2023 - BLUE NOTES - Commercial Law

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A T E ATENEO
N E O LLAW
A WSCHOOL
SCHOOL
Dean Lily K. Gruba

Executive Director of the Fr. Joaquin G. Bernas
Institute for Continuing Legal Education
ATENEO CENTRAL BAR OPERATIONS 2023
Kim Patriz B. Campanilla

Chairperson
Marc Angelo M. Guibone

Clarisse Evangeline G. Choa
Administrative Vice Chairs
Jessa Angelica A. Lat

Sabrina Marie E. De Guia
Marsella Xandra B. Ludan
Adessa Beatrice L. Saulong
Academic Vice Chairs
Jarel Simon K. Uy
Andre Lloyd B. Arellano
Arianne Angelique D. Tolentino
Academic Understudies
Donn Darrick L. Lin

Clarence Nicole T. Lim
Aaron Arwin C. Cheng
Aihra Nicole V. Diestro
Mary Stephanie C. Cruz
Sermae Angela G. Pascual
Francisco Joaquin D. Arceo
Administrative Core
COMMERCIAL LAW
Atty. Roel A. Refran

Atty. Rico V. Domingo
Atty. Elmore O. Capule
Dean Jose Maria G. Hofileña
Atty. Maria Zarah R. Villanueva-Castro
Atty. Christine Joy K. Tan
Faculty Advisers
Sheryl Eve E. Alano

Stefanie Liz S. Ong
Sherminayla S. Paiso
Joice Maurice T. Refrea
Liezl Gabrielle R. Ludan
Marc Victor M. Manatad
Patricia Louise A. Evangelista
Topic Heads
Jose Rafael S. Lasala

Benille John Sanglay
Allyssa Danielle Y. Ng
Jhorilyn M. Santisteban
Yzabel Angelica M. Pinera
Judith Leanne Pauline D. Kit
Josemaria Michael Thaddeus A. Divina
Understudies
Ruth Marie Morales
Allyssa Danielle Y. Ng Pauline M. Santos
Jonathan Jacob R. Ramos Leinell C. Cupiado
Phoebe L. Merielle Tansiongkun Dianne S. Santiago
Sandra Alexie Ambi
Finance Jose Gabriel S.B. Cruz
Mary Elizabeth Garaña
Luis Enrico P. Batara Sean Paul A. De Castro
Chloe Gian S. Jundez Niña Pamela Macaspac
Ella Beatrice M. Vasco Borcelango, Maeden M.
Mary Elizabeth Garaña Ma. Kristine Gianne Kalalo
Jubelle Christine M. Gordo Bianca Rosario J. Maniquis
Geremee Cayle Z. Vasquez
Public Relations
Logistics
Crisandra Amores Angelique P. Leda

Aaliyah T. Ybañez Irish Mae D. Garcia
Patricia Alyx D. Ang Jadel Kaye B. Gines
Rianna Marie S. Co Christine C. Tiamzon
Kathleen C. Romina Charles Arthel R. Rey
Graciella Rachel D. Robles Beatrice Angel V. Yao
Isabelle Beatriz DLS. Ginez Chavi Levine R. Reyes
Marketing Denise Claire G. Molina
Carlo Sebastian L. Chua
Alexis Caesar E. Sanchez
Kiara Lo Juris Eilona B. Hernandez
Princess Andrea Alvaran Artizal Jose King T. Quebal
Monica Margarette R. Feril Sheila Marie Grace delos Angeles
Julianne Beatrice N. Rosario Special Projects
Josemaria Michael Thaddeus A. Divina
Creatives
ATENEO CENTRAL
BAR OPERATIONS 2023 COMMERCIAL LAW
TABLE OF CONTENTS
I. BUSINESS ORGANIZATIONS………………………………………………………………………………………11
A. PARTNERHSIPS ............................................................................................................................... 13
1. General Provisions .......................................................................................................................... 13
2. Rights And Obligations Of The Partnership And Partners ................................................................. 19
3. Dissolution And Winding Up ............................................................................................................ 27
4. Limited Partnership ......................................................................................................................... 30
B. CORPORATIONS .............................................................................................................................. 34
1. Definition Of Corporation ................................................................................................................. 34
2. Classes Of Corporations.................................................................................................................. 35
3. Nationality Of Corporations .............................................................................................................. 37
4. Corporate Juridical Entity................................................................................................................. 39
5. Capital Structure ............................................................................................................................. 46
6. Incorporation And Organization ....................................................................................................... 49
7. Corporate Powers ........................................................................................................................... 56
8. Stockholders And Members ............................................................................................................. 61
9. Board Of Directors And Trustees ..................................................................................................... 72
10. Capital Affairs ................................................................................................................................ 80
11. Dissolution And Liquidation ............................................................................................................ 88
12. Other Corporations ........................................................................................................................ 92
13. Merger And Consolidation ........................................................................................................... 107
II. BANKING……………………………………………………………………………………………………………..112
A. THE NEW CENTRAL BANK ACT .................................................................................................... 113
1. State Policies ................................................................................................................................ 113
2. Monetary Board, Powers And Functions ........................................................................................ 113
3. The Bangko Sentral Ng Pilipinas And Banks In Distress................................................................. 115
B. GENERAL BANKING LAW OF 2000 ............................................................................................... 118
1. Definition And Classification Of Banks ........................................................................................... 118
2. Distinction Of Banks From Quasi-Banks And Trust Entities ............................................................ 120
3. Nature Of Bank Funds And Bank Deposits .................................................................................... 121
4. Diligence Required Of Banks In View Of Fiduciary Nature Of Banking............................................ 121
5. Prohibited Transactions By Bank Directors And Officers ................................................................ 122
6. Stipulation On Interests ................................................................................................................. 123
C. SECRECY OF BANK DEPOSITS .................................................................................................... 124
1. Purpose ........................................................................................................................................ 124
2. Prohibited Acts .............................................................................................................................. 124
3. Deposits Covered .......................................................................................................................... 124
4. Exceptions From Coverage ........................................................................................................... 125
5. Garnishment Of Deposits, Including Foreign Deposits.................................................................... 127
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D. ANTI-MONEY LAUNDERING ACT .................................................................................................. 127

1. Policy ............................................................................................................................................ 127
2. Covered Institutions and Their Obligations ..................................................................................... 128
3. Covered Transactions ................................................................................................................... 129
4. Suspicious Transactions ................................................................................................................ 129
5. Safe Harbor Provision ................................................................................................................... 130
6. Money Laundering (How Committed; Unlawful Activities or Predicate Crimes) ............................... 130
7. Anti-Money Laundering Council and its Functions .......................................................................... 131
8. Authority to Inquire into Bank Deposits .......................................................................................... 132
9. Information Security And Confidentiality ......................................................................................... 133
10. Freezing of Monetary Instrument Or Property............................................................................... 133
III. INSURANCE…………………………………………………………………………………………………………135
A. BASIC CONCEPTS OF INSURANCE .............................................................................................. 136
1. Elements Of An Insurance Contract ............................................................................................... 136
2. Characteristics/ Nature Of Insurance Contracts.............................................................................. 137
3. Classes Of Insurance Contracts .................................................................................................... 139
4. Insurable Interest .......................................................................................................................... 148
5. Double Insurance And Overinsurance............................................................................................ 151
6. No Fault, Suicide, And Incontestability Clause ............................................................................... 152
B. PERFECTION OF THE INSURANCE CONTRACT........................................................................... 157
C. RIGHTS AND OBLIGATIONS OF PARTIES .................................................................................... 162
1. Insurer .......................................................................................................................................... 162
2. Insured.......................................................................................................................................... 162
3. Beneficiary .................................................................................................................................... 163
4. Agent Or Trustee ........................................................................................................................... 164
5. Partner Or Co-Owner .................................................................................................................... 164
6. Assignee ....................................................................................................................................... 164
7. Mortgagor And Mortgagee ............................................................................................................. 164
D. RESCISSION OF INSURANCE CONTRACTS ................................................................................. 166
1. Overview Of General Grounds....................................................................................................... 166
2. Concealment ................................................................................................................................. 166
3. Misrepresentations or Omissions ................................................................................................... 168
4. Breach Of Warranties .................................................................................................................... 169
5. Exercise Of The Right To Rescind Or Cancel ................................................................................ 170
6. Cancellation Of Non-Life Insurance ............................................................................................... 171
IV. TRANSPORTATION LAW…………………………………………………………………………………………173

A. COMMON CARRIERS ..................................................................................................................... 174
1. Diligence required of Common carriers .......................................................................................... 176
2. Liabilities of Common Carriers ....................................................................................................... 177

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B. VIGILANCE OVER GOODS ............................................................................................................. 178

1. Exempting causes ......................................................................................................................... 178
2. Contributory Negligence ................................................................................................................ 180
3. Duration of Liability ........................................................................................................................ 180
4. Stipulations for Limitation of Liability .............................................................................................. 181
5. Liability of Baggage of Passengers ................................................................................................ 184
C. SAFETY OF PASSENGERS ............................................................................................................ 185
1. Void Stipulations ........................................................................................................................... 186
2. Duration of Liability ........................................................................................................................ 186
3. Liability for Acts of Others .............................................................................................................. 186
4. Extent of Liability for Damages ...................................................................................................... 186
D. THE MONTREAL CONVENTION OF 1999 ...................................................................................... 194
1. Applicability ................................................................................................................................... 194
2. Extent of Liability of Air Carrier....................................................................................................... 195
V. INTELLECTUAL PROPERTY CODE……………………………………………………………………………...199

A. PATENTS ........................................................................................................................................ 201
1. Patentable Inventions .................................................................................................................... 201
2. Non-Patentable Inventions ............................................................................................................ 202
3. Ownership Of A Patent .................................................................................................................. 203
4. Grounds For Cancellation Of A Patent ........................................................................................... 203
5. Remedy Of The True And Actual Inventor ...................................................................................... 204
6. Rights Conferred By A Patent ........................................................................................................ 204
7. Limitations Of Patent Rights .......................................................................................................... 204
8. Patent Infringement ....................................................................................................................... 205
9. Licensing....................................................................................................................................... 206
10. Assignment And Transmission Of Rights ..................................................................................... 208
B. TRADEMARKS ................................................................................................................................ 209
1. Marks Vs. Collective Marks Vs. Trade Names ................................................................................ 209
2. Acquisition Of Ownership Of A Mark .............................................................................................. 210
3. Acquisition Of Ownership Of Trade Name...................................................................................... 210
4. Non-Registrable Marks .................................................................................................................. 211
5. Test To Determine Confusing Similarity Between Marks ................................................................ 212
6. Well-Known Marks ........................................................................................................................ 212
7. Rights Conferred By Registration ................................................................................................... 213
8. Cancellation Of Registration .......................................................................................................... 213
9. Trademark Infringement ................................................................................................................ 214
10. Unfair Competition ....................................................................................................................... 216
C. COPYRIGHT .................................................................................................................................... 217
1. Basic Principles ............................................................................................................................. 217
2. Copyrightable Works ..................................................................................................................... 218

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3. Non-Copyrightable Works .............................................................................................................. 218

4. Rights Conferred By A Copyright ................................................................................................... 219
5. Ownership Of Copyright ................................................................................................................ 220
6. Limitations On Copyright ............................................................................................................... 220
7. Doctrine Of Fair Use ...................................................................................................................... 221
8. Copyright Infringement .................................................................................................................. 221
VI. ELECTRONIC COMMERCE ACT…………………………………………………………………..…………….224

A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES
225
B. PRESUMPTIONS RELATING TO ELECTRONIC SIGNATURES (Section 9, ECA) ......................... 226
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT ............................................................................................................................................ 228
D. OBLIGATION OF CONFIDENTIALITY ............................................................................................. 229
VII. FOREIGN INVESTMENTS ACT (RA 7042, as amended by RA 11647) ………………………………….230

A. POLICY OF THE LAW [SEC. 1, RA 11647] ..................................................................................... 231
B. DEFINITION OF TERMS [SEC. 2, RA 11647] .................................................................................. 231
1. Foreign Investment........................................................................................................................ 231
2. Doing Business ............................................................................................................................. 234
3. Export Enterprise .......................................................................................................................... 236
4. Domestic Market Enterprise........................................................................................................... 236
C. REGISTRATION OF INVESTMENT OF NON PHILIPPINE NATIONALS [SEC. 6, RA 11647] .......... 237
D. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES [SEC. 7, RA 11647] .................................. 238
E. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES [SEC. 7, RA 7042]................. 238
F. FOREIGN INVESTMENT NEGATIVE LIST [SEC. 8, RA 11647]....................................................... 238
VIII. PUBLIC SERVICE ACT…………………………………………………………………………………………..240

A. CRITICAL INFRASTRUCTURE ....................................................................................................... 241
B. FOREIGN STATE-OWNED ENTERPRISE ....................................................................................... 241
C. PUBLIC SERVICE AS PUBLIC UTILITY .......................................................................................... 242
D. UNLAWFUL ACTS .......................................................................................................................... 244
E. POWERS OF THE PRESIDENT TO SUSPEND OR PROHIBIT TRANSACTION OR INVESTMENT 245
F. INVESTMENTS BY AN ENTITY CONTROLLED BY OR ACTING BEHALF OF THE FOREIGN
GOVERNMENT OR FOREIGN STATE-OWNED ENTERPRISES ............................................................ 245
G. RECIPROCITY CLAUSE.................................................................................................................. 245

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a. General Powers; Theory of General

I. BUSINESS ORGANIZATIONS
Capacity
b. Specific Powers; Theory of Specific
TOPIC OUTLINE UNDER THE SYLLABUS Capacity
c. Power to Extend or Shorten Corporate
A. PARTNERSHIPS Term
1. General Provisions d. Power to Increase or Decrease Capital
a. Definition, Elements, Characteristics
Stock or Incur, Create, Increase
b. Rules to determine existence
c. Partnership term Bonded Indebtedness
d. Partnership by estoppel e. Power to Deny Pre-Emptive Rights
e. Partnership as distinguished from joint f. Power to Sell or Dispose Corporate
venture Assets
f. Professional partnership g. Power to Acquire Own Shares
g. Management h. Power to Invest Corporate Funds in
2. Rights And Obligations Of The Partnership Another Corporation or Business
And Partners i. Power to Declare Dividends
a. Rights and obligations of the j. Power to Enter into Management
partnership Contract
b. Obligations of partners among k. Doctrine of Individuality of Subscription
themselves l. Doctrine of Equality of Shares
c. Obligations of partnership or partners m. Ultra Vires Doctrine
to third persons n. Trust Fund Doctrine
3. Dissolution And Winding Up 8. Stockholders and Members
4. Limited Partnership a. Fundamental Rights of a Stockholder
b. Participation in Management
B. CORPORATIONS (1) Proxy
1. Definition Of Corporation (2) Voting Trust
2. Classes Of Corporations (3) Cases when Stockholder’s Action
3. Nationality Of Corporations is Required
a. Control Test (4) Manner of Voting
b. Grandfather Rule c. Proprietary Rights
4. Corporate Juridical Entity (1) Rights to Dividends
a. Doctrine of Separate Juridical (2) Appraisal Right
Personality (3) Right to Inspect
b. Doctrine of Piercing the Corporate Veil (4) Preemptive Right
5. Capital Structure (5) Right to Vote
a. Number and Qualifications of (6) Right to Dividends
Incorporators d. Remedial Rights
b. Subscription Requirements (1) Individual Suit
c. Corporate Term (2) Representative Suit
d. Classification of Shares (3) Derivative Suit
6. Incorporation And Organization e. Obligations of a Stockholder
a. Promoter f. Meetings
b. Subscription Contract 9. Board or Directors and Trustees
c. Pre- Incorporation Subscription a. Repository of Corporate Powers
Agreement b. Tenure, Qualifications, and
d. Consideration for Stocks Disqualification of Directors
e. Articles of Incorporation c. Requirement of Independent Directors
f. Corporate Name and Limitation d. Elections
g. Registration, Incorporation, and e. Removal
Commencement of Corporate f. Filing of Vacancies
Existence g. Compensation
h. Election of Directors or Trustees h. Disloyalty
i. Adoption of By-Laws i. Business Judgment Rule
j. Effects of Non-Use of Corporate j. Solidary Liabilities for Damages
Charter k. Personal Liabilities
7. Corporate Powers l. Responsibility for Crimes

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m. Special Fact Doctrine (2) Treatment of Profits

n. Inside Information c. Education Corporations
o. Contracts d. Religious Corporations
(1) By Self-Dealing Directors With the (1) Corporation Sole
Corporation (2) Religious Societies
(2) Between Corporations With e. One Person Corporations
Interlocking Directors (1) Excepted Corporations
10. Capital Affairs (2) Capital Stock Requirement
a. Certificate of Stock (3) Articles of Incorporation and By-
(1) Nature of the Certificate Laws
(2) Uncertificated Shares (4) Corporate Name
(3) Negotiability; Requirements for (5) Corporate Structure and Officers
Valid Transfer of Stocks (6) Nominee
(4) Issuance (7) Liability
(5) Stock and Transfer Book (8) Conversion of Corporation to One
(6) Situs of the Shares of Stock Person Corporations and Vice-
b. Watered Stocks Versa
(1) Definition f. Foreign Corporations
(2) Liability of Directors for Watered (1) Bases of Authority Over Foreign
Stocks Corporations
(3) Trust Fund Doctrine for Liability (a) Consent
for Watered Stocks (b) Doctrine of “Doing Business”
c. Payment of Balance of Subscription (2) Necessity of a License to Do
(1) Call by Board of Directors Business
(2) Notice Requirement (a) Resident Agent
d. Sale of Delinquent Shares (3) Personality to Sue
(1) Effect of Delinquency (4) Suability of Foreign Corporations
(2) Call by Resolution by the Board of (5) Instances When Unlicensed
Directors Foreign Corporations May be
e. Alienation of Shares Allowed to Sue (Isolated
(1) Allowable Restrictions on the Sale Transactions)
of Share (6) Grounds for Revocation of license
(2) Requisites of a Valid Transfer 13. Merger and Consolidation
f. Corporate Books and Records a. Concept
(1) Right to Inspect Corporate b. Constituent Corporation vs
Records Consolidated
(2) Effect of Refusal to Inspect c. Plan of Merger or Consolidation
Corporate Records d. Articles of Merger or Consolidation
11. Dissolution and Liquidation e. Effects
a. Modes of Dissolution
(1) Voluntary Dissolution
(2) Involuntary Dissolution
b. Methods of Liquidation
(1) By the Corporation Itself
(2) Conveyance to a Trustee Within a
Three-Year Period
(3) By Management Committee or
Rehabilitation Receiver
(4) Liquidation after Three Years
12. Other Corporations
a. Close Corporations
(1) Characteristics
(2) Validity of Restrictions on
Transfer of Shares
(3) Preemptive Right
(4) Amendment of Articles of
Incorporation
b. Non-Stock Corporations
(1) Definition

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A. PARTNERHSIPS d. Rules To Determine Existence
1. General Provisions General Rule

Persons who are not partners as between
a. Definition themselves, cannot be partners as to third persons
(CIVIL CODE, Art. 1769[1])
Partnership is a contract whereby two or more
persons bind themselves to contribute money, Exception
property, or industry to a common fund, with the Partnership by estoppel (CIVIL CODE, Art. 1825) [see
Section 6 “Partnership by Estoppel” below]
intention of dividing the profits among themselves.
Two or more persons may also form a partnership
for the exercise of a profession (CIVIL CODE, Art. Other rules to determine whether a partnership
1767) exists (CIVIL CODE, Art. 1769)
The following, alone, do not establish a partnership:
1. Co-ownership or co-possession;
b. Elements 2. Sharing of gross returns, whether or not the
persons sharing them have a joint or common
Elements of a Partnership (ACD) right or interest in any property from which the
1. Meeting of minds (Agreement) returns are derived;
2. To Contribute money, property, or industry to a 3. Receipt by a person of a share of the profits of
common fund; and a business is prima facie evidence that he is a
3. Intent to Divide profits (and losses) among the partner in the business, unless such were
contracting parties (Jarantilla, Jr. v. Jarantilla, received in payment as a:
G.R. No. 154486) i. Debt by installments or otherwise;
ii. Wages or rent;
Essential Features of Partnership (VaLeCLO) iii. Annuity;
1. There must be a Valid contract. (CIVIL CODE, Art. iv. Interest on loan (even if the interest is
1767, Art. 1769[1]) based on the profits of the business);
2. The parties must have Legal capacity to enter v. Consideration on the sale of goodwill of
into the contract. (CIVIL CODE, Art. 37 – 39; business or other property by installments
Art. 1327) or otherwise.
3. There must be a mutual Contribution of money,
property or industry to a common fund. (CIVIL A partnership must have a lawful object or purpose,
CODE, Art. 1767) and must be established for the common benefit or
4. There must be a Lawful object. (CIVIL CODE, Art. interest of the partners. (CIVIL CODE, Art. 1770)
1770)
5. The purpose or primary purpose must be to Article 1769 of Civil Code, which lays down the rule
Obtain profits and divide the same among the for determining when a transaction should be
parties. (CIVIL CODE, Art. 1767) deemed a partnership or a co-ownership, means
that aside from the circumstance of profit, the
c. Characteristics presence of other elements constituting partnership
is necessary, such as the clear intent to form a
Characteristics of a Partnership partnership, the existence of a juridical personality
1. Essentially contractual in nature (CIVIL CODE, different from that of the individual partners, and the
Arts. 1767, 1784) freedom to transfer or assign any interest in the
2. Separate juridical personality (CIVIL CODE, Art. property by one with the consent of the others.
1768) Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).
3. Delectus personae (CIVIL CODE, Arts. 1804,
1813) When facts proven show that purported partner
4. Mutual Agency (CIVIL CODE, Art. 1803) never furnished the P20,000 capital, nor rendered
5. Personal liability of partners for partnership any help or intervention in the management of the
debts (CIVIL CODE, Arts. 1816, 1817) purported partnership business, much less
demanded an accounting of its affairs and its
earnings, there was never intended a real
partnership despite the articles of partnership
executed. All that the purported partner did was to
receive her share of P3,000 a month, and was in
accordance with the original letter of defendant

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(Exh. “A”), which shows that both parties considered personality, and shall be governed by the provisions
themselves as lessor-lessee under a contract of relating to co-ownership. (1669)
lease. Yulo v. Yang ChiaoSeng, 106 Phil. 111
(1959). Note:The phrase “kept secret among the members”
When family members lease out to SHELL a family according to Manresa does not mean that articles
lot for the establishment of a gasoline station, and are known to all members but withheld from third
invested the advanced rentals and deposits to allow persons. It contemplates a situation where the
one of their members to use the amounts as the articles, which allow any one of the members to
registered dealer of SHELL under its of “one station, contract in his own name with third persons are
one dealer” policy, and that the registered dealer known to some members only and kept secret from
had accounted for the operations to the other the rest. In short, the secrecy is directed to some of
members of the family, there was a partnership the partners. The reason for this article is to
formed, for which the registered dealer can be preserve equality among partners and to prevent
compelled to execute the covering articles of fraud.
partnership, for accounting and distribution of the
shares in profits of the other partners. Estanislao,
Jr. v. Court of Appeals, 160 SCRA 830 (1988). Effects of an Unlawful Partnership (i.e.,
established for an unlawful object or purpose)
There was likewise no agreement for the sharing of 1. Void ab initio such that it never existed in the
profits, only that Merian expects to receive eyes of the law (CIVIL CODE, Art. 1409[1])
remittance of monthly interest from the amount she 2. Profits shall be confiscated in favor of the
invested. At any rate, the receipt by a person of a government (CIVIL CODE, Art. 1770)
share of the profits, or of a payment of a contingent 3. Instruments or tools and proceeds of the crime
amount in case of profits earned, is not conclusive shall also be forfeited in favor of the government
evidence of partnership. Article 1769(3) of the Civil (CIVIL CODE, Art. 1770; REVISED PENAL CODE,
Code provides that “the sharing of gross returns Art. 45)
does not of itself establish a partnership, whether or 4. The contributions of the partners shall not be
not the persons sharing them have a joint or confiscated unless they fall under No. 3 (of this
common right or interest in any property from which enumeration) (CIVIL CODE, Arts. 1411 and 1412)
the returns are derived.” There must be an
unmistakable intention to form a partnership which Judicial decree is not necessary to dissolve an
is lacking in this case. Most importantly, the facts do unlawful partnership. (De Leon, 2019)
not disclose that there is mutual agency between
Merian and Edna, that is, neither party alleged that That there is no legally constituted partnership does
she can bind by her acts the other, and can be not mean that there are no contractual or legal
bound by the acts of the other in the ordinary course relations among the parties.
of business. Santiago v. Spouses Garcia, 934
SCRA 641 (2020). Effect of Partial Illegality
Where a part of the business of a partnership is legal
Although the Olivas were mere creditors, not and a part illegal, an account of that which is legal
partners, the Antons agreed to compensate them for may be had.
the risks they had taken. The Olivas gave the loans
with no security and they were to be paid such loans Where, without the knowledge or participation of the
only if the stores made profits. Had the business partners, the firm's profits in a lawful business have
suffered loses and could not pay what it owed, the been increased by wrongful acts, the innocent
Olivas would have ultimately assumed those loses partners are not precluded as against the guilty
just by themselves. Still there was nothing illegal or partners from recovering their share of the profits.
immoral about this scheme. Anton v. Oliva, 647 (De Leon, 2010)
SCRA 506 (2011).
Formation of Partnership
a. When is a Partnership Formed
Where there are articles “kept secret among the Article 1784. A partnership begins from the
members”, this produces only a co-ownership: moment of the execution of the contract, unless
it is otherwise stipulated. (1679)
Article 1775. Associations and societies, whose
articles are kept secret among the members, and
wherein any one of the membersmay contract in his b. How Partnership is Formed
own name with third persons, shall have no juridical General Rule: A partnership may be
constituted in any form, except where

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immovable property or real rights are e. Partnership Term

contributed thereto, in which case a public
instrument shall be necessary.. (CIVIL CODE, Art. Article 1785. When a partnership for a fixed term or
1771) particular undertaking is continued after the
termination of such term or particular undertaking
Article 1773. A contract of partnership is void, without any express agreement, the rights and
whenever immovable property is contributed duties of the partners remain the same as they were
thereto, if an inventory of said property is not at such termination, so far as is consistent with a
made, signed by the parties, and attached to the partnership at will.
public instrument. (1668a)
A continuation of the business by the partners or
such of them as habitually acted therein during the
c. Burden of Proof and Presumption term, without any settlement or liquidation of the
The existence of a partnership must be proven, not partnership affairs, is prima facie evidence of a
presumed. (Rules of Court, Rule 130, Sec. 29) continuation of the partnership. (n)
Persons acting as partners are presumed by law to (i) Partnership with Fixed Term- there is a period
have entered into a contract of partnership. In this of time stated in the agreement during which the
case, the burden of proof is shifted to the party partnership will exist.
denying its existence. (Rules of Court, Rule 131,
Sec. 3 (z)) (ii) Partnership for a Particular Undertaking–
formed to engage in a specific undertaking without
An extant partnership is presumed to exist until specification of the term but owing to the nature of
proven terminated by the person asserting its its purpose with the implied understanding that it
termination. (Rules of Court, Rule 131, Sec. 3 (ee)) shall last only and until the completion of the
undertaking.
The best evidence of the existence of a partnership
would have been the article of partnership itself, but (iii) Partnership at Will– designed to continue for
here there is none. The alleged partnership, though, no fixed period of time and is formed to last only
was never formally organized. The net effect is that during the mutual consent or pleasure of the parties,
we are asked to determine whether a partnership its existence being terminable at the will of any one
existed based purely on circumstantial evidence. or more of them.
Here the evidence adduced fall short of the quantum
of proof required to establish a partnership. Besides, Common Types of Partnership:
it is indeed odd, if not unnatural, that despite the 1. Universal v. Particular Partnership
forty years the partnership was allegedly in
existence, Tan EngKee never asked for an There are two kinds of universal partnerships (CIVIL
accounting,since the essence of a partnership is CODE, Art. 1777) as follows:
that the partners share in the profits and losses,
where each partner has a right to demand an Universal Partnership of All Present Property
accounting for as long as the partnership exists. A (CIVIL CODE, Art. 1778)
demand for periodic accounting is evidence of a A partnership of all present property is that in which
partnership. (Heirs of Tan EngKee v. Court of the partners contribute all the property which
Appeals, 341 SCRA 740 (2000)). actually belongs to them to a common fund, with the
intention of dividing the same among themselves, as
Failure to prepare an inventory of the immovable well as all the profits which they may acquire
property is contributed, in spite of Art. 1773 therewith
declaring the partnership void, would not render the
partnership void when: Comprises the following (CIVIL CODE, Art. 1779):
(a) No third-party is involved since Art. 1773 was a. Property which belonged to each of the
intended for the protection of third parties; and partners at the time of the constitution of the
(b) the partners have made a claim on the partnership
partnership agreement which is deemed binding b. Profits which they may acquire from all
between them as any other contract. (Torres v. CA, property contributed
320 SCRA 428 (1999)). c. A stipulation for the common enjoyment of
any other profits may also be made

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But: the property which the partners may acquire (6) Individuals, associations and corporations not
subsequently by inheritance, legacy, or donation permitted by law to inherit. (745, 752, 753, 754a)
cannot be included in such stipulation, except the
Particular Partnership (CIVIL CODE, Art. 1783) A
fruits thereof
particular partnership has for its objects:
a. Determinate things
Universal Partnership of Profits
b. Their use or fruits
Comprises all that the partners may acquire by their
c. Specific undertaking
industry or work during the existence of the
partnership (CIVIL CODE, Art. 1780). d. Exercise of profession or vocation
2. General v. Limited Partnership

Article 1781. Articles of universal partnership,
entered into without specification of its nature, only
General Partnership
constitute a universal partnership of profits. (1676)
Consists of general partners who are liable pro rata
But persons who are prohibited from giving with all their property after all partnership property is
exhausted for contracts entered into by the
donations or advantage to each other cannot enter
partnership (CIVIL CODE Art. 1816) and solidarily
into a universal partnership (CIVIL CODE, Art. 1782).
liable with the with the partnership for wrongful acts
a. Those made between persons who were
or omissions in the course of business or with the
guilty of adultery or concubinage at the time
authority of the partners and for the misapplication
of the donation;
of money or property of third persons. (CIVIL CODE
b. Those made between persons found guilty
of the same criminal offense, in Arts. 1824, 1822 & 1823)
consideration thereof; and
Limited Partnership
c. Those made to a public officer or his wife,
One formed by two or more persons having as
descendants and ascendants, by reason of
members one or more general partners and one or
his office. (CIVIL CODE, Art. 739)
more limited partners, the limited partner not being
d. Those between spouses, direct or indirect,
personally liable for the obligations of the
including those persons living together as
partnership and who is not entitled to participate in
husband and wife without a valid marriage.
the management and control of the business .(CIVIL
(FAMILY CODE, Art. 87)
CODE, Arts. 1843 to 1867)
Take note of the following prohibitions
Article 1027. The following are incapable of f. Partnership By Estoppel
succeeding:
Definition of Partnership by estoppel
(1) The priest who heard the confession of the
testator during his last illness, or the minister of the Article 1825. When a person, by words spoken or
gospel who extended spiritual aid to him during the written or by conduct, represents himself, or
same period; consents to another representing him to anyone, as
(2) The relatives of such priest or minister of the a partner in an existing partnership or with one or
gospel within the fourth degree, the church, order, more persons not actual partners, he is liable to any
chapter, community, organization, or institution to such persons to whom such representation has
which such priest or minister may belong; been made, who has, on the faith of such
representation, given credit to the actual or apparent
(3) A guardian with respect to testamentary partnership, and if he has made such representation
dispositions given by a ward in his favor before the or consented to its being made in a public manner
final accounts of the guardianship have been he is liable to such person, whether the
approved, even if the testator should die after the representation has or has not been made or
approval thereof; nevertheless, any provision made communicated to such person so giving credit by or
by the ward in favor of the guardian when the latter with the knowledge of the apparent partner making
is his ascendant, descendant, brother, sister, or the representation or consenting to its being made:
spouse, shall be valid;
(1) When a partnership liability results, he is
(4) Any attesting witness to the execution of a will, liable as though he were an actual member of the
the spouse, parents, or children, or any one claiming partnership;
under such witness, spouse, parents, or children;
(2) When no partnership liability results, he is
(5) Any physician, surgeon, nurse, health officer or liable pro rata with the other persons, if any, so
druggist who took care of the testator during his last consenting to the contract or representation as to
illness; incur liability, otherwise separately.

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When a person has been thus represented to be a such representation with the consequence
partner in an existing partnership, or with one or of binding them as though he was a partner
more persons not actual partners, he is an agent of in fact with respect the persons who rely on
the persons consenting to such representation to such representation.
bind them to the same extent and in the same
manner as though he were a partner in fact, with 8) Consequence of consent of others to the
respect to persons who rely upon the person making the representation:
representation. When all the members of the • In the case where all the members
existing partnership consent to the representation, a of an existing partnership consent
partnership act or obligation results; but in all other to the representation, a
cases it is the joint act or obligation of the person partnership act/obligation results.
acting and the persons consenting to the
• In all other cases, it is the joint
representation. (n)
obligation of the person acting and
When reviewing the above article take note of the the persons consenting to the
following: representation.
1) What actions gives rise to the estoppel:
• A person by words spoke or g. Rules of Partnership Applies to
written or conduct Joint Ventures
• Represents himself or
• Consents to another representing A joint venture, therefore, is akin to a partnership,
himself. the essential elements of which are as follows: (1)
2) What is the representation made? an agreement to contribute money, property, or
• That he is a partner in an existing industry to a common fund; and (2) an intent to
partnership, or divide the profits among the contracting parties. In
this case there is no joint venture arrangement. A
• That he is a partner with one or perusal of the Assignment of Rights and the
more persons who are not actual
February 21, 1990 letter agreement clearly shows
partners
that the Valdeses' share in the sale of the
3) Liability arises if the person to whom the subdivision lots was the manner of paying, or mode
representation was made: of payment of the P20 Million consideration for the
• Have given credit to the actual or 4,000 BARECO shares. While we understand that
apparent partnership this type of provision may be peculiar to a contract
of sale, this profit-sharing scheme, as explained by
4) There is an effect if the representation or LCDC, was a means for the latter to acquire the
the consent to the representation has been necessary funds to develop and improve the said
made in a PUBLIC MANNER, in which case lots.Notably, LCDC was contractually obliged to
liability will arise to a person: remit to the Valdeses' their 40% share in the sale of
the Montemar Villas lots despite the fact that LCDC
• Regardless of whether that may be experiencing losses. This runs counter to a
representation has been partnership or joint venture relationship. The
communicated to such person essence of a true partnership is that the partners
5) If a partnership liability results, the person share in the profits and losses of the business. This
making the representation or consenting to is clearly not the case here. Valdes v. La Colina Dev.
it being made is liable as if his an actual Corp., G.R. No. 208140, 12July 2021.
partner of the existing partnership.
Generally understood to mean an organization
6) If there is no partnership liability, the person formed for some temporary purpose, a joint venture
making the representation or consenting to is likened to a particular partnership or one which
it bing made he is liable pro rata with other “has for its object determinate things, their use or
persons who have consented to the fruits, or a specific undertaking, or the exercise of a
contract or representation, otherwise he is profession or vocation. (Realubit v. Jaso, G.R. No.
separately liablie. 178782)
7) The person representing to be a partner of Joint Venture
an existing partnership, with one or more
JV is governed by Law on Partnerships. Here, the
persons who are not actual partners (if any)
JVA parties agreed on a 50-50 ratio on the proceeds
is an AGENT of the persons consenting to of the project, although they did not provide for the

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splitting of losses, which therefore puts into principle of relativity as above-mentioned. In fact,
application Art. 1797: the same ratio applies in under the express terms of the JVA, the developer
splitting the obligation-loss of the joint venture. had even stipulated to hold landowners free from
There being a JVA, not allowing MarsmanDrysdale any liability to third parties for non-compliance with
to recover from Gotesco what it paid to PGI would HLURB rules and regulations. As things stand, only
not only be contrary to the law on partnership on developer should be held liable for its obligations to
division of losses but would partake of a clear case Buenviaje under the subject CTS. Buenviaje v.
of unjust enrichment at Gotesco’s expense. Spouses Salonga,805 SCRA 369 (2016).
(Marsman Drysdale Land, Inc. v. Philippine
Geoanalytics, G.R. No. 183374) 622 SCRA 281 Joint venture between Mabuhay, IDHI and
(2010). Sembcorp was pursued under the JV Corporations,
WJSC and WJNA. By choosing to adopt a corporate
Although parties executed a “Power of Attorney” and entity as the medium to pursue the joint venture
referred to themselves as “Principal” and “Manager”, enterprise, the parties are bound by Corporate Law
a JVA was indeed intended by the parties. Perusal principles, among which is the limited liability
of the agreement indicates that the parties had doctrine. The use of a joint venture allows the co-
intended to create a partnership and establish a venturer to take full advantage of the limited liability
common fund for the purpose. They also had a joint feature of the corporate vehicle which is not present
interest in the profits of the business as shown by a in a formal partnership arrangement. Mabuhay
50-50 sharing in the income of the mine. While a Holdings Corp. v. Sembcorp Logistics Ltd., 888
corporation, like petitioner, cannot generally enter SCRA 364 (2018).
into a contract of partnership unless authorized by
law or its charter, it has been held that it may enter Note: Section 35(h) of the Revised Corporation
into a joint venture which is akin to a particular Code provides that among the powers of a
partnership relationship. corporation it has the power to “ To enter into a
partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and
The fact that the instrument does not clearly provide juridical persons.”
for an option, and not an obligation, on the part of
one of the co-venturers to make contributions into h. Professional Partnership
the business enterprise, will not detract from the
legal fact that they constituted a partnership General professional partnership
between themselves: “The wording of the parties’ Two or more persons may also form a partnership
agreement as to petitioner’s contribution to the for the exercise of a profession (CIVIL CODE, Art.
common fund does not detract from the fact that 1767 [2]). A particular partnership includes one that
petitioner transferred its funds and property to the is formed for the exercise of a profession or a
project as specified in paragraph 5, thus rendering vocation. (Civil Code Art. 1783). The term “general
effective the other stipulations of the contract, professional partnership” is found in the National
particularly paragraph 5(c) which prohibits petitioner Internal Revenue Code where section 22(b)
from withdrawing the advances until termination of excludes such partnerships from the coverage of
the parties’ business relations. As can be seen, corporate income tax.
petitioner became bound by its contributions once
the transfers were made. The contributions acquired i. Management
an obligatory nature as soon as petitioner had
chosen to exercise the option.” Philex Mining Corp. POWERS OF THE PARTNER/S APPOINTED
v. CIR, 551 SCRA 428 (2008). AS MANAGER
Partner is Power of Vote of
appointed managing partners
While developer and landowners entered into a joint manager in partner is representing
venture, which is a form of partnership, the fact the Articles irrevocable controlling
remains that their joint venture was never privy to of without interest is
any obligation with Buenviaje. It must be pointed out partnership just/lawful necessary to
that the JVA was limited to the construction of the (CIVIL CODE, cause; revoke power
residential units under the Brentwoods Project, and Art. 1800) Revocable (CIVIL CODE,
thereafter the distribution of specified units between only when in Art. 1800)
the co-ventures; and that Jebson had the sole hand bad faith
in marketing the units allocated to it to third persons, (CIVIL CODE,
such as Buenviaje.Hence, liability cannot be Art. 1800)
imputed against the joint venture based on the same

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Partner is Power is CODE, Art.

appointed revocable any 1803(1))
manager time by the
after vote of the
constitution partners (Art. 2. Rights And Obligations Of The
of 1800) Partnership And Partners
partnership
(CIVIL CODE, a. Rights And Obligations Of The
Art. 1800) Partnership
Two or more Each may In case of
persons execute all opposition by All partners, including industrial ones, shall be liable
entrusted acts of any of the pro rata with all their property and after all the
with administration partners, partnership assets have been exhausted, for the
management (CIVIL CODE, decision of contracts which may be entered into in the name
of Art. 1801) majority of all and for the account of the partnership, under its
partnership the partners signature and by a person authorized to act for the
without shall prevail; partnership. However, any partner may enter into a
specification separate obligation to perform a partnership
of duties/ In case of tie, contract. (CIVIL CODE, Art. 1816)
stipulation decision of
that each partners Note: A person admitted as a partner into an
shall not act owning existing partnership is liable for all the obligations of
w/o the controlling the partnership arising before his admission as
other's interest shall though he had been a partner when such obligations
consent prevail (CIVIL were incurred, except that this liability shall be
(CIVIL CODE, CODE, Art. satisfied only out of partnership property, unless
Art. 1801) 1801) there is a stipulation to the contrary. (CIVIL C ODE,
Stipulated Concurrence Absence or Art. 1826)
that none of of all disability of
the managing necessary for any one Any stipulation against personal liability of partners
partners the validity of cannot be for partnership debts is void, except as among them.
shall act w/o acts (CIVIL alleged unless (CIVIL CODE, Art. 1817)
the consent CODE, Art. there is
of others 1802) imminent Partners are solidarily liable with the partnership
(CIVIL CODE, danger of in three instances (Civil Code Art. 1824):
Art. 1802) grave or
irreparable 1) Any wrongful act or omission of any
injury to partner acting in the ordinary course of the
partnership business of the partnership or with the
(CIVIL CODE, authority of his co-partners, loss or injury is
Art. 1802) caused to any person, not being a partner
Manner of All partners If refusal of in the partnership, or any penalty is incurred
management are agents of partner is (CIVIL CODE Art. 1822)
not agreed the manifestly 2) Where one partner acting within the scope
upon (CIVIL partnership prejudicial to of his apparent authority receives money or
CODE, Art. (i.e., any interest of property of a third person and misapplies it
1803) partner can partnership, (Civil Code Art. 1823(1)); and
bind the court's Where the partnership in the course of its business
partnership, intervention receives money or property of a third person and the
subject to Art. may be money or property so received is misapplied by any
1801 above). sought (CIVIL partner while it is in the custody of the partnership.
CODE, Art. (Civil Code Art. 1823 (2))
Unanimous 1803(2))
consent Partnership creditors are preferred to those of each
required for of the partners as regards the partnership property.
alteration of (CIVIL CODE, Art. 1827)
immovable
property (CIVIL

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Upon dissolution of the partnership, the partners appraisal must be made in the manner prescribed in
shall contribute the amounts necessary to satisfy the the contract of partnership, and in the absence of
partnership liabilities. (CIVIL CODE, Art. 1839(4), (7)) stipulation, it shall be made by experts chosen by
the partners, and according to current prices, the
Article 1816 provides: First, partners’ obligation to subsequent changes thereof being for account of
partnership liabilities is subsidiary in nature—they the partnership. (Civil Code Art. 1787)
shall only be liable with their property after all
partnership assets have been exhausted. Resort to Who bears the risk for specific and determinate
properties of a partner may be made only after things contributed:
efforts in exhausting partnership assets have failed • Where the Partner bears the risk: If these
or that such partnership assets are insufficient to are not fungible, contributed to the
cover the entire obligation. Second, that partners’ partnership so that only their use and fruits
obligation to third persons with respect to may be for the common benefit, shall be
partnership liability is pro rata or joint, i.e., liable only borne by the partner who owns them. (Civil
for the payment of only a proportionate part of the Code Art. 1795, 1st par.)
debt. Joint liability of partners is a defense that can • Where the Partnership bears the risk (Civil
be raised by a partner impleaded in a complaint Code Art. 1795 2nd par.):
against partnership. Guy v. Gacott, 780 SCRA 579 o If the things contributed are fungible,
(2016). or cannot be kept without
deteriorating, or
b. Obligations Of Partners Among o if they were contributed to be sold,
Themselves • In the absence of stipulation, the risk of the
things brought and appraised in the
Obligation to Contribute to the Common Fund inventory, and in such case the claim shall be
What May Be Contributed limited to the value at which they were
Contribution must be in equal shares unless appraised.
otherwise stipulated. (CIVIL CODE, Art. 1790) In
general, every partner is a debtor of the partnership c. Industry
for whatever he may have promised to contribute
thereto. (CIVIL CODE, Art. 1786,par. 1) An industrial partner is one who contributes his
industry, labor, or services to the partnership. He is
a. Money considered the owner of his services, which is
contribution to the common fund. (Limuco v. Calina,
A partner who has undertaken to contribute a sum [C.A.] No. 10099-R)
of money and fails to do so becomes a debtor for the
interest and damages from the time he should have When Immovables or Real Rights Contributed
complied with his obligation.(CIVIL CODE, Art. 1788, If immovables are not contributed, even if the capital
Par. 1) is at least PhP3,000, failure to comply with the
requirement of appearance in public instrument and
b. Property SEC Registration will not affect the liability of the
partnership and the members thereof to third
Bound for warranty against eviction persons. (CIVIL CODE, Art. 1772, [2])
A partner is bound for warranty in case of eviction
with regard to specific and determinate things which When immovable property are contributed, (1) the
he may have contributed to the partnership, in the Articles of Partnership must appear in a public
same cases and in the same manner as the vendor instrument, and (2) there must be an inventory of the
is bound with respect to the vendee. (Civil Code Art. property contributed signed by the parties and
1786, 2nd par.) attached to the public instrument. (CIVIL CODE,
Arts.1771 and 1773)
Liable for Fruits
A partner shall also be liable for the fruits of a Failure to prepare an inventory of the immovable
specific and determinate from the time they should property contributed shall render the partnership
have been delivered, without the need of any void pursuant to Art. 1773 except when:
demand. (Civil Code Art. 1786, 2nd par.) a. No third party is involved (since Art. 1773
was intended to protect 3rd persons);
When goods are contributed b. Partners themselves have made a claim
When the capital or a part thereof which a partner is based on the partnership agreement.
bound to contribute consists of goods, their (Torres v. CA, G.R. No. 134559)

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Consequence of Failure to Contribute Partners must contribute equal shares to the capital
Each partner has the obligation: of the partnership unless there is stipulation to
a. To contribute at the beginning of the contrary. (CIVIL CODE, Art. 1790)
partnership or at the stipulated time the
money, property or industry which he may Capitalist partners must contribute additional capital
have promised to contribute. (CIVIL CODE, in case of imminent loss to the business of the
Art. 1786) partnership and there is no agreement to the
b. To answer for eviction in case the contrary; refusal to do so shall create an obligation
partnership is deprived of the determinate on his part to sell his interest to the other partners.
property contributed (CIVIL CODE, Art. 1786) (CIVIL CODE, Art. 1791)
c. To answer to the partnership for the fruits
of the property the contribution of which he Requisites before a capitalist partner may be
delayed, from the date they should have obliged to sell his interest to the others:
been contributed up to the time of actual a. There is an imminent loss of the business
delivery (CIVIL CODE, Art. 1786) of the partnership
d. To preserve said property with the diligence b. The majority of the capitalist partners are of
of a good father of a family pending delivery the opinion that an additional contribution to
to partnership (CIVIL CODE, Art. 1163) the common fund would save the business
e. To indemnify partnership for any damage c. The capitalist partner refuses deliberately
caused to it by the retention of the same or to contribute (not due to financial inability)
by the delay in its contribution (CIVIL CODE, d. There is no agreement that even in case of
Arts.1788, 1170) an imminent loss of the business the
partners are not obliged to contribute. (De
In the event that there is a failure to contribute Leon, 2019)
property promised:
a. Partners become ipso jure a debtor of the The industrial partner is exempted from the
partnership even in the absence of any requirement to contribute an additional share.
demand (CIVIL CODE, Art. 1169[1]) (CIVIL CODE, Art.1791)
b. Remedy of the other partner is not
rescission but specific performance with Fiduciary Duty
damages from defaulting partner (CIVIL A partnership is a fiduciary relation—one entered
CODE, Art. 1788) into and to be maintained on the basis of trust and
confidence. With that, a partner must observe the
The partner shall be liable as a debtor of the utmost good faith, fairness, and integrity in his
partnership in two instances: dealings with the others:
a. when he fails to contribute money, on the a. He cannot directly or indirectly use
date he undertook to do so; partnership assets for his own benefit;
b. when he converts partnership funds for his (CIVIL CODE, Art. 1807)
own use, on the date he does so. b. He cannot carry on a business of the
partnership for his private advantage;
In both instances, the partner becomes a (CIVIL CODE, Art. 1807)
partnership debtor and is liable for interest and c. He cannot, in conducting the business of
damages. (CIVIL CODE, Art. 1788) the partnership, take any profit
clandestinely; (CIVIL CODE, Art. 1807)
A partner who promises to contribute to partnership d. He cannot obtain for himself that which he
becomes a promissory debtor of the partnership, should have obtained for the partnership
including liability for interests and damages caused (e.g., business opportunity) (CIVIL CODE,
for failure to pay, and which amounts may be Art. 1789, Art. 1808)
deducted upon dissolution of the partnership from e. He cannot carry on another business in
his share in the profits and net assets. (Rojas v. competition with the partnership; and
Maglana, G.R. No. 30616) (CIVIL CODE, Art. 1808)
f. He cannot avail himself of knowledge or
c. Obligations with respect to information, which may be properly
Contribution to Partnership regarded as the property of the partnership.
Capital (CIVIL CODE, Art. 1807)
g. Every partner is responsible to the
partnership for damages suffered by it
through his fault, and he cannot

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compensate them with the profits and ii. If he received it for the account of
benefits which he may have earned for the partnership, the whole sum shall be applied
partnership by his industry. However, the to partnership credit.(CIVIL CODE,Art. 1792
courts may equitably lessen this 1st par.)
responsibility if through the partner's
extraordinary efforts in other activities of the However, if the personal credit of the partner is more
partnership, unusual profits have been onerous to the debtor, the debtor may exercise his
realized. (CIVIL CODE, Art. 1794) right under Article 1252 to declare at the time of
making the payment, to which of them the same
A. Prohibition to Engage in Competitive must be applied provided that the debt to which the
Business payment is applied is due. (CIVIL CODE,Art.: 1792 2nd
par. & Art. 1252)
1. If an industrial partner engages in any business
without the consent of the partnership: C. Partner who Receives Share of Partnership
i. He can be excluded from the partnership; Credit
or
ii. The capitalist partners can avail of the Obligation of partner who receives share of
benefit he obtained from the business. partnership credit from a debtor who becomes
insolvent: Bring to the partnership capital what he
Note: The capitalist partners have the right to file an has received even though he may have given
action for damages against the industrial partner in receipt for his share only (CIVIL CODE, Art. 1793)
either case. (CIVIL CODE, Art. 1789)
Requisites:
An industrial partner is not deemed to have violated 1. A partner has received, in whole or in part, his
his fiduciary duties to the other partners by having share of the partnership credit
delivered on the particular service required of her 2. The other partners have not collected their
and devoting her time serving in the judiciary which shares
is not considered to be engaged in an activity for 3. The partnership debtor has become insolvent
profit. Evangelista & Co. v. Abad Santos, 51 SCRA
416 (1973)
Rules for Distribution of Profits and Losses
2. Unless there is a stipulation to the contrary, if (CIVIL CODE, Art. 1797)
the capitalist partner engages for his own
account in any operation which is the kind of There are three situations provided under Article
business of the partnership 1797 of the Civil Code:
i. He shall be required to bring to the common 1. When the partners agree on how to
fund the profits he derived from the distribute profits and losses.
competing business; and
ii. He shall personally bear the losses. (CIVIL Consequence: The distribution of profits and losses
CODE, Art. 1808) will be in conformity with such agreement bearing in
mind that any agreement excluding any partner from
When a partner engages in a separate business any share in either profit or losses is prohibited
enterprise that is competitive with that of the under Art. 1799 of the Civil Code.
partnership, the other partner’s withdrawal becomes
thereby justified and for which the latter cannot be 2. When partners agree only on the profits.
held for damages. (Rojas v. Maglana, G.R. No
30616) Consequence: The share of each of each partner
in the losses shall be in the same proportion as the
B. Managing Partner who Collects Debt from profit
Third Party
3. In the absence of any stipulation:
Obligation of a partner authorized to manage the
partnership who collects debt from person who Consequence: The share of the capitalist partner in
owed him and the partnership: the profits and losses shall be in proportion to what
i. Apply sum collected to the two credits (i.e., he may have contributed.
amount owed to the managing partner in his
personal capacity and amount owed to the Article 1797 also provides a special rule for
partnership) in proportion to their amounts. industrial partners as follows:
(a) Industrial partners are not liable for losses.

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(b) For profits:

o the industrial partner shall receive what is Note: The designation of losses and profits cannot
just and equitable; be entrusted to one of the partners. (CIVIL CODE,
o if besides his services, he has Art. 1798)
contributed capital, he shall also receive
a share in the profits in proportion to his 2. Restrictions by virtue of “DELECTUS
capital. PERSONAE” on partner’s rights over his
share:
Note: Losses are not to be confused with liability. a. Every partner may associate another
Losses and Liability operate independently of each person with him in his share, but the
other. Partnership liability can exist regardless of associate shall not be admitted into the
whether there are profits or losses and vice-versa. partnership without the consent of all the
Thus, under Article 1816 of the Civil Code, all other partners, even if the partner having an
partners, including industrial ones, shall be liable associate should be a manager. (CIVIL
pro rata with all their property and after all the CODE,Art. 1804)
partnership assets have been exhausted, for the b. A conveyance by a partner of his whole
contracts which may be entered into in the name interest in the partnership does not of itself
and for the account of the partnership, under its dissolve the partnership. In such case, as
signature and by a person authorized to act for the against the other partners in the absence of
partnership. However, any partner may enter into a agreement, the assignee
separate obligation to perform a partnership (i) is NOT entitled, during the
contract. And in the succeeding Article 1817, any continuance of the partnership, to:
stipulation against the liability laid down in the to interfere in the management or
preceding article shall be void, except as among the administration of the partnership
partners. business or affairs, or
to require any information or
Note: A stipulation which excludes one or more account of partnership
partners from any share in the profits and losses is transactions, or
void. (CIVIL CODE, Art. 1799) to inspect the partnership books;
(ii) but it merely entitles the assignee to
When the agreement in a partnership to pay a high ✓ receive in accordance with his
commission to one of the partners was in contract the profits to which the
anticipation of large profits being made from the assigning partner would otherwise
venture, which eventually sustained losses, there is be entitled.
no legal basis to demand for the payment of the ✓ However, in case of fraud in the
commissions since the essence of the partnership is management of the partnership,
the sharing of profits and losses. Moran, Jr. v. Court the assignee may avail himself of
of Appeals, 133 SCRA 88 (1984). the usual remedies.
✓ In case of a dissolution of the
An MOU executed by the partners to shift losses to partnership, the assignee is
the principal partner does not change the nature of entitled to receive his assignor's
the arrangement as a partnership and the terms of interest and may require an
the MOU are binding among the partners, but not as account from the date only of the
to the creditors of the partnership. Saludo v. Phil. last account agreed to by all the
National Bank, 878 SCRA 43 (2018). partners. (CIVIL CODE,Art. 1813)
Rules on resolving disputes on the sharing of The right to choose with whom to associate himself
profits and losses: is the very foundation and essence of the
If the partners have agreed to intrust to a third partnership. Its continued existence is, in turn,
person the designation of the share of each one in dependent on the constancy of that mutual resolve,
the profits and losses: along with each partner’s capability to give it, and
(a) such designation may be impugned only when the absence of a cause for dissolution provided by
it is manifestly inequitable. the law itself. Ortega v. Court of Appeals, 245 SCRA
(b) In no case may a partner who has begun to 529 (1995).
execute the decision of the third person, or
who has not impugned the same within a
period of three months from the time he had
knowledge thereof, complain of such decision.

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3. Property Rights of a Partner ii) If right exists under the terms of any
a. The property rights of a partner are: agreement
i) His rights in specific partnership iii) As provided by Art. 1807
property; iv) Whenever other circumstances render
ii) His interest in the partnership; and it just and reasonable
iii) His right to participate in the c. Duty to render on demand true and full
management (CIVIL CODE,Art. 1810) information affecting partnership to any
partner or legal representative of any
b. Definition of a partner’s interest in the deceased partner or of any partner under
partnership: A partner's interest in the legal disability (CIVIL CODE,Art. 1806)
partnership is his share of the profits and d. Duty to account to the partnership as
surplus. (CIVIL CODE,Art. 1812) fiduciary (CIVIL CODE,Art. 1807)
Note the difference between the right to inspect and
c. A partner is co-owner with his partners of copy the partnership books (Art. 1805) demand a
specific partnership property. The incidents formal account (Art. 1809 and 1807) and the right to
of this co-ownership are such that: true and full information (Art. 1806).
i) A partner, subject to any agreement
between the partners, has an equal 5. Responsibility of Partnership to Partners
right with his partners to possess a. To refund the amounts disbursed by
specific partnership property for partner on behalf of the partnership plus
partnership purposes; but he has no corresponding interest from the time the
right to possess such property for any expenses are made (loans and advances
other purpose without the consent of made by a partner to the partnership aside
his partners; from capital contribution)
ii) A partner's right in specific partnership b. To answer for obligations partner may have
property is not assignable except in contracted in good faith in the interest of the
connection with the assignment of partnership business
rights of all the partners in the same To answer for risks in consequence of its
property; management(CIVIL CODE, Art. 1796)
iii) A partner's right in specific partnership
property is not subject to attachment or Other Rights and Obligations of Partners
execution, except on a claim against a. Right to associate another person with him
the partnership. When partnership in his share without consent of other
property is attached for a partnership partners (sub-partnership) (CIVIL CODE, Art.
debt the partners, or any of them, or the 1804)
representatives of a deceased partner, b. Right to inspect and copy partnership
cannot claim any right under the books at any reasonable hour (CIVIL CODE,
homestead or exemption laws; Art. 1805)
iv) A partner's right in specific partnership c. Right to a formal account as to partnership
property is not subject to legal support affairs (even during existence of
under article 291. partnership): (CIVIL CODE, Art. 1809)
(CIVIL CODE,Art. 1811) i. If he is wrongfully excluded from
partnership business or possession
4. Rights and Obligations of Partners with of its property by his copartners
respect to accounts and information ii. If right exists under the terms of any
a. Right to inspect and copy partnership agreement
books at any reasonable hour and such iii. As provided by Art. 1807
partnership books partnership books shall iv. Whenever other circumstances
be kept, subject to any agreement between render it just and reasonable
the partners, at the principal place of d. Duty to render on demand true and full
business of the partnership. (CIVIL information affecting partnership to any
CODE,Art. 1805) partner or legal representative of any
b. Right to a formal account as to partnership deceased partner or of any partner under
affairs (even during existence of legal disability (CIVIL CODE, Art. 1806)
partnership): (CIVIL CODE,Art. 1809) e. Duty to account to the partnership as
i) If he is wrongfully excluded from fiduciary (CIVIL CODE, Art. 1807)
partnership business or possession of
its property by his copartners

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Responsibility of Partnership to Partners property of third persons. (CIVIL C ODE Arts. 1824,
a. To refund the amounts disbursed by 1822 & 1823)
partner on behalf of the partnership plus
corresponding interest from the time the Liability of incoming partner is limited to:
expenses are made (loans and advances 1. For partnership obligations arising before his
made by a partner to the partnership aside admission - his share in the partnership
from capital contribution) property
b. To answer for obligations partner may have 2. For partnership obligations arising upon his
contracted in good faith in the interest of the admission - his share in the partnership
partnership business property and his separate property (CIVIL CODE,
c. To answer for risks in consequence of its Art. 1826)
management (CIVIL CODE, Art. 1796)
Creditors of partnership preferred in partnership
d. Obligations Of Partnership Or property & may attach partner's share in partnership
Partners To Third Persons assets. (CIVIL CODE, Art. 1827)
Every partnership shall operate under a firm name. Remedy of Partner’s Separate Creditors (CIVIL
Persons who include their names in the partnership CODE, Art. 1814); the Charging Order:
name even if they are not members shall be liable
as a partner. (CIVIL CODE, Art. 1815) Without prejudice to the preferred rights of
partnership creditors under Article 1827, the
All partners shall be liable for contractual obligations competent court, upon application by a judgment
of the partnership with their property, after all creditor of a partner, , the court which entered the
partnership assets have been exhausted: judgment, or any other court, may:
1. Pro rata
2. Subsidiary (CIVIL CODE, Art. 1816) 1. Issue an order charging the interest of the
debtor partner with the payment of the
Admission or representation made by any partner unsatisfied amount of the judgment debt as
concerning partnership affairs within scope of his well as the interest
authority is evidence against the partnership. (CIVIL 2. Appoint a receiver of the debtor partner’s
CODE, Art. 1820) share of the profits and any other money
due or to fall due to him in respect of the
General rule: Notice to partner of any matter partnership
relating to partnership affairs operate as notice to 3. Make all other orders, directions, accounts,
partnership. (CIVIL CODE, Art. 1821) and inquiries which the debtor partner
might have made, or which the
Cases of Knowledge of a Partner circumstances of the case may require
The following operate as notice to or knowledge of 4. Direct the sale of the interest charged.
the partnership:
• Notice to any partner of any matter relatinf Redemption from a Charging Order:
to partnership affairs and, The interest charged may be redeemed at any time
before foreclosure, or in case of a sale being
• The knowledge of the partner acting in the
directed by the court, may be purchased without
particular matter then present to his mind
thereby causing a dissolution:
o Acquired while a partner or then
1. With separate property, by any one or more
present to his mind
of the partners; or
• Knowledge of any other partner who
2. With partnership property, by any one or
reasonably could and should have
more of the partners with the consent of all
communicated it to the acting partner (CIVIL
the partners whose interests are not so
CODE, Art.1821)
charged or sold.
Exception: Except in case of fraud on partnership
Power of Partner as an Agent of the Partnership
committed by or with the consent of that partner.
(Art. 1818)
(CIVIL CODE, Art. 1821)
ACTS EFFECT
Keep note that partners are solidarily liable with the Acts for carrying on in Every partner is an
with the partnership for wrongful acts or omissions the usual way the agent and may
in the course of business or with the authority of the business of the execute acts with
partners and for the misapplication of money or partnership binding effect

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partnership may
Except: when he has recover.
no authority and 3rd
person has knowledge Partnership may
of lack of authority recover the property
Act which is not Does not bind unless:
apparently for the partnership unless
carrying of business in authorized by other the conveyance was
the usual way partners done in accordance
with the 1st par. of
Acts of strict dominion Art.1818, or
or ownership: theproperty has been
Assign partnership conveyed to a holder
property in trust for for value without
creditors knowledge that the
Dispose of good-will partner, in making the
of business conveyance, has
Do an act which would exceeded his
make it impossible to authority.
carry on ordinary Title in partnership Any partner may
business of name, Conveyance in convey title to such
partnership partner's name property by a
Confess a judgment conveyance executed
Enter into in the partnership
compromise name.
concerning a
partnership claim or Such conveyance
liability binds the partnership
Submit partnership if. If otherwise, the
claim or liability to partnership may
arbitration recover.
Renounce claim of
partnership Partnership may
Acts in contravention Partnership is not recover the property
of a restriction on liable to 3rd persons unless:
authority having actual or
presumptive The conveyance was
knowledge of the done in accordance
restrictions with the 1st par. of
Art.1818, or the
Admission or representation made by any partner property has been
concerning partnership affairs within scope of his conveyed to a holder
authority is evidence against the partnership. (CIVIL for value without
CODE, Art. 1820) knowledge that the
partner, in making the
Effects of Conveyance of Real Property conveyance, has
Belonging to Partnership (CIVIL CODE, Art. 1819) exceeded his
TITLE EFFECT authority.
Title in partnership Any partner may
name, Conveyance in convey title to such Title in name of 1 or The partners in whose
partnership name property by a more partners, name the title stands
conveyance executed Conveyance in name if may convey title to
in the partnership partner/partners in such property.
name. whose name title
stands Partnership may
Such conveyance recover the property
binds the partnership unless:
if. If otherwise, the

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The conveyance was a. Causes Of Dissolution (CIVIL

done in accordance CODE, Art. 1830)
with the 1st par. of
Art.1818 or the Causes of Dissolution
property has been Scenario 1: DISSOLUTION WITHOUT VIOLATION
conveyed to a holder OF THE PARTNERSHIP AGREEMENT
for value without
knowledge that the Without violation of the agreement between the
partner, in making the partners
conveyance, has a. By the termination of the definite term/
exceeded his particular undertaking specified in the
authority. agreement
b. By the express will of any partner, who
must act in good faith, when no definite
Title in name of The conveyance term or particular undertaking is specified
1/more/all partners or executed by a partner c. By the express will of all the partners who
3rd person in trust for in the partnership have not assigned their interests to be
partnership, name, or in his own charged for their separate debts, either
Conveyance executed name, passes the before or after the termination of any
in partnership name if equitable interest of specified term or particular undertaking
in name of partners the partnership, d. By the bona fide expulsion of any partner
provided the act is one from the business in accordance with
within the authority of power conferred by the agreement
the partner under the
provisions of the first Scenario 2: DISSOLUTION IN CONTRAVENTION
paragraph of article OF THE PARTNERSHIP AGREEMENT
1818.
Title in name of all A conveyance In contravention of the agreement between the
partners, Conveyance executed by all the partners, where the circumstances do not permit a
in name of all partners partners passes all dissolution under any other provision of Article 1830,
their rights in such by the express will of any partner at any time
property.
Scenario 3: DISSOLUTION WHERE IT DOES NOT
MATTER WHAT THE PARTNERSHIP
Note: Any immovable property or an interest therein AGREEMENT PROVIDES
may be acquired in the partnership name. Title so
acquired can be conveyed only in the partnership 1. By any event which makes it unlawful for
name. (CIVIL CODE, Art. 1774) business to be carried on/for the members to
carry it on for the partnership
3. Dissolution And Winding Up 2. Loss of specific thing promised by partner
before its delivery
Dissolution is the change in the relation of the 3. Death of any partner
partners caused by any partner ceasing to be 4. Insolvency of a partner/partnership
associated in the carrying on of the business; 5. Civil interdiction of any partner
partnership is not terminated but continues until the 6. Decree of court under Art. 1831.
winding up of partnership affairs is completed. (CIVIL
CODE, Art. 1828) If a partnership has no fixed term, then it is a
partnership at will and can be dissolved by the
Winding up is the process of settling the business will of any partner. However, such partner must be
or partnership affairs after dissolution, which in good faith, otherwise, he will be liable for
includes the paying of previous obligations, damages. Among partners, mutual agency arises
collecting of assets previously demandable. (Idos v. and the doctrine of delectus personae allows them
Court of Appeals, G.R. No. 110782) to have the power, but not necessarily the right, to
dissolve the partnership (Ortega v. Court of
Termination is that point when all partnership Appeals, G.R. 109248).
affairs are completely wound up and finally settled.
It signifies the end of the partnership life. (Idos v.
Court of Appeals, G.R. No. 110782)

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Grounds for dissolution by decree of court b. Transactions which would bind partnership
(CIVIL CODE, Art. 1831): if not dissolved, when the other party:
1. Partner declared insane in any judicial Situation 1
proceeding or shown to be of unsound mind (1) Had extended credit to partnership
2. Incapacity of partner to perform his part of the prior to dissolution; and
partnership contract (2) Had no knowledge/notice of
3. Partner guilty of conduct prejudicial to business dissolution
of partnership Situation 2
4. Willful or persistent breach of partnership (1) Did not extend credit to
agreement or conduct which makes it partnership;
reasonably impracticable to carry on (2) Had known partnership prior to
partnership with him dissolution; and
5. Business can only be carried on at a loss (3) Had no knowledge/notice of
6. Other circumstances which render dissolution dissolution/fact of dissolution not
equitable advertised in a newspaper of
7. Upon application by purchaser of partner's general circulation in the place
interest: where partnership is regularly
a. After termination of specified carried on
term/particular undertaking
b. Anytime if partnership at will when interest Post Dissolution (CIVIL CODE, Art. 1834)
was assigned/charging order issued Partner cannot bind the partnership anymore
after dissolution:
b. Effects Of Dissolution 1. Where dissolution is due to unlawfulness to
carry on with business (except: winding up of
Authority of Partner to Bind Partnership partnership affairs)
General rule: Authority of partners to bind 2. Where partner has become insolvent
partnership is terminated. (CIVIL CODE, Art. 1832) 3. Where partner unauthorized to wind up
partnership affairs, except by transaction with
Exceptions: one who:
1. To wind up partnership affairs
2. Complete transactions not finished (CIVIL CODE, Situation 1
Art. 1834) a. Had extended credit to partnership prior to
dissolution, and
b. Had no knowledge/notice of dissolution; or
Qualifications
1. With respect to Partners (CIVIL CODE, Art.
Situation 2
1833)
a. Did not extend credit to partnership prior to
Authority of partners to bind partnership by new
dissolution
contract is immediately terminated when
b. Had known partnership prior to dissolution
dissolution is not due to act, death, or
c. Had no knowledge/notice of dissolution/fact
insolvency (ADI) of a partner.
of dissolution not advertised in a
newspaper of general circulation in the
If due to ADI, partners are liable as if partnership not
place where partnership is regularly carried
dissolved, when the following concur:
on
a. If cause is act of partner, acting partner
must have knowledge of such dissolution;
and c. Rights Of Partners Upon
b. If cause is death or insolvency, acting Dissolution
partner must have knowledge/ notice.
General rule: Dissolution does not discharge
2. With respect to Persons not Partners (CIVIL existing liability of partner
CODE, Art. 1834)
Exceptions: Except by agreement between:
Partner continues to bind partnership even after 1. The partner himself,
dissolution in following cases: 2. The partnership creditors and
a. Transactions in connection to winding up 3. The person/partnership continuing the business
partnership affairs/completing unfinished (CIVIL CODE, Art. 1835)
transactions

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d. Rights of Partner where Assets of the partnership

Dissolution not in 1. Partnership property (including goodwill)
Contravention of Agreement 2. Contributions of the partners (CIVIL CODE, Art.
(CIVIL CODE, Art. 1837) 1839 [1])
Order of Application of Assets

1. Apply partnership property to discharge
liabilities of partnership 1. Partnership creditors
2. Apply surplus, if any, to pay in cash the net 2. Partners as creditors
amount owed to partners 3. Partners as investors—return of capital
contribution
4. Partners as investors—share of profits if any
e. Rights of Partner where
(CIVIL CODE, Art. 1839 [2])
Dissolution in Contravention of
Agreement The partners will contribute the amount necessary
(CIVIL CODE, Art. 1837) to satisfy the liabilities based on the rules for
distribution of profits and losses in Art. 1797 (CIVIL
A. Partner who did not cause dissolution CODE, Art. 1839 [4]). Even the individual property of
wrongfully a deceased partner shall be liable for such
i. Apply partnership property to discharge contributions (CIVIL CODE, Art. 1839 [7]).
liabilities of partnership
ii. Apply surplus, if any to pay in cash the net The right to an account of his interest shall accrue
amount owed to partners to any partner, or his legal representative as against
iii. Indemnity for damages caused by partner the winding up partners or the surviving partners or
guilty of wrongful dissolution the person or partnership continuing the business,
iv. Continue business in same name during at the date of dissolution, in the absence of any
agreed term agreement to the contrary. (CIVIL CODE, Art. 1842)
v. Possess partnership property if business is
continued h. When Business Of Dissolved
B. Partner who wrongly caused dissolution
Partnership Is Continued
i. If business not continued by others
a. Apply partnership property to
Effects:
discharge liabilities of partnership
1. Creditors of old partnership are also creditors of
b. Receive in cash his share of surplus
the new partnership, which continues the
less damages caused by his wrongful
business of the old one w/o liquidation of the
dissolution
partnership affairs (CIVIL CODE, Art.1840)
ii. If business continued by others
2. Creditors have an equitable lien on the
a. Have the value of his interest at time of
consideration paid to the retiring /deceased
dissolution ascertained and paid in
partner by the purchaser when
cash/secured by bond
retiring/deceased partner sold his interest w/o
b. Be released from all existing/future
final settlement with creditors (CIVIL CODE, Art.
partnership liabilities
1840)
f. Rights of Injured Partner where The retired or deceased partner or his legal
Partnership Contract is representatives may
Rescinded on Ground of a. Have the value of his interest ascertained
Fraud/Misrepresentation by One as of the date of dissolution
Party (CIVIL CODE, Art. 1838) b. May receive as ordinary creditor the value
of his share in the dissolved partnership
1. Right to lien on surplus of partnership property with interest or profits attributable to use of
after satisfying partnership liabilities his right, at his option (CIVIL CODE, Art.
2. Right to subrogation in place of creditors after 1841)
payment of partnership liabilities
3. Right of indemnification by guilty partner i. Persons Authorized To Wind Up
against all partnership debts & liabilities
1. Partners designated by the agreement
g. Settlement of Accounts between 2. In absence of agreement, all partners who have
Partners not wrongfully dissolved the partnership

ATENEO CENTRAL
3. Legal representative of last surviving partner equity from the other partners; it is the partnership
(CIVIL CODE, Art. 1836) that must refund the equity of the retiring partners.
However, before partners can be paid their shares,
The remedy of a partner who furnished the capital partnership creditors must first be compensated;
for the recovery of his money is not a action for whatever is left thereafter becomes available for the
estafa, but a civil one arising from the partnership payment of the partners’ shares. It is wrong to
contract for a liquidation of the partnership and a presume that capital contributions at the beginning
levy on its assets if there should be any. (U.S. v. of the partnership remains intact, unimpaired and
Clarin, 17 Phil. 84 (1910). available for distribution or return to the partners, or
that the total capital contribution in a partnership is
Since the parties entered into a joint venture as equivalent to the gross assets to be distributed to
evidenced by their JVA, the issues shall be the partners at the time of dissolution of the
governed by the laws on partnership. Since it has partnership. In the pursuit of a partnership business,
been proven that Primelink as developer of the its capital is either increased by profits earned or
subdivision project has defrauded the Lazatins from decreased by losses sustained; it does not remain
their share in the income, it was proper for the trial static and unaffected by the changing fortunes of the
court to give possession of the property under business. When partners venture into business
development to the Lazatins who had sought together, they should have prepared for the fact that
rescission of the JVA. However, the property is held their investment would either grow or shrink.
by the Lazatins for purposes of winding-up the Villareal v. Ramirez, 406 SCRA 145 (2003).
affairs of the joint venture as provided under Art.
1836. Until there is proper winding-up of the affairs 4. Limited Partnership
which requires the settlement of all claims of
partnership creditors, it would be premature for a. Characteristics Of Limited
Primelink to demand the value of the improvements Partnership
it has introduced on the property contributed by the
Lazatins. (Primelink Properties and Dev. Corp. v. a. Formed by two or more persons by complying
Lazatin-Magat, 493 SCRA 444 (2006)). with registration requirements having as
members one or more general partners and one
Failure of partner to have published her withdrawal, or more limited partners. The limited partners as
and her agreeing to have remaining partners such shall not be bound by the obligations of the
proceed with running the partnership business partnership. (CIVIL CODE, Art. 1843))
instead of insisting on the liquidation of the b. Subtantial compliance with statutory
partnership, will not relieve withdrawing partner from requriements (CIVIL CODE, Art. 1844)
her liability to the partnership creditors. Even if c. One or more general partners control the
withdrawing partner acted in good faith, this cannot business (CIVIL CODE, Art. 1843)
overcome the position of creditors who also acted in d. One or more general partners and one or more
good faith, without knowledge of her withdrawal limited partners. (CIVIL CODE, Art. 1843) Limited
from the partnership. Thus, when the partnership partners (i) contribute cash or other property,
executes a chattel mortgage over its properties in but not services (CIVIL CODE, Art. 1845); (ii)
favor of a withdrawing partner, and the withdrawal share in the profits but do not participate in the
was not published to bind the partnership creditors, management of the business (CIVIL CODE, Art.
and in fact the partnership itself was not dissolved 1848); and (iii) are not personally liable for
but allowed to be operated as a going concern by partnership obligations beyond their capital
the remaining partners, the partnership creditors contributions
have standing to seek the annulment of the chattel e. May ask for the return of their capital
mortgage for having been entered into adverse to contributions under conditions prescribed by
their interests. (Singson v. Isabela Sawmill, 88 law (CIVIL CODE, Art. 1857)
SCRA 623 (1979) f. Partnership debts are paid out of common fund
and the individual properties of general partners
A partner’s share cannot be returned without first (CIVIL CODE, Art. 1857)
dissolving and liquidating the business for the
partnership’s outside creditors have preference over
the enterprise’s assets. The firm’s property cannot
be diminished to their prejudice. (Magdusa v.
Albaran, G.R. No. L-17526)
Upon the partnership’s dissolution, the withdrawing

partners have no cause to demand the return of their

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b. General Partners V. Limited h. Time, if agreed upon, to return contribution of

Partners limited partner
i. Sharing of profits/other compensation (CIVIL
GENERAL LIMITED CODE, Art. 1844)
Personally liable for Liability extends only
partnership to his capital Note: If given, the following must also appear in
obligations (CIVIL contributions (CIVIL the Certificate/Articles of Limited Partnership:
CODE, Art. 1816) CODE, Art. 1843) a. Right of limited partner to substitute an
When manner of No participation in assignee as contributor and the terms of
management not management (CIVIL substitution
agreed upon, all have CODE, Art. 1848) b. Right of partners to admit additional limited
an equal right in the partners
management of the c. Right of one or more limited partners to priority
business (CIVIL CODE, over other limited partners as to contributions
Art. 1803) and compensation
Contribute cash, Contribute cash or d. Right of remaining partners to continue the
property or industry property only, not business on death, retirement, civil interdiction,
(CIVIL CODE, Art. 1767) industry (CIVIL CODE, insanity, or insolvency of a general partner
Art. 1845) j. Right of limited partner to demand and receive
property other than cash in return for his
Proper party to Not proper party to
contribution (CIVIL CODE, Art. 1844)
proceedings by/ proceedings by/
against partnership against partnership
(CIVIL CODE, Art. 1866) (CIVIL CODE, Art. 1866) Certificate must be filed with the SEC. (CIVIL
CODE, Art. 1844)
Interest not assignable Interest is freely
w/o consent of other assignable (CIVIL
partners (CIVIL CODE, CODE, Art. 1859) Note: To validly form a limited partnership, all that is
Art. 1804) required is substantial compliance in good faith with
Name may appear in Name must not all the requirements under Art. 1844 as enumerated
firm name (CIVIL CODE, appear in firm name above. If no substantial compliance, then the firm
Art. 1815) (CIVIL CODE, Art. 1846) becomes a general partnership as far as third
persons are concerned (but as amongst the
Prohibition against No prohibition against
partners, still limited) (Jo Chung Cang v. Pacific
engaging in business engaging in business
Commercial Co., 45 Phil 142)
(CIVIL CODE, Art. 1789,
Art. 1808)
Retirement, death, Does not have same d. Consent/Ratification Of All
insolvency, insanity effect; rights Limited Partners Needed
dissolves partnership transferred to legal
(CIVIL CODE, Art. 1830) representative (CIVIL i. Any act in contravention of the certificate
CODE, Art. 1861) ii. Any act which would make it impossible to
carry on the ordinary business of the
c. Requirements For Formation Of partnership
iii. Confess judgment against partnership
Limited Partnership
iv. Possess partnership property/assign rights
in specific partnership property other than
Certificate/Articles of Limited Partnership, which for partnership purposes
must be signed and sworn by the parties, must state v. Admit person as general partner
the following matters: vi. Admit person as limited partner - unless
a. Name of partnership plus the word "Limited" (or authorized in certificate
“Ltd.” – SEC Memorandum Circular 13-2019) vii. Continue business with partnership
b. Character of business property on death, retirement, civil
c. Location of principal place of business interdiction, insanity, or insolvency of gen
d. Name/place of residence of members partner unless authorized in certificate
e. Term for partnership is to exist (CIVIL CODE, Art.1850)
f. Amount of cash/value of property contributed by
limited partners
e. Rights Of Limited Partners
g. Additional contributions, if any, to be made by
limited partner
i. Right to have partnership books kept at
principal place of business

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ii. Right to inspect/copy books at reasonable that stated in the certificate as

hour having been made, and
iii. Right to have on demand true and full info 2. For any unpaid contribution which
of all things affecting partnership he agreed in the certificate to
iv. Right to have formal account of partnership make in the future time (CIVIL
affairs whenever circumstances render it CODE, Art. 1858)
just and reasonable b. As a Trustee for the Partnership
v. Right to ask for dissolution and winding up 1. For the specific property stated in
by decree of court the certificate as contributed by
vi. Right to receive share of profits/other him but which he had not
compensation by way of income contributed;
vii. Right to receive return of contributions 2. For the specific property of the
provided the partnership assets are in partnership which had been
excess of all its liabilities (CIVIL CODE, Art. wrongfully returned to him; and
1851) 3. Money or other property wrongfully
viii. A limited partner may receive from the paid or conveyed to him on
partnership the share of the profits or the account of his contribution. (CIVIL
compensation by way of income stipulated CODE, Art. 1858)
for in the certificate; provided, that after
such payment is made, whether from Note Charging Order on a limited partner under
property of the partnership or that of a Article 1862:
general partner, the partnership assets are On due application to a court of competent
in excess of all liabilities of the partnership jurisdiction by any creditor of a limited partner, the
except liabilities to limited partners on court may:
account of their contributions and to 1. Issue an oder to charge the interest of the
general partners. (CIVIL CODE, Art. 1856) indebted limited partner with payment of
the unsatisfied amount of such claim, and
Note: Where there are several limited partners the 2. May appoint a receiver, and
members may agree that one or more of the limited 3. Make all other orders, directions and
partners shall have a priority over other limited inquiries which the circumstances of the
partners as to the return of their contributions, as to case may require.
their compensation by way of income, or as to any
other matter. If such an agreement is made it shall Redemption from a Charging Order on a limited
be stated in the certificate, and in the absence of partner:
such a statement all the limited partners shall stand
upon equal footing. (CIVIL CODE, Art. 1855) The interest may be redeemed with the separate
property of any general partner, but may not be
redeemed with partnership property. (CIVIL CODE,
f. Requisites For Return Of Art. 1862, compare this with the Charging Order
Contribution Of Limited Partner under Art. 1814)
i. All liabilities of partnership have been h. Dissolution Of Limited

paid/if not yet paid, at least sufficient to Partnership
cover them
ii. Consent of all members has been obtained Priority in Distribution of Assets
a. Those due to creditors, including
Exception: The return of the contribution limited partners
may be rightfully demanded. b. Those due to limited partners in
respect of their share in
iii. Certificate is cancelled/amended as to set profits/compensation
forth withdrawal /reduction of contribution c. Those due to limited partners of return
(CIVIL CODE, Art. 1857) of capital contributed
d. Those due to general partner other
g. Liabilities Of A Limited Partner than capital and profits
e. Those due to general partner in respect
a. To the Partnership to profits
f. Those due to general partner for return
1. For the difference between his
of capital contributed (CIVIL CODE, Art.
contribution as actually made and
1863)

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i. Amendment Of Certificate Of Note: Any person who suffers loss by reliance on

Partnership false statement in certificate may hold liable for
damages any party to the certificate who knew the
Certificate Must Be Cancelled When: statement to be false at the time the latter signed the
a. Partnership is dissolved certificate or came to know such falsity
b. There cease to be limited Partners (CIVIL subsequently but within sufficient time before
CODE, Arts.1864 & 1865) reliance to enable such party to cancel or amend the
certificate or file the proper petition for such purpose
Certificate of Partnership Must Be Amended (under Art. 1865). (CIVIL CODE, Art. 1847; Walraven
When: v. Ramsay, 55 N.W.d 853)
a. There is a change in the name of the
partnership or in the amount or character of A general partner’s DIIC (Death, Insolvency,
the contribution of any limited partner; Insanity, or Civil interdiction) dissolves the
b. A person is substituted as a limited partner; partnership unless the business is continued by the
c. An additional limited partner is admitted; surviving general partners under a right stated in the
d. A person is admitted as a general partner; certificate or with their common (i.e., all) consent
e. A general partner retires, dies, becomes (CIVIL CODE, Art. 1860). Still, even if allowed under
insolvent or insane, or is sentenced to civil the certificate or consented to by all, there must be
interdiction and the business is continued an amendment further to Arts. 1864 and 1865.
under Article 1860; Otherwise, limited partners will not be able to avail
f. There is a change in the character of the of the protection of the law as regards liability. The
business of the partnership; partnership will be considered general. (Lowe v.
g. There is a false or erroneous statement in Arizona Power & Light Co., 427 P. d. 366)
the certificate;
h. There is a change in the time as stated in A limited partner shall not become liable as a
the certificate for the dissolution of the general partner, unless in addition to the exercise of
partnership or for the return of a his rights and powers as a limited one, he takes part
contribution; in the control (and management) of the business
i. A time is fixed for the dissolution of the (CIVIL CODE, Art. 1848; Holzman v. Escamilla, 195
partnership, or the return of a contribution, P. d. 833, 1948)
no time having been specified in the
certificate, or A person may be a general and limited partner
j. The members desire to make a change in at the same time provided this fact is stated in the
any other statement in the certificate in certificate. He shall have all the powers, rights, and
order that it shall accurately represent the restrictions of a general partner; but with respect to
agreement among them. (CIVIL CODE, Art. his capital contribution, his right against the other
1864) members of the firm would be that of a limited
k. After the formation of a limited partnership, partner. (CIVIL CODE, Art. 1853)
additional limited partners may be admitted
upon filing an amendment to the original Without prejudice to the provisions of article 1848 ,
certificate in accordance with the a person who has contributed to the capital of a
requirements of article 1865. (CIVIL CODE, business conducted by a person or partnership
Art. 1849) erroneously believing that he has become a limited
partner in a limited partnership, is not, by reason of
The writing to amend a certificate: his exercise of the rights of a limited partner, a
a. Shall conform to the requirements of Article general partner with the person or in the partnership
1844 as far as necessary to set forth clearly carrying on the business, or bound by the
the change in the certificate which it is obligations of such person or partnership, provided
desired to make; and that on ascertaining the mistake he promptly
b. Must be signed and sworn to by all the renounces his interest in the profits of the business,
members including the new members if or other compensation by way of income. (CIVIL
some are added; in case of substitution, the CODE, Art. 1852)
assigning limited partner must also signed
by the assigning limited partner.
General rule: A limited partner may also loan
The cancellation or amendment must be recorded in money to and transact other business with the firm.
the SEC.( CIVIL CODE, Art.1864)
Exceptions: Except that he cannot:

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1. Receive or hold as collateral any B. CORPORATIONS

partnership property; or
2. Receive from a general partner or from the 1. Definition of Corporation
firm any payment, conveyance, release if at
that time assets of the firm are not sufficient A corporation is an artificial being created by
to discharge liabilities to outside creditors. operation of law, having the right of succession and
Any violation would be fraud on such creditors (CIVIL the powers, attributes and properties expressly
CODE, Art. 1854). authorized by law or incident to its existence. (RCC,1
Sec. 2)
Liability of a Limited Partner Whose Surname
Appears in the Partnership Name Attributes Of A Corporation (Sec. 2)
1. Artificial being
General Rule: A limited partner whose surname 2. Created by operation of law
appears in the partnership name is liable as a 3. Has right of succession – A corporation has
general partner to the partnership creditors who the capacity for continuous existence
extended credit without actual knowledge that he is despite changes in stockholders/members
not a general partner. 4. Has only the powers, attributes, and
properties authorized by law or incident to
Exceptions: its existence
1. If the surname is also the surname of a
general partner; or Corporate Fiction
2. If prior to the time the partner became a A corporation has a personality separate and
limited partner, the business has been distinct from the persons composing it. (Civil Code,
carried under such name. (CIVIL CODE, Art. Arts. 44-47; PNB v. Andrada Electric & Engineering
1846) Co., G.R. No. 142936, 2002).
Distinguish A Corporation From A Partnership

CORPORATION PARTNERSHIP
MANNER OF CREATION
Commences only from By mere agreement
the issuance of a
Certificate of
Incorporation by the
SEC, or, in proper
cases, passage of a
special law
NUMBER OF ORGANIZERS
Any person/s but not At least 2
more than fifteen (15).2
POWERS
Restricted due to Subject to the
limited powers agreement of partners
AUTHORITY OF THOSE WHO COMPOSE IT

Stockholders are not Mutual agency
agents of the between partners
corporation in the
absence of express
authority
TRANSFERS OF INTEREST
Freely transferable Cannot be transferred
without the consent of without the consent of
other stockholders the other partners
(unless there is a
1 2
For purposes of this part of the reviewer, unless otherwise Note: There is no 5 person minimum anymore for the
specified, all references refer to the Revised Corporation number of organizers (i.e., incorporators) of a Corporation
Code, Republic Act no. 11232. (hereinafter RCC) under the RCC. (see discussion at page 15, Subheading 5.A)

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stipulation to the However, GOCCs

contrary) may also be created
by special charter
SUCCESSION Created for a public Generally created for
Existence continues Death of a partner purpose profit generation
even as persons who ends the partnership
compose it change Exists primarily for the
government of a
Can Corporations Be Partners In A Partnership? portion of the state
Corporations have the power to enter into a Subject to control and
partnership, joint venture, merger, consolidation, or supervision by the
any other commercial agreement with natural and State or its agency
juridical persons. (Sec. 35(h))
Note:
Can A Defective Corporation Result Into A • Ownership of the government of the majority
Partnership? There are two views: of the shares of a corporation does not by
itself constitute such an entity as a public
First View: No Partnership corporation. (National Coal Co., v. Collector
When investors intended only to invest in a of Internal Revenue, G.R. No. L-22619,
corporate venture with no intention of participating 1994).
in its corporate affairs, and the corporation was not • When the law vests corporate powers in a
formed, no partnership relation is established by the government instrumentality, it does not
failure to incorporate, such investors cannot even be necessarily become a corporation; a GOCC
held liable for the contracts and transactions sued must be organized as a stock or non-stock
upon. (Pioneer Insurance v. CA, G.R. No. 84197, corporation. (MIAA v. CA, G.R. No. 155650,
1989) 2006)
• Test to determine whether a corporation is
Second View: Partnership Exists public or private: If the corporation is created
However, when there was a clear intention to form by the State as the latter’s own agency or
a partnership venture through a corporate vehicle instrumentality to help it in carrying out its
(there was intention to be active participants in the governmental functions, then that
corporation’s business), even those who did not corporation is considered public; otherwise it
directly participate in the contract or transaction is private. (Philippine Society for the
being sued upon, but benefitted therefrom may be Prevention of Cruelty to Animals v. COA,
held liable as general partners. (Lim Tong Lim v. G.R. No. 169752, 2007)
Philippine Fishing Gear, G.R. No. 136448, 1999)
c. Quasi-public corporation - A species of private
2. Classes of Corporations corporations created by special law and required to
In Relation To The State render public service or supply public wants; Usually
a. Private corporations – Formed by private covers school districts, water districts and the like.
persons alone, by or with the State pursuant to a
special charter or through a general enabling act d. Government owned and controlled
such as the Corporation Code. corporations (GOCCs) - Created under a special
law or charter, or any agency organized as a stock
b. Public corporations - Formed or organized for or non-stock cosrporation, vested with functions
the government of a portion of the state (e.g., relating to public needs whether governmental or
barangay, municipality, city and province) Created proprietary in nature, and owned by the Government
for political purposes connected with the public good of the Republic of the Philippines directly or through
in the administration of the civil government its instrumentalities either wholly or, where
applicable as in the case of stock corporations, to
PUBLIC PRIVATE the extent of at least a majority of its outstanding
CORPORATION CORPORATION capital stock
Government holds the Government may hold (R.A. No. 10149)
controlling interest the controlling interest
Note:
Created by its charter Created under the • A GOCC when organized under the
Corporation Code Corporation Code is still a private
corporation. But being a GOCC makes it

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subject to laws and provisions applicable to shares, dividends, or allotments of the surplus
the Government or its entities and subject to profits on the basis of the shares held. (Sec. 3)
the control of the Government (Cervantes v.
Auditor General, G.R. No. L-4043, 1952). b. Nonstock corporation (Secs. 86-87) - A
• The GOCC Governance Act (R.A. 10149), corporation where no part of its income is
which governs compensation and position distributable as dividends to members, trustees or
classification systems within the GOCC officers. Any profit obtained as an incident to its
Sector, does not distinguish between operations shall, whenever necessary or proper, be
chartered and non-chartered GOCCs, and its used for the furtherance of the purpose for which the
provisions apply equally to both. (GSIS corporation was organized.
Family Bank Employees Union v. Villanueva,
G.R. No. 210773, 2019). As To Control
• In order to qualify as a GOCC, one must be a. Holding company – one that controls another as
organized either as a stock or non-stock a subsidiary or affiliate by the power to elect its
corporation. Section 31 defines a stock management; one which holds shares in other
corporation as one whose “capital stock is companies for purposes of control rather than for
divided into shares and ... authorized to mere investment. (SEC Opinion No. 15-15)
distribute to the holders of such shares
dividends.” Although BCDA has an b. Affiliate company – one that is subject to common
authorized capital of P100 Billion, however, it control of a parent or holding company and operated
is not divided into shares of stock; it has no as part of a system. (SEC Opinion No. 15-15)
voting shares; and has no provision which
authorizes the distribution of dividends and c. Parent and subsidiary companies – when a
allotment of surplus and profits to BCDA’s corporation has a controlling financial interest in one
stockholders. It cannot qualify also as a non- or more corporations, the one having control is
stock corporation because its primary known as the “parent company” and the controlled
purpose do not fall within the purposes corporations are known as the “subsidiary
enumerated under Section 88. (BCDA v. CIR, companies”.
G.R. No. 205925, 20 June 2018)
• However, there is now formal administrative As To Purpose of Incorporation
and statutory recognition of “government a. Municipal corporation
instrumentalities with corporate b. Religious corporation
powers/government corporate entities,” c. Educational corporation
which may not fall within the definition of d. Charitable, Scientific or Vocational corporation
stock and non-stock corporations, but are e. Business corporation
government instrumentalities that are vested
with corporate powers. (LRTA v. Quezon As To Number of Members
City, G.R. No. 221626, 2019) a. Aggregate - a corporation which consists of many
• Under the Constitution, the COA has audit persons united to form a body politic and corporate
jurisdiction over both GOCCs with original (IEMELIF v. Lazaro, G.R. No. 184088, 2010).
charters (subject to COA pre-audit) and those
without original charters (those organized b. Corporation sole – Formed by one person who
under the Corporation Code—subject to may be the chief archbishop, bishop, minister, rabbi,
post-audit). (Alejandrino v. COA, G.R. No. or other presiding elder of any religious
245400, 2019) denomination, sect or church. (Sec. 108)
Purpose: created to administer and manage the
As to Place of Incorporation affairs, properties, temporalities of the church to
a. Domestic – one incorporated under laws of the which the holder of the office belongs and also to
Philippines transmit the same to his successor in office.
b. Foreign – one formed, organized or existing under c. Close Corporation- a corporation where:
any laws other than those of the Philippines, and stockholders of record shall not exceed twenty (20);
whose laws allow Filipino citizens and corporations all the issued stock shall be subject to one or more
to do business in its own country. (Sec. 140) specified restrictions on transfer permitted by this
Title; and the corporation shall not list in any stock
As To Existence of Stocks exchange or make any public offering of its stocks
a. Stock corporation - Stock corporations are those of any class.
which have capital stock divided into shares and are
authorized to distribute to the holders of such

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Notwithstanding, a corporation shall not be deemed corporate stockholders, Grandfather test would be
a close corporation when at least 2/3 of its voting applied (Narra Nickel Mining and Development
stock is owned or controlled by another corporation Corp. v. Redmont Consolidated Mines Corp., G.R.
which is not a close corporation within the meaning No. 195580, 2014)
of this Code. (Sec. 95)
a. Control Test
d. One Person Corporation- a corporation with a
single stockholder. Only a natural person, trust, or In cases involving properties, business or industries
an estate may form a One Person Corporation. reserved for Filipinos, in addition to the place of
Banks and quasi-banks, pre-need, trust, insurance, incorporation test, the nationality of a corporation is
public and publicly-listed companies, and non- determined by the nationality of the “controlling
chartered government-owned and -controlled stockholders”.
corporations may not incorporate as One Person
Corporations. A natural person who is licensed to Absent any doubt, the Control Test shall be used in
exercise a profession may not organize as a One determining the nationality of a corporation specially
Person Corporation for the purpose of exercising in cases where foreign ownership restrictions apply.
such profession except as otherwise provided under (SEC OGC Opinion No. 16-19)
special laws.
[T]here are two cases in determining the nationality
3. Nationality of Corporations of the Investee Corporation. The first case is the
‘liberal rule’, later coined by the SEC as the Control
Serves as a legal basis for subjecting the enterprise Test in its 30 May 1990 Opinion, and pertains to the
or its activities to the laws, the economic and fiscal portion in said Paragraph 7 of the 1967 SEC Rules
powers, and various social and financial policies of which states, ‘(s)hares belonging to corporations or
the state to which it is supposed to belong. partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of
Tests to determine the nationality of Philippine nationality.’ Under the liberal Control
corporations: Test, there is no need to further trace the ownership
of the 60% (or more) Filipino stockholdings of the
1. Place of Incorporation Investing Corporation since a corporation which is
2. Control Test at least 60% Filipino-owned is considered as
3. Grandfather Rule3 Filipino. (Narra Nickel Mining and Development
Corp. v. Redmont Consolidated Mines Corp., G.R.
War-time – in times of war, nationality of corporation No. 195580, 2014).
is determined by the character or citizenship of its
controlling stockholders The required percentage of Filipino ownership
shall be applied to both:
4. Investment Test a. The total number of outstanding shares of
5. Place of Principal Business stock entitled to vote in the election of
directors, and
In order to determine the nationality of a corporation, b. The total number of outstanding shares of
the following steps should apply: stock, whether or not entitled to vote in the
election of directors. (SEC Memorandum
1st Step: The nationality of a corporation is Circular No. 8, s. 2013, Sec. 2)
determined by the country under whose laws it is
incorporated (Place of Incorporation Test). Mere legal title is not enough. Full beneficial
ownership of 60 percent of the outstanding capital
2nd Step: If the corporation is applying for a (2nd) stocks, coupled with 60 percent of the voting rights,
franchise for public utility and etc. which requires a is constitutionally required for the State's grant of
certain percentage of control of stock, the Test of authority to operate a public utility. Thus, voting
Controlling Ownership (i.e., the Control Test) would rights of stocks which have been assigned or
be applied. transferred to aliens cannot be considered held by
Philippine citizens or nationals (cannot give proxies
3rd step: If there is doubt as to the domestic control to vote). (Roy III v. Herbosa, et al., G.R. No. 207246,
of the percentage of stock in a corporation with 2016)
3
Emphasis on no. 2 & 3 for they are expressly indicated in the
bar syllabus.

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The definition of “beneficial owner or beneficial primary franchise that makes a corporation
ownership in the SRC-IRR, which is in consonance a juridical person, but at the grant of the
with the concept of “full beneficial ownership” in the secondary franchise that authorizes the
FIA-IRR, is relevant in resolving only the question of corporation to engage in a nationalized
who is the beneficial owner or has beneficial industry. (People v. Quasha, G.R. No. L-
ownership of each “specific stock” of the public utility 6055, 1953)
whose stocks are under review. If the Filipino has
c. The Constitution requires a franchise for
the voting power of the “specific stock”, i.e., he can
vote the stock or direct another to vote for him, or operating a public utility; however, it does
the Filipino has the investment power over the not require a franchise before one can own
“specific stock”, i.e., he can dispose of that “specific the facilities needed to operate a public
stock” or direct another to vote or dispose it for him, utility so long as it does not operate them to
then such Filipino is the “beneficial owner” of that serve the public.(Tatad v. Garcia, Jr., G.R.
“specific stock.” Being considered Filipino, that No. 114222, 1995).
“specific stock” is then to be counted as part of the
60% Filipino ownership requirement under the Mass Media (100%)
Constitution. The right to the dividends, jus fruendi— a. Sec 11, Art XVI, 1987 Constitution –
a right emanating from ownership of that “specific ownership of mass media shall be limited to
stock” necessary accrues to its Filipino “beneficial the citizens of the Philippines, or to
owner.” (Roy III v. Herbosa, G.R. No. 207246 corporations, cooperatives or associations,
(Resolution), 18 April 2017.)
wholly-owned and managed by such
General Rule: The Control Test requires citizens (100% Filipino management of the
compliance with the Place of Incorporation Test. entity)
b. Cable Industry - CATV as “a form of mass
Exception: A corporation organized abroad and media which must, therefore, be owned
registered as doing business in the Philippines and managed by Filipino citizens, or
under the Corporation Code, whose capital corporations, cooperatives or associations,
outstanding stock and entitled to vote is wholly wholly-owned and managed by Filipino
owned by Filipinos is a Philippine National. (SEC citizens pursuant to the mandate of the
Opinion No. 04-14 in reference to the Foreign Constitution.” (DOJ Opinion No. 95, series
Investments Act) of 1999).
Some instances wherein the Control Test
Advertising Industry (> 70%)
applies:
a. Sec 11, Art XVI, 1987 Constitution – only
Exploitation of natural resources (> 60%)
Filipino citizens or corporations or
a. Sec 2, Art XII, 1987 Constitution – policy of
associations at least 70% of the capital of
the State is to ensure that the exploitation
which is owned by such citizens shall be
of natural resources or the pursuit of the
allowed to engage in the advertising
activities deemed to be of public or national
agency
interest are in the control of the Filipinos
b. The State may directly undertake such
NEDA could advise Congress to set limitations of
activities, or it may enter into co-production,
stock ownership in Corporations vested with Public
joint venture, or production sharing
Interests (Sec. 176)
agreements with:
i) Filipino citizens; or
Double 60% Rule
ii) Corporations or associations, at least
Where a corporation and its non-Filipino
60% owned by such citizens stockholders own stock in a SEC-registered
enterprise, at least 60% of the outstanding capital
Public Utilities (> 60%) stock and entitled to vote of both corporations and
a. Sec 11, Art XII, 1987 Constitution – requires at least 60% of the members of the Board of
that only domestic corporations with at least Directors of both corporations must be Filipino
60% of the capital stock owned by Filipinos citizens (R.A. No. 7042, Sec. 3[a], as amended)
may own and operate public utilities in the
Philippines
b. The nationality test for public utilities
applies not at the time of the grant of the

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b. Grandfather Rule corporation, its capacity or powers, internal

organization, capital structure, the rights and
Where corporate shareholders are present (and liabilities of directors, officers, and shareholders
when the Filipino-foreign equity ownership is in towards each other and to creditors and third
doubt), the percentage of the Filipino equity in persons.
corporations is computed by attributing the
nationality of the second or subsequent tier of 4. Corporate Juridical Entity
ownership to determine the nationality of the
corporate shareholder General Rule: The Corporation has a separate
and distinct juridical personality from its directors,
Example: MV Corporation and AC Corporation officers, trustees and shareholders (Doctrine of
have equal interest in XYZ Company. MV Separate Juridical Personality).
Corporation is 60% owned by Filipinos, while AC
Corporation is 50% owned by Filipinos. By the Exception: When the corporation is used as a cloak
grandfather rule, MV Corporation would have a 30%
for fraud, illegality, or in other certain circumstances,
Filipino interest in XYZ Company (60% of 50%),
while AC Corporation would have a 25% Filipino the courts may disregard the separate and distinct
interest in XYZ Company (50% of 50%). Hence, the personality of the corporation and treat the
total Filipino interest is only 55%. corporation as a mere collection of individuals
undertaking business as a group (Doctrine of
The Control Test is still the prevailing mode of Piercing the Veil of Corporate Fiction).
determining whether or not a corporation is a Filipino
corporation within the ambit of the natural resources a. Doctrine of Separate Juridical
provisions of the Constitution. But when in the mind
Personality
of the court there is doubt based on attendant facts
and circumstances, in the 60-40 Filipino equity
ownership in the corporation, then it may apply the General Rule: The Corporation has a separate and
grandfather rule (Narra Nickel Mining and distinct juridical personality from its directors,
Development Corp. v. Redmont Consolidated Mines officers, trustees and shareholders (Doctrine of
Corp., G.R. No. 195580, 2014). Separate Juridical Personality).
The “grandfather rule” does not eschew, but in fact Exception: When the corporation is used as a cloak
for fraud, illegality, or in other certain circumstances,
supplements the “control test”, as the latter implements
the courts may disregard the separate and distinct
Filipinization provisions of the Constitution. (Narra
personality of the corporation and treat the
Nickel Mining and Development Corp. v. Redmont
corporation as a mere collection of individuals
Consolidated Mines Corp., G.R. No. 195580, 2015).
undertaking business as a group (Doctrine of
Piercing the Veil of Corporate Fiction).
c. Other Tests
A corporation is a juridical entity with a legal
A. War-Time Test
personality separate and distinct from those acting
In times of war, nationality of corporation is
for and on its behalf, and, in general, from the
determined by the character or citizenship of its
people comprising it; the obligations incurred by the
controlling stockholders
corporation, acting through its directors, officers and
employees are its sole liabilities (Santos v NLRC,
B. Place of Principal Business Test
G.R. No. 101699, 1996).
Residence of a corporation is the place where its
principal office is located, as stated in its Articles of
While a share of stock represents a proportionate or
Incorporation.
aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right
The place where the principal office of the
or title to any of the corporate property, his interest
corporation is to be located is one of the required
in such property being equitable or beneficial in
contents of the articles of incorporation to be filed
nature. Shareholders are in no legal sense the
with the SEC (Hyatt Elevators v. Goldstar, G.R. No.
owners of corporate property, which is owned by the
161026, 2005).
corporation as a distinct legal person (Magsaysay-
Labrador v CA, G.R. No. 58168, 1989).
Applied to determine whether a state has jurisdiction
over the existence and legal character of a

ATENEO CENTRAL
Corporate Liability responsible officer will be held personally liable for

On Torts the crimes committed by the corporation. However,
• A corporation is civilly liable in the same such liability will only attach to the officer when the
manner as natural persons for torts, because corporation is directly required by law to do an act in
the rules governing the liability of a principal a given manner, and the same law makes the
for a tort committed by an agent are the same person who fails to perform the act in the prescribed
whether the principal be a natural person or manner expressly liable criminally (Sia v. Court of
a corporation, and whether the agent be a Appeals, G.R. No. 108222, 1997).
natural or artificial person. That a principal is
liable for every tort which he expressly directs For example:
or authorizes, is just as true of a corporation a. Under the Anti-Money Laundering Act,
as a natural person (PNB v. CA, G.R. No. L- juridical persons are also defined as
27155, 1978). offenders.
• A corporate officer who caused the tort act to b. The RCC provides situations where
be committed in the name of the corporation corporations are liable for criminal
is also personally liable as a joint-tortfeasor. sanctions:
• The failure of the corporate employer to i) SEC. 161. Violation of Duty to Maintain
comply with a legal duty, such as under the Records, to Allow their Inspection or
Labor Code to grant separation pay to Reproduction;
employees constitutes tort and its
ii) SEC. 165. Fraudulent Conduct of
stockholder who was actively engaged in the
Business;
management of the business should be held
personally liable (Naguiat v. NLRC, G.R. No. iii) SEC. 166. Acting as Intermediaries for
116123, 1997). Graft and Corrupt Practices;
• A corporation can be held liable for the iv) SEC. 167. Engaging Intermediaries for
tortious acts of a corporate officer, in the Graft and Corrupt Practices
absence of a prior express direction from the
BOD, if such was connected to the business Recovery of Moral Damages
of the corporation. General rule: A corporation cannot recover moral
• The remedy of the corporation is to recover damages as it cannot suffer physical suffering and
damages against the acting corporate officer mental anguish (Prime White Cement v IAC, G.R.
responsible for the tortious act. No. L-68555, 1993).
On Crimes Exception: A corporation with a good reputation, if

General rule: Corporations cannot commit felonies besmirched, is allowed to recover moral damages
under the RPC for it is incapable of the requisite upon proof of existence of factual basis of damage
intent to commit these crimes. (actual injury) and its causal relation (Crystal v. BPI,
G.R. No. 172428, 2008).
• It also cannot commit crimes that are
punishable under special laws because The following Constitutional rights apply to a
crimes are personal in nature requiring corporation:
personal performance of overt acts. a. Due process The due process clause is
• A corporation cannot be arrested and universal in its application to all persons
imprisoned; hence, cannot be penalized for a without regard to any differences of race,
crime punishable by imprisonment. color, or nationality. Private corporations,
likewise, are “persons” within the scope of the
Exceptions: If the crime is committed by a guaranty insofar as their property is
corporation, the directors, officers, employees or concerned.” (Smith Bell & Co. v. Natividad,
other officers thereof responsible for the offense G.R. No. 15574, 1919).
shall be charged and penalized for the crime, b. Equal protection of the law (Smith Bell &
precisely because of the nature of the crime and the Co. v. Natividad, G.R. No. 15574, 1919)
penalty therefore. However, the corporation may be c. Right against unreasonable searches and
charged and prosecuted for a crime if the imposable seizures - (Stonehill v. Diokno, G.R. No. L-
penalty is fine (Ching v. Secretary of Justice, G.R.
19550, 1967).
No. 164317, 2006).
In organizing itself as a collective body, the
When a law expressly provides that a corporation
corporation waives no constitutional immunities
may be proceeded against criminally, the
applicable to it. Its property cannot be taken without

ATENEO CENTRAL
compensation; can only be proceeded against by Note: A corporation may not be made to answer for
due process of law; and is protected against acts or liabilities of its stockholders or those of the
unlawful discrimination (Bache & Co. (Phil.), Inc. v. legal entities which it may be connected and vice-
Ruiz, G.R. No. 32409, 1971, citing Hale v. Henkel, versa (ARB Constructions Co., Inc. v. Court of
201 U.S. 43, 50 L.Ed. 652.). Appeals, G.R. No. 126554, 2000).
NOTE: The right against self-incrimination has no c) Pertaining to privileges enjoyed

application to juridical persons. (Bataan Shipyard v. The tax privileges enjoyed by a corporation do not
PCGG, G.R. No. 75885, 1987) extend to its stockholders. A corporation has a
a. The right against self-incrimination refers personality distinct from that of its stockholders,
only to testimonial compulsion; enabling the taxing power to reach the latter when
b. A corporation cannot testify; and they receive dividends from the corporation. It must
c. The State can freely open the books of the be considered as settled in this jurisdiction that
corporation to ensure that it does not exceed dividends of a domestic corporation which are paid
its powers and delivered in cash to foreign corporations as
stockholders are subject to the payment of the
income tax, the exemption clause to the charter [of
Implications of the Existence of the Corporate
the domestic corporation] notwithstanding. (Manila
Veil or a Separate and Distinct Juridical
Gas Corporation. v. Collector of Internal Revenue,
Personality
G.R. No.L-42780, 1936).
a) Controlling interest of and/or dealings in
shareholdings
d) Assumption as a corporate officer
Ownership of a majority of capital stock and the fact
Being an officer or stockholder of a corporation does
that majority of directors of a corporation are the
not by itself make one’s property also of the
directors of another corporation creates no
corporation, and vice-versa, for they are separate
employer-employee relationship with the latter’s
entities, and that shareholders are in no legal sense
employees (DBP v. NLRC, G.R. No. 86932, 1990;
the owners of corporate property which is owned by
Francisco, et al. v. Mejia, G.R. No. 141617, 2001).
the corporation as a distinct legal person (Good
Earth Emporium, Inc. v. CA, G.R. No. 82797, 1991).
The mere fact that a stockholder sells his shares of
stock in the corporation during the pendency of a
The mere fact that one is president of the
collection case against the corporation, does not
corporation does not render the property he owns or
make such stockholder personally liable for the
possesses the property of the corporation, since that
corporate debt, since the disposing stockholder has
president, as an individual, and the corporation, are
no personal obligation to the creditor, and it is the
separate entities (Cruz v. Dalisay, A.M. No. R-181-
inherent right of the stockholder to dispose of his
D, 1987).
shares of stock anytime he so desires (Remo, Jr. v.
IAC, G.R. No. L-67626, 1989).
e) Properties, obligations and debts
A corporation has no legal standing to file a suit for
Mere substantial identity of the incorporators of the
recovery of certain parcels of land owned by its
two corporations does not necessarily imply fraud,
members in their individual capacity, even when the
nor warrant the piercing of the veil of corporate
corporation is organized for the benefit of the
fiction. In the absence of clear and convincing
members (Sulo ng Bayan v. Araneta, Inc., G.R. No.
evidence to show that the corporate personalities
L-31061, 1976).
were used to perpetuate fraud, or circumvent the
law, the corporations are to be treated as distinct
The corporate debt or credit is not the debt or credit
and separate from each other (Laguio v. NLRC,
of the stockholder nor is the stockholder’s debt or
G.R. No. 108936, 1996).
credit that of the corporation (Traders Royal Bank v.
CA, G.R. No. L-78412, 1989).
b) Transaction amongst the corporation and
stockholders
Stockholders have no personality to intervene in a
collection case covering the loans of the corporation
The transfer of the corporate assets to the
on the ground that the interest of shareholders in
stockholder is not in the nature of a partition but is a
corporate property is purely inchoate (Saw v. CA,
conveyance from one party to another
G.R. No. 90580, 1991).
(Stockholders of F. Guanzon and Sons, Inc. v.
Register of Deeds of Manila, G.R. No. L-18216,
The interests of payees in promissory notes cannot
1962).
be off-set against the obligations between the

ATENEO CENTRAL
corporations to which they are stockholders absent or is merely a farce since the corporation is
any allegation, much less, even a scintilla of merely the alter ego, business conduit, or
substantiation, that the parties interest in the instrumentality of a person or another
corporation are so considerable as to merit a entity.
declaration of unity of their civil personalities (CKH c. Equity cases – when piercing the
Industrial and Development Corp. v. CA, G.R. No. corporate fiction is necessary to achieve
111890, 1997). justice or equity.
Even when the foreclosure on the assets of the Note: The three cases may appear together in one
corporation was wrongful and done in bad faith, the application (R.F. Sugay & Co. v. Reyes, G.R. No. L-
stockholders of the corporation have no standing to 20451, 1964).
recover for themselves moral damages. Otherwise,
it would amount to the appropriation by, and the i. Grounds for application of the different types
distribution to, such stockholders of part of the of piercing
corporation’s assets before the dissolution of the
corporation and the liquidation of its debts and For Fraud Cases:
liabilities (APT v. CA, G.R. No. 121171, 1998). a. There must have been fraud or an evil
motive in the affected transaction, and
Where real properties included in the inventory of the mere proof of control of the corporation
the estate of a decedent are in the possession of by itself would not authorize piercing; and
and are registered in the name of the corporations, b. The main action should seek for the
in the absence of any cogency to shred the veil of enforcement of pecuniary claims
corporate fiction, the presumption of conclusiveness pertaining to the corporation against
of said titles in favor of said corporations should corporate officers or stockholders.
stand undisturbed (Lim v. CA, G.R. No. 124715,
2000). Example cases:
• Where a stockholder, who has absolute
b. Doctrine of Piercing the control over the affairs of the corporation,
Corporate Veil entered into a contract with another
corporation through fraud and false
Under certain circumstances, the courts may representations, such stockholder shall be
disregard the separate and distinct personality of the liable solidarily with co-defendant corporation
corporation from its members or stockholders and even when the contract sued upon was
treat the corporation as a mere collection of entered into on behalf of the corporation
individuals or an aggregation of persons (NAMARCO v. Associated Finance Co.,G.R.
undertaking business as a group such as when the No. L-20886, 1967).
corporate legal entity is used as a cloak for fraud or • Piercing is allowed where the corporation is
illegality (Kukan Int’l v Reyes, G.R. No. 182729, used as a means to appropriate a property by
2010). fraud which property was later resold to the
controlling stockholders. (Heirs of Ramon
It is an equitable doctrine used as a last resort Durano, Sr. v. Uy, G.R no.136456, 2000).
only when the objective is to hold the officers and/or • Fraud and bad faith on the part of certain
stockholders liable. Thus, in one case, it cannot be corporate officers or stockholders may
applied in order to declare a foreclosure proceeding warrant the piercing of the veil of corporate
a nullity (Umali v. CA, GR No. 89561, 1990). fiction so that the said individual may not
seek refuge therein, but may be held
Being merely an equitable remedy, employment of individually and personally liable for his or her
the piercing doctrine can only be for the “protection actions. (Lafarge Cement Phils., Inc. v.
of the interests of innocent third persons Continental Cement Corp., G.R. no. 155173,
dealing with the corporate entity which the law 2004)
aims to protect by this doctrine” (Traders Royal
Bank v. Court of Appeals, G.R. No. 93397, 1997). For Alter-ego Cases:
a. The doctrine applies in this case even in the
Classification of piercing cases: absence of evil intent; it applies because of
a. Fraud piercing – when a corporate entity the direct violation of a central corporate
is used to commit fraud or justify a wrong or law principle of separating ownership from
to defend a crime. management.
b. Alter-ego piercing – when a corporate b. The doctrine in such cases is based on
entity is used to defeat public convenience estoppel: if stockholders do not respect the

ATENEO CENTRAL
separate entity, others cannot also be c. The parent company finances the
expected to be bound by the separate subsidiary.
juridical entity. d. The parent company subscribed to all the
c. Piercing in alter ego cases may prevail capital stock of the subsidiary or otherwise
even when no monetary claims are sought caused its incorporation.
to be enforced against the stockholders or e. The subsidiary has grossly inadequate
officers of the corporation. capital.
f. The parent corporation pays the salaries
ii. Tests for Applicability of the Doctrine of and other expenses or losses of the
Piercing the Veil of Corporate Fiction: subsidiary.
a. Control – not mere stock control but g. The subsidiary has substantially no
Complete Domination – not only of business except with the parent corporation
finances, but of policy and business or no assets except those conveyed to or
practice in respect to the transaction by the parent corporation.
attacked and must have been such that the h. The papers of the parent corporation or in
corporate entity as to this transaction had at the statements of its officers, the subsidiary
the time no separate mind, will or existence is described as a department or subdivision
of its own. of the parent corporation, or its business or
b. Such control must have been Used by the financial responsibility is referred to as the
defendant to commit a fraud or wrong to parent corporation’s own.
perpetuate the violation of a statutory or i. The parent corporation uses the property of
other positive legal breach of duty, or a the subsidiary as its own.
dishonest and an unjust act in j. The directors or executives of the
contravention of the plaintiff’s legal right; subsidiary do not act independently in the
and, interest of the subsidiary but take their
c. The said control and breach of duty must orders from the parent corporation.
have Proximately caused the injury or k. The formal legal requirements of the
unjust loss complained of (Concept subsidiary are not observed (Phil. National
Builders Inc. v. NLRC, 108734, 1996). Bank v. Ritratto Group, Inc., GR No.
142616, 2001).
These were expanded as three-pronged tests
The first prong is the "instrumentality" or Note: Mere ownership by a single stockholder or by
"control" test. This test requires that the subsidiary another corporation of all or substantially all of the
be completely under the control and domination of capital stock of the corporation does not justify the
the parent corporation or shareholder. It seeks to application of the doctrine (Francisco v. Mejia, G.R.
establish whether the corporation has no autonomy No. 141617, 2001).
and the parent corporation or shareholder "is
operating the business directly for itself or Example of situations wherein the Doctrine of
themselves." Piercing the Corporate Veil was used:
a. Where the stock of a corporation is owned
The second prong is the "fraud" test. This test by one person whereby the corporation
requires that the conduct in using the corporation be functions only for the benefit of such
unjust, fraudulent or wrongful. individual owner, the corporation and the
individual should be deemed the same
The third prong is the "harm" test. This test (Arnold v. Willets and Patterson, Ltd., G.R.
requires the plaintiff to show that the defendant’s No. L-20214, 1923).
control, exerted in a fraudulent, illegal or otherwise b. When the corporation is merely an adjunct,
unfair manner toward it, caused the harm suffered business conduit or alter ego of another
(PNB v. Hydro Resources Contractors corporation, the fiction of separate and
Corporations, G.R. no. 167530, 2013). distinct corporation entities should be
disregarded (Tan Boon Bee & Co. v.
Factors to Consider in cases of Parent and Jarencio, G.R. No. L-41337, 1988).
Subsidiary corporations in Alter-ego Piercing: c. Employment of same workers; single place
a. The parent corporation owns all or most of of business, etc. (La Campana Coffee
the capital of the subsidiary. Factory v. Kaisahan ng Manggagawa, G.R.
b. The parent and subsidiary corporations No. L-5677, 1953).
have common directors or officers. d. Use of nominees (Marvel Building v. David,
G.R. No. L-508, 1951)

ATENEO CENTRAL
e. Avoidance of tax. (Yutivo Sons Hardware v. b. When used to raise issues relating only to
Court of Tax Appeals, G.R. No. L-13203, technicalities (Emilio Cano Ent. v. CIR,
1961; Liddell& Co. v. Collector of Internal G.R. No. L-20502, 1965).
Revenue, G.R. No. L-9687, 1961).
f. Mixing of bank deposit accounts. (Ramirez The veil may not always be pierced, especially in
Telephone Corp. v. Bank of America, G.R. the following circumstances:
No. L-22614, 1969).
g. Where it appears that two business a. Piercing is a remedy of last resort and is not
enterprises are owned, conducted, and available when other remedies are still
controlled by the same parties, both law available (Umali v. CA, G.R. No. 89561,
and equity will, when necessary to protect 1990).
the rights of third persons, disregard the b. One cannot successfully invoke the
legal fiction that two corporations are piercing doctrine when it was proven that
distinct entities and treat them as identical the act done was contrary to the existing
(Sibagat Timber Corp. v. Garcia, G.R. No. rules, which were well-known to the
98185, 1992) officers of the one invoking it (Traders
h. Thinly-capitalized corporations (McConnel Royal Bank v. Court of Appeals, G.R. No.
v. Court of Appeals, G.R. No. L-10510, 93397, 1997).
1961). c. Piercing is forbidden unless the remedy
i. Parent-subsidiary relationship. (Koppel sought is to make the stockholder, officer
(Phil.), Inc. v. Yatco, G.R. No. L- or another corporation pecuniarily liable
47673,1946; Philippine Veterans for corporate debts (Umali v. CA, G.R.
Investment Development Corporation v. No. 89561, 1990; Indophil Textile Mill
CA, G.R. No. 85266, 1990) Workers Union-PTGWO v. Calica, G.R. No.
j. Affiliated companies (Guatson International 96490, 1992).
Travel and Tours, Inc. v. NLRC, G.R. No.
100322, 1994) Note: However, piercing in alter ego cases may
prevail even when no monetary claims are sought to
Note: While each of the above situations resulted be enforced against the stockholders or officers of
in the Court piercing the veil of corporate fiction, the corporation. (e.g. piercing for other purposes
the elements – control, injury to others, etc. – were such as laborer’s rights)
also present and likewise determinants.
d. Piercing is forbidden when the personal
Summary of Probative Factors (Philippine National obligations of an individual are sought
Bank vs. Ritratto Group, Inc., et al., G.R. No. to be enforced against the corporation
142616, 2001; Concept Builders, Inc. v. NLRC, G.R. (Robledo v. NLRC, G.R. No. 110358,
No. 108734, 1996): Whether the separate 1994).
personality of the corporation should be pierced
depends on questions of facts, appropriately Note: As an exception to this rule, the Supreme
pleaded. Mere allegation that a corporation is the Court allowed such piercing by applying the concept
alter ego of the individual stockholders is of “reverse piercing”. In a traditional veil-
insufficient. The presumption is that the piercing action, a court disregards the existence of
stockholders or officers and the corporation are the corporate entity so a claimant can reach the
distinct entities. The burden of proving otherwise is assets of a corporate insider. In a reverse piercing
on the party seeking to have the court pierce the veil action, however, the plaintiff seeks to reach the
of corporate entity (Ramoso v. CA, G.R. No. assets of a corporation to satisfy claims against a
117416, 2000). corporate insider."
For Equity Cases: Reverse piercing has two (2) types:

These are cases, where there is no fraud or alter 1. Outsider reverse - piercing occurs when a party
ego circumstances that can warrant the piercing of with a claim against an individual or corporation
the corporate veil. This mainly used to render justice attempts to be repaid with assets of a corporation
in the situation at hand, or to brush aside technical owned or substantially controlled by the defendant.
defenses. 2. Insider reverse piercing - the controlling
members will attempt to ignore the corporate fiction
For example: in order to take advantage of a benefit available to
a. When used to confuse legitimate issues the corporation, such as an interest in a lawsuit or
(Telephone Engineering and Service Co., protection of personal assets. (International
Inc. V. WCC, G.R. No. L-28694, 1981).

ATENEO CENTRAL
Academy of Management and Economics vs. Litton jurisdiction. It is not available to confer
and Company, G.R. No. 191525, 2017). jurisdiction over a party not impleaded
in a case. (Mayor v. Tiu, G.R. No. 203770,
e. To disregard the separate juridical 2016)
personality of a corporation, the
wrongdoing must be clearly and De Facto Corporation Versus Corporations By
convincingly established. It cannot be Estoppel
presumed (DBP vs. CA, G.R. No. 126200,
2001). As To Legal Status
f. Piercing of the veil of corporate fiction is not De jure corporation
allowed when it is resorted to justify a. Corporation organized in accordance with
under a theory of co-ownership the requirements of law;
continued use and possession by b. Every corporation is deemed to be a de jure
stockholders of corporate properties until proven otherwise
(Boyer-Roxas v. Court of Appeals, G.R. No.
100866, 1992). De facto corporation (Sec. 19)
g. The piercing doctrine cannot be availed of
a. A corporation claiming in good faith to be a
in order to dislodge from the jurisdiction
of the SEC the petition for suspension of corporation under the Corporation Code but
payments filed under Section 5(e) of Pres. where there exists a flaw in its incorporation
Decree No. 902-A, on the ground that the or it falls short of the requirements provided
petitioning individuals should be treated as by law.
the real petitioners to the exclusion of the b. It is the result of an attempt to incorporate
petitioning corporate debtor (Union Bank v. under an existing law coupled with the
CA, G.R. No. 131729, 1998). exercise of corporate powers.
h. Changing of the petitioner’s subsidiary c. A de facto corporation will incur the same
liabilities by converting them to guarantors obligations; have the same powers and
of bad debts cannot be done by piercing the rights as a de jure corporation.
veil of corporate identity (Ramoso v. CA, d. The due incorporation of any corporation
G.R. No. 117416, 2000)
claiming in good faith to be a corporation
i. Piercing doctrine is meant to prevent fraud,
under the Corporation Code, and its right to
and cannot be employed to perpetrate
fraud or a wrong (Araneta, Inc. v. Tuason, exercise corporate powers, shall not be
G.R. No. L-2886, 1952). inquired into collaterally in any private suit.
j. Corporate persons are entitled to due e. Under the Rules of Court Rule 66, inquiry
process protection. Thus, failure to must be done by the Solicitor General in a
implead a corporation in a suit for quo warranto proceeding where the main
recovery of ill-gotten wealth against its issue is the right to exist as a corporation
stockholders cannot bind the
corporation itself; otherwise, its Elements of a de facto corporation
fundamental right to due process will be a. Valid law under which incorporated;
violated. (COCOFED v. Republic, G.R. No. b. Attempt in good faith to incorporate or
177857-58, 2016) “colorable compliance;”
k. Mere ownership of all or nearly all of the c. Assumption of corporate powers; and
capital stocks of a corporation is not in itself d. Issuance of certificate of incorporation.
a sufficient reason for disregarding the
(Arnold Hall v. Piccio, G.R. No. L-2598, 1950)
fiction of separate corporate personalities.
The probate court applied doctrine of
Note: A corporation which has failed to file its by-
piercing the corporate veil since Rosario
laws within the prescribed period does not ipso facto
had no other properties that comprise her
lose its powers as such (Sawadjaan v. CA, G.R. No.
estate other than her shares. Although the
141735, 2005).
intention to protect the shares from
dissipation is laudable, it is still an error to
Corporation by estoppel (Sec. 20);
order tenants to remit payments to the
All persons who assume to act as a corporation
estate. Also, the court has not acquired
knowing it to be without authority to do so shall be
jurisdiction over Primrose and its
liable as general partners for all debts, liabilities and
properties. Piercing applies to the
damages incurred or arising as a result thereof
determination of liability not of

ATENEO CENTRAL
When such ostensible corporation is sued on any a. Application for registration must be
transaction entered by it as a corporation or on any accompanied with an affidavit,
tort committed by it as such, it shall not be allowed executed by all the partners, indicating
to use its lack of corporate personality as a defense. that they authorized the partnership to
be an incorporator and have
Anyone who assumes an obligation to an ostensible designated one of the partners to sign
corporation as such cannot resist performance the incorporation documents.
thereof on the ground that there was in fact no b. Partnerships under Dissolved or
corporation. Expired status with the SEC shall not
be authorized to become an
Corporation by prescription incorporator.
The Roman Catholic Church is a corporation by
prescription, with acknowledged juridical personality For Domestic Corporations or Associations as
inasmuch as it is an institution which antedated by Incorporators:
almost a thousand years any other personality in a. Its investment in the new corporation
Europe (Barlin v Ramirez, G.R. No. L-2832, 1906). must be approved by a majority of the
board of directors or trustees ratified by
5. Capital Structure the stockholders representing at least
two- thirds (2⁄3) of the outstanding
a. Number and Qualifications of capital stock, or at least two-thirds (2⁄3)
Incorporators of the members in cases of nonstock
corporations.
Incorporators4 – Incorporators are those b. A Directors'/Trustees' Certificate or a
stockholders or members mentioned in the articles Secretary's Certificate, indicating the
of incorporation as originally forming and composing necessary approvals, as well as the
the corporation and who are signatories thereof authorized signatory to the
(Sec.5). incorporation documents, shall be
executed under oath and submitted by
They must: the applicant.
a. Be a natural person, partnership, c. Domestic corporations under
b. association or corporation, singly or jointly "delinquent", "suspended", "revoked"
with others but not more than fifteen (15)5 or "expired" status with the SEC shall
i. May be composed of any not be authorized to become an
combination of natural person/s, incorporator.
SEC-registered partnership/s,
SEC-registered domestic For Foreign Corporations as incorporators:
corporation/s or associations, and a. The application for registration must be
foreign corporation/s (SEC MC No. accompanied by a copy of a document
16-19) duly authenticated by a Philippine
c. If natural persons, be of Legal Age; Consulate or with an apostille affixed
d. Each owns or subscribes to at least one thereto, authorizing the foreign
share for stock corporations and be a corporation to invest in the corporation
member for non-stock corporations. being formed and specifically naming
the designated signatory on behalf of
Note: Natural persons who are licensed to practice the foreign corporation.
a profession, and partnerships or associations
organized for the purpose of practicing a profession, b. Subscription Requirements
shall not be allowed to organize as a corporation (for
the practice of such profession) unless otherwise Minimum Capital Stock and Subscription
provided under special laws. (Sec. 10) Requirements
Stock corporations shall not be required to have a
Additional Guidelines issued by the SEC minimum capital stock, except as otherwise
(SEC MC no.16-19): specifically provided by special law (Sec 12)
For Partnerships as Incorporators:
4
Note: Amendments were introduced by the RCC removing
5
the qualifications to be natural persons, and majority must be Note: A corporation with a single stockholder is considered
residents of the Philippines; either as an One Person Corporation or a Corporation Sole.

ATENEO CENTRAL
Note: The RCC completely removes Sec. 13 of the Doctrine of Relations or Relating Back Doctrine
Old Corporation Code which provided for the 25-25 Where the delay in affecting the amendment is due
rule upon incorporation to the neglect of the officer with whom the certificate
is required to be filed, or to a wrongful refusal on his
c. Corporate Term (Sec. 11) part to receive it, the same will be treated as having
been filed before the expiry date. The doctrine does
not apply where the delay is attributable to the
Perpetual Existence
corporation (Alhambra Cigar v. SEC, G.R. No. L-
General Rule: A corporation shall have perpetual
23606, 1968)
existence
Revival of Corporate Existence
Exception: Unless its articles of incorporation
If a corporation’s term has expired, it may apply for
provide otherwise.
a revival of its corporate existence, together with all
the rights and privileges under its certificate of
For Corporations with certificates of incorporations
incorporation and subject to all of its duties, debts
issued prior to the effectivity of this code and which
and liabilities existing prior to its revival. Upon
continues to exist shall have perpetual existence,
approval by the SEC, the corporation shall be
unless:
deemed revived and a certificate of revival of
a. Upon a vote of its majority stockholders
corporate existence shall be issued, giving it
representing majority of its outstanding
perpetual existence, unless its application for revival
capital stock,
provides otherwise.
b. the corporation notifies the SEC that it
elects to retain its specific corporate
Who may file for petition for revival of corporate
term pursuant to its articles of
existence:
incorporation.
Generally, a corporation whose term has expired;
Any change in the corporate term under this section
a. An Expired Corporation whose Certificate
is without prejudice to the appraisal right of
of Registration has been revoked for non-
dissenting stockholders in accordance with the
filing of reports,
provisions of this Code.
b. An Expired Corporation whose Certificate
of Registration has been suspended
Extension of Corporate Term
General Rule: A corporate term for a specific period
NOTE: For a and b: it shall file the proper Petition
may be extended or shortened by amending the
to Lift its Suspended Status, which may be
articles of incorporation
incorporated in its Petition to Revive, and must
settle the corresponding penalties thereof
Limitation: No extension may be made earlier than
three (3) years prior to the original or subsequent
c. An Expired Corporation whose corporate
expiry date(s)
name has already been validly re-used,
and is currently being used, by another
Exception: There are justifiable reasons for an
existing corporation duly registered with
earlier extension as may be determined by the SEC
the SEC, provided that the former shall
change its corporate name within thirty
Effects
(30) days from the issuance of its
If Extended If NOT extended or
Certificate of Revival of Corporate
expired
Existence. (SEC Memo. Circ. no. 23-19)
Such extension of the Upon expiration of the
corporate term shall period fixed in the Who may not file?
take effect only on the articles of
a. An Expired Corporation which has
day following the incorporation, in the completed the liquidation of its assets;
original or subsequent absence of b. A corporation whose Certificate of
expiry date(s). compliance with the Registration has been revoked for reasons
legal requisites for the other than non-filing of reports;
extension of the c. A corporation dissolved by virtue of
period, the corporation Sections 6(c) and 6(d) of SEC
is dissolved ipso facto. Reorganization Act;
(PNB v. CFI Rizal, d. An Expired Corporation which already
G.R. No. 63201, 1992) availed of re-registration or other

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memorandum circulars issued by the SEC b. Preferred shares may be preferred (a)
pertaining to re-registration, except when: as to dividends, or (b) as to distribution
i. The re-registered corporation has of assets during liquidation, or (c) as to
given its consent to the Petitioner any other manner stated in the Articles,
to use its corporate name, and has not violative of the Corp Code. If
undertaken to undergo voluntary authorized by Articles, Board may fix
dissolution immediately after the terms. It is ALWAYS with a stated par
issuance of the Petitioner's value.
Certificate of Revival; or
ii. The re-registered corporation has ii. Par Value and No-Par Value
given its consent to the Petitioner a. Par value shares - with a pre-stated
to use its corporate name, and has amount or denomination.
undertaken to change its corporate b. Non- par value - no pre-stated value.
name immediately after the
issuance of the Petitioner's Non-par value shares are deemed fully paid and
Certificate of Revival. (SEC Memo. non-assessable so holders of such are not liable to
Circ. no. 23-19) the corporation or its creditors.
No application for revival of certificate of The consideration received is treated as capital and
incorporation of following corporations shall be cannot be declared as dividends.
approved by the SEC unless accompanied by a
favorable recommendation of the appropriate Because they are vested with public interest, the
government agency: following types of corporations may only issue par
1. Banks, value shares:
2. Banking and quasi banking institutions, 1. Banks
3. Preneed, Insurance and trust companies, 2. Trust Companies
4. Non-stock savings and loan associations 3. Insurance Companies
(NSSLAs), 4. Public Utilities
5. Pawnshops, 5. Building and Loan Association
6. Corporations engaged in money service
business, and iii. Voting and Non- Voting Shares
7. Other financial intermediaries (Sec. 11) a. Voting share with complete voting
rights
Required Vote to Initiate Revival: b. Non - voting shares are preferred or
The required number of votes for the Revival of an redeemable shares that have limited
Expired Stock Corporation is at least a majority vote voting rights.
of the board of directors, and the vote of at least
majority of the outstanding capital stock. For Non-Voting Shares Have Voting Rights In
nonstock corporations, at least a majority vote of the The Following Matters:
board of trustees, and the vote of at least majority of 1. Amendment of Articles
the members. (SEC MC no. 23-19) 2. Adoption/ Amendment of By- Laws
3. Sale, lease, exchange, mortgage,
d. Classification of Shares (Sec. 6) pledge or dispose of all or
substantially all of corporate property
The classification of shares, their corresponding 4. Incur, create, increase bonded
rights, privileges, or restrictions, and their stated par indebtedness
value, if any, must be indicated in the articles of 5. Increase, decrease capital stock
incorporation. 6. Merger/ consolidation with another
corporation
Doctrine of Equality of Shares 7. Investment of funds in another
Each share shall be equal in all respects to every corporation
other share, except as otherwise provided in the 8. Dissolution of corporation
articles of incorporation and in the certificate of
stock. (sec. 6)
i. Common and Preferred shares

a. Common shares are also called
ordinary shares and they share in
profits pro-rata

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e. Other Classes Of Shares (Sec. 7, participate further with common

Sec. 8, Sec. 9) stockholders in dividend declarations.
a. Founder’s shares – Given rights and f. Over-Issued Stock – Stock issued in

privileges not enjoyed by owners of excess of authorized capital stock; null
other stocks; exclusive right to vote/be and void.
voted in the election of directors shall
not exceed 5 years. 6. Incorporation and Organization
Note: such exclusive right shall not be allowed if its a. Promoter

exercise will violate the “Anti-Dummy Law”; the
“Foreign Investments Act of 1991”; and other A person who, acting alone or with others, takes
pertinent laws. initiative in founding and organizing the business or
enterprise of the issuer and receives consideration
Since Section 7 makes no distinction (and is found therefor. (Securities Regulation Code, Sec. 3.10.
under General Provisions), then it must mean that [R.A. 8799])
founders’ shares may be applied to both stock and
nonstock corporations. Although [Section 88 of the (1) Liability of Promoter
Revised Corporation Code] allows in a nonstock
corporation to limit, broaden or deny the right of General Rule: Promoter is personally liable in the
members of any class, the specific provision of event the corporation is not duly incorporated.
Section 7 to founders’ share must prevail, and that
the nonstock corporation can lawfully suspend or Exception: Investors who were not the “moving
define the voting rights of its members, but with spirit” behind the organization of the corporation, but
respect to founders’ share, the exclusive right to who were merely convinced to invest in the
vote and be voted for of the founders’ share should proposed corporate venture on the basis of the
expire after five years from the approval of the SEC. feasibility study undertaken, are not liable
(Forest Hills and Country Club, Inc. v. Kings personally with the corporation for the cost of such
Properties Corp., G.R. No. 212833, 2019). feasibility study.(Caram, Jr. v. CA, G.R. No. L-
48627, 1987)
b. Redeemable shares – Expressly
provided in articles; may be (2) Liability of Corporation for
purchased/taken up upon expiration of Promoter’s Contracts
the period of said shares purchased
whether or not there are unrestricted General Rule: Corporation is not bound to a
retained earnings; may be deprived of contract made by a promoter before its incorporation
voting rights. (Cagayan Fishing v. Sandiko, G.R. No. L-43350,
1937)
c. Treasury stocks – stocks previously
issued and fully paid for and reacquired Exception:
by the corporation through lawful a. It adopts or ratifies the contract; or
means (purchase, donation, etc.); not b. It accepts its benefits with knowledge of the
entitled to vote and no dividends could terms thereof (Rizal Light v. Morong, G.R.
be declared thereon as corporations No. L-20993, 1968)
cannot declare dividends to itself.
Ratification is the key element in upholding the
d. Escrow shares – those held by a validity and enforceability of promoter's contracts.
third person to be released only upon Without ratification by a corporation after its due
the performance of a condition or the incorporation, a contract entered into on behalf of
happening of a certain event a corporation yet to be organized or still in the
contained in the agreement. process of incorporation is void as against the
corporation (Cagayan Fishing Development Co.,
e. Preferred cumulative participating Inc. v. Teodoro Sandiko, G.R. No. L-43350, 1937).
share of stock - Share entitling its
holder to preference in the payment of Although a franchise may be treated as a contract,
dividends ahead of common a. The eventual incorporation of the
stockholders and to be paid the applicant corporation after the grant of the
dividends due for prior years and to franchise; and

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b. Its acceptance of the franchise as shown e. Amounts from unrestricted dividends

by its action in prosecuting the application (for declaration of stock dividends)
filed with the SEC for the approval of said f. Outstanding shares exchanged in
franchise, reclassification or conversion
not only perfected a contract between the g. Shares of stock in another corporation;
respondent municipality and Morong Electric but and/or
cured the deficiency in the application of Morong h. Other generally accepted forms of
Electric (Rizal Light & Ice Co., v. Municipality of consideration.
Morong, Rizal, G.R. No. L-20993, 1968).
Other Rules pertaining to consideration of
b. Subscription Contract (Sec. 59) stocks
a. Where the consideration is other than
Any contract for the acquisition of unissued stock actual cash, or consists of intangible
shall be deemed a subscription, notwithstanding the property such as patents of copyrights,
fact that the parties refer to it as a purchase or some the valuation thereof shall initially be
other contract. determined by the incorporators or the
board of directors, subject to approval
c. Pre-Incorporation Subscription by the SEC.
Agreements (Sec. 60) b. No issuance of shares on promissory
notes or future services.
It is entered into before the incorporation and c. The same considerations under Sec. 61
irrevocable for a period of six (6) months from the whenever applicable are to be used for
date of subscription unless: bonds issued by the corporation.
a. All other subscribers consent to the d. The issued price of no par value shares
revocation, or is the amount fixed:
b. The corporation failed to materialize i. In the Articles
after 6 months or within the stipulated ii. By the Board if authorized by its
period. Articles or By-Laws, or
iii. If not so fixed, by the stockholders
It cannot be revoked after filing the Articles of representing the majority of the
Incorporation with the SEC. outstanding capital stock (Sec. 61)
In contrast:
Post-incorporation subscription – entered into e. Articles of Incorporation
after incorporation, such as for the unsubscribed
portion of the authorized capital stock and for the Nature and Function of Articles
purchase of increased capital stocks after an The Articles of Incorporation is a basic contract
amendment of the article of incorporation. document in Corporate Law which defines the
charter of the corporation. Section 13 of the
d. Consideration for Stocks (Sec. Corporation Code provides that the Articles of
61) Incorporation do not become binding as the charter
of the corporation unless they have been filed with
Stocks shall not be issued for a consideration less and registered with the SEC.
than the par or issued price thereof.
Note: The Articles of Incorporation defines the
Consideration for issuance of stock may be by contractual relationships between the State and the
corporation, the stockholders and the State, and
any or a combination of any two or more of the
following: between the corporation and its stockholders
a. Cash actually paid (Lanuza v. CA, G.R. No. 131394, 2005).
b. Property (tangible or intangible)
(1) Contents (Sec. 13)
actually received and necessary or
convenient for the corporation’s use
c. Labor performed or service actually All corporations shall file with the SEC articles of
incorporation in any of the official languages, duly
rendered to the corporation
d. Debts incurred previously by the signed and acknowledged or authenticated, in such
corporation (for subscriptions after form and manner as may be allowed by the SEC,
containing substantially the following matters,
incorporation)
except as otherwise prescribed by this Code or by
special law:

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a. The name of the corporation; Requirement for Amending Articles of

b. The specific purpose or purposes for Incorporation (Sec. 15)
which the corporation is being 1. A legitimate purpose for the amendment;
incorporated. Where a corporation has 2. Majority vote of directors or trustees and the
more than one stated purpose, the vote or written assent of the stockholders
articles of incorporation shall state which representing at least two-thirds (2/3) of the
is the primary purpose and which is/are outstanding capital stock, without prejudice to
the secondary purpose or purposes: the appraisal right of dissenting stockholders if
Provided, That a non-stock corporation available, or if it be a non-stock corporation,
may not include a purpose which would two-thirds (2/3) of the members.
change or contradict its nature as such; 3. The original and amended articles together
c. The place where the principal office of the shall contain all provisions required by law to
corporation is to be located, which must be set out in the articles of incorporation.
be within the Philippines; 4. Indication in the articles, by underscoring, the
d. The term for which the corporation is to change or changes made.
exist, IF not elected the perpetual 5. A copy of amended articles duly certified under
existence; oath by the corporate secretary and a majority
e. The names, nationalities and residences of of the directors or trustees stating the fact that
the incorporators; said amendment or amendments have been
f. The number of directors or trustees, duly approved by the required vote of
which shall not more than fifteen (15); stockholders or members, as the case may be.
g. The names, nationalities and residences of
persons who shall act as directors or When would take effect:
trustees until the first regular directors or a. The amendments shall take effect upon
trustees are duly elected and qualified in their approval by the SEC or
accordance with the Corporation Code; b. From the date of filing with the said
h. If it be a stock corporation, the amount of Commission, if not acted upon within six
its authorized capital stock in lawful (6) months from the date of filing for a
money of the Philippines, the number of cause not attributable to the corporation.
shares into which it is divided, and in
case the share are par value shares, the Grounds for Rejecting Incorporation or
par value of each, the names, Amendment to Articles of Incorporation (Sec.
nationalities and residences of the 16)
original subscribers, and the amount a. Not in prescribed form;
subscribed and paid by each on his b. Illegal purpose;
subscription, and if some or all of the c. False Treasurer’s affidavit; and
shares are without par value, such fact d. Non-compliance with required Filipino
must be stated; stock ownership.
i. If it be a non-stock corporation, the amount
of its capital, the names, nationalities The SEC shall give the corporation a reasonable
and residences of the contributors and time to correct or modify objectionable portions.
the amount contributed by each; and
j. Such other matters as are not inconsistent Note: A favorable recommendation of the
with law and which the incorporators may appropriate government agency to the effect that
deem necessary and convenient. such article or amendment is in accordance with law
is required in the following types of corporation:
An arbitration agreement may be provided in the 1. Banks, banking and quasi-banking
articles of incorporation pursuant to Section 181 of institutions,
this Code. 2. Preneed, insurance and trust companies,
3. Non-stock savings and loan associations
Note: The articles of incorporation and applications (NSSLAS),
for amendments thereto may be filed with the SEC 4. Pawnshops, and
in the form of an electronic document, in accordance 5. Other financial intermediaries
with the SEC’s rules and regulations on electronic
filing. (2) Non-Amendable Items
Amendments 1. Names of incorporators

2. Names of incorporating directors/trustees

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3. Names of original subscribers to capital applicable laws and/or revoke the registration of
stock and subscribed and paid-up capital the corporation.(Sec. 17)
4. Treasurer-in-trust elected by original
subscribers Other Limitations on the Use of Corporate
5. Members who contributed to the initial Name:
capital of non-stock corporation a. The Corporate Name of the following
6. Witnesses and acknowledgments entities shall include:
1. For a Corporation- "Corporation" or
f. Corporate Name and "Incorporated," or the abbreviations
Limitations on its Use "Corp." or "Inc."
2. For One Person Corporations- “OPC”
Corporate Name (Sec. 17) 3. Partnerships
A corporation’s right to use its corporate and trade i. General Partnerships -
name is a property right, it is a right in rem which it "Company" or "Co."
may assert or protect against the whole world in the ii. limited partnership, the
same manner as it may protect its tangible property word "Limited" or "Ltd."
against trespass or conversion (Philips Export v. iii. Professional partnership -
CA, G.R. No. 96161, 1992) "Company," "Associates,"
or "Partners," or other
Statutory Limitations on Use of Corporate similar descriptions;
Name 4. For Foundations- “Foundation”
No corporate name shall be allowed by the SEC if: 5. For engaging in microfinance activities
a. it is not distinguishable from that already - "Microfinance" or
reserved or registered for the use of another i. "Microfinancing"
corporation, 6. Other words or phrases, authorized by
b. if such name is already protected by law, or law or other rules and regulations, to
c. when its use is contrary to existing law, rules be used by specific corporations or
and regulations. partnerships
b. A term that describes the business of a
“Non distinguishable” corporation in its name should refer to its
A name is not distinguishable even if it contains primary purpose. If there are two such
one or more of the following: terms, the first should refer to the primary
a. The word “corporation”, “company”, purpose and the second to the
“incorporated”, “limited”, “limited liability”, or secondary purpose.
an abbreviation of one of such words; and c. If the name is similar to a registered
b. Punctuations, articles, conjunctions, corporation or partnership, the applicant
contractions, prepositions, abbreviations, shall add distinctive word/s to the proposed
different tenses, spacing, or number of the name to remove the similarity from the
same word or phrase. registered name
Effects if Statutory Limitations are Violated: Note: This shall not be allowed if the registered
a. SEC may summarily order the corporation to name is coined or unique unless the board of
immediately cease and desist from using directors or majority of the partners gives its
such name and require the corporation to consent to the applied name.
register a new one.
b. The SEC shall also cause the removal of all d. A name that consists solely of special
visible signages, marks, advertisements, symbols, punctuation marks or specially
labels, prints and other effects bearing such designed characters shall not be
corporate name. registered.
c. Upon the approval of the new corporate e. The name of an internationally known
name, the SEC shall issue a certificate of foreign corporation cannot be used by a
incorporation under the amended name. domestic corporation unless it is its
subsidiary and the parent corporation has
Note: If the corporation fails to comply with the consented to such use.
SEC’s order, the SEC may hold the corporation f. A name written in a foreign language, even
and its responsible directors or officers in contempt if registered in another country, shall not be
and/or hold them administratively, civilly and/or registered if the name violates good
criminally liable under this Code and other morals, public order or public policy

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g. The name of a local geographical unit, Change of Corporate Name

site or location cannot be used as a A corporation may change its name by the
corporate or partnership name unless it is amendment of its articles of incorporation, but the
accompanied by a descriptive word or same is not effective until approved by the SEC
phrase. (Philippine First Insurance Co. v. Hartigan, G.R. No.
h. The name of a corporation or partnership L-26370, 1970).
that has been dissolved or whose
registration has been revoked shall not be A change in the corporate name does not make a
used by another corporation or partnership new corporation, and whether affected by special
within five (5) years from the approval of act or under a general law, has no effect on the
dissolution or five (5) years from the date of identity of the corporation, or on its property, rights,
revocation, unless its use has been or liabilities (Republic Planters Bank v. CA, G.R. No.
allowed at the time of the dissolution or 93073, 1992).
revocation by the stockholders, members
or partners who represent a majority of the Similarity in corporate names between two
outstanding capital stock or membership of corporations would cause confusion to the public
the dissolved corporation or partnership, as especially when the purposes stated in their charter
the case may be. are also the same type of business (Universal Mills
i. A corporate or partnership name, which Corp. v. Universal Textile Mills Inc., G.R. No. L-
was previously used but become the 28351, 1977).
subject of amendment, shall not be re-
registered or used by another A corporation has no right to intervene in a suit using
corporation or partnership for a period of a name other than its registered name; if a
three (3) years from the date of the corporation legally and truly wants to intervene, it
approval of the adoption of the new should have used its corporate name as the law
corporate or partnership name. An earlier requires and not another name which it had not
period may be allowed for the registration registered (Laureano Investment & Development
or use of the former corporate or Corp. v. CA, G.R. No. 100468, 1997).
partnership name provided that the
corporation or partnership, which There would be no denial of due process when a
previously owned the used corporate or corporation is sued and judgment is rendered
partnership name, gives its consent. against it under its unregistered trade name,
j. Names of absorbed/constituent holding that a corporation may be sued under the
corporation may not be used unless it is name by which it makes itself known to its workers
the surviving corporation intending to use (Pison-Arceo Agricultural Development Corp. v.
the said absorbed/constituent corporate NLRC, G.R. No. 117890, 1997).
name, or that another corporation may use
the names of absorbed/constituent
corporation if consent of the surviving g. Registration, Incorporation, and
corporation is obtained Commencement of Corporate
Existence (Sec. 18)
Doctrine of Secondary Meaning
General Rule: A corporation whose corporate name Registration
is a word or phrase which is generally descriptive or A person or group of persons desiring to incorporate
geographical cannot prevent another corporation, shall submit the intended corporate name to the
which uses the same or phrase as its corporate SEC for verification. If the SEC finds that the name
name, from using such. is distinguishable from a name already reserved or
registered for the use of another corporation, not
Exception: A word or phrase originally incapable of protected by law and not contrary to law, rules and
exclusive appropriation with reference to an article regulations, the name shall be reserved in favor of
on the market because geographically or otherwise the incorporators. The incorporators shall then
descriptive, might nevertheless have been used so submit their articles of incorporation and bylaws to
long and so exclusively by one producer with the SEC.
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase Issuance of Certificate of Incorporation:
has come to mean that the article was his product. If the SEC finds that the submitted documents and
(Lyceum v. CA, G.R. No. 101897, 1993) information are fully compliant with the requirements
of this Code, other relevant laws, rules and

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regulations, the SEC shall issue the certificate of

incorporation. Requisites of Valid By-Laws:
a. It must be consistent with the Corporation
Commencement of Corporate Existence Code, other pertinent laws and regulations.
A private corporation organized under this Code b. It must be consistent with the Articles of
commences its corporate existence and juridical Incorporation.
personality from the date the SEC issues the c. It must be reasonable and not arbitrary or
certificate of incorporation under its official seal and oppressive.
thereupon the incorporators, stockholders/ d. It must not disturb vested rights, impair
members and their successors shall constitute a contract or property rights of stockholders or
body corporate under the name stated in the articles members or create obligations unknown to
of incorporation for the period of time mentioned law.
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with Binding Effects
law. (Sec. 18) The by-laws of the corporation are its own private
laws that have the same effect as the laws of the
h. Election of Directors or corporation. They are deemed written into the
Trustees (Sec. 23) 6 charter. Thus, they become part of the fundamental
laws of the corporation which are binding upon the
The Directors or Trustees who possess all of the corporation and its officers, and the litigating parties
qualifications shall be elected by the stockholders, who are not part of the corporation in accordance
or members as the case may be, at a meeting duly with their terms (Peña v. CA, G.R. No. 91478, 1991;
called for the purpose in which a quorum is present. Forest Hills Golf Club v. Gardpro Inc., G.R. No.
164686, 2014).
Manner of Election
Procedure on Adoption of By-Laws (Sec. 45)
a. In any form; or
b. By ballot when requested by any voting After incorporation:
a. Approval by the majority of outstanding
stockholder or member
shares/members
c. In stock corporations, voting may be in person
or by proxy b. By-laws must be signed by
stockholders/members voting for them
c. Kept in the principal office of the corporation
Time to Determine Voting Right
a. At the time fixed in by- laws d. Subject to inspection by stockholders or
b. If by- laws are silent, at time of election members
e. Certified copy signed by majority of directors,
countersigned by the corporate secretary,
i. Adoption of By-Laws
filed w/ SEC and attached to original Articles
of Incorporation
By-laws
Prior to Incorporation:
Relatively permanent and continuing rules of action
a. Such by-laws shall be approved and signed
adopted by the corporation for its own government
by all the incorporators and
and of the individuals composing it and those having
b. Submitted to the SEC, together with the
direction, management and control of its affairs, in
articles of incorporation.
whole or in part, in the management and control of
its affairs and activities.
Note: A certification of the appropriate government
Regulations, ordinances, rules or laws adopted by
agency to the effect that such bylaws or
an association or corporation or the like for its
amendments are in accordance with law is
internal governance, including rules for routine
required before he SEC shall accept for filing the
matters such as calling meetings and the like (San
bylaws or any amendment thereto of the following:
Miguel Corp. v. Mandaue Packing Products Plants
1. Bank,
Union-FFW, G.R. No. 152356, 2005).
2. Banking institution,
3. Building and loan association,
By-laws are intended merely for the protection of the 4. Trust company,
corporation, and prescribe regulation, not 5. Insurance company,
restrictions, they are always subject to the charter of 6. Public utility,
the corporation (Rural Bank of Salinas v. CA, GR 7. Educational institution, or
No. 96674, 1992).
6
NOTE: This will be discussed extensively under the heading
Board of Directors and Trustees (9)(D)

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8. Other special corporations governed by 1992; quoting from Thompson on Corporation Sec.
special laws 4137, cited in Fleischer v. Nolasco, G.R. No. L-
23241, 1925).
FAILURE TO Adopt And Maintain The Bylaws
Now Specifically Criminally Punishable And C. By-law provisions cannot discriminate
Subject To Sec’s Contempt Power (Sec. 161) among its stockholders or members
Common Law Limitations on By-Laws (1) Contents of By-Laws
A. By-laws cannot be contrary to law and A private corporation may provide the following in
articles of incorporation its bylaws:
1. The time, place and manner of calling and
A by-law provision granting to a stockholder a conducting regular or special meetings of the
permanent representation in the Board of Directors directors or trustees;
is contrary to the Corporation Code requiring all 2. The time and manner of calling and
members of the Board to be elected by the conducting regular or special meetings and
stockholders or members. Even when the members mode of notifying the stockholders or
of the association may have formally adopted the members thereof;
provision, their action would be of no avail because 3. The required quorum in meetings of
no provision of the by-laws can be adopted if it is stockholders or members and the manner of
contrary to law (Grace Christian High School v. CA, voting therein;
G.R. No. 108905 , 1997). 4. The modes by which a stockholder, member,
director, or trustee may attend meetings and
Although the right to amend by-laws lies solely in the cast their votes;
discretion of the employer, this being in the exercise 5. The form for proxies of stockholders and
of management prerogative or business judgment, members and the manner of voting them;
such right cannot impair the obligation of existing 6. The directors’ or trustees’ qualifications,
contracts or rights or undermine the right to security duties and responsibilities, the guidelines for
of tenure of a regular employee. Otherwise, it would setting the compensation of directors or
enable an employer to remove any employee from trustees and officers, and the maximum
employment by the simple expediency of amending number of other board representations that
its by-laws and providing the position shall cease to an independent director or trustee may have
exist upon occurrence of a specified event which shall, in no case, be more than the
(Salafranca v. Philamlife (Pamplona) Village number prescribed by the SEC;
Homeowners Association, Inc., G.R. No. 121791, 7. The time for holding the annual election of
1998) directors or trustees and the mode or manner
of giving notice thereof;
By-laws that prohibit directors who have interests in 8. The manner of election or appointment and
competitor corporations are reasonable in order to the term of office of all officers other than
protect the interests of the company (Gokongwei v. directors or trustees;
SEC, G.R. No. L-45911, 1979) 9. The penalties for violation of the bylaws;
10. In the case of stock corporations, the manner
B. By-laws cannot be unreasonable or be of issuing stock certificates; and
contrary to the nature of by-laws (GPI v. El 11. Such other matters as may be necessary for
Hogar Filipino, G.R. No. L-26649, 1927). the proper or convenient transaction of its
corporate affairs for the promotion of good
Authority granted to a corporation to regulate the governance and anti-graft and corruption
transfer of its stock does not empower corporation measures.
to restrict the right of a stockholder to transfer his
shares, but merely authorizes the adoption of Note: An arbitration agreement may be provided in
regulations as to the formalities and procedure to be the bylaws pursuant to Section 181 of this Code.
followed in effecting transfer (Thomson v. CA, G.R.
No. 116631, 1998). (2) Binding Effects
By-laws are intended merely for the protection of the Binding effect of by-laws
corporation, and prescribe regulation, not 1. As to the corporation and its components -
restrictions; they are always subject to the charter of Binding not only upon the corporation but
the corporation (Rural Bank of Salinas, Inc. v. CA, also on its stockholder, members and those

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having direction, management and control j. Effects of Non-Use of Corporate

of its affairs. They have the force of contract Charter (Sec. 21)
between the members/stockholders.
2. As to third persons - Not binding unless 1. If a corporation does not formally
there is actual knowledge. Third persons organize and commence its business
are not even bound to investigate the within five (5) years from the date of its
content because they are not bound to incorporation, its certificate of
know the by- laws which are merely incorporation shall be deemed revoked as
provisions for the government of a of the day following the end of the five-year
corporation and notice to them will not be period.
presumed (China Banking Corp. v. CA, 2. If a corporation has commenced its
G.R. No. 118332 1997). business but subsequently becomes
inoperative for a period of at least five
(3) Amendments (5) consecutive years, the SEC may, after
due notice and hearing, place the
Amendment or Revision (Sec. 47) corporation under delinquent status.
1. With stockholders or members approval
a. Majority vote of the members of the Delinquent Corporation:
Board; and A Corporation placed by the SEC under delinquency
b. Majority of the outstanding capital stock or status after due notice and hearing, because it
majority of the members in case of non- commenced its business but subsequently
stock corporation, in a meeting duly called becomes inoperative for a period of at least five (5)
for the purpose consecutive years.
2. The board may be delegated to have the power
to amend or repeal any by- laws or adopt new Effects of Delinquency Status:
by- laws, by a vote of: A delinquent corporation shall have a period of two
a. 2/3 of the shareholders representing the (2) years to resume operations and comply with all
outstanding capital stock; or requirements that the SEC shall prescribe.
b. 2/3 of the members in a non- stock 1. Upon compliance by the corporation, the
corporation. SEC shall issue an order lifting the
delinquent status.
Such power of the Board may be revoked by 2. Failure to comply with the requirements
majority vote of the outstanding capital stock or and resume operations within the period
majority of the members in a non- stock corporation. given by the SEC shall cause the
revocation of the corporation’s certificate of
Note: The power to adopt the first original by- laws incorporation.
cannot be delegated to the board of directors or
trustees; only the power to amend or repeal any by- Corporations under special regulatory
laws or adopt new by- laws that will supplant the old jurisdiction
by- laws can be validly delegated. The SEC shall give reasonable notice to, and
coordinate with the appropriate regulatory agency
Filling and Effectivity prior to the suspension or revocation of the
Whenever the bylaws are amended or new bylaws certificate of incorporation of companies under their
are adopted, the corporation shall file with the SEC special regulatory jurisdiction.
1. Amended or new bylaws and,
2. If applicable, the stockholders’ or 7. Corporate Powers
members’ resolution authorizing the
delegation of the power to amend
a. General Powers; Theory of
and/or adopt new bylaws, duly
certified under oath by the corporate General Capacity
secretary and a majority of the
directors or trustees. The general capacity theory maintains that a
corporation is said to hold such powers as are not
The amended or new by-laws shall only be prohibited or withheld from it by general law.
effective upon the issuance by the SEC of a
certification that the same is in accordance with a. Express powers – Those expressly authorized
this Code and other relevant laws. by the Corporation Code and other laws, and its
Articles of Incorporation or Charter

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b. Implied/necessary powers – Those that can 3) Power to deny pre-emptive rights (Sec. 38)
be inferred from or necessary for the exercise 4) Power to sell or dispose corporate assets
of the express powers or for the pursuit of its (Sec. 39)
purposes as provided in the Charter. Examples 5) Power to acquire own shares (Sec. 40)
are powers related to the same line of business 6) Power to invest corporate funds in another
(e.g. stevedoring services to unload coal to its corporation or business (Sec. 41)
pier for corporations supplying electric power) 7) Power to declare dividends (Sec. 42)
c. Incidental/inherent powers – Those that are 8) Power to enter into management contract
deemed to be within the capacity of corporate (Sec. 43)
entities. These “necessarily flow” from the
business and attach at the moment of creation c. Power to Extend or Shorten
without regard to express powers or primary Corporate Term (Sec. 36)
purpose.
There should be a written notice of
General Express Powers under the Corporation stockholders/members meeting stating:
Code (Sec. 35) ● Proposed action and time and place of
a. Sue and be sued in its corporate name; meeting
b. Succession; ● Addressed to each stockholder/ member
c. Adopt and use a corporate Seal; ● Deposited to the addressee in post office,
d. Amend Articles of Incorporation with postage prepaid or served personally;
e. Adopt, amend or repeal By-laws;
f. For stock corporations – Issue stocks to Note: When allowed in the by-laws or done with the
subscribers and to sell treasury stocks; for non- consent of the stockholder, sent electronically in
stock corporations – admit members; accordance with the rules and regulations of the
g. Purchase, receive, take, or grant, hold, convey, SEC on the use of electronic data messages
sell, lease, pledge, mortgage and otherwise
Vote needed:
deal with real and personal property, pursuant
● Board majority (in board meeting) and
to its lawful business;
● Ratified by 2/3 of OUTSTANDING
h. Enter into Partnership, joint venture, merger,
CAPITAL STOCK or members in a meeting
consolidation, or any other commercial
– mere written assent is not enough
agreement with natural and juridical persons;
i. Reasonable Donations for public welfare, Note: No extension may be made earlier than three
hospital, charitable, cultural, scientific, civil or (3) years prior to the original or subsequent expiry
similar purposes (Prohibited for foreign date(s) unless there are justifiable reasons for an
corporations: for partisan political activity; earlier extension as may be determined by the
j. Establish pension, retirement and other Plans Commission
for the benefit of directors, trustees, officers and
employees; and The extension of the corporate term shall take effect
k. Other powers essential or necessary to carry only on the day following the original or subsequent
out its purposes. expiry date(s).
b. Specific Powers; Theory of Appraisal rights available to dissenting

stockholders
Specific Capacity
● In case of extension of term – right of
appraisal exists
The specific capacity theory maintains that the
corporation cannot exercise powers except those ● In shortening of term – right of appraisal
expressly/impliedly given. recognized in Sec 81(1) – amendment of
Articles to shorten or extend corporate term
Some of the Specific Powers Granted by the
RCC:
1) Power to extend or shorten corporate term
(Sec. 36)
2) Power to increase or decrease capital stock
or incur, create, increase bonded
indebtedness (Sec. 37)

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d. Power to Increase or Decrease ● Approved by at least 2/3 of members in a

Capital Stock or Incur, Create, meeting
Increase Bonded Indebtedness ● With notice of the proposal and meeting
(Sec. 37) given to stockholders
● With prior approval of the SEC
Power to increase or decrease capital stock - Bonds issued by a corporation shall be registered
provided that in the case of an increase in capital with the SEC, which shall have the authority to
stock, the 25-25 rule is complied with, as approved determine the sufficiency of the terms thereof.
by the SEC
e. Power to Deny Pre-Emptive
There shall be no increase or decrease of capital Rights (Sec. 38)
stock unless :
● Approved by majority of the board General rule: Stockholders have the pre-emptive
● Approved by at least 2/3 of right to subscribe to all issues or disposition of
OUTSTANDING CAPITAL STOCK in a shares by the corporation of any class in proportion
to their shareholdings
meeting
● With notice of the proposal and meeting
Exception:
given to stockholders- given personally or ● Denied by the Articles of Incorporation or
through electronic means if allowed amendment thereto;
● With prior approval of the SEC ● Shares are issued in compliance with laws
o The application with the SEC shall be requiring minimum stock ownership by the
made within six (6) months from the public
date of approval of the board of ● Shares issued in good faith in exchange for
directors and stockholders, which property for corporate purposes approved
period may be extended for justifiable by 2/3 of the OUTSTANDING CAPITAL
reasons. STOCK
● Accompanied by a sworn statement of the ● Shares in payment of previously contracted
treasurer showing that the 25-25 rule has debts approved by 2/3 of OUTSTANDING
been complied with CAPITAL STOCK
25-25-25 Rule f. Power to Sell or Dispose

The SEC shall not accept for filing any certificate of Corporate Assets (Sec. 39)
increase of capital stock unless accompanied by a
sworn statement of the treasurer of the corporation This Power is subject to the provisions of the
lawfully holding office at the time of the filing of the “Philippine Competition Act”, and other related laws.
certificate, showing that at least twenty-five
percent (25%) of the increase in capital stock Votes Required
has been subscribed and that at least twenty-five a. Power to Sell or Dispose Corporate Assets
percent (25%) of the amount subscribed has been (Not all or Substantially All)
paid in actual cash to the corporation or that
property, the valuation of which is equal to Majority Vote by Board of Directors or Trustees
twenty-five percent (25%) of the subscription, only
has been transferred to the corporation:
b. Power to Sell All or Substantially All Corporate
Note: No decrease of capital stock shall be Assets Including its Goodwill
approved by the SEC if it will prejudice the rights of
corporate creditors Needs vote of:
1. Majority Vote by Board of Directors or
From and after the approval by the SEC and the Trustees
issuance of its certificate of filing, capital stock shall 2. 2/3 of OUTSTANDING CAPITAL STOCK
stand increased or decreased as the certificate may or members
declare
Note: In nonstock corporations where there are
Incur, create, or increase bonded indebtedness no members with voting rights, the vote of at
(non-stock): least a majority of the trustees in office will be
There should be no incurring, creating or increasing sufficient authorization for the corporation to enter
any bonded indebtedness unless: into any transaction authorized by this section.
● Approved by majority of the board

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● To pay dissenting or withdrawing

Sale of all or substantially all corporate assets: stockholders entitled to payment for their
shares under the provisions of the
Net Asset Value Test- The determination of Corporation Code.
whether or not the sale involves all or substantially
all of the corporation’s properties and assets must Shares of stock which have been issued and fully
be computed based on its net asset value, as shown paid for, but subsequently reacquired by the issuing
in its latest financial statements. corporation through purchase, redemption,
donation, or some other lawful means are Treasury
Incapacity Test- A sale or other disposition shall be Shares. Such shares may again be disposed of for
deemed to cover substantially all the corporate a reasonable price fixed by the board of directors
property and assets if thereby the corporation would (Sec. 9) subject to stockholders’ preemptive rights.
be rendered incapable of continuing the business or
accomplishing the purpose for which it was
incorporated. (Sec. 39) h. Power to Invest Corporate
Funds in Another Corporation
Notice or Business (Sec. 41)
Written notice of stockholder/member meeting
proposing said action served personally at their Needs vote of:
places of residence and deposited to the addressee a. Board majority in meeting
in the post office with postage prepaid, or when b. 2/3 of OUTSTANDING CAPITAL STOCK
allowed by the by-laws or done with the consent of or members - Stockholders/members’
the stockholder, sent electronically approval not needed if investment in stock
of other corporations is reasonably
Dissenting stockholders have appraisal rights. necessary to accomplish primary purpose
c. Written notice of proposed investment and
After authorization or approval by the time and place of meeting sent to
stockholders/members, the Board may however, stockholders
abandon proposed action without prior d. Dissenting stockholders have appraisal
authorization/approval of stockholders/members, rights
subject to rights of 3rd parties
Investment by a sugar central in the equity of a jute-
However, stockholders’/members’ authorization not bag manufacturing company used in packing sugar,
needed if falls within the implied powers of the sugar central
● Disposition of property and assets is as part of its primary purpose (De La Rama v. Ma-
necessary in the usual and regular course ao Sugar Central, G.R. No. L-17504, 1969)
of business, or
● If the proceeds of sale or disposition is i. Power to Declare Dividends
appropriated for the conduct of the
(Sec. 42)
remaining business
Only Board action is needed (Except: Stock
g. Power to Acquire Own Shares dividends where stockholder action is needed)
(Sec. 40) ● Cash dividends due on delinquent stock
should first be applied to unpaid balance
Requirements:
plus cost and expenses
1) Corporation has unrestricted retained earnings
● Stock dividends shall be withheld from
in its books to cover the shares to be purchased
or acquired, delinquent stockholders until the unpaid
2) It is for a legitimate corporate purpose or subscription is fully paid
purposes, including the following cases: ● Stock dividends need 2/3 vote of the
● To eliminate fractional shares arising out of OUTSTANDING CAPITAL STOCK
stock dividends; ● Dividends are payable out of unrestricted
● To collect or compromise an indebtedness retained earnings
to the corporation, arising out of unpaid ● Stock corporations cannot retain surplus
subscription, in a delinquency sale, and to profits more than 100% of paid-in capital
purchase delinquent shares sold during stock unless:
said sale; o Needed for corporate expansion
projects approved by the board

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o Or prohibited by loan agreement k. Doctrine of Individuality of

which prohibits declaration of Subscription
dividends without financial
institution’s consent No certificate of stock shall be issued to a subscriber
o Or needed under special until the full amount of the subscription together with
circumstances interest and expenses (in case of delinquent
● Unless otherwise provided in the articles of shares), if any is due, has been paid. (Sec. 63)
incorporation, distribution of dividends is
done on a pro rata basis. The foregoing provision sets forth the Doctrine of
Indivisibility/Individuality of Subscription. This
doctrine espouses that the subscription contract is
The power to declare dividends under [Sec. 42 of
one, entire, indivisible and whole contract which
RCC] is with the Board of Directors, and can be
cannot be divided into portions. It cannot be divided
declared only out of its unrestricted retained
into portions so that no stockholder shall be entitled
earnings. Assuming that a corporate director was
to a certificate of stock until said stockholder has
authorized by the Board to fix the monthly dividends,
paid the entire value of the shares subscribed,
dividends can be declared only out of unrestricted
including the interest and expenses. The Doctrine of
retained earnings of a corporation, which earnings
Indivisibility of Subscription is absolute since the
cannot obviously be fixed and predetermined 5
above-quoted Section 64 speaks of no exception.
years in advance. (Ongkingco v. Sugiyama, G.R.
No. 217787, 2019).
The purpose of the prohibition is to prevent the
partial disposition of a subscription which is not fully
j. Power to Enter into paid, because if it is permitted, and the subscriber
Management Contract (Sec. 43) subsequently becomes delinquent in the payment of
his subscription, the corporation may not be able to
Where one corporation undertakes to manage all or sell as many of his subscribed shares as would be
substantially all of the business of another necessary to cover the total amount due from him,
corporation, whether the contract is called “service which is authorized under section [67]. (SEC OGC
contracts” or “operating agreement” Opinion No. 16-05)
General Rule: Contract may not exceed 5 yrs per l. Doctrine of Equality of Shares
term
(Sec. 6)
Exception: Contracts relating to exploration,
Under the doctrine of equality of shares – all stocks
development, exploitation or utilization of natural
issued by the corporation are presumed equal with
resources, where pertinent laws or regulations will
the same privileges and liabilities, provided that the
govern
Articles of Incorporation is silent on such differences
(CIR vs. CA, G.R. No. 108576, 1999)
A management contract is not an agency contract,
and therefore is not revocable at will (Nielson v.
Each share shall be equal in all respects to every
Lepanto, G.R. No. L-21601, 1968)
other share, except as otherwise provided in the
articles of incorporation and in the certificate of
This needs approval of:
stock. (Sec. 6)
1. Board of Directors of both managing and
managed corporation The following are important rights of stockholders,
2. Majority of outstanding shares or members which continue to exist even when the shares have
of both managed and managing been sequestered:
corporation a. Right to attend meetings and to vote
3. But 2/3 vote of outstanding stock/members b. Right to receive dividends
of managed corporation necessary in the ff: c. Right to receive distributions upon liquidation of
• Where stockholders of both managing and the corporation
managed corporation (the common d. Right to inspect the books of the corporation
stockholders) own or control more than 1/3 or e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas,
the outstanding stock of managing G.R. No. 91925, 1991)
corporation
• Where majority of directors in both
corporations are the same

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m. Ultra Vires Doctrine funds to the prejudice of creditors is null and void.
(Boman Environmental Dev. Corp. v. Court of
Applicability of Ultra Vires Doctrine Appeals, G.R. No. 77860, 1988). This is without
An act not within the express or implied, and prejudice to the ability of a corporation to effect
incidental powers of the corporation. distributions to its stockholders by way of dividends
charged against unrestricted retained earnings.
Types of Ultra Vires Cases
a. First type: Acts done beyond the powers of the Coverage of the Trust Fund Doctrine
corporation as provided for in the law or its
articles of incorporation (Sec. 44) 1. In case of Solvency: The coverage of the trust
b. Second type: Acts or contracts entered into on fund doctrine is only up to the extent of the
behalf of the corporation by persons without “subscribed capital stock” of the corporation. In
corporate authority, even though the contract is this sense, the unrestricted retained earnings
within the powers of the corporation (Manila do not constitute part of the capital stock.
Metal Container Corp. v. PNB, G.R. No. Hence, the corporation is at liberty to pay out
166862, 2006) and assets to the stockholders by way of dividends
c. Third type: Acts or contracts, which are per se up to the extent of the unrestricted retained
illegal as being contrary to law. earnings.
Consequences of Ultra Vires Acts 2. In case of Insolvency: The trust fund doctrine
Executed contract – Courts will generally not set is not limited to reaching the stockholders’
aside or interfere with such contracts; unpaid subscriptions. The scope of the
Executory contracts – No enforcement even at the doctrine when the corporation is insolvent
suit of either party (void and unenforceable); encompasses not only the capital stock, but
Partly executed and partly executory – Principle also other property and assets generally
against unjust enrichment shall apply. regarded in equity as a trust fund for the
payment of corporate debts. Thus, the Trust
Ultra vires test: It is a question, therefore, in each Fund Doctrine extends to all assets (not just
case, of the logical relation of the act to the subscribed capital stock) when a corporation
corporate purpose expressed in the charter. If that becomes insolvent. (Halley v. Printwell, G.R.
act is one which is lawful in itself, and not otherwise No. 157549, 2011)
prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the 3. Releasing Subscribers: where the corporation
promotion of those ends, in a substantial, and not in released the subscribers to the capital stock
a remote and fanciful, sense, it may fairly be from their subscriptions without valuable
considered within charter powers. The test to be
consideration. (Ong Yong v. Tiu, G.R.
applied is whether the act in question is in direct and
No.144476, 2003)
immediate furtherance of the corporation’s
business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the 8. Stockholders and Members
corporation has the power to do it; otherwise, not.
(University of Mindanao, Inc. v. Bangko Sentral ng a. Fundamental Rights of a
Pilipinas, G.R. 194964-65, 2016) Stockholder
n. Trust Fund Doctrine The following are important rights of stockholders,

which continue to exist even when the shares have
The subscriptions to the capital stock of a been sequestered:
corporation constitute a fund to which the creditors 1. Right to attend meetings and to vote
have a right to look for satisfaction of their claims 2. Right to receive dividends
and that the assignee in insolvency can maintain an 3. Right to receive distributions upon liquidation
action upon any unpaid stock subscription in order of the corporation
to realize assets for the payment of its debts. (Phil. 4. Right to inspect the books of the corporation
Trust Co. v. Rivera, G.R. No. L-19761, 1923) 5. Pre-emptive rights (Cojuangco, Jr. vs. Roxas,
G.R. No. 91925, 1991)
[Hence,] there can be no distribution of assets
among the stockholders without first paying
corporate creditors; any disposition of corporate

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b. Participation in Management The regular courts now have the power to hear and
decide cases involving all matters and conduct of
(1) Proxy the elections of directors, including validation of
proxies. The power of SEC to regulate proxies
Section 57 of the Corporation Code provides that remains only in instances when stockholders vote
stockholders and members may vote in person or by on matters other than the election of directors (SEC
proxy in all meetings of stockholders or members. v. CA, G.R. No. 187702/189014, 2014).
(2) Voting Trust Requisites for Valid Voting Trust

a. In writing and notarized
A stockholder confers upon a trustee the right to b. Specifying the terms and conditions
vote and other rights pertaining to the shares for a c. A certified copy must be filed with the
period not exceeding 5 years at any one time. (Sec. corporation and with the SEC. (Sec. 58)
58).
Duration
However, if the voting trust was a requirement for a General Rule: Not exceeding 5 years
loan agreement, period may exceed 5 years but
shall automatically expire upon full payment of the Exception: If the voting trust was a requirement for
loan. a loan agreement, period may exceed 5 years but
shall automatically expire upon full payment of the
Pooling or voting agreements – two or more loan.
stockholders agree that their shares shall be voted
as a unit. Usually concerned with the election of No voting trust must be used for the purposes of
directors to gain control of the management. fraud. Stockholders who are defrauded by their
trustees have a right to revoke the trust and recover
Requisites for Valid Proxy damages from such trustee.
1. The proxy shall be in writing;
2. Signed by the stockholder or member; and Voting Trust v. Proxy
3. Filed before the scheduled meeting with the
corporate secretary (Sec. 57) VOTING TRUST PROXY
Trustee votes as Proxy holder votes as
Duration of Proxy owner agent
General Rule: It shall be valid only for the meeting Agreement must be Proxy need not be
for which it is intended. notarized notarized
Exception: Unless otherwise provided in the proxy Trustee acquires legal Proxy has no legal title
title to the shares of to the shares of the
NOTE: No proxy shall be valid and effective for a the transferring principal
period longer than five (5) years at any one time. stockholder; only
beneficial title remains
The by-laws of the corporation may prescribe a with the stockholder
particular form for proxy and fix the deadline for its Trustee may vote in Proxy must vote in
submission. person or by proxy person
unless the agreement
Generally, proxies, even those with irrevocable provides otherwise
terms, have always been considered as revocable, Trustee is not limited Proxy can only act at a
unless coupled with an interest, and their revocation to act at any particular specified
may be by formal notice, orally, or by conduct as by meeting stockholder’s meeting
the appearance of the stockholder or member giving (if not continuing)
the proxy, or the issuance of a subsequent proxy, or Trustee can vote and Proxy can only vote in
the sale of shares. exercise all the rights the absence of the
of the stockholder owners of the stock
Note: Proxies, who are not stockholders or even when the latter is
members, cannot be elected as a director or trustee. present
(Lim v. Moldex Land, Inc., G.R. No. 206038, 2017) Agreement must not Proxy cannot exceed
exceed 5 years at any 5 years at any one
Proxy Disputes—Jurisdiction one time, except when time

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the same is made a a. Extend or shorten corporate term;

condition of a loan b. Increase/Decrease Corporate Stock;
c. Incur, Create Bonded Indebtedness;
Voting right is divorced Right to vote is
d. Deny pre-emptive right;
from the ownership of inherent or
e. Sell, dispose, lease, encumber all or
stocks inseparable from the
right to ownership of substantially all of corporate assets;
the stock f. Investing another corporation, business
Agreement is Revocable anytime, other than the primary purpose;
irrevocable except if coupled with g. Declare stock dividends
interest h. Enter into management contract if (1) a
stockholder or stockholders representing
Limitations on Right to Vote the same interest of both the managing and
a. Where the Articles of Incorporation provides for the managed corporations own or control
classification of shares pursuant to Sec. 6, non- more than 1/3 of the total outstanding
voting shares are not entitled to vote except as capital entitled to vote of the managing
other provided in the said section. corporation; or (2) a majority of the
b. Preferred or redeemable shares may be members of the board of directors of the
deprived of the right to vote unless otherwise managing corporation also constitute a
provided. majority of the members of the board of the
c. Fractional shares of stock cannot be voted managed corporation;
unless they constitute at least one full share. i. Amend the Articles of Incorporation
d. Treasury shares have no voting rights as long
as they remain in treasury. 3. By Cumulative Voting
e. Holders of stock declared delinquent by the a. See discussion on election of directors
board for unpaid subscription have no voting
rights. 4. Without board resolution
f. A transferee of stock if his stock transfer is not a. 2/3 of outstanding capital stock – delegate
registered in the stock and transfer book of the to the board the power to amend the by-
corporation and does not have a proxy from or laws;
b. Majority of the outstanding capital stock –
voting trust agreement with the transferor may
revoke the power of the board to amend the
not vote the purchased/acquired shares. by-laws which was previously delegated.
g. A stockholder who mortgages or grants a c. Removal of directors by a vote of the
security interest over his shares retains the right stockholders representing at least 2/3 of
to vote unless he gives authority for the creditor the outstanding capital stock;
to vote. d. To approve the granting of compensation to
(3) Cases When Stockholders’ the Board of Directors;
Action is Required
The term “outstanding capital stock
1. Concurrence of majority of the outstanding (Outstanding Capital Stock),” means the total
capital stock (by majority vote) in concurrence shares of stock issued under binding subscription
with an affirmative vote of a majority of the contracts to subscribers or stockholders, whether
Board of Directors: fully or partially paid, except treasury shares. (Sec.
a. To enter into management 173)
contract if any of the two instances
(4) Manner of Voting (Sec. 57)
stated above are absent;
b. To adopt, amend or repeal the by-
Stockholders and members may vote in person or
laws by proxy in all meetings of stockholders or
c. To dissolve the corporation members.
voluntarily where no creditors are
affected; Voting through remote communication or in
absentia; Requisites
2. Concurrence of 2/3 of outstanding capital 1. Authorized in the by-laws or by a majority
stock (by 2/3 vote) (see similar enumeration in of the board of directors
the specific express powers of the corporation)

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2. Votes are received before the corporation Note: No dividends can be declared out of capital,
finishes the tally of votes. except liquidating dividends distributed at
dissolution.
Effect: A stockholder or member who participates
through remote communication or in absentia, shall (2) Appraisal Right
be deemed present for purposes of quorum.
The right to withdraw from the corporation and
The corporation shall establish the appropriate demand payment of the fair value of his shares after
requirements and procedures for voting through dissenting from certain corporate acts involving
remote communication and in absentia, taking into fundamental changes in corporate structure.
account the company’s scale, number of
shareholders or members, structure and other 1. When available
factors consistent with the basic right of corporate a. Extension or shortening of corporate term;
suffrage. (Sec. 36)
b. In case any amendment to the articles of
c. Proprietary Rights incorporation has the effect of changing or
restricting the rights of any stockholders or
(1) Rights to Dividends class of shares, or of authorizing
preferences in any respect superior to
The right to dividends vests at the time of its those of outstanding shares of any class;
declaration by the Board of Directors. (Sec. 80)
c. Investing of corporate funds for any
Although stock certificates grant the stockholder the
purpose other than the primary purpose;
right to receive quarterly dividends of 1%,
cumulative and participating, the stockholders do (Sec. 80)
not become entitled to the payment thereof without d. Sell or dispose all or substantially all
necessity of a prior declaration of dividends. assets of corporation;(Sec. 80)
(Republic Planters Bank v. Hon. Agana, Sr., G.R. e. Merger or consolidation.(Sec. 80)
No. 51765, 1997)
2. Manner of exercise of right (Sec 81, RCC)
No declaration of dividends can be valid if there are a. A written demand on the corporation within
no sufficient unrestricted retained earnings. 30 days after the vote was taken (failure to
do so means waiver);(Sec. 81)
Stock Corporations are prohibited from retaining b. From the time of demand, all rights
surplus profits in excess of 100% of their paid-in accruing to such shares including voting
capital stock, except: and dividend rights shall be suspended
1. When justified by definite corporate expansion except the right of such stockholder to
projects or programs approved by the board of receive payment of the fair value of
directors stockholder’s shares. (Sec. 82)
2. Corporation is prohibited under a loan c. Ten (10) days from demand, the
agreement from declaring dividends without the dissenting stockholder must submit his
creditor’s consent. certificates of stocks for notation that such
3. Under special circumstances such as when certificates represent dissenting shares.
there is a need for special reserve for probable (Sec. 85)
contingencies d. The price to be paid is the fair value of the
shares on the date the vote was taken;
Form of Dividends
(Sec. 81)
1. Cash Dividends (revocable before
e. The fair value shall be agreed upon by the
announcement).
corporation and the dissenting
2. Property Dividends (revocable before
stockholders within 60 days from the date
announcement).
the vote was taken. In case there is no
3. Stock Dividends, which requires, aside from the
agreement, the fair value shall be
declaration by the Board, the approval of 2/3 of
determined by a majority of the 3
the outstanding capital stock (revocable before
distinguished persons one of whom shall
issuance).
be named by the stockholder another by
the corporation and the third by the two
who were chosen; (Sec. 81)

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f. The right of appraisal is extinguished transfer book (Yujuico v. Quiambao, G.R. No.
when: (Sec. 83) 180416, 2014)
i. He withdraws the demand with
the corporation’s consent; The corporate secretary is the officer who is duly
ii. The proposed action is authorized to make entries on the stock and transfer
abandoned; book (Gokongwei v. SEC, GR No. 45911, 1979).
iii. The SEC disapproves of such
All transfers of shares not entered in the stock and
action where approval is
transfer book of the corporation are invalid as to
necessary attaching or execution creditors of the assignors, as
iv. The SEC determines that such well as to the corporation and to subsequent
dissenting stockholder is not purchasers in good faith and to all persons
entitled to the appraisal right. interested, except the parties to such transfers: “All
g. If the dissenting stockholder is not paid transfers not so entered on the books of the
within 30 days from the award, he shall corporation are absolutely void; not because they
automatically be restored to all his rights as are without notice or fraudulent in law or fact, but
stockholder. (Sec. 82) because they are made so void by statute (Uson vs.
Diosomito, G.R. No. 42135, 1935).
(3) Right to Inspect
The entries are considered prima facie evidence
Records that can be inspected only and may be subject to proof to the contrary
Corporate records, regardless of the form in which (Bitong v. CA, G.R. No. 123553, 1998).
they are stored, shall be open to inspection by any
director, trustee, stockholder or member of the The stock and transfer book of the corporation
corporation in person or by a representative at cannot be used as the sole basis for determining the
reasonable hours on business days, and a demand quorum as it does not reflect the totality of shares
in writing may be made by such director, trustee or which have been subscribed, and more so when the
stockholder at their expense, for copies of such articles of incorporation show a significantly larger
records or excerpts from said records. (Sec. 73). amount of shares issued and outstanding as
compared to that listed in the stock and transfer
Also, a corporation shall furnish a stockholder or book (Lanuza v. Court of Appeals, G.R. No. 131394,
member, within 10 days from receipt of their written 2005).
request, its most recent financial statement (Sec.
74). Grounds for Not Allowing Inspection by a
Stockholder
The first three are the formulation of the old code. a. If the person demanding to examine the
Under the Revised Corporation Code, inspection records has improperly used any
rights covers a’’ “corporate records, regardless of information secured for prior examination,
the form in which they are stored” (see Sec. 73) b. He is not acting in good faith,
c. A requesting party who is not a stockholder
Stock and transfer book or member of record, or is a competitor
Record of: shall have no right to inspect or demand
1. All stocks in the names of the stockholders reproduction of corporate records. (Sec.
alphabetically arranged; 73)
2. The installment paid and unpaid on all stock for
which subscription has been made, and the Competitor- competitor, director, officer, controlling
date of payment of any installment; stockholder or otherwise represents the interests of
3. A statement of every alienation, sale or transfer a competitor shall have no right to inspect or
of stock made; and demand reproduction of corporate records. (Sec.
4. Such other entries as the by-laws may 73)
prescribe.
In one case, the Supreme Court clarified that the
Note: right of inspection may only be exercised by a
Section [73], while specific in the kinds of records stockholder of record. As such, the corporation may
that must be maintained, is not limiting, thus, the validly set up the defense in its refusal to grant a
inspection right is applicable to the stock and claim of the right of inspection on the ground that the
person is not a stockholder of record. (Puno v. Puno

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Enterprises Inc., GR No. 177066, September 11, 3. The demand must be accompanied with
2009) statement of the purpose of the inspection,
which must show good faith or legitimate
In Terelay Investment and Development Corp. v. purpose.
Yulo, the court ruled that although the corporation 4. Illegitimate purposes include to obtain
may deny a stockholder's request to inspect corporate secrets (formula), nuisance suit,
corporate records, the corporation must show that
or to embarrass the company. (Africa v.
the purpose of the shareholder is improper by way
of defense. PCGG, G.R. No. 83831, 1992)
5. If the corporation or its officers contest such
The purposes held to justify a demand for purpose or contend that there is evil motive
inspection are the following: behind the inspection, the burden of proof
1. To ascertain the financial condition of the is with the corporation or such officer to
company or the propriety of dividends; show the same.
2. The value of the shares of stock for sale or 6. The RTC, and not the Sandiganbayan, has
investment; jurisdiction over a stockholder’s suit to
3. Whether there has been mismanagement; enforce its right to inspect under the
4. In anticipation of shareholders' meetings to Corporation Code where the case does not
obtain a mailing list of shareholders to involve a sequestration-related incident, but
solicit proxies or influence voting; an intra-corporate controversy (Abad v.
5. To obtain information in aid of litigation with
PHILCOMSAT, G.R. No. 200620, 2015)
the corporation or its officers as to
corporate transactions. 7. A stockholder’s right to inspect corporate
records subsists during the period of
The improper purposes which may warrant the liquidation (three year period for dissolution
denial of the right of inspection: per Sec. 145). (Chua v. SEC, G.R. No.
1. Obtaining of information as to business 216146, 2016)
secrets or to aid a competitor; 8. An action for injunction and, consequently,
2. To secure business "prospects" or a writ of preliminary injunction filed by a
investment or advertising lists; corporation is generally unavailable to
3. To find technical defects in corporate prevent stockholders from exercising their
transactions in order to bring "strike suits" right to inspection…[C]orporations may
for purposes of blackmail or extortion. raise their objections to the right
(Terelay Investment and Development
of inspection through affirmative defense in
Corp. v. Yulo, G.R. No. 160924, 2015)
an ordinary civil action for specific
The Right to Inspect Corporate Records is performance or damages, or through a
Subject to Confidentiality rules comment (if one is required) in a petition
The inspecting or reproducing party shall remain for mandamus. (Philippine Associated
bound by confidentiality rules under prevailing laws, Smelting and Refining Corp. v. Lim, G.R.
such as: No. 172948, 2016)
1. Trade secrets or processes under Republic
Act No. 8293, or the “Intellectual Property Remedies If Right to Inspect is Denied
Code of the Philippines”, as amended, a. Mandamus
2. Republic Act No. 10173, or the “Data Refusal to allow stockholders (or members of a non-
Privacy Act of 2012”, stock corporation) to examine books of the company
3. Republic Act No. 8799, or “The Securities is not a ground for appointing a receiver (or creating
a mgt. committee) since there are other adequate
Regulation Code”, and
remedies, such as mandamus. (Ao-as v. CA, G.R.
4. the Rules of Court. (Sec. 73) No. 128464, 2006)
Doctrinal Rulings on Right to Inspect b. Damages
1. The demand for inspection should cover Administrative Sanction (Sec. 158)
only reasonable hours on business days; Requisites for Section [158] to Apply (Ang-Abaya v.
2. The stockholder, member, director or Ang, G.R. no. 178511, 2008)
trustees demanding the right is one who
has not improperly used any information ● A director, trustee, stockholder or member has
secured through any previous examination made a prior demand in writing for a copy of
of the records;

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excerpts from the corporations records or d. In case the right is denied in the Articles of
minutes; Incorporation;
● Any officer or agent of the concerned e. Waiver of the right by the stockholder;
corporation shall refuse to allow the said f. If the shares of a corporation are offered and not
director, trustee, stockholder or member of the subscribed and purchased by the stockholders,
corporation to examine and copy said excerpts; and the shares are being offered again, there is
● If refusal is made per a resolution or order of the no pre-emptive right with respect to the latter
board of directors or trustees, the liability under offer of shares (Benito v. SEC, G.R. No. L-
this section for such action shall be imposed 56655, 1983)
upon the directors or trustees who voted for
refusal; Right of First Refusal
● Where the officer or agent of the corporation The right of first refusal provides that a stockholder
sets up the defense that the person demanding who may wish to sell or assign his shares must first
to examine and copy excerpts from the offer the shares to the corporation or to the existing
corporation’s records and minutes has stockholders of the corporation, under terms and
conditions which are reasonable; and that only when
improperly used any information secured
the corporation or the other stockholders do not or
through any prior examination of the records or fail to exercise their option, is the offering
minutes of such corporation or of any other stockholder at liberty to dispose of his shares to third
corporation, or was not acting in good faith or parties.
for a legitimate purpose in making his demand,
the contrary must be shown or proved. Pre-Emptive Right v. Right of First Refusal
● The person demanding to examine has PRE-EMPTIVE RIGHT OF FIRST
improperly used any information secured RIGHT REFUSAL
through any prior examination of the records or Generally may be Arises only by virtue of
minutes of such corporation or for any other exercised, subject to contractual
corporation; and limitations in stipulations or by law
● The one requesting to inspect was not acting in Corporation Code
good faith or for a legitimate purpose in making Covers unissued Covers shares already
his demand shares offered for issued
subscriptions
c. Criminal sanctions under Sec. 161 May be exercised by Can only be exercised
refer to discussion at the respective topic below mere trustees or by the owner and not
conservators mere trustee or
(4) Preemptive Right (Republic v. conservator, since it is
Sandiganbayan, G.R. an act of ownership
The shareholders’ right to subscribe to all issues or No. 107789, 2003) (Republic v.
dispositions of shares of any class in proportion to Sandiganbayan, G.R.
his present stockholdings, the purpose being to No. 107789, 2003)
enable the shareholder to retain his proportionate Right claimed against Right exercisable
control in the corporation and to retain his equity in the Corporation, against the seller-
the surplus. where the stockholder stockholder
must pay
Instances When Preemptive Right Is Not
Available Note:
a. Shares to be issued to comply with laws A corporation has no power to prevent or restrain
requiring stock offering or minimum stock transfers of its shares, unless such power is
expressly conferred in the Articles of Incorporation
ownership by the public;
or the law. (Fleischer v. Botica Nolasco Co., G.R.
b. Shares issued in good faith with approval of the No. L-23241, 1925)
stockholders representing 2/3 of the
outstanding capital stock in exchange for A provision in the by-laws granting the right of first
property needed for corporate purposes; refusal (and therefore, restrains trade) is void and
c. Shares issued in good faith with approval of the does not bind third parties (Fleischer v. Botica
stockholders representing 2/3 of the Nolasco Co., G.R. No. L-23241, 1925)
outstanding capital stock issued in payment of
previously contracted debts;

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By-laws are intended merely for the protection of the 3. Under special circumstances such as when
corporation and prescribe relation, not restriction; there is a need for special reserve for probable
they are always subject to the charter of the contingencies
corporation. (Rural Bank of Salinas v. CA, G.R. No.
96674, 1992) Form of Dividends
1. Cash Dividends (revocable before
(5) Right to Vote announcement).
2. Property Dividends (revocable before
The right to vote is given to the shareholders but can
announcement).
be limited if stipulated in the Articles of Incorporation
3. Stock Dividends, which requires, aside from the
and the Certificate of Stock.
declaration by the Board, the approval of 2/3 of
However, holders of nonvoting shares shall the outstanding capital stock (revocable before
nevertheless be entitled to vote on the following issuance).
matters:
(a) Amendment of the articles of incorporation Note: No dividends can be declared out of capital,
(b) Adoption and amendment of bylaws; except liquidating dividends distributed at
(c) Sale, lease, exchange, mortgage, pledge, dissolution.
or other disposition of all or substantially all
of the corporate property; Other Rights
(d) Incurring, creating, or increasing bonded ● Right to issuance of stock certificate for
indebtedness; fully paid shares - Under Section 64 of the
(e) Increase or decrease of authorized capital Corporation Code, no certificate of stock shall
stock; be issued to a subscriber until the full amount of
(f) Merger or consolidation of the corporation his subscription together with interest and
with another corporation or other expenses (in case of delinquent shares), if any
corporations; is due, has been paid. A subscriber must first
(g) Investment of corporate funds in another totally pay his subscription before a certificate
corporation or business in accordance with
of stock covering shares subscribed and paid
this Code; and
(h) Dissolution of the corporation for could be issued to him. But an unpaid
subscription (not declared delinquent) can be
(6) Right to Dividends voted upon in corporate meetings. Such
delinquent shares are also entitled to dividends,
The right to dividends vests at the time of its subject to the rules set forth in Section 43 of the
declaration by the Board of Directors. Corporation Code on delinquent shares.
Although stock certificates grant the stockholder the Nevertheless, Section 64 does not prohibit the
right to receive quarterly dividends of 1%, corporation from “dividing” the subscription of a
cumulative and participating, the stockholders do subscriber by considering portion thereof as fully
not become entitled to the payment thereof without paid and issuing a corresponding certificate over the
necessity of a prior declaration of dividends. paid- up shares. Thus, in the absence of provisions
(Republic Planters Bank v. Hon. Agana, Sr., G.R. in the by- laws to the contrary, a corporation may
No. 51765, 1997) apply payments made by subscribers on account of
their subscriptions either as:
No declaration of dividends can be valid if there are 1. Full payment for the corresponding
no sufficient unrestricted retained earnings. number of shares, the par value of which is
covered by such payment; or
Stock Corporations are prohibited from retaining 2. Payment pro rata to each and all the entire
surplus profits in excess of 100% of their paid-in number of shares subscribed for
capital stock, except:
1. When justified by definite corporate expansion Once an alternative is chosen, it must be applied
projects or programs approved by the board of uniformly to all stockholders similarly situated, and
directors therefore, it cannot be changed without the consent
2. Corporation is prohibited under a loan of all stockholders who might be affected.
agreement from declaring dividends without the
creditor’s consent. ● Proportionate participation in the
distribution of assets in liquidation

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o Stockholders and stock corporation form of absolute conveyance of ownership. It does

– Except by decrease of capital stock, not pertain to the surrender of the stock certificate to
and as otherwise allowed by the the corporation. (Teng v. SEC, G.R. No. 184332,
Corporation Code, no corporation shall 2016)
distribute any of its assets or property
to its stockholders except upon lawful However: The surrender of the original certificate of
stock is necessary before the issuance of a new one
dissolution and after payment of all its
so that the old certificate may be cancelled. A
liabilities (Sec. 122)
corporation is not bound and cannot be required to
o Members and foundations – Upon issue a new certificate unless the original certificate
dissolution of a non-stock corporation, is produced and surrendered. (Teng v. SEC, G.R.
all liabilities and obligations must first No. 184332, 2016)
be paid, and assets received and held
subject to limitations permitting their A transfer of shares not recorded in the stock and
use for specified eleemosynary transfer book is non- existent as far as the
purposes shall be properly transferred corporation is concerned, and consequently, a
or returned, then the net assets petition for mandamus filed by a transferee,
remaining, if any, shall be distributed to compelling it to issue the corresponding certificates
the members, or any class or classes in the name of the transferee would be without
basis. It is only when the transfer has been recorded
of members, to the extent that the
in the stock and transfer book that a corporation may
articles of incorporation or by- laws
rightfully regard the transferee as one of its
provide for a plan of distribution. stockholders. From this time, the consequent
Otherwise, a plan of distribution may obligations on the part of the corporation to
be adopted in the process of recognize such right as it is mandated by law to
dissolution by: recognize arises (Ponce v. Alsons Cement, G.R.
a. Majority vote of the Board of No. 139802, 2002).
Trustees
b. Adopted by at least 2/3 of the NOTE: In Andaya v. Rural Bank of Cabadbaran,
members having voting rights Inc., G.R. No. 188769, 2016, the Court ruled that the
(Secs. 93–94) registration of a transfer of shares of stock is a
ministerial duty on the part of the corporation.
● Right to transfer of stocks in corporate Aggrieved parties may then resort to the remedy of
books; mandamus to compel corporations that wrongfully
or unjustifiably refuse to record the transfer or to
issue new certificates of stock. This remedy is
Requirements for valid transfer of stocks
available even upon the instance of a bona fide
1. There must be delivery of the stock certificate
transferee who is able to establish a clear legal
with intent to transfer title;
right to the registration of the transfer.
2. The certificate must be endorsed by the owner,
or his attorney-in-fact, or other persons legally d. Remedial Rights
authorized to make the transfer; and
3. To be valid against third parties, the transfer (1) Individual Suit
must be recorded in the books of the
corporation Those brought by the shareholder in his own name
against the corporation when a wrong is directly
Note The delivery of the stock certificate duly inflicted against him.
endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the new (2) Representative Suit
transferee. (Bitong v. Court of Appeals, G.R. No.
123553, 1998) Those brought by the stockholder on behalf of
himself and all other stockholders similarly situated
The delivery contemplated in Section [73], however,
pertains to the delivery of the certificate of shares when a wrong is committed against a group of
by the transferor to the transferee, that is, from stockholders.
the original stockholder named in the certificate to
the person or entity the stockholder was transferring
the shares to, whether by sale or some other valid

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(3) Derivative Suit consideration, refuses to remedy a corporate wrong.

A derivative suit may only be instituted after such an
Those brought by one or more omission. Simply put, derivative suits take a back
stockholders/members in the name and on behalf of seat to board-sanctioned litigation whenever the
the corporation to redress wrongs committed corporation is willing and able to sue in its own
against it, or protect/vindicate corporate rights name. (Ago Realty & Dev. Corp. v. Ago, G.R. Nos.
whenever the officials of the corporation refuse to 210906 & 211203, 2019)
sue, or the ones to be sued, or has control of the
corporation. (Ching v. Subic Bay, G.R. No. 174353, e. Obligations of a Stockholder
2014)
a. Liability to the corporation for unpaid
• A lawyer engaged as counsel for a
subscription;
corporation cannot represent members of the
b. Liability to the creditors of the corporation for
Board in a derivative suit against them. To do
unpaid subscription;
so would be tantamount to conflicting interest
c. Liability to the corporation for interest on unpaid
between the Board and the corporation
subscription if so required by the by-laws;
(Hornilla v. Salunat, A.C. 5804, 2003).
d. Liability for watered stock;
e. Liability for dividends unlawfully paid;
One or more stockholders/members in the name
and on behalf of the corporation may bring a
f. Meetings
derivative suit to redress wrongs committed
against it, or protect/vindicate corporate rights
i. Regular or Special:
whenever the officials of the corporation refuse to Regular - held annually on a date fixed in the by-
sue, or the ones to be sued, or has control of the laws, or if not so fixed, on date after April 15 of every
corporation. (Ching v. Subic Bay, G.R. No. 174353, year as determined by the board of directors or
2014) trustees.(Sec. 49)
Special - held at any time deemed necessary or as
Requisites of Derivative Suit provided in the by- laws. Provided that at least 1
a. He (Plaintiff) was a stockholder or member at week written notice shall be sent to all stockholders
the time the acts or transactions subject of the or members, unless otherwise provided in the by-
action was filed; laws. Note that notice of any meeting may be
b. He exerted all reasonable efforts, and alleges waived, expressly or impliedly by any stockholder or
the same with particularity in the complaint, to member.
exhaust all remedies available under the
ii. Notice of Meeting
articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to
When - written notice of regular meetings shall be
obtain the relief he desires; sent to stockholders or members of record at least
twenty-one (21) days prior to the meeting. (Sec. 49)
The exhaustion of intra-corporate remedies
cannot be dispensed even if the company is a How - written notice to regular meetings may be
family corporation (Yu v. Yukayguan, G.R. No. sent to the stockholders or members of record
177549, 2009; Ang v. Sps. Ang, G.R. No. through:
201675, 2013) 1. means of communication provided in the
bylaws (Sec. 50)
c. No appraisal rights are available for the act or 2. electronic mail (Sec.49)
acts complained of; and 3. such other manner as the SEC shall allow
d. The suit is not a nuisance or harassment suit under its guidelines.
(Interim Rules of Procedure for Intra-Corporate
Controversies, A.M. No. 01-2-04-SC, 2001). Notice of Meetings shall state the time place and
purpose of the meeting and shall be accompanied
As a general rule, corporate litigation must be by:
commenced by the corporation itself, with the 1. agenda for the meeting
imprimatur of the board of directors, which, pursuant 2. proxy form
to the law, wields the power to sue. Therefore, since 3. requirements and procedures to be followed
the derivative suit is a remedy of last resort, it must in case a stockholder elects and is allowed to
be shown that the board, to the detriment of the participate, attend and vote by remote
corporation and without a valid business communication.

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4. requirements and procedures for nomination The petitioning stockholders / member shall preside
and in case the meeting is for election of until at least a majority of stockholders/ members
directors. (Sec. 50) present have chosen a presiding officer. (Sec 49).
Section 50 of the Corporation Code expressly allows iv. Quorum

a shorter period of notice of stockholders’ meetings General rule: Majority of the outstanding capital
that those provided under its default two (2) week stock, or of the members, shall constitute a quorum
period, provided the same is provided for in the By- (Sec. 51)
Laws, (Ricafort v. Dicdican, 787 SCRA 163, 2016);
such period set in the by-laws is valid even when the Outstanding Capital Stock – the total shares of stock
period is reckoned from the mailing of the notice issued under binding subscription agreements to
rather than when it is actually received by the subscribers or stockholders, whether or not fully or
stockholder of record, (Guy v. Guy, 790 SCRA 288, partially paid, except treasury shares
2016)
Exceptions:
iii. Place and time of meetings a. The bylaws provides for a greater majority
(Sec. 51)
Where?- The meetings of stockholders or b. If the rescheduled election of
members whether regular or special shall be held directors/trustees is held, the voting shares of
in the principal office of the corporation as set forth stock or membership represented at the
in the articles or if not practicable, in the city or meeting ordered by the SEC shall constitute a
municipality where the principal office of the quorum for purposes of conducting an
corporation is located. (Sec. 49) election under this Section 25.
c. In cases where greater vote for an act or
When? – Regular – held annually ; Special – held business is required by law as when the
at any time deemed necessary required vote is 2/3 of the outstanding capital
stock, or membership as the case may be.
Who calls for the meetings?
In case the ff. shall occur: Note: For stock corporations, the “quorum” referred
(1) there is no person designated by the by-laws to to in Section 52 of the Corporation Code is based on
call a meeting, or the number of outstanding voting stocks. For non-
(2) the person authorized unjustly refuses to call a stock corporations, only those who are actual, living
meeting, members with voting rights shall be counted in
determining the existence of a quorum during
The SEC upon petition of a stockholder/ member, member’s meetings. Dead members shall not be
and on the showing of good cause therefore, may counted (Tan v. Sycip, G.R. No. 153468, 2006).
issue an order directing the petitioner to call a
meeting of the corporation by giving proper notice V. Minutes and agenda of meetings Minutes of
required by this Code or the bylaws, with the the
petitioner presiding thereat until at least a majority • Records of all business transactions and
of stockholders/ members present have chosen a minutes of all meetings shall be kept and
presiding officer. (Sec. 49). carefully preserved at a corporation’s principal
office
Who presides over the meetings? • It shall set forth in detail:
General Rule: The chairman a. the time and place of the meeting held
Exceptions: b. how it was authorized
1. In the absence of the chairman, the c. the notice given
president shall preside at all meetings of d. the agenda therefor
the directors or trustees as well as of the e. whether the meeting was regular or
stockholders or members, unless the special, its object if special
bylaws provide otherwise. f. those present and absent, and
2. In the following cases: (1) there is no g. every act done or ordered done at the
person designated by the by-laws to call a meeting.
meeting, or h. upon the demand of any director, trustee,
(2) the person authorized unjustly refuses stockholder or member, the time when any
to call a meeting, director, trustee, stockholder or member
entered or left the meeting must be noted
in the minutes;

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i. on a similar demand, the yeas and nays board and its committees and in regular or
must be taken on any motion or special stockholder meetings;
proposition, and a record thereof carefully h. Appraisals and performance reports for the
made. board and the criteria and procedure for
j. the protest of any director, trustee, assessment;
stockholder or member on any action or i. A director or trustee compensation report
proposed action must be recorded in full j. Director disclosures on self-dealings and
upon their. (Sec. 75) related party transactions; and/or
k. The profiles of directors nominated or
The signing of the minutes by all the members of the seeking election or reelection.
board is not required—there is no provision in the
Corporation Code that requires that the minutes of 9. Board of Directors and Trustees
the meeting should be signed by all the members of
the board. The signature of the corporate secretary a. Repository of Corporate
gives the minutes of the meeting probative value Powers
and credibility (People v. Dumlao, G.R. No. 168918,
2009). Doctrine of Centralized Management
Unless otherwise provided in this Code, the board
The entries contained in the minutes are prima facie of directors or trustees shall exercise the corporate
evidence of what actually took place during the powers, conduct all business, and control all
meeting, pursuant to Section 44, Rule 130 of the properties of the corporation (Sec. 22).
Revised Rule on Evidence (People v. Dumlao, G.R.
No. 168918, 2009). Powers of the Board of Directors
General Rule: The Board of Directors alone
Resolution vs. Minutes Of The Meeting exercises the powers of the corporation.
(People v. Dumlao, G.R. No. 168918, 2009) Exceptions: Other persons or groups within the
RESOLUTION MINUTES OF THE corporation may do so similarly:
MEETING a) If (1) there is a management contract and
A formal action by a A brief statement not (2) powers are delegated by majority of the
corporate board of only of what transpired board to an executive committee;
directors or other at a meeting, usually b) Corporate officers (e.g. the President) via
corporate body of authority from (1) law, (2) corporate by-
authorizing a particular stockholders/members laws; and (3) authorization from the board,
act, transaction, or or directors/trustees, either expressly or impliedly by habit,
appointment but also at a meeting custom or acquiescence in the general
of an executive course of business;
committee c) A corporate agent in transactions with third
persons to the extent of the authority to do
Agenda of meetings (Sec. 49) so has been conferred upon him;
At each regular meeting of stockholders or d) Those with apparent authority (doctrine of
members, the board of directors or trustees shall apparent authority).
endeavor to present to stockholders or members the
following: Theories on Source of Board Power
a. The minutes of the most recent regular a) Directly-Vested / Original Power Pursuant
meeting to Section 22, the source of power of the
b. A members’ list for non-stock corporations Board of Directors is primarily and directly-
and, for stock corporations, material vested by law; it is not a delegated power
information on the current stockholders, from the stockholders or members of the
and their voting rights; corporation
c. A detailed, descriptive, balanced and b) Delegated Powers from Stockholders The
comprehensible assessment of the Board of Directors is a creation of the
corporation’s performance, stockholders and controls and directs the
d. A financial report for the preceding year, affairs of the corporation by delegation of
e. An explanation of the dividend policy and the stockholders. By drawing to themselves
the fact of payment of dividends the powers of the corporation, they occupy
f. Director or trustee profiles positions of trusteeship in relation to the
g. A director or trustee attendance report, stockholders.
indicating the attendance of each director
or trustee at each of the meetings of the

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Doctrine of Ratification lot to Efren but eventually notified the latter about
The corporation may ratify the unauthorized acts of the rescission of lease. Using the Doctrine of
its corporate officer. The substance of the doctrine Apparent Authority, Bonanza was estopped from
is confirmation after conduct, amounting to a denying the existence and enforceability of Lease
substitute for a prior authority. Ratification can be Contract after it effectively ratified the lease by
made either expressly or impliedly like silence or accepting proceeds throughout several years. Also,
acquiescence and acceptance of benefits (Yasuma while it is true that the doctrine cannot be invoked by
v. Heirs of Cecilio De Villa, G.R. No. 150350, 2006). one who is not a third party, an officer of a
But illegal acts cannot be ratified. corporation can actually be a third person in contract
with the corporation. (Quesada, et al. v. Bonanza
Doctrine of Apparent Authority Restaurants, Inc., G.R. No. 207500, 2016)
If a corporation knowingly permits one of its officers,
or any other agent, to act within the scope of an b. Tenure, Qualifications, and
apparent authority, it holds him out to the public Disqualifications of Directors
possessing the power to so do those acts; and thus,
the corporation will, as against anyone who has in Term of Office (Sec. 22)
good faith dealt with it through such agent, be • Directors shall be elected for a term of one
estopped from denying the agent’s authority. (1) year from among the holders of stocks
(Francisco v. GSIS, G.R. No. L- 18287, 1963) registered in the corporation’s books
• Trustees shall be elected for a term not
Apparent authority may be ascertained through: exceeding three (3) years from among the
a. The general manner in which the corporation members of the corporation.
holds out an officer or agent as having the
power to act or, in other words, the apparent Each director/trustee shall hold office until the
authority to act in general, with which it clothes successor is elected and qualified.
him; or
b. The acquiescence in his acts of a particular Qualifications of Directors
nature, with actual or constructive knowledge a. Must own at least one (1) share of the capital
thereof, whether within or beyond the scope of stock of the corporation in his own name or
his ordinary powers. must be a member in the case of non-stock
corporations
If a private corporation intentionally or negligently
• Any director who ceases to be the owner of
clothes its officers or agents with apparent power to
at least one (1) share of the capital stock of
perform acts for it, the corporation will be estopped
the corporation of which he is a director
to deny that the apparent authority is real as to
shall thereby cease to be a director. (Sec.
innocent third persons dealing in good faith with
22)
such officers or agents.
b. He must not be disqualified under the RCC
(Sec. 26)
Note: It requires presentation of evidence of similar
c. He must possess other qualifications as may be
acts executed either in its favor or in favor of other
prescribed in the by-laws of the corporation.
parties. It is not the quantity of similar acts which
(Gokongwei, Jr. v. SEC, G.R. No. L-45911,
establishes apparent authority, but the vesting of a
1979)
corporate officer with the power to bind the
d. He must be of legal age
corporation (People’s Aircargo and Warehousing
Co., Inc. v. CA., G.R. No. 117847, 1998).
Disqualifications of Directors, Trustees, or
Officers (Sec. 26)
When the officers or agents of a corporation exceed
A person shall be disqualified from being a director,
their powers in entering into contracts or doing other
trustee, or officer of any corporation if, within five (5)
acts, the corporation, when it has knowledge
years prior to the election or appointment as such,
thereof, must promptly disaffirm the contract or act
the person was:
and allow the other party or third persons to act in
a) Convicted by final judgment:
the belief that it was authorized or has been ratified.
i. Of an offense punishable by
If it acquiesces, with knowledge of the facts, or fails
imprisonment for a period
to disaffirm, ratification will be implied or else it will
exceeding six (6) years;
be estopped to deny ratification (Premiere
ii. For violating this Code; and
Development Bank vs. CA, G.R. No. 159352, 2004).
iii. For violating “The Securities
Efren was Bonanza’s General Property Manager
Regulation Code”;
while Miguel was the President. Bonanza leased the

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b) Found administratively liable for any

offense involving fraud acts; and Corporations required to have Independent
c) By a foreign court or equivalent foreign Directors
regulatory authority for acts, violations or The board of the following corporations vested with
misconduct similar to those enumerated in public interest shall have independent directors
paragraphs (a) and (b) above. constituting at least twenty percent (20%) of such
board:
Grounds not exclusive a) Corporations covered by “The Securities
The foregoing is without prejudice to qualifications Regulation Code”, namely:
or other disqualifications, which the SEC or the i. those whose securities are
Philippine Competition Commission may impose in registered with the SEC,
its promotion of good corporate governance or as a ii. corporations listed with an
sanction in its administrative proceedings. (Sec. 26) exchange or with assets of at least
By-law provisions that prohibit directors who have Fifty million pesos
interests in competitor corporations are reasonable (P50,000,000.00) and having two
in order to protect the interests of the company hundred (200) or more holders of
(Gokongwei v. SEC, G.R. No. L-45911, 1979) shares, each holding at least one
hundred (100) shares of a class of
Hold-Over Principle its equity shares;
Directors/Trustees may continue to hold office b) Banks and quasi-banks, NSSLAs,
despite the lapse of one year until their successors pawnshops, corporations engaged in
are elected and qualified. money service business, pre-need, trust
and insurance companies, and other
Remaining members of the board of directors financial intermediaries; and
cannot elect another director to fill in a vacancy c) Other corporations engaged in business
caused by the resignation of a hold-over director. vested with public interest similar to the
above, as may be determined by the SEC,
The hold-over period is not part of the term of office considering such factors:
of a member of the board of directors. (Valle Verde i. such as the extent of minority
Country Club v. Africa, G.R. No. 151969, 2009) ownership,
ii. type of financial products or
Thus, when during the holdover period, a director securities issued or offered to
resigns from the board, the vacancy can only be investors,
filled-up by the stockholders, since there is no term iii. public interest involved in the
left to fill-up pursuant to the provisions of Section 29 nature of business operations, and
which mandates that a vacancy occurring in the iv. other analogous factors.
board of directors caused by the expiration of a
member’s term shall be filled by the corporation’s d. Elections
stockholders. (Valle Verde Country Club v. Africa,
G.R. No. 151969, 2009) Election Of Directors Or Trustees (Sec. 23)
Manner of Election
A director continuing to serve after one year from his • In any form; or
election (on a holdover capacity), cannot be • By ballot when requested by any voting
considered as extending his term. This hold-over stockholder or member
period is not part of his term, which, as declared, had • In stock corporations, voting may be in
already expired. (Valle Verde Country Club v. Africa, person or by proxy
G.R. No. 151969, 2009)
Time to Determine Voting Right
c. Requirement of Independent • At the time fixed in by- laws
Directors (Sec. 22) • If by- laws are silent, at time of election
An independent director is a person who, apart Cumulative Voting/Straight Voting
from shareholdings and fees received from the 1. Straight voting – Every stockholder may
corporation, is independent of management and vote the number of outstanding capital
free from any business or other relationship which stock in his own name for as many persons
could, or could reasonably be perceived to as there are directors to be elected; or in
materially interfere with the exercise of independent non-stock corporations, members may cast
judgment in carrying out the responsibilities as a as many votes as there are trustees to be
director.

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elected but may not cast more than one communication or in absentia. The right to vote
vote for one candidate. (In straight voting, through such modes may be exercised in
the votes are spread out evenly among all corporations vested with public interest,
the elective positions) notwithstanding the absence of a provision in the by-
2. Cumulative voting for one candidate – a laws of such corporations. (sec. 23)
stockholder may accumulate his shares
and give one candidate as many votes as Who Elects Directors or Trustees
the number of directors to be elected 1. By the stockholders/members as
multiplied by the number of his shares shall provided in the by-laws (traditionally during
equal; annual SH/M meetings
3. Cumulative voting by distribution – a 2. By the board, if still constituting quorum for
stockholder may also cumulate his shares vacancies in the interim (i.e. between
by multiplying the number of his shares by annual meetings) due to causes other than
the number of directors to be elected and removal or expiry of term (Sec. 28)
distribute the same among as many 3. If the vacancies are due to removal or
candidates as he shall see fit expiry of term, the directors/trustees must
be elected by the stockholders/members
Methods of Voting in Relation to Type of at a meeting for this purpose (special
Corporation meeting)
a. Stock Corporations
Stockholders entitled to vote shall have the right to How Elected
vote the number of shares of stock standing in their 1. By owners of majority of outstanding capital
own names in the stock books of the corporation at stock or by members in annual
the time fixed in the bylaws or where the bylaws are stockholders’/members’ meeting
silent, at the time of the election 2. Stockholders/members may be present in
person or by written proxy
The stockholder may use: 3. For stock corporations: Number of votes =
1. Straight Voting (no. of shares) x (no. of directors to be
2. Cumulative voting for one candidate elected)
3. Cumulative voting by distribution 4. By straight voting or cumulative voting,
which is all votes may be cast for a
Note: The total number of votes cast shall not candidate or distributed among the
exceed the number of shares owned by the candidates
stockholders as shown in the books of the 5. For non-stock corporations: Unless
corporation multiplied by the whole number of otherwise provided in the articles of
directors to be elected; and that no delinquent stock incorporation or in the by-laws, members of
shall be voted. non-stock corporations may cast as many
votes as there are trustees to be elected but
b) Non-stock Corporations may not cast more than one vote for one
General Rule: Members of nonstock corporations candidate.
may use Straight Voting, i.e. cast as many votes as 6. Viva voce (live voice) or must be by ballot if
there are trustees to be elected but may not cast requested
more than one (1) vote for one (1) candidate. 7. Delinquent shares and treasury shares
Exception: Unless otherwise provided in the cannot vote
articles of incorporation or in the bylaws. (Sec. 23) 8. Candidates with highest number of votes
will be declared elected
Quorum
At all elections of directors or trustees, there must Election Rules on Stock and Non-Stock
be present, either in person or through a Corporations
representative authorized to act by written proxy: STOCK NON-STOCK
• Stock Corporation – owners majority of CORPORATIONS CORPORATIONS
outstanding capital stock Owners of a majority A majority of the
• Non-stock Corporation – majority of of outstanding capital members, either in
members entitled to vote stock, either in person person or by
or by representative representative
Note: When so authorized in the bylaws or by a authorized to act by authorized to act by
majority of the board of directors, the stockholders written proxy, must be written proxy, must be
or members may also vote through remote

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present at the election present at the election be later than sixty (60) days from the scheduled
of the directors of the trustees date.
Cumulative voting or Cumulative voting is If no new date has been designated, or if the
Straight voting can be not available, unless rescheduled election is likewise not held, the SEC
used; a matter of right allowed by the articles may, upon the application of a stockholder, member,
granted by law to each or by-laws. director or trustee, and after verification of the
stockholder with voting unjustified non-holding of the election, summarily
rights. The Board may be order that an election be held.
elected by region.
Directors are elected The SEC shall have the power to issue such orders
at large. as may be appropriate, including:
a) orders directing the issuance of a notice
Alien Membership in Board of Directors stating the time and place of the election,
P.D. No. 715: “election of aliens as members of the b) designated presiding officer, and
board of directors of governing body of corporations c) the record date or dates for the
or associations engaging in partially nationalized determination of stockholders or members
activity shall be allowed in proportion to their entitled to vote.
allowable participation or share in the capital of such
entities.” Notwithstanding any provision of the articles of
incorporation or bylaws to the contrary, the shares
Non-Filipino citizens may become members of the of stock or membership represented at such
board of directors of a bank to the extent of the meeting and entitled to vote shall constitute a
foreign participation in the equity of said bank. quorum for purposes of conducting an election
(General Banking Law, Sec. 15) under this section. (Sec. 25)
Filling Vacancies in Board – Permissive Cessation from Office

The filling of vacancies in the board by the remaining Should a director, trustee or officer die, resign or in
directors or trustees constituting a quorum as any manner cease to hold office, the secretary, or
provided for by Section [28] is merely permissive, the director, trustee or officer of the corporation, or
not mandatory, and the vacancies may still be filled- in case of death, the officer’s heirs shall, within
up by the stockholders of members in a regular or seven (7) days from knowledge thereof, report in
special meeting called for the purpose. However, writing such fact to the SEC. (Sec. 25)
when the by-laws of the corporation contain a
specific mode of filling- up existing vacancies in the e. Removal (Sec. 27)
board, the same is mandatory (Tan v. Sycip, G.R.
No. 153468, 2006). Requisites of Removal from the Board
a) It must take place either at a regular meeting or
Report Of Election of Directors, Trustees and special meeting of the stockholders or members
Officers called for the purpose;
Within thirty (30) days after the election of the b) There must be previous notice to the
directors, trustees and officers of the corporation, stockholders or members of the intention to
the secretary, or any other officer of the corporation, remove;
shall submit to the SEC, the names, nationalities, c) The removal must be by a vote of the
shareholdings, and residence addresses of the stockholders representing 2/3 of the
directors, trustees, and officers elected. (Sec. 25) outstanding capital stock or 2/3 of the members,
as the case may be;
Only the directors and officers of the corporation d) The director may be removed with or without
whose names appear in the report submitted to the cause unless he was elected by the minority, in
SEC are deemed legally constituted to bind the which case, it is required that there is cause for
corporation in bringing a suit on behalf of the removal.
corporation (Premium Marble Resources v. CA,
G.R. No. 96551, 1996). NOTE: The SEC shall, motu proprio or upon
verified complaint, and after due notice and hearing,
Non-holding of Election order the removal of a director or trustee elected
The non-holding of elections and the reasons shall despite the disqualification, or whose
be reported to the SEC within thirty (30) days from disqualification arose or is discovered subsequent
the date of the scheduled election. The report shall to an election. This is without prejudice to other
specify a new date for the election, which shall not sanctions that the SEC may impose on the board of

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directors or trustees who, with knowledge of the b) The action by the designated director or
disqualification, failed to remove such director or trustee shall be limited to the emergency
trustee. action necessary,
The term shall cease within a reasonable
f. Filling of Vacancies (Sec. 28) time from the termination of the emergency
or upon election of the replacement director
General Rule: Any vacancy in the board are filled or trustee, whichever comes earlier.
by the remaining directors. c) The corporation must notify the SEC within
three (3) days from the creation of the
Exception: Vacancy arises by removal or expiration emergency board, stating therein the
of the term, in which case a meeting is required reason for its creation.
wherein the stockholders or members will elect the
replacement. Vacancy filled by reason of an increase in
the number of directors or trustees
Replacement director or trustee – A director or This vacancy shall be filled only by an election
trustee elected to fill a vacancy and shall serve only at a regular or at a special meeting of
for the unexpired term of the predecessor in office. stockholders or members duly called for the
purpose, or in the same meeting authorizing the
How Elections should be held: increase of directors or trustees if so stated in
In all elections to fill vacancies under this section, the notice of the meeting.
the procedure set forth in Sections 23 and 25 of this
Code shall apply. g. Compensation (Sec. 30)
When Elections may be held: General Rule: In the absence of any provision in the
a) Due to term expiration- the election shall be by-laws fixing their compensation, the directors shall
held no later than the day of such expiration at not receive any compensation, as such
a meeting called for that purpose. Exception: They may receive reasonable per
b) Result of removal- the election may be held on diems [i.e. at meetings]
the same day of the meeting authorizing the
removal and this fact must be so stated in the Qualifiers to General Rule and Exception
agenda and notice of said meeting. Any such compensation other than per diems may
c) In all other cases, the election must be held no be granted to directors by the vote of the
later than forty-five (45) days from the time the stockholders representing at least a majority of the
vacancy arose. outstanding capital stock at a regular or special
stockholders’ meeting.
Vacancy NOT by removal or expiration of term
May be filled by: However: In no case shall the total yearly
a) the vote of at least a majority of the compensation of directors, as such directors,
remaining directors or trustees, if still exceed 10% percent of the net income before
constituting a quorum; income tax of the corporation during the preceding
b) if not, said vacancies must be filled by the year.
stockholders or members in a regular or Directors or trustees shall not participate in the
special meeting called for that purpose. determination of their own per diems or
compensation.
Cases when Emergency Action is Required
Requirements: NOTE: The implication of the phrase “as such
a) If the vacancy prevents the remaing directors” is that members of the Board may receive
directors from constituting a quorum compensation, in addition to reasonable per diems,
b) emergency action is required to prevent when they render services to the corporation in a
grave, substantial, and irreparable loss or capacity other than as directors or trustees [in this
damage to the corporation case, if serving as corporate officers] (Western
Technology v. Salas, G.R. No. 113032, 1997)
Effects:
a) The vacancy may be temporarily filled from For Corporations vested with public interest
among the officers of the corporation by These corporations shall submit to their
unanimous vote of the remaining directors shareholders and the SEC, an annual report of the
or trustees. total compensation of each of their directors or
trustees.

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3. The corporation has an interest or a

h. Disloyalty reasonable expectancy, by embracing the
opportunity.
Rules on Fiduciaries’ Duties and Liabilities
Consequence of violation
Three-Fold Duties of Directors (Strategic Alliance 1. Directors must account for all the profits by
Development Corporation v. Radstock, G.R. No. refunding the same to the corporation
178158, 2009) 2. Directors may be removed from the board.
1. Duty of Obedience (Basis: Sec. 24) Exception: The act of the director has been ratified
To direct the affairs of the corporation only in by a vote of the stockholders owning or representing
accordance with the purposes for which it was at least two-thirds (2/3) of the outstanding capital
organized stock.
2. Duty of Loyalty (Basis: Secs. 30 & 33) Violations of Secs. 30 and 33 are not penal
Directors or trustees shall not acquire any personal offenses in relation Sec. 158: Had the Legislature
or pecuniary interest in conflict with their duty as intended to attach penal sanctions to said sections,
such directors or trustees. it could have expressly stated such intent in the
same manner it did for Section 74 of the same Code
Disloyalty: Sec. 30(2) v. Sec. 33 that the violation thereof is likewise considered an
SEC. 30(2) SEC. 33 offense under Section 144. (Ient v. Tullet, Inc., G.R.
Applicable to directors, Applicable to directors No. 189158, 2016)
trustees, and officers only
i. Business Judgment Rule
No ratification allowed Allows ratification of a
transaction by the Questions of policy or management are left solely to
director the honest decision of officers and directors of a
Covers stock and non- Covers stock corporation and the courts are without authority to
stock corporations corporations only substitute their judgment for the judgment of the
board of directors; the board is the business
manager of the corporation and so long as it acts in
3. Duty of Diligence (Basis: Sec. 30) good faith its orders are not reviewable by the courts
Directors and/or trustees shall not willfully and or the SEC. The directors are also not liable to the
knowingly vote for or assent to patently unlawful stockholders in performing such acts (Philippine
acts of the corporation or act in bad faith or with Stock Exchange, Inc. v. CA, GR No. 130644, 1997).
gross negligence in directing the affairs of the
corporation. Coverage of the Rule: Two Branches
1. Resolutions and transactions entered into by
Doctrine of Corporate Opportunity the Board of Directors within the powers of the
If there is presented to a corporate officer or director corporation cannot be reversed by the courts
a business opportunity, which the corporation has not even on the behest of the stockholders of
an interest or a reasonable expectancy, the self- the corporation; and
interest of the officer or director will be brought into 2. Directors and officers acting within such
conflict with that of his corporation. The law does not business judgment cannot be held personally
permit him to seize the opportunity even if he will liable for the consequences of such acts.
use his own funds in the venture. If he seizes the
opportunity thereby obtaining profits to the expense j. Solidary Liabilities for Damages
of the corporation, he must account all the profits by
refunding the same to the corporation. Liability under Sec. 30(1)
The following shall be liable jointly and severally for
Requisites of Doctrine of Corporate all damages resulting therefrom suffered by the
Opportunity corporation, its stockholders or members and other
1. The Corporation is financially able to persons.
undertake the business opportunity.
2. From the nature of the business Directors or trustees who willfully and knowingly:
opportunity, it is in line with the a) vote for or assent to patently unlawful acts
corporation’s business and is of practical of the corporation
advantage to the corporation. b) are guilty of gross negligence or bad faith in
directing the affairs of the corporation

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c) acquire any personal or pecuniary interest General rule: The Board being generally a policy-
in conflict with their duty as such directors making body, directors as such cannot be held liable
or trustees under a criminal statute making those in charge of
the management of the corporation liable for the
Liability for Watered Stocks criminal acts done in pursuit of corporate operations.
Directors or officers consenting to issuance of The members of the Board generally do not concern
watered stocks are solidarily liable with the themselves with the day-to-day affairs of the
stockholder concerned, to the corporation or its corporation, except those corporate officers who are
creditors for the difference between the fair value charged with the running of the business of the
received (by the corporation at the time of the corporation and are concomitantly members of the
issuance) and the par or issued value of the stock Board, like the President. (Federated Dealers Assn.
issued. (Sec. 64) v. Del Rosario, G.R. No. 202639, 2016).
k. Personal Liabilities Exception: To be held criminally liable for the acts

of a corporation, there must be a showing that its
Personal liability of a corporate director, trustee or officers, directors, and shareholders actively
officer may so validly attach, as a rule, only when: participated in or had the power to prevent the
1. He assents: wrongful act. (SEC v. Price Richardson Corp., G.R.
a. To a patently unlawful act of the No. 197032, 2017)
corporation, or
b. For bad faith, or gross negligence in m. Special Fact Doctrine
directing its affairs, or
c. For conflict of interest, resulting in Under the Special Facts Doctrine, although a
damages to the corporation, its director does not stand in fiduciary relation to the
stockholders or other persons (solidary stockholder, he is under legal obligation to make fair
liability under Sec. 30(1)); and full disclosure of pertinent official information
2. He attempts to acquire, or acquires any where special circumstances exist, giving rise to the
interest adverse to the corporation in obligation to disclose. (Soledad M. Cagampang,
respect of any matter which has been The Fiduciary Duties of Corporate Directors Under
reposed in them in confidence (liable as a Philippine Law, 46 Phil. L. J., 513, 562 [1971])
trustee for the corporation under Sec.
30(2)) n. Inside Information
3. He consents to the issuance of watered
stocks or who, having knowledge thereof, Unlawful Acts of Insider (RA 8799, Sec. 27)
does not forthwith file with the corporate It shall be unlawful for an insider to sell or to buy a
secretary his written objection thereto security of an issuer, while in the possession of
(solidary liability under Sec. 64); material information with respect to the issuer or the
4. He agrees to hold himself personally and security that is not generally available to the public
solidarily liable with the corporation; or unless:
5. He is made, by a specific provision of law, 1. The insider proves that the info was not gained
to personally answer for his corporate from such relationship
action (Tramat Mercantile, Inc. v. CA, G.R. 2. That the other party selling to or buying from
No. 111008, 1994). the insider is identified the insider proves
a. That he disclosed the information
Case law states that to hold a director or officer b. That he had reason to believe that the
personally liable for corporate obligations, two other party otherwise is also in
requisites must concur: possession of the information
1. it must be alleged in the complaint that the
director or officer assented to patently Presumption of a Purchase or Sale of a Security
unlawful acts of the corporation or that the of an Issuer of Insider
officer was guilty of gross negligence or bad Applies when an insider or an insider’s spouse, or
faith; and relatives by affinity or consanguinity within the
2. There must be proof that the officer acted second degree, legitimate or common-law, while in
in bad faith. (Freyssinet Filipinas Corp. v. possession of material nonpublic information if
Lapuz, G.R. No. 226722, 2019) transacted after such information came into
existence but prior to dissemination of such
l. Responsibility for Crimes information to the public and the lapse of a

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reasonable time for market to absorb such

information. (2) Between Corporations With
Interlocking Directors (Sec.
This presumption is rebutted upon a showing by the 32)
purchaser or seller that he was aware of the material
nonpublic information at the time of the purchase or A contract between two (2) or more corporations
sale. having interlocking directors shall not be invalidated
on that ground alone. These are valid so long as
Material Nonpublic Information there is no fraud and the contract is fair and
a. It has not been generally disclosed to the reasonable. However, if the director’s interest is
public and would likely affect the market nominal in one of the contracting corporations (not
price of the security after being exceeding 20% of the outstanding capital stock),
disseminated to the public and the lapse of then the contract must comply with the requisites
a reasonable time for the market to absorb provided supra, Sec. 31, otherwise voidable.
the information; or
b. Would be considered by a reasonable 10. Capital Affairs
person important under the circumstances
in determining his course of action whether a. Certificate of Stock
to buy, sell or hold a security.
A stock certificate or a certificate of stock is defined
o. Contracts as a written instrument signed by the proper officer
of a corporation stating or acknowledging that the
(1) By Self-Dealing Directors person named in the document is the owner of a
With the Corporation (Sec. designated number of shares of its stock. It is prima
31) facie evidence that the holder is a shareholder of a
corporation. (Teng v. Securities and Exchange
A contract of the corporation with its director/s or Commission, G.R. No. 184332, [February 17, 2016],
trustee/s or officer/s, or their spouses and relatives 781 PHIL 133-148)
within the fourth civil degree of consanguinity or
affinity is voidable at the option of such corporation, Classes Of Shares Of Stock (Sec. 6)
unless the following are present: The classification of shares, their corresponding
c. The presence of such director/trustee in the rights, privileges, or restrictions, and their stated par
Board meeting in which the contract was value, if any, must be indicated in the articles of
approved was not necessary to constitute a incorporation.
quorum.
d. The vote of such director or trustee was not i. Common and Preferred shares
necessary for the contract’s approval. • Common shares are also called ordinary
e. The contract is fair and reasonable shares and they share in profits pro-rata
f. In case of corporations vested with public • Preferred shares may be preferred (a) as
interest, material contracts are approved by
to dividends, or (b) as to distribution of
at least two-thirds (2/3) of the entire
assets during liquidation, or (c) as to any
membership of the board, with at least a
majority of the independent directors voting other manner stated in the Articles, not
to approve the material contract; and violative of the Corp Code. If authorized by
g. In case of an officer, the contract with him Articles, Board may fix terms. It is ALWAYS
has been previously authorized by the with a stated par value.
Board.
ii. Par Value and No-Par Value
Where any of the first three (3) conditions set forth ● Par value shares - with a pre-stated
in the is absent such contract may be ratified by: amount or denomination
a. the vote of the stockholders representing at ● Non- par value - no pre-stated value
least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of Non-par value shares are deemed fully paid and
the members in a meeting called for the non-assessable so holders of such are not liable to
purpose; and the corporation or its creditors.
b. Full disclosure of the adverse interest of the
directors or trustees involved is made at The consideration received is treated as capital and
such meeting and the contract is fair and cannot be declared as dividends.
reasonable under the circumstances.

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Because they are vested with public interest, the b. Redeemable shares – Expressly provided
following types of corporations may only issue in articles; may be purchased/taken up
par value shares: upon expiration of the period of said shares
a. Banks purchased whether or not there are
b. Trust Companies unrestricted retained earnings; may be
c. Insurance Companies deprived of voting rights.
d. Public Utilities c. Treasury stocks – stocks previously
e. Building and Loan Associations. issued and fully paid for and reacquired by
the corporation through lawful means
iii. Voting and Non- Voting Shares (purchase, donation, etc.); not entitled to
● Voting share with complete voting rights vote and no dividends could be declared
● Non - voting shares are preferred or thereon as corporations cannot declare
redeemable shares that have limited voting dividends to itself.
rights.
Escrow shares – those held by a third person to be
Non-Voting Shares Have Voting Rights In The released only upon the performance of a condition
Following Matters: or the happening of a certain event contained in the
a. Amendment of Articles agreement.
b. Adoption/ Amendment of By- Laws
c. Sale, lease, exchange, mortgage, pledge or Preferred cumulative participating share of
dispose of all or substantially all of corporate stock - Share entitling its holder to preference in
property the payment of dividends ahead of common
d. Incur, create, increase bonded indebtedness stockholders and to be paid the dividends due for
e. Increase, decrease capital stock prior years and to participate further with common
f. Merger/ consolidation with another corporation stockholders in dividend declarations.
g. Investment of funds in another corporation
Over-Issued Stock – Stock issued in excess of
h. Dissolution of corporation
authorized capital stock; null and void
Other Classes of Shares: (Secs. 7, 8, 9)
(1) Nature of the Certificate
a. Founder’s shares – Given rights and
(Sec. 62)
privileges not enjoyed by owners of other
stocks; exclusive right to vote/be voted in A stock certificate is a written instrument signed by
the election of directors shall not exceed 5 the proper corporate officers stating or
years. acknowledging that the person named in the
document is the owner of a designated number of
Note: such exclusive right shall not be allowed if its shares of its stock. (Lao v. Lao, G.R. No. 170585,
exercise will violate the “Anti-Dummy Law”; the 2008)
“Foreign Investments Act of 1991”; and other
pertinent laws. A stock certificate is not necessary to render one a
shareholder in a corporation; nevertheless, it is the
Since Section 7 makes no distinction (and is found paper representative or tangible evidence of the
under General Provisions), then it must mean that share itself and the various interests therein. The
founders’ shares may be applied to both stock and stock certificate expresses the contract between the
nonstock corporations. Although [Section 88 of the corporation and the shareholder, but it is not
Revised Corporation Code] allows in a nonstock essential to the existence of a share in or the
corporation to limit, broaden or deny the right of creation of the relationship with the shareholder.
members of any class, the specific provision of (Tan v. SEC, G.R. No. 95696, 1992)
Section 7 to founders’ share must prevail, and that
the nonstock corporation can lawfully suspend or A stock certificate could not be considered issued in
define the voting rights of its members, but with contemplation of law unless signed by the president
respect to founders’ share, the exclusive right to or vice-president and countersigned by the
vote and be voted for of the founders’ share should secretary or assistance secretary. (Bitong v. Court
expire after five years from the approval of the SEC. of Appeals, G.R. No. 102726, 1994)
(Forest Hills and Country Club, Inc. v. Kings
Properties Corp., G.R. No. 212833, 2019).

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Certificates of stock are not the actual shares of (3) Negotiability; Requirements
stock in the corporation and merely expresses the for Valid Transfer of Stocks
contract between the corporation and the
shareholder. Therefore, when a buyer of shares Quasi-Negotiable Character of Certificate of
gives notice to original seller for the latter’s exercise Stock
of his right of first refusal and the original seller failed A stock certificate is merely a quasi-negotiable
to respond, there was already the valid offer by the instrument in the sense that it may be transferred by
buyer that triggered the running of the period for the endorsement, coupled with delivery; but it is not
exercise of the right of first refusal in spite of the fact negotiable because the holder thereof takes it
that no certificate of stock had been issued yet in the without prejudice to such rights or defenses as the
name of the buyer. (Makati Sports Club v. Cheng, registered owners or transferor’s creditors may have
G.R. No. 178523, 2010) under the law, except only insofar as such rights or
defenses are subject to the limitations imposed by
The shares evidenced by said certificates, the principles governing estoppel. (Delos Santos v.
meanwhile, are regarded as property and the owner Republic, G.R. No. L-4818, 1955)
of such shares may, as a general rule, dispose of
them as he sees fit, unless the corporation has been The rule is that the endorsement of the stock
dissolved, or unless the right to do so is properly certificate by the owner or his attorney-in-fact or any
restricted, or the owner's privilege of disposing of his other person legally authorized to make the transfer
shares has been hampered by his own action. (Teng shall be sufficient to effect the transfer of shares only
v. SEC, G.R. No. 184332, 2016) if the same is coupled with delivery. The delivery of
the stock certificate duly endorsed by the owner is
(2) Uncertificated Shares (Sec. the operative act of transfer of shares from the lawful
62) owner to the new transferee.
But to be valid against third parties, the transfer
The Commission may require corporations whose must be recorded in the corporate books. (Bitong v.
securities are traded in trading markets, and which Court of Appeals, G.R. No. 102726, 1994)
can reasonably demonstrate their capability to do so
to issue their securities or shares of stocks in Since physical delivery of stock certificates is one of
uncertificated or scripless form in accordance with the essential requisites for the transfer of ownership
the rules of the Commission. of the stocks purchased, then the failure of the
seller-registered owner to deliver the stock
Defined as security evidenced by electronic or certificates would constitute a material breach that
similar records. (Securities and Regulation Code, warrants the rescission of the sale of the shares
Sec. 3.14) upon the option of the buyer. (Fil-Estate Golf v.
Vertex Sales and Trading, G.R. No. 202079, 2013)
Note: Under Sec. 43.1 of the Securities and
Regulation Code, a corporation whose shares of (4) Issuance (Sec. 63)
stock are registered pursuant to the Corporation
Code or listed in a stock exchange may: No certificate of stock shall be issued to a subscriber
a. If so resolved by its Board of Directors and until the full amount of the subscription together with
agreed by a shareholder, issue shares to, or interest and expenses (in case of delinquent
record the transfer of some or all of its shares shares), if any is due, has been paid.
into the name of said shareholders, investors or,
securities intermediary in the form of Lost or Destroyed Certificates (Sec. 72)
uncertificated securities; The following procedure shall be followed by a
b. The use of uncertificated securities shall be corporation in issuing new certificates of stock in lieu
without prejudice to the rights of the securities of those which have been lost, stolen or destroyed:
intermediary subsequently to require the a. The registered owner of a certificate of stock in
corporation to issue a certificate in respect of a corporation or such person’s legal
any shares recorded in its name; and representative shall file with the corporation an
c. If so provided in its articles of incorporation and affidavit in triplicate setting forth, if possible, the
by-laws, issue all of the shares of a particular i. circumstances as to how the certificate
class in the form of uncertificated securities and was lost, stolen or destroyed,
subject to a condition that investors may not ii. the number of shares represented by
require the corporation to issue a certificate in such certificate,
respect of any shares recorded in their name. iii. the serial number of the certificate and
the name of the corporation which issued
the same.

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iv. The owner of such certificate of stock While Sec. 72 of RCC appears to be mandatory, the
shall also submit such other information same admits exceptions, such that a corporation
and evidence as may be deemed may voluntarily issue a new certificate in lieu of the
necessary; and original stock certificate which has been lost without
b. After verifying the affidavit and other information complying with the requirements under said section.
and evidence with the books of the corporation, It would be an internal matter for the corporation to
the corporation shall publish a notice in a find measures in ascertaining who are the real
newspaper of general circulation in the place owners of shares for purposes of liquidation. It is
where the corporation has its principal office, well-settled that unless proven otherwise, the “stock
once a week for three (3) consecutive weeks at and transfer book” is the best evidence to establish
the expense of the registered owner of the stock ownership.
certificate of stock which has been lost, stolen
or destroyed. The notice shall state (5) Stock and Transfer Book
i. the name of the corporation,
ii. the name of the registered owner, 1. Contents
iii. the serial number of the certificate, Stock corporations must keep a stock and transfer
iv. the number of shares represented by book, which shall contain a record of:
such certificate, and 1. All stocks in the names of the stockholders
v. shall state that after the expiration of one alphabetically arranged;
(1) year from the date of the last 2. The installments paid and unpaid on all
publication, stock for which subscription has been
c. if no contest has been presented to the made, and the date of payment of any
corporation regarding the certificate of stock, installment;
the 3. A statement of every alienation, sale or
i. right to make such contest shall be transfer of stock made; and
barred and the corporation shall cancel 4. Such other entries as the by-laws may
the lost, destroyed or stolen certificate of prescribe. (Sec. 73)
stock in its books.
ii. In lieu thereof, the corporation shall issue Only absolute transfers of shares of stock are
a new certificate of stock, unless the required to be recorded in the corporation’s stock
registered owner files a bond or other and transfer book in order to have force and effect
security as may be required, effective for as against third persons. Attachments of shares are
a period of one (1) year, for such amount not “transfers” and need not be recorded in the
and in such form and with such sureties corporation’s stock and transfer book. (Ferro
as may be satisfactory to the board of Chemicals v. Garcia, et al., G.R. 168134, 2016)
directors, in which case a new certificate
may be issued even before the expiration 2. Who May Make Valid Entries
of the one (1) year period provided Only the corporate secretary is duly authorized to
herein. make entries on the stock and transfer book. Hence,
entries made by the Chairman or the President are
d. If a contest has been presented to the invalid. (Torres Jr. v. CA, G.R. No. 120138, 1997).
corporation or if an action is pending in court
regarding the ownership of the certificate of Registration of a transfer of shares of stock is a
stock which has been lost, stolen or destroyed, ministerial duty on the part of the corporation.
the issuance of the new certificate of stock in Aggrieved parties may then resort to the remedy of
lieu thereof shall be suspended until the court mandamus to compel corporations that wrongfully
renders a final decision regarding the or unjustifiably refuse to record the transfer or to
ownership of the certificate of stock which has issue new certificates of stock. This remedy is
been lost, stolen or destroyed. available even upon the instance of a bona fide
transferee who is able to establish a clear legal right
Except in case of fraud, bad faith, or negligence on to the registration of the transfer. (Andaya v. Rural
the part of the corporation and its officers, no action Bank of Cabadbaran, Inc., G.R. No. 188769, 2016)
may be brought against any corporation which shall
have issued certificate of stock in lieu of those lost, 3. Stock transfer agents
stolen or destroyed pursuant to the procedure A stock transfer agent or one engaged principally in
above-described. the business of registering transfers of stocks on
behalf of a stock corporation. (Sec. 75)
Exception (SEC Opinion 28 Jan. 1999)

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A stock transfer agent shall be allowed to operate in (1) Call by Board of Directors
the Philippines upon compliance with the following:
1. securing a license from the SEC The board of directors may, at any time, declare due
(renewable annually) and payable to the corporation unpaid subscriptions
2. payment of a fee fixed by the SEC and may collect the same or such percentage
thereof, in either case, with accrued interest, if any,
(6) Situs of the Shares of Stock as it may deem necessary.
Situs of shares is the domicile of the corporation that Requisites for a valid call
issued them. (Wells Fargo Bank and Union v. 1. Must be made in the manner prescribed by
Collector, G.R. No. L-46720, 1940) law;
2. Must be made by the Board of Directors;
b. Watered Stocks and
3. Must operate uniformly upon all
(1) Definition shareholders
Watered stocks are issued for less than the par Note: A call is not necessary in two cases
value or issued value or for a consideration other 1. when the date of payment is specified in
than cash, valued in excess of its fair value. the subscription
2. when the corporation becomes insolvent
(2) Liability of Directors for (Velasco v. Poizat)
Watered Stocks
(2) Notice Requirement
Directors or officers who shall commit the following
will be liable to the corporation or its creditors, The unpaid subscriptions are not due and payable
solidarily with the stockholder concerned for the without a call. A corporation cannot file an action to
difference between the value received at the time of recover the unpaid price if the action is not preceded
issuance of the stock and the par or issued value of by a call, until a call is made, no cause of action
the same: (Sec. 64) accrues (Lingayen Gulf Electric Power Company v.
1. consents to the issuance of stocks for a Baltazar, G.R. No. L-4824, June 30, 1954).
consideration less than the par or issued
value; d. Sale of Delinquent Shares (1)
2. consents to the issuance of stocks for a
consideration other than cash, valued in Payment of balance of subscription
excess of its fair value; Payment of unpaid subscription or any percentage
3. having knowledge of the insufficient thereof, together with any interest accrued, shall be
consideration does not file a written made on the date specified in the subscription
objection with the corporate secretary contract or on the date stated in the call made by the
board.(Sec 66)
(3) Trust Fund Doctrine for
Liability for Watered Stocks Effect of Failure to Pay Balance (Sec. 66)
1. The entire balance shall be due and
The Trust Fund Doctrine is the basis for the payable
prohibition on issuing watered stock. 2. The stockholder shall liable for interest
3. If no payment is made within thirty (30)
A Corporation has no power to release an original days from the said date, all stocks covered
subscriber of its capital stock from the obligation of by the subscription shall thereupon become
paying for his shares, without a valuable delinquent and shall be subject to sale as
consideration for such release; and as against hereinafter provided, unless the board of
creditors, a reduction of the capital stock can take directors orders otherwise.
place only in the manner and under the conditions
prescribed by the statute or the charter or the The prescriptive period in case of subscription of
articles of incorporation (Philippine Trust Corp. v. shares begins to run only from the time the board of
Rivera, G.R. No. L-19761, 1923). directors declares that the balance is due and
payable (Garcia v. Suarez, G.R. No. 45493, 1939)
c. Payment of Balance of
Subscription Unpaid Subscriptions (Sec. 66)
a. There will be interest imposed on unpaid
subscriptions

ATENEO CENTRAL
b. Payable to the corporation from date of either personally, by registered mail, or

subscription through other means provided in the
c. If required by and interest fixed in the By-laws bylaws.
d. If interest is required but not fixed – legal rate 2. Notice of the sale shall be published once
e. Therefore, no interest on unpaid subscription is a week for two (2) consecutive weeks in a
required: newspaper of general circulation in the
1. If not required by by-laws province or city where the principal office of
2. If not required by subscription contract the corporation is located.
Methods of Collection of Unpaid Subscription Auction Sale

1. Call for payment Auction Sale is conducted not less than thirty (30)
2. Declaration of delinquency and sale at days nor more than sixty (60) days from the date
public auction of delinquent shares; the stocks become delinquent.
3. Ordinary civil action; 1. The delinquent stock shall be sold at a
4. Collection from cash dividends and other public auction to such bidder who shall offer
amounts due to stockholders if allowed by to pay ff:
by-laws/agreed to by him. a. the full amount of the balance on
the subscription together
(1) Effect of Delinquency b. accrued interest
Delinquent stocks - Stocks not paid within 30 days c. costs of advertisement
from the date fixed in the contract of subscription or d. expenses of sale for the smallest
from the date stated in the call made by the Board number of shares or fraction of a
of Directors. share.
2. The stock so purchased shall be
Effect of Delinquency transferred to such purchaser in the books
1. They shall be subject to delinquency sale. of the corporation and a certificate for such
2. The stock shall not be voted or be entitled stock shall be issued in the purchaser’s
to vote or to representation at any favor.
stockholder’s meeting. 3. The remaining shares, if any, shall be
3. The holder shall not be entitled to any of the credited in favor of the delinquent
rights of a stockholder except the right to stockholder who shall likewise be entitled to
dividends the issuance of a certificate of stock
4. The corporation has the right to apply cash covering such shares. (Sec. 67)
dividends due to the unpaid balance plus
cost and expenses and to withhold stock Note: There shall be no sale at public auction if:
dividends until the unpaid subscription is 1. The delinquent stockholder pays on or
fully paid. before the sale: (a) balance due, (b)
accrued interest, or (c) advertising costs
Note: the only right that may not be exercised is and expenses of sale.
the right to dividends 2. The Board orders otherwise, on any of the
following grounds: (a) Defect in the Notice
(2) Call by Resolution of the of Sale; or (b) Defect in sale itself. (Sec.
Board of Directors 67)
Call by resolution of the board of directors When Sale May Be Questioned

The board of directors shall issue a resolution a. The action is filed on the ground of irregularity
ordering the sale of delinquent stocks. (Sec. 67) or defect in the notice of sale, or in the sale of
the delinquent stock;
There is no need for a call if the subscription contract b. The party seeking to maintain such action first
specifies dates when subscription balance is due. If pays or tenders to the party holding the stock
no payment is made within thirty (30) days from the the sum for which the same was sold with
date specified, the board shall order the sale of interest from the date of the sale at the legal
delinquent shares. rate; and
c. The complaint was filed within 6 months from
Notice of Sale the date of the sale (Sec. 68)
1. Notice of the sale, with a copy of the
resolution, shall be sent to every
shareholder with unpaid subscriptions

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e. Alienation of Shares assignee as the owner of the shares (not just an

equitable mortgage).
Sales of Shares
General Rule: Shares are not owned or are the (c) Attachments and Executions (Chemphil
assets of the corporation—they are owned by the Export & Import Corp. v. CA, G,R. Nos. 112438-39,
shareholders of record. Based on the Doctrine of 1995)
Free Transferability of Shares, the sale of shares
may be made by shareholders as this is their Attachments of shares are not included in the term
property right. “transfer” as provided in Sec. 62 of RCC. Both the
Revised Rules of Court and RCC do not require
Exception: Right of First Refusal annotation in the stock and transfer book for the
attachment of shares to be valid and binding on the
Under Sec. 62 of RCC, certain minimum requisites corporation and third parties.
must be complied with for there to be a valid transfer
of stocks: (d) Other Encumbrances on Shares
(a) there must be delivery of the stock certificate; The process of registering lis pendens is
(b) the certificate must have been endorsed by the inapplicable to shares which are personal
owner or his attorney-in-fact or other persons legally properties; however, formal notice given to the
authorized to make the transfer; and to be valid Corporate Secretary of claims to the shall be
against third parties, the transfer must be recorded deemed equivalent of registration of an
in the corporate books. encumbrance or assignment of the shares on the
corporate books; and that by virtue of such
No transfer, however, shall be valid, except as registration through notice to the corporation,
between the parties, until the transfer is recorded in pending litigation, third parties, or potential
the books of the corporation showing the names of transferees pendente lite, may therefore be charged
the parties to the transaction, the date of the with constructive notice of claimants lien/title over
transfer, the number of the certificate or certificates, the subject shares and the pending litigation
and the number of shares transferred. (Sec. 62) involving the same. (MR Holdings, Ltd. v. Bajar,
G.R. No. 153478, 2012)
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the (2) Requisites of a Valid
books of the corporation. (Sec. 62) Transfer
(1) Allowable Restrictions on Requisites Of A Valid Transfer

the Sale of Shares Under Sec. 62 of RCC, certain minimum requisites
must be complied with for there to be a valid transfer
The following are allowable restrictions on the of stocks:
sale of shares: (a) there must be delivery of the stock certificate;
(b) the certificate must have been endorsed by the
(a) Pledge or Mortgage (Fua Cun v. Summers, owner or his attorney-in-fact or other persons legally
G.R. No. 19441, 1923) authorized to make the transfer; and to be valid
against third parties, the transfer must be recorded
Shares for which no stock certificate has been in the corporate books.
issued may validly be mortgaged in whole (and not
just with respect to the portion paid-up) and the No transfer, however, shall be valid, except as
corporation receiving notice thereof is bound to between the parties, until the transfer is recorded in
respect the security arrangement. The “unpaid the books of the corporation showing the names of
claims” under Sec. 62 of RCC refers to any unpaid the parties to the transaction, the date of the
subscription, and not to any indebtedness which a transfer, the number of the certificate or certificates,
shareholder may owe the corporation arising from and the number of shares transferred. (Sec. 62)
any other transactions, like unpaid monthly dues.
Involuntary Dealings
(b) Equitable Mortgage Assignment (APT v. As between two contending judgment creditors:
Sandiganbayan, G.R. No. 109376, 2000) The first to have the writ served upon the proper
officer of the corporation would be preferred.
The assignment of voting shares as security for a
loan operates to give the assignee not only the right As between an attaching/levying creditor where
to vote on the shares, but would also treat the there has been proper service of the writ to the
proper corporate officer (even when not

ATENEO CENTRAL
registered in the stock and transfer book) and

the buyer/assignee of the shares: If writ was What does the right to inspect corporate records
properly served upon the corporate officer ahead of include? (Sec. 73)
the registration of the sale/assignment in the stock 1. Right to inspect corporate records
and transfer book (even when the sale or 2. Right to demand for their reproduction,
assignment was perfected and consummated provided that:
ahead of the pledge or mortgage), the a. Demand in writing is made by the
pledge/mortgage would still be preferred because requesting party
the registration of the sale/assignment would still be b. Copies are reproduced at the
preferred because the registration of the requesting party’s expense
sale/assignment in the stock and transfer book is a 2. The inspecting or reproducing party shall
necessary ingredient to make the sale/assignment remain bound by confidentiality rules under
binding on third parties, including the prevailing laws, such as the rules on trade
pledgee/mortgage. secrets or processes under Republic Act
No. 8293, otherwise known as the
Note: A bona fide transfer of shares, not registered “Intellectual Property Code of the
in the corporate books, is not valid as against a Philippines”, as amended, Republic Act No.
subsequent lawful attachment of said shares, 10173, otherwise known as the “Data
regardless of whether the attaching creditor had Privacy Act of 2012”, Republic Act No.
actual notice of said transfer or not. All transfers not 8799, otherwise known as “The Securities
so entered on the corporate books are absolutely Regulation Code”, and the Rules of Court.
void; not because they are without notice or
fraudulent in law or fact, but because they are made Who may inspect corporate records?
so void by statute. (Garcia v. Jomouad, G.R. No. A director, trustee, stockholder or member of the
133969, 2000) corporation in person or by a representative has the
right to inspect corporate records (Sec. 73).
f. Corporate Books and Records The ff. may NOT inspect or demand reproduction of
corporate records: (Sec. 73)
Corporate records to be kept at principal office: 1. One who is not a stockholder or member of
(Sec. 73) record,
1. The articles of incorporation and bylaws of 2. A competitor, director, officer, controlling
the corporation and all their amendments; stockholder or otherwise represents the
2. The current ownership structure and voting interests of a competitor shall have no right
rights of the corporation, including lists of to inspect or demand reproduction of
stockholders or members, group corporate records.
structures, intra-group relations, ownership
data, and beneficial ownership; Any stockholder who shall abuse the rights granted
3. The names and addresses of all the under Sec. 73 shall be penalized under Section 158
members of the board of directors or the RCC without prejudice to the provisions of
trustees and the executive officers; Republic Act No. 8293, otherwise known as the
4. A record of all business transactions; “Intellectual Property Code of the Philippines”, as
5. A record of the resolutions of the board of amended, and Republic Act No. 10173, otherwise
directors or trustees and of the known as the “Data Privacy Act of 2012”.
stockholders or members;
6. Copies of the latest reportorial Requisites for the exercise of the right to inspect
requirements submitted to the SEC; and 1. It must be exercised at reasonable hours on
7. The minutes of all meetings of stockholders business days
or members, or of the board of directors or 2. The stockholder has not improperly used
trustees. any information he secured through any
previous examination
Note: This is not an exclusive list. Section 73 states 3. The demand is made in good faith and for
that Every corporation shall keep and carefully a legitimate purpose
preserve at its principal office all information relating
to the corporation including, but not limited to the When may corporate records be inspected?
abovementioned. Authorized persons may inspect corporate books at
reasonable hours on business days (Sec. 73)
(1) Right to Inspect Corporate
Records

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(2) Effect of Refusal to Inspect 2. Notice of the meeting should be given to the
Corporate Records stockholders by personal delivery or
registered mail at least twenty (20) days
Any officer or agent of the corporation who shall prior to the meeting;
refuse to allow the inspection and/or reproduction of 3. The notice of meeting should also be
records shall be liable for: published for once in a newspaper
1. damages
published in the principal place of business,
2. shall be guilty of an offense which shall be
punishable under Section 161, RCC otherwise, in a newspaper of general
circulation
If such refusal is made pursuant to a resolution or 4. The resolution to dissolve must be
order of the board of directors or trustees, the approved by the majority of the
liability under this section for such action shall be directors/trustees and approved by the
imposed upon the directors or trustees who voted stockholders representing at least majority
for such refusal. (Sec. 73) of the outstanding capital stock or majority
of members;
Defenses that may be used by officer / agent / 5. A verified request for dissolution is then
director / trustee: filed with the SEC stating:
1. the requesting party improperly used any a. the reason for dissolution
information secured through any prior b. the form, manner and time when
examination of the records or minutes of
the notices were given
such corporation or of any other
corporation, c. names of the stockholders and
2. the requesting party was not acting in good directors or members and trustees
faith or for a legitimate purpose in making who approved the dissolution
the demand to examine or reproduce d. the date, place, and time of the
corporate records, meeting in which the vote was
3. the requesting party is a competitor, made; and
director, officer, controlling stockholder or e. details of publication
otherwise represents the interests of a 6. In addition, the following shall be submitted
competitor (Sec. 73) to the SEC:
a. Copy of the resolution authorizing
11. Dissolution and Liquidation the dissolution, certified by a
majority of the board and
a. Modes of Dissolution countersigned by the secretary;
b. Proof of publication
Dissolution
c. Favorable recommendation from
Extinguishment of the franchise of a corporation and
the appropriate regulatory agency,
the initiation of the termination of its corporate
existence when necessary.
7. The SEC shall, within 15 days from the
However, the corporation shall nevertheless be receipt of the verified request for
continued as a body corporate for three (3) years dissolution, and in the absence of any
after the time when it would have been so dissolved, withdrawal within said period, approve the
for the purpose of prosecuting and defending suits request and issue the certificate of
by or against it and enabling it to settle and close its dissolution, upon which the dissolution will
affairs, to dispose of and convey its property and to take effect. (Sec. 134)
distribute its assets, but not for the purpose of
continuing the business for which it was established. 2. Where Creditors Are Affected
(Sec. 122) Procedure where the dissolution of the
corporation may prejudice the rights of any
(1) Voluntary Dissolution creditor:
1. A verified petition for dissolution shall be
1. Where No Creditors Are Affected filed with the SEC.
Procedure where no creditors are affected by
2. The petition shall be:
the dissolution of the corporation:
a. signed by a majority of the
1. A meeting must be held on the call of
corporation’s board of directors or
directors or trustees;
trustees

ATENEO CENTRAL
b. verified by its president or 10. The dissolution shall take effect only upon
secretary or one of its directors or issuance by the SEC of a certificate of
trustees dissolution* (Sec. 135)
c. shall set forth all claims and
demands against it 3. By Shortening Corporate Term
d. that its dissolution was resolved Procedure on voluntary dissolution by
upon by the affirmative vote of the shortening of the corporate term (Sec. 36):
stockholders representing at least 1. A private corporation may extend or
two-thirds (2/3) of the outstanding shorten its term by amending the articles of
capital stock or at least two-thirds incorporation when approved by a majority
(2/3) of the members at a meeting vote of the board of directors or trustees,
of its stockholders or members and ratified at a meeting by the
called for that purpose. stockholders or members representing at
3. The petition shall likewise state: least two-thirds (2/3) of the outstanding
a. the reason for the dissolution; capital stock or of its members.
b. the form, manner, and time when 2. Written notice of the proposed action and
the notices were given; the time and place of the meeting shall be
c. the date, place, and time of the sent to stockholders or members
meeting in which the vote was 3. In case of extension of corporate term, a
made. dissenting stockholder may exercise the
4. The corporation shall submit to the SEC right of appraisal under the conditions
the following: provided in this Code. (Sec. 137)
a. a copy of the resolution authorizing
the dissolution, certified by a Note: Under Sec. 11, the RCC now allows the
revival of a the corporate existence of an Expired
majority of the board of directors or
Corporation.
trustees and countersigned by the
secretary of the corporation; and If a corporation’s term has expired, it may apply for
b. list of all its creditors. a revival of its corporate existence, together with
5. By an order reciting the purpose of the all the rights and privileges under its certificate of
petition, the SEC shall fix a deadline for incorporation and subject to all of its duties, debts
filing objections to the petition (shall not be and liabilities existing prior to its revival. Upon
less than thirty (30) days nor more than approval by the SEC, the corporation shall be
sixty (60) days after the entry of the order). deemed revived and a certificate of revival of
6. Publication: Before such the deadline, a corporate existence shall be issued, giving it
copy of the order shall be published at least perpetual existence, unless its application for
once a week for three (3) consecutive revival provides otherwise. (Sec. 11)
weeks in a newspaper of general
Withdrawal Of Dissolution
circulation published in the municipality or
Procedure on Withdrawal of Request for
city where the principal office of the Dissolution:
corporation is situated, otherwise, in a 1. Withdrawal of Request of Dissolution: Not
newspaper of general circulation in the later than 15 days from the receipt by SEC
Philippines of the request for dissolution, the
7. Posting: A similar copy shall be posted for withdrawal thereof shall be made in writing,
three (3) consecutive weeks in three (3) duly verified by any incorporator, director,
public places in such municipality or city. trustee, shareholder, or member and
8. After the expiration of the time to file signed by the same number of
objections, a hearing shall be conducted incorporators, directors, trustees,
upon prior five (5) day notice to hear the shareholders, or members necessary to
objections; request for dissolution.
9. Judgment shall be rendered dissolving the 2. Upon receipt of a withdrawal of request for
corporation and directing the disposition of dissolution, the SEC shall withhold action
assets; the judgment may include on the request for dissolution and shall,
appointment of a receiver. after investigation:

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a. Make a pronouncement that the

request for dissolution is deemed If the corporation is ordered dissolved by final
withdrawn; judgment pursuant to the grounds set forth in
b. Direct a joint meeting of the board subparagraph (e) hereof, its assets, after payment
of directors or trustees and the of its liabilities, shall, upon petition of the SEC with
stockholders or members for the the appropriate court, be forfeited in favor of the
national government. Such forfeiture shall be
purpose of ascertaining whether to
without prejudice to the rights of innocent
proceed with dissolution; or stockholders and employees for services rendered,
c. Issue such other orders as it may and to the application of other penalty or sanction
deem appropriate. (Sec. 137) under this Code or other laws. (Sec. 138)
Procedure on Withdrawal of Petition for The SEC shall give reasonable notice to, and
Dissolution coordinate with, the appropriate regulatory agency
A withdrawal of the petition for dissolution shall be prior to the involuntary dissolution of companies
in the form of a motion and similar in substance to a under their special regulatory jurisdiction.(Sec. 138)
withdrawal of request for dissolution but shall be
verified and filed prior to publication of the order Non-use of corporate charter (Sec. 21)
setting the deadline for filing objections to the If a corporation does not formally organize and
petition. (Sec. 137) commence its business within 5 years
(2) Involuntary Dissolution Effect: certificate of incorporation shall be deemed

revoked following the end of the 5-year period
A corporation may be dissolved by the SEC motu
proprio or upon filing of a verified complaint by any
Continuous Inoperation (Sec. 21)
interested party. (Sec. 138)
If a corporation has commenced its business but
subsequently becomes inoperative for a period of at
Grounds for dissolution of the corporation:
least 5 consecutive years
a. Non-use of corporate charter as provided
● Effect: after due notice and hearing, the
under Section 21 of this Code; corporation will be put on delinquent
b. Continuous inoperation of a corporation as status
provided under Section 21 of this Code; ● Remedy: it shall have a period of 2 years to
c. Upon receipt of a lawful court order
resume operations. Otherwise, certificate
dissolving the corporation;
of incorporation will likewise be revoked.
d. Upon finding by final judgment that the
corporation procured its incorporation “Organization” under SEC Rules
through fraud; ● Adoption of the by-laws and the filing and
e. Upon finding by final judgment that the approval of the same with and by the SEC
corporation: if the same were not adopted and filed
1. Was created for the purpose of simultaneously with the articles of
committing, concealing or aiding incorporation;
the SEC of securities violations, ● Election of the Board of Directors or
smuggling, tax evasion, money Trustees and of the officers;
laundering, or graft and corrupt ● Establishment of the principal office; and
practices; ● Providing for the subscription and payment
2. Committed or aided in the SEC of of the capital stock and the taking of such
securities violations, smuggling, steps as are necessary to endow the legal
tax evasion, money laundering, or entity with capacity to transact the
graft and corrupt practices, and its legitimate business for which it was created
stockholders knew of the same;
and “Commenced Business” under SEC Rules
3. Repeatedly and knowingly When the corporation has performed preparatory
tolerated the SEC of graft and acts geared towards the fulfillment of the purposes
corrupt practices or other for which it was established such as but not limited
fraudulent or illegal acts by its to the following:
directors, trustees, officers, or
employees. (Sec. 138)

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● Entering into contracts or negotiations for organized (PNB v. Court of First Instance of Rizal,
lease or sale of properties to be used as Pasig, Br. XXI, G.R. No. 63201, 1992).
business or factory site;
● Making plans for and the construction of the A party’s stockholding in a corporation, whether
factory; and existing or dissolved, is a property right which he
● Taking steps to expedite the construction of may vindicate against another party who has
deprived him thereof.
the company’s working equipment
Stockholders may convey their respective
In the event of failure to file for an extension if a
shareholdings toward the creation of a new
corporation’s term has expired, it may apply for a
corporation to continue the business of the old or
revival of its corporate existence, together with all
they may reincorporate by filing new articles of
the rights and privileges under its certificate of incorporation and by-laws.
incorporation and subject to all of its duties, debts
and liabilities existing prior to its revival. Upon
Liquidation
approval by the SEC, the corporation shall be
Process by which all the assets of the corporation
deemed revived and a certificate of revival of
are converted into liquid assets in order to facilitate
corporate existence shall be issued, giving it
the payment of obligations to creditors, and the
perpetual existence, unless its application for revival remaining balance if any is to be distributed to the
provides otherwise. stockholders.
Demands of Minority for Dissolution
There is no time limit within which the trustees
Corporate dissolution due to mismanagement of
must complete a liquidation placed in their
majority stockholder is too drastic a remedy,
hands (Vigilla et.al. v. Philippine College of
especially when the situation can be remedied such
Criminology, G.R. No. 200094, 2013).
as giving minority stockholders a veto power to any
decision (Chase v. Buencamino, G.R. No. 20395,
1985).
b. Methods of Liquidation
Effects Of Dissolution (1) By the Corporation Itself

(a) Vesting of legal title to the corporate property in
the stockholders, who become co-owners Through Board of Directors or Trustees – normal
thereof method of procedure
(b) The corporation ceases to be a body corporate
Even if no trustee is appointed or designated during
to continue the business for which it was
the three-year period of the liquidation of the
established. corporation, the Court has held that the Board of
Directors may be permitted to complete the
The termination of the life of a juridical entity does corporate liquidation by continuing as trustees by
not by itself cause the extinction or diminution of the legal implication (Vigilla et al. v Philippine College of
rights and liability of such entity, since it is allowed Criminology, G.R. No. 200094, 2013)
to continue as a juridical entity for three (3) years for
the purpose of prosecuting and defending suits by Note: This only concerns the matters/actions that
or against it and enabling it to settle and close its are initiated during the 3 year grace period. The
affairs, to dispose of and convey its property, and to Board cannot be considered as trustees for matters
distribute its assets (Republic v. Tancinco, G.R. No. initiated after the 3-year period.
139256, 2002).
(2) Conveyance to a Trustee
A board resolution to dissolve the corporation does Within a Three-Year Period
not operate to so dissolve the juridical entity. For
dissolution to be effective “the requirements Through Trustee – at any time during the three
mandated by the Corporation Code should have years of liquidation, a corporation is authorized and
been strictly complied with” (Vesagas v. Court of
empowered to convey all of its property to trustees
Appeals, G.R. No. 142924, 2001)
for the benefit of stockholders, members, creditors,
When the period of corporate life expires, the and other persons in interest. The three (3)-year
corporation ceases to be a body corporate for the limitation will not apply provided the designation of
purpose of continuing the business for which it was the trustee is made within said period.

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(3) By Management Committee a. Continues as a corporate body for 3 years

or Rehabilitation Receiver to prosecute and defend suits against it,
close its affairs, dispose and convey its
Through Receiver – created by means of judicial or property and distribute assets
quasi-judicial appointment of the receiver. The b. Cannot continue business for which it was
receiver is actually an officer of the court and must established
therefore be accountable to the court. c. Can convey property to trustees for the
benefit of the stockholders/members,
Note: If there is no Board of Directors or Trustees, creditors and other persons in interest
those having pecuniary interest in the assets, i. Legal interest vests in
including not only the shareholders but likewise the
business
creditors of the corporation, acting for and in its
ii. Beneficial interest remains
behalf, may liquidate (Alabang Dev’t v. Alabang Hills
Village Ass’n, G.R. No. 196950, 2014) with stockholders/ members,
creditors
(4) Liquidation after Three d. Assets distributable to unknown creditors,
Years stockholders/ members, persons in interest
or those who cannot be found shall be
Liquidation after Three Years - If full liquidation escheated to the city or municipality where
can only be effected after the 3-year period and the assets are located.
there is no trustee, the directors may be permitted e. Distribution of assets only upon lawful
to complete the liquidation by continuing as trustees dissolution and payment of all debts and
by legal implication (Reburiano v. CA, G.R. No. liabilities. Exceptions:
102965, 1999). i. Decrease of capital stock
ii. As otherwise allowed in the
The trustee may continue to prosecute a case
commenced by the corporation within three years Corporation Code
from its dissolution until rendition of the final
judgment, even if such judgment is rendered beyond
the three-year period allowed by Section [139]. 12. Other Corporations
However, an already defunct corporation cannot
initiate a suit after the lapse of the three-year period. a. Close Corporations
(Alabang Dev’t v. Alabang Hills Village Ass’n, G.R.
No. 196950, 2014) (1) Characteristics
Note: When a corporation threatened by bankruptcy Characteristics of a close corporation

is taken over by a receiver, all the creditors shall A close corporation, within the meaning of the
stand on equal footing. Not one of them should be Corporation Code, is one whose articles of
given preference by paying one or some of them incorporation provides that:
ahead of the others. 1. All the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
The Civil Code provisions on concurrence and record by not more than a specified number of
preference of credits are applicable to the liquidation persons, not exceeding twenty (20)
proceedings.
2. All the issued stock of all classes shall be
subject to one or more specified restrictions on
A corporation in the process of liquidation has no
legal authority to engage in any new business, even transfer permitted by this Title
if the same is in accordance with the primary 3. The corporation shall not list in any stock
purpose stated in its articles of incorporation. exchange or make any public offering of any of
its stock of any class.
When a Corporation Must Wind Up (Sec. 139)
If it is dissolved by: Notwithstanding the foregoing, a corporation shall
a. By expiry of term or not be deemed a close corporation when at least
b. Is annulled by forfeiture, or otherwise, or two-thirds (2/3) of its voting stock or voting rights is
c. Is terminated In any other manner owned or controlled by another corporation which is
not a close corporation within the meaning of the
Effects of Winding Up of Affairs: (Sec. 139) Corporation Code. (Sec. 95)

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Suppletory Effect
The provisions of other Titles of the Corporation Effects Of Issuance Or Transfer Of Stock In
Code shall apply suppletorily except insofar as Title Breach Of Qualifying Conditions. –
of Close Corporation otherwise provides. (Sec. 95)
(a) If shares of stock of a close corporation are
Management of a close corporation issued or transferred to any person who is not
The articles of incorporation of a close corporation eligible to be a holder thereof under any provision of
may provide that the business of the corporation the articles of incorporation, and if the certificate for
shall be managed by the stockholders of the such stock conspicuously shows the qualifications
corporation rather than by a board of directors. of the persons entitled to be holders of record
a. When they manage, stockholders are liable thereof, such person is conclusively presumed to
as directors; have notice of the fact of the ineligibility to be a
stockholder.
b. There is no need to call a meeting to elect
directors;
(b) If the articles of incorporation of a close
c. To the extent that the stockholders are corporation states the number of persons, not
actively engaged in the management, said exceeding twenty (20), who are entitled to be
stockholders shall be liable for corporate stockholders of record, and if the certificate for such
torts unless the corporation has obtained stock conspicuously states such number, and the
reasonably adequate liability insurance. issuance or transfer of stock to any person would
cause the stock to be held by more than such
Companies That Cannot Be Close Corporations number of persons, the person to whom such stock
(MIPES-BOO) is issued or transferred is conclusively presumed
a. Mining companies; to have notice of this fact.
b. Insurance companies;
c. Public utilities; (c) If a stock certificate of a close corporation
d. Educational institutions; conspicuously shows a restriction on transfer of the
e. Stock exchanges; corporation’s stock and the transferee acquires the
stock in violation of such restriction, the transferee
f. Banks;
is conclusively presumed to have notice of the
g. Oil companies;
fact that the stock was acquired in violation of
h. Other corporations declared to be vested with the restriction.
public interest.
(d) Whenever a person to whom stock of a
(2) Validity of Restrictions on close corporation has been issued or transferred
Transfer of Shares has or is conclusively presumed under this section
to have notice of:
Validity Of Restrictions On Transfers Of Shares 1. the person’s ineligibility to be a stockholder
(Sec 97) of the corporation; or
Restrictions on the right to transfer shares must 2. that the transfer of stock would cause the
appear in:
stock of the corporation to be held by more
1. The articles of incorporation;
than the number of persons permitted
2. The by-laws; and
under its articles of incorporation; or
3. In the certificate of stock 3. that the transfer violates a restriction on
transfer of stock, and the corporation may,
Otherwise, the same shall not be binding on any
at its option, refuse to register the transfer
purchaser thereof in good faith.
in the name of the transferee.
Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation (e) The provisions of subsection (d) shall not
the option to purchase the shares of the transferring be applicable if the transfer of stock, though contrary
stockholder with such reasonable terms, conditions to subsections (a), (b) or (c), has been consented to
or period stated therein. by all the stockholders of the close corporation, or if
the close corporation has amended its articles of
If upon the expiration of said period, the existing incorporation in accordance with this Title.
stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may (f) The term “transfer”, as used in this section,
sell his shares to any third person. is not limited to a transfer for
value.

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General Rule: It shall extend to all stock to be

(g) The provisions of this section shall not issued, including reissuance of treasury shares,
impair any right which the transferee may have to whether for money, property or personal services, or
either rescind the transfer or recover the stock under in payment of corporate debts
any express or implied warranty. (Sec. 98)
Exception: Unless the articles of incorporation
Note: Even if the transfer of shares is made in provide otherwise.
violation of the restrictions enumerated under [Sec.
98 of RCC], such transfer is still valid if it has been (4) Amendment of Articles of
consented to by all the shareholders of the close Incorporation
corporation and the corporation cannot refuse to
register the transfer of shares in the name of the Amendment Of The Articles Of Incorporation
transferee. (Florete, Sr. v. Florete, Jr., G.R. No. (Sec. 102)
223321, 2018) Any amendment to the articles of incorporation
which seeks to delete or remove any provision
Need for factual determination of close required by this Title or to reduce a quorum or voting
corporation to apply requirement stated in said articles of incorporation
Before courts can allow the operation of Section 98 shall require the affirmative vote of at least two-
to a case, there must first be a factual determination thirds (2/3) of the outstanding capital stock,
that the corporation is indeed a close corporation. whether with or without voting rights, or of such
There needs to be a presentation of evidence on the greater proportion of shares as may be specifically
relevant restrictions in the articles of incorporation provided in the articles of incorporation for
and by-laws of the corporation. (Rural Bank of amending, deleting or removing any of the aforesaid
Andaya v. Cabadbaran, G.R. No. 188769, 2016) provisions, at a meeting duly called for the purpose.
When Board Meeting Is Unnecessary Or Power To Buy-Back Shares Of Close

Improperly Held (Sec. 100) Corporations v. Appraisal Right In Stock
General Rule: Any action taken by the directors Corporations
without a board meeting shall be deemed INVALID. CLOSE CLOSE STOCK
Exception: The following shall nonetheless be valid CORP CORP CORP
despite the lack of a valid board meeting, unless the (Sec. 103 – (Sec. 104 –
by-laws provide otherwise Deadlocks) Withdrawal)
1. Before or after such action is taken, a Exercised by Exercised by Exercised by
written consent thereto is signed by all the the the the
directors; or corporation stockholder stockholder
2. All the stockholders have actual or implied Exercisable Exercisable There are
knowledge of the action and make no only in a for any reason certain
prompt objection in writing; or deadlock instances
3. The directors are accustomed to take situation where
informal action with the express or implied appraisal
rights can be
acquiescence of all the stockholders; or
exercised
4. All the directors have express or implied
Can be Available only Available only
knowledge of the action in question and directed either against the against the
none of them makes a prompt objection in against the corporation corporation
writing. corporation or
any other
An action within the corporate powers taken at a stockholder
meeting held without proper call or notice, is Available even Limited only in Unrestricted
deemed ratified by a director who failed to attend, without a situation retained
unless after having knowledge thereof, the unrestricted when the earnings are
director promptly files his written objection with the retained corporation required for
secretary of the corporation. earnings and has sufficient buyback to
not subject to assets in its happen,
(3) Preemptive Right any formula books generally
Pre-Emptive Rights Of Stockholders In Close

Corporations (Sec 101)

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Compelling Dissolution In Close Corporations v. professional, cultural, fraternal, literary, scientific,

Stock Corporations social, civic or other similar purposes. It may not
CLOSE CLOSE STOCK engage in undertakings such as the investment
CORP (Sec. CORP (Sec. CORP business where profit is the main or underlying
104) 105) purpose. Although the non-stock corporation may
SEC is given A stockholder Majority of the obtain profits as an incident to its operation such
express power must make a Board plus 2/3 profits are not to be distributed among its members
to dissolve a written petition stockholder but must be used for the furtherance of its purposes
close to the vote is (People v. Menil, G.R. No. 115054-66, 1999).
corporation dissolution required for
when there is dissolution The incurring of profit or losses does not determine
a deadlock whether an activity is for profit or non-profit, and the
situation courts will consider whether dividends have been
declared or its members or that is property, effects
b. Non-Stock Corporations or profit was ever used for personal or individual
gain, and not for the purpose of carrying out the
(1) Definition objectives of the enterprise (Manila Sanitarium and
A non-stock corporation is one where no part of its Hospital v. Gabuco, G.R. No. 13873, 1963).
income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of the In a mutual life insurance corporation, organized as
Corporation Code on dissolution a non-stock nonprofit corporation, the so-called
“dividend” that is received by members-
Any profit which a non-stock corporation may obtain policyholders is not a portion of profits set aside for
as an incident to its operations shall, whenever distribution to the stockholders in proportion to their
necessary or proper, be used for the furtherance of subscription to the capital stock of a corporation.
the purpose or purposes for which the corporation One, a mutual company has no capital stock to
was organized, subject to the provisions of this Title. which subscription is necessary; there are no
(Sec. 86) stockholders to speak of, but only members. And,
two, the amount they receive does not partake of the
Requisites: nature of a profit or income. The quasi-appearance
1. Does not have a capital stock divided into of profit will not change its character; it remains an
overpayment, a benefit to which the member-
share
policyholder is equitably entitled (Republic v. Sunlife
2. No part of its income is distributable as
Assurance Company of Canada, GR No. 158085,
dividends to its member 2005).
3. They must be formed or organized for
purposes specified in Sec. 87 Delinquency in Membership Dues of Non-Stock
Corporations
Conversion between Stock and Non-Stock A non-stock corporation may seize and dispose of
Corporation the membership share of a fully-paid member on
A non-stock corporation cannot be converted into a account of his unpaid monthly dues, when such
stock corporation through mere amendment of its corporation is authorized to do so under the by-laws,
Articles of Incorporation as this would be in violation even when no provision on the matter appears in the
of Section 87 which prohibits distribution of income articles of incorporation, and in spite of the fact that
as dividends to members. (SEC Opinion, 20 March Sec. 67 of Corporation Code on delinquency sale
1995) However, a non-stock corporation can be pertains to payment of shares subscription. (Valley
converted into a stock corporation only if the Golf v. De Caram, G.R. No. 155805, 2000)
members dissolve it first and then organize a stock
corporation. The result is a new corporation. (SEC Comparative Table: Stock v. Non-Stock
Opinion, 13 May 1992) Corporations
STOCK NON-STOCK
On the other hand, a stock corporation may be CORPORATION CORPORATION
converted into a non-stock corporation by mere Can they earn profit?
amendment provided all the requirements are Yes Yes
complied with. Its rights and liabilities will remain.
Theory on Non-Stock Corporations Distribution of Dividends

A non-stock corporation may only be formed or
organized for charitable, religious, educational,

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Yes No Term
Trustees shall hold office for a period of three (3)
years until their successors are elected and qualified
Name of “Constituents” (Sec. 91)
Stockholders Members
Qualifications of Trustees
Only ONE qualification under Sec. 92: Membership
Limitation to Purpose
in the corporation. Nonetheless, the member who
There can be May not include a may be elected as trustee may just be a nominee. A
secondary purposes purpose which would trustee who ceases to be a member of the
change or contradict corporation can no longer act as a trustee.
its nature in AOI
Kind of Board Note: An independent trustee of a non-stock
Board of Directors Board of Trustees corporation vested with public interest need not be
a member of such non-stock corporation (Sec. 91)
Number of Board Members
For stock corporations, the "quorum" referred to in
Must not be more than May be more than 15
Section 52 of the Corporation Code is based on the
15
number of outstanding voting stocks. For nonstock
EXC: Special
corporations, only those who are actual, living
corporations
members with voting rights shall be counted in
Term of Board Members
determining the existence of a quorum during
1 year 3 years, but AOI or members' meetings. Dead members shall not be
by-laws may provide counted. (Tan v. Sycip, G.R. No. 153468 August 17,
Constant terms otherwise 2006)
5 years - educational Purposes
institutions A non-stock corporation may be formed or
organized for the following purposes:
Staggered terms a. Charitable,
How Board Members are Elected b. Religious,
Elected by the Directly elected by the
c. Educational,
stockholders (per members, unless AOI
d. Professional,
Corp. Code) provides otherwise
Manner of Voting e. Cultural,
Straight or cumulative Straight voting, unless f. Recreation,
voting AOI or by-laws g. Fraternal,
provide otherwise h. Literary,
Can membership be transferred? i. Scientific,
Generally yes Generally no, EXC: if j. Social,
AOI or by-laws k. Civic Service,
provide otherwise l. Similar purposes, like trade, industry,
Can a stockholder/member disengage from agriculture and like chambers, or
the corporation? m. Any combination of thereof (Sec. 87)
Can sell to other Articles or by-laws
stockholders OR specifically provide for In the Articles of Incorporation, a non-stock
exercise of appraisal the method of corporation may not include a purpose which would
rights termination change or contradict its nature as such.
Number of Trustees (2) Treatment of Profits

A non-stock corporation may OR may not have
more than 15 trustees. Non-stock non-profit corporations may actually earn
profits incidentally from its operations, provided
Note: However, SEC has adopted a policy of that the profits are devoted to their purpose.
requiring registrant corporations to submit an
explanation if its articles or by-laws provide for more The mere fact that a non-stock corporation may earn
than 15 members of the Board. (Sec. 91) profit does not make it a profit-making corporation,
where such profit is used to carry out the purposes
set forth in the Articles of Incorporation and is not

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distributed to its incorporators, members, trustees, of distribution adopted pursuant to this

or officers. (SEC Opinion, 13 November 1990, XXIV Chapter;
SEC Quarterly Bulletin 63) 4. Assets other than those mentioned in the
preceding paragraphs, if any, shall be
Note: distributed in accordance with the
Despite its nomenclature, the essence of a non- provisions of the articles of incorporation or
stock non-profit corporation is not the non-existence
the by-laws, to the extent that the articles of
of shares of stock to cover its capital (it is legally
incorporation or the by-laws, determine the
possible for a corporation having capital stock to still
be considered a non-stock corporation), but that: distributive rights of members, or any class
a. Its primary purpose should be any of those or classes of members, or provide for
under Sec. 88 of the Corporation Code, and distribution; and
b. There is a prohibition in the articles of 5. In any other case, assets may be
incorporation and by-laws that no part of the distributed to such persons, societies,
income or any form of dividend is distributable organizations or corporations, whether or
to the members, trustees, and officers of the not organized for profit, as may be specified
corporation (CIR v. Club Filipino Inc. de Cebu, in a plan of distribution adopted pursuant to
G.R. No. L-12719, 1962) this Chapter.(Sec. 93)
i. Even though the corporation may
incidentally earn profits from its Plan of Distribution of Assets
A non-stock corporation in the process of dissolution
operations. (CIR v. University of
may adopt a plan providing for the distribution of
Visayas, G.R. No. L-13554, 1961)
assets, not inconsistent with the RCC, in the
following manner:
Plan And Distribution Of Assets Upon
Dissolution 1. The board of trustees shall, by majority
Rules of Distribution of Assets upon Dissolution
vote, adopt a resolution recommending a
The assets of a nonstock corporation undergoing
plan of distribution and directing the
the process of dissolution for reasons other than
those set forth in Section 139 of the RCC (every submission thereof to a vote at a regular or
corporation whose charter expires pursuant to its special meeting of members having voting
articles of incorporation, is annulled by forfeiture, or rights;
whose corporate existence is terminated in any 2. Each member entitled to vote shall be given
other manner) shall be applied and distributed as a written notice setting forth the proposed
follows: plan of distribution or a summary thereof
1. All liabilities and obligations of the and the date, time and place of such
corporation shall be paid, satisfied and meeting within the time and in the manner
discharged, or adequate provision shall be provided in this Code for the giving of notice
made therefore; of meetings; and
2. Assets held by the corporation upon a 3. Such plan of distribution shall be adopted
condition requiring return, transfer or upon approval of at least two-thirds (2/3) of
conveyance, and which condition occurs by the members having voting rights present
reason of the dissolution, shall be returned, or represented by proxy at such meeting.
transferred or conveyed in accordance with
such requirements; Note:
3. Assets received and held by the Although a non-stock corporation cannot distribute
corporation subject to limitations permitting incidental profits or dividends to its members,
their use only for charitable, religious, trustees and officers during its corporate term, in the
benevolent, educational or similar event of dissolution, after the payment of all
purposes, but not held upon a condition liabilities and return of assets received subject to
limitations permitting their use, the remaining assets
requiring return, transfer or conveyance by
may be distributed to the members, as provided for
reason of the dissolution, shall be
in the articles of incorporation of by-laws.
transferred or conveyed to one or more
corporations, societies or organizations In the absence of distribution rules, the remaining
engaged in activities in the Philippines assets may be distributed to such persons,
substantially similar to those of the societies, organizations, or corporations, whether
dissolving corporation according to a plan or not organized for profit, as may be specified in

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a plan of distribution as adopted by the Board of b. If owned by a corporation, at least 60%

Trustees and ratified by the members. of the capital must be owned by
Filipino citizens.
In a regular non-stock corporation it is possible for 2. The control and administration shall be vested
its net assets and accumulated “earnings” from its in citizens of the Philippines.
operations, to inure to the benefit of private 3. No educational institution shall be established
individuals (e.g., its own members) or entities, but exclusively for aliens. The 60% ownership
only as a consequence of dissolution. requirement does not apply to the following:
a. Educational institutions established by
Suppletory Effect religious groups and mission boards;
The provisions governing stock corporation, when b. Schools established for foreign
pertinent, shall be applicable to non-stock diplomatic personnel and their
corporations, except as may be covered by specific dependents;
provisions of this Title. c. Other foreign temporary residents
(unless otherwise provided by law)
c. Educational Corporations 4. No group of aliens shall comprise more than
1⁄3 of the enrollment in any school.
Educational corporations shall be governed by:
1. Special laws (e.g. “Education Act of d. Religious Corporations
1982”)
2. General provisions of the Revised (1) Corporation Sole
Corporation Code (Sec. 105)
Nationality
Term of Office Special form of corporation, usually associated with
Unless otherwise provided in the articles of the clergy and consists of one person only and his
incorporation or bylaws, the board of trustees of successors, who are incorporated by law to give
incorporated schools, colleges, or other institutions some legal capacities and advantages.
of learning shall, as soon as organized, so classify
themselves that the term of office of one- fifth (1/5) A corporation sole does not have any nationality but
of their number shall expire every year. Trustees for purposes of applying our nationalization laws,
thereafter elected to fill vacancies, occurring before nationality is determined by the nationality of the
the expiration of a particular term, shall hold office members (Roman Catholic Apostolic Church v.
only for the unexpired period. Trustees elected LRC, G.R. No. 8451, 1957).
thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. (Sec. 106) Composition
A corporation sole may be formed by the chief
NOTE: For institutions organized as stock archbishop, bishop, priest, minister, rabbi, or other
corporations, the number and term of directors shall presiding elder of such religious denomination, sect
be governed by the provisions on stock or church, for the purpose of administering and
corporations.(Sec. 106) managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or
Quorum church.
A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and Articles of Incorporation: Contents
authority of trustees shall be defined in the In order to become a corporation sole, the chief
bylaws.(Sec. 106) archbishop, bishop, priest, minister, rabbi, or
presiding elder of any religious denomination, sect
1987 Constitution Provisions or church must file with the SEC articles of
Article II, Sec. 17 of the Constitution: “The State incorporation setting forth the following:
shall give priority to education [...] to foster 1. That the applicant chief archbishop, bishop,
patriotism and nationalism, accelerate social priest, minister, rabbi, or presiding elder
progress, and promote total human liberation and represents the religious denomination, sect
development.” or church which desires to become a
corporation sole;
Article XIV, Sec. 4 of the Constitution requires: 2. That the rules, regulations and discipline of
1. That educational institutions shall be: the religious denomination, sect or church
a. Solely owned by Filipino citizens; OR are consistent with becoming a corporation
sole and do not forbid it;

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3. That such chief archbishop, bishop, priest, (G.R. No. 180067, 1984), that a corporation sole is
minister, rabbi, or presiding elder is disqualified to acquire/hold alienable lands of the
charged with the administration of the public domain, because of the constitutional
temporalities and the management of the prohibition qualifying only individuals to acquire land
affairs, estate and properties of the and the provision under the Public Land Act which
religious denomination, sect, or church applied only to Filipino citizens or natural persons,
within the territorial jurisdiction, so has been expressly overturned in Director of Lands
described succinctly in the articles of v. IAC (G.R. No. 66575 1986).
incorporation
4. The manner by which any vacancy A registered corporation sole can acquire land if its
occurring in the office of chief archbishop, members constitute at least 60% Filipinos. (SEC
bishop, priest, minister, rabbi, or presiding Opinion, 8 August 1994)
elder is required to be filled, according to
the rules, regulations or discipline of the Dissolution of a Corporation Sole
religious denomination, sect or church; and A corporation sole may be dissolved and its affairs
5. The place where the principal office of the settled voluntarily by submitting to the SEC a
corporation sole is to be established and verified declaration of dissolution, setting forth:
located, which place must be within the 1. The name of the corporation;
territory of the Philippines. 2. The reason for dissolution and winding up;
6. The articles of incorporation may include 3. The authorization for the dissolution of the
any other provision not contrary to law for corporation by the particular religious
the regulation of the affairs of the denomination, sect or church; and
corporation. (Sec. 109) 4. The names and addresses of the persons
who are to supervise the winding up of the
Note: The articles must be verified by affidavit or affairs of the corporation.
affirmation of presiding elder. Document that such
presiding elder was duly elected or appointed as Upon approval of such declaration of dissolution by
such and this document must be certified by notary the SEC, the corporation shall cease to carry on its
public. (Sec. 110) operations except for the purpose of winding up its
affairs. (Sec. 113)
Acquisition and Alienation of Property
A corporation sole may purchase and hold real (2) Religious Societies (Sec.
estate and personal property for its church, 114)
charitable, benevolent, or educational purposes,
and may receive bequests or gifts for such General Rule: Any religious society, religious order,
purposes. (Sec. 111) diocese, or synod, or district organization of any
religious denomination, sect or church, may
Such corporation may sell or mortgage real property incorporate for the:
held by it by obtaining an order for that purpose from 1. Administration of its temporalities or
the Regional Trial Court of the province where the 2. For the management of its affairs, properties,
property is situated upon proof that the notice of the and estate
application for leave to sell or mortgage has been
made through publication or as directed by the Exception: Unless forbidden by the competent
Court, and that it is in the interest of the corporation authority, the Constitution, pertinent,
that leave to sell or mortgage be granted. (Sec. 111) rules, regulations, or discipline of the religious
denomination, sect or church of which it is part
Note: In cases where the rules, regulations, and
discipline of the religious denomination, sect or How incorporated:
church, religious society, or order concerned • Upon written consent and/or by an
represented by such corporation sole regulate the affirmative vote at a meeting called for the
method of acquiring, holding, selling, and purpose of at least two-thirds (2/3) of its
mortgaging real estate and personal property, such membership,
rules, regulations and discipline shall govern, and • By filing with the Commission, articles of
the intervention of the courts shall not be necessary. incorporation
(Sec. 111) • Verified by the affidavit of the presiding
elder, secretary, or clerk or other member
The doctrine in Republic v. Villanueva (G.R. No. of such religious society or religious
55418-19, 1982) and Republic v. Iglesia ni Cristo

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denomination, sect or church, setting forth h. Natural person who is licensed to exercise
the following: a profession may not organize an OPC for
a) That the religious society or the purpose of exercising such a
religious order, or diocese, synod, profession.
or district organization is a
religious organization of religious Exception: unless otherwise provided by special
denomination, sect or church; laws. (Sec. 116)
b) That at least two-thirds (2/3) of its
membership has given written (2) Capital Stock Requirement
consent or has voted to (Sec. 117)
incorporate, at a duly convened
meeting of the body; General Rule: A One Person Corporation is not
c) That the incorporation of the required to have a minimum authorized capital
religious society or religious order, stock.
or diocese, synod, or district Exception: As otherwise provided by special law.
organization is not forbidden by
competent, authority or by the Note: Unless required by applicable laws or
Constitution, rules, regulations or regulations, no portion of the authorized capital is
discipline of the religious required to be paid up at the time of incorporation.
denomination, sect or church of (SEC Circular No. 7, Series of 2019)
which it forms part;
d) That the religious society or (3) Articles of Incorporation
religious order, or diocese, synod, and by-laws
or district organization desires to
incorporate for the administration Articles of incorporation and by-laws
of its affairs, properties and estate; Requirements for filing the Articles of Incorporation:
e) The place within the Philippines i. In accordance with Sec. 14 of the RCC.
where the principal office of the ii. If the single stockholder is a trust or an
corporation is to be established estate - the name, nationality, and
and located; and residence of the trustee, administrator,
f) The names, nationalities, and executor, guardian, conservator, custodian,
residence addresses of the or other person exercising fiduciary duties
trustees, not less than five (5) no together with the proof of such authority to
more than fifteen (15), elected by act on behalf of the trust or estate
the religious society or religious iii. Name, nationality, residence of the
order, or the diocese, synod or nominee and alternate nominee, and the
district organization to serve for extent, coverage and limitation of the
the first year or such other period authority. (Sec. 118)
as may be prescribed by the laws
of the religious society or religious Note: OPCs are NOT required to file their
order, or of the diocese, synod, or corporate bylaws. (Sec. 119)
district organization.
(4) Corporate Name
e. One Person Corporations
It should Indicate the letters “OPC” either below or
(1) Excepted Corporations at the end of their corporate name. (Sec. 120)
Excepted Corporations (5) Corporate Structure and

The following are not allowed to incorporate as Officers
OPC:
a. Banks, One Person Corporation (OPC) (Sec. 116)
b. Non-bank financial institutions, A corporation with a single stockholder
c. Quasi-banks,
d. Pre-need, Who may form
e. Trust, 1. Natural person – must be of legal age
f. Insurance public and publicly listed 2. Undertake in writing to faithfully administer
companies, the One Person Corporation’s funds to be
g. Non-chartered GOCCs; and received as treasurer

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3. To disburse and invest the same according Single stockholder allowed

to the articles of incorporation as approved a. Corporate secretary – Not allowed
by the SEC b. Treasurer – Yes allowed
Natural Person Condition - Give bond to the SEC in such a sum as

a. A foreign natural person may put up an may be required
OPC subject to applicable capital
requirement and constitutional and Bond Requirement as per SEC Memorandum 7-
statutory restrictions on foreign 2019:
participation in certain investment areas or ACS SURETY BOND
activities (SEC Memorandum 7-2019) COVERAGE
b. Trust – does not refer to a trust entity, but 1 to 1,000,000 1,000,000
the subject being managed by a trustee. If 1,000,001 to 2,000,000
the single stockholder is a trustee, 2,000,000
administrator, executor, guardian,
2,000,001 to 3,000,000
conservator, custodian, or other person 3,000,000
exercising fiduciary duties
3,000,001 to 4,000,000
i. Proof of authority to act on behalf
4,000,000
of the trust or estate must be
4,000,001 to 5,000,000
submitted at the time of
5,000,000
incorporation (SEC
Memorandum 7-2019) 5,000,001 and above Equal to the OPC’s
ACS
c. Estate
Who may not form • Bond shall be renewed every two (2) years
1. Banks and quasi-banks, non-bank financial or as often as may be required, upon review
institutions (SEC Memorandum 7-2019) of the Audited Financial Statements/
2. Pre-need, trust, insurance, public and Financial Statements certified under oath
publicly-listed companies by the company’s President/Treasurer
3. Non-chartered government-owned and - • Bond is a continuing requirement as long as
controlled the single stockholder is the self-appointed
4. Natural person who is licensed to exercise Treasurer of the OPC
a profession to form an OPC for the • Bond may be cancelled upon proof of
purpose of exercising such profession appointment of another person as the
Treasurer and Filing of Amended Form for
Exception: as provided under special laws Appointment of Officers
The single stockholder shall be the sole director

and president of the One Person Corporation. (Sec. Special Functions of the Corporate
121) Secretary(Sec. 123)
In addition to the functions designated by the One
When to appoint officers (Sec. 122) Person Corporation, the corporate secretary shall:
Within fifteen (15) days from the issuance of its a. Be responsible for maintaining the minutes
certificate of incorporation book and/or records of the corporation
b. Notify the nominee or alternate nominee of
Who to appoint the death or incapacity of the single
a. Treasurer stockholder
b. Corporate secretary c. Notice shall be given no later than five (5)
c. Other officers as may be deemed days from such occurrence
necessary d. Notify the SEC of the death of the single
stockholder
Who and when to notify e. Within five (5) days from such occurrence !!
Securities and Exchange Commission (SEC) f. State the names, residence addresses, and
a. within five (5) days from appointment contact details of all known legal heirs
b. using the Appointment Form as may be g. Call the nominee or alternate nominee and
prescribed by the SEC (SEC Memorandum the known legal heirs to a meeting and
7-2019) advise the legal heirs with regard to:
h. The election of a new director
i. Amendment of the articles of incorporation

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j. Other ancillary and/or consequential General rule: No minimum authorized capital stock
matters Exception: as otherwise provided by special law
(6) Nominee Required Paid Up Capital (SEC Memorandum 7-

2019)
1. Designated by a single stockholder General rule: No portion of authorized capital stock
2. In the event of the single stockholder’s is required to be paid up at the time of incorporation
death or incapacity, nominee takes the Exception: as otherwise required by applicable
place of the single stockholder as director laws or regulations
and shall manage the corporation’s affairs
3. Written consent of both nominee and Minutes And Records
alternate nominee (SEC Memorandum 7- A One Person Corporation shall maintain a minutes
2019) – to be attached in the application of book which shall contain all actions, decisions, and
incorporation resolutions taken by the One Person Corporation.
a. may be withdrawn in writing any (Sec. 127)
time before the death or incapacity
of the single stockholder When action is needed on any matter, it shall be
4. May be changed at any time sufficient to prepare a written resolution, signed and
a. by submitting to the SEC the dated by the single stockholder, and recorded in the
names of the new nominees and minutes book of the One Person Corporation. The
their corresponding written date of recording in the minutes book shall be
consent deemed to be the date of the meeting for all
b. Articles of Incorporation need NOT purposes under this Code. (Sec. 128)
be amended (SEC Memorandum
7-2019) (7) Liability (Sec. 130)
What shall be contained in articles of A sole shareholder claiming limited liability has the
incorporation with regard to the nominee and burden of affirmatively showing that:
alternate nominee 1. the corporation was adequately financed.
a. names 2. the property of the One Person Corporation
b. residence addresses is independent of the stockholder’s
c. contact details personal property.
d. extent and limitations of their authority
in managing the affairs of the One Person The principles of piercing the corporate veil applies
Corporation. with equal force to One Person Corporations as with
other corporations
Term of Nominee and Alternate Nominee (Sec.
125) (8) Conversion of Corporation
Incapacity of the single stockholder: to One Person Corporations
1. Temporary - until the stockholder, by self and Vice-Versa
determination, regains the capacity to assume such
duties. Conversion from an Ordinary Corporation to a
2. Death or Permanent - until the legal heirs of OPC (Sec. 131)
the single stockholder have been lawfully When a single stockholder acquires all the stocks of
determined, and the heirs have designated one of an ordinary stock corporation, the latter may apply
them or have agreed that the estate shall be the for conversion into a OPC, subject to the submission
single stockholder of the One Person Corporation of such documents as the SEC may require. If the
application for conversion is approved, the SEC
Alternate Nominee shall issue certificate of filing of amended articles of
• Shall sit as director and manage the One incorporation reflecting the conversion.
Person Corporation in case of the
nominee’s inability, incapacity, death, or
refusal to discharge the functions as Conversion from an OPC to an Ordinary Stock
director and manager of the corporation Corporation (Sec. 132)
• for the same term and under the same A One Person Corporation may be converted into
conditions applicable to the nominee an ordinary stock corporation after due notice to the
SEC of such fact and of the circumstances leading
Minimum Capital Stock Required For One to the conversion, and after compliance with all
Person Corporation (Sec. 117) other requirements for stock corporations under this

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Code and applicable rules. Such notice shall be filed organization. Isolated, occasional or casual
with the SEC within sixty (60) days from the transactions do not amount to engaging in business.
occurrence of the circumstances leading to the But where the isolated act is not incidental/casual
conversion into an ordinary stock corporation. If all but indicates the foreign corporation’s intention to do
requirements have been complied with, the SEC other business, said single act constitutes engaging
shall issue an amended certificate of incorporation in business in the Philippines.
reflecting the conversion.
a. Isolated Transactions Test: where a foreign
In case of death of the single stockholder, the corporation needs to obtain a license and fails
nominee or alternate nominee shall transfer the to do so, whether it should be denied legal
shares to the duly designated legal heir or estate standing to obtain remedies from local courts
within seven (7) days from receipt of either an and administrative agencies or not, depends
affidavit of heirship or self- adjudication executed by
therefore on the issue whether it will engage in
a sole heir, or any other legal document declaring
business in the Philippines. Not every activity
the legal heirs of the single stockholder and notify
the SEC of the transfer. Within sixty (60) days from undertaken in the Philippines amounts to doing
the transfer of the shares, the legal heirs shall notify business as to require a foreign corporation to
the SEC of their decision to either wind up and obtain such license.
dissolve the One Person Corporation or convert it
into an ordinary stock corporation. Single or isolated acts, contracts, or transactions of
foreign corporations are not regarded as a doing or
Note: The Converted Corporations shall succeed carrying on of business. Typical examples of these
the former corporation and be legally responsible for are the making of a single contract, sale, sale with
all the latter’s outstanding liabilities as of the date of the taking of a note and mortgage in the state to
conversion. secure payment thereof, purchase, or note, or the
mere commission of a tort. In these instances, there
f. Foreign Corporations is no purpose to do any other business within the
country (MR. Holdings, Ltd. V. Bajar, G.R. No.
A corporation formed, organized or existing under 138104, 2002).
any law other than those of the Philippines, and
whose laws allow Filipino citizens and corporations However: Where a single act or transaction is not
to do business in its own country or state. (Sec. 140) merely incidental or casual but indicates the foreign
corporation's intention to do other business in the
A foreign corporation is one which owes its Philippines, said single act or transaction constitutes
existence to the laws of another state, and doing business (Far East Int'l. v. Nankai Kogyo, G.R.
generally, has no legal existence within the state in No. 13525, 1962).
which it is foreign (Avon Insurance PLC v. Court of
Appeals, G.R. No. 97642, 1997). Need to Allege: The fact that a foreign corporation
is not doing business in the Philippines must be
A fundamental rule of international jurisdiction is that alleged, if a foreign corporation desires to sue in
no state can by its laws, and no court which is only Philippines courts under the “isolated transactions
a creature of the state, can by its judgments and rule” (Atlantic Mutual Inc. Co. v. Cebu Stevedoring
decrees, directly bind or affect property or persons Co., G.R. No. 18961, 1966); if not alleged, it can be
beyond the limits of that state (Time, Inc. v. Reyes, dismissed for lack of capacity to sue by the plaintiff
GR No. 28882, 1971). (Commissioner of Customs v. K.M.K. Gani, G.R. No.
73722, 1990).
(1) Bases of Authority Over
Foreign Corporations b. Twin Characterization Test (Mentholatum Co.
Inc v. Mangaliman G.R. No. 47701, 1941)
(a) Consent
It is the voluntary surrender of jurisdiction over its Substance Test: Consider the body or
person in a pending suit before the host state substance of the business or the enterprise for
(Salonga, Private International Law, 1979 ed., which it was organized or whether it has
p.344). substantially retired from it and turned it over to
(b) Doctrine of “Doing Business” another.
“Doing Business” with regard to Foreign Continuity Test: That doing business implies a
Corporations - Continuity of commercial dealings continuity of commercial dealings and
incident to prosecution of purpose and object of the arrangements and contemplates, to that extent, the

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performance of acts or works or the exercise of establishing commercial operations in the

some of the functions normally incidental to, and in Philippines. (Pioneer International, LTD v. Guadiz,
progressive prosecution of, the purpose and object G.R. No. 156848, 2007)
of its organization.
Does Not Include:
Taken together, doing business in the Philippines a. Mere investment as a shareholder by a foreign
must cover transactions and series of transactions entity in domestic corporations duly registered
in pursuit of the main business goals of the to do business, and/or the exercise of rights as
corporation and done with the intent to continue the such investor;
same in the Philippines. b. Having a nominee director or officer to
represent its interests in such corporation;
c. Contract Test: if the salient points of a contract
c. Appointing a representative or distributor
do not find themselves in the Philippines,
domiciled in the Philippines which transacts
Philippine authorities have no business
business in its own name and for its own
subjecting the parties to local registration and
account;
licensing requirements (Pacific Vegetable Oil
d. The publication of a general advertisement
Corp. v Singzon, G.R. No. 7917, 1955)
through any print or broadcast media;
e. Maintaining a stock of goods in the Philippines
“Doing Business” Under The Foreign
Investment Act and IRR solely for the purpose of having the same
processed by another entity in the Philippines;
“Doing Business” in the Philippines - Includes: f. Consignment by a foreign entity of equipment
a. Soliciting orders, service contracts, opening with a local company to be used in the
offices, whether called “liaison” offices or processing of products for export;
branches; g. Collecting information in the Philippines; and
b. Appointing representatives or distributors h. Performing services auxiliary to an existing
domiciled in the Philippines; isolated contract of sale which are not on a
continuing basis, such as Installing in the
Note: Includes “appointing representatives or Philippine machinery it has manufactured or
distributors in the Philippines” but not when the exported to the Philippines, servicing the same,
representative or distributor “transacts business in training domestic workers to operate it, and
its name and for its own account.” (Alfred Hahn v. similar incidental services.
CA, G.R. No.113074, 1997)
No foreign corporation transacting business in the
c. Participating in the management, supervision, Philippines without a license, or its successors or
or control of any domestic business, firm, entity, assigns, shall be permitted to maintain or intervene
or corporation in the Philippines; and in any action, suit or proceeding in any court or
d. Any other act or acts that imply a continuity of administrative agency of the Philippines; but such
commercial dealings or arrangements, and corporation may be sued or proceeded against
contemplate to that extent the performance of before Philippine courts or administrative tribunals
acts or works, or the exercise of some of the on any valid cause of action recognized under
functions normally incident to, and in Philippine laws (Lorenzo Shipping Corp. v. Chubb &
Sons, Inc., et al., G.R. No. 147724, 2004).
progressive prosecution of, commercial gain or
of the purpose and object of the business
(2) Necessity of a License to Do
organization Business
a. To place them under the jurisdiction of the
Note: “Doing business” was upheld against Pioneer courts
International for soliciting orders and service
b. To place them in the same footing as
contracts in the performance of acts that imply
domestic corporations
continuity of commercial dealings. Pioneer
International’s alleged acts in actively negotiating to c. Protection for the public in dealing with said
employ Todaro to run its pre-mixed concrete corporations.
operations in the Philippines, which acts are
hypothetically admitted in Pioneer International’s Requisites For Issuance Of License
motion to dismiss, are not mere acts of a passive A foreign corporation applying for a license to
investor in a domestic corporation. Such are transact business in the Philippines shall submit to
managerial and operational acts in directing and the SEC the following:

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1. A copy of its articles of incorporation and a. A certificate under oath duly executed
bylaws, certified in accordance with law and by the authorized official or officials of
their translation to an official language of the the jurisdiction of its incorporation,
Philippines, if necessary. attesting to the fact that the laws of the
2. The application shall be under oath and shall country or State of the applicant allow
specifically set forth the following: Filipino citizens and corporations to do
a. The date and term of incorporation; business therein, and that the applicant
b. The address, including the street is an existing corporation in good
number, of the principal office of the standing. If the certificate is in a foreign
corporation in the country or State of language, a translation thereof in
incorporation; English under oath of the translator
c. The name and address of its resident shall be attached to the application.
agent authorized to accept summons b. A statement under oath of the
and process in all legal proceedings president or any other person
and all notices affecting the authorized by the corporation, showing
corporation, pending the establishment to the satisfaction of the Commission
of a local office; and when appropriate, other
d. The place in the Philippines where the governmental agencies that the
corporation intends to operate; applicant is solvent and in sound
e. The specific purpose or purposes financial condition, setting forth the
which the corporation intends to assets and liabilities of the corporation
pursue in the transaction of its as of the date not exceeding one (1)
business in the Philippines: Provided, year immediately prior to the filing of
That said purpose or purposes are the application.
those specifically stated in the 4. Foreign banking, financial, and insurance
certificate of authority issued by the corporations shall, in addition to the above
appropriate government agency; requirements, comply with the provisions of
f. The names and addresses of the existing laws applicable to them.
present directors and officers of the 5. In the case of all other foreign corporations, no
corporation; application for license to transact business in
g. A statement of its authorized capital the Philippines shall be accepted by the
stock and the aggregate number of Commission without previous authority from the
shares which the corporation has appropriate government agency, whenever
authority to issue, itemized by class, required by law. (Sec. 142)
par value of shares, shares without par
value, and series, if any; (a) Resident Agent
h. A statement of its outstanding capital Who may be a Resident Agent
a. Individual residing in the Philippines of
stock and the aggregate number of
good moral character and of sound
shares which the corporation has
financial standing
issued, itemized by class, par value of
b. Domestic corporation lawfully transacting
shares, shares without par value, and
business in the Philippines, with a sound
series, if any;
financial standing and must show proof that
i. A statement of the amount actually
it is in good standing as certified by the SEC
paid in; and
(Sec. 144)
j. Such additional information as may be
necessary or appropriate in order to Service of Process upon a Foreign Corporation
enable the Commission to determine Through A Resident Agent
whether such corporation is entitled to Before a foreign corporation can be issued a license
a license to transact business in the to transact business in the Philippines, such
Philippines, and to determine and corporation must first file with the SEC
assess the fees payable. 1. A written power of attorney designating some
3. The application shall be accompanied by the person who must be a resident of the
following: Philippines, on whom any summons and other
legal processes may be served in all actions or

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other legal proceedings against such exercises its corporate powers. (Bitong v. CA, G.R.
corporation; No. 123553, 1998)
2. Consent that service upon such resident agent
shall be admitted and held as valid as if served (4) Suability of Foreign
upon the duly authorized officers of the foreign Corporations
corporation at its home office.
Every foreign corporation
a. Whenever such service of summons or
● Doing business in the Philippines with a license
other process is made upon the SEC,
may sue and can be sued in the Philippines
it must, within 10 days thereafter,
● Doing business in the Philippines without a
transmit by mail a copy of such
license cannot sue, but may be sued in the
summons or other legal process to the
Philippines
corporation at its home or principal
● Not doing business in the Philippines, or on
office. When SEC sends such copy, it
isolated transactions may sue and can be sued
shall constitute a necessary part of and
(if jurisdiction can be acquired)
shall complete such service
b. In case of a change of address of the
(5) Instances When Unlicensed
resident agent, it shall be his or its duty Foreign Corporations May
to immediately notify the SEC in be Allowed to Sue (Isolated
writing. (Sec. 145) Transactions)
3. Amendment of license (Sec. 148)
Instances When Unlicensed Foreign
A foreign corporation authorized to transact Corporations May Be Allowed To Sue:
business in the Philippines shall obtain an amended a. Isolated transactions;
license in the event it changes its corporate name, b. Action to protect good name, goodwill, and
or desires to pursue other or additional purposes in reputation of a foreign corporation;
the Philippines, by submitting an application with the c. The subject contracts provide that
Commission, favorably endorsed by the appropriate Philippine Courts will be venue to
government agency in the proper cases. controversies;
d. A license subsequently granted enables
Amendment of the Articles of Incorporation or
By-laws of Foreign Corporations the foreign corporation to sue on contracts
executed before the grant of the license
Sixty (60) days after the effectivity of the (Eriks Ltd. v. Court of Appeals, G.R. No.
amendment of the articles of incorporation or bylaws 118843, 1997);
of a foreign corporation authorized to transact e. Recovery of misdelivered property;
business in the Philippines, such foreign corporation f. Where the defendant is estopped.
shall, file with the Commission, and in the proper
cases, with the appropriate government agency, a The Intellectual Property Code provides that any
duly authenticated copy of the amended articles of foreign corporation not engaged in business in the
incorporation or bylaws, indicating clearly in capital Philippines and a national of a country which is a
letters or underscoring the change or changes party to any convention, treaty or agreement relating
made, duly certified by the authorized official or to intellectual property rights or the repression of
officials of the country or State of incorporation. unfair competition, to which the Philippines is also a
party or extends reciprocal rights, may sue in
Such filing shall not in itself enlarge or alter the trademark or service mark enforcement action
purpose or purposes for which such corporation is (Sehwani Inc v. In-n-Out Burger, G.R. No. 171053,
authorized to transact business in the Philippines. 2007).
(Sec. 147)
Rules Regarding A Foreign Corporation’s Right
(3) Personality to Sue to Bring Suit in the Philippines
(Agilent Technologies v. Integrated Silicon, G.R. No.
Section 35 enumerates the express powers of a 154618, 2004)
corporation, which includes the corporation’s ability
to sue and be sued.
The power of the corporation to sue and be sued in

any court is lodged with the board of directors that

ATENEO CENTRAL
FOREIGN CORP CAN FC SUE IN PH? a. Failure to file its annual report or pay any
STATUS fees as required by Code;
Doing business in Cannot sue before b. Failure to appoint and maintain a resident
Philippines without a Philippine courts agent;
license c. Failure to inform SEC of the change of
Not doing business in Can sue before resident agent or the latter’s change of
the Philippines Philippine courts on an address;
isolated transaction or d. Failure to submit a copy of amended
on a cause of action
articles of incorporation or by- laws; or
entirely independent
of any business articles of merger or consolidation;
transaction e. A misrepresentation of any material
Doing business in the Can sue before matters in reports;
Philippines without a Philippine courts due f. Failure to pay any and all taxes, imposts,
license, but Philippine to estoppel assessments or penalties;
citizen or entity has g. Engaged in a business not authorized by
contracted with said SEC;
corporation or derived h. Acting as a dummy of a foreign corporation
benefits from the not licensed to do business in the
Foreign Corporation Philippines; or
Doing business in the Can sue before i. Any other ground as would render it unfit to
Philippines and has Philippine courts on transact business in the Philippines.
the required license any transaction
Law applicable to Foreign Corporations (Sec.
Capability to Sue and Suability of Foreign 146)
Corporations W/N Doing Business A foreign corporation lawfully doing business in the
DOING BUSINESS IN THE NOT DOING Philippines shall be bound by all laws, rules and
PHILIPPINES BUSINESS regulations applicable to domestic corporations of
IN THE the same class, except:
PHILIPPINES 1. those which provide for the creation,
Licensed Unlicensed Isolated formation, organization or dissolution of
Transactions
corporations or
YES, can sue NO, cannot Yes, can sue; 2. those which fix the relations, liabilities,
sue; responsibilities, or duties of stockholders,
EXC: if members, or officers of corporations to
EXC: transactions each other or to the corporation.
estoppel exhibits intent
to do 13. Merger and Consolidation
business,
Foreign a. Concept
Corporation
needs license Merger
to sue A union whereby one or more existing corporations
YES, can be YES, can be sued are absorbed by another corporation that survives
sued and continues the combined business (Villanueva,
Qualifier: as long as 2018).
summons were properly
served (to acquire Consolidation
jurisdiction) The union of two or more existing corporations. A
new corporation is created, and consolidating
(6) Grounds for Revocation of corporations are extinguished. (PNB v. Andrada
License Electric & Engineering Co., G.R. No. 142936, [April
17, 2002], 430 PHIL 882-903)
Section 151 provides that the SEC may cancel the
certificate or license of a foreign corporation on any
of the following grounds:

ATENEO CENTRAL
Differentiating Merger from Consolidation binding only between them and cannot
MERGER CONSOLIDATION prejudice creditors who are not parties thereto.
A corporation A NEW corporation is (Y-I Leisure Philippines, Inc. et al. v James Yu,
ABSORBS another created, and G.R. No. 207161, 2015)
corporation and constituent
REMAINS IN corporations are NOTE: The sale under [Sec. 39] does not
EXISTENCE while the EXTINGUISHED. contemplate an ordinary sale of all corporate assets;
other is DISSOLVED the transfer must be of such degree that the
transferor corporation is rendered incapable of
The power to merge or consolidate is not within the continuing its business or its corporate purpose. (Y-
inherent powers of the corporation. Therefore, it I Leisure Philippines, Inc. et al. v James Yu, G.R.
must be expressly granted by law. No. 207161, 2015)
Merger or consolidation does not become effective However, not every transfer of the entire corporate
by mere agreement of the constituent corporations. assets would qualify under Section [39]. It does not
The approval of the SEC is required (PNB v. apply:
Andrada Electric & Engr. Co., Inc., G.R. No. 142936, (1) if the sale of the entire property and
2002) assets is necessary in the usual and regular
course of business of corporation, or
Mere Acquisition/Transfer (3 Levels) (2) if the proceeds of the sale or other
MERGER/CONSOLIDATION TRANSFER OF disposition of such property and assets will
PROPERTY be appropriated for the conduct of its
Loss of separate existence by A NEW remaining business.
the absorbed corporation (in corporation is Thus, the litmus test to determine the applicability of
mergers) or the constituent created, and Section [39] would be the capacity of the corporation
corporations (in constituent to continue its business after the sale of all or
consolidation) corporations are substantially all its assets.(Y-I Leisure Philippines,
EXTINGUISHED. Inc. et al. v James Yu, G.R. No. 207161, 2015)
1) Assets-Only Level. 3) Equity Level. Purchaser takes control of the

General Rule: A corporation that purchases the business by purchasing the shareholdings.
assets of another will not be liable for the debts Purchasing corporation is still protected by the
and liabilities of the selling corporation provided limited liability feature but the same can be
the former acted in good faith. pierced.
Except, when the following circumstances are
present: In order to transfer ownership of shares of stock not
1. where the purchasers expressly or traded in the Stock Exchange, it is necessary to
impliedly agrees to assume the debts secure a Certificate of Authorizing Registration
2. where the selling corporation fraudulently (CAR) pursuant to the process laid down in RMO
enters into the transactions to escape No. 15-03. The receipts of the payment of the tax
liability for those debts should also be filed with and recorded by the
3. where the purchasing corporation is merely secretary of the corporation pursuant to Section 11
a continuation of the selling corporation of RR. No. 06-08.
4. where the transaction amounts to a
consolidation or merger of the corporations b. Constituent Corporation vs.
(Edward J. Nell Co. v Pacific Farms Inc., G.R. Consolidated Corporation
No. L-20850, 1965)
CONSTITUENT CONSOLIDATED
2) Business Enterprise Level. Purchase of CORPORATION CORPORATION
substantially all the assets of the corporation The corporations that The corporation
extending to its “going concern” (ability to do shall cease to exist formed after the
business and make money, goodwill, clientele, after joining together consolidation of two
stock-in-trade, etc). There is case law, based on through consolidation constituent
(Bank of Commerce v. corporations
equity, that holds the transferee liable for the
Radio Philippines
debts and liabilities of the transferor. A “free
Network, Inc., G.R.
and harmless clause” holding the transferee No. 195615, [April 21,
free from the liabilities of the transferor is 2014], 733 PHIL 491-

ATENEO CENTRAL
581) names of the iii. As to each corporation, the number of

corporations shares or members voting for or
proposing to merge or against such plan, respectively;
consolidate, iv. The carrying amounts and fair values
hereinafter referred to of the assets and liabilities of the
as the constituent respective companies as of the agreed
corporations
cut-off date;
v. The method to be used in the merger
The constituent corporations shall become a single
or consolidation of accounts of the
corporation which, in case of merger, shall be the
surviving corporation designated in the plan of companies;
merger; and, in case of consolidation, shall be the vi. The provisional or pro-forma values, as
consolidated corporation designated in the plan of merged or consolidated, using the
consolidation accounting method; and
vii. Such other information as may be
c. Plan of Merger or Consolidation prescribed by the SEC.
(Sec. 75)
Procedure Of Consolidation Or Merger
The plan of merger or consolidation shall set forth STEP 1: Drawing up of the Plan of Merger or
the ff: Consolidation (Sec. 75)
1) The names of the constituent corporations; The board of constituent corporations shall draw up
2) The terms of the merger or consolidation a plan of merger or consolidation. It shall contain the
and the mode of carrying the same into following:
effect; a. The names of the constituent
3) A statement of the changes, if any, in the corporations;
articles of incorporation of the surviving b. The terms of the merger or
corporation in case of merger; and, in case consolidation and the mode of carrying
of consolidation, all the statements required the same into effect;
to be set forth in the articles of incorporation c. A statement of the changes, if any, in
for corporations organized under this Code; the articles of incorporation of the
and surviving corporation in case of
4) Such other provisions with respect to the merger; and, in case of consolidation,
proposed merger or consolidation as are all the statements required to be set
deemed necessary or desirable. forth in the articles of incorporation for
corporations organized under this
Note: The plan of merger has to be approved by Code; and
majority of the board of each constituent d. Such other provisions with respect to
corporation; it has to be approved by affirmative vote the proposed merger or consolidation
of stockholders representing ⅔ of the outstanding as are deemed necessary or desirable.
capital stock or ⅔ of the members in case of a non-
stock corporation. STEP 2: Board Approval (Sec. 75)
The plan of merger or consolidation shall be
d. Articles of Merger or approved by majority vote of each of the boards of
Consolidation (Sec. 78) the corporations involved at separate meetings;
The articles must be signed by the president or vice STEP 3: Stockholders’ or Members’ Approval
president and certified by the secretary or assistant (Sec. 76)
secretary setting forth: 1. Notice of such meeting should be given to
i. The plan of the merger or the plan of all stockholders or members at least 1 week
consolidation; before the meeting.
ii. As to stock corporations, the number of 2. The plan has to be approved by a vote of
shares outstanding, or in the case of stockholders representing ⅔ of the
non-stock corporations, the number of outstanding capital stock, if a stock
members; corporation, or ⅔ of the members of the
non- stock corporation.

ATENEO CENTRAL
3. Dissenting stockholders may exercise their the opportunity to be heard. Written notice
right of appraisal. However, if the board of the date, time and place of hearing shall
abandons the plan, such right is be given to each constituent corporation at
extinguished. least two (2) weeks before said hearing.
4. Any amendment to the plan must be
approved by the same votes of the board e. Effects
members or trustees and stockholders or
members required for the original plan. A merger does not become effective upon the mere
agreement of the constituent corporations, but open
STEP 4: Articles of Merger or Consolidation approval of the articles of merger by the SEC issuing
(Sec. 77) the certificate of merger as required by Section 79
Once the required number of stockholders or of the Corporation Code (Bank of Commerce v.
members approved of the plan, Articles of Merger or Heirs of Rodolfo dela Cruz).
Articles of Consolidation shall be executed by each
of the constituent corporations, to be signed by the Effects of Merger or Consolidation
president or vice-president and certified by the 1. Constituent corporations become a single
secretary or assistant secretary of each corporation, corporation
setting forth: a. Merger: surviving corporation
a. The plan of the merger or the plan of b. Consolidation: consolidated
consolidation; corporation under
b. As to stock corporations, the number of the plan of
shares outstanding, or in the case of consolidation
non-stock corporations, the number of 2. Separate existence of constituent
members; corporations cease EXCEPT that of the
c. As to each corporation, the number of surviving or consolidated corporation
shares or members voting for or against 3. Surviving or consolidated corporation
such plan, respectively; possesses the rights privileges immunities;
d. The carrying amounts and fair values of and powers and is subject to all duties and
the assets and liabilities of the liabilities of a corporation organized under
respective companies as of the agreed this Code
cut-off date; 4. ALL of the following are deemed
e. The method to be used in the merger or transferred to and vested in such surviving
consolidation of accounts of the or consolidated corporation:
companies; (BY OPERATION OF LAW)
f. The provisional or pro-forma values, as a. Rights
merged or consolidated, using the b. Privileges
accounting method; and c. Immunities
g. Such other information as may be d. Franchises of each constituent
prescribed by the SEC. corporation
e. Real or personal property
STEP 5: Approval by the SEC f. Receivables due on whatever
The Articles of Merger or Articles of Consolidation account (hence
shall be submitted to the SEC for approval. surviving/consolidated corp has
However, in the case of special corporations, like the power to file an action for
banks, insurance companies, building and loan
recovery) including:
associations, etc., the favorable recommendation of
i. subscriptions to shares
the appropriate government agency shall first be
obtained. and other choses in
1. If the SEC is satisfied that the merger or action
consolidation of the corporations ii. and every other interest
concerned is legal, it shall issue a certificate of, belonging to, or due to
of merger or of consolidation, at which time each constituent
the merger or consolidation shall be corporation
effective. 5. Regarding liabilities and pending claims:
2. If the SEC is not satisfied, it shall set a a. Liabilities and obligations of each
hearing to give the corporations concerned constituent corporation:

ATENEO CENTRAL
i. Surviving or consolidated Merger or acquisition agreements that substantially

corporation shall be prevent, restrict or lessen competition in the relevant
responsible market or in the market for goods or services as may
b. Pending claim, action or be determined by the Commission shall be
proceeding brought by or against prohibited. (Sec. 20 of R.A. no. 10667)
any constituent corporation
Exemptions: Notwithstanding such prohibition, the
i. may be prosecuted by or
PCC would allow such merger or acquisition
against the surviving or
provided the parties prove the following:
consolidated corporation
c. The rights of creditors or liens (a) The concentration has brought about or is likely
upon the property of such to bring about gains in efficiencies that are greater
constituent corporations are not than the effects of any limitation on competition that
impaired result or likely to result from the merger or
d. Employee contracts acquisition agreement; or
Limitations of Merger or Consolidation (b) A party to the merger or acquisition agreement is

Under the Philippine Competition Act (R.A. no. faced with actual or imminent financial failure, and
10667), the Philippine Competition Commission can the agreement represents the least anti-competitive
review the mergers and acquisitions of a arrangement among the known alternative uses for
corporation/s based on the factors it deems to be the failing entity’s assets.(Sec. 21 of R.A. no. 10667)
relevant. (Sec. 16 of R.A. no. 10667)
-- end of topic --
Parties to a merger or acquisition agreement without
complying with the thresholds are prohibited from
consummating their agreement until thirty (30) days
after providing notification to the Commission in the
form and containing the information specified in the
regulations issued by the Commission. A
transaction that meets the thresholds and does not
comply with the notification requirements and
waiting periods set out in Section 5 shall be
considered void and will subject the parties to an
administrative fine of one percent (1%) to five
percent (5%) of the value of the transaction. (Sec.
17 of R.A. no. 10667; PCA Rule 4, as amended by
PCC Resolution No. 02-2020)
Thresholds for compulsory notification

M&A transactions whose definitive agreements are
executed on or after 1 March 2020 will be subject to
mandatory notification to the PCC if they meet the
ff. thresholds:
SIZE OF (i) the aggregate annual gross

PARTY revenues in, into or from the
Philippines, or (ii) the value of the
assets in the Philippines of the
ultimate parent entity (UPE) of
either the acquiring or acquired
entities exceeds PhP 6 billion
SIZE OF The size of transaction will be met

TRANSAC if the transaction value, as
TION determined below, exceeds PhP
2.4 billion.

ATENEO CENTRAL
II. BANKING A. THE NEW CENTRAL BANK ACT
1. State Policies
TOPIC OUTLINE UNDER THE SYLLABUS:
a. The State shall maintain a central monetary
A. THE NEW CENTRAL BANK ACT
authority which is the Bangko Sentral ng
1. State Policies Pilipinas (BSP)
2. Monetary Board and its Powers and b. The BSP is an independent and
Functions accountable body corporate.
3. The Bangko Sentral ng Pilipinas and c. The mandated responsibilities are in the
Banks in Distress field of money, banking, and credit.
a. Conservatorship d. The BSP is a government-owned
b. Closure corporation with fiscal and administrative
c. Receivership autonomy. (Sec 1, New Central Bank Act
d. Liquidation [hereinafter “NCBA”])
B. GENERAL BANKING LAW OF 2000 The State’s central monetary authority is charged
1. Definition and Classification of Banks with the responsibility of administering the
2. Distinction of Banks from Quasi-Banks monetary, banking, and credit system of the country
and Trust Entities and is granted the power of supervision and
3. Nature of Bank Funds and Bank examination over bank and non-bank financial
Deposits institutions performing quasi-banking functions,
4. Diligence Required of Banks including savings and loan associations. (Busuego
5. Prohibited Transactions by Bank v. Court of Appeals [CA], G.R. No. 95326, 1999)
Directors and Officers
6. Stipulation on Interests 2. Monetary Board, Powers And
Functions
C. SECRECY OF BANK DEPOSITS
1. Purpose The Monetary Board is a seven (7) man body
2. Prohibited Acts appointed by the President through which the
3. Deposits Covered powers and functions of the BSP are exercised. Its
members shall serve a term of six (6) years, and no
4. Exceptions from Coverage
member shall be reappointed more than once. (Sec.
5. Garnishment of Deposits, including
6, NCBA)
Foreign Deposits
Composition
D. ANTI-MONEY LAUNDERING ACT
a. Chairman who is the BSP Governor;
1. Policy b. A cabinet member to be designated by the
2. Covered Institutions and Their President of the Philippines;
Obligations c. 5 Members who shall come from the private
3. Covered Transactions sector, all of whom shall serve full time (Id.)
4. Suspicious Transactions
5. Safe Harbor Provision While Sec. 6(a) of the NCBA requires that the
6. Money Laundering (How Committed; Governor be subject to confirmation by the
Unlawful Activities or Predicate Crimes) Commission on Appointments, he is not among
7. Anti-Money Laundering Council and its government officials expressly mentioned in Sec.
Functions 16, Article VII of the Constitution who should be
8. Authority to Inquire into Bank Deposits confirmed. (Tarrosa vs. Singson, G.R. No. 111243,
9. Freezing of Monetary Instrument or 1994)
Property
Vacancies
Any vacancy in the Monetary Board created by the
death, resignation, or removal of any member shall
be filled by the appointment of a new member to
complete the unexpired period of the term of the
member concerned. (Sec. 7, NCBA)

ATENEO CENTRAL
Qualifications
a. Natural-born citizens of the Philippines; Indemnification
b. At least 35 years of age; (except the They shall be indemnified for any and all liabilities,
Governor, who should be at least 40 years losses, claims, demands, damages, deficiencies,
of age) costs and expenses of whatsoever kind and nature
c. Of good moral character; that may arise in connection with the exercise of
d. Of unquestionable integrity; their powers and performance of their duties and
e. Of known probity and patriotism; and functions. (Id.)
f. With recognized competence in social and
economic disciplines (Sec. 8, NCBA) Exception: Their actions or omissions are finally
adjudged to be in willful violation of the BSP Charter,
Disqualifications performed in evident bad faith, or with gross
a. Disqualifications imposed by R.A. No. 6713 negligence. (Id.)
– Code of Conduct and Ethical Standards
for Public Officials; The legal obligations of diligence and good faith that
b. Disqualified from being a director, officer, BSP officials owe to the public start with the official
employee, consultant, lawyer, agent or acts of the Monetary Board which, rightly or wrongly,
stockholder of any bank, quasi-bank or any are the cause of loss or injury to third parties, not
other institution which is subject to any preparatory report or recommendation.
supervision or examination by the BSP; (Borlongan v. Reyes, G.R. No. 161726, 2005)
c. Members coming from the private sector
shall not hold any other public office or Removal of Members of the Monetary Board
public employment during their tenure. The President may remove any member of the
d. Person who has been connected directly Monetary Board for any of the following reasons:
with any multilateral banking or financial a. The member no longer possesses the
institution or has a substantial interest in qualifications under NCBA, Sec. 8;
any private bank in the Philippines, within 1 b. The member is guilty of acts or operations
year prior to his appointment; which are fraudulent or illegal;
e. No member shall be employed in any such c. The member is physically, or mentally
institution within 2 years after the expiration incapacitated and such incapacity lasted
of his term (compared with the one year for more than 6 months;
prohibition for ordinary public official under d. The member is subsequently disqualified
R.A. No. 6713 and R.A. No. 3019) except under NCBA, Sec. 9. (Sec. 10, NCBA)
when he serves as an official
representative of the Philippine Powers and Functions of the Monetary Board
Government to such institution; and a. Issue rules and regulations;
f. Person who has substantial interest in any b. Direct the management, operations, and
private bank in the Philippines, within 1 year administration of the BSP;
prior to his appointment. (Sec. 9, NCBA) c. Establish a human resource management
system;
Degree of Diligence d. Adopt its annual budget and authorize
The degree of diligence required of Monetary Board expenditures;
Members, BSP Officials, and Employees, is now e. Indemnify its members and other officials of
aligned with that required of public officers under the BSP against all costs and expenses
Sec. 38 and 39 of Chapter 9, Book I of the Revised reasonably incurred by such persons by
Administrative Code of 1987 (previously it was reason of the performance of their functions
“extra-ordinary diligence”). They cannot be liable for or duties in accordance with the free and
acts done in the performance of their official duties harmless, and indemnification clause.
“unless there is a clear showing of bad faith, malice (Secs. 15 and 16, NCBA)
or gross negligence.” (Sec. 16, NCBA) The former
requirement of extraordinary diligence was Myriad of functions
already amended. BSP is an administrative agency which exercises
"powers and/or functions which may be
General Rule: characterized as administrative, investigatory,
Free and Harmless regulatory, quasi-legislative, or quasi-judicial.”
BSP, members of the Monetary Board, and its other (Bank of Commerce v. Planter’s Development Bank,
personnel, are held free and harmless to the fullest G.R. Nos. 154470-71 and 154589-90, 2012)
extent permitted by law from any liability. (Sec. 16,
NCBA)

ATENEO CENTRAL
When the Monetary Board exercises its quasi- withdrawals may be considered as suffering from
judicial powers or functions, it has the power to issue liquidity problems.
subpoena, to sue for contempt those refusing to
obey the subpoena without justifiable reason, or Status of the Bank
administer oaths and compel presentation of books, A bank placed under conservatorship remains open
records, and others, needed in its examination, to but under the management and control of the
impose fines and other sanctions and to issue cease conservator. On the other hand, when a bank is
and desist order. The BSP Monetary Board can ordered closed by the Monetary Board, it is taken
exercise discretion in determining whether over by the PDIC as statutory “receiver”, and the
administrative sanctions should be imposed on PDIC is directed to proceed with the liquidation.
banks and quasi-banks. (UCPB v. Ganzon, G.R. No. (Sec. 30(d), NCBA; Sec. 12, New PDIC Charter)
168859, 2009; Sec. 37, NCBA)
Decisions appealable to the Court of Appeals Qualifications of a Conservator

Any petition for certiorari against an act or omission The conservator should be competent and
of BSP, when it acts through the Monetary Board, knowledgeable in bank operations and
must be filed with the Court of Appeals. (Vivas vs. management. (Id.)
Monetary Board, G.R. No. 191424, 2013).
The Monetary Board has exclusive power to
Note: This is a petition for review on certiorari over designate the conservator. (Koruga v. Arcenas,
decisions of quasi-judicial bodies (Monetary Board) G.R. Nos. 168332, 2009)
under Rule 43 of the Rules of Court. This is different
from a special petition for certiorari (similar to Rule Duration of Conservatorship
65) for bank closures under Sec. 30 of the NCBA, Shall not exceed 1 year (Sec. 29, NCBA)
which should likewise be filed with the Court of
Appeals. Powers of a Conservator:
a. To take charge of the assets, liabilities, and
the management thereof;
3. The Bangko Sentral Ng Pilipinas b. Reorganize the management;
And Banks In Distress c. Collect all monies and debts due said
institution;
Methods d. Exercise all powers necessary to restore its
a. Conservatorship viability;
b. Closure (placement under Receivership e. Report and be responsible to the Monetary
and Liquidation) Board; and
f. Where necessary, overrule or revoke the
a. Conservatorship actions of the previous management and
board of directors of the bank or quasi-
A tool in restoring the viability of a bank or quasi- bank. (Id.)
bank through measures to address its state of
illiquidity. For this purpose, the Monetary Board may A bank conservator appointed by the BSP has no
appoint a conservator. (Sec. 29, NCBA) power to unilaterally rescind contracts entered into
by the previous management. The power to revoke
Appointment of Conservator cannot extend to post-facto repudiation of perfected
A conservator is appointed based on a report transactions otherwise they would infringe against
submitted to the Monetary Board by the appropriate the non-impairment clause of the Constitution. The
supervising or examining department showing that law merely gives the conservator the power to file
the bank or quasi-bank is in a state of illiquidity court actions to revoke contracts that are defective
which is not adequate to protect the interest of – void, voidable, unenforceable, or rescissible.
depositors and creditors. (Id.) (Producers Bank v. NLRC, G.R. No. 118069, 1998;
First Philippine International Bank v. CA, G.R. No.
Liquidity 115849, 1996)
Ability to pay off obligations when they fall due.
Remuneration of a Conservator
An institution which fails to pay its matured General Rule: The conservator shall receive
obligations or meet the normal demands of remuneration in an amount not to exceed 2/3 of the
withdrawals for deposits due to insufficient cash, or salary of the president of the institution (i.e. the bank
resorts to intermittent/staggered payments or

ATENEO CENTRAL
under conservatorship) in 1 year, payable in 12 liquidation, and the same is also true for
equal monthly payments. “receivership” and “liquidation”
Exception: A conservator connected with the BSP, The appointment of a receiver operates to suspend
in which case said conservator shall not be entitled the authority of the bank and of its directors and
to receive any remuneration or emolument (Sec. 29, officers over its property and effects. (Villanueva v.
NCBA) CA, G.R. No. 114870, 1995)
Note: If at any time within one-year period, the c. Receivership

conservatorship is terminated on the ground that the
institution can operate on its own, the conservator Requisites for Placement of a Bank under
shall receive the balance of the remuneration which Receivership
he would have received up to the end of the year; 1. Report of the head of the supervising
but if the conservatorship is terminated on other department involving the bank, it need not
grounds, the conservator shall not be entitled to be a report of examination (Rural Bank of
such remaining balance. (Id.) San Miguel vs. MB, (516 S.C.R.A. 154);
2. Finding of the Monetary Board of the
Expenses existence of any of the grounds for
The expenses attendant to the conservatorship receivership;
shall be borne by the bank or quasi-bank concerned. 3. Decision of the Monetary Board to forbid
(Id.) the institution from doing business which
decision may be done summarily and
Termination of Conservatorship without need of prior hearing; and
a. When the Monetary Board is satisfied that 4. Notice in writing to the Board of Directors
the institution can continue to operate on its informing the institution of the Order of the
own and the conservatorship is no longer Monetary Board.
necessary;
b. When the Monetary Board determines that Grounds for Receivership
the continuance in business of the When the Monetary Board finds that a bank or
institution would involve probable loss to its quasi-bank:
depositors or creditors, in which case, a. Notified the BSP or publicly announced a
proceedings for receivership and liquidation unilateral closure; (Sec. 30[a], NCBA)
shall be pursued. (Id.) b. Has been dormant for at least sixty (60)
days; (Id.)
c. Suspended the payment of its deposit or
b. Bank Closure (Receivership and deposit substitute liabilities (Sec. 30 [a],
Liquidation) NCBA, as amended, which superseded
the requirement of “continuously for more
Whenever the Monetary Board finds the existence than 30 days” under GBL, Sec 53)
of any of the grounds under Section 30 of The New d. Is unable to pay its liabilities as they
Central Bank Act, it may summarily and without become due in the ordinary course of
need for prior hearing forbid the bank and quasi- business.
bank from further doing business in the Philippines,
and place the institution under receivership. The Exception: Inability to pay caused by
same authority may also be exercised over non- extraordinary demands induced by
stock savings and loan associations based on the financial panic in the banking community
same applicable grounds. The PDIC manages the (bank run). (Sec. 30[a], NCBA)
affairs of the closed bank and preserves its assets
for the benefit of creditors. (Sec. 10[a][b], New PDIC e. Has insufficient realizable assets as
Charter) determined by the BSP to meet its
liabilities; (Sec. 30[b], NCBA)
Note: Once the Monetary Board closes a bank, the f. Cannot continue business without
PDIC as the statutory receiver shall immediately involving probable losses to its depositors
proceed with the bank’s liquidation (Sec. 30[d], and creditors; (Sec. 30[c], NCBA)
NCBA, as amended). The terms “receiver” and g. Has willfully violated a cease-and-desist
“liquidator” may be used interchangeably for order under NCBA, Sec. 37
purposes of bank closure and involuntary (Administrative Sanctions) that has
become final and involves acts or

ATENEO CENTRAL
transactions which amount to fraud or a Judicial Remedy from the decision of the
dissipation of assets; (Sec. 30[d], NCBA) Monetary Board of BSP placing a bank under
h. Persistence in conducting its business in conservatorship, receivership, or liquidation
an unsafe or unsound manner. (Sec. 56,
GBL) Final and Executory. The action of the Monetary
Board in placing a bank under conservatorship or
Close Now-Hear Later Doctrine placing it under receivership and liquidation shall be
The provision under Sec. 30 of the NCBA that the final and executory and, as a general rule, may not
Monetary Board may summarily and without need be restrained or set aside by the court.
for prior hearing forbid the institution from doing
business in the Philippines is a statutory Nature of Action
enactment based on jurisprudence. Due process A petition for certiorari on the ground that the action
does not necessarily require prior hearing; a hearing taken was in excess of jurisdiction or with such
or an opportunity to be heard may be subsequent to grave abuse of discretion as to amount to lack or
closure. One can just imagine the dire excess of jurisdiction.
consequences of a prior hearing; bank runs would
be the order of the day, resulting in panic and Petitioner and period to file
hysteria. In the process, fortunes may be wiped out Petition is filed by the stockholders of record
and disillusionment will run the gamut of the entire representing the majority of the capital stock within
banking community. (Rural Bank of Buhi, Inc. vs. ten (10) days from receipt by the board of directors
CA, G.R. No. L-61689, 1988) of the institution of the order directing receivership,
liquidation, or conservatorship. (Sec. 30, NCBA)
The purpose is to prevent unwarranted dissipation
of the bank’s assets and as a valid exercise of the Court of Appeals
police power to protect the depositors, creditors, The petition for certiorari must be filed with the CA,
stockholders, and the general public. (Central Bank not the SC, in accordance with Rule 65, since the
of the Philippines v. CA, G.R. No. 72200, 1993) Monetary Board is a quasi-judicial agency. (Vivas,
et al. v. Monetary Board, G.R. No. 191424, 2013)
d. Liquidation
Note: Other decisions of the Monetary Board acting
The recovery and conversion of assets into cash for as a quasi-judicial body can be elevated to the Court
distribution to all creditors in accordance with the of Appeals by way of a petition for review under Rule
rules on concurrence and preference of credits. 43.
PDIC is the receiver and liquidator (AM No. 19-12-
02-SC, Sec. 1 (m), Rule 2). Involuntary dissolution and liquidation
CORPORATION NCBA (MONETARY
Types of Liquidation CODE (SEC) BOARD, PDIC)
a. Voluntary liquidation FILING OF COMPLAINT
In case of the voluntary liquidation of any Requires filing of a Monetary Board may
bank organized under the laws of the verified complaint and summarily and without
Philippines, or of any branch or office in the proper notice and need for prior hearing,
Philippines of a foreign bank, written notice hearing forbid the bank from
of such liquidation shall be sent to the doing business
Monetary Board before such liquidation is PRIOR TO DISSOLUTION
undertaken, and the Monetary Board shall Requires a BIR Tax PDIC shall immediately
have the right to intervene and take such Clearance; SEC shall gather and take charge
steps as may be necessary to protect the issue final order of of all its assets and
interests of creditors. (Sec. 68, GBL) dissolution after liabilities
submission of tax
b. Involuntary Liquidation (Sec. 30, NCBA) clearance
AUTHORITY OF THE CORPORATION
Modes of Liquidation IN THE DISSOLUTION
a. Conventional liquidation. Corporation is allowed Bank is not given the
b. Purchase of Assets and/or Assumption of to undertake its own option to undertake its
Liabilities liquidation or at any own liquidation
time during 3 years
after its dissolution

ATENEO CENTRAL
(In re: Petition for Assistance in the Liquidation of more money and precious time (Carandang
the Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, v. CA, G.R. No. L-44932, 1988); and
G.R. No. 158261, 2006) c. When the issue is the validity of contracts
upon which a claim is based.
Nature of the Proceedings in Petition for
Assistance in Liquidation Note: Even if the case falls within the exceptions,
A liquidation proceeding is a special proceeding, the claimant should still file the adjudicated claim
and a proceeding in rem. Jurisdiction over all with the liquidator or liquidation court for processing
persons affected by the proceedings shall be of claims to determine the proper concurrence and
considered acquired upon publication of the order preference of credit among the different creditors of
setting the Petition for Assistance in Liquidation for the bank. (Cudiamat v. Batangas Savings Bank,
initial hearing (Rules on Liquidation of Closed G.R. No. 182403, 2010)
Banks, Rule 3, Sec. 1, 2020).
Termination of the Proceedings
Exclusive Jurisdiction of the Liquidation The finality of the resolution approving the final
Court Asset Distribution Plan shall usher in the winding up
Liquidation court refers to the regional trial court phase under the PDIC Charter and the termination
designated as Special Commercial Court where the of the liquidation proceeding (Rules on Liquidation
Petition for Assistance in the Liquidation of a closed of Closed Banks, Rule 10, Sec. 1, 2020).
bank is filed by the PDIC and given due course. It
has exclusive jurisdiction to adjudicate disputed B. GENERAL BANKING LAW OF 2000
claims against the closed bank, assist in the
enforcement of individual liabilities of the directors, 1. Definition And Classification Of
officers, and stockholders, and decide on all other Banks
issues as may be material to implement the
distribution plan PDIC adopted for general Banks
application to all closed banks (that is, the Master Entities engaged in the lending of funds obtained in
Liquidation Plan). (Rules on Liquidation of Closed the form of deposits. (Sec. 3.1, GBL)
Banks, Rule 3, Sec. 1(c), 2020)
Note: No person or entity shall engage in banking
“Disputed claims” refer to all claims, whether they be operations or quasi-banking functions without
against the assets of the insolvent bank, for specific authority from the Bangko Sentral Banks (Sec. 6,
performance, breach of contract, damages, or GBL). Its corporate powers are exercised within its
whatever (Miranda vs. PDIC, G.R. No. 169334, banking license.
2006).
Elements
General Rule- All claims should be filed with the 1. Engaged in lending of funds
liquidation court. 2. Obtained in the form of deposits
In a judicial liquidation of an insolvent bank, all 3. From the public, which shall mean 20 or
claims against the bank should be filed in the more persons
liquidation proceeding. (In re: Petition for Assistance 4. Entity should be a stock corporation.
in the Liquidation of the Rural Bank of Bokod However, an exception is a cooperative
Benguet, Inc., PDIC v. BIR, G.R. No. 158261, 2006). bank which is formed under the
The liquidation court’s exclusive jurisdiction pertains Cooperative Code (Sec. 23[i], R.A. No.
to the adjudication of claims against the bank. It 9520).
does not cover the reverse situation where it is the 5. Minimum capital requirements prescribed
bank that files a claim against another person or by the MB is satisfied (Sec. 8, GBL).
legal entity (Manalo vs. CA, G.R. No. 14129, 2001)
Franchise: The Articles of Incorporation (SEC) or
Exceptions: Articles of Cooperation (CDA) is the primary
a. When re-filing and re-litigating the case franchise, and the secondary franchise is issued by
before the liquidation court would be an the BSP to engage in banking. SEC will not register
exercise in futility in view of the number of the articles of incorporation of a bank unless
years the case has been on trial and accompanied by a certificate of authority from the
additional expenses to the party who is BSP (Sec. 14, Revised Corporation Code of the
living in poverty. (Valenzuela v. CA, G.R. Philippines). Banks with original charters, such as
No. L-56168, 1988) DBP, LBP, Al Amanah Islamic Bank of the
b. When more inconveniences would be Philippines, and Philippine Veterans Bank are
caused to the parties, entailing waste of

ATENEO CENTRAL
governed by the laws creating them as far as their etc.). (MORB – Manual of Regulations for Banks,
authority to exist as a juridical entity and corporate Appendix 19)
powers are concerned`.
Commercial Banks
Classification of Banks They shall have, in addition to the general powers
The classification of banks according to functions incident to corporations:
and services are: a. All such powers as may be necessary to
1. Universal banks; carry on the business of commercial
2. Commercial banks; banking such as accepting drafts and
3. Thrift banks, composed of: issuing letters of credit;
a. Savings and mortgage banks; b. Discounting and negotiating promissory
b. Stock savings and loan notes, drafts, bills of exchange, and other
associations; and evidence of debt;
c. Private development banks; c. Accepting or creating demand deposits;
4. Rural banks d. Receiving other types of deposits and
5. Cooperative banks; deposit substitutes;
6. Islamic banks; e. Buying and selling foreign exchange and
7. Digital banks; and gold or silver bullion;
8. Other classifications of banks as f. Acquiring marketable bonds and other debt
determined by the Monetary Board. securities; and
g. Extending credit, subject to such rules as
Universal Banks the Monetary Board may promulgate. (Sec.
Universal bank has the authority to exercise 29, GBL)
1. Powers granted to a commercial bank
2. The powers of an investment house Unlike Universal Banks, Commercial Banks can
3. Power to invest in non-allied enterprises. invest only in allied enterprises (bank-related
4. May own up to 100% of the equity in a thrift activities), which may be financial or non-financial.
bank, rural bank, financial allied enterprise, (Secs. 30, 31, and 32, GBL)
or non-financial allied enterprise. (Sec. 23,
25 and 26, GBL) Thrift Banks
They are organized for the purpose of, among other
Investment House things, accumulating savings of depositors and
It is an intermediary between security issuers and investing them with capital loans, financing
investors. It engages in underwriting of securities, homebuilding, providing short term capital, medium
among other things. (Sec. 2, PD 129). and long term financing for small and medium
enterprises and individuals engaged in agriculture,
Financial Allied services, industry and housing. (Sec. 3[a][1]), R.A.
Financial allied enterprise is a firm with homogenous No. 7906 - Thrift Banks Act)
or similar activities, business, or functions as a
financial intermediary, such as banks, Investment They include savings and mortgage banks, private
houses, financing companies, credit card development banks, and stock savings and loans
companies etc. (MORB, Sec. 372-373, MORB, associations organized under existing laws. (Id.)
Appendix 62 )
Rural Banks
Non-Financial Allied Banks which are designed to make needed credit
Non-financial allied enterprise is a firm with available and readily accessible in the rural areas on
activities, business, or functions that are connected reasonable terms. (Sec. 2, R.A. No. 7353 - Rural
to banking but is not considered a financial Act)
intermediary such are warehousing companies,
storage companies, safe deposit box companies, Cooperative Banks
companies primarily engaged in the management of The majority shares of which is owned and
mutual funds but not in the mutual funds controlled by cooperatives, primarily to provide
themselves, companies providing computer financial and credit services to cooperatives and
services etc. their members (Art. 2, R.A. No. 9520 – Philippine
Cooperative Code), It may also provide the same
Non-allied enterprises services to non-members or the general public
They are non-bank related activities (e.g., (MORB, Appendix 34)
agriculture, mining, manufacturing, public utilities,

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Islamic Banks platform and/or electronic channels with no physical

Islamic banking is based on the Islamic concept of branch/sub-branch or branch-lite unit offering
banking: risk sharing rather than speculation. financial products and services. (CB Circular No.
Essentially, this is based on basic principles and 1105, MORB Sec. 101 and 102)
rulings of Sharia, or Islamic law. interest (riba) is
prohibited. (Sec. 2[a][4], R.A. No. 11439 – An Act 2. Distinction Of Banks From Quasi-
Providing for the Regulation and Organization of Banks And Trust Entities
Islamic Banks)
Quasi-Banks
There is a general framework of Islamic Banking An entity that uses deposit substitute instruments to
(R.A. No. 11439), which allows the creation of source funds from the public for purposes of
Islamic banks, and a special law creating the Al- relending or purchasing of receivables and other
Amanah Islamic Bank, an Islamic Bank to promote obligations is referred to as a quasi-bank.(Sec. 4[3],
and accelerate socio-economic development of the GBL)
Autonomous Region by performing banking,
financing, and investment operations and to Deposit Substitutes
establish and participate in agricultural, commercial, An alternative form of obtaining funds from the
and industrial ventures based on the Islamic public, other than deposits, through the issuance,
concept of banking. (Sec. 3, R.A. No. 6848 – endorsement, or acceptance of debt instruments for
Charter of the Al-Amanah Islamic Investment Bank the borrower's own account, for the purpose of
of the Philippines,) relending or purchasing of receivables and other
obligations. (Sec. 95, NCBA)
Foreign Banks
A foreign bank is a banking corporation formed, The phrase “obtaining funds from the public”
organized or existing under any law other than those shall mean borrowing from twenty (20) or more
of the Republic of the Philippines. (R.A. No. 11232 lenders at any one time. (Id.)
– Revised Corporation Code, Sec. 140). In all
matters not specifically covered by special For this purpose, “lenders” shall refer to individuals
provisions applicable only to a foreign bank, or its and corporate entities that are not acting as
branches and other offices in the Philippines, any financial intermediaries, subject to the safeguards
foreign bank licensed to do business in the and regulations issued by the Monetary Board. (Id.)
Philippines shall be bound by the provisions of The
General Banking Law of 2000, as well as all other Note: The definition of deposit substitutes in the
laws, rules, and regulations applicable to banks banking laws was brought about by an observation
organized under the laws of the Philippines of the that banks and non-bank financial intermediaries
same class (Sec. 77, GBL). have increasingly resorted to issuing a variety of
debt instruments, other than bank deposits, to
Foreign banks are allowed to enter the Philippine obtain funds from the public. (BDO v. RCBC, G.R.
banking system under any of the following modes: No. 198756, 2016)
a. Acquiring, purchasing, or owning up to
100% of the voting stock of an existing Under the NIRC, deposit substitutes include not only
bank; the issuances and sales of banks and quasi-banks
b. Investing in up to 100% of the voting stock for relending or purchasing receivables and other
of a new banking subsidiary incorporated similar obligations, but also debt instruments issued
under the laws of the Philippines; or by commercial, industrial, and other non-financial
c. Establishing branches with full banking companies to finance their own needs or the needs
authority. (Sec. 2, R.A. No. 10641 – An Act of their agents or dealers. (Id.)
Allowing the Full Entry of Foreign Banks in
the Philippines) To determine whether the financial assets are
deposit substitutes, the “20 or more individual or
corporate lenders” rule must apply. (Id.)
Other Classification of Banks as determined by
the Monetary Board (Sec. 3(g), GBL) When the Government Securities Eligible Dealer
(GSED) sells the government securities to 20 or
Digital Banks more investors, the government securities are
The Monetary Board approved the inclusion of deemed to be in the nature of a deposit substitute.
"Digital Banks" as a distinct classification of banks . (BDO v. Republic, G.R. No. 198756, 2016)
A digital bank offers financial products and services
that are processed end-to-end through a digital

ATENEO CENTRAL
Trust Entities and business or implied." It simply means that the bank is obliged
A stock corporation, or a person duly authorized by to observe "high standards of integrity and
the Monetary Board to engage in trust business, and performance" in complying with its obligations under
act as a trustee, administer any trust or hold the contract of simple loan. (Goyanko, Jr. v. UCPB,
property in trust or on deposit, for use, benefit or G.R. No. 179096, 2013)
behoof of another (GBL. Sec. 79). Trust business
is any activity resulting from a trustor-trustee Bank Deposit as a simple loan
relationship (trusteeship) involving the Bank acquires ownership of money deposited;
appointment of a trustee by a trustor for the obligation to pay the amount, but no obligation to
administration, holding, and management of return the same money. (Guingona, Jr. v. City Fiscal
funds and/or properties of the trustor by the of Manila, G.R. No. L-60033, 1984)
trustee for the use, benefit, or advantage of the
Payment to proper party-depositor (Fultron Iron
trustor or of others called beneficiaries (MORB,
Sec. 403 (2020); & MORNBFI, Sec. 403-Q & Sec. Works Co. v. China Banking Corp., G.R. No. 32576,
102-T) 1930)
Bank, Quasi-Bank, and Trust Entity Deposits are not preferred credits. (Central Bank v.
Morfe, G.R. No. L-38427, 1975)
BANK QUASI-BANK TRUST
ENTITY
Bank has the right to set-off or compensation.
Entities Entities Entities
(Gullas v. Philippine National Bank, G.R. No. 4391,
engaged in the engaged in the engaged in
1935)
lending of borrowing of trust,
funds obtained funds through investment
Kinds of Deposits
in the form of the issuance or management,
a. Savings Deposits. They are interest
deposits. acceptance of and fiduciary
bearing deposits without a stated maturity.
deposit business.
b. Negotiable Order of Withdrawal (NOW).
substitutes for
They are interest bearing deposit accounts
the purpose of
that combine the payable on demand
relending or
feature and investment feature of savings
purchasing
accounts.
receivables or
c. Time Deposits. They are issued for a
other
specific period of time (Sec. 216, MORB),
obligations.
and generally cannot legally be withdrawn
before maturity or within a specified number
of days. (BPI Family Savings v. First Metro
3. Nature Of Bank Funds And Bank Investment, G.R. 132390, 2004)
Deposits d. Demand Deposits. They are those
liabilities of the BSP and of other banks,
By the nature of its business, banks derive its funds which are denominated in Philippine
principally from its deposit taking or quasi-banking currency and are subject to payment in
operations. It also gets funds from the public when legal tender upon demand by the
it acts as a trust entity under Chapter IX of the GBL. presentation of checks. Only banks duly
authorized by the BSP may issue demand
Nature of Bank Funds deposits. (Sec. 59, NCBA)
The bank can make use as its own, the money
deposited. (Tan Tiong Tick v. American Checks representing demand deposits do not have
Apothecaries, G.R. No. L-43682, 1938) legal tender power and their acceptance in the
payment of debts, both public and private, is at the
Nature of Bank Deposits option of the creditor. However, a check which has
Bank deposits are in the nature of irregular deposits. been cleared and credited to the account of the
Fixed, savings, and current deposits of money in creditor shall be equivalent to a delivery to the
banks and similar institutions shall be governed by creditor of cash in an amount equal to the amount
the provisions concerning simple loans. (Art. 1980, credited to his account. (Sec. 60, NCBA)
NCC)
4. Diligence Required Of Banks In
The fiduciary relationship does not "convert the View Of Fiduciary Nature Of
contract between the bank and its depositors from a
Banking
simple loan to a trust agreement, whether express

ATENEO CENTRAL
General Prohibition: No director or officer of any

Highest Degree of Diligence bank shall, directly or indirectly, for himself or as
The fiduciary nature of banking requires high the representative or agent of others:
standards of integrity and performance. (Sec. 2, a. Borrow from such bank;
GBL) b. Become a guarantor, endorser, or surety
for loans from such bank to others; or
Fiduciary relationship c. Be an obligor or incur any contractual
The bank’s obligation to observe high standards of liability to the bank. (Sec. 36, GBL)
integrity and performance is deemed written into
every deposit agreement between a bank and its A stockholder to fall under this provision should
depositor. (Philippine Banking Corp. v. CA, G.R. No. own at least 1% of the subscribed capital of the
127469, 2004) bank. (MORB, Sec. 341[c])
Banking is vested with public interest An indirect borrowing includes one that is made
As a business affected with public interest and by a third party, but the DOSRI has a stake in the
because of the nature of its functions, the bank is transaction; a case where the DOSRI acted for his
under obligation to treat the accounts of its own benefit, using the name of an unsuspecting
depositors with meticulous care, always having in person and using dummies to circumvent the
mind the fiduciary nature of their relationship. requirements of the law. (Soriano v. BSP, G.R. No.
(Simex International (Manila) Inc. v CA, G.R. No. 162336, 2010)
88013, 1990)
Related Interest is considered as indirect borrowing
Banks are expected to exercise the highest degree or the Directors, Officers and Stockholders.
of diligence in the selection and supervision of their a. Spouse or relative within the first degree
employees. By the very nature of their work, the (including adoption)
degree of responsibility, care and trustworthiness b. Partnership where the spouse or relative is
expected of their employees and officials is far a general partner
greater than those of ordinary clerks and c. Co-ownership of the property mortgaged to
employees. (Philippine Commercial and secure the loan or other credit
International Bank v. CA, G.R. No. 121413, 2001) accommodations
d. Interlocking directorship or officership
Banking business is impressed with public interest, between the bank and the borrower
of paramount importance thereto is the trust and e. Corporation at least 20% of the capital
confidence of the public in general, the highest stock or equity is owned by DOS of the
degree of diligence is expected, and high standards lending bank. (MORB, Sec. 341[e])
of integrity and performance are even required of it.
(Bank of the Philippine Islands v. Casa Montessori Exception: The director or officer may do so,
Internationale, G.R. No. 149454, 2004) provided the following requirements are complied
with:
a. Written approval of the majority of all the
5. Prohibited Transactions By Bank directors of the bank, excluding the director
Directors And Officers borrowing and recorded in the books of the
bank. (Sec. 36, GBL)
Principles b. The reportorial requirement where such
The Monetary Board is granted the authority to approval should be entered upon the
regulate the amount of loans and credit records of the corporation, and a copy of
accommodations extended to Directors, Officers, the entry be transmitted to the appropriate
Stockholders and their Related Interest (DOSRI). supervising department of the BSP. (Id.; Go
(Sec. 36) v. BSP, GR No. 178429, 2009)
c. Ceiling requirement. The limit on the
The prohibition on DOSRI loans is intended as a amount of loans and credit
protection against over-borrowing of bank funds by accommodations that can be extended to
bank’s DOSRI, as such over-borrowings may lead the bank’s DOSRI is equivalent to their
to bank failures. (Soriano v. BSP, G.R. No. 162336, respective unencumbered deposits and
2010) Banks are not created for the benefit of their book value of their paid-in capital
directors and officers, they cannot use the assets of contribution in the bank, excluding the
the bank for their benefit. (Go v. BSP, G.R. No. following:
178429, 2009) 1. Secured by assets considered as
non-risk by the Monetary Board;

ATENEO CENTRAL
2. In the form of fringe benefits; or Courts have the power to reduce interest in loan
3. Extended by a cooperative bank to transactions if they find it excessive, iniquitous,
its cooperative shareholders. (Id.) unconscionable, or exorbitant. What is iniquitous,
unconscionable, and exorbitant shall depend upon
d. Terms. Not less favorable to the bank than the factual circumstances of each case (Dio v.
those offered to others. (Id.) Japor, G.R. No. 154129).
e. Waiver of Secrecy. DOSRI loans are also
subject to the waiver of secrecy of bank Other Special Laws empowering the BSP to
deposits. (Sec. 26, NCBA) regulate/set interest rate ceiling
1. Microfinance loans (Sec. 43, GBL)

Waiver of Secrecy of Bank Deposits If the loan is 2. Credit Cards (Philippine Credit Card
a DOSRI loan, the lending bank shall require the industry Regulation Law [R.A. No. 10870])
director, officer, or stockholder to waive the secrecy 3. Lending Company (R.A. No. 9474)
or confidentiality of his deposits of whatever nature 4. Financing Company (R.A. No. 5980)
in all banks in the Philippines (Sec. 26, NCBA) 5. Financial Products (Financial Products
and Services Consumer Protection Act
Offenses [R.A. No. 11765])
Criminal. Failure to comply with each requirement
is already a violation of DOSRI Rules (prosecution Legal Rate of Interest.
of 3 offenses), and violation of each requirement is The legal rate of interest is 6% per annum for loan
an offense in itself. (Go v. BSP, GR No. 178429, or forbearance of any money, goods, or credits, and
2009) the rate allowed in judgments, in the absence of an
agreed interest rate (BSP Cir. No. 799 , 2013).
The violation consists in the failure to observe and
comply with procedural, reportorial, or ceiling Floating Rate of Interest
requirements prescribed by law in the grant of a While it may be acceptable, for practical reasons
loan to a director, officer, stockholder and other given the fluctuating economic conditions, for banks
related interests in the bank. The elements of abuse to stipulate that interest rates on a loan not be fixed
of confidence, deceit, fraud or false pretenses, and and instead be made dependent upon prevailing
damage, which are essential to the prosecution for market conditions, there should always be a
estafa, are not elements of a DOSRI violation. reference rate upon which to peg such variable
(Soriano vs BSP, G.R. Nos. 159517-18, 2009) interest rates. (Consolidated Bank and Trust
Corporation (Solid Bank) v. CA, G.R. No. 114286,
Thus, a person be held liable both for estafa through 2001)
falsification of commercial documents and violation
of Sec. 83 of the GBL (DOSRI) for a single Note: Benchmark interest rates are the reference
transaction. rate to peg the rate (e.g. Interbank Call Loan Rate,
BSP rates, Government securities rates, treasury
Administrative: removal. After due notice to the rate benchmark, PHP BVAL rates).
board of directors of the bank, the office of any bank
director or officer who violates the provisions of this Escalation Clause
Section may be declared vacant. It refers to stipulations allowing an increase in the
interest rate agreed upon by the contracting parties.
They are valid stipulations in commercial contracts
6. Stipulation On Interests to maintain fiscal stability and to retain the value of
money in long term contracts.
Usury Law is suspended
Central Bank of the Philippines Circular No. 905 It has to comply with the principles on mutuality of
(1982) suspended the ceilings on interest rates for contracts. The contract must bind both contracting
a loan or forbearance of money, goods, or credits, parties; its validity or compliance cannot be left to
regardless of maturity and whether secured or the will of one of them. (Art. 1308, NCC)
unsecured. Contracting parties are free to stipulate
on the rate of interest for loan or forbearance of The bank cannot be given an unbridled right to
money, goods, or credits adjust the interest independently and upwardly.
Such would negate the mutuality of contracts.
Power of Courts. (Floirendo v. Metropolitan Bank, G.R. No. 148325,
2007)

ATENEO CENTRAL
For an escalation clause to be valid there should be The following are liable under R.A. No. 1405:
a corresponding de-escalation clause that a. Any person or government official who
authorizes a reduction in interest rates examines, inquires, or looks into bank
corresponding to downward changes made by the deposits or government bond investments
law or by the Bangko Sentral's Monetary Board in any instance not allowed by law.
(Villa Cristina Monte Realty & Development b. Any official or employee of the banking
Corporation vs Equitable PCIBank G.R. No. institution who makes a disclosure
208336, 2018) concerning bank deposits to another in any
instance not allowed by law (Sec. 3, R.A.
If a provision neither states an increase nor a No. 1405); and
decrease in interest rate, but said clause simply c. Any person who commits a violation of any
states that the interest rate should be based on the provision of this law. (Sec. 5, R.A. No.
prevailing market rate, it violates the mutuality of 1405)
contracts. (Polotan Sr. v. Court of Appeals, G.R. No.
119379, 1998) Foreign Currency Deposits
All foreign currency deposits are absolutely
confidential and cannot be examined, inquired, or
C. SECRECY OF BANK DEPOSITS looked into by any person, government official,
bureau, or office, whether judicial or administrative
1. Purpose or legislative, or any other private or public entity.
(Sec. 8, R.A. No. 6426)
R.A. No. 1405 (Bank Secrecy Law) covers deposits
in Peso while R.A. No. 6426 (Foreign Currency The following are liable under R.A. No. 6426:
Deposits Act) covers deposits in foreign currency. a. Any person or government official who
Its purpose is as follows: examines, inquires, or looks into foreign
a. To give encouragement to the people to currency deposits without written
deposit their money in banking institutions; permission of the depositor. (Sec. 8, R.A.
and No. 6426)
b. To discourage private hoarding so that the b. Anyone who shall attach, garnish, or
same may be properly utilized by banks in subject the foreign currency deposit to any
authorized loans to assist the economic other order or process of any court,
development of the country. (Sec. 1, R.A. legislative body, or other administrative
No. 1405) body. (Id.)
c. Any official or employee of the banking
State Policy institution who makes a disclosure
It is hereby declared the policy of the state to protect concerning bank deposits to another in any
and preserve the integrity and confidentiality of bank instance not allowed by law. (Sec. 10, R.A.
accounts. (Sec. 2, R.A. No. 9160 [hereinafter No. 6426)
“AMLA”]) d. Any person who commits a violation of any
provision of this law as well as regulation of
Construction of confidentiality the Monetary Board pursuant to this law.
If there are doubts in upholding the absolutely (Id.)
confidential nature of bank deposits against
affirming the authority to inquire into such accounts, 3. Deposits Covered
such doubt must be resolved in favor of
confidentiality. (Republic v. Eugenio, G.R. No. Peso Deposits. All (peso) deposits of whatever
174629, 2008) nature with banks or banking institutions in the
Philippines including trust accounts. (Ejercito v.
2. Prohibited Acts Sandiganbayan, G.R. No. 157294-95, 2006)
Peso Deposits Deposits refer to money or funds placed in a bank

All deposits of whatever nature with the banks in the which can be withdrawn on depositor’s order or
Philippines, including investments in the demand. It is characterized as being in the nature of
government bonds are considered absolutely a simple loan and creates a creditor-debtor
confidential and may not be examined, inquired, or relationship between the depositor and the bank.
looked into by any person except as allowed by law. (Art. 1980, NCC) While trust funds are different, by
(Sec. 2, R.A. No. 1405) jurisprudence, this is included in the broad category
of deposits under R.A. No. 1405.

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2. Dereliction of duty of public officials

Investment in bonds issued by the Government of
the Philippines, its political subdivisions, and its d. Money invested or deposited is subject
instrumentalities. (Sec. 2, R.A. No. 1405) of litigation (Sec. 2, R.A. No. 1405).
Foreign currency deposits (R.A. No. 6426) and Fishing for information as to the amount of damages
deposits in offshore banking units (PD No. 1246, it can recover does not fall within the exception.
Sec. 8) are considered as absolutely confidential. Since the subject matter of the dispute is not the
R.A. No. 6426 only provided for written permission money deposited in the drawer's account, it does
of the depositor as an exception. However, other not, by itself, warrant the examination of the bank
exceptions evolved by jurisprudence and statutes. deposits. (Union Bank vs. CA, GR No. 134699,
1999)
Note: Other funds or properties in the bank which
are not in the nature of deposits are still confidential. The subject matter of the action is to be determined
No director, officer, employee, or agent of any bank from the indictment that charges respondent with
shall, without order of a court of competent the offense, and not from the evidence sought. The
jurisdiction, disclose to any unauthorized person information charges qualified theft. There was no
any information relative to the funds or properties in mention of the supposed bank account in which the
the custody of the bank belonging to private funds represented by the checks have allegedly
individuals, corporations, or any other entities. (Sec. been kept to allow testimony on the bank account.
55(1)(b), GBL) (BSB Group vs. Go, GR No. 168644, 2010)
4. Exceptions From Coverage

Inquiry into the whereabouts of the amount
converted necessarily extends to whatever is
Grounds to allow examination of a bank account
concealed (being in the name of persons other than
under Section 2 of R.A. No. 1405:
the one responsible for the illegal acquisition)
a. Where the depositor consents in writing.
inasmuch as the case is aimed at recovering the
amount converted. (Mellon Bank v. Magsino, G.R.
Note: A waiver of rights (R.A. No. 1405)
No. 71479, 1990)
must be voluntary, knowingly, intelligently,
and with sufficient awareness of the
relevant circumstances and likely Additional exceptions to the Secrecy of Bank
consequences. There must be evidence to Deposits Act
show an actual intention to relinquish the a. Violations of Anti-Graft and Corrupt
right. Mere silence on the part of the holder Practices Act. Section 8 of R.A. No. 3019
of the right should not be construed as a directs that bank deposits shall be taken
surrender thereof. (Doña Adela Export into consideration in its enforcement,
International, Inc. v. TIDCORP, G.R. No. notwithstanding any provision of the law to
201931, 2015) the contrary. (PNB v. Gancayco, G.R. No.
L-18343, 1965)
Examples of waiver: Waiver in case of
DOSRI loans (NCBA, Sec. 26) and waiver The Courts are authorized to examine bank
of a taxpayer in case of compromise of tax deposits of spouses and unmarried children
liability. (Sec. 6[f], NIRC) of government officials found to have
unexplained wealth under R.A. No. 3019 –
b. Impeachment Cases. It is necessary that Anti-Graft and Corrupt Practices Act. (Sec.
there be an order issued by the 8, R.A. No. 3019)
impeachment court or by its authorized
officer to allow examination. b. Commissioner of Internal Revenue
(CIR). The CIR can inquire into the bank
It is limited to Peso deposits, as it is not an accounts of the following taxpayers:
exemption to the absolute confidentiality of 1. A decedent to determine his gross
foreign currency deposits under R.A. No. estate;
6426. (Philippine Savings Bank v. Senate, 2. Any taxpayer who has filed an
G.R. No. 200238, 2012) application for compromise of his tax
liability on the ground of financial
c. By Court Order in cases of; incapacity; and
1. Bribery

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3. A taxpayer, information on whose by series of overt or criminal acts, is also

account is requested by a foreign tax analogous to bribery. Therefore, the
authority. (Sec. 6(f), NIRC) exception to R.A. No. 1405 applicable in
cases of bribery must also apply to cases of
c. Unclaimed balances. Disclosure to the plunder. (Ejercito v. Sandiganbayan, G.R.
Treasurer of the Philippines for dormant Nos. 157294-95, 2006)
deposits for at least 10 years. (Sec. 2, Act
3936) h. Unsafe and unsound banking practices.
BSP and PDIC may inquire into bank
d. BSP periodic or special examination. To deposits (both Peso and Foreign Currency
ensure compliance of the covered Deposits) and all information related
institution with the Anti Money Laundering thereto if there is a finding of unsafe or
Act. (Sec. 25, NCBA; Sec. 11, AMLA) unsound banking practice. (Sec. 9, New
PDIC Charter)
Annual testing solely limited to the
determination of the existence and true i. In-Camera Inspection. The Ombudsman
identity of the owners of the accounts. (Sec. is granted the express powers to examine
9[a], AMLA) and have access to bank accounts and
records. (Sec. 15, R.A. No. 6770 –
e. Human Security Act (R.A. No. 9372). Ombudsman Act,)
After determining existence of probable
cause, the Court of Appeals may authorize Requisites:
examination of and gathering of information 1. Pending case before a court of
on deposits, placements, trust accounts, competent jurisdiction;
assets, and records in a bank or financial 2. Account must be clearly identified;
institution; (Sec. 27, R.A. No. 9372) of the 3. The inspection is limited to the
following: subject matter of the pending case;
1. A person charged with or suspected 4. The bank personnel and the account
of the crime of terrorism or holder must be notified to be present
conspiracy to commit terrorism; during the inspection, and such
2. Any judicially declared and outlawed inspection may cover only the
terrorist organizations, associations, account identified in the pending
or group of persons; or case. (Marquez v. Desierto, G.R.
3. Any member of such organization, 135882, 2001)
association, or group of persons in a
bank or financial institution and the Note: An investigation by the Office of the
gathering of any relevant information Ombudsman is not a pending litigation to
about the same from said bank or allow examination of a bank account.
financial institution. (Sec. 28, R.A. (Marquez v. Desierto, G.R. No. 135882,
No. 9372) 2001)
f. Anti-Money Laundering Act (AMLA). j. Terrorism Financing Prevention and

Upon order of a competent court in cases Suppression Act (R.A. No. 10168). The
of violation of the AMLA where there is Anti-Money Laundering Council (AMLC),
probable cause of money laundering, without a court order, is authorized to
except that no court order is required in inquire into or examine bank deposits and
cases of: investments with any banking institution or
1. Kidnapping for ransom non-bank financial institution and their
2. Drug trafficking subsidiaries and affiliates concerning:
3. Hijacking, destructive arson, and 1. Any property or funds that are in any
murder including those perpetrated way related to financing of terrorism
by terrorists against non-combatants or acts of terrorism; or
and similar targets. (Sec. 11, AMLA) 2. Any property or funds of any person
or persons in relation to whom there
g. Plunder. Sec. 1(d) and 4 of the Plunder is probable cause to believe that
Law (R.A. No. 7080). such person or persons are
committing or attempting or
Plunder (Sec. 2, R.A. 7080), which is conspiring to commit or participating
amassing or accumulating ill-gotten wealth in or facilitating the financing of

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terrorism or acts of terrorism. (Sec. (Salvacion v. Central Bank of the

10, R.A. No. 10168) Philippines, G.R. 94723, 1997)
2. A co-payee of a check who filed a
k. Failure of PCA. The PDIC and Bangko suit for recovery of a sum of money
Sentral may examine, inquire, or look into was considered as a depositor
the deposit records of a bank if there is a because of the distinctive
failure of Prompt Corrective Action as circumstances of the case. (China
declared by the Monetary Board due to Banking Corporation v. Court of
capital deficiency (Sec. 11, New PDIC Appeals, G.R. 14068, 2006)
Charter, as amended by R.A. No. 11840
[2022]) 5. Garnishment Of Deposits, Including
Foreign Deposits
l. Presidential Commission on Good Peso deposits
Governance (PCGG). Investigation by the R.A. No. 1405 does not preclude deposits from
PCGG to recover ill-gotten wealth (Sec. being garnished to ensure satisfaction of a
3[e], EO 1) judgment. There is no real inquiry in such a case,
and if the existence of the deposit is disclosed, the
m. Commission on Audit (COA). Audit on disclosure is purely incidental to the execution
government deposits by the COA. (Sec. process. (China Bank v. Ortega, G.R. L-34964,
2[1], 1987 Constitution, Art. IX (D)) 1973)
Grounds for Disclosure of Foreign Currency Foreign currency deposits

Deposits. Anyone who shall attach, garnish, or subject this to
a. Upon written permission of depositor order or process of any court, legislative body,
b. Under Other Laws (as discussed) government agency or other administrative body
1. CIR. (Sec. 6[f], NIRC) shall be held liable. (Sec. 8, R.A. No. 6426)
2. AMLC – with or without a court
order under the AMLA and Note: Jurisprudence created 2 exceptions on
Terrorism Financing Prevention ground of equity as discussed earlier.
and Suppression Act. (Sec. 11,
AMLA; Sec. 10, R.A No. 10168)
3. BSP in limited examination to D. ANTI-MONEY LAUNDERING ACT
ensure compliance of supervised
institutions to AMLA. (Sec. 11,
AMLA) 1. Policy
4. PDIC and BSP if there is failure of
The law declares that it is the policy of the State to:
PCA due to capital deficiency in
banking resolution when there is 1. Protect and preserve the integrity and
failure of PCA. (Sec. 11, New PDIC confidentiality of bank accounts;
2. Ensure that the Philippines shall not be used as
Charter, as amended by RA No.
11840 [2022]) a money laundering site for the proceeds of any
5. BSP and PDIC when there is a unlawful activity; and
3. Extend cooperation in transnational
finding of unsafe or unsound
investigations and prosecutions of persons
banking practice. (Sec. 8, New
PDIC Charter, as amended by R.A. involved in money laundering acts wherever
No. 11840 [2022]) committed
4. Implementation of targeted financial sanctions
6. COA and PCGG. (Sec. 2(1, 1987
Constitution, Art. IX (D)); Sec. 3[e], related to the financing of the proliferation of
EO 1) weapons of mass destruction, terrorism, and
financing of terrorism, pursuant to the
c. Jurisprudence (equity). The following resolutions of the United Nations Security
exceptions are provided on grounds of Council. (Sec. 2, R.A. No. 9160 [AMLA], as
amended by R.A. 11521, effective 30 January
equity.
1. Account of non-resident alien 2021
found guilty of raping a minor was
allowed on the basis of equity.

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2. Covered Institutions and Their 6. Persons who provide for any of the
Obligations following services:
a. Managing of client money, securities,
Covered Institutions or other assets;
1. Supervised or regulated by the Bangko b. Management of bank, savings, or
Sentral ng Pilipinas: Banks, non-banks, quasi- securities account;
banks, trust entities, foreign exchange dealers, c. Organization or contribution for the
pawnshops, money changers, remittance, and creation, operation, or management of
transfer companies and other similar entities companies; and
and all other persons and their subsidiaries and d. Creation, operation or management of
affiliates juridical persons or arrangements, and
2. Supervised or regulated by the Insurance buying and selling business entities.
Commission: Insurance companies, pre-need (Sec. 3[a][7], AMLA, as amended by
companies, and all other person (e.g., R.A. No. 10365)
insurance agents and brokers, professional
reinsurers, reinsurance brokers, holding Lawyers and accountants are not
companies and systems, mutual benefit considered as covered persons if they
associations and their subsidiaries and render services under item 6 provided the
affiliates); following requisites are present.
3. Supervised or regulated by the Securities
and Exchange Commission a. They are acting as independent
a. Securities dealers, brokers, salesmen, legal professionals
investment houses, and other similar b. Authorized to practice in the
persons managing securities or Philippines; and
rendering services as investment c. They are subject to the provisions
agent, advisor, or consultant; of their respective codes of
b. Mutual funds, close-end investment conduct and/or professional
companies, common trust funds, and responsibility or any of its
other similar persons; and amendments. (Sec. 3[a], AMLA,
c. Other entities administering or as amended by R.A. No. 10365)
otherwise dealing in currency,
commodities, or other financial They shall be excluded from the coverage of the
derivatives based thereon, valuable Anti-Money Laundering Act in relation to
objects, cash substitutes, and other information concerning their clients or where
similar monetary instruments or the disclosure of information would compromise
property client confidences or the attorney-client
4. Jewelry dealers who deal with precious relationship.
metals, and precious stones for transactions in 7. Casinos, including internet and ship-based
excess of One Million Pesos (P1,000,000.00); casinos with respect to their casino cash
5. Company service providers which, as a transactions related to their gaming operations.
business, provide any of the following services (Sec. 3[a][8], AMLA, as amended)
to third parties: 8. Real estate developers and brokers (Sec.
a. Acting as a formation agent of juridical 3[a][9], AMLA, as amended by R.A . No.
persons; 11521); and
b. Acting as (or arranging for another 9. Supervised, accredited or regulated by
person to act as) a director or corporate PAGCOR or any government agency:
secretary of a company, a partner of a Offshore gaming operators, as well as their
partnership, or a similar position in service providers (Sec. 3[a][10] AMLA, as
relation to other juridical persons; amended by R.A. No. 11521)
c. Providing a registered office, business
address or accommodation,
correspondence or administrative Obligations Of Covered Persons
address for a company, a partnership Persons and institutions covered by the Anti-Money
or any other legal person or Laundering Act are subject to the following
arrangement; and obligations:
d. Acting as (or arranging for another
person to act as) a nominee a. Customer Identification (“Know Your
shareholder for another person; and Client”) - covered and institutions shall:

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● Establish and record the true identity of c. Record Keeping

its clients based on official documents; ● Covered institutions and persons shall
● Maintain a system of verifying the true maintain and safely store all records of
identity of their clients transactions for five (5) years from the
● For corporate clients, require a system dates of transactions;
of verifying their legal existence and ● For closed accounts, covered
organizational structure, as well as institutions and persons shall preserve
authority and identification of all and store the records on customer
persons purporting to act on their identification, account files, and
behalf; business correspondence for at least
● Absolutely prohibit anonymous five (5) years from the dates when they
accounts, accounts under fictitious were closed. (Sec. 9[b], AMLA)
names, and all other similar accounts;
● Allow peso and foreign currency non- 3. Covered Transactions
checking numbered accounts.
“Transaction” Refers to any act establishing any
The BSP may conduct annual testing solely limited right or obligation or giving rise to any contractual or
to the determination of the existence and true legal relationship between the parties. It also
identity of the owners of such accounts. (Sec. 9[a], includes any movement of funds by any means with
AMLA) a covered person.
b. Reporting of Covered and Suspicious “Covered Transactions” are transactions in cash or

Transactions other equivalent monetary instrument involving a
● Covered institutions and persons shall total amount in excess of Five Hundred Thousand
report to the Anti-Money Laundering Pesos (P500,000.00) within one (1) banking day.
Council (AMLC) all covered
transactions and suspicious For covered persons under Section 3(a)(8), a single
transactions within five (5) working casino cash transaction involving an amount in
days from occurrence thereof, unless excess of Five million pesos (P5,000,000.00) or its
the AMLC prescribes a different period equivalent in any other currency.
not exceeding fifteen (15) working days
(Sec. 9[c], AMLA, as amended by R.A. For covered persons under Section 3(a)(9) (real
No. 10365); estate developers and brokers) herein, a single cash
● A transaction should be reported as a transaction involving in excess of Seven Million Five
suspicious transaction if the Hundred thousand pesos (7,500,000.00) or its
transaction in question is determined to equivalent in any other currency. (Sec. 3[b], AMLA,
be both a covered and suspicious as amended by R.A. No. 9194, R.A. No. 10927 and
transaction (Sec. 9 [c], AMLA, as R.A. No. 11521)
amended by R.A. No. 9194);
4. Suspicious Transactions
Confidentiality and liability
When reporting covered or suspicious transactions, “Suspicious Transactions” are transactions with
covered institutions and persons are prohibited from covered institutions, regardless of the amount
communicating, directly or indirectly, in any manner involved, where any of the following circumstances
or by any other means, to any person or entity, or exist:
the media, the fact that a covered or suspicious 1. There is no underlying legal or trade obligation,
transaction report has been or about to be reported, purpose or economic justification;
the contents thereof, or any other information in 2. The client is not properly identified;
relation thereto. (Sec. 9[c], AMLA, as amended by 3. The amount involved is not commensurate with
R.A. No. 9194) the business or financial capacity of the client;
Neither may such reporting be published or aired in 4. Taking into account all known circumstances, it
any manner or form by the mass media, electronic may be perceived that the client’s transaction is
mail, or other similar devices. (Sec. 9[c], AMLA, as structured in order to avoid being the subject of
amended by R.A. No. 10365) reporting requirements under the Anti-Money
In case of violation, the concerned officer and Laundering Act;
employee and media shall be held criminally liable. 5. Any circumstance relating to the transaction
(Sec, 9[c], AMLA, as amended by R.A. No. 9194 which is observed to deviate from the profile of
and R.A. No. 10365)

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the client and/or the client’s past transactions (b) Converts, transfers, disposes of, moves,
with the covered institution; acquires, possesses or uses said monetary
6. The transaction is in any way related to an instrument or property;
unlawful activity or offense under the Anti- (c) Conceals or disguises the true nature,
Money Laundering Act that is about to be, is source, location, disposition, movement, or
being, or has been committed; or ownership of or rights with respect to said
7. Any transaction that is similar or analogous to monetary instrument or property;
any of the foregoing. (Sec. 3[b-1], AMLA, as (d) Attempts or conspires to commit money
amended by R.A. No. 9194) laundering offenses referred to in
paragraphs (a), (b), and (c);
5. Safe Harbor Provision (e) Aids, abets, assists in or counsels the
commission of the money laundering
No administrative, criminal, or civil proceedings shall offenses referred to in paragraphs (a), (b),
lie against any person for having made a covered and (c) above; and
transaction report or suspicious transaction report in (f) Performs or fails to perform any act as a
the regular performance of his/her duties in good result of which he/she facilitates the offense
faith, whether or not such reporting results in any of money laundering referred to in
criminal prosecution under the Anti-Money paragraphs (a), (b), and (c) above. (Sec. 4,
Laundering Act or any other law. (Revised IRR of AMLA, as amended by R.A. No. 9194 and
R.A. No. 9194, Rule 9.c.5) R.A. No. 10365)
Exemption from Bank Secrecy Laws
When reporting covered or suspicious transactions Failing to file a report as a Money Laundering
to the AMLC, covered persons and their officers and Offense.
employees shall not be deemed to have violated Any covered institution or person who, knowing that
R.A. No. 1405 (Secrecy of Bank Deposits), as a covered or suspicious transaction is required
amended, R.A. No. 6426 (Foreign Currency under the Anti-Money Laundering Act to be reported
Deposits Act) and R.A. No. 8791 (General Banking to the Anti-Money Laundering Council, fails to do so.
Law), and other similar laws, provided that (Sec. 4, AMLA, as amended by R.A. No. 9194 and
confidentiality is observed. (Sec. 9[c], AMLA, as R.A. No. 10365)
amended)
“Monetary Instrument” refers to proceeds of, or
6. Money Laundering (How instruments related to an unlawful activity. This may
Committed; Unlawful Activities or refer to any of the following:
Predicate Crimes) 1. Coins or currency of legal tender of the
Philippines, or of any other country;
Money Laundering is a crime whereby the proceeds 2. Drafts, checks, and notes;
of an unlawful activity are transacted, thereby 3. Securities or negotiable instruments, bonds,
commercial papers, deposit certificates, trust
making them appear to have originated from
certificates, custodial receipts, or deposit
legitimate sources. (Sec. 4, AMLA)
substitute instruments, trading orders,
Persons liable for Money Laundering: transaction tickets and confirmations of sale or
investments and money market instruments;
1. Any person; or
2. Any person employed with a covered and
institution 4. Other similar instruments where title thereto
passes to another by endorsement,
Elements: assignment, or delivery. (Sec. 3[c], AMLA)
1. The monetary instrument or property
“Unlawful Activity” refers to any act, omission, or
represents, involves or relates to the
series or combination thereof involving or having
proceeds of any unlawful activity;
2. Knowledge of the offender that the any direct relation to the following:
monetary instrument or property 1. Kidnapping under ransom;
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16
represents, involves or relates to the
proceeds of the unlawful activity; of the Comprehensive Dangerous Drugs Act;
3. The offender commits any of the following: 3. Section 3, paragraphs B, C, E, G, H, and I of the
Anti-Graft and Corrupt Practices Act;
(a) Transacts said monetary instrument or
property; 4. Plunder;
5. Robbery and Extortion;
6. Jueteng and Masiao punished as Illegal
Gambling;

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7. Piracy on the high seas; part of the taxpayer: Provided, finally, That in no
8. Qualified Theft; case shall the AMLC institute forfeiture
9. Swindling and Other Forms of Swindling; proceedings to recover monetary instruments,
10. Smuggling; property or proceeds representing, involving, or
11. Violations of the Electronic Commerce Act; relating to a tax crime, if the same has already
12. Hijacking and other violations of the Anti- been recovered or collected by the BIR in a
Hijacking Law and Destructive Arson and separate proceeding; and (New provision under
Murder; R.A. 11521)
13. Terrorism and Conspiracy to Commit Terrorism 36. Felonies and offenses of a similar nature that
14. Financing of Terrorism and offenses punishable are punishable under the penal laws of other
under the Terrorism Financing Prevention and countries. (Sec. 3[i], AMLA, as amended by
Suppression Act; R.A. No. 9194 and R.A. No. 10365)
15. Bribery and Corruption of Public Officers;
16. Frauds and Illegal Exactions and Transactions; 7. Anti-Money Laundering Council and
17. Malversation of Public Funds and Property; its Functions
18. Forgeries and Counterfeiting;
19. Violations of the Anti-Trafficking in Persons Act; The Anti-Money Laundering Act created the entity
20. Violations of the Revised Forestry Code of the known as the Anti-Money Laundering Council
Philippines; (AMLC). The AMLC is composed of:
21. Violations of the Philippine Fisheries Code; 1. Governor of Bangko Sentral ng Pilipinas as its
22. Violations of the Philippine Mining Act; Chairman;
23. Violations of the Wildlife Resources 2. The Commissioner of the Insurance
Conservation and Protection Act; Commission as a member;
24. Violations of the National Caves and Cave 3. The Chairman of the Securities and Exchange
Resources Management Protection Act; Commission as a member. (Sec. 7, AMLA, as
25. Violations of the Anti-Carnapping Act; amended by R.A. No. 9194 and R.A. No.
26. Violations of the Decree Codifying the Laws on 10365)
Illegal/Unlawful Possession, Manufacture,
Dealing in, Acquisition or Disposition of The AMLC has the following functions:
Firearms, Ammunition or Explosives; 1. Require and receive covered or suspicious
27. Violations of the Anti-Fencing Law; transaction reports from covered institutions
28. Violations of the Migrant and Overseas Workers and persons (Sec. 7, AMLA, as amended by
Filipinos Act; R.A. No. 9194);
29. Violations of the Intellectual Property Code; 2. Issue orders addressed to the appropriate
30. Violations of the Anti-Photo and Video Supervising Authority or the covered institution
Voyeurism Act; to determine the true identity of the owner of any
31. Violations of the Anti-Child Pornography Act; monetary instrument or property subject to a
32. Violations of the Special Protection of Children covered transaction or suspicious transaction
Against Abuse, Exploitation, and report or request for assistance from a foreign
Discrimination; State, or believed by the AMLC, on the basis of
33. Fraudulent practices and other violations of the substantial evidence, to be, in whole or in part,
Securities Regulation Code; wherever located, representing, involving, or
34. Violation of Section 19 (a)(3) of the “Strategic related to, directly or indirectly, in any manner
Management Act”, in relation to the proliferation or by any means, the proceeds from an unlawful
of weapons of mass destruction and its activity (Sec. 7, AMLA, as amended by R.A. No.
financing pursuant to United Nations Security 9194);
Council Resolution Numbers 1718 of 2006 and 3. Institute civil forfeiture proceedings and all other
2231 of 2015; (New provision under R.A. remedial proceedings through the Office of the
11521) Solicitor General (Sec. 7, AMLA);
35. Violation of Section 254 of Chapter II, Title X of 4. Cause the filing of complaints with the
the NIRC, where the deficiency basic tax due in Department of Justice or the Ombudsman for
the final assessment is in excess of Twenty-five the prosecution of money laundering offenses;
million pesos (P25,000,000.00) per taxable 5. Investigate suspicious transactions and
year, for each tax type covered and there has covered transactions deemed suspicious after
been a finding of probable cause by the an investigation by the AMLC, money
competent authority: Provided, further That laundering activities, and other violations of the
there must be a finding of fraud, willful AMLA (Sec. 7, AMLA, as amended by R.A. No.
misrepresentation or malicious intent on the 9194);

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6. Apply before the Court of Appeals, ex parte for indirectly, including funds and assets derived or
the freezing of any monetary instrument or generated therefrom, by individuals or entities
property alleged to be laundered, proceeds designated and listed under United Nations
from, or instrumentalities used or intended to be Security Council Resolution Numbers 1718 of
used in any unlawful activity (Sec. 7, AMLA, as 2006 and 2231 of 2015 and their successor
amended by R.A. No. 9194); resolutions as well as any binding resolution of
7. Implement such measures as may be the Security Council; and (new provision under
necessary and justified under the AMLA to R.A. 11521)
counteract money laundering (Sec. 7, AMLA); 16. Preserve, manage, or dispose assets pursuant
8. Receive and take action in respect of, any to a freeze order, asset preservation order, or
request from foreign states for assistance in judgement of forfeiture (new provision under
their own anti-money laundering operations R.A. 11521)
(Sec. 7, AMLA);
9. Develop educational programs on the 8. Authority to Inquire into Bank
pernicious effects of money laundering, the
Deposits
methods and techniques used in money
laundering, the viable means of preventing
The Anti-Money Laundering Council may inquire
money laundering and the effective ways of
into or examine any particular deposit or investment,
prosecuting and punishing offenders (Sec, 7,
including related accounts, with any banking
AMLA);
institution or non-bank financial institution upon
10. Enlist the assistance of any branch,
order of any competent court. (Sec. 11, AMLA, as
department, bureau, office, agency, or
amended by R.A. No. 9194 and R.A. No. 10167)
instrumentality of the government, including
government-owned and controlled
The term “related accounts” shall refer to accounts,
corporations, in undertaking any and all anti-
the funds and sources of which originated from
money laundering operations, which may
and/or materially linked to the monetary
include the use of its personnel, facilities and
instrument(s) or property(ies) subject of the freeze
resources for the more resolute prevention,
order(s). (Sec. 11, AMLA, as amended by R.A. No.
detection, and investigation of money
9194 and R.A. No. 10167)
laundering offenses and prosecution of
offenders(Sec. 7, AMLA);
The order of the competent court must be based on:
11. Impose administrative sanctions for the
1. An ex parte application in cases of violations of
violation of laws, rules, regulations and orders,
the Anti-Money Laundering Act; and
and resolutions issued pursuant thereto (Sec. 7,
2. Probable cause that the deposits or
AMLA as amended by R.A. No. 9194);
investments, including related accounts
12. Require the Land Registration Authority and all
involved, are related to an unlawful activity.
its Registries of Deeds to submit to the AMLC
(Sec. 11, AMLA, as amended by R.A. No. 9194
reports on all real estate transactions involving
and R.A. No. 10167)
an amount in excess of Five Hundred Thousand
Pesos (P500,000.00) within fifteen (15) days
No court order shall be required in the following
from the date of the registration of the
cases:
transaction, in a form to be prescribed by the
1. Kidnapping for ransom;
AMLC. The AMLC may also require the Land
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16
Registration Authority and all its Registries of
of the Comprehensive Dangerous Drugs Act;
Deeds to submit copies of relevant documents
3. Hijacking and other violations of the Anti-
of all real estate transactions. (Sec. 7, AMLA, as
Hijacking Law and Destructive Arson and
amended by R.A. No. 10365)
Murder;
13. Apply for the issuance of a search and seizure
4. Felonies similar to those previously mentioned
order with any competent court (new provision
which are punishable in other countries;
under R.A. 11521)
5. Terrorism and conspiracy to commit terrorism
14. Apply for the issuance of subpoena ad
(Sec. 11, AMLA, as amended by R.A. No. 9194
testificandum and/or subpoena duces tecum
and R.A. No. 10167)
with any competent court (new provision under
R.A. 11521)
The Court of Appeals shall act on the application to
15. Implement target financial sanctions in relation
inquire into or examine any depositor or investment
to proliferation of weapons of mass destruction
with any banking institution or non-bank financial
and its financing, including ex parte freeze,
institution within twenty-four (24) hours from the
without delay, against all funds and other assets
that are owned and controlled, directly or

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filing of the application. (Sec. 11, AMLA, as a. Requisites

amended by R.A. No. 9194 and R.A. No. 10167)
1. Upon a verified ex parte petition filed by the
To ensure compliance with the AMLA, the Bangko AMLC with the CA; and
Sentral ng Pilipinas may, in the course of a periodic 2. Determination that probable cause exists that
or special examination, check the compliance of a any monetary instrument or property is in any
covered institution with the requirements of the way related to an unlawful activity. (Sec.10,
AMLA and its implementing rules and regulations. AMLA, as amended by R.A. No. 9194, R.A. No.
(Sec. 11, AMLA, as amended by R.A. No. 9194 and 10167, and R.A. No. 10365).
R.A. No. 10167)
Probable cause is the sufficiency of the relation
9. Information Security And between the unlawful activity and the property or
Confidentiality monetary instrument (Subido Law Offices vs. Court
of Appeals, GR 216914, 2016) It's different from the
The AMLC and its Secretariat shall securely protect probable cause for the institution of criminal action.
information received or processed and shall not
reveal, in any manner, any information known to No prior criminal charge, pendency of a case, or
them by reason of their office. This prohibition shall conviction for an unlawful activity is necessary for
apply even after their separation from the AMLC. the commencement or the resolution of a petition for
freeze order. (Rule 10 [Section 1(2), 2018 AMLA
IRR)
The AMLC shall formulate rules governing
information exchange and dissemination, the b. Effectivity
security and confidentiality of such information,
including procedures for handling, storage, and
● The Freeze Order shall be effective
protection of, as well as access to such information.
immediately for a period of 20 days. The
(Sec. 8-A, AMLA, as amended by R.A. 11521)
CA shall conduct a summary hearing within
the period to determine whether to modify,
10. Freezing of Monetary Instrument Or lift or extend the period. The total period of
Property the Freeze Order shall not exceed six (6)
months.
Definition and Purpose. A freeze order is an extra- ● Once the six months has lapsed, the freeze
ordinary and interim relief issued by the Court of order is deemed ipso facto lifted.
Appeals to prevent the dissipation, removal, or
disposal of properties that are suspected to be the Exceptions:
proceeds of, or related to, unlawful activities as a. When a money laundering complaint has
defined in the AMLA. Its primary purpose is to already been filed against the person
temporarily preserve monetary instruments or whose monetary instrument or property
money that are in any way related to an unlawful was frozen, or
activity or money laundering, by preventing the b. A petition for civil forfeiture against the
owner from using them during the duration of the frozen monetary instrument or property
freeze order. The relief is preemptive in character, was filed (Rule 10, Sec. 2.10[a], 2018
meant to prevent the owner from disposing his AMLA IRR).
property and thwarting the State’s effort in building
its case and eventually filing civil forfeiture If an asset preservation order is issued by
proceedings and/or prosecuting the owner (Ret. Lt. the RTC having jurisdiction over these
Gen. Jacinto C. Ligot et. Al. vs. Republic of the cases, the freeze order shall remain
Philippines, GR No. 176944, 2013). effective until the money laundering case is
terminated or an asset preservation order is
Exception. The AMLC has authority to issue an ex issued, respectively (Sec. 10, AMLA as
parte freeze order, either under its own initiative or amended by R.A. No. 9194, R.A. No.
of the Anti-Terrorism Council, property or funds 10167, and R.A. No. 10365)
related to financing of terrorism or terrorist acts or
property or funds of any person, terrorist
organization or association of group of persons. c. Duties of covered institutions
(Sec. 11, R.A. No. 10168 [2012])
In relation to Freeze Orders, the covered institutions
and persons have the following duties:

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1. Implement freeze order. Upon receipt the

covered institution shall immediately freeze the
monetary instrument or property and desist
from and not allow any transaction, withdrawal,
transfer, removal, conversion, other movement,
or concealment thereof.
2. Freeze and report related accounts.
3. Furnish copy of freeze order to owner or
holder.
4. Submit the written detailed return. To the
Court of Appeals and AMLC, within twenty-four
(24) hours from receipt of the freeze order, a
detailed written return which shall include:
a. Account numbers and/or description of
the monetary instruments, property or
proceeds involved;
b. Names of the account owners or
holders;
c. The value of the monetary instrument,
property, or related accounts as of the
time they were frozen;
d. All relevant information as to the nature
of the monetary instrument, property or
instruments;
e. Any information on the related
accounts pertaining to the monetary
instrument or property subject of the
freeze order; and
f. The date and the time when the freeze
order was served.
5. Freeze all related accounts upon the receipt
of the freeze orders and upon the verification of
the covered institution that these are accounts
related to the monetary instrument or property
subject of the freeze order. (Rule 10, Sec. 4,
2018 AMLA IRR).
--- end of topic ---

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III. INSURANCE
A. BASIC CONCEPTS OF
TOPIC OUTLINE UNDER THE SYLLABUS
INSURANCE
Contract of Insurance
A. BASIC CONCEPTS
1. An agreement;
1. Elements of an Insurance Contract 2. Whereby one undertakes for a
2. Characteristics/Nature of Insurance consideration;
Contracts 3. To indemnify another against loss, damage
3. Classes of Insurance or liability;
a. Marine 4. Arising from an unknown or contingent
b. Fire event. (Sec. 2[a], Insurance Code).
c. Casualty
d. Suretyship 1. Elements of an Insurance Contract
e. Life
f. Microinsurance Requisites of Ordinary Contracts:
g. Compulsory Motor Vehicle Liability a. Consent
Insurance b. Subject-matter
h. Compulsory Insurance Coverage for c. Cause
Agency-Hired Workers
4. Insurable Interest Additional Requisites for Insurance Contract:
5. Double Insurance and Overinsurance (PIRAD)
6. No Fault, Suicide, and Incontestability a. As consideration for the insurer’s Promise,
Clause the insured makes a ratable contribution
called premium, to a general insurance
fund.
B. PERFECTION OF THE INSURANCE
b. The insured must possess an interest of
CONTRACT
some kind susceptible of pecuniary
estimation, known as insurable Interest;
C. RIGHTS AND OBLIGATIONS OF PARTIES c. The insured is subject to a Risk of loss
1. Insurer through the destruction or impairment of
2. Insured that interest by the happening of
3. Beneficiary designated perils;
d. The insurer Assumes the risk of loss;
D. RESCISSION OF INSURANCE e. Such assumption is part of a general
CONTRACTS scheme to Distribute actual losses among
1. Concealment a large group of persons bearing somewhat
2. Misrepresentation or Omissions similar risks;
3. Breach of Warranties
Note: The presence of these five elements are what
separates Insurance from other contracts, and
which makes Insurance a “risk-distributing device”.
(De Leon, The Insurance Code Annotated, 2014)
Risk-distributing device
A contract of insurance is primarily a risk-distributing
device, a mechanism by which all members of a
group exposed to a particular risk contribute
premiums to an insurer. From these contributory
funds are paid whatever losses occur due to
exposure to the peril insured against.
Test to Determine Whether a Contract is an

Insurance Contract
It depends on the nature of the promise, the act
required to be performed, and the exact nature of
the agreement in the light of the occurrence,
contingency or circumstances under which the

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performance becomes requisite. It is not by what it An insurance may arise by operation of law. By way
is called (White Gold Marine Services v. Pioneer of example, the War Damage Corporation Act
Insurance, G.R. No. 154514, 2005) provides for the payment of compensation without
requiring a contract of insurance or the payment of
Principal Objects and Purpose Test premium or other charge as if a policy was in fact in
Whether the assumption of risk and indemnification force at the time of the loss or damage. (De Leon,
of loss (which are elements of an insurance The Insurance Code Annotated, 2019)
business) are the principal object and purpose of the
organization or whether they are merely incidental Social insurance for members of the Government
to its business. If these are the principal objectives, Service Insurance System (GSIS) and for
the business is that of insurance. But if they are employees of the private sector covered by the
merely incidental and service is the principal Social Security System (SSS) is also established by
purpose, then the business is not insurance. law. (De Leon, The Insurance Code Annotated,
(Philippine Health Care Providers v. CIR, G.R. No. 2019)
167330, 2009)
2. Aleatory
Contracts for Personal Service Distinguished An insurance contract is aleatory in the sense that it
from Contracts of Insurance depends upon some contingent event.
Contracts a law firm enters into with clients whereby
in consideration of periodical payments, the law firm An insurance contract is not a contract of chance
promises to represent such clients in all suits for or although the event against the occurrence of which
against them are not insurance contracts but are it is intended to provide may never occur. De Leon,
contracts for personal services; The Insurance Code Annotated, 2019)
A contract by which a corporation, in consideration By an aleatory contract, one of the parties or both
of a stipulated amount, agrees at its own expense to reciprocally bind themselves to give or to do
defend a physician against all suits for damages for something in consideration of what the other shall
malpractice is one of insurance, and the corporation give or do upon the happening of an event which is
will be deemed as engaged in the business of uncertain, or which is to occur at an indeterminate
insurance since the purpose of the contract is to time. (Art. 2010, Civil Code)
indemnify against loss and damage. (Philippine
Health Care Providers v. CIR, G.R. No. 167330, In insurance, each party must take a risk; the
2009) insurer, that of being compelled upon the happening
of the contingency, to pay the entire sum agreed
2. Characteristics/ Nature Of upon the insured, that of parting with the amount
Insurance Contracts required as premium without receiving anything
therefor in case the contingency does not happen
Characteristics of Insurance Contracts (VAU- except what is ordinarily termed “protection” which
CCC-PP) is itself is a valuable consideration (De Leon, The
1. Voluntary Insurance Code Annotated, 2019, citing Vance, op.
An insurance contract is voluntary in the sense that cit. p. 93))
it is not compulsory and the parties may incorporate
such terms and conditions as they may deem 3. Unilateral
convenient (Art. 1306, Civil Code) which will be An insurance contract is executed as to the insured
binding (Art. 1308, Civil Code) provided they do not after the payment of the premium, and executory on
contravene any provision of law and are not the part of the insurer in the sense that it is not
opposed to public policy. (Art. 1306, Civil Code) executed until payment for a loss.
Note: Although the contract of insurance is In other words, it is a unilateral contract imposing
generally a voluntary contract, the carrying of legal duties only on the insurer who promises to
insurance, particularly liability insurance, may be indemnify in case of loss.
required by law in certain instances such as motor
vehicles (Secs. 373-389, Insurance Code), or The contract contemplates the payment of the
employees (Arts. 168-184, Labor Code), or as a premium as condition precedent to the inception of
condition to granting a license to conduct a business the contract but the insured usually assumes no
or calling affecting the public safety or welfare (De duty to pay subsequent premiums enforceable at
Leon, The Insurance Code Annotated, 2019) the suit of the insurer unless the latter has continued
the insurance after maturity of the premium, in

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consideration of the insured’s express or implied NOTE: As a rule, the insured cannot assign, before
promise to pay. But he has a right to pay the the happening of the loss, his rights under a property
stipulated premium and the insurer is under a duty policy to others without the consent of the insurer.
to accept the payment when tendered. Of course, (Sec. 85, Insurance Code)
the insurer may not be liable if the insured fails to
pay the premiums. In such a case, the insurance Consequently, the obligation of the insurer to pay
usually lapses. (De Leon, The Insurance Code does not attach to or run with the property whether
Annotated, 2019) it be real property or personal. (De Leon, The
Insurance Code Annotated, 2019)
4. Consensual
An insurance contract is consensual because it is It follows that if a person whose property is insured
perfected by the meeting of the minds of the parties. sells it to another, the buyer cannot be his successor
(Art. 1319, Civil Code) in the contract of insurance unless the sale is with
the consent of the insurer or unless by express
So, if an application for insurance has not been stipulation of the parties, the contract is made to run
either accepted or rejected, there is no contract as with the property to the transferee. (Secs. 20, 57, 58,
yet. (Secs. 49-50, Insurance Code) Insurance Code)
5. Conditional Note: Regardless of how they are categorized, all

An insurance contract is conditional because it is insurance contracts share a common trait of
subject to conditions the principal one of which is the “personalness.”
happening of the event insured against.
The category of personal insurance, which includes
In addition to this main condition, the contract life, health, accident, and disability insurance, is
usually includes many other conditions (such as plainly “personal”: the insurance applies only to a
payment of premium or performance of some other particular individual, and it is not possible, for
act) which must be complied with as precedent to example, for the insured unilaterally declaring that
the right of the insured to claim benefit under it. (De his health insurance policy shall now be deemed to
Leon, The Insurance Code Annotated, 2019) cover the health of someone else.
6. Contract of Indemnity Liability insurance is also personal in the same

An insurance contract is a contract of indemnity sense; each person purchases coverage for his own
(except life and accident insurance where the result (or a group of related persons) potential liability to
is death) because the promise of the insurer is to others. The insurer prices the coverage depending
make good only the loss of the insured. (Sec. 18) on the characteristics and traits of the particular
insured.
Any contract that contemplates a possible gain to
the insured by the happening of the event upon Property insurance is also “personal” in this limited
which the liability of the insurer becomes fixed is sense. The insurance is on the insured’s interest in
contrary to the proper nature of insurance. Hence, the property, not on the property itself. It is the
no person may secure insurance upon property in damage to the personal interest not the property that
which he has no interest. (De Leon, The Insurance is being reimbursed under a policy of property
Code Annotated, 2019, citing Vance, op. cit., p. 101) insurance (De Leon, The Insurance Code
Annotated, 2019, citing R.H. Jerry, II, Understanding
If the insured has no insurable interest, the contract Insurance Law, pp. 265-266, 1987 Ed.)
is void and unenforceable (Secs. 18-19, Insurance
Code) as being contrary to public policy because it Life insurance policies, however, are generally
affords a temptation to the insured to wish or bring assignable or transferable (Sec. 184, Insurance
about the happening of the loss. (De Leon, The Code) as they are in the nature of property and do
Insurance Code Annotated, 2019) not represent a personal agreement between
insured and insurer.
7. Personal 8. Property in Legal Contemplation

An insurance contract is a personal contract Since an insurance is a contract, as such, it is
between the insurer and the insured, each party property in legal contemplation. But unlike property
having in view the character, credit, and conduct of policies, life insurance policies are generally
the other. (De Leon, The Insurance Code assignable or transferable like any “chose in action.”
Annotated, 2019, citing Vance, op. cit. p. 96) (Sec. 184, Insurance Code) They are in the nature
of property and do not represent a personal

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agreement between the insurer and the insured. (De However, the Insurance Code does not limit marine
Leon, The Insurance Code Annotated, 2019) insurance to risks of navigation. (Sec. 101,
Insurance Code)
The word "property" is a generic term. Hence, it
could include machinery and equipment which are Scope of Marine Insurance
assets susceptible of being insured. Inasmuch as 1. Insurance Against Loss or Damage
machinery and equipment are included under the a. Vessels, craft, aircraft, vehicles, goods, freights,
term "property," petitioner must give notice to the cargoes, merchandise, effects, disbursements,
insurer of any other fire insurance policies on said profits, moneys, securities, choses in action,
machinery and equipment. instruments of debts, valuable papers,
bottomry, and respondentia interests and all
Where the insurance policy specifies as a condition other kinds of property and interests therein, in
the disclosure of existing co-insurers, non- respect to, appertaining to or in connection with
disclosure thereof is a violation that entitles the any and all risks or perils of navigation, transit
insurer to avoid the policy. This condition is common or transportation, or while being assembled,
in fire insurance policies and is known as the “other packed, crated, baled, compressed or similarly
insurance clause.” (J. Hernando: Multi-Ware prepared for shipment or while awaiting
Manufacturing Corp. v. Cibeles Insurance Corp., shipment, or during any delays, storage,
G.R. No. 230528, 2021). transshipment, or reshipment incident thereto,
including war risks, marine builder's risks, and
Nature of Insurance Contracts all personal property floater risks;
A contract of insurance is an agreement whereby
one undertakes for a consideration to indemnify b. Person or property in connection with or
another against loss, damage or liability arising from appertaining to a marine, inland marine, transit
an unknown or contingent event. (Sec. 2(a), or transportation insurance, including liability for
Insurance Code) loss of or damage arising out of or in connection
with the construction, repair, operation,
The character of insurance is to be determined by maintenance or use of the subject matter of
the exact nature of the contract actually entered into such insurance (but not including life insurance
whatever the form it takes or by whatever name it or surety bonds nor insurance against loss by
may be called. reason of bodily injury to any person arising out
of ownership, maintenance, or use of
Thus, it was held that an agreement entered into by automobiles);
a corporation, even though it was called a surety
company, to indemnify for a valuable consideration c. Precious stones, jewels, jewelry, precious
another against loss by reason of uncollectible metals, whether in course of transportation or
debts, was a contract of insurance and not a otherwise; and
contract of indemnity. (Tebbets v. Guarantee Co.,
73 F. 95) d. Bridges, tunnels and other instrumentalities of
transportation and communication (excluding
Under the Code, a contract of suretyship shall be buildings, their furniture and furnishings, fixed
deemed an insurance contract “if made by a surety contents and supplies held in storage); piers,
who or which as such, is doing an insurance wharves, docks and slips, and other aids to
business,” within the meaning of the Code. But navigation and transportation, including dry
strictly speaking, a contract of suretyship is different docks and marine railways, dams and
from a contract of insurance. (De Leon, The appurtenant facilities for the control of
Insurance Code Annotated, 2019) waterways.
3. Classes Of Insurance Contracts 2. Marine Protection and Indemnity

Insurance
Insurance against, or against legal liability of the
a. Marine
insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use,
Marine Insurance Defined
repair, or construction of any vessel, craft or
An agreement to indemnify against injury to a ship,
instrumentality in use of ocean or inland waterways,
cargo, profits, persons or property involved in a
including liability of the insured for personal injury,
certain voyage or for a specific vessel during a fixed
illness or death or for loss of or damage to the
period. (Secs. 101-168, Insurance Code)
property of another person.

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Perils of the Sea v. Perils of the Ship 3. Cargo Owner

Over the cargo and expected profits. (Sec. 107,
PERILS OF THE PERILS OF THE
Insurance Code)
SEA SHIP
Concealment in Marine Insurance
Covered by marine Not covered by To constitute concealment, it is sufficient that the
insurance marine insurance insured is in possession of the material fact
concealed although he may not be aware of it.
Accidents peculiar to Damage or losses
the sea which do not resulting from: Each party in a marine insurance contract is bound
happen by 1. Natural and to communicate the following:
intervention of man inevitable action of the 1. All facts within his knowledge which are
nor are to be sea material to the contract and as to which he
prevented by human 2. Ordinary wear and makes no warranty, and which the other
prudence. Casualties tear of a ship, or has not the means of ascertaining.
due to the: 3. Negligent failure of
1. Unusual violence; the ship owner to 2. All the information which he possesses,
or provide the vessel material to the risk
2. Extraordinary with proper equipment
action of wind and to convey the cargo Exceptions:
wave; or under ordinary a. Those which the other knows;
3. Other extraordinary conditions b. Those which, in the exercise of
causes connected ordinary care, the other ought to know,
with navigation and of which the former has no reason
to suppose him ignorant;
c. Those of which the other waives
Insurable Interest in Marine Insurance communication;
1. Shipowner d. Those which prove or tend to prove the
Over the value of the vessel, even if chartered and existence of a risk excluded by a
the charterer agreed to pay the shipowner the value warranty, and which are not otherwise
of the vessel in case of loss, however, the shipowner material; and
can recover only the amount not recoverable from e. Those which relate to a risk excepted
the charterer. (Sec. 102, Insurance Code) from the policy and which are not
otherwise material
However, if the ship is hypothecated by a bottomry
loan, the insurable interest is only up to the excess 3. State the exact and whole truth in relation
of the value of the vessel over the loan (Sec. 103, to all matters that he represents, or upon
Insurance Code) inquiry discloses or assumes to disclose
(Insurance Code, Sec. 109)
Over expected freightage. (Sec. 105, Insurance
Code) In marine insurance, there are instances when
matters, although concealed, will not vitiate the
NOTE: Freightage may be derived from the contract but merely exonerates the insurer from the
following: (1) the chartering of the ship; (2) its loss resulting from the risk concealed:
employment for the carriage of his own goods; and 1. National character of the insured;
(3) Its employment for the carriage of the good 2. Liability of insured thing to capture (or) and
detention;
2. Charterer 3. Liability to seizure from breach of foreign
Over the vessel up to the extent of the amount he is laws of trade;
liable to the shipowner, if the ship is lost or damaged 4. Want of necessary documents; and
during the voyage. (Sec. 108, Insurance Code) 5. Use of false or simulated papers. (Secs.
109-112, Insurance Code)
Over his expected profits or freightage if he accepts
cargoes from other persons for a fee. (Sec. 105, Representation in Marine Insurance
Insurance Code) If a representation by a person insured by a contract
of marine insurance, is intentionally false in any
Over his own cargo or client’s cargo. 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. The

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eventual falsity of a representation as to expectation commencement of an entirely different voyage.

does not, in the absence of fraud, avoid a contract (Sec. 125, Insurance Code)
of marine insurance. (Secs. 113 and 114, Insurance
Code) Proper Deviations
1. If due to circumstances outside the control
Implied Warranties in Marine Insurance of the master or ship owner;
1. That the ship is seaworthy at the inception
of the insurance (Sec. 115, Insurance 2. If done to comply with a warranty or to avoid
Code); a peril, whether or not the peril is insured
2. That the ship will not deviate from agreed against;
voyage unless deviation is proper (Secs.
125-127, Insurance Code); 3. If made in good faith, and upon reasonable
3. That the ship will not engage in an illegal ground of belief in its necessity to avoid a
venture; peril;
4. Warranty of possession of documents of
neutrality; that the ship will carry the 4. If made in good faith, for the purpose of
requisite documents of nationality or saving human life or relieving another
neutrality of the ship or cargo where such distressed vessel. (Sec. 125, Insurance
nationality or neutrality is expressly Code)
warranted (Sec. 122, Insurance Code);
5. Presence of insurable interest. Effect in case of loss or injury: Insurer is still
liable, as if there was no deviation.
Seaworthiness
Seaworthiness relates to the vessel’s actual Improper Deviations
condition at the time of the commencement of the Every deviation not specified in the last section is
voyage. The issuance of the certificate neither improper. (Sec. 127, Insurance Code)
negates the presumption of unseaworthiness
triggered by an unexplained sinking or establishes Effect in case of loss or injury: Insurer is not liable
seaworthiness. (Delsan Transport Lines v. CA, G.R. (Sec. 128, Insurance Code)
No. 127897, 2001)
Losses in Marine Insurance
Test of Seaworthiness 1. Actual Total Loss
Whether or not the ship is reasonably fit to perform a. Total Destruction;
the service and to encounter the ordinary perils of b. Irretrievable loss by sinking or by being
the voyage (Sec. 117, Insurance Code) broken up;
c. Damage rendering the thing valueless
for the purpose held; or
Note: The implied warranty of seaworthiness also d. Total Effective deprivation of owner of
applies to a cargo owner. possession of thing insured at the port
of destination. (Sec. 132, Insurance
Since the law provides for an implied warranty of Code)
seaworthiness in every contract of ordinary marine
insurance, it becomes the obligation of a cargo NOTE: Complete physical destruction of the subject
owner to look for a reliable common carrier which matter is not essential to constitute an actual total
keeps its vessels in seaworthy condition. The loss. Such a loss may exist where the form and
shipper of cargo may have no control over the specie of the thing is destroyed, although the
vessel but he has full control in the choice of the materials of which it consisted still exist as where the
common carrier that will transport his goods. Or the cargo by the process of decomposition or other
cargo owner may enter into a contract of insurance chemical agency no longer remains the same kind
which specifically provides that the insurer answers of thing as before (Pan Malayan Insurance Corp v.
not only for the perils of the sea but also provides for CA, G.R. No. 95070, 1991)
coverage of perils of the ship. (Roque v. IAC, G.R.
No. L-66935, 1985) 2. Constructive Total Loss
a. Actual loss or more than three-fourths
Deviation (3/4) of the value of the object;
Departure of vessel from course of voyage, or an b. Damage reducing value by more than
unreasonable delay in pursuing voyage, or the three-fourths (3/4) of the value of the
vessel and of cargo; and

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c. Expenses of shipment exceed three- they are expected to arise, and the valuation fixes
fourths (3/4) of value of cargo. (Sec. their amount. (Sec. 162, Insurance Code)
141, Insurance Code)
Average
In case of constructive total loss, insured may: Any extraordinary or accidental expense incurred
a. Abandon the goods or vessel to the during the voyage for the preservation of the vessel,
insurer and claim for whole insured cargo, or both; and all damages to the vessel and
value (Sec. 141, Insurance Code); or cargo from the time it is loaded and the voyage
b. He may, without abandoning vessel, commenced, until it ends and the cargo is unloaded.
claim for partial actual loss (Sec. 157,
Insurance Code). b. Fire
The word “may” in Section1 141 is intended to grant Fire Insurance Defined
the insured the option or direction to make the It is a contract of indemnity by which the insurer for
choice. This option or discretion is expressed as a a consideration agrees to indemnify the insured
right in Section 133. (Keppel Cebu Shipyard v. against loss of, or damage to, property by fire. (Sec.
Pioneer Ins. & Surety, G.R. Nos. 180880-81, 2009) 169, Insurance Code)
3. Abandonment May include loss by lightning, windstorm, tornado or

The act of the insured by which, after a constructive earthquake and other allied risks, when such risks
total loss, he may declares the relinquishment to the are covered by extension to fire insurance policies
insurer of his interest in the thing insured. (Sec. 140, or under separate policies.
Insurance Code)
Friendly Fire vs. Hostile Fire
Measure of Indemnity
1. Valued Policy FRIENDLY FIRE HOSTILE FIRE
The parties are bond by the valuation if the insured
had some interest at risk and there is no fraud (Sec. So long as a fire burns When the fire occurs
158, Insurance Code) in a place where it was outside of the usual
intended to burn, and confines or begins as
Exception: When a thing has been hypothecated by ought to be, it is a friendly fire and
bottomry or respondentia , before its insurance, and merely an agency for becomes hostile by
without the knowledge of the person actually the accomplishment escaping from the
procuring the insurance, he may show the real value of some purpose; not place where it ought to
(Sec. 158, Insurance Code) a hostile peril. be to some place
where it ought not to
2. Open Policy be.
The following rules shall apply in estimating a loss:
a. Value of the ship – value at the Insurer is liable. Insurer is not liable.
beginning of the risk;
b. Value of the cargo – actual cost when
laden on board, or market value at the Alteration
time and place of lading; The use of condition of a thing insured from that to
c. Value of freightage – gross freightage which it is limited by the policy made without the
exclusive of primage; and consent of the insurer, by means within the control
d. Cost of insurance – in each case, to be of the insured, and increasing the risks, entitles the
added to the estimated value (Sec. 163, insurer to rescind a contract of fire insurance.
Insurance Code)
Effect of an Alteration in the Use or Condition of
Loss of Profits Separately Insured a Thing Insured from that Limited by the Policy
(Value of property lost / Value of whole property The insurer may rescind a contract of fire insurance,
insured) * amount of insurance = Amount of provided the following are present:
recovery 1. The use or condition of the thing insured is
specially limited or stipulated in the policy;
2. Such use or condition is altered;
Presumption of Loss of Profits
3. The alteration is made without the consent
When profits are valued and insured by a contract
of the insurer;
of marine insurance, a loss of them is conclusively
4. The alteration is made by means within the
presumed from a loss of the property out of which
control of the insured;

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5. The alteration increases the risk; and d. Suretyship

6. There must be a violation of a material
policy provision. Suretyship Defined
An agreement whereby one undertakes to answer,
Alterations with Do Not Avoid Policy under specified terms and conditions, for the debt,
1. Where risk of loss is not increased; or default or miscarriage of another in favor of a third
2. Where the insured property would be party. (Sec. 177, Insurance Code)
useless if questioned acts were prohibited
Liability of Surety
Even though the policy contains certain provisions The extent of a surety’s liability is determined by the
prohibiting specified articles from being kept in the language of the suretyship contract or bond itself. It
insured premises, the policy will not be avoided by cannot be extended by implication, beyond the
a violation of these provisions if the articles are terms of the contract. Thus, to determine whether
necessary or ordinarily used in the business petitioner is liable to respondent under the surety
conducted in the insured premises, like benzine kept bond, it becomes necessary to examine the terms
in a furniture factory for purposes of operating or for of the contract itself (First Lepanto-Taisho Insurance
cleaning machinery (Bachrach v. British American Corporation (now known as FLT Prime Insurance
Assur. Co., G.R. No. L-5715, 1910). Corporation) vs. Chevron Philippines, inc. (formerly
known as Caltex Philippines, Inc.), G.R. No.
c. Casualty 177839, 2012).
Casualty Insurance Defined Nature of Liability of Surety

Insurance covering loss or liability arising from a. The liability of the sureties under a bond is
accident or mishap, excluding certain types of loss joint and several / solidary (Arts. 1207-
which by law or custom are considered as falling 1208, Civil Code)
exclusively within the scope of other types of
insurance such as fire or marine. It includes, but is b. The liability is limited to the amount of the
not limited to, employer’s liability insurance, motor bond (Republic v. CA, G.R. No. 103073,
vehicle liability insurance, plate glass insurance, 2001).
burglary and theft insurance, personal accident and
health insurance as written by non-life insurance c. The liability is contractual as it is
companies, and other substantially similar kinds of determined strictly by the terms of the
insurance (Sec. 176, Insurance Code) contract of suretyship in relation to the
principal contract between the obligor and
the obligee (Zenith Insurance Corp v. CA,
It is an insurance covering loss or liability arising G.R. No. L-57957, Dec. 29, 1982.).
from accident or mishap, excluding those falling
under those types of insurance such as fire, Note: In Suretyship, the obligee accepts the surety’s
suretyship, life or marine. solidary undertaking to pay if the obligor does not
pay. Such acceptance, however, does not change
Accident or Health Insurance in any material way the obligee’s relationship with
Insurance against specified perils which may affect the principal obligor. Neither does it make the surety
the person and/or property of the insured. (ex. an active party to the principal obligee-obligor
Personal Accident, Robbery/Theft Insurance) relationship.
Accidental Thus, the acceptance does not give the surety the
That which happens by chance or fortuitously, right to intervene in the principal contract. (Asset
without intention or design, which is unexpected, Builders Corporation vs. Stronghold Insurance Co.,
unusual and unforeseen (Sun Insurance v. CA, G.R. Inc., G.R. No. 187116, 2010).
No. 92383, 1992)
Suretyship v. Property Insurance
NOTE: The terms “accident” and “accidental” do SURETYSHIP PROPERTY
not, without qualification, exclude events resulting in INSURANCE
damage or loss due to fault, recklessness or
negligence of third parties. (Pan Malayan Insurance Accessory contract Principal contract
v. CA, G.R. No. 81026, 1990)
Parties: Parties:

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1. Surety, 1. Insurer, and e. Life

2. Principal Debtor / 2. Insured
Obligor, and Life Insurance Defined
3. Creditor / Obligee Life insurance may be defined as insurance payable
on the death of a person, or on his surviving a
Credit where assumes Contract of indemnity specified period, or otherwise contingently on the
liability transaction, continuance or cessation of life. (Sec. 182,
the surety primary Insurance Code)
Surety is entitled to In subrogation, the 3rd It has also been defined as a mutual agreement by
reimbursement from party against whom which a party agrees to pay a given sum on the
the principal and his the insurer may happening of a particular event contingent on the
guarantors for the loss proceed is not a party duration of human life, in consideration of the
it may suffer under the to the contract payment of a smaller sum immediately, or in
contract periodical payments by the other party. (De Leon,
The Insurance Code Annotated, 2019)
Generally, can only be May be cancelled
cancelled with the unilaterally either by Essentially, life insurance is a contract to make
consent of the oblige the insured or by the specific payments to pay to a certain person, the
or by the Comm’r or by insurer on grounds beneficiary, upon the death of a person whose life
a court of competent provided by law (Sec. has been insured.
jurisdiction 64)
Parties involved in a policy of life insurance
The obligee must The insurance 1. Insurer
accept before the contract does not Owner of the policy, who has the power to name or
suretyship becomes need the acceptance change the beneficiary, to assign the policy, and the
valid and enforceable of any 3rd party obligation to pay the premiums;
2. Insured
Rules on Payment of Premium
Person whose life is the subject of the policy, also
The premium is the consideration for furnishing the
known as the cestui que vie; and
bond or the guaranty and the obligation to pay the
same subsists for as long as the liability of the surety
3. Beneficiary
shall exist. (Reparations Commission v. Universal
The beneficiary to whom the proceeds are paid.
Deep-Sea Fishing Corporation, A.M. No. 219091-
96, 1978)
Liability of Insurer in Case of Suicide
1. When liable:
1. The premium becomes a debt as soon as
a. The suicide is committed after the
the contract of suretyship or bond is
policy has been in force for a
perfected and delivered to the obligor (Sec.
period of two (2) years from the
78, Insurance Code)
date of its issue or of its last
reinstatement;
2. The contract of suretyship or bonding shall
b. (b) The suicide is committed after
not be valid and binding unless and until the
a shorter period (e.g. one year)
premium therefor has been paid;
provided in the policy although
within the two (2) year period; and
3. Where the obligee has accepted the bond,
c. The suicide is committed in the
it shall be valid and enforceable
state of insanity regardless of the
notwithstanding that the premium has not
date of commission, unless suicide
been paid (Philippine Pryce Assurance v.
is an excepted risk
CA, G.R. No. 107062, 1994);
2. When not liable
a. The suicide is not by reason of
NOTE: Where a contract of surety is terminated
insanity and is committed within
under its terms, the liability of the principal for
the two-year period;
premiums after such termination ceases
b. The suicide is by reason of insanity
notwithstanding the pendency of a lawsuit to enforce
but is not among the risks
a liability that accrued during its stipulated lifetime
assumed by the insurer regardless
(Capital Insurance & Surety Co v. Ronquillo Trading,
of the date of commission; and
G.R. No. L-36488, 1983).

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c. The insurer can show that the Motor Vehicle Defined

policy was obtained with the A motor vehicle shall mean any vehicle propelled by
intention to commit suicide even in any power other than muscular power using the
the absence of any suicide public highways, but excepting road rollers, trolley
exclusion in the policy. cars, street sweepers, sprinklers, lawn mowers,
bulldozers, graders, forklifts, amphibian trucks, and
Measure of Indemnity under Life Policy cranes if not use din public highways, vehicles which
The extent or amount of indemnity payable on the run only on rails or tracks, and tractors, trailers and
death of the insured under a policy of insurance traction engines of all kinds used exclusively for
upon life or health is the amount fixed in the policy. agricultural purposes. (Sec. 3[a], RA 4236)
In effect, life policies are valued ones. (Sec. 61,
Insurance Code) Trailers having any number of wheels, when
propelled or intended to be propelled by attachment
There could be no exact pecuniary measurement of to a motor vehicle shall be classified as separate
a person’s interest in his life or the life of another. motor vehicle with no power rating. (De Leon, The
Hence, a person can purchase life insurance for any Insurance Code Annotated, 2019)
amount as long as he can pay the premium. (De
Leon, The Insurance Code Annotated, 2019) Motor Vehicle Liability Insurance Defined
Motor vehicle liability insurance is a protection
The exception is when the interest of a person coverage that will answer for legal liability for losses
insured is susceptible of exact pecuniary and damages for bodily injuries or property damage
measurement, as where a creditor insures the life of that may be sustained by another arising from the
his debtor. (Sec. 10[c], Insurance Code). In this use and operation of a motor vehicle by its owner or
case, the interest of the creditor in the “life of the the driver authorized by the owner. (De Leon, The
debtor” is susceptible of exact pecuniary Insurance Code Annotated, 2019)
measurement or estimation. (De Leon, The
Insurance Code Annotated, 2019 and Sec. 189, No-Fault Indemnity Claim
Insurance Code) The term “no-fault” connotes that the victim of a tort
can recover for his loss from his insurer without
f. Microinsurance regard to his own contributory fault or the fault of the
tortfeasor. (De Leon, The Insurance Code
Microinsurance Defined Annotated, 2019)
Microinsurance is an activity providing specific
insurance, insurance-like and other similar products The fundamental purpose of the “no-fault" provision
and services that meet the needs of the low-income is to guarantee compensation or indemnity to
sector for risk protection and relief against distress, persons suffering loss in motor vehicle accidents.
misfortune and other contingent events. (De Leon, (De Leon, The Insurance Code Annotated, 2019)
The Insurance Code Annotated, 2019, citing Ins.
Memo. Cir. No. 001-10, January 29, 2010.) Claim subject to certain conditions
Under Section 391 of the Insurance Code, the
insurance company concerned shall pay any claim
g. Compulsory Motor Vehicle
for death or bodily injuries sustained by a passenger
Liability Insurance or third party without the necessity of proving fault or
negligence of any kind subject to certain conditions.
Concept
Casualty insurance against liability mandatory This no-fault claim does not apply to property
GR: It shall be unlawful for any land transportation damage. If the total indemnity claim exceeds
operator or owner of a motor vehicle to operate the P15,000, and there is a controversy in respect
same in the public highways. thereto, the finding of fault may be availed of by the
insurer only as to the excess. The first P15,000
XPN: There is in force in relation thereto a policy of should be paid without regard to fault. (De Leon, The
insurance or guaranty in cash or surety bond issued Insurance Code Annotated, 2019)
in accordance with the provisions of this chapter to
indemnify the death, bodily injury, and/or damage to Claim against insurer of vehicle in which victim
property of a third-party or passenger, as the case is an occupant
may be, arising from the use thereof. (Sec. 387, Art. 391 (par. iii) of the Insurance Code is very clear
Insurance Code) that the claim shall lie against the insurer of the

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vehicle in which the occupant is riding, mounting, or from denial of the claim, otherwise, the claimant’s
dismounting from. right of action shall prescribe. (Sec. 397, Insurance
Code)
The claimant is not free to choose from which
insurer he will claim the “no-fault indemnity” as the If a claim be made and rejected and an action or suit
law, by using the word “shall,” makes it mandatory be not commenced either in the IC or any court of
that the claim be made against the insurer of such competent jurisdiction within twelve (12) months
vehicle. from receipt of notice of such rejection, then the
claim shall be deemed to have been abandoned and
That said vehicle might not be the one that caused shall not be recoverable. (J. Hernando: Alpha Plus
the accident is of no moment since the law itself International Enterprises Corp. v. Philippine Charter
provides that the party paying the claim may recover Insurance Corp., G.R. No. 203756, 2021)
against the owner of the vehicle responsible for the
accident. h. Compulsory Insurance
Coverage for Agency-Hired
This is precisely the essence of the “no-fault Workers
indemnity” insurance which was introduced in order
to provide victims of vehicular accidents or their Scope; At No Cost
heirs immediate compensation although in a limited
Each migrant worker deployed by a recruitment
amount, pending final determination of who is
or manning agency shall be covered by a
responsible for the accident and liable for the
victim’s injuries or death. So, it is immaterial whether compulsory insurance policy which shall be
or not fault or negligence lies with the other vehicle secured at no cost to the said worker.
involved in the incident. (De Leon, The Insurance
Code Annotated, 2019) On the other hand, insurance coverage is not
mandatory for direct-hired or name-hired, and
Claim against insurer of vehicle responsible for rehired OFWs.
accident
In any other case (i.e. the victim is not an occupant An OFW is direct-hired or name-hired if s/he
of a vehicle), the claim shall lie against the insurer was engaged directly by foreign employers
of the directly offending vehicle. (De Leon, The such as international organizations, diplomatic
Insurance Code Annotated, 2019) corps, and those who were able to get an
employment without the assistance or
Note that Sec. 386 (par. iii) of the Insurance Code participation of any recruitment/manning
uses the general term “occupant” to distinguish it agency.
from a “passenger” and a “third party.” (Sec. 386[b
and c], Insurance Code). Thus, as used, “occupant” A rehired OFW is one who has been re-
includes both a “passenger” and a “third party” so engaged by the foreign principal without the
long as they are riding in or mounting or dismounting
participation of an agency.
from a motor vehicle. (De Leon, The Insurance
Code Annotated, 2019, citing Perla Compania de
Seguors, Inc. vs. Ancheta 164 SCRA 144 [1988]). Direct-hired, name-hired, or rehired OFWs,
however, can avail themselves of this
Prescription insurance by requesting their foreign employers
Any person having any claim upon the policy to pay for the cost of the insurance coverage or
issued pursuant to this chapter shall, without any they may pay for the premium themselves.
unnecessary delay, present to the insurance (Eastern Overseas Employment Center, Inc. v.
company concerned a written notice of claim Heirs of Odulio, G.R. No. 240950 (Resolution),
setting forth the nature, extent and duration of the [July 29, 2020])
injuries sustained as certified by a duly licensed
physician. Coverage
Such insurance policy shall be effective for the
Notice of claim must be filed within six (6) months duration of the migrant worker's employment
from the date of accident, otherwise, the claim and shall cover, at the minimum:
shall be deemed waived. 1. Accidental death, with at least Fifteen
thousand United States dollars
Action or suit for recovery of damage due to loss or (US$10,000.00) survivor's benefit
injury must be brought, in proper cases, with the
Commissioner or the courts within one (1) year

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payable to the migrant worker's judgment or settlement of his or her

beneficiaries; case in the NLRC. The insurance
coverage for money claims shall be
2. Permanent total disablement, with at equivalent to at least three (3) months
least Seven thousand five hundred for every year of the migrant worker's
United States dollars (US$7,500.00) employment contract;
disability benefit payable to the migrant
worker. 6. Compassionate visit when a migrant
worker is hospitalized and has been
The following disabilities shall be confined for at least seven (7)
deemed permanent: consecutive days, he shall be entitled
a. total, complete loss of sight of to a compassionate visit by one (1)
both eyes; family member or a requested
b. loss of two (2) limbs at or individual. The insurance company
above the ankles or wrists; shall pay for the transportation cost of
c. permanent complete paralysis the family member or requested
of two (2) limbs; and individual to the major airport closest to
d. brain injury resulting to the place of hospitalization of the
incurable imbecility or insanity worker. It is, however, the responsibility
of the family member or requested
3. Repatriation cost of the worker individual to meet all visa and travel
when his/her employment is document requirements;
terminated without any valid cause,
including the transport of his or her 7. Medical evacuation when an
personal belongings. adequate medical facility is not
available proximate to the migrant
In case of death, the insurance worker, as determined by the
provider shall arrange and pay for the insurance company's physician and/or
repatriation or return of the worker's a consulting physician, evacuation
remains. The insurance provider shall under appropriate medical supervision
also render any assistance necessary by the mode of transport necessary
in the transport including, but not shall be undertaken by the insurance
limited to, locating a local licensed provider; and
funeral home, mortuary or direct
disposition facility to prepare the body 8. Medical repatriation When medically
for transport, completing all necessary as determined by the
documentation, obtaining legal attending physician, repatriation under
clearances, procuring consular medical supervision to the migrant
services, providing necessary casket worker's residence shall be undertaken
or air transport container, as well as by the insurance provider at such time
transporting the remains including that the migrant worker is medically
retrieval from site of death and delivery cleared for travel by commercial
to the receiving funeral home; carrier.
4. Subsistence allowance benefit, with If the period to receive medical

at least One hundred United States clearance to travel exceeds fourteen
dollars (US$100.00) per month for a (14) days from the date of discharge
maximum of six (6) months for a from the hospital, an alternative
migrant worker who is involved in a appropriate mode of transportation,
case or litigation for the protection of such as air ambulance, may be
his/her rights in the receiving country; arranged. Medical and non-medical
escorts may be provided when
5. Money claims arising from necessary. (Sec. 23 of R.A. 10022)
employer's liability which may be
awarded or given to the worker in a

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Jurisdiction of Insurance Commission over Note: A creditor may insure his debtor’s life for the
claims, questions, disputes purpose of protecting his debt, but only to the extent
Any question or dispute in the enforcement of of the amount of the debt and the cost of carrying
any insurance policy issued under this Rule the insurance on the debtor’s life.
shall be brought before the IC for mediation or
adjudication. (Sec. 11 of R.A. 10022) d. Any person upon whose life any
estate or interest vested in him
depends. (Sec. 10, Insurance Code)
4. Insurable Interest
Life Insurance v. Civil Donation
a. Definition and Nature
Insurable Interest LIFE INSURANCE CIVIL DONATION
Interest which the law requires the owner of an
insurance policy to have in the thing or person
insured. This is also founded An act of liberality
on liberality, as the whereby a person
General Rule: It is pecuniary in nature. beneficiary will receive disposes gratuitously
the proceeds of the a thing or right in favor
A person is deemed to have an insurable interest in said insurance. of another who
the subject matter insured where he has a relation accepts it.
or connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation
and will suffer pecuniary loss or damage from its
destruction, termination or injury by the happening
As a consequence, the proscription in Civil Code,
of the event insured against. (Lalican v. Insular Life
Art. 739 should equally operate in life insurance
Insurance Co, G.R. No. 183526, 2009)
contracts (Insular Life v. Ebrado, G.R. No. L-44059,
1977)
b. Distinguishing Life From Non-
Life (Property) Insurance Beneficiary
Person who is named or designated in a contract of
Exception: Life Insurance life, health, or accident insurance as the one who is
to receive the benefits which become payable,
The expectation of benefit from the continued life of according to the terms of the contract, upon the
that person need not necessarily be of pecuniary death of the insured (44 Am. Jur. 2d. 639 cited in de
nature. Leon, 2010, p. 96).
1. In Life/Health Designation of Beneficiary

a. Himself, of his spouse and of his General rule: When one insures his own life, he
children; may designate any person as the beneficiary,
whether or not the beneficiary has an insurable
If a person will insure the life of another payable to interest in the life of the insured.
himself, he must have an insurable interest in the life
of the person whose life he is insuring. Exceptions: Persons specified in Article 739 of the
Civil Code cannot be designated:
b. Any person on whom he depends 1. Those made between persons who were
wholly or in party for education or guilty of adultery or concubinage
support, or in whom he has pecuniary (conviction is not a condition precedent);
interest; 2. Those made between persons found guilty
of the same criminal offense, in
Note: Persons obliged to support each other: (See consideration thereof;
Family Code, Art. 195) 3. Those made to a public officer or his wife,
descendants or ascendants by reason of
c. Any person under a legal obligation his office.
to him for the payment of money, or
respecting property or services, of In order for Article 739 to apply, it is not required
which death or illness might delay or that there be a previous conviction for adultery or
prevent the performance; and concubinage, due to the wording of “preponderance
of evidence” (Insular Life v. Ebrado, G.R. No. L-
44059, 1977)

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LGBTQ+ members have the right to designate their b. If no other beneficiaries, in accordance with
domestic partners as beneficiaries. An individual the policy contract; (e.g. to the contingent
who has secured a life insurance policy on his or her or substitute of beneficiaries)
own life may designate any person as beneficiary c. If the policy contract is silent, to the estate
provided that such designation does not fall under of the insured. (Sec. 12, Insurance Code)
the enumerations provided in Article 739 of the Civil
Code. (Insurance Commission, Legal Opinion No. 2. In Property
2020-02, dated March 04, 2020) Coverage of Insurable Interest in Property
1. Property itself;
When is the estate entitled to the proceeds of the 2. Any relation thereto; or
insurance? 3. Liability in respect thereof (Sec. 13,
1. Where the insured has not designated any Insurance Code)
beneficiary; or
2. When the designated beneficiary is It may consist of:
disqualified by law to receive the proceeds 1. An existing interest;
(Heirs of Maramag v. Maramag, G.R. No. 2. An inchoate interest founded on an existing
181132, 2009) interest; or
3. An expectancy, coupled with an existing
Note: interest in that out of which the expectancy
1. The designation is revocable unless the arises
right to revoke is expressly waived in the
policy. Measure of Insurable Interest in Property
2. If the insured or beneficiary is a minor, and The extent to which the insured might be damnified
the amount involved does not exceed by loss or injury thereof.
P50,000.00, the father, or in his absence or
incapacity, the mother may exercise the In general, a person has an insurable interest in the
minor’s rights under the policy, without the property, if he derives pecuniary benefit or
need of a court authority or a bond. advantage from its preservation or would suffer
3. If the premiums are paid out of the conjugal pecuniary loss, damage or prejudice by its
funds, the proceeds are considered destruction whether he has or has no title in, or lien
conjugal. upon, or possession of the property. Hence,
pecuniary interest over the property is always
If the beneficiary is other than the insured’s estate, necessary.
the source of premiums (either from paraphernal or
conjugal funds) would not be relevant (BPI v. Existence of insurable interest is a matter of public
Posadas, G.R. No. L-34583, 1931). policy. Hence, the principle of estoppel cannot be
invoked.
Right of Insured to Change Beneficiary in Life
Insurance Insurable Interest in Life v. Property
General Rule: The insured shall have the right to
LIFE PROPERTY
change the beneficiary he designated in the policy.
(Sec. 11, Insurance Code)
BASIS
Exception: If the insured expressly waived his right May be based on Based on pecuniary
to change the beneficiary, this makes the latter an pecuniary interest, interest.
irrevocable beneficiary. But despite the waiver, he affinity, or
can still change the beneficiary, provided that he consanguinity.
obtains the beneficiary’s consent. (Sec. 11,
Insurance Code) WHEN INTEREST MUST EXIST
Forfeiture by Beneficiary of Interest in Insurance In life insurance (save Must exist when the
Policy that effected by insurance takes effect
The interest of a beneficiary in a life insurance policy creditor on life of and when the loss
shall be forfeited when the beneficiary is the debtor), it is enough occurs, but need not
principal, accomplice, or accessory in willfully that insurable interest exist in the meantime.
bringing about the death of the insured; in which exists at the time the
event, the share forfeited shall be paid as follows: policy takes effect and
a. To the other beneficiaries if not disqualified;

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need not exist at the 23 A change of interest by will or

time of the loss. succession on the death of the
insured.
24 A transfer of interest by one of

AMOUNT OF INSURABLE INTEREST several partners, joint owners, or
owners in common, who are jointly
General Rule: No Limited to the actual insured, to the others.
limit. value of
Exception: If insurable damage/injury/loss.
interest is based on 57 When a policy is so framed that it
creditor-debtor will inure to the benefit of
relationship, only to the whomsoever, during the
extent of the credit or continuance of the risk, may
debt. become the owner of the interest
insured.
WHEN BENEFICIARY MUST HAVE

INSURABLE INTEREST NOTE: When there is an express prohibition against
alienation in the policy, in case of alienation, the
There is no need No contract or policy of contract of insurance is not merely suspended
for the insurance on property shall be but is avoided. (Art. 1306, Civil Code)
beneficiary to enforceable except for the Change of Interest That Suspends an Insurance
have insurable benefit of some person having Contract
interest in the an insurable interest in the The change of interest contemplated by law is an
life insured. property insured. absolute transfer of the insured’s entire interest in
the property insured to one not previously interested
or insured. In the following cases, the policy is not
suspended: (ML2R2)
Change in Interest of Thing
General rule: A change in interest in the thing a. Execution of a Mortgage
insured without a change in insurance does not b. Lease of the insured property
transfer the policy but suspends it until the interest c. Vendor who has a Lien on the property
in the thing and the interest in the insurance are sold until the purchase price is paid or
vested in the same person. the conditions of the sale are
performed
Exceptions d. Judgment debtor whose property has
SEC. EXCEPTION been sold on execution (Right to
redeem)
e. Mortgagor whose property has been
20 Life, health, and accident foreclosed (Right of redemption)
insurance.
Extent of Insurable Interest in a Mortgage
Situation
21 A change of interest in the thing Interest of the Mortgagor and the Mortgagee in the
insured after the occurrence of an mortgaged property is separate and distinct from the
injury which results in a loss. other. In case both of them take out separate
insurance policies on the same property, or one
policy covering their respective interests, there is no
22 A change of interest in one or more double insurance.
of several things, separately
insured by one policy. Mortgagor, as owner, may insure the property
mortgaged to the full value of such property.
Mortgagee can insure the same only to the extent of

the amount of his credit.

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Insurance by Mortgagor for the Benefit of Double insurance exists where the same person is
Mortgagee, or Policy Assigned to the insured by several insurers separately in respect to
Mortgagee: the same subject and interest.
The insurance is still deemed to be upon the interest
of the mortgagor who does not cease to be a party Note: It is not prohibited by law. But it may be
to the original contract. contractually prohibited by a provision in an
insurance policy.
Any act of the mortgagor, prior to the loss, which
would otherwise avoid the insurance, will have the Over insurance exists when the amount of the
same effects, although the property is in the hands insurance is beyond the value of the insured’s
of the mortgagee. insurable interest.
Any act, which under the contract of insurance is to When there is double insurance and over insurance
be performed by the mortgagor, may be performed results, the insured can claim in case of loss only up
by the mortgagee with the same effect as if it has to the agreed valuation or up to the full insurable
been performed by the mortgagor. value from any, some or all insurers, without
prejudice to the insurers ratably apportioning the
Upon the occurrence of the loss, the mortgagee is payments. Insured can also recover before or after
entitled to recover to the extent of his credit and the the loss, from both insurers the excess premium he
balance, if any, is payable to the mortgagor since has paid.
such policy is for the benefit of both the mortgagor
and mortgagee. Requisites of Double Insurance:
1. The person injured is the same;
Upon recovery of the mortgagee to the extent of his 2. There are two or more insurers insuring
credit from the insurer, the mortgagor is released separately;
from his indebtedness. 3. The subject matter is the same;
4. The interest insured is also the same;
Insurance by Mortgagee of His Own Interest 5. The risk or peril insured against is likewise
The mortgagee may collect from the insurer upon the same.
the occurrence of the loss to the extent of his credit.
Double Insurance v. Over insurance
Unless otherwise stated in the policy, the mortgagor
DOUBLE OVER INSURANCE
has no right to collect the balance of the proceeds
INSURANCE
of the policy after payment of the interest of the
mortgagee.
There may be no over Amount of insurance
The insurer, upon payment to the mortgagee-
insurance as when the is beyond the value of
insured, becomes subrogated to the rights of the
sum total of the the insured’s
mortgagee against the mortgagor and may collect
amounts of the insurable interest.
the debt of the mortgagor to the extent of the amount
policies issued does
paid to the mortgagee.
not exceed the
insurable interest of
Standard or Union Mortgage Clause
the insured.
If a fire insurance policy contains this, the acts of the
mortgagor do not affect the mortgagee. It makes a
separate and distinct contract of insurance on the
Several insurers May have only one
interest of the mortgagee.
involved. insurer involved.
Open or Loss-Payable Mortgage Clause
It is a contract which provides that the payment of
loss to the mortgagee, if any, will be according to his Reinsurance
interest as it may appear in the contract. Under such One by which an insurer procures a third person to
clause, the acts of the mortgagor will affect the insure him against loss or liability by reason of such
mortgagee. original insurance. In every reinsurance contract,
the original contract of insurance and the contract of
5. Double Insurance And Over reinsurance are separate and distinct and covered
insurance by separate policies. The original insured has no
interest in a contract of reinsurance.

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6. No Fault, Suicide, And

Insurance v. Reinsurance Incontestability Clause
INSURANCE REINSURANCE a. General Overview
POLICY
No Fault of Indemnity
An insurer may be held liable under the “no fault
Written document Any contract by which indemnity” provision in respect of a Compulsory
embodying the terms an insurer procures a Motor Vehicle Liability Insurance policy without the
and stipulations of the 3rd person to insure necessity of proving fault or negligence of any kind
contract of insurance him against loss or provided the requisites are present:
between the insured liability by reason of an 1. The claim is for death or injury to any
and insurer. original insurance. passenger or third party
2. The total indemnity in respect of any one
person shall be P15000.
3. The necessary proof of loss under oath
to substantiate the claim must be
Formal written The original contract of submitted.
instrument insurance and the
evidencing the contract of reinsurance Rules on Claims Under Sec. 391
contract of insurance. are covered by The following rules on claim under the “no fault
separate policies. indemnity” provision where proof of fault or
negligence is not necessary for payment of any
claim for death or injury to a passenger or third party
are established:
1. A claim may be made against one motor
Reinsurance v. Double Insurance vehicle only.
2. If the victim is an occupant of a vehicle, the
DOUBLE REINSURANCE
claim shall lie against the insurer of the
INSURANCE
vehicle in which he is riding, mounting or
dismounting from.
Involves the same Insurance of different 3. In any other case (i.e. if the victim is not an
interest. interests. occupant of a vehicle), the claim shall lie
against the insurer of the directly offending
vehicle.
Insurer remains in Insurer becomes an 4. In all cases, the right of the party paying the
such capacity. insured in relation to claim to recover against the owner of the
insurer. vehicle responsible for the accident shall be
maintained.
Insured in the 1st Original insured has no Right of Insurer Paying “No Fault Indemnity”
contract is a party in interest in reinsurance In all cases, the right of the party paying the claim to
interest in the 2nd contract. recover against the owner of the vehicle responsible
contract. for the accident shall be maintained.
It is of no moment that the vehicle insured isnot the

Subject of insurance Subject of insurance is one that caused accident since the law provides that
is property. the original insurer’s the insured is not the one that caused the accident
risk. since the law provides that the insurer paying the
claim may recover from the owner of the vehicle
responsible for the accident.
Insured has to give Consent of original
his consent. insured, not This is precisely the essence of "no fault indemnity"
necessary. insurance which was introduced to and made part of
our laws in order to provide victims of vehicular
accident or their heirs immediate compensation,
although in a limited amount, pending final
determination of who is responsible for the
accidental and liable for the victim's injuries or
death.

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The "no fault indemnity" provision is part of the Effects and Purpose of Incontestability
provisions on compulsory motor vehicle liability When all requisites are present, the insurer can no
insurance and should be read together with the longer escape liability nor be allowed to prove that
requirement for compulsory passenger and/ or third the policy is void ab initio or rescindable.
party-liability insurance which was mandated in
order to ensure ready compensation for victims of The insurer is precluded from contesting the policy
vehicular accidents. on any ground.
Suicide Clause The purpose of the clause was to prevent the

The insurer in a life insurance contract shall be liable inequities perpetrated by insurance companies of
in case of suicide only when it is committed after the fishing for evidence to show that the insured made
policy has been in force for a period of two (2) years false representations in order to escape liability on
from the date of its issue or of its last reinstatement, the policy.
unless the policy provides a shorter period:
Provided, however, That suicide committed in the Period of Incontestability
state of insanity shall be compensable regardless of Old Doctrine: The insurer has 2 years from the date
the date of commission. (Sec.183, Insurance Code) of issuance of the life insurance contract or its last
reinstatement within which to contest the policy,
Burden of Proof in Suicide Clauses whether or not the insured still lives within such
The basic instinct of self-preservation militates period. (Tan v. CA, G.R. No. 48049, 1989)
against the commission of suicide. Hence it is
incumbent upon a party alleging suicide as a Prevailing Doctrine: The insurer must rescind the life
defense, especially in actions involving insurance insurance contract on the ground of concealment or
policies to prove it by clear and convincing proof. misrepresentation within 2 years from the time the
policy was issued provided the insured is still alive
Incontestability Clause at that time. If the insured is already dead, the life
Whenever a right to rescind a contract of insurance insurance policy is already incontestable even if less
is given to the insurer by any provision of Chapter I than 2 years had elapsed at that time. (Sun Life v.
of the Insurance Code (The Contract of Insurance), Sibya, G.R. No. 211212, 2016)
such right must be exercised previous to the
commencement of an action on the contract. Insurer’s Defenses Not Barred by Incontestable
Clause
After a policy of life insurance made payable on the 1. That the premiums were not paid.
death of the insured shall have been in force during 2. That the insured violated the condition in
the lifetime of the insured for a period of two (2) the policy relating to military or naval
years from the date of its issue or of its last service in times of war.
reinstatement, the insurer cannot prove that the 3. That the insured has no insurable interest
policy is void ab initio or is rescindable by reason of in the subject matter of the insurance.
the fraudulent concealment or misrepresentation of 4. That the cause of death was expected or
the insured or his agent. (Sec. 48, Insurance Code) not covered by the terms of the policy.
5. That the fraud committed was of a
Meaning of Incontestable Clause particularly vicious type such as:
An incontestable clause is an agreement by which a. Where the policy was taken in
the insurance company limits the period of time furtherance of a scheme to murder
within which it will interpose objections to the validity the insured;
of the policy or set up any defense. (Sec. 48[2], b. Where the insured substituted
Insurance Code) another person for the medical
examination; or
Requisites of Incontestability c. Where the beneficiary feloniously
1. It must be a life insurance policy. killed the insured.
2. It must be payable on the death of the 6. That the necessary notice or proof of
insured. insured’s death was not given.
3. It must have been in force during the
lifetime of the insured for a period of two Period of Contestability in Reinstated Policies
years. When the policy lapses and is subsequently
reinstated, the 2 year period of contestability should
start from the date of last reinstatement because a

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reinstated policy should be viewed as a new Right of the Injured Person to Sue Insurer of
contract. the Party at Fault
SCENARIO EFFECT
Thus, where the insurer asserts that the
reinstatement was obtained through fraud, he may
raise this defense at any time before the expiration The contract provides 3rd persons, to whom
of the contest period, reckoned from the date of for indemnity against the insured is liable,
reinstatement. liability to 3rd persons. CAN sue the insurer.
When the insured concealed in the application for
reinstatement the fact that she had been suffering
for at least 3 years from bronchial asthma, the
period of incontestability should be computed from
the date of reinstatement. The contract is for 3rd persons CANNOT
indemnity against proceed against the
b. No Fault Clauses In Casualty actual loss or insured.
payment.
Insurance
It is an insurance covering loss or liability arising (Guingon v. Del Monte, G.R. No. L-22042, 1967)
from accident or mishap, excluding those falling
under those types of insurance such as fire, NOTE: The injured person may sue the insurer and
suretyship, life or marine. (Sec. 176, Insurance the person at fault, notwithstanding the stipulation
Code) against suing the insurer (“no-action” clause) in the
policy. (Guingon v. Del Monte, G.R. No. L-22042,
Accident or Health Insurance 1967)
Insurance against specified perils which may affect
the person and/or property of the insured. (ex. NOTE: Where casualty insurance insures against
Personal Accident, Robbery/Theft Insurance) liability, then an injured third party may have direct
recourse against the insurance. On the other hand,
Third Party Liability Insurance if the casualty insurance insures against loss, then
Insurance against specified perils which may give an injured third party will not be able to directly sue
rise to liability on the party of the insured for claims the insurer.
for injuries to or damage to property of others. (ex.
Motor Vehicle Liability, Professional Liability, Rules as to Death or Injury Resulting from
Product Liability) Accidental Means
Where the contract is one of indemnity against “Intentional”

liability, it becomes operative as soon as the liability Implies the exercise of the reasoning faculties,
of the person indemnified arises irrespective of consciousness, and volition.
whether or not he has suffered actual loss (Republic
Glass Corp v. Qua, G.R. No. 144413, 2004) Where the provision of the policy excludes
intentional injury, the intention of the person inflicting
In a third-party liability insurance contract, the is the controlling factory.
insurer assumes the obligation of paying the injured However, if the injuries suffered by the insured
third party to whom the insured is liable. The insurer clearly resulted from the intentional act of a third
becomes liable as soon as the liability of the insured person, the insurer is relieved from liability as
to the injured third person attaches. Prior payment stipulated (Biagtan v. The Insular Life Assurance
by the insured to the injured third person is not Co. Ltd., G.R. No. 26194, 1972).
necessary in order that the obligation of the insurer
may arise. From the moment that the insured “Accidental”
became liable to the third person, the insured That which happens by chance or fortuitously,
acquired an interest in the insurance contract, which without intention or design, which is unexpected,
interest may be garnished like any other credit. unusual and unforeseen (Sun Insurance v. CA, G.R.
(Perla Compania de Seguros v. Ramolete, G.R. No. No. 92383, 1992)
L-60887, 1991)
The terms “accident” and “accidental” do not,
without qualification, exclude events resulting in
damage or loss due to fault, recklessness or

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negligence of third parties. (Pan Malayan Insurance Scope of Coverage Required

v. CA, G.R. No. 81026, 1990)
OWNERS OF OPERATORS OF
PRIVATE MOTOR LAND
“No Fault”
VEHICLES TRANSPORATION
The concept of accident is not necessarily
synonymous with “NO FAULT”. It may be utilized
simply to distinguish intentional or malicious acts
Comprehensive Comprehensive
from negligent or careless acts of man (Pan against 3rd party against 3rd party
Malayan Insurance Corp. v. CA, G.R. No. 81026, liability for death or liability for death or
1990). bodily injuries bodily injuries
The reinsurance contracts were correctly issued in In case a private The insurer may
favor of Plaridel. By its nature, reinsurance contracts
motor vehicle is being extend additional other
are issued in favor of the direct insurer because the used to transport risks at its option
subject of such contracts is the direct insurer’s risk, passengers for
in this case, Plaridel’s contingent liability to MSAPL, compensation, such
and not the risk assumed under the original policy. coverage shall, in
With or without reinsurance, the obligation of the addition, include
surety to the party against whom writ of attachment
passenger liability
is issued remains the same (Communication and
Information Systems Corporation v. Mark Sensing
Australia, G.R. No. 192159, 2016).
c. No Fault Clauses In Compulsory

Motor Vehicle Liability Rules of Comprehensive Third-Party Liability
Insurance (CMVIL) Insurance (CTPL)
Registration of any vehicle will not be made or

A protection coverage that will answer for legal
renewed without complying with the requirements.
liability for losses and damages for bodily injuries
and/or property damage that may be sustained by
The protection may be complied with using any of
another arising from the use and operation of a
the following:
motor vehicle by its owner.
1. Insurance policy
2. Surety bond
It is unlawful for any land transportation operator or
3. Cash bond
owner of a motor vehicle to operate the same in
public highways unless there is an insurance or
The purpose of CTPL is to give immediate financial
guaranty to indemnify the death or bodily injury of a
assistance to victims of motor vehicle accidents
third party or passenger arising from the use thereof.
and/or their dependents, especially if they are poor
regardless of the financial capability of motor vehicle
owners or operators responsible for the accident.
Motor Vehicle
(First Integrated Bonding and Ins. Co., Inc. v.
Shall mean any vehicle propelled by any power
Hernando, G.R. No. 51221, 1991).
other than muscular power using the public
highways (Sec. 3[a], R.A. 4136)
“No Fault” Clause
The injured third party or passenger or heirs of the
Exceptions: road rollers, trolley cars, street
deceased is given the option to file a claim for death
sweepers, sprinklers, lawn mowers, bulldozers,
or injury without the necessity of proving fault or
graders, forklifts, amphibian trucks, and cranes if not
negligence of any kind.
used in public highways, vehicles which run only on
rails or tracks, and tractors, trailers and traction
Conditions for Application of No-fault Clause:
engines of all kinds used exclusively for agricultural
1. The claim must be for death or bodily
purposes.
injuries only (property damage/liability not
included).
2. The total indemnity in respect of any person
shall not be less than fifteen thousand
pesos (P15,000).

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3. The following proofs of loss, when Note: In all cases, the right of the party paying the
submitted under oath, shall be sufficient claim to recover against the owner of the vehicle
evidence to substantiate the claim: responsible for the accident shall be maintained.
1. Police report of accident; and (Sec. 391, Insurance Code)
2. Death certificate and evidence
sufficient to establish the proper d. Liability Of Insurer In Case Of
payee; or, Suicide Or Death
3. Medical report and evidence or
medical or hospital disbursement 1. Suicide
in respect of which refund is The insurer is LIABLE in the following cases:
claimed. 1. Suicide was committed after the policy has
4. Claim may be made against one motor been in force for a period of two years from
vehicle only; the date of its issue or its last reinstatement;
1. Against the insurer of the vehicle 2. Suicide committed in a state of insanity
where one is a passenger regardless of the date of the commission of
2. in any other case, the offending the suicide; or
vehicle 3. If committed after the lapse of a shorter
period in the policy (Sec. 183, Insurance
Claimant Code)
The claimant or victim may be a “passenger” or a
“third party” (Sec. 391, Insurance Code) NOTE: Any stipulation extending the two-year
period is void.
1. Passenger
Any fare paying person being transported and The insurer is NOT liable in the following cases:
conveyed in and by a motor vehicle for 1. The suicide is not by reason of insanity and
transportation of passengers for compensation, is committed within the two-year period;
including persons expressly authorized by law or 2. The suicide is by reason of insanity but is
by the vehicle’s operator or his agents to ride not among the risks assumed by the insurer
without fare. (Insurance Code, Sec. 386[b]] regardless of the date of commission; and
3. The insurer can show that the policy was
2. Third Party obtained with the intention to commit
Any person other than a passenger as defined in suicide even in the absence of any suicide
this section and shall also exclude a member of exclusion in the policy.
the household, or a member of the family within
the second degree of consanguinity or affinity, of 2. Killing by the Beneficiary
a motor vehicle owner or land transportation General Rule: The interest of a beneficiary in a life
operator, as likewise defined herein, or his insurance policy shall be forfeited when the
employee in respect of death, bodily injury, or beneficiary is the principal, accomplice, or
damage to property arising out of and in the accessory in willfully bringing about the death of the
course of employment (Sec. 386[c], Insurance insured. In such a case, the share forfeited shall
Code) pass on to the other beneficiaries, unless otherwise
disqualified. In the absence of other beneficiaries,
Proper Insurer to Claim From the proceeds shall be paid in accordance with the
In the case of an occupant of a vehicle, claim shall policy contract. If the policy contract is silent, the
lie against the insurer of the vehicle in which the proceeds shall be paid to the estate of the insured.
occupant is riding, mounting or dismounting from. (Sec. 12, Insurance Code)
If not an occupant, claim shall lie against the insurer
of the directly offending vehicle. Exceptions:
1. Accidental killing;
The claimant is not free to choose from which 2. Self-defense; and
insurer he will claim the "no-fault indemnity" as the 3. Insanity of the beneficiary at the time he
law, by using the word "shall," makes it mandatory killed the insured
that the claim be made against the insurer of such
vehicle. That said vehicle might not be the one that e. Incontestability Clauses
caused the accident is of no moment since the law In relation to the time to exercise the right to rescind
itself provides that the party paying the claim may the insurance contract, it shall be made prior to the
recover against the owner of the vehicle responsible commencement of an action on the contract, if it be
for the accident. (Perla Compania de Seguros v.
Ancheta, G.R. No. L-49699 August 8, 1988)

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a Non-Life Policy, and before the incontestability either accepted or rejected, it is merely a proposal
clause sets in, if it be a Life Policy. or an offer to make a contract. (Perez v. CA, G.R.
No. 112329, 2000)
Requisites of Incontestability Clause:
1. The insurance is a life insurance policy. Also, according to Enriquez v. Sun Life Assurance
2. It is payable on the death of the insured. (G.R. No. L-15895, 1920):
3. It has been in force during the lifetime of the 1. Submission of application, even with
insured for at least 2 years from its date of premium payment is a mere offer on the
issue or of its last reinstatement. part of the applicant, and does not bind the
insurer;
NOTE: The period of 2 years may be shortened but 2. An insurance contract is also not perfected
it cannot be extended by stipulation. where the applicant dies before the
approval of his application or it does not
When incontestability clause sets in appear that the acceptance of the
Whichever is earlier, between: application ever came to the knowledge of
1. Within 2 years from the date of issuance or the applicant;
its last reinstatement; or 3. An acceptance made by letter shall not bind
2. Upon the insurer’s death (Sun Life v. Sibya, the person making the offer except from the
G.R. No. 211212, 2016) time it came to his knowledge.
After the two-year period lapses, or when the a. Offer And Acceptance/
insured dies within the period, the insurer must Consensuality
make good on the policy, even though the policy
was obtained by fraud, concealment, or Delay in Acceptance
misrepresentation (Sun Life v. Sibya, G.R. No. A contract of insurance, like other contracts, must
211212, 2016). be assented to by the parties either in person, or by
their agents. Under the law, assent or consent is
Defenses Not Barred by Incontestability Clause: manifested by the meeting of the offer and the
1. Person taking the insurance lacked acceptance upon the thing and the cause which are
insurable interest as required by law; to constitute the contract. If an application has not
2. Cause of the death of the insured is been either accepted or rejected, there is no
excepted risk; contract yet as it is merely and offer or proposal (De
3. Premiums have not been paid; Leon, The Insurance Code Annotated, 2014)
4. Conditions of the policy relating to military
or naval service have been violated; Delivery of the Policy
5. The fraud is of a particularly vicious type, The delivery of a policy is not, however, a
wherein: prerequisite to a valid contract of insurance. The
1. The policy was taken in contract may be completed prior to delivery of the
furtherance of a scheme to murder policy or even without delivery of the policy
the insured; depending on the intention of the parties. (De Leon,
2. The insured instituted another The Insurance Code Annotated, 2014)
person for the medical
examination; and, b. Premium Payment
3. The beneficiary feloniously killed
the insured; Premium
6. Beneficiary failed to furnish proof of death Premium is the consideration paid to an insurer for
or to comply with any condition imposed by undertaking to indemnify the insured against a
the policy after the loss has happened; or, specified peril.
7. Action was not brought within the time
specified. An insurer is entitled to payment of the premium as
soon as the thing insured is exposed to the peril
B. PERFECTION OF THE INSURANCE insured against.
CONTRACT
Effect of Non-Payment of Premium
Consensual Nature of Contract General Rule:
A contract of insurance must be assented to by both Non-payment of first premium - Prevents the
parties, either in person or through their agents and contract from becoming binding notwithstanding the
so long as an application for insurance has not been

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acceptance of the application or the issuance of the e. Where the parties are barred by
policy. estoppel. (Jose Marques, et al. vs. Far
But non-payment of the balance of the premium due East Bank and Trust Company, et al. /
does not produce the cancellation of the contract. Far East Bank and Trust Company, et
(Phil. Phoenix Surety & Insurance v. Woodworks, al. vs. Jose Marques, et al. G.R. No.
G.R. No. L-22684, Aug. 31, 1967). 171379/G.R. No. 171419, 2011).
Subsequent premiums - Does not affect the Given the provisions of the Insurance Code, which
validity of the contracts unless, by express is a special law, the applicable rate of interest shall
stipulation, it is provided that the policy shall in that be that imposed in a loan or forbearance of money
event be suspended or shall lapse. as imposed by the BSP. The unpaid amount due
from insurer is a forbearance of money. So, the
Exceptions: proper rate applies (Stronghold Insurance Co., Inc.
a. In case of life and industrial life v. Pamana Island Resort Hotel and Marina Club,
whenever the grace period provision Inc., G.R. No. 174838, 2016).
applies.
But NOTE: In the case of Chartis Philippines
Individual Life or Endowment Insurance Inc. v. Cyber City Teleservices Ltd
Insurance and Group Life Insurance (G.R. No 234299), the Supreme Court discussed a
Grace period of either thirty (30) days or useful evaluation of Section 77 of the Insurance
one (1) month within which the payment Code. The essential rules worth noting are as
of any premium after the first may be follows:
made 1. If the insured paid the premium, the
insurer's liability attaches correspondingly.
Industrial Life Insurance a. There is a valid and binding policy
Grace period is four (4) weeks, and or contract of insurance and the
where premiums are payable monthly, insured may demand
either thirty (30) days or one (1) month. indemnification in case of loss.
b. There is no credit on the premium
b. Where there is an acknowledgement in to speak of and, therefore, none
the contract or policy of insurance that which the insurer can demand
the premium had already been paid. because he has already been
(Insurance Code, Sec. 79) paid.
2. If the insured did not pay the premium and
c. There is an agreement allowing the the parties did not agree that the insurer's
insured to pay the premium in liability has attached, then there is no valid
installments and partial payment has or binding contract of insurance.
been made at the time of loss (Makati a. The insured cannot demand
Tuscany Condominium v. Court of indemnification if loss occurs and
Appeals, G.R. No. 95546, 1992) neither can the insurer demand
payment of the premium.
Cf. Where the policy provides for 3. If the insured did not actually pay the
payment in premium in full before the premium but the parties have agreed that
“policy shall be deemed effective, valid, the insurer's liability has attached, then the
and binding upon the company” – the insured is considered to have extended
partial payment is merely treated as a credit on the premium.
deposit and does not make the policy a. When the insured accepts the
binding. (Sps. Tibay v. CA, G.R. No. terms of the credit, there is a valid
119655, 1996) and binding contract of insurance.
b. The insured must pay the premium
d. Where a credit term was agreed upon before the end of the credit term;
like the agreement in where the insurer otherwise, he cannot demand
granted a 60-90-day credit term for the indemnification in case of loss.
payment of the premiums despite full c. The insurer may demand the
awareness of Section 77 (UCPB premium, whether or not loss
General Insurance, Inc. v. Masagana occurred.
Telemart, G.R. No. 137172, 1999)

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c. Apply such value as the premium for a paid-

Acknowledgment up insurance
Authority of Agent to Receive Premium d. Secure from such value an automatic
Where an insurer authorizes an insurance agent or premium loan before the expiration of the
broker to deliver a policy to the insured, it is deemed grace period
to have authorized said agent to receive the
premium in its behalf. Cash Surrender Value
An amount to be paid to the insured upon surrender
The insurer is also bound by its agent’s of the policy contract.
acknowledgement of receipt of payment of premium
(American Home Assurance Co. v. Chua, G.R. No. Alternatives to Cash Surrender Value
130421,1999). a. Extended Insurance/Term Insurance
Where insurance is "extended," the insured
Return/Refund is given the right, upon default, after the
Instances for Refund payment of at least three full annual
The insured is entitled to return of premiums paid premiums (see Sec. 227[f].), to have the
when: policy continued in force from the date of
a. The thing insured was never exposed to the default for a time either stated or equal to
risks insured against; the amount as the net value of the policy
b. Contract is voidable due to the fraud or taken as a single premium, will purchase.
misrepresentation of insurer; In case of death of the insured within the
c. Insurer never incurred liability; extended term, he may recover the face
d. The insurance is for a definite period and value of the policy. Extended insurance is
the insured surrenders his policy before the sometimes called "term insurance,"
termination thereof (pre-termination); "temporary insurance," or "paid-up
e. Contract is voidable because of the extended insurance." (De Leon, The
existence of facts of which the insured was Insurance Code of the Philippines
ignorant without his fault; Annotated [2014])
f. There is over-insurance (but only a ratable
return of premium); and b. Paid-up Insurance
g. rescission is granted due to the insurer’s Where insurance is "paid-up," the insured
breach of contract. is given the right, upon default, after the
payment of at least three annual premiums
Payment of Interest on Refund of Premium: (Ibid.) to have the policy continued in force
Sections 243 and 244 of the Insurance Code from the date of default for the whole period
explicitly provide for payment of interest when there of the insurance without further payment of
is unjustified refusal or withholding of payment of premiums. In case of death of the insured,
claim by the insurer. Article 2209 of the Civil Code he may recover only the "paid-up" value of
likewise provides for payment of interest when the the policy, usually less than the "paid-up"
debtor is in delay. However, in cases where the premiums, under the same conditions as
refusal to refund insurance premiums is because the the original policy. Technically, the term
insurer wants to rescind the contract due to "paid-up" insurance is often referred to as
concealment, the insurance company did not "reduced paid- up" insurance. (De Leon,
unreasonably deny or withhold the insurance The Insurance Code of the Philippines
proceeds (Sun Life v. Tan Kit, G.R. No. 183272, Annotated [2014])
2014).
c. Automatic Premium Loan
c. Non-Default Options In Life This provision protects against the
Insurance unintentional lapse of the contract by
advancing, in the form of policy loan, the
Options to a Policyholder unpaid amount of a premium due. The
The options available to a policyholder in case of automatic premium loan is advantageous
non-payment of premium after three full annual to the policy owner because it helps to
premiums have been paid are: continue the contract and all its features in
a. Received the cash surrender value full force and effect.
b. Apply such value as the premium for an
extended insurance Conditions:

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1. In the event of default in premium payment, Kinds of Policies

the Premium Loan provision shall only Open or Unvalued Policy
apply if requested in writing by the Value of thing insured is not agreed upon, but left to
policyholder either in the application or at be ascertained in case of loss;(ex. Marine and Fire
any time before the expiration of the grace Insurances). (Section 60, Insurance Code)
period.
2. The moment there is default in premium In an open policy, the value of the property insured
payment and no option has been elected is not agreed upon, although the parties may agree
either in the application or within the time on the maximum amount of recovery or limit to the
specified in the policy, one of the paid-up liability of the insurer. In case of loss, this amount
options specified therein shall automatically must be considered, by agreement of the insurer
take effect. (De Leon, The Insurance Code and the insured, the actual value of the property in
of the Philippines Annotated [2014]) the absence of evidence of greater or lesser value.
(Dev’t Ins. Corp. v. IAC, G.R. No. L-71360, 1986).
d. The Policy
Valued Policy
Insurance Policy Definite valuation is agreed upon by both parties,
A written document issued by the insurer to the and written on the face of the policy; (ex. Marine and
insured, embodying the terms and conditions of their Fire Insurances) (Section 51, Insurance Code)
contract of insurance.
Running Policy
The policy is not necessary for the perfection of the Also called Floating, Adjustable, Blanket or
contract. The Policy is only the formal written Declaration Policy; Contemplates successive
instrument evidencing the contract. It is required, insurances and which provides that the subject of
however, that all policies issued or delivered must the policy may from time to time be defined. (Section
be in the form previously approved by the Insurance 62, Insurance Code)
Commission.
Void Stipulations in an Insurance Contract
Formal Requirements of a Policy ● Stipulations for the payment of loss
a. In printed form which may contain blank whether the person insured has or has not
spaces; any interest in the property insured;
b. Any word, phrase, clause, mark, sign, ● The policy shall be received as proof of
symbol, signature, number or word such interest; or
necessary to complete the contract of ● Policies executed by way of gaming or
insurance shall be written in the blank wagering.
spaces provided therein. (Sec. 50,
Insurance Code) Form NOT REQUIRED to Perfect a Contract of
Insurance
Contents of an Insurance Policy The policy is the formal written instrument
a. The parties between whom the contract is evidencing the contract of insurance entered into
made; between the insured and the insurer. No form is
b. The amount to be insured except in the required to perfect (i.e., to give rise to rights and
cases of open or running policies; obligations) a contract of insurance although an
c. The premium, or if the insurance is of a insurer is potentially exposed to sanctions if the
character where the exact premium is only following are not complied with.
determinable upon the termination of the
contract, a statement of the basis and rates Form of Insurance Contracts
upon which the final premium is to be a. No policy, certificate or contract of
determined; insurance shall be issued or delivered
d. The property or life insured; within the Philippines unless in the form
e. The interest of the insured in property previously approved by the Commissioner;
insured, if he is not the absolute owner and
thereof; b. No application form shall be used with, and
f. The risks insured against; and no rider, clause, warranty or endorsement
g. The period during which the insurance is to shall be attached to, printed or stamped
continue. (Section 50, Insurance Code) upon such policy, certificate or contract
unless the form of such application, rider,
clause, warranty or endorsement has been

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approved by the Commissioner. (Sec. 232, adhesion which must be construed liberally in favor
Insurance Code) of the insured (The Insular Life Assurance Company
v. Paz Khu, G.R. No. 195176, 2016).
Delivery
The best evidence that a contract has been entered Riders/Endorsements
into between the insurer and the insured is the Attachment to an insurance policy that modifies the
DELIVERY of the policy by the insurer to the conditions of the policy by expanding or restricting
insured. its benefits or excluding certain conditions from the
coverage.
Reinstatement of a Lapsed Policy
A provision that the policyholder shall be entitled to Formal Requirements of Riders
have the policy reinstated at any time within three Riders, together with other attachments to the
years from the date of default of premium payment policy, like clause, warranty or endorsements, are
unless the cash surrender value has been duly paid, not binding on the insured unless:
or the extension period has expired, upon 1. The descriptive title or name thereof is
production of evidence of insurability satisfactory to mentioned and written on the blank spaces
the company and upon payment of all overdue provided in the policy and;
premiums and any indebtedness to the company 2. Countersigned by insured or owner.
upon said policy, with interest rate not exceeding
that which would have been applicable to said Exception: No need to countersign if the rider
premiums and indebtedness in the policy years prior or other attachment is applied for by the insured
to reinstatement. or owner of the policy.
Requisites for Reinstatement of Lapsed Life A rider containing an “Automatic Increase

Insurance Policy Clause” – one that increases the coverage subject
a. Application shall be made within three to the attainment of a certain age of the insured – is
years from the date of lapse; not a separate contract. It is part of the original policy
b. There should be a production of evidence which is in the nature of a conditional obligation (CIR
of the good health of the insured: v. Lincoln Philippine Life Insurance Company, G.R.
c. If the rate of premium depends upon the No. 119176, March 19, 2001).
age of the Beneficiary, there should
likewise be a production of evidence of his Note: If there is inconsistency between the policy
or her good health; and the rider, the rider prevails, it being a more
d. There should be presented such other deliberate expression of the agreement.
evidence of insurability at the date of
application for reinstatement; Cover Note
e. There should be no change which has It is a contract for temporary insurance for a
taken place in such good health and reasonable time until the policy or policies can be
insurability subsequent to the date of such written or issued by the insurer.
application and before the policy is Also called: Binding Receipt or Slip, Interim,
reinstated; and Temporary or Provisional Policy
f. All overdue premiums and other
indebtedness in respect of the policy, Rules on Cover Notes:
together with interest at six per cent, a. Insurance companies doing business in the
compounded annually, should first be paid. Philippines may issue cover notes to bind
(Andres v. Crown Life Insurance Co., G.R. insurance temporarily, pending the
No. L-10874, 1958) issuance of the policy.
b. A cover note shall be deemed to be a
Insular Life’s argument was that the two-year contract of insurance within the meaning of
contestability period of the reinstated insurance Section 1(1) of the Code.
policy had not lapsed inasmuch as the insurance c. No cover note shall be issued or renewed
policy was reinstated only on December 27, 1999. unless in the form previously approved by
The Court notes that the reinstatement was the Insurance Commission.
conditioned upon the payment of additional d. A cover note shall be valid and binding for
premium not only prospectively, that is, to cover the a period not exceeding sixty (60) days from
remainder of the annual period of coverage, but also the date of its issuance, whether or not the
retroactively, that is for the period starting June 22, premium therefor has been paid, but such
1999. An insurance contract is a contract of cover note may be cancelled by either party

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upon at least seven (7) days’ notice to the 2. Making or proposing to make, as surety,
other party. any contract of suretyship as a vocation
e. If a cover note is not so cancelled, a policy and not as merely incidental to any other
of insurance shall, within sixty (60) days legitimate business or activity of the surety;
after the issuance of such cover note, be 3. Doing any kind of business, including a
issued in lieu thereof. Such policy shall reinsurance business, specifically
include within its terms the identical recognized as constituting the doing of an
insurance bond under the cover note and insurance business within the meaning of
the premium. this Code;
f. Cover notes may be extended or renewed 4. Doing or proposing to do any business in
beyond such sixty (60) days with the written substance equivalent to any of the
approval of the Commissioner if he foregoing in a manner designed to evade
determines that such extension is not the provisions of this Code.
contrary to and is not for the purpose of
violating any provisions of this Code. The In the application of the provisions of this Code, the
Commissioner may promulgate rules and fact that no profit is derived from the making of
regulations governing such extensions for insurance contracts, agreements or transactions or
the purpose of preventing such violations that no separate or direct consideration is received
and may by such rules and regulations therefor, shall not be deemed conclusive to show
dispense with the requirement of written that the making thereof does not constitute the doing
approval by him in the case of extension in or transacting of an insurance business. (Section
compliance with such rules and 2(b), Insurance Code)
regulations. (Section 52, Insurance Code)
g. Insurance companies may impose on cover Rights and Obligations of Insurer
notes a deposit premium equivalent to at An insurer is the party who assumes or accepts the
least 25% of the estimated premium of the risk of loss in an insurance contract. An insurer
intended insurance coverage but in no case undertakes for a consideration to indemnify the
less than P500.00. (Ins. Cir. Letter, Jan. 17, insured or to pay him a certain sum on the
1980.) (De Leon, The Insurance Code of happening of a specified contingency or event.
the Philippines Annotated [2014])
As such, an insurer has the right to receive
The fact that no separate premium was paid on the premiums to be paid by the insured.
cover note before the loss insured against occurred, ● Notwithstanding any agreement to the
does not militate against its binding effect as an contrary, no policy or contract of insurance
insurance contract. By their nature, cover notes do issued by an insurance company is valid
not contain particulars that would serve as basis for and binding unless and until the premium
the computation of the premiums and consequently, thereof has been paid, except in the case
no separate premiums are intended or required to of a life or an industrial life policy whenever
be paid therefor (Pacific Timber Export Corp. v. CA, the grace period provision applies, or
G.R. No. L-38613, 1982) whenever under the broker and agency
agreements with duly licensed
C. RIGHTS AND OBLIGATIONS OF intermediaries, a ninety (90)-day credit
PARTIES extension is given.
● No credit extension to a duly licensed
intermediary should exceed ninety (90)
1. Insurer
days from date of issuance of the policy.
Meaning of Insurer
Every corporation, partnership, or association, duly
authorized to transact insurance business as
2. Insured
elsewhere provided in this Code may be an insurer.
Meaning of Insured
(Section 6, Insurance Code)
The insured is a person to be indemnified, or one
The term doing an insurance business or who is to receive a certain sum upon happening of
a specified contingency or event.
transacting an insurance business, within the
meaning of this Code, shall include:
1. Making or proposing to make, as insurer, Anyone except a public enemy may be insured.
(Section 7, Insurance Code)
any insurance contract;

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Public Enemy b. Those made between persons found guilty

Public enemy is a nation at war with the Philippines, of the same criminal offense in
and also every citizen or subject of such nation. consideration thereof; and
Such term does not include robbers, thieves, and c. Those made to a public officer or his wife,
riotous mobs. descendants and ascendants, by reason of
his office.
Rights and Obligations of Insured
An insurer is entitled to payment of premium as soon Though the general principle stands, it is still
as the thing insured is exposed to the peril insured necessary that such designation of a beneficiary be
against. (Sec. 77, Insurance Code) made in good faith without fraud or intent to enter
● An acknowledgment in a policy or contract into a wagering contract. (Philippine Commercial
of insurance or the receipt of premium is Laws: The Insurance Code Vol. 1 Commentary,
conclusive evidence of its payment, so far Hernando B. Perez)
as to make the policy binding,
notwithstanding any stipulation therein that Rights and Obligations of Beneficiary
it shall not be binding until the premium is A beneficiary is the one to whom the insurance is
actually paid. (Sec. 79, Insurance Code) payable, or who is entitled to the proceeds of the
● An insurer may also contract and accept policy on the occurrence of the event designated.
payments, in addition to regular premium,
for the purpose of paying future premiums On the matter of consent
on the policy or to increase the benefits In cases of a revocable beneficiary, the policyowner
thereof. (Sec. 84, Insurance Code) is given the right to change beneficiaries at any time
before the insured’s death, and without the consent
Furthermore, since contracts of insurance are of the beneficiary. On the other hand, the
contracts uberrimae fidei (i.e. good faith), the insurer policyowner may not change an irrevocable
has a right to depend on the utmost good faith of the beneficiary, nor may the insured add other
insured regarding the nature of the risk to be beneficiaries without the irrevocable beneficiary's
assumed. The doctrines of warranties, consent.
representation, and concealment are predicated a. The insured also cannot obtain a policy
upon the principle of good faith. (Philippine loan or cash surrender value on the policy
Commercial Laws: The Insurance Code Vol. 1 without the consent of the irrevocable
Commentary, Hernando B. Perez) beneficiary because the latter’s vested right
extends to all benefits accruing to the
On the other hand, as a matter of right, an insured policy.
is the person whose loss is the occasion for the b. Should the insured discontinue paying
payment of the insurance proceeds by the insurer. premiums, the beneficiary may continue
paying it and be entitled to automatic
Note: The insured is not always the person to whom extended term or paid-up insurance
the proceeds are paid, as in the case where there is options.
a designated beneficiary. (Philippine Commercial Laws: The Insurance Code
Vol. 1 Commentary, Hernando B. Perez)
3. Beneficiary
Furthermore, the interest of a beneficiary in a life
Meaning of Beneficiary insurance policy shall be forfeited when the
The beneficiary is the one who receives a benefit or beneficiary is the principal, accomplice, or
advantage or who is entitled to the benefit of a accessory in willfully bringing about the death of the
contract. insured.
● In such a case, the share forfeited shall
Any person may be designated as beneficiary in a pass on to the other beneficiaries, unless
life insurance contract even though he is a stranger otherwise disqualified.
and has no insurable interest in the life of the ● In the absence of other beneficiaries, the
insured. proceeds shall be paid in accordance with
the policy contract.
Exception: Those who are forbidden by law to ● If the policy contract is silent, the proceeds
receive donations from the insured: shall be paid to the estate of the insured.
a. Those made between persons who are (Sec. 12, Insurance Code)
guilty of adultery or concubinage at the time
of the donation;

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4. Agent Or Trustee 5. Partner Or Co-Owner
Agent or Trustee Insurance Procured by Partner

Insurance agents are the legal representatives of A partner has an insurable interest in the property of
insurers, the principals. A contract of insurance must the partnership which will support a separate policy
be assented to by both parties either in person or by for his benefit.
their agents.
When a partner takes a policy on the partnership
Insurance Procured by Agent property in his own name, it includes his separate
When property is in the possession of an agent, the interest alone, unless the “terms of the policy should
principal may insure the same as owner, while the be such as are applicable to the joint or common
agent who is responsible for such property may interest.”
likewise insure the same.
Reason why interest of others not included: the
If insurance is procured by an agent and intended to policy procured by them shall be applied exclusively
cover interest of the principal, this fact must be to the proper interest of the person in whose name
stated in the policy. or for whose benefit it is made unless otherwise
specified.
If the agent secures the policy in his name alone, it
covers only the interest of the agent and the 6. Assignee
principal has no right of action against the insurer.
Meaning of Assignee
Agreement Between Applicant and Agent An assignee merely acquires the rights of the
In an agreement between the applicant and the insured. Thus, if the insured procured the policy by
agent, there is no liability until the principal approves fraud or misrepresentation, then the assignee of the
the risk and receipt is given by the agent. The policy cannot be entitled to the proceeds as well.
acceptance is conditional and is subordinated to the
act of the company approving or rejecting the 7. Mortgagor And Mortgagee
application. (Great Pacific Life v. CA, G.R. 113899,
1999) Insuring Mortgaged Property
Unless the policy otherwise provides, where a
Rights and Obligations of Agent mortgagor of the property effects insurance in his
An agent must exercise the required degree of own name providing that the loss shall be payable
diligence in performing his duties so as to avoid to the mortgagee, or assigns a policy of insurance
committing an act of negligence. This entails the to a mortgagee, the insurance is deemed to be upon
timely collection of premiums to avoid situations of the interest of the mortgagor, who does not cease to
non-payment by the insured. be a party to the original contract, and any act of his,
prior to the loss, which would otherwise avoid the
An insurer is not liable for a loss caused by the willful insurance, will have the same effect, although the
act or though the connivance of the insured; but he property is in the hands of the mortgagee, but any
is not exonerated by the negligence of the insured, act which, under the contract of insurance, is to be
or of the insurance agents or others. (Sec. 89, performed by the mortgagor, may be perform by the
Insurance Code) mortgagee therein named, with the same effect as if
it had been performed by the mortgagor. (Sec. 8,
In case of industrial life insurance, the policy shall Insurance Code)
not lapse for non-payment of premium if such non-
payment was due to the failure of the insurer to send MORTGAGOR MORTGAGEE
its representative or agent to the insured at the EXTENT OF INTEREST
residence of the insured or someplace indicated by As owner, he has an As creditor with
him for the purpose of collecting such premium. insurable interest to security, has an
extent of the value of insurable interest in
Note: However, this does not apply when the the property. the mortgaged
premium on the policy remains unpaid for a period property to the extent
of 3 months or 12 weeks after the grace period has of the debt secured
expired. and does not exceed
beyond the value of
the mortgaged
property. Mortgagee is

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not insuring the

property itself but his 3. Any act which, under the insurance, is to be
interest or lien thereon performed by the mortgagee with the same
as security of the effect as if it has been performed by the
mortgagor’s debt. mortgagor.
CONTINUING OF INTEREST
Interest continues Interest continues only 4. Upon concurrence of the loss, the
even if the debt has until the mortgage mortgagee is entitled to recover to the
been paid. debt is extinguished. extent of his credit and the balance, if any,
EXTENT OF RECOVERY is payable to the mortgagor since such
policy is for the benefit of both the
Cannot recover that Cannot recover that mortgagor and the mortgagee.
which exceeds the full which (1) exceeds the
amount of loss. amount of credit at the The mortgagee is the proper party to
time of loss AND (2) prosecute an action for a loss sustained
exceeds the value of under a policy of insurance where the loss
the property was made payable to him, and such action
mortgaged. may be brought by the mortgagee even
without including the mortgagor as party.
Who May Insure Mortgaged Property
When a property is mortgaged, the mortgagor and 5. Upon recovery by the mortgagee to the
mortgagee may take out separate policies with the extent of his credit from the insurer, the
same or different insurance companies. The mortgagor is released from his
mortgagor may insure the property mortgaged to the indebtedness.
full value of such property, while the mortgagee can
insure the same only to the extent of the amount of Policy Assignment to ME Not a Payment
credit. In case the mortgagor insures the mortgaged
property and assigns the policy to the mortgagee,
Insurance by Mortgagor Without Assigning such assignment is merely to afford the mortgagee
Loss to Mortgagee a greater security for the settlement of the
Where the mortgagor insures the property mortgagor’s obligation and should not be construed
mortgaged without making the loss payable to the as payment.
mortgagee, upon occurrence of the loss, only the
mortgagor may recover from insurer since the policy By such assignment, the mortgagee indebtedness
taken by the mortgagor shall be applied exclusively is not extinguished until such time as the mortgagee
to his interest. has collected the proceeds of the policy from the
insurer after the occurrence of the loss.
However, the mortgage constituted shall extend to
the proceeds of the indemnity paid by the insurer of Effect of “Mortgagee Redemption” Insurance
the mortgaged property upon occurrence of the loss (MRI) Procured by the Mortgagor
and thus the mortgagee has a lien on the proceeds “Mortgagee redemption” insurance is a kind of life
of the policy. insurance procured by the mortgagor with the
mortgagee as beneficiary up to the extent of the
Insurance by Mortgagor Making Loss Payable to mortgage indebtedness.
Mortgagee
1. The insurance is still deemed to be upon In case the mortgagor-insured dies, the proceeds of
the interest of the mortgagor, who does not such insurance will be applied to the payment of the
cease to be a party to the original contract. mortgage debt to the mortgagee, thereby relieving
It is an insurance on the property of the the heirs of the mortgagor of the burden of paying
mortgagor as owner and not on the interest debt.
of the mortgagee, and accordingly, the
contract is one between the insurer and the Where the mortgagor pays the insurance premium
mortgagor who is the insured and not one under the MRI, making the loss payable to the
between the insurer and the mortgagee. mortgagee, the insurance is still on the mortgagor’s
interest, and the mortgagor continues to be a party
2. Any act of the mortgagor prior to the loss, to the contract, while mortgagee is simply a
which would otherwise avoid the insurance, beneficiary of the insurance to the extent of the
will have the same effect although the
property is in the hands of the mortgagee.

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unpaid indebtedness and does not make the and without reference to whether
mortgagee a party to the contract. the insurer was in fact prejudiced
by such untruth or non-fulfilment
Open Mortgage Clause renders the policy voidable by the
If an insurer assents to the transfer of an insurance insurer.
from a mortgagor to a mortgagee, and, at the time d. Conditions
of his assent, imposes further obligations on the e. Exceptions
assignee, making a new contract with him, the acts i. Stipulations excluding certain
of the mortgagor cannot affect the rights of said specified risks that otherwise
assignee. (Section 9, Insurance Code) would be included under the
general language describing the
Essentially, when the mortgagor insures the risks assumed.
property mortgaged and makes the loss payable to
the mortgagee, the mortgagor does not cease to be 2. Concealment
a party to the contract and thus, any act of his which
would avoid the policy shall have the same effect. Definition
A neglect to communicate that which a party knows
Union Mortgage Clause and ought to communicate (Section 26, Insurance
A union mortgage clause, or its equivalent, creates Code)
the relation of insured and insurer between the
mortgagee and the insurance company Requisites of Concealment (KDNA)
independent of the contract with the mortgagor. a. A party knows the fact which he neglects to
communicate or disclose to the other;
If an insurer assents to the transfer of an insurance b. Such party concealing is duty bound to
from the mortgagor to the mortgagee, at the time of disclose such fact to the other;
his assent, imposes further obligations on the c. Such party concealing makes no warranty
assignee, making a new contract with him, the act of the fact concealed; and
of the mortgagor cannot affect the rights of said d. The other party has not the means of
assignee. ascertaining the fact concealed.
D. RESCISSION OF INSURANCE Proof of Fraud in Concealment

CONTRACTS General Rule: Fraud need not be proven in order to
prove concealment.
1. Overview Of General Grounds
Good faith is not a defense. (Saturnino vs Phil.
Primary Concerns of the Insurer American Life Insurance, G. R. No. L-16163, 1963)
1. Correct estimation of risk which enables
insurer to determine if he will approve the Proof of fraudulent intent is unnecessary for the
policy application and if so, at what rescission of an insurance contract on account of
premium rate; concealment. It is because in insurance contracts,
2. Delimitation of the risk; concealing material facts is inherently fraudulent: "if
3. Control of risk to guard against increase in a material fact is actually known to the [insured], its
risk; concealment must of itself necessarily be a fraud."
4. Determine if loss occurs and if so, the When one knows a material fact and conceals it, "it
amount thereof. is difficult to see how the inference of a fraudulent
intent or intentional concealment can be avoided.”
Devices of Insurer in Ascertaining and Thus, a concealment, regardless of actual intent to
Controlling Risks defraud, "is equivalent to a false representation."
a. Concealment (Insular Life vs Heirs of Alvarez, G.R. No. 207526)
b. Representation
c. Warranties Exception: When the concealment is made by the
i. Statements or promises by the insured in relation to the falsity of a warranty, the
insured, whether expressed, non-disclosure must be intentional and fraudulent in
implied, affirmative or promissory, order that the contract may be rescinded. (Sec. 29,
set forth in the policy itself or Insurance Code)
incorporated in it by proper
reference, the untruth or non-
fulfilment of which in any respect,

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Effect of Concealment b. That which, in the exercise of ordinary care,

General Rule: the other ought to know and of which the
Concealment, whether intentional or not, entitles the former has no reason to suppose his
injured party to rescind a contract of insurance ignorance, i.e. political situation, general
(Section 27, Insurance Code, even if the death or usages of trade;
loss is due to a cause not related to the concealed c. Those of which the other waives
matter. (Sunlife v. CA, G.R. No. 105135, 1995) communication;
d. Those which prove or tend to prove the
Exceptions: existence of the risk excluded by a warranty
a. Incontestability Clause (Insurance Code, and which are not otherwise material; and
Secs. 48 and 233[b]) e. Those which relate to a risk excepted from
b. Concealment made after the contract has the policy and which are not otherwise
become effective; material. (Section 30, Insurance Code)
c. Waiver or estoppel;
d. In marine insurance, in situations where Disclosure of Insurable Interest
concealment does not vitiate the entire General rule: The insured is not required to
contract, but merely exonerates the insurer communicate the nature (or kind) or the amount of
from a loss resulting from the risk his insurable interest in the life or property insured
concealed (Sec. 112, Insurance Code). to the insurer.
Instances When Concealment Made by an Agent Exceptions:

Procuring Insurance Binds Principal a. When the insurer makes inquiry from the
a. Where it was the duty of the agent to insured of the nature or amount of the
acquire and communicate information of latter’s insurable interest, whether in life or
the facts in question; property insurance;
b. Where it was possible for the agent, in the b. Insurance policy must specify the interest
exercise of reasonable diligence, to have of the insured in the property insured, if he
made the communication before the is not the absolute owner thereof.
making of the insurance contract.
Waiver of Disclosure of Material Facts
Failure on the part of the insured to disclose such a. By the terms of the insurance (express
facts known to his agent, or wholly due to the fault waiver); or
of the agent, will avoid the policy, despite the good b. By the neglect to make inquiry as to such
faith of the insured. facts, where they are distinctly implied in
other facts which information is
Duty to Communicate communicated (implied waiver). (Sec. 33,
Items to disclose to the other, in good faith, even Insurance Code)
without inquiry
1. Party concealing must have knowledge of No duty to disclose opinions
the facts concealed; Neither party is bound to communicate his mere
2. Facts concealed must be material to the opinion, speculation, intention or expectation even
risk; upon inquiry, because such opinion would add
3. Party is duty bound to disclose such fact to nothing to the appraisal of the application. (Sec. 35,
the other; Insurance Code)
4. Party concealing makes no warranty as to
the facts concealed; Materiality
5. Other party has no other means of Materiality is to be determined not by the event, but
ascertaining the facts concealed. solely by the probable and reasonable influence of
the facts upon the party to whom the communication
Items to disclose upon inquiry is due:
General Rule: Neither party to the insurance ● In forming his estimate of the
contract is bound to communicate information on the disadvantages of the proposed contract; or
following matters ● In making his inquiries. (Sec. 31, Insurance
Code)
Exception:
Except in answer to the inquiries of the other: Test of Materiality
a. Those of which the other knows; Was the insurer misled or deceived into entering a
contract obligation or in fixing the premium of

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insurance by a withholding of material information or him without knowledge of its incorrectness and
facts within the assured’s knowledge or presumed without any deliberate intent on his part to mislead
knowledge? (Argente v. West Coast Life, G.R. No. the insurer. (Ng Zee v. Asian Crusader, G.R. No. L-
L-24899, 1928) 30685, 1983)
It is sufficient that his non-disclosure misled the 3. Misrepresentations or Omissions

insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries Definition
(Sunlife Assurance Company v. CA, G.R. No. It is a factual statement made by the insured at the
105135, 1995). time of, or prior to, the issuance of the policy, to give
information to the insurer and otherwise induce him
The materiality of the existence of other insurance to enter into the insurance contract.
contracts against fire upon the same property
insured, when its disclosure is one of the conditions A representation cannot qualify an express
specified in the fire insurance policy, is not open to provision in a contract of insurance but it may qualify
doubt (Union Mfg. v. Phil. Guaranty, G.R. No. L- an implied warranty. (Section 40, Insurance Code)
27932, October 30, 1972)
Form
Materiality in Medical Examinations Oral or written. (Sec. 36, Insurance Code)
General rule: non-disclosure is concealment. In
non-medical insurance (which does away with the When Made
usual medical examination before the policy is It may be made orally or in writing. It may be made
issued), the waiver by said insurance company at the time of, or before, the issuance of the policy.
makes the previous health conditions of the insured (Section 37, Insurance Code)
more material (Saturnino v. Phil. American Life Ins.,
G.R. No. L-16163, 1963) It may be altered or withdrawn before the insurance
is effected, but not afterwards. (Sec. 41, Insurance
Where the applicant concealed the fact that he had Code)
pneumonia, diabetes or syphilis, the policy is
avoided although the cause of the death (e.g., plane Requisites for Misrepresentations (UWiM)
crash) be totally unconnected with the material fact 1. The insured stated a fact which is Untrue;
concealed or misrepresented. 2. Such fact was stated with knowledge that it
is untrue and With Intent to deceive or
The withholding by the applicant, father of one year- which he states positively as true without
old insured, of the fact that his daughter was knowing it to be true and which has a
typically a mongoloid child, of which he was fully tendency to mislead;
aware, as such a congenital physical defect could 3. Such fact in either case is Material to the
never be ensconced nor disguised, in supplying risk.
essential data for the insurance application form
which fact is material to the contract, constitutes Misrepresentation as Affirmative Defense
fraudulent concealment (Great Pacific v. CA, G.R. Misrepresentation is an affirmative defense. To
No. L-31845, 1979) avoid liability, the insurer has the duty to establish
such a defense by satisfactory and convincing
Exception: Imprecise description of information is evidence. (Ng Gan Zee v. Asian Crusader, G.R. No.
not concealment. L-30685, 1983)
Where the insured lacked sufficient medical The fraudulent intent on the part of the insured must
knowledge as to enable him to distinguish between be established to entitle the insurer to rescind the
“peptic ulcer” and “tumor” the insured cannot claim contract. Misrepresentation as a defense of the
that he was deceived into entering into the contract. insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory
In the absence of evidence that the insured had and convincing evidence rests upon the insurer.
sufficient medical knowledge as to enable him to (Manulife Philippines v. Ybanez, G.R. No. 204736,
distinguish between "peptic ulcer" and a "tumor," his 2016)
statement that said tumor was "associated with
peptic ulcer of the stomach" should be construed as Kinds of Representation
an expression made in good faith of his belief as to 1. Affirmative - an affirmation of a fact
the nature of his ailment and operation. Such existing when the contracts begins; or
statement must be presumed to have been made by

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2. Promissory - a statement by the insured Usually occurs prior to May be made at the
concerning what is to happen during the making of the time of the insurance
term of the insurance. insurance contract. of the contract.
In cases of rescission In cases of rescission
Effect of Expressions of Opinion or Expectation due to concealment, due to misrepresentat-
on Insurance Policy proof of fraudulent ion, proof of fraudulent
A representation of the expectation, intention, belief, intent not necessary intent necessary
opinion or judgment of the insured, although false,
WILL NOT AVOID a policy of insurance if there is The Insurance Code dispenses with proof of
no actual fraud in inducing the acceptance of the fraudulent intent in cases of rescission due to
risk, or its acceptance at a lower rate of premium concealment, but not so in cases of rescission due
(Philam Health Systems v. CA, G.R. No. 125678, to false representations. Concealment of material
2002); facts is fraudulent in and of itself. (The Insular Life
Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos.
However, in a marine insurance, information of the 207526 & 210156, 2018)
belief or expectation of a third person, in reference
to a material fact, is material. (Section 110, 4. Breach Of Warranties
Insurance Code)
Definition
Adoption of Misrepresentation A statement or promise set forth in the policy or by
An insured who signed the pension plan application, reference incorporated therein, the untruth or
adopted as his own the written representations and nonfulfillment of which in any respect, and without
declarations embodied in it (Ma. Lourdes S. reference to whether insurer was in fact prejudiced
Florendo vs. Philam Plans, Inc., Perla Abcede, et by such untruth or non-fulfillment, renders the policy
al., G.R. No. 186983, 2012). VOIDABLE by the insurer.
Effect of Misrepresentation Kinds

If there is misrepresentation, the injured party is 1. Express – An agreement contained in the
entitled to rescind from the time when the policy or clearly incorporated therein as
representation becomes false. (Sec. 45, Insurance part thereof whereby the insured stipulates
Code) that certain facts relating to the risk are or
shall be true or certain acts relating to the
Test of Materiality same subjects have been or shall be done.
The injured party can rescind the contract: 2. Implied – Warranties that are deemed
a. When the representation fails to included in the contract, although not
correspond with the facts (Sec. 44, expressly mentioned. They are found
Insurance Code); and usually in marine insurance.
b. When it is false in a material point (Sec. 45, 3. Affirmative – Asserts the existence of a
Insurance Code) fact or condition at the time it is made;
4. Promissory – The insured stipulates that
Note: The materiality of a representation is certain facts or conditions shall exist or thin
determined by the same rules as the materiality of shall be done or omitted.
concealment. (Sec. 46, Insurance Code)
Warranty v. Representations
Concealment vs Misrepresentation WARRANTY REPRESENTATION
CONCEALMENT MISREPRESENTATION
Part of the contract. Collateral inducement.
The insured withholds The insured makes
information of material erroneous statements
facts from the insurer. of facts with the intent Written on the policy or Need not be written.
of inducing the insurer in a valid rider or
to enter into the attachment. (except
insurance contract. for implied warranties)
Passive form of the Active form of the act. Generally, Should be established
act. conclusively to be material.
presumed to be
material.

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Falsity or non- Falsity renders the Right of Insurer to Rescind

fulfillment operates as policy voidable or Time to Exercise the Right to Rescind
a breach of contract rescissible on the 1. Non-Life Policy – Prior to the
ground of fraud. commencement of an action on the
Facts warranted must Requires only to be contract.
be strictly complied substantially true. 2. Life Policy – Before the incontestability
with. clause sets in.
Form Incontestable Clause in Life Insurance

Where express warranty must be contained Requisites of Incontestability Clause:
1. The policy itself; or a. The insurance is a life insurance policy.
2. In another instrument signed by the insured b. It is payable on the death of the insured.
and referred to in the policy as making a c. It has been in force during the lifetime of the
part of it. insured for at least 2 years from its date of
issue or of its last reinstatement.
Effect of Omission or Breach
General Rule: The violation of a material warranty Note: The period of 2 years may be shortened but it
or other material provision of the policy gives the cannot be extended by stipulation.
insurer the right to rescind the insurance policy (Sec.
74, Insurance Code) When Incontestability Clause Sets In
Whichever is earlier, between:
Note: A policy may declare that a violation of a. Within 2 years from the date of issuance or
specified provisions thereof shall avoid it. its last reinstatement; or
Otherwise, the breach of an immaterial provision b. Upon the insurer’s death (Sun Life v. Sibya,
does not avoid the policy. (Sec. 75, Insurance Code) G.R. No. 211212, 2016)
Exception: The below instances of warranties After the two-year period lapses, or when the
relating to the future insured dies within the period, the insurer must
a. Loss occurs before the time of performance make good on the policy, even though the policy
of the warranty; was obtained by fraud, concealment, or
b. The performance becomes unlawful; misrepresentation (Sun Life v. Sibya, G.R. No.
c. Performance becomes impossible. (Sec. 211212, 2016).
73, Insurance Code)
Defenses Not Barred by the Incontestability
Note: Waiver or estoppel may also prevent the Clause
insurer from being discharged from liability (Pioneer a. Person taking the insurance lacked
v. Yap, G.R. No. L-36232, 1974) insurable interest as required by law;
b. Cause of the death of the insured is
Other Insurance Clause – This is a clause in the excepted risk;
policy that provides that the policy shall be void if the c. Premiums have not been paid;
insured procures additional insurance without the d. Conditions of the policy relating to military
consent of the insurer. The purpose is to prevent or naval service have been violated;
over-insurance and thus to avert the possibility of a e. The fraud is of a particularly vicious type,
perpetration of fraud. It is a warranty that entitles the wherein:
insurer to rescind in case of breach. i. The policy was taken in
furtherance of a scheme to murder
The “other insurance clause” may be subject to the insured;
waiver but the waiver must either be express or if it ii. The insured instituted another
is to be implied from conduct mainly, said conduct person for the medical
must be clearly indicative of a clear intent to waive examination; and,
such right. There must be clear showing that the iii. The beneficiary feloniously killed
insurer knew about the violation of the clause the insured;
(General Insurance and Surety Corp. v. Ng Hua, f. Beneficiary failed to furnish proof of death
G.R. No 14373, 1960). or to comply with any condition imposed by
the policy after the loss has happened; or,
5. Exercise Of The Right To Rescind g. Action was not brought within the time
Or Cancel specified.

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Insurer is Liable if: v. Phil. International Surety, G.R. No. L-15184,

a. Loss, the proximate cause of which is the 1963).
peril insured against;
b. Loss, the immediate cause of which is the b. Notice
peril insured against except where
proximate cause is an excepted peril; When Insurer is Liable for Loss
c. Loss through the negligence of insured a. Unless otherwise provided by the policy, an
except where there was gross negligence insurer is liable for a loss of which a peril
amount to willful act; and insured against was the proximate cause,
d. Loss caused by efforts to rescue the thing although a peril not contemplated by the
from peril insured against – if during the contract may have been a remote cause of
course of rescue, the thing is exposed to a the loss (Insurance Code, Sec. 86)
peril not insured against, which b. The thing insured is rescued from a peril
permanently deprives the insured of its insured against that would otherwise have
possession, in whole or in part. caused a loss, if, in the course of such
rescue, the thing is exposed to a peril not
Insurer is Not Liable if: insured against, which permanently
a. Loss by insured’s willful act or gross deprives the insured of its possession, in
negligence; whole or in part; or where a loss is caused
b. Loss due to connivance of the insured; by efforts to rescue the thing insured from
c. Loss where the excepted peril is the a peril insured against (Sec. 87, Insurance
proximate cause. Code)
c. The proximate cause of which is the peril
6. Cancellation Of Non-Life Insurance insured against
d. Immediate cause of which is the peril
a. Grounds for Cancellation of a insured against except where proximate
Non-Life Policy by the Insurer: cause is an excepted peril;
e. Loss through the negligence of insured
1. Non-payment of premium; except where there was gross negligence
2. Conviction of a crime out of acts increasing amount to willful act; and
the hazard insured against; f. Loss caused by efforts to rescue the thing
3. Fraud or material misrepresentation; from peril insured against – if during the
4. Willful or reckless acts or omissions course of rescue, the thing is exposed to a
increasing the risk insured against; peril not insured against, which
5. Physical changes in the property insured permanently deprives the insured of its
making it uninsurable; and possession, in whole or in part.
6. Determination by the Insurance
Commissioner that the policy would violate When Insurer is Not Liable for Loss
the Insurance Code. (Sec. 64, Insurance a. Loss of which the peril insured against was
Code) only a remote cause. (Sec. 86, Insurance
Code)
Requisites for Cancellation by Insurer (Other b. Loss caused by the willful act or through the
Than Life Insurance Contracts) connivance of the insured; but he is not
a. Prior notice of cancellation to insured; exonerated by the negligence of the
b. Notice must be based on the occurrence insured, or of the insurance agents or
after effective date of the policy of one or others (Sec. 89, Insurance Code)
more of the grounds mentioned; c. Loss by insured’s willful act or gross
c. Notice must be in writing, mailed or negligence;
delivered to the insured at the address d. Loss due to connivance of the insured;
shown in the policy; and e. Loss where the excepted peril is the
d. Notice must state the grounds relied upon proximate cause.
and upon request of insured, to furnish
facts on which cancellation is based. Mandatory Requirement of Notice of Loss and
Proof of Loss
Prior Notice is required to prevent the cancellation The requirement of the notice of loss and obligation
of the policy, without allowing the insured ample to file a proof of loss are conditions with which the
opportunity to negotiate for other insurance in its insured MUST comply before there is any liability on
stead for his own protection (Saura Import & Export the part of the insurer.

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When to Give Notice of Loss Payment Of Proceeds

Without unnecessary delay or within a reasonable Life Insurance
time. The proceeds shall be paid immediately upon the
maturity of the policy (survival benefits) if there is
A requirement of the policy that notice of loss be such a maturity date. If the policy matures by the
given immediately or forthwith requires the giving of death of the insured, within sixty (60) days after
notice within a reasonable time. (Bachrach v. Britain presentation of the claim and filing of the proof of the
Am. Assur. Co., G.R. No. L-5715, 1910) death of the insured.
Form of Notice or Proof of Loss Property Insurance

In case of loss upon fire insurance, the law requires Proceeds shall be paid within thirty (30) days after
written notice. (Section 90, Insurance Code) proof of loss is received by the insurer and
For other kinds of insurance, absent any stipulation ascertainment of the loss or damage is made either
in the policy, notice or proof may be given orally or by agreement or by arbitration. If no ascertainment
in writing. is made within 60 days after receipt of proof of loss,
the loss shall be paid within 90 days.
When Defects in Notice of Loss are Waived
All defects in a notice of loss, or in preliminary proof c. Renewal
thereof, which the insured might remedy, and which
the insurer omits to specify to him, without Renewal of Non-Life Insurance
unnecessary delay, as grounds of objection, are The insured shall be entitled to renew the policy
waived. (Sec. 92, Insurance Code) upon payment of the premium due on the effective
date of the renewal. Policy written:
When Delay in the Presentation of Notice or a. Term of less than one (1) year - considered
Proof of Loss is Deemed Waived as if written for a term of one (1) year
Delay in the presentation to an insurer of notice or b. Term longer than one (1) year or any policy
proof of loss is waived if caused by any act of him, with no fixed expiration date - considered
or if he omits to take objection promptly and as if written for successive policy periods or
specifically upon that ground. (Sec. 93, Insurance terms of one (1) year
Code) Exception: The insurer at least forty-five (45) days in
advance of the end of the policy period mails or
Note: A notice of claim under Compulsory Motor delivers to the named insured at the address shown
Vehicle Insurance must be filed within 6 months in the policy notice of its intention not to renew the
from the date of the accident. policy or to condition its renewal upon reduction of
limits or elimination of coverages. (Sec. 66,
Periods For The Filing Of Actions Insurance Code)
A condition, stipulation, or agreement in any policy
of insurance, limiting the time for commencing an
action thereunder to a period of less than one (1)
year from the time when the cause of action
accrues, is void. (Sec. 63, Insurance Code)
Any person having any claim upon the policy issued

pursuant to Compulsory Motor Vehicle Liability
Insurance shall, without any unnecessary delay,
present to the insurance company concerned a
written notice of claim setting forth the nature, extent
and duration of the injuries sustained as certified by
a duly licensed physician.
a. Notice of claim must be filed within six (6)
months from the date of accident,
otherwise, the claim shall be deemed
waived.
b. Action or suit for recovery of damage due
to loss or injury must be brought, in proper
cases, with the Commissioner or the courts
within one (1) year from denial of the claim,
otherwise, the claimant’s right of action
shall prescribe. (Sec. 397, Insurance Code)

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IV. TRANSPORTATION LAW

TOPIC SUBTOPICS/LEGAL BASIS
Land Common Carriers - Civil Code
Sea Maritime Transportation - Code
of Commerce, COGSA
A. COMMON CARRIERS Subtopics:
1. Diligence Required of Common Carriers a. Maritime Contracts – Bills of
2. Liabilities of Common Carriers
Lading and Charter Parties
B. VIGILANCE OVER GOODS
b. Persons in Maritime Law –
1. Exempting Causes
Shipowner, Ship agent,
2. Contributory Negligence
Captain, Sailing Mate,
3. Duration of Liability Supercargo
a) Actual or Constructive Liability c. Limited Liability rule
b) Temporary Unloading or d. Maritime Accidents –
Storage
General Average, Arrivals
4. Stipulation for Limitation of Liability
under Stress, Collisions,
a) Void Stipulations
Shipwreck and Salvage
b) Limitation of Liability to Fixed e. COGSA
Amount
Air Montreal Convention
c) Limitation of Liability in Absence
Registered Extent of Liability
of Declaration of Greater Value
Owner Rule
5. Liability for Baggage of Passengers
a) Checked-In Baggage
b) Hand-Carried Baggage A. COMMON CARRIERS
C. SAFETY OF PASSENGERS
1. Void Stipulations Contract of Transportation
2. Duration of Liability A contract of transportation is a consensual contract
3. Liability for Acts of Others perfected by a meeting of the minds. Natural or
a) Employees juridical persons bind themselves to transport
b) Other Passengers and persons, goods, or both for compensation offering
Strangers their services to the public.
4. Extent of Liability for Damages
D. THE MONTREAL CONVENTION OF 1999 Parties to the Contract of Transportation
1. Applicability
2. Extent of Liability of Air Carrier Carriage of Passengers
a) Death or Injury of Passenger (a) Carrier: A party who binds himself to
b) Lost or Delayed Baggage transport persons, goods, or both. It may be
a common carrier or a private carrier.
(b) Passenger: One who travels in a public
conveyance by virtue of an express or
implied contract with the common carrier,
paying the fare or what is the equivalent
thereof (Jesusa Vda. de Nueca v. Manila
Railroad Company, G.R. No. 31731-R,
1968)
Carriage of Goods
(a) Shipper: A person who delivers the goods
to the carrier for transportation and pays the
consideration, or on whose behalf the
payment is made
(c) Carrier: A party who binds himself to
transport persons, goods, or both. It may be
a common carrier or a private carrier
(d) Consignee: Party who receives the goods
or cargo or someone for whose benefit the

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contract was taken.The consignee and the and one who does such carrying of goods only
shipper may be the same. as an ancillary activity. (A.F. Sanchez Brokerage
Inc. v. CA, 488 Phil. 430)
Governing Laws: ● The Civil Code does not distinguish:
(a) New Civil Code o Between a person or enterprise
(b) Code of Commerce offering transportation services on
(c) Special Laws a regular or scheduled basis and
one offering such service on an
1. Carriage of Goods By Sea Act
unscheduled basis. (De Guzman
2. Montreal Convention v. CA, 250 Phil. 613)
● Between a carrier offering its services to the
In all matters not regulated by the Civil Code, the general population and one who offers its
rights and obligations of common carriers shall be services only to a narrow segment of the general
governed by the Code of Commerce and by special population (Id.)
laws. (Civil Code, Art. 1766) ● The Civil Code makes no distinction as to the
means of transportation as long as it is done
Elements of a Common Carrier: through land, water, or air. (First Philippine
(a) Persons, corporations, firms, or Industrial Corporation v. CA, 360 Phil. 852)
associations; ● A carrier will be considered a common carrier
(b) Engaged in the business of carrying or regardless of whether it owns the vehicle it used
transporting passengers or goods or both; or has to actually hire one as long as the entity
(c) By land, water, or air; holds itself out to the public for the transport of
(d) For compensation; and goods as a business. (Torres-Madrid Brokerage,
(e) Offering their services to the public. Inc. v. FEB Mitsui Marine Insurance Co., 789
(Civil Code, Art. 1732) Phil. 413)
Certificate of Public Convenience

Tests to determine whether the entity is a It is not a requisite to incur liability under the Civil
common carrier Code provisions governing common carriers. (De
(a) It must be engaged in the business of Guzman v. CA, 250 Phil. 613)
carrying goods for others as a public
employment and must hold itself out as Person, Partnership, Firm or Corporation as a
ready to engage in the transportation of Common Carrier
goods generally as a business and not as a ● A customs broker is a common carrier due to the
casual occupation; transportation of goods being integral to the
(b) It must undertake to carry goods of the kind nature of the business (Calvo v. UCPB, G.R. No.
that to which its business is confined; 148496, 2002)
(c) It must undertake to carry by the method by ● Petroleum Act of the Philippines (R.A. No. 387):
oil pipeline operators are considered common
which its business is conducted, and over its
carriers (First Philippine Industrial Corp v. CA,
established roads; G.R. No. 125948, 1998)
(d) The transportation must be for hire. ● The operator of a beach resort that accepts
(First Philippine Industrial Corporation v. CA, 360 clients by virtue of a tour package – contracts
Phil. 852) that included transportation to and from the
resort and the point of departure is considered
The “true” test for a common carrier is not the as a common carrier. Its services are so
quantity or extent of the business actually intertwined with its main business as to be
transacted, or the number and character of the properly considered ancillary thereto. (Cruz v.
conveyances used in the activity, but whether the Sun Holidays, G.R. No. 186312, 2010)
undertaking is part of an activity engaged in by the ● The bus was principally used as a bus service for
carrier that he has held out to the general public as school children, and was hired by a group of
his business or occupation. (Sps. Pereña v. Sps. persons although the owners were not engaged
Zarate, 693 Phil. 373) in the business of public transportation as a
common carrier (Fabre, Jr. v. CA, G.R. No.
Doctrinal Pronouncements Related to the 11127, 1996)
Determination of Common Carriers ● A freight forwarder’s liability is limited to
● The Civil Code does not distinguish between one damages arising from its own negligence,
whose principal activity is the carrying of goods including negligence in choosing the carrier;

ATENEO CENTRAL
however, where the forwarder contracts to technology application or digital platform technology
deliver goods to their destination instead of transporting passengers from one point to another,
merely arranging for their transportation, it for compensation. The TNVS cannot operate as a
becomes liable as a common carrier for loss or common carrier outside of or independent from the
damage to goods. (Unsworth Transport v. CA, use of the internet-based technology of the TNC or
G.R. No. 166250, 2010) TNCs to which they are accredited [DOTr D.O. No.
2018-012].
Person, Partnership, Firm or Corporation NOT
as a Common Carrier The LTFRB shall grant the TNCs and their
● A travel agency is NOT a common carrier. Its accredited TNVS a Certificate of Public
covenant with its customers is simply to make Convenience (CPC) upon full compliance of
travel arrangements in their behalf. The jurisdictional requirements, as may be determined
relationship between the travel agency and the by LTFRB. The LTFRB shall also set the fare for the
passenger is, at most, one of agency TNVS after public hearing or in consultation with the
(Crisostomo v. CA, G.R. No. 138334, 2003) TNCs and TNVS [DOTr D.O. No. 2018- 012].
● An exclusive contractor and hauler, rendering or
offering its services to an individual or entity. Despite the limited market scope of its app, Angkas’
(FGU Insurance v. G.P. Sarmiento Trucking, bikers offer transportation services to willing public
G.R. No. 141910, 2002) consumers and these services may be readily
accessed by anyone who chooses to download the
Transport Network Vehicle Services and Angkas app. While they may refuse to offer their
Transport Network Companies service by simply not going online or not logging in,
when they do log in, they make their services
TNVs and TNCs are expressly considered common publicly available. As such, DBDOYC (Angkas) is a
carriers. They are subject to full regulation and transportation provider and its accredited drivers are
supervision by the LTFRB, including but not limited common carriers [LTFRB v. Valenzuela and
to: DBDOYC, Inc. G.R. No. 242860 (2019)].
a. Application and approval/ denial of
franchise,
b. Setting of fares, routes, operating 1. Diligence required of Common
conditions, and carriers
c. Imposition of fines, suspension, and
cancellation of franchise. Extraordinary Diligence or Responsibility of
Common Carriers Regarding Passengers and
In 2017, MyTaxi.PH, Inc. (GRAB) filed a case before Goods
the LTFRB which did not reach the Supreme Court, Common carriers are required to exercise
LTFRB held that under D.O. 2015-011 then in force, extraordinary diligence both over the goods and
a TNC is not granted unilateral authority to set fares over the safety of the passengers they are
as the same would be constitutive of an undue transporting, according to all the circumstances of
delegation of legislative authority. Subsequently, each case. (Civil Code, Art. 1733)
D.O. 2017-011 and D.O. 2018-013 were issued,
removing the “confusing language” of D.O. 2015- The Common Carrier Is Not an Insurer of
011 and explicitly stating that rate-fixing authority Absolute Safety
shall be limited to the LTFRB in accordance with the It has been held that airline passengers must take
law [Case No. CO-EB-2018-04-0039, Accreditation such risks incident to the mode of travel. In this
No. 2015-TNC-001]. regard, adverse weather conditions or extreme
climatic changes are some of the perils involved in
Transport Network Company or TNC is defined as air travel, the consequences of which the passenger
an organization whether a corporation, partnership, must assume or expect. After all, common carriers
or sole proprietor, that provides pre-arranged are not the insurer of all risks.
transportation services for compensation using an (Japan Airlines v. CA, G.R. No. 118664, 1998)
internet-based technology application or a digital
platform technology to connect passengers with In Transportation of Goods vs Passengers
drivers using their personal vehicles [DOTC D.O. GOODS PASSENGERS
No. 2015-011]. To transport with To carry passengers safely
the greatest skill as far as human care and
Transport Network Vehicle Service or TNVS refers and utmost foresight can provide,
to a TNC-accredited private vehicle owner, which is foresight
a common carrier, using the internet- based

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Utmost vigilance of Using the utmost diligence

a very cautious of a very cautious person, Exception: Common carriers are not required to
person, according With due regard to all the exercise extraordinary diligence anymore if the
to all circumstances (Sulpicio v. shipper/owner has made use of their right of
circumstances First Lepanto, G.R. No. stoppage in transit. ((Civil Code, Art. 1737)
140349, 2005).
Stoppage In Transit
2. Liabilities of Common Carriers Right of an unpaid seller to stop delivery and regain
possession of the goods while they are in transit to
the buyer who has been declared
Start and End of Exercise of Extraordinary
bankrupt/insolvent.
Diligence
Other Doctrinal Pronouncements
a. In The Transportation Of ● Surrender of the original Bill of Lading is NOT a
Goods condition precedent for a Common Carrier to be
discharged of its contractual obligation. If
The transportation of goods lasts from the time the surrender of the original Bill of Lading is not an
goods are unconditionally placed in the possession option, acknowledgment of the delivery by
of, and received by the carrier for transportation until signing the delivery receipt suffices ( National
the same are delivered, actually or constructively, by Trucking and Forwarding v. Lorenzo Shipping,
the carrier to the consignee or to the person who has G.R. No. 153563, 2005)
a right to receive them or to his duly authorized ● Delivery of the cargo to the customs authorities
agent and a reasonable time is given him to remove is not delivery to the consignee or “to the person
the goods. (Nedlloyd B.V. Rotterdam v Glow Laks, who has a right to receive them.” The goods are
G.R. No. 156330, 2014) still in the hands of the government and the
owner cannot exercise dominion over them.
Note: However, the parties may agree to limit the
● Even during the time of the storage at liability of the carrier. ((Lu Do v. Binamira, G.R.
warehouse of a common carrier at the place of No. L-9840, 1957)
destination, until the consignee is advised of the
good’s arrival and has had an opportunity to b. In The Transportation Of
remove or dispose of them. (Civil Code, Art. Passengers
1738)
● The fact that only a portion of the goods had As to the commencement of the duty to exercise
been delivered and loaded to the carrier does not extraordinary diligence, there are two views:
impair the contract of carriage, as the goods still
remained in the custody and control of the Liberal View v. Strict View
carrier. (Ganzon v. CA, 244 Phil. 664) LIBERAL The liberal view is based only on the
● Actual delivery: When possession has been perfection of the contract (or
turned over to the consignee or his duly meeting of the minds) between
authorized agent and a reasonable time is given carrier and passenger.
to him to remove the goods ( Westwind STRICT The strict view is based on both
Shipping Corporation v. UCPB General perfections of the contract (or
Insurance Co., Inc., 722 Phil. 38) meeting of the minds) between
● Constructive delivery: Delivery of the bill of carrier and passenger the and
lading to the consignee or any person who has a actual physical contact of a
right to receive the goods under the bill of lading passenger with the vehicle, ship or
can be considered a constructive delivery. After airplane.
all, the issuance of a bill of lading is prima facie For buses, a bus slowing down means that it is
evidence of the receipt of the goods by the offering itself to prospective passengers as a
carrier ( Saludo v. CA, G.R. No. 95536) common carrier. A passenger who signals for a ride
with his thumb signifies that he is offering himself as
Special rule when there is temporary unloading a passenger. (Dangwa v. CA, G.R. No. 95582,
or storage
1991)
General Rule: Common carriers are still required to
exercise extraordinary diligence over the goods,
Note:
even if the goods are temporarily unloaded or stored
● The duty to exercise extraordinary diligence
in transit.
terminates when the passenger alights from the

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vehicle at the place of destination and has a All persons who remain on the premises a
reasonable opportunity to leave the common reasonable time after leaving the conveyance are
carrier’s premises. deemed passengers. What constitutes a
● The duty to exercise extraordinary diligence “reasonable time” is to be determined from all the
commences when the passenger places himself circumstances, which includes a reasonable time to
in the care and control of the common carrier see after his/her baggage and prepare for his/her
who accepts him/her as a passenger. departure. (Id.)
● For passengers of ships, the Supreme Court has
ruled that a reasonable time to leave and pick up For passengers of ships, the SC has ruled that a
baggage is an hour after arrival (Aboitiz Shipping reasonable time to leave and pick up baggage is an
v. CA, G.R. No. 84458, 1989). hour after arrival (Id.)
Do not confuse the perfection of the contract of In a case involving a bus passenger, SC reiterated
carriage with the commencement of the duty to as a rule that the relation of carrier and passenger
exercise extraordinary diligence. For example, the does not cease at the moment the passenger alights
contract of carriage may be perfected in January from the carrier's vehicle at a place selected by the
while the duty to exercise extraordinary diligence carrier at the point of destination, but continues until
may only start or commence in March. the passenger has had a reasonable time or a
reasonable opportunity to leave the carrier's
Example: It is possible for a law student to enter into premises. Reasonable time or a reasonable delay is
a perfected contract with the carrier (such as buying to be determined from all the circumstances. (La
a ticket online) in June before the Bar Exam for a trip Mallorca v. CA, G.R. No. L-20761, 1966)
or voyage scheduled in December after the Bar
Exam. The duty to exercise extraordinary diligence B. VIGILANCE OVER GOODS
over the safety of the law student will obviously not
start or begin in June but only when the law student Presumption of Negligence
actually boards the ship or airplane in December General Rule: The common carrier is presumed to
(this is the strict view which is more logical and less have been at fault or to have acted negligently when
absurd than the liberal view) the goods transported are lost, destroyed or
deteriorated, or when a passenger dies or is injured.
c. Waiting for carrier or boarding This is not a conclusive but disputable presumption,
of carrier and it may be overcome by contrary evidence of
defenses.
A public vehicle, once it stops, is in effect making a
continuous offer to prospective passengers. Hence, 1. Exempting causes
it becomes the duty of the drivers and conductors to
do no act which would have the effect of increasing Exceptions (Civil Code, Art. 1734): When the
the peril to a passenger while he/she was attempting same is due to any of the following causes only:
to board the vehicle. (Dangwa Transportation Co., (a) Flood, earthquake, storm, lightning or other
Inc. v. CA, 278 Phil. 629)
natural disaster or calamity
(b) Act of the public Enemy in war, whether
It is the duty of common carriers to stop their
conveyances at a reasonable length of time to afford international or civil.
the passengers an opportunity to board and enter. (c) Act or omission of the shipper or owner of
Carriers become liable for injuries suffered by the goods
boarding passengers resulting from the starting up (d) The character of the goods or defects in the
or jerking of the vehicle while boarding. (Id.) packing or in the containers
(e) Order or act of competent authority
d. Arrival at destination
a. Flood, earthquake, storm,
The duty to exercise extraordinary diligence lightning or other natural
terminates when the passenger alights from the disaster or calamity
vehicle at the place of destination and has a
reasonable opportunity to leave the common
Conditions to avail of defense:
carrier’s premises. (Aboitiz Shipping Corporation v.
CA, 258-A Phil. 665) (a) The natural disaster was the proximate &
only cause

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(b) Exercise of diligence to prevent or minimize

loss before, during and after the occurrence Conditions to Avail of Defense:
of the natural disaster (a) Act was the proximate & only cause
(c) No delay (Civil Code, Art. 1740) (b) Exercise of diligence to prevent or minimize
loss before, during and after the act
Requisites for caso fortuito which would (c) No delay (Civil Code, Art. 1740)
exempt the carrier from liability
(a) The event must be independent of human c. Act or omission of the shipper
will or owner of the goods.
(b) The occurrence must render it impossible
for the debtor to fulfill the obligation in a Conditions to Avail of Defense:
normal manner (a) If proximate cause, exempting
(c) The obligor must be free of participation in, (b) If contributory negligence, mitigating
or aggravation of, the injury to the creditor, (c) Immediate protest by the carrier; otherwise,
and the carrier may be in estoppel
(d) The event must have been impossible to
foresee, or if it could be foreseen, must have When the private respondent did furnish the
been impossible to avoid. common carrier with an inaccurate weight of the
payloader, the common carrier is nonetheless liable,
Fire may not be considered a natural disaster or for the damage caused to the machinery could have
calamity, unless it is caused by lightning or by other been avoided by the exercise of reasonable skill and
natural disasters or calamities (Eastern Shipping attention on its part in overseeing the unloading of
Lines v. IAC, G.R. No. 69044, 1987) such heavy equipment. It was the duty of its Chief
Officer to determine the weight of heavy cargoes
Heavy seas and rains are not caso fortuito, but before accepting them (Compania Maritima v. CA,
normal occurrences that an ocean-going vessel G.R. No. 31379, 1997)
would encounter (Id.)
d. The character of the goods or
Mechanical defects are not force majeure if the defects in the packing or in the
same were discoverable by regular and adequate
containers.
inspections (Necesito v. Paras, G.R. No. L-10605,
1958)
Conditions to avail of defense:
A tire blow-out is not considered a fortuitous event, (a) Exercise of due diligence to forestall or
as there are human factors involved in the situation prevent loss
(Yobido v. CA, G.R. No. 113003, 1997) (b) Immediate protest by the carrier if the
problem with the goods or the packing or
Highjacking is not an exempting cause under Art. containers is visible; otherwise, the carrier
1734. However, common carriers are not held liable may be in estoppel
for acts or events which cannot be foreseen or are
inevitable, provided that they exercised This particular exempting cause only refers to cases
extraordinary diligence (De Guzman v. CA, G.R. No. when goods are lost or damaged while in transit as
L-47822, 1988) a result of:
(a) The natural decay of perishable goods;
A common carrier is still liable, even though the loss,
(b) Fermentation or evaporation of substances
destruction, or deterioration of the goods was
is liable thereof;
caused by a natural disaster when it incurs a delay
in the transportation of goods. (Civil Code, Art. (c) Necessary and natural wear and tear of
1740) goods in transport;
(d) Defects in the packages; or
Note: This defense cannot be availed of when the (e) Natural propensities of animals. (Belgian
carrier is negligent. Overseas Chartering and Shipping N.V. v.
Philippine First Insurance Co., Inc., 432
Phil. 567)
b. Act of the public enemy in war,
whether international or civil.

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If the improper packaging is known to the carrier or 2. Contributory Negligence

his/her/its employees or the improper packaging is
apparent under ordinary observation but accepts it General Rule: If the shipper/owner contributed to
without protest, Art. 1734, paragraph 4 will not the loss, destruction, or deterioration of the goods
relieve the carrier from any liability (Calvo v. UCPB caused proximately by the common carrier, the
General Insurance Co., Inc., 429 Phil. 244) carrier’s liability shall be equitably reduced. (Civil
Code, Art. 1741)
e. Order or act of competent
authority. Exception: In collision cases (moving object strikes
another moving object) and allision cases (moving
Condition to avail of defense object strikes a stationary object). In such cases, the
Said public authority had the power to issue the parties are liable for their own damage.
order. (Civil Code, Art. 1740)
3. Duration of Liability
Similar conditions the order was lawful; or the
order was issued under legal processes of authority. Common carriers are required to exercise
(Ganzon v. CA, 244 Phil. 644) extraordinary diligence over the goods to be
transported:
• From the time the goods are
Summary Table: Art. 1734 and Defenses
unconditionally placed in the possession of
DEFENSES CONDITIONS TO AVAIL and received by carrier until the goods are
Flood, storm, Proximate and only cause; delivered, actually or constructively, to the
earthquake, consignee or to the person who has a right
lightning, or Exercise of diligence to to receive them and a reasonable time is
other natural prevent or minimize loss; given to remove the goods. (Civil Code, Art.
and no delay 1736; Nedlloyd B.V. Rotterdam v. Glow
disaster or
Laks, G.R. No. 156330, 2014)
calamity
• Even when the goods are temporarily
Act of the public unloaded or stored in transit, unless the
enemy in war, shipper used right of stoppage in transit.
whether • Even during the time of the storage at the
international or warehouse of the common carrier at place
civil of destination, until consignee is advised of
Act or omission If the owner or shipper is the the goods’ arrival and has had opportunity
of the shipper proximate cause, to remove or dispose them. (Civil Code, Art.
or owner of the exempting 1738)
goods
If there is contributory Delivery of goods to common carrier
negligence, mitigating The fact that only a portion of the goods had been
delivered and loaded to the carrier does not impair
Immediate protest by a the contract of carriage, as the goods still remained
carrier; else: estoppel in the custody and control of the carrier. (Ganzon v.
The character Exercise of due diligence to CA, 244 Phil. 664)
of the goods or forestall or prevent loss
defects in the a. Actual or Constructive Liability
packing or in Immediate protest by a
the containers carrier; else: estoppel Even during the time of the storage at warehouse of
a common carrier at the place of destination, until
Order or act of Said public authority had the consignee is advised of the good’s arrival and
the power to issue the order has had an opportunity to remove or dispose of
competent
them. (Civil Code, Art. 1738)
public authority
The order or act of the
competent public authority The fact that only a portion of the goods had been
needs to be a legal or lawful delivered and loaded to the carrier does not impair
order or act. It cannot be the contract of carriage, as the goods still remained
illegal or unlawful. (Ganzon in the custody and control of the carrier. (Ganzon v.
v CA) CA, 244 Phil. 664)

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Actual delivery: When possession has been turned the shipper/owner agreed to such
over to the consignee or his duly authorized agent stipulation (Civil Code, Art. 1746)
and a reasonable time is given to him to remove the (e) Cannot be availed of if the common carrier,
goods ( Westwind Shipping Corporation v. UCPB without just cause, delays the transportation
General Insurance Co., Inc., 722 Phil. 38) of the goods or changes the stipulated or
usual route in cases of loss, destruction, or
Constructive delivery: Delivery of the bill of lading
to the consignee or any person who has a right to deterioration of the goods. (Civil Code, Art.
receive the goods under the bill of lading can be 1747)
considered a constructive delivery. After all, the (f) For delay on account of strikes or riots is
issuance of a bill of lading is prima facie evidence of valid. (Civil Code, Art. 1748)
the receipt of the goods by the carrier ( Saludo v. (g) To the value of the goods appearing in the
CA, G.R. No. 95536) bill of lading is valid, unless the
shipper/owner declares a greater value.
b. Temporary Unloading or (Civil Code, Art. 1749)
Storage
Determination if the stipulation is within public
A public vehicle, once it stops, is in effect making a policy
continuous offer to prospective passengers. Hence, The fact that the common carrier has no competitor
it becomes the duty of the drivers and conductors to along the line or route, or a part thereof, to which the
do no act which would have the effect of increasing contract refers shall be taken into consideration on
the peril to a passenger while he/she was attempting the question of whether a stipulation limiting the
to board the vehicle. (Dangwa Transportation Co., common carrier's liability is reasonable, just, and in
Inc. v. CA, 278 Phil. 629) consonance with public policy. (Civil Code, Art.
1751)
It is the duty of common carriers to stop their
conveyances at a reasonable length of time to afford Note: Presumption of negligence against the carrier
the passengers an opportunity to board and enter. in cases of loss, destruction, or deterioration of the
Carriers become liable for injuries suffered by goods is still present despite stipulations limiting
boarding passengers resulting from the starting up liability. (Civil Code, Art. 1752.)
or jerking of the vehicle while boarding. (Id.)
Factors to be considered when refusing
stipulations limiting liability
4. Stipulations for Limitation of (a) Refusal to carry goods, UNLESS
Liability stipulation limiting liability is signed by the
shipper (Civil Code, Art. 1746)
Stipulations for Limitations of Liability (b) Delay or deviation, without just cause (Civil
1. Degree less than extraordinary diligence Code, Art. 1747)
2. Limitation of liability to a fixed amount (c) Lack or presence of competition (Civil
Code, Art. 1751)
(a) Degree less than extraordinary Diligence
The Common carrier and the shipper/owner can
stipulate in limiting the carrier’s liability for the loss, Limitations Under Montreal Convention
destruction, or deterioration of the goods to be Convention for the Unification of Certain Rules for
transported to a degree less than extraordinary International Carriage by Air - Montreal, 28 May
diligence. This stipulation is valid if it is: 1999
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other Application
than the service rendered by the carrier; and It applies to all international carriage of persons,
3. Reasonable, just, and not contrary to public baggage, or cargo performed by aircraft for reward.
policy (Civil Code, Art. 1744) It applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking. (Article 1
Other Stipulations Limiting Liability of Common par. 1)
Carrier
A stipulation limiting the common carrier’s liability:
(a) May be annulled by the shipper/owner if the International Carriage (Article 1 par. 2)
carrier refused to carry the goods, unless COVERED NOT COVERED

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Any carriage in which, Carriage between Combined carriage

according to the agreement two points within In the case of combined carriage performed partly
between the parties, the the territory of a by air and partly by any other mode of carriage, the
place of departure and the single State Party provisions of this Convention shall, subject to
place of destination, without an agreed paragraph 4 of Article 18, apply only to the carriage
whether or not there be a stopping place by air, provided that the carriage by air falls within
break in the carriage or a within the territory the terms of Article 1. (Article 38)
transshipment, are situated of another State
either within the territories (Article 1 par. 2) Prima facie evidence
of two States Parties, or The air waybill or the cargo receipt is prima facie
within the territory of a evidence of the conclusion of the contract, of the
single State Party if there is acceptance of the cargo, and of the conditions of
an agreed stopping place carriage mentioned therein. (Article 11, par. 1)
within the territory of
another State, even if that Damage to baggage (Article 17)
State is not a State Party. Baggage means both checked baggage and
unchecked baggage. (Article 17, par 4)
Successive Carriage
Carriage to be performed by several successive Liabilities of the carrier:
carriers is deemed, for the purposes of this (a) Liable for damage sustained in case of death or
Convention, to be one undivided carriage if it has bodily injury of a passenger upon condition only
been regarded by the parties as a single operation, that the accident which caused the death or
whether it had been agreed upon under the form of injury took place on board the aircraft or in the
a single contract or of a series of contracts, and it course of any of the operations of embarking or
does not lose its international character merely disembarking.
because one contract or a series of contracts is to (h) Liable for damage sustained in case of
be performed entirely within the territory of the same destruction or loss of, or of damage to, checked
State. (Article 1, par 3)
baggage upon condition only that the event
which caused the destruction, loss, or damage
Actions of Passenger Against Carrier in
took place on board the aircraft or during any
Transportation of: (Article 36)
GOODS PASSENGER period within which the checked baggage was in
1. Passenger or General Rule: the charge of the carrier. However, the carrier is
consignor will have The passenger or any not liable if and to the extent that the damage
a right of action person entitled to resulted from the inherent defect, quality, or vice
against the first compensation in of the baggage.
carrier respect of him or her (i) In the case of unchecked baggage, including
2. The passenger or can take action only personal items, the carrier is liable if the damage
consignee who is against the carrier resulted from its fault or that of its servants or
entitled to delivery which performed the agents.
will have a right of carriage during which
(j) If the carrier admits the loss of the checked
action against the the accident or the
last carrier delay occurred baggage, or if the checked baggage has not
3. Further, each may Exception: arrived at the expiration of twenty-one days after
take action against By express agreement, the date on which it ought to have arrived, the
the carrier which the first carrier has passenger is entitled to enforce against the
performed the assumed liability for carrier the rights which flow from the contract of
carriage during the whole journey. carriage.
which the
destruction, loss, Damage to Cargo (Article 18)
damage, or delay General Rule: The carrier is liable for damage
took place. sustained in the event of the destruction or loss of,
These carriers will be or damage to, cargo upon condition only that the
jointly and severally event which caused the damage so sustained took
liable to the passenger place during the carriage by air.
or the consignor or
consignee.

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Exception: Not liable if and to the extent it proves Advance Payments (Article 28)
that the destruction, or loss of, or damage to, the In the case of aircraft accidents resulting in the
cargo resulted from one or more of the following: death or injury of passengers, the carrier shall, if
(a) inherent defect, quality, or vice of that required by its national law, make advance
cargo; payments without delay to a natural person or
(b) defective packing of that cargo performed persons who are entitled to claim compensation to
by a person other than the carrier or its meet the immediate economic needs of such
servants or agents; persons.
(c) an act of war or an armed conflict;
Such advance payments shall not constitute a
(d) an act of public authority carried out in recognition of liability and may be offset against any
connection with the entry, exit, or transit of amounts subsequently paid as damages by the
the cargo. carrier.
Carriage by air a. Void Stipulations

The period during which the cargo is in charge of the
carrier. General Rule: The responsibility of a common
carrier cannot be dispensed with or lessened by
Note: The period of the carriage by air does not stipulation, by posting of notices, or by statements
extend to any carriage by land, by sea, or by inland on tickets. A reduced fare cannot justify limited
waterway performed outside an airport. If, however, liability.
such carriage takes place in the performance of a
contract for carriage by air, for the purpose of Exception: If the carriage is gratuitous or for free, a
loading, delivery, or transshipment, any damage is stipulation limiting liability is valid.
presumed, subject to proof to the contrary, to have
been the result of an event which took place during Exception to the Exception: The stipulation does
the carriage by air. If a carrier, without the consent not cover willful acts or gross negligence of the
of the consignor, substitutes carriage by another carrier. (Civil Code, Arts. 1757-1759)
mode of transport for the whole or part of a carriage
intended by the agreement between the parties to Reason: Waiver of future fraud or gross negligence
be carriage by air, such carriage by another mode is invalid (Civil Code, Art. 1172)
of transport is deemed to be within the period of
carriage by air. Note: Moral damages may be recovered in an
action for breach of contract of transportation when
Delay (Article 19) death results. Even if the passenger does not die,
General Rule: The carrier is liable for damage the passenger can recover moral damages if the
occasioned by delay in the carriage by air of carrier is guilty of fraud or bad faith. However, only
passengers, baggage, or cargo. the passenger is entitled to moral damages, not
anyone else.
Exception: If it proves that it and its servants and
agents took all measures that could reasonably be A Stipulation in Transportation is of Goods
required to avoid the damage or that it was Contract Limiting Liability is Void if:
impossible for it or them to take such measures. (a) Unreasonable
(b) Unjust
Defenses Available to Carrier (Article 20)
If the carrier proves the following, the carrier shall be (c) Contrary to public policy
wholly or partly exonerated from its liability to the
extent of damage contributed: Liability in the Absence of a Rejection Clause in
1. If the carrier proves that the damage a Contract of Carriage of Goods
was caused or contributed to by the In the absence of a “rejection clause” in a contract
negligence or other wrongful act or of carriage of goods, Articles 361, 362, 364, and 365
omission of the person claiming of the Code of Commerce become applicable. The
compensation, or the person from aforementioned provisions, in summary, state that if
whom he or she derives his or her rights the goods are delivered but arrived at the
2. When by reason of death or injury of a destination in damaged condition, the remedies to
passenger compensation is claimed by be pursued by the consignee depend on the extent
a person other than the passenger of damage to the goods. (Loadstar Shipping
Company, Incorporated v. Malayan Insurance
Company, Incorporated, G.R. No. 185565, 2014)

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b. Limitation Liability to Fixed prudence in the vigilance over the movables

Amount transported;
(e) That the common carrier shall not be
A contract can fix the sum that may be recovered by responsible for the acts or omissions of his
the shipper/owner in case of loss, destruction, or or its Employees;
deterioration of the goods. It must be: (f) That the common carrier's liability for acts
(a) Reasonable and just under the committed by Thieves, or of robbers who do
circumstances; and not act with grave or irresistible threat,
(b) Fairly and freely agreed upon. (Civil Code, violence, or force, is dispensed with or
Art. 1750) diminished;
(g) That the common carrier is not responsible
c. Limitation of Liability in for the loss, destruction, or deterioration of
Absence of Declaration of goods on account of the defective condition
Greater Value of the car, vehicle, ship, airplane, or other
equipment Used in the contract of carriage.
Limitation of liability in the absence of a
declaration of greater value
General Rule: A stipulation limiting the carrier’s
5. Liability of Baggage of Passengers
liability to the value of the goods appearing in the bill
of lading is valid. a. Checked-in Baggage
Exception: A passenger who declares a greater or Distinctions between Hand-Carried Baggage

higher value must also pay additional freight. (Civil and Checked-In Baggage
Code, Art. 1749) HAND-CARRIED CHECK-IN
Legal Nature of Baggage
Multi-Carriers
When there are several carriers who successively For hand-carried baggage, The checked-in
transport goods, or there is a single “through bill of the responsibility of the baggage is
lading” issued by one carrier and honored by other carrier will be governed by considered
carriers, the following are the rules: the Civil Code provisions on “goods” and the
(a) The last carrier assumes the obligation of hotelkeepers and passenger is
the previous carriers. But the last carrier, if innkeepers. Items of hand- considered the
not directly responsible, may proceed carried baggage are shipper/consigne
considered items of e.
against previous carriers.
necessary deposit. Common
(b) The shipper/consignee has a cause of
carriers shall be treated as
action against the carrier who executed the depositaries.
contract or other carriers who received In Custody of
goods without reservation.
(c) Carriers who made a reservation may still Passenger Carrier
be liable for their own acts. Applicable Rule
Civil Code, Arts. 1998, 2000- Civil Code, Arts.
Note: Carriers with reservations are NOT relieved of 2003 1733-1753
responsibilities for their own acts
Diligence by Common Carrier
Prohibited Stipulations in a Contract of The diligence of a depositary Extraordinary
Carriage (OLD FETU) (ordinary diligence) diligence
(a) That the goods are transported at the risk of
the Owner or shipper; Inspection Duties
(b) That the common carrier will not be Liable General Rule: The carrier may only inquire into the
for any loss, destruction, or deterioration of nature of the passenger’s baggage, but not search
the goods; nor inspect its contents
(c) That the common carrier need not observe
any Diligence in the custody of the goods; An inquiry may be made as to the nature of
passengers’ baggage, but beyond this,
(d) That the common carrier shall exercise a
constitutional boundaries are already in danger of
degree of diligence less than that of a good
Father of a family, or of a man of ordinary

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being transgressed (Nocum v. Laguna Tayabas, (c) Acts of Thief or robbers, done with the use
G.R. No. L-23733, October 31, 1969). of arms or through irresistible force (Civil
Code, Art. 2001)
Exception: While there is no law that authorizes
bus operators to open the luggage of their The relationship between the consignee and the
passengers, RA 6235 (Acts Inimical to Civil arrastre operator is bailor-bailee or depositor-
Aviation) gives airline companies authority to open depositary. An arrastre operator does not render
and investigate packages and cargoes loaded on any service of a maritime nature. (Unknown Owner
board. Should the personnel of the airline fail to of MV China vs. Asian Terminals, G.R. No 195661,
discover explosives, it could only be due to their 2015)
failure to exercise the utmost diligence of very
cautious persons. Thus, an arrastre operator should adhere to the
same degree of diligence as that legally expected of
Declaration of Passenger of Contents of a a warehouseman or a common carrier as set forth
Package which Injured Other Passengers in Warehouse Receipts Act and Article 1733 of the
The carrier is not liable. It exercised extraordinary Civil Code. As custodian of the shipment discharged
diligence. It is to be presumed that a passenger will from the vessel, the arrastre operator must take
not take with him anything dangerous to the life and good care of the same and turn it over to the party
limbs of his co-passengers, not to speak of his own. entitled to its possession. (Marina Port Service, Inc.
Not to be considered lightly is the right to privacy to v. American Home Assurance Corporation, G.R.
which each passenger is entitled. (Nocum v. Laguna 201822, 2015)
Tayabas Bus Co., G.R. No. L-23733, 1969)
Note: The Supreme Court ruled in Fortune Express

C. SAFETY OF PASSENGERS
v. CA (G.R. No. 119756, 1999) that: “Under the
circumstances, simple precautionary measures to Passenger
protect the safety of passengers, such as frisking One who travels in a public conveyance by virtue of
passengers and inspecting their pieces of baggage, an express or implied contract with the common
preferably with non-intrusive gadgets such as metal carrier paying the fare or what is equivalent thereof.
detectors, before allowing them on board could have (Jesusa Vda. De Nueca v. Manila Railroad
been employed without violating the passenger’s Company, G.R. No. 31731-R, 1968)
constitutional rights. In Gacal v. Philippine Air Lines,
Inc., a common carrier can be liable for failing to Presumption of Negligence
prevent a hijacking by frisking passengers and If the passenger is injured or killed, there is a
inspecting their pieces of baggage.” presumption of negligence against a carrier. (Civil
Code, Art. 1756)
b. Hand-Carried Baggage
It is presumed that a person driving a motor vehicle
has been negligent if, at the time of the mishap, he
Requisites for Common Carrier’s Liability for
was violating a traffic regulation unless there is proof
Hand-Carried Baggage (Necessary Deposit)
to the contrary. (Sps. Estrada v. Philippine Rabbit,
(a) Notice was given to the common carrier, or
G.R. 203902, 2017)
their employees, of the baggage brought by
the passengers; and Presumption of negligence applies so long as:
(b) Passengers took precautions that the ● A contract exists between the passenger and the
common carrier advised relative to the care common carrier; and
and vigilance of their baggage (Civil Code, ● The injury or death took place during the
Art. 1998) existence of the contract (Sulpicio Lines, Inc. v.
Sesante, G.R. No. 172682)
Instances When Common Carrier is Not
Responsible for the Loss and Injury to
Passengers’ Hand-Carried Baggage Defenses Available To Common Carrier:
(a) Those which may proceed from any Force (a) Fortuitous event
Majeure (Civil Code, Art. 2000) (b) Extraordinary diligence
(b) Loss due to the Act of the passenger or his (c) Passenger is the proximate cause of death
agents or if the loss arises from the or injury
character of the things (Civil Code, Art. (d) Employees could not have prevented by
2000); and ordinary diligence the willful act or

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negligence of other passengers or ● One who attempts to board a moving vehicle,

strangers (which caused the death) although he has a ticket, unless he attempts to
(e) If the contract of carriage is gratuitous and be with the knowledge and consent of the carrier;
there is no willful act or negligence on the ● One who has boarded a wrong vehicle has been
part of the carrier, a stipulation limiting properly informed of such fact, and on alighting,
is injured by the carrier; or
liability is valid
● One who rides any part of the vehicle which is
unsuitable or dangerous or that he knows is not
1. Void Stipulations designed or intended for passengers
General Rule: The responsibility of a common

carrier cannot be dispensed with or lessened by 3. Liability for Acts of Others
stipulation, by posting of notices, or by statements
on tickets. A reduced fare cannot justify limited
a. Employees
liability.
Employees
Exception: If the carriage is gratuitous or for free, a
Common carriers are liable even if the employees
stipulation limiting liability is valid.
may have acted beyond the scope of their authority
or in violation of the orders of the common carrier.
Exception to the Exception: The stipulation does
not cover willful acts or gross negligence of the
Note: If the cause of action alleged by the plaintiff
carrier. (Civil Code, Arts. 1757-1759)
passenger in the complaint is based on culpa
contractual or breach of contract, the defendant
Reason: Waiver of future fraud or gross negligence
carrier may not use the defense of diligence in the
is invalid (Civil Code, Art. 1172)
selection or supervision of employees. However, if
the cause of action alleged by the plaintiff passenger
Note: Moral damages may be recovered in an
in the complaint is based on culpa aquiliana or
action for breach of contract of transportation when
quasi-delict, the defendant carrier may use the
death results. Even if the passenger does not die,
defense of diligence in the selection or supervision
the passenger can recover moral damages if the
of employees.
carrier is guilty of fraud or bad faith. However, only
the passenger is entitled to moral damages, not
The driver and the owner of the vehicle, regardless
anyone else.
of relationship, are solidarily liable for the injuries
caused to a victim of an accident involving the
2. Duration of Liability vehicle owner and driven by 2 different persons.
(Dela Cruz v. Octaviano, G.R. 219649, 2017)
This duty of common carriers to exercise the highest
degree of diligence commences from the moment b. Other Passengers and
the person who purchases the ticket from the carrier
Strangers
presents himself at the proper place and in a proper
manner to be transported. Once created, the
Passengers
relation of carrier and passenger will not ordinarily
Common Carriers are liable if its employees could
terminate until the passenger has, after reaching his
have prevented by ordinary diligence the willful act
destination, safely alighted from the carrier’s
or negligence of other passengers or strangers.
conveyance or had a reasonable opportunity to
leave the carrier’s premises.
4. Extent of Liability for Damages
The following are not passengers and thus, no
carrier – passenger relationship or relationship a. Recoverable Damages
ceases:
● One who has not yet boarded any part of a Damages can be awarded in cases of injuries
vehicle regardless of whether or not he has a suffered by or deaths of passengers in accordance
ticket; with the provisions of the Civil Code on Damages.
● One who remains on a carrier for an (Civil Code, Art. 1764)
unreasonable length of time after he has been
afforded every safe opportunity to alight; Kinds of Damages
● One who has boarded by fraud, stealth, or (a) Actual or Compensatory Damages
deceit; (b) Moral Damages
(c) Exemplary Damages

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(d) Nominal Damages (f) The quantity, quality, number of packages,

(e) Temperate Damages and marks of the merchandise; and
(f) Liquidated Damages (g) The freight and the primage stipulated
(Code of Commerce, Art. 706)
Rule on Moral Damages
General Rule: Moral damages are not recoverable Three-Fold Character (Purposes)
in actions for damages predicated on a breach of 1. It is the receipt of the goods shipped;
contract of carriage. The issuance of a bill of lading carries the
presumption that the goods were delivered to the
Exceptions: Moral Damages may be awarded in a carrier issuing the bill and is prima facie evidence of
breach of contract caused by the common carrier the receipt of the goods by the carrier (Saludo v. CA,
where: G.R. No. 95536)
● There is a death of a passenger (Civil Code, Art.
1764) 2. It is a contract between the parties; and
● In breach of contract of carriage, there must be The acceptance of a paper containing the terms of
fraud, bad faith, or death (Sps. Estrada v. a proposed contract generally constitutes an
Philippine Rabbit Bus Lines, G.R. No. 203902, acceptance of the contract and all of its terms and
2017) conditions of which the acceptor has actual or
● The carrier was guilty of fraud or bad faith even constructive notice. (Keng Hua Paper Products, Co.,
if there is no death. Only injured passengers are Inc. v. CA, 349 Phil. 925)
entitled to moral damages due to injuries In case
of death, only compulsory heirs are entitled to 3. It is a symbolic representation of the goods, i.e.,
claim moral damages. (Sulpicio Lines, Inc. v.
it is a document of title
Curso, G.R. No. 157009)
In the charter of the entire vessel, the bill of lading
issued by the master to the charterer is in fact a
Note: Attorney’s Fees are considered actual
receipt and document of title, not a contract. (Home
damages. There are two kinds of attorney’s fees –
Insurance v. American Steamship Agencies, Inc.,
one for the client and one for the attorney. In
131 Phil. 552)
transportation law, what is relevant is attorney’s fees
for the client and not for the attorney.
Delivery of Goods
Maritime Transportation Common carriers are obliged to deliver the goods in
I. Maritime Contracts (Bills of Lading and the same condition which they were at the time of
their receipt, without any detriment or impairment.
Charter Parties)
Bill of Lading This obligation will not apply if the goods suffered
A written acknowledgment of the receipt of the damage or impairment:
goods and an agreement to transport and deliver (f) Due to accidents;
them at a specified place to a person named or on (g) Due to force majeure; or
his/her order. It is signed by the captain and shipper, (h) By virtue of the nature or defect of the
and furnished to the consignee (Saludo v. CA, G.R. goods (Code of Commerce, Art. 363 &
No. 95536) Code of Commerce, Art. 361)
Note: It is not indispensable to the creation of a
Period of delivery
contract of carriage. The contract itself arises from
The period of delivery will depend on what is
the moment the goods are delivered by the shipper
to the carrier and the carrier agrees to carry them. provided on the bill of lading.
NO FIXED The first shipment of the same
Contents PERIOD or similar goods which the
(a) The name, registry, and tonnage of the carrier may make to the point
vessel; of delivery. (Code of
(b) The name of the captain and the captain’s Commerce, Art. 358)
domicile; STIPULATED Within the period provided in
(c) The port of loading and unloading;
PERIOD the bill of lading. (Code of
(d) The name of the shipper;
Commerce, Art. 370)
(e) The name of the consignee, if the bill of
lading is issued to order;

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Delivery without surrender of bill of lading (b) From the day on which it should be delivered
The surrender of the bill of the original bill of lading according to the conditions of its transportation.
is not a condition precedent for a common carrier to (Code of Commerce, Art. 952)
be discharged of its contractual obligation.
Note: The above period applies to cases under the
If the surrender is not possible, acknowledgment of
Carriage of Goods by Sea Act
delivery by signing the delivery receipt suffices.
(Republic of the Philippines v. Lorenzo Shipping
Corporation, 491 Phil. 151) Claim v. Suit
CLAIM File a CLAIM against the carrier:
Refusal of the consignee to take delivery Upon receipt of the goods; or
Instances when consignee can refuse to accept the Within 24 hours following the
goods receipt of the merchandise
(a) Only a PART of the goods are delivered and it SUIT The CLAIM is a condition precedent
to the filing of a SUIT.
cannot make use of the goods without the others
The consignee shall file a SUIT
(b) If the goods are DAMAGED and thus rendered within 1 year from either:
useless for the purposes of sale or consumption. Delivery of the goods; or
In this instance, the consignee may leave the Denial of the claim
goods to the carrier and demand payment for the
goods at their current market price (Code of Effects of Stipulations
Commerce, Art. 365) a. Change of Route
(c) When there is a DELAY on account of the fault General Rule: Common carriers cannot change the
of the carrier. This is considered to be an agreed route to which the transportation is to be
abandonment. In this case, the carrier shall made. (Code of Commerce, Art. 359)
satisfy the total value of the goods as if the goods
Exception: When the carrier is obliged to change
were lost or misplaced. (Code of Commerce, Art. its route due to force majeure. If the transportation
371) costs increase in such an instance, the carrier shall
be reimbursed for the increase. (Id.)
Period for Filing Claims
The period of filing of claims will depend on whether Note: If the carrier changes its route without just
the damage or average can be determined from the cause, the carrier shall be liable to pay damages
exterior of the packaging: suffered by the goods for any cause. If no route was
agreed upon, the carrier must select the shortest,
CAN BE Claims should be filed upon least expensive, and practically passable route. (Id.)
ASCERTAINED the receipt of the package;
CANNOT BE Claims should be filed within b. Change in the Consignment of Goods
ASCERTAINED twenty-four (24) hours The shipper may change the consignment of the
following the receipt of the goods delivered to the common carrier as long as
goods. the place of delivery is not changed. The change is
No claims shall be admitted against the Common considered a novation. The carrier shall comply with
carrier with regard to the condition of the goods after this change, provided that the bill of lading be
the lapse of these periods. (Code of Commerce, Art. returned to the carrier at the time of making the
366) change of the consignee. (Code of Commerce, Art.
360)
Claims are conditions precedent to the accrual of a
right of action to recover damages. (Southern Lines, All expenses arising from the change of
Inc. v. CA, 114 Phil. 198) consignment shall be shouldered by the shipper.
Period for Filing Actions
Actions relating to the delivery of cargo or the Charter Party
indemnity for delays and damages suffered by the It is a contract by virtue of which the owner or the
goods transported prescribed after one (1) year. agent of a vessel binds himself to transport
merchandise or persons at a fixed price. (San
The prescriptive period will be counted from: Miguel Corporation v. Heirs of Inguito, 433 Phil. 428)
(a) The day of delivery of the cargo at the place of
its destination; or

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A charter party may either be: II. Persons in Maritime Law (Shipowner, Ship
(a) Bareboat or demise charters; or agent, Captain, Sailing Mate, Supercargo)
(b) Contracts of affreightment, which includes
i. time charters and Persons Participating in Maritime Commerce
ii. voyage charters (San Miguel (a) Ship owner and/or ship agent – the shipping
Corporation v. Heirs of Inguito, 433 agent is the person entrusted with the
Phil. 428) provisioning of a vessel or who represents her in
the port in which she may be found
General Categories or Kinds of Charter Party
(b) Captain or Master — the person in charge of the
DEMISE / CONTRACT OF
BAREBOAT AFFREIGHTMENT vessel and navigates it. The captain also acts as
The charterer mans The owner of a vessel the general agent of the ship owner.
the vessel with its own leases the whole or (c) Other officers of the vessel (i.e. sailing mate,
people and is part of its space to haul second mate, third mate, marine engineer)
considered the owner goods for another. (d) Supercargo — the person specially employed by
pro hac vice (for this the owner of cargo to take charge of and sell to
occasion only). the best advantage merchandise which has
The owner retains been shipped, and to purchase returning
Owner completely and possession, command, cargoes and to receive freight
exclusively and navigation of the
relinquishing ship.
possession, Basic Functions of a Captain
command, and A master or captain, for purposes of maritime
navigation to the commerce, is the one who has command of a
charterer. vessel. A captain commonly performs three (3)
distinct roles:
The charterer is liable The shipowner is liable
(a) he is a general agent of the shipowner;
for damages for damages
Carrier is converted to The carrier remains a (b) he is also the commander and technical director
the private carrier – common carrier – of the vessel; and
ordinary diligence extraordinary diligence (c) he is a representative of the country under
whose flag he navigates
a. Bareboat/demise charter (Inter-Orient Maritime Enterprises, Inc. vs NLRC,
Under a Bareboat/Demise Charter, the charterer G.R. No. 115286, 1994).
mans the vessel with his own people and becomes,
in effect, the owner of the ship for the voyage or Liability for acts of captain
service stipulated, subject to the liability for The ship owner and ship agent shall be civilly liable
damages caused by negligence. (San Miguel for the:
Corporation v. Heirs of Inguito, 433 Phil. 428) (a) Acts of the captain; and
(b) The obligations contracted by the captain to
Conversion of a Common Carrier into a Private repair, equip, and provision the vessel, provided
Carrier the creditor proves that the amount claimed
A charter party may transform a common carrier into
was invested therein. (Code of Commerce, Art.
a private carrier. However, it must be a bareboat or
demise charter where the charterer mans the vessel 586)
with his own people and becomes, in effect, the
owner for the voyage or service stipulated (Caltex v. When Ship Owner/Ship Agent is not liable
Sulpicio Lines, G.R. No. 131166, 1999) The ship owner and ship agent shall NOT be liable
for obligations contracted by the captain which
b. Time charter exceed the powers and privileges granted to the
The leased vessel is leased to the charterer for a latter. However, the owner and agent will be again
fixed period of time. (San Miguel Corporation v. liable if the amounts claimed were used for the
Heirs of Inguito, 433 Phil. 428) benefit of the vessel. (Code of Commerce, Art. 588)
c. Voyage/trip charter III. Limited Liability rule

The ship is leased for a single voyage. (San Miguel General Rule: The liability of the ship owner is
Corporation v. Heirs of Inguito, 433 Phil. 428) limited to the value of the vessel, its equipment, and
freight. The rule is “no vessel, no liability.” (Code of
Commerce, Art. 837)

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Exceptions: Averages shall either be:

(a) The injury or death is due either to the fault of the 1. Simple or Particular Average – The expenses
shipowner or to the concurring negligence of the and damages caused to the vessel or to her
shipowner and captain cargo which have not redounded to the benefit
(b) The vessel is insured of all persons interested in the vessel and her
(c) Workmen’s Compensation Cases (Chua Yek cargo. (Code of Commerce, Art. 809)
Hong v. Intermediate Appellate Court, 248 Phil.
This shall be borne by the owner of the goods which
422)
gave rise to the expense or suffered the damage.
(d) Expenses for repairs on the vessel before its loss (Code of Commerce, Art. 810)
(Luzon Stevedoring v CA, G.R. No. L-58897,
1987) 2. General or Gross Average – The expenses and
damages which are deliberately caused to save
Who Can Exercise the Right of Abandonment the vessel, her cargo, or both at the same time,
General Rule: Only the ship owner and the shipping from a real known risk. (Code of Commerce, Art.
agent can make an abandonment. 811)
Exception: in cases of co-ownership of a vessel, a This shall be borne by all persons having an interest
co-owner may exempt himself from liability by in the vessel and cargo at the time of the occurrence
abandonment of the part of the vessel belonging to of the average. (Code of Commerce, Art. 812)
him.
To incur the expenses and cause of damages as
Abandonment may be done to avoid liability in general/gross average, there must be:
the following cases: (a) A resolution of the captain, adopted after
(a) For civil liability to third persons arising from the deliberation with the sailing mate and other
conduct of the captain in the vigilance over the officers of the vessel; and
goods which the vessel carried; (b) A hearing with the persons interested in
(b) For the proportionate contribution of co-owners the cargo who may be present. (Code of
of the vessel to a common fund for the results of Commerce, Art. 813)
the acts of the captain referred to in Art. 587 of
the Code of Commerce; and Four Requisites of General Average
(c) For the civil liability incurred by the ship owner in Tolentino, in his commentaries on the Code of
case of collision. Commerce, gives the following requisites for the
general average:
Exemption of Agent (a) First, there must be a common danger. This
The shipping agent shall also be civilly liable for the means, that both the ship and the cargo, after
indemnities in favor of third persons which arose has been loaded, are subject to the same
from the conduct of the captain in the care of the danger, whether during the voyage, or in the port
goods. However, the agent may exempt himself of loading or unloading; that the danger arises
from this liability by abandoning the vessel with all from the accidents of the sea, dispositions of the
her equipment and the freight he may have earned
authority, or faults of men, provided that the
during the voyage. (Code of Commerce, Art. 587)
circumstances producing the peril should be
IV. Maritime Accidents – General Average, ascertained and imminent or may rationally be
Arrivals under Stress, Collisions, Shipwreck and said to be certain and imminent. This last
Salvage requirement excludes measures undertaken
Averages against a distant peril.
1. All extraordinary or accidental expenses which (b) Second, that for the common safety part of the
may be incurred during the navigation for the vessel or of the cargo or both are sacrificed
preservation of the vessel or cargo, or both; or deliberately.
2. All damage or deterioration the vessel may suffer (c) Third, that from the expenses or damages
from the time she puts to sea from the port of caused follow the successful saving of the vessel
departure until she casts anchor in the port of and cargo.
destination, and those suffered by the (d) Fourth, that the expenses or damages should
merchandise from the time it is loaded in the port have been incurred or inflicted after taking
of shipment until it is unloaded in the port of
proper legal steps and authority.
consignment. (Code of Commerce, Art. 806)

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(A. Magsaysay, Inc. v Anastacio Agan, G.R. No. L-

6393, 1955) Exception: Damage caused by reason of arrival
under stress, provided the latter is legitimate
b. Arrivals under stress
Exception to Exception: Otherwise, the shipowner
When there is arrival under stress or agent and captain shall be jointly liable (Code of
If the captain during the navigation should believe Commerce, Art. 821)
that the vessel cannot continue the voyage to the
port of destination on account of c. Collisions and allisions
(a) the lack of provisions
(b) well-founded fear of seizure, privateers, or Collisions
pirates The impact of two or more vessels, both of which
(c) because of any accident in the sea disabling her are moving.
to navigate
Allisions
The impact between a moving vessel against a
The captain shall assemble the officers and shall
stationary object.
call the persons interested in the cargo who may be
present, and who may attend the meeting without
Zones of Collision and the Doctrine of Error in
the right to vote; and if, after examining the
Extremis:
circumstances of the case, the reasons should be
(a) First Zone – All the time up to the moment
considered well-founded
(a) it shall be decided to make the nearest and most the risk of collision begins;
convenient port (b) Second Zone – All the time from the
(b) drafting and entering in the log book the proper moment the risk of collision begins up to the
minutes, which shall be signed by all. moment the collision becomes a practical
certainty; and
The captain shall have the deciding vote and the (c) Third Zone – All the time when the
persons interested in the cargo may make the collision is certain up to the point of impact.
objections and protests they may deem proper, (A. Urrutia Co v. Baco River Plantation Co.,
which shall be entered in the minutes in order that 26 Phil. 632)
they may make use thereof in the manner they may
consider advisable. (Code of Commerce, Art. 819) The Doctrine of Error in Extremis
A sudden movement by a faultless vessel during the
Arrival under stress not legal third zone of collision with another vessel which is at
(a) Lack of provisions should arise from the failure fault during the second zone of collision will not
to take the necessary provisions for the voyage, make the faultless vessel responsible for any fault
according to usage and custom, or if they should due to the sudden movement. (A. Urrutia Co v. Baco
have been rendered useless or lost through bad River Plantation Co., 26 Phil. 632)
stowage or negligence in their care.
Rules Governing Collisions
(b) If the risk of enemies, privateers, or pirates (a) If a vessel collides with another through the fault,
should not have been well known, manifest, and negligence, or lack of skill of the captain, sailing
based on positive and justifiable facts. mate, or any other member of the crew, the
(c) If the injury to the vessel should have been owner of the vessel at fault shall be liable for the
caused by reason of her not being repaired, suffered losses and damages after appraisal
rigged, equipped, and arranged in a convenient (Code of Commerce, Art. 826)
manner for the voyage, or by reason of some (b) If both colliding vessels are at fault, each vessel
erroneous order of the captain. shall be liable for its own damages. Moreover,
(d) Whenever malice, negligence, want of foresight, both vessels shall be solidarily liable for the
or lack of skill on the part of the captain is the damages suffered by their cargoes. (Code of
reason for the act causing the damage. Commerce, Art. 827)
(Code of Commerce, Art. 820) (c) If it cannot be determined which of the two
vessels is at fault, it will be considered as if both
Expenses
vessels are at fault. Therefore, both vessels shall
General Rule: For the account of the shipowner or
agent be liable for their own damages but solidarily
liable for the damages suffered by their cargoes.

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This is also called the Doctrine of Inscrutable Contract of Towage

Fault. (Code of Commerce, Art. 828) A contract to render service whereby a vessel pulls
(d) If a vessel is forced to collide with another by or tows another from one place to another for
reason of accident or force majeure, each vessel compensation. It is not a contract of carriage or
shall be liable for its own damage. (Code of transportation. Only the owner of the towing vessel
can ask for compensation.
Commerce, Art. 830)
(e) If a vessel is forced to collide with another by a Salvage v. Towage
third vessel, the owner of the third vessel shall SALVAGE TOWAGE
indemnify all losses and damages caused. The The crew of the The crew of the towing
captain of the third vessel will then be liable to salvaging ship is ship does not have any
the owner of the third vessel. (Code of entitled to salvage, and interest or rights in the
Commerce, Article 832) can look to the remuneration
(f) If a storm or force majeure forces a properly salvaged vessel for its under the contract.
anchored and moored vessel to collide with other share Only the owner of the
vessels in her immediate vicinity, the damages tugboat will receive
caused shall be considered as a compensation in
towage.
simple/particular average. (Code of Commerce,
Salvor takes Tower has no
Art. 832)
possession and may possessory lien; only
retain possession until an action for recovery
d. Shipwreck he is paid of a sum of money.
Court has the power to Court has no power to
It covers all types of loss/wreck of a vessel at sea reduce the amount of change the amount in
either by being swallowed up by the waves or by remuneration if towage even if
running against another vessel or thing at sea or the unconscionable unconscionable
coast and the vessel is rendered incapable of
navigation. f. Maritime Protest
Liability in Shipwrecks It is a written statement under oath, made by the
General Rule: The losses and deteriorations master of a vessel, after the occurrence of an
suffered by a vessel and her cargo by reason of accident or disaster in which the vessel or cargo is
shipwreck or stranding shall be individually for the
lost or injured, concerning the circumstances
account of the owners, the part of the wreck which attending such occurrence.
may be saved belonging to them in the same
proportion. (Code of Commerce, Art. 840) It is intended to show that the loss or damage
resulted from a peril of the sea, or some other cause
Exception: If the wreck or stranding should arise for which neither master nor owner was responsible,
through the malice, negligence, or lack of skill of the and concludes with a protest against any liability of
captain, or because the vessel put to sea
the owner for such loss or damage.
insufficiently repaired and prepared, the owner or
the freighters may demand indemnity of the captain It is a condition precedent or prerequisite to recovery
for the damages caused to the vessel or cargo by of damages arising from collisions and other
the accident. (Code of Commerce, Art. 841) maritime accidents (Code of Commerce, Art. 835)
e. Salvage Made by whom: Captain
Elements of a valid salvage When made: Within 24 hours from the time the
(a) A marine peril collision took place (Code of Commerce, Art. 835);
(b) Service voluntarily rendered when not Upon arrival at the place of destination, the captain
required as an existing duty or from a shall ratify the protest within 24 hours.
special contract
(c) Success, in whole or in part, or that the Before whom made: Competent authority at the
services rendered contributed to the such point of a collision or the first port of arrival, if in the
success (Barrios vs. Go Thong, G.R. No. L- Philippines and to the Philippine consul, if the
17192, 1963) collision took place abroad (Code of Commerce, Art.
835)

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Maritime protest is required In the following However, it may also apply to domestic trade
Cases: provided there is a Paramount Clause in the
(a) Collision; contract.
(b) Arrival under stress
(c) Shipwreck; and Paramount clause
(d) In case the vessel has gone through a A stipulation or clause either on the bill of lading or
hurricane or when the captain believes that the charter party stipulating the laws that the parties
agreed to be used of that particular transport.
cargo has suffered damages.
Responsibility of the carrier under the COGSA
Maritime Protest shall also be done if the vessel has The responsibility of the carrier begins when the
been wrecked, and the captain is saved alone or goods are brought to the carrier and cross one side
with part of the crew, in which case, the captain shall of the vessel (portside). It ceases only when the
appear before the nearest authority and make a goods cross the other side (starboard side). This is
sworn statement of the facts. also known as the “tackle to tackle” rule.
Salvage - it is the compensation allowed to persons Requisites of contracts covered by COGSA
by whose voluntary assistance a ship at sea or her (a) Contracts for the carriage of goods
cargo or both have been saved in whole or in part
(b) By sea
from impending peril, or such property recovered
from actual peril or loss. (c) To and from Philippine ports
(d) In foreign trade
In case of shipwreck, derelict or recapture; a service
which one person renders to the owner of a ship or Shipper’s guaranty upon delivery of the goods
goods by his own labor, preserving the goods or to carrier for shipment
ship which the owner or those entrusted with the The shipper guarantees at the time of shipment the
care of them either abandoned in distress at sea or accuracy of the marks, number, quantity, and weight
are unable to protect and secure. of the goods. The shipper shall indemnify the carrier
against all losses, damages, and expenses arising
Derelict from errors or inaccuracies.
It is a ship or cargo which is abandoned and
deserted at sea by those who are in charge of it, The carrier shall be bound before and at the
without any hope of recovering it, or without any beginning of the voyage, to exercise due diligence
intention of returning to it. to:
(a) Make the ship seaworthy
Note: Different liabilities may arise depending on (b) Properly man, equip, and supply the ship
the type of vessel or contract (c) Make the holds, refrigerating and cooling
(a) Common carrier – governed by the Civil chambers, and all other parts of the ship in
Code (as discussed above) which goods are carried, fit, and safe for
(b) Charter party – governed by Code of reception, carriage, and, preservation.
Commerce (Maritime Commerce)
(c) Contracts of carriage by sea to and from Notice of loss or damage
the Philippines in foreign trade – Carriage When there is a loss or damage to the goods, there
of Goods by Sea Act must be a written notice that provides:
(a) The general nature of such loss or damage
V. COGSA (Carriage of Goods by Sea Act) (b) Given to the carrier or his agent
Application (c) At the port of discharge or at the time of
The law of the country to which the goods are to be the removal of the goods.
transported shall govern the liability of the common
carrier for their loss, destruction or deterioration. If the loss or damage is not apparent, the notice
(Article 1753, Civil Code) must be given within 3 days from delivery. The
notice of loss or damage may be endorsed upon the
The COGSA is the applicable law for all contracts of receipt of the goods given by the person taking
carriage by sea to and from the Philippines in foreign delivery thereof.
trade. (COGSA, Sec. 1 & Cua v. Wallem Philippines
Shipping, Inc., 690 Phil. 491) The notice or writing need not be given if the state
of the goods at the time of their receipt has been the

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subject of Joint Survey Inspection. (COGSA, Sec. lading; the declaration is prima facie evidence
3(6)) and not conclusive on the carrier.
● Shipper and carrier may agree on another
Under COGSA, the filing of a notice of claim is NOT maximum amount, but not more than the amount
a condition precedent to filing a suit (UCPB v. of damage actually sustained. The fixed
Aboitiz Shipping G.R. No. 168433, 2009) maximum amount must also not be less than
$500 per package per customary freight unit.
“Loss” contemplates merely a situation where no (COGSA, Sec. 6 [5])
delivery at all was made by the shipper of the goods
because the same had perished, gone out of D. THE MONTREAL CONVENTION OF
commerce or disappeared in much a way that their 1999
existence is unknown or they cannot be recovered.
It does not include a situation where:
1. Applicability
● There was indeed delivery — but delivery to the
wrong person, or a misdelivery (Ang. V.
Application
American Steamship, G.R. No. L-22491, 1967)
It applies to all international carriage of persons,
● Damage arising from delay or late delivery
baggage, or cargo performed by aircraft for reward.
(Mitsui O.S.K. Lines v. CA, G.R. No. 119571,
It applies equally to gratuitous carriage by aircraft
1998).
performed by an air transport undertaking. (Article 1
In such instances, the Civil Code rules on
par. 1)
prescription shall apply.
International Carriage (Article 1 par 2)
Period of prescription COVERED NOT COVERED
Actions must be brought within one (1) year after:
Any carriage in which, Carriage between
(a) Delivery of the goods; or
according to the agreement two points within
(b) The date when the goods should have been between the parties, the the territory of a
delivered. (COGSA, Sec. 3[6]) place of departure and the single State Party
place of destination, without an agreed
Failure to file within the prescriptive period will whether or not there be a stopping place
discharge the common carrier and the vessel from break in the carriage or a within the territory
liability. (COGSA, Sec. 3[6]) transshipment, are situated of another State
either within the territories (Article 1 par 2)
However, the shipper shall not lose the right to of two States Parties, or
initiate an action against the carrier or the vessel if within the territory of a
no notice of loss or damage is given. (COGSA, Sec. single State Party if there is
3[6]) an agreed stopping place
within the territory of
When The One-Year Period In COGSA Is another State, even if that
Interrupted: State is not a State Party.
(a) When an action is filed in court; (Universal
Shipping Lines v. IAC, G.R. No. 74125,
1990); and Successive Carriage
(b) When there is a contrary agreement Carriage to be performed by several successive
between the parties. (Stevens v. carriers is deemed, for the purposes of this
Norddeuscher, G.R. No. L-17730, 1962) Convention, to be one undivided carriage if it has
been regarded by the parties as a single operation,
whether it had been agreed upon under the form of
Limitation of liability a single contract or of a series of contracts, and it
● Carriers and vessels shall be liable for any loss does not lose its international character merely
or damage in connection with the transportation because one contract or a series of contracts is to
of goods. However, such liability is limited to: be performed entirely within the territory of the same
● Maximum of $500 per package or, if not shipped State. (Article 1, par 3)
in packages, per customary freight unit (e.g.
metric ton). Actions of Passenger Against Carrier in
● Carriers and vessels will be subject to greater Transportation of: (Article 36)
liability if the nature and value of goods are GOODS PASSENGER
declared by the shipper and inserted in the bill of a) Passenger General Rule:
or consignor

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will have a The passenger or any (b) Damages exceeding 100 000 Special
right of action person entitled to Drawing Rights – the carrier is liable
against the compensation in unless the carrier proves that:
first carrier respect of him or her 1. such damage was not due to the
b) The can take action only negligence or other wrongful act or
passenger or against the carrier omission of the carrier or its servants or
consignee which performed the agents; or
who is entitled carriage during which 2. such damage was solely due to the
to delivery will the accident or the negligence or other wrongful act or
have a right of delay occurred omission of a third party.
action against Exception:
the last carrier By express
h. Lost or Delayed Baggage
c) Further, each agreement, the first
may take carrier has assumed
Damage to Baggage (Article 17)
action against liability for the whole
the carrier journey. Baggage
which Baggage means both checked baggage and
performed the unchecked baggage. (Article 17, par. 4)
carriage
during which Liabilities of the carrier:
the (a) Liable for damage sustained in case of
destruction, death or bodily injury of a passenger upon
loss, damage, condition only that the accident which
or delay took caused the death or injury took place on
place.
board the aircraft or in the course of any of
These carriers will be
jointly and severally the operations of embarking or
liable to the passenger disembarking.
to the consignor or (b) Liable for damage sustained in case of
consignee. destruction or loss of, or of damage to,
checked baggage upon condition only that
Combined Carriage the event which caused the destruction,
In the case of combined carriage performed partly loss, or damage took place on board the
by air and partly by any other mode of carriage, the aircraft or during any period within which the
provisions of this Convention shall, subject to checked baggage was in the charge of the
paragraph 4 of Article 18, apply only to the carriage
carrier. However, the carrier is not liable if
by air, provided that the carriage by air falls within
and to the extent that the damage resulted
the terms of Article 1. (Article 38)
from the inherent defect, quality, or vice of
Prima facie evidence the baggage.
The air waybill or the cargo receipt is prima facie (c) In the case of unchecked baggage,
evidence of the conclusion of the contract, of the including personal items, the carrier is liable
acceptance of the cargo, and of the conditions of if the damage resulted from its fault or that
carriage mentioned therein. (Article 11, par. 1) of its servants or agents
(d) If the carrier admits the loss of the checked
2. Extent of Liability of Air Carrier baggage, or if the checked baggage has not
arrived at the expiration of twenty-one days
g. Death or Injury of Passenger after the date on which it ought to have
arrived, the passenger is entitled to enforce
Limitations and Extent of Compensation
against the carrier the rights which flow from
Compensation in Case of Death or Injury of
the contract of carriage.
Passengers (Article 21)
(a) Damages not exceeding 100 000 Special
Damage to Cargo (Article 18)
Drawing Rights - the carrier shall not be
General Rule: The carrier is liable for damage
able to exclude or limit its liability.
sustained in the event of the destruction or loss of,
or damage to, cargo upon condition only that the

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event which caused the damage so sustained took b. When by reason of death or injury of a
place during the carriage by air. passenger compensation is claimed by
a person other than the passenger.
Exception: Not liable if and to the extent it proves
that the destruction, or loss of, or damage to, the Advance Payments (Article 28)
cargo resulted from one or more of the following: In the case of aircraft accidents resulting in the
(e) inherent defect, quality, or vice of that death or injury of passengers, the carrier shall, if
cargo; required by its national law, make advance
(f) defective packing of that cargo performed payments without delay to a natural person or
by a person other than the carrier or its persons who are entitled to claim compensation to
servants or agents; meet the immediate economic needs of such
persons.
(g) an act of war or an armed conflict;
(h) an act of public authority carried out in Such advance payments shall not constitute a
connection with the entry, exit, or transit of recognition of liability and may be offset against any
the cargo. amounts subsequently paid as damages by the
carrier.
Carriage by air
The period during which the cargo is in charge of the Limitations and Extent of Compensation
carrier.
Compensation in Case of Death or Injury of
Note: The period of the carriage by air does not Passengers (Article 21)
extend to any carriage by land, by sea, or by inland (a) Damages not exceeding 100 000 Special
waterway performed outside an airport. If, however, Drawing Rights - the carrier shall not be
such carriage takes place in the performance of a
able to exclude or limit its liability.
contract for carriage by air, for the purpose of
loading, delivery, or transshipment, any damage is (b) Damages exceeding 100 000 Special
presumed, subject to proof to the contrary, to have Drawing Rights – the carrier is liable
been the result of an event which took place during unless the carrier proves that:
the carriage by air. If a carrier, without the consent 1. such damage was not due to the
of the consignor, substitutes carriage by another negligence or other wrongful act or
mode of transport for the whole or part of a carriage omission of the carrier or its servants or
intended by the agreement between the parties to agents; or
be carriage by air, such carriage by another mode 2. such damage was solely due to the
of transport is deemed to be within the period of negligence or other wrongful act or
carriage by air. omission of a third party.
Delay (Article 19) Limits of Liability in Relation to Delay, Baggage,

General Rule: The carrier is liable for damage and Cargo (Article 22)
occasioned by delay in the carriage by air of (a) Damage caused by delay
passengers, baggage, or cargo.
Liability of the carrier for each passenger is limited
Exception: If it proves that it and its servants and
to 4 150 Special Drawing Rights
agents took all measures that could reasonably be
required to avoid the damage or that it was
(b) In the carriage of baggage, in case of
impossible for it or them to take such measures.
destruction, loss, damage, or delay
Defenses Available to Carrier (Article 20)
If the carrier proves the following, the carrier shall be General Rule: Liability is limited to 1 000 Special
wholly or partly exonerated from its liability to the Drawing Rights for each passenger
extent of damage contributed:
Exception: The passenger has made, at the time
a. If the carrier proves that the damage when the checked baggage was handed over to the
was caused or contributed to by the carrier, a special declaration of interest in delivery at
negligence or other wrongful act or the destination and has paid a supplementary sum
omission of the person claiming if the case so requires. In that case, the carrier will
compensation, or the person from be liable to pay a sum not exceeding the declared
whom he or she derives his or her sum, unless it proves that the sum is greater than
rights

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the passenger’s actual interest in delivery at other expenses of the litigation, does not exceed the
destination. sum which the carrier has offered in writing to the
plaintiff within a period of six months from the date
(c) In the carriage of cargo, the liability of of the occurrence causing the damage, or before the
the carrier in the case of destruction, commencement of the action, if that is later.
loss, damage, or delay
Valid Stipulation (Article 25)
General Rule: Limited to a sum of 17 Special A carrier may stipulate that the contract of carriage
Drawing Rights per kilogram, shall be subject to higher limits of liability than those
provided for in this Convention or to no limits of
Exception: The consignor has made, at the time liability whatsoever.
when the package was handed over to the carrier, a
special declaration of interest in delivery at the Void Stipulation (Article 26)
destination and has paid a supplementary sum if the Any provision tending to relieve the carrier of liability
case so requires. or to fix a lower limit than that which is laid down in
this Convention shall be null and void
In that case, the carrier will be liable to pay a sum
not exceeding the declared sum, unless it proves Note: It does not result in the nullity of the whole
that the sum is greater than the consignor’s actual contract
interest in delivery at destination.
Aggregation of Claims (Article 30)
Weight of Package in case of destruction, loss, Available conditions and limits of liability
damage, or delay of a part of the cargo, or an If an action is brought against a servant or agent of
object contained therein the carrier arising out of damage to which the
The weight to be taken into consideration in Convention relates, such servant or agent, if they
determining the amount to which the carrier’s liability prove that they acted within the scope of their
is limited shall be only the total weight of the employment, shall be entitled to avail themselves of
package or packages concerned. If the destruction, the conditions and limits of liability which the carrier
etc. affects the value of other packages covered by itself is entitled to invoke under this Convention.
the same air waybill, or the same receipt or, if they
were not issued, by the same record preserved by Aggregate Amount
the other means referred to in paragraph 2 of Article The aggregate of the amounts recoverable from the
4, the total weight of such package or packages carrier, its servants, and agents, in that case, shall
shall also be taken into consideration in determining not exceed the said limits.
the limit of liability.
Note: Save in respect of the carriage of cargo,
Exemption from liability availability of limits and limits on aggregate amount
No liability for damage caused by delay or damage shall not apply if it is proved that the damage
in the carriage of baggage (1st and 2nd type of resulted from an act or omission of the servant or
liability) if it is proven: agent done with intent to cause damage or
recklessly and with the knowledge that damage
Damage resulted from an act or omission of the would probably result.
carrier, its servants or agents, done with intent to
cause damage or recklessly and with knowledge Prescription
that damage would probably result; provided that, in Timely Notice of Complaints (Article 31)
the case of such act or omission of a servant or Every complaint must be made in writing and given
agent, it is also proved that such servant or agent or dispatched within the times aforesaid.
was acting within the scope of its employment.
RECEIPT Prima facie evidence that the
Additional compensation (Article 22, par 6) WITHOUT same has been delivered in
The limits prescribed in Articles 21 and 22 shall not COMPLAINT good condition and in
prevent the court from awarding, in accordance with accordance with the document
its own law, in addition, the whole or part of the court of carriage or with the record
costs and of the other expenses of the litigation preserved
incurred by the plaintiff, including interest.
DAMAGE Complain to the carrier forthwith
The foregoing provision shall not apply if the amount after the discovery of the
of the damages awarded, excluding court costs and damage

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At the latest, within seven days

from the date of receipt in the
case of checked baggage and
fourteen days from the date of
receipt in the case of cargo
DELAY Complaint must be made at the
latest within twenty-one days
from the date on which the
baggage or cargo has been
placed at his or her disposal.
Effect of Non-compliance
General Rule: If no complaint is made within the

times aforesaid, no action shall lie against the carrier
Exception: Fraud
Right to Damages
It shall be extinguished if an action is not brought
within a period of two years, reckoned from:
(a) the date of arrival at the destination, or
(b) from the date on which the aircraft ought to
have arrived, or
(c) from the date on which the carriage
stopped.
The method of calculating that period shall be

determined by the law of the court seized of the
case. Lex fori (or the law of the forum).

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V. INTELLECTUAL PROPERTY CODE

Intellectual Property Rights In General
a. Intellectual property Rights
The State recognizes that an effective intellectual
A. PATENTS
and industrial property system is vital to the
1. Patentable Inventions
development of domestic and creative activity,
a. Novelty
facilitates transfer of technology, attracts foreign
b. Inventive Step
investments, and ensures market access for our
c. Industrial Applicability
products. The use of intellectual property bears a
2. Non-Patentable Inventions
social function. To this end, the State shall promote
3. Ownership of a Patent
the diffusion of knowledge and information for the
a. Right of a Patent
promotion of national development and progress
b. First-to-File rule
and the common good. (Sec. 2, IP Code)
c. Inventions Created Pursuant to a
Commission
All agreements concerning industrial property are
d. Right of Priority
intimately connected with economic development.
4. Grounds for Cancellation of a Patent
Industrial property encourages investments in new
5. Remedy of the True and Actual Inventor
ideas and inventions and stimulates creative efforts
6. Rights Conferred by a Patent
for the satisfaction of human needs. They speed up
7. Limitations of Patent rights
transfer of technology and industrialization, and
a. Prior User
thereby bring about social and economic progress.
b. Use by Government
(Mirpuri v. Court of Appeals, G.R. No. 114508,
8. Patent Infringement
1999).
a. Tests in Patent Infringement
(1) Literal Infringement
Intellectual property protection is merely a means
(2) Doctrine of Equivalents
towards the end of making society benefit from the
b. Defenses in Action for Infringement
creation of its men and women of talent and genius.
9. Licensing
This is the essence of intellectual property laws, and
a. Voluntary
it explains why certain products of ingenuity that are
b. Compulsory
concealed from the public are outside the pale of
10. Assignment and Transmission of Rights
protection afforded by the law. It also explains why
the author or the creator enjoys no more rights than
B. TRADEMARKS
are consistent with public welfare. (ABS-CBN
1. Marks vs. Collective Marks vs. Trade
Broadcasting Corp. v. Philippine Multi-Media
Names
System, Inc., G.R. Nos. 175769-70, 2009).
2. Acquisition of Ownership Mark
3. Acquisition of Ownership of Trade Name
4. Non-Registrable Marks b. Differences between copyright,
5. Tests to Determine Confusing Similarity trademarks, and patents
Between Marks RATIONALE
a. Dominancy Test 1. To promote creativity
6. Well-Known Marks Copyright 2. To encourage creation of
7. Rights Conferred by Registration works
8. Cancellation of Registration 1. To indicate origin or
9. Trademark Infringement ownership of the articles to
10. Unfair Competition which they are attached
2. To guarantee that those
Trademarks
C. COPYRIGHT articles come up to a certain
1. Basic Principles standard of quality
2. Copyrightable Works 3. To advertise the articles
a. Original Works which they symbolize
b. Derivative Works 1. To foster and reward
3. Non-Copyrightable Works invention;
4. Rights Conferred by Copyright Patents 2. To promote disclosures of
5. Ownership of a Copyright inventions to stimulate
6. Limitations on Copyright further innovation
7. Doctrine of Fair Use
8. Copyright Infringement

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3. To ensure that ideas in the inventiveness, novelty, and usefulness of the

public domain remain there improved process therein specified and described
for the free use of the public are matters which are better determined by the
SUBJECT MATTER Philippines Patent Office. The technical staff of the
Original intellectual creations in Philippines Patent Office, composed of experts in
Copyright the literary and artistic domain their field, have, by the issuance of the patent in
(literary and artistic works) question, accepted the thinness of the private
Any visible sign capable of respondent's new tiles as a discovery. There is a
Trademarks presumption that the Philippines Patent Office has
distinguishing the goods
A product, process or any correctly determined the patentability of the
Patents improvement thereof which is a improvement by the private respondent of the
technical solution of a problem process in question. (Aguas v. De Leon, G.R. No. L-
ELEMENTS 32160, 1982)
1. Literary or artistic work
2. Independently created 1. Patentable Inventions
Copyright (originality) PATENTABLE NON-PATENTABLE
3. Involves minimal or a INVENTIONS INVENTIONS
modicum of creativity Any technical 1. Discoveries,
1. Visible sign solution of a problem scientific theories
2. Capable of distinguishing in any field of human and mathematical
Trademarks
[distinctive] the goods or activity which is: methods.
services of an enterprise (a) new, involves 2. Schemes, rules
1. Technical solution of a an and methods of
problem in a field of human (b) inventive performing mental
activity step and is acts, playing
Patents 2. Must be new (novelty) (c) industrially games or doing
3. Involves an inventive step; applicable business and
(non-obvious) shall be program for
4. Industrially applicable patentable. computers.
WHEN PROTECTION BEGINS It may be, or may relate 3. Methods for human
Upon creation (but registration to: or animal treatment
Copyright needed only to recover damages (a) a product, or by surgery or
in cases of infringement) (b) process, or an therapy and
Upon grant of trademark (c) improvement diagnostic methods
Trademarks of any of the practiced on the
registration
Patents Upon grant of patent foregoing. human or animal
TERM OF PROTECTION (Sec. 21, IP body.
Generally, during the life of the Code) 4. Plant varieties or
Copyright author and for 50 years after his animal breeds or
death [life + 50] biological process
10 years, renewable for periods for the production
of 10 years after the expiration of of plants or
Trademarks animals.
the original term (perpetual
protection as long as renewed) 5. Aesthetic
creations; and
Patents 20 years from grant
6. Anything contrary
to public order or
A. PATENTS morality.
(Sec. 22, IP Code)
A patent is a grant issued by the Intellectual
Property Office of the Philippines (IPOPHL). Patentable invention
Through the patent, a patent holder is given the Any technical solution of a problem in any field of
exclusive right to exclude others from making, using, human activity which is (a) new, involves an (b)
importing, and selling the patented innovation for a inventive step and is (c) industrially applicable
limited period of time. shall be patentable. It may be, or may relate to, a
product, or process, or an improvement of any of the
The validity of the patent issued by the Philippines foregoing. (Sec. 21, IP Code)
Patent Office and the question over the

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c. Novelty 3. the mere use of a known process unless such

An invention shall not be considered new if it forms known process results in a new product that
part of a prior art. (Sec. 23, IP Code). Novelty is an employs at least one new reactant. (Sec. 26.2,
essential requisite of patentability of an invention or IP Code)
discovery. An invention is not new if it has been
disclosed or used in public, or sold in the market e. Industrial Applicability
before the patent application for the invention is An invention that can be produced and used in any
filed. (Manzano v. Court of Appeals, G.R. No. industry shall be industrially applicable. (Sec. 27, IP
113388, 1997). Code). Industrial applicability refers to an invention’s
real-life benefit and practical use.
Prior Art – It consists of:
a. Everything which has been made available to 2. Non-Patentable Inventions
the public anywhere in the world, before the
filing date or the priority date of the application The following shall be excluded from patent
claiming the invention; and protection:
b. The whole contents of an application for a 1. Discoveries, scientific theories and
patent, utility model, or industrial design mathematical methods, and in the case of drugs
registration, published in accordance with this and medicines, the mere discovery of a new
Act, filed or effective in the Philippines, with a form or new property of a known substance
filing or priority date that is earlier than the filing which does not result in the enhancement of the
or priority date of the application: Provided known efficacy of that substance, or the mere
i. An application which has validly discovery of any new property or new use for a
claimed the filing date of an earlier known substance, or the mere use of a known
application shall be prior art with effect process unless such known process results in a
as of the filing date of such earlier new product that employs at least one new
application; reactant.
ii. The applicant or the inventor identified
in both applications are not one and the For the purpose of this clause, salts, esters,
same. (Sec. 24, IP Code) ethers, polymorphs, metabolites, pure form,
particle size, isomers, mixtures of isomers,
d. Inventive Step complexes, combinations, and other derivatives
An invention involves an inventive step if, having of a known substance shall be considered to be
regard to prior art, it is not obvious to a person the same substance, unless they differ
skilled in the art at the time of the filing date or significantly in properties with regard to efficacy;
priority date of the application claiming the invention.
(Sec. 26.1, IP Code) For drugs and medicines, the following are
unpatentable:
Person Skilled in the Art (POSITA)
A hypothetical person presumed to be an ordinary a. Discovery of a new form or new property
practitioner aware of what was common general of a known substance UNLESS it results in
knowledge in the art at the relevant date. He or she the enhancement of the substance’s
is also presumed to have: efficacy;
1. knowledge of all references that are sufficiently b. Discovery of any new property or use of
related to one another and to the pertinent art; a known substance; and
2. knowledge of all arts reasonably pertinent to the c. Mere use of a known process UNLESS
particular problems with which the inventor was such process results in a new product that
involved; and employs at least one new reactant.
3. normal means and capacity for routine work and
experimentation at his or her disposal. 2. Schemes, rules and methods of performing
mental acts, playing games or doing business,
In the case of drugs and medicines, there is no and programs for computers;
inventive step if the invention results from:
1. the mere discovery of a new form or new General Rule: Computer programs are
property of a known substance which does not subjects of copyright.
result in the enhancement of the known efficacy Exceptions: The computer program is still
of that substance, subject of copyright protection; in addition, the
2. the mere discovery of any new property or new machine or article described below may be
use for a known substance, or patentable if the computer program:

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(1) is implemented by a particular machine in a h. Inventions Created Pursuant to

non-conventional and non-trivial manner, a Commission
or The person who commissions the work shall own
(2) transforms an article from one state to the patent, unless otherwise provided in the
another, then it may be patentable. contract. (Sec. 30, IP Code)
3. Methods for treatment of the human or animal If an employee made the invention in the course of
body by surgery or therapy and diagnostic his regular employment, the patent shall belong to:
methods practiced on the human or animal 1. The employee, the inventive activity is not
body; part of his regular duties (even if the
employee uses the time, facilities, and
Note: This prohibition, however, does not apply materials of the employer);
to products and compositions for use in any of 2. The employer, if the invention is the result
these methods. of the performance of the employee’s
regular duties UNLESS there is an
4. Plant varieties or animal breeds or essentially agreement to the contrary.
biological process for the production of plants or
animals; i. Right of Priority
An application for patent filed by any person who
Note: This provision shall not apply to micro- has previously applied for the same invention in
organisms and non-biological and another country which by treaty, convention, or law
microbiological processes. Further, Congress affords similar privileges to Filipino citizens, shall be
may enact a law providing sui generis protection considered as filed as of the date of filing the foreign
of plant varieties and animal breeds and a application, provided that:
system of community intellectual rights 1. The local application expressly claims
protection. priority;
2. It is filed within twelve (12) months from the
Note: Congress has already enacted the Plan date the earliest foreign application was
Variety Protection Act which grants a Certificate filed; and
of Plant Variety Protection for varieties that are: 3. A certified copy of the foreign application
(a) new, (b) distinct, (c) uniform, and (d) together with an English translation is filed
stable. (Sec. 4, Plant Variety Protection Act) within six (6) months from the date of filing
in the Philippines.
5. Aesthetic creations; and
4. Grounds For Cancellation Of A
6. Anything which is contrary to public order or
morality. (Sec. 22, IP Code) Patent
Any interested person may, upon payment of the

3. Ownership Of A Patent
required fee, petition to cancel the patent or any
claim thereof, or parts of the claim, on any of the
Term of Patent
following grounds:
The term of a patent shall be 20 years from the filing
1. That what is claimed as the invention is not
date of the application. (Sec. 54, IP Code)
new or patentable;
2. That the patent does not disclose the
f. Right to a Patent invention in a manner sufficiently clear and
The right to a patent belongs to the inventor, his complete for it to be carried out by any
heirs, or assigns. When two (2) or more persons person skilled in the art; or
have jointly made an invention, the right to a patent 3. That the patent is contrary to public order
shall belong to them jointly. (Sec. 28, IP Code) or morality.
g. First-to-File Rule NOTE: Where the grounds for cancellation relate to
If two (2) or more persons have made the invention some of the claims or parts of the claim, cancellation
separately and independently of each other, the may be effected to such extent only.
right to the patent shall belong to the person who
filed an application for such invention, or where two
or more applications are filed for the same invention,
to the applicant who has the earliest filing date or the
earliest priority date. (Sec. 29, IP Code)

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5. Remedy Of The True And Actual without consent of other owner or owners, or without
Inventor proportionally dividing proceeds therewith. (Sec.
107, IP Code)
If a person, who was deprived of the patent without
his consent or through fraud, is declared by final 7. Limitations Of Patent Rights
court order or decision to be the true and actual
inventor, the court shall order for his substitution as The patentee has no right to prevent third parties in
patentee, or at the option of the true inventor, cancel the following circumstances:
the patent, and award actual and other damages in 1. Using a patented product which has been
his favor if warranted by the circumstances. (Sec. put on the market in the Philippines by the
68, IP Code) owner of the product, or with his express
consent, insofar as such use is performed
The remedies of the true and actual inventor are: after that product has been so put on the
(1) Substitution as patentee, and said market.
(2) Cancellation of the patent
In both remedies, damages may be awarded. Note: With regard to drugs and medicines, the
limitation on patent rights shall apply after a
Note: There must be a final court order declaring drug or medicine has been introduced in the
that he is the true and actual inventor. Philippines or anywhere else in the world. The
right to import the drugs and medicines shall be
Patent Application by Persons not Having the available to any government agency or any
Right to a Patent private third party.
If a person other than the applicant is declared by
final court order or decision as having the right to the 2. Where the act is done privately and on a
patent, such person may, within three (3) months non-commercial scale or for a non-
after the decision has been final: commercial purpose, and the economic
(1) Prosecute the application as his own interests of the patentee are not
application in the place of the applicant significantly prejudiced;
(2) File a new patent application in respect of 3. Where the act consists of making or using
the same invention; exclusively for experimental use of the
(3) Request that the application be refused; or invention for scientific purposes or
(4) Seek cancellation of the patent if one has educational purposes and such other
already been issued. (Sec. 67, IP Code) activities directly related to such scientific
or educational experimental use;
6. Rights Conferred By A Patent 4. In the case of drugs and medicines, where
the act includes testing, using, making or
A patent shall confer on its owner the following selling the invention including any data
exclusive rights: related thereto, solely for purposes
(1) Where the subject matter of a patent is a reasonably related to the development and
product, to restrain, prohibit, and prevent submission of information and issuance of
any unauthorized person or entity from approvals by government regulatory
making, using, offering for sale, selling, or agencies required under any law of the
importing that product. Philippines or of another country that
(2) Where the subject matter of a patent is a regulates the manufacture, construction,
process, to restrain, prevent, or prohibit use or sale of any product;
any unauthorized person or entity from 5. Where the act consists of the preparation
using the process, and from manufacturing, for individual cases, in a pharmacy or by a
dealing in, using, selling or offering for sale, medical professional, of a medicine in
or importing any product obtained directly accordance with a medical prescription or
or indirectly from such process. acts concerning the medicine so prepared;
and
Rights of Joint Owners 6. Where the invention is used in any ship,
If two or more persons own patent and invention vessel, aircraft, or land vehicle of any other
covered thereby, each of the joint owners shall be Philippines temporarily or accidentally.
entitled to personally make, use, sell, or import the
invention for his own profit. Provided, neither of joint Note: Such invention must be used exclusively
owners shall be entitled to grant licenses or to for the needs of the ship, vessel, aircraft, or land
assign his right, title or interest or part thereof

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vehicle and not used for the manufacturing of (2) use of a patented process without the
anything to be sold within the Philippines. authorization of the patentee constitutes
patent infringement.
a. Prior User To be able to effectively and legally preclude others

from copying and profiting from the invention, a
Any prior user, who, in good faith was using the patent is a primordial requirement. No patent, no
invention or has undertaken serious preparations to protection. (Pearl & Dean (Phil.) v. Shoemart, G.R.
use the invention in his enterprise or business, No. 148222, 2003)
before the filing date or priority date of the
application on which a patent is granted, shall have There can be no infringement of a patent until a
the right to continue the use thereof within the patent has been issued, since whatever right one
territory where the patent produces its effect. The has to the invention covered by the patent arises
right of prior user may only be transferred or alone from the grant of patent. (Creser Precision
assigned together with enterprise or business, or Systems, Inc. v. Court of Appeals, G.R. No. 118708,
with the part of his enterprise or business in which 1998)
use or preparations for use have been made.
Exception:
b. Use by Government The applicant shall have all the rights of a patentee
under Section 76 against any person who, without
his authorization, exercised any of the rights
A Government agency or third person authorized conferred under Section 71 of this Act in relation to
by the Government may exploit the invention the invention claimed in the published patent
even without agreement of the patent owner application, as if a patent had been granted for that
where: invention. (Sec 46, IP Code)
(1) The public interest, in particular, national
security, nutrition, health or the In order to infringe a patent, a machine or device
development of other sectors, as must perform the same function, or accomplish the
determined by the appropriate agency of same result by identical or substantially identical
the government, so require; or means and the principle or mode of operation must
(2) A judicial or administrative body has be substantially the same. (Del Rosario v. Court of
determined that the manner of Appeals, G.R. No. 115106, 1996)
exploitation, by the owner of the patent or
his licensee, is anti- competitive; or However: The exclusive right of a patentee to
(3) In the case of drugs and medicines, there make, use and sell a patented product, article or
is a national emergency or other process exists only during the term of the patent.
circumstance of extreme urgency (Phil Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
requiring the use of the invention; or 167715, 2010)
(4) In the case of drugs and medicines, there
is a public non- commercial use of the a. Tests in Patent Infringement
patent by the patentee, without
1. Literal Infringement
satisfactory reason; or
Resort must be had to the words of the claim. If
(5) In the case of drugs and medicines, the accused matter clearly falls within the claim, then
demand for the patented article in the there is literal infringement.
Philippines is not being met to an
adequate extent and on reasonable To determine whether the particular item falls within
terms, as determined by the Secretary of the literal meaning of the patent claims, the Court
the Department of Health. a. Compares the claims of the patent and the
accused product within the overall context
8. Patent Infringement of the claims and specifications, and
b. Determines whether there is exact identity
Patent infringement consists of the following acts: of all material elements. (Godines v. Court
(1) making, using, offering for sale, selling, or of Appeals, G.R. No. 97343, 1993)
importing a patented product or a product
obtained directly or indirectly from a 2. Doctrine of Equivalents
patented process; or Infringement also occurs when a device
appropriates a prior invention by incorporating its

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innovative concept and, albeit with some The following provisions shall be deemed prima
modification and change, performs substantially the facie to have an adverse effect on competition
same function in substantially the same way to and trade:
achieve substantially the same result. (Smith Kline a. Those which impose upon the licensee
Beckman Corp. v. Court of Appeals, G.R. No. the obligation to acquire from a specific
126627, 2003) source capital goods, intermediate
products, raw materials, and other
Under the doctrine of equivalents, there is still patent technologies, or of permanently
infringement when:
employing personnel indicated by the
a. There is an appropriation of the inventive
licensor;
step of a prior invention;
b. The subsequent invention has been b. Those pursuant to which the licensee
modified or changed; and reserves the right to fix the sale or resale
c. Despite such changes, the subsequent prices of the products manufactured on
invention performs substantially the same the basis of the license;
function in substantially the same way to c. Those that contain restrictions regarding
achieve substantially the same result. the volume and structure of production;
d. Those that prohibit the use of competitive
Rationale: Such imitation would leave room for the technologies in a non-exclusive
unscrupulous copyist to make unimportant and technology transfer arrangement;
insubstantial changes and substitutions in the e. Those that establish full or partial
patent which, though adding nothing, would be purchase option in favor of the licensor;
enough to take the copied matter outside the claim, f. Those that obligate the licensee to
and hence outside the reach of the law. (Godines v. transfer for free to the licensor the
Court of Appeals, G.R. No. 97343, 1993) inventions or improvements that may be
obtained through the use of the licensed
b. Defenses in Action for technology;
Infringement g. Those that require payment of royalties
to the owners of patents for patents which
In an action for infringement, the defendant may are not used;
show the invalidity of the patent, or any claim h. Those that prohibit the licensee to export
thereof, on any of the following grounds: the licensed product unless justified for
a. That what is claimed as the invention is not
the protection of the legitimate interest of
new or patentable;
the licensor such as exports to countries
b. That the patent does not disclose the
invention in a manner sufficiently clear where exclusive licenses to manufacture
and complete for it to be carried out by any and/or distribute the licensed product(s)
person skilled in the art; or have already been granted;
c. That the patent is contrary to public order i. Those which restrict the use of the
or morality. technology supplied after the expiration
of the technology transfer arrangement,
NOTE: These are the same grounds for the except in cases of early termination of the
cancellation of a patent. technology transfer arrangement due to
reason(s) attributable to the licensee;
9. Licensing j. Those which require payments for
patents and other industrial property
a. Voluntary rights after their expiration or termination
To encourage the transfer and dissemination of of the technology transfer arrangement;
technology, prevent or control practices and k. Those which require that the technology
conditions that may constitute an abuse of recipient shall not contest the validity of
intellectual property rights having an adverse any of the patents of the technology
effect on competition and trade. supplier;
l. Those which restrict the research and
All technology transfer arrangements must development activities of the licensee
comply with the provisions of the IP Code. designed to absorb and adapt the
transferred technology to local conditions
Prohibited Clauses or to initiate research and development

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programs in connection with new during the whole term of the technology transfer
products, processes or equipment; arrangement.
m. Those which prevent the licensee from
adapting the imported technology to local Non-Registration
conditions, or introducing innovation to it, Technology transfer arrangements that conform
as long as it does not impair the with the previous requirements need not be
standards prescribed by the licensor; and registered with the Documentation, Information and
n. Those which exempt the licensor from Technology Transfer Bureau (DITTB). Non-
conformance, however, shall automatically render
liability for non-fulfillment of his
the technology transfer arrangement unenforceable,
responsibilities under the technology
unless the technology transfer agreement is
transfer arrangement and/or liability considered as an exceptional case.
arising from third party suits brought
about by the use of the licensed product Exceptional Cases
or the licensed technology. Non-conformance with the requirements in a
o. Other clauses with equivalent effects.
voluntary licensing contract may be allowed
where, after evaluation by the DITTB, substantial
Mandatory Provisions
benefits will accrue to the economy such as in
The following provisions shall be included in all
the following exceptional or meritorious cases:
voluntary license contracts:
1. High technology content,
1. That the laws of the Philippines shall
2. Increase in foreign exchange earnings,
govern the interpretation of the
3. Employment generation,
agreement and in the event of litigation,
4. Regional dispersal of industries and/or,
the venue shall be the proper court in the
5. Substitution with or use of local raw
place where the licensee has its principal
materials, or
office;
6. Registered companies with pioneer
2. That continued access to improvements
status.
in techniques and processes related to
the technology shall be made available
during the period of the technology b. Compulsory
transfer arrangement; The Director of Legal Affairs may grant license to
3. That, in the event the technology transfer exploit patented invention, even without
arrangement shall provide for arbitration, agreement of patent owner, in favor of any person
the Procedure of Arbitration of the who has shown his capability to exploit invention,
Arbitration Law of the Philippines or the under any of the following circumstances:
Arbitration Law of the United Nations 1. National emergency or other
Commission on International Trade Law circumstances of extreme urgency; or
(UNCITRAL) or the Rules of Conciliation 2. Where public interest, in particular,
and Arbitration of the International national security, nutrition, health or
Chamber of Commerce shall apply and development of other vital sectors of
the venue of arbitration shall be the national economy as determined by the
Philippines or any neutral country; and appropriate agency of the Government,
4. That the Philippine taxes on all payments so requires; or
relating to the technology transfer 3. Where a judicial or administrative body
arrangement shall be borne by the has determined that manner of
licensor. exploitation by patent owner or his
licensee is anti-competitive; or
Rights of Licensor 4. In case of public non-commercial use of
Absent a contrary provision in technology transfer patent by patentee, without satisfactory
arrangement, the grant of a license shall not prevent reason; or
the licensor from granting further licenses to third 5. If patented invention is not being worked
persons nor from exploiting the subject matter of the in Philippines on commercial scale,
technology transfer arrangement himself. although not capable of being worked,
without satisfactory reason: Provided,
Rights of Licensee that importation of patented article shall
The licensee shall be entitled to exploit the subject constitute working or using the patent; or
matter of the technology transfer arrangement

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6. Where the demand for patented drugs grant have ceased to exist and are unlikely
and medicines is not being met to an to recur;
adequate extent and on reasonable (6) The patentee shall be paid adequate
terms, as determined by the Secretary of remuneration taking into account the
the Department of Health. (Sec. 96, IP economic value of the grant or
Code) authorization. (Sec. 100, IP Code)
Use of Invention by Government Amendment, Cancellation, Surrender of

A Government agency or third person authorized by Compulsory License
the Government may exploit the invention even Upon request of patentee, or licensee, Director of
without agreement of the patent owner where: Legal Affairs may amend decision granting
• The public interest, in particular, national compulsory license, upon proper showing of new
security, nutrition, health or the facts or circumstances justifying such amendment;
development of other sectors, as or may cancel compulsory license if:
determined by the appropriate agency of (1) Ground for grant of compulsory license no
the government, so requires; or longer exists and is unlikely to recur;
• A judicial or administrative body has (2) Licensee has neither begun to supply
determined that the manner of exploitation, domestic market nor made serious
by the owner of the patent or his licensee is preparation therefore; or
anti-competitive; or (3) Licensee not complied with prescribed
• In the case of drugs and medicines, there terms of license. (Sec. 101, IP Code)
is a national emergency or other
circumstance of extreme urgency requiring Licensee’s Exemption from Liability
the use of the invention; or Any person who works a patented product,
substance and/or process under a compulsory
• In the case of drugs and medicines, there
license, shall be free from any liability for
is public non-commercial use of the patent
infringement. In case of voluntary licensing, it must
by the patentee, without satisfactory
be proven that no collusion with licensor existed.
reason; or
This is without prejudice to rightful patent owner to
• In the case of drugs and medicines, the
recover from licensor whatever he may receive as
demand for the patented article in the
royalties under the license. (Sec. 102, IP Code)
Philippines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the 10. Assignment And Transmission Of
Department of Health. (Sec. 74.1, IP Code) Rights
Terms and Conditions of the Compulsory Patent owners shall also have the right to assign,
License transfer by succession the patent, and conclude
(1) The scope and duration of such license licensing contracts for the same.
shall be limited to the purpose for which
it was authorized; NOTE: Patents or applications for patents and
(2) The license shall be non-exclusive; invention to which they relate, shall be protected
(3) The license shall be non-assignable, in the same way as the rights of other property
except with that part of the enterprise or under the Civil Code. (Sec. 103, IP Code)
business with which the invention is
being exploited; Assignment of Inventions
(4) Use of the subject matter of the license An assignment may be of the entire right, title or
shall be devoted predominantly for the interest in and to the patent and the invention
supply of the Philippine market; covered thereby, or of an undivided share of the
entire patent and invention, in which event the
Note: This shall not apply where the grant of parties become joint owners thereof. An
the license is based on the ground that the assignment may be limited to a specified territory.
patentee’s manner of exploiting the patent is (Sec. 104, IP Code)
determined by judicial or administrative
process to be anti-competitive. Form of Assignment
The assignment must be in writing,
(5) The license may be terminated upon proper acknowledged before a notary public or other
showing that circumstances which led to its officer authorized to administer oath or perform

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notarial acts, and certified under the hand and COLLECTIVE Any visible sign designated as
official seal of the notary or such other officer. MARK such in the application for
(Sec. 105, IP Code) registration and capable of
distinguishing the origin or any
Requirements for Recording of Assignment other common characteristic,
i. It must be in writing and accompanied by including the quality of goods or
an English translation, if it is in a services of different enterprises
language other than English or Filipino; which use the sign under the
ii. It must be notarized; control of the registered owner
iii. It must be accompanied by an of the collective mark. (Sec.
121.2, IP Code)
appointment of a resident agent, if the
TRADE Any name or designation
assignee is not residing in the
NAME identifying or distinguishing an
Philippines; enterprise (Sec. 121.3, IP
iv. It must identify the letters patent involved Code);
by number and date and give the name
of the owner of the patent and the title of A name or designation may not be used as a trade
the invention. In the case of an name if, by its nature or the use to which such name
application for a patent, it should state or designation may be put:
the application number and the filing date 1. It is contrary to public order or morals;
of the application and give the name of 2. It is liable to deceive trade circles or the
the applicant and the title of the invention. public as to the nature of the enterprise
If the assignment was executed identified by that name; or
concurrently with or subsequent to the 3. It is similar to a mark or a trade name
execution of the application but before owned by another person and its use would
the application is filed or before its likely mislead the public.
application number is ascertained, it
should adequately identify the application A trade name refers to the business and its goodwill;
by its date of execution, the name of the a trademark refers to the goods. (Canon Kabushiki
applicant, and the title of the invention. Kaisha v. Court of Appeals, G.R. No. 120900, 2000)
v. It must be accompanied by the required
Spectrum of Distinctiveness of Trademark
fees.
(Zantarain’s Inc. v. Old Grove Smokehouse, 698
F.2d 786, 1983) (from weakest to strongest)
B. TRADEMARKS 1. Generic – refers to a particular genus or class
of which an individual article or service is a
Modern authorities on trademark law view member (e.g. escalator, cellophane, etc.)
trademarks as performing three distinct functions: a. It can never attain trademark
(1) they indicate origin or ownership of the protection.
articles to which they are attached; b. If a registered trademark becomes
(2) they guarantee that those articles come up generic as to a particular product or
to a certain standard of quality; and service, the mark’s registration is
(3) they advertise the articles they symbolize. subject to cancellation.
(Mirpuri v. Court of Appeals, G.R. No. 2. Descriptive – identifies a characteristic or
114508, 1999) quality of an article or service such as its color,
odor, function, dimensions, or ingredients
1. Marks Vs. Collective Marks Vs.
Trade Names General Rule: It is not ordinarily protectable as
a trademark because, like a generic term, it
MARK Any visible sign capable of: belongs to the public domain. (Ong Ai Gui v.
a. distinguishing the goods Director of Patents, G.R. No. L-6235, 1955)
(trademark) or services
(service mark) of an Exception: When the doctrine of secondary
enterprise and meaning applies in such a way that it has
b. shall include a stamped or acquired a secondary meaning in the minds of
marked container of the consumers. (Sec. 123.2)
goods. (Sec. 121.1, IP
Code)

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3. Suggestive – requires the consumer to Secondary meaning is established when a

exercise the imagination in order to draw a descriptive mark no longer causes the public to
conclusion as to the nature of the goods or associate the goods with a particular place but to
services associate the goods with a particular source. (Shang
4. Arbitrary or Fanciful – bear no relationship to Properties Realty Corp. v. St. Francis Development
the products or services to which they are Corp., G.R. No. 190706, 2014)
applied; protectable without proof of secondary
meaning (e.g. Adidas, Rolex, etc.) Requirements for a Geographically-descriptive
Mark to Acquire Secondary Meaning
2. Acquisition Of Ownership Of A 1. The secondary meaning must have arisen
Mark as a result of substantial commercial use of
a mark in the Philippines; and
The rights in a mark shall be acquired through 2. Such use must result in the distinctiveness
registration made validly in accordance with the of the mark insofar as the goods or the
provisions of this law. (Zuneca Pharmaceutical v. products are concerned.
Natrapharm, Inc., G.R. No. 211850, 2020) NOTE: Proof of substantially exclusive and
continuous commercial use in the
NOTE: Any person who shall procure registration in Philippines for five (5) years before the date
the Office of a mark by a false or fraudulent on which the claim of distinctiveness is
declaration or representation, whether oral or in made is prima facie evidence of
writing, or by any false means, shall be liable in a distinctiveness. (Sec. 123.2, IP Code)
civil action by any person injured thereby for any
damages sustained in consequence thereof. (Sec. Duration and Renewal
162, IP Code) A certificate of registration shall remain in force for
10 years: Provided, That the registrant shall file a
The registration of trademark under the law is declaration of actual use and evidence to that effect,
required to give notice to the entire world that a mark or shall show valid reasons based on the existence
has already been registered. The failure to give of obstacles to such use, as prescribed by the
notice of registration bars recovery of damages for Regulations, within 1 year from the fifth anniversary
trademark infringement, without prejudice to other of the date of the registration of the mark. Otherwise,
causes of action based on other laws. (Cagayan the mark shall be removed from the Register by the
Valley Enterprises, Inc. v. Court of Appeals, G.R. Office.
No. 78413, 1989)
A certificate of registration may be renewed for
The owner of the registered mark shall not be periods of 10 years at its expiration upon payment
entitled to recover profits or damages in any suit for of the prescribed fee and upon filing of a request.
infringement, unless the acts have been committed
with knowledge that such limitation is likely to cause 3. Acquisition Of Ownership Of Trade
confusion, to cause mistake, or to deceive. Such Name
knowledge is presumed if the registrant gives notice Notwithstanding any laws or regulations providing
that his mark is registered by displaying with the for any obligation to register trade names, such
mark the words “Registered Mark” or the letter R names shall be protected, even prior to or without
within a circle or if the defendant had otherwise registration, against any unlawful act committed by
actual notice of the registration. (Sec. 158, IP Code) third parties. (Sec. 165.2.a, IP Code)
Doctrine of Secondary Meaning In particular, any subsequent use of the trade name
A word or phrase originally incapable of exclusive by a third party, whether as a trade name or a mark
appropriation with reference to an article in the or collective mark, or any such use of a similar trade
market (because it is geographically or otherwise name or mark, likely to mislead the public, shall be
descriptive) might nevertheless have been used for deemed unlawful. (Sec. 165.2.b, IP Code)
so long and so exclusively by one producer with
reference to his article that, in the trade and to that Doctrine of Secondary Meaning Applicable to
branch of the purchasing public, the word or phrase Trade Names
has come to mean that the article was his property. The doctrine’s application has been extended to
(Pearl & Dean (Phil.) v. Shoemart, G.R. No. 148222, corporate names since the right to use a corporate
2003) name to the exclusion of others is based upon the
same principle which underlies the right to use a
particular trademark or tradename. (Lyceum of the

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Philippines, Inc. v. Court of Appeals, G.R. No. those with respect to which registration is
101897, 1993) applied for.
NOTE: Under this provision, (i) the use of the mark

4. Non-Registrable Marks in relation to those goods or services must indicate
a connection between those goods or services, and
A mark cannot be registered if it: the owner of the registered mark; and (ii) the
a. Consists of immoral, deceptive or interests of the owner of the registered mark are
scandalous matter, or matter which may likely to be damaged by such use.
disparage or falsely suggest a connection
with persons, living or dead, institutions, g. Is likely to mislead the public, particularly as
beliefs, or national symbols, or bring them to the nature, quality, characteristics or
into contempt or disrepute; geographical origin of the goods or
b. Consists of the flag or coat of arms or other services;
insignia of the Philippines or any of its h. Consists exclusively of signs that are
political subdivisions, or of any foreign generic for the goods or services that they
nation, or any simulation thereof; seek to identify;
c. Consists of a name, portrait or signature i. Consists exclusively of signs or of
identifying a particular living individual indications that have become customary or
except by his written consent, or the name, usual to designate the goods or services in
signature, or portrait of a deceased everyday language or in bona fide and
President of the Philippines, during the life established trade practice;
of his widow, if any, except by written j. Consists exclusively of signs or of
consent of the widow; indications that may serve in trade to
d. Is identical with a registered mark designate the kind, quality, quantity,
belonging to a different proprietor or a mark intended purpose, value, geographical
with an earlier filing or priority date, in origin, time or production of the goods or
respect of: rendering of the services, or other
i. The same goods or services, or characteristics of the goods or services;
ii. Closely related goods or services, k. Consists of shapes that may be
or necessitated by technical factors or by the
iii. If it nearly resembles such a mark nature of the goods themselves or factors
as to be likely to deceive or cause that affect their intrinsic value;
confusion; l. Consists of color alone, unless defined by
e. Is identical with, or confusingly similar to, or a given form; or
constitutes a translation of a mark which is m. Is contrary to public order or morality. (Sec.
considered by the competent authority of 123.1, IP Code)
the Philippines to be well-known
internationally and in the Philippines, a. Concept of Actual Use
whether or not it is registered here, as being
already the mark of a person other than the Declaration of Actual Use
applicant for registration, and used for Within 3 years from the filing date of the application,
identical or similar goods or services; the applicant or the registrant shall file a declaration
of actual use of the mark with evidence to that effect.
NOTE: In determining whether a mark is well- Failure to do so shall result to a refusal of the
known, account shall be taken of the knowledge of application or removal of the mark from the Register
the relevant sector of the public, rather than of the by the Director. (Section 124.2, IP Code)
public at large, including knowledge in the A certificate of registration shall remain in force for
Philippines which has been obtained as a result of ten (10) years. (Section 145, IP Code)
the promotion of the mark.
Best Proof of Actual Use
f. Is identical with, or confusingly similar to, or The most convincing proof of use of a mark in
constitutes a translation of a mark commerce is testimony of such witnesses as
considered well-known in accordance with customers, or the orders of buyers during a certain
the preceding paragraph, which is period. (Converse Rubber Corporation v. Universal
registered in the Philippines with respect to Rubber Products, 147 SCRA 154, 1987)
goods or services which are not similar to
Abandonment of Mark

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Once a trademark is considered abandoned, the 6. Well-Known Marks

protection accorded by the IPC, or in this case the
old Trademark Law, is also withdrawn. (ABS-CBN v. The countries of the Union undertake, ex officio if
Director of Bureau of Trademarks, GR. No. 217916, their legislation so permits, or at the request of an
2018) interested party, to refuse or to cancel the
registration, and to prohibit the use, of a trademark
Internet Use of a Mark which constitutes a reproduction, an imitation, or a
Use of mark on the Internet must be shown to result translation, liable to create confusion, of a mark
into a within-State sale, or at the very least, considered by the competent authority of the
discernibly intended to target customers that reside country of registration or use to be well known in that
in that country. This being so, the use of the mark country as being already the mark of a person
on an interactive website, for instance, may be said entitled to the benefits of this Convention and used
to target local customers when they contain specific for identical or similar goods. These provisions shall
details regarding or pertaining to the target State, also apply when the essential part of the mark
sufficiently showing an intent towards realizing a constitutes a reproduction of any such well-known
within-State commercial activity or interaction. (W mark or an imitation liable to create confusion
Land Holding Inc. v. Starwood Hotels and Resorts therewith. (Art. 6bis, Paris Convention)
Worldwide Inc., G.R. No. 222366. 2017)
Note: The essential requirement under this Article is
b. Effect of Registration that the trademark to be protected must be “well-
Administrative Confirmation known” in the country where protection is sought.
Registration is only an administrative confirmation of The power to determine whether a trademark is
the existence of the right of ownership of the mark, well-known lies in the “competent authority of the
but does not perfect such right; actual use thereof is country of registration or use.” This competent
the perfecting ingredient. The registration of a authority would be either the registering authority, if
trademark unaccompanied by actual use thereof in it has the power to decide this, or the courts of the
the country accords the registrant only the standing country in question if the issue comes before a
to sue for infringement in Philippine courts. (Philip court. (Sehwani, Inc. v. In-N-Out Burger, Inc., G.R.
Morris v. Fortune Tobacco, G.R. No. 91332, 1993) No. 171053, 2007)
A certificate of registration of a mark shall be The question of whether or not respondent's

prima facie evidence of the validity of the trademarks are considered “well-known” is factual in
registration, the registrant’s ownership of the nature, involving as it does the appreciation of
mark, and of the registrant’s exclusive right to use evidence adduced before the BLA-IPO. The settled
rule is that the factual findings of quasi-judicial
the same in connection with the goods or services
agencies, like the IPO, which have acquired
and those that are related thereto specified in the
expertise because their jurisdiction is confined to
certificate. (Section 138, IP Code) specific matters, are generally accorded not only
respect, but, at times, even finality if such findings
5. Test To Determine Confusing are supported by substantial evidence. (Sehwani,
Similarity Between Marks Inc. v. In-N-Out Burger, Inc., G.R. No. 171053,
2007)
a. Dominancy Test
The dominancy test focuses on the similarity of the Factors Which Shall NOT be Required in
prevalent features of the competing trademarks that Determining Whether a Mark is a Well-known
might cause confusion and deception, thus Mark:
constituting infringement. 1. that the mark has been used in, or that the
mark has been registered, or that an
If the competing trademark contains the main, application for registration of the mark has
essential, and dominant features of another, and been filed in or in respect of the Member
confusion or deception is likely to result, State;
infringement occurs. Exact duplication or imitation is 2. that the mark is well known in, or that the
not required. mark has been registered, or that an
application for registration of the mark has
The question is whether the use of the marks been filed in or in respect of, any jurisdiction
involved is likely to cause confusion or mistake in other than the Member State;
the mind of the public or to deceive consumers. 3. that the mark is well known by the public at
(Citigroup v Citystate, G.R. No. 205409, 2018) large in the Member State. (Part I, Art. 2.3,
1999 Joint Recommendation Concerning

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Provisions on the Protection of Well-Known

Marks cited with approval in Sehwani v. In- The owner of a registered mark shall have the
N-Out) exclusive right:
1. to prevent all third parties not having the
It is easily recognizable as the trade name and mark owner’s consent
of Harvard University of Cambridge, 2. from using in the course of trade identical
Massachusetts, U.S.A., internationally known as or similar signs or containers for goods or
one of the leading educational institutions in the services which are identical or similar to
world. As such, even before Harvard University those in respect of which the trademark is
applied for registration of the mark Harvard in the registered
Philippines, the mark was already protected under 3. where such use would result in a likelihood
Article 6b and Article 8 of the Paris Convention. of confusion.
(Fredco Manufacturing v. Harvard University, G.R.
No. 185917, 2011) Note: In case of the use of an identical sign for
identical goods or services, a likelihood of confusion
Criteria for determining whether a mark is well- shall be presumed. (Sec. 147.1, IP Code)
known:
1. Duration, extent and geographical area of The exclusive right of the owner of a well-known
any use of the mark, in particular, the mark which is registered in the Philippines, shall
duration, extent and geographical area of extend to goods and services which are not similar
any promotion of the mark, including to those in respect of which the mark is registered,
advertising or publicity and the Provided:
presentation, at fairs or exhibitions, of the 1. That the use of that mark in relation to those
goods and/or services to which the mark goods or services would indicate a
applies; connection between those goods or
2. Market share, in the Philippines and in services and the owner of the registered
other countries, of the goods and/or mark; and
services to which the mark applies; 2. That the interests of the owner of the
3. Degree of the inherent or acquired registered mark are likely to be damaged by
distinction of the mark; such use. (Sec. 147.2, IP Code)
4. Quality-image or reputation acquired by the
mark; The ownership of a trademark or tradename is a
5. Extent to which the mark has been property right that the owner is entitled to protect.
registered in the world; However, when a trademark is used by a party for a
6. Exclusivity of registration attained by the product in which the other party does not deal, the
mark in the world; use of the same trademark on the latter's product
7. Extent to which the mark has been used in cannot be validly objected to. (Canon Kabushiki
the world; Kaisha v. Court of Appeals, G.R. No. 120900, 2000)
8. Exclusivity of use attained by the mark in
the world; 8. Cancellation Of Registration
9. Commercial value attributed to the mark in
the world; A petition to cancel a registration of a mark may be
10. Record of successful protection of the filed with the Bureau of Legal Affairs by any person
rights in the mark; who believes that he is or will be damaged by the
11. Outcome of litigations dealing with the registration of a mark under this act as follows:
issue of whether the mark is a well-known 1. Within 5 years from the date of registration
mark; and of the mark under;
12. Presence or absence of identical or similar 2. at any time, if the registered mark becomes
marks validly registered for or used on the
identical or similar goods or services and a. generic name for the goods or
owned by persons other than the person services, or a portion thereof, for
claiming that his mark is a well-known which it is registered;
mark. b. has been abandoned;
(Rule 102, Rules and Regulations On Trademarks, c. registration was obtained through
Servicemarks, Tradenames and Marked or fraud or contrary to the provisions
Stamped Containers) of the Act;
7. Rights Conferred By Registration

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Registration through fraud or in A person shall be liable for trademark infringement

bad faith should be sufficiently if, without the consent of the owner of the registered
established. Otherwise, it is mark, he:
considered to have acquired all the a. Uses in commerce any reproduction or
rights of a trademark owner under colorable imitation of a registered mark or
the IP Code. the same container or a dominant feature
(Zuneca Parmaceutical v thereof in connection with the sale, offering
Natrapharm, G,R. 185917, 2011) for sale, distribution, advertising of any
goods or services which is likely to cause
d. the mark is being used by, or with confusion, or to cause mistake, or to
the permission of, the registrant so deceive;
as to misrepresent the source of
the goods or services on or in Note: This includes other preparatory steps
connection with which the mark is necessary to carry out the sale of any goods or
used. services.
The primary significance of the registered
mark to the relevant public rather than b. Reproduces or colorable imitates a
purchaser motivation shall be the test for registered mark or a dominant feature
determining whether the registered mark thereof and applies such reproduction or
has become the generic name of goods or colorable imitation to signs, packages, or
services on or in connection with which it advertisements intended to be used in
has been used. commerce upon or in connection with the
3. At any time, if the registered owner of the sale, offering for sale, distribution, or
mark without legitimate reason advertising of goods or services which
a. Fails to use the mark within the likely to cause confusion, or to cause
Philippines or mistake, or to deceive.
b. To cause it to be used in the
Philippines by virtue of a license Note: It is immaterial that there was no actual sale
during an uninterrupted period of 3 of goods or services using the infringing material as
years or longer. (Sec. 151.1, IP long as the acts mentioned were actually committed.
Code) (Sec. 155, IP Code)
Court Has The Authority to Determine Right to The “likelihood of confusion” is the gravamen of
Registration trademark infringement. But likelihood of confusion
In any action involving a registered mark, the court is a relative concept, the particular, and sometimes
may determine the right to registration, order the peculiar, circumstances of each case being
cancellation of a registration, in whole or in part, and determinative of its existence. Thus, in trademark
otherwise rectify the register with respect to the infringement cases, more than in other kinds of
registration of any party to the action in the exercise litigation, precedents must be evaluated in the light
of this. Judgment and orders shall be certified by the of each particular case. (Philip Morris, Inc. v.
court to the Director, who shall make appropriate Fortune Tobacco Corp., G.R. No. 158589, 2006)
entry upon the records of the Bureau, and shall be
controlled thereby. (Section 161, IP Code) Elements of Trademark Infringement
To establish trademark infringement, the following
Filing of a suit to enforce a mark v. petition to elements must be shown:
cancel a mark i. The validity of plaintiff’s mark;
The filing of a suit to enforce the registered mark ii. The plaintiff’s ownership of the mark;
with the proper court or agency shall exclude any and
other court or agency from assuming jurisdiction iii. The use of the mark or its colorable
over a subsequently filed petition to cancel the same imitation by the alleged infringer results
mark. On the other hand, the earlier filing of petition in “likelihood of confusion.”
to cancel the mark with the Bureau of Legal Affairs (McDonald's Corp. v. L.C. Big Mak
shall not constitute a prejudicial question that must Burger, Inc., G.R. No. 143993, 2004)
be resolved before an action to enforce the rights to
same registered mark may be decided. (Sec. 17, Test to Determine Likelihood And Confusion
R.A. No. 166a) Dominancy Test – Focuses on the similarities of the
prevalent features of the competing trademarks that
9. Trademark Infringement might cause confusion of deception. (Mcdonald’s v.
Big Mak, G.R. No. 143993, 2004)

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Right of Foreign Corporation to Sue in

The phrase “colorable imitation” denotes such a Trademark or Service Mark Enforcement Action
“close or ingenious imitation as to be calculated to Any foreign national or juridical person who meets
deceive ordinary persons, or such a resemblance to the requirements of Section 3 of the IP Code and
the original as to deceive an ordinary purchaser does not engage in business in the Philippines may
giving such attention as a purchaser usually gives, bring a civil or administrative action hereunder for
and to cause him to purchase the one supposing it opposition, cancellation, infringement, unfair
to be the other”. (Etepha, A.G. v. Director of Patents, competition, or false designation of origin and false
G.R. No. L-20635, 1966) description, whether or not it is licensed to do
business in the Philippines under existing laws.
Factors To Consider In Relatedness (Sec. 160, IP Code)
Goods should be tested against several factors
before arriving at a sound conclusion on the Limitations to Actions for Infringement
question of relatedness. Such as: 1. A registered mark shall have no effect
(a) the business (and its location) to which the against any person who, in good faith,
goods belong; before the filing date or the priority date,
(b) the class of product to which the goods was using the mark for the purposes of his
belong; business or enterprise.
(c) the product's quality, quantity, or size,
including the nature of the package, Note: Such right may only be transferred or
wrapper or container; assigned together with his enterprise or business or
(d) the nature and cost of the articles; with that part of his enterprise or business in which
(e) the descriptive properties, physical the mark is used.
attributes or essential characteristics with
reference to their form, composition, Note: cf. (Zuneca v. Natrapharm, G.R. No. 211850,
texture or quality; 2020 - wherein the SC held that the first to file rule
(f) the purpose of the goods; shall prevail against a user of a mark in good faith.)
(g) whether the article is bought for immediate
consumption, that is, day-to-day 2. Where an infringer who is engaged solely
household items; in the business of printing the mark or other
(h) the fields of manufacture; infringing materials for others is an innocent
(i) the conditions under which the article is infringer, the owner of the right infringed
usually purchased; and shall be entitled as against such infringer
(j) the channels of trade through which the only to an injunction against future printing.
goods flow, how they are distributed, 3. Where the infringement complained of is
marketed, displayed and sold. (Kolin v. contained in or is part of paid advertisement
Kolin, G.R. No. 209843, 2015) in a periodical or in an electronic
communication, the remedies of the owner
The use of an identical or colorable imitation of a of the right infringed as against the
registered trademark by a person for the same publisher or distributor of periodical or
goods or services or closely related goods or electronic communication shall be limited to
services of another party constitutes infringement. It an injunction against the presentation of
is a form of unfair competition because there is an such advertising matter in future issues.
attempt to get a free ride on the reputation and
selling power of another manufacturer by passing of Note: This shall apply only to innocent infringers.
one’s goods as identical or produced by the same
manufacturer as those carrying the other mark 4. There shall be no infringement of
(brand). (Commissioner of Internal Revenue v. San trademarks or tradenames of imported or
Miguel Corp., G.R. Nos. 205045 & 205723, 2017) sold drugs and medicines as well as
imported or sold off-patent drugs and
The general impression of the ordinary purchaser medicines PROVIDED, the marks
buying under the normally prevalent conditions in appearing thereon have been registered
trade and giving the attention such purchasers marks that have not been tampered or
usually give in buying that class of goods, is the unlawfully modified.
touchstone. (Del Monte Corp v. Court of Appeals,
G.R. No. 78325, 1990) a. Damages
The owner of a registered mark may recover
damages from any person who infringes his rights.

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The measure of the damages suffered shall be destroyed without compensation of any sort. (Sec.
either: 157.1, IP Code)
1. The reasonable profit which the
complaining party would have made had 10. Unfair Competition
the defendant not infringed his rights, or
2. The profit which the defendant actually A person who has identified in the mind of the public
made out of the infringement. the goods he manufactures or deals in, his business
or services from those of others, whether or not a
If the measure of damages cannot be readily registered mark is employed, has a property right in
ascertained with reasonable certainty, the court may the goodwill of the said goods, business or services
award as damages a reasonable percentage based so identified, which will be protected in the same
upon the amount of gross sales of the defendant or manner as other property rights. (Sec. 168.1, IP
the value of the services in connection with which Code)
the mark or trade name was used in the
infringement of the rights of the complaining party. Any person who shall employ deception or any other
(Sec. 156.1, IP Code) means contrary to good faith by which he shall pass
off the goods manufactured by him or in which he
NOTE: Where there was actual intent to mislead the deals, or his business, or services for those of the
public or to defraud the complainant, the court may one having established such goodwill, or who shall
double the amount of damages to be awarded. (Sec. commit any acts calculated to produce said result,
156.3, IP Code) shall be guilty of unfair competition. (Sec. 168.2, IP
Code)
On application of the complainant, the court may
impound during the pendency of the action, sales Any conduct the end and probable effect of which is
invoices and other documents evidencing sales. to deceive the public or pass off the goods or
(Sec. 156.2, IP Code) business of a person as that for another constitutes
actionable unfair competition. (Alhambra Cigar vs.
b. Requirement of Notice Mojica, G.R. No. L-8937, 1914)
In any suit for infringement, the owner of the
registered mark shall not be entitled to recover Essentially, what the law punishes is the act of
profits or damages UNLESS the acts have been giving one’s goods the general appearance of the
committed with knowledge that such imitation is goods of another, which would likely mislead the
likely to cause confusion, or to cause mistake, or to buyer into believing that such goods belong to the
deceive. Such knowledge is presumed if: latter. (Manuel C. Espiritu et. al. v. Petron Corp. et.
1. The registrant gives notice that his mark is al., G.R. No. 170891, 2009)
registered by displaying with the mark the
words “Registered Mark” or the letter R The “true test” of unfair competition is whether the
within a circle, or acts of the defendant have the intent of deceiving or
2. The defendant had otherwise actual notice are calculated to deceive the ordinary buyer making
of the registration. (Sec. 158, IP Code) his purchases under the ordinary conditions of the
particular trade to which the controversy relates.
c. Penalties One of the essential requisites in an action to
Independent of the civil and administrative restrain unfair competition is proof of fraud; the
sanctions imposed by law, a criminal penalty of intent to deceive, actual or probable must be shown
imprisonment from 2 to 5 years and a fine ranging before the right to recover can exist. (Superior
from P50,000 to P200,000 shall be imposed on any Commercial Enterprises v. Kunnan Enterprises Ltd.,
person who is found guilty of committing any of the et. al., G.R. No. 169974, 2010)
acts of trademark infringement, unfair competition,
or false description or representation. (Sec. 170, IP Trademark Infringement vs. Unfair Competition
Code) The law on unfair competition is broader and more
inclusive than the law on trademark infringement.
Power of Court to Order Infringing Material Trademark infringement is more limited, but it
Destroyed recognizes a more exclusive right derived from the
In any action involving a violation of a right of the trademark adoption and registration by the person
owner of the registered mark, the court may order whose goods or business is first associated with it.
that goods found to be infringing be disposed of The law on trademarks is a specialized subject
outside the channels of commerce in such a manner distinct from the law on unfair competition, although
as to avoid any harm caused to the right holder or the two subjects are entwined with each other and
are dealt with together in the IP Code.

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knowledge and learning. The goal of copyright is to

Hence, even if one fails to establish his exclusive promote creativity and encourage creation of works.
property right to a trademark, he may still obtain (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)
relief on the ground of his competitor's unfairness or
fraud. Conduct constitutes unfair competition if the The copyright for a work is acquired by an
effect is to pass off on the public the goods of one intellectual creator from the moment of creation
man as the goods of another. It is not necessary that even in the absence of registration and deposit
any particular means should be used to this end. (Columbia Pictures v. CA, G.R. No. 110318, 1996)
(Mighty Corp. v. E. & J. Gallo Winery, G.R. No.
154342, 2004) The focus of copyright is the usefulness of the
artistic design, and not its marketability. The central
TRADEMARK UNFAIR inquiry is whether the article is a work of art. (Ching
INFRINGEME COMPETITI v. Salinas Sr., G.R. No. 161295, 2005)
NT ON
Passing off of Idea-Expression Dichotomy
Unauthorized Unlike a patent, a copyright gives no exclusive right
one’s goods
ESSENCE use of a to the art disclosed; protection is given only to the
as those of
trademark expression of the idea — not the idea itself. (Mazer
another
FRAUDULEN v. Stein, 347 U.S. 201, 1954)
Unnecessary Essential
T INTENT
PRIOR Purely Statutory Right
Prerequisite to Copyright is purely a statutory right. Being a
REGISTRATI Unnecessary
the action statutory grant, the rights are only such as the
ON
statute confers, and may be obtained and enjoyed
only with respect to the subjects and by the persons,
C. COPYRIGHT
and on terms and conditions specified in the statute.
(Joaquin, Jr. v. Drilon, G.R. No. 108946, 1999)
1. Basic Principles
Originality
Works are protected by the sole fact of their Originality is the sine qua non of copyright. If the
creation, irrespective of their mode or form of basic design reflected in a work or art does not owe
expression, as well as of their content, quality and its origin to the putative copyright holder, then that
purpose. (Sec. 172.2, IP Code) person must add something original to that design,
and then only the original addition may be
No protection shall extend to any: copyrighted. (Meshwerks, Inc. v. Toyota Motor
1. Idea, procedure, system, method or Sales U.S.A., 528 F.3d 1258, 2008)
operation, concept, principle, discovery or
mere data [IPSMOC-PDD]; Originality requires only that the author make the
2. News of the day and other miscellaneous selection or arrangement independently (i.e.,
facts having the character of mere items of without copying that selection or arrangement from
press information; or another work), and that it display some minimal level
Official text of a legislative, administrative or legal of creativity. (Feist Publications, Inc. v. Rural
nature, as well as any official translation thereof. Telephone Service Co., Inc., 499 U.S. 340, 1991)
(Sec. 175, IP Code)
NOTE: The requisite level of creativity is extremely
Copyright and Material Object low; even a slight amount will suffice.
Copyright is distinct from the property in the material
object subject to it. The transfer or assignment of the Authorship
copyright does not by itself constitute a transfer of An author is “he to whom anything owes its origin;
the material object, and nor shall transfer or originator; maker; one who completes a work of
assignment of the sole copy or of one or several science or literature.” (Burrow-Giles Lithographic
copies of the work imply transfer or assignment of Company v. Sarony, 111 U.S. 53, 1884)
the copyright. (Sec. 181, IP Code)
Note: The author must be a natural person. (Sec.
Copyright is not primarily about providing the 171.1, IP Code)
strongest possible protection for copyright owners
so that they have the highest possible incentive to
create more works. The control given to copyright
owners is only a means to an end: the promotion of

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2. Copyrightable Works Computer - An electronic or similar device having

information-processing capabilities
a. Original Literary or Artistic
Works Computer Program - A set of instructions
expressed in words, codes, schemes or in any other
These are original intellectual creations in the form, which is capable when incorporated in a
literary and artistic domain protected from the medium that the computer can read, or causing the
moment of their creation and shall include in computer to perform or achieve a particular task or
particular: result.
a. Books, pamphlets, articles and other
writings; o. Other literary, scholarly, scientific and artistic
b. Periodicals and newspapers; works.
c. Lectures, sermons, addresses, (Sec. 172.1, IP Code)
dissertations prepared for oral delivery,
whether or not reduced in writing or other Note: Works are protected by the sole fact of their
material form; creation, irrespective of their mode or form of
d. Letters; expression, as well as of their content, quality and
e. Dramatic or dramatico-musical purpose. (Sec. 172.2, IP Code)
compositions; choreographic works or
entertainment in dumb shows; b. Derivative Works
f. Musical compositions, with or without
words; The following derivative works shall be protected by
g. Works of drawing, painting, architecture, copyright:
sculpture, engraving, lithography or other 1. Dramatizations, translations, adaptations,
works of art; models or designs for works of abridgments, arrangements, and other
art; alterations of literary or artistic works; and
2. Collections of literary, scholarly or artistic works,
Work of Architecture and compilations of data and other materials
Copyright in a work of architecture shall include the which are original by reason of the selection or
right to control the erection of any building which coordination or arrangement of their contents.
reproduces the whole or a substantial part of the (Sec. 173.1, IP Code)
work either in its original form or in any form
recognizably derived from the original Derivative works shall be protected as new works,
provided however, that such new work:
Note: The copyright in any such work shall not a. Shall not affect the force of any subsisting
include the right to control the reconstruction or copyright upon the original works employed or
rehabilitation in the same style as the original of a any part thereof, or
building to which that copyright relates. (Sec. 186, b. Shall not be construed to imply any right to such
IP Code) use of the original works, or
c. Shall not be construed to secure or extend
h. Original ornamental designs or models for copyright in such original works.
articles of manufacture, whether or not
registrable as an industrial design, and other Published Edition of Work
works of applied art; In addition to the right to publish granted by the
i. Illustrations, maps, plans, sketches, charts and author, his heirs, or assigns, the publisher shall have
three-dimensional works relative to geography, a copyright consisting merely of the right of
topography, architecture or science; reproduction of the typographical arrangement of
j. Drawings or plastic works of a scientific or the published edition of the work. (Sec. 174, IP
technical character; Code)
k. Photographic works including works produced
by a process analogous to photography; lantern 3. Non-Copyrightable Works
slides;
l. Audiovisual works and cinematographic works No protection shall extend to any:
and works produced by a process analogous to 3. Idea, procedure, system, method or
cinematography or any process for making operation, concept, principle, discovery or
audio-visual recordings; mere data [IPSMOC-PDD];
m. Pictorial illustrations and advertisements; 4. News of the day and other miscellaneous
n. Computer programs; and facts having the character of mere items of

ATENEO CENTRAL
press information; or 2. Speeches, lectures, sermons, addresses,

5. Official text of a legislative, administrative and dissertations, pronounced, read or
or legal nature, as well as any official rendered in courts of justice, before
translation thereof. (Sec. 175, IP Code) administrative agencies, in deliberative
assemblies, and in meetings of public
The expression of an idea is protected by character.
copyright, not the idea itself.
It is axiomatic that copyright protection does not Note: The author of speeches, lectures, sermons,
extend to news "events" or the facts or ideas which addresses, and dissertations mentioned in the
are the subject of news reports. But it is equally well- preceding paragraphs shall have the exclusive right
settled that copyright protection does extend to the of making a collection of his works.
reports themselves, as distinguished from the
substance of the information contained in the Publication or republication by the government in a
reports. Copyright protects the manner of public document of any copyrighted work shall not
expression of news reports, "the particular form or be taken to cause any abridgment or annulment of
collocation of words in which the writer has the copyright or to authorize any use or
communicated it." Such protection extends to appropriation of such work without the consent of
electronic news reports as well as written reports. the copyright owner. (Sec. 176.3, IP Code)
The idea/expression dichotomy is a complex 4. Rights Conferred By A Copyright

matter if one is trying to determine whether a certain
material is a copy of another. This dichotomy would Copyright or Economic Rights
be more relevant in determining, for instance, Copyright or economic rights shall consist of the
whether a stage play was an infringement of an exclusive right to carry out, authorize or prevent the
author’s book involving the same characters and following acts:
setting. In this case, however, respondents admitted
that the material under review — which is the 1. Reproduction of the work or substantial
subject of the controversy — is an exact copy of the portion of the work;
original. Respondents did not subject ABS-CBN’s
footage to any editing of their own. The news Reproduction - Making of one or more copies,
footage did not undergo any transformation where temporary or permanent, in whole or in part, of a
there is a need to track elements of the original. work or a sound recording in any manner or form
(ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)
2. Dramatization, translation, adaptation,
Works of the Government abridgment, arrangement or other
A work of the Government is a work created by an transformation of the work;
officer or employee of the Philippine Government or 3. The first public distribution of the original
any of its subdivisions and instrumentalities, and each copy of the work by sale or other
including government-owned or controlled forms of transfer of ownership;
corporations as part of his regularly prescribed 4. Rental of the original or a copy of an
official duties. (Sec. 171.11, IP Code) audiovisual or cinematographic work, a
work embodied in a sound recording, a
No copyright shall subsist in any work of the computer program, a compilation of data
Government of the Philippines. However, the and other materials or a musical work in
Government is not precluded from receiving and graphic form, irrespective of the ownership
holding copyrights transferred to it by assignment, of the original or the copy which is the
bequest or otherwise. subject of the rental;
General Rule: Prior approval of the government Rental - Transfer of the possession of the original or
agency or office wherein the work is created shall be a copy of a work or a sound recording for a limited
necessary for exploitation of such work for profit. period of time, for profit-making purposes
Such agency or office may impose as a condition 5. Public display of the original or a copy of the
the payment of royalties. work;
6. Public performance of the work; and
Exception: No prior approval or conditions shall be
required for the use of any purpose of: Definitions of Public Performance
1. Statutes, rules and regulations, or a. For Non-audiovisual work – reciting,

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playing, dancing, acting or otherwise is not a part of his

performing the work, either directly or regular duties even if
by means of any device or process the employee uses the
b. For Audiovisual work – showing of its time, facilities and
images in sequence and the making of materials of the
the sounds accompanying it audible employer.
c. For Sound recording – making the 2. Employer: work is the
recorded sounds audible at a place or result of the
at places where persons outside the performance of his
normal circle of a family and that regularly-assigned
family’s closest social acquaintances duties, UNLESS there
are or can be present is an agreement,
express or implied, to
7. Other communication to the public of the the contrary
work, e.g. online/Internet. Ownership of the work
belongs to the person other
Communication to the public - Any than the employer who
communication to the public, including commissioned the work and
broadcasting, rebroadcasting, retransmitting by INDEPENDENT
who pays for it.
cable, broadcasting, and retransmitting by satellite, CONTRACTOR’S
and includes the making of a work available to the WORK
Copyright remains with the
public by wire or wireless means in such a way that creator, unless there is a
members of the public may access these works from written stipulation to the
a place and time individually chosen by them contrary.
• Copyright belongs to
5. Ownership Of Copyright the producer, the author
of the scenario, the
a. Rules on Ownership composer of the music,
the film director, and the
Copyright ownership shall be governed by the author of the work so
following rules: adapted.
• The producer shall
TYPE OF WORK OWNERSHIP exercise the copyright
AUDIOVISUAL
ORIGINAL to an extent required for
WORK
LITERARY AND Copyright belongs to the the exhibition of the
ARTISTIC author of the work. work in any manner.
WORKS
Co-authors shall be the Exception: Right to collect
original owners of the performing license fees for
copyright. the performance of musical
compositions, with or
In the absence of without words, which are
agreement, rights shall be incorporated into the work
governed by the rules on co- Copyright belongs to the
ownership. writer subject to the
JOINT provisions of Article 723 of
AUTHORSHIP NOTE: If a work of joint the Civil Code wherein it
authorship consists of parts LETTERS provides that the court may
that can be used separately authorize their publication or
and the author of each part dissemination if the public
can be identified, the author good or the interest of
of each part shall be the justice so requires.
original owner of the
copyright in the part that he 6. Limitations On Copyright
has created.
Copyright shall belong to: Fair Use
EMPLOYEE’S The fair use of a copyrighted work for criticism,
1. Employee: creation of
WORK
the object of copyright comment, news reporting, teaching including limited

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number of copies for classroom use, scholarship,

research, and similar purposes is not an If a court finds that the use had or will have
infringement of copyright. a negative impact on the copyrighted
work's market, then the use is deemed
In determining whether the use made of a work in unfair. (ABS-CBN Corp. v. Gozon, G.R. No.
any particular case is fair use, the factors to be 195956, 2015)
considered shall include: [PuCha-Nat-Su-E]
1. The purpose and character of the use, NOTE: That a work is unpublished shall not by itself
including whether such use is of a bar a finding of fair use if such finding is made upon
commercial nature or is for non-profit consideration of all the above factors. (Sec. 185.2,
educational purposes; IP Code)
The purpose and character requirement is 7. Doctrine Of Fair Use

important in view of copyright’s goal to
promote creativity and encourage creation Fair use is a privilege to use the copyrighted
of works. Hence, commercial use of the material in a reasonable manner without the consent
copyrighted work can be weighed against of the copyright owner or as copying the theme or
fair use. ideas rather than their expression. Fair use is an
exception to the copyright owner’s monopoly of the
The “transformative test” is generally used use of the work to avoid stifling the very creativity
in reviewing the purpose and character of which that law is designed to foster. (ABS-CBN
the usage of the copyrighted work. Courts Corp. v. Gozon, G.R. No. 195956, 2015)
must look into whether the copy of the work No question of fair or unfair use arises, however, if
adds “new expression, meaning or no copying is proved to begin with. This is in
message” to transform it into something consonance with the principle that there can be no
else. (ABS-CBN Corp. v. Gozon, G.R. No. infringement if there was no copying. It is only where
195956, 2015) some form of copying has been shown that it
becomes necessary to determine whether it has
2. The nature of the copyrighted work; been carried to an “unfair,” that is, illegal, extent.
(Habana v. Robles, G.R. No. 131522, 1999)
If the nature of the work is more factual than
creative, then fair use will be weighed in 8. Copyright Infringement
favor of the user. (ABS-CBN Corp. v.
Gozon, G.R. No. 195956, 2015)
Any person infringes a right protected under the IP
Code when one:
3. The amount and substantiality of the
a. Directly commits an infringement (direct
portion used in relation to the copyrighted
infringement);
work as a whole; and
b. Benefits from the infringing activity of
another person who commits an
An exact reproduction of a copyrighted
infringement if the person benefiting has
work, compared to a small portion of it, can
been given notice of the infringing activity
result in the conclusion that its use is not
and has the right and ability to control the
fair.
activities of the other person (vicarious
infringement); or
However, there may also be cases where,
c. With knowledge of infringing activity,
though the entirety of the copyrighted work
induces, causes or materially contributes to
is used without consent, its purpose
the infringing conduct of another (direct
determines that the usage is still fair. For
infringement). (Sec. 216, IP Code)
example, a parody using a substantial
amount of copyrighted work may be
Also includes the act of any person who at the time
permissible as fair use as opposed to a
when copyright subsists in a work has in his
copy of a work produced purely for
possession an article which he knows, or ought to
economic gain. (ABS-CBN Corp. v. Gozon,
know, to be an infringing copy of the work for the
G.R. No. 195956, 2015)
purpose of:
a. Selling, letting for hire, or by way of trade
4. The effect of the use upon the potential
offering or exposing for sale, or hire, the
market for or value of the copyrighted work.
article
(Sec. 185.1, IP Code)

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b. Distributing the article for purpose of trade, into the channels of commerce of imported
or for any other purpose to an extent that goods that involve an infringement, immediately
will prejudice the rights of the copyright after customs clearance of such goods.
owner in the work; or
c. Trade exhibit of the article in public. (Sec. b. To pay to the copyright proprietor or his assigns
217.3, IP Code) or heirs such actual damages, including legal
costs and other expenses, as he may have
Copyright Infringement incurred due to the infringement as well as the
Infringement of a copyright is a trespass on a private profits the infringer may have made due to such
domain owned and occupied by the owner of the infringement.
copyright, and, therefore, protected by law, and
infringement of copyright, or piracy, which is a Note: In proving profits, the plaintiff shall be
synonymous term in this connection, consists in the required to prove sales only and the defendant
doing by any person, without the consent of the shall be required to prove every element of cost
owner of the copyright, of anything the sole right to which he claims or, in lieu of actual damages
do which is conferred by statute on the owner of the and profits, such damages which, to the court,
copyright. (Columbia Pictures, Inc. v. Court of shall appear to be just and shall not be regarded
Appeals, G.R. No. 110318, 1996) as penalty.
Gravamen of Copyright Infringement The amount of damages to be awarded shall be

The gravamen of copyright infringement is not doubled against any person who:
merely the unauthorized “manufacturing” of 1. Circumvents effective technological
intellectual works but rather the unauthorized measures; or
performance of any of the acts covered by Sec. 177 2. Having reasonable grounds to know that it
(economic rights). Hence, any person who performs will induce, enable, facilitate or conceal the
any of the acts thereunder without obtaining the infringement, remove or alter any electronic
copyright owner’s prior consent renders himself rights management information from a copy
civilly and criminally liable for copyright of a work
infringement. (NBI - Microsoft Corp. v. Hwang, G.R.
No. 147043, 2005) c. Deliver under oath, for impounding during the
pendency of the action, upon such terms and
When Committed conditions as the court may prescribe, sales
By any person who shall use original literary or invoices and other documents evidencing
artistic works, or derivative works, without the sales, all articles and their packaging alleged to
copyright owner’s consent in such a manner as to infringe a copyright and implements for making
violate the foregoing copy and economic rights. For them.
a claim of copyright infringement to prevail, the d. Deliver under oath for destruction without any
evidence on record must demonstrate: compensation all infringing copies or devices,
a. Ownership of a validly copyrighted material as well as all plates, molds, or other means for
by the complainant; and making such infringing copies as the court may
b. Infringement of the copyright by the order.
respondent. (Olano v. Eng Co, G.R. No. e. Such other terms and conditions, including the
195835, 2016) payment of moral and exemplary damages,
which the court may deem proper, wise and
The Intellectual Property Code is malum prohibitum equitable and the destruction of infringing
and prescribes a strict liability for copyright copies of the work even in the event of acquittal
infringement. Good faith, lack of knowledge of the in a criminal case.
copyright, or lack of intent to infringe is not a defense
against copyright infringement. (ABS-CBN Corp. v. Statutory Damages
Gozon, G.R. No. 195956, 2015) The copyright owner may elect, at any time before
final judgment is rendered, to recover instead of
a. Remedies actual damages and profits, an award of statutory
damages for all infringements involved in an action
Any person infringing a right protected under the IP in a sum equivalent to the filing fee of the
Code shall be liable: infringement action but not less than P50,000.00.
a. To an injunction restraining such infringement. In awarding statutory damages, the court may
consider the following factors:
The court may also order the defendant to 1. The nature and purpose of the infringing
desist from an infringement to prevent the entry act;

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2. The flagrancy of the infringement; a. The circumvention of effective

3. Whether the defendant acted in bad faith; technological measures;
4. The need for deterrence; b. The removal or alteration of any electronic
5. Any loss that the plaintiff has suffered or is rights management information from a copy
likely to suffer by reason of the of a work, sound recording, or fixation of a
infringement; and performance, by a person, knowingly and
6. Any benefit shown to have accrued to the without authority; or
defendant by reason of the infringement.
(Sec. 216.1, IP Code) The distribution, importation for distribution,
broadcast, or communication to the public of works
b. Criminal Penalties or copies of works, by a person without authority,
knowing that electronic rights management
Where Filed information has been removed or altered without
The copyright owner can file a criminal, civil or authority. (Sec. 217.2, IP Code)
administrative action for copyright infringement.
Place of Filing
Filed in the court situated in
CRIMINAL CASE the place where the
violation occurred
Filed at the Bureau of
ADMINISTRATIVE Legal Affairs at the
CASE Intellectual Property Office
of the Philippines
Filed in the appropriate
court located at the place
where the defendant
CIVIL CASE resides/is located, or
where the plaintiff
resides/is located, at the
option of the plaintiff
Penalties
Imprisonment of between 1 to
FIRST
3 years and a fine of between
OFFENSE
50,000 to 150,000 pesos
Imprisonment of 3 years and 1
SECOND day to six years plus a fine of
OFFENSE between 150,000 to 500,000
pesos
Imprisonment of 6 years and 1
THIRD AND
day to 9 years plus a fine
SUBSEQUENT
ranging from 500,000 to
OFFENSES
1,500,000 pesos
In all cases, subsidiary imprisonment in cases of

insolvency. (Sec. 217.1, IP Code)
In Determining Number of Years of

Imprisonment and Amount of Fine
The court shall consider the value of the infringing
materials that the defendant has produced or
manufactured and the damage that the copyright
owner has suffered by reason of the infringement:
Provided, That the respective maximum penalty
stated in Section 217.1. (a), (b) and (c) herein for the
first, second, third and subsequent offense, shall be
imposed when the infringement is committed by:

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VI. ELECTRONIC COMMERCE ACT

A. LEGAL RECOGNITION OF
ELECTRONIC DATA MESSAGES,
DOCUMENTS, AND SIGNATURES
A. LEGAL RECOGNITION OF ELECTRONIC
DATA MESSAGES, DOCUMENTS, AND Electronic Data Message
Information generated, sent, received or stored by
SIGNATURES
electronic, optical or similar means. (Section 5 (c))
B. PRESUMPTION RELATING TO Information And Communication System
ELECTRONIC SIGNATURES A system for generating, sending, receiving, storing
or otherwise processing electronic data messages
C. ADMISSIBILITY AND EVIDENTIAL or electronic documents and includes the computer
WEIGHT OF ELECTRONIC DATA system or other similar device by or in which data is
MESSAGE OR ELECTRONIC DOCUMENT recorded or stored and any procedures related to
the recording or storage of electronic data message
D. OBLIGATION OF CONFIDENTIALITY or electronic document. (Section 5 (d))
Electronic Signature
Any distinctive mark, characteristic and/or sound in
electronic form, representing the identity of a person
and attached to or logically associated with the
electronic data message or electronic document or
any methodology or procedures employed or
adopted by a person and executed or adopted by
such person with the intention of authenticating or
approving an electronic data message or electronic
document. (Section 5 (e))
Electronic Document
Information or the representation of information,
data, figures, symbols or other modes of written
expression, described or however represented, by
which a right is established or an obligation
extinguished, or by which a fact may be proved and
affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced
electronically. (Section 5 (f))
Note: Art. 1403, Civil Code, on the Statute of Frauds

(Unenforceable Contracts)
LEGAL RECOGNITION OF ELECTRONIC DATA

MESSAGES AND ELECTRONIC DOCUMENTS
(SECTIONS 6 & 7)
Information shall not be denied validity or

enforceability solely on the ground that it is in the
form of an electronic data message or electronic
document, purporting to give rise to such legal
effect. (Section 7, IRR)
Legal Effect, Validity or Enforceability

Electronic data messages or electronic documents
shall have the legal effect, validity or enforceability
as any other document or legal writing. (Section 7,
IRR) In particular:

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1. A requirement under law that information is in Best Evidence

writing is satisfied if the information is in the form An electronic data message or electronic document
of an electronic data message or electronic meeting and complying with the requirements of
document. (Section 7(a), IRR) Sections 6 or 7 of ECA shall be the best evidence of
2. A requirement under law for a person to provide the agreement and transaction contained therein.
(Section 11, IRR)
information in writing to another person is
satisfied by the provision of the information in Note: A person is not required to use or accept
an electronic data message or electronic information contained in electronic data messages,
document. (Section 7(b), IRR) electronic documents, or electronic signatures, but
3. A requirement under law for a person to provide a person's consent to do so may be inferred from
information to another person in a specified the person's conduct. (Section 9, IRR)
non-electronic form is satisfied by the provision
of the information in an electronic data message LEGAL RECOGNITION OF ELECTRONIC
or electronic document if the information is SIGNATURES (SECTION 8) [I.R.N.A.]
provided in the same or substantially the same
An electronic signature on the electronic document
form. (Section 7(c), IRR)
shall be equivalent to the signature of a person on a
4. Nothing limits the operation of any requirement written document if the signature is an electronic
under law for information to be posted or signature and proved by showing that a prescribed
displayed in specified manner, time or location; procedure, not alterable by the parties interested in
or for any information or document to be the electronic document, existed under which:
communicated by a specified method unless 1. A method is used to identify the party sought
and until a functional equivalent shall have been to be bound and to indicate said party's access
developed, installed, and implemented. to the electronic document necessary for his
(Section 7(d), IRR) consent or approval through the electronic
signature;
Document Required in Writing (Section 7, ECA, 2. Said method is reliable and appropriate for the
Section 10, IRR) [I.C.-C.R.] purpose for which the electronic document was
Where the law requires a document to be in writing, generated or communicated, in the light of all
or obliges the parties to conform to a writing, or circumstances, including any relevant
provides consequences in the event information is
agreement;
not presented or retained in its original form, an
electronic document or electronic data message will 3. It is necessary for the party sought to be bound,
be sufficient if the latter: in order to proceed further with the transaction,
to have executed or provided the electronic
1. Maintains its integrity and reliability; and signature; and
2. Can be authenticated so as to be usable for 4. The other party is authorized and enabled to
subsequent reference in that: verify the electronic signature and to make
i. It has remained complete and the decision to proceed with the transaction
unaltered, apart from the addition of authenticated by the same
any endorsement and any authorized
change, or any change which arises in B. PRESUMPTIONS RELATING TO
the normal course of communication, ELECTRONIC SIGNATURES (Section
storage and display; and 9, ECA)
ii. It is reliable in the light of the purpose
for which it was generated and in the 1. The electronic signature is the signature of the
light of all relevant circumstances. person to whom it correlates; and (IRR, Section
14 (a))
Incorporation by Reference 2. The electronic signature was affixed by that
Information shall not be denied validity or person with the intention of signing or approving
enforceability solely on the ground that it is not the electronic document unless the person
contained in an electronic data message or
relying on the electronically signed electronic
electronic document but is merely incorporated by
document knows or has notice of defects in or
reference therein. (Section 8, IRR)
unreliability of the signature or reliance on the

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electronic signature is not reasonable under the 1. The electronic signature shall be authenticated
circumstances. (Section 14(b), IRR) by proof that a letter, character, number or other
symbol in electronic form representing the
Original Documents (SECTION 10, ECA; Section persons named in and attached to or logically
11, IRR) associated with an electronic data message,
electronic document, or that the appropriate
Where the law requires information to be presented methodology or security procedures, when
or retained in its original form, that requirement is
applicable, were employed or adopted by a
met by an electronic data message or electronic
document if: person and executed or adopted by such
1. There exists a reliable assurance as to the person, with the intention of authenticating or
integrity of the electronic document or electronic approving an electronic data message or
data message from the time when it was first electronic document;
generated in its final form and such integrity is 2. The electronic data message or electronic
shown by evidence aliunde (that is, evidence document shall be authenticated by proof that
other than the electronic data message itself) or an appropriate security procedure, when
otherwise; and (Section 11(a), IRR) applicable was adopted and employed for the
2. The electronic document or electronic data purpose of verifying the originator of an
message is capable of being displayed to the electronic data message or electronic
person to whom it is to be presented. (Section document, or detecting error or alteration in the
11(b), IRR) communication, content or storage of an
electronic document or electronic data
In relation to the existence of a reliable assurance message from a specific point, which, using
as to the integrity of the electronic document or algorithm or codes, identifying words or
electronic data message, as provided under Section numbers, encryptions, answers back or
11(a) of the IRR: acknowledgment procedures, or similar security
1. The criteria for assessing integrity shall be devices.
whether the information has remained complete
and unaltered, apart from the addition of any Other Authentication Procedures
endorsement and any change which arises in The Supreme Court may adopt such other
the normal course of communication, storage authentication procedures, including the use of
and display; and (Section 11(c)(i), IRR) electronic notarization systems as necessary and
2. The standard of reliability required shall be advisable, as well as the certificate of authentication
assessed in the light of the purpose for which on printed or hard copies of the electronic
documents or electronic data messages by
the information was generated and in the light
electronic notaries, service providers and other duly
of all the relevant circumstances. (Section recognized or appointed certification authorities.
11(c)(ii), IRR)
Burden of Proving Authenticity
Note: These requirements applies whether the The person seeking to introduce an electronic data
requirement therein is in the form of an obligation or message or electronic document in any legal
whether the law simply provides consequences for proceeding has the burden of proving its authenticity
the information not being presented or retained in its by evidence capable of supporting a finding that the
original form. (Section 10, ECA) electronic data message or electronic document is
what the person claims it to be.
AUTHENTICATION OF ELECTRONIC DATA
MESSAGES AND ELECTRONIC DOCUMENTS Establishment of Integrity of Information and
(SECTION 11) Communication System
In the absence of evidence to the contrary, the
Until the Supreme Court by appropriate rules shall integrity of the information and communication
have so provided, electronic documents, electronic system in which an electronic data message or
data messages and electronic signatures, shall be electronic document is recorded or stored may be
authenticated by demonstrating, substantiating and established in any legal proceeding:
validating a claimed identity of a user, device, or 1. By evidence that at all material times the
another entity in an information or communication information and communication system or other
system, among other ways, as follows: similar device was operating in a manner that

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did not affect the integrity of the electronic data signatures, may be presumed to have been
message or electronic document, and there are established by an affidavit given to the best of the
no other reasonable grounds to doubt the deponent's or affiant's personal knowledge subject
integrity of the information and communication to the rights of parties in interest to cross-examine
system; such deponent or affiant as a matter of right.
(Section 19, IRR)
2. By showing that the electronic data message or
electronic document was recorded or stored by
Cross-Examination
a party to the proceedings who is adverse in A deponent of an affidavit that has been introduced
interest to the party using it; or in evidence may be cross-examined as of right by a
3. By showing that the electronic data message or party to the proceedings who is adverse in interest
electronic document was recorded or stored in to the party who has introduced the affidavit or has
the usual and ordinary course of business by a caused the affidavit to be introduced. (Section
person who is not a party to the proceedings 15(1), ECA)
and who did not act under the control of the
party using the record. The person who is not a party to the proceedings
and who did not act under the control of the party
RETENTION OF ELECTRONIC DATA MESSAGE using the electronic data message or electronic
OR ELECTRONIC DOCUMENT (SECTION 13) document may also be cross-examined provided
that the electronic data message or electronic
Notwithstanding any provision of law, rule or document was recorded or stored in the usual and
regulation to the contrary, the requirement in any ordinary course of business by the former. (Section
provision of law that certain documents be retained 15(2), ECA)
in their original form is satisfied by retaining them in
the form of an electronic data message or electronic
document which: C. ADMISSIBILITY AND EVIDENTIAL
1. Remains accessible so as to be usable for WEIGHT OF ELECTRONIC DATA
subsequent reference; (Section 20(a)(i), IRR) MESSAGE OR ELECTRONIC
2. Is retained in the format in which it was DOCUMENT
generated, sent or received, or in a format
which can be demonstrated to accurately ADMISSIBILITY AND EVIDENTIAL WEIGHT OF
represent the electronic data message or ELECTRONIC DATA MESSAGES AND
electronic document generated, sent or ELECTRONIC DOCUMENTS (SECTION 12)
received; and (Section 20(a)(ii), IRR)
For evidentiary purposes, an electronic document or
3. Where applicable, enables the identification electronic data message shall be the functional
of its originator and addressee, as well as the equivalent of a written document under existing
determination of the date and the time it was laws. (Section 18, IRR)
sent or received. (Section 20(a)(iii), IRR)
Admissibility
Note: These requirements are satisfied by using the In any legal proceeding, nothing in the application of
services of a third party, provided that the conditions the rules on evidence shall deny the admissibility of
set forth above are met. (Section 20(b), IRR) an electronic data message or electronic document
in evidence:
Relevant government agencies tasked with 1. On the sole ground that it is in electronic form;
enforcing or implementing applicable laws relating or (Section 18(a), IRR)
to the retention of certain documents may, by 2. On the ground that it is not in the standard
appropriate issuances, impose regulations to written form. (Section 18(b), IRR)
ensure the integrity, reliability of such documents
and its proper implementation. (Section 20(c), IRR) Note: The DPA and IRR does not modify any
statutory rule relating to the admissibility of
PROOF BY AFFIDAVIT AND CROSS- electronic data messages or electronic documents,
EXAMINATION (SECTIONS 14 and 15; Section except the rules relating to authentication and best
19, IRR)
evidence. (Section 18, IRR)
Proof by Affidavit Evidential Weight
The matters on admissibility and evidentiary weight, In assessing the evidential weight of an electronic
and on the presumption of integrity of electronic data message or electronic document, the reliability

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of the manner in which it was generated, stored or

communicated, the reliability of the manner in which
its originator was identified, and other relevant factor
shall be given due regard. (Section 18, IRR)
Proof by Affidavit and Cross Examination

Matters of admissibility and evidentiary weight (Sec.
12, ECA), and of the presumptions relating to
electronic signatures (Sec. 9, ECA) may be
presumed to have been established by affidavit
given to the best of the deponent’s or affiant’s
personal knowledge subject to the rights of parties
in interest to cross-examine such deponent or affiant
as a matter of right.
Such right of cross-examination may likewise be

enjoyed by a party to the proceedings who is
adverse in interest to the party who has introduced
the affidavit or has caused the affidavit to be
introduced. (Sections 14 & 15, ECA, Section 19,
IRR)
D. OBLIGATION OF CONFIDENTIALITY
Except for the purposes authorized under ECA, any

person who obtained access to any electronic key,
electronic data message or electronic document,
book, register, correspondence, information, or
other material pursuant to any powers conferred
under ECA, shall not convey to or share the same
with any other person. (Section 32, ECA)
-- end of topic --

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VII. FOREIGN INVESTMENTS ACT (RA A. POLICY OF THE LAW [SEC. 1, RA

7042, as amended by RA 11647) 11647]
It is the policy of the State to attract, promote and

TOPIC OUTLINE UNDER THE SYLLABUS: welcome productive investments from foreign
individuals, partnerships, corporations and
A. POLICY OF THE LAW governments, including their political subdivisions
in activities which significantly contribute to national
B. DEFINITION OF TERMS industrialization and socioeconomic development
1. Foreign Investment to the extent that foreign investment is allowed in
2. Doing Business such activity by the Constitution and relevant laws.
3. Export Enterprise
4. Domestic Market Enterprise
B. DEFINITION OF TERMS [SEC. 2, RA
C. REGISTRATION OF INVESTMENT OF NON- 11647]
PHILIPPINE NATIONALS
1. Foreign Investment
D. FOREIGN INVESTMENTS IN EXPORT
ENTERPRISES "Foreign Investment" shall mean an equity
investment made by a non- Philippine national in the
E. FOREIGN INVESTMENTS IN DOMESTIC form of foreign exchange and/or other assets
MARKET ENTERPRISES actually transferred to the Philippines and duly
registered with the Central Bank which shall assess
F. FOREIGN INVESTMENT NEGATIVE LIST and appraise the value of such assets other than
foreign exchange (Sec. 3[c])
Provided, however, that for purposes of determining

foreign ownership, peso investments made by non-
Philippine nationals shall be considered;
Provided, further, that only foreign investments in

the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly
registered with the Central Bank (CB) and profits
derived therefrom can be repatriated; (Implementing
Rules and Regulations of RA 7042 [as amended by
RA 8179 July 9, 1996] Rule 1 §1 [g])
“Foreign Corporation”
1. A corporation formed, organized or existing
under any law other than those of the
Philippines, and
2. whose laws allow Filipino citizens and
corporations to do business in its own
country or state – reciprocity clause.
(Revised Corporation Code, Sec. 140)
Note: The Reciprocity clause does not affect the

status of the foreign corporation. It merely
emphasizes the policy of granting access to foreign
corporations whose home state also grants access
to Filipino citizens and corporations.
Branch office
Carries out the business activities of the head office
and derives income from the host country.
(Implementing Rules and Regulations of RA 7042,

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Rule 1 §1 [c]). Dividends paid Branch Not subject

Representative or Liaison office are taxed profit to local
It deals directly with the clients of the parent remittances taxes and
company but does not derive income from the host are taxed VAT
country and is fully subsidized by its head office.
“Philippine National” refers to:
It undertakes activities such as but not limited to 1. A citizen of the Philippines, or
information dissemination and promotion of the 2. A domestic partnership or association
company’s products as well as quality control of wholly owned by citizens of the Philippines;
products. (Implementing Rules and Regulations of or
RA 7042, Rule 1 §1 [c]). 3. A corporation
a. organized under the laws of the
Philippines
Regional or Area Headquarters (RHQ) b. of which at least sixty percent
An office whose purpose is to act as an (60%) of the capital stock
administrative branch of a multinational company outstanding and entitled to vote
engaged in international trade which principally is owned and held by citizens of
serves as a supervision, communications and the Philippines or
coordination center for its subsidiaries, branches or 4. A corporation
affiliates in the Asia-Pacific Region and other foreign a. organized abroad and
markets (R.A. 8756 §2 [2]) b. registered as doing business in
the Philippines under the
It does not earn or derive income in the Philippines; Corporation Code
(R.A. 8756 §2 [2] ; National Internal Revenue Code, c. of which one hundred percent
§22 [D]) (100%) of the capital stock
outstanding and entitled to vote
Regional Operating Headquarters (ROHQ) is wholly owned by Filipinos
A foreign business entity which is allowed to derive (mere legal title is not enough,
income in the Philippines by performing qualifying there should be beneficial
services to its affiliates, subsidiaries or branches in ownership)
the Philippines, in the Asia-Pacific Region and in 5. A trustee of funds for pension or other
other foreign markets. (R.A. 8756 §2 [3]) employee retirement or separation
benefits,
ROHQs will be allowed to derive income by a. trustee must be a Philippine
performing the following qualifying services: national and
1. General administration and planning;
b. at least sixty percent (60%) of
2. Business planning and coordination;
the fund will accrue to the
3. Sourcing/procurement of raw materials and
benefit of Philippine nationals.
components;
(Sec. 3[a])
4. Corporate finance advisory services;
5. Marketing control and sales promotion;
6. Training and personnel management; Three rules in Determining the Nationality of
7. Logistics services; Corporations with Foreign Equity: Incorporation
8. Research and development services, and Test, Control Test and the Grandfather Rule:
product development;
9. Technical support and maintenance; Incorporation Test – the nationality of a corporation
10. Data processing and communication; depends on the state under which laws it is
11. Business development. (R.A. 8 incorporated. This is regardless of the nationality of
its stockholders
Taxation of Income: General Rules Control Test -– the nationality of the corporation
depends upon the nationality of the controlling
DOMESTIC BRANCH REGIONAL
stockholders
SUBSIDIARY OFFICE HQ
Taxed on Only Not allowed Note: While the incorporation test serves as the
worldwide Philippine to generate primary test under Philippine jurisdiction, the
income source income “control test” and, in appropriate cases, the
income is “grandfather rule” is applied to determine
taxed

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compliance with the Constitution and other laws on certain percentage of control of stock, the Test of
nationality requirements. Controlling Ownership would be applied.
Grandfather Rule – the combined totals in the 3rd step: If there is doubt as to the domestic control
investing corporation and the investee corporation of the percentage of stock in a corporation with
must be traced (i.e. “grandfathered”) to determine corporate stockholders, Grandfather test would be
the total percentage of Filipino ownership. applied (Narra Nickel Mining and Development
Corp. v. Redmont Consolidated Mines Corp.,722
All covered corporations shall, at all times, observe SCRA 382 [2014]).
the constitutional or statutory ownership
requirement. For purposes of determining The issue in the case of Gamboa v. Teves is the
compliance therewith, the required percentage of proper interpretation of the word “capital” in Section
Filipino ownership shall be applied to BOTH (a) the 11, Article 12 of the 1987 Constitution. For a
total number of outstanding shares of stock entitled corporation to be granted authority to operate a
to vote in the election of directors AND (b) the total public utility, at least sixty percent (60%) of the
number of outstanding shares of stock, whether or capital must be Filipino. The Court holds that the
not entitled to vote in the election of directors. term capital must be interpreted to refer to shares of
(Section 2, SEC Memorandum Circular No. 08-13 stock entitled to vote in the election of directors.
dated May 20, 2013) Sixty percent (60%) of capital must assume a
controlling interest over the company.(Gamboa v.
Basis of Computation of 60-40 percentage Finance Secretary Margarito Teves, 652 SCRA 690
requirement: [2011], .G.R. No. 176579, June 28, 2011)
● Under existing laws, the basis is the total
number of outstanding capital stock, The 60-40 ownership requirement applies not only
irrespective of the amount of the par value to voting control, but also to beneficial control of the
of the shares. corporation. Both the Voting Control Test and the
● Under the Control Test, once it is Beneficial Ownership Test must be applied to
established that the corporation is at determine whether a corporation is
least 60% owned by Filipinos, it is no Filipino.(Gamboa v. Finance Secretary Margarito
longer necessary to conduct any further Teves 682 SCRA 397 [October 9,2012])
inquiry as to the ownership of the
shareholders of the investing All covered corporations shall, at all times, observe
corporation since the entire company at the constitutional or statutory ownership
least 60% Filipino owned is already requirement. For purposes of determining
considered a Filipino entity. compliance therewith, the required percentage of
● However, a Filipino entity (60% Filipino- Filipino ownership shall be applied to BOTH (a) the
owned) is not qualified to invest in or enter total number of outstanding shares of stock entitled
into a joint venture agreement with to vote in the election of directors; AND (b) the total
corporations or partnerships, the capital or number of outstanding shares of stock, whether or
ownership of which, under the Constitution not entitled to vote in the election of directors.
or special laws, are limited exclusively to (Section 2, SEC Memorandum Circular No. 08-13
Filipino citizens. dated May 20, 2013)
● The shares of former Filipino citizens who
became citizens of foreign countries but Petitioners in Roy v. Herbosa alleged that SEC-MC
who reacquired Philippine citizenship under No. 8 is in violation of the Supreme Court’s ruling in
the RA 9225 (Citizenship Retention and Gamboa v. Teves. The Court upheld the validity of
Reacquisition Act of 2003” are considered SEC-MC No. 8. The Gamboa decision held that
as Filipino Investments. what the Constitution requires is that full and legal
beneficial ownership of 60% of outstanding capital
In order to determine the nationality of a corporation, stock, coupled with 60% of voting rights, must rest
the following steps should apply: in the hands of Filipinos, which is precisely what
SEC-MC No. 8 requires. In constructing beneficial
1st Step: The nationality of a corporation is ownership, the IRR of the FIA and the IRR of the
determined by the country under whose laws it is Securities and Regulation Code both provide that
incorporated (Place of Incorporation Test). such requires voting rights. If a Filipino has voting
2nd Step: If the corporation is applying for a (2nd) power, or investment power (can dispose), or both,
franchise for public utility and etc. which requires a he is considered the beneficial owner. (Roy III v.

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Herbosa, G.R. No. 207246, November 22, 2016)

Public utility- Any form of authorization for the
operation of a shall be granted only to citizens of the
The definition of “beneficial owner or beneficial
Philippines or to corporations or associations
ownership” in the SRC-IRR, which is in
organized under the laws of the Philippines, at least
consonance with the concept of “full beneficial
sixty per centum of whose capital is owned by such
ownership” in the FIA-IRR, is relevant in resolving
citizens. (Article XII, Section 11, 1987 Constitution)
only the question of who is the beneficial owner or
has beneficial ownership of each “specific stock” of The right to operate a public utility may exist
the public utility whose stocks are under review. If
independently and separately from the ownership of
the Filipino has the voting power of the “specific
the facilities thereof. Operation of public utility must
stock”, i.e., he can vote the stock or direct another
be granted only to Philippine citizens but ownership
to vote for him, or the Filipino has the investment
of the structure may not necessarily be limited to
power over the “specific stock”, i.e., he can dispose
Filipinos (Tatad v. Garcia, G.R. No. 114222, April 6,
of that “specific stock” or direct another to vote or 1995)
dispose it for him, then such Filipino is the
“beneficial owner” of that “specific stock.” Being
Natural Resources - The exploration,
considered Filipino, that “specific stock” is then to
development, and utilization of natural resources
be counted as part of the 60% Filipino ownership
shall be under the full control and supervision of the
requirement under the Constitution. The right to the
State. The State may directly undertake such
dividends, jus fruendi—a right emanating from
activities, or it may enter into co-production, joint
ownership of that “specific stock” necessary accrues venture, or production-sharing agreements with
to its Filipino “beneficial owner.” (Roy III v. Herbosa,
Filipino citizens, or corporations or associations at
G.R. No. 207246 (Resolution), 18 April 2017.)
least 60 per centum of whose capital is owned by
such citizens. The foreign investor is limited to
The Anti-Dummy Law confines the number of passive participation.
foreign directors in the board in proportion to their
allowable participation or share in the capital. (SEC- The President may enter into agreements with
OGC Opinion No. 24-18 dated December 20, 2018) foreign-owned corporations involving either
technical or financial assistance for large-scale
1987 Constitution exploration, development, and utilization of
minerals, petroleum, and other mineral oils. Foreign
Filipino First Policy - In the grant of rights and investors, through (Financial/Technical Assistance
concessions covering the national economy and Agreements) FTAAs, are limited only to providing:
patrimony, the State shall give preference to a. Technical assistance for highly technical
qualified Filipinos (Art. XII, Sec 10, 1987 enterprises
Constitution) b. Financial assistance for large-scale
enterprises (La Bugal Bl’aan Tribal
The control and administration of educational Association Inc. v. Ramos, G.R. No.
institutions shall be vested in citizens of the 127882, December 1, 2004)
Philippines. (Art. XIV. Sec. 4, [2], 1987 Constitution)
Practice of Professions - Foreigners practicing
Educational institutions, shall be owned solely by professions in the Philippines – a regulated activity.
citizens of the Philippines or corporations or
associations at least sixty per centum of the capital But mere investment in a corporation (eg: foreign
of which is owned by such citizens. doctors investing in a domestic hospital corporation)
is not deemed to be a practice of profession.
Exception: those established by religious groups a. Nonetheless, public hospitals are
and mission boards, considered public utilities thus ownership
is still regulated. (Crisostomo v. Securities
The Congress may, however, require increased and Exchange Commission, G.R. Nos.
Filipino equity participation in all educational 89095 & 89555 November 6, 1989)
institutions. (Art. XIV. Sec. 4, [2], 1987 Constitution)
Mass Media - The ownership and management 2. Doing Business

shall be limited to citizens of the Philippines, or to
corporations, cooperatives or associations, wholly- “Doing business” shall include:
owned and managed by such citizens. (Article XVI 1. Soliciting orders, service contracts,
Section 11 [1], 1987 Constitution) opening offices, whether called “liaison”

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offices or branches; transactions or occasional, incidental, and

2. Appointing representatives or distributors casual transactions that do not come within
who are: the meaning of the law.
a. domiciled in the Philippines or o XPN: Where a single transaction is
b. Staying in the country for a period NOT merely incidental or casual
totaling 180 days or more in a but indicates the foreign
calendar year corporation’s intent to do business
3. Participating in the management, in the Philippines, said single
supervision or control of any domestic transaction constitutes “doing”
business, firm, entity or corporation in the business in the Philippines.
Philippines; and ● No general rule or governing principles can
4. Any other act or acts that imply a continuity be laid down as to what constitutes “doing
of commercial dealings (Sec. 3 [d]) business” (case to case basis)
● A foreign corporation is “doing business”
when it has entered the State by its agents
“Doing business” shall NOT include:
and is there engaged in carrying on and
1. Mere investment as a shareholder in transacting through them some substantial
domestic corporations part of its ordinary or customary business,
2. Exercise of rights of such investor usually continuous in the sense that it may
(shareholder) be distinguished from merely casual,
3. Having a nominee director or officer to sporadic or occasional transactions and
represent the foreign investor's interest in isolated acts.
the domestic corporation ● The element of continuity is important for
4. Appointing a distributor domiciled in the a foreign corporation to be deemed doing
Philippines which transacts business in its business in the Philippines.
own name and account ● Actual Transaction of Business
5. Publication of a general advertisement Required.
6. Maintaining a stock of goods in the
Philippines solely for the purpose of having License and Capacity to Sue
the same processed by another entity in the 1. If a foreign corporation does business in the
Philippines Philippines without a license, it cannot sue
7. Consignment by a foreign entity of before Philippine courts and administrative
equipment with a local company to be used agencies. (Revised Corporation Code, Sec.
in the processing of products for export 150)
8. Collecting information in the Philippines 2. If a foreign corporation is NOT doing
9. Performing services auxiliary to an existing business in the Philippines, it needs no
isolated contract of sale which are NOT on license to sue before Philippine courts
a continuing basis (Implementing Rules including on an isolated transaction
and Regulations of RA 7042, Rule 1 §1 [f]). 3. If a foreign corporation does business in the
Philippines without a license, a Philippine
Test to determine if a corporation is doing citizen which has contracted with said
business in the Philippines is expressed in the corporation may be estopped from
leading case of Mentholatum Co. v. Mangaliman challenging the foreign corporation's
which is sometimes referred to as the “Twin capacity to sue.
Characterization Test” NOTE: The estoppel doctrine is an
exception to the general rule but is relevant
● Twin Characterization Test – doing only when a foreign corporation is the
business implies a continuity of commercial plaintiff.
dealings and arrangements and 4. If a foreign corporation does business in the
contemplates to that extent the Philippines with the required license, it can
performance of acts or works or he exercise sue before Philippine courts on any
of some of the functions normally incident transaction.
to, and in progressive prosecution of, the
purpose and object of its organization. Note: Subsequent acquisition of the license will cure
● This test includes “Substance Test” and the lack of capacity at the time of the execution of
“Continuity Test” the contract. The requirement of a license is not
● GR: The acts of the foreign corporation meant to put foreign corporations at a disadvantage.
doing business should be distinguished Rather, the doctrine of lack of capacity to sue is
from a single or isolated business

ATENEO CENTRAL
based on considerations of sound public policy Capacity to sue is a personal qualification, thus if
(Eriks PTE Ltd. v. Court of Appeals, G.R. No. successor in interest of the disqualified entity is
118843, February 6, 1997) qualified to sue, then the restriction does not apply
(Lorenz Shipping v. Chubb & Sons, G.R. No.
To constitute “doing business”, the activity to be 147724 June 8, 2004)
undertaken is one that is for profit-making. (Agilent
v. Integrated Silicon, G.R. No. 154618, April 14,
A letter of intent to enter a bid is not an act sufficient
2004)
enough to constitute an intent to do business. A
bidder must win the bid first before acquiring a
For purposes of having summons served on a
license. (Steelcase Inc v Design International
foreign corporation, it is sufficient that it be alleged
Selections, G.R. No. 171995, April 18, 2012)
that the foreign corporation is doing business in the
Philippines. (Alfred Hahn v. Court of Appeals, G.R.
No. 113074 January 22, 1997) A foreign entity may bring an action in Philippine
courts to enforce an insurance policy, executed
The mere act of exporting from one's own country abroad, even if it has no license to do business since
without doing any specific commercial acts within such insurance contract did not arise from a
the territory of the importing country cannot be business transaction done here in the Philippines.
deemed as doing business in the importing country (Universal Shipping Lines, Inc. v IAC
(B Van Zuiden v GTVL Manufacturing Industries.
G.R. No. 147905, May 28, 2007) NATURE SUE BE SUED
A series of separate deliveries for one single order Doing May sue May be sued
is considered as an isolated transaction. However, Business
a series of commercial dealings (unique and With
independent from one another) signifies an intent to License
do business in the Philippines. A grant of a 90-day Doing Cannot May be sued
credit term is proof of an intention to continue Business Sue
transacting with the domestic client. (Eriks PTE Ltd. Without
v. Court of Appeals, G.R. No. 118843. February 6, License
1997) Isolated May GR: May not be
Transaction sue sued
A foreign corporation doing business in the jurisdiction
Philippines without a license may sue in Philippine over foreign
courts a Philippine citizen or entity that had corp.
contracted with and benefited from it. (European
Resources and Technologies Inc. and Delfin J. Except: consent
Wenceslao v. Ingenieuburo Birkhahn + Nolte, G.R. through a
No. 159586, July 26, 2004) contractual
stipulation
A foreign entity bringing an action to protect a
trademark right needs no license to do business in 3. Export Enterprise
order to access the domestic courts because it does
not seek to enforce any contractual right arising from
any business transaction. (General Garments “Export enterprise” shall mean:
Corporation v. Director of Patents, G.R. No. L-24295 1. an enterprise wherein a manufacturer,
September 30, 1971) processor or service (including tourism)
enterprise exports sixty percent (60%) or
more of its output, or
Where a single act or transaction of a foreign 2. Wherein a trader purchases products
corporation is not merely incidental or casual but is domestically and exports sixty percent
of such character as distinctly to indicate a purpose (60%) or more of such purchases. (Sec.
on the part of the foreign corporation to do other 3[e], Implementing Rules and Regulations
business in the state, such act will be considered as of RA 7042 as amended] Rule 1 §1 (g)]
constituting doing business. (Litton Mills v. Court of
Appeals, G.R. No. 94980. May 15, 1996)
4. Domestic Market Enterprise
“Domestic Market Enterprise” shall mean:

ATENEO CENTRAL
1. an enterprise which produces goods for a. All applications are considered

sale, or renders services to the domestic officially accepted only upon
market entirely or submission of complete
2. if exporting a portion of its output fails to documents to either the SEC or
consistently export at least sixty percent BTRCP.
(60%) thereof; (Sec 3[f]) b. Applications for clearances from
the Department of National
A domestic market enterprise may change its status Defense (DND) or Philippine
to export enterprise if over a three (3) year period it National Police (PNP) for defense-
consistently exports in each year thereof sixty per related activities, or the DOST for
cent (60%) or more of its output. investments involving advanced
technology shall be decided upon
C. Registration of Investment of Non by said agencies within fifteen (15)
Philippine Nationals [Sec. 6, RA working days. (Implementing
Rules and Regulations of R.A.
11647] 7042, IRR of RA 7042, [1991])
3. Approval. Within fifteen (15) working days
A Non-Philippine national may do business or invest from official acceptance of an application,
in a domestic enterprise up to one hundred percent the SEC or BTRCP shall act on the same.
(100%) of its capital, provided: Otherwise, the application shall be
1. It is investing in a domestic market considered as automatically approved if it is
enterprise in areas outside the FINL; not acted upon within said period for a
2. It is investing in an export enterprise whose cause not attributable to the applicant.
products and services do not fall within (Implementing Rules and Regulations of
Lists A and B (except for defense-related R.A. 7042, IRR of RA 7042, [1991])
activities, which may be approved pursuant
to Section 8(b)(1) of the Act) of the FINL. STEP 2. Registration with the SEC.
3. As required by laws, the existing country or An application form together with the following
state of the applicant must also allow documents shall be submitted to the SEC.
Filipino citizens and corporations to do
1. New domestic corporation or a partnership:
business therein. (Rule VI, Implementing
Rules and Regulations of R.A. 7042, IRR of a. Articles of
Incorporation/Partnership
RA 7042, [1991])
b. Name Verification Slip
Steps In The Registration Of Investments Of c. Bank Certificate of Deposit
Non-Philippine Nationals d. ACR/ICR, SIRV (Special Investors
Resident Visa), Visa #13 of the
STEP 1. Application alien subscribers
1. Filing of Application. e. Proof of Inward Remittance (for
a. Foreign corporation, domestic non-resident aliens)
corporations or partnerships which 2. Foreign corporation
are non-Philippine nationals.- a. Name verification slip
applications for registration shall b. Board Resolution authorizing the
be filed with the SEC. establishment of an office in the
b. Single proprietorships, Philippines;
applications for Metro Manila shall c. Financial statements for the
be filed with the BTRCP or the immediately preceding year at the
DTI-National Capital Region. time of filing of the application,
c. In the provinces, applications may certified by an independent
be filed with the extension offices Certified Public Accountant of the
of the SEC for home country.
corporations/partnerships and the d. Certified copies of the Articles of
provincial offices of the DTI for Incorporation/Partnership with an
sole proprietorships. English translation thereof if in a
2. Pre-Processing of Documents - Pre- foreign language.
processing of documents shall be e. Proof of inward remittance such as
undertaken to assist the investor in bank certificate of inward
determining the completeness of his remittance or credit advices.
documents. (Implementing Rules and

ATENEO CENTRAL
Regulations of R.A. 7042, IRR of continuing compliance of the export enterprise with
RA 7042, [1991]) its export requirement. (Sec 6)
3. Additional requirements to be submitted to
the : SEC STEP 2. BOI shall advise SEC or BTRCP, as the
a. Clearance from the DND or PNP case may be, of any export enterprise that fails to
(for enterprises wishing to engage meet the export ratio requirement. (Sec 6)
in defense-related activities)
b. Certificate from the DOST that the STEP 3. The SEC or BTRCP shall thereupon order
investment involves advanced the non-complying export enterprise to reduce its
technology shall be submitted (for sales to the domestic market to not more than forty
small and medium-sized domestic percent (40%) of its total production; failure to
market enterprises with paid-in comply with such SEC or BTRCP order, without
equity capital less than the justifiable reason, shall subject the enterprise to
equivalent of US$500,000) cancellation of SEC or BTRCP registration, and/or
(Implementing Rules and the penalties provided in Section 14 hereof. (Sec 6)
Regulations of R.A. 7042, IRR of
RA 7042, [1991]) E. Foreign Investments in Domestic
4. Application Fee Market Enterprises [Sec. 7, RA 7042]
STEP 3. Registration with the BTRCP Bureau of Non-Philippine nationals may own up to one
Trade Regulation and Consumer Protection hundred percent (100%) of domestic market
Department of Trade and Industry (BTRCP-DTI) enterprises unless foreign ownership therein is
1. As required by existing laws and prohibited or limited by existing law or the Foreign
regulations, BTRCP Form No. 17 and Investment Negative List under Section 8 hereof.
accompanying documents shall be
submitted to BTRCP.
A domestic market enterprise may change its status
2. All documents executed abroad should be
to export enterprise if over a three (3) year period it
authenticated by the Philippine Embassy or
consistently exports in each year thereof sixty per
Consular Office.
cent (60%) or more of its output. (Sec. 7)
3. Application Fee. A reasonable application
fee to be determined by BTRCP shall be
collected from each applicant. At its option, a domestic market enterprise may
4. Upon fulfilment of all BTRCP-DTI change its status to an export enterprise if, over the
requirements and favorable evaluation by last three (3) years, it consistently exported in each
DTI, the Certificate of Registration for Sole year thereof sixty percent (60%) or more of its
Proprietorship shall be issued by DTI. In output. (Implementing Rules and Regulations of
case of disapproval, DTI shall also inform R.A. 7042, IRR of RA 7042, [1991])
the applicant in writing of the reasons for
the disapproval of the registration. F. Foreign Investment Negative List
(Implementing Rules and Regulations of [Sec. 8, RA 11647]
R.A. 7042, IRR of RA 7042, [1991])
“Foreign Investments Negative List” or
D. Foreign Investments in Export “Negative List” shall mean a list of areas of
Enterprises [Sec. 7, RA 11647] economic activity whose foreign ownership is limited
to a maximum of forty percent (40%) of the equity
Foreign equity participation in export capital of the enterprises engaged therein. (Sec
enterprises shall be allowed up to one hundred 3[g])
percent (100%) provided that the products and
services of such enterprises do not fall within Lists
The Foreign Investment Negative List shall have two
A and B of the FINL. (Implementing Rules and
(2) components lists; A, and B.
Regulations of RA 7042 (as amended by RA 8179
July 9, 1996) Rule VI §1)
List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate of the
Steps In The Registration Of Export Enterprises
Constitution and specific laws.
STEP 1. Export enterprises which are non-
Philippine nationals shall register with BOI and
List B shall contain the areas of activities and
submit the reports that may be required to ensure
enterprises regulated pursuant to law:

ATENEO CENTRAL
c. Secretary of Education, Culture and

1. Defense-related activities, requiring prior Sports,
clearance and authorization from Department 2. Endorsement by the NEDA,
of National Defense (DND) to engage in such 3. Approval by the President, and
activity, such as the manufacture, repair, 4. Promulgation by a Presidential
storage and/or distribution of firearms, Proclamation. (Sec.8)
ammunition, lethal weapons, military
ordinance, explosives, pyrotechnics and Foreign Investment Negative Lists shall become
similar materials; unless such manufacturing or effective fifteen (15) days after publication in a
repair activity is specifically authorized, with a newspaper of general circulation in the Philippines:
substantial export component, to a non- Provided, however, That each Foreign Investment
Philippine national by the Secretary of National Negative List shall be prospective in operation and
Defense; or shall in no way affect foreign investment existing on
the date of its publication. (Sec.8)
2. Activities that have implications on public
health and morals, such as the: Amendments to List B after promulgation and
publication of the first Regular Foreign Investment
a. manufacture and distribution of
Negative List at the end of the transitory period shall
dangerous drugs;
not be made more often than once every two (2)
b. all forms of gambling; nightclubs, bars,
years. (Sec.8)
beerhouses, dance halls;
c. sauna and steam bathhouses and
massage clinics.
3. GR: Small and medium-sized domestic
market enterprises, with paid-in equity capital
less than the equivalent two hundred thousand
US dollars (US$200,000) are reserved to
Philippine nationals.
Exception: A small and medium-sized domestic

market enterprise with paid-in equity capital less
than the equivalent one hundred thousand US
dollars (US$100,000) shall be allowed to non-
Philippine nationals if:
a. it involves advanced technology* as
determined by the Department of Science
and Technology; or
b. they employ at least fifty (50) direct
employees (Sec.8)
Advanced technology should be:

1. Necessary for the development of certain
industries;
2. Subject to guidelines of the Department of
Science and Technology; and
3. Appropriate and adaptable to local
conditions, such that it can be eventually be
transferred and applied to available
indigenous technology. (Implementing
Rules and Regulations of RA 7042 [as
amended by RA 8179 July 9, 1996] Rule 1
§1 [o])
Steps to Amend List B [R-E-A-P]:

1. Recommendation of the
a. Secretary of National Defense, or
b. Secretary of Health, or

ATENEO CENTRAL
VIII. PUBLIC SERVICE ACT

A. CRITICAL INFRASTRUCTURE
Critical Infrastructure refers to any public service
which owns, uses, or operates systems and assets,
whether physical or virtual, so vital to the Republic
A. CRITICAL INFRASTRUCTURE
of the Philippines that the incapacity or destruction
of such systems or assets would have a detrimental
B. FOREIGN STATE-OWNED ENTERPRISE impact on national security, including
telecommunications and other such vital
C. PUBLIC SERVICE AS PUBLIC UTILITY services as may be declared by the President of
the Philippines. (PSA, RA 11659, Sec. 2[e])
D. UNLAWFUL ACTS
NOTE: A public service engaged in the provision of
E. POWERS OF THE PRESIDENT TO telecommunications services is critical infrastructure
SUSPEND OR PROHIBIT TRANSACTION under the PSA. Up to date, no other system or asset
OR INVESTMENT is classified as critical infrastructure except for
telecommunications.
F. INVESTMENTS BY AN ENTITY
CONTROLLED BY OR ACTING ON No other public service shall be considered critical
BEHALF OF THE FOREIGN infrastructure unless declared by the President.
GOVERNMENT, OR FOREIGN STATE- (Sec. 32, Rule VIII, Implementing Rules and
OWNED ENTERPRISES Regulations of RA 11659, amending CA 146)
G. RECIPROCITY CLAUSE Telecommunications

Refer to any process which enables a
telecommunications entity to relay and receive
voice, data, electronic messages, written or printed
matter, fixed or moving pictures, words, music or
visible or audible signals or any control signals of
any design and for any purpose by wire, radio or
other electromagnetic, spectral, optical or
technological means, as defined by Section 3 (a) of
Republic Act No. 7925, otherwise known as the
"Public Telecommunications Policy Act of the
Philippines," as amended, except
a) passive telecommunications tower
infrastructure and
b) components, such as, but not limited to,
poles, fiber ducts, dark fiber cables, and
passive telecommunications tower
infrastructure, as defined by the
Department of Information and
Communications Technology (DICT), and
value-added services, as defined in Section
3 (h) of Republic Act No. 7925, as
amended;
National Security
Refers to the requirements and conditions
necessary to ensure the territorial integrity of the
country and the safety, security, and well-being of
Filipino citizens. (Sec. 2, Rule I, Implementing Rules
and Regulations of RA 11659, amending CA 146)
B. FOREIGN STATE-OWNED
ENTERPRISE
Foreign State-owned Enterprise refers to an entity
in which a foreign State: (OCA)

ATENEO CENTRAL
a. Directly or indirectly Owns more than q. Toll Regulatory Board (TRB). (PSA, RA
fifty percent (50%) of the capital taking 11659, Sec. 3)
into account both the voting rights and
beneficial ownership; b. Authority of Congress
b. Controls, through ownership interests, Nothing in the PSA shall be interpreted to diminish,
the exercise of more than fifty percent limit, or restrict the authority of Congress from
(50%) of the voting rights; or granting franchises to public services, including
c. Holds the power to Appoint a majority public utilities, and other activities, as may be
of members of the board of directors or provided by law.
any other equivalent management
body. (PSA, RA 11659, Sec. 2[g]) GR: Any franchise or certificate necessary for the
operation of a public service shall be granted by
C. PUBLIC SERVICE AS PUBLIC UTILITY Congress
XPN: previously delegated by law to the relevant
a. Jurisdiction and Supervision Administrative Agencies. (PSA, RA 11659, Sec. 4)
over all Public Services, Public
Utilities, Franchises, c. Public Utility
Equipment, and other Public utility refers to a public service that operates,
manages or controls for public use any of the
Properties
following: (DTPe-WaSP)
The Commission shall have jurisdiction and
• Distribution of Electricity;
supervision over all public services, including public
utilities, and their franchises, equipment, and other • Transmission of Electricity;
properties, and in the exercise of its authority, it shall • Petroleum and Petroleum Products
have the necessary powers and the aid of public Pipeline Transmission Systems;
force: Provided, That public services, including • Water Pipeline Distribution Systems and
public utilities, owned or operated by government Wastewater Pipeline Systems, including
entities or government-owned or controlled sewerage pipeline systems
corporations shall be regulated by the Commission • Seaports; and
in the same way as privately-owned public services. • Public Utility Vehicles. (PSA, RA 11659,
(PSA, RA 11659, Sec. 4) Sec. 4)
NOTE: All references to “Commission” shall pertain Distribution of Electricity

to any Administrative Agency to which the powers Refers to the conveyance of electric power by a
and duties of the Public Service Commission were distribution utility through its distribution system as
transferred by subsequent laws, such as but not defined by Section 4 (n) of Republic Act No. 9136,
limited to: otherwise known as the "Electric Power Industry
a. Civil Aeronautics Board (CAB); Reform Act of 2001," as amended. (PSA, RA 11659,
b. Civil Aviation Authority of the Philippines Sec. 2)
(CAAP);
c. Department of Energy (DOE); Transmission of Electricity
d. Department of Environment and Natural Refers to the conveyance of electricity through the
Resources (DENR); high voltage backbone system, as defined by
e. DICT; Section 4 (ccc) of Republic Act No. 9136, as
f. Department of Transportation (DOTr); amended. (PSA, RA 11659, Sec. 2)
g. Energy Regulatory Commission (ERC);
h. Land Transportation Franchising and Petroleum and Petroleum Products Pipeline
Regulatory Board (LTFRB); Transmission Systems
i. Land Transportation Office (LTO); Refers to the operation and maintenance of pipeline
j. Local Water Utilities Administration transmission systems to ensure an uninterrupted
(LWUA); and adequate supply and transmission of petroleum
k. Maritime Industry Authority (MARINA); and petroleum products to the public; and excludes
l. Metropolitan Waterworks and Sewerage petroleum pipeline systems
System (MWSS); a. operated exclusively for private or own use,
m. National Telecommunications Commission or;
(NTC); b. incidental to the operations of a distinct
n. National Water Resources Board (NWRB); business. (PSA, RA 11659, Sec. 2)
o. Philippine National Railways (PNR);
p. Philippine Ports Authority (PPA); and

ATENEO CENTRAL
Water Pipeline Distribution Systems and • All concessionaires, joint ventures and
Wastewater Pipeline Systems, including other similar entities that wholly operate,
sewerage pipeline systems manage or control for public use the sectors
Refer to the operation and maintenance of water above are public utilities. (PSA, RA 11659,
pipeline distribution systems to ensure an Sec. 4)
uninterrupted and adequate supply and distribution • Legislative franchise is not the only mode
of potable water for domestic and other purposes of authorization to operate a public utility.
and the operation and maintenance of wastewater Nothing in Article XII, Section 11of the
pipeline systems, except desludging companies and Constitution implies that only the Congress
septic tanks, to ensure public health and safety, as has the authority to grant such
regulated by Republic Act No. 6234, entitled "An Act authorization. (Albano v. Reyes, G.R. No.
Creating the Metropolitan Waterworks and 83551, 11 July 1989)
Sewerage System and Dissolving the National • It is not the ownership but the operation of
Waterworks and Sewerage Authority; and for Other the facilities used to provide the public
Purposes," as amended, and Presidential Decree service that vests the status as public utility.
No. 198, otherwise known as the "Provincial Water (Tatad v. Garcia Jr., G.R. No. 114222, 06
Utilities Act of 1973," as amended. (PSA, RA 11659, August 1995)
Sec. 2) • Manila Water and Maynilad are public
utilities. They are privately owned and
Seaports operated business entities engaged in
Refers to a place where ships may anchor or tie up regularly supplying water-the most basic of
for the purpose of shelter, repair, loading or all necessities or human survival. As
discharge of passengers or cargo, or for other such provided in the Concession Agreements,
activities connected with water-borne commerce, they are to serve an indefinite public, at
and including all the land and water areas and the least within their respective service areas.
structures, equipment and facilities related to these o Manila Water and Maynilad
functions, as defined by the charters of relevant contend that they are not public
authorities or agencies, such as the Philippine Ports utilities but rather they are mere
Authority, Subic Bay Metropolitan Authority, "contractors" and "agents" bases
PHIVIDEC Industrial Estate Authority, Cebu Port on the Concession Agreements
Authority, local government units, and other similar with Metropolitan Waterworks and
agencies or government bodies. (PSA, RA 11659, Sewerage System (MWSS), the
Sec. 2) public utility and legislative
franchise holder. The Court held
Public Utility Vehicles that that the legislative franchise of
Refer to internal combustion engine vehicles that MWSS did not prevent the
carry passengers and/or domestic cargo for a fee, declaration of Manila Water and
offering services to the public, namely trucks-for- Maynilad's status as public
hire, UV express service, public utility buses utilities. (Maynilad Water Services,
(PUBs), public utility jeepneys (PUJs), tricycles, Inc. v. National Water and
filcabs, and taxis. (PSA, RA 11659, Sec. 2) Resources Board, G.R. 181764,
16 May 2023)
Note:
• Transport vehicles accredited with and Note: Nothing in the PSA shall be interpreted as a
operating through transport network requirement for legislative franchise where the law
corporations shall not be considered as does not require any. No other person shall be
public utility vehicles. (PSA, RA 11659, deemed a public utility unless otherwise
Sec. 2) subsequently provided by law. (PSA, RA 11659,
• Generation of electricity shall not be Sec. 4)
considered a public utility operation. (Sec.
1 Rule 5, Rules and Regulations d. Recommendatory Power of the
Implementing RA 9136, “Electric Power President to Congress
Industry Reform Act of 2001”) Upon the recommendation of the National Economic
• Supply of electricity shall not be considered and Development Authority (NEDA), the President
public utility operation. (Sec. 29, RA 9136, may recommend to Congress the classification of a
“Electric Power Industry Reform Act of public service as a public utility on the basis of the
2001”) following criteria: (ReNa-NeO)

ATENEO CENTRAL
a. The person or juridical entity Regularly operational resiliency at risk. (PSA, RA 11659, Sec.
supplies and transmits and distributes to 4)
the public through a network a commodity
or service of public consequence; D. UNLAWFUL ACTS
b. The commodity or service is a Natural It shall be unlawful for any public service: (ProM-
monopoly that needs to be regulated when C-Urge)
the common good so requires; 1. To Provide or maintain any service that is
unsafe, improper, or inadequate, or
Note: natural monopoly exists when the market withhold or refuse any service which
demand for a commodity or service can be supplied can reasonably be demanded and
by a single entity at a lower cost than by two or more furnished, as found and determined by the
entities. Commission in a final order which shall be
conclusive and shall take effect in
c. The commodity or service is Necessary for accordance with the PSA, upon appeal or
the maintenance of life and occupation of otherwise. (PSA, CA 146 as amended,
the public; and Sec. 19)
d. The commodity or service is Obligated to
provide adequate service to the public on 2. To Make or give, directly or indirectly, by
demand. (PSA, RA 11659, Sec. 4) itself or through its agents, attorneys or
brokers, or any of them, discounts or
Note: All public services, including those classified rebates on authorized rates, or
as public utilities under the PSA, shall continue to be
regulated and supervised by the relevant grant credit for the payment of freight
Administrative Agencies under existing laws. (PSA, charges, or any undue or unreasonable
RA 11659, Sec. 4) preference or advantage to any person or
corporation or to any locality or to any
Note: A public service which is not classified as a particular description of traffic or service, or
public utility under the PSA shall be considered a
business affected with public interest for subject any particular person or corporation
purposes of Sections 17 and 18 of Article XII of the or locality or any particular description of
Constitution. (PSA, RA 11659, Sec. 4) traffic to any prejudice or disadvantage in
any respect whatsoever; or
Under Section 17 of Article XII of the 1987
Constitution, the State may in times of national adopt, maintain, or enforce any regulation,
emergency, when the public interest so requires, practice or measurement which shall be
during the emergency and under reasonable terms found or determined by the Commission to
prescribed by it, temporarily take over or direct the be unjust, unreasonable, unduly
operation of any privately-owned public utility or preferential or unjustly discriminatory, in a
business affected with public interest. (Sec. 17, final order which shall be conclusive and
Article XII, 1987 Constitution) shall take effect in accordance with the
PSA, upon appeal or otherwise. (PSA, CA
Under Section 18 of Article XII of the 1987 146 as amended, Sec. 19)
Constitution, the State may, in the interest of
national welfare or defense, establish and operate 3. To refuse or neglect, when requested by
vital industries and, upon payment of just the Postmaster General or his authorized
compensation, transfer to public ownership utilities representative, to Carry public mail on the
and other private enterprises to be operated by the regular trips of any public land
Government. (Sec. 18, Article XII, 1987 transportation service maintained or
Constitution) operated by any such public service . (PSA,
RA 11659, Sec. 19)
NOTE: Nationality requirements shall not be
imposed by the relevant Administrative Agencies on 4. To refuse or neglect, when requested by
any public service not classified as a public utility. the Administrative Agency to Urgently use,
(PSA, RA 11659, Sec. 4) deliver or render the public service for the
purpose of avoiding further loss on human,
NOTE: The NEDA shall provide periodic advice to material, economic, or environment during
Administrative Agencies on the proper application of a state of calamity. (PSA, RA 11659, Sec.
the constitutional and other legal restrictions to local 19)
and foreign-owned subcontractors, without putting

ATENEO CENTRAL
E. POWERS OF THE PRESIDENT TO G. RECIPROCITY CLAUSE

SUSPEND OR PROHIBIT
TRANSACTION OR INVESTMENT a. Ownership of Capital Entities
Engaged in Operation and
In the interest of national security, the President, Management of Critical
after review, evaluation and recommendation of the Infrastructures
relevant government department or Administrative
Agency, may, within sixty (60) days from the receipt GR: Foreign nationals shall not be allowed to own
of such recommendation, suspend or prohibit any more than fifty percent (50%) of the capital entities
proposed merger or acquisition transaction, or any engaged in the operation and management of
investment in a .public service that effectively results critical infrastructures.
in the grant of control, whether direct or indirect, to XPN: If the country of such foreign national accords
a foreigner or a foreign corporation. (PSA, RA reciprocity to Philippine Nationals as may be
11659, Sec. 23) provided by foreign law, treaty or international
agreement. (PSA, RA 11659, SEC. 25)
The Philippine Competition Commission (PCC) may
be consulted on all matters relating to mergers and Reciprocity may be satisfied by according rights of
acquisitions. similar value in other economic sectors.
b. Employment of Foreign National

F. INVESTMENTS BY AN ENTITY
CONTROLLED BY OR ACTING GR: A public service shall employ a foreign national
BEHALF OF THE FOREIGN only after the determination of non-availability of a
GOVERNMENT OR FOREIGN STATE- Philippine National who is competent, able and
OWNED ENTERPRISES willing to perform the services for which the foreign
national is desired.
An entity controlled by or acting on behalf of the
foreign government or foreign state-owned XPN: Unless otherwise provided by law, or by any
enterprises shall be prohibited from owning capital international agreement. (PSA, RA 11659, SEC. 25)
in any public service classified as public utility or
critical infrastructure: Provided that c. Employment Permit
a. the prohibition shall apply only to
investments made after the effectivity Any foreign national seeking admission to the
of RA 11659; Philippines for employment purposes and any public
b. That foreign state-owned enterprises service which desires to engage a foreign national
which own capital prior to the effectivity for employment in the Philippines must obtain an
of RA 11659 are prohibited from employment permit pursuant to Presidential Decree
investing in additional capital upon the No. 442, otherwise known as the "Labor Code of the
effectivity of this Act; Philippines," as amended. (PSA, RA 11659, SEC.
c. notwithstanding the immediately 25)
preceding clause, the sovereign wealth
funds and independent pension funds d. Understudy/skills Development
of each state may collectively own up Program
to thirty percent (30%) of the capital of
such public services. (PSA, RA 11659, Public services employing foreign nationals issued
Sec. 24) employment permits in industries to be determined
by the Department of Labor and Employment
In the interest of national security, an entity (DOLE) shall implement an understudy/skills
controlled by or acting on behalf of the foreign development program to ensure the transfer of
government or foreign-owned enterprises shall not technology/skills to Filipinos, whether next-in-rank
make any data or information disclosure, nor extend or otherwise, with the potential of succeeding the
assistance, support or cooperation to any foreign foreign national in the same establishment or its
government, instrumentalities or agents. subsidiary, within a specific period as may be
determined by the DOLE, upon consultation with
relevant government agencies and industry experts.
(PSA, RA 11659, SEC. 25)

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Entities controlled by or GR: May own capital of

acting on behalf of the entities engaged in the
CAPITAL OWNERSHIP
foreign government or operation and
FOREIGN FOREIGN NATIONALS
foreign state-owned management of capital
GOVERNMENTS
enterprises are infrastructures
PUBLIC UTILITY
prohibited from owning amounting to not more
Entities controlled by or No franchise, certificate, capital in any public than fifty percent (50%)
acting on behalf of the or any other form of service classified as
foreign government or authorization for the public utility or critical XPN: Country of foreign
foreign state-owned operation of a public infrastructure provided national accords
enterprises are utility shall be granted that: reciprocity to Philippine
prohibited from owning except to citizens of the a. It shall apply only nationals as provide by
capital in any public Philippines or to to investments foreign law, treaty, or
service classified as corporations or made after the international
public utility or critical associations organized effectivity of this agreements (PSA, RA
infrastructure, provided under the laws of the Act 11659, SEC. 25)
that: Philippines, at least b. Foreign state-
a. It shall apply only sixty per centum of owned
to investments whose capital is enterprises
made after the owned by such owning capital
effectivity of this citizens; nor shall such prior to the
Act franchise, certificate, or effectivity are
b. Foreign state- authorization be prohibited from
owned exclusive in character or investing
enterprises for a longer period than additional capital
owning capital fifty years. Neither shall c. Sovereign wealth
prior to the any such franchise or funds and
effectivity are right be granted except independent
prohibited from under the condition that pension funds of
investing it shall be subject to each state may
additional capital amendment, alteration, collectively own
c. Sovereign wealth or repeal by the up to thirty
funds and Congress when the percent (30%) of
independent common good so the capital of such
pension funds of requires. The State shall public services
each state may encourage equity
collectively own participation in public
up to thirty utilities by the general
percent (30%) of public. The participation
--end of topic--
the capital of such of foreign investors in
public services the governing body of
(PSA, RA 11659, any public utility
SEC. 24) enterprise shall be
limited to their
proportionate share in
its capital, and all the
executive and
managing officers of
such corporation or
association must be
citizens of the
Philippines.
(Sec. 11, Article XII,

1987 Constitution)
CRITICAL INFRASTRUCTURE

2023 - BLUE NOTES - Commercial Law

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This material is an intellectual creation of the Ateneo Central Bar Operations 2023

Dean Lily K. Gruba

ATENEO CENTRAL BAR OPERATIONS 2023

Kim Patriz B. Campanilla

Marc Angelo M. Guibone

Jessa Angelica A. Lat

Donn Darrick L. Lin

Atty. Roel A. Refran

Sheryl Eve E. Alano

Jose Rafael S. Lasala

Crisandra Amores Angelique P. Leda

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D. ANTI-MONEY LAUNDERING ACT .................................................................................................. 127

IV. TRANSPORTATION LAW…………………………………………………………………………………………173

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B. VIGILANCE OVER GOODS ............................................................................................................. 178

V. INTELLECTUAL PROPERTY CODE……………………………………………………………………………...199

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3. Non-Copyrightable Works .............................................................................................................. 218

VI. ELECTRONIC COMMERCE ACT…………………………………………………………………..…………….224

VII. FOREIGN INVESTMENTS ACT (RA 7042, as amended by RA 11647) ………………………………….230

VIII. PUBLIC SERVICE ACT…………………………………………………………………………………………..240

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a. General Powers; Theory of General

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m. Special Fact Doctrine (2) Treatment of Profits

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A. PARTNERHSIPS d. Rules To Determine Existence

1. General Provisions General Rule

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immovable property or real rights are e. Partnership Term

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2. General v. Limited Partnership

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Partner is Power is CODE, Art.

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(b) For profits:

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The conveyance was a. Causes Of Dissolution (CIVIL

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d. Rights of Partner where Assets of the partnership

Order of Application of Assets

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Upon the partnership’s dissolution, the withdrawing

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b. General Partners V. Limited h. Time, if agreed upon, to return contribution of

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ii. Right to inspect/copy books at reasonable that stated in the certificate as

i. All liabilities of partnership have been h. Dissolution Of Limited

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i. Amendment Of Certificate Of Note: Any person who suffers loss by reliance on

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1. Receive or hold as collateral any B. CORPORATIONS