Commercial Law Study Guide | Negotiable Instrument | Letter Of Credit

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CODE OF COMMERCE Commerce  It is that branch of human activity, the purpose of which is to bring products to the consumer by means of exchanges or operations which tend to supply and extend to him, habitually, with intent to gain at the proper time and place in good quality and quantity.  “Commerce” and “trade” are used interchangeably although the former is more commonly used in international dealings and the latter in domestic ones. (Pandect of Commercial Law and jurisprudence, justice Jose Vitug, 1997 ed.) Commercial Law  It is that branch of private law governing acts of commerce (Business intercourse) and/or the juridical relations arising from such commercial acts. (Pandect of commercial law and jurisprudence, justice Jose Vitug, 1997 ed.)  Principal characteristics: 1. uniform 2. universal 3. equitable 4. customary 5. progressive Law Merchant/Lex Mercatoria  An old international law of merchants and mariners growing out of their customary practices. It was a law practiced and enforced by businessman and ship owners in their own courts without professional judges or lawyers. (Tristan Catindig, Notes on Selected Commercial Laws) Commercial Laws in the Philippines A. Code of Commerce (Portions still in force) 1. Merchants, Commercial registries, Book of Merchants, General provisions on Commercial Contracts (Arts. 1-63) 2. Joint Accounts (Arts. 239-243) 3. Transfers of non- negotiable credits (Arts. 347- 348)

4. Commercial Contracts of Overland transportation (Arts. 349-379) 5. Letters of Credit(Arts. 567-572) 6. Maritime Commerce (Atrs.573-869) B. Special Laws 1. Corporation Code 2. Negotiable Instruments Law 3. Insurance Code 4. Insolvency Law 5. Securities Registration Code 6. Public Service Law 7. General Banking Law 8. Warehouse Receipts Law 9. Chattel Mortgage Law 10. Others C. New Civil Code (repealed certain contracts in the Code of Commerce) 1. Sales 2. Partnership 3. Agency 4. Loan 5. Deposit 6. Guaranty Merchants A. Foreign Merchants  Those engaged in business in the Philippines 1. As to capacity to contract - governed by the laws of their country 2. As to the creation of their establishments, their mercantile operations and the jurisdiction of our courts - governed by the Code of Commerce Note: The Corporation Code applies to corporations. B. Filipino Merchants 1. Natural Person  Qualifications: a. Legal capacity to engage in commerce (capacity) i. of legal age (18years) ii. has free disposition of property b. habitually engaged in commerce (habituality) 2. Juridical person  Qualifications: a. industrial or commercial company b. organized in accordance with existing legislation Habituality 1. Series of acts:  the repetition and continuation of commercial acts in such manner that they are related to each other by reason of the commercial or end which they 1

Commercial Law Study Guide
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tend to have, which is, the exchange or circulation of products. 2. Single acts:  Act which manifests the intention to engage habitually in commerce.  Examples: Throwing open to the public a shop or establishment; public announce; etc.  Presumption of habituality Exists from the moment a person who intends to engage in commerce announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial operations. (Art. 3 of code of commerce) Disqualifications from Engaging in Commerce A. Absolute disqualifications: 1. those serving the penalty of civil interdiction; 2. those judicially declared insolvent; 3. those who are absolutely disqualified under special laws. B. Relative Disqualifications: 1. Certain government officials, such as judicial officers, prosecutors, department heads, collectors, and custodian of government funds 2. Money and commercial brokers 3. those who are under relative disqualification under special laws 4. Members of Congress. 5. President, Vice President, members of the Cabinet and their deputies or assistants. 6. Members of the Constitutional Commission. 7. President, Vice President, Members of the Cabinet , Congress, Supreme Court and the Constitutional Commission, Ombudsman with respect to any loan, guaranty, or other form of financial accommodation for any business purpose by any government- owned or controlled bank to them. ABSOLUTE INCAPACITY Extends through out the Philippines Effect of act is null and void RELATIVE INCAPACITY Extends only to the territory where the officer is exercising his functions Effect is to subject the violator to disciplinary action or punishment

Acts of Commerce (Commercial Transactions) 1) Those acts contained in the Code of Commerce and 2) all others of analogous character. The Code of Commerce does not attempt anywhere to define what commercial transactions are. It only specifies two general classes.  Moreover, an act need not be performed by the merchant in order that it may be considered an act of commerce. (Cia Agricola de Ultramar v. Reyes, 4 PHIL 2)  Governing Law (in successive order): 1) Code of Commerce; 2) commercial usage; and 3) Civil Code. Commercial Registry 1. A book where entries are made of merchants and of documents affecting their commercial transactions; OR 2. An office established for the purpose of copying and recording verbatim certain classes of documents of commercial nature. Nature of Registration 1. By individual merchants – optional; 2. By corporations – compulsory, as it is the fact of registration which creates the Corporation; 3. Partnerships with a capital of P3,000 or more or where the contributions consist of real estate properties – Compulsory, as provided by Art.1772 of the Civil Code; 4. Philippine Vessels – a. With more than 3 tons gross – compulsory b. With gross tonnage of 3 tons or less – optional. Effect of Failure to Register  An individual merchant who fails to register cannot request the inscription of any document in the mercantile registry, nor take advantage of its effects (Art. 18, Code of Commerce)  Failure to register the articles of incorporation of a corporation will not create the corporation.  Failure to register a partnership does not affect the existence of juridical personality, whether or not it has P3, 000 or more or real estate properties on contributions by the partners.(Bar Review Materials in Commercial Law, J. Miravite, 2005 ed.) 2

Commercial Law Study Guide
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Required Books of Merchants 1. Under the Code of Commerce a. Book of inventories and balances b. Journal c. ledger d. Books for copies of letters and telegrams. 2. Under special laws; e.g stock and transfer book under the corporation Code 3. Under the National Internal Revenue Code. Commercial Contracts  Those entered into by, merchants in the pursuit of their activities as such merchants, those involving articles of commerce, or those defined as such contract by certain special commercials laws.  An agreement between two or more merchants or non-merchants bonding themselves to give or to do something in commercial transactions. (Del Viso 88 cited in Miravite Bar Review Materials in Commercial law.) Governing Laws: 1. Code of Commerce- primary 2. Civil Code- suppletory (Art. 18, Civil Code)  But in case of inconsistency. The lather prevails except as to contracts explicitly governed by the former such as bottomry and respondentia. Formalities: General Rule: Need not be in any particular form Exception: 1. Contracts required by the code or special laws to be in writing or in a certain form. 2. Foreign contracts executed abroad, required by foreign law to be in a particular form. Perfection: General Rule: Commercial contracts are consensual as to perfection. Exception: When the Code of commerce requires specific forms such as charter parties and loans on bottomry and respondentia. Exact moment of perfection: General Rule: All contracts, whether civil or commercial, are perfected from the moment the offeror has notice of the offeree’s acceptance. (Cognition Theory; Art.1319, Civil Code) Exception: Under Art.54 of the Code of Commerce, commercial contracts entered into by correspondence are perfected from the moment an answer is made accepting the offer or the condition by which the latter may be modified. (Manifestation Theory) 3

However, Justice Vitug believes that Article 54 is applicable only to contracts still specially governed by the Code of Commerce. Joint Account (cuentas en participacion)  A business arrangement of merchants where other merchants agree to contribute the amount of capital agreed upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine. (Art;239) Distinctions between Joint Account and Partnership (2000 Bar Exam) JOINT ACCOUNT No firm name No common fund No juridical personality Only ostensible partner manages Liquidation done by ostensible partner Liquidation done by ostensible partner PARTNERSHIP Has a firm name Has common fund Has juridical personality All general partners liable to third persons All general partners manage Liquidation entrusted to any partners.

LETTER OF CREDIT ( LC) (2000, 2002, 2005 Bar Exams)  That issued by one merchant to another for the purpose of attending to a commercial transaction (Art. 567) An instrument issued by a bank on behalf on one of its customers, authorizing an individual or firm to draw on the bank or one of its correspondents for its account under certain conditions of the credit. (Commercial Law Review, C Villanueva, 2004 ed.) An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. (Prudential Banks vs. CA, 216 SCRA 257). Through it, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credits or commitment fees mutually agreed upon. Letters of credit are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not

Commercial Law Study Guide
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accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. (Metropolitan vs. Daway) A letter of credit is a commercial transaction because it is one of the contracts provided for by the Code of Commerce not repealed by the Civil Code. (Bar Review Materials in Commercial Law, Miravite, 2005 ed.)

Essential conditions: 1. Issued in favor of a definite person and not to order; 2. Amount fixed and specified. (Art. 568) Note: If any of these essential conditions is not present, the instrument is merely considered as a letter of recommendation. Duration: a. Upon the period fixed by the parties: or b. If none is fixed, 6 months from its date if used in the Philippines, or 12 months if used abroad. (Art. 572) Note: The LC becomes void if it is not used within the period applicable. Perfection: LC are perfected from the moment the correspondent bank makes payment to persons in whose favor the LC has been opened. (Belman, Inc. vs. Central Bank, 104 Phil. 887) Parties 1. Applicant/buyer/importer – one who purchases the goods, procures the LC, and obliges himself to reimburse the issuing bank upon receipt of the documents of title. 2. Issuing/opening bank – one which issues the LC, and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement; and 3. Seller/exporter/beneficiary – one who sells the goods to the buyer, and who delivers the draft and documents to the issuing bank to recover payment.  The number of parties may be increased. Modern letters of credit are usually not made between natural persons. They involve bank- to bank transactions. 4. Advertising/ Notifying Bank - the correspondent bank (agent) of the opening bank through which it advises the beneficiary of the LC. 5. Confirming Bank – bank which, upon the request of the beneficiary, confirms the LC issued. 6. Paying Bank – bank on which the drafts are to be drawn, which

may be the opening bank or another bank not in the city of the beneficiary. 7. Negotiating Bank – bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary.  A mere advertising or notifying bank is not liable for a breach of the letter of credit, while a confirming bank is liable in case of breach thereof. An advertising bank is bound only to check the apparent authenticity of the letter of credit. (Bank of America NT. & SA vs. CA, G.R. No. 105395, December 10, 1993) Nature: The LC is the financial devise (mode of payment) developed a s a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.

Stages: 1. Contract of sale between the buyer and seller 2. Application for LC by the buyer with the bank 3. Issuance of LC by the bank 4. shipping of goods by the seller 5. Execution of draft and tender of documents by the seller 6. Redemption of draft (payment)and obtaining of documents by the issuing bank 7. reimbursement to the bank and obtaining of documents by the buyer

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Commercial Law Study Guide
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 There are at least 3 distinct and independent contracts involved in a LC: 1. Contract of sale between the buyer and the seller 2. Contract of the buyer with the issuing bank 3. LC roper in which bank promises to pay the seller pursuant to the terms and conditions stated therein (with a pour autrui stipulation in favor of the seller). How their governed respective relationships are

a. Issuing bank and applicant/buyer/importer – governed by the terms of the application and agreement for the issuance of the letter of the credit by the bank. b. Issuing bank and Beneficiary/seller/exporter – governed by the terms of the letter of the credit issued by the bank. c. Applicant and beneficiary – governed by the sales of contract (Bar Review Materials in Commercial Law, J. MIravite, 2005 ed.)  The opening of the letter of credit in favor of a vendor is only a mode of payment; it is not among the essential requirements of a contract of sale enumerated in arts.1305 and 1474 of the Civil Code. Therefore it does not prevent the perfection of the contract between the parties. (Johannes vs. CA, 227 SCRA 717) Other contracts maybe involved especially where additional parties are present. Independence Principle  The 3 basic contract s are distinct and indepen dent, 5

and the underta kings of the respecti ve parties in each are neither subject to claims and defense s nor affected by the breach in the others.  A direct conseq uence of the indepen dence principl e is the rule that banks deal only which docume nts and not with goods, services or obligation to which they relate. By this so-called independence principle, the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. (Bank of America, NT. & SA vs. CA, G.R. No. 105395, December 10, 1993) Rule of strict compliance  It espouses that the documents tendered by the seller/beneficiary must strictly conform to terms of the LC. (Feati bank vs. CA 196 SCRA 576)  Thus, a correspondent bank which departs from what has been stipulated under the letter of credit acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank the money thus paid to the beneficiary.(Feati Bank vs. CA)

Commercial Law Study Guide
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Kinds of LC CONFIRMED LC A LC issued by one bank confirmed by another , in which case both banks are obligated to honor drafts drawn in compliance with the credit IRREVOCABLE LC A definite undertaking on the part of the issuing bank and constitutes the engagement of the bank to the beneficiary and bona fide holders of drafts drawn and or documents presented thereunder, that the provisions for payment, acceptance and negotiation contained in the credit will be fully fulfilled, provided that all the terms and conditions of the credit are complied with. The issuing bank may not without the consent of the beneficiary (seller) and the applicant ( buyer) revoke his understanding under the LC.

beneficiary have been reimbursed to the opening bank by the buyer Governing Law 1. Code of Commerce 2. Uniform Customs Documentary Credits

and

Practice

for

Note: the Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be payable to order. NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) I. General Concepts Negotiable Instrument (2005 Bar Exam) - a written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law, Sundiang and Aquino) Functions of Negotiable Instrument: 1. Substitute for money 2. Medium of exchange 3. Tool used in commercial transaction. Two Distinctive Features/Characteristics of NI: (2005 Bar Exam) 1. Negotiability - it is that attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses.  Requisites of Negotiability: (1996 Bar Exam) a. It must be in writing and signed by the maker or drawer; b. Must contain an unconditional promise or order to pay a sum certain in money; c. Must be payable on demand, or at a fixed or determinable future time; d. Must be payable to order or to bearer; and 6

The correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as to its own according to the terms and conditions of the credit.

OTHER KINDS OF LC REVOLVING LC A credit that provides for the renewed credit to become available as soon as the opening bank has advised the paying bank that the drafts already drawn by the BACK-TOBACK LC A credit with identical documentary requirements and covering the same merchandise as another LC, except for a difference in the price. STANDBY LC A security arrangement for the performance of certain obligations. It can be drawn against only if another business transaction is permitted.

Commercial Law Study Guide
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e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
2.

Accumulation of Secondary Contracts secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder.

Distinctions between Negotiable Instruments and Non-Negotiable Instruments NEGOTIABLE INSTRUMENTS 1. Must contain all requisites of sec.1 2. Transferable by negotiation and assignment. 3. HDC can have rights better than his transferor 4. Prior parties warrant payment (secondary liability). 5. Governed by NIL 6. Transferee is a holder in due course. 7. Defenses generally not available. NON-NEGOTIABLE INSTRUMENTS 1. Does not contain all requisites of sec.1 2. Transferable by assignment only 3. A transferee acquires no better right than his transferor 4. Prior parties do not warrant payment but merely the legality of his title. 5. NIL only applies by analogy 6. Transferee is assignee only. 7. All defenses available against last transferee.

Classes of Negotiable Instruments: (2002 Bar Exam) 1. Promissory Note (PN) - unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer. 2. Bill of Exchange (BE) -an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. 3. Check- a bill of exchange drawn on a bank payable on demand. Kinds:

Manager’s / Cashier’s Check – drawn by a bank on itself and therefore, it is a primary obligation of the bank. o It is accepted in advance by the act of its issuance and is not subject to countermand by the payor after indorsement. o The bank’s manager signs manager’s check while cashier’s check is signed by the bank cashier. • Memorandum Check – it is like an ordinary check except that the word “memorandum,” “mem” or “memo” is written upon the face of the check, signifying that the drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment at maturity and if due notice of the presentment and nonpayment should be given. • Certified Check – one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment • Traveler’s check – one upon which the holder’s signature must appear twice, one to be affixed by him at the time it is issued and the second o counter-signature, to be affixed by him in the presence of the payee before it is paid, otherwise it is incomplete • Crossed check (1995, 1996, 2004, 2005 Bar Exams) – when 2 parallel lines are drawn across its face or across a corner thereof. If the name of a bank appears between the parallel lines, the check is said to be specially crossed, and payment should be made only if presented by the named bank. If no name appears between the parallel lines, the check is said to be generally crossed, and payment should be made only upon presentment by some bank. • Effects of crossing a check: a. That the check may not be encashed but only be deposited in the bank; b. That the check may be negotiated only once to one who has an account with a bank; and c. That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire

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Commercial Law Study Guide
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if he has received the check pursuant to that purpose. Stale check – one which has not been presented for payment within a reasonable time after its issue

5. A holder, if HDC, may acquire rights over the instrument better than his predecessors PROMISSORY NOTE 1.Unconditional promise 2. Involves 2 parties 3. Maker is primarily liable 4.Only one presentment: for payment

5. A holder can never acquire rights to the document better than his predecessors

Iron Clad Rule: Prohibits the countermanding of payment of certified checks. (Republic of the Philippines v. PNB. GR No. 16106. December 1, 1961) Bills in Set: one composed of several parts, each part numbered and containing a reference to the other parts, the whole of the parts constituting but one bill. • Rights of holders where parts are negotiated separately: 1. If both are HDC, the holder whose title first accrues is considered the true owner of the bill. 2. But the person who accepts or pays in due course shall not be prejudiced. • Obligations of holder who indorses 2 or more parts of the Bill in Set: 1. The person shall be liable on every such part. 2. Every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Distinctions between a Negotiable Instrument and a Negotiable Document of Title (2005 Bar Exam) NEGOTIABLE INSTRUMENT 1. The subject is Money 2. Is itself the property with value NEGOTIABLE DOCUMENT OF TITLE 1. The subject is goods 2. The document is a mere evidence of title – the things of value being the goods mentioned in the document 3. Does not have these requisites 4. Intermediate parties are not secondarily liable if the document is dishonored

BILL OF EXCHANGE 1.Unconditional order 2.Involves 3 parties 3.Drawer is only secondarily liable 4.Two presentments: for acceptance and for payment

Instances when BILL may be treated as a NOTE: 1. Drawer and drawee are the same person. 2. Drawee is a fictitious person. 3. Drawee has no capacity to contract. 4. When instrument is so ambiguous, the holder may treat it either as a BILL or a NOTE. BILLOF EXCHANGE 1.Not necessarily drawn on a deposit. The drawee need not be a bank. 2.Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay. 3. May be presented for payment within a reasonable time after its last negotiation because it may be further negotiated. 4.May be payable on demand or at a fixed or determinable future time CHECK 1.It is necessary that a check is drawn on a bank deposit. The drawee is always a bank. 2.Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay. 3. Must be presented for payment within a reasonable time after its issue. 4. Always payable on demand

3.

Has all the requisites of Sec 1 of NIL 4. A holder of NI may run after the secondary parties for payment if dishonored by the party primarily liable

Other Forms of Negotiable Instruments 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer 2. Trade acceptance 3. Bonds, which are in the nature of promissory notes

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Commercial Law Study Guide
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4. Drafts, which are bills of exchange drawn by one bank upon another  All of these must comply with Sec. 1, NIL Note: Letters of credit are not negotiable. Legal Tender That kind of money that the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. Note: A negotiable instrument although intended to be a substitute for money, is generally not a legal tender. Incidents in “Life” of Negotiable Instrument 1. Issue 2. Delivery 3. Negotiation 4. Presentment for acceptance, in certain kinds of bills of exchange 5. Acceptance 6. Dishonor by non-acceptance 7. Presentment for payment 8. Dishonor by non-payment 9. Notice of dishonor 10. Discharge Issue - the first delivery of the instrument, complete in form, to a person who takes it as a holder. Delivery - transfer of possession, actual or constructive, from one person to another Holder – refers to the: a. The payee or indorsee of a bill or note who is in possession of it, or b. The bearer thereof (sec.191) Bearer - the person in possession of a bill or note which is payable to bearer. Person - includes a body of persons, whether incorporated or not. II. Negotiability Requisites of Negotiability (Sec. 1, NIL) (1996 Bar Exam) a. It must be in writing and signed by the maker or drawer; b. Must contain an unconditional promise or order to pay a sum certain in money; c. Must be payable on demand, or at a fixed or determinable future time; d. Must be payable to order or to bearer; and e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

1. Must be in writing, signed by the maker or drawer; - Otherwise it cannot be a substitute for money. 2. Must contain an unconditional promise or order to pay a sum certain in money; Certainty of sum payable. The sum payable is a sum certain although it is to be paid: a. With interest; or b. By stated installments; or c. By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or d. With exchange, whether at a fixed rate or at the current rate; or e. With costs of collection or an attorney's fee, in case payment shall not be made at maturity. (sec. 2) Acceleration clause - renders whole debt due and demandable upon failure of obligor to comply with certain conditions. When promise is unconditional An unqualified order or promise to pay is unconditional though coupled with: a. An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or b. A statement of the transaction which gives rise to the instrument.  An order or promise to pay out of a particular fund is not unconditional.

FUND FOR REIMBURSEMENT 1. Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated.

PARTICULAR FUND FOR PAYMENT 1. There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient.

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2.

Particular fund indicated is NOT the direct source of payment but only the source of reimbursement. Indication in the instrument does not affect the unconditional nature of the promise or order.

2. Particular fund indicated is the direct source of payment. 3. Indication in the instrument makes the promise or order conditional.

person so issuing, accepting, or indorsing it, payable on demand. 4. Payable to order or to bearer When payable to order The instrument is drawn payable: a. To the order of a specified person or b. To him or his order.  The payee must be named or otherwise indicated therein with reasonable certainty.  It may be drawn payable to the order of: a. A payee who is not maker, drawer, or drawee; or b. The drawer or maker; or c. The drawee; or d. Two or more payees jointly; or e. One or some of several payees; or f. The holder of an office for the time being. When payable to bearer. a. When it is expressed to be so payable; or b. When it is payable to a person named therein or bearer; or c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or d. When the name of the payee does not purport to be the name of any person; or e. When the only or last indorsement is an indorsement in blank. (Sec. 9) 5. Identification of the drawee  Where the instrument is addressed to a drawee (meaning in a bill of exchange), he must be named or otherwise indicated with reasonable certainty. The holder must know to whom he should present it for acceptance and/or payment; otherwise, the purpose of negotiable instrument as a tool in commercial dealings will be greatly hampered. (Reviewer on Commercial Law, Sundiang and Aquino)  A bill may be addressed to more than one drawee jointly, whether they are partners or not; but not to two or more drawers in the alternative or in succession. (Sec. 128) Test of Negotiability: presence of requirements in Section 1 of NIL. Factors that Determine Negotiability: 10

3.

3. Payable on demand or at a fixed determinable future time; Certainty of time of payment An instrument is payable at a determinable future time which is expressed to be payable: a. At a fixed period after date or sight; or b. On or before a fixed or determinable future time specified therein; or c. On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (sec. 4)  A promise to pay “when able,” “as soon as I can”, etc., without specification of an absolute date is not negotiable. However, there is a difference of opinion as to whether it is a conditional promise or an absolute promise to pay at un unreasonable time: a. Under the first view, negotiability is destroyed both by the condition and by want of a fixed time for payment; b. Under the second view, by the general principle that a promise to pay within a reasonable time is not so certain as to render an instrument negotiable. Aftersight Draft - payable only after the expiration of the stipulated period from acceptance (legal sight).  When payable on demand: a. When it is so expressed to be payable on demand, or at sight, or on presentation; or b. In which no time for payment is expressed. Note: Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the

Commercial Law Study Guide
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1. The whole instrument itself 2. Only what appears on the face of the instrument 3. Provisions of the NIL, Sec.1 BAR QUESTION (Q): Which of the following stipulations or features of a promissory notes (PN) affect or do not affect its negotiability, assuming that the PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below and your corresponding answer, either ‘Affected” or “Not affected.” Explain. (a)The date of the PN is “February 30, 2002.” (b)The PN bears interest payable on the last day of each calendar quarter at a rate equal to 5% above the then prevailing 91-day Tbill rate as published at the beginning of such calendar quarter. (c)The PN gives the maker the option to make payment either in money or in quantity of palay of equivalent value. (d) The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or escort of the holder for 0 days. SUGGESTED ANSWER (SA): (a) NOT AFFECTED. The date is not one of the requirements for negotiability. (b) NOT AFFECTED. The interest is to be computed at a particular time and is determinable. It does not make the sum uncertain or the promise conditional. (c) AFFECTED. Giving the maker an option renders the promise conditional. (d) NOT AFFECTED. Giving the holder an option does not make the promise conditional.

c. waives the benefit of any law intended
for the advantage or protection of the obligor; or d. gives the holder an election to require something to be done in lieu of payment of money.

Confession of judgment – a written statement signed by the defendant, setting forth the basis of liability and authorizing the entry of judgment thereon.  Kinds of confession of judgment a. cognivit actiomen – literally means “he has confessed action”. It is a written confession of action by the defendant acknowledging is indebtedness to the plaintiff after the action has been filed. It is given after the action is brought to save expenses. b. relicta verificationem – literally means “his pleadings being abandoned.” It is confession of judgment by withdrawal of the defense.

Note: However, warrants of attorney to confess judgment, are not authorized nor contemplated by our law. They are void as against public policy because they enlarge the field for fraud, because under these instruments, the promissory bargains away his right to a day in court. The NIL does not sanction nor validated any provision otherwise illegal. Omissions and Provisions that do not affect Negotiability (Sec. 6) The validity and negotiable character of an instrument are not affected by the fact that: a. it is not dated; or b. does not specify the value given, or that any value had been given therefore; or c. does not specify the place where it is drawn or the place where it is payable; or d. bears a seal; or e. designates a particular kind of current money in which payment is to be made.  if it is not dated, the instrument will be considered to be dated as of the time it was issued.  consideration for the instrument is presumed. (art. 154 NCC & sec. 25 NIL)  sec. 73 specifies where presentment for payment should be made when the place of payment is not specified Rules of construction: a. Where the sum payable is expressed in words and also in figures and there is a 11

Additional provisions not affecting negotiability. General Rule: the instrument is non-negotiable if it contains a promise or order to do any act in addition to the payment of money. Exceptions: a. authorizes the sale of collateral securities in case the instrument be not paid at maturity; or b. authorizes a confession of judgment if the instrument be not paid at maturity; or

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b.

c. d.

e.

f.

g.

discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; Where the instrument is not dated, it will be considered to be dated as of the time it was issued; Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. (sec. 17)

deemed a holder for value to the extent of his lien.  Effect of want of consideration: a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Absence of consideration – total lack of any valid consideration for the contract is only a personal defense. Failure of consideration – failure or refusal or one party to do, perform or comply with the consideration agreed upon is also only a personal defense. III. Transfer and Negotiation Types of transfers: 1. Assignment - transfer of title to the instrument, with the assignee generally taking only such title as his assignor has, subject to all defenses available against his assignor; 2. Negotiation - transfer of a negotiable instrument from one person to another made in such a manner as to constitute the transferee the holder thereof 3. By Operation of Law – such as by succession, by insolvency. Distinctions Assignment between Negotiation and

Consideration  Presumption of consideration. - every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.  Value - any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.  Holder for value – one who has given a valuable consideration for the instrument issued or negotiated to him. • What constitutes holder for value: where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. • where the holder has a lien on the instrument arising either from contract or by implication of law, he is

NEGOTIATION 1. Refers only to negotiable instruments; 2. The transferee is a holder; 3. A holder in due course is subject only to real defenses; 4. A holder in due course may acquire a better right than that of a prior party 5. A general indorser warrants the solvency of prior parties;

6. An indorser is not liable unless there be presentment and 12

ASSIGNMENT 1. Refers generally to an ordinary contract; 2. The transferee is an assignee; 3. An assignee is subject to both real and personal defenses; 4. Generally, an assignee merely steps into the shoes of the assignor; 5. An assignor does not warrant the solvency of prior parties unless expressly stipulated or the insolvency is known to him; 6. An assignor is liable even without notice of dishonor;

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notice of dishonor; 7. Negotiation is governed y the NIL.

7. Governed by Arts. 1624 to 1635 (on assignment of credits) of the Civil Code.

b. To bring any action thereon
that the bring; c. indorser could

Methods of negotiation

1.

Order Instrument – Indorsement and Delivery. 2. Bearer Instrument – Delivery only. Indorsement - legal transaction effected by the writing of one's own name at the: a. back of the instrument or b. upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid.  General Rule: indorsement must be of the entire instrument. Exception: where instrument has been paid in part, it may be indorsed as to the residue.  Kinds of indorsement: a. Special - specifies the person to whom or to whose order, the instrument is to be payable (sec. 34) b. Blank - specifies no indorsee: • Instrument is payable to bearer and may be negotiated by delivery (sec. 34) • May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement. c. Restrictive - when the indorsement either: i. Prohibits further negotiation of the instrument; or ii. Constitutes the indorsee the agent of the indorser; or iii. Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive. • A restrictive indorsement confers upon the indorsee the right: a. To receive payment of the instrument;

To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. (sec. 37)  Such indorsement destroys the negotiability of the instrument and bars further negotiation to a holder in due course. Qualified - constitutes the indorser a mere assignor of the title to the instrument. (sec. 38) • made by adding to the indorser's signature words like "sans recourse,” “without recourse", "indorser not holder", "at the indorser's own risk", etc. • The purpose of this kind of indorsement is to transfer title without guaranteeing payment by the primary party. • It does not mean, however, that the qualified indorser incurs no liability at all. The effect is merely to limit his liability. He is secondarily liable for breach of is warranties as an indorser under Sec. 65. Thus, he is liable if the instrument is dishonored by NON-ACCEPTANCE or NON-PAYMENT due to: a. forgery; b. lack of good title to the instrument indorsed; c. lack of capacity to contract on the part of prior parties; or d. the fact that the instrument was valueless or not valid at the time of the indorsement which fact was known to him. Conditional - right of the indorsee is made to depend on the happening of a contingent event • Party required to pay may disregard the conditions. • This kind of indorsement has no effect on the further negotiation of the instrument. The party required to pay, if he chooses, may make payment, disregarding the condition

d.

e.

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without incurring any liability because he is expressly authorized to do so under Sec. 39. But the person who received payment will hold the proceeds subject to the right of the conditional indorser.

BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specifically, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed. Striking out indorsements: the holder may at any time strike out any indorsement, which is not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him, are thereby relieved from liability on the instrument.  If the instrument is payable to bearer on its face, then whether or not there are indorsements on the back of the instrument would be immaterial to the title of the bearer, who is presumptively the owner and holder by his mere possession of such instrument. None of the indorsement would be necessary to it’s title since mere delivery would have been sufficient to transfer title from one holder to another.  Where the instrument is payable to order on its face, the situation is different. First, the indorsement of a special indorsee is necessary for the further negotiation of the instrument. Second, the last indorsement controls the method of further negotiation. When prior party (reacquirer) may negotiate: where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.  In the following cases, a prior party cannot further negotiate the instrument: 1. Where it is payable to the order of a third person, and has been paid by the drawer; 2. Where it was made or accepted for accommodation and has been paid by the party accommodated; 3. In other cases, where the instrument is discharged when acquired by a prior party. Holders Classes of holders: 1. simple holder (sec. 51) 2. holder for value (sec. 26) 3. holder in due course (sec.52, 57)

f. Absolute - one by which indorser binds
himself to pay: i. upon no other condition than failure of prior parties to do so; and ii. upon due notice to him of such failure. Joint - indorsement of instrument payable to 2 or more persons; all must indorse in order for the transaction to operate as a negotiation. • Exceptions to the rule requiring joint indorsement: a. Where the payees or indorsees are partners; and b. Where the payee or indorsee indorsing has authority to indorse for the others. Irregular - a person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery.

g.

h.

 Rules on Indorsements: •
Effect of transfer without indorsement: a. transfer vests in the transferee such title as the transferor had therein (assignment), and b. the right to have the indorsement of the transferor.  For the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.  Applicable only to order instruments

Indorsement of a bearer instrument: where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Note: The rule only applies to originally bearer instruments. If it is originally a BEARER instrument, it will always be a

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Holder in Due Course (1996, 1998, 2000 Bar Exams)  holder who has taken the instrument under the following conditions:

c. case.

facts of the particular

a. That it is complete and regular upon its
face;

b. That he became the holder of it before it
was overdue, and without notice that it has been previously dishonored, if such was the fact; c. That he took it in good faith and for value; d. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.  When title defective - The title of a person who negotiates an instrument is defective when he obtained the instrument or any signature thereto, by: a. fraud, b. duress, or force and fear, c. other unlawful means, d. illegal consideration, e. negotiation in breach of faith, f. circumstances amounting to fraud. g.  What constitutes notice of defect. The person to whom it is negotiated must have: a. actual knowledge of the infirmity or defect, or b. knowledge of such facts that his action in taking the instrument amounted to bad faith. (sec. 56)  Notice before full amount is paid where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid, he will be deemed a holder in due course only to the extent of the amount paid by him.  When person not deemed a holder in due course - where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. • Reasonable time, what constitutes. - regard is to be had to the a. nature of the instrument, b. the usage of trade or business with respect to such instruments, and the

Effect: in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable.  General Rule: every holder is deemed prima facie to be a holder in due course Exception: when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course (shifting of burden of proof). Limitation: the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. (sec. 59)  Rights of a holder in due course: a. he may sue on the instrument in his own name; b. he may receive payment and if payment is in due course, the instrument is discharged. c. holds the instrument free from any defect of title of prior parties, d. holds the instrument free from defenses available to prior parties among themselves, and e. may enforce payment of the instrument for the full amount thereof against all parties liable thereon. Payment in due course is payment made: at or after the maturity of the instrument to the holder thereof in good faith and without notice that his title is defective.  Shelter Rule: a. derives his title through a holder in due course, and b. who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.  Rights of a Holder NOT in Due Course 1. He may sue on the instrument in his own name; 2. He may receive payment and if the payment is in due course, the instrument is discharged; 15

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3. He is entitled to the instrument but holds it subject to the same defenses as if it were nonnegotiable; and 4. He has all the rights of the holder in due course from whom he derived his title in respect of all parties prior to such holder, provided he is not himself a party to any fraud or illegality affecting the instrument. V. Liabilities of Parties Persons primarily liable on instrument: the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable. Classification of parties according to liability Persons liable: In a Promissory Note Maker Indorser 3. Persons negotiating delivery Drawer Acceptor Indorsers 4. Persons negotiating delivery

by

3. his capacity and authority to draw the instrument; and 4. the existence of the payee and his then capacity to indorse. Note: the drawee is not liable until he accepts the instrument • Where a check is certified by a bank, it is equivalent to an acceptance. Since certification is equivalent to acceptance, a bank which has certified a check whether at the request of the holder or of a drawer, has the same liabilities and makes the same warranties as an acceptor. It cannot, after certification, question the genuineness of the drawer’s signature. If it discovers that such signature is forged subsequent to certification but prior to payment, it cannot refuse to pay on the check. If its discovery comes after it has paid the check, it cannot recover back what it paid on the ground of mistaken payment unless the holder is guilty of fraud or negligence. • If a drawee-bank accepts or pays a check despite a stop payment order from the drawer, through oversight or otherwise, it cannot refuse to pay the holder or recover what has been paid; neither may it debit the drawer’s account unless the acceptance nor payment was made prior to the receipt of the order. 2. Parties Secondarily Liable a. Drawer (Sec. 61) • admits the existence of the payee and his capacity to indorse; • engages that the instrument will be accepted or paid by the party primarily liable; and • engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid. b. General Indorser (Sec. 66) • Warrants: 1. genuineness of the instrument; 2. his good title to it; 3. capacity to contract of prior parties; and 4. instrument is valid and subsisting.

In a Bill of Exchange:

by

1. Parties Primarily Liable a. Maker (Sec. 60) • engages to pay according to the tenor of the instrument; and • admits the existence of the payee and his then capacity to indorse at the time of the making of the note. • A person placing his name on the face of a note is prima facie a maker and liable as such; and he is presumed to have acted with care and to have signed the instrument with full knowledge of its contents. b. Acceptor or Drawee (Sec. 62) • engages to pay according to the tenor of his acceptance; • admits: 1. the existence of the drawer, 2. the genuineness of his signature and

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c.

• engages that the instrument will be accepted or paid by the party primarily liable; and • engages that if the instrument is dishonored and proper proceedings are taken, he will pay to the party entitled to be paid. Irregular Indorser – a person, not otherwise a party to an instrument, places his signature thereon in blank before delivery. Rules: • If instrument payable to the order of a 3rd person, he is liable to the payee and subsequent parties. • If instrument payable to order of maker or drawer, he is liable to all parties subsequent to the maker or drawer. • If he signs for accommodation of the payee, he is liable to all parties subsequent to the payee.

2. Indorses the instrument after its delivery to the payee; and 3. Liable only to parties subsequent to him

delivery; 3. Liable to the payee and subsequent parties unless he signs for the accommodation of the payee in which case he is liable only to all parties subsequent to the payee.

3.

Distinctions: Primary Party 1. Unconditionally Bound; 2.Absolutely required to pay upon the maturity of the instrument. Secondary Party 1. Conditionally bound; 2. Undertakes to pay only after certain conditions have been fulfilled: a. due presentment for payment or acceptance to primary party; b. dishonor by such party; and c. the taking of proceedings required by law after dishonor. Drawer 1. A party only to a bill; 2. The drawer makes such admission; 3. Makes no warranties, but he engages to pay after certain conditions are complied with. IRREGULAR INDORSER 1. Always makes a blank indorsement; 2. Indorses before its

Parties with Limited Liability (sec. 65; Metropol Financing v. Sambok, 120 SCRA 864) a. Qualified Indorser - warrants that:  instrument is genuine and in all respects what it purports to be;  he has good title to it;  all prior parties had capacity to contract;  he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. b. Persons Negotiating by Delivery  warranties same as those of qualified indorsers; and  warranties extend transferee only. to immediate

Liability 1. To pay a sum certain. 2. Requires Notice of Dishonor. 3. Action can be brought only on maturity of instrument.

Warranty 1. No obligation to pay. 2. Notice of Dishonor is not a requirement. 3. Action may be brought anytime.

Indorser 1. A party to either a note or a bill; 2. Does not make any admission regarding the existence of the payee and his capacity to indorse; and 3. Has warranties. (2005 Bar Exam) GENERAL INDORSER 1. Makes either a blank or special indorsement;

Negotiating by Mere delivery or by Qualified Indorsement 1. No secondary liability; 2. Warrants that he has no knowledge of any fact, which would impair the validity of the instrument or render it valueless.

General Indorser 1. With secondary liability; 2. Warrants that the instrument is, at the time of his indorsement, valid and subsisting.

4. Other parties who may be liable:

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General Rule: One whose signature does not appear on the instrument shall not be liable thereon. Exceptions: 1. The principal who signs through an agent is liable; 2. The forger is liable; 3. One who indorses in a separate instrument (allonge) is liable; 4. One who signs his assumed or trade name is liable; and 5. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee. Requisites for an Agent to escape liability: 1. must be duly authorized; 2. add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or in a representative capacity; and 3. disclose his principal.  A signature by “procuration” operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. (sec. 21)  Indorsement or assignment of the NI by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. (sec. 22) Accomodation Party (1996, 1998, 2005 Bar Exams) One who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person  Liability: such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.  Effects: 1. accommodation party is generally regarded as a surety for the party accommodated; 2. When accommodation party makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement.

accommodation party without first directing his action against the principal debtor provided: 1. he made the payment by virtue of judicial demand; or 2. the principal debtor is insolvent. Note: A corporation cannot act as an accommodation party. The issuance or indorsement of negotiable instrument by a corporation without consideration and for the accommodation of another is ultra vires. (Crisologo v. CA, 117 SCRA 594). Order of liability of indorsers: 1. among themselves – indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise (sec. 68) 2. to the holder – indorsers are liable in any order

Rights of accommodation parties as against each other: the other may demand contribution from his co-

Defenses (1996, 1998, 2004, 2005 Bar Exams) Kinds: 1. Real/Absolute Defenses - those that attach to the instrument itself and are available against all holders, whether in due course or not. Examples: 1. Alteration; 2. Non-delivery of incomplete instrument; 3. Duress amounting to forgery; 4. Fraud in factum or fraud in esse contractus; 5. Minority; 6. Marriage in the case of a wife; 7. Insanity where the insane person has a guardian appointed by the court; 8. Ultra vires acts of a corporation, where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances; 9. Want of authority of agent; 10. Execution of instrument between public enemies; 11. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute; and 12. Forgery. 2. Personal/Equitable Defenses – those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. Examples: 18

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1. Absence or failure of consideration, partial or total; 2. Want of delivery of complete instrument; 3. Insertion of wrong date in an instrument, where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period after sight and the acceptance is undated; 4. Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered; 5. Fraud in inducement; 6. Acquisition of instrument by force, duress, or fear; 7. Acquisition of the instrument by unlawful means; 8. Acquisition of the instrument for an illegal consideration; 9. Negotiation in breach of faith; 10. Negotiation under circumstances that amount to fraud; 11. Mistake; 12. Intoxication (according to better authority); 13. Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued; 14. Want of authority of agent where he has 15. apparent authority; 16. Insanity where there is no notice of insanity on the part of the one contracting with the insane person; and 17. Illegality of contract where the form or consideration is illegal. Fraud in Factum 1. It exists in those cases in which a person, without negligence, has signed an instrument which was in fact a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of its, as where a not was signed by one under the belief that he was signing as a witness to a deed. 2. This kind of fraud is a real defense because there is no Fraud in Inducement 1. It is that which related to the quality, quantity, value or character of the consideration of the instrument. In this case, the signer is led by deception to execute what he knows is a negotiable instrument. It implies that the signer knew what he was signing but that he was induced by fraud to sign. 2. Such type of fraud is only a personal defense because it

contract. It implies that the person did not know what he was signing. But where the signer by the exercise of reasonable diligence could have discovered the nature of the instrument, the fraud cannot be considered a real defense, as where a person, who can read, signed a note but failed to read it.

does not prevent a contract.

1.

 Effects of Defenses: Complete and undelivered instrument • as between immediate parties and as regards a remote party other than a holder in due course, the delivery must be authorized in order to be effectual • where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed • where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved

2. Incomplete but delivered instrument (1997,
2004 Bar Exams) • where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. • it must be filled up strictly in accordance with the authority given and within a reasonable time • if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Incomplete and undelivered instrument • it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. • However, subsequent indorsers are liable. Forgery (1995, 2006 Bar Exams)

3.

4.
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• A.

counterfeit making or fraudulent alteration of any writing, which may consist of: 1. signing of another’s name with intent to defraud; or 2. alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud. Effect: signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party thereto, can be acquired through or under such signature Exception: unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Cut-Off Rule General Rule: Parties prior to the forged signature are cut-off from the parties after the forgery in the sense that prior parties cannot be held liable and can raise the defense of forgery. The holder can only enforce the instrument against parties who became such after the forgery. Exception: When the prior parties are precluded from setting up the defense of forgery. Persons precluded from setting up the defense of forgery are: 1. Those who by their acts, silence, or negligence, are estopped from setting up the defense of forgery; 2. Those who warrant or admit the genuineness of the signature in question. These include acts or omissions that amount to ratification, express or implied. Note: Persons precluded from setting up the defense of forgery may still recover damages under the NCC provisions on quasi-delicts. Rules on Forgery: Promissory Notes 1. Maker’s signature forged Order Instrument a. Maker is not liable because he never became a party to the instrument. b. Indorse rs subsequent to forgery are liable because of their warranties.

c. a.

Party who made the forgery is liable. Bearer Instrument Maker is not liable.

b.
Indorsers may be made liable to those persons who obtain title through their indorsements. c. Party who made the forgery is liable. Payee’s signature forged Order Instrument

2.

a.
Maker and payee not liable

b.
Indorsers subsequent to the forgery is liable.

c.
Party who made the forgery is liable Bearer Instrument a. Maker is liable. Indorsement is not necessary to title and the maker engages to pay holder. b. Party who made the forgery is liable 3. Indorser’s signature forged Order Instrument a. Maker, payee, and indorser who signature was forged is not liable. b. Indorsers subsequent to forgery are liable because of their warranties. c. Party who made the forgery is liable. Bearer Instrument a. Maker is liable. Indorsement is not necessary to title and the maker engages to pay holder. b. Indorser whose signature was forged is not liable c. Party who made the forgery is liable. Bill of Exchange 1. Drawer’s signature forged Order Instrument a. Drawer is not liable. b. Drawee is liable if it paid (nor recourse to drawer) because he admitted the genuineness of the drawer’s signature. Drawee cannot recover from the collecting bank because there is no privity

B.

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between the collecting bank and the drawer. There is no warranty as to the signature of the drawer. (Associated Bank v. CA) c. Indorsers subsequent to forgery are liable. d. Party who made the forgery is liable Bearer Instrument a. Drawer is not liable b. Drawee is liable if it paid. Drawee cannot recover from the collecting bank because it is bound to known the drawer’s signature since the latter is its depositor. c. Party who made the forgery is liable. 2. Payee’s signature forged Order Instrument a. Drawer, drawee and payee not liable. Cut-off rule applies. b. Indorsers subsequent to forgery are liable. c. Party who made the forgery is liable Bearer Instrument a. Drawer is liable. His indorsement is not necessary to pass title. b. Drawee is liable. No privity between drawer and payee because indorsement of payee is not necessary (Ang Tek Lian case, 87 SCRA 383) c. Payee is not liable d. Collecting bank is liable because of warranty. e. Party who made the forgery is liable. 3. Indorser’s signature forged Order Instrument a. Drawer, payee and indorser whose signature was forged are not liable. b. Drawee is liable if it paid. c. Indorsers subsequent to forgery are liable. d. Party who made the forgery is liable. Bearer Instrument a. Drawer is liable. Indorsement is not necessary to pass title. b. Drawee is liable.

c. Indorser whose signature was
forged is liable because indorsement is not necessary to pass title. Party who made the forgery is liable.

d.

5. Alteration (1995, 1996, 1999 Bar Exams) • Effect: the instrument is avoided

• Exceptions: 1. against a party who has himself made, authorized, or assented to the alteration 2. subsequent indorsers 3. holder in due course not a party to the alteration - he may enforce payment according to its original tenor • Changes constituting material alteration: a. date; b. sum payable, either for principal or interest; c. time or place of payment; d. number or relations of the parties; e. medium or currency in which payment is to be made; f. that which adds a place of payment where no place of payment is specified; and g. any other change or addition which alters the effect of the instrument in any respect. Note: a material alteration is one that alters the effect of the instrument; one which changes the items required to be stated under Sec. 1, NIL. • Spoliation – alteration made by a stranger. • The general rule denies the drawee bank’s right to charge against the drawer’s account the amount of an altered check. However, the latter’s negligence, before or after the alteration, may estop him from setting such alteration as against an innocent drawee bank who has paid the check. • In cases of altered checks and checks with forged indorsements, the drawee bank must notify and return them to the collecting bank before 4:00 p.m. of the next day of clearing, but the drawee bank may still return them even after such time provided he does so within 24 hours from its discovery of the

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alteration or forged instruments so that recovery of the amount may be had. BUT, in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same. Note: Alteration is only a partial real defense because a holder in due course can still enforce it according to its original tenor. VI. Presentment for Payment Presentment for payment – the presentation of an instrument to the person primarily liable for the purpose of demanding and receiving payment. General Rules: • presentment for payment to charge persons primarily liable is not necessary • presentment for payment to charge persons secondarily liable is necessary Exceptions: a. drawer - where he has no right to expect or require that the drawee or acceptor will pay the instrument (sec. 79) b. indorser - where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. c. when dispensed: i. where, after the exercise of reasonable diligence, presentment as required cannot be made; ii. where the drawee is a fictitious person; iii. by waiver of presentment, express or implied. (sec. 82) d. when the instrument has been dishonored by non-acceptance (sec. 151) Sufficiency of presentment. It must be: 1. made by the holder or any person authorized to receive payment on his behalf; 2. at a reasonable hour on a business day; 3. at a proper place; 4. to the person primarily liable or if he is absent or inaccessible, to any person found at the place where the presentment is made. How made: 1. personal demand for payment at the proper place; and

2. readiness to exhibit the instrument if required, and to receive payment and to surrender the instrument if the debtor is willing to pay. • Purpose of exhibition: To enable the debtor to: 1. determine the genuineness of the instrument and the right of the holder to receive payment; and 2. to enable him to reclaim possession upon payment. • When exhibition excused: 1. when debtor does not demand to see the instrument but refuses payment on some other grounds, and 2. when the instrument is lost or destroyed. When made: • where the instrument is payable at a fixed or determinable future time, presentment must be made on the day it falls due • where it is payable on demand: a. promissory note: presentment must be made within a reasonable time after its issue b. bill of exchange: presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof • a check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Time of maturity: • every negotiable instrument is payable at the time fixed therein without grace • when the day of maturity falls upon a Sunday or a holiday, the instruments are to be presented for payment on the next succeeding business day • when the day of maturity falls upon a Saturday:  Instrument is payable at a fixed or determinable future time (time instrument) - presented for payment is on the next succeeding business day  instruments is payable on demand - at the option of the holder, be presented for payment: a. before 12:00 noon on Saturday when that entire day is not a holiday or b. the next succeeding business day. How computed:  excluding the day from which the time is to begin to run, and by including the date of payment 22

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applies to instruments which are payable at a fixed period after date, after sight, or after that happening of a specified event. Proper place for presentment: a. Where a place of payment is specified in the instrument and it is there presented; b. Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; c. Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; d. In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. When delay in presentment excused – delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence.  VII. Presentment for Acceptance Presentment for acceptance – the production or exhibition of a bill of exchange to the drawee for his acceptance or payment General Rule: presentment for acceptance is not necessary to render any party to the bill liable. Exception: presentment for acceptance must be made: a. Where the bill is payable after sight, or where presentment for acceptance is necessary in order to fix the maturity of the instrument; or b. Where the bill expressly stipulates that it shall be presented for acceptance; or Where the bill is drawn payable elsewhere, then at the residence or place of business of the drawee. (sec. 143) Note: in all the above cases, the holder must either present the bill for acceptance or negotiate it within a reasonable time; otherwise, the drawer and all indorsers are discharged. How made: 1. made by or on behalf of the holder; 2. at a reasonable hour; c.

3. on a business day; 4. before the bill is overdue and within reasonable time; 5. to the drawee or some person authorized to accept or refuse acceptance on his behalf. Days presentment may be made. If date of presentment is: a. Sunday or a holiday – must be made on the next succeeding business day b. Saturday – before 12:00 noon on Saturday provided that it is not a holiday. When delay for presentment excused: a. bill is drawn payable elsewhere than at the place of business or the residence of the drawee. b. holder has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due. Effect: does not discharge the drawers and indorsers. Where presentment is excused: a. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. b. Where presentment can not be made after the exercise of reasonable diligence c. Where, although presentment has been irregular, acceptance has been refused on some other ground. Note: bill may be treated as dishonored by non-acceptance. Duty of holder where bill not accepted. where a bill is duly presented for acceptance and is not accepted within the prescribed time (24 hours – sec. 136), the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. VIII. Acceptance Acceptance: the signification by the drawee of his assent to the order of the drawer. It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him. How made : 1) must be in writing 2) signed by the drawee 3) must not express that the drawee will perform his promise by any other means than the payment of money. • the holder of the bill presenting the same for acceptance may require that the acceptance be written on the bill, and if such request is refused, may treat the bill as dishonored. 23

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where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Period for drawee to accept - allowed 24 hours after presentment in which to decide whether or not he will accept the bill; if acceptance is given, it dates as of the day of presentation. Constructive/Implied acceptance: where a drawee refuses within 24 hours after delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Note: same effect if the drawee destroys the instrument. Kinds: 1. General - assents without qualification to the order of the drawer. 2. Qualified - which in express terms varies the effect of the bill as drawn. a. Conditional - makes payment by the acceptor dependent on the fulfillment of a condition therein stated. b. Partial - an acceptance to pay part only of the amount for which the bill is drawn. i. Local - an acceptance to pay only at a particular place. ii. Qualified as to time iii. The acceptance of some one or more of the drawees but not of all. 3. Constructive Rights of parties as to qualified acceptance. • Holder: he may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by nonacceptance. • Drawer or indorser: when he receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto (implied assent). Effect of taking a qualified acceptance: the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. Other rules of acceptance: • a bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment

when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. • an unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. • where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Effect: the drawer and all indorsers are discharged from liability thereon. Acceptance for Honor - an undertaking by a stranger to a bill after protest for the benefit of any party liable thereon or for the honor of the person for whose account the bill is drawn which acceptance inures also to the benefit of all parties subsequent to the person for whose honor it is accepted, and conditioned to pay the bill when it becomes due if the original drawee does not pay it.  Requisites: 1. the bill must have been protested for dishonor by nonacceptance or for better security; 2. the acceptor for honor must be a stranger and not a party already liable on the instrument; 3. bill must not be overdue; 4. acceptance for honor must be with the consent of the holder of the instrument.  Formalities: 1. must be in writing; 2. must indicate that it is an acceptance for honor; 3. signed by the acceptor for honor; 4. must contain an express or implied promise to pay money; 5. the accepted bill for honor must be delivered to the holder. IX. Notice of Dishonor and Protest Notice of Dishonor - notice given by the holder or his agent to a party or parties secondarily liable that the instrument was dishonored by non-acceptance by the drawee of a bill, or by non-payment by the acceptor of a bill or by nonpayment by a maker of a note.

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- If such notice is given by a notary public, it is called PROTEST.

1. 2.

1. 2.

1. 2. 3.

Effect of failure to give notice: parties secondarily liable are discharged  Requisites: 1. Given by holder or his agent, or by any party who may be compelled by the holder to pay; 2. Given to secondary party or his agent; 3. Given within the periods provided by law; 4. Given at the proper place.  When notice of dishonor dispensed with: 1. when party to be notified knows about the dishonor, actually or constructively; 2. if waived; and 3. when after due diligence, it cannot be given.  How given: by bringing verbally or by writing to the knowledge of the person liable the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.  To whom given: Non-acceptance (bill) – to persons secondarily liable, namely, the drawer and indorsers as the case may be. Non-payment (both bill and note) – indorsers. Note: Notice must be given to persons secondarily liable. Otherwise, such parties are discharged. Notice may be given to the party himself or to his agent.  By whom given: the holder another on behalf of the holder any party to the instrument who may be compelled to pay it to the holder, and who would have a right of reimbursement from the party to whom notice is given.  Notice of dishonor given by or on behalf of a holder inures to the benefit of: a. all parties prior to the holder, who have a right of recourse against the party to whom the notice is given; and b. all holders subsequent to the holder giving notice. Notice of dishonor given by or on behalf of a party entitled to give notice inures to the benefit of: a. the holder; and b. all parties subsequent to the party to whom notice is given.

Where an instrument is dishonored in the hands of an agent, he can do either of the ff.: a. directly give notice to persons secondarily liable thereon; or b. give notice to his principal. In such case, he must give notice within the time allowed by law as if he were a holder. A party giving notice is deemed to have given due notice where: a. the notice of dishonor is duly addressed, and b. deposited in the post-office, even when there is miscarriage of mail. Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Notice may be waived either before the time of giving notice, or after the omission to give due notice. Waiver may be expressed or implied. As to who are affected by an express waiver depends on where the waiver is written: a. if it appears in the body or on the face of the instrument, it binds all parties; but b. if it is written above the signature of an indorser, it binds him only. Notice of dishonor is not required to be given to the drawer in any of the ff. cases: 1. drawer and drawee are the same; 2. drawee is a fictitious person or not having the capacity to contract; 3. drawer is the person to whom the instrument is presented for payment; 4. the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; 5. where the drawer has countermanded payment. Notice of dishonor is not required to be given to an indorser in the ff. cases: 1. drawee is a fictitious person or does not have the capacity to contract, and indorser was aware of that fact at the time he indorsed the instrument; 2. indorser is the person to whom the instrument is presented for payment; 3. instrument was made or accepted for his accommodation.

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If an instrument is not accepted by the drawee, there is no sense presenting it again for payment, and notice of dishonor must at once be given. If there was acceptance, presentment for payment is still required and if payment is refused, there is a need for notice of dishonor. An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission.

Dishonor by Non-Payment When instrument dishonored by non-payment: a. it is duly presented for payment and payment is refused or cannot be obtained; or b. presentment is excused and the instrument is overdue and unpaid. Effect of dishonor: an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. Dishonor by Non-Acceptance Instances: When it is duly presented for acceptance and such an acceptance is refused or can not be obtained; or b. When presentment for acceptance is excused and the bill is not accepted (sec. 149) Effect: an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. Note: where a bill is duly presented for acceptance and is not accepted within the prescribed time (24 hours), the person presenting it must treat the bill as dishonored by non-acceptance. When Instrument Considered to be Dishonored a. If it is not accepted when presented for acceptance; or b. If it is not paid when presented for payment at maturity; or c. If presentment is excused or waived and the instrument is past due and unpaid. Protest - the formal instrument executed usually by a notary public certifying that the legal steps necessary to fix the liability of the drawee and the indorsers have been taken.

Effect of waiver: where protest is waived, presentment and notice of dishonor are also deemed waived. But where the notice of dishonor is waived, presentment is not waived.  Applicability: protest is necessary only in case of foreign bills of exchange which have been dishonored by non-acceptance or nonpayment, as the case may be. If it is not so protested, the drawer and indorsers are discharged.  Foreign Bill of Exchange: 1. Drawn in the Philippines but payable outside the Philippines. 2. Payable in the Philippines but drawn outside the Philippines.  Protest may be made by:: 1. a notary public; or 2. any respectable resident of the place where the bill is dishonored, in the presence of 2 or more credible witnesses. Protest for better security is one made by the holder of a bill after it has been accepted but before it matures, against the drawer and indorsers, where the acceptor has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of the creditors.  X. Discharge Discharge of instrument - a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated. Instances: 1. By payment in due course by or on behalf of the principal debtor; 2. Payment by accommodated party; 3. Intentional cancellation by the holder; 4. By any act which will discharge a simple contract for the payment of money; 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right. By any act which would discharge a simple contract: 1. Payment or performance; 2. Loss of the thing due; 3. Condonation or remission; 4. Confusion or Merger; 5. Compensation; 6. Novation; 7. Annulment or Rescission; 8. Fulfillment of a resolutory condition; 9. Prescription. When persons secondarily liable on the instrument are discharged: 1. By any act which discharges the instrument; 26

a.

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2. By the intentional cancellation of his signature by the holder; 3. By the discharge of a prior party; 4. By a valid tender of payment made by a prior party; 5. By the release of the principal debtor, unless the holder’s right of recourse against the party secondarily liable is expressly reserved; 6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument.  In the following cases, the agreement to extend the time of payment does not discharge a party secondarily liable: a. where the extension of time is consented to by such party; b. where the holder expressly reserves his right of recourse against such party.  Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of the parties subsequent to him. Effects of Renunciation: 1. A renunciation in favor of a secondary party may be made by the holder before, at or after maturity of the instrument. Effect: only such secondary party is discharged and all parties subsequent to him but the instrument itself remains in force. 2. A renunciation in favor of the principal debtor may be effected at or after maturity. Effect: the instrument is discharged and all parties thereto provided the renunciation is made unconditionally and absolutely. Note: In either case, renunciation does not affect the rights of a holder in due course without notice.  Cancellation of an instrument includes tearing, erasure, obliteration, or burning. It is not limited to writing of the word ‘cancelled”, or “paid”, or drawing of crisscross lines across the instrument. Payment for Honor - payment made by a person, whether a party to the bill or not, after it has been protested for non-payment, for the benefit of any party liable thereon or for the benefit of the person for whose account it was drawn.  Requisites: 1. the bill has been dishonored by nonpayment; 2. it has been protested for non-payment; 3. payment supra protest (another term for payment for honor because prior protest for non-payment is required) is made by any person, even by a party thereto;

4. the payment is attested by a notarial act of honor which must be appended to the protest or form an extension of it; 5. the notarial act must be based on the declaration made by the payor for honor or his agent of his intention to pay the bill for honor and for whose honor he pays. Note: If the above formalities are not complied with, payment will operate as a mere voluntary payment and the payor will acquire no right to full reimbursement against the party for whose honor he pays.  In payment for honor, the payee cannot refuse payment. If he refuses, he cannot recover from the parties who would have been discharged had he accepted the same. In acceptance for honor, the holder’s consent is necessary.  The payor for honor is given the right to receive both the bill and the protest obviously to enable him to enforce his rights against the parties who are liable to him.

INSURANCE (P.D. No. 1460) I. INTRODUCTION

Laws governing Insurance: a. Insurance Code of 1978; b. Civil Code, Art. 2011 and other articles; c. Family Code (E.O 209); d. Other Special laws. General concepts Contract of Insurance - an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. Contract of Suretyship – an agreement whereby a party called the surety guarantees the performance by another called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It shall be deemed to be an insurance contract if made by a surety who or which, as such, is doing an insurance business. “Doing an insurance business or transacting an insurance business” 1. making or proposing to make, as insurer, any insurance contract 2. making or proposing to make, as surety, any contract of suretyship as a vocation and not as a mere incident to any other legitimate business of a surety 3. doing any insurance business, including a reinsurance business 27

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4. doing or proposing to do any business in substance equivalent to any of the foregoing NOTE: Article 2011 of the Civil Code states that the contract of insurance is governed by special laws and that matters not expressly provided for in the special laws shall be regulated by the Civil Code. (Villanueva, Commercial Law Reviewer) Types of Insurance Contracts 1. LIFE INSURANCE a. individual life (Secs. 179–183, 227) b. group life (Secs. 50, last par., 228) c. industrial life (Secs. 229–231) 2. NON-LIFE INSURANCE a. Marine (Secs. 99–166) b. Fire (Secs. 167–173) c. Casualty (Sec. 174) 3. CONTRACTS OF SURETYSHIP OR BONDING (Secs. 175–178) Note: 1. health and accident insurance are either covered under life or casualty insurance 2. marine, fire and the property aspect of casualty insurance are also referred to as property insurance Nature and Characteristics 1. Risk distributing device – The device of insurance serves to distribute the risk of economic loss among as many as possible of those who are subject to the same kind of risk. By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group. 2. Consensual – it Is perfected by the meeting of the minds of the parties 3. Voluntary – the parties may incorporate such terms and conditions as they may deem convenient. 4. Aleatory – one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time (Article 2010, NCC). 5. Contract of Indemnity – Except life and accident insurance, a contract of insurance is a contract of indemnity whereby the insurer promises to make good only the loss of the insured. 6. Personal Contract - insurer considers the personal qualifications of the insured in approving the contract. 7. Bilateral - both parties are bound to do something.

8. Onerous - there is a valuable consideration called the premium. 9. Conditional - subject to conditions such as the happening of the event insured against, payment of premium, etc. 10. Since insurance is a contract, as such, it is property in legal contemplation Five Cardinal Principles in Insurance 1. Insurable Interest 2. Principle of Utmost Good Faith 3. Contract of indemnity 4. Contract of adhesion (Fine Print Rule) 5. Principle of Subrogation

 Insurable Interest - that interest which
the law requires the owner of the insurance policy to have in the person or thing insured.  Principle of Utmost Good Faith - An insurance contract requires utmost good faith (uberrimae fidei) between the parties. The applicant is enjoined to disclose any material fact which he knows or ought to know.  Contract of Indemnity - It is the basis of all property insurance. The insured who has insurable interest over a property is entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss. • Rules: 1. applies only to property insurance except when the creditor insures the life of his debtor 2. life insurance is not a contract of indemnity 3. insurance contracts are neither wagering nor gambling contracts Reason: it is not a contract of chance and is not used for profit WAGERING CONTRACT The parties contemplate gain through mere chance Gambler courts misfortune Tends to increase the inequality of fortune Essence of gambling is that whatever one wins from a wager is lost by the other wagering party As soon as the party 28 CONTRACT OF INSURANCE The parties seek to distribute the possible loss by reason of mischance Insured seeks to avoid misfortune Tends to equalize fortune What one insured gains is not at the expense of another insured The purchase of

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makes a wager, he creates a risk of loss to himself where no such risk previously existed

insurance does not create a new and non – existing risk of loss to the purchase

 Contract of Adhesion or Fine Print Rule most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed form to which the insured “adhere” if he chooses but which he cannot change. Hence, in case of doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the insured (Rizal Surety and Insurance Co. v. C.A.,336 SCRA 12 [2000].  Principle of Subrogation - A process of legal substitution where the insurer steps into the shoes of the insured and he avails of the latter’s rights against the wrongdoer at the time of loss. The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent upon nor dos it grow out of any private contract. Payment to the insured makes the insurer a subrogee in equity (Malayan Insurance Co. Inc., v. CA, 165 SCRA 536) • Purposes: 1. to make the person who caused the loss responsible for it 2. to prevent the insured from receiving double recovery from the wrongdoer and the insurer - it is a method of implementing the principle of indemnity 3. to prevent tortfeasors from being free from liability and is thus founded on public policy. • Rules: 1. Applicable only to property insurance. Reason: the value of human life is regarded as unlimited and therefore no recovery from a third party can be deemed adequate to compensate the insured’s beneficiary 2. The insurer can only recover from the third person what the insured could have recovered. • No subrogation in the following instances: 1. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage

2. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured’s claim for loss 3. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance Company v. CA, 184 SCRA 54) 4. in life insurance 5. for recovery of loss in excess of insurance coverage

Should the insured, after receiving payment from the insurer, release by his own act the wrongdoer or third party responsible for the loss or damage from liability, the insurer loses his rights against the wrongdoer since the insurer can only be subrogated to only such rights as the insured may have. (Manila Mahogany Mfg. Corp. v. CA, 154 SRA 668) • If the amount paid by the insurance company does not fully cover the injury or loss, it is the aggrieved party, the insured, who is entitled to recover the deficiency from the person responsible for the loss or injury. Requisites for Recovery Upon Insurance 1. the insured must have an insurable interest in the subject matter; 2. the interest is covered by the policy; 3. there must be a loss; 4. the loss must be proximately caused by the peril insured against. Construction of Insurance Contracts  The ambiguous terms are to be construed strictly against the insurer, and liberally in favor of the insured. However, if the terms are clear, there is no room for interpretation.

 The word “intentional” as used in an
accident policy excepting intentional injuries inflicted by the insured or any other person implies the reasoning faculties, consciousness and volition. The exception does not speak of the purpose of inflicting the injury but the fact that the same were intentionally inflicted (Biagtan v. Insular Life Assurance Co., 44 SCRA 58) Distinguishing Elements of an Insurance Contract (GRAIP) 1. Existence of an insurable interest susceptible of pecuniary estimation 29

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2. Risk of loss; 3. Insurer assumes the risk of loss; 4. Such assumption is part of the general
scheme to distribute actual losses among a large group or substantial number of persons bearing somewhat similar risks; and 5. Payment of premiums (Sec.77, ICP). (Philamcare Health Systems, Inc. v. CA, No. 125678, March 18,2002). Note: A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements, it is a risk-distributing device. II. CONTRACT OF INSURANCE

contract, must possess an insurable interest in the subject of the insurance and must not be a public enemy.  Public enemy: a nation with whom the Philippines is at war and it includes every citizen or subject of such nation (Section 7)  A juridical person may only take out a policy of insurance on property owned. The relationship between the insurer and the insured is that of a continent debtor and creditor. 3. Beneficiary – person designated to receive the proceeds of the policy when the risk attaches  Kinds of beneficiary:  a. insured himself b. third person who paid the consideration c. third person though mere bounty of the insured In the second and third cases, the beneficiary is not a party to the contract. In all three cases, the proceeds of the life insurance policy become the exclusive property of the beneficiary upon the death of the insured Rule in the designation of the beneficiary: (1997, 1998, 2001, 2005 Bar Exams) A. Life Insurance 1. a person who insures his own life can designate any person as his beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured subject to the limitations under Art. 739 and Art. 2012 of the NCC.  Reason: in essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded on the same consideration or liberality. (Insular Life v. Ebrado, 80 SCRA 181)  When the court finds that a wagering policy has been taken out by the insured on his life at the behest of a third person who is named as the beneficiary, the contract shall be VOID entirely. 2. A person who insures the life of another person and names himself as the beneficiary must have an insurable interest in such life.  When the owner of the policy insures the life of another – the cestui que vie – and designates a third party as the beneficiary, 30

Requisites of a contract of insurance: 1. A subject matter in which the insured has an insurable interest; 2. Event or peril insured against which may be any contingent or unknown event, past or future, and a duration for the risk thereof; 3. A promise to pay or indemnify in a fixed or ascertainable amount; 4. A consideration for the promise, known as the premium 5. A meeting of minds of the parties upon all the foregoing essentials Perfection  Consensual contract and therefore perfected the moment there is meeting of the minds with respect to the object and the cause or consideration.  Mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance (Great Pacific Life Assurance Corp. v. CA, 89 SCRA 543)  What is being followed in insurance contracts is what is known as the Cognition Theory. Thus, 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 Co. of Canada, 41 PHIL 269) Parties to a contract of insurance 1. Insurer – the person who undertakes to indemnify another.  For a person to be called an insurance agent, it is necessary that he should perform the function for compensation (Aisporna v. CA, 113 SCRA 459) 2. Insured – the party to be indemnified upon the occurrence of the loss. He must have capacity to

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both the owner and beneficiary must have an insurable interest in the life of cestui que vie.  As a general rule, the designation of a beneficiary is revocable unless the insured expressly waived the right to revoke the policy.  The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.

a. appointment of a resident as a general agent b. Paid-up unimpaired assets or capital and reserves not less than that required of Domestic Corporation. c. Deposit for the benefit and security of policyholders, securities satisfactory to the Commission d. Investments should not exceed 20% of the net worth of the foreign corporation or 20% of the capital of the registered enterprise. Subject matter of insurance  Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this chapter.  An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize is not authorized.

B. Property Insurance The beneficiary of property insurance must have an insurable interest in such property, which must exist not only at the time the policy takes effect but also when the loss occurs (Sections 13 and 18)  Effects of irrevocable designation of beneficiary: Insured cannot: 1. assign the policy 2. take the cash surrender value of the policy 3. allow his creditors to attach or execute on the policy 4. add new beneficiary 5. change the irrevocable designation to revocable, even though the change is just and reasonable. The insured does not even retain the power to destroy the contract by refusing to pay the premiums for the beneficiary can protect his interest by paring such premiums for he has an interest in the fulfillment of the obligation.  Limitations in the appointment of beneficiary: 1. the person who takes out a policy acts in good faith; and 2. there is no intent in making the policy merely a cover for a forbidden contract 3. any person forbidden in Art. 739 NCC to receive a donation cannot be named beneficiary (Art. 2012, NCC) Foreign Insurance Corporations - May be authorized by the Commission to engage in insurance business in the country. Requirements:

III.

INSURABLE INTEREST (1997, 1999, 2000, 2001,2002 Bar Exams)

Concept of insurable interest in general  A person has an insurable interest in the subject matter if he is so connected, so situated, so circumstanced, so related, that by the preservation of the property he shall derive pecuniary benefit, and by its destruction he shall suffer pecuniary loss, damage or prejudice.  A policy issued to a person without the requisite insurable interest in the subject matter is a mere wager policy or contract, hence it is VOID. Insurable interest in life insurance  Every person has an insurable interest in the life and health: a. Of himself, of his spouse and of his children; b. Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; A risk of actual monetary loss is essential, it is not necessary that the expectation of pecuniary benefits have legal basis. c. Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and 31

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a. an existing interest d. Of any person upon whose life any estate or interest vested in him depends. An existing interest may be legal title or equitable title. b. any inchoate interest founded on an existing interest; or A stockholder has an inchoate interest in the property of the corporation of which he is the stockholder which is founded on an existing interest arising from his ownership of shares in the corporation. c. an expectancy coupled with an existing interest in that out of which the expectancy arises. The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof.  When it should exist: When the insurance takes effect and when the loss occurs, but need not exist in the meantime  Amount: The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof (Section 17) Reason: this is because a contract of property insurance that gives the insured more than the indemnity of his actual loss suffered by reason of the designated perils is a wagering policy contrary to public policy, hence, VOID. INSURABLE INTER EST IN LIFE Must exist only at the time the policy takes effect and need not exist at the time of loss Insurable interest unlimited except in life insurance effected by creditor on life of debtor The expectation of benefit to be derived from the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient without more. INSURABLE INTEREST IN PROPERTY Must exist at time the policy takes effect and when the loss occurs Insurable interest limited to actual value of interest in property insured An expectation of a benefit to be derived from the continued existence of the property insured must have a legal basis.

 When it should exist: Insurable interest
in the life of another need exist only at the time of perfection of the contract and need not exist thereafter or when the loss occurs  Amount: No limit in the amount the insured can insure his life except in a creditor-debtor relationship where the creditor insures the life of his debtor, (the limit of insurable interest is equal to the amount of the debt)  When insurance taken by the creditor on the life of the debtor for the benefit of the creditor: An insuring creditor could only recover such amounts as remain unpaid at the time of the death of the debtor. If the whole debt has already been paid, recovery on the policy by the creditor is no longer possible. Neither can the debtor recover for he is not a privy to the contract of insurance taken.  When insurance taken by debtor n his life for the benefit of the creditor: If at the time of the death of the debtor the whole debt has already been paid, the creditor can no longer recover on the policy because the principle of indemnity applies. Where the debtor in good faith insures his life for the benefit of the creditor, full payment of the debt does not invalidate the policy, in suh case, the proceeds shall go to the estate of the debtor.  When the debt becomes legally unenforceable, by reason of being barred b the statute of limitations or of a debtor’s discharge of insolvency, it does not cut off the insurable interest of the creditor. Reason: the moral or equitable obligation of a debtor to pay his debt is not destroyed by the discharge which affects only the legal obligation to pay.  Consent of a person whose life is insured is not essential to the validity of the insurance taken by another, as long as the insured has a legal insurable interest at the inception of the policy, the insurance contract is VALID. Insurable interest in property insurance  Every interest in property whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that the contemplated peril might directly damnify the insured (Sec. 13), which may consist in:

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The beneficiary need not have an insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have an insurable interest over the life of the insured.

The beneficiary must have insurable interest over the thing insured.

contrary to law and public policy. (Cha v. CA, 227 SCRA 690) STANDARD OR UNION MORTGAGE CLAUSE the subsequent acts of the mortgagor cannot affect the rights of the assignee OPEN OR LOSS PAYABLE MORTGAGE CLAUSE the mortgagor does not cease to be a party to the contract. Thus, the acts of the mortgagor affect the mortgagee (Secs. 8 and 9)

Insurable interest in case of a carrier or depository  A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof (Section 15) Reason: the loss of the thing by the carrier or depositor may cause liability against them to the extent of its value. Insurable interest in case of mortgaged property  The mortgagor and the mortgagee each have an insurable interest in the property mortgaged and this interest is separate and distinct from each other. Therefore, insurance taken by one in his name and in his favor alone, does not inure to the benefit of the other. a. Mortgagor: as the owner, has an insurable interest to the extent of its value, even though the mortgage debt equals such value. Reason: the loss or destruction of the property insured will not extinguish the mortgage debt b. Mortgagee: his interest is only up to the extent of the debt. Such interest continues until the mortgage debt is extinguished. Reason: property relied on as mortgaged is only a security. In insuring the property, he is not insuring the property itself but only his interest or lien thereon.  In case if an insurance taken by the mortgagee alone and for his benefit, the mortgagee, after recovery from the insurer, is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer to the extent of the insurance money paid. (Palileo v. Caltex, 97 PHIL 919)

Effects of Loss Payable Clause: 1. the contract is deemed to be upon the interest of the mortgagor; hence, he does not cease to be a party to the contract; 2. any act of the mortgagor prior to the loss which would otherwise avoid the insurance affects the mortgagee even is the property is in the hands of the mortgagee. 3. any act, which under the contract of insurance is to be performed by the mortgagor, may be performed by the mortgagee with the same effect 4. in case of loss, the mortgagee is entitled to the proceeds t the extent of his credit 5. upon recovery of the mortgagee to the extent of his credit, his debt is extinguished  The rule on subrogation by the insurer to the right of the mortgagee does not apply in this case. Reason: premium payment has been paid by the mortgagor and not by the mortgagee. Mortgage Redemption Insurance - a life insurance taken pursuant to a group mortgage redemption scheme by the lender of money on the life of a mortgagor, who mortgages the house constructed to the extent of the mortgage indebtedness, such that if the mortgagor dies, the proceeds of his life insurance will be used to pay for his indebtedness and the deceased’s heirs will thereby be relieved from paying the unpaid balance of the loan. (Great Pacific Life Assurance Corp. v. CA, 316 SCRA 677) Transfer of Interest 1. Life Insurance - It can be transferred even without the consent of the insurer except when there is a stipulation requiring the consent of the insurer before the transfer. Reason: the policy does not represent a personal agreement between the insured and the insurer.

 The

lessor cannot be validly a beneficiary of a fire insurance policy, taken by a lessee over his merchandise, and the provision in the lease contract providing for such automatic assignment is void for being

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Is the consent of the beneficiary necessary to the assignment of a life insurance policy? It depends. If the designation of the beneficiary is irrevocable, the beneficiary’s consent if essential because of his vested right. If the designation is revocable, the policy may be assigned without such consent because the beneficiary only has a mere expectancy to the proceeds. 2. Property Insurance - It cannot be transferred without the consent of the insurer. Reason: the insurer approved the policy based on the personal qualifications and the insurable interest of the insured. 3. Casualty Insurance - It cannot be transferred without the consent of the insurer

g. When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided. IV. POLICY OF INSURANCE

Definition and form  Policy of insurance - the written instrument in which a contract of insurance is set forth.  A policy of insurance is signed only by the insurer or his duly authorized agent. It need not be signed by the insured except where express warranties are contained in a separate instrument forming part of the policy. Contents of the policy (PARPIRD) 1. Parties – to determine who are privity to the contract of insurance concerned 2. Amount of insurance, except in open or running policies – to easily determine the amount of indemnity to be paid the insured in case of loss or damage especially if it is only partial and not total. It serves as the maximum limit on the insurer’s liability. 3. Rate of premium – represents the consideration of the contract 4. Property or life insured 5. Interest of the insured in the property if he is not the absolute owner thereof 6. Risk insured against – the insurer’s undertaking is to indemnify the insured for the loss, damage or liability caused or created ONLY by the risk insured against 7. Duration of the insurance Kinds of policy 1. Open - one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss. The actual loss, as determined, will represent the total indemnity due the insured from the insurer EXCEPT only that the total indemnity shall not exceed the face value of the policy (Development Insurance Corp. c. IAC, 143 SCRA 62) 2. Valued - one which expresses on its face an agreement that the thing insured shall be valued at a specific sum.  In the absence of fraud or mistake, the agreed valuation will be paid in case of total loss of the property, unless the insurance is for a lower amount. 34

Effect of change in interest in the thing insured General Rule: suspends the insurance until the interests in the thing and the interest in the insurance are vested in the same person. (Sec. 20) Exceptions: a. In life, health and accident insurance; b. Change in interest in the thing insured after occurrence of an injury which results in a loss; Reason: after the loss has happened, the liability of the insurer becomes fixed. Therefore, the insured has the right to assign his claim against the insurer as any other money claim. c. Change in interest in one or more of several distinct things separately insured by one policy; Reason: contract is divisible d. Change of interest, by will or succession, on the death of the insured; Reason: upon death, the contract f insurance passes automatically to the heir, legatee or devisee of the insured. e. Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to others; Reason: no new party is brought to the insurance contract. It is alienation to a stranger that will avoid the policy. f. When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured

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3. Running - one which contemplates successive insurances, and which provides that the object of the policy may be from time to time defined, especially as to the subjects of insurance, by additional statements or indorsements. Rider - printed stipulation usually attached to the policy because they constitute additional stipulations between the parties.

2. A cover note shall be deemed to be a contract of insurance and no separate premiums are required for their issuance 3. No cover note shall be issued or renewed unless in the form previously approved by the Commission 4. A cover note shall be valid and binding for a period not exceeding 60 days from the date of issuance, but such cover note may be cancelled by the other party upon at least 7 days notice to the other party. 5. If the cover note is not so cancelled, a policy of insurance shall, within 60 days after the issuance of the cover note, be issued in lieu thereof. 6. Insurance companies may impose on cover notes a deposit premium equivalent t at least 25% of the estimated premium of the intended insurance coverage but in no case less than P500. Cancellation of policy

General Rule: not binding Exception: valid when the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and written on the blank spaces provided in the policy.  In case of conflict between the provisions of a rider and the printed stipulations in the policy, the former shall prevail.  As a general rule, where the rider is physically attached to the policy of insurance contemporaneously with its execution and delivered to the insured, the fact that it is without the signature of the insurer or the insured will not prevent its inclusion and construction as a part of the insurance contract. The same rule applies where the rider was applied for by the insured or owner. Cover note - a concise and temporary written contract issued to the insurer through its duly authorized agent embodying the principal terms of an expected policy of insurance.  Purpose: It is intended to give temporary insurance protection coverage to the applicant pending the acceptance or rejection of his application for a period of not exceeding 60 days unless a longer period is approved by Insurance Commissioner  Binding Receipt - merely an acknowledgment on behalf of the company that their branch office had received from the applicant the insurance premium and had accepted the application subject to processing by the head office.  Rules of cover notes: 1. Cover notes may be issued to afford immediate protection to the insured until the insurer can inspect or evaluate the risk in question and issue the policy until the risk is declined and notice thereof given.

 Grounds(except life insurance) (FUDWNC) 1. Non-payment of premium; 2. Conviction of a crime out of acts increasing the hazard insured against; 3. Discovery of fraud or material misrepresentation; 4. Discovery of willful or reckless acts of omissions increasing the hazard insured against; 5. Physical changes in property making the property uninsurable; and 6. Determination by the Insurance Commissioner that the continuation of the policy would violate the Insurance Code. Requirements for Cancellation of Policy: 1. prior notice of cancellation to the insured; 2. notice must be based on the occurrence after the effectivity date of the policy; 3. notice must be in writing, mailed or delivered to the named insured at the address shown in the policy 4. notice must state which of the grounds set forth in Sec. 64 is relied upon and that upon written request of the insured, the insurer will furnish the facts on which the cancellation is based. Rule on renewal of policy: 35

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General

Rule:

entitled

to

renewal Exceptions: a. life insurance; or b. the insurer does not intend to renew, provided: • the insurer at least 45 days in advance of the end of the policy period • mails or delivers to the named insured at the address shown in the policy • notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverage V. RISK

Four primary concerns of the parties: 1. correct estimation of the risk; 2. precise delimitation of the risk; 3. control of the risk; 4. determining whether a loss occurred and if so, the amount of such loss. What may be insured against: 1. Future contingent event resulting in loss or damage 2. Past unknown event resulting in loss or damage 3. Contingent liability VI. DEVICES FOR ASCERTAINING CONTROLLING RISK AND LOSS 1. 2. 3. 4. 5. Concealment Representation Warranties Conditions Exceptions AND

in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries. (Sec. 31) Exceptions to Sec. 31: 1. incontestability clause - In life insurance, after the policy has been in force for at least 2 years, the insurer cannot rescind the policy due to fraudulent concealment or misrepresentation by the insured. 2. matters under Sec. 110 (marine insurance)  Effects: Rescission of the contract by the insurer, whether the concealment is intentional or unintentional. Good faith therefore is not a defense. (Sec. 27)  The following matters, though concealed will not vitiate the contract except when they caused the loss: 1. National character of the insured; 2. Liability of insured thing to capture or detention; 3. Liability to seizure from breach of foreign laws; 4. Want of necessary documents; 5. Use of false or simulated papers.  The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered (Sunlife v. Sps. Bacani, 246 SCRA 268)  The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated.

Concealment (1996, 2001 Bar Exams ) neglect to communicate that which a party knows and ought to communicate  Requisites of concealment: 1. A party knows of a fact (a material fact) which he neglects to communicate or disclose to the other 2. Such party is duty bound to disclose such fact to the other 3. Such party concealing makes no warranty as to the fact concealed 4. The other party has not the means of ascertaining the fact concealed  Test of Materiality: determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, 36

Where matters of opinion or judgment are called for, matters made in good faith and without intent to deceive will not avoid the policy even though they are untrue. Reason: the insurer cannot rely on those statements. He must make further inquiry (Philamcare Health Systems v. CA, GR 125678, March 18, 2002)  Matters that must be communicated even if the absence of inquiry (Sec. 28): 1. Those material to the contract (Secs. 31, 34, 35) 2. Those which the other has no means of ascertaining the said facts (Secs. 30, 32, 33)

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3. Those as to which the party with the duty to communicate makes no warranty (Secs. 67-76) General Rule: Matters made subject of special inquiries under Sec. 30 must be deemed material, even though otherwise they might not be so regarded and the insured is required to make full and true disclosure to questions asked. Exceptions: There is no duty to make a disclosure on the following instances: 1. Those which the other knows; 2. Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant; 3. Those of which the other waives communication; 4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and 5. Those which relate to a risk excepted from the policy and which are not otherwise material. (Sec. 30) 6. Information on the nature or amount of the interest of one need not be communicated unless in an answer to an inquiry, except as prescribed by Sec. 51. (Sec. 34) Representations - factual statements made by the insured at the time of, or prior to, the issuance of the policy to give information to the insurer and induce him to enter into the insurance contract.  Requisites of false representation (misrepresentation): 1. The insured stated a fact which is untrue 2. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead 3. Such fact in either case is material to the risk  A misrepresentation by the insured renders the insurance contract voidable at the option of the insurer.  Effect: the injured party is entitled to rescind from the time when the representation becomes false  Characteristics: a. It is not a part of the contract but merely a collateral inducement to it b. It may be oral or written

c. d. e.  1. 2.

It is made at the same time of issuing the policy or before but not after It may be altered or withdrawn before the insurance is effected but not afterwards It always refers to the date the contract goes into effect Kinds: Affirmative– affirmation of a fact when the contract begins; and (Sec. 37) Promissory – promise to be performed after policy was issued. (Sec. 39)

 A representation may be made at the time of, or before, issuance of the policy.  A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation.  Test of materiality: same as that in concealment  Where the insured merely signed the application form and made the agent of the insurer fill the same for him, it was held that by doing so, the insured made the agent of the insurer his own agent and he was responsible for his acts for that purpose. (Insular Life Assurance Co. v. Feliciano, 74 PHIL 469) Warranties- Statement or promise by the insured set forth in the policy or by reference incorporated therein, the untruth or nonfulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer.

 Purpose:

to eliminate potentially increasing hazards which may either be due to the acts of the insured or to the change to the condition of the property.  Basis: the insurer took into consideration the condition of the property at the time of effectivity of the warranty. Warranty part of the contract written on the policy, actually or by reference Representation mere collateral inducement may be written in the policy or may be oral.

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Falsity or non- Falsity renders the compliance policy void on the operates as a ground of fraud breach of contract must be strictly requires only complied with substantial truth and compliance.  Kinds: a. Express an agreement expressed in a policy whereby the insured stipulates that certain facts relating to the risk are or shall be true, or certain acts relating to the same subject have been or shall be done b. Implied - it is deemed included in the contract although not expressly mentioned. Example: In marine insurance, seaworthiness of the vessel. c. Affirmativeasserts the existence of the fact or condition at the time it is made. d. Promissorythe insured stipulates that certain facts or conditions shall exist or thing shall be done or omitted. (Sec. 67) Effects of breach:

Condition precedent – prevents the accrual of cause of action • Condition subsequent – avoids the policy or entitles the insurer to rescind  The insurer may also protect himself against fraudulent claims of loss and this he attempts to do by inserting in the policy various conditions which take the form of conditions precedent. For instance, there are conditions requiring the immediate notice of loss or injury and detailed proofs of loss within a limited period. Exceptions - provisions that may specify excepted perils. It makes more definite the coverage indicated by the general description of the risk by excluding certain specified risk that otherwise would be included under the general language describing the risks assumed

 Effect: limit the coverage of the contract
 Breach of warranty or of condition may be waived without consideration BUT the insurer does not become liable for an excepted loss by waiver unless the waiver amounts to a new contract on valuable consideration. RESCISSION Grounds for rescission: a. Concealment b. Misrepresentation c. Breach of material warranty d. Breach of a condition subsequent e. Alteration of the thing insured Waiver of right to rescind: The right to rescind is waived by the acceptance of premium payments despite the knowledge of the ground for rescission. Limitations on the right of the insurer to rescind: 1. In non-life policy – such right must be exercised prior to the commencement of an action on the contract 2. In life insurance – such right must be availed of during the first 2 years from the date of issue of policy or its last reinstatement. INCONTESTABILITY CLAUSE (1998 Bar Exam) Concept: Clause in life insurance policy that stipulates that the policy shall become incontestable after a stated period.

a. Violation of material warranty General Rule: Violation of material warranty or of a material provision of a policy will entitle the other party to rescind the contract. Exceptions: 1. loss occurs before the time of performance of the warranty 2. the performance becomes unlawful at the place of the contract 3. performance becomes impossible b. Violation of immaterial provision (example: “other insurance clause”) General Rule: it will not avoid the policy Exception: when the policy expressly provides or declares that a violation thereof will avoid it. Condition– an event signifying in its broadest sense either an occurrence or a non-occurrence that alters the previously existing legal relations of the parties to the contract. It may be a condition precedent or a condition subsequent.  Effect of breach:

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It creates a kind of contractual statute of limitations on certain defenses that may be raised by the insurer. “Incontestability” – means that after the requisites are shown to exist, the insurer shll be estopped from contesting the policy or setting up any defense, except as is allowed, on the ground of public policy. Requisites: a. The insurance is a life insurance policy b. It is payable on the death of the insured. c. It has been in force during the lifetime of the insured for at least two years from its date of issue or of its last reinstatement. Note: the period of 2 years may be shortened but it cannot be extended by stipulation. Effect when policy becomes incontestable: a. Barred defenses of the insurer: 1. the policy is void ab initio 2. it is rescissible by reason of the fraudulent concealment or misrepresentation of the insured or his agent b. Defenses not barred 1. That the person taking the insurance lacked insurable interest as required by law; 2. hat the cause of the death of the insured is an excepted risk; 3. That the premiums have not been paid; 4. That the conditions of the policy relating to military or naval service have been violated; 5. That the fraud is of a particularly vicious type; 6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or 7. That the action was not brought within the time specified. VII. PREMIUM (2000, 2006 Bar Exams) Concept: A consideration paid to an insurer for undertaking to indemnify the insured against a specified peril.

The basis of the right of the insurer to collect premiums is the assumption of risk. Effect of exceptions non-payment of premium;

General Rule: No policy issued by an insurance company is valid and binding until actual payment of premium. Any agreement to the contrary is void. (Sec. 77) Exceptions to the requirement for pre-payment of premiums: 1. in case of life or industrial life insurance, when the grace periods applies; 2. when the insurer makes a written acknowledgment of the receipt premium; 3. when the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss (Makati Tuscany Condominium Corp v. CA, 215 SCRA 462) 4. when a credit term has been agreed upon (UCPB v. Masagana Telemart, 308 SCRA 259) 5. where the parties are barred by estoppel (UCPB v. Masagana Telemart, 356 SCRA 307) Effect of non-payment: notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid. (Sec. 77)  Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not paid. (Makati Tuscanny Condominium Corp. v. CA, 215 SCRA 462) Effect of acknowledgment of receipt of premium in policy: Conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid. Reason: when the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of the payment. Note: The conclusive presumption extends only to the question on the binding effect of the policy. As far as the payment of the premium itself is concerned, the acknowledgment is only a prima facie evidence of the fact of such payment. The insurer may still dispute its acknowledgment but only for the purpose of receiving the premium due and paid.

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Effect of acceptance of the premium: Acceptance of the premium within the stipulated period for payment thereof, including the agreed period of grace, merely assures continued effectivity of the insurance policy in accordance with its terms. A. When insured entitled to the return of premiums Whole: 1. If thing insured was never exposed to the risks insured against (Sec. 79); 2. Contract is voidable due to the fraud or misrepresentation of insurer or his agents; (Sec. 81) 3. Contract is voidable because of the existence of facts of which the insured was ignorant without his fault; (Sec. 81) 4. When by any default of the insured other than actual fraud, the insurer never incurred liability (Sec. 81); 5. When rescission is granted due to the insurer’s breach of contract (Sec. 74); Pro rata: 1. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof; Exceptions: a. policy not made for a definite period of time b. short period rate is agreed upon c. life insurance policy When there is over-insurance; In case of over insurance by double insurance, the insurer is not liable for the total amount of the insurance taken, his liability being limited on the property insured. Hence, the insurer is not entitled to the portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured. In case of over insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all policies exceeds the insurable value of the thing insured. VIII. LOSS (1996, 2005 Bar Exams)

which the insurer, in consideration of the premium, has undertaken to indemnify the insured. (Bonifacio Bros. Inc. v. Mora, 20 SCRA 261) Proximate cause - an event which sets all other events in motion without any intervening or independent case, without which the injury or loss would not have occurred. A. Loss for which the insurer is liable: 1. loss the proximate cause of which is the peril insured against; 2. loss the immediate cause of which is the peril insured against except where proximate cause is an excepted peril; 3. loss through negligence of insured except where there was gross negligence amounting to willful acts; and 4. loss caused by efforts to rescue the thing from peril insured against; 5. if during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part B. Loss for which the insurer is not liable: 1. loss by insured’s willful act; 2. loss due to connivance of the insured; and 3. loss where the excepted peril is the proximate cause. C. Notice and proof of loss  Purposes: 1. to give the insurer information by which he may determine the extent of his liability 2. to afford the insurer a means of detecting any fraud that may have been practiced upon him 3. to operate as a check upon extravagant claims D. Effect of failure to give notice of loss: In fire insurance - it will defeat the right of the insured to recover; In other types of insurance – it will not exonerate the insurer unless there is a stipulation in the policy to that effect. IX. DOUBLE INSURANCE (1999, 2005 Bar Exams) Overinsurance results when the insured insures the same property for an amount greater than the value of the property with the same insurance company. 40

2.

Loss - injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune against

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Effect in case of loss: a. the insurer is bound only to pay to the extent of the real value of the property lost; b. the insured is entitled to recover the amount of premium corresponding to the excess in value of the property Double Insurance: exists where the same person is insured by several insurers separately in respect to the same subject and interest.  Requisites: 1. The person insured is the same; 2. Two or more insurers insuring separately; 3. The subject matter is the same; 4. The interest insured is also the same; 5. The risk or peril insured against is likewise the same. Over-Insurance 1. One insurer is sufficient 2. Insurance taken must be more than the amount of insurable interest Double Insurance 1. Two or more insurers 2. Total amount of policies taken need not exceed the amount of the insurable interest

e. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (sec. 94) Under the “Principle of Contribution” or “Contribution clause” it is required that each insurer contribute ratably to the loss or damage considering insurances to cover the same subject matter and interest against the same peril. Additional or Other Insurance Clause - a condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property insured is lawful and specifically allowed under Sec. 75 of the ICP which provides that “a policy may declare that a violation of a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it.” It is a stipulation against double insurance. Purposes: a. to prevent an increase in the moral hazard b. to prevent over insurance and fraud Note: to constitute a violation of the clause, there must have been double insurance X. REINSURANCE

Effects: where double insurance is allowed, but over insurance results: (Sec. 94) a. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; b. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured; c. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy; d. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves;

Concept: a contract by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance. Also known as Reinsurance Cession. In every reinsurance, the original contract of insurance and the contract of reinsurance are covered by separate policies. Double Insurance involves the same interest insurer remains in such capacity insured is the party in interest in the 2 contracts subject of insurance is property insured has to give his consent Reinsurance involves different interest insurer becomes the insured in relation to reinsurer original insured has no interest in the reinsurance contract. subject of insurance is the original insurer’s risk insured’s consent not necessary

Duty of reinsured to disclose facts 41

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Where an insurer obtains reinsurance, except under automatic reinsurance treaties, he must communicate all the representations of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk. Terms: 1. Reinsurance Treaty – merely an agreement between two insurance companies whereby one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty 2. Automatic Reinsurance – the reinsured is bound to cede and the reinsurer is obligated to accept a fixed share of the risk which has to be reinsured under the contract. 3. Facultative Reinsurance – there is no obligation to cede or accept participation I the risk each party having a free choice. But once the share is accepted, the obligation is absolute and the liability thereunder can be discharged only by payment. 4. Retrocession – a transaction whereby the reinsurer in turn, passes to another insurer a portion of the risk reinsured. It is really the reinsurance of reinsurance. XI. TYPES OF INSURANCE A. MARINE INSURANCE (1998, 2000, 2005 Bar exams) Definition: insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time. (Sec. 99) Scope: A. Insurance against loss or damage to: 1. vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation; 2. persons or property in connection with marine insurance; 3. precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and 4. bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99)

Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque v. IAC, 139 SCRA 596) B. Marine protection and indemnity insurance  Classes of inland marine insurance: 1. Property in transit – provides protection to property frequently exposed to loss while it is being transported from one location to another 2. Bailee liability – insurance for those who have temporary custody of the goods 3. Fixed transportation property – they are so insured because they are held to be an essential part of the transportation system such as bridges, tunnels, etc. 4. Floater – provides insurance to follow the insured property wherever it may be located, subject always to the territorial limits of the contract Risks or Losses Covered:

Perils Of The Sea - includes only those casualties due to the unusual violence or extraordinary action of wind and wave or to other extraordinary causes connected with navigation.  Perils Of The Ship - a loss which in the ordinary course of events, results from the: 1. natural and inevitable action of the sea 2. ordinary wear and tear of the ship or 3. negligent failure of the ship’s owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions. Note: it is only perils of the sea which may be insured against unless perils of the ship is covered by an all-risk policy. Special Contracts and Clauses 1. All Risks Policy - insurance against all causes of conceivable loss or damage, except: (1) as otherwise excluded in the policy or (2) due to fraud or intentional misconduct on the part of the insured. The insured has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage (Filipinas Merchants Insurance v. C, 179 SCRA 638) 42

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2. Barratry Clause – A clause which provides that there can be no recovery in case of any willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without consent of owners, and to the prejudice of the owner’s interest. 3. Inchamaree Clause - covers loss or damage to the hull or machinery through: 1. negligence of the captain, engineers, etc. 2. explosions, breakage of shafts; and 3. latent defect of machinery or hull. 4. Sue and Labor Clause – a clause under which the insurer may become liable to pay the insured, in addition to the loss actually suffered, such expenses as he may have incurred in his efforts to protect the property against a peril for which the insurer would have been liable (Sec. 163) Insurable Interest in Marine Insurance 1. a. Shipowner 1. over the vessel t the extent of its value, provided that if chartered, the recovery is only up to the amount not recoverable from the charterer 2. he also has an insurable interest on expected freightage 3. no insurable interest if he will be compensated by the charterer for the value of the vessel in case of loss. b. Charterer - to the extent that he is liable to the shipowner, if the ship is lost or damaged during the voyage. c. Cargo Owner - over the cargo and the expected profits (Sec. 105) 2. In loans on bottomry and respondetia Repayment of the loan is subject to the condition that the vessel or goods, respectively, given as a security, shall arrive safely at the port of destination. a. Owner/Debtor - difference between the value of vessel or goods and the amount of the loan b. Creditor/Lender - amount of the loan Note: if the vessel is hypothecated by bottomry, only the excess is insurable, since a loan on bottomry partakes of the nature of an insurance coverage to the extent of the loan accommodation. The same rule would apply to the hypothecation of the cargo by respondentia.

Concealment in Marine Insurance

 Concept: failure to disclose any material
fact or circumstance which in fact or law is within, or which ought to be within the knowledge of one party and of which the other has no actual or presumptive knowledge.  Matters although concealed will not vitiate the contract, except when they caused the loss: 1. national character of the insured; 2. liability of the thing insured to capture and detention; 3. liability to seizure from breach of foreign laws of trade; 4. want of necessary documents; 5. use of false and simulated papers. Distinctions on Concealment MARINE INSURANCE The information of the belief or expectation of third persons is material and must be communicated OTHER PROPERTY INSURANCE The information of belief of a third party is not material and need not be communicated unless it proceeds from an agent of the insured whose duty it is to give information Concealment of any material fact will vitiate the entire contract, whether or not the loss results from the risk concealed

The concealment of any fact in relation to any of the matters stated in Section 110 does not vitiate the entire contract but merely exonerates the insurer from a risk resulting from the fact concealed

Representations in Marine Insurance  Effect of false representation by the insured If a representation is intentionally false in any material respect, or in respect of any fact on which the character and nature of the risk depends, the insurer may rescind the entire contract.  Effect of false representation as to expectation The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance.

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Implied Warranties in Marine Insurance a. that the ship is seaworthy at the inception of the insurance (Sec. 113); b. that the ship will not deviate from agreed voyage unless deviation is proper (Sec. 123, 124, 125); c. that the ship will not engage in an illegal venture; d. warranty of neutrality: that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted; (Sec. 120) e. presence of insurable interest.  While the payment by the insurer for the insured value of the lost cargo operates as a waiver of the insurer’s right to enforce the term of the implied warranty against the assured under the marine insurance policy, the same cannot be validly interpreted as an automatic admission of the vessel’s seaworthiness by the insurer as to foreclose recourse against the common carrier for any liability under the contractual obligation as such common carrier (Delsan Transportation Lines v. CA, 264 SCRA 24) Seaworthiness: A relative term, depending upon the nature of the ship, voyage, service and goods, denoting in general a ship’s fitness to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy. (Sec. 114)  What constitutes seaworthiness: A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be: a. properly laden, and b. provided with a competent master, c. sufficient number of competent officers and seamen, and the d. requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and e. other necessary or proper stores and implements for the voyage. (Sec. 116) • A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of the insurance upon the cargo.

It becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has control in the choice of the common carrier that will transport his goods (Roque v. IAC, 139 SCRA 596).

General Rule: An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the of commencement of the risk. Prior or subsequent unworthiness is not a breach of the warranty nor is it material that the vessel arrives in safety at the end of her voyage. Exceptions: a. in the case of a time policy, the ship must be seaworthy at the commencement of every voyage she may undertake b. in case of cargo policy, each vessel upon which the cargo is shipped or transshipped must be seaworthy at the commencement of each particular voyage c. in the case of a voyage policy contemplating a voyage in different stages, the ship must be seaworthy at the commencement of each portion  Rule where ship becomes unseaworthy in the course of the voyage When the ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner's interest from liability from any loss arising therefrom. Warranty that necessary documents are carried Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon. (Sec. 120) Warranty against improper deviation Deviation: a departure from the course of the voyage insured or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage. Instances of deviation: 1. deviation from the agreed voyage 2. departure of vessel from the course of sailing fixed by mercantile usage 44

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3. departure of the vessel from the most natural, direct and advantageous route is not fixed by mercantile usage 4. unreasonable delay in pursuing voyage 5. commencement of an entirely different voyage Kinds of deviation: a. Proper i. When caused by circumstances over which neither the master nor the owner of the ship has any control; ii. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against; iii. When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or iv. When made in good faith, for the purpose of saving human life or relieving another vessel in distress. (Sec. 124) Effect of a proper deviation: in case of loss, the insurer is still liable. b. Improper - Every deviation not specified in Section 124. Effect of improper deviation: An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation. (Sec. 126) Loss in Marine Insurance Kinds: a. total loss: 1. actual loss - caused by: a. A total destruction of the thing insured; b. The irretrievable loss by sinking, or by being broken up; c. Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or d. Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. (Sec. 130) Right to payment: Upon an actual total loss, a person insured is entitled to payment without notice of abandonment. (Sec. 135) 2. constructive total loss –

a. actual loss of more than ¾ of the value of the thing insured b. damage reducing value by more than ¾ of the value of the vessel and of cargo c. expense of transshipment exceed ¾ of the value of the cargo In case of constructive total loss, insured may: a. abandon the goods or vessel to the insurer and claim for the whole insured value b. without abandoning vessel, claim for partial actual loss b. partial loss – that which is not total (Sec. 128) Co-Insurance A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured. When the property is insured for less than its value, the insured is considered a co-insurer of the difference between the amount of insurance and the value of the property.  Requisites: 1. The loss is partial; 2. The amount of insurance is less than the value of the property insured (Sec 157).  Rules: 1. co – insurance applies only to marine insurance 2. logically, there cannot be co-insurance in life insurance 3. co – insurance applies in fire insurance when expressly provided for by the parties CO-INSURANCE A percentage in the value of the insured property which the insured himself assumes to act as insurer to the extent of the deficiency in the insurance of the insured property in case of loss or damage REINSURANCE Situation where the insurer procures a third party called the reinsurer to insure him against liability by reason of the original insurance. Basically, reinsurance is an insurance against liability which the original insurer may incur in favor of the original insured

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Abandonment The act of the insured by which, after a constructive total loss, he declared the relinquishment to the insurer of his interest in the thing insured (Sec. 138) Requisites for validity of abandonment: 1. There must be an actual relinquishment by the person insured of his interest in the thing insured; 2. There must be a constructive total loss ; 3. The abandonment be neither partial nor conditional; 4. It must be made within a reasonable time after receipt of reliable information of the loss ; 5. It must be factual; 6. It must be made by giving notice thereof to the insurer which may be done orally or in writing; and 7. The notice of abandonment must be explicit and must specify the particular cause of the abandonment  Effects: 1. equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity. 2. acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer and for his benefit. Acceptance of abandonment, whether express or implied, is conclusive upon the parties, and admits the loss and the sufficiency of the abandonment. Once made and accepted abandonment is irrevocable, unless the ground upon which it was made proves to be unfounded.  Rules: 1. If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment. 2. The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed as an acceptance. 3. On an accepted abandonment of a ship, freightage earned previous to the loss belongs to the insured of said freightage; but freightage subsequently earned belongs to the insurer of the ship. 4. If an insurer refuses to accept a valid abandonment, he is liable as upon actual total loss, deducting from the amount any proceeds of 

the thing insured which may have come to the hands of the insured. (Sec. 154) Average Definition: Any extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo, or both, and all damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo unloaded.  Kinds: 1. General Average Loss - includes damages and expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her cargo, or both at the same time from real or known risk. It must be borne equally by all of the interests concerned in the venture. 2. Particular Average Loss - includes all damages and expenses caused to the vessel or to her cargo which have not inured to the common benefit and profit of all persons interested in the vessel and her cargo. It is borne alone by the owner of the cargo or the vessel, as the case may be. GENERAL Has inured to the common benefit and profit of all persons interested in the vessel and cargo Must be borne equally by all of the interests concerned in the venture Requisites for the right: 1. common danger to the vessel or cargo; 2. Part of the vessel or cargo was sacrificed deliberately; 3. sacrifice must be for the common safety or for the benefit of all; 4. sacrifice must be made by the master or upon his authority; 5. It must be not be caused by any fault of the party asking the contribution; 46 PARTICULAR Has not inured to the common benefit and profit of all persons interested in the vessel and her cargo To be borne alone by the owner of the cargo or the vessel, as the case may be

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6. It must be successful, i.e. resulted in the saving of the vessel or cargo; and 7. It must necessary. be

to such fire policies or insured under separate policy. Prerequisites to recovery 1. Notice of loss – must be immediately given, unless delay is waived expressly or impliedly by the insurer 2. Proof of loss – according to best evidence obtainable. Delay may also be waived expressly or impliedly by the insurer HOSTILE FIRE One that escapes from the place where it was intended to burn and ought to be Insurer is liable FRIENDLY FIRE One that burns in a place where it was intended to burn and ought to be Insurer is not liable

 Right of the insured in case of General Average: General Rule: The insured may either hold the insurer directly liable for the whole of the insured value of the property sacrificed for the general benefit, subrogating him to his own right of contribution or demand contrinution from the other interested parties as soon as the vessel arrives at her destination. Exceptions: a. after the separation of the interests liable to the contribution b. when the insured has neglected or waived his right to contribution

Measure of indemnity 1. Open policy: only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury 2. Valued Policy: the parties are bound by the valuation, in the absence of fraud or mistake Note: It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance. The determination is important for three reasons: a. Rule on constructive total loss and abandonment – applies only to marine insurance b. Rule on co – insurance – applies primarily to marine insurance c. Rule on co – insurance applies to fire insurance only if expressly agreed upon Effect of alteration in the thing insured: entitles an insurer to rescind a contract of fire insurance  Requisites: 1. The use or condition of the thing is specifically limited or stipulated in the policy; 2. Such use or condition as limited by the policy is altered; 3. The alteration is made without the consent of the insurer; 4. The alteration is made by means within the control of the insured; 5. The alteration increases the risk; and 6. There must be a violation of a policy provision. Fall-of-building Clause: a clause in a fire insurance policy which provides that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease.

FPA Clause (Free From Particular Average): A clause agreed upon in a policy of marine insurance in which it is stated that the insurer shall not be liable for a particular average, such insurer shall be free therefrom, but he shall continue to be liable for his proportion of all general average losses assessed upon the thing insured (Sec. 136) B. FIRE INSURANCE

Definition and scope of fire insurance A contract by which the insurer for a consideration agrees to indemnify the insured against loss of, or damage to, property by fire, but may include loss by lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. Risks or losses covered 1. direct losses 2. indirect or consequential losses a. physical damage b. loss of earnings c. extra expense Note: The liability of the insurer is to pay for direct loss only. The insurer may be liable to pay for consequential losses if covered by extension

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Option to Rebuild Clause: a clause giving the insurer the option to reinstate or replace the property damaged or destroyed or any part thereof, instead of paying the amount of the loss or the damage. The insurer, after electing to rebuild, cannot be compelled to perform this undertaking by specific performance because this is an obligation to do, not to give. Remedy: ‘the same be executed at his cost’. (Art. 1167 Civil Code) C. CASUALTY OR ACCIDENT INSURANCE (2005 Bar Exam) Concept 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 other types of insurance such as fire or marine. Classifications: 1. Insurance against specified perils which may affect the person and/or property of the insured (Accident or health insurance) Ex: personal accident, robbery/theft insurance 2. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to or damage to the property of others (Third party liability insurance) Insurable interest is based on the interest of the insured in the safety of persons, and their property, who may maintain an action against him in case of their injury or destruction, respectively. Ex: workmen’s compensation, motor vehicle liability In a third party liability (TPL) insurance contract, the insurer assumes the obligation by paying the injured third party to whom the insured is liable. Prior payment by the insured to the third person is not necessary in order that the obligation may arise. The moment the insured becomes liable to third persons, the insured acquires an interest in the insurance contract which may be garnished like any other credit (Perla Compania de Seguro, Inc. v. Ramolete, 205 SCRA 487)  Aside from compulsory motor vehicle liability insurance, the Insurance Code contains no other provisions applicable to

casualty insurance. Therefore, such casualty insurance are governed by the general provisions applicable to all types of insurance, and outside of such statutory provisions, the rights and obligations of the parties must be determined by their contract, taking into consideration its purpose and always in accordance with the general principles of insurance law.  In burglary, robbery and theft insurance, the opportunity to defraud the insurer – the moral hazard – is so great that insurers have found it necessary to fill up the policies with many restrictions designed to reduce the hazard. Persons frequently excluded are those in the insured’s service and employment. The purpose of the exception is to guard against liability should theft be committed by one having unrestricted access to the property (Fortune Insurance v. CA, 244 SCRA 208)

Liability insurable 1. liability for quasi-delict or non-fulfillment of contract 2. liability for criminal negligence Liability of the insurer if insured was committing a felony: Liabilities arising out of acts of negligence, which are also criminal, are also insurable on the ground that such acts are accidental. But liability consequences of deliberate criminal acts are not insurable. “Intentional” vs. “Accidental” as used in insurance policies: 1. Intentional - implies the exercise of the reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieved from liability as stipulated (Biagtan v. the Insular Life Assurance Co. Ltd., 44 SCRA 58, 1972) 2. Accidental - that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen. Right of a third party injured to sue the insurer of party at fault

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Depends on whether the contract of insurance is intended to benefit third persons also or only the insured  1. Test applied: Indemnity against third party liability – a third party injured can directly sue the insurer Purpose: to protect injured persons against the insolvency of the insured who causes such injury 2. Indemnity against actual loss or payment – A third party has no cause of action against the insurer. The third person’s recourse is limited to the insured alone (Bonifacio Bros. v. Mora, 20 SCRA 261) If the policy provides for “reimbursement after actual payment by the insured,” or for the indemnity against loss, a third person has no cause of action against the insurer. (Bonifacio Bros. v. Mora 20 SCRA 261) The insurer is not solidarily liable with the insured. The insurer’s liability is based on contract; that of the insured is based on torts. Furthermore, the insurer’s liability is limited by the amount of the insurance coverage. (Pan Malayan Insurance Corp. v. CA, 184 SCRA 54) While in a solidary obligation the creditor may enforce the entire obligation against one of the solidary debtors, in an insurance contract, the insurer undertakes to indemnify the insured against loss, damage or liability arising from unknown or contingent event. To make the insurer solidarily liable with the latter’s entire obligation beyond the sum limited in the insurance contract would result in “evident breach of the concept of solidary obligations.” (Vda. De Maglana vs Consolacion, 212 SCRA 268) NO ACTION CLAUSE a requirement in a policy of liability which provides that suit and final judgment be first obtained against the insured’ that only thereafter can the person injured recover on the policy (Guingon v. del Monte, 20 SCRA 1043)

A “no action clause” must yield to the provisions of the Rules of Court regarding multiplicity of suits. (Shafer v. RTC, 167 SCRA 386) D. SURETYSHIP

Definition An agreement whereby a surety guarantees the performance by the principal or obligor of an obligation or undertaking in favor of an obligee. (Sec. 175) It is essentially a credit accommodation.  It is considered an insurance contract if it is executed by the surety as a vocation, and not incidentally.  When the contract is primarily draws up by one party, the benefit of doubt goes to the other party (insured/oblige) in case of ambiguity following the rule in contracts of adhesion. Suretyship, especially in fidelity bonding, is thus treated like non – life insurance in some respects. Kinds: a. Fidelity Bond – contract of insurance against loss from misconduct b. Fidelity Guaranty Insurance – a contract whereby one, for a consideration, agrees to indemnify the assured against loss arising from want of integrity, fidelity or honesty of employees or other persons holding positions of trust Nature of liability of surety 1. Solidary; 2. Limited to the amount of the bond; 3. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (Sec. 176) SURETYSHIP accessory contract parties: surety, obligor and obligee credit accommodation surety can recover from principal bond can be cancelled only with consent of obligee, Commissioner or court requires acceptance of obligee to be valid risk-shifting 49 device, PROPERTY INSURANCE principal contract parties: insurer and insured contract of indemnity Insurer has no such right; only right of subrogation may be cancelled unilaterally either by insured or insurer on grounds provided by law no need of acceptance by any third party risk-distributing

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premium paid being in the nature of a service fee

device, premium paid as a ratable contribution to a common fund

1. If committed after two years from the
date of the policy’s issue or its last reinstatement; 2. If committed after a shorter period provided in the policy; and 3. If committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril. (Sec. 180-A) Note: Any stipulation extending the 2year period is null and void. 2. At the hands of the law (e.g. by legal execution) It is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception. Note: Justice Vitug believes that death by suicide (if the insured is sane) or at the hands of the law obviates against recovery as being more in consonance with public policy and as being implicit under Section 87, ICP. (Pandect of Commercial Law and Jurisprudence) 3. Killing by the beneficiary General Rule: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice or accessory in willfully bring about the death of the insured, in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified (Sec. 12) Exceptions: a. accidental killing b. self – defense c. insanity of the beneficiary at the time he killed the insured

E. LIFE INSURANCE (1995, 2000 Bar Exams) Definition Insurance on human lives and insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities. Kinds of life insurance 1. Ordinary Life, General Life or Old Line Policy - insured pays a fixed premium every year until he dies. Surrender value after 3 years. 2. Limited Payment Policy – insured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if he outlives the period, he does not get anything. 3. Endowment Policy – pays premium for specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit. 4. Term Insurance – insurer pays once only, and he is insured for a specified period. If he dies within the period, his beneficiaries benefits. If he outlives the period, no person benefits from the insurance.

5.

Industrial Life - life insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener; 6. Group Life – essentially a single insurance contract that provides coverage for many individuals. Examples: in favor of employees, “mortgage redemption insurance” 7. Variable Contract – Any policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments thereunder to vary so as to reflect investment results of any segregated portfolio of investment. Liability of insurer in certain causes of death of the insured 1. Suicide Insurer is liable in the following cases:

If the premiums paid came from conjugal funds, the proceeds are considered conjugal. If the beneficiary is other than the insured’s estate, the source of premiums would not be relevant (Del Val v. Del Val, 29 Phil 534). Reason: a natural person cannot be placed in the same footing as a juridical person Right to assign life insurance policy 1. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. (Sec. 181) 2. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly required. (Sec. 182)

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Measure of indemnity The measure of indemnity in life or health insurance policy is the sum fixed in the policy except when a creditor insures the life of his debtor Cash Surrender Value – as applied to a life insurance policy, it is the amount the insured, in case of default, after the payment of at least 3 full annual premiums, is entitled to receive if he surrenders the policy and releases his claims upon it. XII. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE (CMVLI) A specie of compulsory insurance that provides for protection coverage that will answer for legal liability for losses and damages, for bodily injuries, or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. Definitions: Motor Vehicle – any vehicle as defined in Sec. 3[a] of RA 4136, otherwise known as the “Land Transportation and Traffic Code.” Passenger – any fare – paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without fare. Third Party – any person other than the passenger, excluding a member of the household or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, or his employee in respect of death or bodily injury arising out of and in the course of employment. Owner or Motor Vehicle Owner – actual legal owner of the motor vehicle, in whose name such vehicle is duly registered with the Land Transportation Commission Land Transportation Operator – the owner or owners of motor vehicles for transportation of passengers for compensation, including school buses. Purpose: to give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor, regardless of the financial capability of motor vehicle owners or operators responsible for the injury sustained. (Shafer vs Judge, RTC 167 SCRA 386) Method of coverage 1. insurance policy

2. surety bond 3. cash deposit Scope of coverage required 1. Private motorists – comprehensive against third party liability for death or bodily injuries 2. Operators of land transportation – comprehensive against both passenger and third party liabilities for death or bodily injuries No-fault indemnity claim (2000 Bar Exam) No-fault Clause: a clause that gives the victim (injured person or heirs of the deceased) an option to file a claim for death or injury without the necessity of proving fault or negligence. Rules of recovery 1. Total indemnity: maximum of P5,000 2. Proof of loss: a. police report of accident; b. death certificate and evidence sufficient to establish proper payee c. medical report and evidence of medical or hospital disbursement. 3. Claim may be made against one motor vehicle only 4. Proper insurer from which to claim – a. In the case of an occupant: claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from b. in any other case: claim shall lie against the insurer of the directly offending vehicle. 5. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. The claimant is not free to choose from which insurer he will claim the “no fault indemnity.” As the law, makes it mandatory that the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. The said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying may recover against the owner of the vehicle responsible for the accident. (Perla Compania de Seguros, Inc. v. Ancheta, 169 SCRA 144). This no-fault claim does not apply to property damage. If the total indemnity of the claim exceeds P5,000 and there is controversy in respect thereto, the finding of fault may be availed of by the insurer only as to the excess. The P5,000 shall be paid without regard to fault. (de Leon, The Insurance Code of the Philippines) 51

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The essence of the no-fault indemnity insurance is to provide victims of vehicular accidents or their heirs immediate compensation although in limited amount, pending final determination of who is responsible for the accident and liable for the victim’s injuries or death. Special Clauses 1. Authorized Driver Clause A clause which aims to indemnify the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission (Villacorta v. Insurance Commissioner) The requirement that the person driving the insured vehicle is permitted in accordance with the licensing laws or other laws or regulations to drive the motor vehicle (licensed driver) is applicable only if the person driving is other than the insured. 2. Theft Clause A clause which includes theft as among the risks insured against. Where the car is unlawfully and wrongfully taken without the owner’s consent or knowledge, such taking constitutes theft, and thus, it is the “theft clause” and not the “authorized driver clause” that should apply (Palermo v. Pyramids Ins., 161 SCRA 677). 3. Cooperation Clause A clause in an automobile insurance policy which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings. Time to file and Process claim under CTPL Period to file notice – the written notice of claim (setting forth the nature, extent and duration of the injuries as certified by a duly licensed physician) must be presented within 6 months from the date of the accident otherwise the claim is deemed waived. Prescriptive Period – the action must be filed in court or the Insurance Commission within one year from the denial of the claim. If there is an agreement, the insurance company concerned shall forthwith ascertain the truth and

extent of the claim and make payment within 5 working days after reaching an agreement. If no agreement is reached, the insurance company shall pay only the “no fault” indemnity, without prejudice to the claimant from pursuing his claim further, in which case, he shall not be required or compelled by the insurance company to execute any quit claim or document releasing it from liability under the policy of insurance or surety bond issued. XIII. CLAIMS SETTLEMENT

The indemnification of the loss of the insured. In case of an unreasonable delay in the payment of the insured’s claim by the insurer, the insured can recover: 1.) attorney’s fees; 2.) expenses incurred by reason of the unreasonable withholding; 3.) interest at double the legal interest rate fixed by the Monetary Board; and 4.) the amount of the claim (Zenith Insurance Corp. v. CA, 185 SCRA 398) Time for payment of claims LIFE POLICIES a. Maturing upon the expiration of the term – the proceeds are immediately payable to the insured b. Maturing at the death of the insured occurring prior to the expiration of the term stipulated – The proceeds are payable to the beneficiaries within 60 days after presentation and filing of proof of death NON – LIFE POLICIES Proceeds under the policy shall be paid within 30 days after the receipt by the insurer of proof of loss, and ascertainment of the loss or damage by agreement of the parties or by arbitration but not later than 90 days from such receipt of proof of loss whether or not ascertainment is had or made

XIV. PRESCRIPTIVE PERIOD (Sections 63 & 384) (1996 Bar Exam) Rules: 1. In the absence of an express stipulation in the policy, it being based on a written contract, the action prescribes in 10 years. 2. HOWEVER, the parties may validly agree on a shorter period provided it is not less than one year from the time the cause of action accrues.

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 A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than 1 year from the time when the cause of action accrues, is void. (Sec. 63) 3. The cause of action accrues from the rejection of the claim of the insured and not from the time of the loss.  Prescriptive period shall commence from the initial denial of the claim, not from the resolution of the motion for reconsideration filed by the insured, otherwise, it can be used by the insured as a scheme or device to waste time until the evidence which may be used against him is destroyed. (Sun Insurance Office Ltd. vs. CA, 195 SCRA 193) 4. In CMVLI, the written notice of claim must be filed within 6 months from the date of the accident; otherwise, the claim is deemed waived even if the action is brought within one year from its rejection (Vda. De Gabriel vs. CA, 264 SCRA 137). 5. The suit for damages either with the proper court or with the Insurance Commissioner should be filed within 1 year from the date of the denial of the claim by the insurer, otherwise, the claimant’s right of action shall prescribe. XV. INSURANCE COMMISSIONER

is not covered by the term “doing or transacting an insurance business” under Section 2, ICP, neither is it covered by Section 416 of the same Code which grants the Commissioner adjudicatory powers. (Philippine American Life Insurance Co. v. Ansaldo, 234 SCRA 509) 2. Administrative/Regulatory functions a. Enforcement of insurance laws b. issuance, suspension or revocation of certificate of authority c. power to examine books and records, etc. d. rule – making authority e. punitive TRANSPORTATION LAWS GOVERNING LAWS Land Transportation 1. Common Carriers a. New Civil Code (NCC) – primary b. Code of Commerce – suppletory 2. Private Carriers a. Object is a merchandise 1. Code of Commerce – primary 2. NCC – suppletory b. Object is non-commercial a. Law on deposit – if object is property b. Law on contracts – if passenger Transportation by Sea 1. Coastwise a. NCC – primary b. Code of Commerce – suppletory c. Carriage of Goods by Sea Act (COGSA) does not apply even if the parties expressly provide for it 2. Philippine port to foreign ports – law of the country of destination 3. Foreign ports to Philippine ports a. NCC – primary b. Code of Commerce c. COGSA d. Philippine laws still apply even if the collision actually takes place in foreign waters. Air Transportation 1. Domestic – Commerce 2. International Convention NCC; – Code of

Functions: 1. Adjudicatory/Quasi - Judicial functions a. Exclusive Original Jurisdiction – Any dispute in the enforcement of any policy issued pursuant to Chapter VI (CMVLI) (Sec. 385[2]) b. Concurrent Original Jurisdiction (with the RTC) – where the maximum amount involved in any single claim is P100,000 (Sec. 416), except in case of maritime insurance which is within the exclusive jurisdiction of the RTC. (BP 129; admiralty & maritime jurisdiction)  Where the amount exceeds P100,000, the RTC has jurisdiction  The filing of a complaint with the Commissioner shall preclude civil courts from taking cognizance of the case (Sec. 416).  A decision which has become final may be the subject of a writ of execution which may be served and enforced by a sheriff (Sec. 416).  The Insurance Commissioner has no jurisdiction to decide the legality of a contract of agency entered into between an insurance company and its agent. The same

Warsaw

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COMMON CARRIERS

 A

person, corporation, firm or association, 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 (Art. 1732 NCC) Tests: (1996, 2000 Bar Exams) 1. He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in transportation of goods for persons generally as a business and not as a casual occupation; 2. He must undertake to carry goods of a kind to which his business is confined; 3. He must undertake to carry by the method by which his business is conducted and over his established roads; and 4. The transportation must be for hire (First Phil. Industrial vs. CA, 300 SCRA 661) Characteristics:  Art. 1732 makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (sideline). It also avoids distinction between offering transportation service on a regular or scheduled basis, and on an occasional, episodic or unscheduled basis. Neither does it distinguish between a carrier offering its services to the “general public” (general community or population) and one who offers services only from a narrow segment of the population. A person or entity is a common carrier even if he did not secure a Certificate of Public Convenience (De Guzman vs. CA, 168 SCRA 612)  It does not provide that the transportation should be by motor vehicle. Hence, a grantee of pipeline concession under the Petroleum Act is considered a common carrier (First Phil. Industrial vs. CA, supra)  One is a common carrier even if he has no fixed and

publicly known route, maintains no terminals, and issues no tickets (Asia Lighterage Shipping vs. CA GR No. 147246, August 19, 2003)  A common carrier shall remain as such, notwithstanding the charter of the whole or portion of a vessel, provided the charter is limited to the ship only, as in the case of a time or voyage charter. It is only when the charter includes both the vessel and its crew, as in a bareboat or demise, that a common carrier becomes private (Planters Products vs. CA, 226 SCRA 476)  A travel agency is not a common carrier. Its services include procuring tickets and facilitating travel permits or visas as well as booking customers for tours (Crisostomo vs. CA, GR No. 138334, Aug. 25, 2003) Distinctions between a Common Carrier and a Private Carrier: (2002 Bar Exam) COMMON CARRIER Holds himself out for all people indiscriminately Extraordinary diligence is required Subject to State regulation There is a presumption of fault or negligence Exempting circumstances are proof of extraordinary diligence and Art. 1734 NCC Parties may not agree on limiting the carrier’s liability except when provided by law Governed by law on common carriers PRIVATE CARRIER Contracts with particular individuals or groups only Only ordinary diligence is required Not subject to State regulation No presumption of fault or negligence Exempting circumstance is fortuitous event Parties may even exempt carrier’s liability, provided it is not contrary to law, morals, good customs, public order or public policy Governed by law on obligations and contracts

Registered Owner Rule  A registered owner of a vehicle (even if not used for public service) is the lawful operator insofar as the public and third persons are concerned; consequently, it is directly and primarily responsible for the consequences of its operation. 54

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a.

In contemplation of the law, the owner/operator of record is the employer of the driver, the actual operator and employer being considered as merely its agent (Equitable Leasing Corp. vs. Suyom, GR No. 143360. Sept. 5, 2002) 2. The registered owner cannot escape responsibility by proving that a third person is the actual and real owner. He is liable to the injured party subject to his right of recourse against the transferee or buyer. The registered owner is liable even if the vehicle was leased to another (BA Finance Corp. vs. CA, 215 SCRA 715) 1.

solidarily liable with the driver (Zamboanga Tranportation Co. vs. CA, 30 SCRA 717) 5. The transfer, sale, lease or assignment of the privilege granted is valid between the contracting parties but not upon the public or third persons (Gelisan vs. Alday, 152 SCRA 388) Exceptions to kabit system:  When neither of the parties to the kabit system is being held liable for damages.  When the case arose from the negligence of another vehicle in using the public road to whom no representation or misrepresntation as regards the ownership and operation of passenger jeepney was made.  When the riding public was not bothered or inconvenienced at the very least by the illegal arrangement. (Lim vs. CA, 373 SCRA 394) Boundary System (2005 Bar Exam)  The driver pays for the gasoline consumed and does not receive a fixed wage but gets only the excess of the receipt of the fares collected by him over the amount he has agreed to pay to the owner of the vehicle  The owner cannot escape liability: 1. The owner is subsidiarily liable as employer in accordance with Art. 103 RPC 2. From the viewpoint of labor laws, he is an employee, being entitled to all privileges going along with the employer-employee relationship 3. From the viewpoint of the NCC, the driver is a lessee because he pays a fixed amount of rental for his use of the vehicle 4. From the viewpoint of the law on common carriers, he is an employee of the operator for purpose of the latter’s liability to passengers Arrastre Operator  The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and a warehouseman. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator. Hence, the duty of the arrastre operator to take care of the goods that are in its custody and to deliver them in good condition to the consignee also devolves upon the common 55

b. It would be absurd to hold liable
the owner of a stolen vehicle for an accident caused by the person who stole the vehicle (Duavit vs. CA, 173 SCRA 490) Kabit System (2005 Bar Exam)  A system whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or a percentage of such earnings. It is void under Art. 1409 NCC.  Effects: 1. The thrust of the law in enjoining the kabit system is to identify the person upon whom responsibility may be fixed with the end in view of protecting the riding public 2. The registered owner is primarily liable for all the consequences of the operations of the carrier. 3. The registered owner cannot recover from the actual owner and the latter cannot obtain transfer of the vehicle to himself, both being in pari delicto (Teja Marketing vs. IAC, 148 SCRA 347) 4. Both the registered owner and the actual owner are

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carrier. Thus, the arrastre operator and the common carrier are liable in solidum for the proper delivery of the goods to the consignee (Eastern Shipping Lines v. CA, 234 SCRA 78) TOWAGE ARRASTRE A vessel is hired to bring another vessel to another place A contract for unloading of goods from a vessel. Services are not maritime. They are in fact no different from those of a depositary or warehouseman. Loading and unloading of coastwise vessels calling at the port

the carrier to the consignee or to the person who has the right to receive them (Art. 1736) Liability remains: a. Even when goods are temporarily unloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transitu (Art. 1737) b. And when goods are stored in the carrier’s warehouse at the place of destination until the consignee has been advised of the arrival thereof and had reasonable opportunity thereafter to remove or dispose them (Art. 1738) c. Delivery to the customs authorities is not delivery to the consignee. However, the parties may agree to limit the liability of carrier (Lu Do vs. Binamira, 101 Phil. 120) Defenses (1995, 1996, 1997, 2001, 2002 Bar Exams)  Flood, storm, earthquake, lighting, or other natural disaster or calamity.(Caso Fortuito/Force Majeure)  Act of public enemy in war, whether international or civil  Act or omission of shipper or owner of goods  Character of goods or defects in packing or in containers.  Order or act of competent authority (Art. 1734)  Stipulation limiting liability of carrier (Arts. 1744, 1448, 1749, 1750) Caso Fortuito/Force Majeure a. Must be proximate and only cause of loss b. Carrier must exercise due diligence to prevent or minimize the loss before, during or after the disaster (Art. 1739) c. Carrier not in delay in transporting the goods (Art. 1740)

STEVEDORIN G

I. CARRIAGE OF GOODS Extraordinary Diligence (1997, 2001, 2002 Bar Exams)  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 passengers transported by them, according to all circumstances of each case (Art. 1733, NCC) Presumption of Negligence 1. If the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently (Art. 1735) 2. Mere proof of the delivery of goods in good order to a common carrier and their arrival in bad order at their destination makes for a prima facie case against the carrier (Coastwise Lighterage Corp. vs. CA, 245 SCRA 796) 3. The court need not make an express finding of fault or negligence, the law imposes liability upon common carriers, as long as it is shown that: a. There is a contract between the shipper and common carrier b. Loss or deterioration took place during the existence of contract  Duration of Liability Commencement: from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation Termination: actual or constructive delivery by

 Fire may not be considered a natural 
disaster (Eastern Shipping vs. IAC, 150 SCRA 463) “Very rough seas and stormy weather” were not caso fortuito, but normal occurences that an ocean-going vessel, particularly in the month of September which, in our area, is a month of rains and heavy seas would encounter as a matter of routine (Eastern Shipping vs, CA, 196 SCRA 570)

Acts of Public Enemy a. Must be proximate and only cause of loss

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b. Carrier must exercise due diligence
to prevent or minimize loss before, during or after the act causing loss, of goods (Art. 1739) Contributory Negligence  If shipper or owner merely contributed to the loss, the proximate cause thereof being the negligence of carrier, the carrier shall still be liable for damages, but such shall be equitably reduced (Art. 1741) Character of the Goods

c.

circumstances and has been fairly and freely agreed upon. (Art. 1750) Limiting carrier’s liability for delay on account of strikes or riots. (Art. 1748)

1.

Even if damage caused by the inherent defect/character of goods, the common carrier must exercise due diligence to forestall or lessen loss (Art. 1742) 2. Carrier who, knowing the fact of improper packing of the goods upon ordinary observation, still accepts the goods notwithstanding such condition is not relieved of liability for loss resulting therefrom (Southern Lines, Inc. v. CA, 4 SCRA 258) Order or Act of Public Authority  Public authority must have power to issue the order (Art. 1743). Where the officer acts without legal process, the common carrier will be held liable. Stipulation Limiting Liability of Carrier (2002 Bar Exam)  Common carrier and shipper may agree on carrier’s observance of diligence to a degree less than extraordinary, provided it be: 1. In writing, signed by shipper or owner; 2. Supported by a valuable consideration other than the service rendered by carriers; and 3. Reasonable, just and not contrary to public policy. (Art. 1744) Valid Stipulations: a. Carrier's liability limited to the value of goods appearing in the bill of lading, unless the shipper or owner declares a greater value. (Art. 1749) b. Fixing the sum to be recovered by the owner or shipper, if it is reasonable and just under the

Invalid Stipulations: (RL²NTD²) a. Goods are transported at the risk of the owner or shipper; b. Carrier will not be liable for any loss of goods; c. Carrier need not observe any diligence in the custody of goods; d. Carrier shall exercise a degree of diligence less than that of a good father of a family; e. Carrier shall not be responsible for the acts or omissions of his or its employees; f. Carrier’s liability for acts committed by thieves or robbers who do not act with grave or irresistible threat, violence or force is dispensed with or diminished; g. Carrier not responsible for the loss of goods on account of defective condition of car, vehicle, ship or other equipment used in the contract of carriage. (Art. 1745) Effect of Delay  If, without just cause, (1) delays the transportation of goods or (2) changes the stipulated or usual route, the contract limiting the common carrier's liability cannot be availed of in case of loss of goods (Art. 1747) Presumption despite stipulation  Even when there is an agreement limiting the liability, the common carrier is disputably presumed to have been negligent in case of their loss. (Art. 1752) Grounds for valid refusal to accept goods: (DUO-CIEDSF) 1. Dangerous objects or substances including dynamites and other explosives 2. Unfit for transportation 3. Acceptance would result in overloading 4. Contrabands or illegal goods 5. Injurious to health 6. Goods will be exposed to untoward danger like flood, capture by enemies and the like 7. Goods like livestock will be exposed to diseases 8. Strike 57

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9.

Failure to tender goods in time

Duty to Deliver Goods  Oft-Repeated Rule: In the absence of a special contract, a carrier is not an insurer against delay in transportation of goods

 Consequences of Delay: a. A natural disaster shall not free carrier from
responsibility (Art. 1740)

b. Contract limiting carrier's liability cannot be
availed of in case of loss of goods (Art. 1747) c. Excusable delays in carriage suspend, but do not generally terminate, the contract of carriage, and when the cause is removed, the master must proceed with the voyage and make delivery d. During delay the vessel continues to be liable as a common carrier, not as a warehouseman, and remains duty bound to exercise extraordinary diligence e. Payment of indemnity: i. Stipulated in bill of lading ii. If no indemnity stipulated, then carrier shall be liable for damages incurred due to delay f. Consignee may: i. Leave goods transported in the hands of carrier (Abandonment) advising him thereof in writing before their arrival at the point of destination. The carrier shall pay the full value of goods as if they had been lost or mislaid. ii. If no abandonment was made indemnification shall not exceed the current price of goods at the time it should have been delivered II. CARRIAGE OF PASSENGERS Not Passengers: 1. One who has boarded by fraud, stealth or deceit 2. Rides any part of the vehicle unsuitable or dangerous or which he knows is not designated or intended for passengers 3. Remains on a carrier for an unreasonable length of time after he has been afforded every safe opportunity to alight Utmost Diligence  A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances (Art. 1755)

BAR QUESTION (Q): X, an 80-year old epileptic, boarded the S/S Tamaraw in Manila going to Mindoro. To disembark, the passengers have to walk thru a gang plank. While negotiating the gang plank, X slipped and fell into the waters. X was saved from drowning, brought to a hospital but after a month, died from pneumonia. Except for X, all the passengers were able to walk thru the gang plank. What is the liability of the owner of S/S Tamaraw? SUGGESTED ANSWER (SA): The owner of S/S Tamaraw is liable for the death of X in failing to exercise utmost diligence in the safety of passengers. Evidently, the carrier did not take the necessary precautions in ensuring the safety of passengers in the boarding of and disembarking from the vessel. Unless shown to the contrary, a common carrier is presumed to have been negligen tin cases of death or injury to its passengers (Arts. 1755-1756, NCC). Since X has not completely disembarked yet, the obligation of the shipowner to exercise utmost diligence still then subsisted and he can still be held liable. Duration of Liability  Commencement: From the moment the person who purchases the ticket (or token or card) presents himself at the proper place and in a proper manner to be transported with a bona fide intent to ride the coach (Vda. De Nunca vs. Manila Railroad Co., 13 SCRA 249) Termination: Until the passenger has, after reaching his destination, (1) safely alighted; or (2) had a reasonable opportunity to leave the carrier’s premises

1.

2.

3.

Liability remains: 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 (LRTA vs. Navidad) Includes reasonable time to remain on the premises to see after his baggage and prepare for his departure (La Mallorca vs. CA, 17 SCRA 739) Extends to persons boarding the cars as well as to those alighting therefrom. It is the duty of common carriers to stop their conveyances a reasonable length of time to afford passengers an opportunity to enter (Dangwa Trans Co. vs. CA, 202 SCRA 574)

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Presumption of Negligence 1. In case of death of or injury to passengers, common carriers are presumed to have been at fault or to have acted negligently (Art. 1756 NCC). This provision applies the doctrine of res ipsa loquitor for several reasons: i) The contract imposes on the carrier the obligation to transport the passengers safely, hence the burden of explaining should fall on the carrier; ii) The cause of accident is better known to the carrier than the passenger; and iii) The accident could not have happened if due care was exercised by the carrier 2. The court need not make an express finding of fault or negligence of the common carrier to hold it liable Liability for Acts of Employees a. Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former’s employees, although: i. Such employees may have acted beyond the scope of their authority or ii. In violation of the orders of common carriers (Art. 1759) b. Not a defense: i. Proof of exercise of diligence of a good father of a family in the selection and supervision of employees (Ibid) ii. Cannot be eliminated or limited by stipulation, posting of notices, statements on the tickets or otherwise (Art. 1760) c. Liability of carrier for the personal violence of its employees or agents upon its passengers extends only to those acts that the carrier could foresee or avoid through the exercise of the degree of diligence required. d. Diligence in the selection and supervision of employees under Art. 2180 NCC cannot be interposed by the common carrier to prevent damages because the liability of the carriers

arises from the breach of the contract of carriage. The defense under Art. 2180 is applicable to negligence in quasi-delicts (Del Prado v. Manila Electric Co., 52 Phil 900) Liability for Acts of Strangers or other Passengers a. 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 (Art. 1763) b. The carrier is liable when its personnel allowed a passenger to drive the vehicle causing it to collide with another vehicle resulting to the injuries suffered by the other passengers (MRR v. Ballesteros, 16 SCRA 641) Effect of Stipulation on Liability  General Rule: Liability cannot be dispensed with or lessened by stipulation, posting of notices, statements on tickets or otherwise (Art. 1757) Exception: When a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid Exception to the exception: Willful acts or gross negligence (Art. 1758) Passenger’s Baggages HAND-CARRIED CHECKED-IN (In the custody of (In the custody of the passengers or their common carrier) employees) Necessary deposit Considered as goods Common carrier Requires extraordinary exercises diligence of diligence a depositary (ordinary diligence) Governed by Arts. Governed by Arts. 1998 and 2000-2003 1733-1753 III. ACTIONS Causes of Action: 1. Culpa Contractual a. The liability of the carrier is not merely subsidiary or secondary but 59

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direct, immediate and primary. (Medina vs. Cresencia, 99 Phil. 506) b. Only the carrier is primarily liable and not the driver, because there is no privity between the driver and the passenger. c. No defense of due diligence in the selection and supervision of employees. (Art. 1759) 2. Culpa Aquiliana a. The carrier and driver are solidarily liable as joint tortfeasors. b. Defense of due diligence in the selection and supervision of employees is available. Except: maritime tort resulting in collision Culpa Delictual The driver is primarily liable. The carrier is subsidiarily liable only if the driver is convicted and declared insolvent (Art. 100 RPC)

respective claims may be determined by legal proofs which each of the contracting parties may present in conformity with law. Obligations of the Carrier a) Duty to Accept Goods – see notes on Common Carriers for ground for valid refusal to accept goods b) Duty to Deliver Goods to (i) person indicated in bill of lading; or (ii) any person to whom bill of lading was validly transferred or negotiated  see notes on Common Carriers for effects of delay c) Duty to exercise extraordinary diligence Right of Consignee to Abandon the Goods 1. Partial non-delivery, where goods are useless with others (Art. 363 Code of Commerce) 2. Goods rendered useless for sale or consumption for purposes for which they are properly destined (Art. 365) 3. In case of delay through the fault of carrier (Art. 371) Notice of Damage  Condition precedent  Damage apparent – immediately upon delivery  Damage not apparent – within 24 hours from delivery (Art. 366) Prescriptive Period 1. Not provided by Art. 366, hence NCC applies 2. No bill of lading – within 6 years 3. With bill of lading – 10 years Art. 366 Code of Commerce Notice of damage is a condition precedent 24-hour period for nonapparent damage No prescriptive period provided. NCC applies Does not cover misdelivery or delay Extrajudicial demand tolls prescriptive period Parties can stipulate shorter period COGSA Notice of damage not a condition precedent 3-day period for nonapparent damage 1-year period Also does not cover misdelivery or delay Extrajudicial demand does not toll prescriptive period 1-year period cannot be shortened

3.

a.

OVERLAND TRANSPORTATION Scope: 1. Domestic land and transportation 2. Domestic air transportation water/maritime

Bill of lading (1998, 2005 Bar Exams)  Written acknowledgment of receipt of goods and agreement to transport them to a specific place to a person named or to his order. Note: It is not indispensable for the creation of a contract of carriage. The contract itself arises from the moment goods are delivered by the shipper to the carrier and the carrier agrees to carry them (Compania Maritima v. Insurance Company of North America, 12 SCRA 213) Functions: 1. A receipt for the goods shipped. 2. A contract which the three parties (shipper, carrier, consignees) undertake specific responsibilities and assume stipulated obligations. 3. A legal evidence of the contract between the shipper and the carrier. Its contents shall decide all disputes which may arise with regard to their execution and fulfillment. (Magellan Manufacturing v. CA, 201 SCRA 2021)  In the absence of a bill of lading, their

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MARITIME LAW Characteristics: 1. Real a) Similar to transactions over real property with respect to effectivity against third persons which is done through registration b) Evidence of real nature is shown by (1) limitation of liability of agents to actual value of the vessel and freight money; and (2) right to retain cargo and embargo and detention of vessel (Luzon Stevedoring Corp v. CA, 156 SCRA 169) 2. Hypothecary i) Liability of owner of vessel is limited to the value of vessel (Doctrine of Limited Liability) I. DOCTRINE OF LIMITED LIABILITY (1997, 1999, 2000 Bar Exams) “No vessel, no liability”  The liability of ship owners is limited to the amount of interest in said vessel such that where vessel is entirely lost, the obligation is extinguished (Luzon Stevedoring v. Escano, 156 SCRA 169)  Interest extends to: a. Vessel itself b. Equipments c. Freightage d. Insurance proceeds (Chua v. IAC, 166 SCRA 183) Exceptions: 1. Where injury or damage is due to ship owner’s fault 2. Vessel is insured 3. Claims under Workmen’s Compensation 4. Expenses for repair on vessel before loss 5. Vessel is not abandoned 61

6. Voyage is not maritime but only in a river or gulf Abandonment 1. Indispensable requirement before the shipowner or ship agent can enjoy the benefits of the limited liability principle. The only instance where such abandonment is dispensed with is when the vessel was entirely lost. 2. Only the ship owner and the ship agent can make an abandonment 3. What may be abandoned – vessel 4. Instances: 1. Civil liability from indemnities to third persons (Art. 587 Code of Commerce) 2. Leakage of at least ¾ of contents of cargo containing liquids (Art. 687) 3. Constructive loss of vessel (Sec. 138 Insurance Code)

 See notes on Overland Transportation
for right of consignee to abandon goods 5. No procedure to be followed 6. No prescriptive period provided not estopped from invoking the same or do acts inconsistent with abandonment 7. May be made to be exempted from the following liabilities: i. Civil liability to third persons arising from the conduct of the captain in the vigilance over the goods ii. Proportionate contribution of co-owners of the vessel to a common fund for the results of the acts of the captain referred to in Art. 587 Code of Commerce iii. Civil liability incurred by the ship owner in case of collision Admiralty Jurisdiction  all actions in admiralty and maritime jurisdiction where the claim exceeds P300,000 or in Metro Manila, exceeds P400,000 the RTC has jurisdiction (Sec. 19(3) BP 129, as amended by RA 7691) II. VESSELS

 Engaged

in navigation, whether coastwise or on the high seas, including floating docks, pontoons, dredges, scows and any other floating apparatus destined for the services of the industry or maritime commerce. Excluded are local and foreign military vessels, bancas and other watercrafts of less than 3 tons gross

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capacity and small watercrafts engaged in river and bay traffic. Ownership 1. Acquisition a. Prescription – (1) acquisition must appear in a written instrument, (2) which shall not produce any effect to third persons if not inscribed in the registry of vessels and (3) shall be acquired by possession in good faith, continued for 3 years, (4) with a just title duly recorded. (5) In the absence of any of these, continuous possession for 10 years shall be necessary to acquire ownership. b. Sale If made while it is on voyage – the freightage which it earns from the time it receives its last cargo shall pertain entirely to the purchaser, and the payment of the crew and other persons who make up its complement shall be for his account.  If made after vessel arrived at port of its destination – freightage shall pertain to the vendor, and the payment of the crew and other individuals who make up its complement shall be for his account, unless the contrary is stipulated in either case. 

2.

Contracts of the captain, whether authorized or not, to repair, equip and provision the vessel, provided that the amount claimed was invested for the benefit of the vessel (Art. 586) 3. Indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which the vessel carried, as well as for the safety of the passengers transported 4. Damages to the goods loaded on the vessel without prejudice to their right to free themselves from liability by abandoning the vessel to the creditors (Art. 587) Notes:  Liable jointly and severally  Not liable for an obligation contracted by the captain in excess of the latter’s powers and privileges pertaining to him. However, if the amount claimed were used for the benefit of the vessel, the ship owner or ship agent is liable Captains and Masters of Vessels Nature of Position 1. General agent of the ship-owner 2. Technical director of the vessel 3. Representative of the government of the country under whose flag he navigates  Qualifications: 1. Filipino citizen 2. Legal capacity to contract 3. must have passed the required physical and mental examinations required for licensing him as such (Art. 609)  Supercargoes - Persons who discharge administrative duties assigned to him by ship agent or shippers, keeping an account and record of transaction as required in the accounting book of the captain (Art. 649)  IV. CHARTER PARTY

2. Registration – through the Maritime
Industry Authority (MARINA) Ship’s Manifest - Declaration of the entire cargo. The object is to furnish customs officers with a list to check against, to inform the revenue officers what goods are brought into a port of the country on a vessel. Hence, the requirement that a vessel must carry a manifest is not complied with even if a bill of lading can be presented  A bill of lading is just a declaration of a specific cargo rather than the entire cargo. It is issued as a matter of convenience by virtue of a contract. III. PARTIES 1. agents 2. vessel 3. vessel 4. Ship-owners and ship

Captains and masters of the Officers and crew of the Supercargoes

 Contract by which an entire ship, or
some principal part thereof is let by the owner to another person for a specified time or use for the conveyance of goods, in consideration of the payment of freight (Caltex Phils. vs. Sulpicio Lines, 315 SCRA 709)

Shipowners and Ship Agents  Liabilities: 1. Acts of the captain (Art. 618) 62

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LEASE If for a definite period, lessee cannot give up lease by paying a portion of the amount agreed upon If the leased property is sold to one who knows of the existence of the lease, the new owner must respect the lease

CHARTER PARTY Charterer may rescind charter party by paying half of freightage agreed upon The new owner is not compelled to respect the charter party so long as he can load the vessel with his own cargo

Common carrier becomes private

Common carrier remains as such

Freight – Parties may fix the manner or form in which the charter price shall be satisfied Lay days – period when vessel will be delayed in the port for loading and unloading Primage – bonus to be paid to the captain after the successful voyage Deadfreight – where the charterer failed to occupy the leased portion of the vessel, he may thereby be made liable by the ship-owner Demurrage – sum due, by express contract, for the detention of the vessel, in loading and unloading, beyond the time allowed in the contract of affreightment, and to any other improper detention or delay beyond the time set for loading V. BOTTOMRY AND RESPONDENTIA Bottomry – loan made by ship-owner or ship agent guaranteed by the vessel itself and repayable upon arrival of vessel at destination (Art. 719) Respondentia – loan, taken on security of the cargo laden on a vessel, and repayable upon safe arrival of cargo at destination (Art. 719) Common Requisites: (BDPS²R)  Borrows money for use, equipment or repair of vessel  For a definite term  With extraordinary interest called premium  Secured by pledge of vessel or portion thereof (in bottomry) or goods (respondentia)  Loan repayment depends or conditioned on the safe arrival of the vessel (bottomry) or goods (respondentia)  Obligation to repay extinguished if vessel is lost due to specific marine perils in the course or voyage within a limited time, or if pledged goods are lost Formal Requirements: 1. By means of public instrument 2. Policy signed by the contracting parties and the broker taking part therein 3. Private instrument

Classes: 1. Bareboat or Demise Charter  Charterer provides crew, food and fuel. The charterer is liable as if he were the owner, except when such arises from the unworthiness of the vessel

 Owner pro hac vice – a demise
charterer, in spite of the fact that somebody else is the owner of the vessel, is treated as the owner of the chartered vessel, just for that one particular purpose only. Effect: charterer assumes customary rights and liabilities of the ship-owner to third persons and is held liable for the expense of the voyage and the wages of the seamen 2. Contract of Affreightment Owner leases the boat or part of it for the carriage of goods 1. Time charter – vessel is chartered for a period of time or duration of voyage 2. Voyage or trip charter – contract for hire of vessel for one or series of voyages BAREBOAT OR DEMISE CHARTER Charterer becomes liable to others caused by its negligence Charterer regarded as owner pro hac vice for the voyage Owner of vessel relinquishes possession, command and navigation to charterer CONTRACT OF AFFREIGHTMENT Owner remains liable as carrier and must answer for any breach of duty Charterer is not regarded as owner Owner retains possession, command and navigation of the ship

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Who may contract:  Bottomry – ship owner or ship agent. Outside of the residence of the owners, the captain.  Respondentia – only the owner of the cargo, except: (i) on the portion of the vessel he owns, provided no money has been previously borrowed on the whole vessel, nor exists any other kind of lien or obligation chargeable against her; (ii) when he is permitted to do so, he must necessarily state what interest he has in the vessel Exceptions to the Hypothecary Nature of Bottomry and Respondentia: 1. Loss due to inherent defect 2. Loss due to the barratry on the part of the captain 3. Loss due to the fault of malice of the borrower 4. Vessel was engaged in contraband 5. Cargo loaded on the vessel be different in form that agreed upon When Bottomry/Respondentia Regarded as Simple Loan 1. Lender loaned an amount larger than the value of the object due to fraudulent means employed by borrower (Art. 726) 2. Full amount of the loan is not used for the cargo or given on the goods if all of them could not have been loaded, the balance will be considered a simple loan (Art. 727) 3. If the effects on which the money is taken is not subjected to any risk (Art. 729) BOTTOMRY/ RESPONDENTIA May or may not have a collateral Collateral may be any property Absolutely repayable Need not be in writing but interest shall not be due unless expressly stipulated in writing Need not be registered to bind third persons Loss of collateral does ORDINARY LOAN Must have collateral Must be vessel or cargo subject to maritime risks Depends upon the safe arrival of the collateral at the port Must be in writing

not extinguish the loan VI. ACCIDENTS 1. 2. 3. 4.

extinguishes the same

Averages Collision Arrival Under Stress Shipwreck

Protest– written statement by the master of a vessel or any authorized officer, attested by proper officer or a notary, to the effect that damages has been suffered by the ship. Required in the following instances: 1. Vessel makes an arrival under stress 2. Vessel is shipwrecked 3. Vessel has gone through hurricane or the captain has suffered damages or averages 4. Maritime collisions Note: Should be made within 24 hours following the arrival of the vessel at the first port. Upon arrival at the place of destination, the captain shall ratify the protest within 24 hours. Averages 1. An extra-ordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both; and 2. All damages or deterioration suffered by the vessel from departure to the port of destination, and to the cargo from the port of loading to the port consignment (Art. 806)  Classes of Averages 1. Particular or Simple Average (i) Damage or expenses caused to the vessel or cargo that did not inure to common benefit, and (ii) borne by respective owners (Art. 809) 2. Gross or General Average a. Damage or expenses deliberately caused in order to save the vessel, its cargo or both from real and known risk (Art. 811) b. All the persons having an interest in the vessel and the cargo therein at the time of the occurrence of the average shall contribute to satisfy this average (Art. 812) c. Requisites: 1. Common danger present 64

Must be recorded in the registry of vessels of the port of registry of the vessel Loss of collateral

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2. Arising from accidents of sea, disposition of authority 3. Peril imminent and ascertained 4. Part of vessel or cargo deliberately sacrificed 5. Intended to save vessel or cargo or both 6. Successful saving of vessel or cargo 7. Proper legal steps and authority taken d. Procedure for recovery: 1. There must be an assembly of the sailing mate and other officers with the captain including those with interests in the cargo 2. Resolution of the captain 3. The resolution must be entered in the logbook, with reasons and motives and the votes for and against the resolution 4. The minutes shall be signed by the parties 5. The captain shall deliver a copy of the minutes to the maritime judicial authority of the first port he may make, within 24 hours after his arrival, and to ratify it immediately under oath (Art. 813-814) York-Antwerp Rules on determining liability for contribution on averages: 1. Deck cargo is permitted in coastwise shipping but prohibited in overseas shipping 2. Overseas trade – must always contribute to general average, but should the same be jettisoned, it would not be entitled to reimbursement because there is violation of the Y-A Rules 3. Coastwise shipping – must always contribute to general average and if jettisoned would be entitled to reimbursement Collision – Impact of two vessels both of which are moving

and time of impact  Error in Extremis – sudden movement made by a faultless vessel during the third zone of collision with another vessel which is at fault during the second zone. Even if such sudden movement is wrong, no responsibility will fall on said faultless vessel (Urrutia and Co. v. Baco River Plantation, 26 Phil. 632)  Cases Covered: 1. One vessel at fault – such vessel is liable for damage caused to innocent vessel as well as damages suffered by the owners of cargo of both vessels 2. Both vessels at fault – each vessel must bear its own loss, but the shippers of both vessels may go against the ship owners who will be solidarily liable 3. Vessel at fault not known Doctrine of “Inscrutable Fault” (1997 Bar Exam)  In case of collision where it cannot be determined which between the two vessels was at fault, both vessels bear their respective damage, but both should be solidarily liable for damage to the cargo of both vessels.

4. Third vessel at fault – same rule as
(1)

5. Fortuitous event – each bears its

1.

2.

own loss Procedure: Protest should be made within 24 hours before the competent authority at the point of collision or at the first port of arrival, if in the Philippines and to the Philippine consul, if the collision took place abroad (Art. 835) Injuries to persons and damage to cargo of owners not on board on collision time need not be protested (Art. 836)

 Allision - Impact between a moving
vessel and a stationary one  Zones of Time in the Collision of vessels: First zone - all time up to the moment when risk of collision begins Second zone - time between moment when risk of collision begins and moment it becomes a practical certainty; Third zone - time when collision is certain

1. 2. 3.

Arrival under Stress  Arrival of a vessel at a port of destination on account of lack of provision, well-founded fear of seizure, pirates, or accidents of sea disabling navigation (Art. 819)  When Not Lawful: 1. Lack of provisions due to negligence to carry according to usage and customs 2. Risk of enemy not well known or manifest 3. Defect of vessel due to improper repair; and 4. Malice, negligence, lack of foresight or skill 65

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1. 2.

of captain (Art. 820)  Who Bears Expenses: The ship-owner or ship agent except for damages caused by the shippers by reason of a lawful arrival (Art. 821) The captain shall be liable for damages caused by his delay, if after the cause of the arrival under stress has ceased, he continues the voyage (Art. 825)  Procedure: 1. Captain determines during the voyage if there is well founded fear of seizure, privateers and other valid grounds 2. He shall then assemble the officers 3. He shall summon the persons interested in the cargo who may be present and who may attempt but without right to vote 4. The officers determine and agree if there is well founded reason after examining the circumstances. The captain shall have the deciding vote 5. The agreement shall be drafted and the proper minutes shall be signed and entered in the log book 6. Objections and protests shall likewise entered in the minutes

3.

Shipwreck  Denotes all types of loss/ wreck of a vessel at sea either by being swallowed up by the waves, by running against another vessel or thing at sea or on coast where the vessel is rendered incapable of navigation SALVAGE LAW (Act 2616)

b. Exposed to marine peril c. Voluntary salvage services d. Success in whole or in part, or that services contributed to success  Rules on Salvage Award (1) Fixed by RTC in the absence of agreement or where the latter is excessive (Sec. 9) (2) If sold (no claim being made within 3 months from publication) a. Proceeds, after deducting expenses and the salvage claim, shall go to the owner b. If he does not claim it within 3 years, 50% of the said proceeds shall go to the salvors, and the other half to the government (Secs. 11-12) If a vessel is the salvor, the reward shall be distributed as follows: a. 50% to ship owner b. 25% to captain c. 25% to officers and crew in proportion to their salaries (Sec. 13)  Persons Without Right to a Salvage Reward: 1. Crew of the vessel saved 2. Persons who commenced salvage in spite of opposition of the captain or his representative 3. Person who fails to deliver a salvaged vessel or cargo to the Collector of Customs (Sec. 3)

 Towage - contract whereby one vessel,  Salvage
- Compensation allowed to persons by whose voluntary assistance a ship at sea or her cargo or both have been saved in whole or in part from an impending or actual peril, shipwrecks, derelicts or recapture - Services one person render to the owner of a ship or goods, by his own labor, preserving the goods or the ship which the owner or those entrusted with the care of them have either abandoned in distress at sea, or are unable to protect or secure usually motorized, pulls another from one place to another, for compensation. It is a contract for services rather than a contract of carriage. SALVAGE Governed by special law (Act No. 2616) Requires success, otherwise no payment Must be done with the consent of the captain/crewmen Vessel must be involved in an accident Fees distributed among crewmen Salvor takes possession and may retain possession 66 TOWAGE Governed by NCC on contract of lease Success not required Only the consent of the tugboat owner is needed Vessel need not be involved in an accident Fees belong to the tugboat owner Tower has no possessory lien; only an action for sum of

 Derelict – Ship or her cargo which is
abandoned and deserted at sea by those who were in charge of it, without any hope of recovering it, or without any intention of returning to it  Requisites for Salvage Award: a. Valid object of salvage

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until he is paid Court can reduce amount of renumeration if unconscionable

money Court cannot change amount in towage even if unconscionable

CARRIAGE OF GOODS BY SEA ACT (CA 65) (1995, 2000, 2004)  Requisites: 1. Contracts for carriage of goods 2. By sea 3. To and from Philippine ports 4. In foreign trade  Shipper guarantees at time of shipment the accuracy of marks, number quantity and weight as furnished by him. He shall indemnify the carrier against all loss, damages and expenses arising from inaccuracies in such particulars  To recover loss or damage to cargo, notice and general nature thereof in writing must be given by the shipper or consignee to the carrier or his agent at the port of discharge or at the time of removal of the goods • If loss/damage not apparent – within 3 days from delivery • May be endorsed upon receipt for the goods given by the person taking delivery thereof • Need not be given if the state of goods at the time of their receipt has been the subject of joint inspection  Prescriptive Periods: 1. To give notice if loss or damage is apparent – notice in writing must be given to carrier or agent at time of removal of goods by persons entitled to delivery. 2. To give notice if not apparent – within 3 days from delivery. 3. To bring suits – 1 year after delivery or when goods should have been delivered a suit must be filed (whether notice of loss/damage is given), otherwise prescribed. a. Stipulation reducing the 1 year period is null and void, but a written agreement to suspend it is valid (Maritime Company of the Philippines vs. CA, 164 SCRA 593) b. An extra-judicial demand does not suspend the period c. An insurer who is exercising its right of subrogation is also bound by the 1-year period (Fil. Merchants vs. Alejandro 145 SCRA 42). It does not apply to a claim

against the insurer for the insurance proceeds. The claim against the insurer is based on contract that expires in 10 years (Mayer Steel Pipe Corp. vs. CA 274 SCRA 432) d. If there is no delivery in case of undelivered or lost cargo the one-year period starts to run from the day the vessel left port e. When interrupted i. Action is filed in court ii. Contrary agreement between parties 4. Delivery to the wrong person – prescriptive period is (i) 10 years because there is a breach of contract, or (ii) 4 years for quasi-delict (Ang v. American SS Agencies (19 SCRA 631)  Delay or late delivery are not the damage or loss contemplated under the COGSA. The goods are not actually lost or damaged. The applicable period is 10 years (Mitsui vs. CA 287 SCRA 366)  Liability under COGSA: 1. Maximum of $500 per package or, if not shipped in packages, per customary freight unit (e.g. metric ton) 2. Nature and value of goods may be declared by shipper and inserted in bill of lading; declaration is prima facie evidence and not conclusive on carrier 3. Shipper and carrier may agree on another maximum amount, but not more than the amount of damage actually sustained  No Liability under COGSA: 1. Nature or value of goods knowingly and fraudulently misstated by shipper 2. Damage resulted from dangerous nature of shipment loaded without consent of carrier 3. Unseaworthiness not due to negligence of carrier 4. Deviation was to save life or property at sea SHIP MORTGAGE DECREE Purpose: To accelerate the growth and development of the shipping industry in the Philippines and to finance the acquisition, construction, purchase or initial operation of vessels Salient Features: Recognizes the creation of preferred mortgage that must be satisfied prior to all other claims and it allows for the arrest of the vessel which in effect treats the vessel itself as the defendant in an action 67

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 Preferred

Mortgage Lien - One constituted for the financing, acquisition, purchase, construction and initial operation of vessels under the provisions of PD 1521 • Requisites a. Recorded in MARINA b. Affidavit of good faith c. Mortgage does not stipulate the waiver of preferred status of claim d. Mortgage must be valid e. Mortgage includes the whole vessel of domestic ownership • If Vessel is of Foreign Ownership – it will be recognized if: 1. Mortgage, hypothecation or similar charge has been duly and validly executed in accordance with the laws of the country under which the vessel is documented 2. Same has been duly registered in accordance with such laws in a public register – either at the port of registry of vessel or at a central office  Claims Preferred Over a Preferred Mortgage Lien: 1. Taxes 2. Judicial costs 3. Pilotage and tonnage charges and other sea and port charges 4. Salaries of depositaries and keepers of vessel 5. Captain and crew’s wages 6. General average 7. Salvage 8. Prior maritime liens 9. Damages arising out of tort 10. Prior preferred mortgage lien WARSAW CONVENTION OF 1929 Scope 1. International transport by air 2. Transport of persons, baggage or goods Note: Warsaw Convention prevails over the Civil Code, Rules of Court and all laws in the Philippines since an international law prevails over general law.  International Transportation by Air – any transportation in which the place of departure and the place of destination are situated either: 1. Within the territories of two High Contracting Parties regardless of

whether or not there be a break in the transportation or transshipment 2. Within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though that power is not a party to the Convention (“round trip”) Note: Absence of agreement concerning stopping place – transportation not deemed international for purposes of the WC  When Not Applicable:

1. If there is willful misconduct on the part
of the carrier’s employees (PAL v. CA, 257 SCRA 33). 2. When it contradicts public policy 3. If requirements under WC are not complied with  Liability of Air Carriers 1. Death or injury of a passenger if the accident causing it took place on board the aircraft or in the course of its operations (Art. 17) 2. Destruction, loss or damage to any luggage or goods, if it took place during the carriage (Art. 18) 3. Delay in the transportation of passengers, luggage or goods (Art. 19) Note: The Hague Protocol amended the Warsaw Convention by removing the provision that if the airline took all necessary steps to avoid the damage, it could exculpate itself completely (Art. 20(1)) (Alitalia v. IAC, 192 SCRA 9)  Action for Damages 1. Condition precedent a. Written complaint (protest) must me made: i. Damage to baggage – 3 days from receipt ii. Damage to goods – 7 days from receipt iii. Delay – 14 days from receipt b. Otherwise the action is barred except in case of fraud on the part of the carrier (Art. 26) 2. Jurisdiction – governed by domestic law 3. Venue – at the option of the plaintiff: a. Court of domicile of carrier b. Its principal place of business c. Where it has a place of business through which the contract has been made d. Place of destination (Art. 28) Note: The above enumeration cannot be waived, but are jurisdictional in nature 68

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(Santos III vs. Northwest Orient Airlines 210 SCRA 256) 4. Prescriptive period – 2 years from: 1. Arrival at the destination 2. Expected arrival 3. Date on which the transportation stopped (Art. 29) 5. Rule in case of various successive carriers 1. In case of transportation of passengers – action is filed only against the carrier in which the accident or delay occurred unless there is an agreement whereby the first carrier assumed liability for the whole journey. 2. Transportation of baggage or goods i. Consignor can file an action against the first carrier and the carrier in which the damage occurred ii. Consignee can file an action against the last carrier and the carrier in which the damage occurred iii. These carriers are jointly and severally liable (Art. 30)  Limit of Liability  Passengers – $10,000 to $100,000 except: agreement to a higher limit  Checked-in baggage – $20 / kg except: consigner declared its value and paid a supplementary sum, carrier liable to not more than the declared sum unless it proves the sum is greater than its actual value  Hand-carry baggage – $400 to $1000 / passenger (Art. 22 as amended by Guatemala Protocol, 1971; Alitalia v. IAC, supra) • An agreement relieving the carrier from liability or fixing a lower limit is null and void (Art. 23) • Carrier not entitled to the foregoing limit if the damage is caused by his willful misconduct or default (Art. 25)  Special Rules on Liabilities of Airline Carriers: 1. In case of flight diversion due to bad weather or other circumstances beyond the pilot’s control, the relation between carrier and passenger continues until the latter has been landed at the port of destination and has left the carrier’s premises. The carrier should exercise extraordinary diligence in safeguarding the safety of its stranded passengers 69

2.

3.

4.

5.

until they have reached their final destination (Philippine Airlines v. CA, 226 SCRA 423) Even where overbooking of passengers is allowed as a commercial practice, the airline company would still be guilty of bad faith and still be liable for damages if it did not properly inform passenger that it could breach the contract of carriage even if they were confirmed passengers (Zalamea v. CA, 228 SCRA 23) An open-dated ticket constitutes a complete contract between the carrier and passenger. Hence, the airline company is liable if it refused to confirm a passenger’s flight reservation (Singson v. CA, 282 SCRA 149) An airline company which issued a confirmed ticket to a passenger covering successive trips on different airlines can be held liable for damages occasioned by “bumping off” by one of the successive airlines (Lufthansa German Airlines v. CA, 238 SCRA 290) An airline ticket providing that carriage by successive air carriers is to be regarded as a “single operation” is to make the issuing carrier liable for the tortuous conduct of the other carrier. A printed provision in the ticket limiting liability only to its own conduct is not enough to rebut that liability (KLM Royal Dutch Airlines v. CA, 65 SCRA 237) PUBLIC SERVICE ACT (CA 146, as amended) (1995, 1998, 2000 Bar Exams)

“Public Service” - Includes any person who may own, operate, manage, or control in the Philippines for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier, railroad, street railway, traction railway, subway motor vehicle, steamboat, or steamship line, ferries, and water craft, shipyard, ice-plant, electric light, heat and power or any public utility (Sec. 13(b) Commercial Act 146)

 A casual or incidental service devoid of
public character and interest is not brought within the category (Luzon Stevedoring vs. PSC, 156 SCRA 169) Certificate of Public Convenience

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No public service shall operate without having been issued a certificate of public convenience (no franchise is required by law, e.g. common carriers) or a certificate of public convenience and necessity (a prior franchise is required by law, e.g. telephone and other services) (Sec. 15 Comm. Act 146) • Exceptions: 1. Warehouses 2. Animal drawn vehicles and bancas moved by oar or sail; tugboats 3. Airships, except for the fixing of maximum rates for fare and freight 4. Radio companies, except for rates fixing 5. Public services owned or operated by the government, except as to rates fixing 6. Ice plants 7. Public markets • The certificate constitutes neither a franchise nor a contract, confers no property right, and is a mere license or privilege. The holder of said certificate does not acquire a property right in the route covered thereby. Nor does it confer any property right, interest or interest in the public highways. Revocation of this certificate deprives him of no vested right. New and additional burdens, alteration of the certificate, or even revocation or annulment thereof is reserved to the State (Luque vs. Villegas, 30 SCRA 408) • It is a “property” and has a considerable value and can be the subject of sale or attachment (CoqueCubao Operators vs. CA, 207 SCRA 343)  Requirements for granting certificate: 1. Citizen of the Philippines, or a corporation, etc. constituted and organized under the laws of the Philippines at least 60% of its stock or paid-up capital must belong entirely to citizens of the Philippines 2. Financially capable of undertaking the proposed service 3. Proof of public necessity, interest and convenience (KMU vs. Garcia, Jr., 239 SCRA 386)  Grounds for revocation of certificate: 1. Where holder is a mere dummy 2. Where operator ceased operation and placed his buses on storage

3. Where operator totally abandons the
service (Manzanal vs. Ausejo, 164 SCRA 36) NOTICE AND HEARING REQUIRED a. Issuance of Certificate b. Fixing of rates, tolls and charges c. Setting up of standards and classifications d. Establishment of rules to secure accuracy of all meters and all measuring appliances e. Issuance of orders requiring establishment or maintenance of extension facilities f. Revocation of modification of Certificate g. Suspension of Certificate (except when it is necessary to avoid serious and irreparable damage or inconvenience to the public or private interest, in which case, a suspension not more than 30 days may be ordered prior to the hearing) WHEN NOT REQUIRED Investigation of any matter concerning public service Requiring operators to furnish safe, adequate and proper service Requiring public services to pay expenses of investigation Valuation of properties of public utilities Examination and test of measuring appliances Grant of special permits to make extra or special trips in territories specified in certificate Uniform accounting system and furnishing of annual reports Compelling compliance with the laws and regulations

1.

2.

3.

4. 5. 6.

7.

8.

CORPORATION CODE OF THE PHILIPPINES (BP 68) GENERAL PROVISIONS Corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2) Attributes of a Corporation(CARP) 1. It is an artificial being. 70

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2. 3. 4.

It is created by operation of law. It enjoys the right of succession. It has the powers, attribute and properties expressly authorized by law or incident to its existence. Theories on the Formation of a Corporation: 1. Concession theory – a corporation is an artificial creature without any existence until it has received the imprimatur of the state acting according to law, through the SEC. 2. Theory of corporate enterprise or economic unit – the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. 3. Genossenschall theory – treats the corporation as the reality of the group as a social and legal entity independent of state recognition and “concession.” Doctrine of Separate Personality (1996, 1999, 2000 Bar Exams)  A corporation has a juridical personality separate and distinct from that of its stockholders or members.  Consequences: 1. Liability for acts or contractsobligations incurred by a corporation, acting through its authorized agents are sole its sole liabilities (Creese vs CA, 93 SCRA 483) 2. Right to bring actions – may bring civil and criminal actions in is own name in the same manner as natural persons. 3. Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. 4. Acquisition of court of jurisdiction – service of summons may be mad on the president, general manager, corporate secretary, treasure or inhouse counsel (Sec 11, Rule 14, Rules of Court) 5. Changes in individual membership Remains unchanged and unaffected in its identity by changes in its individual membership 6. Entitlement to constitutional guarantees: • Due Process • Equal protection of the law

Protection against unreasonable searches and seizures Note: A corporation is not entitled to invoke the right against selfincrimination. (Bataan Shipyard vs PCGG) 7. Liability for torts – a corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body or generally, from the directors as the governing body. 8. A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses (ABS-CBN vs CA) 9. Liability for crimes – since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable (People vs Tan Boon Kong, 54 Phil 607) Doctrine of Piercing the Veil of Corporate Entity (1998, 2001, 2004, 2006 Bar Exams)  Requires the court to see through the protective shroud which exempts its stockholders from liabilities that they ordinarily would be subject to, or distinguishes a corporation from a seemingly separate one, were it not for the existing corporate fiction (Lim vs CA, 323 SCRA 102)  Extent: The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied (Koppel v. Yatco 77 Phil. 496)  Rules: 1. has only a res judicata effect 2. to prevent wrong or fraud and not available for other purposes; 3. judicial prerogative only; 4. must be with necessary and factual basis BAR QUESTION (Q): XYZ Corp. owns a beach resort with several cottages. A, the President of XYZ Corp. occupied one of the cottages for residential 71

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purposes. After A’s term expired, XYZ wanted to recover possession of the cottage. A refused to surrender the cottage, contending that as a stockholder and former President, he has the right to enjoy the properties of the corporation. Is A’s contention correct? Explain. SUGGESTED ANSWER (SA): A’s contention is not correct. A may own shares of stock of XYZ Corp. but such ownership does not entitle him to the possession of any specific property of the corporation or a definite portion thereof. Neither is he a co-owner of corporate property. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from that of its stockholders. Stockholders like A can only own shares of stock in the corporation. Such shares of stock do not represent specific corporate property. (Rebecca Boyer-Roxas vs. CA, 211 SCRA 470) 3 Classes of Piercing: (FAE) 1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong. 2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation 3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity. Instrumentality / Alter Ego Rule  Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. • Requisites: 1. There must be control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy, and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had, at that time, no separate mind, will or existence of its own (control); 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff’s legal rights (breach of duty); and

3. Such control and breach of duty must
proximately cause the injury to the plaintiff. (proximate cause) Distinctions between Corporation and Partnership CORPORATION PARTNERSHIP 1. Creation Created by operation Created by agreement of law; of the parties; 2. Numbers of incorporators 2. Requires at least 5 2. Requires at least 2 incorporators; partners; 3. Commencement of juridical personality Acquires juridical Acquires juridical personality from the personality form the date of issuance of the moment of execution certificate of of the contract of incorporation by the partnership Securities and Exchange Commission 4. Powers Corporation can Partnership may exercise only the exercise any power powers expressly authorized by the granted by law or partners (provided it is implied from those not contrary to law, granted or incident to morals, good customs, its existence public order, public policy) 5. Management The power to do the When management is business and manage not agreed upon, every its affairs is vested partner is an agent of in the board of the partnership directors and trustees 6. Effect of mismanagement The suit against a A partner as such can member of the board sue a co-partner who of directors or trustees mismanages who mismanages must be in the name of the corporation 7. Right of succession Has right of Has nor right of succession succession 8. Extent of liability to third persons

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Stockholders are liable only to the extent of the shares subscribed by them

Partners are liable personally and subsidiarily (sometimes solidarily) for partnership debts to third persons

PRIMARY 1. Refers to the franchise of being or existing as a corporation 2. Vested in the individuals who compose the corporation 3. It cannot be sold or transferred because it is inseparable from the corporation itself. SECONDARY 1. Refers to the exercise of rights. Example: right of eminent domain 2. Vested in the corporation after its incorporation and not upon the individuals who compose it 3. It may be sold or transferred; subject to sale on execution, subject to levy

9. Transferability of interests Stockholder has Partner cannot transfer generally the right to his interest in the transfer his shares partnership so as to without prior consent make the transferee a of the other partner without the stockholders because unanimous consent of a corporation is not all existing partners based on this principle because the partnership is based on the principle of delectus personarum 10. Term of existence May not be formed for May be established for a term in excess of 50 any period of time years extendible to no stipulated by the more than 50 years in partners any one instance 11. Firm name May adopt any name Limited partnership is provided it is not the required by law to add same as or similar to the word “Ltd” to its any registered firm name name 12. Dissolution Can only be dissolved May be dissolved at with the consent of the any time by or all of State the partners 13. Governing Law Governed by the Governed by the Civil Corporation Code Code Franchises of Corporations: 1. Primary or corporate franchise  The right or privilege granted by the State to individuals to exist and act as a corporation after its incorporation. 2. Secondary or special franchise  The special right or privilege conferred upon an existing corporation to the business for which it was created. Example, use of the streets of a municipality to lay pipes or tracks, or operation of a messenger and express delivery service.

Classes of Corporations: 1. AS TO ORGANIZERS: a. Public – by State only; and b. Private – by private persons alone or with the State. 2. AS TO FUNCTIONS: a. Public – government of a portion of the territory; and b. Private – usually for profit-making c. Quasi-public – those private corps. which have accepted from the state the grant of a franchise or contact involving the performance of public duties. 3. AS TO GOVERNING LAW: a. Public – Special Laws; and b. Private – Law on Private Corporations 4. AS TO LEGAL STATUS: a. De jure corporation – organized in accordance with the requirements of law. b. De facto corporation – organized with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.  Requisites: 1. The existence of a valid law under which it may be incorporated; 2. A bona fide attempt in good faith to incorporate under such law; 3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of certificate of incorporation by the SEC

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as a minimum requirement of continued good faith Note: The only difference between a de facto corporation and a de jure corporation is that a de jure corporation can successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right to exist. c. Corporation by estoppel – group of persons that assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction. It is neither de jure nor de facto. d. Corporation by prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power, e.g. Roman Catholic Church. 5. AS TO EXISTENCE OF SHARES OF STOCK: a. Stock corporation – a corporation: 1. whose capital stock is divided into shares and 2. which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the shares held. b. Non-stock Corporation – does not issue stocks nor distribute dividends to their members. 6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL: a. Holding corporation - it is one which controls another as a subsidiary by the power to elect management. b. Subsidiary corporation 1. Majority-owned subsidiary – where one corporation owns 51% to 94% of the capital stock of another corporation. 2. Wholly-owned subsidiary – where one corporation holds 95% to 100% of the capital stock of another corporation. c. Affiliates - company that is subject to common control of a mother holding company and operated as part of the system. d. Parent and Subsidiary Corporation separate entities with power to contract with each other.

 The board of directors of the parent company determines its representatives to attend and vote in the stockholder’s meeting of its subsidiary.  The stockholders of the parent company demand representation in the board meetings of its subsidiary. 7. AS TO PLACE OF INCORPORATION: a. Domestic corporation - a corporation formed, organized, or existing under Philippine laws. b. Foreign corporation – a corporation formed, organized, or existing under any laws other than those of the Philippines. Quasi-Corporation 1. Possesses only some corporate powers, therefore, not a full corp. 2. Organized to aid the state in some public or state work other than the government of a portion thereof. Quasi-Corporation 1. Not a full corp.; 2. An instrumentality of the state. De Facto Corporation 1. Has a real existence in law; Public Corporation 1. A full corporation;

2. Organized for the government of a portion of the state.

Quasi-Public Corporation 1. A full corp.; 2. An instrumentality of private individuals. Corporation by Estoppel 1. No real existence in law but it is a mere fiction existing only for a particular case; 2. Cannot exist unless there are dealings between the parties on a corporate basis. (2004 Bar Exam)

2. May exist even if there are no dealings between the parties on a corporate basis.

Concept of Going Public and Going Private A corporation is deemed to be ‘going public’ when it decides to list its shares in the stock exchange. These include corporations that will make initial public offering of its shares. A corporation is said to be ‘going private’ when it would restrict the shareholders to a certain group. In a sense, these also include closed and closely held corporation. (Phil. Corporate Law Compendium, T. Aquino, 2005 ed.) 74

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One Man Corporation A corporation wherein all or substantially all of the stocks is held directly or indirectly by one person. However, it should still follow the formal requirements of a corporation (e.g. number of incorporators, board of directors composed of stockholders owning shares in a nominal capacity) in order to validly enjoy the attributes of the corporation, so as to avoid the application of the doctrine of piercing the veil of corporate entity. Tests to Determine Nationality of Corporation 1. INCORPORATION TEST – determined by the state of incorporation, regardless of the nationality of the stockholders. 2. DOMICILE TEST – determined by the state where it is domiciled.  The domicile of a corporation is the place fixed by the law creating or recognizing it; in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercise its principal functions. 3. CONTROL TEST – determined by the nationality of the controlling stockholders or members. This test is applied in times of war. Also known as the WARTIME TEST. “Philippine National” under the Foreign Investment Act (R.A. No. 7042): 1. A corporation organized under the laws of the Philippines of which at least 60% of the outstanding capital stock entitled to vote is owned and held by Filipino citizens; 2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by Filipinos; and  However, it provides that where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both corporations must be Filipino citizens (double 60% rule). NOTE: The law applies the control test both with respect to the ownership of shares entitled to vote and the membership in the board of directors. Components of a Corporation a. Corporators – those who compose a corporation, whether as stockholders or members b. Incorporators - They are those mentioned in the Articles of Incorporation as originally forming and composing the corporation, having signed

the Articles and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute.  Qualifications: 1. natural person; 2. not less than 5 but not more than 15; 3. of legal age; 4. majority must be residents of the Philippines; and 5. each must own or subscribe to at least one share. General Rule: Only natural persons can be incorporators. Exception: When otherwise allowed by law, e.g., Rural Banks Act of 1992, where incorporated cooperatives are allowed to be incorporators of rural banks. Note: However, it is undeniable that corporations can be corporators. c. Stockholders – owners of shares of stock in a stock corporation d. Members – corporators of a corporation which has no capital stock INCORPORATORS signatory to the Articles of Incorporation fait accompli; accomplished fact (the Articles of Incorporation cannot be amended to replace them) number is limited to 5-15 must have contractual capacity CORPORATORS stockholder (stock corporation) or member (nonstock corporation) they may cease to be such if they subsequently lose their qualifications no restriction as to number may be such through a guardian

Other Components a. Promoter - A person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor.  He is an agent of the incorporators but not of the corporation.  Contracts by the promoter for and in behalf of a proposed corporation generally bind only him, subject to and to the extent of his representations, and not the corporation, unless and until after these contracts are ratified, expressly or impliedly, by its Board of Directors/Trustees. b. Subscriber – persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed. 75

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c. Underwriter – a person who guarantees on a firm commitment and/ or declared best effort basis the distribution and sale of securities of any king by another company. (Sec. 3 R.A. 8799) Classification of Shares 1. COMMON SHARES  The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. 2. PREFERRED SHARES  Those issued with par value, and preferences either with respect to (a) assets after dissolution, (b) distribution of dividends, or both, and other preferences.  Limitations: a. If deprived of voting rights, it shall still be entitled to vote on matters enumerated in Section 6 paragraph 6. b. Preference must not be violative of the Code. c. May be issued only with a stated par value. d. The board of directors may fix the terms and conditions only when so authorized by the articles of incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. 3. REDEEMABLE SHARES  Those which permit the issuing corporation to redeem or purchase its own shares.  Limitations: a. Redeemable shares may be issued only when expressly provided for in the articles of incorporation; b. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares; c. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code.  Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock. 4. TREASURY SHARES  Shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation

by purchase, donation, and redemption or through some lawful means. (Sec. 9)  If purchased from stockholders: The transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital.  If acquired by donation from the stockholders: The act would amount to a surrender of their stock without getting back their investments that are instead, voluntarily given to the corporation.  Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable, provided it is reasonable. When treasury shares are sold below its par or issued value, there can be no watering of stock because such watering contemplates an original issuance of shares.  Treasury shares have no voting rights as long as they remain in treasury (uncalled and subject to reissue). Reason: A corporation cannot in any proper sense be a stockholder in itself and equal distribution of voting rights will be effectively lost.  Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself. 5. FOUNDERS' SHARE  Shares issued to organizers and promoters of a corporation in consideration of some supposed right or property.  Shares classified as such in the articles of incorporation which may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval. 6. VOTING SHARES - Shares with a right to vote. 7. NON-VOTING SHARES  Shares without right to vote.  The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. 76

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These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the following fundamental matters: (A2 SI2 MID) a. amendment of Articles of Incorporation b. adoption and amendment of by-laws; c. sale or disposition of all or substantially all of corporate property; d. incurring, creating or increasing bonded indebtedness; e. increase or decrease of capital stock f. merger or consolidation of capital stock g. investments of corporate funds in another corporation or another business purpose; and h. corporate dissolution

8. ESCROW STOCK
 Deposited with a third person to be delivered to a stockholder or his assign after complying with certain conditions, usually payment of full subscription price. 9. OVER-ISSUED STOCK  Stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its issuance is considered null and void. 10. WATERED STOCK  A stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services.  “Water” in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks.  It includes stocks: a. Issued without consideration. b. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value. c. Issued for a consideration other than actual cash, the fair valuation of which is less than its par or issued value. d. Issued as stock dividend when there are no sufficient retained earnings to justify it. 11. PAR VALUE SHARES

 Shares with a value fixed in the certificates of stock and the articles of incorporation. 12. NO PAR VALUE SHARES  Shares having no par value but have issued value stated in the certificate or articles of incorporation.  Limitations: a. No par value shares cannot have an issued price of less than P5.00; b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c. They cannot be issued as preferred stocks; d. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; e. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; f. Once issued, they are deemed fully paid and non-assessable. 13. STREET CERTIFICATE  A stock certificate endorsed by the registered holder in blank and transferee can command its transfer to his name from the issuing corporation. 14. CONVERTIBLE SHARE  A share that is changeable by the stockholder from one class to another at a certain price and within a certain period. 15. FRACTIONAL SHARE  A share with a value of less than one full share. Doctrine of Equality of Shares  Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. Definition of Terms 1. CAPITAL STOCK OR LEGAL STOCK OR STATED CAPITAL - The amount fixed in the corporate charter to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation. 2. CAPITAL – The value of the actual property or estate of the corporation whether in money or property. Its net worth (or stockholder’s equity) is its assets less liabilities. 3. AUTHORIZED CAPITAL STOCK - The capital stock divided into shares with par values. Par value stocks are required in the case of 77

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corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter, which may be raised by the corporation for its operations. 4. SUBSCRIBED CAPITAL STOCK - The total amount of the capital stock subscribed whether fully paid or not. 5. OUTSTANDING CAPITAL STOCK - The portion of the capital stock issued to subscribers except treasury stocks. 6. STATED CAPITAL – The capital stock divided into no par value shares. 7. PAID-UP CAPITAL – The amount paid by the stockholders on subscriptions from unissued shares of the corporation. INCORPORATION AND ORGANIZATION (2002, 2006 Bar Exams) Steps in the Creation of a Corporation a. PROMOTION – a number of business operations peculiar to the commercial world by which a company is generally brought into existence. (18 Am. Jur. 2d 647, cited in de Leon p. 116) b. INCORPORATION  Steps: 1. Drafting and execution of Articles of Incorporation by the incorporators and other documents required for registration of the corporation 2. Filing with the SEC of the articles of incorporation 3. Payment of filing and publication fees 4. Issuance by the SEC of the certificate of incorporation c. FORMAL ORGANIZATION AND COMMENCEMENT OF THE TRANSACTION OF BUSINESS  These are conditions subsequent, which may be satisfied by substantial compliance in order that a corporation may legally continue as such.  Formal organization: 1. Adoption of By-Laws and filing of the same with the SEC; 2. Election of board of directors/trustees, and officers; 3. Establishment of principal office; 4. Providing for subscription and payment of capital stock. Term of Existence  Limitations: a. The term shall not exceed 50 years in any one instance.

b. The amendment is effected before the expiration of corporate term, for after dissolution by expiration of the corporate term there is no more corporate life to extend. c. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable reasons as determined by the SEC. Capital Stock Requirement General Rule: No minimum authorized capital stock as long as the paid-up capital is not less than P5,000.00 Except: a. as provided for by special law 1.  Domestic Insurance Corporations - P500T capital stock; 50% subscribed and the balance payable in 12 months. 2. Private Development Banks - P4M for class A - P2M for class B - P1M for class C 3. Investment Companies – paid up at least P500T 4. Savings and Loan Corporation – to be fixed by the Monetary Board, but not less than P100T 5. Financing Companies Paid up: - P2M for Metro Manila - P1M for Cities - P500T for others b. provided that at least 25% of the authorized capital stock has been subscribed and at least 25% of the total subscription must be paid-up Filipino Percentage Ownership Requirement No Foreign Equity 1. Mass Media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated 04 May 1994) 2. Practice of all professions 3. Retail trade enterprises with paid-up capital of less than US$2,500,000(Sec. 5 of RA 8762) 4. Cooperatives (Ch. III, Art. 26 of RA 6938) 5. Private Security Agencies (Sec. 4 of RA 5487) 6. Small-scale Mining (Sec. 3 of RA 7076) 7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone as well as smallscale utilization of natural resources in rivers, lakes, bays, and lagoons (Art. XII, Sec. 2 of the Constitution) 8. Ownership, operation and management of cockpits (Sec. 5 of PD 449)

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9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution) 10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines) 11. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183) Up to Twenty Percent (20%) Foreign Equity 12. Private radio communications network (RA 3846) Up to Twenty-Five Percent (25%) Foreign Equity 13. Private recruitment, whether for local or overseas employment (Art. 27 of PD 442) 14. Contracts for the construction and repair of locally-funded public works (Sec. 1 of CA 541, LOI 630) except: a) infrastructure/development projects covered in RA 7718; and b) projects which are foreign funded or assisted and required to undergo international competitive bidding (Sec. 2a of RA 7718) 15. Contracts for the construction of defenserelated structures (Sec. 1 of CA 541) Up to Thirty Percent (30%) Foreign Equity 16. Advertising (Art. XVI, Sec. 11 of the Constitution) Up to Forty Percent (40%) Foreign Equity 17. Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution) 18. Ownership of private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182) 19. Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146) 20. Ownership/establishment and administration of educational institutions (Art. XIV, Sec. 4 of the Constitution) 21. Culture, production, milling, processing, trading excepting retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof (Sec. 5 of PD 194;Sec. 15 of RA 8762 22. Contracts for the supply of materials, goods and commodities to government-

owned or controlled corporation, company, agency or municipal corporation (Sec. 1 of RA 5183) 23. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise (Art. XII, Sec. 11 of the Constitution; Sec. 2a of RA 7718) 24. Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550) 25. Adjustment Companies (Sec. 323 of PD 612 as amended by PD 1814) 26. Ownership of condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation (Sec. 5 of RA 4726) Up to Sixty Percent (60%) Foreign Equity 27. Financing companies regulated by the Securities and Exchange Commission (Sec. 6 of RA 5980 as amended by RA 8556) 28. Investment houses regulated by the SEC (Sec. 5 of PD 129 as amended by RA 8366) Articles of Incorporation (AI)  The document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Code.  Significance: 1. The issuance of a certificate of incorporation signals the birth of the corporation’s juridical personality; 2. It is an essential requirement for the existence of a corporation, even a de facto one.  Contents: 1. name of corporation; 2. purpose/s, indicating the primary and secondary purposes; 3. place of principal office; 4. term of existence; 5. names, citizenship and residences of incorporators; 6. number, names, citizenship and residences of directors or trustees; 7. names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular ones are elected and qualified; 8. if a stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share; 9. names, residences, number of shares, and the amounts subscribed and paid by each of

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the original subscribers which shall not be less than 25% of authorized capital stock; 10. if non-stock, the amount of capital, the names, residences, and amount paid by each contributor, which shall not be less than 25% of total subscription; 11. name of treasurer elected by subscribers; and 12. if the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. Amendment of AI  Limitations: 1. The amendment of any provision or matters stated in the articles of incorporation is not allowed when it will be contrary to the provisions or requirement prescribed by the Code or by special law or changes any provision in the articles of incorporation stating an accomplished fact 2. It must be for legitimate purposes 3. It must be approved by the required vote of the board of directors or trustees and the stockholders or members 4. The original articles and amended articles together must contain all provisions required by law to be set out in the articles of incorporation 5. Such articles, as amended, must be indicated by underscoring the changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating that the amendments have been duly approved by the required vote of the stockholders or members must be submitted to the SEC 6. The amendments shall take effect only upon their approval by the SEC 7. If the corporation is governed by special law, the amendments must be accompanied by a favorable recommendation of the appropriate government agency. Number of Votes for BOD: Majority vote Number of Votes of Corporators Vote or written assent of 2/3 of OCS/ members Non-Amendable Facts in the AI  Those matters referring to facts existing as of the date of the incorporation such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital; 3. Treasurer elected by the original subscribers; 4. Members who contributed to the initial capital of a non-stock corporation;

5. Date and place of execution of the articles of incorporation; 6. Witnesses to the signing and acknowledgment of the articles. Grounds for rejection of AI or amendments thereto 1. The articles or its amendment is not substantially in accordance with the form prescribed 2. The purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations 3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false 4. The required percentage of ownership of the capital stock to be owned by Filipino citizens has not been complied with Grounds for Suspension or Revocation of Certificate of Incorporation 1. Fraud in procuring its certificate of incorporation 2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of, or damage to, the general public 3. Refusal to comply with or defiance of a lawful order of the SEC restraining the commission of acts which would amount to a grave violation of its franchise 4. Continuous inoperation for a period of at least 5 years 8. Failure to file the by-laws within the required period 9. Failure to file required reports BOARD OF DIRECTORS/TRUSTEES Qualifications: 1. For a stock corporation, ownership of at least 1 share capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a director. (Sec. 23) For a non-stock corporation, only members of the corporation can be elected to seat in the Board of Trustees.  In order to be eligible as a director, what is material is the legal title to, not beneficial ownership of the stocks appearing on the books of the corporation 2. A majority of the directors/trustees must be residents of the Philippines. (Sec. 23) 3. He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date of his election. (Sec. 27) 80

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4. Only natural persons can be elected directors/trustees. • In case of corporate stockholders or members, their representation in the board can be achieved by making their individual representatives trustees of the shares or membership to make them stockholders/members of record. 5. Other qualifications as may be prescribed in the by-laws of the corporation. 6. Must be of legal age Corporate Officers 1. President – must be a director; 2. Treasurer – may or may not be a director; as a matter of sound corporate practice, must be a resident 3. Secretary – need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and 4. Such other officers as may be provided in the by-laws. CORPORATE CORPORATE OFFICER EMPLOYEE Position is provided Employed by the for in the by-laws or action of the under the managing officer of Corporation Code the corporation RTC has NLRC has jurisdiction in case jurisdiction in case of labor dispute of labor disputes BOD/BOT as Repositary of Powers General Rule: The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees. (Sec. 23) Exceptions: 1. In case of an Executive Committee duly authorized in the by-laws; 2. In case of a contracted manager which may be an individual, a partnership, or another corporation. Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies. 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide.  The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through

its board of directors and through its officers and agents when authorized by a board resolution or by its by-laws. (Spouses Constantine Firme vs. Bukal Enterprises and Development Corporation, G.R. No. 146608, October, 23, 2003) Limitations on Powers of BOD/BOT 1. Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws. 2. Cannot perform constituent or those involving fundamental changes in the corporation requiring the approval of stockholders or members. 3. Cannot exercise powers not possessed by the corporation. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) Nature of Powers of BOD/BOT (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) a. Under the Theory of Original Power, the powers of the board of directors or trustees are ORIGINAL and UNDELEGATED. The stockholders or members do not confer, nor can they revoke those powers. b. They are DERIVATIVE only in the sense of being received from the State in the act of incorporation. Business Judgment Rule

 A resolution or
transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors, is valid and binding, and generally the courts have no authority to review the same and substitute their own judgment, even when the exercise of such power may cause losses to the corporation or decrease the profits of a department. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) 81

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Consequences: a. Resolutions and transactions entered into by the Board within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders. b. Directors and officers acting within such business judgment cannot be held personally liable for such acts. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) 3-Fold Duties of Directors (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) 1. Duty of Obedience  To direct the affairs of the corporation only in accordance with the purposes for which it was organized.  Legal Basis: The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws (Sec. 25) 2. Duty of Diligence  Legal Basis: Directors or trustees 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 shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons (Sec. 31) 3. Duty of Loyalty  Legal Basis: Directors or trustees who acquire any pecuniary or personal interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom. (Sec. 31)  When a director or trustee attempts to acquire or acquires in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence as to which equity imposes a liability upon him to deal in his own behalf, he shall be liable as trustee for the corporation and must account for all the profits which otherwise would have accrued to the corporation (Sec. 31, 2nd par.)  Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits which should belong to the corporation, he must account to the latter for all such profits by refunding the same (Sec. 34) Elections of Directors/Trustees

 Limitations: a. At any meeting of stockholder or members called for the election of directors or trustees, there must be present either in person or by representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock or majority of the members entitled to vote. b. The election must be by ballot if requested by any voting member or stockholder. c. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. d. No delinquent stock shall be voted. e. The candidates receiving the highest number of votes shall be declared elected. Methods of Voting a. Straight Voting – every stockholder may vote such number of shares for as many persons as there are directors to be elected. b. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and give one candidate, as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. c. Cumulative voting by distribution - a stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. Limitations on the Stockholder’s Right to Vote 1. Where the articles of incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6. 2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code. 3. Fractional shares of stock cannot be voted. 4. Treasury shares have no voting rights as long as they remain in the treasury. 5. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled to vote or to a representation at any stockholder’s meeting. 6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.

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Removal of Directors/Trustees (1996, 2001 Bar Exams)  Limitations: a. Vote of the stockholders representing at least 2/3 of the outstanding capital stock, or 2/3 of the members entitled to vote b. At a regular or special meeting after proper notice is given c. Removal may be with or without cause. d. A minority director elected through cumulative voting cannot be removed without cause. (Sec. 28) Extent of Powers or Authority of Corporate Officers 1. The authority which he has by virtue of his office; 2. The authority which is expressly conferred upon him or is incidental to the effectualness of such express authority; 3. As to third persons dealing with him without notice of any restriction thereof, the authority which the corporation holds the officer out as possessing or is estopped to deny. 4. The nature of the corporate business must also be taken into consideration; and 5. The nature act of an officer though originally unauthorized, may become upon the corporation by a subsequent ratification. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) Note: It is a familiar doctrine that if a corporation knowingly permits one of it officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. (2004, 2006 Bar Exams; LapuLapu Foundation Inc., vs. Court of Appeals, et al., G.R. No. 126006, January 29, 2004.) Personal Liability of Directors 1. Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; (Sec. 31) 2. Gross negligence or bad faith in directing the affairs of the corporation; (Sec. 31) 3. Acquiring any personal or pecuniary interest in conflict of duty; (Sec. 31) 4. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with the secretary;(Sec. 65) 5. Agreeing or stipulating in a contract to hold himself liable with the corporation; or 6. By virtue of a specific provision of law DOCTRINE OF DOCTRINE OF

LIMITED LIABILITY Shields corporators corporate beyond their contribution capital shareholding corporation. the from liability agreed to the or in the

IMMUNITY Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions

Remedies in case of Mismanagement 1. Receivership; 2. Injunction, if the act has not yet been done; 3. Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act; and 4. Derivative suit or complaint filed with SEC. Special Rules on Contracts Entered Into by Directors, Trustees or Officers 1. Doctrine of Corporate Opportunity (2001, 2005 Bar Exams)  Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which: 1. The corporation is financially able to undertake; 2. From its nature, is in line with corporations business and is of practical advantage to it; and 3. The corporation has an interest or a reasonable expectancy.  The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture. 2. Contracts of self-dealing directors  Contracts which are entered into by the corporation with one or more of its own directors/trustees, or officers. (Sec. 32)  They are voidable, unless: a) The presence of such director/trustee in the board meeting approving the contract was not necessary to constitute a quorum for such meeting; b) The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract; c) The contract is fair and reasonable under the circumstances; d) In the case of an officer, there was previous authorization by the board of directors.  Although not all said conditions are present, the corporation may elect not to attack or question the validity of the contract, without prejudice, however, to the liability of

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the director/trustee for damages under Sec. 31.  Where any of the first two conditions is absent, said contract must be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director/ trustee involved is made at such meeting. 3. Contracts of interlocking directors  Contracts entered into between corporations with interlocking directors (interest of said directors is “substantial”, i.e. exceeding 20% of the outstanding capital stock).  They are valid, provided that: a. The contract is not fraudulent; and b. The contract is fair and reasonable under the circumstances.  If the interlocking director’s interest in one corporation or corporations is “nominal” (not exceeding 20% of the outstanding capital stock), then all the conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has nominal interest. BAR Q: A, the President of XYZ Corp., wrote a letter to B, offering to sell to the latter 5000 bags of cement at P100 per bag. B signed his conformity to the letter offer, and paid a down payment of 50000. A few days later, C the Corporate Secretary of XYZ Corp. informed B of the decision of the Board of Directors not to ratify the letter offer. However, since B had already paid the down payment, XYZ Corp. delivered 500 bags of cement which B accepted. XYZ Corp. made it clear that the delivery should be considered as an entirely new transaction. Thereafter, B sought to enforce the letter-offer. Is there a binding contract for the 5000 bags of cement? SA: NO. There is no binding contract for the 5000 bags of cement. First, the facts do not indicate that A, the President , was authorized by the Board of Directors to enter into the contract or that he was empowered to do so under some provision of the by-laws of XYZ Corp. The facts do not indicate that A has been clothed with the apparent power to execute the contracts or agreements similar to it. Second, XYZ Corp. has specifically informed B that it has not ratified and that the delivery to B of the 500 bags, which A accepted, is

an entirely new transaction (Yao Ka Sin Trading vs. CA, 209 SCRA 763). Compensation of Directors or Trustees General Rule: They shall be entitled to reasonable per diems only Exception: a. when their compensation is fixed in the bylaws b. when granted by the vote of stockholders representing at least a majority of the outstanding capital stock at a regular or special meeting c. when they are also officers of the corporation Executive Committee  A body created by the by-laws and composed of some members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or bylaws.  Must be provided for in the by laws and composed of not less than 3 members of the board appointed by the board.  May act by a majority vote of all of its members. Limitations on the Powers of the Executive Committee It cannot act on the following: 1. Matters needing stockholder approval; 2. Filling up of board vacancies; 3. Amendment, repeal or adoption of by-laws; 4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable; and 5. Cash dividend declaration. POWERS OF THE CORPORATION 1. Express Powers - granted by law, Corporation Code, and its Articles of Incorporation or Charter 2. Inherent/Incidental Powers – not expressly stated but are deemed to be within the capacity of corporate entities 3. Implied/Necessary Powers – exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter Classification: 1. Acts in the usual course of business 2. Acts to protect debts owing to the corporation 3. Acts which involve embarking in a different business usually to collect debts out of profits 4. Acts to protect or aid employees 5. Acts to increase business (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) 84

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General Powers 1. To sue and be sued; 2. Of succession; 3. To adopt and use of corporate seal; 4. To amend its Articles of Incorporation; 5. To adopt its by-laws; 6. For stock corporations: issue and sell stocks to subscribers and treasury stocks; for nonstock corporations: admit members; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds 8. To enter into merger or consolidation; 9. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any (i) political party, (ii) candidate and (iii) partisan political activity. 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees. 11. To exercise other powers essential or necessary to carry out its purposes. Special/Specific Powers 1. Power to extend or shorten corporate term; 2. Increase or decrease corporate stock; 3. Incur, create, or increase bonded indebtedness; 4. Sell, dispose, lease, encumber all or substantially all of corporate assets; 5. Purchase or acquire own shares provided: a.there is an unrestricted retained earnings, and b. it is for a legitimate purpose. 6. Invest corporate funds in another corporation or business for other purpose other than primary purpose; 7. Power to declare dividends out of unrestricted retained earnings; 8. Enter into management contract with another corporation (not with an individual or a partnership-within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than 5 years for any one term. Corporate Acts

1. Power to extend or shorten corporate term  May be used as means to voluntarily dissolve a corporation 2. Power to increase or decrease capital stock Ways of Increasing/Decreasing the Capital Stock (1998, 2001 Bar Exams) a. By increasing/decreasing the number of shares and retaining the par value; b. By increasing/decreasing the par value of existing shares without increasing/decreasing the number of shares; c. By increasing/decreasing the number of shares and increasing/decreasing the par value. Number of Votes for BOD: Majority vote Number of Votes of Corporators: 2/3 of OCS/ members Tools Available to the Stockholder to Replenish Capital (1999 Bar Exam) a. Additional subscription to shares of stock of the corporation by stockholders or by investors; b. Advances by the stockholders to the corporation; c. Payment of unpaid subscription by the stockholders; and d. Loans from third persons. 3.Incur, create or increase bonded indebtedness Corporate bond – an obligation to pay a definite sum of money at a future time at fixed rate of interest BONDED INDEBTEDNESS Secured by a mortgage on corporate property. DEBENTURE Serial obligations or notes issued on the basis of the general credit of the corporation. Hence, they are not bonded indebtedness

Salient Points: • Meeting is required • Non-voting shares can vote • No appraisal right • Notice is required • Registration of bonds with the SEC is necessary Number of Votes for BOD: Majority vote Number of Votes of Corporators: 2/3 of OCS/ members

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4. Sell, dispose, lease, encumber all or substantially all of corporate assets; No ratificatory vote needed: a. If it is necessary in the usual and regular course of business b. if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business Salient Points: • Majority can vote • Non-voting shares can vote • Appraisal right is available • Notice is required • If sale is abandoned, director’s action is sufficient, no need for ratification by stockholders Number of Votes for BOD: Majority vote Number of Votes of Corporators: 2/3 of OCS/ members 5. Power to acquire own shares Instances: a. To eliminate fractional shares out of stock dividends b. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale and to purchase delinquent shares sold during said sale c. To pay dissenting stockholders d. To acquire treasury shares e. Redeemable shares regardless of existence of retained earnings f. To effect a decrease of capital stock g. In close corporations, when there is a deadlock in the management of the business Note: In letters a-c, there must be unrestricted retained earnings. Number of Votes for BOD: Director’s action 6. Invest corporate funds in another corporation or business for other purpose other than primary purpose The other purposes for which the funds may be invested must be among those enumerated as secondary purposes and must further comply with the requirements of Section 42. Salient Points: • Non-voting shares can vote • Appraisal right available • Notice is required • Investment in the secondary purpose is covered

• Stockholder’s ratification is not necessary if the investment is incidental to primary purpose Number of Votes for BOD: Majority vote Number of Votes of Corporators: 2/3 of OCS/ members 7. Power to declare dividends out of unrestricted retained earnings RETAINED EARNINGS = ASSETS – LIABILITIES AND LEGAL CAPITAL “Unrestricted” – if the retained earnings have not been reserved or set aside by the board of directors for some corporate purpose. Number of Votes for BOD: Majority of the quorum Number of Votes of Corporators: 2/3 of OCS/ members Dividends (2001, 2005 Bar Exams)  Corporate profits set aside, declared, and ordered to be paid by the directors for distribution among shareholders at a fixed time.  Forms: a. Cash b. Property c. Stock  While cash dividends due on delinquent shares can be applied to the payment of the unpaid balance, stock dividends cannot be applied as payment for unpaid subscription. The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from entitling thereto anyone else.  General Rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock Exceptions: a. When justified by definite corporate expansion projects approved by the board of directors b. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its/his consent and such consent has not yet been secured c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

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Sources of dividends: General Rule: Dividends can only be declared and paid out of actual and bona fide unrestricted retained earnings. Special Rules: a. Where a corporation sold its real property, which is not being used for business, at a gain, the income derived therefrom may be availed of for dividend distribution. b. Increase in the value of a fixed asset as a result of its revaluation is not retained earning. However, increase in the value of fixed assets as a result of revaluation (“Revaluation surplus”) may be declared as cash or stock dividends provided that the company: (i) Has sufficient income from operations from which the depreciation on the appraisal increase was charged (ii) Has no deficit at the time the depreciation on the appraisal increase was charged to operations; and (iii) Such depreciation on appraisal increase previously charged to operations has not been impaired by losses. c. Dividends can be declared out of the amount received in excess of the par value of shares (“paid-in surplus”) when: (i) That they be declared only as stock dividends and not cash; (ii) No creditors are prejudiced; and (iii) There is no impairment of capital. Note: unlike par value shares, when no par value shares are sold at a premium, the entire consideration paid is considered capital; hence the same cannot be declared as dividends. d. Reduction surplus can be a source of dividends. Rule on paid-in surplus is applicable. e. No dividends can be declared out of capital except only in two instances: 1) liquidating dividends; and 2) dividends from investments in wasting asset corporation. Note: It permits corporations solely or principally engaged in the exploitation of “wasting assets” to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion. f. Profits realized from sale of treasury shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital. g. Money cannot be borrowed for the payment of dividends because indebtedness is not a retained earning of the corporation.

h. Corporate earnings which have not yet been received even though they consist in money which is due, cannot be included in the profits out of which dividends may be paid. CASH DIVIDENDS 1. Involves a disbursement to the stockholders of accumulated earnings 2. When declared and paid becomes the absolute property of the stockholder and cannot be reached by creditors of the corporation in the absence of fraud STOCK DIVIDENDS 1. Does not involve any disbursement

2. Since it is still part of corporate property, may be reached by corporate creditors

3. Declared only by the board of directors at its discretion

3. Declared by the board with the concurrence of the stockholders representing at least 2/3 of the outstanding capital stock at a regular/special meeting

4. Does not increase the corporate capital 5. Its declaration creates a debt from the corporation to each of its stockholders

4. Corporate capital is increased 5. No debt is created by its declaration

Trust Fund Doctrine  The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription.  Application of the TFD: 1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2. Where it had released the subscribers to the capital stock from their subscriptions;

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3. Where it has transferred the corporate property in fraud of its creditors; and 4. Where the corporation is insolvent.  Coverage of the TFD: 1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporation’s legal capital. 2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its property and assets.  Exceptions to the TFD: 1. Redemption of redeemable shares (Sec. 8) 2. In close corporation, when there should be a deadlock and the SEC orders the payment of the appraised value of the stockholder’s share. (Sec. 104) 8. Power to enter into management contract EXECUTIVE COMMITTEE 1. Its creation must be provided for in the by-laws 2. A governing body which functions as the board itself. MANAGEMENT CONTRACT 1. Express power of a corporation 2. Management company must always be subject to the superior power of the board to give specific directions from time to time or to recall the delegation of managerial power.

 An ultra vires act may be that of: a. The corporation; b. The Board of Directors; and c. The corporate officers.  Effects of ultra vires act on: a. Executed contract – courts will not set aside or interfere with such contracts; b. Executory contracts – no enforcement even at the suit of either party (void and unenforceable); c. Part executed and part executory – principle of “no unjust enrichment at expense of another” shall apply; and d. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply. Ultra Vires Acts and Illegal Acts Ultra vires (“beyond powers”) refers only to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are, by general or special laws, either prohibited or declared illegal. It is in this context that the Code has used the term. Ultra Vires Acts Not necessarily unlawful, but outside the powers of the corporation Can be ratified Can bind the parties if wholly or partly executed Illegal Acts Unlawful; against law, morals, public policy, and public order Cannot be ratified Cannot bind the parties

Ultra Vires (“beyond powers”) Act  An act which is beyond the conferred powers of a corporation or the purposes or objects for which it is created as defined by the law of its organization.  An act done by a corporation outside of the express and implied powers vested in it by its charter and by the law.  Types: (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) 1. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; 2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation); and 3. Acts or contracts, which are per se illegal as being contrary to law.

TEST whether or not a corporation may perform an act: consider the logical and necessary relation between the act questioned and the corporate purpose expressed by law or in the charter. If the act is lawful in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense. (Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36) Remedies in Case of Ultra Vires Acts 1. State a. Obtain a judgment of forfeiture; or b. The SEC may suspend or revoke the certificate of registration 2. Stockholders a. Injunction; or b. Derivative suit 3. Creditors a. Nullification of contract in fraud of creditors BY-LAWS 88

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(1998, 2000, 2001 Bar Exams)  Rules of action adopted by a corporation for its internal government and for the regulation of conduct and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs.  Functions: a. Supplement the articles of incorporation b. Provide for details not important enough to be stated in the articles of incorporation c. Continuing rule for the government of the corporation and the individuals composing it d. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation and among themselves e. Source of authority for corporate officers and agents of the corporation Requisites for validity: a. Must not be contrary to law nor with the Corporation Code b. Must not be contrary to morals and public policy; c. Must not impair obligations and contracts; d. Must be general and uniform; e. Must be consistent with the charter or articles of incorporation; and f. Must be reasonable, not arbitrary or oppressive. Binding effect: a. As to members and corporation They have the force of contract between the members themselves.They are binding only upon the corporation and on its members and those having direction, management and control of its affairs. b. As to third persons They are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. Reason: By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned. Contents of By-Laws a. Time, place and manner of calling and conducting regular or special meetings of directors or trustees b. Time and manner of calling and conducting regular or special meetings of the stockholder or members c. The required quorum in meeting of stockholders or members and the manner of voting therein d. The form for proxies of stockholders and members and the manner of voting them

e. The qualification, duties and compensation of directors or trustees, officers and employees f. Time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof g. Manner of election or appointment and the term of office of all officers other than directors or trustees h. Penalties for violation of the by-laws i. In case of stock corporations, the manner of issuing certificates j. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs Articles of By-Laws Incorporation Condition precedent Condition in the acquisition of subsequent; its corporate existence; absence merely furnishes a ground for the revocation of the franchise Essentially a For the internal contract between the government of the corporation and the corporation but has stockholders/ the force of a members; between contract between the stockholders/ the corporation member inter se, and the and between the stockholders/ corporation and the members, and State; between the stockholders and members; Executed before May be executed incorporation after incorporation. Sec. 46 allows the filing of the by-laws simultaneously with the Articles of Incorporation Amended by a May be amended majority of the by a majority vote directors/ trustees of the BOD and and stockholders majority vote of representing 2/3 of outstanding the outstanding capital stock or a capital stock, or 2/3 majority of the of the members in member in noncase of non-stock stock corporation corporations Power to Power to amend amend/repeal or repeal by-laws articles cannot be or adopt new bydelegated by the laws may be stockholders/ delegated by the members to the 2/3 of the board of directors/ outstanding trustees capital stock or 89

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2/3 of the members in the case of non-stock corporation MEETINGS Stockholders/Members Meeting WHEN: 1. REGULAR - held on the date fixed in the by-laws or if not fixed on any date in April;and 2. SPECIAL - held at any time deemed necessary or as so provided in the by-laws. WHERE:  In the city or municipality where the principal office of the corporation is located, and if practicable, in the principal office of the corporation. However, in the case of non-stock corporations, the by-laws may provide that meetings may be held at any place even outside the principal place of the corporation. Board Meeting WHEN: 1. REGULAR - held monthly, unless otherwise provided in the by-laws; and 2. SPECIAL - held at any time upon the call of the president. WHERE: May be held anywhere in or outside of the Philippines. Proxy  Limitations: a. It must be in writing and signed by the stockholder or member (as principal) and filed before the scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such person to exercise the voting rights of the former. b. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. c. No proxy shall be valid and effective for a longer period than five years at any one time. • The right to vote by proxy may be exercised in any of the following instances: 1. Election of the board of directors or trustees; 2. Voting in case of joint ownership of stock; 3. Voting by trustee under voting trust agreement; 4. Pledge or mortgage of shares; 5. As provided for in its by-laws. Note: Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); directors cannot do so. Directors must always act in person. (Sec. 25). Extent of Authority

a. GENERAL PROXY – confers a general discretionary power to attend and vote at annual meeting. b. LIMITED PROXY – restrict the authority to vote to specified matters only and may direct the manner in which the vote shall be cast Voting Trust - An agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement.  Limitations: a. Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a loan agreement or for the purpose of circumventing the law against monopolies and illegal combinations b. The agreement must not be used for purposes of fraud c. It must be in writing and notarized and specify the terms and conditions thereof d. A certified copy of the agreement must be filed with the corporation and with the SEC e. The agreement shall be subject to examination by any stockholder of the corporation f. Unless expressly renewed, all rights granted in the agreement shall automatically expire at the end of the agreed period VOTING TRUSTS The trustee votes as owner rather than as mere agent The trust may vote in person or by proxy unless the agreement provides otherwise Trustee acquires legal title to the shares of the transferring stockholder The agreement must be notarized The agreement is irrevocable Trustee is not limited to act at any particular meeting A trustee can vote and exercise all the 90 PROXY The proxy holder votes as agent The proxy must vote in person

Proxy has no legal title to the shares of the principal Proxy need not be notarized Revocable anytime except one with interest Proxy can only act at a specified stockholder’s meeting (if not continuing) A proxy can only vote in the absence

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rights of the stockholder even when the latter is present An agreement must not exceed 5 years at any one time except when the same is made a condition of a loan. The voting right is divorced from the ownership of stocks

of the owners of the stock A proxy is usually of shorter duration although under Sec. 58 it cannot exceed 5 years at any one time The right to vote is inherent in or inseparable from the right to ownership of stock

which cannot be sold. Underwriters are given commission. The signer can refuse to become a stockholder/ member of the company.

absolute.

STOCKS AND STOCKHOLDERS Subscription Contract - any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription.  The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription contract is a consensual contract that is perfected upon the meeting of the minds of the parties. The name of the subscriber is recorded in the stock and transfer book, and from that time, such subscriber becomes a stockholder of record entitled to all the rights of a stockholder. Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable.  In Ong Yong, et.al, vs. David Tiu, the Court did not allow the rescission of the PreSubscription agreement since the action was filed by the Tius in their personal capacities. It ruled that it was the corporation who had the legal personality to file the suit, it being the real party in interest. Underwriting Agreement an agreement between a corporation and a third person, termed the “underwriter”, by which the latter agrees, for a certain compensation, to take a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not taken by those to whom they are first offered. Underwriting Agreement The signers obligate themselves to take the shares of stock Stock Subscription Agreement The obligation of the signer to the purchasers and to the public is

There is no commission. He becomes a stockholder of the company and is liable to pay the amount due on the stock. Pre-Incorporation Subscription Agreements (PISA) - Subscription of shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from date of subscription, unless: 1. All of the other subscribers consent to the revocation; 2. The incorporation of said corporation fails to materialize with said period or within a longer period as may be stipulated in the contract of subscription; provided that no preincorporation subscription may be revoked after the submission of the articles of incorporation to the SEC. (Sec. 61) Modes of issuance of Shares a. By subscription before and after incorporation to original, unissued stock b. By sale of treasury stock after incorporation for money, property or service c. By subscription to new issues of stock in case of an increase in the capital stock d. By making a stock dividend Valid Considerations in Subscription Agreement 1. Cash actually received; 2. Property, tangible or intangible, actually received AND necessary or convenient for its use and lawful purposes; Requisites; a. Necessary or proper in carrying on the corporate business b. Ascertainable pecuniary value c. Capable of being transferred and applied to payment of debts 3. Labor or services actually rendered to the corporation; 4. Previously incurred corporate indebtedness; 5. Amounts transferred from unrestricted retained earning to stated capital, 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion. Note: Shares of stock shall not be issued in exchange for promissory notes or future services. There is no prohibition on the use of

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checks, bills or notes in payment of the “cash” consideration. Shares of Stock Interest or right which owner has in the management of the corporation, and its surplus profits, and, on dissolution, in all of its assets remaining after the payment of its debt. Certificate of Stock (1996, 2001 Bar Exams)  The document evidencing the ownership of shares of stocks by a stockholder and the full payment of its issue or subscription price.  It is not essential to the ownership and/or existence of the share of stock.  Where the certificate of stock reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered: 1. To the extent that there is an overissue, the excess issuance (over the authorized capital stock or the stated capital) shall be void as being ultra vires. 2. If there is no overissue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute “watered” stocks. 3. If there is no overissue and watering of stocks, the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party. Capital Stock Amount paid in or secured to be paid in by the stockholders upon which the corporation is to conduct its operation. It is the property of the corporation itself (monetary value). Shares of Stock Interest or right which the stockholder has in the management of the corporation, and its surplus profits, and upon a dissolution, in all of its assets remaining after payment of corporate debts. CERTIFICATE OF STOCK Evidence of the holder’s ownership of the stock and of his right as a shareholder Concrete and

intangible property May be issued by the corporation even if the subscription is not fully paid.

tangible May be issued only if the subscription is fully paid.

Requirements for Validity of Transfers of Stocks a. In case of shares covered by a certificate, the indorsement of the owner or his agent coupled with delivery is essential b. Where no certificate has been issued or for some reason it is not in the possession of the stockholder, it may be transferred by means of a deed of assignment duly recorded in the books of the corporation c. To be valid against the corporation and third persons, the transfer must be recorded in the stock and transfer book d. The transferee must present the indorsed certificate to the corporate secretary who shall effect the transfer in the corporate books, issue a new stock certificate in favor of the transferee and cancel the former certificate. Note: Only absolute transfers need be registered. The pledge or mortgage itself need not be recorded in the stock and transfer book, but a chattel mortgage must comply with the Chattel Mortgage Law, and a pledge would require the shares to be placed in the possession of the creditor/pledgee. The agreement must appear in a public instrument to take effect against third persons. (Chemphil vs. CA, 251 SCRA 257) Effects of Unregistered Transfer of Stocks a. It is valid and binding as between the transferor and the transferee b. It is invalid as to the corporation except when notice is given to the corporation for purposes of registration c. It is invalid as against corporate creditors and the transferor is still liable to the corporation d. It is invalid as to the attaching or executing creditors of the transferor, as well as subsequent purchasers in good faith without notice of the transfer. Issuance of Certificate of Stock No certificate of stock shall be issued until the full amount of the subscription is paid. Basis: Doctrine of Individuality of Subscription that espouses that the subscription is one, entire, indivisible, and whole contract, which cannot be divided into portions. Collection of Unpaid Subscription 1. Voluntary payment 92

SHARES OF STOCK Unit of interest in a corporation

Incorporeal

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a. Upon the date specified in the subscription contract b. Upon call by the Board of Directors 2. Involuntary payment a. Extra-judicial i. Delinquency sale ii. Application of dividends b. Judicial action Note: The prescriptive period in case of subscription of shares begins to run only from the time the board of directors declares that the balance are due and payable. It does not begin to run from the date of the subscription. (Garcia vs. Suarez, 67 Phil. 441) DELINQUENCY 1. If the subscription contract fixes the date for payment, failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise. 2. If no date is fixed in the subscription contract, the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to sale, unless the board declares otherwise. Effect: A. Upon the stockholder 1. Accelerates the entire amount of the unpaid subscription; 2. Subjects the shares to interest, expenses and costs; 3. Disenfranchises the shares from any right that inheres to a shareholder, except the right to dividends (but which shall be applied to any amount due on said shares or, in the case of stock dividends, to be withheld by the corporation until full payment of the delinquent shares. B. Upon the director owning delinquent shares 1. He can continue serving in that capacity unless and until said shares are totally bidded away, he continues to be the owner thereof and in the interim he is not disqualified. 2. A delinquent stockholder seeking to be elected as director may not be a candidate for, nor be duly elected to, the board. Note: No delinquency stock shall be voted for or be entitled to vote or representation at any stockholders meeting, nor shall the holder be entitled to any of the rights of a stockholder except the right to dividends in accordance with

the provisions of this Code until and unless he pays the amount due on his subscription with accrued interest, and the cost and expenses of advertisement, if any. Procedure for the Sale of Delinquent Stocks Call by resolution demanding payment of the balance. However, if the contract of subscription prescribes the date of payment, no call is necessary. Notice of the board resolution given to the stockholders by the corporate secretary, either personally or by registered mail. Publication of notice of call is not required. Failure of the stockholder to pay within a grace period of 30 days from the date specified in the contract of subscription or in the call, the stocks shall be declared delinquent and shall be subject to sale. Notice of delinquency served on the subscribers either personally or registered mail and publication in a newspaper of general circulation in the province or the city where principal office is located for once a week for 2 consecutive weeks. Notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. Sale of the delinquent shares at public auction. Highest Bidder in Delinquency Sale a. The person participating in the delinquency sale who offers to pay the full amount of the balance of the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares. In other words, the amount of the bid does not vary but only the number of shares to be bought changes and determines the highest bidder. b. If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Such shares shall be considered as treasury shares. Procedure for Issuance of New Certificate of Stock in lieu of Lost, Stolen or Destroyed Ones 1. Filing with the corporation an affidavit in triplicate by the registered owner setting forth the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares, serial number of the certificate and the name of the corporation that issued the same. 2. Publication of notice of loss by the corporation in a newspaper of general circulation in the

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place of the principal office, once a week for 3 consecutive weeks. 3. After the lapse of 1 year from the date of the last publication, if no contest has been presented, the corporation shall cancel in its books the certificate of stock, which has been lost, stolen or destroyed, and issue in lieu thereof a new certificate of stock. However, if the registered owner files a bond or other securities as may be necessary to the board, the new certificate of stock may be issued even before the expiration of one (1) year period. Rights of Stockholders 1. Managerial Rights a. Voting rights; and b. Right to remove directors 2. Proprietary Rights a. Right to dividends; b. Right to issuance of stock certificate for fully paid shares; c. Proportionate participation in the distribution of assets in liquidation; d. Right to transfer of stocks in corporate books; e. Right to recover stocks unlawfully sold for delinquent payment of subscription f. Preemptive right Preemptive Right of Stockholders (1999, 2001, 2004 BAR EXAMS)  It is the shareholders’ preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings.  Purpose: to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.  Extends to treasury shares in case of their reissuance.  If the shares preferentially offered to a stockholder are not subscribed or purchased by him, it does not follow that said shares shall again be re-offered on a pro rata basis to stockholders who already exercised their preemptive rights. There is no preemptive right with respect to the share to be reoffered.  In case additional issues of originally authorized shares:  General Rule: There is no preemptive right. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. Exception: When a corporation at its inception offers only a specified portion of its

authorized capital stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to the remaining portion thus offered for subscription.  When pre-emptive right not available: a. When denied by the article of incorporation b. Shares requiring stock offering or minimum stock ownership by the public c. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt PRE-EMPTIVE RIGHT May be exercised even when there is no express provision of law RIGHT OF FIRST REFUSAL Arises only by virtue of contractual stipulations but is also granted under the provisions on Close Corporation Exercisable against another stockholder of the corporation of his shares of stock

Pertains to unsubscribed portion of the authorized capital stock. A right that may be claimed against the corporation

3. Remedial Rights a. Individual suit – a suit instituted by a shareholder for his own behalf against the corporation; b. Representative suit – a suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation; and c. Derivative suit – a suit filed in behalf of the corporation by its shareholders (not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation.  Requisites: (i) An existing cause of action in favor of the corporation (ii) The stockholder/member must first make a demand upon the corporation or the management to sue unless such a demand would be futile 94

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(iii) The stockholder/member must be such at the time of the objectionable acts or transactions unless the transactions are continuously injurious (iv) The action must be brought in the name of the corporation The number of shares of the stockholder is immaterial since he is not suing in his own behalf Note: The mere trustee of shares registered in his name cannot file a derivative suit for he is not a stockholder in his own right. (Bitong vs. CA, 292 SCRA 304)

3. Financial Records. MERGER AND CONSOLIDATION (1996, 1999 Bar Exams) Merger A union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business.

Liabilities of Stockholders a. Liability to the corporation for unpaid subscription b. Liability to the corporation for interest on unpaid subscription c. Liability to creditors of the corporation on the unpaid subscription d. Liability for watered stock e. Liability for dividends unlawfully paid f. Liability for failure to create corporation CORPORATE BOOKS AND RECORDS Inspection Rights Limitations: a. The right must be exercised during reasonable hours on business days; b. The person demanding the right has not improperly used nay information obtained through any previous examination of the books and records of the corporation; and c. The demand is made in good faith or for a legitimate purpose. (Sec. 74)  The right extends, in consonance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-owned by the corporation.  Books required to be kept by the corporation: 1. Book of Minutes a. minutes of stockholder or members meetings; and b. minutes of board meetings. 2. Book of all business transactions; 3. Stock and transfer book, in case of stock corporations.  Corporate records required by the SEC to be kept and/or registered: 1. Books of Account; 2. List of Stockholders or Members; and

Consolidation The union of two or more existing corporations to form a new corporation called the consolidated corporation. Procedure: a. The board of directors or trustees of each corporation shall approve a plan of merger or consolidation b. The plan shall be submitted for approval by the stockholders or members of each of such corporation at separate corporate meetings duly called for the purpose c. The articles of merger or consolidation shall be executed by each of the constituent corporations d. Submission to the SEC for approval e. The SEC may or may not conduct a hearing f. Issuance of certificate of merger or consolidation by the SEC. Effects of Merger and Consolidation 1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation and, in the case of consolidation, shall be the consolidated corporation; 2. The separate existence of the constituent corporation shall cease, except that of the surviving corporation; 3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and subject to all the duties and liabilities of a corporation; 4. The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; 5. All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; 6. The surviving or consolidated corporation shall be responsible for all the liabilities and

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obligations of each of the constituent corporations; 7. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations; and 8. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. General Rule: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts of the other. Exceptions as to Non-assumption of Liabilities: 1. If there is an express assumption of liabilities; 2. If there is a consolidation or merger; 3. If the purchase was in fraud of creditors; and 4. If the purchaser is merely a continuation of the seller. De Facto Merger One corporation acquiring all or substantially all of the properties of another corporation in exchange for shares of stock of the acquiring corporation. The acquiring corporation would end-up with the business enterprise of the selling corporation whereas the latter would end up with basically its remaining assets being the shares of stock of the acquiring corporation and may then distribute it as liquidating dividend to its stockholders. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) Merger and Consolidation Sale of Assets

4. Title to the assets are transferred by operation of law 5. The constituent corporations are automatically dissolved

4. Transfer of title is by virtue of contract 5. The selling corporation is not dissolved by the mere transfer of all its property

Types of Acquisitions (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) a. “ASSETS-ONLY” LEVEL The purchaser is interested only in the raw assets and properties of the business. He is not interested in the entity of the corporate owner of the assets nor of the goodwill and other factors relating to the business itself. The transferee would not be liable for the debts and liabilities of his transferor since there is no privity of contract over debt obligations between the transferee and the transferor’s creditors b. “BUSINESS-ENTERPRISE” LEVEL The transferee merely continues the same business of the transferor since he obtains the earning capability of the venture The transferee is liable for the debts and liabilities of the transferor c. “EQUITY” LEVEL The purchaser takes control and ownership of the business by purchasing the shareholdings of the corporate owner. What the purchaser actually purchased is the ability to elect the members of the board of the corporation who run the business. APPRAISAL RIGHT Appraisal Right The right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure, namely: (ASIM) 1. An amendment to the articles that has the effect of a) changing or restricting the rights of shareholders or of authorizing preferences over those of outstanding shares, or b) changing the term of corporate existence; 2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets. (Sec. 81) 3. Merger or consolidations; and 96

1. Sale of assets is always involved 2. There is automatic assumption of liabilities

3. There is continuance of the enterprise and of the stockholders

1.merger/consol idation is not always involved 2. Purchasing corporation is not generally liable for the debts and liabilities of the selling corporation 3. The selling corporation ordinarily contemplates a liquidation of the enterprise

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Investment of corporate funds in another corporation or in a purpose other than the primary purpose;  Other instances when right available: 5. When a corporation invest its funds in another corporation or business for any purpose other than its primary purpose 6. In a close corporation, a stockholder 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 Procedure a. The dissenting stockholder shall make a written demand on the corporation within 30 days after the date on which the vote was taken for the payment of the fair value of his shares. Failure to do so, shall be deemed a waiver of his a waiver of his appraisal right b. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon surrender of the corresponding certificate of stock within 10 days after demanding payment of his shares c. Upon payment of the agreed or awarded price, the stockholder shall transfer his shares to the corporation Conditions on the Exercise of Appraisal Rights 1. Any of the instances provided for by law for the exercise of the right must be present. 2. The dissenting stockholder must have voted against the proposed corporate action. 3. The stockholder must make a written demand within 30 days from the date that the vote was taken. 4. The price must be based on the fair value of the shares as of the day prior to the date in which the vote was taken. 5. Payment of the shares must be made only out of the unrestricted retained earnings of the corporation. 6. Upon payment, the stockholder must transfer his shares to the corporation. Effect of the Exercise of the Right: a. All rights accruing to the such shares shall be suspended b. The dissenting stockholder shall be entitled to receive payment of the fair value of his shares as agreed upon between him and the corporation or as determined by the appraisers chosen by them.

4.

General Rule: A dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision Exceptions: 1. The corporation consents to the withdrawal 2. The proposed corporate action is abandoned or rescinded by the corporation 3. The proposed corporate action is disapproved by the SEC where its approval is necessary 4. The Commission determines that such stockholder is not entitled to appraisal right. NON-STOCK CORPORATION Non-Stock Corporation –a corporation organized for an eleemosynary purpose, and no part of whose income is, during its existence, distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution. (Sec. 87)  Any profit which it may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which it was organized.  Eleemosynary purposes: charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural. (Sec. 88)  They are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of special features. Rules on Conversion (2001 Bar Exam) 1. Stock to non-stock corporation Conversion may be made by mere amendment of the articles of incorporation. 2. Non-stock to stock corporation • The corporation must first be dissolved; mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to monetary gain. • The conversion without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the asset of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become stockholders of the corporation. Rights of Members 1. To be entitled to 1 vote unless otherwise provided in the articles or by-laws 97

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2. To vote by proxy unless otherwise provided in the articles or by-laws 3. To transfer membership if allowed by the articles or by-laws 4. To be elected as trustee Distinctions between Stock Corp and NonStock Corp (2004 Bar Exam) Stock Non-Stock Has capital stock • Does not have divided into shares shares and may not and with authority distribute profits to to distribute its members dividends to its stockholders Stockholders may • Members transfer their cannot transfer shares their membership unless allowed by the articles or bylaws Cumulative voting • Cumulative is available in the voting not available election of directors unless otherwise provided in the articles or by-laws Directors cannot • Trustees may exceed 15 in exceed 15 in number number The term of a • The term of a director is 1 year trustee is 3 years; 1/3 of the Board shall be elected annually Stockholders may • Members may vote by proxy be deprived of the right to vote by proxy in the articles or by-laws Officers are elected • Officers may be by the Board of directly elected by Directors the members unless otherwise provided in the articles or by-laws Stockholders and • Members may directors must act be allowed by the in a meeting, by-laws to vote by except where a mail or other similar mere written assent means is sufficient or a formal meeting unnecessary Rules for Distribution of Assets in case of Dissolution All liabilities and obligations of the corporation shall be paid, satisfied and discharged or adequate provision shall be made therefor

1. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of dissolution, shall be returned, transferred or conveyed in accordance with such requirements 2. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes but not held upon a condition requiring return, transfer or conveyance by reason of dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a plan of distribution 3. Other assets, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws 4. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution. Note: The plan of distribution shall be approved by a majority vote of the board of trustees and by 2/3 of the members having voting rights at a meeting CLOSE CORPORATION Definition: A special kind of stock corporation: 1. whose articles of incorporation should provide that: a.the number of stockholders shall not exceed 20; b. issued stocks are subject to transfer restrictions, with a right of preemption in favor of the stockholders or the corporation; and c. the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; AND 2. whose at least 2/3 of the voting stocks or voting rights should not be owned or controlled by another corporation which is not a close corporation. Characteristics: 1. Stockholders may act as directors without need of 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;

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4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are invalid; 5. Corporate actuations 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 are settled by the SEC, on the written petition by any stockholder; and 8. Stockholder may withdraw and avail of his right of appraisal. Note: Special rules are provided for close corporations because it is essentially an incorporated partnership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) The following cannot be a close corporation: a. mining companies; b. oil companies; c. stock exchanges; d. banks; e. insurance companies; f. public utilities; g. education institutions; h. other corporations declared to be vested with public interest. Ordinary Stock Corporation Its articles of incorporation need only contain the general matters enumerated in Sec. 14 of the Code. Close Corporation Its articles must contain the special matters prescribed by Sec. 97, aside from the general matters in Sec. 14. Failure to do so precludes a de jure close corporation status. 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation. Its articles may classify its directors. Business of the corporation may be managed by the stockholders if the

The corporate officers and employees are elected by a majority vote of all the members of the board of directors. The pre-emptive right is subject to the exceptions found in Sec. 39. The appraisal right may be exercised by a stockholder only in the cases provided in Secs. 81 and 42 of the Code. Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings.

Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights. Its articles cannot classify its directors. Business of the corporation is managed by the board of directors.

Arbitration of intracorporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting the management of the corporation.

articles so provide, but they are liable as directors. Its articles may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders. The pre-emptive right is subject to no exceptions unless denied in the articles The appraisal right may be exercised and compelled against the corporation by a stockholder for any reason. In case of an arbitration of an intra-corporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings. Arbitration of intracorporate deadlock by the SEC is an available remedy in case the directors or stockholders are so divided respecting the management of the corporation.

Powers of the SEC in case of DEADLOCK in Close Corporations 1. Cancel or alter any provision in the articles of incorporation or bylaws 2. Cancel, alter or enjoin any resolution of the corporation 3. Direct or prohibit any act of the corporation 4. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings. 5. Appoint a provisional director 99

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6. Dissolve the corporation 7. Granting such other relief circumstances may warrant. SPECIAL CORPORATIONS

as

the

incorporated by an aggregate of persons, e.g. religious order, diocese, synod, sect, etc. DISSOLUTION AND WINDING UP (LIQUIDATION) Dissolution Extinguishment of the franchise of a corporation and the termination of its corporate existence. Modes: 1. Voluntary (2002 Bar Exam) a) Application for dissolution with the SEC i. Where no creditors are affected ii. Where creditors are affected b) Shortening of the corporate term by amending the articles of incorporation. 2. Involuntary a) Expiration of the corporate term; b) Failure to organize and commence business within 2 years from the date of issuance of the certificate of incorporation c) Legislative dissolution; d) Quo warranto suit against a de facto corporation; e) Minority stockholders’ suit for dissolution on justifiable grounds; or f) SEC dissolution, upon complaint and after notice and hearing, on the following grounds: i. The corporation was illegally organized; ii. Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5 years; iii. Serious dissension in the corporation; or iv. Commission by the corporation of illegal or ultra vires acts or violations of the Code. Effects of Dissolution a. Transfer of legal title to corporate property to the stockholders who become co-owners thereof b. Continuation of corporate business merely as an association without juridical personality c. Conveyance by the stockholders of their respective shareholdings toward the creation of a new corporation to continue the business of the old d. Reincorporation of the dissolved corporation by refilling new articles of incorporation and bylaws e. The corporation continues as a body corporate for 3 years for purposes of winding up f. Cessation of corporate existence for all purposes upon the expiration of the winding up period of 3 years. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.

1. Educational Corporation  A stock or non-stock corporation organized to provide facilities for teaching or instruction.  A favorable recommendation of the DECS is essential for the approval of its articles and by-laws.  It is primarily governed by special laws and suppletorily by the provisions of the Code. NON-STOCK EDUCATIONAL CORPORATION A non-stock corporation Governed by the provisions on nonstock corporations and suppletorily by the provisions on stock corporations The number of board of trustees may be more than 15 The term of office of the board of trustees shall be 3 years EDUCATIONAL CORPORATION A special corporation which may a stock or nonstock Governed by special laws and by the general provisions of the Corporation Code The number of the board of trustees should not be less than 5 but not more than 15. The term of office of the board of trustees shall be 5 years

2. Religious Corporation  A corporation composed entirely of spiritual persons and which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property. It is different from an ordinary non-stock corporation organized for religious purposes.  Kinds: A) CORPORATION SOLE - A special form of corporation, usually associated with the clergy, consisting of one person only and his successors, who is incorporated by law to give some legal capacities and advantages; and B) RELIGIOUS SOCIETIES - A non-stock corporation governed by a board but with religious purposes. It is

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Liquidation (1997, 2000, 2001 Bar Exams) The process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members. Methods: 1. By the corporation itself through its board of directors/trustees; 2. By a trustee to whom the corporate assets have been conveyed; and 3. By a management committee or rehabilitation receiver appointed by the SEC. Note: The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or the receiver is appointed within the said period.  The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike (see Sec. 145).  The word “trustee” as sued in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted the prosecution of the suit filed by the corporation. (Spouses Gelano vs. CA 103 SCRA 90) Liquidation Connotes a winding up or settling with creditors and debtors Winding up process so that assets may be distributed to those entitled Rehabilitation Connotes a reopening or reorganization Contemplates a continuance of corporate life in an effort to restore the corporation to its former successful operation

following ways: (1) physical division or partition based on the proportion of the value of their stockholdings; or (2) selling the property to a 3rd person and dividing the proceeds among the 5 stockholder in proportion to their stockholdings; or (3) after determination of the value of the property, by assigning or transferring the property to one stockholder with the obligation on the part of the said stockholder to pay the other four stockholders the amount in proportion to the value of the stockholdings of each. FOREIGN CORPORATION (1995, 2002 Bar Exams) Definition: A corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123)  The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes.  It is not permitted to “transact or do business in the Philippines” until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency. Resident Agent An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. Grounds for Revocation of License 1. Failure to file annual reports required by the Code; 2. Failure to appoint and maintain a resident agent; 3. Failure to inform the SEC of the change of residence of the resident agent; 4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation; 5. A misrepresentation in material matters in reports; 6. Failure to pay taxes, imposts and assessments; 7. Engage in business unauthorized by SEC; 101

BAR Q: XYZ Corp. shortened its corporate life by amending its articles of incorporation. It has no debts but owns several real estate properties in Metro Manila. How would said property be liquidated among the 5 stockholders of said corporation. Discuss the two methods of liquidation. SA: The real estate properties of XYZ Corp. can be liquidated among the five stockholders after the property has been conveyed by the corporation to the 5 stockholders, by dividing or partitioning it among themselves in any of the

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8. Acting as dummy of a foreign corporation; and 9. Not licensed to do business in the Philippines. (Sec. 134) Test of “Doing or Transacting Business in the Philippines” (1998, 2002 Bar Exams) The Corporation Code does not define the phrase “doing or transacting business.” A. Jurisprudential Tests 1. Twin characterization test a) 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 (Substance Test); and b) 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 (Continuity Test). 2. Contract Test Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. B. Statutory Tests 1. Foreign Investment Act of 1991 (R.A. No. 7042) Acts constituting “doing business”: a) Soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more; c) Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; and d) 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 of the business organization. 2. Implementing Rules of R.A. No. 7042 Acts not constituting “doing business”: a) Mere investment as a shareholder in a domestic corporation and/or the exercise of rights as such investor;

b) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; c) Publication of a general advertisement through any print or broadcast media; d) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; e) Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export; f) Collecting information in the Philippines; and g) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis. C. Jurisprudential Rules 1. Doctrine of Isolated Transactions Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. (Eriks Pte.Ltd vs. CA, 267 SCRA 567) 2. In Pari Delicto Rule In the case of Top-Weld Manufacturing vs. ECED, S.A., the Court denied the relief prayed for by petitioner when it ruled that the very purpose of the law was circumvented and evaded when the petitioner entered into the said agreements despite the prohibition contained in the questioned law. The parties were considered as being in pari delicto because they equally violated R.A. 5455 3. Estoppel Rule  A party is estopped from questioning the capacity of a foreign corporation to institute an action in our courts where it had obtained benefits from its dealings with such foreign corporations and thereafter committed a breach or sought to renege on its obligations. Effects of Lack of License A. On suits 1. Foreign corporation doing business in the Philippines: a) may not sue or intervene in any action in any court or administrative agency of the Philippines; but b) may be sued on any valid cause of action recognized in the Philippines (under the doctrine of quasi-estoppel by acceptance of benefits). (Sec. 133)

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2. Foreign corporation not doing business in the Philippines: a) Generally, it may not sue and be sued in any court or administrative agency of the Philippines; b) However, it may sue and be sued for isolated transactions, as well as for those which are casual or incidental thereto. B. On contracts The contracts contemplated are those that satisfy the “contract test” or those that make a foreign corporation as one “doing business in the Philippines.” General Rule: The contracts are unenforceable. They are enforceable only upon securing a license. Exception: However, the contracts are null and void if they are contrary to law, morals, good customs, public order and public policy. Instances when a Foreign Corp may sue in the Philippines whether or not Licensed to do Business thereat 1. To seek redress for an isolated business transaction; 2. To protect its corporate reputation, name, and goodwill; 3. To enforce a right not arising out of a business transaction, e.g. tort that occurred in the Philippines; 4. When the parties have contractually stipulated that Philippines is the venue of actions; and 5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation. O rig i nal and Exclusive Jurisdiction of the RTC (Sec. 5 in relation to Sec. 5.2 OF RA 8799): 1. Fraudulent devices and schemes employed by directors detrimental to the public interest and to other firms; 2. Intra-corporate disputes; 3. Disputes with the state in relation to their franchise and right to exist as such; 4. Controversies in election, appointment of directors or trustees; 5. Petition to be declared in a state of suspension of payments; 6. Petition for rehabilitation; and 7. Appointment of rehabilitation receiver or management committee (provisional remedies). Note: A corporate officer’s dismissal is always a corporate act and/or an intra-corporate controversy. However, the corporate officers SEC REORGANIZATION DECREE (P.D. No. 902-A)

contemplated are those whose offices are created by the Corporation Code or the by-laws. Intra-Corporate Dispute (1996, 1997, 2006 Bar Exams) Elements: 1. Status or relationship of the parties – controversy must be between and among corporators, between corporators and the corporation 2. Nature of the question – intrinsic connection with the regulation or the internal affairs of the corporation Examples: 1. Action by a corporate officer to recover compensation from the corporation 2. Action by a stockholder to compel issuance of certificate of stocks 3. Action for recovery of corporate funds Note: Allegations in the complaint determines jurisdiction. Grounds for Suspension or Cancellation of Certificate of Registration (SEC. 6[L]) 1. fraud in procuring registration; 2. serious misrepresentation as to objectives of corporation; 3. refusal to comply with lawful order of SEC; 4. continuous inoperation for at least 5 years; 5. failure to file by-laws within required period; 6. failure to file reports; and 7. Others similar grounds. Interim Rules of Procedute on Corporate Rehabilitation (effective December 15, 2000) Corporate Rehabilitation A process to try to conserve and administer the corporation’s assets in the hope that it may eventually be able to return from financial stress to solvency. Nature: in rem, summary, and non-adversarial Applicability: These Rules apply to petitions for rehabilitation filed by corporations, partnerships and associations pursuant to P.D. 902-A Steps: 1. Filing verified petition with the appropriate RTC by: a. corporate debtor who foresees the impossibility of meeting its debts when they respectively fall due; or b. creditors holding at least 25% of the debtor’s total liabilities; 2. The following shall be annexed to the petition: a. audited financial statements at end of its last fiscal year; b. interim financial statement; c. schedule of debts and liabilities; d. inventory of assets; e. rehabilitation plan; 103

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schedule of payments and disposition of assets effected within 3 months preceding the filing of the petition; g. schedule of cash flow for the last 3 months’ h. statement of possible claims; i. affidavit of general financial condition; j. at least 3 nominations for rehabilitation receiver; k. certificate under oath that directors and stockholders have irrevocably approved/ consented to all actions/matters necessary under the rehabilitation plan. 3. The court shall issue the stay order not later than 5 days from the filing of the petition, which among others, shall: a. appoint a rehabilitation receiver; b. stay all actions for claims against the debtor, which shall cover both secured and unsecured creditors; c. set an initial hearing for the petition (not earlier than 45 days but not later than 60 days from filing of the petition); and d. direct the creditors to file their verified comment or opposition not later than 10 days before the initial hearing; their failure to do so would bar them from any participating in the proceedings. 4. Publication of the stay order in a newspaper of general circulation once a week for 2 consecutive weeks; 5. Referral of rehabilitation plan to rehabilitation receiver; 6. Meetings between corporate debtor with creditors. Discussions on the rehabilitation plan; 7. Submission of final rehabilitation plan to the RTC for approval; 8. The petition shall be dismissed (which results into the automatic lifting of the stay order unless RTC ordered otherwise) if no rehabilitation plan is approved after 180 days from initial hearing; 9. Approval or disapproval of the rehabilitation plan by RTC. Rehabilitation Receiver  A person appointed by the RTC, in behalf of all the parties for the purpose of preserving and conserving the property and preventing its possible destruction or dissipation, if it were left in the possession of any of the parties.  He acts in a fiduciary capacity and with impartiality towards all interested.  He does not take over the management and control of the debtor, but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings.

f.

Powers and Functions of Management Committee and Rehabilitation Receiver (Sec. 6[d], P.D. 902-A) 1. To take custody of, and control over, all the existing assets and property of such entities under management; 2. To evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or other associations; 3. To determine the best way to salvage and protect the interest of the investors and creditors; 4. To study, review and evaluate the feasibility of continuing operations and structure and rehabilitate such entities if determined to be feasible by the RTC; 5. To report and be responsible to the RTC until dissolved; and 6. May overrule or revoke the actions of the previous management and board of directors of the entity under management, notwithstanding any provision of law, articles of incorporation or by-laws to the contrary.

Mere disagreement among stockholders as to the affairs of the corporation would not in itself suffice as a ground for the appointment of a management committee. At least where there is no imminent danger of loss of corporate property or of any other injury to stockholders, management of corporate business should not be wrested away from duly elected officers, who are prima facie entitled to administer the affairs of the corporation, and placed in the hands of the management committee. However, where the dissension among stockholders is such that the corporation cannot successfully carry on its corporate functions the appointment of a management committee becomes imperative. (Jacinto and Colayco vs. First Women’s Credit Corporation, G.R. No. 154049, August 28, 2003)  RA 8799 effectively amended Sec. 5 of PD 902-A, jurisdiction over intra-corporate disputes is now vested in the RTCs. However, while Sec. 5 was amended, there is no repeal of Sec. 6 thereof declaring that the fraudulent acts or schemes, which the SEC shall exclusively investigate and prosecute, are those in violation of any law or rules and regulations administered and enforced by the SEC alone. The filing of 104

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civil/intra-corporate case before SEC does not preclude the simultaneous and concomitant filing of a criminal action before the regular courts; such that a fraudulent act may give rise to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as well as criminal liability for violation of the Revised Penal Code cognizable by the regular courts, both charges to be filed and proceeded independently, and may be simultaneously with the other. (Fabia vs. CA, G.R.No. 132684. September 11, 2002.) Automatic Stay  Effect of appointment of a management committee or rehabilitation receiver  All actions for claims against the corporation shall be suspended accordingly.  Purpose/justification: To enable the management committee or the rehabilitation receiver to effectively exercise its powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company. (Rubberworld v. NLRC)  No definite duration; deemed to apply during the entire period that the corporate debtor is under management committee or the rehabilitation receiver. (BF Homes v. CA)

SECURITIES REGULATION CODE (R.A. 8799) Securities Regulation (1995, 1996, 2001, 2004 Bar Exams) • The Code is also known as the “Blue Sky Law”, because it was enacted to protect the public from unscrupulous promoters who stake business or venture claims which have really no basis and sell shares or interests therein to investors, who are then left holding certificates representing nothing more than a square of the blue sky. • The Code is self-executory and failure of SEC to issue rules and regulations shall not in any manner affect its self-executory nature. (Subsec. 72.1) Powers and Functions of the SEC: 1. Shall have jurisdiction and supervision over all corporations, partnerships or associations who are grantees of primary franchises;

2. Formulate policies and recommendations on securities market, advise Congress and other government agencies on all aspects of securities market, and propose legislation and amendments thereto; 3. Approve, reject, suspend, revoke, or require amendments to the registration statements, and registration licensing applications; 4. Regulate, investigate or supervise activities of persons to ensure compliance; 5. Supervise, monitor, suspend or take over activities of exchanges, clearing agencies and other SROs; 6. Impose sanctions for violation of laws and rules, regulations, and orders; 7. Prepare, approve, amend or repeal rules and regulation and orders, and issue opinions and provide guidance on and supervise compliance therewith; 8. Enlist aid and support of and/or deputize any and all enforcement agencies of Government, as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions; 9. Issue cease and desist orders to prevent fraud or injury to investing public; 10. Punish for both direct and indirect contempt; 11. Compel corporate officers to call meetings of stockholders or members thereof under its supervision; 12. Issue subpoena duces tecum and summon witnesses, and order the examination, search and seizure of all documents, papers, file and records, tax returns, and books of accounts of any entity or person under investigation; 13. Suspend, or revoke, after proper notice and hearing, franchise or certificate of registration of corporations, partnerships or associations; and 14. Exercise such other powers as may be provided by law, implied from, or which are necessary or incidental to the carrying out of express powers. Securities Shares, participation or interest in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. (Sec. 3) Kinds: a. Debt Instruments: bonds, debentures, notes, and other evidences of indebtedness, asset-backed securities;

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b. Equity Instruments: shares of stock,
certificate of deposit for a future subscription, proprietary or nonpropriety membership certificates in corporations; c. Investment Instruments: investment contracts, fractional undivided interests in oil, gas or other mineral rights; d. Derivatives: like options and warrants; e. Trust Instruments: certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar certificates; f. Catch-All: other instruments as may in the future determined by the Commission. Registration of Securities General Rule: Securities shall NOT be sold or offered for sale or distribution within the Philippines (a) without registration statement duly filed and approved by SEC; and (b) Prior to such sale, information on the securities in such form and with such substance as SEC may prescribe, shall be made available to each prospective purchaser. Exception: The following securities may be sold without need of registration; A. Exempt Securities: a. Those issued or guaranteed by the Government or by any political subdivision, agency, or by any person controlled or supervised by, and acting as an instrumentality of the Government; b. Those issued or guaranteed by the government of any country with which the Philippines has diplomatic relations, or by any state, province, or political subdivision thereof on the basis of reciprocity, although the SEC may require compliance with the form and content of disclosures; c. Certificates issued by receiver or by trustee in a bankruptcy duly approved by proper adjudicatory body; d. Any security or its derivatives the sale or transfer of which, by law, is under supervision and regulation of OIC, HLURB, or BIR; e. Any security issued by bank, except its own shares. B. Exempt Transactions a. Judicial sale by executor, administrator, guardian/receiver in insolvency or bankruptcy; b. Sale of pledged or foreclosed property to liquidate debts; c. Sale on isolated transaction by owner;

d. e. f.

g. h. i. j. k. l.

Distribution of stock dividends; Sale of capital stock exclusively to stockholders where no commission is paid; The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage are sold to a single purchaser at a single sale; Issuance of security in exchange of any security from same issuer pursuant to the right of conversion; Broker’s transactions; Pre-incorporation subscription pursuant to the increase of the authorized capital stock; Exchange of securities by issuer with securities holders exclusively; Sale to less than 20 persons during any 12 month period; Sale of securities to banks, registered investment house, insurance companies, pension fund or retirement plan maintained by the government or other persons authorized by the BSP to engage in trust functions.

Procedure for Registration of Securities: 1. The Issuer(originator, maker, obligor, or creator of the security) shall file with the SEC a sworn registration statement; 2. The registration statement shall include a prospectus (document made by and on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with SEC); 3. The submission of the following information: the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership; 4. The registration statement shall be signed by Issuer’s executive officer, principal operation officer, principal officer, comptroller, principal accounting officer, secretary or persons performing similar functions accompanied by a duly verified petition of the Board of Director’s of the Issuer; 5. Filing of the written consent of the expert named; 6. Written certification of the selling shareholders, if the registration statement includes shares to be sold by selling shareholders; 7. Payment of fees to the SEC by the Issuer; 106

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8. Publication in 2 newspapers of general circulation in the Philippines, once a week for 2 consecutive weeks, reciting that a registration statement has been filed; 9. The SEC may compel the production of all the books of such Issuer, and may administer oaths to, and examine the officers of such Issuer or any other person connected therewith as to its business and affairs; 10. Within 45 days after the date of filing of the registration statement, or by such later date to which the issuer has consented, SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement. Grounds for Rejection and Revocation: (Sec. 13.1) 1. The issuer: a. has been judicially declared insolvent; b. has violated the provisions of the Code or orders issued by the SEC; c. has been engaged in fraudulent transactions; d. has made false or misleading representation in any material facts; e. has failed to comply with any requirement the SEC may impose as a condition of registration; 2. The registration statement is on its face inaccurate or incomplete, or includes ant untrue statement or omits to state a material fact required to be stated therein; 3. The issuer, any officer, director or controlling person performing similar functions, has been convicted by a competent judicial or administrative body (it includes a foreign court of competent jurisdiction), of an offense involving moral turpitude and/or fraud or is restrained by the SEC or other bodies for violation of securities, commodities and other related laws; 4. Non-production of all books and papers, administration of oath or examination of its officers as required by the SEC. Pre-Need Plans Contracts which provide for the performance of future services or the payment of future monetary consideration at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverages and includes

life, pension, interment, and other plans which SEC shall approve. (Subsec. 3.9) Tender Offer (2002 Bar Exam) A publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a “public company”  It is mandatory to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire in the following circumstances: a. The person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers; b. The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months; or c. The person intends to acquire shares that would result in ownership of more than 50% of the equity shares of a public company. (Sec. 19)  Securities deposited may be withdrawn at any time throughout the period that the tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after 60 days from the date of the original tender offer or request or invitation.  Unlawful and Prohibited Acts Relating to Tender Offers: To make an untrue statement of a material fact or omit to state any material fact in order to make the statements made, not misleading, or to engage in any fraudulent, deceptive, or manipulative act or practices. How Tender Offer is made: 1. By filing with the SEC a declaration to make a tender offer; 2. By furnishing the issuer or the originator of the security a statement containing such information required under Sec. 17 of the SRC: a. Annual Report (includes balance sheet, profit and loss statement); and b. Periodical reports for interim fiscal periods; and 3. By publishing all request or invitations for tender, or materials, making a tender offer or requesting on inviting letters of such a security. 107

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Public Company: 1. Any corporation with a class of equity securities listed on an Exchange; or 2. Any corporation with assets in excess of P50M and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its securities. Unlawful Acts: 1. UNLAWFUL SALE OF SECURITIES-For any beneficial owner, director, or officer to sell any security if the seller or his principal does not own or does not deliver it within 20 days from sale. (Sec. 23.3) 2. Manipulation of security prices. (Sec. 24.1) 3. MANIPULATIVE AND DECEPTIVE DEVICES-- Employment of manipulative or deceptive device or contrivance in connection with purchase and sale of authorities. Execution of “short sale”, “stop-loss order” not in accordance with SEC rules. (Sec 24.2) 4. OPTION TRADING-- For any member of Exchange directly or indirectly endorse or guarantee the performance of any “put”, “call”, “straddle”, “option” or “privilege” in relation to any security registered. (Sec. 25) 5. FRAUDULENT TRANSACTION-Fraudulent transactions in the sale of securities. (Sec. 26) 6. Insider trading (Sec. 27) 7. For an insider to communicate material non-public information about the issuer or security (Sec. 27.3) 8. Unlawful Tender Offer (Sec. 27.4) 9. Use of Extensive Credit. (Sec. 48.1) Definition of terms: 1. SHORT SALE— A contract for sale of shares of stock which the seller does not own, or certificates which are not within his control, so as to be available for delivery at the time when delivery must be made. 2. STOP-LOSS ORDER—The direction by a customer to his broker that if the commodity touches the price named, the broker shall close the trade at the best available price. 3. PUT—An option that, in consideration of a premium paid, give the purchase the right to make the seller take for him a given number of shares of a named stock between a given time at a

stipulated price which is usually below the prevailing market price of the stock at the time the “put” is purchased. 4. CALL— An option that, in consideration of a premium paid, entitles the buyer the right to compel the seller to deliver to him a certain number of shares within a given time at a stipulated price which is usually higher than the prevailing market price of the stock at the time the “call” is bought. “Call” is the reverse of “put”. 5. STRADDLE—The double privilege of a “put” and a “call”, and secures to the holder the right to demand of the seller at a certain price within a certain time a certain number of shares of specified stock, or to require him to take, at the price within the same time, the same shares of stock. 6. WASH SALE—the operation of simultaneously buying and selling the same stock. It is any transaction in any security which involves no change in the beneficial ownership thereof. It is the reverse of “matched orders” wherein there is a change in the ownership of the securities. 7. SHORT SWING TRANSACTION—One where a person buys securities and sells the same within a period of six months. Unlawful Sale of Securities (Sec. 23.3) • It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer if person selling security or his principal: a. does not own the security sold; or b. if owning the security, does not deliver it against such sale within 20 days thereafter, or does not within 5 days after such sale deposit it in the mails or other usual channels of transportation. • No person shall be deemed to have violated the Code if he proves the exercise of good faith. • Prohibition does NOT apply to a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise than in an Exchange, for such security. Insider’s Trading (Sec. 27)  The selling or buying of a security by an insider while in possession of material 108

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non-public information with respect to the issuer or the security. It is considered unlawful unless: 1. The insider proves that the information was not gained from such relationship; or 2. If the other party selling to or buying form the insider (or his agent) is identified, the insider proves: a. that he disclosed the information to the other party; or b. that he had reason to believe that the other party otherwise is also in possession of the information. Presumption: A purchase or sale made by an insider, his spouse, or relatives, shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to public dissemination of such information. (Sec 27.1) Insider A person who, with respect to a particular security, may be any of the following: a. The issuer; b. The director or officer of, or a person controlling, controlled by, or under common control with the Issuer; c. A person whose relationship or former relationship to Issuer gives or gave him access to a fact of special significance about Issuer or the security that is not generally available; d. A government employee, or director, or officer of an exchange, clearing agency and/ or selfregulatory organization who has access to material information about an Issuer or a security that is not generally available to the public; e. A person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is an insider. Material Non-Public Information (Sec. 27.2) 1. Information about the Issuer or the security which has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb information; or

2. Information about the Issuer or the security which would be considered by a reasonable person important under the circumstances in determining his course of action to buy, sell or hold security. Self- Regulatory Organizations (SROs) Organizations whose operation are related to or connected with securities market such as but not limited to associations of: a. brokers and dealers; b. transfer agents; c. custodians; d. fiscal and paying agents; e. computer services; f. news disseminating services; g. proxy solicitors; h. statistical agencies; i. securities- rating agencies; and j. securities information processors. Margin Sum of money, or its equivalent, placed in the hands of a stockbroker by principal or persons on whose account the purchase is to be made, as a security to the former against losses to which he may be exposed by a subsequent depression in the market value of the stock. Purpose: Margin limitations are provided in the Code to prevent excessive use of credit for the purchase or carrying of securities. Margin Trading A kind of trading that allows a broker to advance for the customer part of the purchase price of a security and to keep it as a collateral for such advance. • The credit extended must be for an amount not greater than whichever is higher of: 1. 65% of current market price of the security; 2. 100% of the lowest market price of security during the preceding 36 calendar months, but not greater than 75% of the current market price. (Sec. 48) Margin Call When a broker makes a demand on the investor to deposit money or securities with the broker when a purchase is made or when the investor’s equity in a margin account declines below a minimum standard set by the exchange or the broker. Compliance with SRC Provisions Any condition, stipulation or provision binding any person to waive compliance with any provision of the SRC or of any rule or regulation thereunder, or of any rule of an Exchange

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required thereby, as well as the waiver itself, shall be void. BANKING LAWS I. INTRODUCTION Banks – entities engage in the lending of funds obtained in the form of deposits from the public Quasi-banks –entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations  Entities authorized to perform universal or commercial banking functions may also engage in quasi-banking functions (Sec. 6) Deposit substitutes – an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations. Nature of Business:  A bank has a vital role in providing an environment conducive to the sustained national economy. Banking is fiduciary in nature that requires high standards of integrity and performance. • The appropriate standard of diligence must be very high, if not the highest degree of diligence; highest degree of care (PCI Bank v. CA, 350 SCRA 446) • This applies only to cases where banks are acting in their fiduciary capacity, as depository of the deposits of their depositors (Reyes v. CA). • An innocent mortgage is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon what is or is not annotated on the title. (DBP v. CA, 331 SCRA 267) • The banks are expected to ascertain and verify the identities of the persons it transacts business with (UCPB v. Ramos, G.R. No. 147800, November 11, 2003) • Due diligence required of banks extend even to persons or institutions, like the GSIS, regularly engaged in the business of lending money secured by real estate

mortgages (GSIS v. Santiago, G.R. No. 155206, October 28, 2003) Consequences of nature of business: 1. It is subject to heavy and close supervision and/or regulation by the BSP (Central Bank of the Phils. v. CA, 208 SCRA 652). 2. It is required to exercise utmost diligence in the handling of deposits (Simex International Manila Inc., 183 SCRA 361). 3. Special rules on strikes and lockouts: any strike or lockout involving banks, if unsettled after 7 calendar days shall be reported by the BSP to the Sec. of Labor who has 2 options: a. He may assume jurisdiction over and decide the dispute; or b. certify it to the NLRC for compulsory arbitration The President may also intervene at any time and assume jurisdiction over such labor dispute in order to settle or terminate the same. Financial Intermediaries – persons or entities whose principal functions include the lending, investing or placement of funds on evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. Foreign Stockholdings - Foreign individuals and non-bank corporations may own or control up to 40% of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. (Sec. 11)  Grandfather Rule: The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. Note: Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. II. GENERAL BANKING LAW (GBL) [R.A. 8791 Declaration of Policy: to promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and 110

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responsive to the demands of a developing economy. Scope of Application: The GBL primarily governs universal banks and commercial banks. It suppletorily governs thrift banks, rural banks and other banking institutions. A. Classification of Banks (2002 Bar Exam) 1. Universal Banks – primarily governed by the GBL, can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement. 2. Commercial Banks – ordinary banks governed by the GBL, which have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in non-allied enterprises. 3. Thrift Banks – these are a) Savings and mortgage banks; b) Stock savings and loan associations; c) Private development banks, which are primarily governed by the Thrift Banks Act. 4. Rural Banks – mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act. 5. Cooperative Banks – those banks organized whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall include cooperative rural banks. They are governed primarily by the Cooperative Code. 6. Islamic Banks – banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’a, such as the Al Amanah Islamic Investment Bank of the Philippines. 7. Other classification of banks as determined by the Monetary Board of the BSP. ORDINARY CORPORATION 1. May be a stock or non-stock corporation 2. May issue par value or no par value stocks. 3. May be registered with the SEC without any certificate of authority issued by a government agency. BANKING CORPORATION 1. Must generally be a stock corporation 2. May issue par value stocks only. (Sec. 9) 3. Must secure a certificate of authority from the Monetary Board before it can register with SEC.

4. May purchase/acquire its own shares for a legitimate corporate purpose; provided that, it has unrestricted retained earnings in its books to cover the shares to be purchased/acquired. 5. Must be composed of 5 to 15 directors, each of whom shall own at least one (1) share of the capital stock of the corporation.

4. May not purchase/acquire its shares or accept them as security for a loan. Except: when authorized by the Monetary Board. In such case, the bank must sell or dispose of said shares within 6 months from the time of their acquisition. (Sec. 10) 5. Also composed of 5 to 15 directors w/ 2 independent directors (Sec. 15). In case of merger or consolidation, the number of directors shall not exceed 21. (Sec. 17) Independent Director – a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. 6. May not declare dividends, if any of the conditions set forth under Sec. 57 are present.

6. May declare dividends out of its unrestricted retained earnings.

Universal Bank Authority to exercise additional powers other than those authorized for commercial banks May invest in the equities of allies, whether financial or non-financial, and non-allied enterprises (Sec. 24) 1. The powers authorized for a commercial bank; 2. The powers of an investment house; and 3. The power to invest in non-allied enterprises. (Sec.23)

Commercial Bank No such additional powers

May only invest in equities of allied enterprises, whether financial or nonfinancial 1. General powers incident to corporations Such powers as may be necessary to carry on the business of commercial banking.

a. Accepting drafts and issuing letter of credits; 111

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b. Discounting and negotiating promissory notes, drafts, bills of exchange and other evidence of debt; c. Accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; d. Buying and selling foreign exchange and other debt securities; e. Extending credit. (Sec. 29) Universal & Commercial Banking Authorized to engage in quasi-banking functions without need for approval. May accept or create demand deposits without need for approval Demand deposits – Liabilities of the BSP and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. (Sec. 58, NCBA) Other Banks Not so authorized

in any one enterprise Equity investment in financial allied enterprise - thrift bank, rural bank or any financial allied enterprise (Sec. 25) A publicly-listed bank may own up to 100% of the voting stock of only one other UB / CB. (Sec. 25) Equity investment in non-financial allied enterprises Equity investment in non-allied enterprise Equity investment in Quasi-Banks

25% of net worth 100% of equity

25% of net worth 100% of equity In other financial allied enterprises investment shall remain a minority holding. (Sec. 31)

100% of equity

100% of equity

Must seek approval of Monetary Board before accepting or creating demand deposits (Sec. 33)

40% of equity

40% of equity

 Allied Enterprises – those entities which 
enhance or complement banking. Non-financial Allied Enterprises – pertains to activities that do not involve money matters (such as warehousing, safety deposit boxes)

EQUITY INVESTMENTS: Universal Bank (Sec. 2428) Power to invest May invest in allied and nonallied enterprises (Sec. 24) Total investment in 50% allied enterprises of net worth Total investment in non-allied 50% enterprises of net worth Equity investment

Net Worth -- the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net valuation reserves and other adjustments as may be required by the Bangko Sentral. Risk-Based Capital – The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. Provided: the Comm’l Bank Monetary Board may require or suspend (Sec. 30-32) compliance with such ratio whenever necessary for a maximum period of one year; that such ratio shall be applied uniformly to banks of the May invest only same category. in the equities of Effects of non-compliance with the allied enterprises prescribed minimum ratio: (Sec. 30) 1. Distribution of net profits may be limited or prohibited and MB may require that part or all of the net profits be used to increase the 35% capital accounts of the bank until the of net worth minimum requirement has been met; or 2. Acquisition of major assets and making of new investments may be restricted. N/A EXCEPT: purchases of evidence of indebtedness guaranteed by the Government.

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3. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by BSP, the MB may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio. III. ORGANIZATION AND OPERATION Authority to Register/Incorporate

C. Authority to engage in banking or quasibanking functions  A person or entity cannot engage in banking or quasi-banking functions without a certificate of authority from the BSP.  The determination of whether a person or entity is performing banking or quasibanking functions without BSP authority shall be decided by the Monetary Board. Fit and Proper Rule. To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.  After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

 The SEC shall not register the articles of
incorporation of any bank or nay amendment thereto unless accompanied by a certificate of authority issued by the Monetary Board under its seal ( Sec. 14) The certificate of authority shall not be issued unless the Monetary Board is satisfied: 1. that all requirements of existing laws and regulations for which the applicant is proposed to be incorporated have been complied with; 2. that the public interest and economic conditions, both general and local, justify the authorization; 3. that the amount of the capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators, reasonably assure the safety of deposits and the public interest.

In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his: a. integrity, b. experience, c. education, d. training, and e. competence. (Sec. 16) Prohibition on Public Officials. - No appointive or elective public official whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government owned or controlled corporation to the bank or unless otherwise provided under existing laws. (Sec. 19) Exceptions: 1. as otherwise provided under Sec. 5 of the Rural Bank Act - Nothing in the Act shall be construed as prohibiting any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank. 2. where such service is incident to financial assistance provided by the government-owned or -controlled corporation to the bank 3. as otherwise provided under existing laws. IV. FUNCTIONS OF BANKS

B. Organization of a Bank or Quasi-Bank Requirements: 1. the entity must be organized as a stock corporation 2. funds must be obtained from the public (20 or more persons) 3. minimum capital requirements prescribed by the Monetary Board are satisfied • an investment company that performs functions as such is not a bank. Thus an investment company that is engaged solely in investing, reinvesting or trading in securities is NOT engaged in banking (Banas v. Asia Pacific Finance Corp., Oct. 18, 2000) • An investment company which loans out the money of its customers, collects the interests, and charges a commission to both lender and borrower is engaged in banking.

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1. Deposit Function a. As debtor-creditor i. Savings ii. Time iii. Demand Characteristics: • In the nature of irregular deposits (Serrano v. Central Bank, 96 SCRA96) • Contract of loan/mutuum with the depositor as creditor • Bank acquires ownership of the thing deposited and the right to use and dispose. • Money deposited is commingled with other money, constituting a common fund • Not preferred credits (Central Bank v. Morfe, 20 SCRA 507) b. As lessor-lessee Safety deposit boxes (2004 Bar Exam) – the relations between a bank renting out safety deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment for hire and mutual benefit. It cannot be considered as a contract of lease because the full possession and control of the safety deposit box is not given to the renters (Sila v. CA, 222 SCRA 24).

3.

4.

he must prove the same before a competent jurisdiction. (Fulton Ironworks v. Chinabank, November 6, 1930) The bank has the right to compensation. It can set off the deposits with the indebtedness of the depositor that are due and demandable. (Gullas v. PNB, 62 Phil. 519) The bank cannot be held liable for estafa if they authorized the use of the money deposited by the depositor even if the bank failed to return the amount deposite (Guingona v. City Fiscal of Manila, 128 SCRA 577).

Depositors: 1. Minors : a. at least seven years of age b. able to read and write c. not disqualified by any incapacity d. it should only be savings or time deposits Parents may deposit for their minor children or wards (Sec.1 PD No.734)  If the guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made to the guardian. (Sec. 22, Thrift Banks Act of 1995) Married Women are allowed to open bank accounts without assistance of their husbands (RA No. 7192) 

2.

c. d.

As trustee-trustor – trustt account As bailee-bailor – deposit strictly for safekeeping and for specific purposes e. As agent-principal i. Deposit of check for collection ii. Deposit for specific purpose iii. Deposit for safekeeping Simple Loan - fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.

Kinds of Deposits DEMAND DEPOSITS 1. Only a universal or commercial bank can accept or create demand deposits. 2. Other banks can only accept demand deposits except upon prior approval of the Monetary Board. 3. Temporary overdrawing against current accounts shall not be allowed unless caused by normal bank charges and other fees incidental to 114 SAVINGS ACCOUNT 1. Evidenced by a passbook . 2. Banks are prohibited from issuing / accepting withdrawal slips or other similar instruments to effect withdrawals without the passbooks except for bank authorized by the BSP to adopt the no passbook withdrawal system. 3. A bank is negligent if it allows the

1. The bank can use as its own the money
deposited. The amount is not being held in trust for the depositor not is it being kept for safety (Tang Tiong Tick vs. American Aphothecaries , 65 Phil. 414). The duty of a bank is to its creditor-depositor and not to third persons. If a third person has a valid right over the money deposited,

2.

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handling such accounts. 4. Drawings against uncollected deposits (uncleared checks) are generally prohibited. NOW ACCOUNTS (Negotiable Order of Withdrawal) Interest bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings account.

withdrawal without requiring the presentation of a passbook. (BPI v. CA) TIME DEPOSITS An account with fixed term

its deposit liabilities continuously for more than 30 days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the PDIC. Deposits that are exempt from garnishment: 1. Foreign Currency Deposits . Exception: The SC ruled in Salvacion v. Central Bank of the Philippines (August 20, 1997) that the FCD of an American tourist who was found guilty of repeatedly raping a twelve (12) year old child is subject to garnishment. 2. Those exempt under the Rules of Civil Procedure like the provision for the family for four months. 2. Loan Function

Note: Demand , savings , NOW accounts , time deposits and deposit substitutes shall not be subject to interest ceilings. Note: A bank other than a universal or commercial bank must seek approval of Monetary Board before accepting or creating demand deposits. (Sec. 33) Deposit Substitutes - An alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of re-lending or purchasing of receivables and other obligations (Sec. 95, RA 7653). Deposit No security given to guarantee repayment; the depositor relies on the stability and reputation of the bank. Deposit Substitute Guaranteed by certificates and other instruments

Requirement for grant of loans:  Before granting of a loan, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. Rules: 1. A bank may demand from its applicants a statement of their assets and liabilities and of their income and expenditures and other information. 2. Should such statements prove to be false or incorrect the bank may terminate any loan granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of obligation (Sec. 40). CLASSIFICATION OF LOANS Unclassified Loans Those that do not have a greater-than-normal risk, and the borrower has apparent ability to satisfy it in full and no loss in ultimate collection is anticipated. Classified Loans Those that have extraordinary risks of loss in collection due to some defects such as bad debts or those under litigation.

A bank has the right to set-off to the deposits in its hands for the payment of nay outstanding indebtedness to it on the part of the depositor (Gullas v. PNB, 62 Phil 519) Failure by the bank to pay the depositor is failure to pay a simple loan and not a breach of trust (CBTC v. CA, G.R. No. 138569, September 11,2003)

Limitation on Loans, Credit Accomodations and Gurantees (2002, 2006 Bar Exams) A. Single Borrower’s Limit  the total amount of loans extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed 20% of the net worth of such bank.  The total amount of loans may be increased by additional 10% of the net worth of such bank provided the additional 115

Suspension of Payment on Its Deposit Liabilities  In case a bank or quasi-bank notifies the BSP or publicly announces a bank holiday, or in any manner suspends the payment of

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liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, nonperishable goods which must be fully covered by insurance; The prescribed ceiling shall include: a. The direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discount paper with or sells paper to such banks; b. In the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of the said entities to the bank; c. In a case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and d. In the case of a partnership, association, or other entity, the liabilities of the member thereof to such bank. Exclusions from the Limits: a. loans secured by obligations of the Bangko Sentral or the Philippine Government; b. loans fully guaranteed by the government; c. loans covered by assignment of deposits maintained in the lending bank and held in the Philippines; d. loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and e. other loans or credit accommodations which the MB may specify as non-risk items. B. DOSRI accounts  Restrictions on bank exposure to Directors, Officers, Stockholder 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, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned (Sec. 36)

Requisites: 1. The borrower is a director, officer or any stockholder of a bank (and related interests) 2. He contracts a loan or any form of financial accommodation. 3. The loan or accommodation is from: a. his bank , or b. a bank that is a subsidiary of a bank holding company of which both his bank and lending bank are subsidiaries c. a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; 4. The loan or financial accommodation is in excess of 5% of capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is lower. Who are covered (BSP Circular No. 170): 1. Directors – of the lending bank 2. Officers – either identified in the bylaws or are generally know as such 3. Stockholders – those whose stockholdings and/or together with any of the following persons, amount to 2% or more of the total subscribed capital stock of the bank; a. His spouse or relative within the first degree of affinity/consanguinity or relative by legal adoption, partnership, wherein any of the foregoing is a general partner; b. A co-owner with the stockholder or the stockholder’s spouse or relative mentioned above of property/right/interest (mortgaged, pledged, or assigned to secure the loan or credit accommodations, except when the mortgage, pledge or assignment covers only said coowner’s undivided interest). 4. Related interests a. Spouse, relatives within the first degree of consanguinity of a DOS, partnerships of which a DOS or any of the foregoing is a general partner; b. Co-owner with the DOS or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property/interest/right mortgaged, pledged, assigned to secure the 116

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c.

loans or credit accommodations, except when the mortgage, pledge or assignment covers only said coowner’s undivided interest. Corporation with inter-locking directors or 20% of the capital stock is owned by the DOS and/or their spouses or relative mentioned above, or wholly or majority owned or controlled by any related entities in items (b), (d), and (e).

A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices. (Sec. 39) The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. Requirement for Grant of Loans: Before granting a loan, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. 1. A bank may demand from its applicants a statement of their assets and liabilities and of their income and expenditures and other information. 2. Should such statements prove to be false or incorrect, the bank may terminate any loan granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of obligation. (Sec. 40) Restrictions under the GBL and NCBA: a. No director or officer of any bank shall, directly or indirectly, borrow from such bank nor shall be guarantor, endorser or surety for loans from such bank to others, or in any manner be obligor or incur any contractual liability to the bank, except with the written approval of the majority of all the directors of the bank, excluding the director concerned. The written approval shall not be required for loans granted to officers under a fringe benefit plan approved by the Bangko Sentral. b. Dealings of a bank with any of its DORSI shall be upon terms not less favorable to the bank than those offered to others. (ARMS LENGTH RULE) c. Loans extended to DORSI shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank. Except : i. Loans, credit accommodations, and guarantees secured by assets considerd as non-risk by the Monetary Board. ii. Loans, credit accommodations, and advances to officers in the form of fringe benefits. iii. Cooperative bank with regard to its cooperative shareholders.

Principles Involved:  Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others;  After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act;  DOSRI account shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank. Provided:  That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit That loans, credit accommodations and advances to officers in the form of fringe benefits granted shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders.

Note: Stockholdings of individuals related to each other within the 4th degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. Grant and Purpose of Loans and Other Credit Accomodations

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d.

The resolution approving the loan shall be entered in the records of the bank and transmitted to the BSP. e. Waiver of secrecy of deposits of whatever nature in all banks in the Philippines by the borrower. No waiver is required if the related interests are the borrower. f. Information obtained form examination are strictly confidential. Other Functions a. Receive in custody funds, documents and valuable objects; b. Act as financial agent and buy and sell, by order of and for the account of their customer, shares, evidences of indebtedness and types of securities; c. Make collection and payments for the account of others and perform such other services for their customer as are not incompatible with banking business; d. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/ advisory/consultancy accounts; and e. Rent out safety deposit boxes. Note: The bank shall act as depositary or as an agent shall keep the funds, securities and other effects which it receives duly separated from its own assets and liabilities. (Sec. 53) Prohibitions: 1. Prohition to act as insurer - A bank shall not directly engage in insurance business as the insurer. (Sec. 54) 2. Prohibited transactions by bank officials - No director, officer, employee, or agent of any bank shall a. Make false entries in any bank report or statement or participate in any fraudulent transaction; b. Without order of a court of component jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; c. Accept gifts or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; d. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or e. Outsource inherent banking functions. 3. Prohibited acts by borrower - No borrower of a bank shall a. Fraudulently overvalue property offered as security for a loan from the bank; 118

b. Make misrepresentations for the purpose of obtaining, renewing, or increasing a loan or extending the period thereof; c. Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or d. Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. 3. Prohibited acts by BSP officers - No examiner, officer or employee of the Bangko Sentral or any department, bureau, office, branch or agency of the Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall make false reports or suppress material facts. 4. No bank shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits. (Sec. 55) 5. Conducting Business in an Unsafe or Unsound Manner - In determining whether a particular act or omission, which is not otherwise prohibited by any law, rule or regulation affecting banks, quasi-banks or trust entities, may be deemed as conducting business in an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances:  The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, liquidity or solvency of the institution;  The act or omission has resulted or may result in material loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the public in general;  The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the bank or any party in the discharge by the director or officer of his duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or

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The act or omission involves entering into any contract or transaction manifestly and grossly disadvantageous to the bank, quasibank or trust entity, whether or not the director or officer profited or will profit thereby

Declaration of Policy - The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharege of its mandated responsibilities concerning money, banking and credit. Bangko Sentral - a government-owned corporation established as an independent central monetary authority Responsibility and Primary Objective 1. Provide policy directions in the areas of money, banking, and credit 2. Supervise the operations of banks and exercise such regulatory powers over the operations of finance companies and nonbank financial institutions performing quasibanking functions. Powers and Functions: 1. Issuer of Currency (Sec. 50) 2. Custodian of Reserves (Sec. 94) 3. Clearing Channel or House - especially where the PCHC does not operate 4. Banker of the Government - the BSP shall be the official depository of the Government and shall represent it in all monetary fund dealings. (Secs. 110 and 111) 5. Financial Advisor of the Government (Sec. 123) Under Article VII, Sec. 20 of the 1987 Constitution, the President may contract or guarantee foreign loans but with the prior concurrence of the Monetary Board. 6. Source of Credit (Sec. 81) 7. Supervisor of the Banking System (Sec. 25) Shall include the power to: a. Examine – extends to enterprises wholly or majority-owned or controlled by the bank. (Sec. 7, RA 8791); this power may not be restrained by a writ of injunction unless there is convincing proof that the action of the BSP is plainly arbitrary. (Sec. 25) b. Place a bank under receivership or liquidation (Sec. 30) c. Initiate criminal prosecution of erring officers of banks.

Whenever a bank, quasi-bank or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may, without prejudice to the administrative sanctions provided in Section 37 of the New Central Bank Act, take action under Section 30 of the same Act and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. 6. Prohibition on dividend declaration – No bank or quasi-bank shall declare dividends, if at the time of declaration: a. Its clearing account with the Bangko Sentral is overdrawn; b. It is deficient in the required liquidity floor for government deposits for 5 or more consecutive days; c. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; d. It has committed a major violation as may be determined by the Bangko Sentral. Foreign Banks  The entry of foreign banks in the Philippines through the establishment of branches shall be governed by the provisions of the Foreign Bank Liberalization Act.  The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank if it finds that the foreign bank is insolvent or in imminent danger thereof or that its continuance in business will involve probable loss to those transacting business with it. Trust Operations • Only a stock corporation or a person duly authorized by the Monetary Board shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behalf of others. V. THE NEW CENTRAL BANK ACT (R.A. No. 7653)

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Monetary Board The powers and functions of BSP are exercised by the Monetary Board, composed of 7 members appointed by the President of the Philippines for a term of 6 years: 1. The governor as Chairman 2. A member of the Cabinet designated by the President 3. 5 members who shall come from the private sector, all of whom shall serve full-time; No member of the Monetary Board may be reappointed more than once. Qualifications of Members of the Monetary Board: 1. must be natural-born citizens of the Philippines, 2. at least 35 years of age, with the exception of the Governor who should at least be 40 years of age, 3. of good moral character, of unquestionable integrity, of known probity and patriotism, and 4. with recognized competence in social and economic disciplines. Disqualifications and Inhibition on Governor and Board Members: 1. disqualified from being a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of office (Sec. 9); 2. those coming from the private sector shall not hold any other public office or public employment during their tenure (Sec. 9); 3. cannot be connected directly with any multilateral banking or financial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment (Sec. 9); 4. cannot be employed in any such institution within two (2) years after the expiration of his term except when he serves as an official representative of the Philippine Government to such institution (Sec. 9); 5. the Governor of the Bangko Sentral and the full-time members of the Board shall limit their professional activities to those pertaining directly to their positions with the Bangko Sentral. Accordingly, they may not accept any other employment, whether public or private, remunerated

or ad honorem, with the exception of positions in eleemosynary, civic, cultural or religious organizations or whenever, by designation of the President, the Governor or the full-time member is tasked to represent the interest of the Government or other government agencies in matters connected with or affecting the economy or the financial system of the country (Sec. 20); 6. in case any member of the Monetary Board with personal or pecuniary interest in any matter in the agenda of the Monetary Board shall disclose his interest to the Board and shall retire from the meeting when the matter is taken up (Sec. 14). Supervision and Examination of Banks  The BSP shall have supervision over, and conduct periodic or special examinations of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities.  Subsidiary – a corporation more than 50% of the voting stock of which is owned by a bank or quasi-bank  Affiliate – a corporation the voting stock of which, to the extent of 50% or less, is owned by a bank or quasi-bank or which is related or linked to such institution or intermediary through common stockholders or other factors determined by the Monetary Board.  No Restraining Order against BSP No restraining order or injunction shall be issued by the court enjoining the Bangko Sentral from examining any institution subject to supervision or examination by the Bangko Sentral, unless there is convincing proof that the action of the Bangko Sentral is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of the Bangko Sentral, in an amount to be fixed by the court. Refusal to Make Reports or Permit Examination. - Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or examination by the Bangko Sentral who, being required in writing by the Monetary Board or by the head of the supervising and examining department willfully refuses to file the required report or permit any lawful examination into the affairs of such

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institution shall be punished under the Act. (Sec. 34) False Statement. - The willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral shall be punished. (Sec. 35)

Such power to revoke cannot extend to post facto repudiation of perfected transactions, otherwise they would infringe against the nonimpairment clause of the Constitution. Sec. 28A gives the conservator power to revoke contracts that are deemed defective – i.e., void, voidable, unenforceable or rescissible. (First Phil. Int’l Bank v. CA, 252 SCRA 259) Duration – Period not exceeding one year When conservatorship terminated: 1. When the Monetary Board is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary; 2. But if the continuance in business of the bank would involve probable loss to its depositors or creditors, proceedings for receivership and liquidation shall be pursued (Sec. 29). Receivership: Whenever the Monetary Board finds that a bank or quasi-bank: 1. is unable to pay its liabilities as they become due in the ordinary course of business. But shall not include inability to pay cause by extraordinary demands induced by financial panic in the banking community; 2. has insufficient realizable assets to meet its liabilities; 3. cannot continue business without involving probable losses to its depositors or creditors; or 4. has willfully violated a cease and desist order involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. Note: The designation of a conservator is not a precondition to the designation of a receiver. Liquidation - If the receiver determines that the bank cannot be rehabilitated: 1. He shall file ex parte, with the proper RTC, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. 2. He shall convert the assets of the institution to money for the purpose of paying the debts of the institution. (Sec. 30) Effect of appointment of receiver / liquidation on creditor’s claims: The assets under 121

Prohibitions on Bank Officers, Directors, Lawyers, Agents Personnel of the Bangko Sentral are hereby prohibited from: 1. being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral; Exception: non-stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in this Act; 2. directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; 3. revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, information relating to the condition or business of any institution; 4. borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board. (Sec. 27) Conservatorship Whenever the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a conservator to: a. Take charge of the assets, liabilities, and the management thereof; b. Reorganize the management; c. Collect all monies and debts due said bank; and d. Exercise all powers necessary to restore its viability, with the power to overrule or rebuke the actions of the previous management and board of directors of the bank or quasi-bank.

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receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall be exempt from garnishment, levy, attachment or execution (Sec. 30). Close Now and Hear Later Scheme Sec. 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of a subsequent judicial review. The purpose of the scheme is to protect the depositors, creditors, stockholders and general public (Central Bank v. CA, 220 SCRA 536). Legal Tender – all notes and coins issued by the Bangko Sentral and fully guaranteed by the Government. Note: Coins shall be legal tender in amounts: a. Not exceeding P50.00 - 25 centavos or above b. Not exceeding P20.00 - 10 centavos or less.  The BSP may call in for replacement notes for any series or denomination which are more than 5 years old and coins which are more than 10 years old.  Notes and coins called in for replacement shall remain legal tender for a period of one year from the date of call. After that period, they shall cease to be legal tender during the following year or for such longer period as MB may determine. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of BSP and shall be demonetized (Sec. 57). Demand Deposits – all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. (Sec. 58) Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor. However, a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. 3 Important Tools to Achieve Price Stability: 1. Loans to Banks (Sec. 83) - If BSP wants to increase money supply, it opens rediscount window

If BSP wants to decrease money supply, it closes rediscount window or charges very high interest rates for rediscounted notes 2. Open Market Operations (Sec. 90) - If BSP wants to increase money supply, it buys government securities - If BSP wants to decrease money supply, it sells government securities 3. Reserve Requirements - The required reserves of each bank shall be proportional to the volume of its deposit liabilities Since the required reserves are imposed primarily to control the volume of money, the Bangko Sentral shall not pay interests thereon. Deposits maintained with the Bangko Sentral as part of the reserve requirements shall be exempt from attachment, garnishment, or any other order or process of any court or agency. Prohibitions on the BSP: 1. The BSP shall not acquire shares of any kind or accept them as collateral, and shall not participate in the ownership or management of any enterprise, either directly or indirectly; and 2. It shall not engage in development banking and financing. (Sec. 128) V. OTHER RELATED LAWS (See notes on Anti-Money Laundering Act and Truth in Lending Act under SPECIAL LAWS) A. SECRECY OF BANK DEPOSITS LAW (R.A. No. 1405) (1995, 1996, 1997, 1998, 2000, 2001, 2005, 2005, 2006 Bar Exams) Purpose: to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country (Sec. 1) Acts prohibited: 1. the examination and inquiry or looking into 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) by any person, government official, bureau or office. 2. the disclosure by any official or employee of any bank to any unauthorized person of any information concerning the said deposits. 122

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General Rule: All deposits of whatever nature with banks or banking institutions in the Philippines are considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office. Exceptions: 1. upon written permission of the depositor; 2. in cases of impeachment; 3. upon order of a competent court in cases of bribery or dereliction of duty of public officials; 4. In cases where the money deposited or invested is the subject matter of the litigation; 5. upon order of the court in cases of unexplained wealth under Section 8 of the Anti-Graft and Corrupt Practices Act (PNB vs Gancayco 15 SCRA 91) 6. upon order of the Commissioner of Internal Revenue in respect of the bank deposits of a decedent for the purpose of determining such decedent’s gross estate (Sec. 6[F][1], NIRC) 7. upon order of the Commissioner of Internal Revenue in respect of the bank deposits of a taxpayer who has filed an application for compromise of his tax liability under Section 204(A)(2) of the NIRC by reason of financial incapacity to pay his tax liability (Sec. 6[F][2], NIRC) 8. upon order of the court in cases filed by the Ombudsman and upon the latter’s authority to examine and have access to bank accounts and records (Marquez, et al. vs Desierto, et al., GR No. 135882 in relation to Sec. 15[8], RA 6770) 9. disclosure of the Treasurer of the Philippines for dormant deposits for at least 10 years under the Unclaimed Balances Act (Sec. 2, RA 3936) 10. without need of a court order if the AntiMoney Laundering Council determines that a particular deposit or investment with any banking institution is related to any one of the following unlawful activities: a. kidnapping for ransom under Article 267 of the Revised Penal Code, as amended b. violations of sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of the Comprehensive Dangerous Act of 2002 (RA 9165) c. hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated

by terrorists against non-combatant persons and similar targets 11. upon order o the court, if the AMLC determines that a particular deposit or investment with any banking institution is related to any one of the unlawful activities under Section 3 (i), except those refereed to in Section(i)[1], [2] and [12] of RA 9160 or a money laundering offense under Section 4. 12. inquiry into or examination of any deposit or investment with any banking institution when the examination is made by the Bangko Sentral ng Pilipinas to insure compliance with the Anti-Money Laundering Law in the course of a periodic or special examination in accordance with the rules of examination of the BSP (Sec. 11, RA 9160; see also Sec. 4, RA 8791) Impeachment • In impeachment proceedings, the impeachment court may inquire into bank deposits. Thus, during the impeachment proceedings against former President Estrada, Chief Justice Davide ruled that Clarissa Ocampo could testify on the Jose Estrada/Jaime Dichaves accounts maintained with Equitable PCIB Bank, over the objections of the defense that this would violate the Bank Secrecy Law. Basis for this ruling was that the inquiry would be made in the course of an impeachment proceeding.

Written Permission of Depositor • A bank may allow an inquiry into a deposit with the written consent of the depositor. An oral or implied authorization does not suffice. This consent may be given voluntarily. In some cases, however, the consent is involuntary because the law requires it. Thus, Section 26 of the New Central Bank Act as implemented by BSP Circular No. 170, series of 1998, requires a director, officer or stockholder of a bank or their related interests to submit a written waiver of the secrecy of all his deposits of whatever nature in all banks of the Philippines in favor of the Banko Sentral, if he applies for a DOSRI loan. However, the information obtained from the examination remains confidential and may be used by BSP examiners only in legal

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action it may initiate involving the said deposits. • A waiver of the Bank Secrecy Law is also required in case of loans secured by a hold-out or an assignment of certificates of time deposits. (Section X315, Manual of Regulations for Banks). Where Funds Deposited are Subject of Litigation • In a case where Sun Life brought a collection case to recover the proceeds of a check it had issued, the insurance company wanted to determine how the defendant had applied the proceeds of the check. The trial court allowed Sun Life to examine pertinent records of the bank in which the check was deposited. The Supreme Court held that the examination was authorized by Section 10 of Rule 57, on the examination of a person whose property has been attached and person indebted to him or controlling his property. The Court struck down the argument that the examination would violate the Bank Secrecy Law, explaining that the examination fell within the exception “in cases where the money deposited or invested is the subject matter of litigation.” The Court added that the examination of bank records was not a fishing expedition, but rather a method by which Sun Life could trace the proceeds of the check that it paid to the petitioners. (Onate v Hon Zeus Abrogar, 230 SCRA 181(1994). • In another case, Mellon Bank remitted $1 million rather that an intended $1,000 to the recipient, who deposited part of the remittance in a local bank. When personnel of the depositary bank testified on the bank deposits, the defense moved to strike out the testimonies of the depositary bank’s witnesses. The Supreme Court allowed their testimonies to remain on the record, stating Section 2 of said law allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the litigation. (Mellon Bank v. Magsino, 190 SCRA 633.

Graft Law among the exceptions, the Supreme Court held that they should be included. The only conclusion possible is that Section 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing an additional exception to the rule against disclosure of band deposits.” (PNB v. Gancayco, 15 SCRA 91 (1965).

This overturned an earlier case decided by the High Court where it held that a prosecution under the Anti-Graft Law was not embraced within any of the exceptions to the Bank Secrecy Law that would allow disclosure by a bank of information concerning a deposit. (Tatalon Bario Council v. Bank of PI, 7 SCRA 10 (1963).

In another case, the Supreme Court expanded the exception under the AntiGraft Law, when it allowed an examination not only of the accused’s deposits, but also those of his spouse, ascendant, descendants and relatives, and other persons as well. (Banco Filipino v. Hon. Fidel Purisima, 161 SCRA 576 (1988). Here, the Court declared as proper the production by subpoena duces tecum of bank records of transactions by or in the names of the wife, children and friends of a special agent of the Bureau of customs accused of having allegedly acquired property manifestly out of proportion to his salary and lawful income. The Court explained: • To sustain the petitioner’s theory, and restrict the inquiry only to property held by or in the name of the government official or employee, or his spouse and unmarried children, is unwarranted in the light of the provisions of the statutes in question, and would make available to persons in government who illegally acquire property an easy and fool-proof means of evading investigation and prosecution; all they would have to do would be to simply place the property in the possession or name of persons other than their spouse and unmarried children. This is an absurdity that we will not ascribe to the lawmakers. Although Section 8 of the law that created the Office of the Ombudsman expressly granted the

Unexplained Wealth (RA3019)

Upon Order of the Ombudsman

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Ombudsman the power to “administer oaths, issue subpoena and subpoena duces tecum and take testimony in any investigation or inquiry, including the power to examine and have access to bank accounts and records,” the Supreme court held that the Ombudsman could not inquire into bank deposits until there was a pending case in court involving the deposits. (Marquez v. Desierto, 359 SCRA 772 (2001)  Unclaimed Balances Law

Court of Appeals, 93 SCRA 452 (1991). Confidentiality under General Banking Law • Section 55.1(b) of Republic Act No. 8791, better known as the General Banking Law, contains a provision that extends the confidentiality of bank transactions beyond deposits. The provision reads: (b) Without order of a court of competent jurisdiction, disclose to any authorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; Provided, That with respect to bank deposits, the provisions of existing laws shall prevail. Considered confidential under this provision are transactions not covered by the Bank Secrecy Law. These would include, among others, safety deposit boxes, trust accounts and money market placements.  Note that the exception expressly set forth in the Bank Secrecy Law, do not apply to the confidential transactions covered by the General Banking Law. These confidential transactions, however, are within the ambit of the AntiMoney Laundering Act.

The Unclaimed Balances Law (Republic Act No. 3936) requires each bank to file a sworn statement with the Treasurer of the Philippines stating the deposits that the bank holds in the names of persons known to be dead or who have not made deposits or withdrawals during the preceding ten years or more. It is also requires the bank to post a copy of the sworn statement in the bank premises. However, this is done only after the bank shall have first communicated with the depositor at his last known residence or post office address. Such a disclosure of the deposits and the depositors, does not violate the Bank Secrecy Law. In China Banking Corporation v. Court of Appeals, (193 SCRA 452 (1991) the Supreme Court held that the garnishment of a bank deposit does not violate the Bank Secrecy Law. Said the court: “It is clear from the discussion of the conference committee report on x x x Republic Act. No. 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act No. 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed, there is no real inquiry in such a case, and if the existence of the deposit is disclosed, the disclosure to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.”(Phil. Commercial & International Bank v.

Garnishment of Bank Deposit

Foreign Currency Deposit Act • The secrecy afforded foreign currency deposits is greater that that granted to peso deposits. For Section 8 of Republic Act No. 6426 provides: Sec. 8. Secrecy of foreign currency deposits. - All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall such foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any

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other entity whether public or private: Provided however, That said foreign garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. The FCDU Act allows only one exception, and that is upon the written permission of the depositor. However, the Anti-Money Laundering Act added at least one more exception: upon order of a court of competent jurisdiction for violations of the Act, when it has been established that there is probable cause that the deposits involved are in any way related to a money laundering offense. In addition, the Unclaimed Balances Law also constitutes an exception to the FCDU Act. A. Foreign Currency Deposit Act (RA No. 6426)

2. To direct the management, operations and administration of the PDIC 3. To establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion or dismissal of all personnel 4. To appoint, establish the rank, fix the remuneration, approve local and foreign training of, and remove any officer or employee of the PDIC, for cause, subject to pertinent civil service laws 5. To adopt an annual budget for, and authorize such expenditures by the PDIC 6. To approve the methodology for determining the level and amount of provisioning for insurance and financial assistance losses, which shall establish reasonable levels of deposit insurance reserves. Main functions of the PDIC: 1. Risk Management:  deals with the insurance assessment and premium collection from member banks.  monitors the health of member banks, examines and identifies “risk” areas in banks, or their weaknesses.  institutes corrective measures to prevent closures thru bank rehabilitation and provides financial assistance to distressed banks and assists in the reopening of closed banks, provided all PDIC requirements are met. 2. Claims, Receivership and Liquidation.  claims refers to the settlement of claims for insured deposits  receivership deals with the takeover and control of all assets, liabilities and affairs of closed banks  liquidation covers the conversion of loans, disposal of fixed assets into cash deposits, and the implementation of final settlement with creditors. Insurance coverage:  The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits, or which thereafter may engage in the business of receiving deposits, shall be insured with the PDIC. Deposit - the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which 126

All foreign currency deposits authorized under the Act are declared as and considered of an absolutely confidential nature and in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office. Except: 1.when there is written consent of depositor under Sec 8 of the Foreign Currency Deposits Act ; 2. upon order of the court (or even without court order in proper cases) when there is probable cause of money laundering as provided for under Sec.11 of the Anti-Money Laundering Act. C. Philippine Deposit Insurance Corporation (RA 3591, as amended by RA 9302) Purpose:  shall insure the deposits of all banks which are entitled to the benefits of insurance under this Act  shall promote and safeguard the interests of the depositing public by providing permanent and continuing insurance coverage on all insured deposits The Board of Directors shall have the authority: 1. To prepare and issue rules and regulations

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is evidenced by passbook, check and/or certificate of deposit.  any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposit  subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch. Extent of liability: not to exceed P250,000 as of the date of the bank’s closure(Sec. 4) Rules:  In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefit either in his own name or in the name of others.  A joint account regardless of whether the conjunction “and,” “or,” “and/or” is used, shall be insured separately from any individually-owned deposit account, provided that 1. If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit, and 2. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity  The aggregate of the interests of each coowner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P250,000.00.  Liability is per bank basis. When liable: Whenever an insured bank shall have been closed by the Monetary Board. Form of payment: payment shall be made as soon as possible either by 1. cash or

2. making available to each depositor a
transferred deposit in another insured bank in an amount equal to insured deposit of such depositor Transfer Deposit - a deposit in an insured bank made available to a depositor by the PDIC as payment of insured deposit of such depositor in a closed bank and assumed by another insured bank.  The PDIC may withhold payment of such portion of the insured deposit of any depositor in a closed bank as may be required to provide for the payment of any liability of such depositor as a stockholder of the closed bank, or of any liability of such depositor to the closed bank or its receiver, which is not offset against a claim due from such bank, pending the determination and payment of such liability by such depositor or any other liable therefor. (Sec. 16) Except as otherwise prescribed by the Board of Directors, neither the PDIC nor such other insured bank shall be required to recognize as the owner of any portion of a deposit appearing on the records of the closed bank under a name other than that of the claimant, any person whose name or interest as such owner is not disclosed on the records of such closed bank as part owner of said deposit, if such recognition would increase the aggregate amount of the insured deposits in such closed bank.

Effect of payment: 1. The PDIC, upon payment of any depositor shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment. Extent: Such subrogation shall include the right on the part of the PDIC to receive the same dividends and payments from the proceeds of the assets of such closed bank and recoveries on account of stockholders’ liability as would have been payable to the depositor on a claim for the insured deposits Limitation: The depositor shall retain his claim for any uninsured portion of his deposit. Nature of payments: All payments by the PDIC of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to 127

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the National Government in the order of preference under Article 2244 of the New Civil Code. 2. Payment of an insured deposit to any person by the PDIC shall discharge the PDIC, and payment of a transferred deposit to any person by the new bank or by an insured bank in which a transferred deposit has been made available shall discharge the PDIC and such new bank or other insured bank, to the same extent that payment to such person by the closed bank would have discharged it from liability for the insured deposit. (Sec. 16) Period to settle claims by PDIC: 6 months from the date of filing of claim for insured deposit. Liability for failure to settle: will subject the directors, officers or employees of the PDIC responsible for the delay to imprisonment upon conviction from 6 months to 1 year, where such failure was due to: a. grave abuse of discretion, b. gross negligence, c. bad faith, or d. malice, the PDIC, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that in any case where the PDIC is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim  the period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency or by the PDIC together with such other office, body or agency. Prescription: Unless otherwise waived by the PDIC, all of the depositor’s rights with respect to the insured deposit shall be barred if the said depositor in the closed bank fails to claim his insured deposits with the PDIC: a. within 2 years from actual takeover, or b. does not enforce his claim within 2 years after the 2-year period to file a claim. Effects:  all rights of the depositor against the PDIC with respect to the insured deposit shall be barred  all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the 

PDIC may have become subrogated, shall thereupon revert to the depositor  the PDIC shall be discharged from any liability on the insured deposit Permanent Insurance Fund  shall be three billion pesos (P3,000,000,000.00) Deposit Insurance Fund  shall be the capital account of the PDIC and shall consist of the ff.: (i) the Permanent Insurance Fund; (ii) assessment collections; (iii) reserves for insurance and financial assistance losses; and (iv) retained earnings D. Unclaimed Balances Law (RA 3936)

Elements of Unclaimed balances: 1. there must be a claim or depost of: (a) money; (b) bullion; (c) security; or (d) other evidence of indebtedness. 2. the credit or deposit must be with a bank, building and loan association, or trust corporation; and 3. the credit or deposit is in favor of a person: (a) who is dead; or (b) who has not made further deposits or withdrawals during the preceding 10 years or more. Note: Demand drafts cannot be escheated but telegraphic notes can be. (Republic v. FNCB) Legal Consequence The unclaimed balances may be subject of escheat proceedings, after proper publication and the depositors still do not lay claim to them. INTELLECTUAL PROPERTY CODE (RA 8293)

INTRODUCTION Laws Specifically Repealed 1. 2. 3. 4. Patent Law-R.A. 165 Trademark Law R.A. 166 Copyright Law PD 49 Articles 188 & 189 RPC

Intellectual Property - Those property rights which result from the physical manifestation of original thought.

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Intellectual Property Rights (Sec. 4) 1. Copyright 2. Related rights or neighboring rights of copyright 3. Patents 4. Mark 5. Geographical Indications 6. Industrial Designs (Topographies) of Integrated Circuits 7. Protection of Undisclosed Information International Law Related Provisions 1. Principle of Reciprocity - (as referring to persons entitled to the benefits of IPC) any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which: 1. is party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition to which the Philippines is also a party, or 2. extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty, or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise entitled by the IPC. 2. Principle of Reverse Reciprocity - Any condition, restriction, limitation, diminution, requirement, penalty or any similar burden imposed by the law of a foreign country on a Philippine national seeking protection of intellectual property rights in that country shall reciprocally be enforceable upon nationals of said country within Philippine jurisdiction. 3. National Treatment Principle - The Philippines, upon becoming a member of the WTO, has adhered to the Trade- Related Aspects of Intellectual Property Rights (TRIPS), which provides that protection afforded to the member-state (with respect to intellectual property) must be extended to the nationals of other member-states. 4. Most Favored Nation Principle - Whatever favor, allowance, consideration, privilege or immunity a member-state grants the nationals of another country is “immediately and unconditionally Jurisdiction over Disputes under the IPC A. Original Jurisdiction 1. Director General - Over disputes relating to the terms of a license involving the author’s right

to public performance or other communication of his work. 2. Bureau of Legal Affairs - Over: a. Opposition to applications for registration of marks; b.Cancellation of trademarks; c. Cancellation of patents, utility models, and industrial designs; d.Petitions for compulsory licensing e.Administrative complaints for violation of laws involving intellectual property rights where the total damages claimed are not less than P200,000.00. The Director of Legal Affairs has the power to punish contempt. 3. Documentation, Information and Technology Transfer Bureau - Over disputes involving technology transfer payments. 4. Regular Courts (Sec. 225) B. Appellate Jurisdiction 1.Director by the: a. b. c. d. General - Over all decision rendered

Director of Legal Affairs Director of Patents Director of Trademarks Director of the Documentation, Information and Technology Transfer. 2. Court of Appeals –Over Decisions of the Director General in the exercise of his appellate jurisdiction over the decisions of the a)Director of Legal affairs, b) Director of Patents, c)Director of Trademarks. 3. Secretary of Trade and Industry a. Over decisions of the Director in the exercise of his appellate jurisdiction over the decisions of the Director of the Documentation, Information and Technology Transfer. b. Over decisions of the Director General in the exercise of his original jurisdiction relating to the terms of license involving the author’s rights. COPYRIGHT (1995, 1997, 1998, 2005, 2006 Bar Exams) Copyright: The right over military and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of creation. Requisites: 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.

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a. The work is an independent creation of the author b. It must not be copied c. It must involve some intellectual effort. 2. Expression There must be fixation. 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.  Strictly speaking, there is no work for copyright purpose, unless there is something tangible.  It is fixation that defines the time from when copyright subsists. Before the time of fixation there can be no infringement. Principles: 1. Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as their content, quality or purpose. 2. The copyright of original literary and artistic works belong to the author of the work. 3. Protection extends only to the expression of the idea, not to the idea itself or to nay procedure, system, method, or operation, concept or principle, discovery, or mere data. 4. The copyright is distinct from the property in the material object subject to it. 5. 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 specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description. Definitions: 1. Author – is the natural person who has created the work. 2. Collective Work – is a work which has been created by two or more natural persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that contributing natural persons will not be identified. 3. Joint Work– is a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole, i.e. medical textbook that is jointly authored by two or three experts. 4. Work of Applied Art – is an artistic creation with utilitarian functions or

incorporated in a useful article, whether made by hand or produced on an industrial scale. 5. Performers – are actors, singers, musicians, dancers, and other persons who act, sing, declaim, play in, interpret, or otherwise perform literary and artistic work. Formalities: Principle of Automatic Protection - No formality is required for the author to be vested with the rights of copyright.  Registration and Deposit with the National Library and the Supreme Court Library of 2 copies of the work within 3 weeks after first public dissemination is only for the purpose of completing the records of these libraries. Failure to do so after formal demand subjects the author to a fine. When Rights over Copyright are conferred From the moment of creation The work is deemed created if something original is expressed in a fixed manner. Who Owns the Copyright: a) ONE CREATOR – creator or his heirs or assigns owns copyright. b) JOINT CREATION – co-authors shall be the original owners of the copyright and in the absence of agreement, their rights shall be governed by the rules on coownership. EXCEPTION: work of joint authorship consists of parts that can be used separately and the author of each part shall be the original owner of the copyright in the part that he has created. c) COMMISSIONED WORK – the person commissioning owns the work; ownership of copyright remains with the creator, unless there is a written stipulation to the contrary. d) AUDIO-VISUAL WORK – producer (for purposes of exhibition); for all other purposes, the producer, the author of the scenario, the composer, the film director, the photographic director and the author of the work are the owners. e) PSEUDONYMOUS and ANONYMOUS WORKSunless the author is undisputably known, the publisher shall be presumed to be the representative of the author. f) EMPLOYEE’S WORK DURING COURSE OF EMPLOYMENT – employer, if it is the result of regular

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g) h)

functions or duties but the employee owns it if it is not part of his duties. COLLECTIVE WORKS – Contributor is deemed to have waived his right, unless he expressly reserves it. LETTERS – Writer. However, the court may authorize their publication or dissemination if the public good or the interest of justice so requires.

BAR QUESTION (Q): May a person have photocopies of some pages of the book of Professor Rosario made without violating the copyright law? SUGGESTED ANSWER (SA): YES. The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, is permitted, without the authorization of the owner of the copyright in the work. BAR Q: BR and CT are noted artists whose paintings are highly prized by collectors. Dr. DL commissioned them to paint a mural at the main lobby of his new hospital for children. Both agreed to collaborate on the project for a total fee of two million pesos to be equally divide between them. It was also agreed that Dr. DL had to provide all the materials for the painting and pay for the wages of technicians and laborers needed for the work on the project. Assume that the project is completed and both Br and CT are fully paid the amount of P2M as artists’ fee by DL. Under the law on intellectual property, who will own the mural? Who will own the copyright in the mural? Why? Explain. SA: Under Section 178.4 of the Intellectual property Code, in case of commissioned work, the creator (in the absence of a written stipulation to the contrary) owns the copyright, but the work itself belongs to the person who commissioned its creation. Accordingly, the mural belongs to DL. However, BR and CT own the copyright since there is no stipulation to the contrary. Duration of Copyright 1. Literary Artistic Works and Derivative Works – during the lifetime of the creator and for fifty years after his death. 2. Joint Creation – the economic rights shall be protected during the life of the last surviving

author and for fifty years after the death of the last surviving author. 3. Anonymous or a pseudonymous work – till the end of fifty years following the date of their first publication. The fifty-year period commences from January 1 following the date of publication. 4. Work of applied art – twenty-five years from the date of making.  An artistic creation with utilitarian functions or incorporated in a useful article, whether made by hand or produced on an industrial scale (Sec. 171.10) 5. Photographic works – fifty years from the publication of the work, or from making if unpublished (the same term is given to audiovisual work produced by photography or analogous processes). 6. Broadcast – twenty years from the date of broadcast. 7.Newspaper Article – Lifetime of the author and 50 years thereafter Copyrightable Objects a) Literary and Artistic Works: 1. Books, pamphlets, articles and other writings 2. Periodicals and newspapers 3. Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form 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 design or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art. 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 131

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13. Pictorial illustrations and advertisements 14. Computer programs 15. other literary, scholarly, scientific and artistic works • The author of speeches, lectures, sermons, addresses, dissertations shall have the exclusive right of making a collection of his works. (Sec. 176.2,IPC) b) Derivative Works: 1. dramatizations, translations, adaptations, abridgements, arrangements, and other alterations of literary or artistic works; and 2. Collection of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents (Sec. 173 IPC) Unprotected Works a. Any idea, procedure, system, method or operation, concept, principle, discovery or mere data as such , even if they are expressed, explained, illustrated or embodied in a work. Thus, the format of a television game show is not subject to a copyright (Joaquin v. Drilon, January 28, 1999, No. 108946). b. News of the day and other miscellaneous facts having the character of mere items of press information.  No protection is given to “news of the day and other miscellaneous facts having the character of mere items of press information.”  A pure news report will no longer find protection under the new law, but a column or published comment will. When newspapers and periodicals include works enjoying independent copyrights, the works so included continue enjoying the rights for duration proper to them. c. Any official text of a legislative, administrative or legal nature, as well as nay official translation. d. Any work of the Government of the Philippines  However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, 132

sermons, addresses and dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in deliberative assemblies and in meetings of public character. (Sec. 175,IPC). e. The tradename and container of a medicated cream is the proper subject of trademark. Hence, copyright and patent registration of the name and container would not guarantee the registrant the right to the exclusive use of the same, not being the proper subjects thereof. (Kho v. CA, No. 115758, March 19, 2002). f. In the same manner, copyright registration of a drawing or pictorial illustration which depicts light boxes or box-type electrical devices protects the drawing but no the light box depicted therein (Pearl and Dean {Phil.}v Shoemart, Inc, No. 148222, August 15, 2003) Rights of Authors a) Economic Rights b) Moral Rights c) Right to participate in the gross proceeds of the sale or lease of the original work or DROIT DE SUITE. Publisher’s Rights a. The right to publish granted by the author, his heirs, or assigns; b) copyright consisting merely of the right of reproduction of the typographical arrangement of the published edition of the work. b. if submitted to newspaper, magazine and the like, the right to publish once materials sent by a writer, a photographer, an artist to a periodical or newspaper publisher, but such writer or artist retains his copyright on the piece. Limitations to the Rights of Copyright: 1. General Limitations (Sec. 184) 2. Fair use 3. In the case of a work of architecture, the right to control the reconstruction or rehabilitation in the same style as the original of the building. 4. Private reproduction of published work in a single copy by a natural person for research and private study. 5. Reprographic reproduction in a single copy by non-profit libraries, under certain circumstances. 6. Reproduction under certain circumstances, of a computer program in one back-up copy by the lawful owner of the program.

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7. Importation for personal purposes under certain conditions. Acts that do not infringe copyright 1. work: Recitation or performance of a

a. made accessible to the public b. privately done c. free of charge d. strictly for a charitable or religious institution 2. Making of quotations from a published work: a. compatible with fair use b. extent is justified by the purpose c. source and name of the author, appearing on work, must be mentioned 3. Reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works, delivered in public: a. for information purposes b. not expressly reserved c. source is already indicated 4. 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. 5. Inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film if made by way of illustration for teaching purposes compatible with fair use and the source and name of the author, appearing on work, must be mentioned. 6. Recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of such schools, universities or educational institutions. Such recording must be deleted within a reasonable period; such recording may not be made from audio-visual works which are part of the general cinema repertoire of feature films except for brief excerpts of the work. 7. Making of ephemeral recordings: a. by a broadcasting organization b. by means of its own facilities c. for use in its own broadcast 8. Use made of a work by or under the direction or control of the Government for public interest compatible with fairs use. 9. Public performance or the communication to the public of a work in a place where no admission fee is charged by a club on institution for charitable or educational purpose only and the aim is not profit-making

10. 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, sold, given away, or transferred to another person by the author or his successors in title 11. Any use made of a work for the purpose of any judicial proceedings; or for the giving of professional advice by a legal practitioner 12. Single copy reproduction of a published work by natural person exclusively for research and private study (even without authorization of owner).
13. Reproduction by libraries of:

a. b. works c. d. e.

fragile works isolated articles in composite brief portions of published work to preserve or replace copy

14. One back-up copy of computer program Fair Use  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. a) Factors to consider to determine whether use is fair or not: (P-A-N-E) 1. Purpose and the character of the use 2. Nature of the copyrighted work 3. Amount and substantially of the portion used 4. Effect of the use upon the potential market of the copyrighted work. Importation for Personal Purposes  The importation of a copy of a work by an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances: a) Copies of the work are not available in the Philippines, and: 1. One copy at one time is imported, but strictly for individual use only 2. By authority of and for the use of the Philippine Government

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For the use of religious, Charitable or educational Society or institution if not more than three copies per title provided they are not for sale. b) Copies form parts of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, That such copies do not exceed three Infringement  Any violation of the owner’s exclusive rights conferred by law. (Justice Vitug, Pandect of Commercial Law, 1997 ed.)  An appropriation of a copyrighted work buy another who is not authorized.  Copying alone is not what is prohibited. The copying must produce injurious effect. The author’s work is the product of his long and assiduous research and for another to represent it, as one’s own is injury enough. (Habana vs. Robles)  It is not necessary that the whole or even a large portion of the work shall have been copied. If so much is taken that the value of the original is sensibly diminished, or the labors of the original author are substantially and to an injurious extent appropriated by another, that is sufficient in point if law to constitute piracy. (Columbia Pictures vs. CA) a) How Made – when there is piracy or substantial reproduction. If so much is taken that the value of the original author are substantially and to an injurious extent appropriated by another (Habana v. Robles, No. 131522, July 19, 1999) b) Remedies Judicial
a. Injunction to prevent infringement b. Action for damages which should be filed within four years. Damages are assessed on the basis of the proof alleged by the plaintiff of sales made by the defendant of the infringing work minus whatever costs the defendant may be able to prove and appreciated by the court. c. Criminal case. The infringer also exposes himself to criminal liability wherein the law prescribes penalties of imprisonment and fines, including subsidiary imprisonment in case of insolvency.

3.

d. Seizure infringing materials evidence Administrative: 1. action 2. order 3. paraphernalia used offense 4. fines

and impounding of for the purpose of administrative cease and desist forfeiture of in committing the administrative

BAR Q. Juan Xavier wrote and published a story similar to an unpublished copyrighted story of Manoling Santiago. It was, however, conclusively proven that Juan Xavier was not aware that the story of Manoling Santiago was protected by copyright. Manoling Santiago sued Juan Xavier for infringement of copyright. Is Juan Xavier liable? SA: YES. Juan Xavier is liable for infringement of copyright. It is not necessary that Juan Xavier is aware that the story of Manoling Santiago was protected by copyright. The work of Manoling Santiago wais protected from the time of its creation. Plagiarism - The act of appropriating the literary composition of another, or parts or passages of his writings, or the ideas or language of the same and passing them off as the product of one’s mind. (Estela vs. Santiago) - The incorporation in one’s own work that of another without the proper acknowledgment thereof. BAR Q. In an action for damages on account of an infringement of a copyright, the defendant (the alleged pirate) raised the defense that he was unaware that what he had copied was a copyright material. Would this defense be valid? SA: No. An intention to pirate is not an element of infringement. Hence, an honest intention is no defense to an action for infringement. ALTERNATIVE ANSWER: YES. The owner of the copyright must make others aware that the material in question is under or covered by a copyright This is done by the giving of such notice at a prominent portion of the copyright material. When the alleged pirate is thus made aware thereof; his 134

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act of pirating the copy material will constitute infringement. TRADEMARKS (1996, 2005 Bar Exams) Trademark – any visible sign capable of distinguishing the goods or services of an enterprise and shall include a stamped or marked container of goods. In relation thereto, a trade name means the name or designation identifying or distinguishing an enterprise. (Kho v. CA, No. 115758, March 11, 2002). Thus, the basic requirements are: 1. There must be a visible sign. 2. It must be capable of distinguishing the goods of an enterprise. Collective Mark – any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark. There is no need to register trade names in order to secure protection for them. Functions: a. To indicate the origin of the goods to which they are attached b. To guarantee the standard of quality of the goods b. To advertise the goods (Mirpuri v. CA, 318 SCRA 516, 1999) How Marks are Acquired 1) The rights in a mark shall be acquired through registration with the Intellectual Property Office or IPO. 1. Registration is necessary before one can file an action for infringement 2. Actual use a. Prior use in the Philippines is not required before registration b. However, there must be actual use after registration. The registrant shall file a declaration of actual use of the mark with evidence to that effect within 3 years from the filing date of application otherwise it may be cancelled. (Secs. 142.2 and 151(c), IPC) The registrant is required to file a declaration of actual use and evidence to that effect, or shall show valid reasons for non-use within one year from the fifth anniversary date of registration. c. It is also provided that a certificate of registration of a mark

shall be prima facie evidence of the validity of the registration, the registrant’s ownership of the mark, and of the registrant’s exclusive right to use the same. This means that registrant’s right may be questioned by a person who has a better right, including a prior actual user. This also includes persons with internationally known marks. d. Registration is also not important to protect the goodwill that identifies in the mind of the public the goods he manufactures or deals in. e. Registration of a mark is not necessary for purposes of filing a case for unfair competition or false designation of origin (Secs. 168.2 and 169,IPC). Unfair competition is present when:1) there is passing of a product format of another;2) giving goods or service the appearance of goods of another. 2) When the law states the right is acquired from the time of registration, it is acquired form the time of registration, it is actually referring to the filing date of application. 1. the filing date of an application shall be the date on which the IPO received the following indications and elements: i. express or implicit indication that the registration of the mark is sought ii. identity of the applicant iii. indications sufficient to contact the applicant or his representative iv. reproduction of the mark v. list of goods or services for which registration is sought. 2. However, the right may also be protected from the priority date. Subject to the rules on reciprocity, where the application is filed in the Philippines and the same applicant previously filed an application in the countries covered by the reciprocity rule under Sec. 3 of the IPC, the application is deemed filed as of the day the application was first filed as of the day the application was first filed in the foreign country. However, there will be no registration in the Philippines until registered in such foreign country.  Ownership of a mark or trade name may be acquired not necessarily by registration but by adoption and use in trade or commerce. As between actual use of a mark without registration, and registration of the mark without actual use thereof, the former prevails over the latter. For a rule widely accepted and 135

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firmly entrenched, because it has come down through the years, is that actual use in commerce or business is a prerequisite to the acquisition of the right of ownership.  While the present law on trademarks has dispensed with the requirement of prior actual use at the time of registration, the law in force at the time of registration must be applied (R.A. No. 166), and thereunder it was held that as a condition precedent to registration of trademark, trade name or service mark, the same must have been in actual use in the Philippines before the filing of application for registration. (Shangrila Intl Hotel Management v. Developers Group of Companies, March 31, 2006,G.R. No. 159938) What may become tradenames or marksGenerally, a word, name, symbol, emblem, sign, device, figure or any combination thereof, which may not validly monopolized and registered as mark or trade name because of some defects, as provided in Sec. 123 of R.A. 8293 may after such defects are removed, be appropriated and registered as a mark or trade name. What marks or tradenames cannot be protected as such: 1. 1.Those which consist exclusively of sign or indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services. 2. Those which consist of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value 3. Those which consist of colors alone. 4. a descriptive or common term or symbol Note: the abovementioned can still be registered when: 1. They acquire a secondary meaning Doctrine of Secondary Meaning - A word, phrase, design or device originally incapable of exclusive appropriation with reference to an article in the market because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word, phrase, sign or device has come to mean that the article is his product.

2. Mark is used arbitrarily – a generic, descriptive or common term may be registered if used in arbitrary or fanciful manner and with no relation to the product it identifies. - a geographical name may be registered if it is used in an arbitrary, artificial or fictitious sense merely to indicate ownership, independent of location or place of manufacture and for a product not manufactured in the geographical place. 3. Descriptive word is used as a part of coined mark. 4. Descriptive word is used as part of composite mark. Composite Mark – is a mark consisting of two or more elements or a combination of words, phrases or words and designs or symbols or color schemes. Marks that Cannot be Registered: 1. Immoral, deceptive, or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; 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 nay simulation thereof; 3. Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if many, except by written consent of the widow; 4. Identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: a. the same goods or services b. closely related goods or services c. if it nearly resembles such a mark as to be likely to deceive or cause confusion; 5. Generic terms for goods or services; 6. Characteristics of goods like quality or quantity; 7. Customary sign in everyday language; 8. Color by itself. Internationally Well-Known Marks a. question 136 the mark The persons who may (that is, oppose

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registration, petition for the cancellation thereof, sue for unfair competition) include persons whose internationally well-known mark, whether or not registered, is identical with or confusingly similar to or constitutes a translation of a mark that is sought to be registered or is actually registered. b. There is also protection for internationally known marks registered in the Philippines for goods that are not similar with respect to which registration is applied for. Rights Conferred 1. The right to the exclusive use of the mark for one’s own goods or services . 2. The right to prevent others from the use of the same mark for identical goods or services in the course of trade. 3. The right to the exclusive use of one’s already registered mark even for goods or services into which one’s venture expands, if used by others for dissimilar products is likely to damage the business interest of the first venturer (Sec. 147, IPC). Duration – Ten years subject to indefinite renewal for periods of ten year each. Confusion of Trademarks: The term confusing similarity refers to such resemblance between a mark or trade name of a person and that of another as to likely when applied to or used on their respective goods, business or services cause confusion or mistake on the part of the purchasers as to the goods or services themselves or as to their source or origin. The result of confusion is damage or prejudice on the part of the owner of the senior mark or trade name as well as on the part of the buying public. TWO TYPES OF CONFUSION OF MARKS OR TRADE NAMES: 1.Confusion of Goods or Services- a person’s goods or services are purchased as those of another person, and the proper quality of the former reflects adversely on the latter’s reputation. The confusing similar marks or trade names are used on the same kind of products or services. 2. Confusion of Business or Origin- exist when one party’s product or service though different from that of another, is such as might

reasonably be assumed to originate from the latter and the public would then be deceived into the belief that there is some connection or business association between the parties which in fact is absent. Confusion of Goods: The product or service of one is identical or similar to that of the other. Colorable Imitation Refers to such similarity in form, content, words, sound, meaning, special arrangement or general appearance of the mark or trade name with that of the other mark or trade name in their over-all presentation or in their essential, substantive and distinctive parts as would likely mislead or confuse persons in the ordinary course of purchasing the genuine article. Infringement  How Committed: 1. If a person, without the owner’s consent, use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake or to deceive. (Sec. 155.1,IPC) 2. If a person, without the owner’s consent, reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive (Sec. 155.2,IPC).  While an administrative cancellation of a registered trademark on any of the grounds under Sec. 17 of R.A. No. 166, is within the ambit of the BPTTT, an action for infringement or any other incidental remedy sought is within the jurisdiction of the ordinary courts.  An action for infringement or unfair competition, including the available remedies of injunction & damages in the regular courts can proceed independently or simultaneously with an action for the administrative cancellation of a registered trademark in the BPTTT. 137

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(Levi Strauss vs. Vogue Traders Clothing Company, June 29, 2005, G.R. No. 132993)  Use of trademark by a person for a product in which the other party does not deal, the use of the same trademark cannot be objected to, it will only be prohibited if the goods are related, that is, they belong to the same class or have the same descriptive properties (Canon Kabushi Kaisha v CA, 336 SCRA 266, 2000). Thus, a trademark certificate that covers stationeries such as letterheads, envelopes, calling cards and newsletters does not cover light boxes or electrically operated backlit advertising units.(Pearl & dean Phil. V Shoemart, Inc., et al. No 148222, August 15, 2003)  Tests in Determining if there is colorable imitation 1. Test of Dominancy – focuses on the similarly of the prevalent features of the competing trademarks which might cause confusion or deception and thus constitute infringement. This test is incorporated in the IPL and is therefore controlling (Mcdonalds Corp. v L.C. Mak Burger,Inc. 437 SCRA 10) The test of dominancy requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate. Similarity in size, form and color, while relevant, is not conclusive. (Asia Brewery, Inc. v CA, G.R. No. 193543, 224 SCRA 437) ILLUSTRATION: 2. Holistic Test – mandates that the entirety of the marks in question must be considered in determining confusing similarity (Society des Produits Nestle v CA 112012, April 4, 2001; Amigo Manufacturing v. Cluett Peabody Co. No. 139300, march 14, 2001) *Idem Sonans test (similarity of sounds or pronunciations) alone cannot be applied (Amigo Mfg. V. Cluett Peabody)

ILLUSTRATION: FACTS: ABC filed a petition for cancellation of the registered trademark STYLISTIC MR.LEE used on skirts, jeans, blouses, socks, briefs, jackets, jogging suits, dresses, shorts and lingerie owned by EGM. ISSUE: Is there confusing similarity? HELD: NO. Although on its label the word LEE is prominent, the trademark should be considered as a whole and not piecemeal. Jeans are expensive products hence the casual buyer is predisposed to be more cautious. (Emerald Garment vs. CA, 251 SCRA 60, December 29, 1995) Unfair Competition: Section 168 of the IPC provides that a person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights. Hence, unfair competition may be committed as follows: 168.2. Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or hiss for those of the one having established such good will, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action therefore. 168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the following shall be deemed guilty of unfair competition: a) Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would likely to influence purchasers

FACTS: ER Co. used the trademark PHILIPPINE PLANTERS CORDIAL PEANUTS which was registered in the IPO. JR Co. filed suit with the Director of Patents for the cancellation of the registration of Er Co.’s trademark on the ground the trademark of ER Co. would likely deceive the buying public because JR Co.s trademark which is also registered is PLANTERS COCKTAIL PEANUTS. ISSUE: Is there confusing similarity between the two trademarks? HELD: YES. Although “planters” is an ordinary word, nevertheless, it is used in the labels not to describe the nature of the product but o project the source or origin of the salted peanuts. The word PLANTERS easily attracts and catches the eye of the ordinary consumer and it is that word and none other that sticks in his mind when he thinks of salted peanuts.(Phil. Nut Industry Inc. Vs. Standard Brands Inc., 65 SCRA 575, July 31, 1975)

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to believe that the goods offered are those of a manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose; b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public; or c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another.” Given the single registration of the trademark “Dockers and Design” and considering that respondent only uses the assailed device but a different word mark, the right to prevent the latter from using the challenged “Paddocks” device is far from clear. Stated otherwise, it is not evident whether the single registration of the trademark “Dockers and Design” confers on the owner the right to prevent the use of a fraction thereof in the course of trade. It is also unclear whether the use without the owner’s consent of a portion of a trademark registered in its entirety constitutes material or substantial invasion of the owner’s right.(Levi Strauss vs. Clinton Apparel, September 20, 2005)

4.

Unfair competition is broader as it includes cases that are covered not only by the IPC but also by Article 27 of the New Civil Code (Del Monte Corp. v. CA, 181 SCRA 410)

Rights of Foreign Nationals: 1. those provided by local laws in favor of nationals of country of which, by their laws, grant similar rights or privileges to Filipino citizens 2. those provided by the Paris Convention - a covenant among member countries for the protection of industrial property - the underlying principle is that foreign nationals should be given the same treatment in each member countries as that country makes available to its own citizens. Reciprocity Rights: 1. the right to register their marks or tradenames or to claim priority rights in connection wit their pending foreign application (Philippine law govern the requirements for registration) Right of Priority  The significance of priority right is that a Phil. Application filed by another applicant after the priority date but earlier than the foreign applicant’s actual filing may be refused registration because the law provides that a mark cannot be registered if it is identical with a mark with an earlier filing or priority date in respect of the same goods or closely related goods or if it merely resembles such mark as to be likely to deceive or cause confusion. 2. the right to file an action for infringement or unfair competition whether or not the foreign corporation has been licensed to do business under Phil. Laws 3. the right to oppose or to cancel the registration of a mark which is identical or substantially similar to their own marks or tradenames. PATENT (2005, 2006 Bar Exams) 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. (Kho v. CA, No. 115758, March 11, 2002. Requisites: 1. a technical solution of a problem in any field of human activity; 2. it must be a novel intention 3. industrially applicable

Distinctions between infringement of trademark and unfair competition. 1. In infringement of trademark, there is unauthorized use of a trademark, while unfair competition under the IPC involves passing off of one’s goods as those of another and giving one’s goods the appearance of that of another. 2. It is not necessary to establish fraudulent intent in a case for infringement of trademark while it is necessary to establish fraudulent intent in an unfair competition case. 3. Registration of the trademark is necessary for the filing of an action for infringement of trademark while prior registration of a trademark is not necessary in unfair competition.

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TRIPS Agreement: is one of the many agreements concluded during the Uruguay Round of Negotiations of the WTO, provides minimum standards for intellectual property rights, including patents, which each member of the WTO must incorporate in its national laws. Definitions: 1. NOVEL – that which does not form part of the prior art. 2. PRIOR ART – a)that which has been made available to the public anywhere in the world before the filing date or the priority date of application; b) that which forms part of an application whether for patent, utility model or industrial design, effective in the Philippines, Provided, That the inventor or applicants are no the same and the contents of the application are published in accordance with the requirements of patent application rules and the filing date of prior art is earlier. 3. 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. 4. PERSON SKILLED IN THE ART – 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 references that are sufficiently related to one another and to the pertinent art and to have knowledge of all arts reasonable pertinent to the particular problems with which the inventor was involved. He is presumed also to have had at his disposal the normal means and capacity to routine work and experimentation. 5. INDUSTRIAL APPLICABILITY – an intervention that can be produced and used in any industry. Purposes: The patent law has a three-fold purpose: first, patent law seeks to foster and reward invention; second, it promotes disclosures of inventions to stimulate further innovation and to permit the public to practice the invention once the patent expires; third’ the stringent requirements for patent protection seek to ensure that ideas in the public domain remain there for free use of the public (Pearl &Dean Phil. V. Shoemart, Inc No. 148222, August 15, 2003). Principles

1. 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. 2. 2.If any person possessing ordinary skill in the art was able to draw the inferences and the constructs that the supposed inventor drew from prior art, then the latter did not really invent. (Test of Nonobviousness) 3. 3.The application shall relate to one invention only or to a group of inventions forming a single general inventive step.(Unity of Invention) 4. 4.An applicant may not file 2 applications for the same subject, one for utility model registration and the other for the grant of a patent whether simultaneously or successively. (Parallel Application) 5. Whatever right one has to the invention covered by the patent arises alone from the grant of patent. (Creser Precision System vs. CA, 286 SCRA 13) Persons who may file an application: 1. As to nationality a. Filipino nationals b. Foreign nationals or those domiciled or have a real and effective commercial establishment in a country which is bound by treaty (such as the Paris Convention and the TRIPS Agreement) to grant Filipinos the same rights it grants to its own nationals. c. Foreign nationals whose country also accepts the patent application of Filipinos. 2. As to the legal personality of the applicant a. inventor or his attorney-in-fact b. assignee of the inventor  To be able to effectively and legally preclude others from copying and profiting from the invention, a patent is a primordial requirement. No patent, no protection. The ultimate goal of a patent system is to bring new designs and technologies into the public domain through disclosures. Ideas, once disclosed to the public without the protection of a valid patent, are subject to appropriation without significant restraint. Classes of Patentable Inventions 1. useful machine 2. product 3. process 4. improvement of 1,2 or 3 5. micro-organism; and 140

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6. non-biological and microbiological process (Rule 201, Rules and Regulations on Inventions). Non-Patentable Inventions: a. discoveries, scientific theories and mathematical method; b. schemes, rules and methods of performing mental acts, playing games, or doing business, and programs for computer; c. methods for treatment of the human body or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body; d. plant varieties or animal breeds of essentially biological process for the production of plants or animals; e. aesthetic creations; f. anything which is contrary to public order or morality. BAR Q. Cezar works in a car manufacturing company owned by Joab. Cezar is quite innovative and loves to tinker with things the materials and parts of the car, he was able to invent a gassaving device and likewise, came up with a similar gadget, also using scrap materials and spare parts of the company. Thereafter, Francis filed an application for registration pf his device with the Bureau of Patents. a)Is the gas-saving device patentable? Explain. b)Assuming that it is patentable, who is entitled to the patent? What, if any, is the remedy of the losing party? c)Supposing Joab got wind of the inventions of his employees and also laid claim to the patents, asserting that Cezar and Francis were using his materials and company time in making the devices, will his claim prevail over those of his employees? Explain. SA: :a)It is patentable because it is new, it involves an inventive step and it is industrially applicable. (Section 21, Intellectual property Code) b)Francis is entitled to the patent, because he had the earlier filing date (Sec.29, Intellectual property Code). The remedy of Cezar is to file a petition in Court for the cancellation of the patent of Francis on the ground that he is the true and actual inventor, and ask for his substitution as patentee. (Secs. 67 and 68, Intellectual Property Code) c)The claim of Joab will not prevail over those of his employees, even if they used his materials and company time in

making the gas-saving device. The invention of the gas-saving device is not part of their regular duties as employees. (Sec. 30.2 a, Intellectual property Code) Registration of Utility Models  The provisions governing patents shall apply, mutates mutandis, to the registration of utility models.  Where right to patent conflicts with right to utility model registration in the cases referred to in Sec. 29, said provision shall apply as if the word “patent” were replaced by words “patent or utility model registration.”  An invention qualifies for registration as utility model if it is new and industrially applicable.  PATENTABLE INVENTIONS – shall apply except the reference to inventive step as a condition of protection.  A utility model registration shall expire, without any possibility or renewal, at the end of 7th year after date of filing of application. Protection of Industrial Design  Only industrial design that are new or ornamental shall benefit from protection  Only lay-out design that are original shall benefit from protection.  A lay-out design consisting of combination of elements and interconnections that are commonplace shall be protected only if the combination taken as a whole is original.  A lay-out design shall be considered original if it is the result of its creator’s own intellectual effort and is not commonplace among creators of lay-out designs and manufacturers of integrated circuit at the time of creation.

UTILITY MODEL Any new, model of implements or tools of any industrial product even if not possessed of the quality of invention but which is of practical utility. (Del Rosario vs. CA)

INDUSTRIAL DESIGN Any composition of lines and colors or any three dimensional for, whether or not associated with lines, or colors Provided that such composition or form gives a special appearance to and can serve as

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pattern for an industrial product or handicraft. (Sec. 112.1)  Bushing and cushion are not works of art. They are utility models which may be the subject of a patent not copyright. The focus of copyright is the usefulness of the artistic design and not its marketability. While works of applied art, original, intellectual, literary and artistic works are copyrightable, useful articles and works of industrial design are not. (Ching v. Salinas, G.R. No. 161295, June 29, 2005) Persons Entitled to Right: 1. The right to a patent belongs to the inventor, his heirs, or assigns 2. When two or more persons have jointly made an invention, the right to a patent shall belong to them jointly. 3. First to File Rule – if two or more persons have made the invention separately and independently of each other the right to the patent shall belong to the person who first filed an application for such invention (Sec. 29, IPC) Prior Art  That which has been made available to the public anywhere in the world before the filing date or the priority date of the application.  General Rule: That which forms part of an application whether for patent, utility model of industrial design, effective in the Philippines, provided that: a.) the inventors or applicants are not the same. b.) the contents of the application are published in accordance with the requirements of patent application rules. c.) the filing date of the prior art is earlier Exception: Non-prejudicial disclosure a.) Disclosure of information contained in the application b). Made by:  The Inventor  Patent Office and the information was contained: in another application filed by the inventor and should not have been disclosed by the office; or in an application filed without the knowledge or consent of the inventor by a third party which

obtained the information directly or indirectly from the inventor; a third party which obtained the information directly or indirectly from the inventor (Sec. 25) c.) Made during the 12 months preceding the filing date or the priority date of the application Compulsory Licensing: The Director of Legal Affairs may grant a license to exploit a patented invention without any agreement in favor of any person who has shown his capability to exploit the invention. Grounds: 1. National emergency or other circumstances of extreme urgency. 2. Where the public interest (national security, nutrition, health, development of vital sectors of economy) so requires. 3. Where a judicial or administrative body has determined that the manner of exploitation by the owner or his licensee is anti-competitive, or 4. In case of public noncommercial use of the patent by the patentee, without satisfactory reason.  The grant of compulsory license was sustained for medicinal products (Smith Kline and French Lab. V. CA, No. 121267, October 23, 2001) Concept of Divisional Applications The concept of divisional applications comes into play when two or more inventions are claimed in a single application but are of such nature that a single patent may not be issued for them. The applicant thus required to divide, that is, to limit the claims to which ever invention he may elect, whereas those inventions not elected may be made the subject of separate applications which are called divisional applications.(Smith Kline Beckman Corp. v. CA, ibid) Term/Duration of Patent: Twenty years from filing date of application. (Sec. 54, IPC). Infringement: The making, using, offering for sale, selling or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee. Tests of Patent Infringement: 1. Economic Interest Test When the process-discoverer’s economic interests are compromised, i.e., when others can 142

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import the products that result from the process, an act is said to be prohibited. 2. Literal Infringement Test Resort, in the first, must be had to the “words” of the claim. If the accused matter clearly falls within the claim, infringement is made out and that is the end of it. The claims of patent and the accused product must be juxtaposed within the over-all context of claims and specification. (Godines vs. CA, 226 SCRA 338) 3.Doctrine of Equivalents Test If two devices do the same work in substantially the same way, the same result, and produce substantially the same result, they are the same even though they differ in name, form or shape. (Godines vs. CA, 226 SCRA 338) It provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. In other words, the principle or mode of operation must be the same or substantially the same. The doctrine of equivalents thus requires satisfaction of the function means and result test, the patentee having the burden to show that all three components of such equivalency test are met (Smith Klein Beckman Corp. v CA, No. 126627, August 14, 2003). The doctrine of equivalents cannot be applied when the infringing invention is clearly beyond what is written in the claim. Doctrine of File Wrapper Estoppel It balances the doctrine of equivalents. Patentee is precluded from claiming as part of patented product that which he had to excise or modify in order to avoid patent office rejection, and he may omit any additions he was compelled to add by patent office regulations. Defenses in Actions for Infringement: 1. invalidity of patent or claim 2. existence of ground cancellation.

Purpose: To prevent secret or fraudulent sales or conveyances of goods in bulk and, thereby, protect the creditors of the seller. Bulk Sale: Any sale, transfer, mortgage, or assignment of: (SBE) 1. a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of business; 2. all, or substantially all, of the business or trade theretofore conducted; and 3. all, or substantially all, of the fixtures and equipment used in and about the business. Exceptions: (WOJAE) 1. written waiver from all the creditors; 2. sale or transfer is made in the ordinary course of business; 3. sale by virtue of a judicial order; 4. those sold by assignee or those beyond the right of creditors; and 5. sale of properties exempt from attachment or execution. (Rule 39, Sec.13, Rules of Court) Duties of Seller, Mortgagor or Assignor in Bulk: (SPIN-R) 1. to deliver to the vendee, mortgagee, or his agent or representative a sworn written statement of the names and addresses of all the creditors to whom the vendor or mortgagor may be indebted, together with the amount of indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of said creditors. 2. to apply the purchase or mortgage money to the pro rata payment of the bona fide claims of the creditors of the vendor or mortgagor. 3. at least 10 days before the sale, transfer or execution of a mortgage upon any stock of goods, wares, merchandise, provisions or materials, in bulk, to make a full detailed inventory thereof and to preserve the same showing the quantity and, to the extent possible, the cost price to the vendor, transferor, mortgagor or assignor of each article to be included in the sale, transfer or mortgage. 4. notify every creditor whose name and address is set forth in the verified statement of the vendor, transferor, mortgagor, or assignor, at least 10 days 143

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5.

before transferring possession, of the price, terms conditions of the sale, transfer, mortgage, or assignment. to register the sworn statement containing the names and addresses of all creditors o the vendor or mortgagor with the Bureau of Trade Regulation and Consumer Protection.

WAREHOUSE RECEIPTS LAW (Act 2137) (1998, 1999, 2000, 2005 Bar Exams) Coverage: Seeks to encourage transactions on negotiable warehouse receipts, which may only be issued by a warehouseman who is engaged in the business of receiving commodities on deposits for storage. In correlation with: a. Articles 706 to 718 of Code of Commerce (Bill of Ladings); b. Articles 1507 to 1520 of Civil Code (Documents on Title)  The Civil Code provisions have repealed the Code of Commerce provisions on the Bill of Lading.  Despite the fact that we have Warehouse Receipts Law, the Civil Code still have provisions on quedans.  The sugar centrals which issue quedans are not warehousemen, since their service is offered only to sugar planters and not to the public. Purposes of the Law: a. to prescribe the rights and duties of a warehouseman ; b. to regulate the relationship between a warehouse man and i.) the depositor of goods, or ii) the holder of a warehouse receipt for the goods, or iii) the person lawfully entitled to the possession of the good, or iv) other persons. Definitions:

2.

Effects Of Violation: 1. On the transaction: VALID as between the parties. VOID as to affected creditors. On the purchaser: 1. holds the property in trust for seller (whether in good faith or bad faith); 2. acquires no right in the property purchased as against the creditors of the seller; and 3. liable to seller’s creditors for properties forming part of bulk and already disposed by him. Note: The law imposes no direct obligation on the buyer, mortgagee, transferee or assignee in bulk sale. Strictly speaking, therefore, since criminal provisions are to be construed strictly in favor of the accused, a buyer in bulk sale cannot be deemed to be subject to criminal liability under the law, although it may be argued that the buyer would be a principal by indispensable cooperation, if he was aware of the intent of the seller or conspired with the seller. (Villanueva, Commercial Law Reviewer) 3. On the seller, mortgagor, transferor or assignor: Criminal liability for: (FKT) a. failure to prepare and deliver the sworn statement listing his creditors and the application pro-rata of the proceeds thereof to the listed creditors. b. knowingly or willfully make, or deliver or cause to be made or delivered, a statement which shall not include the names of all such creditors, with the correct amount due and to become due to each of them, or shall contain any false or untrue statement. c. transfer of title without consideration or for a nominal consideration only. Dinstinction on Fraudulent Transfer against Creditors Bulk Sales Law Null and void New Civil Code Rescissible (Article 1381-1389) —oOo—

1.

Warehouseman - A person lawfully engaged in the business of storing goods for profit. 2. Warehouseman Receipt - A written acknowledgement by a warehouseman that he has received and holds certain goods therein described in store for the person to whom it is issued. Form: No particular form. However, it must contain the following terms: (ROAD-LoNe-SRD) a. receipt number; b. language indicating if the warehouseman is an owner, solely or jointly with others, of the goods deposited;

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c. statement of advances made by the
warehouseman for which he claims a lien; d. date of issue; e. location of the warehouse; f. language to indicate if the receipt were negotiable or non-negotiable, that is, whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order; g. signature of the warehouseman or his agent; h. rate of storage charges; and i. description of the goods or the packages containing them.  Prohibited terms: a. Such additional terms that are contrary to the provisions of the Warehouse Receipts Law; b. Terms that reduces the degree of diligence imposed by law.

be the debtor who will bear the loss as the true intent to the parties is not the negotiation of the warehouse receipt with its consequent transfer of title but merely as security. Kinds of Warehouse Receipt 1. Negotiable – one which states that the goods received by the warehouse will be delivered: a. to the bearer or b. to the order of any person named in such receipt. 2. Non-Negotiable – one which states that the goods received by the warehouseman will be delivered to the depositor or to any other specified person. Distinctions between a Negotiable Instrument and a Negotiable Warehouse Receipt

Function of Warehouse Receipt: The negotiation of a warehouse receipt carries with it the transfer of title over the commodity covered by the receipt, so also with a negotiable bill of lading. Exception: Where a negotiable warehouse receipt is indorsed and delivered to a creditor as collateral for a loan.

Distinctions between a Negotiable Warehouse Receipt and a Non-Negotiable Warehouse Receipt Negotiable May be acquired through Rights of the person to whom it is negotiated (holder)/ transferee Negotiation  Title to the goods of the person negotiating the receipt and title of the person to whose order the goods were to be delivered.  Direct obligation of the warehouse man to hold possession of the goods for him as if the warehouse man directly contracted NonTransfer or assignment  title of the goods, as against the transferor (merely steps into the shoes)  right to notify the warehousem an of the transfer and acquire the direct obligation of the warehousem an to hold the goods for him. (Sec. 42)

Note: in case of loss of the commodity covered by the receipt through a fortuitous event, it will Negotiable Negotiable As to: Instrument Warehouse Receipt Subject Money Money Object of Instrument Goods value itself deposited None for Liability of Secondary failure to intermediate liability deliver the parties goods Valid but enforceable Effect of only in deliberate Null and void accordance alteration with its original tenor Can be An originally converted to bearer Conversion an order instrument from bearer warehouse will always to order receipt if be such specifically endorsed Obtains only the title 145 May obtain a which the Significance better title party Commercial Law Study Guide of a HIDC negotiating Bar Operations 2007 Centralized had over the goods

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Attachment or levy by execution of goods represented

with him (Sec. 41 Negotiation defeats the lien of the seller of the goods. Cannot unless in proper circumstance s

Note: The negotiation takes effect on the date of indorsement only. Effects of Negotiation: 1. Warranties on sale of receipt: A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears, warrants: (GRIT) a. that the receipt is genuine; b. that he has legal right to negotiate or transfer it; c. that he has knowledge of no fact which would impair the validity or worth of the receipt; and d. that he has a right to transfer title to the goods and that the goods are merchantable. Note: Sec. 44 (warranties on sale of receipt) is similar to Sec. 65 of NIL on warranties of a qualified indorser. 2. Indorser not a guarantor - The indorsement of a receipt shall not make the indorser liable for any failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations. 3. Negotiation defeats vendor's lien - Where a negotiable receipt has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation. Warehouseman’s Obligation To Deliver The Goods  upon demand made either: a. by the holder of a receipt for the goods; b. by the depositor, provided that such demand is accompanied by: i. an offer to satisfy the warehouseman’s lien; ii. an offer to surrender the receipt if it is negotiable; and iii. a readiness and willingness to sign an acknowledgment, when such goods are delivered, that they have been delivered if such is requested by the warehouseman. Commingling of Goods

Can be subject to such

Note: Negotiation of the document has the effect of manual delivery so as to constitute the transferee the owner of the goods. Negotiation carries with it both the title to and possession of the property. (Philippine Trust Co. vs. National Bank, 42 Phil. 413) Kinds of Negotiation: 1. Negotiation by delivery: a. Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer; or b. Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer. Note: A bearer document of title is not always a bearer document. A special indorsement has the effect of converting the bearer instrument into an order instrument 2. Indorsement coupled with delivery a. A negotiable receipt may be negotiated by the indorsement of the person to whose order the goods are, by the terms of the receipt, deliverable. b. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiation may be made in like manner. Effect of delivery without indorsement: (ANT)  The transferee acquires title against the transferor;  There is no direct obligation of the warehouseman; and  The transferee can compel the transferor to complete the negotiation by indorsing the instrument.

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General Rule: Warehouseman must keep the goods of a depositor from the goods of other depositors, or from the goods of the same depositor for which a separate receipt has been issued. Exception: Commingling of goods is allowed if: a. the goods are fungible; and b. the commingling is authorized by agreement or by custom. What The Warehouseman Can Do In Case Of Several Claims: a. He can refuse to deliver the goods to anyone of them until he has had reasonable time to ascertain the validity of the various claims; b. He can require all claimants to interplead, either as a defense to an action brought against him for non-delivery of the goods, or as an original suit, whichever is appropriate. When Justified In Delivering The Goods: The person lawfully entitled to the possession of the goods: 1. the person who is himself entitled to delivery of goods by the terms of a nonnegotiable receipt or who has been authorized to take delivery of the goods by the person entitled to such delivery; 2. the person in possession of a negotiable instrument receipt by the person to whom delivery was promised by the terms of the receipt by immediate endorsee. When Liable For Misdelivery: 1. if he delivers the goods to one who is not in fact lawfully entitled to the possession of the goods; 2. If he delivers to a person holding a nonnegotiable receipt or a negotiable receipt, if prior to the delivery he had either: a. been requested not to make such delivery by the person lawfully entitled to a right of property or possession in the goods; or b. had information that delivery about to be made was to one not lawfully entitled to the possession of the goods. When Delivery Be Legally Refused: (SHAPE-L) where the goods have already been lawfully sold to third persons to satisfy the May

2. 3. 4.

5. 6.

warehouseman’s lien or disposed of because of their perishable nature; When the holder of the receipt does not satisfy the conditions prescribed in Section 8 of the Act; In case of adverse claimants; Prior to delivery: a. if he has been requested by a person lawfully entitled to a right of property or possession in the goods not to make delivery to any person; b. if he had information that the delivery to be made was to one not lawfully entitled to the passion of the goods. In the valid exercise of the warehouseman’s lien;and When the warehouseman has a legal title in himself on the goods such title or right being derived directly or indirectly from the transfer made by the depositor at the time or subsequent to the deposit for storage or from the warehouseman’s lien.

Warehouseman’s Lien Extent: 1. lawful charges for storage and preservation of the goods; 2. lawful claims for money advanced; and 3. reasonable charges and expenses for notice and advertisement of the sale, and the sale of goods. Remedies available to warehouseman to enforce his lien: (SOR) 1. To refuse to deliver the goods until his lien is satisfied; 2. To sell the goods and apply the proceeds to the value of the lien; 3. By other means allowed by law to a creditor against his debtor, for the collection from the depositor of all charges and advances which the depositor contracted with the warehouseman to pay, or such other remedies allowed by law for the enforcement of a lien against personal property. Against what property may Lien be enforced: 1. All deposited goods of the person liable for the lien; and 2. All goods belonging to others deposited by the person liable for the lien. How Lien May Be Lost: 1.By surrendering possession thereof; or 2.By refusing to deliver the goods when a demand is made with which he is bound to comply. 147

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Rules on Attachment / Execution of Goods Deposited: 1. If a negotiable receipt is issued, the goods cannot be attached or levied in execution unless: a. The receipt is first surrendered; or b. Its negotiation is enjoined; or c. The receipt is impounded by the court. 2. If a non-negotiable receipt is issued, goods can be attached provided it is done prior to the notification of the warehouseman of the transfer. Reason: Absent such notice, both the warehouseman and the sheriff have a right to assume that the goods are still owned by the person whose name appears in the receipt. —oOo— GENERAL BONDED WAREHOUSE ACT (Act No. 3893) Purposes: 1. to regulate the business of receiving commodities for storage in order; 2. to protect persons who may want to avail themselves of warehouse facilities; and 3. to encourage the establishment of more warehouses.  to achieve this purpose, any person who wants to engage in the business of receiving commodities fro storage is required by the Act to first secure a license therefore from the Department of Trade and Industry.

Warehouseman - A person engaged in the business of receiving commodity for storage.  Included in the business of receiving commodity for storage (Sec. 2)  It includes entering into any contract or transaction wherein: a. the warehouseman is obligated to return the very same commodity delivered to him or to pay its value; b. commodity delivered to him or to pay its value; c. the commodity delivered is to be milled for the owner thereof; d. the commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligated to return commodity of the same kind or to pay its value. Commodities stored in a bonded warehouse  Generally, these commodities could be any raw, processed, manufactured or finished product or by-product, goods, article, or merchandise, either domestic or foreign production or origin, which may be traded or dealt in openly and legally.  Prohibited substances, the possession of which is proscribed by law, may not be validly received for storage in a bonded warehouse. Bond Required To Be Put Up By The Warehouseman 1. the bond may either be: a. a cash bond; b. a bond secured by real estate; or c. a bond issued by a duly authorized bonding company. 2. the amount of the bond must not be less than 33 1/3% of the market value of the maximum quantity of the commodity to be received by the warehouseman. 3. It shall be so conditioned to respond for the market value of the commodity actually delivered at any time by the warehouseman in case the latter is unable to return the commodity or to pay its value. Duties of a Bonded Warehouseman: 1. to receive for storage any commodity the kind customarily stored by him in the warehouse, so far as his license and the capacity of his warehouse will permit, without making any discrimination between person desiring to avail themselves of warehouse facilities. 2. to keep a complete record of all commodities received by him, of the receipts issued therefore, of the withdrawals, of the 148

Any warehouseman receiving commodities for storage, milling, or commingling must: 1. obtain prior license from the Bureau of Commerce; 2. file a bond in an amount equivalent to 33 1/3% of the capacity of the warehouse against which bond depositors may sue directly (pour autrui); 3. open to the public; no discrimination allowed; 4. liable for double market value should he accept if goods are damaged or destroyed.  a warehouse accepting tobacco for flueing is covered by law.  Itinerant miller of palay who keeps palay in process of milling under a camalig falls within the law.  A mill which must store palay temporarily must still get the license from the Bureau.

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liquidation, and of all receipts returned to and cancelled by him. Rights of Injured Person against Warehouseman:  He may sue on the bond put up by the warehouseman to recover the damages he may have sustained on account of such breach.  In case the bond is not sufficient to cover the full market value of the commodity stored, he may sue on any property or assets of the warehouseman not exempt by law from attachment and execution. Offenses Penalized under the Act: a. engaging in the business of receiving commodities for storage without the proper license (Sec. 11); b. receiving a quantity of commodity greater than that specified in the license of the warehouseman (Sec. 12); c. conniving or entering into a combination with an unlicensed warehouseman for the purpose of avoiding compliance with the requirement of obtaining a license before engaging in the business of receiving commodities for storage (Sec. 13). —oOo— TRUST RECEIPTS LAW (PD 115) (1997, 2005, 2006 Bar Exams) Definition: A commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of his liability with the bank.  It is a written / printed document signed by the entrustee;  in favor of the entruster;  whereby the latter releases the goods, documents or instruments to the possession of the former upon the entrustee’s promise: a. to hold said goods in trust for the entruster; b. to sell the goods; c. turn over the proceeds thereof to the extent of what is owing to the entruster; or d. to return the goods if unsold or for other purposes.

The Trust Receipt Law does not seek to enforce the payment of loans. Thus, there can be no violation of the right against imprisonment for non-payment of a debt. It is not an offense against property but an offense against public order. (People vs. Nitafan, 207 SCRA 726) Parties: 1. Entrustee –person having or taking possession o goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement. 2. Entruseor – person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person; not the owner of the goods, but merely a holder of security interest 3. Seller of the goods – Not strictly and actually a party to the trust receipt transaction; but merely a party to the contract of sale with the buyer/importer (entrustee). Note: On issuing trust receipts, the bank, if not paid what is due it, will be preferred over other creditors of the entrustee. He is not liable to the buyer of the goods as vendor. Rights of the Entruster: (PROCN) 1. Entitled to the proceeds from the sale of goods, documents or instruments; 2. Entitled to the return of goods , etc. in case of non-sale; 3. Enforce all other rights conferred on him under the trust receipts; 4. May cancel the trust and take possession of goods, etc. on case of breach of trust agreement; and 5. Give at least 5 days notice to the entrustee of the intention to sell the goods, etc.; he may purchase at a public sale.  The entruster’s security interest shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. Security interest of the entruster’s advances will have to be settled first before the entrustee can consolidate his ownership over the goods.  He is not liable as principal or vendor under any sale or contract to sell made by the entrustee.  No agency relationship is established in Trust Receipts Law. Obligations of Entrustee: (RTIDS-ROH) 149

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Receive the proceeds in trust for the entruster; 2. Turn over the proceeds to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; 3. Insure the goods for their total value against loss from fire, theft, pilferage or other casualties; 4. Dispose the goods, etc. strictly in accordance with the terms and conditions of the trust receipt; 5. Keep said goods or proceeds thereof separate and capable of identification as property of the entruster; 6. Return the goods, etc. in the event of non-sale or upon demand of the entruster; 7. Observe all other terms and conditions of the trust receipt not contrary to law. and 8. Hold the goods, etc. in trust for the entruster.
1.

 The risk of loss shall be borne by the entrustee. Loss of goods, etc. pending disposition, whether due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.  It is assumed that the title and possession is turned over to the entrustee. The law does not cover sales on credit with the title or other interest being retained by the seller as security thereof.  A purchaser for value and in good faith acquires said goods, etc. free from the entruster’s security interest. Civil Law Concepts Where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected. (Art. 1505) Trust Receipts Law Concept Although the trustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor), anyone who acquires the goods from the entrustee acquires good title over the goods. Although the entrustee is not the owner of the goods covered by a trust receipt, he bears the risk of loss.

over the goods or the proceeds realized from the sale thereof, shall render the offender liable for estafa under Article 315, par. 1-b of the Revised Penal Code.  If the violation or offense is committed by a corporation, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. (Pilipinas Bank vs. Ong, G.R. No. 133176)  In the event of default by the entrustee the entruster need not demand the return of the unsold goods to be able to enforce his rights under the trust receipt.  Fraud and deceit need not be proven for the offense is punished as malum prohibitum regardless of intent or malice.  Surrender of the goods to the bank, if unsold merely extinguishes the entrustee’s criminal liability but is not relieved of its obligation to pay for the money borrowed. Note: Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation of PD No. 115. However, what is being punished by the law is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. The mala prohibita nature of the offense notwithstanding, intent to misuse or misappropriate the goods or their proceeds has to be established by the records. (Pilipinas Bank vs. Ong, G.R. No. 133176) Trust Receipt The property is in the possession of the person financed. There is no sale of the property from the entruster to the entrustee. Does not involve the creation of a lien. The seller does not retain title to the property but transfers such title to the entruster. Pledge The person doing the financing has possession of the property. Conditional Sale There is a sale of the property from the seller to the buyer. Chattel Mortgage Involves the creation of a lien upon the property. Consignment The consignor retains title to the property to secure the indebtedness due form the consignee.

Owner will bear the risk of loss of the object.

—oOo—

Effects of breach of obligation:  Acts involving the violation of trust receipts agreement, such as failure to turn 150

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CHATTEL MORTGAGE LAW (Act 1508) (1996, 1997, 1999 Bar Exams) Chattel Mortgage An accessory contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. (Art. 2140, NCC) Subject Matter: personal or movable property: 1. Machinery treated as personal property subsequently installed on leased land; (Davao Sawmill v. Castillo, 61 Phil. 709) 2. Interest in business; 3. House of strong materials- personal property for purposes of executing a chattel mortgage as the parties to the contract so agrees and no innocent third party will be prejudiced. 4. Shares of stock; (need not be registered in the stocks and transfer book.) 5. House of mixed materials; 6. Vessels recorded in the office of the Philippine Coast Guard to be effective as to third persons; not necessary to be recorded in the Office of the Registry of Deeds; 7. Motor Vehicles mortgage registered in LTO (for vehicles used for public services); 8. House intended to be demolished. Extent of Chattel Mortgage: 1. After-acquired properties: General Rule: covers only the property described therein and not like or substituted property acquired by the mortgagor and placed in the same depository as the property originally mortgaged. Exception: This provision does not apply to stores open to public for retail business where the goods are constantly sold and substituted with new stock (Torres v. Limjap, 56 Phil 141). Note: A stipulation in the chattel mortgage which includes goods that are acquired in renewal of or in substitution of goods on hand when the mortgage was executed is valid and binding. (Northern Motors, Inc. v. Coquia, 66 SCRA 415). 2. After-incurred obligations  While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage can only

cover obligations existing at the time the mortgage is constituted. Promise expressed in a chattel mortgage to cover debts yet to be contracted may be binding but security itself arise only after amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. (Acme Shoe Rubber and Plastic Corp. v. CA, 260 SCRA 714) A deed of chattel mortgage is void where it provides that the security stated therein is for the payment of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor of the mortgagee.

Essential requisites: 1. Constituted to secure the fulfillment of a principal obligation; 2. The mortgagor be the absolute owner of the thing mortgaged; 3. The persons constituting the mortgage have the free disposal of the property or in the absence thereof, that they are legally authorized for the purpose; 4. The object be personal or movable property. Formal requisites: (SARD) 1. Signed by the person executing the same in the presence of 2 witnesses; 2. Accompanied by an affidavit of good faith and a certificate of oath; 3. Mortgaged property must be described in such a manner as to enable anybody reading the document, after reasonable inquiry and investigation, to be able to identify the same; and 4. Registration. Affidavit of Good Faith  Included in the contract of chattel mortgage wherein the parties “severally swear that the mortgage is made: • for the purpose of securing the obligation specified in conditions thereof, and • for no other purpose and that the same is just and valid obligation and • one not entered into for the purpose of fraud.”  The affidavit gives the mortgagee a preferred status; it enjoys preference of third person.

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 Effect of its absence: the contract is valid between the parties but will not bind third person without notice. Where registered:  Resident: place of residence  Non-resident: where the property is situated  Where the mortgagor resides in a place different from where the property is situated: in the place where the mortgagor resides and where the property is situated  Exception: Where the amount of the mortgage is more than P500,000 registration of the mortgage in the province where the property is situated is sufficient. Note: where motor vehicles are involved, the contract must be recorded also in the Land Transportation Office where the vehicle is registered (Sec. 5(e), Revised Motor Vehicles Law);  where the vehicle is a public utility and the mortgage is executed to guaranty a loan not payable within 1 year, the approval of the Land Transportation Franchising and Regulatory Board is required. Effect of failure to register: the contract is valid between the parties but will not bind third person without notice. Remedies of Mortgagee in case of Default by Mortgagor: 1. Foreclose the mortgage 30 days after the condition is broken; General Rule: public auction Exception: there is an agreement for private sale; hence, the mortgagor is in estoppel to question it Exception to the exception: when there is fraud or duress 2. Bring ordinary action to recover money; Note: Remedies are alternative. Distribution of proceeds of foreclosure sale: 1. payment of the costs of keeping and sale; 2. payment of the obligation secured by such mortgage; 3. payment of the obligation secured by subsequent mortgages; and 4. balance, if any shall be paid to the mortgagor. Rule on Recovery of Deficiency:

General Rule: There is recovery of deficiency in all mortgages (chattel and real). Reason: Mortgages as accessory contracts serve only as securities and not for the satisfaction of the principal obligation. The action may be brought within 10 years from the time the cause of action accrues. Exceptions: 1. Chattel mortgage on the thing sold (Art. 1484, 1485 NCC) 2. Pledge (Art. 2115, NCC) Equity of Redemption The following may redeem after the condition of the chattel mortgage is broken but before the sale thereof: 1. mortgagor; 2. a person holding a subsequent mortgage; 3. a subsequent attaching creditor.  An attaching creditor who redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage.  No right of redemption in chattel mortgage after foreclosure sale (Cabral vs. Evangelista 28 SCRA 1000). Right acquired by 2nd mortgagee and subsequent purchaser: 1. Before payment of debt  After the mortgage is executed, the mortgagor has only an equity of redemption and only this right passes to the 2nd mortgagee in case of a 2nd mortgage.  As between the 1st and the 2nd mortgagee, the latter can only recover the property from the former by paying him the mortgage debt. 2. After payment of debt  The judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption.  He is not entitled to the actual possession and delivery of the property without first paying the mortgage debt. —oOo— RECTO LAW (Arts 1484 and 1485, NCC) (1996, 1997 Bar Exams) Applicability: 152

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1. Sale of personal property, the price of which is payable on installment; and 2. Contracts purporting to be leases of personal property with option to buy. Seller’s Remedies in Case of Default: (ECF) 1. Exact fulfillment of the obligation, should the vendee fail to pay 2. Cancel the sale, should the vendee’s failure to pay cover 2 or more installments; and 3. Foreclose the chattel mortgage on the thing sold, should the vendee’s failure to pay cover 2 or more installments. He can not recover any unpaid balance of the price. Any agreement to the contrary shall be void. Notes: The remedies are alternative, not cumulative. Foreclosure of chattel mortgage on the things sold shall bar recovery of any deficiency, including recovery from a guarantor. If the seller-mortgagee opts to exercise remedy #1, he shall be deemed to have waived his right as a mortgagee but may still levy on the mortgaged property. Offenses involving Chattel Mortgage under the Art. 319 of the RPC: 1. Knowingly removing any personal property mortgaged under the Chattel Mortgage Law to any province or city other than the one in which it was located at the time of the execution of the mortgage without the written consent of the mortgagee; and 2. Selling or pledging personal property already mortgages, or any part thereof, under the terms of the Chattel Mortgage Law without the consent of the mortgagee written on the back of the mortgage and duly recorded in the Chattel Mortgage Register.  The property removed or repledged, as the case may be, should be the same or identical property that was mortgaged or pledged before such removal or pledging.  The mortgagor is not relieved of criminal liability even if the mortgage indebtedness is thereafter paid in full, or the mortgagor-seller informed the purchaser that the thing sold had been mortgaged, though the sale is valid. Distinctions between a Chattel Mortgage and a Pledge

As to: Delivery of the personal property Registration of the property Procedure Right of the debtor to the excess Deficiency Consent of the mortgagee/ pledgee

Chattel Mortgage Not necessary Necessary for the validity of the mortgage. Sec. 14 of Act No. 1508 Has a right to the excess Creditor recover may

Pledge Necessary Not necessary Art. 2112 of the Civil Code No right tot eh excess Creditor cannot recover Need not be in writing and may be oral.

Affidavit

Must be in writing and annotated on the back of the mortgage instrument. Mortgagor must execute an affidavit of good faith.

Not required

Distinctions between a Chattel Mortgage and a Pacto de Retro Sale As to: Nature of the contract Title to the thing Affidavit of good faith Chattel Mortgage Accessory Not transferred Required Pacto de Retro Sale Principal Transferred subject to the right of redemption Not required

Distinctions between a Chattel Mortgage and a Real Estate Mortgage As to: Object Affidavit of good faith Consent of the mortgagee in order to alienate the property 153 Chattel Mortgage Personal or movable property Required Consent must be written Real Estate Mortgage Real or immovable Not required No consent needed and any such prohibition is void

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Right of redemption Future obligations

No right

such

Cannot guarantee —oOo—

Right exists in extrajudicial and judicial foreclosure by banks Can guarantee

REAL ESTATE MORTGAGE (Act 3135, as amended) (1999, 2001, 2002, 2006 Bar Exams) Remedies of a Real Estate Mortgagee 1. Ordinary action for sum of money; 2. Foreclosure a. judicial – file a petition in court under Rule 68 if there is no stipulation authorizing extrajudicial foreclosure. b. extrajudicial (Act 3135) – file a petition with sheriff’s office provided there is a stipulation authorizing extrajudicial foreclosure. Kinds of Redemption: 1. Equity redemption – the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the mortgaged property or confirmation of the sale. 2. Right of redemption – the right of the mortgagor to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgage debt. Right of Redemption 1. Judicial foreclosure General Rule: No right of redemption. Only equity of redemption within 90 days after judgment becomes final or even after foreclosure sale but prior to confirmation of sale (Limpin v. IAC, 166 SCRA 87). Exceptions: a. mortgagee is a bank – 1 year from registration of the sale (Sec. 47, General Banking Law) b. the purchaser consents Procedure: a. An action for the purpose should be filed. b. The court will order the mortgagor to pay the amount due with interest and other charges within a period of not less than

90 days nor more than 120 days from the entry of judgment. c. If the mortgagor fails to pay at such time, the court, upon motion, shall order the property to be sold to the highest bidder at public auction. d. Confirmation of sale by the court upon motion. e. Application of proceeds of sale: (CAJB) 1. costs of the sale; 2. the amount due to the mortgagee; 3. claims of junior encumbrances or persons holding subsequent mortgages in the order of their priority; and 4. the balance, if any, shall be paid to the mortgagor or his duly authorized agent, or to the person entitled to it. 2. Extrajudicial foreclosure (Act 3135) General Rule: There is right of redemption within 1 year from registration of the sale with Registry of Deeds. (Sec. 6, Act No. 3135) Exception: where the mortgagee is a bank and the mortgagor is a juridical person, redemption period is: a. 3 months after foreclosure; or b. before registration of the sale; whichever is earlier. (Sec. 47, General Banking Law)  Shall be made at public auction within the province where the property is situated  Sale is made after: • posting the notice of the sale for not less than 20 days in at least 3 public places at the municipality or city where the property is situated:  Sheriff’s Office  Assessor’s Office, and  Register of Deeds; and • The publication thereof once a week for 3 consecutive weeks in a newspaper of general circulation in said municipality or city if the property is worth more than 400 pesos.  Personal notice to the mortgagor. General Rule: not required Exception: contrary stipulation in the mortgage contract. Redemption Price General Rule: Bid / purchase price, 1% interest per month from date of registration to redemption, costs and expenses of sale. (Rule 39 Sec. 28) 154

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Exception: In banks, the amount of loan, interest, costs and expenses of sale less income derived by the bank (Sec. 47, General Banking Law).  Who may redeem: 1. Mortgagor or one in privity of title with mortgagor; 2. Successor-in-interest: (TCS-JW) a. the one to whom the debtor has transferred his right of redemption; or b. one to whom the debtor has conveyed his interest in the property for the purpose of redemption; or c. one who succeeds to the interest of the debtor by operation of law; or d. one or more joint debtors who were joint owners of the property sold; or e. the wife as regards her husband’s homestead by reason of the fact that some portion of her husband’s title passes to her. —oOo— INSOLVENCY LAW (Act No. 1956) (1995, 1996, 1997, 1998, 2002, 2005 Bar Exams) Purposes: 1. To effect equitable distribution of the insolvent’s property among his creditors; and 2. To discharge the debtor from his liabilities so that he can start afresh with the property set apart to him as exempt. (Mindanao Motor line, Inc. v. Alforque 57 SCRA 98 [1974]) Two Divisions of the Law 1. Suspension of Payments (Sections 2 to 13) In suspension of payments, the debtor possesses sufficient property to cover all his debts, but foresees the impossibility of meeting them when they respectively fall due. The debtor can go to court and ask for suspension of payments of his debts: the creditors should give him more time within which to convert some of his properties to cash to be able to pay his debts. 2. Insolvency Proceedings (Sections 14 to 82) Insolvency proceedings work under the premise that the debtor has neither cash nor property of sufficient value with

which to pay all his debts. The two types of proceedings covered are: 2.1 Voluntary Insolvency – it is the debtor who files the petition for insolvency; and 2.2 Involuntary Insolvency – it is the creditors who ask for the declaration of the debtor’s insolvency. SUSPENSION OF PAYMENTS Note: The Regional Trial Court has jurisdiction over a petition for suspension of payments. Sec. 5.2 of R.A. No. 8799 (Securities Regulation Code) transferred petitions by corporations, partnerships, or associations to be declared in the state of suspension of payments from SEC to the RTC. The following may file a petition for suspension of payments: 1.Individual Debtor  He may petition the court of the province or city in which he has resided for six (6) months preceding the filing of his petition that he be declared in the state of suspension of payments (Sec. 2). 2.Corporate Debtor  The corporation may possess sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation has no assets to cover its liabilities but is under management of a Rehabilitation Receiver or Management Committee. (Sec. 5 [d], PD 902-A) Procedure: (PIPA-OC) 1. Filing of petition by the debtor (Sec. 2). Annexed is the schedule of creditors, a statement of debtors assets and liabilities, and the debtor’s proposal for the suspension of payments 2. Issuance by the court of an order calling for a meeting of the creditors (Sec.3). 3. Publication of the order and service thereof on the creditors (Sec. 4). 4. Meeting of creditors for the approval or disapproval of the debtor’s proposition (Sec. 8). • The presence of creditors representing at least 3/5 of the liabilities of the debtor is the quorum required for the debtor’s proposal to be properly approved (Sec. 8).

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5.

6. 

Double Majority Rule: To obtain a majority vote, at least 2/3 of the creditors representing at least 3/5 of the total liabilities of the debtor must vote on the same proposition. (Sec. 8 [e]) Objection, if any and if justified, to the decision of the meeting of the creditors (Sec. 11). Grounds for objection: a. defects in the call for the meeting, in holding thereof, or in deliberations ha thereat, which prejudiced creditor’s rights b. fraudulent connivance between one or more creditors and debtor to vote in favor of the proposed agreement c. fraudulent connivance of claims to obtain a majority (Sec. 12) Court order to complement the agreement (Sec. 11).

votes

INSOLVENCY PROCEEDINGS Insolvency  A state of inability of a person to pay his debts at maturity. (equity test)  The relative condition of a debtor’s assets and liabilities that the former, if all made immediately available, would not be sufficient to discharge the latter. (balance sheet test)  The insufficiency of the entire property and assets of an individual to pay his debts. Distinctions between suspension payments and insolvency: Suspension of Payments The debtor has sufficient property to cover all his debts but foresees the impossibility of meeting them when they respectively fall due Insolvency of

Suspension of payments is a proceeding in rem; thus, for the court to acquire proper jurisdiction, the application must be published as often as the court may require. Effects of Filing of Petition by Individual Debtor for Suspension of Payments: 1. All pending executions against debtor’s property are suspended, except executions against properties specially mortgaged (Sec. 8); 2. No ordinary creditor may file an action in court against the debtor (Sec. 9); 3. Debtor may not dispose of his property, except in the ordinary course of the business in which he is engaged; 4. Debtor cannot make any payments outside of the necessary or legitimate expenses of his business (Sec. 3). Distinctions between the insolvency law and PD 902-A: Insolvency Law PD 902-A Applies to either Only to corporate individual or corporate debtors debtor Suspensive effect Suspensive effect does not cover covers secured and secured creditors unsecured creditors In absence of any No time limit as long agreement among as corporate debtor creditors, automatic under management stay expire after 3 committee/ mos. rehabilitation receiver Agreement subject to No need to obtain qualifying majority approval of creditors

The debtor does no sufficient property to pay his debts

The purpose is to suspend the payment of debts.

The purpose is to discharge the debtor from the payment of certain debts. Some of the creditors may receive less than their credits In case of involuntary insolvency, 3 or more creditors are required.

The amount of the indebtedness is not affected. The number creditors immaterial. of is

Distinctions between voluntary insolvency and involuntary insolvency: As to: Voluntary Insolvency Involuntar y Insolvenc y 3 or more are required By 3 or

Number of creditors Who must 156

One sufficient By

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file

debtor No need for the commission of acts of insolvency Exceeds P1,000.00 Not required

Reason for filing Amount of indebtedne ss Bond

None

as to creditors

The order of adjudicatio n

May granted parte

be ex

more qualified creditors Debtors must have committed any acts of insolvency Must not be less than P1,000.00 Required The creditors must be Philippine residents whose credits accrued in the Philippines and none of them become a creditor by assignmen t within 30 days prior to the filing of the petition. Granted only after a hearing

2.

Issuance by the court of an order declaring, among other things, that the petitioner is insolvent (Sec. 18). 3. Publication of order and service thereof on the creditors (Sec. 19). 4. Meeting of Creditors for assignment of assignee in insolvency (Sec. 30). 5. Conveyance of debtor’s property to assignee in insolvency (Sec. 32). 6. Liquidation of assets and payment of debts (Sec. 33). 7. Discharge of the debtor (Sec. 66). 8. Objections to the discharge, if any (Sec. 66). 9. Appeal to the Supreme Court in certain cases (Sec. 82). Effects of Order Declaring Debtor Insolvent: (SPAT) 1. All debtor’s assets placed in sheriff’s custody until a receiver or assignee has been appointed; 2. Payment to debtor of any debt due him, or delivery of any property due to him, and the transfer or conveyance of any property by him, are forbidden; 3. All civil proceedings against the insolvent are stayed, except those pertaining to foreclosure of secured liens; and 4. Time and place fixed for a meeting of creditors to select the assignee in insolvency. Voluntary Insolvency of Partnership (Sec. 51)  upon the petition of partners  same requisites and conditions for natural persons will also apply  partnerships duly registered with the SEC are now governed by PD 902-A when it comes to rehabilitation/ suspension of payments Voluntary Insolvency of Corporation (Sec. 52)  How: 1. upon petition by any officer of the corporation, duly authorized by the board of directors, or 2. upon the written assent of majority of the board.

Where to file petition

Petition must be filed with the RTC where petitionerdebtor resided 6 months prior to filing

Length of residence is immaterial

Voluntary Insolvency  The state desired by a debtor owing debts exceeding the amount of P1, 000. He may be discharged from his liabilities by filing a petition with the RTC of the province or city in which he has resided for 6 months next preceding the filing of the petition. (Sec. 14) Procedure: (PIPAC-LDOA) 1. Filing of petition by the debtor. (Sec. 14)

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Exception: if the articles or by-laws of the corporation provides otherwise, such method shall be followed  Same rules for natural persons shall apply. However, no discharge shall be granted to any corporation. Exception: corporations engaged principally in the banking business or to any other corporation governed by special laws providing for rules of liquidation in case of insolvency Involuntary Solvency  The state to which the debtor may be placed by:  3 or more creditors  who are residents of the Philippines  whose credits accrued in the Philippines  in the amount not less than 1,000 pesos  The creditors may file, with the RTC of the province or city in which the debtor resides or has his principal place of business, a petition which must allege the commission by the debtor of one or more acts of insolvency. (Sec. 20) Procedure: (FOSAT-FPACL-DOS)

12.

Objections to the discharge, if any (Sec. 66). 13. Appeal to the Supreme Court in certain cases (Sec. 82). Acts of Insolvency: (CRAFT-ACCD²I²) 1. Concealment of debtor to avoid legal processes. 2. Concealment or removal of his property to avoid legal processes. 3. Absence from the Philippines to defraud creditors. 4. Failure to pay money on deposit or received in a fiduciary capacity for a period of thirty (30) days. 5. Transferring his property in contemplation of insolvency. 6. Allowing his property to be taken under legal process in preference of a particular creditor to defraud other creditors. 7. Confession of judgment in favor of any creditor to defraud other creditors. 8. Making conveyance, assignment, or transfer of his property to defraud other creditors. 9. Default of merchant or tradesman to pay his current obligations for a period of thirty (30) days after demand. 10. Intention to depart from the Philippines to defraud creditors. 11. Allowing default judgment in favor of a creditor to defraud other creditors. 12. Insufficiency of property to satisfy an execution issued against him. (Sec. 20) Effects of Adjudication of Insolvency: (PTS) 1. Forbid the payment to the debtor of any debt due to him and the delivery to him of any property belonging to him; 2. Forbid the transfer of any property to him; 3. Stay of all pending civil proceedings against the insolvent. (Sections 18 and 24).  Unpaid claims of wages are subordinate to legal and contractual claims.  The Insolvency Law still governs the procedure when a corporate debtor seeks to pursue voluntary insolvency proceedings. Date of Cleavage  Date when the petition is filed, from which we count backward or forward, in

1. 2. 3. 4. 5. 6.

7. 8. 9.

Filing of petition by 3 or more creditors of the debtor. (Sec. 20) Order of the court requiring the debtor to show cause why he should not be declared insolvent (Sec. 21). Service of the order on the debtor (Sec. 22). Filing of answer or motion to dismiss by the debtor (Sec. 23). Trial of the case (Sec. 23). If the court favors the debtor, then the proceedings shall be dismissed (Sec. 23); if the court favors the creditors or the debtor defaults, then the court shall issue an order-adjudging debtor insolvent (Sec. 24). Publication of order and service thereof on the creditors (Sec.25). Meeting of creditors for election of the assignee in insolvency (Sec. 30). Conveyance of debtor’s property to assignee in insolvency (Sec. 32). 10. Liquidation of assets and payment of debts (Sec. 33). 11. Discharge of the debtor (Sec. 66).

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determining the effects provided for under the Insolvency Law. When important:  A creditor by assignment of credit made within 30 days from date of cleavage shall be disqualified as petitioning creditor. (Sec. 20)  Attachment levied upon within a period of 30 days before the date of cleavage may be set aside by the assignee. (Sec. 32)  Judgments on cases filed and decided within 0 days prior to the date of cleavage may be set aside by the assignee. (Sec. 32)  Judgments on cases filed before 30 days from the date of cleavage but decided within 0 days because of confession o judgment or declaration of default of debtor may be set aside by action of assignee. (Sec. 32)  Properties acquired after date of cleavage, after discharge of debtor in good faith shall not be liable for debts incurred prior to date of cleavage  Fraudulent references made within 30 days prior to the date of cleavage may be set aside in an action brought by assignee. (Sec. 70) Composition  An agreement whereby the creditors of an insolvent agree to accept a certain percentage of their claims in full settlement of such claims. It is the method of dividing the estate of the insolvent debtor among his creditors. Discharge  The release of the debtor from his liabilities, which may be proved in the insolvency proceedings such that they are no longer a charge upon him.  Only natural persons may ask for a discharge (Sec. 52) Requirements: 1. Debtor must have complied with statutory requirements regarding surrender of his assets for the benefit of credits and regarding the rendition of an account of his assets and liabilities. 2. He must have applied for discharge. and 3. Debtor must not have committed any of the acts of insolvency under Section 65 preventing discharge of a debtor.

Accord - an agreement between a debtor and a single creditor for a discharge of the obligation by a part payment or on different terms. When may a debtor apply for discharge:  Anytime after the expiration of 3 months from the adjudication of insolvency BUT not later than 1 year from such adjudication.  Failure to apply within the said period, debtor loses his right to be discharged. (Sec. 64)  But the debtor is still entitled to a SECOND DISCHARGE. The second discharge takes place:  after 6 years from the first discharge or,  within 6 years from the first discharge, if the second insolvency proceeding is INVOLUNTARY. (Sec. 65) Legal Effects of Discharge: (C²ORS) 1. The insolvent debtor is released from: a. all his debts and liabilities set forth in the schedule; and b. all debts, liabilities or claims which were or might have been proved against the estate in insolvency (Sec. 69) 2. Takes effect not from the date it was granted but retroacts to the date of the commencement of the proceedings in insolvency. 3. It operates as a discharge of the insolvent and future acquisitions, but permits mortgagees and other lien creditors to have their satisfaction out of the mortgage or subject of the lien. 4. It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities or demands. 5. Where a debtor is judicially declared insolvent, the remedy of the guarantor or surety would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety is not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities. Discharge does not apply to: 1. Assessmen ts due the government. 2. Debts due to fraud, embezzlement, and defalcation by the debtor. 159

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3. Solidary debts. 4. Alimony. 5. Corporate debts. 6. Debts not included in the schedule. 7. Debts owing to creditors without notice. Fraudulent Preferences (Sec. 70)  If a debtor transferred property to any person to give him preference, such transfer may be set aside by proper court action by the assignee and the property will be returned to the insolvent’s estate for equitable distribution among his creditors. Period: the transfer should take place within the 30 day period from the date of cleavage. Presumed fraudulent transfer: 1. ordinary course of business; 2. confession of judgment; 3. valuable consideration. —oOo— TRUTH IN LENDING ACT (RA 3765) (2000 Bar Exam) Purposes: 1. To protect citizens from a lack of awareness of the true cost of credit to the user; 2. To protect a debtor from the effects of misrepresentation or concealment; and 3. To avoid circumvention of usury laws. Applicability The law applies to creditors who extend loans, sales in installments, and other credit transactions. It applies only to cases involving an extension of credit, and not to those in cash basis NOTE: Banks and non-bank financial intermediaries authorized to engage in quasibanking functions are required to strictly adhere to this law by making true and effective cost of borrowing an integral part of every loan contract. Consolidated Bank v. CA 246 SCRA 193 (1995) Disclosure Requirement Not in the Under Not for

Any person extending “credit” (i.e. loan, sale on installments, lease with option to buy) must give debtor a written statement containing: 1. Cash price. 2. Amounts credited as down payment or trade-in. 3. Difference between the cash price and amount credited as down payment or trade-in. 4. Charges not incident to the extension of credit. 5. Total amount to be financed. 6. Finance charge includes interest, fees, charges, collection charges, discounts and such other charges incident to the extension of credit. 7. Percentage of the finance charge to amount financed. (Sec. 4) Effect of non-disclosure 1. The validity of the transaction remains. 2. The creditor is liable to the debtor for P100 or an amount equal to twice the finance charge, whichever is greater, plus attorney’s fees, provided that the amount shall not exceed P2,000 on any credit transaction. Any action to recover penalty must be brought within 1 year from the date of violation. 3. The creditor can be held criminally liable. The penalty that may be imposed is imprisonment from 6 months to 1 year, or a fine ranging from P1,000 to P5,000, or both. 4. Finance charges need not be paid. 5. Debtor may recover any interest payment made. (Sec. 6) —oOo— ANTI-MONEY LAUNDERING ACT (RA 9160, as amended by RA 9194) (2006 Bar Exam) Declared Policies: 1. To protect and preserve the integrity and confidentiality of bank accounts, to ensure that the Philippines shall not be used as a site for unlawful money laundering activities;

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2. To pursue State’s foreign policy to extend cooperation in transnational investigations and prosecution on money laundering activities. Definitions: 1. Money Laundering – a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. 2. Covered Transaction – a transaction in cash or other equivalent monetary instrument involving a total amount in excess of P500,000.00 within 1 banking day. Covered Institutions – refers to: 1. banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas; 2. insurance companies and all other institutions supervised or regulated by the Insurance Commission; and 3. SEC supervised/regulated: 3.1 securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant; 3.2 mutual funds, close-end investment companies, common trust funds, preneed companies and other similar entities; 3.3 foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities; and 3.4 other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange Commission. Suspicious Transactions – transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist: 1. there is no underlying legal or trade obligation, purpose or economic justification; 2. the client is not properly identified; 3. the amount involved is not commensurate with the business or financial capacity of the client;

4. taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act; 5. any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution; 6. the transaction is in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or 7. any transaction that is similar or analogous to any of the foregoing. Unlawful activity - refers to any act or omission or series or combination thereof involving or having direct relation to following: 1. Kidnapping for ransom 2. Drug trafficking 3. Graft and corrupt practices 4. Plunder 5. Robbery and extortion 6. Jueteng and Masiao 7. Piracy on the high seas 8. Qualified theft 9. Swindling 10. Smuggling 11. Violations of the Electronic Commerce Act 12. Hijacking, destructive arson and murder, including acts of terrorism against noncombatant persons and similar targets 13. Fraudulent practices under the Securities Regulation Code of 2000 14. Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. Obligations of Covered Institutions: 1. Establish and record, and maintain a system of verifying, the true identities of clients, including the legal existence and organizational structure of a corporate client, and their representatives, based on official documents; 2. Keep records for 5 years; 3. Report Covered and Suspicious Transactions to the Anti-Money Laundering Council (AMLC) within 5 working days from occurrence. Notes: The reporting duty of covered institutions is not considered a violation of the Secrecy of Bank Deposit Act, the Foreign Currency Deposit Act and the General Banking Law of 2000. Should a transaction be determined to be both a covered transaction and a suspicious transaction, the same should be reported as a suspicious transaction. 161

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Jurisdiction  All cases on money laundering shall be within the jurisdiction of RTCs. However, those committed by public officers, and private persons in conspiracy with such public officers, shall be within the jurisdiction of the Sandiganbayan.

Freeze of Account  The power of the AMLC to freeze accounts has been deleted under RA 9194 The Court of Appeals , upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity , may issue a freeze order which shall be effective immediately. The freeze order shall be for a period of 20 days unless extended by the court.

Powers: 1. Require and receive covered and suspicious transactions reports from covered entities. 2. Investigate suspicious transactions, covered transactions deemed suspicious, money laundering activities and other violations of the Act. 3. Apply ex parte before the CA for the freezing of any monetary instrument or property alleged to be proceeds of any unlawful activity; 4. Institute forfeiture and other remedial proceedings through the Solicitor General; and 5. Seek court order to inquire into or examine any particular deposit with any banking or non-bank financial institution. —oOo—

Authority to Inquire into Bank Deposits  The AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution: upon order of any competent court in cases of violation of the Act existence of probable cause that the deposits or investments are related to an unlawful activities as defined in Section 3(i) or a money laundering offense under Section 4.  However, no court order shall be required in cases involving kidnapping for ransom; drug trafficking; hijacking, destructive arson and murder, including acts of terrorism against noncombatant persons and similar targets.

a. b.

Anti-Money Laundering Council (AMLC) Composition: 1. BSP Governor – AMLC Chairman 2. Insurance Commission Chairman 3. SEC Chairman

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Centralized Bar Operations 2007

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