art. 1785).

d) Partnership by Estoppel
(3) When is there a partnership by estoppel?
When all the members of the existing partnership consented to the representation, a
partnership act of obligation arises (Civil Code, Art. 1825).

(4) What are the requisites to make a person liable as a partner by estoppel? (RTC)
In order to make a person liable as a partner by estoppel, the following requisites must be
present:
1. The person must Represent himself, or consent to another representing him to anyone,
as a partner in an existing partnership or with one or more persons not actual partners;
2. The representation has been made to a Third person; and
3. On the faith of such representation, the third person has given Credit to the actual or
apparent partnership (Civil Code, Art. 1825).

e) Partnership as Distinguished from Joint Venture

(5) What is a joint venture?
An association of persons or companies jointly undertaking some commercial enterprise;
generally all contribute assets and share risks. It requires a community interest in the
performance of the subject, a right to direct and govern the policy connected therewith, and
duty, which may be altered by agreement to share both in profit and losses (Kilosbayan, Inc.
et al, v. Guingona, G.R. No. 113375, May 5, 1994).

(6) What are the differences between a partnership and a joint venture?
 3

1. As to coverage: a partnership contemplates the undertaking of a general and continuous

business of a particular kind. A joint venture is ordinarily limited to a single transaction
and not intended to pursue continuous business.
2. As to firm name: a partnership is required to have a firm name. A joint venture has no
firm name.
3. As to transfer of property: in a partnership, the property used becomes the property of
the business entity and hence of all the partners. In a joint venture, the property used
remains undivided property of its contributor.
4. As to power: in a partnership, a partner acting in pursuance of the firm business, binds
not only himself as a principal, but as their agent as well, also the partnership and his co-
partners. In a joint venture, none of the co-venturers can bind the joint venture or his co-
venturers. (Villanueva, Agency & Trusts, Partnerships & Joint Ventures, supra at 429-
430)

(7) What are the requisites of a “joint venture”? (CRiSP)

The requisites of a joint venture are the following:
1. A Community of interest in the performance of the subject matter;
2. A Right to direct and govern the policy in connection therewith; and
3. Duty to Share Profits and losses (Kilosbayan, Inc., v. Guingona, Jr., G.R. No. 113375,
May 5, 1994).

f) Professional Partnership
(8) What is a general professional partnership?
A general professional partnership is a partnership for the exercise of a profession (Civil Code,
Art. 1767). A “profession” has been defined as “a group of men pursuing a learned art as a
common calling in the spirit of public service” (De Leon, Partnership, supra at 9).

g) Management
(9) What is the extent of power of a partner that has been appointed in the articles of
partnership?
He may execute all acts of administration despite the opposition of his partners, unless he
should act in bad faith (Civil Code, Art. 1800)

(10) Is the power of the managing partner appointed in the Articles of Partnership
revocable?
No. It is generally irrevocable. It can be revoked only upon i) showing of just and lawful cause;
and ii) the vote of the partners representing the controlling interest (Civil Code, Art. 1800)

(11) What is the extent of power of a partner that has been appointed as manager after the
constitution of the partnership?
As long as he remains a manager, he can perform all acts of administration, but if others
oppose and he persists, he can be removed (Tai Tong Chuache & Co. v. Insurance
Commission, G.R. No. L-55397 February 29, 1988)

(12) Is the power of a partner that has been appointed as manager after the constitution of
partnership revocable?
Yes. The power to act may be revoked at any time for any cause whatsoever (Civil Code, Art.
1800)

(13) What are the rules when 2 or more managing partners have been entrusted with the
management without specification of their respective duties and without stipulation
that one of them shall not act without the consent of all the others?
Generally, each one may execute all acts of administration. The exceptions are in case any
such partner should oppose: i) decision of the majority (per head) of the managing partners
shall prevail; or ii) in case of a tie, decision of the partners having the controlling interest (holds
 4

more than 50% of capital investment) shall prevail, provided that they are also managers (Civil
Code, Art. 1801; Paras, Civil Code, supra at 647-648)

(14) What are the rules when 2 or more managing partners have been entrusted with the
management with stipulation that none of the managing partners shall act without the
consent of the others?
Generally, the concurrence of all shall be necessary for the validity of the acts and absence
or disability of any managing partner cannot be alleged. The exceptions are when there is an
imminent danger of grave or irreparable injury to the partnership (Civil Code, Art. 1802)

(15) What are the rules when the manner of management has not been agreed upon?
1. All partners shall be considered agents and whatever any one of them may do alone
binds the partnership, without prejudice to the provisions of Art 1801 (Civil Code, Art.
1803), Par. 1) , regardless of the amounts of their capital contributions or extent of their
services to the partnership (De Leon, Partnership, Agency, and Trusts, supra at 129)
2. None of the partners may, without the consent of the others, make any important
alteration in the immovable property of the partnership, even if it may be useful to the
partnership (Civil Code, Art. 1803, par. 1)

Rights and Obligations of Partnership and Partners

a) Rights and Obligations of the Partnership
(16) What are the responsibilities of a partnership to partners?
1. To refund amounts disbursed by the partner in behalf of the partnership and the
corresponding interest from the time the expenses are made. This refers to loans and
advances made by the partner other than capital
2. To answer for the obligations that the partner may have contracted in good faith in the
interest of the partnership business
3. To answer for risks in consequence of management (Civil Code, Art. 1796)

b) Obligations of Partners Among Themselves

(17) What are the obligations of partners among themselves?
1. Obligation with respect to contribution of property:

a. to contribute what had been promised (Civil Code, Art. 1786)

b. to warrant specific and determinate property contributed to the partnership in case
of eviction (Civil Code, Art. 1786)
c. to deliver the fruits of the property from the time they should have been delivered,
without the need of any demand (Civil Code, Art. 1786)
d. when contribution is in goods, the amount thereof must be determined by proper
appraisal of the value thereof at the time of contribution (Civil Code, Art. 1787)
e. to preserve the property with the diligence of a good father of a family pending
delivery to the partnership (Civil Code, Art. 1163)
f. to indemnify for any interest and damages caused by the retention of the property
or by delay in its obligation to contribute a sum of money (Civil Code, Arts. 1788 &
1170)

2. Obligations with respect to contribution of money and money converted to personal use:

a. to contribute on the date due the amount promised to be given (Civil Code, Art.
1786)
b. to reimburse any amount he may have taken from the partnership coffers and
converted to his own personal use (Civil Code, Art. 1788)
c. To indemnify the partnership for the damages caused to it by the delay in the
contribution (Civil Code, Art. 1788)
d. To pay the agreed or legal interest, if he fails to pay in due time (Civil Code, Art.
1788)
 5

3. Obligation not to engage in other business for himself

a. Business prohibition on industrial partner

b. Industrial partner cannot engage in any business for himself unless the partnership
expressly permits him to do so; and if he should do so, the capitalist partners may
either exclude him from the firm or of avail themselves of the benefits which he may
have obtained in violation of this provision, with right to damages in either case (Civil
Code, Art. 1789).
c. Business prohibition on capitalist partner
d. The prohibition extends only to any operation which is of the same or similar kind of
business in which the partnership is engaged, unless there is a stipulation to the
contrary (Civil Code, Art. 1808).

4. Obligation to contribute capital and additional capital

a. Contribution to partnership capital

General rule: the partners shall contribute equal shares (Civil Code, Art. 1790)
Exceptions: when there is a stipulation to the contrary; and industrial partners
Exception to exception: unless besides his services, he has contributed capital pursuant
to an agreement to that effect (De Leon, Partnership, Agency, and Trusts, supra at 101)

b. Contribution of additional capital

General rule: a partner is not bound to contribute additional capital (Civil Code, Art 1791)
Exceptions: when there is an agreement to the contrary; and ii. In case of an imminent loss
of the business, and there is no agreement to the contrary, capitalist partners are under the
obligation to contribute an additional share to save the venture. If he refuses to contribute,
he shall be obliged to sell his interest in the partnership to other partners (Civil Code, Art.
1791)

Obligation of managing partner who collects debt

General rule: when a person is separately indebted to the partnership and to the managing
partner at the same time, any sum received by the latter, shall be applied to the two credits in
proportion to their amounts even though he may have given a receipt for his own credit only
(Civil Code, Art. 1792)
Exceptions: where he received it entirely for the account of the partnership, in which case
the whole sum shall be applied to the partnership credit only (Civil Code, Art. 1792); and ii. If
the collecting partner is not a managing partner. There is no basis for the suspicion that the
partner is in bad faith (Paras, Civil Code, supra at 638)

1. Obligation of partner who receives share in partnership credit

Such partner is obliged, if the debtor should become insolvent, to bring to the partnership
capital what he received even though he may have given receipt for his share only (Civil Code,
Art. 1793).
2. Obligation of partner for damages to partnership
Every partner is responsible to the partnership for damages suffered by it through his fault
and he cannot compensate them with the profits and benefits which he may have earned for
the partnership by his industry (Civil Code, Art. 1794).
3. Duty to render information
4. Obligation to account for any benefit and hold as trustee unauthorized personal profits

(18) What are the rights of a partner?

1. Property rights of a partner
a. Rights in specific partnership property
b. Interest in the partnership
c. Management participation (Civil Code, Art. 1810)
2. Right to Reimbursement for amounts advanced to the partnership and to indemnification
for risks in consequence of management (Civil Code, Art. 1796)
3. Right to associate with another person in his share (Civil Code, Art. 1804)
 6

4. Right to access and inspection of partnership books

5. Right to formal account of partnership affairs under certain circumstances (Civil Code,
Art. 1809)
6. Right to demand true and full information of all things affecting the partnership (Civil Code,
Art. 1806)
7. Right to have partnership dissolved under certain conditions

c) Obligations of Partnership/Partners to Third Persons

(19) What are the obligations of partners to third persons
1. Liability for contractual obligations (Civil Code, Art 1816)
2. Liability of partnership for acts of partners (Civil Code, Art. 1818)

(20) Is an industrial partner exempted from liability?

No, an industrial partner is exempted from losses (Civil Code, Art. 1797). However, neither on
principle nor on authority can the industrial partner be relieved from liability to third persons
for the debts of the partnership (La Compania Maritima v. Muñoz, G.R. No. L-3704, December
12, 1907).

Dissolution and Winding Up

(21) What is dissolution of partnership?

It is the change in the relation of the partners caused by any partner ceasing to be associated
in carrying on the business (Civil Code, Art. 1828)

(22) What is the effect to the existence of a partnership when it is dissolved?

The partnership, although dissolved, continues to exist until its termination, at which time the
winding up of its affairs should have been completed and the net partnership assets are
partitioned and distributed to the partners. The dissolution of the partnership did not mean
that the juridical entity was immediately terminated and that the distribution of the assets to
its partners should perfunctorily follow. Dissolution simply effected a change in the relationship
among the partners. (Sy v. CA, G.R. No. 94285, August 31, 1999)

(23) What does winding up mean in partnership?

It is the actual process of settling the partnership business or affairs after dissolution. Here,
both the partnership and the business enterprise come to an end (De Leon, Partnership,
Agency, Trusts, supra at 215).

It involves:
1. Collection and distributions of assets;
2. Payment of debts;
3. Determination of the value of each partner’s interest in the partnership; and
4. Defending claims against the firm (Pineda, Partnership, Agency & Trusts, supra at 152)

(24) What are the two types of dissolution?

Extra-judicial Dissolution and Judicial Dissolution

(25) What are the causes of extra-judicial dissolution?

(a) Without violation of the agreements between partners:

1. by termination of the definite term or particular undertaking specified in the agreement
2. by express will of any partner, who must act in good faith, when no definite term or
particular undertaking is specified
 7

3. by the express will of all partners who have not assigned their interests or suffered them
to be charged for their separate debts, either before or after the termination of any
specified term or particular undertaking
4. by the expulsion of any partner from the business bon fide in accordance with such power
conferred by the agreement between the partners
(b) in contravention of the agreement between the partners, where the circumstances do
not permit a dissolution under any other provision of this article, by the express will of
any partner at any time
(c) by any event which makes it unlawful for the business of the partnership to be carried
on or for the members to carry it on in partnership
(d) in any case by the loss of the thing:
1. when a specific thing which a partner had promised to contribute to the partnership
perishes before the delivery; or
2. when the partner has not only contributed the usufruct of the property
a. by the death of any partner
b. by the civil interdiction of any partner
c. by the insolvency of any partner or of the partnership
d. by decree of court under Art. 1831 (Civil Code, Art. 1830)

(26) What are the grounds for judicial dissolution?

(a) any partner commits misconduct or persistent breach of partnership agreement, such
as when:
1. a partner willfully or persistently commits a breach of the partnership agreement, or
otherwise conducts himself in matters relating to the partnership business that it is not
reasonable to carry on the business in partnership with him; or
2. a partner has been guilty of such conduct as tends to affect prejudicially the carrying on
of the business (Civil Code, Art. 1831)
3. a partner has been declared insane in any judicial proceeding or is shown to be of
unsound mind
4. a partner becomes in any other way incapable of performing his part of the partnership
contract
5. the business of the partnership can only be carried on at a loss
6. other circumstances that render dissolution equitable

(27) What is the effect of dissolution to a partner’s authority to act for the partnership?
Generally, dissolution terminates all authority of any partner to act for the partnership (Civil
Code, Art. 1832). Except for the following: i. acts necessary to wind up partnership affairs; or
ii. Acts necessary to complete transactions begun but not then finished (Civil Code, Art. 1832).

(28) What is the effect of dissolution to a partner’s existing liability?

In general, dissolution does not automatically discharge the existing liability of any partner
(Civil Code, Art. 1835). As an exception, a partner may be relieved from all existing liabilities
upon dissolution only by an agreement among: a. partner concerned; b. person/partnership
continuing the business; and c. partnership creditors (Civil Code, Art. 1835, par. 2).

(29) What are the rights of a partner upon dissolution?

1. When the dissolution is not in contravention of the partnership agreement
a. Have partnership property applied to discharge partnership liabilities;
b. Receive in cash his share of the surplus
2. When dissolution is in contravention of the partnership agreement (Civil Code, Art.
1837, par. 2 (1))
a. Rights of a partner who has not caused the dissolution wrongfully:
i. To be indemnified for damages caused by the partner guilty of the
wrongful dissolution;
ii. To have partnership property applied to discharge partnership
liabilities;
 8

iii. To possess partnership property should they decide to continue the

business
iv. To receive in cash his share of the surplus; and
v. To continue the business in the same name during the agreed term of
the partnership, by themselves or jointly with others.
b. Rights of a partner who has wrongfully caused the dissolution (Civil Code, Art. 1837,
par. 2(3))
i. If business is not continued by the other partners
a) To have partnership property applied to discharge partnership liabilities;
b) To receive in cash his share of the surplus less damages caused by his wrongful dissolution
(Civil Code, Art. 1837, par. 2(3)(a))
ii. If business is continued
a) To have the value of his interest in the partnership at the time of the dissolution, surplus less
damages caused by his wrongful dissolution to his co-partners, ascertained and paid in cash or
secured by a bond approved by the court;
b) To be released from all existing and future liabilities (Civil Code, Art. 1837, par. 2 (3)(b))

(30) What are the manners of winding up?

Extrajudicial and judicial

(31) Who are authorized to wind up?

1. Partners designated by the agreement;
2. In the absence of such agreement, all partners who have not wrongfully dissolved the
partnership; or
3. Legal representatives of last surviving partner not insolvent (Civil Code, Art. 1836)

(32) What happens when assets are not enough to satisfy the firm’s liabilities?
When the firm's assets are not enough to settle the liabilities, the partners are required to
contribute to fully satisfy its liabilities. The amounts of contribution will depend upon the
partner's contributed capital, that is, pro rata (Pineda, Partnership, Agency & Trusts, supra at
188).

(33) What is the rule when there are claims over partnership assets and claims over
individual properties of partners, which are both in custody of the court for
distribution?
1. 1. Partnership creditors are preferred with regard to partnership property, and
2. 2. Individual creditors are preferred with respect to individual properties* of partners
(Civil Code, Art. 1839, par 8).

Limited Partnership

(34) What is limited partnership?

One formed by two or more persons having as members one or more general partners and
one or more limited partners, the latter not being personally liable for partnership debts (Civil
Code, Art. 1843).

(35) What are the characteristics of a limited partnership?

1. Formed by substantial compliance in good faith with the statutory requirements;
2. One or more general partners control the business and personally liable to creditors;
3. One or more limited partners contribute money or property to the capital and share in
the profits but do not participate in the management of the business;
4. Limited partners are not personally liable for partnership obligations beyond the amount
of their capital contributions;
5. The partnership debts are paid out of the common fund and the individual properties of
the general partners; and
6. The limited partners may ask for the return of their capital contributions under the
conditions prescribed by law (Pineda, Partnership, Agency, & Trusts, supra at 205-206).
 9

(36) Can a limited partner contribute services?

No. The contribution of a limited partner may be cash or property but not services (Civil Code,
Art. 1845). If he does, with the knowledge of his co-partners, he becomes a general and limited
partner at the same time. He will be exposed to all the liabilities of a general partner (Pineda,
Partnership, Agency, & Trusts, supra at 213).

(37) Is it allowed to include the name of a limited partner in the partnership name?
No, the general rule is that the surname of a limited partner shall not appear in the partnership
name (Civil Code, Art. 1846). The reason for the non-inclusion is because he is exempted
from general liability (Pineda, Partnership, Agency, & Trusts, supra at 213). The exceptions
are: if it is also the name of a general partner; or prior to the time when the limited partner
became such, the business had been carried on under a name in which his surname appeared
(Civil Code, Art. 1856).

(38) What is the liability of a limited partner?

Generally, a limited partner is not liable as a general partner. His liability is limited to the extent
of his contribution to the partnership. As an exception, if he takes part in the control of the
business, in addition to the exercise of his rights and powers as a limited partner, he becomes
liable as a general partner (Civil Code, Art. 1848).

(39) When can a limited partner be held liable as a general partner?

1. When he takes part in the control of management of the partnership (Civil Code, Art
1848);
2. In the absence of registration of the limited partnership with the SEC;
3. When he becomes a general partner by estoppel;
4. When he is erroneously designated as a general partner and fails to correct such error
(Paras, Civil Code, supra at 750);
5. When he is a general partner at the same time (Civil Code, Art. 1853); and
6. When his surname appears in the firm name subject to exceptions provided by Art.
1846 of the Civil Code.

(40) What are the instances in which the general partner has no authority without the
necessary consent or ratification of all limited partners?
1. Do any act in contravention of the certificate;
2. Do any act which would make it impossible to carry on the ordinary business of the
partnership;
3. Confess a judgment against the partnership;
4. Possess partnership property, or assign their rights in specific partnership property, for
other than a partnership purpose;
5. Admit a person as a general partner;
6. Admit a person as a limited partner, unless the right to do so is given in the certificate;
and
7. Continue the business with the partnership property on the death, retirement, insanity,
civil interdiction, or insolvency of a general partner, unless the right to do so is given in
the certificate (Civil Code, Art. 1850)

(41) What are the rights of a limited partner? (BI F 2AR2)

1. To have the partnership Books kept at the principal place of business of the partnership;
2. To Inspect, at a reasonable hour, partnership books and copy any of them;
3. To demand true and Full information of the things affecting the partnership;
4. To demand a Formal account of the partnership affairs whenever circumstances render
it just and reasonable;
5. To Ask for dissolution and winding up by decree of court (Civil Code, Art. 1851);
6. To Receive a share in the profits or other compensation by way of income provided that
the partnership assets are in excess of partnership liabilities after such payment (Civil
Code, Arts. 1851 and 1856); and
 10

7. To Receive the return of his contribution provided that:

a. All the liabilities of the partnership, except liabilities to general partners and to limited
partners on account of their contribution, have been paid or the partnership assets
are sufficient to pay partnership liabilities;
b. The consent of all the members (general and limited partners) has been obtained;
and
c. The certificate is cancelled or so amended as to set forth the withdrawal or reduction
(Civil Code, Arts. 1851 and 1857).

(42) What are the liabilities of a limited partner?

GENERAL RULE: A limited partner is not liable as a general partner (Civil Code, Art. 1848).
EXCEPTIONS: (MAGES2)
1. When he takes part in the control or Management of the partnership (Civil Code, Art.
1848);
2. In the Absence of registration of the limited partnership with the Securities and Exchange
Commission (SEC);
3. When he becomes a General partner by estoppel;
4. When he is Erroneously designated as a general partner and fails to correct such error
(Paras, Civil Code, supra at 750);
5. When he is a general partner at the Same time (Civil Code, Art. 1853); and
6. When his Surname appears in the firm name subject to the exceptions provided by Art.
1846 of the Civil Code.

(43) What are the causes of dissolution of a limited partnership?

1. Retirement, insolvency, death, insanity, or civil interdiction of a general partner;
2. When all limited partners ceased to be such (Civil Code, Art. 1864, par. 1);
3. Expiration of the term or period of existence of the partnership (Civil Code, Art. 1830, par.
1(a));
4. By agreement of all partners before the lapse of the period of existence (Civil Code, Art.
1830, par. 1(c));
5. Misconduct of a general partner or fraud committed by a general partner against the
limited partners; or
6. When the limited partner demanded the return of his contribution but same was
unjustifiably denied (Civil Code, Art. 1857, par. 3(1))

B. Corporations

Definition of Corporation

(1) 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
(Sec. 2, Revised Corporation Code).

Classes of Corporations

(2) What is De jure corporation and a De facto Corporation?

A De jure corporation is a corporation organized in accordance with the requirements of law while a
de facto corporation is a corporation that is formed where there exists a flaw in its incorporation
but there is a colorable compliance with the requirements of law.

(3) Differentiate stock corporations from non-stock corporations.

A stock corporation is a corporation with capital stock that is divided into shares and is authorized to
distribute to holders of such shares, dividends, or allotments of the surplus profits on the basis
 11

of the shares held (Sec. 3, RCC) while a non-stock corporation is a corporation where no part
of its income is distributable as dividends to its members, trustees, or officers (Sec. 87, RCC)

Nationality of Corporations

(4) What are the principal tests in determining the nationality of a corporation?
The tests in determining the nationality of a corporation are:
1. Place of incorporation test, where the nationality of a corporation is determined by under
whose laws it has been organized and registered, regardless of the nationality of majority
of its stockholders (Sec. 140, RCC); and
2. Control test, where the nationality of a private corporation is determined by the character
or citizenship of its controlling stockholders (Narra Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No. 195580).

a) Control Test
(5) What is the control test?
It is the test where the nationality of a private corporation is determined by the character or
citizenship of its controlling stockholders (Narra Nickel Mining & Development Corp. v.
Redmont Consolidated Mines Corp., G.R. No. 195580).

b) Grandfather Rule
(6) What is the Grandfather Rule?
The Grandfather Rule 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 nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even subsequent tier
of ownership to determine the nationality of the corporate shareholder. It involves further
investigation as to the nationality of the personalities with the beneficial ownership and control
of the corporate shareholders in both the investing and investee corporations (Narra Nickel
Mining & Development Corp. v. Redmont Consolidated Mines Corp, G.R. No. 195580,
January 28, 2015).

Corporate Juridical Entity

a) Doctrine of Separate Juridical Personality
(7) What is the Doctrine of Separate Juridical Personality?
A corporation is a distinct legal entity to be considered as separate and apart from the
individual stockholders or members who compose it, and is not affected by the personal rights,
obligations and transactions of its stockholders or members (Sulo ng Bayan, Inc., v. Araneta,
Inc., G.R. No. L-31061, August 17, 1976).

(8) X Inc. sued Y Inc. for damages due to the encroachment of Y's retaining wall on the
property line of X. X obtained a favorable ruling but the writ of execution remained
unserved. The sheriff, on his second attempt, served the writ in the registered address
found in the General Information Sheet of Y Inc., only to discover that the office located
in the said address belonged to Z Development Group, not respondent Y Inc.
Thereafter, X Inc. discovered that the officers of Y Inc. and Z Development Group were
one and the same — shareholders of both corporations, and had similar addresses. X
Inc. then filed a motion to examine the respondent Y's officers for the purpose of
satisfying the court decision. Y Inc. argues that the examination is violative of the
doctrine of separate corporate personality. Is the contention of Y Inc. tenable?
No, the examination of the respondent Y’s officers, to determine its income and properties for
the purpose of satisfying the RTC Decision, is not a violation of the doctrine of separate
personality. The doctrine of separate juridical personality provides that a corporation has a
legal personality separate and distinct from those individuals acting for and in its behalf and,
in general, from those comprising it. Any obligation incurred by the corporation, acting through
its directors, officers, and employees, is therefore its sole liability. The motion filed by X Inc.
was not for the purpose of passing the liability of Y Inc. to the latter’s officers, but rather, for
the sole objective of ascertaining which properties and income of Y Inc. may be subjected to
 12

execution in order to satisfy the final judgment and nothing else. Hence, the motion filed by X
Inc. is not violative of the doctrine of separate corporate personality (The Linden Suites, Inc.
v. Meridien Far East Properties, Inc, G.R.No. 211969, October 4, 2021).

b) Doctrine of Piercing the Corporate Veil

(9) What is the Doctrine of Piercing the Corporate Veil?
Though the corporation has separate and distinct personality from its stockholders, such
personality may be disregarded, or veil of corporate fiction may be pierced, attaching personal
liability to the responsible person, if the corporate personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or use to defeat the labor laws
(Dutch Movers, Inc., v. Edilberto Lequin, G.R. No. 210032, April 25, 2017).

(10) Enumerate the cases where the Doctrine of Piercing the Corporate Veil is applied.
The doctrine of piercing the corporate veil applies only 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 - 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 (Montealegre v. Spouses De Vera, G.R. No. 208920,
July 10, 2019).

Capital Structure
a) Number and Qualifications of Incorporators
(11) Is there a required number of incorporators when forming a corporation?
Yes, one for a one-person corporation and at least two for other corporations. Also, under
Sec. 10 of the Revised Corporation Code, any person, partnership, association or corporation,
singly or jointly with others but not more than fifteen (15) in number may organize a
corporation.

(12) What are the basic qualifications in order to become an incorporator?

In order to become an incorporator, the following qualifications must be present:
1. The incorporator must be a natural or juridical entity;
2. There must not be more than 15 incorporators;
3. If the incorporator is a natural person, he or she must be of legal age; and
4. Each incorporator of a stock corporation must own or be a subscriber to at least one
share of the capital stock.

b) Subscription Requirements
(13) What is the required minimum capital stock in a stock corporation?
None. There is no required minimum capital stock in a stock corporation (Sec. 12, RCC).

c) Corporate Term
(14) How long is the term of a corporation?
A corporation shall have perpetual existence unless its articles of incorporation provides
otherwise (Sec. 11, RCC)

d) Classification of Shares
(15) What are the different kinds of shares?
The different kinds of shares are:
1. Common or Preferred Shares
2. Voting or Non-voting Shares
3. Par value or No par value Shares
4. Treasury Shares
 13

5. Redeemable Shares
6. Founder’s Shares

Incorporation and Organization

a) Promoter
(16) Who is a Promoter?
Promoters are persons who, acting alone or with others, take initiative in founding and organizing a
business or enterprise (Sec. 3.1, Securities Regulation Code).

Liability of Corporation for Promoter’s Contracts

(17) What is the liability of the corporation for Promoter’s acts?
The general rule is that the acts of the Promoter is not binding on the corporation that will be
organized. An exception lies when the corporation ratifies the acts of the Promoter (Cagayan
Fishing Development Co., Inc. v. Sandiko, G.R. No. L-43350, December 13, 1937).

b) Subscription Contract
(18) How is a subscription contract perfected?
A subscription contract is perfected as soon as the offer to take shares made by a person to a
corporation is accepted by the corporation, or as soon as the person to whom the offer is
made accepts an offer of shares by a corporation.

c) Pre-Incorporation Subscription Agreements

(19) What is a Pre-Incorporation Subscription?
Pre-Incorporation Subscription of shares refers to the subscription of shares in a corporation still to
be formed (Sec. 60, RCC).

d) Consideration for Stocks

(20) What are the considerations that the law allows to be exchanged for shares in
subscription agreements?
The considerations are:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion;
7. Shares of stock in another corporation; and
8. Other generally accepted form of consideration (Sec. 61, RCC)
Note: The records of the Congress do not reveal the intent with respect to this consideration.
While the term is quite broad, it is believed that the inclusion of this consideration does not
justify the acceptance of any other consideration that is not similar to those specifically
identified.

e) Articles of Incorporation
(1) Contents
(21) What are the contents of the Articles of Incorporation?
The contents of the Articles of Incorporation are:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being formed. Where a
corporation has more than one stated purpose, the articles of incorporation shall indicate
the primary purpose and the secondary purpose or purposes: Provided, That a nonstock
corporation may not include a purpose which would change or contradict its nature as
such;
 14

3. The place where the principal office of the corporation is to be located, which must be
within the Philippines;
4. The term for which the corporation is to exist, if the corporation has not elected perpetual
existence;
5. The names, nationalities, and residence addresses of the incorporators;
6. The number of directors, which shall not be more than fifteen (15) or the number of
trustees which may be more than fifteen (15);
7. The names, nationalities, and residence addresses of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and qualified in
accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock, number of shares
into which it is divided, the par value of each, names, nationalities, and residence
addresses of the original subscribers, amount subscribed and paid by each on the
subscription, and a statement that some or all of the shares are without par value, if
applicable;
9. If it be a nonstock corporation, the amount of its capital, the names, nationalities, and
residence addresses of the contributors, and amount contributed by each; and
10. Such other matters consistent with law and which the incorporators may deem necessary
and convenient (Sec. 13, RCC).

(2) Non-Amendable Items

(22) What are the non-amendable items under the Articles of Incorporation?
The non-amendable items under the articles of incorporation are: (1) names of the
incorporators; (2) the first set of directors and subscribers; (3) the initial treasurer; (4) their
original subscription; and (5) the place and date of execution of the first Articles of
Incorporation cannot be amended.

(f) Corporate Name and Limitations on its Use

(23) May a corporation use a name that belong to another?
No. A corporation cannot use a name that belongs to another even as a trade name. As a
rule, no corporate name shall be allowed if it is not distinguishable from that already reserved
or registered for the use of another corporation, or if such name is already protected by
existing law, rules and regulations (Sec. 17, RCC).

g) Registration, Incorporation, and Commencement of Corporate Existence

(24) When does a corporate term commence?
A corporate term commences upon issuance of the certificate of incorporation by the SEC
(Sec. 19, RCC).

(25) What is the significance of a Certificate of Incorporation?

A certificate of incorporation is an indispensable requirement before a corporate life can
ensue. It is only then that the incorporators/stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles of incorporation
for a period of time mentioned therein (Ibid).

h) Election of Directors or Trustees

(26) How many numbers of directors/trustees are allowed:
(a) In a Stock Corporation?
(b) In a Non-Stock Corporation?
1. In a Stock Corporation, the number of directors to be elected shall not exceed 15.
2. In a Non-Stock Corporation, the number of trustees to be elected may exceed 15.

(27) When are elections of directors or trustees held?

Elections must be held once a year. The Revised Corporation Code authorizes corporation to
provide in the by-laws the time for holding the annual election of directors or trustees and the
mode or manner of giving notice thereof (Sec. 46, RCC).
 15

(28) What is the quorum for purposes of election?

At all elections of directors or trustees, there must be present, either in person or through a
representative authorized to act by written proxy, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote (Sec.
23, RCC).

i) Adoption of By-Laws
(29) What is the purpose of the By-Laws of a corporation?
The By-Laws of a corporation are the rules and regulations or private laws enacted by the
corporation to regulate, govern, and control its own actions, affairs and concerns and of its
stockholders or members and directors and officers in relation thereto and among themselves
in relation to the corporation (Loyola Grand Villas Homeowners (South) Association, Inc. v.
CA, G.R. No. 117188, August 7, 1997).

(1) Contents of By-Laws

(30) What are the contents of the By-Laws?
The contents of By-Laws are the following:
1. The time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting regular or special meetings and mode of
notifying the stockholders or members thereof;
3. The required quorum in meetings of stockholders or members and the manner of voting
therein;
4. The modes by which a stockholder, member, director, or trustee may attend meetings
and cast their votes;
5. The form for proxies of stockholders and members and the manner of voting them;
6. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for
setting the compensation of directors or trustees and officers, and the maximum number
of other board representations that an independent director or trustee may have which
shall, in no case, be more than the number prescribed by the Commission;
7. The time for holding the annual election of directors or trustees and the mode or manner
of giving notice thereof;
8. The manner of election or appointment and the term of office of all officers other than
directors or trustees;
9. The penalties for violation of the bylaws;
10. In the case of stock corporations, the manner of issuing stock certificates;
11. An arbitration agreement may be provided in the bylaws pursuant to Section 181 of the
Revised Corporation Code; and
12. Such other matters as may be necessary for the proper or convenient transaction of its
corporate affairs for the promotion of good governance and anti-graft and corruption
measures (RCC, Sec. 46).

(2) Binding Effects

(31) To whom are by-laws of a corporation binding?
By-Laws of a corporation are binding not only upon the corporation but also on its stockholder,
members, and those having direction, management and control of its affairs.

(3) Amendments
(32) What are the ways to amend the By-Laws of a corporation?
The ways are:
1. Amendment by the approval of the majority of the Board of Directors and at least a
majority of the outstanding capital stock or at least a majority of the members of a non-
stock corporation; and
2. By the Board alone if there is prior delegation of such powers by the
stockholders/members done through votes of the 2/3 of the outstanding capital stock or
2/3 members in a non-stock corporation.
 16

j) Effects of Non-Use of Corporate Charter

(33) What is the effect of the non-use of the Corporate Charter?
The effect of non-use are:
1. If failed to organize or commence business within five years from incorporation: The
certificate of incorporation shall be revoked as of the day following the end of the 5-year
period
2. If commenced business but becomes inoperative for a period of at least 5 consecutive
years: The commission may, after due notice and hearing, place the corporation under
delinquent status (Sec. 21, RCC).

(34) What is the period within which a delinquent corporation is required to resume
operations and comply with all the requirements in order to lift its delinquent status?
Two (2) years within which to resume operations and comply with the requirements of the
Commission. Upon its compliance, the Commission shall issue an order lifting its delinquent
status (Ibid).

Corporate Powers

(35) What corporate powers may a corporation possess or exercise?

Under the theory of specific capacity, no corporation shall possess or exercise corporate
powers other than those conferred by the RCC or by its AOI and except as necessary or
incidental to the exercise of the powers conferred (Sec. 44, RCC).

a) General Powers; Theory of General Capacity

(36) What is the Theory of General Capacity?
The Theory of General Capacity provides that a corporation can perform such acts as long as
it is not prohibited by general law and not contrary to morals and public policy (Sec. 2 & 44,
RCC).

b) Specific Powers; Theory of Specific Capacity

(37) What are the specific powers of a corporation?
The specific powers of a corporation are the following:
1. Extend or shorten corporate term (Sec. 36, RCC);
2. Increase or decrease capital stock and incur, create or increase bonded indebtedness
(Sec. 37, RCC);
3. Deny pre-emptive right (Sec. 38, RCC);
4. Sell or dispose its assets (Sec. 39, RCC);
5. Acquire own shares (Sec. 40, RCC);
6. Invest Corporate funds in another corporation or business or for any other purpose (Sec.
41, RCC);
7. Declare dividends (Sec. 42, RCC); and
8. Enter into management contract (Sec. 43, RCC).

c) Power to Extend or Shorten Corporate Term

(38) How may a corporate term for a specific period be extended or shortened?
A corporate term for a specific period may be extended or shortened by amending the articles
of incorporation (Sec. 11, RCC)

(39) How is the power to extend or shorten corporate term exercised?

A private corporation may extend or shorten its term as stated in the articles of incorporation:
1. When approved by a majority vote of the board of directors or trustees, and
2. Ratified at a meeting by the stockholders or members representing at least 2/3 of the
outstanding capital stock or of its members (Sec. 36, RCC).

d) Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded

Indebtedness
 17

(40) What are the requirements for the increase or decrease of authorized capital stock or
create, incur or increase bonded indebtedness?
The requirements for the increase or decrease of authorized capital stock are as follows:
1. Majority vote of the Board of Directors;
2. Vote of stockholders representing at least 2/3 of the outstanding capital stock;
3. Written notice of the purpose, time and place of the meeting;
4. Meeting of stockholders duly called for such purpose;
5. Certificate signed by a majority of the directors of the corporation and countersigned by
the chairman and the secretary of the stockholders meeting;
6. Approval of the SEC, and where appropriate, of the Philippine Competition Commission;
7. In case of decrease in capital stock, the same must not prejudice the right of the creditors;
and
8. In case of increase in capital stock, treasurer’s sworn statement showing that at least
25% of the increase in capital has been subscribed and that at least 25% of the amount
subscribed has been paid either in actual cash or property, the valuation of which is equal
to 25% of the subscription (Sec. 37, RCC).

e) Power to Deny Pre-Emptive Rights

(41) What is pre-emptive right?
Pre-emptive right is the right of shareholders to subscribe to all issues or dispositions of shares
of any class, in proportion to their respective shareholdings (Sec. 38, RCC).

(42) When is pre-emptive right not available?

As a rule, all stockholders of a stock corporation may enjoy such pre-emptive right. However,
pre-emptive right is not available in the following instances:
1. When Denied in the Articles of Incorporation;
2. When shares are issued in Compliance with laws requiring stock offerings or minimum
stock ownership by the public; and
3. When shares are issued in Good faith with the approval of shareholders representing 2/3
of the outstanding capital stock, in exchange for property needed for corporate purposes
or in payment of previously contracted debt (Sec. 38, RCC).

f) Power to Sell or Dispose Corporate Assets

(43) What are the requirements in order for a corporation to sell or dispose its corporate
assets?
The following are the requirements to sell or dispose the corporate assets:
1. As a general rule, the majority vote of the board shall only be required if the sale or
disposition does not cover all or substantially all of the assets;
2. However, if it involves all or substantially all of the corporate assets including its goodwill,
the following shall be required:
a. Majority vote of the Board;
b. Assent of stockholders representing at least 2/3 of the outstanding capital stock or
2/3 of members in a non-stock corporation; and
c. Meeting duly called for the purpose; and
3. In case of non-stock corporations where there are no members with voting rights, the
vote of the majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by Section 39 (Sec. 39, par. 1-3,
RCC).

g) Power to Acquire Own Shares

(44) What are the conditions before a corporation can acquire its own shares?
A corporation can acquire its own shares provided:
1. The acquisition must be for a legitimate purpose or purposes, such as the following:
a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
the said sale;
c. To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code (Sec. 40, RCC);
 18

d. To acquire treasury shares (Sec. 9, RCC);

e. To effect a decrease in capital stock (Sec. 37, RCC);
f. To purchase or take up redeemable shares (Sec. 8, RCC); and
g. When the SEC orders a close corporation to purchase the shares of stockholders in
case of deadlock in its management (Sec. 103, RCC).
h. The corporation must have unrestricted retained earnings to cover the purchase
of the shares except if the purpose for Sec. 8 or Sec. 103 (Republic Planters Bank
v. Agana, Sr., G.R. No. 51765, March 3, 1997).

h) Power to Invest Corporate Funds in Another Corporation or Business

(45) When may a private corporation invest its corporate funds in another corporation or
business?
Subject to the provisions of the RCC, corporate funds of a private corporation may be
invested:
1. When reasonably necessary to accomplish its primary purpose; and
2. For any other purpose other than the primary purpose for which it was organized (RCC,
Sec. 41).

i) Power to Declare Dividends

(46) What are the requirements before dividends may be declared? (URA)
The following requirements must be met before dividends may be declared by the corporation:
1. Unrestricted retained earnings;
2. Resolution of the board; and
3. In the case of declaration of stock dividends, the Approval of stockholders representing
at least 2/3 of the outstanding capital stock at a regular or special meeting duly called for
the purpose (RCC, Sec. 42).

j) Power to Enter into Management Contract

(47) What are the requirements in order for a management contract to be valid? (ARM)
The requirements, as a general rule, are as follows:
1. Approval by a majority of the board of directors;
2. Ratification by the majority of the stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in case of non-stock
corporation of both the managing corporation and managed corporation; and
3. Meeting duly called for the purpose (RCC, Sec. 43).

k) Doctrine of Individuality of Subscription

(48) What is the Doctrine of Individuality of Subscription?
Section 63 implicitly sets forth the doctrine that a subscription is one, entire and indivisible
whole contract. It cannot be divided into portions, so that the stockholder shall not be entitled
to a certificate of stock until he has remitted the full payment of his subscription together with
any interests and expenses, if any is due. All partial payments on one subscription shall be
deemed applied proportionately among the number of shares (AQUINO, Corporation Law,
supra at 643).

l) Doctrine of Equality of Shares

(49) What is the Doctrine of Equality of Shares?
Each share shall be equal in all respects to every other share, except as otherwise provided
in the articles of incorporation and in the certificate of stock. (RCC, Sec. 6).

m) Ultra Vires Doctrine

(50) What is the ultra vires doctrine?
Under the ultra vires doctrine, no corporation shall possess or exercise corporate powers
other than those conferred by this Code or by its articles of incorporation and except as are
necessary or incidental to the exercise of the powers so conferred (RCC, Sec. 44).
 19

n) Trust Fund Doctrine

(51) What is the Trust Fund Doctrine?
The Trust Fund Doctrine provides that the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. The
subscriptions to the capital of a corporation constitute a fund to which creditors have a right
to look for satisfaction of their claims (Turner v. Lorenzo Shipping Corp., G.R. No. 157479,
November 24, 2010; Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011).

Stockholders and Members

a) Fundamental Rights of a Stockholder
(52) What are the basic rights of shareholders?
The following are the basic rights of a shareholder:
1. Direct or Indirect participation in management;
2. Voting rights (RCC, Sec. 6 & 57);
3. Right to remove directors (RCC, Sec. 27);
4. Proprietary rights:
a. Right to dividends;
b. Appraisal right (RCC, Sec. 80);
c. Right to issuance of stock certificates for fully paid shares
d. (RCC, Sec. 63);
e. Proportionate participation in the distribution of assets in liquidation (RCC, Sec.
139);
f. Right to transfer of stocks in corporate books (RCC, Sec. 62);
g. Pre-emptive right (RCC, Sec. 38);
5. Right to inspect books and records (RCC, Sec. 73);
6. Right to be furnished with the most recent financial
7. statement/financial report (RCC, Sec. 74);
8. Right to recover stocks unlawfully sold for delinquent payment of
9. subscription;
10. Right to the issuance of new certificates in lieu of lost, stolen, or destroyed certificates
(RCC, Sec. 71); and
11. Right to file individual suit, representative suit, and derivative suits (SUNDIANG &
AQUINO, Reviewer on Commercial Law, supra at p.294).

b) Participation in Management
(1) Proxy
(53) What is a proxy?
Proxy is a written authorization given by one person to another so that the second person can
act for the first such as that given by the shareholder to someone else to represent him and
vote his shares at a shareholder’s meeting (VILLANUEVA-CASTRO, Commercial Law 2,
supra at p.144).

(54) What are the requisites for the validity of proxy? (WSF-A5M)
The requisites for the validity of proxy are the following:
1. It shall be in Writing;
2. It shall be Signed and filed by the stockholder or member;
3. It shall be Filed before the scheduled meeting with the corporate secretary;
4. It shall be in any form Authorized in the by-laws;
5. No proxy shall be valid and effective for a period longer than 5 years at any one time;
and
6. Unless otherwise provided in the proxy form, it shall be valid only for the Meeting which
it was intended (RCC, Sec. 57).

(2) Voting Trust

(55) What are the statutory limitations on Voting Trust Agreements: (5-FW-CEA)
The statutory limitations are:
 20

1. The agreement cannot be entered into for a period exceeding 5 years at any one time,
except when it is a condition in a loan agreement, in which case, said contract shall
automatically expire upon full payment of the loan;
2. The agreement must not be used for purposes of Fraud;
3. It must be in Writing and notarized and specify the terms and conditions thereof;
4. A Certified copy of the agreement must be filed with the corporation and with the SEC or
it will be ineffective and unenforceable;
5. The agreement shall be subject to Examination by any stockholder of the corporation;
and
6. Unless expressly renewed, all rights granted in the agreement shall Automatically expire
at the end of the agreed period (RCC, Sec. 58).

(3) Cases When Stockholders’ Action is Required

(56) What are the corporate acts that requires the vote of stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members?
The concurrence or ratification of stockholders representing at least 2/3 of the outstanding
capital stock, or 2/3 of the members is necessary in the following:
1. To amend the articles of incorporation (RCC, Sec. 15);
2. To extend or shorten the corporate term (RCC, Sec. 36);
3. To increase/decrease capital stock (RCC, Sec. 37);
4. To incur, create, or increase bonded indebtedness (RCC, Sec. 37);
5. To deny pre-emptive right after incorporation (RCC, Sec. 38);
6. To sell, dispose, lease, encumber all or substantially all of the corporate assets (RCC,
Sec. 39);
7. To invest in another corporation, business other than the primary purpose like the
secondary purpose (RCC, Sec. 41);
8. To declare stock dividends (RCC, Sec. 42);
9. To enter into a management contract where:
a. a. a stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than one-third (1/3)
of the total outstanding capital stock entitled to vote of the managing corporation; or
b. b. a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors of the
managed corporation (RCC, Sec. 43);
10. To approve a plan of merger or consolidation (RCC, Sec. 76);
11. To adopt a plan providing for the distribution of assets by a nonstock corporation (RCC,
Sec. 94); and
12. Voluntary dissolution where creditors are affected (RCC, Sec. 135).

(57) What are the corporate acts that requires the vote of stockholders representing
majority of the outstanding capital stock or majority of the members?
The corporate acts that requires the vote of stockholders representing majority of the
outstanding capital stock or majority of the members are the following:
1. Power to enter into management contract, if any of the instances required under Section
43 is absent (RCC, Sec. 43);
2. Power to adopt, amend or repeal the by-laws (RCC, Secs. 45 and 47);
3. Power to revoke the power of the board to amend the by-laws which was previously
delegated by the stockholders (RCC, Sec. 47) and
4. Power to fix the issued value of price of shares (RCC, Sec. 61).

(4) Manner of Voting

(58) How do stockholders exercise their right to vote in a special or regular meeting?
Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members. When so authorized in the bylaws or by a majority of the board of directors, the
stockholders or members of corporations may also vote through remote communication or in
absentia provided that the votes are received before the corporation finishes the tally of votes
(RCC, Sec. 49 & 57).
 21

c) Proprietary Rights
(1) Rights to Dividends
(59) When does the right to dividends accrue?
The accrual of right to dividends depends on the type of dividend declared:
1. Cash dividends - as soon as cash dividends are publicly declared, the stockholders have
the right to their pro rata shares; or
2. Stock dividends - a stock dividend, aside from board approval, requires approval of
stockholders representing at least 2/3 of the outstanding capital stock (RCC, Sec. 42).

(2) Appraisal Right

(60) When may a right of appraisal be exercised? (AD-MIC)
Any stockholder of a corporation shall have the right to dissent and demand payment of the
fair value of the shares in the following instances:
1. In case an Amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares, or
b. Of authorizing preferences in any respect superior to those of outstanding shares of
any class, or
c. Of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other Disposition of all or
substantially all of the corporate property and assets;
3. In case of Merger or consolidation; and
4. In case of Investment of corporate funds for any purpose other than the primary purpose
of the corporation (RCC, Sec. 80).
5. In a Close corporation, a stockholder may, for any reason, compel the corporation to
purchase his shares when the corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock (RCC, Sec. 104).

(3) Right to Inspect

(61) What are the conditions for the exercise of the right to inspect corporate books and
records? (RIG-ConComp)
The following conditions must be complied with:
1. The right must be exercised at Reasonable hours on business days;
2. The director, trustee, stockholder, or member has not Improperly used any information
he secured through any previous examination;
3. Demand is made in Good faith or for a legitimate purpose;
4. The inspecting or reproducing party must respect and is bound by Confidentiality rules
under prevailing laws; and
5. The inspecting or reproducing party is not a competitor, director, officer, controlling
stockholder or otherwise represents the interest of a Competitor (RCC, Sec. 73).
Note: Right to inspect subsists even after dissolution of the corporation during the three-year
liquidation period (Roque v. People of the Philippines, G.R. No. 211108, June 7, 2017).

(4) Preemptive Right

(62) What are the instances when pre-emptive right is available, and not available?
 22

When can a stockholder When is pre-emptive right not

exercise his pre-emptive available? (PREP-DeWN)
right?
The following are the instances when pre- The following are the instances when pre-
emptive right is available: emptive right is not available:
1. Original issuance of unissued shares 1. Shares to be issued to comply with
forming part of the original authorized laws requiring stock offering or
capital stock; minimum stock ownership by the
2. Original issuance of new shares Public;
resulting from increase of authorized 2. It does not apply to shares that are
capital stock (Dee v. CA, G.R. No. L- being Reoffered by the corporation
60502, July 16, 1991); and after they were initially offered
3. Disposition of Treasury Shares (SEC together with all the shares;
Opinion, January 14, 1993). 3. Shares issued in good faith, with the
approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in
Exchange for property needed for
corporate purposes;
4. Shares issued, with the approval of
the stockholders representing two-
thirds (2/3) of the outstanding capital
stock, in Payment of previously
contracted debts;
5. In case the right is Denied in the AOI
or an amendment thereto;
6. Waiver of the right by the
stockholder; and
7. In the case of Non-stock
corporations, where the assignors
have previously exercised their pre-
emptive rights to subscribe to new
shares. Otherwise, the pre-emptive
right attached to the original stock
would be exercised twice (SEC
Opinion, November 28, 1990).

(5) Right to Vote

(63) What are the instances wherein non-voting shares are entitled to vote? (AASI-IMID)
Holders of non-voting shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with
this Code; and
8. Dissolution of the corporation (RCC, Sec. 6).
 23

d) Remedial Rights
(1) Individual Suit
(64) What is an Individual suit?
An individual suit may be instituted by a stockholder against another stockholder for wrongs
committed against him personally, and to determine their individual rights. An individual suit
may also be instituted against a corporation, the same having a separate juridical personality,
which by its own may be sued (Guy v. Guy, G.R. Nos. 189486 and 182008, December 4,
2009).
Note: Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation, e.g., denial of right to
inspection and denial of dividends to a stockholder (Villamor, Jr., v. Umale, G.R. No.172843,
September 24, 2014).

(2) Representative Suit

(65) What is a Representative suit?
A representative suit is an action brought by the stockholder in behalf of himself and all other
stockholders similarly situated when a wrong is committed against a group of stockholders
(Cua, Jr. v. Tan, G.R. No. 181455-56, December 4, 2009).

(3) Derivative Suit

(66) What requisites must be met in order for a derivative suit to prosper? (SRAN2)
A stockholder or member may bring an action in the name of a corporation or association,
provided, that:
1. He was a Stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
2. He exerted all Reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, bylaws,
laws or rules governing the corporation or partnership to obtain the relief he desires
(Exhaustion of Intra-Corporate Remedies);
3. No Appraisal rights are available;
4. The suit is not a Nuisance or harassment suit (A.M. No. 01-2-04-SC, Interim Rules of
Procedure for Intra-Corporate Controversies, Rule 8, Sec. 1); and
5. The action must be brought in the Name of the corporation. It is sine qua non that the
corporation is impleaded or made a party to a case (Chua v. CA, G.R No. 150793,
November 18, 2004).

e) Obligations of a Stockholder
(67) What are the obligations of a stockholder?
The following are the obligations of a stockholder:
1. Liability to the corporation for unpaid subscription (RCC, Sec. 65 to 69);
2. Liability to the corporation for interest on unpaid subscription if so required (RCC, Sec.
65 & 66);
3. Liability to the creditors of the corporation for unpaid subscription subject to the Limited
Liability Rule;
4. Liability for watered stocks (RCC, Sec. 64);
5. Liability for dividends unlawfully paid (RCC, Sec. 42); and
6. Administrative, civil, and criminal liability of a stockholder responsible for violation of the
RCC or for acts indispensable to the violation of the RCC (RCC, Sec. 171).

f) Meetings
(68) When is a regular meeting of stockholders or members held?
Regular meetings of stockholders or members shall be held annually on a date fixed in the
by-laws, or if not so fixed, on any date after April 15 of every year as determined by the board
of directors or trustees (RCC, Sec. 49).

(69) When is a special meeting of stockholders or members held?

 24

Special meetings of stockholders or members shall be held at any time deemed necessary or
as provided in the by-laws (RCC, Sec. 49).

Board
a) Repository of Corporate Powers
(70) What is the Doctrine of Centralized Management?
Under the Doctrine of Centralized Management, the board of directors or trustees shall
exercise the corporate powers, conduct all business, and control all properties of the
corporation (RCC, Sec. 22).

b) Tenure, Qualifications, and Disqualifications of Directors

(71) What is the holdover principle?
The Holdover Principle states that upon failure of a quorum at any annual meeting, the
directorate naturally holds over and continues to function until another directorate is chosen
and qualified. Unless the law or the charter of a corporation expressly provides that an office
shall become vacant at the expiration of the term of office for which the officer was elected,
the general rule is to allow the officer to holdover until his successor is duly qualified
(Government of the Philippine Islands v. El Hogar Filipino, G.R. No. L-26649, July 13, 1927).

Note: Holdover is a situation that arises when no successor is elected due to a valid and
justifiable reason (e.g. pending election protest on the outcome of the annual election), in
which case, the incumbent holds over and continues to function until another officer is chosen
and qualified (SEC Opinion No. 06-18, March 20, 2006).

(72) What are the qualifications of directors or trustees?

In order for one to become a director or trustee, he/she must possess the following
qualifications:
1. He must be of legal age;
2. In stock corporations, directors must own at least 1 share of stock.
3. In non-stock corporations, trustees must be a member;
4. He must not possess any of the disqualifications provided Sec. 26 of the RCC; and
5. He must possess such other qualifications as may be prescribed by law and in the
bylaws (RCC, Sec 22).

Note: There is no citizenship requirement for directors. However, the members of the board
must comply with the same proportion of maximum equity participation under nationalization
laws. Also, there is no more residence requirement. The requirement that the majority of the
directors or trustees must be residents of the Philippines under Sec. 23 of the Corporation
Code has been deleted (SUNDIANG & AQUINO, Reviewer on Commercial Law, supra at
258).

(73) What are the grounds for disqualification of directors or trustees?

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:
1. Convicted by final judgment:
a. Of an offense punishable by imprisonment for a period exceeding 6 years;
b. For violating the RCC; and
c. For violating R.A. No. 8799, otherwise known as “The Securities Regulation
Code”;
2. Found administratively liable for any offense involving fraudulent acts; and
3. By a foreign court or equivalent foreign regulatory authority for similar acts, violations or
misconduct (RCC, Sec. 26).

The foregoing is without prejudice to other disqualifications, which the SEC, the primary
regulatory agency, or the Philippine Competition Commission may impose (RCC, Sec. 26).
 25

c) Requirement of Independent Directors

(74) What corporations are required by law to have an independent director?
The board of the following corporations vested with public interest shall have independent
directors constituting at least 20% of such board:
1. Corporations covered by Section 17.2 of the Securities Regulation Code namely:
a. Those whose securities are registered with the SEC,
b. Corporations listed with an exchange or with assets of at least P50,000,000 and
having 200 or more holders of shares, each holding at least 100 shares of a class
of its equity shares;
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries;
and
3. Other corporations engaged in business vested with public interest similar to the above,
as may be determined by the SEC, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of an independent director
(RCC, Sec 22).

d) Elections
(75) What is the quorum for purposes of election?
At all elections of directors or trustees, there must be present, either in person or through a
representative authorized to act by written proxy, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. A
stockholder or member who participates through remote communication or in absentia, shall
be deemed present for purposes of quorum (RCC, Sec. 23).

Note: It is settled that what may not be voted or considered in determining whether a quorum
is present in a stockholders' meeting are unissued stocks and treasury stocks. All voting
stocks actually issued and outstanding may be included in determining the quorum even if
their ownership is disputed. Thus, for stock corporations, the quorum is based on the number
of outstanding voting stocks (Villongco v. Yabut, G.R. Nos. 225022 & 225024, February 5,
2018).

(76) Mr. X was the President of Cartel Inc., his family’s company. He was very eager to take
control of the company and to do so, he purchased unissued shares despite the
absence of a board resolution authoring the transaction. Mr. X, in his capacity as
President, called a special stockholders’ meeting and consequently, Board of Directors
(BOD) were elected. Is the BOD election valid?
No, the BOD election is invalid due to the illegally issued number of shares obtained by Hector.
Purchase of the unissued shares could not be done in the absence of any board resolution
authorizing such transaction. For this reason, Hector could not have validly purchased the
unissued shares of stock without a board resolution authorizing the same and in effect, he
could not have legally used the same in voting for the new set of Cartel Inc. Directors. The
number of shares illegally issued were substantial enough to affect the validity of the BOD
elections and the latter should be deemed void. (Lopez v. Lopez , G.R. Nos. 254957-58, June
15, 2022).

e) Removal
(77) What is the procedure for the removal of directors or trustees? (MS2NVoF)
The procedure for a valid removal is as follows:
1. Call for a regular or special Meeting;
2. Said meeting is called by the
a. Secretary on order of the president; or
b. Secretary upon the written demand of the stockholders representing or holding at
least a majority of the outstanding capital stock or a majority of the members entitled
to vote;
3. Prior Notice to stockholders or members of the corporation of the time and place of such
meeting as well as of the intention to propose removal at the meeting;
4. There must be a Vote of the stockholders representing 2/3 of the outstanding capital stock
or members entitled to vote; and
 26

5. Should the secretary Fail or refuse to call the special meeting upon such demand or fail
or refuse to give the notice, or if there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by any stockholder or member of the
corporation signing the demand (RCC, Sec. 27).

Note: The SEC shall, motu proprio or upon verified complaint, and after due notice and
hearing, order the removal of a director or trustee elected despite the disqualification, or
whose disqualification arose or is discovered subsequent to an election. The removal of a
disqualified director shall be without prejudice to other sanctions that the SEC may impose on
the board of directors or trustees who, with knowledge of the disqualification, failed to remove
such director or trustee (RCC, Sec. 27).

f) Filling of Vacancies
(78) How are the vacancies in the board filled?
Any vacancy occurring in the board of directors or trustees other than by removal or by
expiration of term may be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum (RCC, Sec 28).

Note: When the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or damage to
the corporation, the vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees (RCC, Sec. 28).

g) Compensation
(79) Are directors and trustees entitled to compensation?
In the absence of any provision in the bylaws fixing their compensation, the directors or
trustees shall not received any compensation in their capacity as such, except for reasonable
per diems (RCC, Sec. 29).

h) Disloyalty
(80) When is there disloyalty on the part of a director, trustee or officer?
There is disloyalty when a director, trustee, or officer attempts to acquire or acquires any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, and upon which, equity imposes a disability upon himself to deal in his own behalf
(RCC, Sec. 30).

A director who, by virtue of such office, acquires a business opportunity which should belong
to the corporation, thereby obtaining profits to the prejudice of such corporation, is also guilty
of disloyalty (RCC, Sec. 33).

i) Business Judgment Rule

(81) What are the two branches of the Business Judgment Rule?
The two branches of the Business Judgment Rule are:
1. Immunity for Decisions Made in Good Faith – There is a presumption that in making
business decisions not involving direct self-interest or self-dealing, corporate directors act
on an informed basis, in good faith, and in honest belief that their actions are in the
corporation’s best interest (Grobow v. Perot, 539 A.2d 180 (1988)); and

Note: The rule shields directors and officers from liability for unprofitable or harmful corporate
transactions if the transactions were made in good faith, with due care, and within the
directors’ or officer’s authority.

2. Beyond Judicial Review – Courts cannot undertake to control the discretion of the board
of directors about administrative matters as to which they have legitimate power of, action
and contracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are unconscionable and
 27

oppressive as to amount to a wanton destruction of the rights of the minority (Gamboa v.

Victoriano, G.R. No. L-40620, May 5, 1979).

j) Solidary Liabilities for Damages

(82) When are the board of directors or trustees solidarily liable for damages?
The board of directors or trustees shall be solidarily liable for damages when they willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees (RCC, Sec. 30).

k) Personal Liabilities
(83) What are the conditions for a director or officer to be personally liable for the
obligations of the corporation? (PGBC)
Settled is the rule that a director or officer shall only be personally liable for the obligations of
the corporation, if the following conditions concur:
1. The complainant alleged in the complaint that
a. the director or officer assented to Patently unlawful acts of the corporation, or
b. that the officer was guilty of Gross negligence or Bad faith; and
2. The complainant Clearly and convincingly proved such unlawful acts, negligence or bad
faith (Atienza v. Golden Ram Engineering Supplies & Equipment Corp., G.R. No. 205405,
June 28, 2021).

(84) Mr. A bought two vessel engines from BCD Corp. and was issued a Proforma Invoice
stating that it has a warranty of 12 months. However, within the 12-month period, the
vessel where the engines were attached suffered a major dysfunction. To make sure of
the dysfunction, BCD Corp. sent an engineer to inspect the damage and it was
confirmed that it was due to a factory defect. Mr. A then demanded BCD Corp. to
replace the engine, but to no avail. Hence, Mr. A filed a complaint against BCD Corp.
and its president, Mr. Z. May Mr. Z, as the president of BCD Corp. be held solidarily
liable for the payment of damages against Mr. A?
No, Mr. Z could not be made liable as the president of BCD Corp. It is a settled rule that a
corporation is a distinct legal entity to be considered as separate and apart from the individual
stockholders or members who compose it, and is not affected by personal rights, obligations
and transactions of its stockholders or members (Sulo ng Bayan, Inc. v. Araneta, Inc., G.R.
No. L-31061, August 17, 1976). Hence, BCD Corp. having a legal personality, separate and
apart from Mr. Z, then Mr. Z could no be made solidarily liable for the payment of damages
against Mr. A since the contract was made between Mr. A and BCD Corp. themselves.

(85) Would your answer be the same if Mr. Z acted in bad faith in denying Mr. A’s claim?
No, my answer would not be the same. Under Section 30 of the Revised Corporation Code, directors
who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons. Hence, Mr. Z, knowingly
denying the warranty claim in bad faith subjects him to be solidarily liable with BCD Corp.
(Atienza v. Golden Ram Engineering Supplies & Equipment Corp., G.R. Nos. 205405, June
28, 2021).

l) Responsibility for Crimes

(86) When are the directors or trustees responsible for a crime?
If a statute defines a crime that may be committed by a corporation but prescribes the penalty
therefor to be suffered by the officers, directors, or employees of such corporation or other
persons responsible for the offense, only such individuals will suffer such penalty (Ching v.
Secretary of Justice, G.R. No. 164317, February 6, 2006);
 28

m) Special Fact Doctrine

(87) What is the special fact doctrine?
A Corporate Officer with a superior knowledge gained by virtue of being an insider owes a
fiduciary duty to a shareholder in transactions involving transfer of stocks.

n) Inside Information
(88) Who is an insider? (ID-RGL)
“Insider” means”
1. the Issuer;
2. a Director or officer (or any person performing similar functions) of, or a person controlling
the issuer;
3. a person whose Relationship or former relationship to the issuer gives or gave him access
to material information about the issuer or the security that is not generally available to
the public;
4. A Government employee, director, or officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
5. a person who Learns such information by a communication from any forgoing insiders.
(Chapter I, Section 3.8 of R.A. 8799)

o) Contracts
(1) By Self-Dealing Directors with the Corporation
(89) What is the status of a contract of self-dealing directors, trustees and officers?
A contract between the corporation and one or more of its
directors, trustee, or officers or their spouses and relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of such corporation, unless all the following
conditions are present:
1. The presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. The vote of such director or trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material contracts are approved by
at least 2/3 of the entire membership of the board, with at least a majority of the
independent directors voting to approve the material contract; and
5. In case of an officer, the contract has been previously authorized by the board of
directors (RCC, Sec. 31).

(2) Between Corporations with Interlocking Directors

(90) When is there Interlocking Directorship?
There is interlocking directorship when the two corporations share one or more directors
(RCC, Sec. 32; Forest Hills Golf and Country Club, Inc., v. Fil-Estate Properties, Inc., G.R.
No. 206649, July 20, 2016).

CAPITAL AFFAIRS
a) Certificate of Stock
(1) Nature of the Certificate
(91) What is the nature and function of a certificate of stock?
A certificate of stock is not necessary to render one a stockholder in a corporation.
Nevertheless, a certificate of stock is the paper representative or tangible evidence of the
stock itself and of the various interests therein. The certificate is not stock in the corporation
but is merely evidence of the holder’s interest and status in the corporation, his ownership of
the share represented thereby, but is not in law the equivalent of such ownership (Tan v. SEC,
G.R. No. 95696. March 3, 1992).

(2) Uncertificated Shares

(92) What are the rules on uncertificated shares?
 29

Notwithstanding Section 63 (now Section 62) of the Corporation Code, a corporation whose
shares of stock are registered pursuant to the Code or listed on a stock exchange may:
1. If so resolved by its Board of Directors and agreed by a shareholder, investor or
securities intermediary, issue shares to, or record the transfer of some or all of its
shares into the name of said shareholders, investors or, securities intermediary in the
form of uncertificated securities;
2. The use of uncertificated securities shall be without prejudice to the rights of the
securities intermediary subsequently to require the corporation to issue a certificate in
respect of any shares recorded in its name; and
3. If so provided in its articles of incorporation and bylaws, issue all of the shares of a
particular class in the form of uncertificated securities and subject to a condition that
investors may not require the corporation to issue a certificate in respect of any shares
recorded in their name (Securities Regulation Code, Sec. 43.1).

(3) Negotiability; Requirements for Valid Transfer of Stocks

(93) Why is a stock certificate regarded as quasi-negotiable instrument and not a negotiable
one?
A certificate of stock is regarded as quasi-negotiable in the sense that it may be transferred
by endorsement, coupled with delivery, but it is not negotiable because the holder thereof
takes it without prejudice to such rights or defenses as the registered owners or transferor's
creditor may have under the law, except insofar as such rights or defenses are subject to the
limitations imposed by the principles governing estoppel (Republic v. Sandiganbayan, G.R.
Nos. 107789 & 147214 (Resolution), April 30, 2003).

(4) Issuance
(94) When may a certificate of stock be issued?
No certificate of stock shall be issued to a subscriber until the full amount of the subscription
together with the interest and expenses (in case of delinquent shares), if any is due, has been
paid (RCC, Sec. 63).

(5) Stock and Transfer Book

(95) What are the contents of the stock and transfer book?
A stock and transfer book contains the following:
1. A record of all stocks in the names of the stockholders alphabetically arranged;
2. The installments paid and unpaid on all stocks for which subscription has been made,
and the date of payment of any installment;
3. A statement of every alienation, sale or transfer of stock made, the date thereof, by and
to whom made; and
4. Such other entries as the bylaws may prescribe (RCC, Sec. 73).

(96) Who may make valid entries on the stock and transfer book?
Only the corporate secretary is duly authorized to make entries on the stock and transfer book.
Hence, entries made by the Chairman or President are invalid (Torres, Jr. v. CA, G.R. No.
120138, September 5, 1997).

(97) In determining the status of one claiming, which shall prevail?

(a) the Stock and Transfer Book
(b) the General Information Sheet
A. In the case of Lao vs Lao, the Court held that in determining the status of one claiming to
be a stockholder of a corporation, what was controlling were the entries in the Stock and
Transfer Book and not the General Information Sheet (GIS). However, in the case of Lopez v
Lopez (Lopez v. Lopez , G.R. Nos. 254957-58, June 15, 2022), the same was not applied
because the stockholder was able to prove his status by evidence other than the GIS.
 30

(6) Situs of the Shares of Stock

(98) What is the situs of shares of stock?
The situs of shares of stock is deemed to be the State where the corporation has its domicile
which is ordinarily the State under whose laws it was created (Wells Fargo Bank & Union
Trust Co. v. Collector of Internal Revenue, G.R. No. 46720, June 28, 1940).

b) Watered Stocks
(1) Definition
(99) What are watered stocks?
Watered stocks are stocks of a corporation issued for:
1. Less than their par or issued value in cash; or
2. Non-cash considerations which is valued in excess of its fair value (RCC, Sec. 64).

(2) Liability of Directors for Watered Stocks

(100) Who are liable for watered stocks?
A director or officer of a corporation is liable for the issuance of watered stock when he:
1. Consents to the issuance of stocks for a consideration less than its par or issued value;
2. Consents to the issuance of stocks for a consideration other than cash, valued in excess
of its fair value; or
3. 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
issuance of the stock and the par or issued value of the same (RCC, Sec. 64).

(3) Trust Fund Doctrine for Liability for Watered Stocks

(101) What is the basis for such liability?
Liability is incurred when watered stocks are issued, because the trust fund doctrine provides
that the capital of a corporation constitutes a fund upon which its creditors have a right to rely
for the payment of their claims, and that if the corporation, by knowingly issuing stock as fully
paid when it is not, represents its capital to be greater than it really is, its action is a fraud
upon its creditors (Rhode v. Dock-Hop Co., 184 Cal. 367, 377 (Cal. 1920)).

c) Payment of Balance of Subscription

(1) Call by Board of Directors
(102) When are unpaid subscriptions due and payable?
Subject to the provisions of the subscription contract, the board of directors may, at any time,
declare due and payable to the corporation unpaid subscriptions and may collect the same or
such percentage thereof, in either case, with accrued interest, if any, as it may deem
necessary (RCC, Sec. 66).

(2) Notice Requirement

(103) What is the liability of stockholder if he fails to render the entire balance of the
subscription on such date?
Failure to pay on the date specified in the subscription contract or on the date stated in the
call shall render the entire balance due and payable and shall make the stockholder liable for
interest at the legal rate on such balance, unless a different interest rate is provided in the
subscription contract (RCC, Sec. 66).

Note: The notice is regarded as a condition precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain an action for the call (Baltazar v. Lingayen Gulf
Electric Power Co., Inc., G.R. No. L-16236, June 30, 1965).
 31

d) Sale of Delinquent Shares

(1) Effect of Delinquency
(104) What is the effect of delinquency of shares?
No delinquent stock shall be voted for, be entitled to vote, or be represented at any
stockholders’ meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of the RCC. It is
only upon payment of the amount due on the subscription with accrued interest, and costs
and expenses of advertisement, if any, that the stockholder will be stored to his full rights
(RCC, Sec. 70).

(2) Call by Resolution of the Board of Directors

(105) What does “call” by the board of directors refer to?
A call is the resolution or formal declaration of the board that the unpaid subscriptions are due
and payable. The unpaid subscription is not due and payable without the call (Lingayen Gulf
Electric Power Company v. Baltazar, G.R. No. L-4824, June 30, 1953).

(106) When is a call by the board of directors for the payment of the balance of subscription
not necessary?
A call is not necessary in the following instances:
1. When the date of payment is specified in the subscription agreement (RCC, Sec. 66);
and
2. When the corporation becomes insolvent (Velasco v. Poizat, G.R. No. L-11528, March
15, 1918).

e) Alienation of Shares
(1) Allowable Restrictions on the Sale of Shares
(107) When are restrictions on transfer of stocks considered valid and enforceable?
In order to be valid and enforceable, any restriction on the right to transfer shares must be
explicitly provided for in the articles of incorporation (RCC, Sec. 6, par. 1).

(2) Requisites of a Valid Transfer

(108) What are the requirements for a valid transfer of stocks? (DER)
If represented by a certificate, the following must be complied with:
1. There must be Delivery of the certificate;
2. It must be Endorsed by the owner or his agent;

Note: It is delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original owner
to the transferee (AQUINO, Corporation Law, supra at 624).

3. To be valid against the corporation and third parties, the transfer must be Recorded in
the books of the corporation. Otherwise, the transfer shall be binding only as between
the parties (RCC, Sec. 62).

Note: No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation (RCC, Sec. 62)

f) Corporate Books and Records

(1) Right to Inspect Corporate Records
(109) Why is a corporation not allowed to deny outright access to inspect corporate books
and records?
Access to the information is mandatory. The presumption is that the corporation should
provide access. If it has basis for denial, then the corporation shoulders the risk of being sued
and of successfully raising the proper defenses (Philippine Associated Smelting and Refining
Corporation v. Lim, G.R. No. 172948, October 5, 2016).
 32

(2) Effect of Refusal to Inspect Corporate Records

(110) What are the liabilities incurred when the right to inspection is denied?
Any officer or agent of the corporation who shall refuse to allow the inspection and/or
reproduction of records shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense, which shall be punishable under
Section 161 of the RCC (RCC, Sec. 73, par. 4).

Note: If such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability shall be imposed upon the directors or trustees who voted for such refusal
(RCC, Sec. 73, par. 4).

DISSOLUTION AND LIQUIDATION

a) Modes of Dissolution
(1) Voluntary Dissolution
(111) What are the methods of voluntary corporate dissolution? (EV-JAS)
The methods of voluntary corporate dissolution are:
1. Expiration of the original term (RCC, Sec. 11, par. 2);
2. Vote of the board of directors or trustees and the stockholders or members where NO
Creditors are affected (RCC, Sec. 134);
3. Judgment of the SEC after hearing of petition for voluntary dissolution where creditors
are affected (RCC, Sec. 135);
4. Amending the AOI to shorten the corporate term (RCC, Sec 136); or
5. In the case of a corporation Sole, by submitting to the SEC a verified declaration of
dissolution for approval (RCC, Sec. 113).

(2) Involuntary Dissolution

(112) What are the grounds for involuntary dissolution? (NI-OFF)
The following may be grounds for dissolution of a corporation:
1. Non-use of corporate charter;
2. Continuous Inoperation of a corporation;
3. Upon receipt of a lawful court Order dissolving the corporation;
4. Upon finding by final judgment that the corporation procured its incorporation through
Fraud; and
5. Upon finding by Final judgment that the corporation:
a. Was created for the purpose of committing, concealing or aiding the commission of
securities violation, smuggling, tax evasion, money laundering, or graft and corrupt
practices;
b. Committed or aided in the commission of such acts, and its stockholders knew of
the same;
c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices
or other fraudulent or illegal acts by its directors, trustees, officers, or employees
(RCC, Sec. 138).

b) Methods of Liquidation
(1) By the Corporation Itself
(113) For what purpose may the corporation effect its liquidation?
The corporation, through its board, may effect liquidation:
1. To prosecute and defend suits by or against it;
2. To settle and close its affairs;
3. To dispose of and convey its property; and
4. To distribute its assets. (RCC, Sec. 139).

(2) Conveyance to a Trustee Within a Three-Year Period

(114) How is liquidation made through trustees?
 33

At any time during said 3 years after dissolution, the corporation is authorized and empowered
to convey all of its property to trustees for the benefit of stockholders, members, creditors,
and other persons in interest (RCC, Sec. 139, par. 2).

(3) By Management Committee or Rehabilitation Receiver

(115) When may a management committee be appointed to facilitate the liquidation of a
corporation?
A management committee may be created and appointed upon petition or motu propio to
undertake the management of corporations, partnerships or other associations not supervised
or regulated by other government agencies in appropriate cases when there is imminent
danger of dissipation, loss, wastage or destruction of assets or other properties of paralyzation
of business operations of such corporations or entities which may be prejudicial to the interest
of minority stockholders, parties-litigants or the general public (SRA, Sec. 6(d)).

(116) When may a receiver be appointed to facilitate the liquidation of a corporation?

In case of voluntary dissolution where creditors are affected, the SEC may, in its discretion,
appoint a receiver to collect the assets of the corporation and pay the debts of the corporation
(Sec. 135, par. 3).

(4) Liquidation after Three Years

(117) In what instance may liquidation be effected even after the three-year period?
If a trustee has been designated, the trustee may continue to prosecute a case commenced
by the corporation within 3 years from its dissolution until rendition of the final judgment, even
if such judgment is rendered beyond the 3-year period allowed by Section 122 (now Sec. 139)
of the Corporation Code. However, an already defunct corporation cannot initiate a suit after
the lapse of the said three-year period.

If the corporation had already pending actions at the time that its corporate existence was
terminated (as compared to actions commenced within the 3-year period), the board of
directors or trustees (in the absence of a trustee designated) may be permitted to so continue
as "trustees" by legal implication to complete the corporate liquidation even after the lapse of
the three-year period (Alabang Development Corp. v. Alabang Hills Village Association, G.R.
No. 187456, June 2, 2014).

OTHER CORPORATIONS
a) Close Corporations
(1) Characteristics
(118) What are the distinguishing characteristics of a close corporation? (ALGI-KPDA)
The following are the distinguishing characteristics of a close corporation:
1. Stockholders may act as directors without the need for Election and therefore are liable
as directors;
2. Stockholders who are involved in the management of the corporation are Liable in the
same manner as directors are;
3. Quorum may be Greater than mere majority when provided in the AOI;
4. Transfers of stocks to others, which would increase the number of stockholders to more
than the maximum are Invalid;
5. Corporate Acts may be binding even without a formal board meeting, if the stockholder
had Knowledge or ratified the informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board may be settled by the SEC, on the written petition by any stockholder;
and
8. Stockholder may withdraw and avail of his right of Appraisal (RCC, Secs. 95-104).

(2) Validity of Restrictions on Transfer of Shares

(119) When are restrictions on the transfer of shares considered valid?
Restrictions on the transfer of shares shall be valid provided:
 34

1. The restrictions must appear in the articles of incorporation, bylaws, and certificate of
stock, otherwise the same shall not be binding on any purchaser in good faith; and
2. Right of first refusal – the restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated (RCC, Sec. 97).

(3) Preemptive Right

(120) What is the scope of pre-emptive right in close corporations?
The pre-emptive right of stockholders in close corporations shall extend to all stock to be
issued, including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts, unless the articles of incorporation provide
otherwise (RCC, Sec. 101).

(4) Amendment of Articles of Incorporation

(121) What are the requirements for amendment of articles of incorporation of a close
corporation?
Any amendment which seeks to delete or remove any provision required for close
corporations or to reduce a quorum or voting requirement stated in said articles of
incorporation shall require the affirmative vote of at least 2/3 of the outstanding capital stock,
whether with or without voting rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for amending, deleting or removing any of
the aforesaid provisions, at a meeting duly called for the purpose (RCC, Sec. 102).

b) Non-Stock Corporations
(1) Definition
(122) What is a non-stock corporation?
For purposes of the RCC and subject to its provisions on dissolution, a non-stock corporation
is one where no part of its income is distributable as dividends to its members, trustees, or
officers (RCC, Sec. 86).

(2) Treatment of Profits

(123) What is the rule regarding profits generated by a non-stock corporation?
Any profit which a non-stock corporation may obtain incidental to its operations shall,
whenever necessary or proper, may be used for the furtherance of the purpose or purposes
for which the corporation was organized (RCC, Sec. 86).

Note: The only limitation on a non-stock corporation is that any profit derived by it from any
authorized activity cannot be distributed as dividends

c) Educational Corporations
(124) What is an educational corporation?
Educational corporations are those organized for educational purposes, particularly the
establishment and maintenance of a school, college or university (DIVINA, Questions and
Answers on the Revised Corporation Code, supra at p. 511).

d) Religious Corporations
(1) Corporation Sole
(125) What is a Corporation Sole?
A corporation sole is one which is formed by the chief archbishop, bishop, priest, minister,
rabbi, or other presiding elder of a religious denomination, sect, or church for the purpose of
administering and managing, as trustee, the affairs, property, and temporalities of such
religious denomination, sect or church (RCC, Sec. 108).

(2) Religious Societies

 35

(126) What is a Religious Society?

Unless forbidden by competent authority, the Constitution, pertinent rules, regulations, or
discipline of the religious denomination, sect or church of which it is a part, any religious
society, religious order, diocese or synod, or district organization of any religious
denomination, sect or church, may, upon written consent and/ or by an affirmative vote at a
meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for
the administration of its temporalities or for the management of its affairs, properties, and
estate by filing with the SEC, articles of incorporation verified by the affidavit of the presiding
elder, secretary, or clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect or church (RCC,
Sec. 114).

e) One Person Corporations

(1) Excepted Corporations
(127) What entities are prohibited from becoming an OPC?
The following may not incorporate as an OPC:
1. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies,
and non-chartered government-owned and controlled corporations; and
2. A natural person who is licensed to exercise a profession may not organize an OPC for
the purpose of exercising such profession except as otherwise provided under special
laws (RCC, Sec. 116).

(2) Capital Stock Requirement

(128) What is the minimum capital stock required for an OPC?
A One Person Corporation shall not be required to have a minimum authorized capital stock
except as otherwise provided by special law (RCC, Sec. 117).

(3) Articles of Incorporation and By-Laws

(129) What must comprise the Articles of Incorporation of an OPC?
The articles of incorporation shall be in accordance with the requirements under Section 14
of the RCC. It shall likewise substantially contain the following:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of
the trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of the
trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and imitation of the authority (RCC, Sec. 118).

(130) What is the rule regarding the bylaws of an OPC?

The OPC is not required to submit and file corporate bylaws (RCC, Sec. 119).

(4) Corporate Name

(131) What must be included in the corporate name of an OPC?
A One Person Corporation shall indicate the letters “OPC” either below or at the end of its
corporate name (RCC, Sec. 120).

(5) Corporate Structure and Officers

(132) What are the rules regarding the officers of the OPC?
The rules are as follows:
1. Within 15 days from the issuance of its certificate of incorporation, the OPC shall appoint
a treasurer, corporate secretary, and other officers as it may deem necessary;
2. The OPC shall notify the SEC thereof within 5 days from appointment of the officers;
3. The single stockholder may not be appointed as the corporate secretary; and
4. A single stockholder who is likewise the self-appointed treasurer of the corporation shall:
a. Give a bond to the SEC in such a sum as may be required;
 36

5. Undertake in writing to faithfully administer the OPC’s funds to be received as treasurer,

and to disburse and invest the same according to the AOI as approved by the SEC;
6. Renew the bond every 2 years or as often as may be required (RCC, Sec. 122).

(6) Nominee
(133) How may a nominee and alternate nominee be changed by the stockholder?
The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the SEC the names of the new nominees and their corresponding written
consent. For this purpose, the articles of incorporation need not be amended (RCC, Sec. 126).

(7) Liability
(134) What is the obligation of a single shareholder claiming limited liability?
A sole shareholder claiming limited liability has the burden of affirmatively showing that the
corporation was adequately financed (RCC, Sec. 130).

(8) Conversion of Corporation to One Person Corporations and Vice-Versa

(135) In what instance may an ordinary corporation be converted into an OPC?
When a single stockholder acquires all the stocks of an ordinary stock corporation, the latter
may apply for conversion into an OPC, subject to the submission of such documents as the
SEC may require (RCC, Sec. 131).

(136) In what instances may an OPC be converted into an ordinary corporation?

An OPC may be converted into an ordinary stock corporation after due notice to the SEC of
such fact and of the circumstances leading to the conversion, and after compliance with all
other requirements for stock corporations under this Code and applicable rules.

In case of death of the single stockholder, the legal heirs, within 60 days from the transfer of
shares by the nominee or alternate nominee, shall notify the SEC of their decision to either
wind up and dissolve the OPC or convert it into an ordinary stock corporation (RCC, Sec.
132).

f) Foreign Corporations
(1) Bases of Authority Over Foreign Corporations
(a) Consent
(137) What are the bases of authority over foreign corporations?
The bases of authority over foreign corporations are:
1. Consent (RCC, Sec. 140); and
2. Doctrine of doing business (RCC, Sec. 146).

(b) Doctrine of “Doing Business”

(138) What are the test on whether a foreign corporation is doing business in the
Philippines?
The tests to determine on whether a corporation is doing business in the Philippines are:
1. Substance test – Whether the foreign corporation is maintaining or continuing in the
Philippines the body or substance of the business for which it was organized or whether
it has substantially retired from it and turned it over another; and
2. Continuity test – Whether there is continuity of commercial dealings and arrangements,
contemplating to some extent the performance of acts or works or the exercise of some
functions normally incident to and in progressive prosecution of, the purpose and object
of its organization (Agilent Technologies Singapore v. Integrated Silicon Technology Phil.
Corp., G.R. No. 154618, April 14, 2004).
 37

(2) Necessity of a License to Do Business

(a) Resident Agent
(139) Who could be a resident agent?
The following could be a resident agent
1. An individual, who must be of good moral character and of sound financial standing,
residing in the Philippines; or
2. A domestic corporation lawfully transacting business in the Philippines designated in a
written power of attorney by a foreign corporation authorized to do business in the
Philippines (RCC, Sec. 144).

(3) Personality to Sue

(140) What are the principles on the personality of a foreign corporation to sue?
The principles regarding the right of a foreign corporation to bring suit in Philippine courts are:
1. If a foreign corporation does business in the Philippines without a license, it cannot sue
before the Philippine courts;
2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction;
3. If a foreign corporation does business in the Philippines without a license, a Philippine
citizen or entity which has contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate personality in a suit brought before
Philippine courts; and
4. If a foreign corporation does business in the Philippines with the required license, it can
sue before Philippine courts on any transaction (Agilent Technologies Singapore v.
Integrated Silicon Technology Phil. Corp., G.R. No. 154618, April 14, 2004).

(4) Suability of Foreign Corporations

(141) When may a foreign corporation be sued in the Philippines?
A foreign corporation transacting business in the Philippines, whether or not with a license,
may be sued or proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws (RCC, Sec. 146 & 150).

(5) Instances When Unlicensed Foreign Corporations May be Allowed to Sue (Isolated
Transactions)
(142) What is an isolated transaction?
The Court has not construed the term “isolated transaction” to literally mean “one” or a mere
single act. The phrase “isolated transaction” has a definite and fixed meaning, i.e., a
transaction or series of transaction set apart from the common business of a foreign enterprise
in the sense that there is no intention to engage in progressive pursuit of the purpose and
object of the business organization (Lorenzo Shipping Corp. v. Chubb and Sons, Inc., G.R.
No. 147724, June 8, 2004).

(6) Grounds for Revocation of License

(143) What are the grounds for revocation of the license to transact business in the
Philippines? (AR-CAMPOLU)
The grounds for revocation of license are:
1. Failure to file its Annual report or pay any fees as required by the Code;
2. Failure to appoint and maintain a Resident agent in the Philippines;
3. Failure, after Change of its resident agent or address, to submit to the SEC a statement
of such change;
4. Failure to submit to the SEC an authenticated copy of any Amendment to its articles of
incorporation or bylaws or of any articles of merger or consolidation within the time
prescribed;
5. A Misrepresentation of any material matter in any application, report, affidavit or other
document submitted by such corporation;
6. Failure to Pay any and all taxes, imposts, assessments or penalties, if any, lawfully due
to the Philippine Government or any of its agencies or political subdivisions;
 38

7. Transacting business in the Philippines Outside of the purpose or purposes for which
such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting on behalf of any foreign
corporation or entity not duly Licensed to do business in the Philippines; or
9. Any other ground as would render it Unfit to transact business in the Philippines (RCC,
Sec. 151).

MERGER AND CONSOLIDATION

a) Concept
(144) What is merger?
A merger is a consolidation of two or more corporations, which results in one or more
corporations being absorbed into one surviving corporation. The separate existence of the
absorbed corporation ceases (Philippine Geothermal, Inc., Employees Union v. Unocal
Philippines, Inc., G.R. No. 190187, September 28, 2016).

b) Constituent Corporation vs. Consolidated Corporation

(145) Distinguish constituent corporations from a consolidated corporation.
Constituent corporations are the parties to the merger or consolidation, while a consolidated
corporation is the new corporation formed by virtue of a valid consolidation (RCC, Sec. 75).

Note: The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation (RCC, Sec. 80).

c) Plan of Merger or Consolidation

(146) What are the contents of a plan of merger or consolidation? (NTCO)
A plan of merger or consolidation shall set forth the following:
1. The Names of the corporations proposing to merge or consolidate;
2. The Terms of the merger or consolidation and the mode of carrying the same into effect;
3. A statement of the Changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, in case of consolidation, all the statements required
to be set forth in the articles of incorporation for corporations organized under this Code;
and
4. Such Other provisions as are deemed necessary or desirable (RCC, Sec 75).

d) Articles of Merger or Consolidation

(147) What are the contents of the articles of merger or consolidation?
The articles of merger or consolidation shall set forth:
1. The plan of the merger or consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members;
3. As to each corporation, the number of shares or members voting for or against such plan,
respectively;
4. The carrying amounts and fair values of the assets and liabilities of the respective
companies as of the agreed cut-off date;
5. The method to be used in the merger or consolidation of accounts of the companies;
6. The provisional or pro forma values, as merged or consolidated, using the accounting
method; and
7. Such other information as may be prescribed by the SEC (RCC, Sec. 77).

e) Effects
(148) What are the effects of merger or consolidation?
The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
 39

3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, and powers and shall be subject to all the duties and liabilities of a corporation
organized under the RCC;
4. All real or personal property, all receivables due on whatever account and every other
interest of, belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation without further act
or deed;
5. The surviving or consolidated corporation shall be responsible for all the liabilities and
obligations of each constituent corporation; and
6. Any pending claim, action or proceeding brought by or against any constituent
corporation may be prosecuted by or against the surviving or consolidated corporation
(RCC, Sec. 79).

II. Banking Laws

A. New Central Bank Act

State Policies
(149) What is the State Policy of the New Central Bank Act?
The state shall maintain a central monetary authority that functions and operates as an
independent and accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking, and credit.

The central monetary authority shall enjoy fiscal and administrative autonomy (R.A. 7653,
otherwise known as “The New Central Bank Act” as amended by R.A. No. 11211, Sec 1).

Monetary Board and its Powers and Functions

(150) What is the composition of the MB?
There shall be 7 members appointed by the President of the Philippines for a term of 6 years,
with no member reappointed more than once. The members consist of: (CCPP)
1. A Chairman who is the BSP Governor;
2. A Cabinet member to be designated by the President of the Philippines; and
3. 5 Members who shall come from the Private sector, all shall serve full time (NCBA, Sec.
6 and 26).
In absence of the Governor, a Deputy Governor shall act as chief executive of the BSP and
shall exercise the powers and duties of the Governor and whenever the governor is unable to
attend meeting, a deputy governor shall be vested with the author to participate and exercise
the right to vote in such meeting (NCBA, Sec. 26).

(151) What are the powers and functions of the MB? (IDEA-IA)
The scope of authority of the MB are to:
1. Issue rules and regulations;
2. Direct the management, operations, and administration of the BSP;
3. Establish a human resource management system;
4. Adopt its annual budget and authorize expenditures
5. Indemnify its members and other officials of the BSP against all costs and expenses
which were reasonably incurred by reason of the performance of their functions in
accordance with the free and harmless indemnification clause (Sec. 15 and 16); and
6. Authorize entities or persons to engage in money service businesses (R.A. 7653 as
amended, Sec. 3).

(152) What are the qualifications of an MB Member? (N35-CIPE)

The members of the Monetary Board must be:
1. Natural-born citizens of the Philippines;
2. At least 35 years of age (Exception: The governor, who should be at least 40 years of
age);
 40

3. Of good moral Character;

4. Of unquestionable Integrity;
5. Of known Probity and patriotism; and
6. With recognized competence in social and Economic disciplines (NCBA, Sec. 8).

(153) What are the disqualifications of an MB Member? (CED-DES)

The disqualifications of members of the MB include:
1. Person who has been Connected with any multilateral banking or financial institution,
within 1 year prior to appointment;
2. Members coming from private sector shall not hold any other public, office or
Employment during their tenure;
3. Disqualification imposed by R.A. No. 6713;
4. Disqualified from being a Director officer, employee, consultant, lawyer, agent or
stockholder of any bank, quasi-bank or any other institution subject to supervision or
examination by the BSP;
5. No member shall be employed in any such institution within two years after the
Expiration of his term except when he serves as an official representative of the
Government to such institution; and
6. Person who has Substantial interest in any private bank in the Philippines, within one
year prior to his appointment (NCBA, Sec. 9).

THE BANGKO SENTRAL NG PILIPINAS AND BANKS IN DISTRESS

(154) What is the nature of Conservatorship?
It is a tool for restoring the viability of banks and quasi-banks. It consists of carrying out a
package of administrative, organizational, financial, and/or other measures to address the
state of continuing inability or unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors (BSP, NCBA Annotated p. 122).

The MB may appoint a conservator, who should be competent and knowledgeable in bank
operations and management (R.A. 7653 as amended, sec. 29).

(155) What are the powers of a conservator?

The conservator shall have the power to (TRe-CERO)
1. Take charge of the assets, liabilities, and the management thereof;
2. Reorganize the management;
3. Collect all monies and debts due said institution;
4. Exercise all powers necessary to restore its viability;
5. Report and be responsible to the Monetary Board; and
6. Overrule or revoke the actions of the previous management and board of directors of
the bank or quasi-bank. (NCBA, Sec. 29).

(156) What is the “Close now, Hear later” scheme?

In cases of existence of the grounds for receivership and liquidation, the MB may summarily
and without need for prior hearing forbid the institution from doing business in the Philippines
and designate the person or entity authorized by law to act as receiver of a banking institution
(NCBA, Sec. 30(d); Alfeo Vivas v. MB, G.R. No. 191424, August 7, 2013).

(157) Is prior notice and hearing needed?

Prior notice and hearing is NOT required before a bank may be directed to stop operations
and placed under receivership. When the law provided for the filing of a case within 10 days
after the receiver takes charge of the assets of the bank, it is unmistakable that the closure
should precede the filing of the case (Central Bank v. CA, G.R. No. 76118, March 30, 1993).

(158) What is the remedy from Order of Closure?

Closure Actions of the MB taken under Sec. 29 or 30 shall be final and executory and may
not be restrained or set aside (NCBA, Sec. 29 and 30). Only remedy is Petition for Certiorari
under Rule 65 on the ground that the action of the MB taken was in excess of jurisdiction, or
 41

with such grave abuse of discretion as to amount to lack or excess of jurisdiction (NCBA, Sec.
29·and 30).

Only stockholders of record representing the majority of the capital stock have the personality
to file a petition for certiorari to be filed within 10 days from receipt by the board of directors
of the institution of the order directing receivership, liquidation or conservatorship (NCBA, Sec.
30).

(159) What is a receivership?

It is a proceeding wherein the Monetary Board may summarily and without need for prior
hearing forbid a bank or quasi - bank from doing business in the Philippines and designate a
receiver.

Such authority may also be exercised over non-stock saving and loan association (NSSLAs)
(R.A. 7653 as amended, Sec. 30).

This is referred to as the close as the “Close now, Hear Later” scheme (Vivas v. The Monetary
Board of the Bango Sentral ng Pilipinas Deposit Insurance Corporation, G.R. No. 191424,
August 7, 2013).

(160) When may an institution be placed under receivership?

The Monetary Board may appoint a receiver when it finds that a bank of quasi- bank: (U60-
PI-CoWi-HU)
1. Has notified the Bangko Sentral or publicly announced a Unilateral closure; or
2. Has been dormant for at least 60 days or in any manner has suspended the payment of
its deposit/ deposit substitute liabilities: or
3. Is unable to Pay its liabilities as they become due in the ordinary course of business.
4. Has Insufficient reliable assets, as determined by the Bangko Sentral to meet its
liabilities; or
5. Cannot Continue in business without involving probable losses to its depositors or
creditors; or
6. Has Willfully violated a cease-and-desist order under Section 37 of this Act that has
become final, involving acts or transactions which amount to fraud or a dissipation of
the assets of the institution (R.A. 7653 as amended, sec. 30);
7. Bank notifies the Bangko Sentral or publicly announces a bank Holiday, or in any
manner suspends the payment of its deposit liabilities continuously for more than 30
days (R.A. No. 8971, otherwise known as General Banking Law of 2000 (GBL) Sec.
53); or
8. Has persisted in conducting its business in an Unsafe or unsound manner (GBL, Sec.
56).

(161) What is “voluntary liquidation”?

Liquidation is voluntary when it is commenced by written notice to the MB. MB shall have the
right to intervene and take such steps as may be necessary to protect the interest of creditors
(GBL, Sec. 68).

(162) What is “involuntary liquidation”?

Liquidation is involuntary when any of the grounds in Sec. 30 of the NCBA is present and the
institution is ordered closed by the MB (GBL, Sec. 69).

B. General Banking Law of 2000 (R.A. No. 8791)

DEFINITION AND CLASSIFICATION OF BANKS

(163) What are banks?

Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits
(GBL, Sec. 3).
 42

(164) What are the classification of banks? (UCTRCIO)

Banks shall be classified into:
1. Universal banks;
2. Commercial banks;
3. Thrift banks;
4. Rural banks, as defined in R.A. No. 7353;
5. Cooperative banks, as defined in R.A. No. 6938;
6. Islamic banks as defined in R.A. No. 6848; and
7. Other classifications of banks as determined by the MB of the BSP (GBL, Sec 3.2).

DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES

(165) What are quasi-banks?

Quasi-Bank shall refer to a non-bank financial institution authorized by the BSP to engage in
quasi-banking functions and to borrow funds from more than 19 lenders through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes (as defined in
Section 95 of the NCBA as amended) for purposes of relending or purchasing of receivables
and other obligations (R.A. No. 9474, otherwise known as "Lending Company Regulation Act
of 2007", Sec. 3(c)).

(166) What is a trust entity?

A trust entity shall refer to a:
1. Bank or non-bank financial institution (NBFI), through its specifically designate business
unit to perform trust functions; and
2. Trust Corporation, authorized by the BSP to engage in trust or other fiduciary business
under Section 79 of the GBL or to perform investment management services under
section 53 of GBL (2020 MORB, Sec. 403(a)).

NATURE OF BANK FUNDS AND BANK DEPOSITS

(167) What is the nature of bank deposits?

Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans (Serrano v. Central Bank of the Philippines,
G.R. No. L-30511, February 14, 1980).

DILIGENCE REQUIRED OF BANKS

(168) What is the standard of diligence required of a bank with respect to deposit accounts?
The diligence required of banks is more than that of a good father of a family. Banks are
required to exercise the highest degree of diligence in its banking transactions (Bank of the
Philippine Islands v. Sps. Quiaoit, G.R. No. 199562, January 16, 2019).

But the same higher degree of diligence is not expected to be exerted by banks in commercial
transactions that do not involve their fiduciary relationship with their depositors (Spouses
Reyes v. Court of Appeals, G.R. No. 118492, August 15, 2001).

PROHIBITED TRANSACTIONS BY BANK DIRECTORS AND OFFICERS

(169) What are the restrictions on transactions of a bank with its directors, officers,
stockholders and their related interests (DOSRI)?
No director or officer of any bank shall, directly or indirectly, for himself or as the representative
or agent of others
1. Borrow from such bank;
 43

2. Become a guarantor, indorse or surety for loans from such bank to others; or
3. In any manner to be an obligor or incur any contractual liability to the bank (GBL, Sec.
36).

(170) What are the limitation on approved DOSRI transactions?

Transactions with DOSRI are limited by the following:
1. Arm’s Length Rule;
2. Aggregate Ceiling
3. Individual Ceiling (GBL, Sec. 36).

STIPULATION ON INTERESTS

(171) What is an escalation clause?

An escalation clause is a stipulation which provides that the rate of interest agreed upon may
be increased in the event that the applicable maximum rate of interest in increased by the
Monetary Board (2020 MORB, Sec. 305).

(172) When is such stipulation as to the increase in the interest rate valid?
Such stipulation shall be valid only if there is also a stipulation in the agreement that the rate
of interest agreed upon shall be reduced in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board (2020 MORB, Sec. 305).

(173) When does the adjustment in the rate on interest take effect?
The adjustment in the rate of interest agreed upon shall take effect on or after the effectivity
of the increase or decrease in the maximum rate of interest (2020 MORB, Sec. 305).

C. Secrecy of Bank Deposits (R.A. No. 1405, as amended,

and R.A.No.6426, as amended)

Purpose

(174) What are the purposes of R.A No. 1405?

The purposes of R.A. No. 1405 are to:
1. To encourage people to deposit their money in banking institutions; and
2. To discourage private hoarding so that the same may be properly utilized by banks in
authorized loans to assist in the economic development of the country (R.A. No. 1405,
Sec. 1).

Prohibited Acts

(175) What are the prohibited acts under R.A. No. 1405?
The following acts are prohibited by R.A. No. 1405:
1. Examination and inquiry or looking into all deposits, of whatever nature, with the banks
in the Philippines including investments in bonds issued by the Government (R.A. No.
1405, as amended, Sec. 2); and
2. Any disclosure by any official or employee of any banking institution to any unauthorized
person of any information concerning the said deposits (R.A. No. 1405, as amended by
P.D No. 1792, as amended, Sec. 3).

Deposits Covered

(176) What are deposits covered by R.A No. 1405?

 44

It covers all deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities (R.A. No. 1405 as amended, Sec 2).

The phrase "of whatever nature" in Sec. 2 of R A No. 1405 proscribes any restrictive
interpretation of deposits. R.A. No. 1405 applies not only to money which is deposited but
also to those which are invested such as in those placed under a trust agreement. To hold
that a trust account is not protected by R.A. No. 1405 would encourage private hoarding of
funds that could otherwise be invested by banks in other ventures, contrary to the policy
behind the law (Ejercito v. Sandiganbayan, G.R. Nos. 157294-95, November 30, 2006).

Foreign currency deposits are not covered, because they are governed by the Foreign
Currency Deposit Act (R.A. No. 6426, otherwise known as the Foreign Currency Deposit Act
of the Philippines, as amended, Sec. 8).

Exceptions from Coverage

(177) What are the exceptions to the law on secrecy of bank deposits under R.A. No. 1405?
(MAPIB-L)
Under R.A. No. 1405, deposits may be examined, inquired, or looked into:
1. When it is made in the course of a special or general examination of a bank and is
specifically authorized by the Monetary Board;
2. When it is made by an independent Auditor hired by the bank to conduct its regular audit
for audit purposes only for the exclusive use of the bank;
3. Upon written Permission of the depositor;
4. In cases of Impeachment; or
5. Upon order of a competent court in cases:
a. Of Bribery or dereliction of duty of public officials; and
b. Where the money deposited or invested is the subject matter of the Litigation (R.A.
No. 1405 as amended, Sec 2). The money deposited should be the very thing in
dispute (Mellon Bank, N.A. v. Magsino, G.R. No. 71479, October 18, 1990).

Garnishment of Deposits, including Foreign Deposits

(178) Why can deposit accounts be garnished without violating R.A. No. 1405?
The prohibition against examination of or inquiry into a bank deposit does not preclude its
being garnished to insure satisfaction of a judgment.

There is no real inquiry in such a case, and if the case, and if the existence of the deposit is
disclosed, the disclosure is purely incidental to the execution process (China Banking
Corporation v. Ortega, G.R. No. L-34964, January 31, 1973).

(179) When may the garnishment of foreign currency deposits be allowed?

Foreign currency deposit of a foreign transient may be garnished whenever injustice would
result, especially to a citizen aggrieved by a foreign guest. Otherwise, this would negate Art.
10 of the New Civil Code which provides that "in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and justice to prevail
(Salvacion v. Central Bank of the Philippines, G.R. No. 94723, August 21, 1997).

D. Anti-Money Laundering Act (R.A.No.9160, as amended by

R.A.No.9194, 10167, 10365, 10927, and 11521)

Policy

(180) What is the declared state policy of the Anti-Money Laundering Act? (PEE)
It is hereby declared the policy of the State:
1. To Protect and preserve the integrity and confidentiality of bank accounts;
 45

2. To Ensure that the Philippines shall not be used as a money laundering site for the
proceeds of any unlawful activity; and
3. To Extend cooperation in:
a. Transnational investigations and prosecutions of persons involved in money
laundering activities wherever committed; and
b. the implementation of targeted financial sanctions related to the financing of the
proliferation of weapons of mass destruction, terrorism, and financing of terrorism,
pursuant to the resolution of the United Nations Security Council (R.A. No. 9160,
as amended by R.A. No. 9194, 10167, 10365, 10927, and 11521 otherwise known
as the Anti-Money Laundering Act (AMLA), Sec 2).

Covered Institutions and Their Obligations

(181) Who are the covered persons under the AMLA? (BIS-D)
The covered entities or persons, natural or juridical, who are obligated to report covered and
suspicious transactions refer to the following:
1. Financial Institutions:
a. Persons supervised and/or regulated by BSP, including their subsidiaries and
affiliates, which are also covered persons, supervised and/or regulated by the BSP,
such as:
i. Banks;
ii. Quasi-banks;
iii. Trust entities;
iv. Pawnshops;
v. Non-stock savings and loan associations;
vi. Other non-bank financial institutions which under special laws are subject to BSP
supervision and/or regulation;
vii. Electronic money issuers; and
viii. Foreign exchange dealers, money changers, and remittance and transfer companies.

2. Persons supervised or regulated by the Insurance Commission (IC), such as:

i. Insurance Companies;
ii. Pre-need Companies;
iii. Insurance Agents;
iv. Insurance Brokers;
v. Professional Reinsurers;
vi. Reinsurance Brokers;
vii. Holding Company Systems;
viii. Mutual Benefit Associations; and
ix. All other persons and their subsidiaries and affiliates supervised or regulated by the IC.

3. Persons supervised or regulated by the SEC, such as:

i. Securities dealers, brokers, salesmen, investment houses and other similar persons
managing securities or rendering services as investment agents, advisors, or consultants;
ii. Mutual funds or open-end investment companies, close-end investment companies or
issuers, and other similar entities; and
iii. Other entities administering or otherwise dealing in commodities or financial derivatives
based thereon, valuable objects, cash substitutes, and other similar monetary instruments
or properties, supervised or regulated by the SEC.

4. Designated Non-Financial Businesses and Professions, such as:

a. Jewelry dealers;

5. Dealers in precious metals, and dealers in precious stones; and

6.
Company service providers, which, as a business, provide any of the following services
to third parties:
i. Acting as a formation agent of juridical persons;
 46

ii. Acting as (or arranging for another person to act as) a director or corporate secretary of a
company, a partner of a partnership, or a similar position in relation to other juridical persons;
iii.Providing a registered office, business address or accommodation, correspondence or
administrative address for a company, a partnership or any other juridical person or legal
arrangement; and
iv. Acting as (or arranging for another person to act as) a nominee shareholder
for another person.

7. Persons, including lawyers, accountants, and other professionals, who provide any of the
following services:
i. Managing of client money, securities or other assets;
ii. Management of bank, savings, securities or other assets;
iii.Organization of contributions for the creation, operation or management of companies; and
iv. Creation, operation or management of juridical persons or arrangements, and buying and
selling business entities.

8. Casinos, including internet-based casinos and ship-based casinos, with respect to their
casino cash transactions related to their gaming operations (2018 Implementing Rules
and Regulations (IRR) of the AMLA [hereinafter 2018 IRR of AMLA], Rule 4, Sec. 1);

9. Real estate developers and brokers; and

10. Offshore gaming operation, as well as their service providers, supervised, accredited or
regulated by the Philippine Amusement and Gaming Corporation (PAGCOR) or any
government agency (AMLA, Sec 3(a)).

Note: All covered persons shall register with the Anti-Money Laundering Council (AMLC)
(2018 IRR of AMLA, Rule 4, Sec. 3).

Covered Transactions

(182) What are the covered transactions of the AMLA? (CCR)

Covered Transaction” refers to:
1. A transaction in Cash or other equivalent monetary instrument in excess of P500,000
within 1 banking day;
2. For Casinos, including internet-based casinos and ship-based casinos, with respect to
their casino cash transactions related to their gaming operations, a single casino cash
transaction involving an amount in excess of P5,000,000 or its equivalent in any other
currency.
3. For Real estate developers and brokers, a single cash transaction involving an amount
in excess of P7,500,000 or its equivalent in any other currency (AMLA, Sec. 3(b)).

Suspicious Transactions

(183) What are the suspicious transactions covered by AMLA? (No-CASt-DUS)

“Suspicious Transactions” are transactions with covered institutions, regardless of the
amounts involved, where any of the following circumstances exist:
1. There is No underlying legal or trade obligation, purpose, or economic justification;
2. The Client is not properly identified;
3. The Amount involved is not commensurate with the business or financial capacity of the
client;
4. Taking into account all known circumstances, it may be perceived that the client’s
transaction is Structured in order to avoid being the subject of reporting requirements
under the AMLA;
5. Any circumstance relating to the transaction which is observed to Deviate from the profile
of the client and/or the client’s past transactions with the covered person;
6. The transaction is in any way related to an Unlawful activity or any money laundering
activity or offense that is about to be, is being, or has been committed; or
 47

7. Any transaction that is Similar or analogous to any of the foregoing (AMLA, Sec. 3(b-
1)).

Safe Harbor Provision

(184) What is the safe harbor provision?

The safe harbor provision provides that no administrative, criminal or civil proceedings shall
lie against any person for having made a covered transaction report in the regular
performance of his duties and in good faith, whether or not such reporting results in any
criminal prosecution under the AMLA or any other Philippine law (AMLA, Sec. 9(c)).

Money Laundering (How Committed; Unlawful Activities or Predicate Crimes)

(185) How is money laundering committed? (T-C3AP)

Money laundering is committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity:
1. Transacts said monetary instrument or property;
2. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
3. Conceals or disguises the true nature, source, location, disposition, movement or
ownership of or rights with respect to said monetary instrument or property;
4. Attempts or Conspires to commit money laundering offenses referred to in numbers (1)
(2) and (3);
5. Aids, abets, assists in or counsels the commission of the money laundering offenses
referred to in numbers (1), (2) or (3) above; and
6. Performs or fails to perform any act as a result of which he facilitates the offense of money
laundering referred to in numbers (1), (2) or (3) above (AMLA, Sec. 4).

Note: Money laundering is also committed by any covered person who, knowing that a
covered or suspicious transaction is required under the AMLA to be reported to the AMLC,
fails to do so (AMLA, Sec. 4).

(186) What are the unlawful activities or predicate crimes subject to AMLA?
Unlawful activity refers to any act or omission or series or combination thereof involving or
having direct relation to the following:
1. Kidnapping for Ransom under Art. 267 of Act No. 3815 (RPC), as amended;
2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of the Comprehensive Dangerous
Drugs Act of 2002 (R.A. No. 9165);
3. Section 3 paragraphs B, C, E, G, H and I of the Anti-Graft and Corrupt Practices Act (R.A.
No. 3019);
4. Plunder (R.A. No. 7080 as amended);
5. Robbery and Extortion under Arts. 294, 295, 296, 299. 300, 301 and 302 of the RPC, as
amended;
6. Jueteng and Masiao punished as illegal gambling (P.D. No. 1602);
7. Piracy on the High Seas under the RPC and P.D. No. 532;
8. Qualified Theft under Art. 310 of the RPC, as amended;
9. Swindling under Art. 315 and Other Forms of Swindling under Art. 316 of the RPC, as
amended;
10. Smuggling punished under the Tariff and Customs Code (R.A. No. 455, and R.A. No.
1937, as amended);
11. Violations of the Electronic Commerce Act of 2000 (R.A. No. 8792);
12. Hijacking and other violations under the Anti-Hijacking Law (R.A. No. 6235); Destructive
Arson and Murder, as defined under the RPC, as amended;
13. Terrorism and Conspiracy to Commit Terrorism as defined and penalized under Sections
3 and 4 of R.A. No. 9372;
14. Financing of Terrorism under Section 4, and offenses punishable under Sections 5, 6, 7
and 8 of the Terrorism Financing Prevention and Suppression Act of 2012 (R.A. No.
10168);
15. Bribery under Arts. 210, 211 and 211-A of the RPC, as amended, and Corruption of Public
Officers under Art. 212 of the RPC, as amended;
 48

16. Frauds and Illegal Exactions and Transactions under Arts. 213, 214, 215 and 216 of the
RPC, as amended;
17. Malversation of Public Funds and Property under Arts. 217 and 222 of the RPC, as
amended;
18. Forgeries and Counterfeiting under Arts. 163, 166, 167, 168, 169 and 176 of the RPC,
as amended;
19. Violations of Sections 4 to 6 of the Anti-Trafficking in Persons Act of 2003 (R.A. No.
9208);
20. Violations of Sections 78 to 79 of Chapter IV, of the Revised Forestry Code of the
Philippines, as amended (P.D. No. 705);
21. Violations of Sections 86 to 106 of Chapter VI, of the Philippine Fisheries Code of 1998
(R.A. No. 8550);
22. Violations of Sections 101 to 107, and 110 of the Philippine Mining Act of 1995 (R.A.
No. 7942);
23. Violations of Section 27(c), (e), (f), (g) and (i), of the Wildlife Resources Conservation
and Protection Act (R.A. No. 9147);
24. 24. Violation of Section 7(b) of the National Caves and Cave Resources
Management Protection Act (R.A. No. 9072);
25. Violation of the Anti-Carnapping Act of 2002, as amended (R.A. No. 6539);
26. Violations of Sections 1, 3 and 5 of the decree Codifying the Laws on Illegal/Unlawful
Possession, Manufacture, Dealing in, Acquisition or Disposition of Firearms,
Ammunition or Explosives (P.D. No. 1866 as amended);
27. Violation of the Anti-Fencing Law (P.D. No. 1612);
28. Violation of Section 6 of the Migrant Workers and Overseas Filipinos Act of 1995 (R.A.
No. 8042 as amended by R.A. No. 10022);
29. Violation of the Intellectual Property Code of the Philippines (R.A. No. 8293);
30. Violation of Section 4 of the Anti-Photo and Video Voyeurism Act of 2009 (R.A. No.
9995);
31. Violation of Section 4 of the Anti-Child Pornography Act of 2009 (R.A. No. 9775);
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of the Special
Protection of Children Against Abuse, Exploitation and Discrimination (R.A. No. 7610);
33. Fraudulent practice and other violations under The Securities Regulation Code of 2000
(R.A. No. 8799);
34. Violation of Section 9 (a)(3) of Strategic Trade Management Act (R.A. No. 10697), in
relation to the proliferation of weapons of mass destruction and its financing pursuant to
United Nations Security Council Resolution Numbers 1718 of 2006 and 2231 of 2015;
35. Violation of Section 254 of Chapter II, Title X of the National Internal Revenue Code of
1997, as amended, where the deficiency basic tax due in the final assessment is in
excess of P25,000,000 per taxable year, for each tax type covered and there has been
a finding of probable cause by the competent authority: Provided, further, That there
must be a finding of fraud, willful misrepresenting or malicious intent on the part of the
taxpayer: Provided, finally, That in no case shall the AMLC institute forfeiture
proceedings to recover monetary instruments, property or proceeds representing,
involving, or relating to a tax crime, if the same has already been recovered or collected
by the BIR in a separate proceeding; and
36. Felonies and offenses of a similar nature that are punishable under the penal laws of
other countries (AMLA, Sec. 3 (i)).

Note: In determining whether or not a felony or offense punishable under the penal laws of
other countries is “of a similar nature” so as to constitute an unlawful activity under the AMLA,
it is sufficient that both the Philippines and the other jurisdiction criminalize the conduct or
activity underlying the offense, regardless of whether both countries place the offense within
the same category, or denominate the offense under the same nomenclature (2018 IRR of
AMLA, Rule 3, Sec. 2).

Anti-Money Laundering Council and its Functions

(187) Who compose the members of the Anti-Money Laundering Council (AMLC)?
The Anti-Money Laundering Council shall be composed of the:
1. Governor of the Bangko Sentral ng Pilipinas as Chairman; and
2. Commissioner of the Insurance Commission and
3. Chairman of the SEC, as members (R.A. No. 9160 as amended by R.A. No. 11521, Sec.
7).
 49

(188) What are the functions of the AMLC?

The AMLC shall act unanimously in the discharge of its functions:
1. to require, receive, and analyze covered or suspicious transactions reports from covered
persons;
2. to issue orders addressed to the appropriate Supervising Authority or the covered
institution to determine the true identity of the owner of any monetary instrument or
property subject of a covered transaction report or request for assistance from a foreign
State, or believed by the Council, on the basis of substantial evidence, to be, in whole or
in part, wherever located, representing, involving, or related to, directly or indirectly, in
any manner or by any means, the proceeds of an unlawful activity;
3. to institute civil forfeiture proceedings and all other remedial proceedings through the
Office of the Solicitor General;
4. to cause the filing of complaints with the Department of Justice or the Ombudsman for
the prosecution of money laundering offenses;
5. to investigate suspicious transactions and covered transactions deemed suspicious after
determination of the AMLC, money laundering activities, and other violations of this Act;
6. to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument
or property alleged to be laundered, proceeds from, or instrumentalities used in or
intended for use in any unlawful activity;
7. to implement such measures as may be necessary and justified under this Act to
counteract money laundering;
8. to receive and take action in respect of, any request from foreign states for assistance in
their own anti-money laundering operations provided in this Act;
9. to develop educational programs on the pernicious effects of money laundering, the
methods and techniques used in money laundering, the viable means of preventing
money laundering and the effective ways of prosecuting and punishing offenders;
10. to enlist the assistance of any branch, department, bureau, office, agency or
instrumentality of the government, including GOCCs, in undertaking any and all anti-
money laundering operations, which may include the use of its personnel, facilities and
resources for the more resolute prevention, detection and investigation of money
laundering offenses and prosecution of offenders;
11. to impose administrative sanctions for the violation of laws, rules, regulations and orders
and resolutions issued pursuant thereto;
12. to require the Land Registration Authority (LRA) and all its Registries of Deeds (RD) to
submit to the AMLC, reports on all real estate transactions involving an amount in excess
of P500,000.00 within 15 days from the date of registration of the transaction, in a form
to be prescribed by the AMLC. The AMLC may also require the LRA and all its RD to
submit copies of relevant documents of all real estate transactions;
13. in the conduct of its investigation, the AMLC shall apply for the issuance of a search and
seizure order with any competent court;
14. in the conduct of its investigation, the AMLC shall apply for the issuance of subpoena ad
testificandum and/or subpoena duces tecum with any competent court;
15. to implement targeted financial sanctions in relation to proliferation of weapons of mass
destruction and its financing, including ex parte freeze, without delay, against all funds
and other assets that are owned and controlled, directly or indirectly, including funds and
assets derived or generated therefrom, by individuals or entities designated and listed
under United Nations Security Council Resolution Numbers 1718 of 2006 and 2231 of
2015 and their successor resolutions as well as any binding resolution of the Security
Council; and
16. to preserve, manage or dispose assets pursuant to a freeze order, asset preservation
order, or judgment of forfeiture: Provided, however, That pending their turnover to the
national government, all expenses incurred in relation to the duties herein mentioned
shall be deducted from the amount to be turned over to the national government (R.A.
No. 9160 as amended by R.A. No. 11521, Sec. 7).

Authority to Inquire into Bank Deposits

(189) When can the AMLC inquire into bank deposits?

As a general rule, the AMLC may inquire into or examine any particular deposit or investment,
including related accounts, with any banking institution or non-bank financial institution upon
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order of any competent court based on an ex parte application in cases of violations of this
Act, when it has been established that there is probable cause that the deposits or
investments, including related accounts involved, are related to an unlawful activity as defined
in Section 3(i) or a money laundering offense under Section 4 (AMLA, Sec. 10).

By authority of the AMLC, the AMLC Secretariat shall file before the Court of Appeals, through
the OSG, an ex parte application for the Issuance of Bank Inquiry Order to examine or inquire
into any particular deposit or investment account that is related an unlawful activity or money
laundering offense (2018 IRR of AMLA, Rule 11, Sec. 1, 1.1). A court order ex parte must be
obtained before the AMLC can inquire into the related accounts (2018 IRR of AMLA, Rule 11,
Sec. 1, 1.2).

Note: No prior criminal charge, pendency of a case, or conviction for an unlawful activity or
money laundering offense is necessary for the filing or the resolution of an application for
issuance of bank inquiry order (2018 IRR of AMLA, Rule 11, Sec. 1, 1.3).

Freezing of Monetary Instrument or Property

(190) What is a freeze order?

“Freeze Order” refers to a provisional remedy aimed at blocking or restraining monetary
instruments or properties in any way related to an unlawful activity, as herein defined, from
being transacted, withdrawn, deposited, transferred, removed, converted, concealed, or
otherwise moved or disposed without affecting the ownership thereof (2018 IRR of AMLA,
Rule 2, Sec. 1(mm)).

A freeze order is an extraordinary and interim relief issued by the Court of Appeals to prevent
the dissipation, removal, or disposal of properties that are suspected to be the proceeds of,
or related to, unlawful activities as defined in Section 3 (i) of the AMLA (Ligot v. Republic, G.R.
No. 176944, March 6, 2013).

Who has the power to freeze accounts?

The Court of Appeals may issue a freeze order which shall be effective immediately, for a
period of 20 days upon a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in any way related to an
unlawful activity as defined in Section 3(i) (AMLA, Sec. 10).

Note: The court should act on the petition to freeze within 24 hours from filing of the petition.
If the application is filed a day before a nonworking day, the computation of the 24-hour period
shall exclude the nonworking days (AMLA, Sec. 10).

(191) When can the AMLC issue a freeze order ex parte?

For purposes of implementing targeted financial sanctions in relation to proliferation of
weapons of mass destruction and its financing, the AMLC shall have the power to issue, ex
parte, an order to freeze without delay.

The freeze order shall be effective until the basis for its issuance shall have been lifted. During
the effectivity of the freeze order, the aggrieved party may, within twenty 20 days from
issuance, file with the Court of Appeals a petition to determine the basis of the freeze order
according to the principle of effective judicial protection: Provided, That the person whose
property or funds have been frozen may withdraw such sums as the AMLC determines to be
reasonably needed for monthly family needs and sustenance including the services of counsel
and the family medical needs of such person (AMLA, Sec. 10).

Note: The AMLC, if circumstance warrant, may initiate civil forfeiture proceedings to preserve
the assets and to protect it from dissipation (AMLA, Sec. 10).

(192) What are the requirements for the issuance of freeze orders? (CAT)
The following are the requirements for the issuance of a freeze order:
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1. No prior Criminal charge, pendency of a case, or conviction for an unlawful activity or

ML offense is necessary for the commencement or the resolution of a petition for freeze
order;
2. No Asset shall be frozen to the prejudice of a candidate for an electoral office during an
election period; and
3. No court shall issue a Temporary restraining order or a writ of injunction against any
freeze order, except the Supreme Court (2018 IRR of AMLA, Rule 10, Sec. 1).

III. INSURANCE

A. BASIC CONCEPTS

ELEMENTS OF AN INSURANCE CONTRACT

(193) Juanita applied for healthcare coverage with Sunnies. During the period of coverage,
Juanita suffered a heart attack and tried to claim benefits under the healthcare
agreement. Sunnies denied the claim on the ground that the agreement was void due
to concealment of Juanita’s medical history. Juanita on the other hand argues that the
incontestability clause applies, hence the concealment does not make the agreement
void. Sunnies claim that the healthcare agreement is not an insurance contract, and
therefore is not covered by the “incontestability clause” under the Insurance Code. Is
the contention of Sunnies valid?
NO. 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. The elements of an insurance contract are:
1. Insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. 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;
5. In consideration of the insurer’s promise, the insured pays a premium

In this case, the agreement meets all the elements of being an insurance contract. Juanita’s
insurable interest was her own health, the health care agreement was in the nature of non-
life insurance, which is primarily a contract of indemnity, and once the member incurs hospital,
medical or any other expense arising from sickness, injury or other stipulated contingent, the
health care provider must pay for the same to the extent agreed upon under the contract.
(Philamcare Health v. CA, G.R. No. 125678, March 18, 2002)

CHARACTERISTICS/NATURE OF INSURANCE CONTRACTS

(194) What are the characteristics of an insurance contract?

A contract of insurance has the following characteristics: (CCCVAEEPUF)
1. Consensual – Perfected by the meeting of the minds of the parties. Delivery of the policy
does not give rise to the contract in the absence of an agreement between the parties.
2. Contract of indemnity – There is an exchange of value for value, particularly in property
insurance.
3. Conditional – Subject to conditions the principal one of which is the happening of the
event insured against
4. Voluntary – It is not compulsory and the parties may incorporate such terms and
conditions as they may deem convenient which will be binding provided they are not
against the law or public policy
5. Aleatory – Depends upon some contingent event. There is an element of risk.
6. Executed – As to the insured after the payment of the premium
7. Executory – As to the insurer as it is not executed until payment for a loss
 52

8. Personal – Each party in the contract have in view the character, credit and conduct of
the other.
9. Uberrimae Fidae – It is one entered into in perfect good faith. Thus, both parties must not
only perform their obligations in good faith but they must also avoid material concealment
or misrepresentations. The caveat emptor rule also applies. Good faith is also expected
of the insurer.
10. Formal – In a sense, it is formal and real, as a policy is required to be issued, and the
premium must first be paid (except in certain cases of life insurance). As for fire insurance,
there is “cash and carry”: payment of the premium is a 4th requisite of the contract.

CLASSES OF INSURANCE
a) Marine
(195) Alohamora Shipment Inc. has a vessel “Superferry” which was insured with Onai for
USD 8,000,000.00. In the event that Superferry is totally gutted by fire with pervasive
damage, when may Alohamora claim for the total constructive loss from Onai under
the marine insurance policy?
Alohamora can claim for total constructive loss if it is proven that the damage to the ship is
more than ¾ of the total value of the policies. In marine insurance, a constructive total loss
occurs under any conditions in Section 139 of the Insurance Code such that 1) more than
three-fourths thereof in value is actually lost or would have to be expended to recover it from
peril; and 2) if it is injured to such an extent as to reduce its value more than three-fourths.
(Keppel Cebu Shipyard vs. Pioneer Insurance G.R. Nos. 180880-81 | 2009-09-25)

(196) What is a marine insurance?

Marine insurance includes the following:
1. Loss / Damage (L/D) to:
a. Vessels, craft, aircraft, vehicles, goods, etc. in respect to, appertaining to, or in
connection with any and all risks or perils of navigation, transit or transportation or
while being assembled, created etc. while awaiting shipment and during delays,
storage, transshipment, or reshipment incident thereto, including war risks, and all
personal property floater risks;
b. Persons/property in connection with or appertaining to marine, inland marine, transit
or transportation insurance, including liability for loss or damage arising out of or in
connection with the construction repair, operation, maintenance, or use of the
subject matter of such insurance, except those pertaining to life life insurance, or
surety bonds, nor insurance against loss by reason of bodily injury to any person
arising out of ownership, maintenance or use of automobiles;
c. Precious stones, jewels, precious metals, etc. in the course of transportation or
otherwise; and
d. Bridges, tunnels, etc. and other instrumentalities of transportation and
communications and other aids to navigation, excluding buildings, their furniture and
furnishings, fixed contents and supplied held in storage.
2. Marine protection and indemnity insurance (P and II) which is insurance against legal
liability:
a. For loss, or damage or expense to property incident to ownership, operation,
chartering, maintenance, use, repair, or construction of vessels, craft, or
instrumentality in use of ocean or inland waterways, or
b. For personal injury, illness or death, or loss of or damages to the property of another
person. (Section 101, Insurance Code, as amended by R.A. No. 10607)

(197) What are the kinds of losses in marine insurance?

1. Total – may be actual or constructive; (Section 131, Insurance Code as amended by
R.A. No. 10607)
2. Partial (that which is not total). (Section 129-130, Insurance Code as amended by R.A.
No. 10607)

(198) What are the causes of actual total loss?

1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking, or by being broken up;
 53

3. Any damage to the thing which renders it valueless to the owner for the purpose for
which he held it; or
4. Any other event which effectively deprives the owner of the possession, at the port of
destination, of the thing insured. Section 132

(199) What is a constructive total loss?

A constructive total loss is one which gives to a person insured a right to abandon, under
Section 133 of the Insurance Code.

(200) What is the measure of indemnity in marine insurance?

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. [Section 158, Insurance Code as amended by R.A. No. 10607]

In case of actual total loss, the insured is entitled to payment in actual total loss, and there is
no need for notice of abandonment. [Section 137,

In case of partial loss the insurer is liable only for a proportion of the amount insured as it
bears to the interest insured. This is known as the principle of co-insurance. [Section 159,

(201) When there is partial loss of the ship or its equipment:

The old materials are to be applied to the payment of new ones.
Unless stipulated, the marine insurer is liable:
1. for only 2/3 of the remaining cost of repairs
2. but anchors are to be paid in full.

In a valued marine policy of freightage cargo, if part of the subject is exposed to risk, for
example if only part of the cargo is shipped, then the valuation applies in proportion to such
part.[Section 159, Insurance Code as amended by R.A. No. 10607]

Where profits are separately insured in a contract of marine insurance, the insured is entitled
to recover, in case of loss, a proportion of such profits equivalent to the proportion which the
value of the property lost bears to the value of the whole. [Section 160,

When profits are valued and insured:

• The loss is conclusively presumed from loss of property from which they arise.
• Their valuation fixes their amount. [Section 160, Insurance Code as amended by R.A. No.
10607].

(202) Panama hired Transpork to transport its 10,300 pieces of wooden tiles by sea to Manila
and insured it against loss for Php 1 Million with Assimo Corporation. The tiles were
transported in 2 separate vessels. During the voyage, fate turned sour and the seas
and strong winds caused damage to the vessel carrying the tiles, half of which was
lost. Panama demanded payment but Assimo refused on the ground that its liability is
only for TOTAL LOSS. Can Assimo be held liable under its marine insurance policy
based on the theory of a divisible contract of insurance and consequently a
constructive total loss?
NO. Whether a contract is entire or severable is a question of intention to be determined by
the language employed by the parties. Here, the subject matter insured was the entire
shipment of 10,300 pieces of wooden tiles. The fact that the logs were loaded on two different
barges did not make the contract several and divisible as to the items insured. More
importantly, the insurer's liability was for "total loss only."
 54

(203) Can Panama claim for constructive total loss?

NO. The logs having been insured as one inseparable unit, the correct basis for determining
the existence of constructive total loss is the totality of the shipment of logs. Since half of it
was lost, the loss does not exceed 75% of the value, hence, it cannot be said to have
sustained constructive total loss.

FIRE
(204) What is fire insurance?
Fire insurance includes insurance against loss by:
1. fire,
2. lightning,
3. windstorm,
4. tornado,
5. earthquake.
6. And other allied risks.
If such risks are stipulated in the fire insurance policy or in separate policies. (Section 169,
Insurance Code as amended by R.A. No. 10607)

(205) Mr. A took out a policy to insure the apartment building he owned and renting out
against fire. One of the excepted risks was fire caused by gas explosions. 2 weeks after
the policy was delivered, the building was burned down. Decide the following with
reasons.
May A recover if it was discovered that the fire was caused by A’s business competitor
who set gasoline alight in the parking area of the building which resulted in explosions
of nearby cars?
Yes. Recovery under the insurance contract is allowed if the cause of the loss was either the
proximate or the immediate cause, as long as an excepted peril, if any, was not the proximate
cause of the loss (INSURANCE CODE, Sec. 86). In this case, although gas explosions were
an excepted risk, they were merely the immediate cause of the fire and not the proximate
cause. The proximate cause of the fire was the competitor’s act of arson, which is not an
excepted risk. Thus, A may still recover.

(206) May A recover if the fire was caused by an explosion in the kitchen of the restaurant
next door which had uncontrollably spread before firefighters arrived?
No, A cannot recover on the policy. The insurer is not liable in case of a loss the proximate
cause of which is an excepted peril, although the immediate cause of the loss was a peril
which was not excepted (INSURANCE CODE, Sec. 88). Clearly, the proximate cause of the
fire was the explosion in the kitchen of the restaurant next door, which under the policy entered
into by the parties was an excepted risk.

(207) It was discovered that because he saw the explosion in the restaurant next door, A,
who was cooking, quickly ran out of his apartment in the building without turning off
his stove. The fire fighters arrived before the fire wall between the two buildings burned
and it seems that the fire which gutted A’s building resulted from his own stove. May
he recover?
Yes, A can recover on the policy. It is a basic rule in insurance that carelessness and
negligence of the insured or his agents is not a defense on the part of the insurer (FGU
Insurance Corporation v. CA, G.R. No. 137775, March 31, 2005). Mere negligence on the part
of A will not prevent his recovery under the insurance policy. The law merely prevents recovery
when the loss is caused by the willful acts of the insured or through the connivance of the
insured with others (INSURANCE CODE, Sec. 89)

(208) What is the measure of indemnity in fire insurance?

If there is no valuation in policy (open policy), the measure of indemnity is the replacement
cost at the commencement of the fire. [Section 173, Insurance Code as amended by R.A. No.
10607].
 55

If there is valuation (valued policy), then the same rules as in marine insurance is applied,
The valuation stated in the policy is conclusive between the parties.

CASUALTY
(209) Wingardium Bank recently had losses due to highway robbery committed against it. It
is now considering acquiring a policy issued by Golden Snitch Surety Co. Inc (Golden).
What kind of policy should it get to protect itself from losses arising from robbery?
Wingardium Bank can get a casualty insurance. Under Section 174, casualty insurance is an
insurance covering loss or liability arising from accident or mishap, excluding certain types of
loss which by law or custom are considered as falling exclusively within the scope of insurance
such as fire or marine. It includes, but is not limited to, employer's liability insurance, public
liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft
insurance, personal accident and health insurance as written by non-life insurance
companies, and other substantially similar kinds of insurance.

SURETYSHIP
(210) What is a contract of suretyship?
Under SEC. 177, a contract of suretyship is an agreement whereby a party called the surety
guarantees the performance by another party called the principal or obligor of an obligation
or undertaking in favor of a third party called the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by any company by virtue of and under the
provisions of Act No. 536, as amended by Act No. 2206. For regulatory purposes, a contract
of suretyship shall be deemed to be an insurance contract within the meaning of the Insurance
Code when made by a surety who or which, as such, is doing an insurance business.
(INSURANCE CODE, Sec. 2)

(211) What is the extent of liability of surety?

1. solidary with the obligor;
2. but limited to the amount of the bond or the surety contract.

(212) IPAMS Corporation began recruiting registered nurses for work deployment in the
United States. In an agreement, CB Insurance Corporation, an insurance corporation
engaged in the business of insurance, will provide surety bonds and the premiums
would be paid by IPAMS on behalf of the nurse applicants. Is the agreement an
insurance contract?
Yes, a contract of suretyship shall be deemed to be an insurance contract only if made by a
surety who or which, as such, is doing an insurance business (INSURANCE CODE, Sec. 2).
In this case, the surety, CB Insurance Corporation is an insurance company engaged in the
business of insurance. The subject agreement of the parties indubitably contemplates a surety
agreement, which is governed mainly by the Insurance Code, considering that a contract of
suretyship shall be deemed an insurance contract within the contemplation of the Insurance
Code if made by a surety which is doing an insurance business. (Industrial Personnel and
Management Services, Inc. v. Country Bankers Insurance Corp., G.R. No. 194126; October
17, 2018

(213) Delta Inc. sold jewelries to Alpha. To secure the payment, Delta required Alpha to issue
surety bonds. Sigma issued two surety bonds in behalf of Alpha. Alpha defaulted in
payment and Delta filed a complaint for collection of sum of money against Sigma.
Sigma, however, denied liability because the checks issues for the premiums were
dishonored and that the bonds were merely to guarantee payment of its principal’s
obligation, and thus, excussion is necessary. Is the contention of Sigma correct?
NO. Sec. 177. The surety is entitled to payment of the premium as soon as the contract of
suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or
bonding shall be valid and binding unless and until the premium therefor has been paid,
except where the obligee has accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been paid by the obligor to the
surety. In this case, Delta had accepted the bond, hence the bond is valid and enforceable.
(Philippine Pryce Assurance vs. Court of Appeals, G.R. No. 107062 | 1994-02-21)
 56

LIFE
(214) Vicky and her children were the legitimate family of Lomen, who has an illegitimate
family. Lomen has a life insurance policy under Sunnies, which has Eva, the concubine,
and their children, as the beneficiaries. Lomen died and the legitimate family is
claiming for the proceeds from the insurance policy. How should the proceeds from
the life insurance policy be awarded to claimants?
As a general rule, those who are named beneficiaries in the insurance policy will be entitled
to the proceeds (INSURANCE CODE, Sec. 53). Since Vicky and their legitimate children are
not beneficiaries in the policy, they are not entitled to the proceeds thereto.
On the other hand, Eva, despite being named as beneficiary, is disqualified from being one
for falling under the prohibition of Article 739.
Because no legal proscription exists in naming as beneficiaries the children of illicit
relationships by the insured, the shares of Eva in the insurance proceeds, must be awarded
to the said illegitimate children, the designated beneficiaries, to the exclusion of the legitimate
family. (Heirs of Maramag vs. Maramag, G.R. No. 181132 | 2009-06-05)

MICROINSURANCE
(215) What is a microinsurance?
Microinsurance is a financial product or service that meets the risk protection needs of the
poor where:
1. The amount of contributions, premiums, fees or charges computed on a daily basis,
does not exceed 7.5% of the current daily minimum wage rate for non-agricultural
workers in Metro Manila; and
2. The maximum sum of guaranteed benefits is not more that 1,000 times of the current
daily minimum wage for non-agricultural workers in Metro Manila. (Section 187,
Insurance Code as amended by RA 10607)

(216) Who may engage in microinsurance?

Insurance companies or mutual benefit associations may engage in the business of
microinsurance provided they possess all requirements prescribed by the Commissioner, who
shall issue rules and regulations governing microinsurance. (Section 188, Insurance Code as
amended by RA 10607)

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

(217) What is a compulsory motor vehicle liability insurance?
It is primarily intended to provide compensation for the death or bodily injuries suffered by
innocent third parties or passengers as a result of the negligent operation and use of motor
vehicles. The victims and/or their dependents are assured of immediate financial assistance,
regardless of the financial capacity of motor vehicle owners.

(218) What are the risks covered under CMVLI?

Motor vehicle insurance covers two risks which may be insured against:
1. Passenger and third-party liability for death or bodily injuries; and
2. damage to property arising from motor vehicle accidents. (See Section 386(f),
Insurance Code as amended by R.A. No. 10607)

COMPULSORY INSURANCE COVERAGE FOR AGENCY-HIRED WORKERS

(219) What is the Compulsory Insurance Coverage for Agency-Hired Workers?
The Agency-Hired OFW Compulsory Insurance is an insurance mechanism made available
by the law to provide insurance protection for the OFWs. It is mandatory for agency-hired
OFWs but it is not mandatory for direct-hired, name-hired, or re-hired OFWs. However if
interested, they can also avail of this insurance. (Department of Migrant Workers, Guidelines
on Compulsory Insurance Coverage for Agency-Hired Workers)
 57

INSURABLE INTEREST
(220) What can be the subject matter of insurable interest?
The following can be the subject matter of insurable interest:
1. The life and health of:
a. Himself, his spouse, and his children;
b. Any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest in;
c. 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. Any person upon whose life any estate or interest vested in him depends
(INSURANCE CODE, Sec.10).
2. 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 (INSURANCE
CODE, Sec.13). It 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 (INSURANCE CODE, Sec. 14).

(221) May a Filipino member of the Moro Islamic Liberation Front (MILF) or its breakaway
group, the Abu Sayyaf, be insured with the foreign insurance company licensed to do
business in the Philippines?
YES. A member of the said groups may be insured with a company licensed to do business.
The prohibition provided by the law as to who may not be insured only applies to a public
enemy (Sec. 7, INSURANCE CODE). A public enemy is a citizen or national of a country with
which the Philippines is at war (Filipinas Compania De Seguros v Christern Huenefeld and
Co., Inc. G.R. No. L2294, May 25, 1951). Such member of the said groups is not a citizen nor
national of another country, but of the Philippines.

(222) Mr. A and Ms. B met in Phuket, Thailand. Immediately, they fell in love with each other
and got married soon after. They have been cohabiting blissfully as husband and wife,
but they did not have any offspring. As the years passed by, A decided to take out an
insurance on B’s life for P1M with him (A) as sole beneficiary, given that he did not
have a steady source of income and he always depended on B both emotionally and
financially. During the term of the insurance, B died of what appeared to be a
mysterious cause so that Carlo immediately requested for an autopsy to be conducted.
It was established that B died of testicular cancer. It seems that B was a transsexual all
along—a fact unknown to A. Can A claim the insurance benefit?
Yes, A can claim the insurance benefit. Although A’s insurable interest as the “husband” in a
void marriage is questionable, the law expressly provides that every person has an insurable
interest in the life and health of any person on whom he depends wholly or in part for support
(INSURANCE CODE, Sec. 10). Moreover, insurable interest in the life of the person only
needs to exist at the time the policy takes effect and need not exist at the time of the loss
(INSURANCE CODE, Sec. 19). Thus, the subsequent knowledge of A, upon the death of B,
that the latter is a transsexual, and thus was not his wife, did not destroy the insurable interest
he had on the life of B when he took out the policy.

(223) What is the rule on the insurable interest on a mortgaged property?

As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be one policy, or each may take out a
separate policy covering his interest, either at the same or at separate times (Geagonia v. CA,
G.R. No. 114427 February 6, 1995).

(224) May a lessor recover proceeds from the property insurance of the lessee over the
merchandise and goods inside the leased premises?
 58

No, the lessor cannot recover from the property insurance for their lack of insurable interest
in the goods and merchandise. The insurer cannot be compelled to pay the proceeds of the
fire insurance policy to a person who has no insurable interest in the property insured

(225) If the lease agreement has a provision on automatic assignment or transfer to the
lessor of the property insurance over the leased premises or effects placed therein,
can the lessor recover from the same insurance over the merchandise and goods
inside the premises?
No. The automatic assignment of the policy is void for being contrary to law and/or public
policy. The assignment does not negate the fact that the lessor does not have an insurable
interest over the merchandise or goods insured. (Sps. Cha v. Court of Appeals, G.R. No.
124520, August 18, 1997)

(226) JLO entered into a lease agreement with JCO for the lease of motor vehicles. Can JLO
insure the leased properties?
Yes, JLO as a lessee has an insurable interest in the motor vehicles leased. The measure of
an insurable interest in property is the extent to which the insured might be damnified by loss
or injury thereof (INSURANCE CODE, Sec 17). It cannot be denied that JLO will be directly
damnified in case of loss, damage, or destruction of any of the properties leased. (V. Ong Lim
Sing Jr. vs. FEB Leasing etc G.R. No. 168115 | 2007-06-08).

(227) N entered into a contract for the purchase of certain office supplies. The goods were
shipped. While in transit, the goods were insured by N. However, the goods were lost
before N was able to pay the premium in full. In the action to claim, the insurer argued
that as N had not received the goods, she had no interest thereon. Moreover, the
insurer invoked the cash and carry rule. Does she have an insurable interest over the
goods even before delivery of the same to her? Explain.
Yes, N has an insurable interest over the goods. The contract of sale was already perfected
and N had acquired an interest on the goods although they are still to be delivered
(INSURANCE CODE, Sec. 14).

Double Insurance and Overinsurance

(228) X borrowed money from CCC Bank. As security, she mortgaged her house and lot in
favor of the bank. X then insured her house from fire. The bank also got the house
insured. 1. Is there double insurance? Explain your answer.
No, there is no double insurance. Double insurance exists where the same person is insured
by several insurers separately with respect to the same subject and interest (INSURANCE
CODE, Sec. 95). In this case, the insurable interest of X in the house is based on her
ownership of said house while the insurable interest of the bank is based on its interest as
mortgagee of the property.

(229) In case of damage, how much can X and CCC bank recover, respectively?
If X obtained an open policy then she could claim an amount corresponding to the extent of
the damage based on the value of the house determined as of the date the damaged occurred,
but not to exceed the face value of the insurance policy; however, if she obtained a valued
policy then she could claim an amount corresponding to the extent of the damage based on
the agreed upon valuation of the house (INSURANCE CODE, Sec. 60 and Sec. 61). As for
CCC Bank, it could claim an amount corresponding to the extent of the damage but not to
exceed the amount of the loan it extended to X or so much thereof as may remain unpaid.

(230) Terrazas de Patio Verde, a condominium building, has a value of Php50 Million. The
owner insured the building against fire with three (3) insurance companies for the
following amounts:
Northern Co. – Php 20 Million; Southern Co. – Php 30 Million; Eastern Insurance Corp
– Php 50 Million
 59

Is the taking of insurance for the same building with three (3) insurers allowed by law?
Discuss.

Yes, taking out insurance covering the same property, same insurable interest and same risk
with three insurance companies is double insurance which is recognized as valid by the law
(INSURANCE CODE, Sec. 93). Double insurance is not prohibited by the code per se. An
“other insurance clause” in a policy would only require disclosure of the subsistence of multiple
policies with several insurers as a measure of protection for the insurers but does not
necessarily prohibit double insurance (American Home Assurance Co. v. Chua, G.R. No.
130421, June 28, 1999)

(231) The building was totally razed by fire. If the owner decides to claim all P50Million from
Eastern Insurance Corp. only, will the claim prosper? Explain.
Yes, in case of double insurance, the insured, unless the policy otherwise provides, may claim
payment from the insurers as he may select, up to the amount for which the insurers are
severally liable under their respective contracts (INSURANCE CODE, Sec. 96). Thus, the
insured can recover from P50 Million from Eastern Insurance Corp. as provided under their
agreement except that Eastern Insurance Corp. shall be ultimately liable only to the extent of
its proportional coverage with respect to the total insurance covering the property. Since
Eastern insured the property up to 50% of the total coverage, it is liable for only 50% of the
total actual loss. Payment by Eastern of the P50 Million claim will give it the right to recover
P25 Million from its coinsurers in the proportion of 60% (Southern Insurance) and 40%
(Northern Insurance)

No Fault, Suicide, and Incontestability Clause

(232) What is the no-fault indemnity clause?

Any claim for death or injury to any passenger or third-party shall be paid without the necessity
of proving fault or negligence of any kind. The total indemnity in respect of any person shall
not be less than Fifteen thousand pesos (P15,000.00). (Section 391, Insurance Code as
amended by R.A. No. 10607)

(233) A, B, and C sustained physical injuries resulting from the collision between the jeepney
they were riding and a SuperLines bus. The injured parties filed a civil action against
SuperLines, the bus driver, and Di Siguro Insurance, the insurer of the bus. Included
in the complaint is an application for an order to compel Di Siguro Insurance to pay an
indemnity of Php5,000 to each plaintiff under the “no fault indemnity” provision. Di
Siguro filed an opposition claiming that the “no fault indemnity” is enforceable against
the insurer of the jeepney. If you were the judge, how would you rule on the
application?
I will deny the application and sustain the opposition of Di Siguro. The plaintiffs are not free to
choose from which insurer they will claim the “no fault” indemnity. Under the law, the claim is
to be made against the insurer of the vehicle in which the claimant was riding, mounting, or
dismounting from. Irrespective of whether or not fault or negligence lies with the driver of the
SuperLines bus. Because plaintiffs were not occupants of the bus, they cannot claim the “no
fault indemnity” under Di Siguro’s policy. The claim should be made against the insurer of the
jeepney they were riding (Perla Compania de Seguros v. Ancheta, G.R. No. L-49699, August
8, 1988).

B. Perfection of the Insurance Contract

(234) How are insurance contracts perfected?

Insurance contracts, being consensual contracts, are perfected by mere consent of the parties
(CIVIL CODE, Art. 1315). A contract of insurance, like all other contracts, must be assented
to by both parties, either in person or through their agents and so long as an application for
insurance has not been either accepted or rejected, it is merely a proposal or an offer to make
a contract (Perez v. CA, G.R. No. 112329, January 28, 2000).
 60

The cognition theory applies in insurance contract which states that an acceptance made by
letter shall not bind the person making the offer except from the time it came to his knowledge
(Enriquez v. Sun Life Assurance Company of Canada, G.R. No. L-15895, November 29,
1920)

(235) What are the rules with regard to payment and non-payment of premiums?
1. If the insured paid the premium, the insurer’s liability attaches correspondingly. There is
a valid and binding policy or contract of insurance and the insured may demand
indemnification in case of loss. There is no credit on the premium to speak of and,
therefore, none which the insurer can demand because he has already been paid;
2. If the insured did not pay the premium and the parties did not agree that the insurer’s
liability has attached, then there is no valid or binding contract of insurance. The insured
cannot demand indemnification if loss occurs and neither can the insurer demand
payment of the premium; and
3. If the insured did not actually pay the premium but the parties have agreed that the
insurer’s liability has attached, then the insured is considered to have extended credit on
the premium. When the insured accepts the terms of the credit, there is a valid and
binding contract of insurance. The insured must pay the premium before the end of the
credit term; otherwise, he cannot demand indemnification in case of loss. The insurer
may demand the premium, whether or not loss occurred (Chartis Philippines Insurance,
Inc. v. Cyber City Teleservices, Ltd., G.R. No. 234299, March 3, 2021)

(236) PUB General Insurance issued fire insurance policies covering Y’s properties in Pasay
City from May 22, 2018 to May 22, 2019. As per unspoken practice between him and
PUB’s agent since 2005, Y tendered on May 25, 2019, a post-dated check for the
premium of renewal policies to extend the policies to 2020. The agent issued an
acknowledgement receipt for the post-dated check which Y placed in his envelope
containing similar receipts he had been issued since 2010. The checks he issued were
always dated between July 15 and 30. This year, he dated it July 29, 2019 so the agent
promised to deliver the policies on July 30, 2019. On July 3, 2019 however, Y’s
properties were razed by fire. Y filed a notice of claim on July 15, 2019 but PUB denied
arguing that since Y’s checks had not yet been encashed, the premium had yet to be
paid. PUB also argued that the since it had not delivered the policy, it was not bound.
Decide.
Y may recover. The insured may recover even when no premium has been paid at the time
of the loss if the insurer grants credit extension for the payment of the premium. It would be
unjust and inequitable if recovery on the policy would not be permitted against the insurer
which had consistently granted 60 to 90-day credit term for the payment of renewal premiums
despite its full awareness of Section 77. Estoppel bars it from taking refuge under said section
since the insured relied in good faith on such practice (UCPB General Insurance Co., Inc. v.
Masagana Telamart, Inc., G.R. No. 137172, June 15, 1999).

(237) Antarctica Life Assurance Corporation (ALAC) publicly offered a specially designed
insurance policy covering persons between the ages of 50 to 75 who may be afflicted
with serious and debilitating illnesses. Q applied for insurance coverage, stating that
he was already 80 years old. Nonetheless, ALAC approved his application. Q then
requested ALAC for the issuance of a cover note while he was trying to raise funds to
pay the full insurance premium. ALAC granted the request. 10 days after he received
the cover note, Q had a heart attack and had to be hospitalized. He then filed a claim
on the policy.
Can ALAC validly deny the claim on the ground that the insurance coverage, as publicly
offered was available only to persons 50 to 75 years of age? Why or why not?
No. The right to information of material facts may be waived, either by the terms of the
insurance or neglect to make an inquiry as to the facts, where they are distinctly implied in
other facts of which information is communicated (INSURANCE CODE, Sec. 33). By
approving the application of Q who disclosed that he was already 80 years old, ALAC waived
the age requirement. ALAC is now estopped from raising such defense of age of the insured.
 61

(238) Did ALAC’s issuance of a cover note result in the perfection of an insurance contract
between Q and ALAC? Explain.
Yes. The issuance of a cover note is evidence of the insurer’s acceptance and therefore proof
of an existing and perfected insurance contract. A cover note is a binding temporary document
issued pending the issuance of the final policy for which the cover note shall form an integral
part (INSURANCE CODE, Sec. 52). No separate premium is to be paid on a cover note as it
is not a separate insurance contract. It merely stands in for the regular policy to be
subsequently issued pending its issuance (Pacific Timber Export Corporation v. CA, G.R. No.
L-38613, February 25, 1982).

C. Rights and Obligations of Parties

(239) Who are the parties to the contract of insurance?

The parties to the contract of insurance are:
1. Insurer

The insurer is the party who assumes or accepts the risk of loss and undertakes for a
consideration to indemnify the insured or to pay him a certain sum on the happening of a
specified contingency or event (DE LEON, Insurance Code, p. 75). An insurer may be a
foreign or domestic insurance company or corporation, or a partnership or an association
(INSURANCE CODE, Sec. 6). The term “insurer” no longer includes “individuals” under the
Insurance Code. Hence, an individual natural person is no longer allowed to be an insurer
(SUNDIANG & AQUINO, Reviewer on Commercial Law, p. 103).

2. Insured
The insured or the second party to the contract is the person in whose favor the contract is
operative and who is indemnified against; or is to receive a certain sum upon the happening
of a specified contingency or event. He is the person whose loss is the occasion for the
payment of the insurance proceeds by the insurer (DE LEON, Insurance Code, p. 75).

The insured must have the capacity to contract and must have an insurable interest in the life
or property of the insured (SUNDIANG & AQUINO, Reviewer on Commercial Law, p. 104).
Cestui Que Vie is the person whose life is the subject of a life insurance policy. It is the person
whose life is used to measure the duration of a trust, gift or insurance contract (DE LEON,
Insurance Code, supra at 455). Upon the death of the policy owner all his rights, title, and
interest in the policy of insurance on the life or health of the cestui que vie shall automatically
vest in the latter, unless otherwise provided for in the policy (INSURANCE CODE, Sec. 3, par.
3)

Note: Incidental Party - Beneficiary

A beneficiary is one in whose name or for whose benefit the insurance proceeds shall be
applied exclusively unless otherwise specified in the policy (INSURANCE CODE, Sec. 53)

D. Rescission of Insurance Contracts

(240) What are the grounds for rescission of insurance contracts?
1. Intentional or unintentional concealment;
2. Intentional or fraudulent omission;
3. Misrepresentation;
4. Violation of material warranty or other material provisions of the policy; and
5. Violation of a provision wherein the policy declares that the violation of which would avoid
the policy. (INSURANCE CODE)
 62

IV. TRANSPORATION LAW

A. Common Carrier

(241) What are common carriers?

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 (CIVIL CODE, Art. 1732).

DILIGENCE REQUIRED OF COMMON CARRIERS

(242) What is the diligence required of common carriers over the goods and passengers
transported by them?
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 (CIVIL
CODE, Art. 1733).

LIABILITIES OF COMMON CARRIERS

(243) When are common carriers presumed to be liable with respect to goods?
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 (CIVIL CODE, Art. 1735).

(244) When are common carriers presumed to be liable with respect to their passengers?
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 (CIVIL CODE, Art. 1756).

(245) Mr. A was invited to be a keynote speaker by UN-WHO in Kazakhstan. His route is as
follows: Manila-Singapore, Singapore-Amsterdam, Amsterdam-Frankfurt, and
Frankfurt-Almaty. The connecting flight from Singapore to Frankfurt is on board ABC
Airlines. On the first leg of his two-day flight, Mr. A checked in his suitcase containing
the materials for his speech and his personal items. Upon checking, his suitcase did
not arrive with him, he then informed ABC Airlines which reassured him that his
suitcase will arrive with him in the next leg. His suitcase did not arrive, and he had to
conduct the speech without his materials. Mr. A wrote a demand letter to ABC Airlines.
ABC Airlines insisted that it performed extraordinary diligence in transporting Mr. A’s
suitcase and that it should not be held liable since it is not his first or last carrier. Is
ABC Airlines’ argument correct?

NO, ABC Airlines’ argument is incorrect. Considering that a contract of carriage is vested with
public interest, a common carrier is presumed to have been at fault or to have acted
negligently in case of lost or damaged goods unless they prove that they observed
extraordinary diligence. Hence, in an action based on a breach of contract of carriage, the
aggrieved party does not need to prove that the common carrier was at fault or was negligent.
He or she is only required to prove the existence of the contract and its non-performance by
the carrier.

Since the existence of the contract is proved by the tickets purchased by Mr. A from ABC
Airlines, and ABC Airlines failed to overcome the presumption of negligence, ABC Airlines is
liable. (KLM Royal Dutch Airlines v. Tiongco, G.R. No. 212136, October 4, 2021).
 63

B. Vigilance Over Goods

EXEMPTING CAUSES

(246) What are the causes which exempt a common carrier from responsibility for the loss,
destruction, or deterioration of goods? (FASCOE)
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 or 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 (CIVIL CODE, Art. 1734); and
6. Exercise of Extraordinary Diligence (CIVIL CODE, Art. 1735).

Contributory Negligence

(247) What is the effect of the shipper's contributory negligence as to the common carrier's
liability?
If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods,
the proximate cause thereof being the negligence of the common carrier, the latter shall be
liable in damages, which however, shall be equitably reduced (CIVIL CODE, Art. 1741).

DURATION OF LIABILITY

(248) When does actual or constructive liability commence?

The duty starts 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 the right to receive them (CIVIL
CODE, Art. 1736).

(249) What is the liability of the common carrier in case of temporary unloading or storage?
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 (CIVIL CODE, Art. 1737).

Stipulation for Limitation of Liability

(250) What are the void stipulations in a contract of carriage of goods? (OLD-FETUs)?
The following stipulations are 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 goods;
4. The exercise of diligence less than that of a good Father of a family over the movables
transported;
5. That the common carrier shall not be responsible for the acts or omissions of 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;
and
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 (CIVIL CODE, Art. 1745).
 64

Limitation of Liability to Fixed Amount

(251) When is a contract fixing the sum that may be recovered by the owner or shipper for
the loss, destruction, or deterioration of the goods be valid?
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 (CIVIL CODE, Art. 1750).

Note: 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 (CIVIL CODE, Art. 1751).

Limitation of Liability in Absence of Declaration of Greater Value

(252) Is a stipulation that limits the common carrier's liability to the value of the goods
appearing in the bill of lading binding?
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 (CIVIL
CODE, Art. 1749).

Liability for Baggage of Passengers

(253) What provisions of law shall apply to checked-in baggage?

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 (CIVIL CODE, Art. 1754).

(254) When is a common carrier not liable for the loss and injury to a passenger’s hand-
carried baggage? (FAT)
A common carrier is not liable for loss caused by any of the following:
1. Those which may proceed from any Force majeure (CIVIL CODE, Art. 2000);
2. Act of passenger or his agents or if the loss arises from the character of the things (CIVIL
CODE, Art. 2002);
3. Acts of Thief or robber done with the use of arms or through an irresistible force (CIVIL
CODE, Art. 2001).

C. Safety of Passengers
Void Stipulations

(255) What stipulations eliminating or limiting the liability of a common carrier for the
carriage of passengers are deemed void? (WA-DI)
The following are void stipulations that eliminate or limit the liability of a common carrier for
the carriage of passengers:

1. A stipulation limiting the common carrier's liability for its Willful Acts or gross negligence,
when a passenger is carried gratuitously (CIVIL CODE, Art. 1758 par. 1); and
2. A stipulation limiting the common carrier's liability for the Death of/or Injuries to
passengers through the negligence or willful acts of the former's employees (CIVIL
CODE, Art. 1760).

Duration of Liability

(256) When is a common carrier bound to start the exercise of utmost diligence with respect
to passengers?
 65

Such duty of a common carrier to provide safety to its passengers so obligates it not only
during the course of the trip but for so long as the passengers are within its premises and
where they ought to be in pursuance to the contract of carriage (Light Rail Transit Authority v.
Navidad, G.R. No. 145804, February 6, 2003).

Liability for Acts of Others

(257) When are common carriers liable for the acts of their employees? (FA-NL
Common carriers are liable for the death of or injuries to passengers through the negligence
or willful acts of the former's employees, although such employees may have acted beyond
the scope of their authority or in violation of the orders of the common carriers (CIVIL CODE,
Art. 1759 (1)).
Exceptions:
1. The liability of the carrier for the personal violence of its employees or agents upon its
passengers extends only to those acts which that the carrier could Foresee or Avoid
through the exercise of the degree of diligence required; and
2. The carrier is not liable for acts of the employee Not on duty or in the Line of duty.
However, the rule on strangers apply to them (SUNDIANG & AQUINO, Reviewer on
Commercial Law, supra at 565).

(258) When is a common carrier liable to its passenger for the acts of other passengers or
strangers?
A common carrier is responsible for injuries suffered by a passenger on account of the willful
acts or negligence of other passengers or of strangers, if the common carrier's employees
through the exercise of the diligence of a good father of a family could have prevented or
stopped the act or omission (CIVIL CODE, Art. 1763).

Extent of Liability for Damages

(259) What is the extent of liability for damages?
Generally, the carrier in good faith is liable only to pay for the damages that are natural and
probable consequences of the breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation was constituted (AQUINO &
HERNANDO, Transportation Law, supra at 355-356).

However, if the carrier is in bad faith or was guilty of gross negligence, the said carrier is liable
for all damages, whether the same can be foreseen or not (Id.).

D. The Montreal Convention of 1999

Applicability

(260) What is the scope of application of the Montreal Convention?

The Montreal Convention applies to all international carriage of persons, baggage, or cargo
performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed
by an air transport undertaking (MONTREAL CONVENTION, Art. 1 (1)).

(261) What is international carriage?

Any carriage in which, according to the agreement between the parties, the place of departure
and the place of destination, whether or not there be a break in the carriage or a transhipment,
are situated either within the territories of two State Parties, or within the territory of a single
State Party if there is an agreed stopping place within the territory of another State, even if
that State is not a State Party (MONTREAL CONVENTION, ART.1 (2))
 66

Extent of Liability of Air Carrier

(262) Up to what extent is the carrier liable for damages arising from death or injury of
passengers?
128,821 Special Drawing Rights for each passenger for damage sustained in case of death
or bodily injury of a passenger upon condition only that the accident which caused the death
or injury took place on board the aircraft or in the course of any of the operations of embarking
or disembarking, it should, the carrier shall not be able to exclude or limit its liability
(MONTREAL CONVENTION, Art. 21 (1)).

However, the carrier shall not be liable to the extent that they exceed for each passenger
128,821 Special Drawing Rights if the carrier proves that:
1. Such damage was not due to the negligence or other wrongful act or omission of the
carrier or its servants or agents; or
2. Such damage was solely due to the negligence or other wrongful act or omission of a
third party (MONTREAL CONVENTION, Art. 21 (2)).

(263) Up to what extent is the carrier liable in relation to delay in the carriage of persons?
5,346 Special Drawing Rights for each passenger for damage caused by delay in the carriage
of persons (MONTREAL CONVENTION, Art. 22 (1)).

This limit shall not apply if it is proved that the damage resulted from an act or omission of the
carrier, its servants or agents, done with intent to cause damage or recklessly and with
knowledge that damage would probably result; provided that, in the case of such act or
omission of a servant or agent, it is also proved that such servant or agent was acting within
the scope of its employment. (MONTREAL CONVENTION, Art. 22(5)).

Nevertheless, the carrier shall not be liable for damage occasioned by delay if it proves that it
and its servants and agents took all measures that could reasonably be required to avoid the
damage or that it was impossible for it or them to take such measures (MONTREAL
CONVENTION, Art. 19).

(264) Up to what extent is the carrier liable in relation to destruction, loss, damage or delay
in the carriage of baggage?
1,288 Special Drawing Rights for each passenger in the case of destruction, loss, damage or
delay in the carriage of baggage, unless the passenger has made, at the time when the
checked baggage was handed over to the carrier, a special declaration of interest in delivery
at destination and has paid a supplementary sum if the case so requires. In that case the
carrier will be liable to pay a sum not exceeding the declared sum, unless it proves that the
sum is greater than the passenger’s actual interest in delivery at destination (MONTREAL
CONVENTION, Art. 22 (2)).

This limit shall not apply if it is proved that the damage resulted from an act or omission of the
carrier, its servants or agents, done with intent to cause damage or recklessly and with
knowledge that damage would probably result; provided that, in the case of such act or
omission of a servant or agent, it is also proved that such servant or agent was acting within
the scope of its employment. (MONTREAL CONVENTION, Art. 22(5)).

V. INTELLECTUAL PROPERTY CODE

A. Patents
PATENTABLE INVENTIONS
(265) What are patentable inventions?
 67

Patentable inventions refer to any technical solution of a problem in any field of human activity
which is new, involves an inventive step and is industrially applicable shall be patentable. It
may be, or may relate to, a product, or process, or an improvement of any of the foregoing
(IPC, Sec. 21).

(266) What are the requisites of a patentable invention? (TINIP)

1. Technical solution of a problem in any field of human activity (IPC, Sec. 21);
2. Inventive Step – An invention involves an inventive step if, having regard to prior art, it is not
obvious to a person skilled in the art at the time of the filing date or priority date of the
application claiming the invention (IPC, Sec. 26);
3. Novelty – An invention shall not be considered new if it forms part of a prior art (IPC, Sec.
23);
4. Industrial Applicability – An invention that can be produced and used in any industry (IPC,
Sec. 27); and
5. Patentable Subject Matter – is not otherwise listed as non-patentable (IPC, Sec. 22).

(267) What does “new” mean under Sec. 23 of the IPC?

A utility model shall not be considered "new" if before the application for a patent it has been
publicly known or publicly used in this country or has been described in a printed publication
or publications circulated within the country, or if it is substantially similar to any other utility
model so known, used or described within the country (Manzano v. Court of Appeals, G.R.
113388, September 5, 1997).

(268) What is the Non-Obviousness Rule?

Even if the subject matter sought to be patented is not exactly shown by the prior art, and
involves one or more differences over the most nearly similar thing already known, a patent
may still be refused if the differences would be obvious. The subject matter sought to be
patented must be sufficiently different from what has been used or described before that it
may be said to be non-obvious to a person having ordinary skill in the area of technology
related to the invention. For example, the substitution of one color for another or changes in
size are ordinarily not patentable. (FUNA, Intellectual Property Law, supra at 62).

(269) What does “A Person Skilled in the Art” mean under Sec. 26 of the IPC?
He is a persons presumed to be an ordinary practitioner aware of what was common general
knowledge in the art, at the relevant date; He is presumed to have knowledge of all reference
that are sufficiently related to one another and to the pertinent art and to have knowledge of
all arts reasonably pertinent to the particular problems with which the inventor was involved.
He is also presumed to have had at his disposal the normal means and capacity for routine
work and experimentation (Revised Implementing Rules and Regulations for Patents, Utility
Models and Industrial Designs, RULE 207).

(270) What is the essence of the element of Industrial Applicability?

This requirement demonstrates the practical nature of patent law, which requires that the
invention should be something which can be made industrially or relate to an industrial
process. An application for a patent that depends upon the use of hitherto undiscovered
materials in its manufacture would be refused. The invention has to be something that can be
worked industrially, and to some extent this requirement distinguishes patents from other
forms of intellectual property such as original works of copyright (FUNA, Intellectual Property
Law, supra at 65).

NON-PATENTABLE INVENTIONS
(271) What are non-patentable inventions? (DMe-SAM-PAA)
 68

The following shall be excluded from patent protection:

1. Discoveries, scientific theories, and mathematical methods, a law of nature, a scientific truth,
or knowledge as such;
2. In the case of drugs and Medicines, the mere discovery of a new form or new property of a
known substance which does not result in the enhancement of the known efficacy of that
substance, or the mere discovery of any new property or new use for a known substance, or
the mere use of a known process, unless such known process results in a new product that
employs at least one new reactant;
3. Schemes, rules, and methods of performing mental acts and playing games, or doing
business, and programs for computers;
4. Abstract ideas or theories, fundamental concepts apart from the means or processes for
carrying the concept to produce a technical effect;
5. Methods for treatment of the human or animal body by surgery or therapy and diagnostic
methods practiced on the human or animal body;
6. Plant varieties or animal breeds or essentially biological processes for the production of plants
or animals;.
7. Aesthetic creations; and
8. Anything which is contrary to public order or morality (Revised Implementing Rules and
Regulations for Patents, Utility Models and Industrial Designs, Rule 202).

OWNERSHIP OF A PATENT
(272) Who has the right to a patent?
The right to a patent belongs to the inventor, his heirs or assigns. When two (2) or more
persons have jointly made an invention, the right to a patent shall belong to them jointly (IPC,
Sec. 28).

(273) What is the First-to-File Rule?

If two (2) or more persons have made the invention separately and independently of each
other, the right to the patent shall belong to the person who filed an application for such
invention , or where two (2) or more applications are filed for the same invention, to the
applicant who has the earliest filing data, or the earliest priority date (IPC, Sec. 29).

(274) Who owns inventions created pursuant to a commission but not under an Employee
Employer Relationship?
The person who commissions the work shall own the patent, unless otherwise provided in the
contract (IPC, Sec. 30).

(275) Who owns inventions created by an employee?

In case the employee made the invention in the course of his employment contract, the patent
shall belong to:
(a) The employee, if the inventive activity is not a part of his regular duties even if the employee
uses the time, facilities and materials of the employer.
(b) The employer, if the invention is the result of the performance of his regularly-assigned duties,
unless there is an agreement, express or implied, to the contrary (IPC, Sec. 30).

(276) What is the “Right of Priority”?

An application for patent filed by any person who has previously applied for the same invention
in another country which by treaty, convention, or law affords similar privileges to Filipino
citizens, shall be considered as filed as of the date of filing the foreign application: Provided,
That:
(a) the local application expressly claims priority;
(b) it is filed within twelve (12) months from the date the earliest foreign application was filed; and
(c) a certified copy of the foreign application together with an English translation is filed within six
(6) months from the date of filing in the Philippines (IPC, Sec. 31)
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GROUNDS FOR CANCELLATION OF A PATENT

(277) What are the grounds for the cancellation of a patent? (NDC)
Any interested person may, upon payment of the required fee, petition to cancel the patent or any
claim thereof, or parts of the claim, on any of the following grounds:
1. That the invention is not New or patentable;
2. That the patent does not Disclose the invention in a manner sufficiently clear and complete
for it to be carried out by any person skilled in the art; or
3. That the patent is Contrary to public order or morality (IPC, Sec. 61.1).

REMEDY OF THE TRUE AND ACTUAL INVENTOR

(278) What are the remedies of the true and actual inventor?
If a person, who was deprived of the patent without his consent or through fraud is declared
by final court order or decision to be the true and actual inventor, the court shall order for his
substitution as patentee, or at the option of the true inventor, cancel the patent, and award
actual and other damages in his favor if warranted by the circumstances (IPC, Sec 68).

Note: The action must be filed within one (1) year from that date of publication (IPC, Sec 70).

RIGHTS CONFERRED BY A PATENT

(279) What are the rights conferred by a patent?
A patent shall confer on its owner the following exclusive rights:
1. To restrain, prohibit, and prevent;
a. Where the subject matter of a patent is a product: any unauthorized person or entity from
making, using, offering for sale, selling or importing that product;
b. Where the subject matter of a patent is a process: any unauthorized person or entity from
using the process, and from manufacturing, dealing in, using, selling or offering for sale, or
importing any product obtained directly or indirectly from such process (IPC, Sec. 71.1);
2. To assign or transfer by succession the patent (IPC, Sec. 71.2); and
3. To conclude licensing contracts (IPC, Sec. 71.2).

(280) What is the term of a patent?

The term of a patent shall be 20 years from the filing date of the application. The term is not subject
to extension (DIVINA, Divina on Commercial Law Vol. 2, p. 225).

LIMITATIONS OF PATENT RIGHTS

(281) What are the limitations to patent rights?
1. General Limitations (IPC, Sec. 72);
2. Use by Prior User (IPC, Sec. 73); and
3. Use by Government (IPC, Sec. 74).

(282) What is the rule on “Prior User”?

Any prior user, who, in good faith was using the invention or has undertaken serious
preparations to use the invention in his enterprise or business, before the filing date or priority
date of the application on which a patent is granted, shall have the right to continue the use
thereof as envisaged in such preparations within the territory where the patent produces its
effect (IPC, Sec 73.1).

The right of the prior user may only be transferred or assigned together with his enterprise or
business, or with that part of his enterprise or business in which the use or preparations for
use have been made (IPC, Sec. 73.2).
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(283) What are the grounds on which a government agency or third party authorized by the
government can exploit an invention without the agreement of the patent owner?
A Government agency or third person authorized by the Government may exploit the
invention even without agreement of the patent owner where: (PANPuD)
(a) The Public interest, in particular, national security, nutrition, health or the development of other
sectors, as determined by the appropriate agency of the government, so requires; or
(b) A judicial or administrative body has determined that the manner of exploitation, by the owner
of the patent or his licensee, is Anticompetitive; or
(c) In the case of drugs and medicines, there is a National emergency or other circumstance of
extreme urgency requiring the use of the invention; or
(d) In the case of drugs and medicines, there is a Public noncommercial use of the patent by the
patentee, without satisfactory reason; or
(e) In the case of Drugs and medicines, the demand for the patented article in the Philippines is
not being met to an adequate extent and on reasonable terms, as determined by the Secretary
of the Department of Health (IPC, Sec. 74.1).

PATENT INFRINGEMENT
(284) What constitutes patent infringement? (MUSSI)
Patent infringement is committed by Making, Using, offering for Sale, Selling, or Importing a
patented product or a product obtained directly or indirectly from a patented process, or the
use of a patented process without the authorization of the patentee (IPC, Sec. 76.1).

(285) What are the tests in patent infringement?

(1) Literal Infringement
There is infringement of patent under this test if one makes, uses or sells an item that contains all
the elements of the patent claim. This test is satisfied in either of the following:
a. Exactness rule: The item that is being sold made or used confirms exactly to the patent claim
of another;
b. Addition rule: One makes, uses, or sells an item that has all the elements of the patent claim
of another plus other elements (AQUINO & SUNDIANG, Reviewer on Commercial Law, p.
669).

(2) Doctrine of Equivalents

Infringement also takes place when a device appropriates a prior invention by incorporating
its innovative concept and, although with some modification and change, performs
substantially the same function in substantially the same way to achieve substantially the
same result. The principle or mode of operation must be the same or substantially the same.
This requires satisfaction of the function-means-and-result test, the patentee having the
burden to show that all three components of such equivalency test are met (Smith Kline
Beckman Corporation v. CA, G.R. No. 126627, August 14, 2003).

(286) What are the remedies against patent infringement?

The remedies against patent infringement are the following: (CIDC)
1. Civil action for damages plus attorney’s fees and other expenses for litigation (IPC, Sec. 76.2);
2. Injunction (IPC, Sec. 76.2);
3. Disposal or destruction of the infringing materials (IPC, Sec. 76.5); and
4. Criminal action for repetition of infringement (IPC, Sec. 84).

(287) What are the defenses available in an Action for Infringement?

The defendant, in addition to other defenses available to him, may show:
1. the invalidity of the patent; or
2. any claim thereof, on any of the grounds on which a petition of cancellation can be brought
under Sec. 61 of the IPC (IPC, Sec. 81).

(288) What is the effect if the patent is found invalid?

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If the court shall find the patent or any claim to be invalid, it shall cancel the same, and the
Director of Legal Affairs upon receipt of the final judgment of cancellation by the court, shall
record that fact in the register of the Office and shall publish a notice to that effect in the IPO
Gazette. (IPC, Sec. 82)

LICENSING
(289) What is voluntary licensing in patent?
A voluntary license is an authorization given by the patent holder to another person allowing
him to produce the patented article. The license usually fixes the amount if royalties, sets
quality requirements and defines the markets in which the licensee can sell the product
(DIVINA, Divina On Commercial Law, Vol. 2, p. 240).

(290) What are the mandatory provisions that shall be included in voluntary license
contracts?
The following provisions shall be included in voluntary license contracts: (LaCoArt)
1. That the Laws of the Philippines shall govern the interpretation of the same and in the event
of litigation, the venue shall be the proper court in the place where the licensee has its principal
office (IPC, Sec. 88.1);
2. Continued access to improvements in techniques and processes related to the technology
shall be made available during the period of the technology transfer arrangement (IPC, Sec.
88.2);
3. In the event the technology transfer arrangement shall provide for arbitration, the Procedure
of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United
Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and
Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of
arbitration shall be the Philippines or any neutral country (IPC, Sec. 88.3); and
4. The Philippine Taxes on all payments relating to the technology transfer arrangement shall
be borne by the licensor (IPC, Sec. 88.4).

(291) What is compulsory licensing?

Compulsory licensing is when the government allows another person to produce the patented
product or process without the consent of the patent owner or plans to use the patented
invention itself (DIVINA, Divina On Commercial Law, Vol. 2, p. 240).

(292) What are the grounds for the issuance of compulsory licensing?
The Director General of the Intellectual Property Office may grant a license to exploit a
patented invention, even without the agreement of the patent owner, in favor of any person
who has shown his capability to exploit the invention, under any of the following
circumstances: (NPAPWD)
1. National emergency or other circumstances of extreme urgency (IPC, Sec. 93.1);
2. Where the Public interest, in particular, national security, nutrition, health or the development
of other vital sectors of the national economy as determined by the appropriate agency of the
Government, so requires (IPC, Sec. 93.2); or
3. Where a judicial or administrative body has determined that the manner of exploitation by the
owner of the patent or his licensee is Anticompetitive (IPC, Sec. 93.3); or
4. In case of Public non-commercial use of the patent by the patentee, without satisfactory
reason (IPC, Sec. 93.4);
5. If the patented invention is not being Worked in the Philippines on a commercial scale,
although capable of being worked, without satisfactory reason: Provided, That the importation
of the patented article shall constitute working or using the patent (IPC, Sec. 93.5); and
6. Where the Demand for patented drugs and medicines is not being met to an adequate extent
and on reasonable terms, as determined by the Secretary of the Department of Health (IPC,
Sec. 93.6).

(293) How are right, title or interest in patents and inventions assigned?
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Inventions and any right, title or interest in and to patents and inventions covered thereby,
may be assigned or transmitted by inheritance or bequest or may be the subject of a license
contract (IPC, Sec. 103.2).

B. Trademarks
Marks vs. Collective Marks vs. Trade Names
(294) What is a Mark?
It is any visible sign capable of distinguishing the goods (trademark) or services (service mark)
of an enterprise and shall include a stamped or marked container of goods (IPC, Sec. 121.1).

(295) What is a Collective Mark?

It refers to any visible sign, designated as such in the application for registration and capable of
distinguishing the origin or any other common characteristics, including the quality of goods
or services of different enterprises which u s e the sign under the control of the registered
owner of the collective mark (IPC, Sec. 121.2).

(296) What is a Trade Name?

It means the name or designation identifying or distinguishing an enterprise (IPC, Sec. 121.3). Any
individual name or surname, firm name, device or word used by manufacturers, industrialists,
merchants, and others to identify their businesses, vocations or occupations (Converse
Rubber Corp., v. Universal Rubber: Products, Inc., G.R. No. L-27906, January 8, 1987).

Acquisition of Ownership of Mark

(297) Who is entitled to register a trademark?
Only the owner of the trademark, trade name or service mark is entitled to register the same.
A local importer, however, may make application for the registration of a foreign trademark,
trade name or other mark of ownership (Unno Commercial Enterprises, Inc., v. General Milling
Corp., G.R. No. L-28554, February 28, 1983).

(298) What are the functions of a trademark?

i. The functions of a trademark are the following:
ii. To indicate the origin of the goods to which they are attached;
iii. To guarantee the standard of the quality of the goods; and
iv. To advertise the goods (Mirpuri v. CA, G.R. No. 114508, November 19, 1999)

(299) Rehistrado Ilustrado, Inc. files for a trademark of the company’s upcoming clothing
brand. Inggitero argues that the same shall not be allowed to be registered as there is no
actual use of such trademark in the Philippines. Decide.
The decision shall be in favor of Rehistrado Ilustrado. The IPC no longer provides for prior
use as a condition for ownership of a mark (IPC, Sec. 122).

(300) How can the prima facie presumption of arising from the registration of the mark or
trade name may be overcome?
Under Intellectual Property Code Sec. 152.1, the prima facie presumption of arising from the
registration of the mark or trade name may be overcome by:
i. Evidence of the nullity of the registration; and
ii. Prior use by another. (IPC, Sec. 152.1).
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(301) Can a name of a living person be registered as a trademark?

Yes. A mark cannot be registered if it consists of the name of a living person, except by his
written consent. Another exception is that when the surname has acquired distinctiveness by
acquiring secondary meaning. (IPC, Sec. 123).

Acquisition of Ownership of Trade Name

(302) When can a descriptive name, word or phrase be registered as trademark or
tradename?
A descriptive name, word or phrase be registered as trademark or tradename when:
i. If used in an arbitrary or fanciful manner and with no relation to the product it identifies.
ii. If used as part of a coined mark;
iii. If used as part of a compositive mark; and
iv. If acquired a secondary meaning (IPC, Sec. 123.2).

Non-Registrable Marks
(303) What are the non-registrable marks? (IFNI3-MG-CD-SC2)
A mark cannot be registered if it:
1. Consists of Immoral and deceptive matter, or matter which may disparage or falsely suggest
a connection with persons, living or dead, institutions, beliefs or national symbols, or bring
them into contempt or disrepute (IPC, Sec. 123.1.a);
2. Consists of the Flag or coat of arms or other insignia of the Philippines or any of its political
subdivisions, or of any foreign nation or any simulation thereof (IPC, Sec. 123.1.b);
3. Consists of a Name, portrait or signature identifying a living person, except by his written
consent, or the name, portrait or signature of a deceased President of the Philippines during
the life of his widow, if any, except by written consent of the widow (IPC, Sec. 123.1.c);
4. Is Identical with a registered mark belonging to a different proprietor or a mark with an earlier
filing priority date, in respect of:
a. Same goods or service;
b. Closely-related goods or services; or
c. If it nearly resembles such mark as to be likely to deceive or cause confusion (IPC, Sec.
123.1.d)
5. Is Identical with, or confusingly similar to, or constitutes a translation of a mark which is
considered by the competent authority of the Philippines to be well-known internationally and
in the Philippines, whether or not it is registered here, as being already the mark of a person
other than the applicant for registration, and used for identical or similar goods or services.
Provided, that in determining whether a mark is well-known, account shall be taken of the
knowledge of the relevant sector of the public, rather than of the public at large, including
knowledge in the Philippines which has been obtained as a result of the promotion of the mark
(IPC, Sec. 123.1.e);
6. Is Identical with, or confusingly similar to, or constitutes a translation of a mark considered
well-known in accordance with the preceding paragraph, which is registered in the Philippines
with respect to goods or services which are not similar to those with respect to which
registration is applied for. Provided, that use of the mark in relation to those goods or services
would indicate a connection between those goods or services, and the owner of the registered
mark. Provided further, that the interests of the owner of the registered mark are likely to be
damaged by such use (IPC, Sec. 123.1.f);
7. Is likely to Mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services (IPC, Sec. 123.1.g);
8. Consists exclusively of signs Generic for the goods or services (IPC, Sec. 123.1.h);
9. Consists exclusively of signs or of indications that have become Customary or usual to
designate goods or services in everyday language or bona fide and established trade
practices (IPC, Sec. 123.1.i);
10. Consists exclusively of signs or of indications that may serve in trade to Designate the quality,
quantity, intended purpose, value, geographical origin, time or production of goods or
rendering of the services, or other characteristics of goods (IPC, Sec. 123.1.j);
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11. Consists of Shapes that may be necessitated by technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value (IPC, Sec. 123.1.k);
12. Consists of Color alone, unless defined by a given form (IPC, Sec. 123.1.l); and
13. Is Contrary to public order or morality (IPC, Sec. 123.1.m).

(304) What happens if by mistake or error, a mark or trade name which is prohibited by law
to be registered is registered?
If by mistake or error, a mark or trade name which is prohibited by law to be registered is
registered, the registration is invalid and gives the registrant no protection.

(305) What is Doctrine of Secondary Meaning?

Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used for so long and so exclusively by one producer
with reference to this article that, in that trade and to that group of purchasing public, the word
or phrase has come to mean that the article was his produce. (Lyceum of the Philippines vs
CA, G.R. No. 101897, March 5, 1993)

(306) When are goods related?

Goods are related when:
i. They belong to the same class or have same descriptive properties;
ii. Both possess the same physical attributes or essential characteristics with reference to form,
composition, texture or quality; and
iii. Both serve the same purpose or are sold in groceries or flow through the same channel of
trade (Esso Standard Eastern, Inc. v. CA, G.R No. L-29971, August 31, 1982)

1. Test to Determine Confusing Similarity Between Marks

(307) What is the test to determine confusing similarity between marks?

The test to determine whether a mark is to be considered as "identical" or confusingly similar
with that of another is the Dominancy Test.

Note: Considering the adoption of the Dominancy Test and the abandonment of the Holistic
Test, as confirmed by the provisions of the IP Code and the legislative deliberations, the Court
hereby makes it crystal clear that the use of Holistic Test in determining resemblance of marks
has been abandoned (Kolin Electronics Co., Inc., v. Kolin Philippines International, Inc., G.R.
No. 228165, February 9, 2021).

(308) What is the Dominancy Test?

The Dominancy Test focuses on the similarity of the prevalent or dominant features of the
competing trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. Duplication or imitation is not necessary; neither is it required that the mark
sought to be registered suggests an effort to imitate (Skechers, USA, Inc., v. Inter Pacific
Industrial Trading Corp., et al., G.R. No. 164321, March 28, 2011).

The test of dominancy is now explicitly incorporated into law in Section 155.1 of the IPC which
defines infringement as the 'colorable imitation of a registered mark or a dominant feature
thereof (ABS-CBN Publishing, Inc., v. Director of the Bureau of Trademarks, G.R. No. 217916,
June 20, 2018).

(309) What is the idem sonans rule?

Under the idem sonans rule, the aural effects of the words and letters contained in the marks
are taken into account in determining the issue of confusing similarity.
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The idem sonans rules is applicable to the dominancy test since it relies not only on the visual
but also on the aural and connotative comparisons and overall impressions between the two
trademarks (Societe Produits Nestle, S.A. v. Dy, Jr., G.R. No. 172276, August 9, 2010).

Well-Known Marks

(310) When is mark considered well-known?

A mark is well-known when it is considered by the competent authority of the Philippines to
be well-known internationally and in the Philippines, whether or not it is registered here, as
being already the mark of a person other than the applicant for registration, and used for
identical or similar goods or services (IPC, Sec. 123.1).

(311) What factors are considered in determining whether a mark is well-known?

In determining whether a mark is well-known, account shall be taken of the knowledge of the
relevant sector of the public, rather than of the public at large, including knowledge in the
Philippines which has been obtained as a result of the promotion of the mark (IPC, Sec. 123).

Rights Conferred by Registration

(312) What is the effect of registration of a mark?
A certificate of registration of a mark shall be prima facie evidence of the:
i. Validity of the registration;
ii. Registrant’s ownership of the trademark; and
iii. The exclusive right to the use thereof connection with the goods or services and those that
are related thereto specified in the certificate (IPC, Sec. 138).

(313) Until when is the registration of a trademark effective?

A certificate of registration (of a trademark) shall remain in force for 10 years (IPC, Sec. 145).
A certificate of registration may be renewed for periods of 10 years at its expiration upon
payment of the prescribed fee and upon filing of a request (IPC, Sec. 146.1).

(314) What are the rights conferred to the owner of a registered mark?
The owner of a registered mark shall have the exclusive right to prevent all third parties not
having the owner's consent from using in the course of trade identical or similar signs or
containers for goods or services which are similar to those in respect of which the trademark
is registered where such would result in a likelihood of confusion. In case of the use of an
identical sign for identical goods or services, likelihood of confusion shall be presumed (IPC,
Sec. 147.1).

Note: The exclusive right of the owner of a well-known mark which is registered in the
Philippines, shall extend to goods and services which are not similar to those in respect of
which the mark is registered. Provided, that the use of that mark in relation to those goods or
services would indicate a connection between those goods or services and the owner of the
registered mark. Provided further, that the interests of the owner of the registered mark are
likely to be damaged by such use (IPC, Sec. 147.2).

Cancellation of Registration
(315) When may a petition to cancel a registration of a mark be filed?
A petition to cancel a registration of a mark may be filed by any person who believes that he
is or will be damaged by the registration of a mark either:
i. Within 5 years from the date of registration of the mark; or
ii. At any time, if: (GAMOF)
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a. The registered mark becomes a Generic name for the goods or services or a portion thereof,
for which it is registered (IPC, Sec. 151.1(b));

Note: If the registered trademark becomes the generic name for less than all of the goods or
services for which it is registered, a petition to cancel the registration for only those goods or
services may be filed. (IPC, Sec. 151.1(b)). A registered mark shall not be deemed to be the
generic name of goods or services solely because such mark is also used as a name of or to
identify a unique product or service. (IPC, Sec. 151.1(b)

b. The registered mark has been Abandoned (IPC, Sec. 151.1(b));

c. The registered mark is being used by, or with the permission of, the registrant so as to
Misrepresent the source of the goods or services on or in connection with which the mark is
used (IPC, Sec. 151.1(b));
d. The registration was Obtained fraudulently or contrary to the provisions of the IPC (IPC, Sec.
151.1(b)); and
e. If the registered owner of the mark without legitimate reason Fails to use the mark within the
Philippines, or to cause it to be used in the Philippines by virtue of a license during an
uninterrupted period of 3 years or longer (IPC, Sec. 151.1 (c).

(316) When is non-use of trademark excused? (IFCA)

Non-use of trademark is excused in the following instances:
i. If caused by circumstances arising Independently of the will of the owner. (IPC, Sec. 152.1)
Note: Lack of funds shall not excuse non-use of a mark (IPC, Sec. 152.1);

ii. The use of a mark in a Form different from the form in which it was registered which does not
alter its distinctive character (IPC, Sec. 152.2);
iii. The use of a mark in connection with one or more of the goods or services belonging to the
Class in respect of which the mark is registered (IPC, Sec. 152.3); and
iv. The use of a mark by a company related with the registrant or Applicant shall inure to the
latter’s benefit, provided that such mark is not used in such manner as to deceive the public
(IPC, Sec. 152.4).

Trademark Infringement
(317) When is there an infringement of trademark?
There is infringement of trademark when the use of the mark would be likely to cause
confusion or mistake in the mind of the public or to deceive purchasers as to the origin of the
source of the commodity. (Fruit of the Loom, Inc. vs CA, G.R. No. L-32747, November 29,
1984)

(318) Who are persons liable for trademark infringement?

Any person who shall commit the following acts without the consent of the owner shall be
liable in a civil action for infringement:
i. Use in commerce of any reproduction or colorable imitation of a registered mark or a dominant
feature thereof, in connection with: (SODA)
a. Sale;
b. Offering for sale;
c. Distribution; or
d. Advertising of any goods or services including other preparatory steps necessary to carry out
the sale of any goods or services on or in connection with which such in connection with which
such use is likely to cause confusion, or to cause mistake, or to deceive; and
ii. Reproduction, counterfeit, copy or colorable imitation of a registered mark or dominant feature
thereof and application of the same to labels, signs, prints packages, wrappers, receptacles,
or advertisements intended to be used in commerce upon or in connection with the: (SODA)
a. Sale;
b. Offering for sale;
c. Distribution; or and
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d. Advertising of any goods or services including other preparatory steps necessary to carry out
the sale of any goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive (IPC, Sec. 155).

(319) What are the remedies of the owner of a registered mark in a case of trademark
infringement?
Regardless of whether there is actual sale of goods or services using the infringing material,
the registrant may file a civil action for:
i. Damages (IPC, Sec. 156.1);
ii. The impound during the pendency of an action of the sales invoice and other documents
evidencing sales (IPC, Sec. 156.2);
iii. Injunction (IPC, Sec. 156.4); or
iv. Destruction of infringing material without compensation (IPC, Sec. 157.1).

Note: Independent of the civil and administrative sanctions imposed by law, the following
criminal penalty shall be imposed on any person who is found guilty of Infringement, Unfair
Competition, and False Designation:
i. Imprisonment of 2 years to 5 years; and
ii. Fine of P50,000 to P200,000 (IPC, Sec. 170).

Unfair Competition
(320) What is unfair competition?
There is unfair competition when any person employs deception or any other means contrary
to good faith by which he shall pass off the goods manufactured by him or in which he deals,
or his business, or services for those of the one having established such goodwill, or who
shall commit any acts calculated to produce said result (IPC, Sec. 168.2).

(321) Who may be liable for unfair competition?

A seller or a manufacturer of imitation goods may be liable for unfair competition (Alexander
v. Sy Bok, G.R. No. L-6708, May 31, 1955, citing Sec. 29 of R.A. No. 166).

(322) What are the elements of an action for unfair competition?

The essential elements of an action for unfair competition are:
i. Confusing similarity in the general appearance of the goods; and
ii. Intent to deceive the public and defraud a competitor (Asia Pacific Resources International
Holdings, Ltd. v. Paperone, Inc., G.R. Nos. 213365-66, December 10, 2018).

(323) When is a person is deemed guilty of unfair competition?

A person is deemed guilty of:
i. Unfair competition in goods when:
a. The offender sells his goods and gives them the general appearance of the goods of another
manufacturer or dealer, either as to the goods themselves, their packaging and devises or
words thereon, or in any other feature of their appearance; and
b. The acts described would be likely to influence purchasers to believe that the goods offered
are those of another manufacturer or dealer, or deceive the public and defraud another of his
legitimate trade, or any subsequent vendor of such goods.
ii. Unfair competition in services when he by any artifice, or device, or employs any other means
calculated to induce the false belief that such person is offering the services of another who
has identified such services in the mind of the public; or
iii. Unfair competition by disparaging another’s product or service when he makes any false
statement in the course of trade or commits any other act contrary to good faith of a nature
calculated to discredit the goods, business or services of another (IPC, Sec. 168.3).
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C. COPYRIGHT

Basic Principles
(324) What is a copyright?
It is the right over literary and artistic works which are original intellectual creations in the
literary and artistic domain protected from the moment of creation (Kho v. CA, G.R. No.
115758, March 19, 2002).

(325) What is the scope of a copyright?

Protection extends only to the expression of the idea, not to the idea itself or to any procedure,
system, method or operation, concepts, principle, discovery, or mere data (IPC, Sec. 175).
[An] idea, no matter how original, cannot be protected by copyright. It is the form in which they
are clothed which is protected (FUNA, Intellectual Property Law, supra at 577).

Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory
grant, the rights are limited to what the statute confers. It may be obtained and enjoyed
only with respect to the subjects and by the persons, and on terms and conditions
specified in the statute.7 Accordingly, it can cover only the works falling within the
statutory enumeration or description (Pearl & Dean (Phil.), Inc. v. Shoemart, Inc., G.R.
No. 148222, August 15, 2003).

Copyrightable Works
(326) What are the requisites for the creation of a copyrightable work?
The following are the requisites for the creation of a copyrightable work:
1. Originality – It does not mean novelty or ingenuity; neither uniqueness nor creativity. It
simply means that the work "owes its origin to the author” (Thomas Dawson, The Law of
the Press, P.S. King & Son, Ltd., 1927); and
2. Expression – To be "fixed", a work must be embodied in a medium sufficiently
permanent or stable to permit it to be perceived, reproduced, or otherwise communicated
for a period of more than transitory duration (Managing Intellectual Property in the Book
Publishing Industry, A business-oriented information Booklet, WIPO, Booklet No. 1, p.
14).

Note: Works are protected by the sole fact of their creation, irrespective of their mode or form
of expression, as well as of their content, quality, and purpose (IPC, Sec. 172.2).

(327) What are the types of copyrightable works?

The types of copyrightable works are:
1. Original Works (IPC, Sec. 172); and
2. Derivative Works (IPC, Sec. 173).

(328) What are original works? (BPL2-DMW-OID-PAPCO)

Original works are the literary and artistic works, which are original intellectual creations in the
literary and artistic domain:
1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations prepared for oral delivery;
4. Letters;
5. Dramatic or dramatico-musical compositions; choreographic works or entertainment in
dumb shows;
6. Musical compositions, with or without words;
7. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works
of art; models or designs for works of art;
8. Original ornamental designs or models for articles of manufacture, and other works of
applied art;
 79

9. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to

geography, topography, architecture or science;
10. Drawings or plastic works of a scientific or technical character;
11. Photographic works including works produced by a process analogous to photography;
lantern slides;
12. Audiovisual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audio-visual recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works (IPC, Sec 172.1).

Note: There is no copyright protection for works of applied art or industrial design which have
aesthetic or artistic features that cannot be identified separately from the utilitarian aspects of
the article (Ching v. Salinas, G.R. No. 161295, June 29, 2005).

(329) What is the doctrine of conceptual separability?

The court must decide whether the artistic element of the article is separable from its utilitarian
application. While the applied art aspect can be given copyright protection, the utilitarian part
may not (FUNA, Intellectual Property Law, supra at 563).

(330) What is the Denicola test?

It is one of the tests used to apply the Doctrine of Conceptual Separability. It inquires into
which aspects of the work are dictated by the functional constraints of the article, and which
aspects reflect unconstrained perspective of the artist (FUNA, Intellectual Property Law, supra
at 563).

(331) What are the derivative works?

Derivative works are works based upon one or more pre-existing works (17 US Code, Sec.
101). The following are derivative works that are also protected by copyright:
1. Dramatizations, translations, adaptations, abridgments, arrangements, and other
alterations of literary or artistic works; and
2. Collections of literary, scholarly or artistic works, and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement of
their contents (IPC, Sec. 173.1).

(332) What is the protection given to derivative works?

Derivative works shall be protected as new works: Provided, however, that such new work
shall not affect the force of any subsisting copyright upon the original works employed or any
part thereof, or be construed to imply any right to such use of the original works, or to secure
or extend copyright in such original works (IPC, Sec. 173.2).

Non-Copyrightable Works
(333) What are works not protected by copyright?
The following are not protected by copyright:
1. Any Idea, procedure, system, method or operation, concept, principle, discovery or mere
data as such, even if they are expressed, explained, illustrated or embodied in a work
(IPC, Sec. 175);
2. News of the day and other miscellaneous facts having the character of mere items of
press information (IPC, Sec. 175);
3. Any Official text of a legislative, administrative or legal nature, as well as any official
translation thereof (IPC, Sec. 175); and
4. Any Work of the Government of the Philippines (IPC, Sec. 176.1).

Rights Conferred by a Copyright

(334) What are the rights granted to a copyright owner? (EMD)
The following rights are granted to the copyright owner:
1. Copyright or Economic rights (IPC, Sec. 177);
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2. Moral rights (IPC, Sec. 193); and

3. Right to participate in the gross proceeds of the sale or lease of the original work or Droit
de suite (IPC, Sec. 200).

Copyright subsists from the moment of creation. The intellectual creator's exercise and enjoyment
of copyright for his work and the protection given by law to him is not contingent or dependent
on any formality of registration. (Unilever Phils, Inc. vs CA, G.R. No. 119280, August 10, 2006)

(335) What is droit de suite?

Droit de Suite means "art proceeds right". That in every sale or lease of an original work of
painting or sculpture or of the original manuscript of a writer or composer, subsequent to the
first disposition thereof by the author, the author or his heirs shall have an inalienable right to
participate in the gross proceeds of the sale or lease to the extent of 5%. This right shall exist
during the lifetime of the author and for 50 years after his death (IPC, Sec. 200).

(336) What is the First Sale Doctrine?

After the first sale of the lawfully made copy of the copyrighted work, anyone who is the owner
of that copy can sell or dispose of that copy in any way without any liability for copyright
infringement. The first sale of an authorized copy of the work exhausts the author’s right to
control distribution of copies (IPC, Sec. 177.3).

Ownership of a Copyright
(337) Who is presumed to be the author or maker of a work?
In the absence of proof to the contrary:
1. The natural person whose name is indicated on a work in the usual manner as the author
shall be presumed to be the author of the work, even if the name is a pseudonym, where
the pseudonym leaves no doubt as to the identity of the author (IPC, Sec. 219.1).
2. The person or body corporate whose name appears on an audiovisual work in the usual
manner shall be presumed to be the maker of said work (IPC, 219.2).

(338) May a copyright be transferred, assigned, or licensed?

Yes. The copyright may be assigned or licensed in whole or in part. Within the scope of the
assignment or license, the assignee or licensee is entitled to all the rights and remedies which
the assignor or licensor had with respect to the copyright. (IPC, Sec. 180)

Note: The copyright is distinct from the property in the material object subject to it.
Consequently, the transfer, assignment or licensing of the copyright shall not itself constitute
a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one
or several copies of the work imply transfer, assignment, or licensing of the copyright. (IPC,
Sec. 181)

(339) What is the author’s liability in cases where the author failed to perform his contract to
create a work?
An author cannot be compelled to perform his contract to create a work. However, he may be
held liable for damages for breach of such contract. (IPC Sec. 194)

Limitations on Copyright
(340) What are the limitations on copyright protection?
The following are the limitations on copyright protection:
1. General limitations (IPC, Sec. 184.1);
2. Fair use (IPC, Sec. 185); and
3. Other limitations on copyright (IPC, Sec. 186, 187,188,189, & 190).

(341) What are the general limitations on copyright? (R4EG-CDJB-QI)

 81

The following are the general limitations on copyright under the law, and as such, shall NOT
constitute infringement of copyright:
1. The Recitation or performance of a work, once it has been lawfully made accessible to
the public, if done privately and free of charge or if made strictly for a charitable or
religious institution or society;
2. The Reproduction or communication to the public by mass media of articles on current
political, social, economic, scientific or religious topic, lectures, addresses and other
works of the same nature, which are delivered in public if such use is for information
purposes and has not been expressly reserved, provided that the source is clearly
indicated;
3. The Reproduction and communication to the public of literary, scientific or artistic works
as part of reports of current events by means of photography, cinematography or
broadcasting to the extent necessary for the purpose;
4. The Recording made in schools, universities, or educational institutions of a work
included in a broadcast for their use, provided, that such recording must be deleted
within a reasonable period after they were first broadcast: Provided, further, that such
recording may not be made from audiovisual works which are part of the general cinema
repertoire of feature films except for brief excerpts of the work;
5. The making of Ephemeral recordings by a broadcasting organization by means of its
own facilities and for use in its own broadcast;
6. The use made of a work by or under the direction or control of the Government, by the
National Library or by educational, scientific or professional institutions where such use
is in the public interest and is compatible with fair use;
7. The public performance or the communication to the public of a work, in a place where
no admission fee is charged in respect of such public performance or communication,
by a club or institution for Charitable or educational purpose only, whose aim is not profit
making;
8. Public Display of the original or a copy of the work not made by means of a film, slide,
television image or otherwise on screen or by means of any other device or process:
Provided, that either the work has been published, or, that the original or the copy
displayed has been sold, given away or otherwise transferred to another person by the
author or his successor in title;
9. Any use made of a work for the purpose of any Judicial proceedings or for the giving of
professional advice by a legal practitioner;
10. The reproduction or distribution, on a non-profit basis, of published articles or materials
in a specialized format exclusively for the use of the Blind, visually-and reading-impaired
person, provided that the copyright owner and the date of the original publication shall
be indicated. Provided that the source and the name of the author, if appearing in the
work are mentioned;
11. The making of Quotations from a published work if they are compatible with fair use
and only to the extent justified for the purpose, including quotations from newspaper
articles and periodicals in the form of press summaries; and
12. The Inclusion of a work in a publication, broadcast, or other communication to the
public, sound recording or film, if such inclusion is made by way of illustration for
teaching purposes and is compatible with fair use (IPC, Sec. 184.1).

Doctrine of Fair Use

(342) What is fair use?
Fair use has been defined as a privilege to use the copyrighted material in a reasonable
manner without the consent of the copyright owner or as copying the theme or ideas rather
than their expression (ABS-CBN Corp. v. Gozon, G.R. No. 195956, March 11, 2015).

(343) When is the fair use of a copyrighted work not considered an infringement?
Use of a copyrighted work is not considered an infringement when:
1. The fair use of a copyrighted work for criticism, comment, news reporting, teaching
including multiple copies for classroom use, scholarship, research, and similar purposes
is not an infringement of copyright (IPC, Sec. 185).
2. Decompilation or the reproduction of the code and translation of the forms of a computer
program to achieve the interoperability of an independently created computer program
with other programs may also constitute fair use done for the purpose of obtaining the
information necessary to achieve such interoperability (IPC, Sec. 185.1).
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(344) What are the factors to be considered in determining if there is fair use of a copyrighted
work? (P-NAE)
In determining whether the use made of a work in any particular case is fair use, the factors
to be considered shall include:
1. The Purpose and character of the use, including whether such use is of a commercial
nature or is for non-profit educational purposes;
2. The Nature of the copyrighted work;
3. The Amount and substantiality of the portion used in relation to the copyrighted work as
a whole; and
4. The Effect of the use upon the potential market for or value of the copyrighted work (IPC,
Sec. 185.1).

Note: The fact that the work is unpublished shall not itself bar a finding of fair use (IPC, Sec.
185.2).

(345) Mango Kopya decided to copy and appropriated a portion of Legi Timate’s fiction book.
Mango Kopya argued that the same is not an infringement of copyright as he did not
copied that entire copyrighted work.
It does not necessarily require that the entire copyrighted work, or even a large portion of it,
be copied. If so much is taken that the value of the original work is substantially diminished,
there is an infringement of copyright and to an injurious extent, the work is appropriated
(Habana vs Robles, G.R. No. 131522, July 19, 1999).

Copyright Infringement
(346) What is copyright infringement?
Infringement of a copyright is a trespass on a private domain owned and occupied by the
owner of the copyright, and, therefore, protected by law, and infringement of copyright, or
piracy, which is a synonymous term in this connection, consists in the doing by any person,
without the consent of the owner of the copyright, of anything the sole right to do which is
conferred by statute on the owner of the copyright (Habana v. Robles, G.R. No. 131522, July
19, 1999).

(347) When is a person considered to have committed copyright infringement?

A person infringes a right protected under the Intellectual Property Code when one:
1. Directly commits an infringement;
2. Benefits from the infringing activity of another person who commits an infringement if the
person benefiting has been given notice of the infringing activity and has the right and
ability to control the activities of the other person; or
3. With knowledge of infringing activity, induces, causes or materially contributes to the
infringing conduct of another (IPC, Sec. 216).

Note: Damage is not an element in an infringement suit (FUNA, Intellectual Property Law,
supra at 673).

(348) What is the subconscious copying doctrine?

It contemplates infringement or plagiarism by copying from another work but committed
subconsciously from memory rather than conscious use by deliberately copying (FUNA,
Intellectual Property Law, supra at 674).

Note: A pirated copy is an infringement of the original and it is no defense that the pirate, in
such cases, did not know whether or not he was infringing any copyright; he at least knew
that what he was copying was not his and he copied at his peril (Habana v. Robles, G.R. No.
131522, July 19, 1999; Columbia Pictures v. CA, G.R. No. 131522, July 19, 1999).
 83

(349) What are the kinds of infringement?

The kinds of infringement are:
1. Direct Infringement - It is an infringement by a person who, without the consent of the
owner of the copyright, does anything the sole right to do which is by law conferred on
the owner of the copyright (FUNA, Intellectual Property Law, supra at 676); and
2. Indirect Infringement - Dealings with works of direct infringements (FUNA, Intellectual
Property, supra at 677).

(350) What are the remedies available in cases of copyright infringement?

The remedies available are (IPC Sec 216):
1. Action for damages;
2. Criminal Action;
3. Injunction;
4. Impounding and destruction;
5. Moral and exemplary damages;
6. Seizure and impounding.

VI. Electronic Commerce Act (R.A. No. 8792)

A. Legal Recognition of Electronic Data Messages,

Documents, and Signatures

(351) What are “electronic data messages” and “electronic documents” under the Electronic
Commerce Act?
The Electronic Commerce Act defines “electronic data message” as information generated,
sent, received or stored by electronic, optical or similar means (ELECTRONIC COMMERCE
ACT, Sec. 5(c) [hereinafter E-COMMERCE ACT]).

“Electronic document” refers to information or the representation of information, data, figures,

symbols or other modes of written expression, described or however represented, by which a
right is established or an obligation extinguished, or by which a fact may be proved and
affirmed, which is received, recorded, transmitted, stored, processed, retrieved or produced
electronically (E-COMMERCE ACT, Sec. 5(f)).

(352) Are facsimile transmissions considered “electronic data messages” or “electronic

documents” within the context of the Electronic Commerce Act of 2000 (R.A. No. 8729)?
No, facsimile transmissions are not considered as “electronic data messages” or “electronic
documents.” The E-Commerce Act considers an electronic data message or an electronic
document as the functional equivalent of a written document for evidentiary purposes. To be
admissible in evidence as an electronic data message or to be considered as the functional
equivalent of an original document under the Best Evidence Rule, the writing must be an
“electronic data message” or an “electronic document.” In an ordinary facsimile transmission,
there exists an original paper-based information or data that is scanned, sent through a phone
line, and re-printed at the receiving end. The terms “electronic data message” and “electronic
document,” as defined under the E-Commerce Act of 2000, do not include a facsimile
transmission. Accordingly, a facsimile transmission cannot be considered as electronic
evidence (MCC Industrial Sales Corporation v. Ssangyong Corporation, G.R. No. 170633,
October 17, 2007). Note however that the case is different when the fax is sent through a
computer with built-in fax transmitter.

(353) In an action for enforcement of contract of carriage and suretyship against Common
Carrier D, Plaintiff P offered the following as documentary evidence to prove its claims.
First, P submitted a photocopy of an official purchase order written up by the seller’s
secretary offered as evidence that the parties agreed on the delivery of 1,000 sacks of
rice in exchange for Php1,000,000.00.
Second, P submitted a video recording of the parties’ last conference call where the
lawyer of the D’s insurer read out loud, for the benefit of both parties, the terms of its
 84

contract of suretyship to pay D’s compliance bond as proof of the suretyship contract
itself.

Finally, P submitted a printout of a photograph he took of him tendering his formal

notice of claim to D, both to prove that he had sent a notice and to prove its contents.

D filed an opposition to the admissibility of all the evidence submitted by the plaintiff
arguing that the evidence submitted were not electronic documents within the meaning
of the Electronic Commerce Act which would give rise to the principle of non-
discrimination. Decide.

I disagree with D. The second and third pieces of evidence are electronic documents.
However, only the third piece of evidence is sufficient to prove the fact for which it was offered.

On the first piece of evidence, the Supreme Court has ruled that photostatic copies
(photocopies) of documents are not electronic documents within the meaning of the E-
Commerce Act. What differentiates electronic documents from paper-based documents is the
manner by which the information is processed; clearly, the information in an electronic
document is received, recorded, transmitted, stored, processed, retrieved, or produced
electronically. The purchase order however was clearly recorded physically by pen and paper
before it was photocopied. Thus, it is not an electronic document (National Power Corp. v.
Codilla, Jr., G.R. No. 170491, April 4, 2007). The submission of a photocopy is inadmissible
under the best evidence rule unless there are grounds to allow the admission of the non-
original copy (RULES OF COURT, Rule 130, Sec. 3).

B. Presumption Relating to Electronic Signatures

(354) Q: Ms. K filed an action for enforcement of contract against Mr. T. Ms. K alleged that on
the basis of several email messages between Mr. T and her, Mr. T obligated himself to
deliver his car. For this purpose, Ms. K printed out the email messages from her mail
server. Elements of the contract were found in 3 messages and all of the messages
bore the full name of Mr. T at the bottom as well as his personal mobile number.

In his defense, Mr. T argued that he had left his email inadvertently open in a computer
café and that his email was used without his consent. Thus, the fact that the messages
bore his “electronic signature” did not bind him to the contract. Decide.

Mr. T’s defense does not lie. In any proceeding involving an electronic signature, it shall be
presumed that:
1. The electronic signature is the signature of the person to whom it correlates; and
2. The electronic signature was affixed by that person with the intention of signing or
approving the electronic document unless:
a. The person relying on the electronically signed electronic document knows or has
notice of defects in or unreliability of the signature, or
b. Reliance on the electronic signature is not reasonable under the circumstances (E-
COMMERCE ACT, Sec. 9).

In this case, Mr. T never denied that the email messages presented by Ms. K were sent
through his email account. There is nothing in the email which would have notified Katie that
the signature was not reliable. Thus, Ms. K may rely on the signature in the absence of clear
and convincing proof to the contrary to overthrow the presumption. If Mr. T fails to prove that
his email account had been used without authority, the presumption must be made in Ms. K’s
favor.
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C. Admissibility and Evidential Weight of Electronic Data

Message or Electronic Document

(355) May contracts be expressed in electronic form?

Yes. Except as otherwise agreed by the parties the elements of contracts required under
existing laws for the perfection thereof may be expressed in, demonstrated, and proved by
means of electronic data message or electronic documents. No contract shall be denied
validity or enforceability on the sole ground that it is in the form of an electronic data message
or electronic document, or that any or all of the elements required under existing laws for the
formation of the contracts is expressed, demonstrated, and proved by means of electronic
documents (E-COMMERCE ACT, Sec. 16(1)). This is called the Principle of Non-
Discrimination under the E-Commerce Act.

(356) Through a mobile banking application, Mr. T sent electronic messages to Bank P
containing instructions to debit his savings account and credit the said amount to Ms.
L’s account with the same bank. Can the transaction be considered a negotiable bill of
exchange that is subject of documentary stamps tax?
No. Such instructions are parallel to an electronic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank. Electronic messages
cannot be considered negotiable instruments as they lack the feature of negotiability. Such
message amounts to nothing more than memoranda of a transfer of funds (Hongkong and
Shanghai Banking Corp. v. Commissioner on Internal Revenue, G.R. No. 166018, June
4,2014).

(357) Are screenshots of the confirmation message that the amount had been credited
admissible as evidence of payment in an action for collection of a sum of money by
Ms. L against Mr. T?
Yes. Information shall not be denied legal effect, validity, or enforceability solely on the
grounds that it is in the data message purporting to give rise to such legal effect, or that it is
merely referred to in that electronic data message (E-COMMERCE ACT, Sec. 6). An
acknowledgement or receipt of payment made electronically (such as receipts issued after
online transactions) produces the effect of payment. It is not required that a physical printed
copy of it is made and sent to give it effect.

(358) What are the factors to consider in assessing the evidential weight of an electronic data
message or document admitted into evidence?
In assessing the evidential weight of an electronic data message or electronic document, the
reliability of the manner in which it was generated, stored, or communicated, the reliability
of the manner in which its originator was identified, and other relevant factors shall be given
due regard (E-COMMERCE ACT, Sec. 12).

D. Obligation of Confidentiality
(359) Q: Under the E-Commerce Act, what is the obligation of confidentiality?
Except for the purposes authorized under the E-Commerce Act, any person who obtained
access to any electronic key, electronic data message or electronic document, book, register,
correspondence, information, or other material pursuant to any powers conferred, shall not
convey to or share the same with any other person (E-COMMERCE ACT, Sec. 32).
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VII. FOREIGN INVESTMENT ACT

A. Policy of the Law [Sec.1, RA 11647]

(360) What is the declared state policy of the Foreign Investments Act? (AEWA)
Recognizing that increased capital and technology benefits the Philippines, and that global
and regional economies affect the Philippine economy, it is the policy of the State:
1. To Attract, promote and welcome productive investments from foreign individuals,
partnerships, corporations, and governments, including their political subdivisions, in
activities which significantly contribute to:
a. Sustainable, inclusive, resilient, and innovative economic growth,
b. Productivity,
c. Global competitiveness,
d. Employment creation,
e. Technological advancement, and
f. Countrywide development to the extent that foreign investment is allowed in such
activity by the Constitution and relevant laws, and consistent with the protection of
national security.

2. To Encourage foreign investments in enterprises that:

a. Significantly expand livelihood and employment opportunities for Filipinos:
b. Enhance economic value of agricultural products;
c. Promote the welfare of Filipino consumers;
d. Expand the scope, quality and volume of exports and their access to foreign
markets; and/or
e. Transfer relevant technologies in agriculture, industry and support services.

3. To Welcome foreign investments as a supplement to Filipino capital and technology in

those enterprises serving mainly the domestic market;

4. To promote Accountability and integrity in public office, as well as the promotion and
administration of efficient public service to entice foreign investments (R.A. No. 7042, as
amended by R.A. No. 11647 otherwise known as the “Foreign Investments Act”. Sec. 2
[hereinafter FIA]).

B. Definition of Terms [Sec. 2, RA 11647]

(361) What is meant by the term “foreign investment”?

The term "foreign investment" shall mean an equity investment made by a non-Philippine
national in the form of foreign exchange and/or other assets actually transferred to the
Philippines and duly registered with the BSP (FIA, Sec. 3(c), as amended by R.A. No. 11647).

(362) What does “doing business” mean under the Foreign Investments Act? (SAPO)
The phrase "doing business" shall include:
1. Soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches;
2. Appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totalling 180 days or more;
3. Participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and
4. Any Other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive prosecution of, commercial gain
or of the purpose and object of the business organization (FIA, Sec. 3(d)).
 87

(363) What is an export enterprise?

The term "export enterprise" shall mean an enterprise wherein a manufacture, processor or
service (including tourism) enterprise exports sixty per cent (60%) or more of its output, or
wherein a trader purchases products domestically and exports 60% or more of such
purchases (FIA, Sec. 3(e)).

(364) What is a domestic market enterprise?

The term "domestic market enterprise" shall mean an enterprise which produces goods for
sale, or renders services to the domestic market entirely or if exporting a portion of its output
fails to consistently export at least sixty percent (60%) thereof (FIA, Sec. 3(f)).

C. Registration of Investment of Non-Philippine Nationals

[Sec.6, RA 11647]

(365) How are investments of non-Philippine nationals registered?

Non-Philippine nationals may do business in the Philippines without need of prior approval
unless the business is wholly or partly nationalized. Wholly or partly nationalized means
participation of non-Philippine nationals in the enterprise is prohibited or limited to a smaller
percentage by existing law.
1. Foreign corporations must secure a license to do business from the SEC if it wants to
do business in the Philippines. Single proprietorships must register with DTI (AQUINO
& SUNDIANG, Reviewer on Commercial Law, p. 458-459).
2. Non-Philippine nationals may also invest in a domestic enterprise up to 100% of its
capital, unless partly or wholly nationalized. The SEC or the DTI, as the case may be,
shall not impose any limitations on the extent of foreign ownership in an enterprise
additional to those provided in FIA (FIA, Sec. 5, as amended by R.A. No. 11647).
3. Any enterprise seeking to avail of incentives under the Omnibus Investments Code of
1987 must apply for registration with the BOI. However, registration can also be under
the Philippine Export Zone Authority (PEZA) for investors in export zones (Id.).

Note: A non-Philippine national intending to engage in the same line of business as an existing
joint venture, in which he or his majority shareholder is a substantial partner, must disclose
the fact and the names and addresses of the partners in the existing joint venture in his
application for registration with the SEC (Id.)

Note: During the transitory period, the SEC shall disallow registration of the applying non-
Philippine national if the existing joint venture enterprise, particularly the Filipino partners
therein, can reasonably prove they are capable to make the investment needed for the
domestic market activities to be undertaken by the competing applicant. Upon effectivity of
the FIA, the SEC shall effect registration of any enterprise applying under this Act within 15
days upon submission of completed requirements (FIA, Sec. 5, as amended by R.A. No.
11647).

D. Foreign Investments in Export Enterprises [Sec.7, RA

11647]

(366) What is the requirement for export enterprises owned by non-Philippine nationals to
be valid in the Philippines? (RAN)
1. Export enterprises which are non-Philippine nationals shall Register with BOI and submit
the reports that may be required to ensure continuing compliance of the export enterprise
with its export requirement.
2. The BOI shall Advise SEC or DTI, as the case may be, of any export enterprise that fails
to meet the export ratio requirement.
3. The SEC or DTI shall order the Non-complying export enterprise to reduce its sales to
the domestic market to not more than 40% of its total production (FIA, Sec. 6, as amended
by R.A. No. 11647).
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E. Foreign Investments in Domestic Market Enterprises [Sec.

7, RA 7042]

(367) At what rate are foreign investments in the domestic market enterprises allowed?
Non-Philippine nationals may own up to 100% of domestic market enterprises unless foreign
ownership therein is prohibited or limited by the Constitution and existing law or Foreign
Investment Negative List (FIA, Sec. 7).

F. Foreign Investment Negative List [Sec. 8, RA 11647]

(368) What are the components of Foreign Investment Negative List?

The Foreign Investment Negative List has two component lists:
1. List A shall enumerate the areas of activities reserved to Philippine Nationals by mandate
of the Constitution and specific laws.
2. List B shall contain the areas of activities and enterprises regulated pursuant to law:
a. Which are defense-related activities requiring prior clearance and authorization from
DND to engage in such activity, such as manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons, military ordinance, explosives,
pyrotechnics and similar materials, unless such manufacturing or repair activity is
specifically authorized by the Secretary of National Defense; or
b. Which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses,
dance halls; sauna and steam bathhouses and massage clinics (FIA, Sec. 8, as
amended by R.A. No. 11647).

VIII. Public Service Act

A. Critical Infrastructure [Sec. 2(e), RA 11659]

(369) What are critical infrastructures under the Public Service Act, as Amended by R.A. No.
11659?
Critical infrastructures refer to any public service which owns, uses, or operates systems and
assets, whether physical or virtual, so vital to the Republic of the Philippines that the incapacity
or destruction of such systems or assets would have a detrimental impact on national security,
including telecommunications and other vital services as may be declared by the President of
the Philippines (PUBLIC SERVICE ACT, AS AMENDED BY R.A. NO. 11659, SEC. 25
[hereinafter PSA, AS AMENDED BY R.A. NO. 11659]).

B. Foreign State-Owned Enterprise [Sec. 2(g), RA 11659]

(370) When can an entity be considered a foreign state-owned enterprise?

Under the PSA, a foreign state-owned enterprise is an entity in which a foreign state: (OCA)
1. Directly or indirectly Owns more than 50% of the capital, taking into account both the
voting rights and beneficial ownership;
2. Controls, through ownership interests, the exercise of more than 50% of the voting rights;
or
3. Holds the power to Appoint a majority of members of the board of directors or any other
equivalent management body (PSA, AS AMENDED BY R.A. NO. 11659, Sec. 2(g)).
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C. Public Service as Public Utility [Sec. 4, RA 11659]

(371) Q: Does the Congress still have power to grant franchises to public services, as well
as to public utilities?
Yes, the Congress still has power to grant franchises to public services, including public
utilities. The Public Service Commission (Commission) has jurisdiction and supervision over
all public services, including public utilities, and their franchises, equipment, and other
properties, and in the exercise of its authority, it shall have the necessary powers and the aid
of public force. However, nothing in R.A. No. 11659 shall be interpreted to diminish, limit, or
restrict the authority of Congress from granting franchises to public services, including public
utilities, and other activities as may be provided by law. Any franchise or certificate necessary
for the operation of a public service shall be granted by Congress unless otherwise previously
delegated by law to the relevant Administrative Agencies (PSA, AS AMENDED BY R.A. NO.
11659, Sec. 4(g)).

(372) What are considered as public utilities?

Public utility refers to a public service that operates, manages, or controls for public use any
of the following: (DiTPeWSU)
1. Distribution of Electricity;
2. Transmission of Electricity;
3. Petroleum and Petroleum Products Pipeline Transmission Systems;
4. Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including
sewerage pipeline systems;
5. Seaports; and
6. Public Utility Vehicles.

All concessionaires, joint ventures, and other similar entities that wholly operate, manage, or
control for public use the sectors listed above are public utilities (PSA, AS AMENDED BY R.A.
No. 11659, Sec. 13(d)). Such public utilities are subject to the requirement that at least 60%
of their capital must be owned by Filipinos (AQUINO & SUNDIANG, Reviewer on Commercial
Law, pp. 194).

(373) What criteria must be satisfied for public service to be classified as a public utility?
Upon recommendation of the National Economic and Development Authority (NEDA), the
President may recommend to Congress the classification of a public service as a public utility
based on the following criteria (SMNO):
1. The person or juridical entity regularly Supplies and transmits and distributes to the public
through a network a commodity or service of public consequence;
2. The commodity or service is a natural Monopoly that needs to be regulated when the
common good so requires. For this purpose, natural monopoly exists when the market
demand for a commodity or service can be supplied by a single entity at a lower cost than
by two or more entities;
3. The commodity or service is Necessary for the maintenance of life and occupation of the
public; and
4. The commodity or service is Obligated to provide adequate service to the public on
demand.

Note: The IRR of the Public Service Act, as amended by R.A. No. 11659 was released on
March 20, 2023 and became effective on April 2, 2023. It provides the following factors to be
considered in the review of NEDA for reclassification of public service:
1. The commodity or service can only be regularly supplied, transmitted, and distributed to
the public though an Infrastructure network, composed of nodes and links, specifically
built to facilitate the delivery of the commodity or service;
2. The commodity or service is a Natural monopoly based on, but not limited to, the
following: (EHDM)
a. Economies of scale characterized by declining average cost relative to output;
b. High fixed cost;
c. Industry or market Demand is insufficient to support two or more firms; and
d. Monopoly power is not solely due to regulatory or legal restrictions.
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3. The commodity or service is necessary for the maintenance of Life, livelihood or

employment if the general public; and
4. An Uninterrupted market supply of the commodity or service is required to meet market
demand, whether such market demand is actual or potential (Implementing Rules and
Regulations of R.A. No. 11659, Sec. 14 [hereinafter referred to as IRR of R.A. No.
11659]).

(374) What is the effect if a public service is not classified as a public utility?
Public services that are not public utilities must still secure the certificate or franchise to
operate from the Commission. However, a public service that is not a public utility is not
subject to the constitutional provision requiring Filipino ownership of 60% of its outstanding
capital stock (AQUINO & SUNDIANG, Reviewer on Commercial Law, p. 196-197).
Notwithstanding any law to the contrary, nationality requirements shall not be imposed by the
relevant Administrative Agencies on any public service not classified as a public utility (PSA,
AS AMENDED BY R.A. No. 11659, Sec. 13).

D. Unlawful Acts [Sec. 9, RA 11659]

(375) Mr. A and Mr. B were walking along the sidewalk when a taxicab stopped beside them.
Three men, including the taxi driver, alighted and accosted and held-up Mr. A and Mr.
B. After investigation, it was found that the taxicab was registered under the name of
Mr. X. Should the Certificate of Public Convenience of Mr. X be cancelled pursuant to
Section 19(a) of the Public Service Act for failure to render safe, proper or adequate
service?
No. Section 19(a) of the Public Service Act contemplates of failure to provide a service that is
safe, proper or adequate and refusal to render any service which can reasonably be
demanded and furnished. It refers specifically to the operator's inability to provide reliable
vehicles to transport the riding public to their places of destination and to the failure to provide
an adequate number of units authorized under his franchise at all times to secure the public
of sustained service. In this case, the facts do not show that Mr. X rendered service that is
unsafe, inadequate and improper. While Sec. 19(a) of the PSA does not require a passenger-
operator relationship, a single hold-up incident which does not clearly link Mr. X’s taxicab is
not comprehended within its meaning (Manzanal v. Ausejo, G.R. No. L-31056, August 4,
1988).

(376) Due to heavy rain brought about by a typhoon, the local government of Abra declared
a state of calamity. Can ABC Corporation, an entity engaged in the business of
transporting goods and passengers within Abra, refuse to render its services to the
public during a state of calamity?
No, ABC Corporation cannot refuse to render its services to the public during a state of
calamity. Under the Public Service Act, it is unlawful for any public service to refuse or neglect,
when requested by the Administrative Agency to urgently use, deliver, or render the public
service for the purpose of avoiding further loss on human, material, economic, or environment
during a state of calamity (PSA, AS AMENDED BY R.A. No. 11659, Sec. 9).

E. Powers of the President to Suspend or Prohibit

Transaction or Investment [Sec. 23, RA 11659]

(377) How can the President prevent the full control by foreigners of a public service?
The Public Service Act provides that in the interest of national security, the President, after
review, evaluation, and recommendation of the relevant government department or
Administrative Agency, within 60 days from receipt of the recommendation, may suspend or
prohibit any proposed merger or acquisition transaction, or any investment in a public service
that results in the grant of control, whether direct or indirect, to a foreigner or a foreign
corporation. In such case, the Philippine Competition Commission (PCC) may be consulted
on all matters relating to mergers and acquisitions (PSA, AS AMENDED BY R.A. No. 11659,
Sec. 23).
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F. Investments by an Entity Controlled by or Acting on

Behalf of the Foreign Government, or Foreign State-
owned Enterprises [Sec. 24, RA 11659]

(378) Can TBZ Corporation, a foreign corporation from the Netherlands, be allowed to own
capital in public services classified as public utility?
No, TBZ Corporation cannot be allowed to own capital in public service classified as public
utility. An entity controlled by or acting on behalf of a foreign government or foreign state-
owned enterprises are prohibited from owning capital in any public service classified as public
utility or critical infrastructure. However, such prohibition shall apply only to investments made
after effectivity of the Public Service Act, as amended by R.A. No. 11659 (PSA, AS AMENDED
BY R.A. NO. 11659, Sec. 24).

G. Reciprocity Clause [Sec. 25, RA 11659]

(379) When can ownership of foreign nationals exceed 50% of the capital of entities engaged
in the operation and management of critical infrastructure?
Under the Public Service Act, as amended by R.A. No. 11659, foreign nationals shall not be
allowed to own more than 50% of the capital of entities engaged in the operation and
management of critical infrastructure unless the country of such foreign national accords
reciprocity to Philippine Nationals as may be provided by foreign law, treaty or international
agreement. Reciprocity may be satisfied by according rights of similar value in other economic
sectors (PSA, AS AMENDED BY R.A. NO. 11659, SEC. 25).