Mercantile 2012 Start

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BAR REVIEWER
UP LAW
2012
Letters of Credit
Warehouse Receipts Law
Trust Receipts Law
Negotiable Instruments Law
Insurance Code
Transportation Law
Corporation Law
Securities Regulation Code
Banking and Finance
Intellectual Property Law
LAW
Dean Danilo L. Concepcion
Dean, UP College of Law

Prof. Concepcion L. Jardeleza
Associate Dean, UP College of Law

Prof. Ma. Gisella D. Reyes
Secretary, UP College of Law

Prof. Florin T. Hilbay
Faculty Adviser, UP Law Bar Operations
Commission 2012

Ramon Carlo F. Marcaida
Commissioner

Eleanor Balaquiao
Mark Xavier Oyales
Academics Committee Heads

Anna Katarina Rodriguez
Mickey Chatto
Mercantile Law Subject Heads

Graciello Timothy Reyes
Layout

UP LAW BAR OPERATIONS COMMISSION

MERCANTILE LAW REVIEWER
2

BAR REVIEWER
UP LAW
2012
BAR OPERATIONS COMMISSION 2012

EXECUTIVE COMMITTEE
Ramon Carlo Marcaida |Commissioner
Raymond Velasco Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor

COMMITTEE HEADS
Eleanor Balaquiao Mark Xavier Oyales|Acads
Monique Morales Katleya Kate Belderol Kathleen Mae
Tuason (D) Rachel Miranda (D) |Special Lectures
Patricia Madarang Marinella Felizmenio |Secretariat
Victoria Caranay |Publicity and Promotions
Loraine Saguinsin Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo Jose Lacas |Logistics
Angelo Bernard Ngo Annalee Toda|HR
Anne Janelle Yu Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo Katrina Maniquis |Mock Bar
Krizel Malabanan Karren de Chavez |Bar Candidates Welfare
Karina Kirstie Paola Ayco Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano Katrina Rivera |Hotel Operations
Marijo Alcala Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva Charlaine Latorre |Food
Kris Francisco Rimban Elvin Salindo |Transpo
Paula Plaza |Linkages

LAW
MERCANTILE LAW TEAM 2012
Subject Heads | Anna Katarina Rodriguez
Mickey Chatto

LAYOUT TEAM 2012
Layout Artists | Alyanna Apacible Noel
Luciano RM Meneses Jenin Velasquez
Mara Villega
s Naomi Quimpo Leslie Octaviano Yas
Refran Cris Bernardino
Layout Head| Graciello Timothy Reyes

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LAW

2012 UP Law Bar Reviewer
Copyright and all other relevant rights over this
material are owned jointly by the University of the
Philippines College of Law and the Student Editorial
Team.

The ownership of the work belongs to the University of
the Philippines College of Law. No part of this book
shall be reproduced or distributed without the consent
of the University of the Philippines College of Law.

All Rights reserved.

4

Letters of Credit

A. Definition/Concept ................. 11
B. Governing laws ...................... 11
C. Nature of letter of credit .......... 11
D. Parties to a letter of credit ....... 12
E. Basic Principles of letter of credit 12

Warehouse Receipts Law

A. Nature and Functions of a
Warehouse Receipt ....................... 14
B. Duties of a Warehouseman ........ 15
C. Warehousemans Lien .............. 16

Trust Receipts Law
A. Definition/Concept of a Trust
Receipt Transaction ...................... 17
B. Rights of the Entruster ............. 18
C. Obligations and Liability of the
Entrustee .................................. 18
D. Remedies available ................. 18

Negotiable Instruments Law ......... 20

I. FORMS AND INTERPRETATION ......... 20
A. Requisites of Negotiability ........ 20
1. In writing and signed by the
maker or drawer ....................... 20
2. Containing an unconditional
promise to pay or order to pay ...... 20
3. Sum payable must be certain .. 21
4. Payable in money ................ 21
5. Payable on demand, or at a fixed
or determinable future time ......... 21
6. Payable to order or to bearer .. 22
7. If bill of exchange, drawee must
be named or designated with
reasonable certainty .................. 22
B. Kinds of Negotiable Instrument ... 23

II.Completion and delivery
................................................. 23
A. Insertion of Date (Sec. 13) ........ 23
B. Completion of Blanks .............. 23
C. Incomplete and Undelivered
Instruments (Sec. 15) .................... 24
D. Complete and Undelivered
Instruments (Sec. 16) .................... 24

III.Rules of interpretation
................................................. 24
IV. ..................................... Signature
................................................. 24
A. Signing in Trade Name ............. 24
B. Signature of Agent .................. 24
C. Indorsement by Minor or
Corporation ................................ 25
D. Forgery ............................... 25

V. ............................... Consideration
................................................. 27

VI.Accommodation party
................................................. 27

VII.Negotiation .............................. 27
A. Negotiation Distinguished from
Assignment ................................. 27
B. Modes of Negotiation ............... 27
1. By Delivery - If payable to bearer
(Sec. 30) ................................. 27
2. By Indorsement completed by
Delivery - If payable to order (Sec. 30)
28
3. Other Kinds of Indorsement .... 29

VIII.Rights of the Holder ................... 29
A. Holder in Due Course (HDC) ....... 29
B. Defenses against the Holder ...... 31

IX.Liabilities of Parties
................................................. 31
A. Parties Primarily Liable (Sec. 60 and
62) 31
B. Parties Secondarily Liable ......... 31
C. Warranties ........................... 32

X.Presentment for Payment
................................................. 33
A. Necessity of presentment for
payment .................................... 33
B. Parties to whom presentment for
payment should be made ................ 33
C. Dispensation with presentment for
payment .................................... 33
D. Dishonor by non-payment .......... 33

XI.Notice of Dishonor
................................................. 33
A. Parties to be notified .............. 33
B. Parties who may give notice of
dishonor .................................... 34
C. Effect of notice ..................... 34
D. Form of notice (Sec. 96) ........... 34
E. Waiver ................................ 34
F. Dispensation with notice ........... 34

5
G. Effect of failure to give notice ... 34

XII. Discharge of Negotiable Instrument 34
A. Discharge of negotiable instrument
34
B. Discharge of parties secondarily
liable ....................................... 35
C. Right of party who discharged
instrument ................................. 35
D. Renunciation by holder (Sec. 122) 35

XIII.Material alteration
................................................. 35
A. Concept .............................. 35
B. Effect of material alteration ...... 35

XIV. ................................ Acceptance
................................................. 36
A. Definition ............................ 36
B. Manner ............................... 36
C. Time for acceptance (Sec. 136) .. 36
D. Rules governing acceptance....... 36

XV. Presentment of Acceptance ......... 36
A. Time/place/manner of present-
ment ........................................ 37
B. Effect of failure to make
presentment (Sec. 144) .................. 37
C. Dishonor by non-acceptance ...... 37

XVI.Promissory Notes
................................................. 37

XVII. ..................................... Checks
................................................. 37
A. Definition ............................ 37
B. Kinds .................................. 37
C. Presentment for payment............ 38
1. Time ............................... 38
2. Effect of delay ................... 38

Insurance Code ................... 39

I.Concept of Insurance
................................................. 40

II.Elements of an Insurance Contract
................................................. 40

III.Characteristics/Nature of Insurance
Contracts ..................................... 41

IV. ........................................ Classes
................................................. 42
V.Insurable Interest
................................................. 45
A. In Life/Health ....................... 46
B. In Property ........................... 47
C. Double Insurance and Over
Insurance ................................... 48
D. Multiple or Several Interests on Same
Property [Secs. 8, 9] ..................... 49

VI.Perfection of the Contract of Insurance
................................................. 49

VII. Rescission of Insurance Contracts .... 52

VIII. Claims Settlement and Subrogation . 55

Transportation Law ............ 59

I.Common Carriers
................................................. 60
A. Diligence Required of Common
Carriers ..................................... 60
B. Liabilities of Common Carriers .... 61

II.Vigilance over goods
................................................. 61
A. Exempting Causes ................... 61
1. Requirement of Absence of
Negligence .............................. 62
2. Absence of Delay ................. 62
3. Due diligence to prevent or
lessen the loss .......................... 62
B. Contributory negligence ........... 62
C. Duration of liability ................. 62
1. Delivery of goods to common
carrier ................................... 63
2. Actual or constructive delivery 63
3. Temporary unloading or storage
63
D. Stipulation for limitation of liability
63
1. Void stipulations ................. 63
2. Limitation of liability to fixed
amount .................................. 64
3. Limitation of liability in absence
of declaration of greater value ...... 64
E. Liability for baggage of passengers
(asked in 97 and 98) ...................... 64
1. Checked-in baggage ............. 64
2. Baggage in possession of
passengers .............................. 65

III. Safety of Passengers ................... 65
A. Void stipulations .................... 65

6
B. Duration of liability ................ 65
1. Waiting for carrier or boarding of
carrier ................................... 65
2. Arrival at destination ........... 66
C. Liability for acts of others ......... 66
1. Employees ........................ 66
2. Other passengers and strangers 66
D. Extent of liability for damages ... 67

IV.Bill of Lading
................................................. 67
A. Three-fold character ............... 67
B. Delivery of goods ................... 67
1. Period for delivery ............... 67
2. Delivery without surrender of bill
of lading ................................ 67
3. Refusal of consignee to take
delivery ................................. 68
C. Period for filing claims ............. 68
D. Period for filing actions ............ 68

V.Maritime Commerce
................................................. 68
A. Charter Parties ...................... 68
1. Bareboat/Demise Charter ...... 68
2. Time Charter ..................... 69
3. Voyage/Trip Charter ............ 69
B. Liability of Shipowners and Shipping
Agents ...................................... 69
1. Liability for acts of captain .... 69
2. Exceptions to limited liability . 69
C. Accidents and Damages in Maritime
Commerce ................................. 70
1. General Average ................. 70
2. Collisions (Asked in 95 and 98 Bar
Exams) .................................. 71
D. Carriage of Goods by Sea Act
(Commonwealth Act No. 65) ............ 72
1. Application ....................... 72
2. Notice of Loss or Damage ....... 72
3. Period of Prescription (Asked in
92, 95, 00 and 04 Bar Exams) ........ 72
4. Limitation of liability ........... 72

VI.Public Service Act
................................................. 73
A. Definition of public utility (Asked in
92, 93, 95, 98 and 00) ................... 73
B. Necessity for certificate of public
convenience ............................... 73
1. Requisites for issuance of CPC . 74
2. Prior operator rule .............. 74
C. Fixing of rate ........................ 75
1. Rate of return .................... 75
2. Exclusion of income tax as
expense ................................. 75
D. Unlawful arrangements ............ 75
1. Boundary system ................. 75
2. Kabit system (Asked in 90 and 05)
76
E. Approval of sale, encumbrance or
lease of property ......................... 76

VII.The Warsaw Convention
................................................. 77
A. Applicability ......................... 77
B. Liability of Carrier for Damages .. 77
C. Limitation of Liability .............. 77
1. Liability to passengers .......... 77
2. Liability for checked baggage .. 77
3. Liability for hand-carried baggage
77
D. Willful misconduct .................. 77

Corporation Law ......................... 79

I.Corporation, defined
................................................. 80

II.Classification of corporations
................................................. 80
A. Stock Corporation (Asked in 01 and
04) 80
B. Non-stock Corporation (Asked in 04)
80
C. Other Classification ................. 81

III.Nationality of corporations
................................................. 81
A. Control Test ......................... 81
B. The Grandfather Rule .............. 82

IV. Corporate juridical personality ...... 82
A. Doctrine of Separate Juridical
Entity (Asked in 95, 96, 99 and 00) .... 82
1. Liability for torts and crimes ... 82
2. Recovery of damages ............ 82
B. Doctrine of piercing the corporate
veil (Asked in 91, 01 and 04) ............ 82
1. Grounds for application of
doctrine ................................. 82
2. Test in determining applicability
83

V. Capital structure ........................ 83
A. Number and Qualifications of
Incorporators .............................. 83

7
1. Definition ......................... 83
2. Requirements (Sec. 10) ......... 83
B. Minimum Capital Stock and
Subscription Requirements .............. 84
C. Corporate Term ..................... 84
D. Classification of Shares ............ 84

VI. Incorporation and organization
................................................. 86
A. Promoter ............................. 86
1. Liability of Promoter ............ 86
2. Liability of Corporation for
Promoters Contract .................. 86
B. Subscription Contract .............. 86
C. Pre-incorporation Subscription
Agreements ................................ 87
D. Consideration for Stocks ........... 87
E. Articles of Incorporation ........... 87
1. Contents (Sec. 14) ............... 87
2. Non-amendable items ........... 88
F. Corporate Name limitations on use
of corporate name ....................... 89
G. Registration and Issuance of
Certificate of Incorporation ............. 89
H. Election of Directors or Trustees . 89
I. Adoption of By-Laws ............... 90

VII. Corporate powers ..................... 90
A. General powers, theory of general
capacity (Sec. 36) ........................ 90
B. Specific powers, theory of specific
capacity .................................... 91
1. Power to extend or shorten
corporate term ......................... 91
2. Power to increase or decrease
capital stock or incur, create,
increase bonded indebtedness....... 91
3. Power to deny pre-emptive rights
91
4. Power to sell or dispose of
corporate assets ....................... 91
5. Power to acquire own shares .. 91
6. Power to invest corporate funds
in another corporation or business .. 91
7. Power to declare dividends .... 91
8. Power to enter into management
contract ................................. 91
9. Ultra vires acts (Sec. 45) ....... 93
10. Doctrine of individuality of
subscription ............................ 93
11. Doctrine of equality of shares
93
12. Trust fund doctrine ........... 94
C. How Exercised ....................... 94
1. By the Shareholders ............. 94
2. By the Board ...................... 94
3. By the Officers ................... 95

VIII. Stockholders and members ......... 95
A. Fundamental Rights of a
Stockholder ................................ 95
B. Participation in Management...... 95
1. Proxy ............................... 95
2. Voting Trust ....................... 95
3. Cases When Stockholders Action
is Required .............................. 96
C. Proprietary Rights .................. 98
1. Right to Dividends ............... 98
2. Right of Appraisal ................ 99
3. Right to Inspect .................. 99
4. Preemptive Right ...............100
5. Right to Vote ....................100
D. Remedial Rights ....................100
1. Individual Suit ...................100
2. Representative Suit .............100
3. Derivative Suit ...................101
E. Obligations of a Stockholder .....101
F. Meetings .............................102
1. Regular or Special...............102
2. Who Calls the Meetings ........102
3. Quorum (Sec. 50) ...............102
4. Minutes of Meetings ............103

IX.Board of directors and trustees
............................................... 103
A. Repository of Corporate Powers .103
B. Tenure, Qualifications and
Disqualifications of Directors ..........104
C. Elections (Sec. 24) .................104
D. Removal (Sec. 28) .................105
E. Filling of Vacancies (Sec.29) .....105
F. Compensation (Sec. 30) ...........105
G. Disloyalty ............................105
H. Business Judgment Rule ..........106
I. Solidary Liability for Damages ...106
J. Liability for Watered Stocks ......106
K. Personal Liabilities ................106
L. Responsibility for Crimes .........107
M. Special Facts Doctrine ............107
N. Inside Information .................107
O. Contracts ............................107
1. By self-dealing directors with the
corporation ............................107
2. Between corporations with
interlocking directors ................107
P. Executive Committee .............108
1. Creation ..........................108
2. Limitations on its Powers ......108

8
Q. Meetings ............................ 108
1. Regular or Special .............. 108
2. Who Presides (Sec. 54) ......... 108
3. Quorum (Sec. 25) ............... 108
4. Rule on Abstention ............. 108

X. Capital affairs .......................... 109
A. Certificate of Stock ............... 109
1. Nature of the Certificate ...... 109
2. Uncertificated Shares .......... 109
3. Negotiability ..................... 109
4. Issuance .......................... 109
5. Stock and Transfer Book (Sec. 74,
par. 4) .................................. 110
6. Lost or Destroyed Certificates
(Sec. 73) ............................... 110
7. Situs of the Shares of Stock ... 110
B. Watered Stocks .................... 110
1. Definition ........................ 110
2. Liability of Directors for Watered
Stocks .................................. 110
3. Trust Fund Doctrine for Liability
for Watered Stocks ................... 110
C. Payment of Balance of Subscription
(Sec. 66 & 67) ............................ 111
1. Call by Board of Directors ..... 111
2. Notice Requirement ............ 111
D. Sale of Delinquent Shares (Sec. 68)
111
1. Effect of Delinquency (Sec. 71)
111
2. Call by Resolution of the Board of
Directors (Sec. 68).................... 111
3. Notice of Sale ................... 111
4. Auction Sale ..................... 111
E. Alienation of Shares ............... 112
1. Allowable Restrictions on the
Sale of Shares ......................... 112
2. Sale of Partially Paid Shares .. 112
3. Sale of a Portion of Shares not
Fully Paid .............................. 112
4. Sale of All of Shares Not Fully
Paid 112
5. Sale of Fully Paid Shares ....... 112
6. Requisites of a Valid Transfer . 112
7. Involuntary Dealings ............ 113

XI. Dissolution and liquidation ......... 113
A. Modes of Dissolution .............. 113
1. Voluntary ........................ 113
2. Involuntary....................... 114
B. Methods of Liquidation ........... 114
1. By the Corporation Itself ...... 114
2. Conveyance to a Trustee within a
3-Year Period .......................... 115
3. By Management Committee or
Rehabilitation Receiver ..............115
4. Liquidation after Three Years .115

XII.Other corporations
............................................... 115
A. Close Corporations (Corporation
Code, Title XII) ...........................115
1. Characteristics of a Close
Corporation ............................116
2. Validity of Restrictions on
Transfer of Shares ....................116
3. Issuance or Transfer of Stock in
Breach of Qualifying Conditions ....116
4. When Board Meeting is
Unnecessary or Improperly Held ....116
5. Preemptive Right ...............117
6. Amendment of Articles of
Incorporation ..........................117
7. Deadlocks ........................117
B. Non-Stock Corporations
(Corporation Code, Title XI)............119
1. Definition ........................119
2. Purposes (sec. 88) ..............119
3. Treatment of Profits............119
4. Distribution of Assets Upon
Dissolution .............................119
C. Religious Corporations ............119
1. Corporation Sole (Sec. 110) ...119
D. Foreign Corporations ..............120
1. Bases of Authority Over Foreign
Corporations ...........................120
2. Necessity of a License to Do
Business ................................120
3. Personality to Sue ...............121
4. Suability of Foreign Corporations
121
5. Instances When Unlicensed
Foreign Corporations May Be Allowed
to Sue ...................................121
6. Grounds for Revocation of
License .................................121

XIII. Merger and consolidation .......... 122
A. Definition and Concept (Corporation
Code, Title IX) ............................122
B. Constituent v. Consolidated
Corporation ...............................122
C. Plan of Merger or Consolidation
(Sec. 76) ..................................122
D. Articles of Merger or Consolidation
(Sec. 78) ..................................122
E. Procedure ...........................122
F. Effectivity ...........................123
G. Limitations ..........................123

9
H. Effects ............................... 123

Securities Regulation Code ......... 124

I.State policy
............................................... 125
II.Powers and functions of the SEC
............................................... 125
A. Under the SRC ...................... 125
B. Under PD 902-A .................... 125
C. Under the Corporation Code ..... 126
III.Securities required to be registered
............................................... 126
IV.Procedure for registration of securities
............................................... 127
V.Prohibitions on fraud, manipulation
and insider trading ....................... 128
A. Manipulation of security prices .. 128
B. Short sales .......................... 129
C. Fraudulent transactions .......... 129
D. Insider trading ..................... 129
VI.Protection of investors
............................................... 130
A. Tender offer rule .................. 130
B. Rules on proxy solicitation ....... 130
C. Disclosure rule ..................... 130
VII. Civil liability .......................... 131
A. Civil Liabilities on Account of False
Registration Statement (Sec. 56) ..... 131
B. Civil Liabilities Arising in
Connection With Prospectus,
Communications and Reports (Sec. 57)
132
1. Liability of Sellers/Offerors ... 132
2. Liability of Makers of False
Misleading Statements ............... 132
C. Civil Liability of Fraud in
Connection with Securities Transactions
(Sec. 58) .................................. 132
D. Civil Liability for Manipulation of
Security Prices (Sec. 59) ................ 132
E. Civil Liability with Respect to
Commodity Futures Contracts and Pre-
need Plans (Sec. 60) .................... 132
F. Civil Liability on Account of Insider
Trading .................................... 132
1. Liability for non-disclosure .... 132
2. Liability for communicating non-
public information about issuer .... 133
G. Liabilities of Controlling Persons,
Aider and Abettor and Other Secondary
Liability ................................... 133
1. Liability of Controlling Persons
133
2. Liability of Director/Officer for
Delay in the Filing of Required
Documents .............................133
3. Liability of Aider/Abettor .....133

Banking and Finance .................. 138

I.The New Central Bank Act (RA 7653)
............................................... 139
A. State policies .......................139
B. Salient features of the NCBA .....139
C. Creation of the Bangko Sentral ng
Pilipinas (BSP) ............................139
D. Responsibility and primary
objective ..................................139
E. Monetary Board ....................139
1. Powers and Functions (Sec. 15,
NCBA) ...................................139
2. Composition (Sec. 6, NCBA) ...140
3. Members (Sec. 6, NCBA) .......140
4. Qualifications (Sec. 8, NCBA) .140
5. Disqualifications (Sec. 9, NCBA)
140
6. Prohibitions on members of the
MB (Sec. 9, NCBA) ....................140
7. Grounds for Removal of any
member of the MB (Sec. 10, NCBA) 140
8. Vacancies, how filled (Sec. 7,
NCBA) ...................................140
9. Salaries (Sec. 13, NCBA) .......140
10. Meetings (Sec. 11, NCBA) ...140
11. Civil Liability of Members of
the MB (Sec. 16, NCBA) ..............141
F. How the BSP handles banks in
distress ....................................141
1. Conservatorship .................141
2. Receivership .....................141
3. Liquidation / Closure ...........142
G. How the BSP handles exchange
crisis .......................................142

II.Law on Secrecy of Bank Deposits (RA
1405) ........................................ 143
A. Purpose (Sec. 1) ....................143
B. Prohibited acts (Sec. 3) ...........143
C. Deposits covered (Sec. 2) .........143
D. Exceptions (Sec. 2) ................143
E. Garnishment of deposits ..........145
F. Penalties for violation (Sec. 5) ...146

III.General Banking Law of 2000 (RA
8791) ........................................ 146
A. Policy ................................146

10
B. Definition and classification of
banks ...................................... 146
C. Distinction between banks and
quasi-banks and trust entities ......... 147
D. Bank powers and liabilities ....... 147
E. Diligence required of banks ...... 149
F. Nature of bank funds and bank
deposits ................................... 150
G. Stipulation on interests ........... 150
H. Grant of loans and security
requirements (Prudential measures) . 150
I. Penalties for violation ............ 153

IV. Philippine Deposit Insurance
Corporation Act (RA 3591, as amended)
............................................... 153
A. Basic Policy ......................... 153
B. Concept of Insured Deposits ..... 153
C. Liability of Depositors ............. 154

Chapter V. Foreign Currency Deposit Act
(RA 6426) .................................. 156
A. Confidentiality ..................... 156
B. Privileges ........................... 157

Intellectual Property ................... 158

I. Intellectual Property in general
A. Intellectual Property Rights ...... 159
B. Differences between copyrights,
trademarks and patent ................. 159
C. Technology Transfer Arrangement
160
A. Patentable Inventions ............. 161
B. Non-patentable Inventions ....... 162
C. Ownership of a Patent ............ 162
D. Cancellation of a Patent .......... 163
E. Remedy of the True and Actual
Inventor ................................... 163
F. Rights conferred by a Patent .... 164
G. Limitations on the Rights of
Patentees ................................. 164
H. Patent Infringement ............... 165
I. Licensing ............................ 166
J. Assignment and Transmission of
Rights ...................................... 169

II. Patents
A. Definitions of Marks, Collective
Marks, Trade Names ................. 170
B. Acquisition of Ownership of Marks
170
C. Acquisition of Ownership of Trade
Name ......................................170
D. Non-registrable Marks .............171
E. Tests to Determine Confusing
Similarity between Marks ...............171
F. Well-known Marks ..................172
Determinants (need not concur) ....172
Protection extended to Well-Known
Marks ...................................172
G. Rights Conferred by Registration 173
H. Use by Third Parties of names, etc.
similar to Registered Marks ............173
I. Cancellation of Trademark .......174
J. Infringement and Remedies ......174
K. Unfair Competition ................176
L. Trade Names and Business Names
177
M. Collective Marks ....................178
N. Criminal Penalties .................178

IV. Copyright
A. Basic Principles .....................178
B. Copyrightable Works ..............179
C. Non-copyrightable Works .........179
D. Rights of Copyright Owner ........180
E. Rules on Ownership of Copyright 183
F. Deposit on Copyrightable Materials
184
G. Limitations on Copyright ..........185

V. Registration Flowcharts
A. Patent Application .................190
B. Utility Model and Industrial Design 191
C. Copyright Registration and Deposit 192

11
Letters of Credit
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Securities Regulation
Code
Banking and Finance
Intellectual Property
A. Definition/Concept
B. Governing laws
C. Nature of letter of credit
D. Parties to a letter of credit
E. Basic Principles of letter of credit

A. Definition/Concept

A letter of credit is a written instrument whereby
the writer requests or authorizes the addressee to
pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor
to the addressee (Transfield Philippines v. Luzon
Hydro, 2004).

A letter of credit is an engagement by a bank or
other person made at the request of a customer that
the issuer shall honor drafts or other demands of
payment upon compliance with the conditions
specified in the credit (Prudential Bank v.
Intermediate Appellate Court, 1992).

Its purpose is to substitute for, and support, the
agreement of the buyer-importer to pay money
under a contract or other arrangement, but does not
necessarily constitute as a condition for the
perfection of such arrangement (Reliance
Commodities, Inc. v. Daewoo Industrial Co., Ltd.)

B. Governing laws

The Uniform Customs and Practice (UCP) for
Documentary Credits governs transactions involving
letters of credit.

The provisions of the Code of Commerce on letters
of credit (Art. 567-572) have been repealed.

Letters of Credits have long been and are still
governed by the provisions of the Uniform Customs
and Practice for Documentary Credits of the
International Chamber of Commerce. (Metropolitan
Waterworks and Sewerage System v. Daway, 2004)

We have further observed that there being no
specific provisions which govern the legal
complexities arising from transactions involving
letters of credit not only between or among banks
themselves but also between banks and the seller or
the buyer, as the case may be, the applicability of
the U.C.P. is undeniable. (Bank of America, NT&SA
v. Court of Appeals, 1993)

C. Nature of letter of credit

1. Financial device L/Cs are developed by
merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the
goods before paying. (Bank of America, NT&SA v.
Court of Appeals, 1993)

A letter of credit is one of the modes of payment,
set out in Sec. 8, Central Bank Circular No. 1389,
"Consolidated Foreign Exchange Rules and
Regulations," dated 13 April 1993, by which
commercial banks sell foreign exchange to
service payments for, e.g., commodity imports
(Reliance Commodities v. Daewoo, 1993).

2. Composite of three distinct contracts An L/C
transaction involves three distinct but
intertwined relationships:
(a) First Contract between the party applying for
the L/C (buyer/ importer/ account party) and
the party for whose benefit the L/C is issued
(seller/ exporter/ beneficiary).
(b) Second Contract between the buyer and the
issuing bank. This contract is sometimes
called the "Application and Agreement" or the
"Reimbursement Agreement".
(c) Third Contract between the issuing bank and
the seller, in order to support the contract,
under (a) above (Reliance Commodities v.
Daewoo, 1993).

Types of letters of credit

1. As to the type of the main contract

a. Commercial L/C
The main transaction involves a contract of sale. The
credit is payable upon the presentation by the seller
of documents that show he has taken affirmative
steps to comply with the sales agreement. The
beneficiary of a commercial credit must
demonstrate by documents that he has performed
his contract (Transfield Philippines v. Luzon Hydro,
2004).

b. Standby L/C
Used in non-sale settings. The credit is payable upon
certification of a party's nonperformance of the
agreement. The beneficiary of the standby credit
must certify that his obligor has not performed the
contract. (Transfield Philippines v. Luzon Hydro,
2004).

2. As to revocability

a. Revocable L/C
One which can be revoked by the issuing bank
without the consent of the buyer and seller

b. Irrevocable L/C

12
One which the issuing bank cannot revoke without
the consent of the buyer and seller (Feati Bank and
Trust Co. v. CA, 1991)

3. As to the obligation assumed by correspondent
bank

a. Unconfirmed L/C
One which continues to be the obligation of the
issuing bank

b. Confirmed L/C
One which is supported by the absolute assurance to
the beneficiary that the confirming bank will
undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit
(Feati Bank and Trust Co. v. CA, 1991)

D. Parties to a letter of credit

Bank of America, NT & SA v. Court of Appeals, 1993:
There would be at least three parties to a letter of
credit:

1. Buyer/Exporter/Account Party one who
procures the letter of credit and obliges himself
to reimburse the issuing bank upon receipt of
documents of title.

2. Issuing Bank the bank which undertakes: (1) to
pay the seller upon receipt of the draft and
proper documents of title; and (2) to surrender
the documents to the buyer upon
reimbursement.

The obligation of the issuing bank to pay the
seller is direct, primary, absolute, definite and
solidary with the buyer, in the absence of
stipulation in the letter of credit (Metropolitan
Waterworks and Sewerage System v. Daway,
2004)

3. Seller/Importer/Beneficiary one who ships the
goods to the buyer in compliance with a
contract of sale and delivers the documents of
title and draft to the issuing bank to recover
payment.

Depending on the transaction, the number of parties
to the letter of credit may be increased. Thus, the
different types of correspondent banks:

4. Advising/Notifying Bank the bank which
conveys to the seller the existence of the credit.

The bank assumes no liability except to notify
and/or transmit to the seller the existence of
the letter of credit. A notifying bank is not a
privy to the contract of sale between the buyer
and the seller, its relationship is only with that
of the issuing bank and not with the beneficiary
to whom he assumes no liability.

The bank may suggest to the seller its
willingness to negotiate, but this fact alone does
not imply that the notifying bank promises to
accept the draft drawn under the documentary
credit (Feati Bank and Trust Co. v. CA, 1991).

5. Confirming Bank the bank which lends
credence to the letter of credit issued by a
lesser known issuing bank.

The bank assumes a direct obligation to the
seller and its liability is a primary one as if the
bank itself had issued the letter of credit (Feati
Bank and Trust Co. v. CA, 1991).

6. Negotiating Bank the bank which discounts the
draft presented by the seller.

The bank buys or discounts a draft under the
letter of credit. Its liability is dependent upon
the stage of the negotiation. If before
negotiation, it has no liability with respect to
the seller but after negotiation, a contractual
relationship will then prevail between the
negotiating bank and the seller (Feati Bank and
Trust Co. v. CA, 1991).

7. Paying Bank the bank which undertakes to
encash the drafts drawn by the seller.

E. Basic Principles of letter of
credit

a. Doctrine of independence

The principle of independence assures the seller or
the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not.

Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and/or particular
conditions stipulated in the documents or
superimposed thereon, nor do they assume any
liability or responsibility for the description,
quantity, weight, quality, condition, packing,
delivery, value or existence of the goods
represented by any documents, or for the good faith
or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the
insurers of the goods, or any other person
whomsoever (Transfield Philippines v. Luzon Hydro,
2004; Bank of America, NT&SA v. Court of Appeals,
1993).

Feati v. Court of Appeals, 1991:
The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the
independence of the bank's responsibility from the
contract upon which it was opened. In the second
place, the nature of both contracts is mutually in
conflict with each other. In contracts of guarantee,
the guarantor's obligation is merely collateral and it
arises only upon the default of the person primarily
4

13
liable. On the other hand, in an irrevocable credit
the bank undertakes a primary obligation.

b. Fraud exception principle

The principle that limits the application of the
independence principle only to instances where it
would serve the commercial function of the credit
and not when fraud attends the transaction.

In the case of Transfield Philippines v. Luzon Hydro,
2004, the petitioner alleged misrepresentation as
constituting fraud. The Court, however, made no
ruling as to whether the same indeed constitutes
fraud.

Transfield Philippines v. Luzon Hydro, 2004:
It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the
credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication,
material representations of fact that to his
knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy
available to it.

Citing Dolan's treatise on letters of credit, petitioner
argues that the independence principle is not
without limits and it is important to fashion those
limits in light of the principle's purpose, which is to
serve the commercial function of the credit. If it
does not serve those functions, application of the
principle is not warranted, and the common law
principles of contract should apply.

c. Doctrine of strict compliance

The settled rule in commercial transactions involving
letters of credit which requires that the documents
tendered by the seller must strictly conform to the
terms of the letter of credit.

Otherwise, the issuing bank or the concerned
correspondent bank is not obliged to perform its
undertaking under the contract.

Feati v. Court of Appeals, 1991:
The tender of documents by the beneficiary (seller)
must include all documents required by the letter. A
correspondent bank which departs from what has
been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it
may not thereafter be able to recover from the
buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary.

14
Warehouse
Receipts Law
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
Warehouse Receipt
B. Duties of a Warehouseman
C. Warehousemans Lien

Warehouse Receipt

a. To whom delivered

The warehouseman may deliver the goods to the
following:

(a) The person lawfully entitled to the possession
of the goods, or his agent;

(b) A person who is either himself entitled to
delivery by the terms of a non-negotiable
receipt issued for the goods, or who has
written authority from the person so entitled
either indorsed upon the receipt or written
upon another paper; or

(c) A person in possession of a negotiable receipt
by the terms of which the goods are
deliverable to him or order, or to bearer, or
which has been indorsed to him or in blank by
the person to whom delivery was promised by
the terms of the receipt or by his mediate or
immediate indorser (Sec. 9)

Where a warehouseman delivers the goods to one
who is not in fact lawfully entitled to the possession
of them, the warehouseman shall be liable as for
conversion to all having a right of property or
possession in the goods if he delivered the goods
otherwise than as authorized by subdivisions (b) and
(c) of the preceding section, and though he
delivered the goods as authorized by said
subdivisions, he shall be so liable, if prior to such
delivery he had either:

(a) Been requested, by or on behalf of the person
lawfully entitled to a right of property or possession
in the goods, not to make such deliver; or

(b) Had information that the delivery about to be
made was to one not lawfully entitled to the
possession of the goods.

b. Kinds

a. Negotiable Receipts
A receipt in which it is stated that the goods
received will be delivered to the bearer or to the
order of any person named in such receipt (Sec.5).

Negotiation may be made either by:

i. delivery

(a) Where, by terms of the receipt, the
warehouseman undertakes to deliver the goods
to the bearer, or
(b) Where, by the terms of the receipt, the
warehouseman undertakes to deliver the goods
to the order of a specified person, and such
person or a subsequent indorsee of the receipt
has indorsed it in blank or to bearer (Sec. 37)

ii. indorsement

A negotiable receipt may be negotiated by the
indorsement of the person to whose order the goods
are, by the terms of the receipt, deliverable. Such
indorsement may be in blank, to bearer or to a
specified person. If indorsed to a specified person,
it may be again negotiated by the indorsement of
such person in blank, to bearer or to another
specified person. Subsequent negotiation may be
made in like manner (Sec. 38)

b. Non-Negotiable Receipts

A receipt in which it is stated that the goods
received will be delivered to the depositor or to any
other specified person (Sec. 4).

The indorsement of such receipt gives the transferee
no additional right (Sec. 39)

NOTE
No provision shall be inserted in a negotiable receipt
that it is non-negotiable. Such provision, if
inserted shall be void.

BUT, a non-negotiable receipt shall have plainly
placed upon its face by the warehouseman issuing it
"non-negotiable," or "not negotiable." In case of the
warehouseman's failure so to do, a holder of the
receipt who purchased it for value supposing it to be
negotiable, may, at his option, treat such receipt as
imposing upon the warehouseman the same
liabilities he would have incurred had the receipt
been negotiable (Sec. 7).

c. Distinction between a Negotiable
Instrument and a Negotiable Warehouse
Receipt

Negotiable Instrument Negotiable Warehouse
Receipt
May be issued by anyone
with capacity to contract
May be issued only by a
warehouseman
Must contain all the
requisites under Sec. 1
Must contain all the
essential terms under

15
of the NIL Sec. 2 of the WRL
Subject is sum certain in
money
Subject is goods
Holder has the right to
demand payment
Holder has the right to
demand the delivery of
the goods
The issuer has no lien on
the amount represented
by the instrument
The issuer retains a lien
on the goods

d. Rights of a holder of a negotiable
warehouse receipt as against a transferee of
a non-negotiable warehouse receipt

Rights of Holder of a
Negotiable Warehouse
Receipt
Rights of a Transferee
of Non-Negotiable
Warehouse Receipt
Acquires:

(a) Such title to the
goods as the person
negotiating the receipt
to him had or had ability
to convey to a purchaser
in good faith for value,
and also such title to the
goods as the depositor or
person to whose order
the goods were to be
delivered by the terms
of the receipt had or had
ability to convey to a
purchaser in good faith
for value; and

(b) The direct
obligation of the
warehouseman to hold
possession of the goods
for him according to the
terms of the receipt as
fully as if the
warehouseman and
contracted directly with
him (Sec. 41).
Acquires:

(a) as against the
transferor, the title of
the goods subject to the
terms of any agreement
with the transferor.

(b) the right to notify
the warehouseman of
the transfer to him of
such receipt and thereby
to acquire the direct
obligation of the
warehouseman to hold
possession of the goods
for him according to the
terms of the receipt
(Sec. 42)

NOTE
Prior to the notification
of the warehouseman by
the transferor or
transferee of a non-
negotiable receipt, the
title of the transferee to
the goods and the right
to acquire the obligation
of the warehouseman
may be defeated by the
levy of an attachment or
execution upon the
goods by a creditor of
the transferor or by a
notification to the
warehouseman by the
transferor or a
subsequent purchaser
from the transferor of a
subsequent sale of the
goods by the transferor.
(Sec. 42)

NOTE
If the warehouse receipt is negotiable through
indorsement, the transferee thereof which acquired
the same through mere delivery acquires the right to
compel him to indorse the receipt unless a contrary
intention appears. The negotiation shall take effect
as of the time when the indorsement is actually
made (Sec. 44).

B. Duties of a Warehouseman

1. Duty to deliver to the persons entitled to
delivery as enumerated in Sec. 9

A warehouseman, in the absence of some lawful
excuse provided by this Act, is bound to deliver
the goods upon a demand made either by the
holder of a receipt for the goods or by the
depositor; if such demand is accompanied with:
(a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if
negotiable, with such indorsements as would
be necessary for the negotiation of the
receipt; and
(c) A readiness and willingness to sign, when the
goods are delivered, an acknowledgment
that they have been delivered, if such
signature is requested by the warehouseman
(Sec. 8)

NOTE
Where a warehouseman delivers the goods to one
who is not in fact lawfully entitled to the possession
of them, the warehouseman shall be liable as for
conversion to all having a right of property or
possession in the goods if he delivered the goods
otherwise than as authorized by subdivisions (b) and
(c) of the preceding section, and though he
delivered the goods as authorized by said
subdivisions, he shall be so liable, if prior to such
delivery he had either:
(a) Been requested, by or on behalf of the person
lawfully entitled to a right of property or possession
in the goods, not to make such deliver; or
(b) Had information that the delivery about to be
made was to one not lawfully entitled to the
possession of the goods (Sec. 10)

2. Duty to ensure the existence of goods and the
accurate description thereof in the warehouse
receipt Otherwise, he shall be liable for damages
to the holder of the receipt (Sec. 20)

3. Duty to exercise care over goods A
warehouseman must exercise the degree of care as a
reasonably careful owner would exercise. Otherwise,
he shall be liable for any loss or injury arising from
failure to exercise such care.

4. Duty to keep goods of different depositors, or of
same depositor when his goods are covered by
separate receipts, separate.

Exception: Fungible goods can be commingled
with the same kind, if warehouseman is
authorized by agreement or by custom.

5. Duty to cancel/mark a negotiable receipt when
goods/part of goods are delivered Otherwise, he
shall be liable to anyone who purchases for value in

16
good faith such receipt, for failure to deliver the
goods/all the goods to him, whether such purchaser
acquired title to the receipt before or after the
delivery of the goods by the warehouseman (Secs. 11
and 12)

C. Warehousemans Lien

A warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his hands:
(a) for all lawful charges for storage and
preservation of the goods;
(b) for all lawful claims for money advanced,
interest, insurance, transportation, labor,
weighing, coopering and other charges and
expenses in relation to such goods;
(c) for all reasonable charges and expenses for
notice, and advertisements of sale; and
(d) for sale of the goods where default had been
made in satisfying the warehouseman's lien (Sec.
27)

NOTE
General Rule
A warehouseman shall have lien only for charges for
storage of goods subsequent to the date of the
receipt.

Exception
When the receipt expressly enumerated other
charges provided under Sec. 27 even though the
amounts thereof are not stated in the receipt. (Sec.
30)

However, whether a warehouseman has or has not a
lien upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor for the
collection from the depositor of all charges and
advances which the depositor has expressly or
impliedly contracted with the warehouseman to pay
(Sec. 32).

1. Against what property the lien may be
enforced:
(a) Against all goods, whenever deposited,
belonging to the person who is liable as debtor
for the claims in regard to which the lien is
asserted, and
(b) Against all goods belonging to others which have
been deposited at any time by the person who is
liable as debtor for the claims in regard to
which the lien is asserted if such person had
been so entrusted with the possession of goods
that a pledge of the same by him at the time of
the deposit to one who took the goods in good
faith for value would have been valid (Sec. 28)

2. Satisfaction of the Lien

a. By Sale

In accordance with the terms of a notice so given, a
sale of the goods by auction may be had to satisfy
any valid claim of the warehouseman for which he
has a lien on the goods.

From the proceeds of such sale, the warehouseman
shall satisfy his lien including the reasonable charges
of notice, advertisement and sale. The balance, if
any, of such proceeds shall be held by the
warehouseman and delivered on demand to the
person to whom he would have been bound to
deliver or justified in delivering goods.

At any time before the goods are so sold, any person
claiming a right of property or possession therein
may pay the warehouseman the amount necessary to
satisfy his lien and to pay the reasonable expenses
and liabilities incurred in serving notices and
advertising and preparing for the sale up to the time
of such payment. The warehouseman shall deliver
the goods to the person making payment if he is a
person entitled, under the provision of this Act, to
the possession of the goods on payment of charges
thereon. Otherwise, the warehouseman shall retain
the possession of the goods according to the terms of
the original contract of deposit (Sec. 33)

NOTE
Effect of the Sale
The warehouseman is relieved from any liability for
failure to deliver the goods to the depositor or
owner of the goods or to a holder of the receipt
given for the goods when they were deposited, even
if such receipt be negotiable (Sec. 36)

b. By other means

The remedy for enforcing a lien herein provided does
not:
(a) preclude any other remedies allowed by law for
the enforcement of a lien against personal
property; nor
(b) bar the right to recover so much of the
warehouseman's claim as shall not be paid by
the proceeds of the sale of the property (Sec.
35)

3. How the Lien may be Lost

The Warehousmans Lien is possessory. The lien may
be lost:
(a) by surrendering possession thereof; or
(b) by refusing to deliver the goods when a demand
is made with which he is bound to comply under
the provisions of this Act.

Thus, a warehouseman having a lien valid against the
person demanding the goods may refuse to deliver
the goods to him until the lien is satisfied (Sec. 31)

9

17
Trust Receipts Law
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
Receipt Transaction
B. Rights of the Entruster
Entrustee
D. Remedies available

Receipt Transaction

A Trust Receipt Transaction is any transaction by
and between an entruster and another person as
entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain
specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a
signed document called a trust receipt (Sec. 4)

A Trust Receipt is a written or printed document
signed by the entruster wherein the entrustee binds
himself: (1) to hold the designated goods, documents
or instruments in trust for the entruster; and (2) to
sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the
trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other
purposes substantially equivalent to those specified
under Sec. 4.(Sec. 4)

a. Loan/security feature

A letter of credit-trust receipt arrangement is
endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a
loan covered by the letter of credit, with the trust
receipt as a security for the loan. In other words,
the transaction involves a loan feature
represented by the letter of credit, and a security
feature which is in the covering trust receipt x x x
A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a "security
interest" in the goods (Vintola v. IBAA, 1987)

A trust receipt arrangement does not involve a
simple loan transaction between a creditor and
debtor-importer. Apart from a loan feature, the
trust receipt arrangement has a security feature that
is covered by the trust receipt itself. That second
feature is what provides the much needed financial
assistance to our traders in the importation or
purchase of goods or merchandise through the use of
those goods or merchandise as collateral for the
advancements made by a bank. The title of the bank
to the security is the one sought to be protected and
not the loan which is a separate and distinct
agreement (People v. Nitafan, 1992)

b. Ownership of the goods, documents and
instruments under a trust receipt

Entrustee is the factual owner of the goods,
documents and instruments (Prudentlal Bank v.
NLRC)

Entruster is the real owner of the goods,
documents and instruments.

A trust receipt transaction, within the meaning of
this Decree, is any transactionwhereby the
entruster, who owns or holds absolute title or
security interests over certain specified goods,
documents or instruments... (Sec. 4, TRL)

NOTE
"Security Interest" means a property interest in
goods, documents or instruments to secure
performance of some obligations of the entrustee or
of some third persons to the entruster and includes
title, whether or not expressed to be absolute,
whenever such title is in substance taken or retained
for security only.

Prudential Bank v. NLRC, 1995
Accordingly, in order to secure that the banker
shall be repaid at the critical point that is, when
the imported goods finally reach the hands of the
intended vendee the banker takes the full title to
the goods at the very beginning; he takes it as
soon as the goods are bought and settled for by his
payments or acceptances in the foreign country,
and he continues to hold that title as his
indispensable security until the goods are sold

[I]n a certain manner, (trust receipt contracts)
partake of the nature of a conditional sale as
provided by the Chattel Mortgage Law, that is, the
importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. The
ownership of the merchandise continues to be
vested in the owner thereof or in the person who
has advanced payment, until he has been paid in
full, or if the merchandise has already been sold,
the proceeds of the sale should be turned over to
him by the importer or by his representative or
successor in interest.

NOTE
In the earlier cases of Vintola v. IBAA (1987) and
Abad v. Court of Appeals (1990), the Supreme Court
held that the entrustee becomes the absolute owner
of the goods, documents and instruments, the
entruster being a mere security holder.

18
12
B. Rights of the Entruster

The entruster shall have the following rights:
(1a) Right to the proceeds from the sale of the
goods, documents or instruments released under
a trust receipt to the entrustee to the extent of
the amount owing to the entruster or as appears
in the trust receipt; OR
(1b) Right to the return of the goods, documents or
instruments in case of non-sale; AND
(2) Right to the enforcement of all other rights
conferred on him in the trust receipt provided
such are not contrary to the provisions of the
TRL.
(3) Right to cancel the trust and take possession
of the goods, documents or instruments subject
of the trust or of the proceeds realized
therefrom at any time upon default or failure of
the entrustee to comply with any of the terms
and conditions of the trust receipt or any other
agreement between the entruster and the
entrustee.
(4) Right to sell the goods, documents or
instruments at public or private sale at least
five days notice to the defaulting entrustee of
the intention to sell.
(5) Right to purchase the goods, documents or
instruments at a public sale.
(6) Right to recover the deficiency from the
entrustee should the proceeds of the sale not be
sufficient (Sec. 7)

a. Validity of the security interest as against
the creditors of the entrustee/innocent
purchasers for value

Entrustee

a. Payment/Delivery of proceeds of sale or
disposition of goods, documents or
instruments
b. Return of goods, documents or instruments
in case of sale
c. Liability for loss of goods, documents or
instruments

1. Obligations of the Entrustee

(a) To hold the goods, documents or instruments in
trust for the entruster and shall dispose of them
strictly in accordance with the terms and
conditions of the trust receipt;
(b) To receive the proceeds in trust for the
entruster and turn over the same to the
entruster to the extent of the amount owing to
the entruster or as appears on the trust receipt;
(c) To insure the goods for their total value against
loss from fire, theft, pilferage or other
casualties;
(d) To keep said goods or proceeds thereof whether
in money or whatever form, separate and
capable of identification as property of the
entruster;
(e) To return the goods, documents or Instruments in
the event of non-sale or upon demand of the
entruster; and
(f) To observe all other terms and conditions of the
trust receipt not contrary to the provisions of
the TRL. (Sec. 9)

2. Liabilities of the Entrustee

(a) Liability for Loss - The risk of loss shall be
borne by the entrustee. Loss of goods,
documents or instruments which are the subject
of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the
fault or negligence of the entrustee, shall not
extinguish his obligation to the entruster for the
value thereof (Sec. 10)
(b) Liability for failure to turn over proceeds of
sale or to return the failure shall constitute
the crime of estafa, punishable under Art. 315
(b) of the Revised Penal Code (Sec. 13)

d. Penal sanction if offender is a corporation
If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein
responsible for the offense, without prejudice to the
civil liabilities arising from the criminal offense (Sec.
13)

D. Remedies available

1. In case of default or failure of the entrustee
to comply with the trust receipt agreement
Entruster may cancel the trust receipt
agreement, take possession of the goods,
documents, instruments, and sell the same at
any private or public sale at least five days from
notice of intention to sell to the entrustee.

The proceeds of any such sale, whether public
or private, shall be applied (a) to the payment
of the expenses thereof; (b) to the payment of
the expenses of re-taking, keeping and storing
the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to
the entruster (Sec. 7)

2. In case of loss of the goods, documents,
instruments Entrustee may claim damages
from the entrustee (Sec.10)

3. In case of failure to turn over proceeds of the
sale of the goods, documents or instruments
or to return the same in case of non-sale -
Entruster may file a criminal complaint for
estafa (Art. 315 (b) of the Revised Penal Code)
against the entrustee,

19

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS
Monique Morales Katleya Kate Belderol Kathleen Mae Tuason (D) Rachel
Miranda (D) |Special Lectures

OPERATIONS HEADS

Negotiable Instruments Law
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Subject Heads | Anna
Katarina Rodriguez Mickey
Chatto

LAYOUT TEAM 2012
Layout Artists | Alyanna
Apacible Noel Luciano RM
Meneses Jenin Velasquez
Mara Villegas Naomi
Quimpo Leslie Octaviano
Yas Refran Cris Bernardino
Layout Head| Graciello
Timothy Reyes

Negotiable
Instruments Law
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
I. Forms and Interpretation
II. Completion and Delivery
III. Rules of Interpretation
IV. Signature
V. Consideration
VI. Accommodation Party
VII. Negotiation
VIII. Rights of a Holder
IX. Liabilities of Parties
X. Presentment for Payment
XI. Notice of Dishonor
XII. Discharge of Negotiable
Instrument
XIII. Material Alteration
XIV. Acceptance
XV. Presentment for Acceptance
XVI. Promissory Notes
XVII.Checks

Definition
Written contract for the payment of money, by
its form and on its face, intended as substitute
for money and intended to pass from hand to
hand to give the holder in due course (HDC) the
right to hold the same and collect the sum due.
Instruments are negotiable when they conform
to all the requirements prescribed by the NIL
(Act 2031, 03 February 1911).
Although considered as medium for payment of
obligations, negotiable instruments are not legal
tender (Sec. 60, New Central Bank Act, R.A.
7653).

BPI vs. Royeca, (2008, Nachura):
Q: Can the delivery of a negotiable instrument
discharge an obligation?

A: Settled is the rule that payment must be made
in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as
payment. Mere delivery of checks does not
discharge the obligation under a judgment. The
obligation is not extinguished and remains
suspended until the payment by commercial
document is actually realized.

Negotiable instruments shall produce the effect
of payment only when they have been encashed
or when through the fault of the creditor they
have been impaired. (Art. 1249, Civil Code)
BUT a CHECK which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash.

I. FORMS AND INTERPRETATION

A. Requisites of Negotiability

Sec. 1. Form of negotiable instruments.
An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order
to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee,
he must be named or otherwise indicated
therein with reasonable certainty.

1. In writing and signed by the maker
or drawer

a. No person is liable on the instrument whose
signature does not appear thereon.
b. One who signs in a trade or assumed name will
be liable to the same extent as if he had signed
in his own name (Sec. 18).
c. Signature of any party may be made by duly
authorized agent; no particular form of
appointment necessary (Sec. 19)
d. "In writing" - includes print; written or typed
e. Signature is binding so long as it is intended or
adopted as the signature of the signer or made
with his authority.
f. It may appear on any part of the instrument.
However, if the signature is so placed upon the
instrument that it is not clear in what capacity
the person intended to sign, he is deemed an
indorser. (Sec. 17[f])

2. Containing an unconditional
promise to pay or order to pay

Sec. 3. When promise is unconditional.
An unqualified order or promise to pay is
unconditional within the meaning of this Act,
though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made, or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives rise
to the instrument.

But an order or promise to pay out of a particular
fund is not unconditional.

a. UNCONDITIONAL
The promise or order to pay, to be
unconditional, must be unqualified.
Fact that the condition appearing on the
instrument has been fulfilled will not convert it
into a negotiable one (see Sec. 4)

A negotiable instrument is conditional when
reference to the fund clearly indicates an intention

21
that such fund alone should be the source of
payment. (Metropolitan Bank vs. CA, 1991)

b. ORDER OR PROMISE TO PAY
As to promissory note
- Promise to pay should be express on the face
of the instrument
- Word "promise" is not absolutely necessary.
Any expression equivalent to a promise is
sufficient.
- Mere acknowledgment of a debt is insufficient
As to bill of exchange:
- Order - command or imperative direction; the
instrument is, by its nature, demanding a
right.
- Words which are equivalent to an order are
sufficient.
- A mere request or authority to pay does not
constitute an order. Although the mere use of
polite words like "please" does not of itself
deprive the instrument of its characteristics
as an order, its language must clearly indicate
a demand upon the drawee to pay.

3. Sum payable must be certain

A sum is certain if from the face of the instrument it
can be mathematically computed.

Sec. 2. Certainty as to sum; What constitutes.
The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that,
upon default in payment of any installment or
of interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at
the current rate; or
(e) with costs of collection or an attorney's fee, in
case payment shall not be made at maturity.

4. Payable in money

a. Capable of being transformed into money.
b. NON-NEGOTIABLE:
An instrument which contains an order or
promise to do an act in addition to the payment
of money (with the exception of certain acts
enumerated in Sec. 5)
Payable in personal property like merchandise,
shares of stock or gold.
Maker or the person primarily liable has the
option to require something to be done in lieu of
payment of money. (CAMPOS)
c. NEGOTIABLE: if the option to require something
to be done in lieu of payment of money is with
the holder.

5. Payable on demand, or at a fixed
or determinable future time

a. ON DEMAND
Sec. 7. When payable on demand.
An instrument is payable on demand:
(a) Where it is expressed to be payable on demand,
or at sight, or on presentation; or
(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the person
so issuing, accepting, or indorsing it, payable on
demand.

Demand instruments: Holder may call for payment
any time; maker has an option to pay at any time,
and the refusal of the holder to accept payment will
terminate the running of interest, if any, but the
obligation to pay the note remains.

b. AT A FIXED TIME
Only on the stipulated date, and not before,
may the holder demand its payment.
Should he fail to demand payment, the
instrument becomes overdue but remains valid
and negotiable. It is merely converted to a
demand instrument.

c. AT A DETERMINABLE FUTURE TIME
Sec. 4. Determinable future time; what
constitutes.
An instrument is payable at a determinable future
time, within the meaning of this Act, which is
expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future
time specified therein; or
(c) On or at a fixed period after the occurrence of
a specified event which is certain to happen,
though the time of happening be uncertain.

An instrument payable upon a contingency is not
negotiable, and the happening of the event does not
cure the defect.

Examples:
- I promise to pay Juan Cruz or order the sum of
P100 30 days after date
P100 on or before Dec. 1, 2000
P100 60 days after the death of Jose
Effect of acceleration provisions:
- If option (absolute or conditional) to
accelerate maturity is on the maker, still
NEGOTIABLE.
- If option to accelerate is on the holder and
can be exercised only after the happening of a
specified event/act over which he has no
control (conditional), still NEGOTIABLE.

Provisions extending time of payment
General rule
Negotiability not affected. Effect is similar with that
of an acceleration clause at the option of the
maker.

Exception
Where a note with a fixed maturity provides that the
maker has the option to extend time of payment
until the happening of contingency, the instrument

22
is NOT negotiable. The time for payment may never
come at all.

6. Payable to order or to bearer
(Asked in 98)

a. Must contain Words of Negotiability
Pay to the order of Juan Cruz, or I promise
to pay to the order of Juan Cruz
Pay to Juan Cruz or order, or I promise to
pay Juan Cruz or order

b. Negotiability determined from the face of the
instrument

The negotiability or non-negotiability of an
instrument is determined from the face of the
instrument itself. Where words "or bearer" printed
on a check are cancelled by the drawer, instrument
becomes not negotiable. (Caltex vs. CA, 1992)

c. PAYABLE TO BEARER
Sec. 9. When payable to bearer.
The instrument is payable to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or
non-existing person, and such fact was known to
the person making it so payable; or
(d) When the name of the payee does not purport
to be the name of any person; or
(e) When the only or last indorsement is an
indorsement in blank.

Examples:
- Expressed to be so payable
"I promise to pay the bearer the sum."
- Payable to a person named therein or bearer
"Pay to A or bearer."
- Payable to the order of a fictitious person or
non-existing person, and such fact was known
to the person making it so payable
Pay to John Doe or order."
- Name of payee does not purport to be the
name of any person
"Pay to cash;"
"Pay to sundries."
- Only or last indorsement is an indorsement in
blank.

Fictitious payee rule

It is not necessary that the person referred to in the
instrument is really non-existent or fictitious to
make the instrument payable to bearer. The person
to whose order the instrument is made payable may
in fact be existing but he is still fictitious or non-
existent under Sec. 9(c) of the NIL if the person
making it so payable does not intend to pay the
specified persons.

A check drawn payable to the order of cash is a
check payable to bearer, and the bank may pay it to
the person presenting it for payment without the
drawer's indorsement. (Ang Tek Lian vs. CA, 1950)

d. PAYABLE TO ORDER

Sec. 8. When payable to order.
The instrument is payable to order where it is
drawn payable to the order of a specified person or
to him or his order. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or drawee;
or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
reasonable certainty.

Without the words "to order" or "to the order of,"
the instrument is payable only to the person
designated therein and is therefore non-negotiable.
(Consolidated Plywood Industries vs. IFC Leasing,
1987)
For order instruments - negotiation requires
delivery and indorsement of the transferor.

7. If bill of exchange, drawee must
be named or designated with
reasonable certainty

a. Applies only to bill of exchange
b. A bill may be addressed to 2 or more drawees
jointly whether they are partners or not, but not
to 2 or more drawees in the alternative or in
succession (Sec. 128, NIL).
c. Examples:
To Juan Cruz and Jose Reyes negotiable
To Juan Cruz or Jose Reyes not negotiable;
no certainty as to drawee

Determination of Negotiability
In determining the negotiability of an instrument,
the instrument in its entirety and by what appears
on its face must be considered. It must comply with
the requirements of Sec. 1 of the Negotiable
Instruments Law. (Caltex Phils. v. CA, 1992)

The acceptance of a bill of exchange is not
important in the determination of its negotiability.
The nature of acceptance is important only on the
determination of the kind of liabilities of the parties
involved. (PBCOM vs. Aruego, 1993)

Omissions and Provisions not Affecting
Negotiability
Omissions and
Provisions
That Do Not Affect
Negotiability
Additional Provisions
That Do Not Affect
Negotiability
1. Non-dating of the
instrument
2. Non-specification of
value given, or that
any value had been
given
1. Authorizes the sale of
collateral securities on
default;
2. Authorizes confession of
judgment on default;
3. Waives the benefit of

23
3. Non-specification of
place where it is
drawn or place
where it is payable
4. Bears a seal
5. Designation of
particular kind of
currency in which
payment is to be
made. (Sec. 6)

law intended to protect
the debtor; or
4. Allows the creditor the
option to require
something in lieu of
money.
(Sec. 5)

NOTE: Negotiability is
affected when instrument
contains a promise or order
to do any act in addition
to the payment of money.

B. Kinds of Negotiable Instrument

1. Promissory Note (Sec. 184)
a. An unconditional promise in writing
b. Made by one person to another
c. Signed by the maker
d. Engaging to pay on demand, or at a fixed or
determinable future time
e. A sum certain in money to order or to
bearer
f. Where a note is drawn to the maker's own
order, it is not complete until indorsed by
him.

2. Bill of Exchange (Sec. 126)
a. An unconditional order in writing
b. Addressed by one person to another
c. Signed by the person giving it
d. Requiring the person to whom it is
addressed to pay on demand or at a fixed or
e. A sum certain in money to order or to
bearer

Check - A bill of exchange drawn on a bank payable
on demand. (Sec. 185). It is the most common form
of bill of exchange.

Instances when a bill of exchange may be treated
as a promissory note
The drawer and the drawee are the same
person; or
Drawee is a fictitious person; or
Drawee does NOT have the capacity to contract
(Sec. 130)
Where the bill is drawn on a person who is
legally absent;
Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the
holder may treat it as either at his election.
(Sec. 17[e]) (Sec. 17[e])

Promissory Note vs. Bill of Exchange
Promissory note Bill of exchange
Unconditional promise Unconditional order
Involves 2 parties Involves 3 parties
Maker is primarily liable Drawer is only
secondarily liable
Only one presentment:
for payment
Two presentments: for
acceptance and for
payment

Bill of Exchange vs. Check
Bill of exchange Check
Not necessarily
drawn on a deposit.
The drawee need not be
a bank

It is necessary that a
check be drawn on a
bank deposit. Otherwise,
there would be fraud.
Death of a drawer of a
BOE, with the
knowledge of the bank,
does not revoke the
authority of the drawee
to pay.
Death of the drawer of a
check, with the
knowledge of the bank,
revokes the authority of
the banker to pay.
May be presented for
payment within
reasonable time after its
last negotiation.
Must be presented for
payment within a
reasonable time after its
issue.
May be payable on
demand or at a fixed or
determinable future
time
Always payable on
demand

II. Completion and delivery

A. Insertion of Date (Sec. 13)
Any holder may insert the true date of issue or
acceptance of an instrument where:

(1) the instrument is expressed to be payable at a
fixed period after date is issued undated; or
(2) the acceptance of an instrument payable at a
fixed period after sight is undated.

The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to
be regarded as the true date.

The instrument is not invalid for the reason only that
it is ante-dated or post-dated, provided this is not
done for an illegal or fraudulent purpose. The person
to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery
(Sec. 12).

B. Completion of Blanks

Where the instrument is wanting in any material
particular, the person in possession thereof has
a prima facie authority to complete it by filling
up the blanks therein.

A signature on a blank paper delivered by the
person making the signature in order that the
paper may be converted into a negotiable
instrument operates as a prima facie authority
to fill it up as such for any amount.

For such instrument to be enforceable against
any person who became a party thereto prior to
its completion, it must be filled up strictly in

24
accordance with the authority given and within
a reasonable time.

When subsequently negotiated to an HDC,
there is a presumption that such instrument is
filled up strictly in accordance with the
authority given and within reasonable time.

C. Incomplete and Undelivered
Instruments (Sec. 15)

Where an incomplete instrument has not been
delivered, it will not be a valid contract in the hands
of any holder, as against any person whose signature
was placed thereon before delivery if completed
and negotiated without authority.

Who may be estopped from raising the real
defense under Sec 15? A drawee bank whose
negligent custody of the checks, after partial
execution, contributed to its escape.

D. Complete and Undelivered
Instruments (Sec. 16)

Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto.

Between immediate parties and as regards a remote
party other than a holder in due course, the
delivery, in order to be effectual, must be made
either by or under the authority of the party making,
drawing, accepting, or indorsing.

When the instrument is in the hands of HDC, a
valid delivery thereof by all parties prior to him so
as to make them liable to him is conclusively
presumed.

Incomplete and Delivered Instruments (Sec. 14)
a. Holder has prima facie authority to fill up the
instrument.
b. The instrument must be filled up strictly in
accordance with the authority given and within
reasonable time
c. HDC may enforce the instrument as if filled up
according to b. above.

III. Rules of interpretation

1. Sum expressed in words takes precedence over
sum in numbers; BUT where words are
ambiguous or uncertain, reference to the figures
may be made.
2. Where interest is stipulated, without
specification of the starting date, the interest
runs from the date of the instrument, and if
undated, from the issue thereof.
3. An undated instrument is considered dated as of
time issued.
4. Written provisions prevail over printed
provision.
5. Where the instrument is ambiguous as to
whether it is a note or a bill, the holder may
treat it as either at his election
6. When the capacity of signatory is not clear, he
is to be deemed an indorser.
7. I promise to pay when signed by two or more
persons is deemed to be jointly and severally
signed

Where two promissory notes, both employing the
terms I promise to pay, were each signed by two
or more persons, a solidary (joint and several)
liability on each note is created on the part of the
signors. (Evangelista vs. Mercator Finance, 2003)

IV. Signature

GENERAL RULE
One whose signature does not appear on the
instrument shall not be liable thereon.

EXCEPTIONS
a. The principal who signs through an agent is
liable;
b. The forger is liable;
c. One who indorses in a separate instrument
(allonge) OR where an acceptance is written on
a separate paper is liable;
d. One who signs his assumed or trade name is
liable; and
e. A person negotiating by delivery (as in the case
of a bearer instrument) is liable to his
immediate indorsee.

A. Signing in Trade Name

One who signs in a trade or assumed name will be
liable to the same extent as if he had signed in his
own name

B. Signature of Agent

Signature of any party may be made by duly
authorized agent, established as in ordinary
agency.
Signature per procuration operates as notice
that the agent has limited authority to sign, and
the principal is bound only in case the agent in
so signing acted within the actual limits of his
authority.

Liability
General rule
Where a person adds to his signature words
indicating that he signs on behalf of a principal, then
hes not liable if he was duly authorized.

Exceptions
a. Mere addition of words describing him as an
agent without disclosing his principal
b. Where a broker or agent negotiates an
instrument without indorsement, he incurs
all liabilities in Sec. 65, unless he discloses
name of principal and fact that hes only
acting as agent. (Sec. 69)

25

C. Indorsement by Minor or
Corporation

The indorsement or assignment of the instrument by
a corporation or by an infant passes the property
therein, notwithstanding that from want of capacity,
the corporation or infant may incur no liability
thereon (Sec. 22).

REAL defense but available only to the incapacitated
party (ex. minor or corporation).

D. Forgery

Counterfeit making or fraudulent alteration of any
writing, which may consist of:
a. Signing of anothers name with intent to
defraud; or
b. Alteration of an instrument in the name,
amount, name of payee, etc. with intent to
defraud.

General rule
When a signature is forged or made without the
authority of the person, the signature (not the
instrument itself and the other genuine signatures) is
wholly inoperative
- Effects:
o No right to retain the instrument
o No right to give a discharge therefor
o No right to enforce payment thereof
against any party thereto can be acquired
through or under such signature

Exception
Unless the party against whom it is sought to be
enforced is precluded from setting up the forgery or
want of authority as a defense (Sec. 23).

Persons precluded from setting up defense of
forgery
1. Those who warrant or admit the genuineness of
the signature in question. This includes
indorsers, persons negotiating by delivery and
acceptors.
2. Those who, by their acts, silence, or negligence,
are estopped from setting up the defense of
forgery.

Rules on Forgery

1. Promissory Note
ORDER INSTRUMENT BEARER INSTRUMENT
Makers signature
forged
1. Maker is not liable because he never
became a party to the instrument.
2. Indorsers subsequent to forgery are liable
because of their warranties.
3. Party who made the forgery is liable.
1. Maker is not liable.
2. Indorsers may be made liable to
those persons who obtain title
through their indorsements.
3. Party who made the forgery is
liable.
Payees signature
forged
1. Maker and payee not liable.
2. Indorsers subsequent to forgery are liable.
1. Maker is liable. (Why? Indorsement
is not necessary to title and the
maker engages to pay holder)
2. Party who made the forgery is liable
Indorsers signature
forged
1. Maker, payee, indorser whose signature/s
was/were forged, and all indorsers
preceding the forgery are not liable.
(Because of their warranties)
1. Maker is liable. (Indorsement is not
necessary to title and the maker
engages to pay the holder)
2. Indorser whose signature was forged
is not liable to one who is not a HDC
provided the instrument is
mechanically complete before the
forgery.
liable.

26
2. Bill of Exchange
ORDER INSTRUMENT BEARER INSTRUMENT
Drawers signature
forged
1. Drawer is not liable because he was never
a party to the instrument.
2. Drawee is liable if it paid (no recourse to
drawer) because he admitted the
genuineness of the drawers signature.
Drawee cannot recover from the collecting
bank because there is no privity between
the collecting bank and the drawer. The
latter does not give any warranty re: the
drawers signature. (Associated Bank vs.
CA)
3. Indorsers subsequent to forgery liable
(such as collecting bank or last endorser)
1. Drawer is not liable.
2. Drawee is liable if it paid. Drawee
cannot recover from the collecting
bank.
liable.

Payees signature
forged
1. Drawer and payee not liable
2. Drawee is liable if it paid, but it may pass
liability back through the collection chain
3. Indorsers subsequent to forgery are liable
(such as collecting bank)
1. Drawer and drawee are liable.
2. Payee is not liable.
3. Collecting bank is liable because of
warranty.
liable.
Indorsers signature
forged
1. Drawer, payee, indorser whose signature/s
was/were forged and all indorsers
preceding the forgery are not liable.
2. Drawee is liable if it paid.
(such as collecting bank)
1. Drawer is liable. (indorsement not
necessary to title)
2. Drawee is liable.
3. Indorser whose signature was forged
is liable because indorsement is not
necessary to title.
liable.

Acceptance and payment under mistake
A bank is bound to know the signatures of its
depositors. If bank pays a forged check it must
be considered as making the payment out of its
own funds and cannot charge the account of the
depositor whose signature was forged. (PNB vs.
Quimpo, 1988)
Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds
and cannot charge the amount so paid to the
account of the depositor. A bank is liable,
irrespective of its good faith, in paying a forged
check. (Samsung vs. Far East Bank, 2004)

Extensions of Price vs. Neal doctrine
Doctrine: As between equally innocent persons,
the drawee who pays money on a check or draft
the signature on which was forged CANNOT
recover the money from the one who received
it. The drawee is bound to know the signature
of its depositor.
The bar to recovery is extended to overdrafts
and stop payment orders.
Overdraft occurs when a check is issued for an
amount more than what the drawer has in
deposit with the drawee bank.
- Rule: The drawee who pays the holder of the
bill cannot recover from the holder what he
paid under mistake
Stop Payment Order is one issued by the
drawer of a check countermanding his first
order to the drawee bank to pay the check.
- Rule: The drawee bank is bound to follow the
order, provided it is received prior to its
certification or payment of the check.

Effects of Negligence of Depositor
If such negligence was the proximate cause of
the loss, the drawee-bank is NOT liable
- It is the duty of the depositor/drawer to
carefully examine banks statements,
cancelled checks, his check stubs, and other
pertinent records within a reasonable time
and to report any errors without
unreasonable delay.
- If a drawer/depositors negligence and delay
should cause a bank to honor a forged check,
drawer cannot later complain should bank
refuse to recredit his account.

When drawee may recover from drawer
- Where the instrument is originally a bearer
instrument, because the indorsement can be
disregarded as being unnecessary to the
holders title
- Indorsement forged by an employee or agent
of the drawer
- If due to the drawers negligence/delay, the
forgery is not discovered until it is too late
for the bank to recover from the holder or
the forger

When drawee may not recover from holder
- Where the instrument is originally a bearer
instrument, because the indorsement can be
disregarded as being unnecessary to the
holders title
- If drawee fails to act promptly , if he delays
in informing the holder whom he paid

27
Between Drawee Bank and Collecting Bank
- Collecting bank only liable for forged
indorsements and not forgeries of the drawer
or makers signature (PNB v CA, 1968).
- The collecting bank or last indorser generally
suffers the loss because it has the duty to
ascertain the genuineness of all prior
indorsements considering that the act of
presenting the check for payment to the
drawee is an assertion that the party making
the presentment had done its duty to
ascertain the genuineness of the
indorsements (BPI v CA, 1992).
- In presenting the checks for clearing, the
collecting agent made an express guarantee
on the validity of all the prior
endorsements.
- The drawee bank is not similarly situated as
the collecting bank because the former
makes no warranty as to the genuineness of
any indorsement. The drawee banks duty is
but to verify the genuineness of the drawers
signature and not of the indorsement
because only the drawer is its client.
- However, where the negligence of the
drawee bank is the proximate cause of the
collecting banks payment of a check with a
forged indorsement, the drawee bank may be
held liable to the collecting bank.
- When both are guilty of negligence, the
degree of negligence of each will be weighed
in considering the amount of loss which each
should bear (BPI v CA, 1992)

V. Consideration

Value
Any consideration sufficient to support a simple
contract.

An antecedent or pre-existing debt constitutes
value; and is deemed such whether the instrument is
payable on demand or at a future time.

Who is a Holder for Value (HFV)?
a. A holder of an instrument for which value has
been given at any given time but only with
respect to all parties who have become parties
to the instrument prior to the time at which
value has been given.
b. A holder who as a lien on the instrument but only
to the extent of his lien.

Presumption of Consideration
Sec. 24. Every negotiable instrument is deemed
prima facie to have been issued for a valuable
consideration; and every person whose signature
appears thereon to have become a party thereto for
value.

Effect of Want of Consideration
Absence or failure of consideration is a matter of
defense as against any person not a holder in due
course, hence, a personal defense.

VI. Accommodation party

Sec. 29. Liability of accommodation party.
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the
purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder
for value, notwithstanding such holder, at the time
of taking the instrument, knew him to be only an
accommodation party.

Liability
The person to whom the instrument thus executed is
subsequently negotiated has a right of recourse
against the accommodation party in spite of the
formers knowledge that no consideration passed
between the accommodation and accommodated
parties (Sec. 29).

Stelco Marketing Corp. vs. C.A. (1992): Liable on the
instrument to a holder for value notwithstanding
such holder at the time of the taking of the
instrument knew him to be only an accommodation
party. Hence, as regards an AP, the 4
th
condition,
i.e., lack of notice of infirmity in the instrument or
defect in the title of the persons negotiating it, has
no application.

Accommodation Party as Surety
Accommodation Party is generally regarded as a
surety for the party accommodated;

When AP makes payment to holder of the note, he
has the right to sue the accommodated party for
reimbursement. [Agro Conglomerates, Inc. v. CA]

VII.Negotiation

A. Negotiation Distinguished from
Assignment

NEGOTIATION ASSIGNMENT
The transfer of the
instrument from one
person to another so as
to constitute the
transferee as holder
thereof (Sec.30).

The transferee does not
become a holder and he
merely steps into the
shoes of the transferor.
Any defense available
against the transferor is
available against the
transferee.

B. Modes of Negotiation

1. By Delivery - If payable to bearer
(Sec. 30)

Delivery means transfer of possession of instrument
by the maker or drawer, with intent to transfer title
to the payee and recognize him as holder thereof.

28
Issuance is the first delivery of the instrument
complete in form to a person who takes it as a
holder (Sec. 191).

Requisites
a. Mechanical act of writing the instrument
completely and in accordance with the
requirements of Section 1; and
b. The delivery of the complete instrument by
the maker or drawer to the payee or holder
with the intention of giving effect to it.

Presumption of delivery
a. Where the instrument is no longer in the
possession of a party whose signature appears
thereon, a valid and intentional delivery by him
is presumed until the contrary is proved (Sec.
16)
b. if it is in the hands of a HDC, the presumption is
conclusive (Sec. 16)

Presumption as to date
a. Date is not an essential element of negotiability
b. An undated instrument is considered to be dated
as of the time it was issued

2. By Indorsement completed by
Delivery - If payable to order (Sec.
30)

Indorsement
Where placed The indorsement must be
written (Sec. 31):
a. On the instrument itself, or
b. On a separate piece of paper attached to
the instrument called allonge

Signature of the indorser, without additional
words, is a sufficient indorsement (Sec. 31)
Must be of the ENTIRE instrument
- CANNOT indorse a part only of the amount
payable; BUT if the instrument has been paid
in part, then the instrument may be indorsed
as to the residue (Sec. 32)
- CANNOT transfer the instrument to two or
more indorsees severally (Sec. 32)
- If not an indorsement of the entire
instrument, the transfer remains valid, but as
a mere assignment which subjects the holder
to all defenses on the instrument (CAMPOS)

Kinds of Indorsement
As to manner of future method of negotiation
1. Special
- Specifies the person to whom/to whose
order the instrument is to be payable;
indorsement of such indorsee is
necessary to further negotiation.
- A special indorser is liable to all
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable
only to those who take title through his
indorsement (Sec 40).
- An instrument, payable to bearer, and
indorsed specially, may nevertheless be
further negotiated by delivery. (Sec 40)
2. Blank
- Specifies no indorsee, instrument so
indorsed is payable to bearer, and may
be negotiated by delivery
- The holder may convert a blank
indorsement into a special
indorsement by writing over the
signature of the indorser in blank any
contract consistent with the character
of the indorsement. (Sec 35)
- An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
reconverted into an order instrument by
a subsequent special indorsement
- But a bearer instrument remains as such
whether it has been indorsed specially
or in blank. It is the liability of the
indorser which is affected.

As to title transferred
1. Restrictive
- Such indorsement either:
o Prohibits further negotiation of
instrument
o Constitutes indorsee as agent of
indorser
o Vests title in indorsee in trust for
another (Sec 36)
- Rights of Restrictive Indorsee:
o Receive payment
o Bring any action thereon that the
indorser could bring.
o Transfer his rights as such indorsee,
but all subsequent indorsees acquire
only the title of first indorsee under
restrictive indorsement. (Sec 37)
2. Non-restrictive

As to kind of liability assumed by indorser
1. Qualified
- Constitutes indorser as mere assignor of
title
- Made by adding the words without
recourse (Sec. 38).
- But this does not mean that the
transferee only has the rights of an
assignee. Transfer remains a negotiation
and transferee can still be a holder
capable of acquiring a title free from
defenses of prior parties.
- Effects:
o Relieves the qualified indorser of his
liability to pay the instrument should
the maker be unable to pay
o The qualified indorser does not
guarantee the solvency of the maker,
but merely his legal title to the
instrument
o The instrument may still be further
negotiated; no effect on its
negotiability

2. Non-qualified

As to presence/absence of express limitations
1. Conditional

29
- Placed by indorser upon primary
obligors privileges of paying the holder
- Additional condition annexed to
indorsers liability; such condition must
be expressed
- Where an indorsement is conditional, a
party required to pay the instrument
may disregard the condition, and make
payment to the indorsee or his
transferee, whether condition has been
fulfilled or not.
- But any person to whom an instrument
so indorsed is negotiated, will hold the
same, or the proceeds thereof, subject
to the rights of the person indorsing
conditionally. (Sec. 39)
2. Unconditional

3. Other Kinds of Indorsement

1. Absolute
One by which the indorser binds himself to pay, upon
no other condition than the failure of prior parties
to do so, and of due notice to him of such failure

2. Joint
Where instrument payable to the order of two or
more payees or indorsees not partners, all must
indorse, unless the one indorsing has authority to
endorse for the others (Sec. 41)

3. Irregular
Where a person, not otherwise a party to the
instrument, places thereon his signature in blank
before delivery, he is liable as indorser

VIII.Rights of the Holder

Holder is a payee or indorsee of a bill or note who is
in possession of it, or the bearer thereof (Sec. 191).

A holder may be: (1) Holder in Due Course; or (2) a
Holder NOT in Due Course.

Rights of a holder (Sec. 51)
1. sue thereon in his own name

Unindorsed Instruments
Sec. 49. Transfer without indorsement; effect of.
Where the holder of an instrument payable to his
order transfers it for value without indorsing it, the
transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of
the transferor. But for the purpose of determining
whether the transferee is a holder in due course,
the negotiation takes effect as of the time when the
indorsement is actually made.

NOTE
This section applies only to an instrument payable to
the order of the transferor. This cannot apply to
bearer instruments.

Cancellation of Indorsement
Sec. 48. Striking out indorsement.
The holder may at any time strike out any
indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved
from liability on the instrument.

Indorsement by Agent
Sec. 20. Liability of person signing as agent, and so
forth.
Where the instrument contains or a person adds to
his signature words indicating that he signs for or on
behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly
authorized; but the mere addition of words
describing him as an agent, or as filling a
representative character, without disclosing his
principal, does not exempt him from personal
liability.

2. payment to him in due course discharges
instrument.

A. Holder in Due Course (HDC)

Who are HDCs?
HDC under Sec. 52
HDC under Sec. 58: A holder who derives title
to the instrument through a HDC has all the
rights of the latter even though he himself
satisfies none of the requirements of due course
holding
HDC under Sec. 59 (presumption): Every holder
is deemed prima facie to be a holder in due
course.

Requisites of a holder in due course
Sec. 52. What constitutes a holder in due course.
A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he
had no notice of any infirmity in the instrument
or defect in the title of the person negotiating
it.

a. That the instrument is complete and regular
upon its face
It is incomplete when it is wanting in any
material particular or particular proper to be
inserted in a NI without which the same will not
be complete.

Material Particulars
A change in the ff. is considered a material
alteration (Sec. 125):
- Date

30
- Sum payable, either for principal or interest
- Time or place of payment
- Number or relations of the parties
- Medium or currency in which payment is to
be made
- Or which adds a place of payment where no
place of payment is specified
- Or any other change or addition which
alters the effect of the instrument in any
respect

b. That he became the holder of it before it was
overdue and without notice that it had been
previously dishonored, if such was the fact
OVERDUE
The ff. cannot be HDCs:
- A holder who became such after the date of
maturity of the instrument (instrument is
overdue);
- In case of demand instruments, a holder who
negotiates it after an unreasonable length of
time after its issue (Sec. 53)
- Instruments with fixed maturity but subject
to acceleration: ultimate date of maturity is
the date of maturity for the purpose of
determining whether a purchaser is a HDC
- Undated instruments: Prima facie
presumption that it was negotiated before it
was overdue (Sec. 45).

NOTE
An overdue instrument is still negotiable, but it is
subject to the defense existing at the time of the
transfer.

As to what constitutes a reasonable time, regard is
to be had to the nature of the instrument, the usage
of trade or business with respect to such instrument,
and the facts of the particular case. (Sec. 193)

An instrument is not invalid for the reason only
that it is ANTE-DATED OR POSTDATED provided
not done for an illegal or fraudulent purpose.
The person to whom an instrument so dated is
delivered acquires the title thereto as of the
date of delivery (Sec. 12).

c. That he took it in good faith AND for value
VALUE
- Any consideration sufficient to support a
simple contract. An antecedent or pre-
existing debt constitutes value, whether the
instrument is payable on demand or at a
future time (Sec. 25)
HOLDER FOR VALUE
- Where value has at any time been given for
the instrument, the holder is deemed a HFV
in respect to all parties who become such
prior to that time (Sec. 26); and
- Where the holder has a lien on the
instrument, he is deemed a HFV to the
extent of his lien (Sec .27).

Presumption: Every NI is deemed prima facie issued
for valuable consideration; and every person whose
signature appears thereon is deemed to have
become a party thereto for value (Sec. 24).
Such presumption cannot be overcome by the
petitioners bare denial of receipt of the
consideration. (Bayani vs. People, 2004)

- GOOD FAITH
o Holder must have taken the instrument in
good faith and that at the time it was
negotiated to him he had no notice of any
infirmity in the instrument or defect in
the title of the person negotiating it.
o NOT a Holder in GOOD FAITH: Holder
acted in bad faith or holder had NOTICE
OF DEFECT.
- ACTUAL KNOWLEDGE
Sec 56. What constitutes notice of defect
To constitute notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounted to bad
faith.

d. That at the time it was negotiated to him he
had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
SUSPICIOUS CIRCUMSTANCES
- BAD FAITH - does not require actual
knowledge of the exact fraud that was
practiced; knowledge that there was
something wrong about the assignors
acquisition of title is sufficient.

State Investment House vs. IAC (1989):
A check with 2 parallel lines in the upper left hand
corner means that it could only be deposited and
may not be converted to cash. Consequently, such
circumstance should put the payee on inquiry and
upon him devolves the duty to ascertain the holders
title to the check or the nature of his possession.
Failing in this respect, the payee is declared guilty
of gross negligence amounting to legal absence of
good faith and as such the consensus of authority
is to the effect that the holder of the check is not
a holder in good faith.

DEFECTIVE TITLE
Title is NOT defective when at the time it was
negotiated to him, he had NO notice of:
- any infirmity in instrument
- any defect in title of person negotiating

Title is DEFECTIVE when (Sec. 55):
- instrument / signature obtained by fraud,
duress, force or fear or other unlawful means
OR for an illegal consideration; or
- instrument is negotiated in breach of faith,
or fraudulent circumstances
- NOTICE of infirmity or defect actual
knowledge of the infirmity or defect OR
knowledge of such facts that his action in
taking the instrument amounted to bad faith
(Sec.56)
- RIGHT of a transferee who receives NOTICE
of any infirmity or defect BEFORE he has
PAID THE FULL amount for the instrument.

31
He will be deemed a HDC only to the extent
of the amount therefore paid by him (Sec.54)

Rights of a Holder in Due Course
a. To sue on the instrument in his own name (Sec.
51)
b. To receive payment on the instrument
discharges the instrument (Sec. 51)
c. Holds instrument free of any defect of title of
prior parties (Sec. 57)
d. Free from defenses available to prior parties
among themselves (Sec. 57)
e. May enforce payment of instrument for full
amount, against all parties liable (Sec. 57)

B. Defenses against the Holder

Presumption in Favor of Due Course Holding
Every holder is deemed prima facie to be a holder in
due course (Sec. 59).
a. BURDEN SHIFTS when it is shown that the title
of any person who has negotiated the
instrument was defective. Holder MUST then
PROVE that he or some person under whom he
claims acquired the title as a holder in due
course.
b. But the last mentioned rule does not apply in
favor of a party who became bound on the
instrument prior to the acquisition of such
defective title. (Sec. 59)
c. However, this presumption arises only in favor
of a person who is a holder as defined in Sec.
191, meaning a payee or indorsee of a bill or
note, who is in possession of it, or the bearer
thereof.

Holder Not In Due Course
a. One who became a holder of an instrument
without any, some or all of the requisites under
Sec. 52.
b. With respect to demand instruments, if it is
negotiated an unreasonable length of time after
its issue, the holder is deemed not a holder in
due course. (Sec. 53)
c. Rights of a holder not in due course (Sec. 51,
Rights of a holder):
1. To sue on the instrument under in his own
name
2. To enforce the instrument

Prior parties can avail against him any defense
among these prior parties and prevent the
said holder from collecting in whole or in part
the amount stated in the instrument

Chan Wan vs. Tan Kim, (1960):
The only disadvantage of a holder who is not a
holder in due course is that the negotiable
instrument is subject to defenses as if it were non-
negotiable.

IX. Liabilities of Parties

Primary liability
The unconditional promise attaches the moment the
maker makes the instrument while the acceptors
assent to the unconditional order attaches the
moment he accepts the instrument. No further act is
necessary in order for the liability to accrue.
Presentment for payment is all that is necessary.

A. Parties Primarily Liable
(Sec. 60 and 62)

These are persons who by the terms of the
instrument are absolutely required to pay the
same.

1. Maker (Sec. 60)
Promises to pay according to the tenor of the
promissory note

2. Acceptor (Sec. 62)
Upon acceptance of the bill of exchange, engages to
pay the bill according to the tenor of the
acceptance.
Unconditionally liable; he is duty-bound to pay
the holder at date of maturity, WON holder
demands payment from him, and he is not
relieved from liability even if the instrument
should become overdue due to failure of holder
to make such demand.

NOTE
Until he accepts the bill of exchange, the drawee
assumes no liability to pay the instrument.

Secondary liability
A party secondarily liable is not bound to pay unless
the following have been fulfilled:
Due presentment or demand to the primary
party
Dishonor by such party
Notice of dishonor to secondary party, and, in
cases of foreign bills of exchange, protest of the
bill

B. Parties Secondarily Liable

1. Drawer (Sec. 61)
a. Engages that the instrument will be
accepted or paid, or both, according to its
tenor on due presentment;
b. Engages that he will pay the amount of the
instrument to the holder or to any
subsequent indorser who may be compelled
to pay the same if the instrument be
dishonored upon due presentment and
proceedings on dishonor be taken,

Limiting Liability: Drawer may insert in the
instrument an express stipulation
negativing/limiting his own liability to the
holder.

32
2. Indorsers
The following indorsers assume the liability to pay
the instrument: (1) General or Unqualified Indorser;
and (2) Irregular Indorser.

a. General or Unqualified Indorser (Sec. 66)
Engages that he will pay the amount of the
instrument to the holder or to any subsequent
indorser who may be compelled to pay the same if
the instrument be dishonored upon due
presentment and proceedings on dishonor be
taken.

Who is a General or Unqualified Indorser?
Every person who indorses WITHOUT qualification
(Sec. 66.)

A person placing his signature upon an instrument
other than as a maker, drawer, or acceptor unless
he indicates by appropriate words his intention to be
bound in some other capacity (Sec. 63).

A person, who places his signature on an instrument
negotiable by delivery, incurs all the liabilities of an
indorser (Sec. 67).

NOTE
A Qualified Indorser does not assume the liability to
pay the instrument since he is merely an assignor of
the title to the instrument.

However, he becomes liable once he breaches a
warranty.
Who is a qualified indorser?
One who is constituted as a mere assignor of the
title to the instrument by adding to his signature the
words "without recourse" or any words of similar
import.

b. Irregular Indorser
When a person not otherwise a party to an
instrument, places thereon his signature in blank
before delivery, he is liable as an indorser, in
accordance w/ these rules:
i) Instrument payable to order of 3rd person:
liable to payee and to all subsequent parties
ii) Instrument payable to the order of
maker/drawer, or payable to bearer: liable to
all parties subsequent to maker/drawer
iii) Signs for accommodation of payee: liable to
all parties subsequent to payee (Sec. 64)

Order of Liability among Indorsers (Sec. 68)
a. Among themselves: liable prima facie in the
order they indorse, but proof of another
agreement admissible
b. As to the Holder: Holder may sue any of the
indorsers, regardless of order of indorsement
c. Joint payees/indorsees deemed to indorse
solidarily

C. Warranties

Maker Acceptor Drawer General/
Unqualified
Indorser
Qualified
Indorser
Person
Negotiating by
Delivery
1. existence of
the payee;
2. his then
capacity to
indorse

1. the existence
of the payee;
2. his then
capacity to
indorse;
3. existence of
the drawer;
4. the
genuineness of
the drawers
signature;
5. the drawers
capacity and
authority to
draw the
instrument;

1. existence of
the payee;
2. his then
capacity to
indorse

1.genuineness of
the instrument
in all respects
that it
purports to be;
2. his good title
to the
instrument;
3. all prior
parties
capacity to
contract;
4. the
instrument is
valid and
subsisting at
the time of his
indorsement.
1.genuineness of
the instrument
in all respects
that it purports
to be;
2. his good title to
the instrument;
3. all prior
parties
capacity to
contract;
4. no knowledge
of any fact
which would
impair the
validity of the
instrument or
render it
valueless.
1.genuineness of
the instrument
in all respects
that it
purports to
be;
2. his good title
to the
instrument;
3. prior parties
capacity to
contract;
4. no knowledge
of any fact
which would
impair the
validity of the
instrument or
render it
valueless.

NOTE
No. 3 does not
apply to person
negotiating public
or corporation
securities other
than bills and
notes.
NOTEWarranty
extends only to
immediate
transferee

33

X. Presentment for Payment

Definition
a. The production of a Bill of Exchange to the to
the drawer or acceptor for PAYMENT; or
b. The production of a PN to the party liable for
payment

A. Necessity of presentment for
payment
B. Parties to whom presentment
for payment should be made

When necessary
In order to charge the drawer and indorsers (Sec. 70)

When NOT necessary
To charge the person primarily liable on the
instrument (Sec. 70)
To charge the drawer where he has no right to
expect or require that the drawee or acceptor
will pay the instrument. (Sec. 79)
To charge an indorser where the instrument was
made or accepted for his accommodation and he
has no reason to expect that the instrument will
be paid if presented. (Sec. 80)
When the bill of exchange has previously been
dishonored by non-acceptance and has not been
subsequently accepted. Under Sec. 151, an
immediate right of recourse against the
persons secondarily liable accrues to the holder.

C. Dispensation with presentment
for payment
D. Dishonor by non-payment

When Excused
Where, after the exercise of reasonable
diligence, presentment cannot be made;
Where the drawee is a fictitious person;
By waiver of presentment, express or implied.
(Sec. 82)

In case of waiver of protest, whether in the case of
a foreign bill of exchange or other NI deemed to be
a waiver not only of a formal protest but also of
presentment and notice of dishonor (Sec. 111)

Date and time of presentment
bearing fixed maturity / not payable on
demand on the day it falls due if day of
maturity falls on Sunday or a holiday, the
instruments falling due or becoming payable on
Saturday are to be presented for payment on
the next succeeding business day (Sec. 85)
Payable on demand within a reasonable time
after its issue, iv at the option of the holder,
may be presented for payment before twelve
o'clock noon on Saturday when that entire day is
not a holiday (Sec. 85)
Demand bill of exchange within a reasonable
time after the last negotiation. (Sec. 71)

NOTE Although presentment was made within a
reasonable time from last negotiation, it may have
been made within an unreasonable time from
issuance. Thus holder may still not be a holder in
due course under Sec. 71.

XI. Notice of Dishonor
Notice given by holder or his agent to party or
parties secondarily liable that the instrument was
dishonored by:
(1) non-acceptance by the drawee of a bill;or
(2) non-payment by the acceptor of a bill; or
(3) non-payment by the maker of a note.

Requisites
a. Given by holder or his agent, or by any party
who may be compelled by the holder to pay
(Sec. 90)
b. Given to secondary party or his agent (Sec. 97)
c. Given within the periods provided by law (Sec.
102)
d. Given at the proper place (Secs. 103 and 104)

A. Parties to be notified

1) Non-acceptance (bill) to persons secondarily
liable, namely, the drawer and indorsers as the
case may be.
2) Non-payment (both bill and note) indorsers.

NOTE
Notice must be given to persons secondarily liable.
Otherwise, such parties are discharged. Notice may
be given to the party himself or to his agent.

When not Necessary
Notice of dishonor is not required to be given to the
drawer in any of the ff. cases:
Drawer and drawee are the same;
Drawee is a fictitious person or not having the
capacity to contract;
Drawer is the person to whom the instrument is
presented for payment;
The drawer has no right to expect or require
that the drawee or acceptor swill honor the
instrument;
Where the drawer has countermanded payment.
(Sec. 114)

Notice of dishonor is not required to be given to an
indorser in the ff. cases:
Drawee is a fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument;
Indorser is the person to whom the instrument is
presented for payment;
Instrument was made or accepted for his
accommodation. (Sec. 115)

34

B. Parties who may give notice of
dishonor

Sec. 90. By whom given.
The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to the
holder, and who, upon taking it up, would have a
right to reimbursement from the party to whom the
notice is given.

C. Effect of notice
Notice of Dishonor is required to charge parties
secondarily liable.

D. Form of notice (Sec. 96)
The notice may be:
(1) in writing; or
(2) merely oral

The notice may be given in any terms which:
(1) sufficiently identify the instrument; and
(2) indicate that it has been dishonored by non-
acceptance or non-payment.

It may in all cases be given by delivering it
personally or through the mails

E. Waiver

Sec. 109. Waiver of notice.
Notice of dishonor may be waived either before the
time of giving notice has arrived or after the
omission to give due notice, and the waiver may be
expressed or implied.

Sec. 110. Whom affected by waiver.
Where the waiver is embodied in the instrument
itself, it is binding upon all parties; but, where it is
written above the signature of an indorser, it binds
him only.

F. Dispensation with notice

a. When party to be notified knows about the
dishonor, actually or constructively (Secs. 114-
117)
b. If waived (Sec. 109)
c. When after due diligence, it cannot be given
(Sec. 112).

G. Effect of failure to give notice

Failure to give notice to parties secondarily liable
discharges such parties.

An omission to give notice of dishonor by non-
acceptance does not prejudice the rights of a holder
in due course subsequent to the omission. (Sec. 117)

XII. Discharge of Negotiable
Instrument

Discharge
The release of all parties, whether primary or
secondary, from the obligation on the instrument;
renders the instrument non-negotiable

A. Discharge of negotiable
instrument

Sec. 119. Instrument; how discharged.
A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the
principal debtor;
(b) By payment in due course by the party
accommodated, where the instrument is made
or accepted for his accommodation;
(c) By the intentional cancellation thereof by the
holder;
(d) By any other act which will discharge a simple
contract for the payment of money;
(e) When the principal debtor becomes the holder
of the instrument at or after maturity in his
own right.

1) By payment in due course (Asked in 00)
Sec. 88. What constitutes payment in due course.
Payment is made in due course when it is made at or
after the maturity of the payment to the holder
thereof in good faith and without notice that his
title is defective.

If payment is made before maturity and the
note is negotiated to a HDC, the latter may
recover on the instrument.
Payment to one of several payees or indorsees
in the alternative discharges the instrument, but
payment to one of several joint payees or joint
indorsers is not a discharge. The party receiving
payment must have been authorized by others
to receive payment.
By whom made:
a. payment in due course by or on behalf of
principal debtor
b. payment in due course by party
accommodated where party is made/
accepted for accommodation

2) By intentional cancellation
Sec. 123. Cancellation; unintentional; burden of
proof.
A cancellation made unintentionally or under a
mistake or without the authority of the holder, is
inoperative.

But where an instrument or any signature thereon
appears to have been cancelled, the burden of proof
lies on the party who alleges that the cancellation
was made unintentionally or under a mistake or
without authority.

35
3) By other acts that discharge a simple contract
for payment of money
Any other act which discharges a simple contract for
payment of money (Art. 1231 of the Civil Code), ex.
issuance of a renewal notenovation

4) By reacquisition of principal debtor in his own
right
Principal debtor becomes holder of instrument at or
after maturity in his own right

5) By material alteration
Material alteration w/o assent of all parties liable
avoids instrument except as against party to
alteration and subsequent indorsers (Sec. 124)

B. Discharge of parties secondarily
liable

Grounds under Sec. 120
Sec. 120. When persons secondarily liable on the
instrument are discharged.
A person secondarily liable on the instrument is
discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature
by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior
party;
(e) By a release of the principal debtor unless the
holder's right of recourse against the party
secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to
extend the time of payment or to postpone the
holder's right to enforce the instrument unless
made with the assent of the party secondarily
liable or unless the right of recourse against
such party is expressly reserved.

Other grounds
a. Failure to make due presentment (Secs. 70, 144)
b. Failure to give notice of dishonor
c. Certification of check at instance of holder
d. Reacquisition by prior party
e. Where instrument negotiated back to a prior
party, such party may reissue and further
negotiate, but not entitled to enforce payment
vs. any intervening party to whom he was
personally liable
f. Where instrument is paid by party secondarily
liable, its not discharged, but
the party so paying it is remitted to his
former rights as regard to all prior parties
and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where its
payable to order of 3
rd
party and has been
paid by drawer or where its made/accepted
for accommodation and has been paid by
party accommodated
g. by taking a qualified acceptance

C. Right of party who discharged
instrument

The party secondarily liable who pays the
instrument:
(1) is remitted to his former rights as regard all
prior parties;
(2) may strike out his own and all subsequent
indorsements; and
(3) may again negotiate the instrument, except:
(a) Where it is payable to the order of a third
person and has been paid by the drawer;
and
(b) Where it was made or accepted for
accommodation and has been paid by the
party accommodated.

D. Renunciation by holder (Sec.
122)

The holder may expressly renounce his rights against
any party to the instrument before, at, or after its
maturity. An absolute and unconditional
renunciation of his rights against the principal
debtor made at or after the maturity of the
instrument discharges the instrument.

Renunciation must be in writing unless the
instrument is delivered up to the person primarily
liable thereon

Renunciation does not affect the rights of an HDC
without notice.

XIII. Material alteration

A. Concept

Any change in the instrument which affects or
changes the liability of the parties in any way.

B. Effect of material alteration

1) Alteration by a party Avoids the instrument
except as against the party who made, authorized,
or assented to the alteration and subsequent
indorsers.

However, if an altered instrument is negotiated to a
HDC, he may enforce payment thereof according to
its original tenor regardless of whether the
alteration was innocent or fraudulent.

2) Alteration by a stranger (spoliation) the effect
is the same as where the alteration was made by a
party wherein a HDC can recover on the original
tenor of the instrument (Sec. 124).

Changes in the following constitute material
alterations (Sec. 125):
1. Date
2. Sum payable, either for principal or interest

36
3. Time or place of payment
4. Number or relations of the parties
5. Medium or currency in which payment is to
be made
6. That which adds a place of payment where
no place of payment is specified
7. Any other change or addition which alters
the effect of the instrument in any respect.

XIV. Acceptance

A. Definition

The signification by the drawee of his assent to the
order of the drawer.

Kinds of Acceptance
a. General -- assents without qualification to the
order of the drawer
b. Qualified - which in express terms varies the
effect of the bill as drawn
Conditional - makes payment by the acceptor
dependent on the fulfillment of a condition
therein stated
Partial - an acceptance to pay part only of
the amount for which the bill is drawn.
Local - an acceptance to pay only at a
particular place.
Qualified as to time - the acceptance of
some one or more of the drawees but not of
all. (Sec. 141)

B. Manner

Express Acceptance
Must be in writing and signed by the drawee and
must not express that the drawee will perform his
promise by any other means than the payment of
money. (Sec. 132) If request for a written
acceptance is refused, the holder may treat the bill
as dishonored (Sec. 133)

Implied Acceptance
If the drawee refuses to return the instrument
within 24 hours after it was delivered for
acceptance.
If the drawee destroys the same.
If the drawee makes an unconditional promise
in writing before the instrument is drawn,
with respect to every person who, upon the
faith thereof, receives the bill for value.

C. Time for acceptance (Sec. 136)

The drawee is allowed twenty-four hours after
presentment in which to decide whether or not he
will accept the bill;

The acceptance, if given, dates as of the day of
presentation.

D. Rules governing acceptance

FEBTC vs. Gold Palace Jewellery Co, (Nachura,
2008):
Q: What is the implication of payment without
acceptance by a drawee?

A: Act No. 2031, or the Negotiable Instruments Law
(NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it
according to the tenor of his acceptance. This
provision applies with equal force in case the drawee
pays a bill without having previously accepted it. His
actual payment of the amount in the check implies
not only his assent to the order of the drawer and
a recognition of his corresponding obligation to
pay the aforementioned sum, but also, his clear
compliance with that obligation. Actual payment by
the drawee is greater than his acceptance, which is
merely a promise in writing to pay. The payment of
a check includes its acceptance.

XV. Presentment of Acceptance

Requisites
(a) By the holder, or by some person authorized to
receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the
instrument, or if he is absent or inaccessible, to
any person found at the place where the
presentment is made.

When necessary
Sec. 143. When presentment for acceptance must
be made.
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any
other case, where presentment for acceptance
is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall
be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than
at the residence or place of business of the
drawee.

In no other case is presentment for acceptance
necessary in order to render any party to the bill
liable.

When Excused
Sec. 148. Where presentment is excused.
Presentment for acceptance is excused and a bill
may be treated as dishonored by non-acceptance in
either of the following cases:
(a) Where the drawee is dead, or has absconded, or
is a fictitious person or a person not having
capacity to contract by bill.
(b) Where, after the exercise of reasonable
diligence, presentment cannot be made.

37
(c) Where, although presentment has been
irregular, acceptance has been refused on some
other ground.

A. Time/place/manner of present-
ment

When made
Sec. 146. On what days presentment may be
made.
A bill may be presented for acceptance on any day
on which negotiable instruments may be presented
for payment under the provisions of Sections
seventy-two and eighty-five of this Act. When
Saturday is not otherwise a holiday, presentment
for acceptance may be made before twelve o'clock
noon on that day.

How made
Sec. 145. Presentment; how made.
Presentment for acceptance must be made by or on
behalf of the holder at a reasonable hour, on a
business day and before the bill is overdue, to the
drawee or some person authorized to accept or
refuse acceptance on his behalf; and
(a) Where a bill is addressed to two or more
drawees who are not partners, presentment
must be made to them all unless one has
authority to accept or refuse acceptance for all,
in which case presentment may be made to him
only;
(b) Where the drawee is dead, presentment may be
made to his personal representative;
(c) Where the drawee has been adjudged a
bankrupt or an insolvent or has made an
assignment for the benefit of creditors,
presentment may be made to him or to his
trustee or assignee.

B. Effect of failure to make
presentment (Sec. 144)

Failure to make presentment discharges the
drawer and all indorsers (Sec. 144).
What is reasonable time involves a consideration
of the nature of the instrument, usage of trade
or business with respect to the instrument, and
the facts of each case.

C. Dishonor by non-acceptance

Sec. 149. When dishonored by non-acceptance.
A bill is dishonored by non-acceptance:
(a) When it is duly presented for acceptance and
such an acceptance as is prescribed by this Act
is refused or cannot be obtained; or
(b) When presentment for acceptance is excused
and the bill is not accepted.

Sec. 150. Duty of holder where bill not accepted.
Where a bill is duly presented for acceptance and is
not accepted within the prescribed time, the person
presenting it must treat the bill as dishonored by
nonacceptance or he loses the right of recourse
against the drawer and indorsers.

Sec. 151. Rights of holder where bill not accepted.
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder and no presentment
for payment is necessary.

XVI. Promissory Notes

Promissory Note (Sec. 184)
a. An unconditional promise in writing
b. Made by one person to another
c. Signed by the maker
d. Engaging to pay on demand, or at a fixed or
e. A sum certain in money to order or to bearer
f. Where a note is drawn to the maker's own
order, it is not complete until indorsed by
him.

XVII. Checks

A. Definition

Sec. 185. A check is a bill of exchange drawn on a
bank payable on demand. Except as herein
otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on demand
apply to a check.

B. Kinds

1) Cashiers Check
One drawn by the cashier of a bank, in the name of
the bank against the bank itself payable to a third
person. It is a primary obligation of the issuing bank
and accepted in advance upon issuance (Tan vs. CA
1994).

2) Managers Check
A check drawn by the manager of a bank in the name
of the bank itself payable to a third person. It is
similar to the cashiers check as to the effect and
use.

3) Memorandum Check
A check given by a borrower to a lender for the
amount of a short loan, with the understanding that
it is not to be presented at the bank, but will be
redeemed by the maker himself when the loan falls
due and which understanding is evidenced by writing
the word memorandum, memo or mem on the
check.

4) Certified Check
An agreement whereby the bank against whom a
check is drawn undertakes to pay it at any future
time when presented for payment. (Sec. 187)

38
5) Crossed Check
The NIL is silent with respect to crossed checks,
although the Code of Commerce makes
reference to such instruments.
Article 541 of the Code of Commerce states:
The maker or any legal holder of a check shall
be entitled to indicate therein that it be paid to
a certain banker or institution, which he shall do
by writing across the face the name of said
banker or institution, or only the words and
company.
Under usual practice, crossing a check is done
by placing two parallel lines diagonally on the
left top portion of the check (State Investment
House vs. IAC, 1989).
The crossing may be special wherein between
the two parallel lines is written the name of a
bank or a business institution, in which case the
drawee should pay only with the intervention of
that bank or company, or crossing may be
general wherein between two parallel diagonal
lines are written the words "and Co." or none at
all as in the case at bar, in which case the
drawee should not encash the same but merely
accept the same for deposit (supra).

Effects
Bataan Cigar vs. CA (1994):
a. That the check may not be encashed; it may
only be deposited with the bank;
b. That the check may be negotiated only once to
a person who has an account with the bank; and
c. That it serves as a warning to a holder that the
check has been issued for a definite purpose.

C. Presentment for payment

A check of itself does not operate as an assignment
of any part of the funds to the credit of the drawer
with the bank. The bank is not liable to the holder,
unless and until it accepts or certifies the check.
(Sec. 189)

1. Time

When to present?
A check must be presented for payment within
reasonable time after its issue.

2. Effect of delay

Effect of delay in presentment
The drawer will be discharged from liability thereon
to the extent of the loss caused by the delay. (Sec.
186)

Certification of Checks
An agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future
time when presented for payment.

Effects
Equivalent to acceptance (Sec. 187) and is the
operative act that makes banks liable
Assignment of the funds of the drawer in the
hands of the drawee (Sec. 189)
If obtained by the holder, discharges the
persons secondarily liable thereon (Sec. 188)

Refusal of drawee bank to certify
The holder has no action against the bank but he has
a right of action against the drawer. The drawer in
turn has right of action against the bank based on
the original contact of deposit between them.

39

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS

OPERATIONS HEADS

Insurance Code
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Chatto

LAYOUT TEAM 2012
Mara Villegas Naomi
Timothy Reyes

40
Insurance Code
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
I. Concept of Insurance
II. Elements of Insurance Contract
III. Characteristics/Nature of Insurance
Contracts
IV. Classes
V. Insurable Interest
VI. Perfection of the Contract of
Insurance
VII. Rescission of Insurance Contracts
VIII.Claims Settlement and Subrogation

I. Concept of Insurance

Contract of insurance

Insurance
An agreement whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event [Sec. 2, par.1]

Definition:
A contract of indemnity
Wherein one undertakes for a consideration
To indemnify another against loss, damage, or
liability
Arising from an unknown or contingent event.
- Contingent: an event that is not certain to
take place
- Unknown: an event which is certain to
happen, but, the time of its happening is not
known
- Past event may be a designated event only in
cases where it has happened already but the
parties do not know about it, e.g. prior loss of
a ship at sea

Regulation by the state through a license or
certification of authority is necessary since a
contract of insurance involves public interest.
[White Gold Marine Services vs. Pioneer (2005)]

Sec. 4b of the Pre-Need Code Pre-need plans are
contracts, agreements, deeds or plans for the
benefit of the planholders which provide for the
performance of future service/s, payment of
monetary considerations or delivery of other
benefits at the time of actual need or agreed
maturity date, as specified therein, in exchange for
cash or installment amounts with or without
interest or insurance coverage and includes life,
pension, education, interment and other plans,
instruments, contracts or deeds as may in the future
be determined by the Commission.

Pre-need plans: not considered as insurance
contracts because even pre-need plans can be
insured, thereby implying that the two are not
the same.
Not governed by the Insurance Code

Doing or transacting an insurance business

GENERAL RULE
An insurance business consists in undertaking, for a
consideration, to indemnify another against loss,
damage or liability arising from an unknown or
contingent event.

SUPPLEMENTARY RULE
Although the business is not formally designated
as one of insurance and no profit is derived or
no separate or direct consideration is received,
It is deemed to be doing an insurance business,
If it undertakes any of the following
circumstances:
1. Making or proposing to make, as insurer,
any insurance contract
2. Making or proposing to make, as surety, any
contract of suretyship as a vocation not as a
mere incident to any other legitimate
business of a surety
3. Doing any insurance business, including a
reinsurance business
4. Doing or proposing to do any business in
substance equivalent to any of the above
[Sec. 2, par. 2].

Sec. 2, Par. 2 The fact that no profit is derived
from the making of insurance contracts, agreements
or transactions or that no separate or direct
consideration is received therefor shall not be
deemed conclusive to show that the making thereof
does not constitute the doing or transacting of an
insurance business.

II. Elements of an Insurance
Contract

(PARIS)
1) Payment of Premium
The consideration of the insurance contract
The premium is a ratable consideration
Paid by the insured to a general insurance fund
For the insurers assumption of risk

2) Assumption of Risk: Designated Peril as Cause
The insurer promises to pay or indemnify such
loss
In a fixed or ascertainable amount
in order to recover from the insurance contract,
the cause of the damage or loss must be caused
by the perils expressly indicated in the contract

3) Risk of Loss or Damage
The happening of designated events,
Either unknown or contingent,
Past or future,
Will subject such interest to some kind of loss,
Whether in the form of injury, damage, or
liability

4) Insurable Interest
The interest of the insured in a thing or a life

41
Such interest is susceptible of pecuniary
estimation (for non-life insurance only, does not
apply to life insurance because life does not
have monetary value)
Thing insured in non-life insurance must be
capable of pecuniary estimation because non-
life insurance is essentially for indemnification.
Cannot be waived [Sec. 25]

5) Risk-Distributing Scheme
This assumption of risk is part of a general
scheme to distribute the loss
Among a large number of persons
Exposed to similar risks.
Losses are borne not by the insurer but
proportionally by all those who paid premiums.

III. Characteristics/Nature of
Insurance Contracts

1) Consensual
It is perfected by the meeting of the minds of
the parties.
There must be concurrence of offer and
acceptance.
Unless otherwise stipulated, the policy is not
essential to the existence of the contract. It
merely evidences the terms and conditions
thereof. (CAMPOS)

2) Voluntary
General Rule
It is not compulsory. Also, the parties are free
to stipulate terms provided they are not
contrary to law, morals, good customs, public
order, or public policy.
Exception
For motor vehicles [Sec. 373-389]; employees
[Art. 168-184, Labor Code]; or as a condition to
granting a license [DE LEON].

3) Contract of Adhesion (Fine Print Rule)
The contract is presented to the insured already
in its printed form by which he either takes it
or leaves it.
Contracts of adhesion are valid.
Ambiguity in the insurance contract shall be
interpreted liberally in favor of the insured and
strictly against the insurer.

4) Executory
Once the insured pays the premium, the
contract already takes effect.
Synallagmatic and reciprocal such that even if
the contingent event does not occur, the insurer
has still provided protection against the risk.

5) Aleatory
Art. 2010, Civil Code By an aleatory contract one
of the parties or both reciprocally bind themselves
to give or to do something in consideration of what
the other shall give or do upon the happening of an
event which is uncertain, or which is to occur at an
indeterminate time.

The obligation of the insurer to pay depends on
the happening of an event which is uncertain, or
though certain, is to occur at an indeterminate
time [Art. 2010, Civil Code].
However, it cannot be considered as gambling,
wagering, or a contract of chance because the
risk is created by the contract itself.
The insurance contract is in a sense
commutative since the premium paid by the
insured is deemed the equivalent of the
protection given by the insurer [SUNDIANG AND
AQUINO, Reviewer on Commercial Law].
When the designated peril does not happen, the
insured nevertheless gets the protection against
such risk for the period covered by the
insurance contract.

6) Contract of Indemnity (only for non-life
insurance)
The insured who has insurable interest over the
property is only entitled to recover the amount
of actual loss sustained
The burden is upon him to establish the amount
of such loss.
Generally applies only to property insurance
except when the creditor insures the life of his
debtor for the amount of the debt.
Life insurance is not a contract of indemnity; it
is a mere form of investment.
Insurance contracts are not wagering contracts
[Sec. 4].

7) A Risk Distributing Device
By paying a pre-determined amount into a
general fund out of which payment will be made
for an economic loss of a defined type,
Each member contributes to a small degree
toward compensation for losses suffered by any
member of the group.

8) Uberrimae Fides Contract (Principle of Utmost
Good Faith)
Each party is required to disclose conditions
affecting the risk of which he is aware, or any
material fact which the applicant knows and
those which he ought to know.
Violation of this duty gives the aggrieved party
the right to rescind the contract. Where the
aggrieved party is the insured, the bad faith of
the insurer will preclude it from denying liability
on the policy based on breach of warranty.
[CAMPOS]

9) Personal Contract
Each party takes into consideration the
character, conduct and/or credit of the other
and in making of the contract, each is enjoined
by law to deal with the other in utmost good
faith. [CAMPOS]
So, the insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent of
the insurer [Sec. 20, 58, 83].

42
IV. Classes

1. Marine [Secs. 99166]
Insurance against the peril of property in, or
incidental to, transit
Covers not only property exposed to risks of
navigation but also those which are exposed to
risks not connected with navigation [CAMPOS].
Bottomry loan: a loan is obtained for the value
of the vessel on a voyage and the lender is
repaid only if the vessel subject of the loan
arrives safely at its destination.
Respondentia loan: a loan is obtained as
security for the value of the cargo to be
transported and the lender is repaid only if the
cargo arrives safely at its destination.
Also known as transportation insurance

Has two major divisions:

a. Ocean Marine Insurance
Insurance against risk connected with
navigation, to which a ship, cargo,
freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a
fixed period of time

b. Inland Marine Insurance
Covers the land or over the land
transportation perils of property shipped
by railroads, motor trucks, airplanes, and
other means of transportation
Also covers risks of lake, river or other
inland waterway transportation and other
waterborne perils outside those covered
by ocean marine insurance

Risks that may be insured against:
Perils of the sea- includes casualties arising
from the violent action of the elements and
does not cover ordinary wear and tear or other
damage usually incident to the voyage.
Insurance policy may cover acts of barratry.
Barratry- the willful and intentional act on the
part of the master of the crew, in pursuance of
some unlawful or fraudulent purpose, without
the consent of the owner, and to the prejudice
of his interest (ex: burning the ship, unlawfully
selling the cargo) [CAMPOS].

Liability of Marine Insurer:
Loss- total or partial
Total loss- actual or constructive

Actual total loss- irretrievable loss of the thing
or any damage which renders the thing valueless
to the owner for the purpose for which he held
it

Constructive total loss- gives the insured the
right to abandon the thing insured by
relinquishing to the insurer his interest in such
thing, entitling the former to recover for a total
loss thereof. In turn, the insurer acquires all the
rights over the thing insured. [CAMPOS]

Sec. 139 A person insured by a contract of marine
insurance may abandon the thing insured, or any
particular portion thereof separately valued by the
policy, or otherwise separately insured, and
recover for a total loss thereof, when the cause of
the loss is a peril insured against:
(a) If more than three-fourths thereof in value is
actually lost, or would have to be expended to
recover it from the peril;
(b) If it is injured to such an extent as to reduce its
value more than three-fourths;
(c) If the thing insured is a ship, and the
contemplated voyage cannot be lawfully
performed without incurring either an expense
to the insured of more than three-fourths the
value of the thing abandoned or a risk which a
prudent man would not take under the
circumstances; or
(d) If the thing insured, being cargo or freightage,
and the voyage cannot be performed, nor
another ship procured by the master, within a
reasonable time and with reasonable diligence,
to forward the cargo, without incurring the like
expense or risk mentioned in the preceding sub-
paragraph. But freightage cannot in any case be
abandoned unless the ship is also abandoned.

Insurer becomes the owner of the thing
abandoned.
Abandonment must be total and absolute and
made within a reasonable time so as to give the
insurer the chance to promptly save, if possible,
some part of the property abandoned by the
insured.
If abandonment is not accepted, then the
insured can claim the proceeds or bring the
matter before the court.

Characteristics of a valid abandonment:
Explicit notice of abandonment
Neither partial nor conditional
Irrevocable
Given reasonable time to abandon

2. Fire [Secs. 167173]
Insurance against loss by fire, lightning,
windstorm, tornado or earthquake and other
allied risks, when such risks are covered by
extension to fire insurance policies or under
separate policies [Sec. 167].
Fire must be the proximate cause of the damage
or loss [CAMPOS].
Fire must be visible heat or light. Combustion
which produces heat but not visible glow is not
fire [CAMPOS].
Fire must be hostile. [CAMPOS].

Risks in fire insurance

Hostile vs. friendly fire
HOSTILE FIRE FRIENDLY FIRE
One that escapes from
the place where it was
intended to burn and
ought to be

OR
One that burns in a place
where it is intended to
burn and ought to be

Ex: fire burning in a
stove or lamp

43
HOSTILE FIRE FRIENDLY FIRE

One which remains
completely within its
proper place but
because of the
unsuitable materials
used to light it, it
becomes inherently
dangerous and
uncontrollable
Insurer is liable Insurer is not liable

Measure of indemnity
a. Open policy - only the expense necessary to
replace the thing lost or injured in the condition
it was at the time of the injury
b. Valued policy - the parties are bound by the
valuation, in the absence of fraud or mistake,
just like in marine insurance

However, where the face value of the policy is less
than the agreed valuation, then even in case of total
loss, the insured can only recover up to the policys
face value, which is always the maximum limit of
the insurers liability.

3. Casualty [Sec. 174]

Insurance covering loss or liability arising from
accident or mishap,
Not falling exclusively within the scope of other
types of insurance.
Includes, but not limited to, employers liability
insurance, workmens compensation insurance,
public liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and
theft insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar kinds
of insurance (ex: robbery and theft insurance)
Governed by the general provisions applicable to
all types of insurance + stipulations in the
insurance contract

Risks in casualty or accident insurance

Intentional vs. accidental
Intentional Implies the exercise of the reasoning
faculties, consciousness and volition.
Where a provision of the policy excludes
intentional injury, it is the intention of the
person inflicting the injury that is controlling.
If the injuries suffered by the insured clearly
resulted from the intentional act of the third
person, the insurer is relieved from liability as
stipulated [Biagtan v. the Insular Life Assurance
Co. Ltd. (1972)].

Accidental That which happens by chance or
fortuitously, without intention or design, which is
unexpected, unusual and unforeseen.

Liability vs. Indemnity

Liability insurance
Insurer assumes the obligation to pay the third
party in whose favor the liability of the insured
arises.
Liability of the insurer attaches as soon as the
liability of the insured to the third party is
established.
Insurer is liable regardless of whether or not the
insured has paid the third party [CAMPOS].

Indemnity insurance
NO action will lie against the insurer unless
brought by the insured for loss ACTUALLY
sustained and paid by him.
Liability of the insurer attaches only AFTER the
insured has paid his liability to the third party
[CAMPOS].

No Action Clause
A requirement in a policy of liability insurance which
provides that suit and final judgment be first
obtained against the insured; that only thereafter
can the person injured recover on the policy.
[Guingon vs. Del Monte 1967]

But, the no-action clause CANNOT prevail over the
Rules of Court provisions which are aimed at
avoiding multiplicity of suits. Parties (the insured
and the insurer) may be joined as defendants in a
case commenced by the third party claiming under a
liability insurance, as the right to relief in respect to
the same transactions is alleged to exist [see Sec. 5,
Rule 2, ROC; Sec. 6, Rule 3, ROC].

4. Suretyship [Secs. 175178]
An agreement whereby a surety guarantees the
performance by the obligor of an obligation or
undertaking in favor of the obligee.
It shall be deemed as insurance if the suretys
main business is that of surety ship, and not
where the contract is merely incidental to any
other legitimate business or activity of the
surety. [Secs. 175 par. 2 and 3].
A contract of surety becomes an insurance
contract only when authorized to function as an
insurance business.
Thus, corporations organized for the purpose of
guaranteeing performance of contractual
obligations or the payment of debts of others
are deemed insurance corporations [Sec. 185]
and are thus subject to all the requirements of
the Insurance Code [CAMPOS].
What is unique to a contract of suretyship is
that when the obligee accepts the bond, the
bond becomes valid and enforceable whether or
not the premium has been paid by the obligor
[Sec. 177], unlike in an insurance contract
where payment of premium is necessary for the
contract to be valid [Sec. 77].
If the obligee has not yet accepted, then
payment of premium is still necessary for the
contract of suretyship to be valid [Sec. 177].

44
Bond Necessary to Secure Performance of
Obligation
If the obligor does not perform the obligation, the
bond is forefeited in favor of the obligee and there
will be no more need to go to court. (obligee can go
directly and secure performance of the obligation).
[NPC v. CA (1986)]

5. Life

Individual Life [Secs. 179-183, 227]
Insurance on human lives and insurance
appertaining thereto or connected therewith
[Sec. 179]
May be made payable on the death of the
person, or on his surviving a specified period, or
otherwise contingently on the continuation or
cessation of life

Group Life [Secs. 50, 228]
A blanket policy covering a number of
individuals who are usually a cohesive group (ex:
employees of a company)
No medical examination is required of each
person insured (in contrast to individual life
insurance) but a specified number of persons is
usually required before the policy is issued
Based on the theory that by the law of averages,
only a determinable percentage of the members
of the group would die within the contemplated
period
The policy need not be in printed form and may
be typewritten, but the law prescribes the
contents of such policy.

Industrial Life [Secs. 229-231]
It is tailored to suit the needs of the urban
industrial class of blue-collar workers [J.F.
DOBBYNS].
Purpose: to cover the expenses for the last
sickness of the insured and those for his burial
Face amount is relatively small.
Shall not lapse for non-payment if due to the
failure of the company to send its
representative/agent to the insured to collect
such premium.
A form of life insurance under which
a. The premiums are payable either monthly
or oftener;
b. The face amount of insurance provided in
any policy is not more than 500 times that
of the current statutory minimum daily
wage in the City of Manila; and
c. The words "industrial policy" are printed
upon the policy [Sec. 229].

Risks in life insurance

a. Death or Survival
It may be made payable on the death of the
person, or on his surviving a specified
period, or otherwise contingently on the
continuation or cessation of life. [CAMPOS]
Various Life Insurance Plans
- Ordinary or whole life policy: insurer
agrees to pay the face value of the policy
upon the death of the insured
- Limited payment plan: insured agrees to
pay premiums only for a specified number
of years. If he survives such period, he
stops paying any further premium, and
when he dies, the insurer pays the
proceeds.
- Term plan: insurers liability arises only
upon the death of the insured within the
agreed term or period. If the insured
survives, the contract terminates and the
insurer is not liable.
- Pure endowment policy: insurer pays the
insured if the insured survives a specified
period. If the insured dies within the
period, the insurer is released from
liability and unless the contract otherwise
provides, need not reimburse any part of
the premiums paid.
- Endowment policy: If the insured
outlives the designated period, he is paid
the face value of the policy. If the he dies
within said period, the insurer pays the
proceeds to the beneficiary. (combination
of term policy and pure endowment
policy)
Death of the insured must be proven by the
beneficiary before the insurer can be made
to pay.

b. Suicide (Asked in 95)
Insurer is liable in the following cases:
If committed after two years from the date
of the policys issue or its last
reinstatement;
If committed in a state of insanity
regardless of the date of the commission
unless suicide is an excepted peril. [Sec.
180-A]
If committed after a shorter period
provided in the policy.
Since suicide is contrary to the laws of
nature and the ordinary rules of conduct, it
is never presumed. The burden of proving
lies with the insurer who seeks to avoid
liability under a life policy excepting it from
coverage [CAMPOS].

Note: Any stipulation extending the 2-year
period is null and void.

c. At the hands of the law (e.g. by legal
execution)
It is one of the risks assumed by the insurer
under a life insurance policy in the absence
of a valid policy exception [VANCE].

d. Killing by the beneficiary

GENERAL RULE
The interest of a beneficiary in a life
insurance policy
Shall be forfeited when the beneficiary is
the principal accomplice or accessory in
willfully bringing about the death of the
insured,
In which event, the nearest relative of the
insured shall receive the proceeds of said
insurance if not otherwise disqualified.

45
[Sec. 12] If there is no surviving relative of
the insured, the proceeds should be
delivered to the estate of the insured
subject to the payment of his debts
[CAMPOS].

Note: Conviction of the beneficiary is
necessary before his interest in the
insurance policy is forfeited in favor of the
nearest relative of the insured. This is
consistent with the cardinal principle of law
that forfeitures are not favored, and that
any construction which would result in the
forfeiture of the policy benefits will be
avoided if it is possible to construe the
policy in a manner which would allow
recovery (see page 8). Moreover, a
contrary interpretation would result in the
forfeiture of the beneficiarys interest on
mere imputations of his participation in the
killing of the insured.

EXCEPTIONS
Accidental killing
Self defense
Insanity of the beneficiary at the time he
killed the insured
Negligence (the Code only refers to a
willful act)

6. Compulsory Motor Vehicle Liability Insurance
A species of compulsory insurance that provides
for protection coverage that will answer for
legal liability for losses and damages for bodily
injuries or property damage that may be
sustained by another arising from the use and
operation of motor vehicle by its owner.
The Land Transportation Office shall NOT allow
the registration or renewal of registration of any
motor vehicle unless such insurance is obtained
[Sec. 376, as amended by PD 1455].
To the extent that motor vehicle insurance is
compulsory, it must be a LIABILITY policy [Sec.
373(f)], and the provision making it merely an
indemnity insurance contract CANNOT have any
effect [CAMPOS].
Insurers liability is DIRECT and PRIMARY so the
insurer need not wait for final judgment in the
criminal case to be liable. [Shafer v. Judge,
RTC, (1988)].
Purpose: To give immediate financial assistance
to victims of motor vehicle accidents and/or
their dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for the
accident sustained [Shafer v. Judge, RTC,
(1988)].
Claimants/victims may be a passenger or a
3
rd
party. The insured may be the party at
fault as against claims of third parties (third
party liability) or the victim of the contingent
event.
It applies to all vehicles whether public or
private vehicles.

Note: It is the only compulsory insurance coverage
under the Insurance Code.
V. Insurable Interest

Insurable Interest, Defined
Interest which the law requires the policy owner
to have in the person or thing insured, the
absence of which renders the contract void.

Definition
A person is said to have an insurable interest in
the subject matter insured where he has a
relation 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 of the
event insured against [44 C.J.S. 870 as cited in
Lalican v. Insular Life (2009)]
Insurable interest: one of the essential elements
of an insurance contract so necessary for its
validity, may not be waived

Sec. 25 Every stipulation for the payment of loss
whether the person insured has or has not any
interest in the property insured, or that the policy
shall be received as proof of such interest, and
every policy executed by way of gaming or
wagering, is void.

Rationale for requiring insurable interest
To avoid constituting insurance as a wagering
contract, because the insured has an interest in
the preservation or protection of the subject of
the insured.
To avoid a moral hazard, wherein the insured
will have nothing to lose but everything to gain
with the happening of the event insured against.
Limits the amount that can be recovered in
indemnity insurance.

Transfer of interest

General Rule
Sec. 58 The mere transfer of a thing insured does
not transfer the policy, but suspends it until the
same person becomes the owner of both the policy
and the thing insured.

Sec. 53 The insurance proceeds shall be applied
exclusively to the proper interest of the person in
whose name or for whose benefit it is made unless
otherwise specified in the policy.

Exceptions
1. Life, health and accident insurance [Sec. 20]
2. A change in interest in a thing insured, after the
occurrence of an injury, which results in a loss
[Sec. 21]
3. A change in interest in one or more of several
distinct things, separately insured by one policy
[Sec. 22]
4. A change in interest, by will or succession, on
the death of the insured [Sec. 23]
5. Transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to the others [Sec. 24]

46
6. When a policy is so framed that it will inure to
the benefit of whomsoever, during the
continuance of the risk, may become the owner
of the interest insured [Sec. 57]
7. When there is an express prohibition against
alienation in the policy, in which case, the
insurance contract is avoided [Art. 1306, Civil
Code]

No-Fault Clause
Sec. 378 Any claim for death or injury to any
passenger or third party pursuant to the provisions
of this chapter shall be paid without the necessity
of proving fault or negligence of any kind: Provided,
That for the purpose of this section:
(i) The total indemnity in respect of any person
shall not exceed five thousand pesos;
(ii) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim:
a) Police report of accident; and
b) Death certificate and evidence sufficient to
establish the proper payee; or
c) Medical report and evidence of medical or
hospital disbursement in respect of which
refund is claimed;
(iii) Claim may be made against one motor vehicle
only. In the case of an occupant of a vehicle,
claim shall lie against the insurer of the vehicle
in which the occupant is riding, mounting, or
dismounting from. In any other case, claim shall
lie against the insurer of the directly offending
vehicle. In all cases, the right of the party
paying the claim to recover against the owner of
the vehicle responsible for the accident shall be
maintained.

No-fault clause: for immediate compensation,
only for a minimal amount so injured party can
still recover the remaining balance of the
damage after final judgment
Person who paid under the no-fault clause can
collect from the person at fault in case he was
not responsible for the accident.

A. In Life/Health

Who has insurable interest over whose life?
Sec. 10 Every person has an insurable interest in the
life and health:

(a) Of himself, of his spouse and of his children;

(b) Of any person on whom he depends wholly or in
part for education or support, or in whom he has a
pecuniary interest;

(c) Of any person under a legal obligation to him
for the payment of money, or respecting property or
services, of which death or illness might delay or
prevent the performance; and

(d) Of any person upon whose life any estate or
interest vested in him depends.

Interest in ones own life
Cestui que vie is the insured himself
Insured can designate anyone to be the
beneficiary of the policy.
Each has unlimited interest in his own life,
whether the insurance is for the benefit of
himself or another.
The beneficiary designated need NOT have any
interest in the life of the insured (when person
takes out policy on his own life)
But if a person obtains a policy on the life of
another and names himself as the beneficiary,
he must have insurable interest therein (when a
person takes out policy on the life of another)

Interest in life of another

General Rule
The insured must have pecuniary interest in the
life of another.
Must be based on moral and legal grounds
No insurable interest in the life of an
illegitimate spouse
Such interest exists whenever the insured has a
responsible expectation of deriving benefit from
the continuation of the life of the other person
or of suffering detriment through its
termination.

Exception
In Sec. 10 par. (a) (spouse and children), mere
relationship is sufficient.
Sec. 10(a) does not qualify so children may be
legitimate or illegitimate, minors or of legal
age, married or not, dependent or not

Note:
CREDITOR may take out insurance on the life of
his debtor. BUT his insurable interest is only up
to the amount of the debt.
When the OWNER of the policy insures the life
of another (the cestui que vie) and designates
a third party as BENEFICIARY, BOTH the owner
and beneficiary must have an insurable interest
in the life of the cestui que vie.
ASSIGNEE is not required to have insurable
interest in the life of the insured, for to require
such interest in him is to diminish the
investment value of the contract to the owner.
Note, however, that assignment is different
from a change in the designated beneficiary.
When the beneficiary is the PRINCIPAL,
ACCOMPLICE, or ACCESSORY in willfully bringing
about the death of the insured = Interest of
beneficiary in life insurance policy is FORFEITED
[Sec. 12].

Interest in health
The health care agreement was in the nature of non-
life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital,
medical or any other expense arising from sickness,
injury or other stipulated contingent, the health
care provider must pay for the same to the extent
agreed upon under the contract. [Philamcare Health
Systems v. CA (2002)]

Time of existence of insurable interest

47

General Rule
Interest in the life or health of a person must exist
when the insurance takes effect (at inception), but
need not exist thereafter or when the loss occurs.
[Sec. 19]

Exceptions
1. Creditors insurance taken on the life of the
debtor - Insurable interest disappears once the
debt has been paid. At this point, the
creditor/insured can no longer recover on the
policy.
2. Companys insurance taken on the life of an
employee - insurable interest disappears once
the employee leaves the company, in which
case, the company can no longer recover on the
policy.

Transfer of policy: Interest can be transferred even
without the notice to the insurer of such transfer or
bequest, unless there is a stipulation to the contrary
[Sec. 182].

Note: there is no right of subrogation in life
insurance, because it is not a contract of indemnity.

B. In Property

Sec. 13. Every interest in property, whether real or
personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated
peril might directly damnify the insured, is an
insurable interest.

Forms of insurable interest
1. INTEREST in the property itself
Ex: Ownership of or a lien on property.

2. RELATION to such property
Ex: Interest of a commission agent on goods he
is selling.

3. LIABILITY in respect thereof
Ex: Interest of carrier on cargo which he has to
carry safely to its destination, such interest
being limited to the extent of his liability.

No contract or policy of insurance on property
shall be enforceable except for the benefit of
some person having an insurable interest in the
property insured. [Sec. 18]

Sec. 14 An insurable interest in property may
consist in:
(a) An existing interest;
(b) An inchoate interest founded on an existing
interest; or
(c) An expectancy, coupled with an existing
interest in that out of which the expectancy
arises.

Sec. 16 A mere contingent or expectant interest in
anything, not founded on an actual right to the
thing, nor upon any valid contract for it, is not
insurable.

Nature of insurable interest
1. EXISTING interest
May arise from legal title
Ex: interest of a mortgagor, lessor, assignee
May also arise from equitable title
Ex: purchaser of property before delivery,
builder of a building under construction

2. INCHOATE interest founded on an existing
interest
Must be founded on an existing contract but
not yet clearly defined or identified
Ex: stockholders inchoate interest in the
properties of the corporation, such interest
being based on his owned shares

3. EXPECTANCY, coupled with an existing interest
in that out of which the expectancy arises
Ex: farmers interest over his future crops grown
on land owned by him at the time of the
issuance of the policy

Insurable interest of specific persons
1. Stockholder/partner in a firm has inchoate
right to dividends in case the firm earns profits
and to share in the assets after payment of
corporate debts upon a firm's liquidation.
2. General Creditor does not have insurable
interest in a debtor's property.
3. Judgment Creditor - has insurable interest in
debtors property because he is given a right to
levy (general lien).
4. Mortgage Creditor - has insurable interest (lien)
which is recognized by the Insurance Code [Sec.
8].

Measure of insurable interest in property
Sec. 15 A carrier or depository of any kind has an
insurable interest in a thing held by him as such, to
the extent of his liability but not to exceed the
value thereof.

Sec. 17 The measure of an insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof.

Indemnity principle: insured may not recover a
greater value than his actual loss

Time of existence
Sec. 19 An interest in property insured must exist
when the insurance takes effect, and when the loss
occurs, but need not exist in the meantime; and
interest in the life or health of a person insured
must exist when the insurance takes effect, but
need not exist thereafter or when the loss occurs.

GENERAL RULE
Interest must exist BOTH at inception and at time of
loss, but not in the meantime.

EXCEPTIONS (automatic transfer of interest)

48
1. A change in interest over the thing insured
AFTER the loss contemplated. The insured may
sell the remains without prejudice to his right to
recover (Sec. 21).
2. A change of interest in one or more several
distinct things, separately insured by one policy.
This does not avoid the insurance as to the
others (Sec. 22).
3. A change in interest by will or succession upon
the death of the insured (Sec. 23).
4. A transfer of interest by one of several partners,
joint owners, or owners in common who are
jointly insured. The acquiring co-owner has the
same interest; his interest merely increases
upon acquiring other co-owners interest (Sec.
24).

Distinctions between Insurable Interest in Property
and Insurable Interest in Life
Insurable
Interest in
Property
Insurable Interest in
Life
Extent
Limited to
actual value of
the interest
thereon
Unlimited (save in
life insurance
effected by a
creditor on the life
of the debtor)
Time
when
Insurable
Interest
Must Exist
Must exist when
the insurance
takes effect
and when the
loss occurs,
BUT need not
exist in the
meantime
Must exist at the
time the insurance
takes effect
Expectati
on of
Benefit to
Be
Derived
Must have legal
basis
Need NOT have legal
basis
Beneficiar
ys
Interest
Must have
insurable
interest over
the thing
insured
Need not have
insurable interest
over the life of the
insured if the insured
himself secured the
policy. But if the
insurance was
obtained by the
beneficiary, the
latter must have
insurable interest
over the life of the
insured. (SUNDIANG)

Note: When there is an express prohibition against
alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended but
avoided.

Transfer of policy
Interest cannot be transferred without the insurers
consent, because the insurer has approved the policy
based on the personal qualifications and insurable
interest of the insured.

C. Double Insurance and Over
Insurance

Double insurance (Asked in 93, 99, 05)
It exists where the same person is insured by
several insurers separately in respect to the
same subject and interest [Sec. 93]
Requisites
1) same person insured
2) two or more insurers separately insuring
3) same subject matter
4) same interest insured
5) same risk or peril insured against
The insured CANNOT recover above the value of
property, for otherwise, the insurance would
constitute wagering.
It is not prohibited by law but it may be
prohibited by an other insurance clause.

Note: Double insurance is not applicable to life
insurance because the latter is incapable of
pecuniary estimation.

Overinsurance (Asked in 08)
This happens when the amount of the insurance
policy or policies exceed the value of the
insurable interest.
Overinsurance is allowed, only that the
Insurance Code regulates it.

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

In case of loss, the insurer is bound to pay only
up to the extent of the real value of the
property lost. BUT the insured may recover the
amount of the premium corresponding to the
excess in value of the property.
The insured may claim payment from the
insurers in such order as he may select, up to

49
the amount for which the insurers are severally
liable under their respective contracts.

Double Insurance vs. Over-insurance
Double insurance Over-insurance
There may be no over-
insurance as when the
sum total of the amount
of the policies issued
does not exceed the
insurable interest of the
insured.
The amount of the
insurance is beyond the
value of the insureds
insurable interest.
There are always several
insurers.
There may be only one
insurer involved.

Reinsurance
Sec. 97 A reinsurance is presumed to be a contract
of indemnity against liability, and not merely
against damage.

Sec. 98 The original insured has no interest in a
contract of reinsurance.

The original insurance contract is separate and
distinct from the reinsurance contract.
Insurance contract is independent from
reinsurance contract.
Reinsurance is a contract of indemnity
No relationship between reinsurer and the
insured under the insurance contract

Insurance vs. Reinsurance
Insurance- indemnity against damages
Reinsurance- indemnity against liability

Reinsurance treaty vs. Reinsurance policy
A reinsurance treaty is an agreement between
two insurance companies whereby one agrees to
cede and the other to accept reinsurance
business pursuant to provisions specified in the
treaty [DE LEON].
A reinsurance policy is a contract of indemnity
one insurer makes with another to protect the
first insurer from a risk it has already assumed.
Reinsurance treaties and reinsurance policies
are not synonymous. Treaties are contracts for
insurance; policies are contracts of insurance
[Philamlife vs. Auditor General (1958)].

Double Insurance vs. Reinsurance (Asked in 94)
Double Insurance Reinsurance
Same interest Different interest
Insurer remains as the
insurer.
Insurer becomes the
insured in relation to the
reinsurer.
Insured is a party in
interest in the insurance
contracts.
The original insured is
not a party in the
reinsurance contract.
Property is the subject
matter
The original insurer's risk
is the subject matter.
Insured has to give his
consent.
Insureds consent is not
necessary.

D. Multiple or Several Interests on
Same Property [Secs. 8, 9]

Open mortgage or loss payable mortgage clause
A mortgage that can be paid-off prior to maturity
without penalty; mortgagee is the beneficiary for
insurance taken by mortgagor (insurance taken by
mortgagor but payable or assigned to the
mortgagee).

The insurance is on the interest of the
mortgagor; so, he does not cease to be a party
to the contract.

His acts, prior to the loss, which would
otherwise avoid the insurance, affects the
mortgagee, even if the property is in the hands
of the latter. [Secs. 8 and 9]

In case of loss, the mortgagee is entitled to
recover up to the extent of his credit, and
should the amount he recovers be equal to the
amount of his credit, then the debt is
extinguished.

Union mortgage or standard mortgage clause
Mortgagee may perform the acts of mortgagor.
Subsequent acts of the mortgagor or owner do
NOT prejudice the mortgagee's interest.
- When a mortgagee insured his own interest
and a loss occurs, he is entitled to recover
on the insurance. However, he may no
longer claim against the mortgagor, for his
claim is discharged up to the amount the
insurer has paid him [Palileo vs. Cosio
(1955)].
- If insurance taken by mortgagor for his own
benefit: he can only recover from the
insurer but the mortgagee has a lien on the
proceeds by virtue of the mortgage

Insurance taken by mortgagee
When mortgagee insures his own interest in the
mortgaged property without reference to the right
of the mortgagor
Mortgagee is entitled to the proceeds of the
policy in case of loss to the extent of his credit
If the proceeds are more than the total amount
of credit mortgagor has no right to the
balance

If proceeds are equal to the credit insurer is
subrogated to the mortgagees rights + mortgagee
can no longer recover the mortgagors indebtedness

If proceeds are less than the credit mortgagee
may recover from the mortgagor the deficiency
Upon payment, the insurer is subrogated to the
rights of the mortgagee against the mortgagor
to the extent of the amount paid.

VI. Perfection of the Contract of
Insurance

a. Offer and Acceptance/Consensuality
The insurance contract is consensual and is therefore
perfected the moment there is a meeting of the

50
minds with respect to the object and the cause or
consideration.

Insurance contracts follow the cognition theory.

Enriquez vs. Sun Life Assurance Co. of Canada
(1920)
The insurance contract cannot be perfected without
the notice of acceptance coming to the knowledge
of the applicant. Under the CC, consent is shown by
the concurrence of offer and acceptance.

An acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge, known as the cognition
theory.

Great Pacific Life Assurance Corp. vs. CA (1999)
Note that in insurance contracts, the insured is the
one making the offer by submitting an application to
the insurer and the latter accepts the offer by
approving the application.

Thus, mere submission of the application without
the corresponding approval of the policy does not
result in the perfection of the contract of insurance.

(1) Delay in acceptance
If there is delay in the acceptance by the insurer,
after the insured has submitted an application and
has paid the premium, there are three theories that
can be applied:
1. Insurer is liable for tort, under the tort theory.
Tort theory no pre-existing contractual
relation

2. Here, there is delay in acceptance of the
obligation insurance business is imbued with
public interest.

3. The measure of damage is the face value of the
policy. In life insurance, the proceeds will inure
to the insureds estate and not to the
beneficiary.

4. Insurer is liable under the policy because its
delay in formally accepting/denying the
application and payment of premium is taken as
an implied acceptance.

It should be noted that an application is a mere offer
which requires the overt act of the insurer for it to
ripen into a contract. Delay in acting on the
application does not constitute acceptance even
though the insured has forwarded his first premium
with his application. [Perez v. Court of Appeals
(2000)]

Note:
Offer when the insured submits an application to
the insurer
Acceptance when the insurer approves the
application
Effectivity upon payment of first premium,
provided there has been an approval of the
application.

(2) Delivery of Policy
Delivery- the act of putting the insurance policy
(the actual document) into the possession of the
insured

Delivery of policy is important because it is: a)
an evidence of the execution of the insurance
contract; and b) a communication of the
insurers acceptance of insureds offer.
However, delivery of policy is not essential for
the validity of the contract.

Modes of delivery
1. Actual delivery to the insured
2. Constructive delivery by mail; delivery to the
insureds agent or some person for the benefit
of the insured.

Delivery to the insured in person is not necessary.
Delivery may be made by mail or to a constituted
agent. [Lucero Vda. De Sindayen v. Insular Life
(1935)]

b. Premium Payment

Premium, Defined
The agreed price for assuming and carrying the risk,
that is, the consideration paid an insurer for
undertaking to indemnify the insured against the
specified peril.

Sec. 77 An insurer is entitled to payment of the
premium as soon as the thing insured is exposed to
the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid
and binding unless and until the premium thereof
has been paid, except in the case of a life or an
industrial life policy whenever the grace period
provision applies.

Validity of Contract upon Payment

General Rule
NO insurance policy issued or renewal is valid and
binding until actual payment of the premium. Any
agreement to the contrary is void [Sec. 77].

Exceptions
1. In case of life and industrial life whenever the
grace period provision applies [Sec. 77].
2. Where there is an acknowledgment in the
contract or policy of insurance that the
premium has already been paid [Sec. 78]
3. Where there is an agreement to grant the
insured credit extension for the payment of the
premium despite full awareness of Sec. 77
[UCPB v. Masagana Telemart (2001)]
4. Where there is an agreement allowing the
insured to pay premium in installment and
partial payment has been made at the time of
the loss [Makati Tuscany vs. CA (1992)]
5. Where the parties are barred by estoppel [UCPB
v. Masagana (2001)]

Makati Tuscany v CA (1992)

51
The policies are valid even if the premiums due are
paid in installments because the records clearly
show that the two parties intended the policies to be
binding and effective notwithstanding the staggered
payment of the premiums.

The acceptance of the installment payments over
the period of 3 years speaks loudly of the intention
of insurer to honor the policies it issued to Makati
Tuscany.

Sec. 77 merely prohibits the parties from stipulating
that the policy is valid even if premiums were not
paid, but it does not expressly prohibit an agreement
granting credit extensions.

Sec. 78 also allows the insurer to waive the
condition of full payment by acknowledging in the
policy that there has been receipt of premium
despite the fact that premium is actually unpaid.

If the Code allows a waiver when no actual payment
has been made, then a waiver should also be allowed
in this case where the insurer has already
acknowledged receipt of partial payment.

UCPB Gen. Ins. v Masagana Telemart (2001)
Sec. 77 of the Insurance Code cannot be strictly
applied.

Exceptions to Sec. 77 are:
a.) In case of a life or industrial life policy
whenever the grace period applies.
b.) Sec. 78: An acknowledgment in a policy or
contract of insurance of the receipt of premium
is conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding
until premium is actually paid.
c.) If the parties have agreed to the payment in
installments of the premium and partial
payment has been made at the time of the loss.
d.) The insurer may grant credit extension for the
payment of the premium.
e.) It would be unjust and inequitable if recovery
on the policy would not be permitted against
UCPB, which consistently granted the 60-90 day
credit term for the payment of the premiums
despite its full awareness of Sec. 77.

Estoppel bars it from taking refuge under the action,
since Masagana relied on good faith on such a
practice.

Authority of agent to receive premium
Where an insurer authorizes an insurance agent
or broker to deliver a policy to the insured, it is
deemed to have authorized said agent to
receive the premium in its behalf.
The insurer is also bound by its agents
acknowledgment of receipt of payment of
premium [American Home Assurance Co. vs.
Chua [1999)].

Effect of payment by postdated check
The payment of premium by a postdated check
at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect.
But payment by a check bearing a date prior to
the loss, assuming availability of funds, would
be sufficient even if it remains unencashed at
the time of the loss.
The subsequent effects of encashment would
retroact to the date of the instrument and its
acceptance by the creditor [VITUG, Pandect on
Commercial Law].

Premiums in Suretyship Contracts
Payment of premiums is also necessary to make
suretyship contracts binding, but the acceptance by
the obligee of the bond makes the suretyship
contract binding notwithstanding non-payment of
premium by the insured.

Philippine Pryce Assurance Corp. vs. CA (1994)
Generally, premium is also necessary in order for
the contract of suretyship or bond to be binding.

However, where the obligee has accepted the bond,
it is binding even if the premium has not been paid,
subject to the right of the insurer to recover the
premium from its principal.

c. Non-Default Options in Life Insurance

Options of Insured under a lapsed life insurance
policy [Secs. 227(f), (h), (j))]

Cash Surrender Value (CSV)
Amount that the insured is entitled to receive if he
surrenders the policy and releases his claims upon it
A portion of the reserve on a life insurance policy,
resulting from the accumulation of premium
overcharges in the early years of the policy
Right to CSV accrues only after 3 premium payments
Insured is given the right to claim the amount less
than the reserve, reduced by surrender charge.

Rationale: Premium is uniform throughout your lifetime,
but the risk is varied (higher risk when youre older, low
when youre young) thus the cost of protection is more
expensive during the early years of the policy

Alternatives to Obtaining the Cash Surrender Value

1. Extended Insurance/term insurance
To have the policy continued in force from date of
default for a time either stated or equal to the
amount of the CSV, taken as a single premium
Term insurance: pay a single premium (no further
payments) to extend the policy for a fixed period of
time
Failure to extend at the end of the fixed period
purchase new policy
Face value remains the same but only within the
term
Reinstatement allowed if made within the term
purchased, no reinstatement after the lapse of the
term purchased

52
2. Paid-up Insurance
Such amount of insurance as the CSV applied as a
single premium
Effect: policy continues in force from date of
default for the whole period and under the same
conditions of the original contract without further
payment of premiums
Same policy, same terms and conditions, different
price
Insured is given the right, upon default, the option
to make the policy continued for the whole period
of insurance without further payment of premiums.
In case of maturity, the beneficiary will recover only
the paid-up value.
No reinstatement allowed

3. Automatic Premium Loan (APL)
Upon default, insurer lends/advances to the insured
without any need of application on his part, amount
necessary to pay overdue premium, but not to
exceed the CSV of the policy
Must be requested in writing by the insured either in
the application or at any time before expiration of
the period
Effect: insurance policy continues in force for a
period covered by the payment. After the period, if
insured still does not resume paying his premiums,
policy lapses, unless CSV still remains
If there is still CSV, APL continues until CSV is
exhausted.
Beneficial for the insured because it continues the
contract and all its features with full force and
effect

d. Reinstatement of a Lapsed Policy of Life
Insurance [Sec. 227]

Not a non-default option
Effect: does not create a new contract, merely
revives the original policy so insurer cannot
require a higher premium than the amount
stipulated in the contract
It does not apply to group/industrial life
insurance.

Requisites:
Must be exercised within 3 years from date of
default
Insured must present evidence of insurability
satisfactory to the insurer
Pay all back premiums and all indebtedness to
the insurer
CSV must not have been duly paid to insured nor
the extension period expired

e. Refund of Premiums

Return of Premiums
1. If the thing insured was never exposed to the
risks insured against [Sec. 79(a)]
2. When the contract is voidable due to the fraud
or misrepresentation of insurer or his agent
[Sec. 81]
3. When by any default of the insured other than
actual fraud, the insurer never incurred any
liability under the policy [Sec. 81]
4. Contract is voidable because of the existence of
facts of which the insured was ignorant without
his fault [Sec. 81]
5. Where the insurance is for a definite period and
the insured surrenders his policy [Sec. 79(b)]
Entitled to a portion of the premium that
corresponds to the unexpired time at a pro rata
rate, unless a short period rate has been agreed
upon and appears on the face of the policy
6. Ratable return of the premium when there is
over-insurance by several insurers [Sec. 82]
Proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk
7. When rescission is granted due to the insurers
breach of contract

Note: Under Nos. 1, 2, 3 and 4, the insured is
entitled to a return of the entire premium paid.

VII. Rescission of Insurance
Contracts

1. Concealment (Asked in 96, 97, 01)

Concealment, Defined
A neglect to communicate that which a party knows
and ought to communicate [Sec. 26]

Requisites
1. A party knows a fact which he neglects to
communicate or disclose to the other.
2. Such party concealing is duty bound to disclose
such fact to the other.
3. Such party concealing makes no warranty of the
fact concealed.
4. The other party has not the means of
ascertaining the fact concealed.
5. The fact concealed is material.

Note: Concealment requires fraudulent intent.

Effects of Concealment
It vitiates the contract and entitles the insurer
to rescind, even if the death or loss is due to a
cause not related to the concealed matter [Sec.
27].
The contract is VOIDABLE at the insurers
option.

Note: Good faith is NOT a defense in concealment.
Sec. 27 clearly provides that the concealment
whether intentional or unintentional entitles the
injured party to rescind the contract of insurance.

Test of Materiality

General Rule
Determined not by the event, but solely by the
probable and reasonable influence of the facts upon
the party to whom the communication is due, in
forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries [Sec.
31]

53
It need not increase the risk or contribute to any loss
or damage suffered. It is sufficient if the knowledge
of it would influence the party in making the
contract.

Exceptions
1. Incontestability clause under Sec. 227(b) (will be
incontestable after policy has been in force
during lifetime of insured for two years)
2. marine insurance [Sec. 110]

Concealment: Marine Insurance vs. Ordinary
Insurance
Concealment in Marine
Insurance
Concealment in
Ordinary Private
Insurance
Stricter: state the exact
and whole truth
Need not be the exact
statements
concealment of certain
matters as provided in
Sec. 110 will not entirely
avoid the contract but
will merely exonerate
the insurer from losses
resulting from the risk
concealed
- national character of
the insured
- liability of the thing
insured to capture
and detention
- liability to seizure
from breach of foreign
laws of trade
- want of necessary
documents
- use of false and
simulated papers
Any kind of concealment
will not make the insurer
liable.

Non-Medical Insurance
The waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning the
previous conditions of health and diseases suffered.
[Sunlife v. Sps. Bacani (1995)].

Philamcare Health Systems vs. CA (2002)
Where matters of opinion or judgment are called
for, answers made in good faith and without intent
to deceive will not avoid the policy even though they
are untrue.
Reason: The insurer cannot rely on those
statements. He must make further inquiry.

Note: Concealment must take place at the time the
contract is entered into in order that the policy may
be avoided. Information obtained after the
perfection of the contract is no longer necessary to
be disclosed by the insured, even if the policy has
not been issued.

Sunlife Assurance vs. CA (1995)
The fact that the matter concealed had no bearing
on the cause of death is NOT important because it is
well settled that the insured need not die of the
disease he had failed to disclose to the insurer.
It is sufficient that his nondisclosure misled the
insurer in forming his estimates of the risks of the
proposed policy or in making inquiries.

Matters which NEED to be disclosed
1. Matters within a partys knowledge
2. Which are material to the contract and
3. As to which the party with the duty to
communicate makes no warranty, and
4. Which the other party does not have the means
of ascertaining [Sec. 28].

Note: If the applicant is aware of the existence of
some circumstance which he knows would influence
the insurer in acting upon his application, good faith
requires him to disclose that circumstance, though
unasked [VANCE]

Great Pacific Life v. CA (1979) The fact of being a
mongoloid is a material fact that needs to be
disclosed.

Matters which DO NOT need to be disclosed [Secs.
30, 33-35]
a. Matters already known to the insurer [Sec.
30(a)]
b. Matters each party are bound to know such as
public events, general information etc. [Sec.
30(b)]
c. Matters of which the insurer waives
communication he is in estoppel. [Sec. 30(c)]
d. Matters that concern only risks excepted,
either expressly or by warranty, from the
liability assumed under the policy which are
NOT OTHERWISE MATERIAL. [Sec. 30(e)]
e. Information of the nature or amount of the
interest of one insured except if inquired upon
by the insurer. [Sec. 34]
f. If the interest of the insured to the property
being insured is absolute then there is no
necessity to disclose the extent of his interest,
if not then he is required to disclose under
Section 51 [Sec. 34]
g. The right to information of material fact may
be waived either expressly, by the terms of
insurance or impliedly by neglecting to make
inquiry as to the facts already communicated.
[Sec. 33]
h. Matters of opinion. [Sec. 35]

Mere possibility of previous hypertension is not
enough to establish concealment [Great Pacific Life
v. CA (1999)].

Sec.32 Each party to a contract of insurance is
bound to know all the general causes which are open
to his inquiry, equally with that of the other, and
which may affect the political or material perils
contemplated; and all general usages of trade.

54
2. Misrepresentation/Omissions

Representation, Defined
Factual statements made by the insured at the
time of, or prior to, the issuance of the policy
[Sec. 37] to give information to the insurer and
induce him to enter into the insurance contract.
may be oral or written [Sec. 36]

Kinds of Representations
1) Affirmative
Any allegation as to the existence or non-existence
of a fact when the contract begins

2) Promissory
Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance. A promissory representation is
substantially a condition or warranty.

Requisites of a False Representation
(Misrepresentation)
1. The insured stated a fact which is untrue.
2. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to
be true and which has a tendency to mislead.
3. Such fact in either case is material to the risk.

There is false representation if the matter is
true at the time it was made/represented but
false at the time the contract takes effect.
[Sec. 44]

Remedy of injured party is rescission. But the
remedy is not available should the insurer
accept the premium notwithstanding knowledge
of the ground/s for rescission. [Sec. 45]

A representation must be presumed to refer to
the date on which the contract goes into effect
[Sec.42]

NO false representation if the matter is true at
the time the contract takes effect although
false at the time it was made/represented.

Effect of Misrepresentation
The injured party is entitled to rescind from the
time when the representation becomes false. [Sec.
45]

Representation of Opinion

General Rule
A representation of the expectation, belief, opinion,
or judgment of the insured, although false, will NOT
avoid the policy, even if such was material to the
risk (DE LEON).

Exception
Such representation will avoid the policy if there is a
CONCURRENCE OF MATERIALITY AND FRAUDULENCE
OR INTENT TO DECEIVE.
However, if the representation is one of fact,
the insurer need only prove the materiality of
the representation, because in such cases the
intent to deceive is presumed [DE LEON].

Note: If a statement of fact, fraudulent intent is
presumed. Hence, materiality of the misrepresented
fact will avoid the contract.

A representation cannot qualify an express
provision or an express warranty of insurance
[Sec. 40]. It is not part of the contract but only
a collateral inducement to it. But it may qualify
as an IMPLIED WARRANTY.
A representation may be altered of withdrawn
before the insurance is effected but not
afterwards [Sec. 41]
There is fraud and misrepresentation when
another person took the place of the insured in
the medical examination [Eguaras v. Great
Eastern (1916)].
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on the
policy leads to the conclusion that the insured is
beyond the age covered and yet insurer
continued to accept payment and had issued the
policy. Insurer deemed estopped [Edillon v.
Manila Bankers Life (1982)].

Concealment vs. Misrepresentation
CONCEALMENT MISREPRESENTATION
Passive form Active form
Insured withholds
information of material
facts from the insurer;
he maintains silence
when he ought to speak
Insured makes
erroneous statements
of facts with the intent
of inducing the insurer
to enter into the
insurance contract
Determined by the same rules as to materiality
Same effects on the part of the insured; insurer
has right to rescind
Injured party is entitled to rescind a contract of
insurance on ground of concealment or false
representation, whether intentional or not
Rules on concealment and representation apply
likewise to the insurer as insurance contract is
one of utmost good faith

3) Breach of Warranties

Warranty, Defined
A statement or promise by the insured
Set forth in the policy or by reference
incorporated therein,
The untruth or non-fulfillment of which in any
respect, and without reference to whether
insurer was in fact prejudiced by such untruth or
non-fulfillment,
Renders the policy voidable by the insurer
[VANCE].
Must always be express

Purpose
To eliminate potentially increasing hazards which
may either be due to the acts of the insured or to
the change of the condition of the property.

55
Kinds of warranties
1. Express contained in the policy or clearly
incorporated therein as part thereof; warranty
as a fact [Sec. 71].
2. Implied deemed included in the contract
although not expressly mentioned; applicable in
marine insurance only (ex: implied warranty of
seaworthiness of the vessel.)
3. Affirmative Warranty is one which asserts the
existence of a fact or condition at the time it is
made [Sec. 68].
4. Promissory Warranty or Executory Warranty is
one where the insured stipulates that certain
facts or conditions pertaining to the risk shall
exist or that certain things with reference
thereto shall be done or omitted. It is in the
nature of a condition subsequent [Secs.72 & 73].

Effect of breach of warranty

General Rule
It gives the insurer the right to rescind [Secs.74&76].

Exceptions [Sec. 73]
loss occurs before the time of performance of
the warranty
the performance becomes unlawful
performance becomes impossible

Rule on immaterial provisions

General Rule
Not all breach of the provisions in the policy
may give the right to rescind the policy.
Breach of an immaterial provision does not
avoid the policy [Sec. 75].

Exception
When the parties stipulate that violation of a
particular provision (though normally immaterial)
shall avoid the policy.
In effect, the parties converted the immaterial
provision into a material one [SUNDIANG].

A breach of warranty without fraud merely
exonerates an insurer from the time it occurs [Sec.
76]

Fraud is not essential to entitle the insurer to
rescind a contract for breach of warranty. Falsity,
not fraud, is the basis of liability in warranty.

Warranties in Fire Insurance [Sec. 168]
Entitles the insurer to rescission if:
Use or condition of a thing insured is limited by
the policy
Insured alters the use of condition without the
consent of the insurer
Alteration is by means within the control of the
insured
Alteration increased the risk (increase of hazard
or chance of loss).
Alteration is actual and substantial

A condition in the policy which requires insured to
disclose to the insurer of any insurance that, if
violated by the insured, would ipso facto avoid the
contract [Pioneer v. Yap (1974)].

Insurer is barred by waiver (or estoppel) to claim
violation of the so-called hydrants warranty when,
despite knowing fully that only 2 fire hydrants
existed (out of the 11 hydrants required), it still
issued the insurance policies and received the
premiums [Qua Chee Gan v. Law Union (1955)].

Warranty vs. Representation
Warranty Representation
Part of the contract Mere collateral
inducement
Written on the policy,
actually or by reference
May be written in the
policy or may be oral.
Presumed material Must be proved to be
material
Must be strictly complied
with
Requires only substantial
truth and compliance

Incontestible clause does not include
warranties, only concealment/misre-
presentation.

VIII. Claims Settlement and
Subrogation

Liability for Loss (Asked in 96, 05, 07)
Loss for which insurer is
liable

Loss for which insurer is
NOT liable
Loss the proximate
cause of which is the
peril insured against
[Sec. 84]
Loss by insureds willful
act
Loss the immediate
cause of which is the
peril insured against
except where the
proximate cause is an
excepted peril;
Loss due to connivance
of the insured [Sec. 87]
Loss through negligence
of insured except where
there was gross
negligence amounting to
willful acts; and
Loss where the excepted
peril is the proximate
cause.
Loss caused by efforts to
rescue the thing from
peril insured against;

If during the course of
the rescue, the thing is
exposed to a peril not
insured against, which
permanently deprives
the insured of its
possession, in whole or
in part [Sec. 85]

Requisites for recovery from insurance
1) The insured must have insurable interest in the
subject matter;
2) That interest is covered by the policy;
3) There must be a loss; and

56
4) The loss must be proximately caused by the
peril insured against OR the immediate cause of
the loss is a peril insured against except where
the proximate cause is an excepted peril.
Proximate Cause Remote Cause
An event that sets all
other events in motion
without any intervening
or independent case,
without which the injury
or loss would not have
occurred. [Vda. De
Bataclan v. Medina
(1957)]
An event preceding
another in a causal
chain, but separated
from it by other events

a. Notice and Proof of Loss

Notice of Loss
The formal notice given the insurer by the
insured or claimant under a policy of the
occurrence of the loss insured against.
Purpose: To apprise the insurance company so
that it may make proper investigation and take
such action as may be necessary to protect its
interest.
Necessary as the insurer cannot be liable to pay
a claim unless he receives notice of that claim.
In fire insurance: Insurer is exonerated if notice
of loss is not given to the insurer by the insured
or by the person entitled to the benefit without
unnecessary delay [Sec. 88]
However, it has been held that formal notice of
loss is not necessary if insurer has actual notice
of loss already.

Form of Notice
In the absence of any stipulation in the policy,
notice may be given orally or in writing.
The notice of loss may be in the form of an
informal or provisional claim containing a
minimum of information as distinguished from a
formal claim which contains the full details of
the loss, computations of the amounts claimed,
and supporting evidence, together with a
demand or request for payment [DE LEON].

In fire insurance In other types of insurance
Required Not required
Failure to give
notice will defeat
the right of the
Failure to give notice will not
exonerate the insurer, unless
there is a stipulation in the
insured to
recover.
policy requiring the insured to
do so.

Proof of Loss
The formal evidence given the insurance company by
the insured or claimant under a policy of the
occurrence of the loss, the particulars thereof and
the data necessary to enable the company to
determine its liability and the amount
Is not tantamount to proof or evidence under
the law on evidence.
Form: Like a notice of loss, in the absence of
any stipulation in the policy, proof may be given
orally or in writing.
Proof of loss is intended to:
- Give the insurer information by which he may
determine the extent of his liability.
- Afford him a means of detecting any fraud
that may have been practiced upon him.
- Operate as a check upon extravagant claims.

b. Guidelines on Claims Settlement
Sec. 241. No insurance company doing business in
the Philippines shall refuse, without just cause, to
pay or settle claims arising under coverages
provided by its policies, nor shall any such company
engage in unfair claim settlement practices.

(1) Unfair Claims Settlement; Sanctions

Sec. 241 (1) provides for instances of unfair claims
settlement done by an insurance company:
1. Knowingly misrepresenting to claimants
pertinent facts or policy provisions relating to
coverages at issue;
2. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
3. Failing to adopt and implement reasonable
standards for the prompt investigation of claims
arising under its policies;
4. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of claims
submitted in which liability has become
reasonably clear;
5. Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason substantially
less than the amounts ultimately recovered in
suits brought by them.

57

CLAIMS LIFE INSURANCE NON-LIFE INSURANCE
Maturity
Upon death of the person
insured;
Upon his surviving a specific
period
Otherwise contingently on the
continuance or cessation of life
[Sec. 180]
Upon happening of event insured
against
Event must occur within the period
specified in policy, otherwise insurer
has no liability
Delivery of Proceeds
General Rule:
Immediately upon maturity of
policy.

Exception:
If payable in INSTALLMENTS or as an
ANNUITY, when such installments or
annuities become due

IF MATURITY IS UPON DEATH:
Within 60 days after presentation of
claim and filing of proof of death of
insured.
Within 30 days after
Proof of loss is received by insurer;
and
Ascertainment of loss or damage is
made either by agreement between
the insured and insurer or by
arbitration

If ascertainment not made within 60
days after such receipt by insurer of
proof of loss, loss or damage shall be
paid within 90 days after such
receipt.
Effect of Refusal or Failure to
pay claim within time
prescribed:
In case of litigation, it is the
duty of the Commissioner or
the Court to determine WON
claim has been unreasonably
denied or withheld.
Failure to pay any such claim
within the time prescribed
shall be considered prima
facie evidence of
unreasonable delay in
payment.
Entitles beneficiary to collect
interest on the proceeds of
policy for the duration of the
delay at rate of twice ceiling
prescribed by the monetary
board (unless refusal to pay is
based on ground that claim is
fraudulent)
In case damages awarded, this
includes attorneys fees and
other expenses incurred due to
delay (plus the interest)
Entitles beneficiary to collect interest
on the proceeds of policy for the
duration of the delay at rate of twice
ceiling prescribed by the monetary
board (unless refusal to pay is based
on ground that claim is fraudulent)
In case damages awarded, this
includes attorneys fees and other
expenses incurred due to delay (plus
the interest)

(2) Prescription of Action
Sec. 63 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 year from the time when the cause of
action accrues, is void.

Sec. 384 Any person having any claim upon the
policy issued pursuant to this Chapter shall, without
any unnecessary delay, present to the insurance
company concerned a written notice of claim setting
form the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician.
Notice of claim must be filed within six months from
the date of the accident, otherwise, the claim shall
be deemed waived. 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 year from the denial of the claim,
otherwise, the claimants right of action shall
prescribe.

Period for presenting a written notice of claim
within 6 months from date of accident

Period for action or suit for recovery of damage
within one year from the denial of the claim (denial
of the claim is the time when cause of action
accrues, so prior to such denial, action cannot be
brought)

Art. 1144, Civil Code The following action must be
brought within ten years from the time the right of
action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law
(3) Upon a judgment. (n)

Rules:
1. In the absence of an express stipulation in the
policy, it being based on a written contract, the
action prescribes in 10 years.
2. However, the parties may validly agree on a
shorter period provided it is not less than one
year from the time the cause of action accrues.
Note: In motor vehicle insurance, action
prescribes in one year.
3. The cause of action accrues from the rejection
of the claim of the insured and not from the
time of loss.
The period for filing claim is not merely a
procedural requirement.
It is essential for the prompt settlement of
claims as it demands for suits to be brought
while the evidence as to the origin and cause of
the loss or destruction has not yet disappeared.

58
It is a condition precedent to the insurers
liability or a resolutory cause in case the action
is not filed by the insured within the stipulated
period.
The Insurance Commissioner has the power to
adjudicate disputes relating to an insurance
companys liability to an insured under a policy.
A complaint or claim filed with such official is
considered an action or suit the filing of
which would have the effect of tolling the
suspending the running of the prescriptive
period.
A stipulation stating that the prescriptive period
for filing an action is 1 year from the happening
of loss is void (it should be from the time of
rejection). As the stipulation is void and is upon
a written contract, the time limit is 10 years
from the time the cause of action accrues.

Period for Payment of Claims
LIFE POLICIES [Sec.
242]
NON-LIFE POLICIES
POLICIES [Sec. 243]
Maturing upon the
expiration of the term
The proceeds are
immediately payable to
the insured, unless they
are made payable in
installments or as
annuity, in which case,
the installments or
annuities shall be paid as
they become due
The proceeds shall be
paid within 30 days after
the receipt by the
insurer of proof of loss,
and ascertainment of the
loss or damage by
agreement of the parties
or by arbitration but not
later than 90 days from
such receipt of proof of
loss whether or not
ascertainment is had or
made
Maturing at the death of
the insured, occurring
prior to the expiration
of the term stipulated
Proceeds are payable to
the beneficiaries within
60 days after
presentation and filing of
proof of death

(3) Subrogation

Normal incident of indemnity insurance as a
legal effect of payment
Insurer steps into the shoes of insured.

Note: There is only subrogation in non-life
insurance.

Definition and Scope
Subrogation is the substitution of one person in the
place of another with reference to a lawful claim or
right, so that he who is substituted succeeds to the
rights of the other in relation to a debt or claim,
including its remedies or securities. The principle
covers the situation under which an insurer that has
paid a loss under an insurance policy is entitled to
all the rights and remedies belonging to the insured
against a third party with respect to any loss covered
by the policy. It contemplates full substitution such
that it places the party subrogated in the shoes of
the creditor, and he may use all means which the
creditor could employ to enforce payment [Lorenzo
Shipping Corporation v. Chubb and Sons, Inc.
(2004)].

Rights Transferred
The rights to which the subrogee succeeds are
the same as, but not greater than, those of the
person for whom he is substituted.
He cannot acquire any claim, security, or
remedy the subrogor did not have. In other
words, a subrogee cannot succeed to a right not
possessed by the subrogor. A subrogree in effect
steps into the shoes of insured and can recovery
only if the insured likewise could have
recovered

Rules:
NO need of a formal assignment or an express
stipulation in the policy. It is a legal effect of
payment.
The insurer can only recover from the third
person what the insured could have recovered.
Thus, there can be no recovery if the insurer
voluntarily paid even if the loss is not covered
by the policy.
The insured can no longer recover from the
offended party what was paid to him by the
insurer but he can recover any deficiency, that
is, if the damages suffered are more than what
was paid. The deficiency is not covered by the
right of subrogation.
The insurer must present the policy as evidence
to determine the extent of its coverage [Wallen
Phil. Shipping v. Prudential Guarantee (2003)].

Instances where there is no right of subrogation
Where the insured by his own act releases the
wrongdoer or third party liable for the loss or
damage;
Where the insurer pays the insured the value of the
loss without notifying the carrier who has in good
faith settled the insureds claim for loss;
Where the insurer pays the insured for a loss or risk
not covered by the policy [Pan Malayan Insurance
Company v. CA (1997)].
In life insurance
For recovery of loss in excess of insurance coverage
[DE LEON].

By the act of Manila Mahogany issuing a release
claim to SMC, the right of Zenith against SMC is
nullified since the insurer can be subrogated to only
such rights as the insured may have, should the
insured, after receiving payment from the insurer,
release the wrongdoer who causes the loss, the
insurer loses his rights against him. But in such a
case the insurer will be entitled to recover from the
insured whatever it has paid, unless it was made
with the consent of the insurer. [Manila Mahogany v.
CA (1987)]

COMMERCIAL LAW REVIEWER
59

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS

OPERATIONS HEADS

Transportation Law
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Chatto

LAYOUT TEAM 2012
Mara Villegas Naomi
Timothy Reyes

60
Transportation Law
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
I. Common carriers
II. Vigilance over goods
III. Safety of passengers
IV. Bill of lading
V. Maritime commerce
VI. Public Service Act
VII. The Warsaw Convention

I. Common Carriers

Art. 1732 Civil Code. Common carriers are persons,
corporations, firms or associations engaged in the
business of carrying or transporting passengers or
goods or both, by land, water, or air, for
compensation, offering their services to the public.

What are the elements of a common carrier?
1. It is engaged in the business of carrying or
transporting goods for others as a public
employment, or passengers, or both
2. It is for compensation or for hire
3. It is operated generally as a business and not as
a casual occupation
4. It holds out to the public as ready to engage in
the transportation of goods of the kind to which
his business is confined [cf. First Phil. Industrial
v. CA]

First Phil. Industrial v. CA (1998). There is no
doubt that petitioner (engaged in the business of
transporting petroleum products from the Batangas
refineries, via pipeline) is a common carrier. It is
engaged in the business of transporting or carrying
goods, i.e. petroleum products, for hire as a public
employment. It undertakes to carry for all persons
indifferently, that is, to all persons who choose to
employ its services, and transports the goods by land
and for compensation. The fact that petitioner has
a limited clientele does not exclude it from the
definition of a common carrier.

Fabre v. CA (1996). The provision (Art. 1732) makes
no distinction between one whose principal business
activity is the carrying of persons or goods or both,
and one who does such carrying only as an ancillary
activity (in local idiom, as a sideline).

Art. 1732 avoids the following distinctions:
1. Between a person or enterprise offering
transportation service on a regular basis and one
offering such service on occasional or
unscheduled basis
2. Between one offering its services to the general
public and one soliciting business only from a
narrow segment of the general population [Fabre
vs. CA (1996)]

Private Carriers
Those who transport or undertake to transport in a
particular instance for hire or reward. [Agbayani,
Commercial Laws of the Philippines]

Common
Carrier
Private Carrier
Availability Holds himself
out in common,
that is, to all
persons who
choose to
employ him, as
ready to carry
for hire
Agrees in some
special case
with some
private
individual to
carry for hire
Binding Effect Bound to carry
all who offer
and tender
reasonable
compensation
for carrying
them
Not bound to
carry for any
reason, such
goods as it is
accustomed to
carry, unless it
enters into a
special
agreement to
do so
Diligence
Required
Extraordinary
diligence
Ordinary
diligence
Governing Law Principally, Civil
Code provisions
on common
carriers
Obligations and
contracts
Regulation A public service
and is therefore
subject to
regulation
Not subject to
regulation as a
common
carrier
[Agbayani,
Commercial
Laws of the
Philippines]

A. Diligence Required of Common
Carriers

Art. 1733 Civil Code. Common carriers, from the
nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence
in the vigilance over the goods and for the safety of
the passengers transported by them, according to all
the circumstances of each case.

Such extraordinary diligence in the vigilance over
the goods is further expressed in Articles 1734,
1735, and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the
passengers is further set forth in Articles 1755 and
1756.

Nature: bound to observe extraordinary diligence

Basis of liability: nature of their business and public
policy [Art 1733]

61
Cangco v. MRR. The liability of the carrier is
contractual in nature. It arises from the contract of
carriage. The liability is direct and immediate, and
differs from presumptive responsibility for the
negligence of [Manila Railroads] servants.

The contract of Manila Railroad Company to
transport Cangco carried with it the duty to carry
him safely and provide safe means of entering and
leaving its trains. That duty, being contractual, was
direct and immediate, and its non-performance
could not be excused by proof that the fault was
morally imputable to Manila Railroads servants.
There was no contributory negligence on the part of
Cangco.

B. Liabilities of Common Carriers

Goods

GENERAL RULE: Common carriers are responsible for
the loss, destruction, or deterioration of the goods.
This responsibility arises from contract, as the
relation between a carrier and its patrons is of a
contractual nature. A failure on the carrier to use
extraordinary care in carrying goods or passengers
safely is a breach of contract and constitutes culpa
contractual. The carrier is also liable even in those
cases where the cause of the loss or damage is
unknown. [Agbayani, Commercial Laws of the
Philippines]

EXCEPTION: if due to any of the following causes
only
(1) Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
(2) Act of the public enemy in war, whether
international or civil;
(3) Act of omission of the shipper or owner of the
goods;
(4) The character of the goods or defects in the
packing or in the containers;
(5) Order or act of competent public authority.

NOTE: The presumption of negligence does not apply
in these cases.

Passengers
Art. 1755 Civil Code. A common carrier is bound to
carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the
circumstances.

Art. 1756 Civil Code. In case of death of or injuries
to passengers, common carriers are presumed to
have been at fault or to have acted negligently,
unless they prove that they observed extraordinary
diligence as prescribed in Arts 1733 and 1755.

Common carriers are also responsible for the
safety of the following persons (even though they
are not passengers):
Extraordinary diligence is for the safety of
passengers and crew because any lapse will
result to damage of all aboard. [PAL v. CA
(1981)]
Presence of stevedores on board the barge was
called for by the contract of carriage. Petitioner
is liable if it knew and consented to the
stevedores presence. [Sulpicio v. CA (1995)]

II. Vigilance over goods

A. Exempting Causes

1) Natural disaster

Requisites:
1. The natural disaster must have been the
proximate and only cause [Art 1739]
2. The common carrier must exercise due diligence
to prevent or minimize the loss before, during
and after the occurrence of the flood, storm or
natural disaster [Art 1739]
3. The common carrier must not have been guilty
of delay [Art 1740]
4. The shipment was at shippers risk [Art 361,
Code of Commerce]

Martini v. Macondray (1919): The master is
responsible for the safe & proper stowage of the
cargo, & there is no doubt that by the general
maritime law he is bound to secure the cargo safely
under deck. If the master carries goods on deck w/o
the consent of the shipper, he does it at his own
risk. If they are damaged or lost in consequence of
their being thus exposed, he cannot protect himself
from responsibility by showing that they were
damaged or lost by the dangers of the seas. When
the shipper consents to his goods being carried on
deck, he takes the risks of any damage or loss
sustained as a consequence of their being so carried.

Eastern Shipping Lines v. IAC (1987): Fire may not
be considered a natural disaster/calamity. This must
be so as it arises almost invariably from some act of
man or by human means. It does not fall within the
category of an act of God unless caused by lightning
or boy other natural disaster/calamity. It may even
be caused by the actual fault or privity of the
carrier.

2) Act of public enemy

Requisites:
1. The act of the public enemy must have been the
proximate and only cause [Art. 1739]
to prevent or minimize the loss before, during
and after the act of the public enemy causing
the loss, destruction or deterioration of the
goods. [Art. 1739]

3) Act or omission of shipper

Requisites:
1. The act or omission of the shipper must have
been the proximate and only cause [Art 1741]

62
2. If the shipper owner merely contributed to the
loss, destruction or deterioration of the goods,
the proximate cause being the negligence of the
common carrier, then the common carrier shall
be liable for the damages, which shall, however,
be equitably reduced. [Art 1741]

4) Character of goods

Requisites:
1. The character of the goods or defects in packing
or containers [Art 1739]
to forestall or lessen the loss [Art 1739]

DAMAGE WHEN TO CLAIM
Ascertainable from
package
Claim for damages must
be made upon receipt
Only upon opening the
package
Claim for damages may
be made within 24 hours
upon receipt

After such periods OR after transportation charges
have been paid, no more claims for damages will be
entertained. [Art 366, Code of Commerce]

Southern Lines v. CA (1962). If the fact of improper
packing is known to the carrier or its servants or
apparent upon ordinary observation, but [the
carrier] accepts the goods notwithstanding such
condition, it is not relieved of liability for loss or
injury resulting therefrom.

5) Order of competent authority

Requisites:
1. There must be an order or act of competent
authority [Art. 1743]
2. The said public authority must have had the
power to issue the order. If the officer acts
without legal process, then the common carrier
will be held liable [Art. 1743]

Ganzon v. CA (1988)
The intervention of the municipal officials was not of
a character that would render impossible the
fulfillment by the carrier of the obligation. The
petitioner was not duty bound to obey the illegal
order [of the mayor] to dump into the sea the scrap
iron. There is absence of sufficient proof that the
issuance of the order was attended with such force
or intimidation as to completely overpower the will
of petitioners employees. The mere difficulty in the
fulfillment of the obligation is not force majeure.

Melencio-Herrera, dissent: Through the order or
act of competent public authority, the
performance of the contractual obligation was
rendered impossible. Apparently, the seizure and
destruction of the goods was done under legal
process or authority so that petitioner should be
freed from responsibility.

1. Requirement of Absence of
Negligence

Articles 1739 and 1741 provide that the exempting
causes listed above must have been the proximate
and only cause of the loss. Since the exempting
cause must be the only cause of the loss, it follows
that for the exempting causes to apply, the
provisions also require the absence of negligence.

2. Absence of Delay
Art. 1740. If the common carrier negligently incurs
in delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility.

3. Due diligence to prevent or lessen
the loss

Art. 1739 Civil Code. In order that the common
carrier may be exempted from responsibility, the
natural disaster must have been the proximate and
only cause of the loss. However, the common carrier
must exercise due diligence to prevent or minimize
loss before, during and after the occurrence of
flood, storm or other natural disaster in order that
the common carrier may be exempted from liability
for the loss, destruction, or deterioration of the
goods. The same duty is incumbent upon the
common carrier in case of an act of the public
enemy referred to in Article 1734, No. 2.

Art. 1742 Civil Code. Even if the loss, destruction
or deterioration of the goods should be caused by
the character of the goods or the faulty nature of
the packing or of the containers the common carrier
must exercise due diligence to forestall or lessen
the loss.

B. Contributory negligence

Art. 1741 Civil Code. If the shipper or owner
merely contributed to the loss destruction or
deterioration of the goods the proximate cause
thereof being the negligence of the common carrier
the latter shall be liable in damages which however
shall be equitably reduced.

C. Duration of liability

Duration of liability/Extraordinary diligence

When does carriers responsibility begin?
Under Art. 1738, the extraordinary responsibility of
the common carrier begins from the time the goods
are delivered to the carrier. The delivery must place
the goods to be transported unconditionally in the
possession of the common carrier and the latter
must receive them.

When does carriers responsibility terminate?
Under Art. 1738, the extraordinary responsibility of
the carrier is terminated at the time the goods are

63
delivered to the consignee or the person who has a
right to receive them (actual or constructive
delivery). [Agbayani, Commercial Laws of the
Philippines]

1. Delivery of goods to common
carrier

The liability and responsibility of the carrier
commence on their actual delivery to, or receipt by
the carrier or an authorized agent, of the goods.
[Cia. Maritima v. Insurance Co., 12 SCRA 213]

2. Actual or constructive delivery

Art. 1736 Civil Code. The extraordinary
responsibility of the common carrier lasts from the
time the goods are unconditionally placed in the
possession of and received by the carrier for
transportation until the same are delivered actually
or constructively by the carrier to the consignee or
to the person who has a right to receive them
without prejudice to the provisions of Article 1738.

When is the contract of transportation perfected?
A contract of transportation is consensual in nature;
therefore it is perfected upon the meeting of the
minds of the parties. [Art. 1305 Civil Code]

What if the goods are only for safekeeping?
If the common carrier received the goods not for
transportation but only for safekeeping, where the
goods have already been purchased by the shipper
and ready for transportation, then the duty of
extraordinary diligence has not yet started. [in
relation to Art. 1319 Civil Code]

Who are these persons or entities who have a
right to receive the goods?
These persons include agents, brokers, and the like.

What does unconditionally placed in Art. 1736
mean?
It means that the shipper cannot get the goods back
from the common carrier at will.

Compania Maritima v. Insurance Company of
North America (1964). The liability of the carrier as
common carrier begins with the actual delivery of
the goods for transportation and not merely with the
formal execution of a receipt or bill of lading; the
issuance of a bill of lading is not necessary to
complete delivery and acceptance. Even where it is
provided by statute that liability commences with
the issuance of the bill of lading actual delivery and
acceptance are sufficient to bind the carrier.

Lu Do v. Binamira (1957): Delivery of the cargo to
the customs authorities is not delivery to the
consignee or to the person who has a right to
receive them contemplated in Article 1736 because
in such case the goods are still in the hands of the
Government and the owner cannot exercise
dominion over them however the parties may agree
to limit the liability of the carrier considering that
the goods still have to go through the inspection of
the customs authorities before they are actually
turned over to the consignee. This is a situation
where we may say that the carrier losses control of
the goods because of a custom regulation and it is
unfair that it be made responsible for what may
happen during the interregnum.

3. Temporary unloading or storage

Art. 1737 Civil Code. The common carrier's duty to
observe extraordinary diligence over the goods
remains in full force and effect even when they are
temporarily unloaded or stored in transit unless the
shipper or owner has made use of the right of
stoppage in transitu.

GENERAL RULE: extraordinary diligence over goods
even when the goods are temporarily unloaded or
stored in transit

EXCEPTION: shipper or owner made use of the right
of stoppage in transitu [Art. 1737]

What is stoppage in transitu?
This is the act by which the unpaid vendor of goods
stops their progress and resumes possession of them
constructively while they are in the court of transit
from him to the purchaser, and not yet actually
delivered to the latter. The duty of the common
carrier to exercise extraordinary diligence ends in
the middle of the journey or transit.

When the buyer of the goods becomes insolvent, the
unpaid seller who has parted with the possession of
the goods at any time while they are in transit, may
resume the possession of the goods as he would have
had if he had never parted with the possession. [Art.
1530 Civil Code]

When the right of stoppage in transitu is exercised,
the common carrier holds the goods in the capacity
of an ordinary bailee or warehouseman upon the
theory that the exercise of the right of stoppage in
transitu terminates the contract of carriage. Hence,
only ordinary diligence is required. [Agbayani,
Commercial Laws of the Philippines]

D. Stipulation for limitation of
liability

1. Void stipulations

Art. 1744 Civil Code. A stipulation between the
common carrier and the shipper or owner limiting
the liability of the former for the loss, destruction,
or deterioration of the goods to a degree less than
extraordinary diligence shall be valid, provided it
be:
(1) In writing, signed by the shipper or owner;
(2) Supported by a valuable consideration other
than the service rendered by the common
carrier; and

64
(3) Reasonable, just and not contrary to public
policy.

Art. 1745 Civil Code. Any of the following or similar
stipulations shall be considered unreasonable,
unjust and contrary to public policy:
(1) That the goods are transported at the risk of
the owner or shipper;
(2) That the common carrier will not be liable for
any loss, destruction, or deterioration of the
goods;
(3) That the common carrier need not observe any
diligence in the custody of the goods;
(4) That the common carrier shall exercise a degree
of diligence less than that of a good father of a
family, or of a man of ordinary prudence in the
vigilance over the movables transported;
(5) That the common carrier shall not be
responsible for the acts or omission of his or its
employees;
(6) That the common carrier's liability for acts
committed by thieves, or of robbers who do not
act with grave or irresistible threat, violence or
force, is dispensed with or diminished;
(7) That the common carrier is not responsible for
the loss, destruction, or deterioration of goods
on account of the defective condition of the car,
vehicle, ship, airplane or other equipment used
in the contract of carriage.

Art. 1751 Civil Code. The fact that the common
carrier has no competitor along the line or route, or
a part thereof, to which the contract refers shall be
taken into consideration on the question of whether
or not a stipulation limiting the common carrier's
liability is reasonable, just and in consonance with
public policy.

Kinds of Stipulations Limiting Liability
[Heacock v. Macondray, 42 Phil 205]
Exempting the common carrier from
any and all liability for loss or damage
occasioned by its own negligence
VOID
Providing for an unqualified limitation
of such liability to an agreed
stipulation
VOID
Limiting the liability of the common
carrier to an agreed valuation unless
the shipper declares a higher value and
pays a higher rate of freight
VALID

2. Limitation of liability to fixed
amount

Art. 1749 Civil Code. A stipulation that the common
carrier's liability is limited to the value of the goods
appearing in the bill of lading unless the shipper or
owner declares a greater value is binding.

Art. 1750 Civil Code. A contract fixing the sum that
may be recovered by the owner or shipper for the
loss, destruction or deterioration of the goods is
valid if it is reasonable and just under the
circumstances and has been fairly and freely agreed
upon.

Shewaram v. PAL (1966). There are two requisites
that must be fulfilled in order that the liability of
PAL be limited according to the stipulations behind
the ticket stub:
1. that the contract is just and reasonable under
the circumstances
2. that the contract was fairly and freely agreed
upon (per Art. 1750)

The fact that the conditions are printed at the back
of the ticket stub in letters so small that they are
hard to read would not warrant the presumption that
plaintiff was aware of those conditions such that he
had fairly and freely agreed to those conditions.

Ong Yiu v. CA (1979). While the passenger had not
signed the plane ticket, he is nevertheless bound by
the provision thereof; such provisions have been held
to be part of the contract of carriage and valid and
binding upon the passenger regardless of the latters
lack of knowledge or assent to the regulation. It is
what is known as a contract of adhesion wherein one
party imposes a ready made form of contract on the
other. The one who adheres to the contract is in
reality free to reject it entirely. A contract limiting
liability upon an agreed valuation does not offend
against the policy of the law forbidding one from
contracting against his own negligence.

3. Limitation of liability in absence
of declaration of greater value

Art. 1749 Civil Code. A stipulation that the common
carrier's liability is limited to the value of the goods
appearing in the bill of lading unless the shipper or
owner declares a greater value is binding.

E. Liability for baggage of
passengers (asked in 97 and 98)

What are the kinds of passenger baggage and the
laws applicable to them?
1. Passenger baggage in the custody of the
passenger (e.g. carry-on luggage). These are
considered as necessary deposits. Articles 1998,
2000-2003 apply.
2. Passenger baggage not in the custody of the
passenger (e.g. checked-in luggage). Arts. 1733-
1753 on extraordinary diligence apply. The
liability is greater for baggage that is in the
custody of the carrier in contrast if such is in
the possession of the passenger.

1. Checked-in baggage

Art. 1754 Civil Code. The provisions of Articles
1733 to 1753 shall apply to the passenger's baggage
which is not in his personal custody or in that of his
employee. As to other baggage, the rules in Articles

65
1998 and 2000 to 2003 concerning the responsibility
of hotel-keepers shall be applicable.

2. Baggage in possession of
passengers

Under Art. 1998, the baggage of passengers in their
personal custody or in that of their employees while
being transported shall be regarded as necessary
deposits. The common carrier shall be responsible
for such baggage as depositaries (i.e. like hotel-
keepers), provided that 1) notice was given to them
or to their employees, and that 2) the passengers
take the precautions which said carriers advised
relative to the care and vigilance of their baggage.
[Agbayani, Commercial Laws of the Philippines]

When hotel-keeper liable
In the following cases, the hotel-keeper is liable
regardless of the amount of care exercised:
1. loss or injury is caused by his servants or
employees as well as by strangers (Art 2000)
provided that: a) notice has been given by the
guest, and b) proper precautions taken by the
guest (Art 1998)
2. loss is caused by the act of a thief or robber
done without the use of arms or irresistible
force (Art 2001)

When hotel-keeper not liable
1. loss or injury is caused by force majeure (Art
2000), theft or robbery by a stranger (not by
hotel-keepers servant or employee) with the
use of arms or irresistible force (Art 2001), etc
unless he is guilty of fault or negligence in
failing to provide against the loss or injury from
his cause
2. loss is due to the acts of the guests, his family,
servants, or visitors (Art 2002)
3. loss arises from the character of the things
brought into the hotel (Art 2002)

Art. 2003 Civil Code. The hotel-keeper cannot free
himself from responsibility by posting notices to the
effect that he is not liable for the articles brought
by the guest. Any stipulation between the hotel-
keeper and the guest whereby the responsibility of
the former as set forth in articles 1998 to 2001 is
suppressed or diminished shall be void.

What is a passenger baggage?
They are the things that a passenger will bring with
him consistent with a temporary absence from
where he lives. Passenger baggage must have a
direct relationship with the passenger who is
traveling.

E.g. A balikbayan box or suitcase is passenger
baggage. However, 10,000 cans of corned beef is not
considered as passenger baggage. They are
considered as goods. If you carry goods with you, you
cannot bring them with you as part of your
[passenger] contract of carriage. You will need to
get a separate contract of carriage (bill of lading)
in order to transport them. These goods will then be
transported whether or not you are physically
traveling with them.

III. Safety of Passengers
(Asked in 97 and 01)

A. Void stipulations

Art. 1757 Civil Code. The responsibility of a
common carrier for the safety of passengers as
required in Articles 1733 and 1755 cannot be
dispensed with or lessened by stipulation by the
posting of notices, by statements on tickets, or
otherwise.

Art. 1758 Civil Code. When a passenger is carried
gratuitously, a stipulation limiting the common
carrier's liability for negligence is valid, but not for
willful acts or gross negligence.

The reduction of fare does not justify any limitation
of the common carrier's liability.

Carriage of Validity of Stipulations
Limiting Liability
Goods VALID, subject to
conditions [Art. 1749]
Passengers GR: VOID
E: gratuitous carriage
[Arts. 1757, 1758]

B. Duration of liability

1. Waiting for carrier or boarding of
carrier

Does the duty of extraordinary diligence occur
right at the perfection of the contract of
transportation?
The perfection of the contract of carriage does not
necessarily coincide with the commencement of the
duty of extraordinary diligence. It may occur at the
same time or later.

It is the duty of common carriers of passengers to
stop their conveyances a reasonable length of time
in order to afford passengers an opportunity to board
and enter, and they are liable for injuries suffered
by boarding passengers resulting from the sudden
starting up or jerking of their conveyances while
they are doing so. [Dangwa Transportation v. CA
(1991)]

Del Prado v. Manila Railroad (1929). A person
boarding a moving car must be taken to assume the
risk of injury from boarding the car under the
conditions open to his view, but he cannot fairly be
held to assume the risk that the motorman, having
the situation in view, will increase the peril by
accelerating the speed of the car before he is
planted safely on the platform.

66
2. Arrival at destination

When does relationship of common carrier and
passenger terminate?
It does not cease at the moment that the passenger
alights from the common carriers vehicle at a place
selected by the carrier at the point of destination,
but continues until the passenger has had reasonable
time or a reasonable opportunity to leave the
carriers premises. What is a reasonable time or a
reasonable delay within this rule is to be determined
from all the circumstances. [La Mallorca v. CA
(1966)]

Aboitiz v. CA. It is of common knowledge that by
the very nature of petitioner's business as a shipper,
the passengers of vessels are allotted a longer period
of time to disembark from the ship than other
common carriers such as a passenger bus. Such
vessels are capable of accommodating a bigger
volume of both passenger and baggage as compared
to the capacity of a regular commuter bus.
Consequently, a ship passenger will need at least an
hour as is the usual practice, to disembark from the
vessel and claim his baggage whereas a bus
passenger can easily get off the bus and retrieve his
luggage in a very short period of time.

Does the duty of extraordinary diligence get
interrupted?
No. In PAL v. CA, it was held that PAL had to
continue to exercise extraordinary diligence even in
the case of stranded passengers until they have
reached their final destination.

C. Liability for acts of others

1. Employees

Responsibility for Acts of Employees
Art. 1759 Civil Code. Common carriers are liable
for the death of or injuries to passengers through
the negligence or willful acts of the former's
employees, although such employees may have
acted beyond the scope of their authority or in
violation of the orders of the common carriers. This
liability of the common carriers does not cease upon
proof that they exercised all the diligence of a good
father of a family in the selection and supervision of
their employees.

Art. 1760 Civil Code. The common carrier's
responsibility prescribed in the preceding article
cannot be eliminated or limited by stipulation, by
the posting of notices, by statements on the tickets
or otherwise.

Maranan v. Perez (1967). It is enough that the
assault happens within the course of the employee's
duty. It is no defense for the carrier that the act was
done in excess of authority or in disobedience of the
carrier's orders. The carrier's liability here is
absolute in the sense that it practically secures the
passengers from assaults committed by its own
employees.

Note: The employee must be on duty at the time of
the act.

2. Other passengers and strangers

Responsibility for Acts of Strangers and Co-
passengers
Art. 1763 Civil Code. A common carrier is
responsible for injuries suffered by a passenger on
account of the willful acts or negligence of other
passengers or of strangers, if the common carrier's
employees through the exercise of the diligence of a
good father of a family could have prevented or
stopped the act or omission.

Pilapil v. CA (1989). In consideration of the right
granted to it by the public to engage in the business
of transporting passengers and goods, a common
carrier does not give its consent to become an
insurer of any and all risks to passenger and goods. It
merely undertakes to perform certain duties to the
public as the law imposes, and holds itself liable for
any breach thereof.

Under Art. 1763, a tort committed by a stranger
which causes injury to a passenger does not accord
the latter a cause of action against the carrier. The
negligence for which a common carrier is held
responsible is the negligent omission by the carrier's
employees to prevent the tort from being committed
when the same could have been foreseen and
prevented by them. Further, when the violation of
the contract is due to the willful acts of strangers, as
in the instant case, the degree of care essential to
be exercised by the common carrier for the
protection of its passenger is only that of a good
father of a family.

What is the common carriers responsibility
towards employees?
The common carrier is responsible even beyond the
scope of authority and in violation of orders
compared to quasi-delicts under Art. 2180, which
exempts the employer if it was done outside of
employment. However, there must be a reasonable
connection between the act and the contract of
carriage.

Act Done Liability of Obligor
In good faith Only natural and probable
consequences of the
breach, which have could
have reasonably been
foreseen
In bad faith, fraud,
malice or wanton
attitude
All damages which may be
reasonably attributed to
breach

Culpa Contractual
(quasi-delict)
Culpa Aquiliana
Art. 1759 Art. 2180
Carrier is directly and
primarily liable
Carrier and employee
are solidarily liable as
joint tort-feasors

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No defense of due
diligence in the
selection and
supervision of
employees
Defense of due
diligence in the
selection and
supervision of
employees is available

What is the common carriers responsibility
towards strangers?
Art. 1763 imposes only the duty of ordinary
diligence. In Bachelor Express v. CA (1990), the
Court held that the common carrier has a duty of
extraordinary diligence for the act of a co-
passenger. However, in Pilapil v. CA (1989), the
standard of diligence is only ordinary diligence,
referring to the acts of strangers.

D. Extent of liability for damages

Art. 1761 Civil Code. The passenger must observe
the diligence of a good father of a family to avoid
injury to himself.

Art. 1762 Civil Code. The contributory negligence
of the passenger does not bar recovery of damages
for his death or injuries, if the proximate cause
thereof is the negligence of the common carrier,
but the amount of damages shall be equitably
reduced.

Art. 1764 Civil Code. Damages in cases comprised in
this Section shall be awarded in accordance with
Title XVIII of this Book, concerning Damages. Article
2206 shall also apply to the death of a passenger
caused by the breach of contract by a common
carrier.

Isaac v. A. L. Ammen Transportation (1975). It is
the prevailing rule that it is negligence per se for a
passenger on a railroad voluntarily or inadvertently
to protrude his arm, hand, elbow, or any other part
of his body through the window of a moving car
beyond the outer edge of the window or outer
surface of the car, so as to come in contact with
objects or obstacles near the track, and that no
recovery can be had for an injury which but for such
negligence would not have been sustained.

Spouses Landingin v. PANTRANCO (1970). When a
passenger dies or is injured, the presumption is that
the common carrier is at fault or that it acted
negligently (Article 1756). This presumption is only
rebutted by proof on the carrier's part that it
observed the "extraordinary diligence" required in
Article 1733 and the "utmost diligence of very
cautious persons" required in Article 1755 (Article
1756).

Necesito v. Paras. While the carrier is not an
insurer of the safety of the passengers, it should
nevertheless be held answerable for the flaws of its
equipment, if such flaws were discoverable. The
rationale for the common carriers liability for
manufacturing defects is the fact that the passenger
has neither choice nor control over the carrier in the
selection and use of the equipment and appliances in
use by the carrier. Having no privity whatever with
the manufacturer or vendor of the defective
equipment, the passenger has no remedy against
him.

IV. Bill of Lading

Definition; subject matter
It is a written acknowledgment of the receipt of
goods and an agreement to transport and to deliver
them at a specified place to a person named therein
or on his order. It comprehends all methods of
transportation.

It is not indispensable for the creation of a contract
of carriage. [Compania Maritima v. Insurance
Company of North America, 12 SCRA 213]

A. Three-fold character

a. receipt as to the quantity and description of the
goods shipped;
b. contract to transport the goods to the
consignee or other person therein designated,
on the terms specified in such instrument;
c. document of title

B. Delivery of goods

1. Period for delivery

Rule
Period fixed for the delivery of the goods. If no
period is fixed, within a reasonable time.

Effect of Non-compliance
The carrier shall pay the indemnity agreed upon in
the bill of lading. If no indemnity is fixed, the carrier
shall be liable for the damages which may have been
caused by the delay. [Art. 370, Code of Commerce]

If no period is fixed, the carrier shall be under the
obligation to forward the goods in the first shipment
of the same or similar merchandise which he may
make to the point of delivery. [Art. 358, Code of
Commerce]

2. Delivery without surrender of bill
of lading

If in case of loss or for any other reason whatsoever,
the consignee cannot return upon receiving the
merchandise the bill of lading subscribed by the
carrier, he shall give said carrier a receipt for the
goods delivered, this receipt producing the same
effects as the return of the bill of lading. [Art. 353.
(2) (3), Code of Commerce]

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3. Refusal of consignee to take
delivery

When consignee may refuse to receive goods
1. Partial Delivery. The consignee may refuse to
receive them, when he proves that he cannot
make use thereof without the others. [Art. 363,
Code of Commerce]
2. When the goods are rendered useless for
purposes of sale or consumption in the use for
which they are properly destined. [Effect:
consignee may demand payment of the goods at
current market prices]
3. In case part of the goods is in good condition,
the consignee may refuse to receive only the
damaged goods if separation is possible. [Art.
365, Code of Commerce]

In case of dispute as to the condition of the goods,
the same shall be examined by experts appointed by
the parties, and the third one, in case of
disagreement, appointed by the judicial authority.

If the persons interested should not agree with the
report, said judicial authority shall order the
deposits of the merchandise in a safe warehouse,
and the parties interested shall make use of their
rights in the proper manner. (Art. 367, Code of
Commerce)

C. Period for filing claims

Damage When to Claim
Ascertainable from
package
Claim for damages must
be made upon receipt of
delivery
Only upon opening the
package
Claim for damages may
be made within 24 hours
upon receipt of delivery.

After such periods OR transportation charges have
been paid, no more claims for damages will be
entertained. (Art. 366, Code of Commerce)

Shorter period may be stipulated by the parties
because it merely affects the shippers remedy
and does not affect the liability of the carrier.
[PHILAMGEN v. Sweetlines, Inc.]

D. Period for filing actions

In any event, the carrier and the ship shall be
discharged from all liability in respect of loss or
damage unless suit is brought within one year after
delivery of the goods or the date when the goods
should have been delivered.

The absence of a notice shall not affect or prejudice
the right of the shipper to bring suit within one year
after the delivery of the goods or the date when the
goods should have been delivered. [Sec. 3 (6),
Carriage of Goods by Sea Act]

Maritime Agencies & Services, Inc. v. CA. The
period for filing the claim is one year, in accordance
with the Carriage of Goods by Sea Act.

This was adopted and embodied by our legislature in
Com. Act No. 65 which, as a special law, prevails
over the general provisions of the Civil Code on
prescription of actions. Section 3(6) of that Act
provides as follows: In any event, the carrier and the
ship shall be discharged from all liability in respect
of loss or damage unless suit is brought within one
year after delivery of the goods or the date when
the goods should have been delivered; Provided,
that if a notice of loss for damage; either apparent
or concealed, is not given as provided for in this
section, that fact shall not effect or prejudice the
right of the shipper to bring suit within one year
goods should have been delivered.

V. Maritime Commerce

A. Charter Parties

A charter party is a contract by virtue of which the
owner or agent of a vessel binds himself to transport
merchandise or persons for a fixed price.

It is a contract by which the owner or agent of the
vessel leases for a certain price the whole or portion
of a vessel for the transportation of the goods or
persons from one port to another.

Towage is not a charter party. It is a contract for the
hire of services by which a vessel is engaged to tow
another vessel from one port to another for
consideration.

Caltex v. Sulpicio Lines (1999). A contract whereby
the whole or part of the ship is let by the owner to a
merchant or other person for a specified time or use
for the conveyance of goods, in consideration of the
payment of freight.

1. Bareboat/Demise Charter

Under the demise or bareboat charter of the vessel,
the charterer will generally be regarded as the
owner for the voyage or service stipulated. The
charterer mans the vessel with his own people and
becomes the owner pro hac vice (just for that one
particular purpose only), subject to liability to
others for damages caused by negligence. To create
a demise, the owner of a vessel must completely and
exclusively relinquish possession, command and
navigation thereof to the charterer, anything short
of such a complete transfer is a contract of
affreightment (time or voyage charter party) or not
a charter party at all. [Puromines v. CA]

Puromines, Inc. v. Court of Appeals. Although a
charter party may transform a common carrier into a
private one, the same however is not true in a
contract of affreightment on account of the

69
distinctions between a contract of affreigment and a
demise or bareboat charter.

NOTE: In a bareboat or demise charter, the common
carrier is converted to private carrier.

Owner Pro Hac Vice demise charter to whom the
owner of the vessel has completely and exclusively
relinquished possession, command and navigation of
the vessel. In this kind of charter, the charterer
mans and equips the vessel and assumes all
responsibility for navigation, management and
operation. He thus acts as the owner of the vessel in
all important aspects during the duration of the
charter.

2. Time Charter

Contract of affreightment* wherein the vessel is let
for a fixed day or for a determined number of days
or months.

3. Voyage/Trip Charter

Contract of affreightment* wherein the vessel is let
for a particular or single voyage.

Note: A contract of affreightment is one in which
the owner of the vessel leases part or all of its space
to haul goods for others. It is a contract for special
service to be rendered by the owner of the vessel
and under such contract the general owner retains
the possession, command and navigation of the ship,
the charterer or freighter merely having use of the
space in the vessel in return for his payment of the
charter hire. [Puromines vs. CA]

In a contract of affreightment, the common carrier
is NOT converted into a private carrier.

B. Liability of Shipowners and
Shipping Agents

Shipowner has possession, control and management
of the vessel and the consequent right to direct her
navigation and receive freight earned and paid,
while his possession continues.

Shipagent is the person entrusted with the
provisioning of a vessel, or who represents her in the
port in which she happens to be.

1. Liability for acts of captain

1. The owner of a vessel and the agent shall be
civilly liable for the acts of the captain and for
the obligations contracted by the latter to
repair, equip, and provision the vessel. [Art.
586, Code of Commerce]

2. The agent shall also be civilly liable for the
indemnities in favor of third persons which arise
from the conduct of the captain in the care of
the goods which the vessel carried.

3. Damages to vessel and to cargo due to lack of
skill and negligence.

4. Losses, fines, and confiscations imposed an
account of violation of customs, police, health,
and navigation laws and regulations.

5. Those caused by the misuse of the powers.

6. For those arising by reason of his voluntarily
entering a port other than that of his
destination, outside of the cases or without the
formalities referred to in Article 612.

7. For those arising by reason of non-observance of
the provisions contained in the regulations on
situation of lights and maneuvers for the
purpose of preventing collisions. [Art. 618]

Exemption: abandonment of the vessel [Art. 587,
Code of Commerce]

The owner or agent shall not be liable for the
obligations contracted by the captain if the latter
exceeds his powers and privileges. However, if the
amounts claimed were made use of for the benefit
of the vessel, the owner or agent shall be liable.
(Art. 588, Code of Commerce)

2. Exceptions to limited liability

Limited Liability
The real and hypothecary nature of the liability of
the shipowner or agent had its origin in the
prevailing conditions of the maritime trade and sea
voyages during the medieval ages, attended by
innumerable hazards and perils.

To offset against these adverse conditions and
encourage shipbuilding and maritime commerce, it
was deemed necessary to confine the liability of the
owner or agent arising from the operation of a ship
to the vessel, equipment, and freight, or insurance,
if any, so that if the shipowner or agent abandoned
the ship, equipment, and freight, his liability was
extinguished.

The agent shall be civilly liable for the indemnities
in favor of third persons which arise from the
conduct of the captain in the care of the goods
which the vessel carried; but he may exempt himself
therefrom by abandoning the vessel with all her
equipments and the freight he may have earned
during the voyage. (Art. 587, Code of Commerce)

The owners of a vessel shall be civilly liable in the
proportion of their contribution to the common
fund, for the results of the acts of the captain,
referred to in Article 587.

Each part owner may exempt himself from this
liability by the abandonment before a notary of the
part of the vessel belonging to him. [Art. 590, Code
of Commerce]

70
In case of collision, the liability of the shipowner
shall be understood as limited to the value of the
vessel with all her appurtenances and all the freight
earned during the voyage. [Art. 837, Code of
Commerce]

Liability for wages of the captain and the crew and
for advances made by the ship agent if the vessel is
lost by shipwreck or capture. [Art. 643, Code of
Commerce]

Yangco v. Laserna et al (1941). If the shipowner or
agent may in any way be held civilly liable at all for
injury to or death of passengers arising from the
negligence of the captain in cases of collisions or
shipwrecks, his liability is merely co-extensive with
his interest in the vessel such that a total loss
thereof results in its extinction. In arriving at this
conclusion, the fact is not ignored that the ill-fated
S. S. Negros, as a vessel engaged in interisland
trade, is a common carrier, and that the relationship
between the petitioner and the passengers who died
in the mishap rests on a contract of carriage. But
assuming that petitioner is liable for a breach of
contract of carriage, the exclusively "real and
hypothecary nature" of maritime law operates to
limit such liability to the value of the vessel, or to
the insurance thereon, if any. In the instant case it
does not appear that the vessel was insured.

Art. 587 of the Code of Commerce appears to deal
only with the limited liability of shipowners or
agents for damages arising from the misconduct of
the captain in the care of the goods which the vessel
carries, but this is a mere deficiency of language and
in no way indicates the true extent of such liability.

Exceptions to the Doctrine of Limited Liability
a. Claims under the Workmens Compensation
[Abueg v. San Diego]
b. Expenses for repairing, provisioning and
equipping the vessel
c. Injury or damage due to the fault of the
shipowner
d. Vessel is insured
e. Vessel is not abandoned or there was no total
loss.

C. Accidents and Damages in
Maritime Commerce

Averages
The following shall be considered averages:
1. All extraordinary or accidental expenses
incurred during the navigation for the
preservation of the vessel or cargo, or both.
2. All damages or deterioration the vessel may
suffer from the time she puts to sea from the
port of departure until she casts anchor in the
port of destination, and those suffered by the
merchandise from the time it is loaded in the
port of shipment until it is unloaded in the port
of consignment. [Art. 806, Code of Commerce]

Kinds:
1. Particular or Simple Average
2. Gross or General Average

Simple Average
Particular or Simple Averages shall be all damages or
expenses caused to the vessel or cargo that did not
inure to the common benefit, and borne by
respective owners. [Art. 809]

The owner of the goods which gave rise to the
expense or suffered the damage shall bear this
average. [Art. 810]

1. General Average
General or gross averages shall be all the damages
and expenses which are deliberately caused in order
to save the vessel, her cargo, or both at the same
time, from a real and known risk, and particularly
the following:
1. The goods or cash invested in the redemption of
the vessel or cargo captured by enemies,
privateers, or pirates, and the provisions,
wages, and expenses of the vessel detained
during the time the arrangement or redemption
is taking place.
2. The goods jettisoned to lighten the vessel,
whether they belong to the vessel, to the cargo,
or to the crew, and the damage suffered
through said act by the goods kept.
3. The cables and masts which are cut or rendered
useless, the anchors and the chains which are
abandoned in order to save the cargo, the
vessel, or both.
4. The expenses of removing or transferring a
portion of the cargo in order to lighten the
vessel and place her in condition to enter a port
or roadstead, and the damage resulting
therefrom to the goods removed or transferred.
5. The damage suffered by the goods of the cargo
through the opening made in the vessel in order
to drain her and prevent her sinking.
6. The expenses caused through floating a vessel
intentionally stranded for the purpose of saving
her.
7. The damage caused to the vessel which it is
necessary to break open, scuttle, or smash in
order to save the cargo.
8. The expenses of curing and maintaining the
members of the crew who may have been
wounded or crippled in defending or saving the
vessel.
9. The wages of any member of the crew detained
as hostage by enemies, privateers, or pirates,
and the necessary expenses which he may incur
in his imprisonment, until he is returned to the
vessel or to his domicile, should he prefer it.
10. The wages and victuals of the crew of a vessel
chartered by the month during the time it
should be embargoed or detained by force
majeure or by order of the Government, or in
order to repair the damage caused for the
common good.
11. The loss suffered in the value of the goods sold
at arrivals under stress in order to repair the
vessel because of gross average.

71
12. The expenses of the liquidation of the average.
(Art. 811, Code of Commerce)
13. If in lightening a vessel on account of a storm, in
order to facilitate her entry into a port or
roadstead, part of her cargo should be
transferred to lighters or barges and be lost, the
owner of said part shall be entitled to
indemnity, as if the loss has originated from a
gross average (Art. 817, Code of Commerce)
14. If, as a necessary measure to extinguish a fire in
a port; roadstead; creek, or bay, it should be
decided to sink any vessel, this loss shall be
considered gross average, to which the vessels
saved shall contribute.

Essential Requisites
In order to recover the costs and expenses, the
following are necessary:
1. Previous resolution of the captain adopted after
deliberation with the sailing mate and other
officers
2. Hearing of the persons interested. In case an
interested person should not be heard, he shall
not contribute to the gross average. [Art. 813,
Code of Commerce]
3. Resolution to be entered in the log book, stating
the motives and reasons therefore as well as the
votes and reason for disagreement. [Art. 814,
Code of Commerce]
4. Minutes to be signed by all the persons present
or in urgent cases, the captain.
5. Captain shall deliver one copy of the minutes to
the maritime judicial authority of the first port
he may make within 24 hours and ratify it under
oath. [Art. 814, Code of Commerce]

Magsaysay Inc v. Agan (1955). Requisites for
General Average:
1. There must be a common danger. This means,
that both the ship and the cargo, after it has
been loaded, are subject to the same danger,
whether during the voyage, or in the port of
loading or unloading, that the danger arises
from the accidents of the sea, dispositions of
the authority, or faults of men, provided that
the circumstances producing the peril should be
ascertained and imminent or may rationally be
said to be certain and imminent. This last
requirement excludes measures undertaken
against a distant peril.
2. That for the common safety, part of the vessel
or of the cargo or both is sacrificed deliberately.
3. That from the expenses or damages caused
follows the successful saving of the vessel and
cargo.
4. That the expenses or damages should have been
incurred or inflicted after taking proper legal
steps and authority.

2. Collisions (Asked in 95 and 98 Bar
Exams)

Collision the impact of two vessels both of which
are moving.
Allision the striking of a moving vessel against one
that is stationary.

Classes and Effects

a. Fortuitous Collision: Each vessel and her cargo
shall be liable for their own damage [Art. 830,
Code of Commerce]
b. Vessel forced to collide with another one by a
third vessel: Owner of third vessel shall
indemnify for the losses and damages caused
[Art. 831, Code of Commerce]
c. By reason of fortuitous event, vessel properly
anchored and moored collides with another:
The injury occasioned shall be looked upon as
particular average to the vessel run into.
[Article 832, Code of Commerce]
d. Culpable: The owner of the vessel at fault shall
indemnify the losses and damages suffered,
after an expert appraisal. [Art. 826, Code of
Commerce]
e. Both vessels may be blamed for the collision:
Each one shall be liable for his own damages,
and both shall be jointly responsible for the
losses and damages suffered by their cargoes.
[Art. 827, Code of Commerce]
f. Inscrutable Fault (it can not be decided which
of the two vessels was the cause of the
collision): Each one shall be liable for his own
damages, and both shall be jointly responsible
for the losses and damages suffered by their
cargoes. [Art. 828, Code of Commerce] Asked in
97 Bar Exams

Arrival under stress the arrival of a vessel at the
nearest and most convenient port instead of the port
of destination, if during the voyage the vessel cannot
continue the trip to the port of destination.

It is lawful when the inability to continue voyage is
due to lack of provisions, well-founded fear of
seizure, privateers, pirates, or accidents of the sea
disabling it to navigate. [Art. 819]

It is unlawful when:
1. Lack of provisions due to negligence to carry
according to usage and customs;
2. Risk of enemy not well known or manifest
3. Defect of vessel due to improper repair; and
4. Malice, negligence, lack of foresight or skill of
captain. [Art. 820]

Shipwreck - it denotes loss/wreck of a vessel at sea
as a consequence of running against another vessel
or thing at sea or on coast where the vessel is
rendered incapable of navigation.

If the wreck was due to malice, negligence or lack of
skill of the captain, the owner of the vessel may
demand indemnity from said captain. [Art. 841]

72
D. Carriage of Goods by Sea Act
(Commonwealth Act No. 65)

1. Application

COGSA is a special law that governs all contracts of
carriage of goods by sea between or to and from the
Philippine ports.

Application of laws

a. If the common carrier is coming to the
Philippines:
First: Civil Code
Second: COGSA (in foreign trade)
Third: Code of Commerce

b. If the private carrier is coming to the
Philippines:
First: COGSA
Second: Code of Commerce
Third: Civil Code (excluding rules on common
carriers)

c. If the private or common carrier is from the
Philippines to a foreign country:
Apply the law of the foreign country [per
Art. 1753, CC] UNLESS the parties make
COGSA applicable

Hierarchy of laws
1. Art. 1766, CC (COGSA as only in matters not
regulated by this Code) this notwithstanding the
fact that COGSA is a special law.
Goods in a foreign country shipped to the
Philippines are governed by the Civil Code
2. Art. 1753, CC

2. Notice of Loss or Damage

Notice and the general nature of the loss or damage
must be given in writing to the carrier or his agent at
the port of discharge before or at the time of the
removal of the goods. [Sec. 3 (6)]

If damage is not patent or cannot be ascertained
from the package, the shipper should file the claim
with the carrier within three days from delivery.

Belgian Overseas v. Philippine First Insurance
(2002). First, the provision of COGSA provides that
the notice of claim need not be given if the state of
the goods, at the time of their receipt, has been the
subject of a joint inspection or survey. Prior to
unloading the cargo, an Inspection Report as to the
condition of the goods was prepared and signed by
representatives of both parties. Second, as stated in
the same provision, a failure to file a notice of claim
within three days will not bar recovery if it is
nonetheless filed within one year. This one-year
prescriptive period also applies to the shipper, the
consignee, the insurer of the goods or any legal
holder of the bill of lading. "Inasmuch as the neither
the Civil Code nor the Code of Commerce states a
specific prescriptive period on the matter, the
COGSAwhich provides for a one-year period of
limitation on claims for loss of, or damage to,
cargoes sustained during transit--may be applied
suppletorily to the case at bar."

3. Period of Prescription (Asked in
92, 95, 00 and 04 Bar Exams)

In any event the carrier and the ship shall be
discharged from all liability in respect of loss or
damage unless suit is brought within one year after
delivery of the goods or the date when the goods
should have been delivered.

The absence of a notice shall not affect or prejudice
the right of the shipper to bring suit within one year
goods should have been delivered. [Sec. 3 (6)]

Filipino Merchants Insurance, Inc. v. Alejandro
(1986). Clearly, the coverage of the Act includes the
insurer of the goods. Otherwise, what the Act
intends to prohibit after the lapse of the one-year
prescriptive period can be done indirectly by the
shipper or owner of the goods by simply filing a
claim against the insurer even after the lapse of one
year.

Maritime Agencies & Services, Inc. v. CA. The
period for filing the claim is one year, in accordance
with the Carriage of Goods by Sea Act.
This was adopted and embodied by our legislature in
Com. Act No. 65 which, as a special law, prevails
over the general provisions of the Civil Code on
prescription of actions. Section 3(6) of that Act
provides as follows: In any event, the carrier and the
ship shall be discharged from all liability in respect
of loss or damage unless suit is brought within one
year after delivery of the goods or the date when
the goods should have been delivered; Provided,
that if a notice of loss for damage; either apparent
or concealed, is not given as provided for in this
section, that fact shall not effect or prejudice the
right of the shipper to bring suit within one year
goods should have been delivered.

4. Limitation of liability

Under Sec. 4(5), the limit is set at a maximum of
$500 per package or customary freight unit.

Eastern Shipping vs. IAC (150 SCRA 463). Under
the Sec. 4(5), the liability limit is set at $500 per
package or customary freight unit unless the nature
and value of such goods is declared by the shipper.
This is deemed incorporated in the bill of lading
even if not mentioned in it.

Belgian Overseas v. Philippine First Insurance
(2002). The Civil Code does not limit the liability of
the common carrier to a fixed amount per package.
In all matters not regulated by the Civil Code, the
right and the obligations of common carriers shall be
governed by the Code of Commerce and special

73
laws. Thus, the COGSA, which is suppletory to the
provisions of the Civil Code, supplements the latter
by establishing a statutory provision limiting the
carrier's liability in the absence of a shipper's
declaration of a higher value in the bill of lading. In
the case before us, there was no stipulation in the
Bill of Lading limiting the carrier's liability. Neither
did the shipper declare a higher valuation of the
goods to be shipped. Petitioners' liability should be
computed based on US$500 per package and not on
the per metric ton price declared in the Letter of
Credit.

VI. Public Service Act

A. Definition of public utility
(Asked in 92, 93, 95, 98 and
00)

It is a business or service engaged in regularly
supplying the public with some commodity or service
of public consequence such as electricity, gas,
water, transportation, telephone or telegraph
service.

Two tests for determining public utility:
1. Is it engaged in regularly supplying the public
with some commodity or service? [per definition
in Albano v. Reyes]
2. If #1 is uncertain, is it a public service as
defined in the Public Service Law under CA 146
Sec. 13(b)? If it falls under any one of the
examples given under CA 146 Sec 13(b), then it
is a public utility.

CA 146, Section 13(b). The term public service
includes every person that now or hereafter may
own, operate, manage, or control in the Philippines,
for hire or compensation, with general or limited
clientele, whether permanent, occasional or
accidental, and done for general business purposes,
any common carrier, railroad, street railway,
traction railway, sub-way motor vehicle, either for
freight or passenger, or both with or without fixed
route and whether may be its classification, freight
or carrier service of any class, express service,
steamboat or steamship line, pontines, ferries, and
water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine
railways, marine repair shop, [warehouse] wharf or
dock, ice plant, ice-refrigeration plant, canal,
irrigation system, gas, electric light, heat and power
water supply and power, petroleum, sewerage
system, wire or wireless communications system,
wire or wireless broadcasting stations and other
similar public services

Kilusang Mayo Uno v. Garcia (1994). Public
utilities are privately owned and operated businesses
whose services are essential to the general public.
They are enterprises which specially cater to the
needs of the public and conduce to their comfort
and convenience. As such, public utility services are
impressed with public interest and concern. When,
therefore, one devotes his property to a use in which
the public has an interest, he, in effect grants to the
public an interest in that use, and must submit to
the control by the public for the common good, to
the extent of the interest he has thus created.

Albano v. Reyes (1989). A public utility is a
business or service engaged in regularly supplying
the public with some commodity or service of public
consequence, such as electricity, gas, water,
transportation, telephone or telegraph services.
Apart from statutes which define public utilities that
are within the purview of such statutes, it would be
difficult to construct a definition of a public utility
which would fit every conceivable case. As its name
indicates, however, the term public utility implies a
public use and service to the public.

Tatad v Garcia. While a franchise is needed to
operate these facilities to serve the public, they do
not by themselves constitute a public utility. What
constitutes a public utility is not their ownership but
their use to serve the public.

In law, there is a clear distinction between the
"operation" and the ownership of the facilities and
equipment used to serve the public The devotion
of property to serve the public may be done by the
owner or by the person in control thereof who may
not necessarily be the owner thereof.

What does regularly supplying the public
mean?
The utility must hold itself out to the public as a
public utility by demand and as a matter of right,
and not by permission. To determine regularity, look
at it from the perspective of the public, and not the
operator.

It is a service or a readiness to serve an indefinite
portion of the population subject only to the
limitations of the service as given by the grant such
that [the utility] incurs a liability as a violation of its
duty if it refuses, such that the availment of the
service has become, through time, a matter of right
and not of mere privilege. [also in US v. Tan Piaco]

B. Necessity for certificate of
public convenience

What is a CPC?
A CPC is any authorization to operate a public
service issued by the pertinent government agency
(DOTC, NTC, LTFRB, etc) for the operation of public
services for which no franchise, either municipal or
legislative, is required by law (e.g. motor vehicles.)

It constitutes neither a franchise nor a contract; it
does not confer property rights, it is a mere license
or privilege [Pantranco v. PSC]. Such privilege is
forfeited when the grantee fails to comply with his
commitments to serve the public and public
necessity.

74
However, these certificates represent property
rights to the extent that if the rights which any
public utility is exercising pursuant to the lawful
orders of the PSC (now DOTC) have been invaded by
another public utility, in appropriate cases, actions
may be maintained by the complainant public utility.
[Cui vs. Cui (1934)]

Also, it is a property and has a considerable value
and can be the subject of sale or attachment.
[Cogeo-Cubao Operators and Drivers Assn. v. CA,
Raymundo v. Luneta Motor Co.]

The revocation of this certificate deprives the
grantee of no vested right. New and additional
burdens, alteration of the certificate, or even
revocation or annulment thereof is reserved to the
State. [Luque v. Villegas, 30 SCRA 408]

Public Utilities exempted from getting a CPC
Under the Public Service Law, Sec. 14, the following
are exempted from getting a CPC:
(a) Warehouses;
(b) Animal-drawn vehicles and bancas moved by oar
or sail, and tugboats and lighters;
(c) Airships within the Philippines except as regards
the fixing of their maximum rates on freight and
passengers;
(d) Radio companies except with respect to the
fixing of rates;
(e) Public services owned or operated by any
instrumentality of the National Government or
by any government-owned or controlled
corporation, except with respect to the fixing of
rates. [As amended by Com. Act 454, RA No.
2031 and RA No. 2677]

1. Requisites for issuance of CPC

1) Citizenship

Applicant may either be:
a. a citizen of the Philippines, or
b. corporation, co-partnership or association
i. organized under the laws of the Philippines
ii. at least 60% of the stock of paid-up capital
of which must belong to citizens of the
Philippines. [Sec 16a, CA 146, as amended]

2) Promotion of public interests
The applicant must prove that the operation of the
public service proposed and the authorization to do
business will promote the public interest in a proper
and suitable manner. [Sec 16a CA 146 as amended]

3) Financial capability
The applicant must be financially capable of
undertaking the proposed service and meeting the
responsibilities incident to its operation.

2. Prior operator rule

a. Meaning
The prior operator rule is the rule which prohibits
the issuance of a license to a subsequent operator
for the same route in order to protect the prior
operator that already maintains an adequate service
and is able to meet the demands of the public. The
policy is not to issue a certificate to a second
operator to cover the same field and in competition
with a first operator who is rendering sufficient,
adequate and satisfactory service. If inadequate or
deficient, the prior operator must first be given an
opportunity to improve its service.

Rationale: the preservation of public convenience
and the prevention of ruinous competition in order
that the interests of the public would be conserved
and preserved. [Batangas Transportation Co. v.
Orlanes]

Batangas Transportation Co. v. Cayetano
Orlanes (1928). So long as the 1st licensee keeps
and performs the terms and conditions of its license
and complies with the reasonable rules and
regulations of the Commission and meets the
demands of the public, it should have more or less of
a vested and preferential right over a person who
seeks to acquire another and a later license over
same route. Otherwise, the first licensee would not
have protection on his investment and would be
subject to ruinous competition and thus defeat the
very purpose and intent for the PSC was created.

COROLLARY RULES:

PRIOR APPLICANT RULE: The rule presupposes a
situation where two interested persons apply for a
certificate to operate a public utility in the same
community over which no person has as yet granted
any certificate. If it turns out, after the hearing,
that the circumstances between the two applicants
are more or less equal, then the applicant who
applied ahead of the other, will be granted the
certificate. This rule is subordinated under the Prior
Operator Rule.

PROTECTION OF INVESTMENT RULE: It means that
one of the purposes of the Public Service Act is to
protect and conserve investments which have
already been made for that purpose by public
service operators.

b. Exceptions

Exception to Prior Operator Rule
1. When the subsequent CPC or CPCN covers a new
route, even if it overlaps with the route of the
prior operator;
2. Where the corporate existence of the prior
operator has expired;
3. When regularity is at issue regular operators
are preferred over irregular operators.
4. When the CPC or CPCN already granted
comprises a larger territory than that applied
for;
5. Where public interest would be better served by
the new operator;
6. When the application of the rule would be
conducive to monopoly.

75
c. Ruinous competition

Ruinous competition exists when there is actual ruin
of the business of the operator; that the existing
operator will not gain enough profits if another
person is allowed to enter the business; that which
will result in the deprivation of sufficient gain in
respect of reasonable return of investment,
therefore the oppositor, alleging this, must show
that he will be deprived of a reasonable return on
his investment.

Mere possibility of reduction in the earnings of the
business or the deterioration in the income of his
business is not sufficient to prove ruinous
competition. It must be shown that the business
would not have sufficient gains to pay a fair rate of
interest on his capital investments [Manila Electric
Co. vs. Pasay Transportation Co; Ice & Cold Storage
Industries v. Valero]

C. Fixing of rate

Rates imposed by Public Utilities are regulated by
the State. A public utility submits to the regulation
of government authorities and surrenders certain
business prerogatives, including the amount of rates
that may be charged by it. It is the imperative duty
of the State to interpose its protective power
whenever too much profit becomes the priority of
public utilities.

Three major factors to be considered by the
regulating agency to determine just and reasonable
rates to be charged by a public utility:
a) rate of return;
b) rate base and
c) the return itself or the computed revenue to be
earned by the public utility. [Republic v. Meralco
(2003)]

Hence:
Rate of return x Rate base = return on the public
utility for the use of its property

1. Rate of return

Rates must assure reasonable rate of return. The
rate of return of a public utility is not prescribed by
statute but by administrative and judicial
pronouncements. SC has consistently adopted a 12%
rate of return for public utilities [Republic v.
Meralco, 2002]. However it has also qualified that
what is reasonable or unreasonable depends on a
calculus of changing circumstances that ebb and
flow with time. [Republic v. Meralco (2003)]

Rate base
It is an evaluation of the property devoted by the
utility to the public service or the value of invested
capital or property which the utility is entitled to a
return.

2. Exclusion of income tax as
expense

In computing the return, income tax is EXCLUDED
as an expense.

Republic v. Meralco, 2003. Income tax payments
are NOT deductible expenses for purposes of rate
determination. Rate regulation calls for a careful
consideration of the totality of facts and
circumstances material to each application for an
upward rate revision. Rate regulators should strain
to strike a balance between the clashing interests of
the public utility and the consuming public and the
balance must assure a reasonable rate of return to
public utilities without being unreasonable to the
consuming public. What is reasonable or
unreasonable depends on a calculus of changing
circumstances that ebb and flow with time.
Yesterday cannot govern today, no more than today
can determine tomorrow.

D. Unlawful arrangements

1. Boundary system

The boundary system is a scheme by an
owner/operator engaged in transporting passengers
as a common carrier to primarily govern the
compensation of the driver, that is, the latters daily
earnings are remitted to the owner/operator less the
excess of the boundary which represents the drivers
compensation. Under this system, the
owner/operator exercises control and supervision
over the driver. It is different from lease of chattels
because in the latter, the lessor loses complete
control over the chattel and the lessee is still
ultimately responsible for the consequences of its
use.

In the boundary system, the management of the
business is still in the hands of the owner/operator,
who, being the holder of the certificate of public
convenience, must see to it that the driver follows
the route prescribed by the franchising and
regulatory authority, and the rules promulgated with
regard to the business operations. [Villamaria v.
Court of Appeals(2006)]

Note that the boundary system is not in itself
unlawful but only unlawful when used as a defense
to evade true liability. The owner-operator shall
remain liable to the public Indeed to exempt from
liability the owner of a public vehicle who operates
it under the "boundary system" on the ground that he
is a mere lessor would be not only to abet flagrant
violations of the Public Service Law, but also to
place the riding public at the mercy of reckless and
irresponsible drivers reckless because the measure
of their earnings depends largely upon the number of
trips they make and, hence, the speed at which they
drive; and irresponsible because most if not all of
them are in no position to pay the damages they
might cause. [Sps. Hernandez v. CA (2004)]

76
2. Kabit system (Asked in 90 and 05)

A system whereby a person who has been granted a
certificate of public convenience allows other
persons who own motor vehicles to operate under
such license, for a fee or percentage of such
earnings.

Although not penalized outright as a criminal
offense, the "kabit system" is invariably recognized
as being contrary to public policy and, therefore,
void and inexistent under Art 1409 of the Civil Code.
"Kabit System" has been identified as one of the root
causes of graft and corruption in the government
transportation offices. It is a "pernicious system" that
cannot be too severely condemned. It constitutes an
imposition upon the good faith of the government. It
is an abuse of a certificate of public convenience,
which is a special privilege granted by the
government. [Teja Marketing v. IAC]

Example:
A, a grantee of a CPC from the LTFRB, is given the
authority to operate 10 units of taxis. B, a non-
grantee, wishes to operate as a common carrier and
kabits with the CPC of A who will obtain approval
from the LTFRB to operate another taxi. The taxi
will be registered in the name of A, who will be paid
by B.

Assume that A executed a deed of sale in favor of B
in case B decides not to go on with the arrangement,
in order to safeguard the rights of B. However, in
case of injury to a passenger of the taxi actually
operated by B (and previously sold to B as well) it is
still A who will be liable. The illegal contract of sale
between A & B cannot be used as a defense.

A does not have a cause of action against B either.
They are in pari delicto.

Teja Marketing v. IAC (1987). Parties operated
under an arrangement, commonly known as the
"kabit system" whereby a person who has been
granted a certificate of public convenience allows
another person who owns motor vehicles to operate
under such franchise for a fee. A certificate of
public convenience is a special privilege conferred
by the government. Although not outrightly
penalized as a criminal offense, the kabit system is
invariably recognized as being contrary to public
policy and, therefore, void and in existent under
Article 1409 of the Civil Code.

E. Approval of sale, encumbrance
or lease of property

CA 146, Public Service Act, section 20. Subject to
established limitations and exceptions and saving
provisions to the contrary, it shall be unlawful for
any public service or for the owner, lessee or
operator thereof, without the approval and
authorization of the Commission previously had ---
(g) To sell, alienate, mortgage, encumber or lease
its property, franchises, certificates,
privileges, or rights or any part thereof; or
merge or consolidate its property, franchises
privileges or rights, or any part thereof, with
those of any other public service. The
approval herein required shall be given, after
notice to the public and hearing the persons
interested at a public hearing, if it be shown
that there are just and reasonable grounds for
making the mortgaged or encumbrance, for
liabilities of more than one year maturity, or
the sale, alienation, lease, merger, or
consolidation to be approved, and that the same
are not detrimental to the public interest, and
in case of a sale, the date on which the same is
to be consummated shall be fixed in the order
of approval: Provided, however, that nothing
herein contained shall be construed to
prevent the transaction from being
negotiated or completed before its approval
or to prevent the sale, alienation, or lease by
any public service of any of its property in
the ordinary course of its business.

In order to validly transfer its
franchise/certificate such that it would bind the
public, a public utility owner/operator must
secure PSC approval.
However, the proviso contained in the
aforequoted law, to the effect that nothing
therein shall be construed "to prevent the
transaction from being negotiated or complete
before its approval", means that the sale, even
without the required approval is still valid and
binding between the parties themselves.
[Montoya vs. Ignacio]

Fores v. Medina (1959). A transfer contemplated by
the law, if made without the requisite approval of
the Public Service Commission, is not effective and
binding in so far as the responsibility of the grantee
under the franchise in relation to the public is
concerned. The provisions of the statute are clear
and prohibit the sale, alienation, lease, or
encumbrance of the property, franchise, certificate,
privileges or rights, or any part thereof of the owner
or operator of the public service Commission. The
law was designed primarily for the protection of the
public interest; and until the approval of the public
Service Commission is obtained the vehicle is, in
contemplation of law, still under the service of the
owner or operator standing in the records of the
Commission which the public has a right to rely
upon.

Note: The approval of the sale of CPCs, CPCNs or
other properties does not affect the validity
(perfection) of the sale between the parties as long
as all the elements of a contract are met. The
approval only affects the relation of the parties to
the DOTC or to 3
rd
parties. If there is no approval,
then the sale does not bind the DOTC or 3
rd
parties.
The controlling factor therefore is the registration.

77
VII. The Warsaw Convention

A. Applicability

The Convention is applicable to:
1. International transport by air
2. Transport of persons, baggage, or goods [WC,
Art. 1]

International air transportation
Transportation by air between points of contact of
two high contracting parties, or those countries that
have acceded to the Convention

Two Categories Of "International Transportation By
Air" Under The Convention:
1. That where the place of departure and the
place of destination are situated within the
territories of two High Contracting Parties
regardless of whether or not there be a break in
the transportation or a transshipment; and
2. That where the place of departure and the
place of destination are within the territory of a
single High Contracting Party if there is an
agreed stopping place within a territory subject
to the sovereignty, mandate or authority of
another power, even though the power is not a
party to the Convention. [WC, Article 1, No. 2]

A carriage to be performed by several successive air
carriers is deemed, for the purposes of this
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
a single contract or of a series of contracts. [WC,
Article 1, No. 3]

The Convention does not apply to carriage
performed under the terms of any international
postal Convention. [WC, Article 2, No. 2]
B. Liability of Carrier for Damages

1. Death or injury of a passenger if the accident
causing it took place on board the aircraft or in
the course of the operations of embarking or
disembarking [Art. 17];

2. Destruction, loss, or damage to any baggage or
goods, if it took place during the transportation
by air [Art. 18]

Transportation by Air the period during which
the baggage or goods are in the charge of the
carrier whether in an airport or on board an
aircraft, or in case of a landing outside an
airport, in any place whatsoever. It includes
any transportation by land or water outside an
airport if such takes place in the performance of
a contract for transportation by air, for the
purpose of loading, delivery, or transshipment.

3. Delay in the transportation of passengers,
baggage, or goods [Art. 19]

C. Limitation of Liability

1. Liability to passengers

General Rule: $100,000 per passenger

Exception: Agreement to a higher limit [Article
22(1)]

2. Liability for checked baggage

General Rule: $20 per kilogram

Exception: In case of special declaration of value
and payment of a supplementary sum by consignor,
carrier is liable to not more than the declared sum
unless it proves the sum is greater than actual value.
[Article 22(2)]

3. Liability for hand-carried baggage

$1000/passenger [Article 22(3)]

An agreement relieving the carrier from liability
or fixing a lower limit is null and void. [Art. 23]

Carrier is not entitled to the foregoing limit if
the damage is caused by willful misconduct or
default on its part. [Art. 25]

The right to damages under the WC is
extinguished after 2 years from the date of
arrival at the destination or from the date on
which the aircraft ought to have arrived, or
from the date on which the carriage stopped.
[Art. 29(1)]

Alitalia v. CA. The WC does not operate as an
exclusive enumeration of the instances of an
absolute limit of the extent of liability. It does not
preclude the application of the Civil Code and other
pertinent local laws. It does not regulate or exclude
liability for other breaches of contract by the
carrier, or misconduct of its employees, or for some
particular or exceptional type of damage.

Philippine Airlines vs. Savillo, et al (2008).
Applicability of periods of prescription in WC 29 and
NCC 1146

D. Willful misconduct

When can a common carrier not avail itself of this
limitation?
1. Willful misconduct [Art. 25]

2. Default amounting to willful misconduct [Art.
25]

3. Accepting passengers without ticket [Art. 3, No.
2]

4. Accepting goods without airway bill or baggage
without baggage check

78
Carrier guilty of willful misconduct cannot
avail of the provisions limiting liability but
may still invoke other provisions of the WC.
[see Art. 25]

Lhuillier v. British Airways (2010). Tortious
conduct as ground for petitioners complaint is
within the purview of the Warsaw Condition; venue

Savellano v. Northwest Airlines (2003). Non-use of
original contracted route; notice of loss

79

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS

OPERATIONS HEADS

Corporation Law
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Chatto

LAYOUT TEAM 2012
Mara Villegas Naomi
Timothy Reyes

80
Corporation Law
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
I. Corporation, defined
II. Classification of corporations
III. Nationality of corporations
IV. Corporate juridical personality
V. Capital structure
VI. Incorporation and organization
VII. Corporate powers
VIII.Stockholders and members
IX. Board of directors and trustees
X. Capital affairs
XI. Dissolution and liquidation
XII. Other corporations
XIII.Merger and consolidation

I. Corporation, defined

A corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes, and properties expressly
authorized by law or incident to its existence. (Sec.
2, Corporation Code)

Attributes of a Corporation

1) An Artificial Being
A corporation exists by fiction of law. Hence, it can
act only through its directors, officers and
employees.

Moral Damages cannot be awarded in favor of
corporations because they do not have feelings
and mental state. They may not even claim
moral damages for besmirched reputation
(NAPOCOR v. Philipp Brothers Oceanic, 2001).
However, a corporation can recover moral
damages under Art 2219 (7) if it was the victim
of defamation (Pilipinas Broadcasting Network
v. Ago Medical and Educational Center 2005).

Criminal Liability Since a corporation as a
person is a mere legal fiction, it cannot be
proceeded against criminally because it cannot
commit a crime in which personal violence or
malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act
amounting to a crime and never against the
corporation itself (West Coast Life Ins. Co. v.
Hurd [1914], Time Inc. v. Reyes [1971])

NOTE Doctrine of Separate Personality: A
corporation, upon coming into existence, is invested
by law with a personality separate and distinct from
those persons composing it as well as from any other
legal entity to which it may be related. (Yutivo Sons
Hardware v. CTA 1961)

2) Created by operation of law
Mere consent of the parties to form a corporation is
not sufficient. The State must give its consent either
through a special law (in case of government
corporations) or a general law (i.e., Corporation
Code in case of private corporations).

A corporation comes into existence upon the
issuance of the certificate of incorporation. Then
and only then will it acquire juridical personality to
sue and be sued, enter into contracts, hold or
convey property or perform any legal act in its own
name (Ladia, Corporation Code of the Philippines
2001 ed.)

3) Has the right of succession
Its continued existence during its stated term cannot
be affected by any change in the members or
stockholders or by any transfer of shares by a
stockholder to a 3
rd
person.

4) Has the powers, attributes and properties
expressly authorized by law or incident to its
existence
A corporation has no power except those expressly
conferred on it by the Corporation Code and those
that are implied or incidental to its existence.
(Premium Marble Resources v. CA 1996)

II. Classification of corporations

A. Stock Corporation (Asked in 01
and 04)

Corporations which have capital stock divided into
shares and are authorized to distribute to the
holders of such shares dividends or allotments of the
surplus profits on the basis of shares held (Sec 3)

It is organized for profit.

The governing body of a stock corporation is usually
the Board of Directors (except in certain instances,
e.g. close corporations).

B. Non-stock Corporation (Asked
in 04)

All other corporations are non-stock corporations
(Sec. 3)

One where no part of the income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of the Code on dissolution.

Not organized for profit.

Its governing body is usually the Board of Trustees.

CIR vs. Club Filipino de Cebu (1962):
There are two elements for a stock corporation to
exist:
1) Capital stock divided into shares, and
2) An authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits
on the basis of shares held. (Test of WON a stock
corporation)

81
Even if there is a statement of capital stock, the
corporation is still NOT a stock corporation if
dividends are NOT supposed to be declared, that is,
there is no distribution of retained earnings.

Note: Under Sec. 43 of the Corporation Code, a
corporation is deemed to have the power to declare
dividends. Thus, so long as the corporation has
capital stock and there is no prohibition in its
Articles of Incorporation or in its by-laws for it to
declare dividends, such corporation is a stock
corporation.

C. Other Classification

a. Public corporation (Asked in 04) One formed
or organized for the government of a portion of
the state. Its purpose is for the general good
and welfare.

b. Private corporation (Asked in 04) One formed
for some private purpose, benefit, aim or end; it
may be either stock or non-stock, government-
owned or controlled or quasi-public.

c. Close corporation (see Sec. 96) one that is
limited to selected persons or members of a
family

d. Educational corporation One organized for
educational purposes (Sec. 106).

e. Religious corporations
Corporation sole is one formed for the purpose
of administering and managing, as trustee, the
affairs, property and temporalities of any
religious denomination, sect, or church, by the
chief archbishop, bishop, priest, rabbi, or other
presiding elder of such religious denomination,
sect or church (Sec. 110)

Corporation aggregate is a religious corporation
incorporated by more than one person.

f. Eleemosynary corporation One organized for a
charitable purpose

g. Domestic corporation One formed, organized,
or existing under the laws of the Philippines.

h. Foreign corporation One formed, organized or
existing under any laws other than those of the
Philippines and whose law allows Filipino
citizens and corporations to do business in its
own country and state (Sec. 123).

i. Corporation created by special laws or charter
- Corporations which are governed primarily by
the provisions of the special law or charter
creating them. Corporation Code has suppletory
application. (Sec. 4)

j. Subsidiary corporation one in which control,
usually in the form of ownership of majority of
its shares, is in another corporation (the parent
corporation).

k. Parent corporation its control lies in its
power, directly or indirectly, to elect the
subsidiarys directors thus controlling its
management policies.

III. Nationality of corporations

A. Control Test

A corporation shall be considered a Filipino
corporation if the Filipino ownership of its capital
stock is at least 60%, and where the 60-40 Filipino-
alien equity ownership is NOT in doubt (SEC Opinion
dated 6 November 1989; DOJ Opinion No. 18, s.
1989).

Therefore, its shareholdings in another corporation
shall be considered to be of Filipino nationality when
computing the percentage of Filipino equity of that
second corporation (SEC Opinion dated 23 November
1993).

Control test is applied in the following:
Exploitation of natural resources - Only
Filipino citizens or corporations whose capital
stock are at least 60% owned by Filipinos can
qualify to exploit natural resources. (Sec. 2,
Art. XII, Consti.)
Public Utilities - xxx no franchise, certificate
or any other form of authorization for the
operation of a public utility shall be granted
except to citizens of the Philippines or to
corporations or associations organized under the
laws of the Philippines at least 60% of whose
capital is owned by such citizens. (Sec. 11,
Art. XII, Consti.)

NOTE:
In the recently decided case of Gamboa vs. Teves
(G.R. No. 176579, June 28, 2011), the SC ruled as
follows:

The term "capital" in Section 11, Article XII of the
1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus
in the present case only to common shares, and not
to the total outstanding capital stock (common and
non-voting preferred shares).

The 60 percent of the "capital" assumes, or should
result in, "controlling interest" in the corporation.
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not,
but only such stocks which are generally entitled to
vote are considered.

For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential.
Thus, stocks, the voting rights of which have been

82
assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine
nationals.

Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals.

B. The Grandfather Rule

It is a method of determining the nationality of a
corporation which in turn is owned in part by
another corporation by breaking down the equity
structure of the shareholder corporation.

It involves the computation of Filipino ownership of
a corporation in which another corporation of partly
Filipino and partly foreign equity owns capital stock.
The percentage of shares held by the second
corporation in the first is multiplied by the latters
own Filipino equity, and the product of these
percentages is determined to be the ultimate
Filipino ownership of the subsidiary corporation (SEC
Opinion re; Silahis Intl Hotel May 4, 1987)

IV. Corporate juridical
personality

A private corporation formed or organized under this
code commences to have corporate existence and
juridical personality and is deemed incorporated
from the date the SEC issues a certificate of
incorporation under its official seal (Sec. 19)

A. Doctrine of Separate Juridical
Entity (Asked in 95, 96, 99 and
00)

Concept
A corporation has a personality separate and
distinct from that of its stockholders and members
and is not affected by the personal rights,
obligations, and transactions of the latter.

Merely a legal fiction for purposes of convenience
and to subserve the ends of justice

Property
SHs have no claim on corporate property as owners,
but mere expectancy or inchoate right to the same
upon dissolution of the corporation after all
corporate creditors have been paid. Such right is
limited only to their equity interest (doctrine of
limited liability). Although a stockholders interest
in the corporation may be attached by his personal
creditor, corporate property cannot be used to
satisfy his claim (Wise & Co. v. Man Sun Lung,
1940).

1. Liability for torts and crimes

As a separate juridical personality, a corporation can
be held liable for torts committed by its officers for
corporate purpose (PNB v. CA, 1978).

2. Recovery of damages

GENERAL RULE
A Corporation has the power to sue in its corporate
name. (Sec. 36)

EXCEPTION
Moral Damages cannot be awarded in favor of
corporations because they do not have feelings and
mental state. They may not even claim moral
damages for besmirched reputation (NAPOCOR v.
Philipp Brothers Oceanic, 2001).

HOWEVER, a corporation can recover moral damages
under Art 2219 (7) if it was the victim of defamation
(Pilipinas Broadcasting Network v. Ago Medical and
Educational Center, 2005).

Constitutional Rights
Corporate entities are entitled to due process, equal
protection, and protection against unreasonable
searches and seizures. However, a corporation is
not entitled to the privilege against self-
incrimination (Bataan Shipyard & Engg Co. v.
PCGG, 1987)

B. Doctrine of piercing the
corporate veil (Asked in 91, 01
and 04)

Piercing the veil of corporate entity is merely an
equitable remedy, and may be granted only in cases
when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend
crime (Yutivo Sons v CTA 1961) or where the
corporation is a mere alter ego or business conduit
of a person. (Koppel Phil v Yatco)

1. Grounds for application of
doctrine

If done to defraud the government of taxes due
it.
If done to evade payment of civil liability.
If done by a corporation which is merely a
conduit or alter ego of another corporation.
If done to evade compliance with contractual
obligations.
If done to evade financial obligation to its
employees.

Seaoil vs Autocorp Group ( 2008, Nachura):
Q: Is a corporation liable for the individual acts of its
stockholders or members? Is there an exception to
the general rule?

A: It is settled that a corporation has a personality
separate and distinct from its individual stockholders
or members, and is not affected by the personal

83
rights, obligations and transactions of the latter. The
corporation may not be held liable for the
obligations of the persons composing it, and neither
can its stockholders be held liable for its obligation.
Of course, this Court has recognized instances
when the corporations separate personality may be
disregarded. However, we have also held that the
same may only be done in cases where the corporate
vehicle is being used to defeat public convenience,
justify wrong, protect fraud, or defend crime.
Moreover, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

2. Test in determining applicability

GENERAL RULE
The mere fact that a corporation owns all or
substantially all of the stocks of another corporation
is NOT sufficient to justify their being treated as one
entity.

EXCEPTION
The subsidiary is a mere instrumentality of the
parent corporation.

Circumstances rendering subsidiary an
instrumentality (PNB v. Ritratto Group, 2001):
The parent corporation owns all or most of the
subsidiarys capital stock.
The parent and subsidiary corporations have
common directors or officers.
The parent corporation finances the subsidiary.
The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation.
The subsidiary has grossly inadequate capital.
The parent corporation pays the salaries and
other expenses or losses of the subsidiary.
The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation.
In the papers of the parent corporation or in the
statements of its officers, the subsidiary is
described as a department or division of the
parent corporation or its business or financial
responsibility is referred to as the parent
corporations own.
The parent corporation uses the property of the
subsidiary as its own.
The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation in the latters interest.
The formal ledger requirements of the
subsidiary are not observed.

V. Capital structure

A. Number and Qualifications of
Incorporators

1. Definition

Incorporators - are those stockholders or members
mentioned in the articles of incorporation as
originally forming and composing the corporation
and who are signatories thereof.

2. Requirements (Sec. 10)

Natural persons
All Of legal age
Must own or subscribe to at least one share of
stock of the corporation (Genuine interest)
5-15 incorporators who must sign the articles of
incorporation
Majority of the incorporators must be residents
of the Philippines

GENERAL RULE
All incorporators/ corporators may be foreigners.

EXCEPTIONS
Fully or partly nationalized corporations

Where NO foreign stockholder is allowed.
- Mass media except recording (Art. XVI, Sec.
11 of the Constitution; Presidential
Memorandum dated 04 May 1994)
- Retail trade enterprises with paid-up capital
of less than US$2.5 Million (Sec. 5 of RA
8762)
- Private security agencies (Sec. 4 of RA 5487)
- Small-scale mining (Sec. 3 of RA 7076)
- Utilization of natural resources (Art. XII, Sec.
2 of the Constitution)
- Ownership, operation and management of
cockpits (Sec. 5 of PD 449)
- Manufacture, repair, stockpiling and/or
distribution of nuclear weapons (Art. II, Sec.
8 of the Constitution)
- Manufacture, repair, stockpiling and/or
distribution of biological, chemical and
radiological weapons and anti-personnel
mines (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines)
- Manufacture of firecrackers and other
pyrotechnic services (Sec. 5 of RA 7183)
Only up to 20% foreign equity.
- Private radio communications network (RA
3846)
- Private recruitment, whether for local or
overseas, employment (Art. 27 of PD 442)
- Construction and repair of locally funded
works (Sec. 1 of CA 541, LOI 630)
- Construction of defense-related structures
(Sec. 1 of CA 541)

84
- Exploration, development and utilization of
natural resources (Art. XII, Sec. 2 of the
Constitution).
- Realty companies and other corporations that
own private lands (Art. XII, Sec. 7 of the
Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4
of RA 9182).
- Operation and management of public utilities
(Art. XII, Sec. 11 of the Constitution; Sec. 16
of CA 146)
- Culture, production, milling, processing,
trading except retail of rice and corn and by-
products (Sec. 5 of PD 194; Sec. 15 of RA
8762).
- Adjustment companies (Sec. 323 of PD 612 as
amended by PD 1814).
- Enterprises included in the Foreign
Investment Negative List (Sec. 3(g) in
relation to Sec. 8 and Sec. 15 of R.A. 7042)
- Financing companies regulated by SEC (Sec. 6
of RA 5980 as amended by RA 8556)
- Investment houses (Sec. 5 of PD 129 as
amended by RA 8366)

NOTE
Original subscribers - Persons whose names are
mentioned in the Articles, but not as incorporators;
they do not sign the Articles

B. Minimum Capital Stock and
Subscription Requirements

Definitions

Capital Stock is an amount fixed in the AOI (where
shares are with par value) and is unaffected by
profits and losses. It limits the maximum amount or
number of shares that may be issued without formal
amendment of the articles of incorporation (See Sec.
38).

Authorized Capital Stock - is synonymous with
capital stock where the shares of the corporation
have par value. If the shares of stock have no par
value, the corporation has no ACS, but it has capital
stock the amount of which is not specified in the AOI
as it cannot be determined until all the shares have
been issued. In this case, the two terms are not
synonymous (DE LEON).

Subscribed Capital Stock - It is the amount of the
capital stock subscribed whether fully paid or not. It
connotes an original subscription contract for the
acquisition by a subscriber of unissued shares in a
corporation (Secs. 60 and 61)

Outstanding Capital Stock - it is the total shares of
stock issued under the binding subscription
agreements to subscribers or stockholders, whether
or not fully or partially paid, except treasury shares
(Sec. 137). It is broader than subscribed capital
stock.

Paid-up Capital - Portion of the authorized capital
stock which has been subscribed and paid (See Sec.
13).

Unissued Capital Stock - It is that portion of the
capital stock that is not issued or subscribed. It does
not vote and draws no dividends.

Legal Capital - It is the amount equal to the
aggregate par value and/or issued value of the
outstanding capital stock (DE LEON).

Requirement (Sec 13, Corporation Code)
At least twenty-five (25%) percent of the authorized
capital stock of the corporation must be subscribed;
and

At least twenty-five (25%) of the total subscription
has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at
least twenty-five (25%) percent of the said
subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.

C. Corporate Term

Maximum life of 50 years. Extendible for a period
not exceeding 50 years at any one instance. No
extension, however, can be made earlier than 5
years before the end of the term, unless there are
justifiable reasons for an earlier extension as may
be determined by the SEC (Sec. 11)

Extension requires an amendment of the AOI. Any
dissenting stockholder may exercise his appraisal
right (Sec. 37).

D. Classification of Shares

Shares of stock of stock corporations may be divided
into classes or series of shares or both. Each class or
series of shares may have rights, privileges or
restrictions, as stated in the AOI.

Classification of shares:
Common shares
Preferred shares
Par value shares
No-par value shares
Founders shares
Redeemable shares
Treasury shares
Convertible shares
Non-voting shares

GENERAL RULE
No share may be deprived of voting rights (Sec. 6)

EXCEPTIONS
Preferred or
Redeemable shares,
Provided by the Code

There shall always be a class/series of shares which
have a COMPLETE VOTING RIGHTS (Sec. 6)

85
Doctrine of Equality of Shares
Each share shall be EQUAL in ALL respects to every
other share, except as otherwise provided in the AOI
and stated in the certificate of stock (Sec. 6)

a. Common Shares

The most common type of shares which enjoy no
preference but the owners thereof are entitled to
management of the corporation and to equal pro-
rata division of profits after preference. It
represents a residual ownership interest in the
corporation.

b. Preferred Shares

Stocks which are given preference by the issuing
corporation in dividends and the distribution of
assets of the corporation in case of liquidation or
such other preferences as may be stated in the AOI
which do not violate the Corporation Code.

Limitations:
Preferred shares can only be issued with par
value.
Preferred shares must be stated in the Articles
of Incorporation and in the certificate of stock.
The BOD may fix the terms and conditions only
when so authorized by the AOI and such terms
and conditions shall be effective upon filing a
certificate thereof with the SEC.

c. Par value shares

These are shares with a stated value set out in the
AOI. This remains the same regardless of the
profitability of the corporation. This gives rise to
financial stability and is the reason why banks, trust
corporations, insurance companies and building and
loan associations must always be organized with par
value shares.

Par value is minimum issue price of such share in the
AOI which must be stated in the certificate

d. No-par value shares

These are shares without a stated value.

A no par share does not purport to represent any
stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the
whole number of such shares of the issuing
corporation (AGBAYANI)

Limitations:
No-par value shares cannot have an issue price
of less than P5.00 per share (Sec. 6).
They shall be deemed fully paid and non-
assessable and the holders of such shares shall
not be liable to the corporation or to its
creditors in respect thereto (Sec. 6).
Entire consideration received by the corporation
for its no-par value shares shall be treated as
capital and shall not be available for distribution
as dividends (Sec. 6).
AOI must state the fact that the corporation
issues no-par shares and the number of shares.
Banks, insurance companies, trust companies,
building and loan associations, and public
utilities cannot issue no-par value shares (Sec.
6).
The issued price may be fixed in the AOI, or by
the BOD pursuant to authority conferred upon it
by the AOI, or, in the absence thereof, by
majority vote of the outstanding shares in a
meeting called for the purpose (Sec. 62).

e. Founders Shares (Sec. 7)

These are shares, classified as such in the AOI, which
are given certain rights and privileges not enjoyed by
the owners of other stocks.

Where exclusive right to vote and be voted for in the
election of directors is granted, such right must be
for a limited period not to exceed 5 years subject to
approval by SEC. 5 year period shall commence from
date of approval by SEC.

f. Redeemable Shares (Sec. 8)

These are shares which permit the issuing
corporation to redeem or purchase its shares.

Limitations:
Redeemable shares may be issued only when
expressly provided for in the AOI (Sec. 8).
The terms and conditions affecting said shares
must be stated both in the AOI and in the
certificate (Sec. 8).
Redeemable shares may be deprived of voting
rights in the AOI, unless otherwise provided in
the Code.
The corporation is required to maintain sinking
fund to answer for redemption price if the
corporation is required to redeem.
The redeemable shares are deemed retired upon
redemption unless otherwise provided in the
AOI.
Unrestricted retained earnings is NOT necessary
before shares can be redeemed but there must
be sufficient assets to pay the creditors and to
answer for operations (Republic Planters Banks
v. Agana, 1997). Redemption cannot be made if
such redemption will result in insolvency or
inability of the corporation to meet its
obligations (SEC Opinion, 24 Aug 1987).

NOTE Redeemable shares reacquired shall be
considered retired and no longer issuable, unless
otherwise provided in the Articles of the redeeming
corporation (SEC Rules Governing Redeemable and
Treasury Shares, 26 April 1982).

g. Treasury Shares (Sec. 9)

These are shares which have been issued and fully
paid for, but subsequently re-acquired by the issuing
corporation by purchase, redemption, donation or
through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by
the BOD.

86

Treasury shares are therefore issued shares, but
being in the treasury, do not have the status of
outstanding shares. Consequently, although a
treasury share, not retired by reacquisition, may be
re-issued or resold, but such share, as long as it is
held by the corporation as a treasury share,
participates neither in the dividends, because
dividends cannot be declared by the corporation to
itself nor in the meetings of the corporation as
voting stock, for otherwise equal distribution of
voting powers among stockholders will be effectively
lost and the directors will be able to perpetuate
their control of the corporation, though it still
represents a paid for interest in the property of the
corporation. (CIR v. Manning, 1975).

NOTE
Delinquent stocks, which are stocks that have not
been fully paid, may become treasury stocks upon
bid of the corporation in absence of other bidders
(Sec.68).

h. Convertible shares

A type of preferred stock that the holder can
exchange for a predetermined number of common
shares at a specified time

i. Non-voting shares (Sec. 6)

GENERAL RULE
Non-Voting Shares are not entitled to vote.

EXCEPTIONS
Amendment of the AOI
Adoption and amendment of by-laws
Sale, lease, exchange, other disposition of all or
substantially all of the corporate property
Incurring, creating or increasing bonded
indebtedness
Increase or decrease of capital stock
Merger and consolidation
Investment of corporate funds in another
corporation or business
Dissolution of the corporation

VI. Incorporation and
organization

A. Promoter

Promoters are persons who, acting alone or with
others, take initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefor (RA 8799, The Securities
Regulation Code).

1. Liability of Promoter

GENERAL RULE
The promoter binds himself PERSONALLY & assumes
the responsibility of looking to the proposed
corporation for reimbursement.

EXCEPTIONS
1. Express or implied agreement to the contrary
2. Novation, not merely adoption or ratification of
the contract

2. Liability of Corporation for
Promoters Contract

GENERAL RULE
A corporation is NOT bound by the contract. A
corporation, until organized, has no life and no legal
existence. It could not have had an agent (the
promoter) who could legally bind it. (Cagayan
Fishing Development Co., Inc. v. Sandiko)

EXCEPTIONS
A corporation may be bound by the contract if it
makes the contract its own by:
1. Adoption or ratification of the ENTIRE contract
after incorporation.
Note:
Power of the corporation to adopt a
contract must be understood to be limited
to such contracts as the corporation itself,
after its organization, would be authorized
to make. (Builders Duntile Co. v. Dunn Mfg.
Co.)
Novation or the intent to novate the
original contract is required to adopt or
ratify the pre-incorporation contract.
(Campos, 1990)

2. Acceptance of benefits under the contract with
knowledge of the terms thereof.

3. Performance of its obligation under the contract

B. Subscription Contract

Section 60. Subscription contract.
Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be
formed shall be deemed a subscription contract
within the meaning of this Title, notwithstanding
the fact that the parties refer to it as a purchase or
some other contract.

a. Characteristics

There can be a subscription only with reference to
unissued shares of the Authorized Capital Stock
(ACS), in the following cases:
1. The original issuance of the ACS at the time
of incorporation.
2. The opening, during the life of the
corporation, of the portion of the original
ACS previously unissued; or
3. The increase in ACS achieved through a
formal amendment of the Articles and
registration thereof with the SEC.
(VILLANUEVA)

87
b. Status as Shareholder

A person becomes a shareholder the moment he:
Enters into a SUBSCRIPTION CONTRACT with an
existing corporation (he is a stockholder upon
acceptance of the corporation of his offer to
subscribe whether the consideration is fully paid
or not).
Purchases TREASURY SHARES from the
corporation
Acquires shares from existing shareholders by
SALE OR ANY OTHER CONTRACT (SUNDIANG AND
AQUINO)

c. Types of subscription contracts

i. Pre-incorporation subscription (Sec.
61)
It is a subscription for shares of stock of a
corporation still to be formed.

ii. Post-incorporation subscription
It is entered into after incorporation.

d. Interest on unpaid subscription

GENERAL RULE
Stockholder is NOT liable to pay interest on his
unpaid subscription.

EXCEPTION
If so required by the by-laws

RATE: that fixed in the by-laws, otherwise, the legal
rate (Sec. 66)

NOTES
Transfer of unissued shares = subscription.

Transfer for consideration of treasury shares =
sale by the corporation (not subscription).

Transfer of previously issued shares
by a stockholder to a third person = sale.

Shareholders are NOT creditors of the corporation
with respect to their shareholdings thereto and the
principle of compensation or set-off has no
application.

Subscription contract is NOT required to be in
writing.

C. Pre-incorporation Subscription
Agreements

It is a subscription for shares of stock of a
corporation still to be formed.

When subscription is IRREVOCABLE:
1. For a period of at least 6 months from the date
of subscription, UNLESS (1) all of the other
subscribers consent to the revocation, or (2) the
incorporation fails to materialize within six (6)
months or within a longer period as may be
stipulated in the contract of subscription; or
2. After the submission of the AOI to the SEC.

D. Consideration for Stocks

a. Forms of Consideration (Sec. 62)
[CP-LADS]
Actual cash

Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value of
the stock issued
NOTES
- Property should NOT be encumbered.
Otherwise, it would impair the consideration.
- Valuation is initially determined by the
incorporators or the board of directors,
subject to approval by the SEC.
Labor performed for or services actually
rendered to the corporation;
Previously incurred indebtedness of the
corporation;
Amounts transferred from unrestricted retained
earnings to stated capital (declaration of stock
dividends); and
Outstanding shares exchanged for stocks in the
event of reclassification or conversion.

b. Limitations on Consideration:

Stocks shall NOT be issued
for a consideration less than the par or issued
price thereof
in exchange for promissory notes or future
service

NOTES
Promissory notes and future service may be used as
consideration provided that certificates of stock will
be issued ONLY AFTER actual encashment of
promissory note or performance of such services.

Same consideration applies for the issuance of bonds
by the corporation.

E. Articles of Incorporation

constitutes the charter of the corporation
defines the contractual relationships between
the State and the corporation, the stockholders
and the State, and the corporation and the
stockholders

The Articles must be filed with the SEC for the
issuance of the Certificate of Incorporation.

1. Contents (Sec. 14)

i. Corporate name (Sec. 18)

1. Must not be identical or deceptively or
confusingly similar to that of any existing

88
corporation or to any other name already
protected by law
2. Not patently deceptive, confusing or contrary to
existing laws

Required by law to include the word Corporation
or Inc. (Campos, 1990)

Change of corporate name requires the amendment
of the AOI: majority vote of the board and the vote
or written assent of stockholders holding 2/3 of the
outstanding capital stock (Sec. 16).

Republic Planters Bank v. CA (1992):
Amendment of a corporations AOI changing its
corporate name does not extinguish the
personality of the original corporation. It is the
same corporation with a different name, and its
character is not changed. Consequently, the new
corporation is still liable for the debts and
obligations of the old corporation.

ii. Purpose clause
Must indicate the PRIMARY and SECONDARY
purposes if there is more than one purpose,
which should not contradict or change the
nature of the corporation (Sec. 14(2))
Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules and
regulations (Sec. 17 (2)).
Must not be for the purpose of practicing a
profession (People v. United Medical Service,
200 N.E. 157, cited in Campos)

iii. Principal office
Must be within the Philippines (Sec. 14 (3))
AOI must specify both province or city or town
where it is located

Important for (1) determining venue in an action by
or against the corporation, and (2) determining the
province where a chattel mortgage of shares should
be registered (Chua Gan vs. Samahang Magsasaka,
1935).

iv. Corporate Term
Maximum life of 50 years.
Extendible for a period not exceeding 50 years
at any one instance. No extension, however, can
be made earlier than 5 years before the end of
the term. (Sec. 11)

Extension requires an amendment of the subject
to the exercise of appraisal right by the dissenting
stockholder (Sec. 37).

v. Names, citizenship and residences of
incorporators

vi. Number, names, citizenship and
residences of directors/trustees.

Stock corporations: DIRECTORS
Non-stock corporations: TRUSTEES

GENERAL RULE
Not less than 5 but not more than 15
directors/trustees

EXCEPTION
Non-stock corporations whose articles or by-laws
may provide for more than 15 trustees (Sec. 92)

Educational non-stock corporations:
trustees may NOT be less than 5 NOR exceed 15
number of trustees shall be in multiples of 5
(Sec. 108)

Nationalized industries:
Aliens may be directors but only in such number as
may be proportional to their allowable ownership of
shares

vii. If STOCK corporation:
authorized capital stock in lawful money of the
Philippines
the number of shares into which the ACS is
divided
If with par value shares, the par value of each
share (Sec. 14(8), Sec. 15(7)).
names, citizenship and residences of original
subscribers
amount subscribed and paid on each
subscription
fact that some or all shares are without par
value

viii. If NON-STOCK:
amount of capital
names, nationalities & residences of
contributors
amount contributed by each

ix. Amount paid by each subscriber on
their subscription, which shall not be
less than 25% of subscribed capital
and shall not be less than P5,000
(Sec. 15 (8 & 9))

x. Name of treasurer elected by the
subscribers (Sec. 15 (10)

xi. Other matters
Classes of shares, as well as preferences or
restrictions on any such class (Sec. 6).
Denial or restriction of pre-emptive right
(Sec.39).
Prohibition against transfer of stock which
would reduce stock ownership to less than the
required minimum in the case of a nationalized
business or activity (Sec. 15(11)).

2. Non-amendable items

The following items state accomplished facts,
therefore, cannot be amended:
The names, nationalities and residences of the
incorporators
(Otherwise, an amendment would go against the
definition of incorporators in Sec. 5)
First set of directors or trustees
Original stock subscriptions and paid-in capital

89
Treasurer-in-trust
Place and date of execution
Witnesses (De Leon, 2010)

NOTES:
AOI must be accompanied by Treasurers sworn
statement of compliance with Sec. 13 on amount of
capital to be subscribed and paid for the purposes of
incorporation; otherwise, SEC shall not accept the
AOI. (Sec. 14)

F. Corporate Name limitations
on use of corporate name

Corporate name (Sec. 18)
1. Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
2. Not patently deceptive, confusing or contrary to
existing laws

Required by law to include the word Corporation
or Inc. (Campos, 1990)

Change of corporate name requires the amendment
of the AOI: majority vote of the board and the vote
or written assent of stockholders holding 2/3 of the
outstanding capital stock (Sec. 16).

Republic Planters Bank v. CA (1992):
Amendment of a corporations AOI changing its
corporate name does not extinguish the
personality of the original corporation. It is the
same corporation with a different name, and its
character is not changed. Consequently, the new
corporation is still liable for the debts and
obligations of the old corporation.

G. Registration and Issuance of
Certificate of Incorporation

a. Registration of the Articles of
Incorporation

Documents to be filed with SEC (Asked in 02): [BAT-
LaNG]
1. Articles of Incorporation
2. Treasurers Affidavit certifying that 25% of the
total authorized capital stock has been
subscribed and at least 25% of such has been
fully paid in cash or property.
3. Bank certificate covering the paid-up capital.
4. Letter authority authorizing the SEC to examine
the bank deposit and other corporate books and
records to determine the existence of paid-up
capital.
5. Undertaking to change the corporate name in
case there is another person or entity with same
or similar name that was previously registered.
6. Certificate of authority from proper government
agency whenever appropriate like BSP for banks
and Insurance Commission for insurance
corporations. (SUNDIANG AND AQUINO)

b. Issuance of Certificate of Incorporation by
SEC

EFFECT: Commencement of corporate existence and
juridical personality (Sec. 19)

REVOCATION of certificate of incorporation:
If incorporators are found guilty of fraud in procuring
the same after due notice and hearing (Sec. 6(i), PD
902-A)

c. Grounds for disapproving AOI: (Sec. 17)
[F
2
P
2]
AOI does not SUBSTANTIALLY comply with the
form prescribed
Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
Treasurers Affidavit concerning the amount of
capital subscribed and or paid is false
Required percentage of ownership of Filipino
citizens has not been complied with.

REMEDY in case of rejection of AOI - petition for
review in accordance with the Rules of Court (Sec.
6, last par., PD 902-A)

SEC shall give the incorporators reasonable time to
correct or modify objectionable portions of the
articles or amendment (Sec. 17).

H. Election of Directors or
Trustees

a. Requirements

To hold the ELECTION meeting:
- owners of MAJORITY of the OCS or majority
of the members entitled to vote in the
meeting must be present, in person or by
proxy,

Manner of elections
GEN. RULE: Viva voce
EXCEPTION: Election by ballot if requested

STOCKHOLDERS RIGHT TO VOTE and USE ANY
METHOD for voting cannot be deprived in the
articles of incorporation or in the by-laws

In STOCK CORP:
Stockholders entitled to vote number of shares
of stock standing in OWN NAME in the books of
the corporation-

GENERAL RULE (when by-laws silent): at time of
election
EXCEPTION: at the time fixed in the by-laws

In NON-STOCK CORP:
GENERAL RULE: One member = as many votes as
there are vacancies but only one vote per
candidate
EXCEPTION: otherwise provided by AOI/By-laws

No delinquent stock shall be voted.

90

REQUIREMENT TO BE ELECTED:
Candidates receiving the highest number of
votes shall be declared elected (PLURALITY)

b. Methods of Voting (Sec. 24)

i. Straight Voting

ii. Cumulative voting for one candidate
A stockholder is allowed to cumulate his votes and
give one candidate as many votes as the number of
directors to be elected multiplied by the number of
his shares shall equal.

Illustration: If there are 5 directors to be elected
and Pedro, as shareholder, has 100 shares, Pedro can
give 500 (5 x 100 shares) votes to just one
candidate.

iii. Cumulative voting by distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the number
of directors to be elected and distribute the same
among as many candidates as he shall see fit.

Illustration: In the illustration above, Pedro may
choose to give 100 votes to candidate 1, 100 votes to
candidate 2, 100 votes to candidate 3, 150 votes to
candidate 4, and 50 votes to candidate 5.

I. Adoption of By-Laws

BY-LAWS
Product of agreement of the
stockholders/members and establish the rules
for internal government of the corporation
(Campos, 1990)
Mere internal rules among stockholders and
cannot affect or prejudice 3rd persons who deal
with the corporation unless they have
knowledge of the same (China Banking Corp v
CA, 1997)

a. ADOPTION OF BY-LAWS (Sec. 46)
After incorporation - within 1 month after
receipt of official notice of the issuance of its
certificate of incorporation by the SEC.
Prior to incorporation - approved and signed by
all the incorporators & submitted to SEC
together with AOI

b. EFFECT OF FAILURE TO FILE THE BY-LAWS
WITHIN THE PERIOD:
does not imply the "demise" of the corporation.
By-laws may be required by law for an orderly
governance and management of corporations
but they are not essential to corporate birth.
Therefore, failure to file them within the period
required by law by no means tolls the automatic
dissolution of a corporation (Loyola Grand Villas
Homeowners Assn v. CA (1997)

NOTE
Section 22 on the effect of failure to formally
organize within 2 years from incorporation, the
corporations corporate powers cease and the
corporation is deemed dissolved. Organization
includes: the filing & approval of by-laws with the
SEC and the election of directors and officers
(Campos, 1990).

c. REQUISITES OF VALID BY-LAWS (Sec. 46)
Must be approved by the affirmative vote of the
stockholders representing MAJORITY of the
outstanding capital stock or majority of
members (If filed pre-incorporation: must be
approved and signed by all incorporators)
Must be kept in the principal office of the
corporation, subject to inspection of
stockholders or members during office hours
(Sec. 74)

d. BINDING EFFECT (Sec. 46)
ONLY from date of issuance of SEC of certification
that by-laws are not inconsistent with the Code

Pending approval, they CANNOT bind stockholders or
corporation

e. Amendments or Repeal (Sec. 48)
Effected by: MAJORITY vote of the members of the
BOARD and MAJORITY VOTE OF THE OWNERS of the
OCS or members, in a meeting duly called for the
purpose

DELEGATION TO THE BOD OF POWER TO AMEND OR
REPEAL BY-LAWS:
by vote of stockholders representing 2/3 of the OCS
or 2/3 of the members

HOW DELEGATION REVOKED:
by MAJORITY VOTE only of stockholders representing
2/3 of the OCS or 2/3 of the members

VII. Corporate powers

A. General powers, theory of
general capacity (Sec. 36)

1. Sue and be sued in its corporate name;
2. Succession;
3. Adopt and use a corporate seal;
4. Amend its Articles of Incorporation;
5. Adopt by-laws;
6. For stock corporations - issue or sell stocks to
subscribers and sell treasury stocks; for non-
stock corporation - admit members to the
corporation;
7. Purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, pursuant
to its lawful business;
8. Enter into merger or consolidation with other
corporations as provided in the Code;
9. Make reasonable donations, including those for
the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, no corporation, domestic or foreign,
shall give donations in aid of any political party
or candidate or for purposes of partisan political
activity;

91
10. Establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers
and employees; and
11. Exercise such other powers as may be essential
or necessary to carry out its purposes

NOTE
The Corporation has implied powers which are
deemed to exist because of the following provisions:
Except such as are necessary or incidental to
the exercise of the powers so conferred (Sec.
45)
Such powers as are essential or necessary to
carry out its purpose or purposes as stated in
the AOI catch-all phrase (Sec. 36(11)).

B. Specific powers, theory of
specific capacity

(BADD PIT MC)

1. Power to extend or shorten
corporate term

2. Power to increase or decrease
capital stock or incur, create,
increase bonded indebtedness

3. Power to deny pre-emptive rights

4. Power to sell or dispose of
corporate assets

5. Power to acquire own shares

6. Power to invest corporate funds in
another corporation or business

7. Power to declare dividends

8. Power to enter into management
contract

(Sec. 37-44)
Extend or shorten the corporate Term (Sec. 37)
a) Must be approved by majority vote of the
Board of Directors/ Board of Trustees
(BOD/BOT)
b) Ratified at a meeting by 2/3 of SH
representing the outstanding capital stock/
2/3 of members of non-stock corporations
c) Written notice of meeting (includes
proposed action, time and place of
meeting) shall be addressed to each
SH/member at his place of residence and
deposited to the addressee in the post
office, or served personally
d) In case of extension of corporate term,
appraisal right may be exercised by the
dissenting stockholder

Increase or decrease Capital stock (Sec. 38)

Incur, create or increase Bonded indebtedness
(Sec. 38)
a) Same requirements above from a-c
b) A certificate in duplicate must be signed by
a majority of the directors of the
corporation (countersigned by the chairman
and the secretary of the SH meeting),
setting forth:
a. That requirements of this section have
been complied with
b. The amount of the increase or
diminution of the capital stock
c. In case of increase,
i. the amount of capital stock or
number of shares of no-par stock
actually subscribed
ii. names, nationalities and
residences of the persons
subscribing
iii. the amount of no-par stock
subscribed by each
iv. the amount paid by each on his
subscription, or the amount of
capital stock or number of shares
of no-par stock allotted to each
stockholder if such increase is for
the purpose of making effective
stock dividend
d. any bonded indebtedness to be
incurred, created or increased
e. the actual indebtedness of the
corporation on the day of the meeting
f. the amount of stock represented at the
meeting
g. the vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness
c) prior approval of SEC is required
d) duplicate certificates shall be kept on file
in the office of the corporation and the
other shall be filed with the SEC, attached
in the original articles of incorporation.
a. From and after approval of the SEC of
its certificate of filing, the capital
stock shall stand increased or
decreased and the incurring, creating
or increasing of any bonded
indebtedness authorized
b. SEC shall not accept for filing any
certificate of increase unless
accompanied by the sworn statement
of the treasurer of the corporation
showing:
i. That at least 25% of such
increased capital stock have
been subscribed and
ii. that at least 25% of the amount
subscribed has been paid or that
there has been transferred to
the corporation property the
value is equivalent to 25% of the
subscription
c. SEC shall not approve any decrease in
the capital stock if its effect shall

92
prejudice the rights of corporate
creditors
e) Bonds issued by a corporation shall be
registered with the SEC

Deny Preemptive right (Sec. 39)
- All SH of a Stock Corporation have
preemptive right to subscribe to all issues
or disposition of shares of any class, in
proportion to their respective shareholdings
- Pre-emptive right shall not extend to:
a) shares to be issued in compliance with
laws requiring stock offerings or
minimum stock ownership by the public
b) shares to be issued in good faith with
the approval of 2/3 of the stockholders
representing outstanding capital stock,
in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt

Sell or Dispose of substantially all its assets
(Sec. 40)
a) Same requirements from a-c as Sec. 37
above
b) Any dissenting SH may exercise his appraisal
right
c) Deemed to cover substantially all the
corporate property and assets
d) After authorization by the SH/ members,
the BOD/ BOT may abandon such sale,
lease, exchange, mortgage, pledge or other
disposition, subject to the rights of third
parties under any contract relating thereto,
without further action or approval by the
SH/ members
e) Corporation is not restricted in its power to
dispose assets if the same is necessary in
the usual and regular course of business of
the corporation or if the proceeds of the
sale will be appropriated for the conduct of
its remaining business

Acquire its own shares (Sec. 41)
a) For a legitimate corporate purpose/s,
including but not limited to the following:
a. To eliminate fractional shares arising
out of stock dividends
b. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale;
and
c. To pay dissenting or withdrawing
stockholders
b) Provided there are unrestricted retained
earnings in the corporate books to cover the
shares purchased or acquired

Invest in another corporation or business (Sec.
42)
a) Same requirements from a-c as Sec. 37
above
b) Any dissenting SH shall have appraisal right
c) Where the investment is reasonably
necessary to accomplish the corporations
primary purpose, the approval of the SH/
members is not necessary

Declare dividends (Sec. 43)
a) Out of unrestricted retained earnings
b) Payable in cash, in property, or in stock to
all SH on the basis of outstanding stock held
by them
c) Any cash dividend due on delinquent stock
shall first be applied to the unpaid balance
on the subscription plus costs and expenses
d) Stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid
e) Should be approved by 2/3 of SH
representing the outstanding capital stock
at a regular/ special meeting called for that
purpose
f) Stock corporations- prohibited from
retaining surplus profits in excess of 100% of
their paid-in capital stock, except:
a. When justified by definite corporate
expansion projects or programs
approved by the BOD
b. When the corporation is prohibited
under any load agreement with any
financial institution or creditor from
declaring dividends without its consent,
and such consent has not yet been
secured
c. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation

Enter into Management contracts (Sec. 44)
a) Should be approved by the BOD and by SH
owning at least the majority of the
outstanding capital stock or at least a
majority of the members of both the
managing and the managed corporation at a
meeting duly called for that purpose
b) Should be approved by the 2/3 of
stockholders owning outstanding capital
stock/ members of the managed
corporation when:
a. A stockholder or stockholders
representing the same interest of both
the managing and managed
corporations own more than 1/3 of the
total outstanding capital stock entitled
to vote of the managing corporation;
or
b. A majority of the members of the BOD
of the managing corporation also
constitute a majority of the BOD of the
managed corporation
c) No management contract shall be entered
into for a period longer than 5 years for any
one term
d) a-c above applies to any contract whereby
a corporation undertakes to manage or
operate all or substantially all of the
business of another corporation, whether
such are called service contracts, operating
agreements or otherwise
e) Service contracts or operating agreements
which relate to exploration, development,

93
exploitation or utilization of natural
resources may be entered into for such
periods as may be provided in the pertinent
laws and regulations

NOTES
2 general restrictions on the power of the
corporation to acquire and hold properties:
property must be reasonably and necessarily
required by the business
that the power shall be subject to the
limitations prescribed by other special laws and
the constitution (corporation may not acquire
more than 30% of voting stocks of a bank;
corporations are restricted from acquiring public
lands except by lease of not more than 1000
hectares)

9. Ultra vires acts (Sec. 45)

Definition
Ultra Vires acts are those acts which a corporation is
not empowered to do or perform because they are
not conferred by its AOI or by the Corporation Code,
or not necessary or incidental to the exercise of the
powers so conferred.

Types of Ultra Vires Acts
Acts done beyond the powers of the
corporation as provided in the law or its articles
of incorporation;
Acts or contracts entered into in behalf of a
corporation by persons who have no corporate
authority (Note: This is technically ultra vires
acts of officers and not of the corporation);
Acts or contracts, which are per se illegal as
being contrary to law. (VILLANUEVA)

i. Applicability of ultra vires
doctrine
It is a question, therefore, in each case of the logical
relation of the act to the corporate purpose
expressed in the charter. If that act is one which is
lawful in itself, and not otherwise prohibited, is
done for the purpose of serving corporate ends, and
is reasonably tributary to the promotion of those
ends, in a substantial, and not in a remote and
fanciful sense, it may fairly be considered within the
charter powers. The test to be applied is whether
the act in question is in direct and immediate
furtherance of the corporations business, fairly
incident to the express powers and reasonably
necessary to their exercise. If so, the corporation
has the power to do it; otherwise, not. (Montelibano
v. Bacolod-Murcia Milling Co., Inc., G.R. No.
15092, May 18, 1962)

ii. Consequences of ultra vires
acts

Executed contract courts will not set aside or
interfere with such contracts;
Executory contracts no enforcement even at
the suit of either party (void and
unenforceable);
Partly executed and partly executory
principle of no unjust enrichment at expense of
another shall apply;
Executory contracts apparently authorized but
ultra vires the principle of estoppel shall
apply.

ULTRA VIRES ACTS ILLEGAL ACTS
Not necessarily unlawful,
but outside the powers of
the corporation
Unlawful; against law,
morals, public policy,
and public order
Can be ratified Cannot be ratified
Can bind the parties if
wholly or partly executed
Cannot bind the parties

Seaoil vs Autocorp Group (2008, Nachura):
An ultra vires act is distinguished from illegal act,
the former being voidable which may be enforced by
performance, ratification, or estoppel, while the
latter is void and cannot be validated.

Remedies in Case of Ultra Vires Acts
State
- Forfeiture by judgment of Court
- Suspension or revocation of the certificate of
registration by the SEC
Stockholders
- Injunction
- Derivative suit
Creditors
o Nullification of contract in fraud of
creditors

10. Doctrine of individuality of
subscription

Section 64 of the Corporation Code implicitly sets
forth the doctrine that subscription is one entire and
indivisible contract. Thus, if the stockholder has not
paid the full amount of his subscription, he cannot
transfer part of it in view of the indivisible nature of
subscription contract. It is only upon full payment of
the whole subscription that a stockholder can
transfer a portion of his subscription. However, the
entire subscription although not yet fully paid, may
be transferred to a single transferee. It is necessary,
however, to secure the consent of the corporation
since the transfer of subscription right contemplates
a novation of contract which, under Article 1293 of
the Civil Code of the Philippines, cannot be made
without the consent of the creditor. Likewise, it has
to be emphasized that under Section 63 of the
Corporation Code, no transfer shall be valid, except
as between the parties, until the transfer is
recorded in the books of the corporation. (SEC
Opinion, August 7, 1991)

11. Doctrine of equality of shares

Each share shall be EQUAL in ALL respects to every
other share, except as otherwise provided in the AOI
and stated in the certificate of stock (Sec. 6)

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12. Trust fund doctrine

Boman Environmental Development Corporation v.
CA (1988):
Trust Fund Doctrine means that the capital stock,
properties and other assets of a corporation are
regarded as equity in trust for the payment of
corporate creditors. Stated simply, the trust fund
doctrine states that all funds received by the
corporation in payment of the shares of stock shall
be held in trust for the corporate creditors and other
stockholders of the corporation. Under such
doctrine no fund shall be used to buy back the issued
shares of stock except only in instances specifically
allowed by the Corporation Code.

C. How Exercised

1. By the Shareholders

a. Corporate Acts Requiring Approval of
Stockholders or Members (Voting and
Non-Voting Shares)

GENERAL RULE
Vote necessary to approve a particular corporate act
as provided in this Code shall be deemed to refer
only to stocks with voting rights (Sec. 6)

EXCEPTIONS (Sec. 6)
Voting and non-voting shares shall be entitled to
vote in the following cases:
Amendment of Articles of Incorporation
Extend or Shorten Corporate Term
Increase or Decrease of Capital Stock
Incurring, Creating or Increasing Bonded
Indebtedness
Sale, Lease, Mortgage or Other Disposition of
Substantially all corporate assets
Investment of funds in another corporation or
business or for any purpose other than the
primary purpose for which it was organized

Requisites (Sec. 42)(Asked in 95):
- Approval of majority of the board of
directors or trustees
- Ratification by the stockholders representing
at least 2/3 of the OCS or the members at a
meeting duly called for the purpose
- Written notice addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation
- Appraisal right available to dissenting
stockholders or members

NOTES
If it is the same purpose or incidental or related
to its PRIMARY purpose, the board can invest the
corporate fund WITHOUT the consent of the
stockholders. No appraisal right.

If the investment is in another corporation of
different business or purpose BUT in pursuance
of the SECONDARY purpose, the affirmative vote
of majority of the board consented by
stockholders/ members is required.

If the investment is OUTSIDE the purpose/s for
which the corporation was organized, AOI must
be amended first.

Adoption, Amendment and Repeal of By-Laws
(Sec. 48)
Merger and Consolidation
Dissolution of the Corporation

b. Corporate Acts Requiring Approval of
Stockholders or Members (Voting
Shares Only)

Declaration of Stock Dividends (Sec. 43)

Management Contracts (Sec. 44)
- Any contract whereby a corporation
undertakes to manage or operate ALL OR
SUBSTANTIALLY ALL of the business of
another corporation for a period NOT longer
than 5 years
- Requisites:
o Approval by the BOD
o Approval by SH owning at least the
majority of the OCS or the members of
BOTH the managing and the managed
corporation (at meeting duly called)
o 2/3 vote required of the managed
corporation when:
Where a SH/s representing the same
interest of both the managing and the
managed corporations own or control
more than 1/3 of the total OCS
entitled to vote of the managing
corporation; or
Where a majority of the members of
the BOD of the managing corporation
also constitute a majority of the
members of the BOD of the managed
corporation

Fixing the Consideration of No-Par shares (Sec.
62)

Fixing the Compensation of Directors (Sec. 30)

2. By the Board

Board as Repository of Corporate Powers
GENERAL RULE
The corporate powers of the corporation shall be
exercised, all business conducted and all property of
such corporation controlled and held by the board of
directors or trustees. (Sec. 23)

EXCEPTIONS
- Executive Committee duly authorized in the
by-laws (Sec. 35);
- A contracted manager which may be an
individual, a partnership, or another
corporation.

NOTE
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95
In case the contracted manager is another
corporation, the special rule in Sec. 44
applies.

- In case of close corporations, the
stockholders may manage the business of the
corporation instead by a board of directors,
if the articles of incorporation so provide
(Sec. 97)

Spouses Constantine Firme v. Bukal Enterprises and
Development Corporation (2003):
The power to purchase real property is vested in the
board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of
real property needed by the corporation, the final
say will have to be with the board, whose approval
will finalize the transaction.

Requisites of a VALID Corporate Act by the Board
of Directors (Sec. 25):
The Board must act as a BODY in a meeting.
There must be a VALIDLY constituted meeting.
Their act must be supported by a MAJORITY OF
THE QUORUM duly assembled (Exception:
Election of officers requires a vote of majority
of all the members of the board)
The act must be within the powers conferred on
the Board.

3. By the Officers

CORPORATE OFFICER CORPORATE EMPLOYEE
Position is provided for
in the by-laws or under
the Corporation Code
Employed by the action of
the managing officer of
the corporation
RTC has jurisdiction in
case of labor dispute
NLRC has jurisdiction in
case of labor disputes

a. Who are Corporate Officers (POST) (Sec.
25)
President must be a director;
Treasurer may or may not be a director; as a
matter of sound corporate practice, must be a
resident and citizen of the Phil (SEC opinion)
Secretary need not be a director unless
required by the by-laws; must be a resident and
citizen of the Philippines; and
Other officers as may be provided in the by-
laws.

NOTE
Any two (2) or more positions may be held
concurrently by the same person, EXCEPT that no
one shall act as president and secretary or as
president and treasurer at the same time.

Additional qualifications of officers may be provided
for in the by-laws (Sec. 47(5)).

b. Disqualifications (Sec. 27)
Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years
Convicted by final judgment of a violation of the
Corporation Code committed within 5 years
prior to the date of his election or appointment

c. Authority of Corporate Officers
A person dealing with a corporate officer is put on
inquiry as to the scope of the latters authority but
an innocent person cannot be prejudiced if he had
the right to presume under the circumstances the
authority of the acting officers.

Associated Bank v. Pronstroller (2008, Nachura):
Q: What is the Doctrine of Apparent Authority?
A: If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the
public as possessing the power to do those acts; the
corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped
from denying the agents authority.

VIII. Stockholders and members

A. Fundamental Rights of a
Stockholder

Direct or indirect participation in management
(Sec. 6)
Voting rights (Sec. 6)
Right to remove directors (Sec. 28)
Proprietary rights
- Right to dividends (Secs. 43 and 71)
- Appraisal right (Sec. 81)
- Right to issuance of stock certificate for fully
paid shares (Sec. 64)
- Proportionate participation in the distribution
of assets in liquidation (Sec. 122)
- Right to transfer of stocks in corporate books
(Sec. 63)
- Pre-emptive right (Sec. 39)
Right to inspect books and records (Sec. 74)
Right to be furnished with the most recent
financial statements/reports (Sec. 75)
Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec. 69)
Right to file individual suit, representative suit
and derivative suits

B. Participation in Management

1. Proxy

Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members
(Sec. 58).

2. Voting Trust

An arrangement created by one or more stockholders
for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining
to the shares for a period not exceeding five (5)
years at any time (Sec. 59).
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96

PROXY TRUSTEE
Principal agent Trustee-beneficiary
Proxy cant exceed
delegated authority.
The only limit to
authority is that the act
must be for the benefit
of trustee. (fiduciary
obligation)
Must be in writing Must be in writing and
notarized
Copy must be filed
with the corporation.
Copy must be filed with
SEC and the corporation.
No transfer. Transfer of legal title to
trustee.
Proxy exercises voting
rights only for a
specific meeting
(unless otherwise
provided)
Trustee exercises
absolute voting rights
continuously, subject
only to fiduciary duty.
Proxy cannot be
director
Trustee can be director
Revocable at will in
any manner, EXCEPT
if coupled with an
interest.
Irrevocable, as long as no
misconduct or fraud.
Max of 5 yrs at a time Max of 5 yrs at a time
(unless coterminous with
loan)
SEC can pass on validity

3. Cases When Stockholders Action
is Required

a. By a Majority Vote

(a) Power to enter into management
contracts (Sec. 44)

GENERAL RULE
Requires approval by majority of the BOD/BOT and
approval by stockholders owning at least the
majority of the outstanding capital stock/majority of
members of both the managing and the managed
corporation

EXCEPTIONS
Where a stockholder/s representing the same
interest of both the managing and the managed
corporations own or control more than one-
third (1/3) of the total outstanding capital
stock entitled to vote of the managing
corporation; or
Where a majority of the members of the
managing corporations BOD also constitute a
majority of the the managed corporations BOD

Requires at least 2/3 votes of the outstanding
capital stock/membership of the managed
corporation.

BUT only majority vote is required for the managing
corporation.

(b) Amendments to by-laws (Sec. 48)

members.

Since amendments to by-law is among those
enumerated under Sec. 6, the basis of the majority
vote includes all stockholders/members with or
without voting rights.

(c) Revocation of delegation to the
BOD of the power to amend or
repeal or adopt by-laws (Sec. 48)

members.

(d) Calling a meeting to remove
directors (Sec. 28)
Meeting for the removal of directors or trustees, or
any of them, must be called by the secretary on
order of the president or on the written demand of
the stockholders representing or holding at least a
members.

(e) Granting compensation other than
per diems to directors (Sec. 30)

Compensation other than per diems may be granted
to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock.

(f) Consideration no-par shares (Sec.
62)

When the AOI or the BOD does not provide for the
value of no-par shares, the value of such shares shall
be determined by the stockholders representing at
least a majority of the outstanding capital stock.

b. By a Two-Thirds Vote

(a) Amendment of AOI (Sec. 16)

Amendment of the AOI may be made by a majority
vote of the BOD/BOT and the vote or written assent
of the stockholders representing at least two-thirds
2/3 of the outstanding capital stock, without
prejudice to the appraisal right of dissenting
stockholders.

Since amendment of the AOI is among those
enumerated under Sec. 6, the basis of the two-thirds

Amendment of AOI of close corporations (Sec 103):
Amendment to the AOI which seeks to delete or
remove any provision required to be contained in the
AOI of Close Corporations or to reduce a quorum or
voting requirement stated in said AOI requires the
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97
affirmative vote of at least 2/3 of the outstanding
capital stock, whether with or without voting
rights, or of such greater proportion of shares as
may be specifically provided in the AOI at a meeting
duly called.

(b) Delegating the power to amend
or repeal by-laws or adopt new
by-laws (Sec. 48)

Delegation to the BOD/BOT of the power to amend
or repeal by-laws or adopt new by-laws requires
approval by at least two-thirds (2/3) of the
outstanding capital stock/membership.

Revocation of the delegation requires only majority
vote of the outstanding capital stock/membership.

(c) Extending/shortening corporate
term (Sec. 37)
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds (2/3)
of the outstanding capital stock/membership.

Since extending/shortening corporate term is among
those enumerated under Sec. 6, the basis of the
two-thirds vote includes all stockholders/members
with or without voting rights.

(d) Increasing/decreasing capital
stock (Sec. 38)

Requires approval by a majority vote of the BOD and
outstanding capital stock.

Since increasing/decreasing capital stock is among
those enumerated under Sec. 6, the basis of the
two-thirds vote includes all stockholders/members
with or without voting rights.

(e) Incurring, creating, increasing
bonded indebtedness (Sec. 38)

Requires approval by a majority vote of the BOD and

Since incurring, creating and increasing indebtedness
is among those enumerated under Sec. 6, the basis
of the two-thirds vote includes all stockholders/
members with or without voting rights.

(f) Issuance of shares not subject to
pre-emptive right (Sec. 39)

Shares issued in good faith in exchange for property
or previously incurred indebtedness with the
approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock are not
subject to pre-emptive rights.

(g) Sale/disposition of all or
substantially all of corporate
assets (Sec. 40)


Since sale/disposition of all or substantially all of
corporate assets is among those enumerated under
Sec. 6, the basis of the two-thirds vote includes all
stockholders/members with or without voting rights.

NOTE
In non-stock corporations where there are NO
members with voting rights, the vote of at least the
majority of the BOT will be sufficient authorization
for any sale or disposition of all or substantially all
of corporate assets. (Sec. 40)

(h) Investment of funds in another
business (Sec. 42)


Since the investment of funds in another business is
among those enumerated under Sec. 6, the basis of
the two-thirds vote includes all
stockholders/members with or without voting rights.

(i) Dividend declaration (Sec. 43)

No stock dividend shall be issued without the
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock.

(j) Power to enter into management
contracts (Sec. 44)

GENERAL RULE
members of both the managing and the managed
corporation

EXCEPTIONS
Where a stockholder/s representing the same
interest of both the managing and the managed
corporations own or control more than one-
third (1/3) of the total outstanding capital
stock entitled to vote of the managing
corporation; or
Where a majority of the members of the
managing corporations BOD also constitute a
majority of the the managed corporations BOD

Requires at least 2/3 votes of the outstanding
capital stock/membership of the managed
corporation.

(k) Removal of directors or trustees
(Sec. 28)

Any director or trustee may be removed from office
by a vote of the stockholders holding or representing
at least two-thirds (2/3) of the outstanding capital
stock/membership.

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(l) Ratifying contracts with respect
to dealings with directors/
trustees (Sec. 32)

A contract of the corporation with one or more of its
directors is voidable, at the option of such
corporation, unless all the following conditions are
present:
The directors presence in the BOD meeting in
which the contract was approved was not
necessary to constitute a quorum
The vote of such director was not necessary for
the approval of the contract
The contract is fair and reasonable under the
circumstances
In case of an officer, the contract has been
previously authorized by the BOD.

Where any of the first two conditions is absent, but
necessary that the contract be fair and reasonable,
in the case of a contract with a director, such
contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of
the outstanding capital stock.

(m) Ratifying acts of disloyalty of a
director (Sec. 34)

GENERAL RULE
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong
to the corporation, thereby obtaining profits, he
must account to the corporation for all such profits
by refunding it.

EXCEPTION
His act may be ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of
the outstanding capital stock.

(n) Stockholders approval of the
plan of merger or consolidation
(Sec. 77)

Requires approval by majority of each of the
BOD/BOT of the constituent corporations of the plan
of merger or consolidation and approval by at least
two-thirds (2/3) of the outstanding capital
stock/membership of each corporation at separate
corporate meetings duly called.

Amendments to the plan of merger or consolidation
also requires approval by majority vote of each of
the BOD and two-thirds (2/3) vote of the outstanding
capital stock/membership of each corporation voting
separately.

Since merger or consolidation is among those
enumerated under Sec. 6, the basis of the two-thirds

(o) Distribution of assets in non-stock
corporations (Sec. 96)

The BOT shall, by majority vote, adopt a resolution
recommending a plan of distribution which shall be
approved by at least two-thirds (2/3) of the
members with voting rights.

(p) Incorporation of a religious society
(Sec. 116)

Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, or
discipline of the religious denomination, sect or
church of which it is a part, or by competent
authority, may, upon written consent and/or by an
affirmative vote at a meeting called for the purpose
of at least two-thirds (2/3) of its membership,
incorporate for the administration of its
temporalities or for the management of its affairs,
properties and estate.

(q) Voluntary dissolution of a
corporation (Sec. 118-119)

Requires a resolution adopted by a majority vote of
the BOD/BOT, and by a resolution duly adopted by
the affirmative vote of the stockholders owning at
least two-thirds (2/3) of the outstanding capital
stock/membership of a meeting to be held upon call
for such purpose.

c. By Cumulative Voting

Election of Directors or Trustees (Section 24) - A
stockholder may vote such number of shares for as
many persons as there are directors to be elected or
he may cumulate said shares and give one candidate
as many votes as the number of directors to be
elected multiplied by the number of his shares shall
equal, or he may distribute them on the same
principle among as many candidates as he shall see
fit:

Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him
as shown in the books of the corporation multiplied
by the whole number of directors to be elected.

C. Proprietary Rights

1. Right to Dividends

GENERAL RULE
Right to Dividends vests upon lawful declaration by
the BOD. From that time, dividends become a debt
owing to the SH. No revocation can be made.

EXCEPTIONS
Dividends are revocable if NOT yet announced or
communicated to the stockholders.
Stock dividends, even if already declared, may
be revoked prior to actual issuance since these
are not distributions but merely represent
changes in the capital structure.

NOTE
Right to dividends vests upon declaration so whoever
owns the stock at such time also owns the dividends.
Subsequent transfer of stock would not carry with it

99
right to dividends UNLESS agreed upon by the
parties.

2. Right of Appraisal

Right to withdraw from the corporation and demand
payment of the fair value of the shares after
dissenting from certain corporate acts involving
fundamental changes in corporate structure (Sec.
81).

i. Instances of appraisal right

Extension or reduction or corporate term (Sec.
11)
Change in the rights of stockholders, authorize
preferences superior to those stockholders, or
restrict the right of any stockholder (Sec. 81)
Investment of corporate funds in another
business or purpose (Sec. 42)
Sale or disposal of all or substantially all assets
of the corporation (Sec. 81)
Merger or consolidation (Sec. 81)

ii. Requirements for exercise of appraisal
right (Secs. 82, 86)

Stockholder must have voted against the
corporate act.
Stockholder must make a written demand on the
corporation within 30 days after the vote was
taken for payment of the fair value of his shares
on the said date.
Stockholder must submit the certificates to the
corporation for notation within ten (10) days
after demand for payment. Otherwise, right to
appraisal may be terminated at the option of
corporation.

iii. Effect of demand (Sec. 83)

ALL rights accruing to such shares, including voting
and dividend rights, shall be suspended

EXCEPT the right of such stockholder to receive
payment of the fair value thereof

Immediate RESTORATION of voting and dividend
rights if the dissenting stockholder is not paid the
value of his shares within 30 days after the award.

iv. Extinguishment of appraisal right (Sec.
84)

Withdrawal of demand by the stockholder WITH
CONSENT of the corporation
Abandonment of the proposed action
Disapproval by SEC of the proposed action

3. Right to Inspect

i. Basis of Right

As the beneficial owners of the business, the
stockholders have the right to know the financial
condition and management of corporate affairs.

A stockholders right of inspection is based on his
ownership of the assets and property of the
corporation. Therefore, it is an incident of
ownership of the corporate property, whether this
ownership or interest is termed an equitable
ownership, a beneficial ownership, or quasi-
ownership. Such right is predicated upon the
necessity of self-protection. (Gokongwei Jr. v. SEC,
1979)

ii. Records/Books to be Kept (Sec. 74)

Books that record all business transactions of
the corporation which shall include contract,
memoranda, journals, ledgers, etc;
Minute book for meetings of the
stockholders/members;
Minute book for meetings of the board/trustees;
Stock and transfer book.

Stock transfer agent - One engaged principally in
the business of registering transfers of stocks in
behalf of a stock corporation (licensed by the SEC).
The corporate secretary is the one duly authorized
to make entries in the stock and transfer book.

Torres et al v. CA (1997):
It is the corporate secretary's duty and obligation to
register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor-
stockholder may rightfully bring suit to compel
performance.

iii. Financial Statements (Sec. 75)

Within 10 days from written request, the corporation
shall furnish its most recent financial statement
(balance sheet and profit or loss statement as of last
taxable year)

At a regular meeting, the Board shall present a
financial report of the operations of the corporation
for the preceding year, which shall include financial
statements duly signed and certified by an
independent CPA.

iv. Requirements for the exercise of the
right of inspection (Sec. 74)

It must be exercised at reasonable hours on
business days and in the place where the
corporation keeps all its records (i.e., principal
office).
The stockholder has not improperly used any
information he secured through any previous
examination.
Demand is made in good faith or for a legitimate
purpose. If the corporation or its officers
contest such purpose or contend that there is
evil motive behind the inspection, the burden of
proof is with the corporation or such officer to
show the same.

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Gokongwei v. SEC (1979):
TEST to determine whether the purpose is legitimate
A legitimate purpose is one which is germane to
the interests of the stockholder as such and not
contrary to the interests of the corporation

v. Remedies when inspection is refused

Mandamus
Injunction
Action for damages
File an action under Sec. 144 to impose a penal
offense by fine and/or imprisonment

4. Preemptive Right

i. Definition and Distinguished from
Right of First Refusal

Pre-emptive right is an option privilege of an existing
stockholder to subscribe to a proportionate part of
shares subsequently issued by the corporation before
the same can be disposed of in favor of others; this
right includes all issues and disposition of shares of
any class. It is a common law right and may be
exercised by stockholders even without legal
provision. On the other hand, a right of first refusal
arises only by virtue of contract stipulations, by
which the right is strictly construed against the right
of person to dispose or deal with their property.

Stockholders of a corporation shall enjoy pre-
emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS of shares of any class, in proportion to
their respective shareholdings.

NOTE
The broad phrase all issues or disposition of shares
of any class is construed to include not only new
shares issued in pursuance of an increase in capital
stock or from the unissued shares which form part of
the ACS, but also covers treasury shares. Treasury
shares would come under the term disposition.
Likewise considering that it is not included among
the exceptions enumerated therein, where pre-
emptive right shall not extend, the intention is to
include it in its application. (SEC Opinion, 14
January 1993).

A pre-emptive right is a right claimed against the
corporation on unissued shares of its capital stock,
and likewise on treasury shares held by the
corporation; while the right of first refusal is a right
exercisable against another stockholder on his shares
of stock. (VILLANUEVA)

Basis of Preemptive Right: to preserve the existing
proportional rights of the stockholders (CAMPOS)

ii. Limitations to exercise of pre-
emptive right (Sec. 39):

Such pre-emptive right shall not extend to
shares to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
It shall NOT extend to shares to be issued in
good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed
for corporate purposes or in payment of a
previously contracted debt
It shall not take effect if denied in the AOI or an
amendment thereto.

iii. Remedies in case of unwarranted
denial:

Injunction
Mandamus
The suit should be individual and not derivative
because the wrong done is to the stockholders
individually
SEC can cancel shares if the third party is not
innocent

iv. Waiver/ Denial of Preemptive Right
Allowed by the Code provided that it is made in
the articles of incorporation
- Waiver made through AOI would bind
present and subsequent SH
- 2/3 vote of the outstanding capital stock is
necessary before waiver is binding
- Result of Non-placement of waiver clause in
AOI: waiver shall not bind future stockholders
but only those who agreed to it
The SH must be given reasonable time within
which to exercise their pre-emptive rights. Upon
expiration of such period, any SH who did not
exercise such will be deemed to have waived it.
May be Necessary so as to not hinder future
financing plans of the corporation
Because some new investors may be willing only
to invest ONLY if all the new shares will be
issued to them (CAMPOS)

5. Right to Vote

Non-voting shares are not entitled to vote
except as provided for in the last paragraph of
Sec. 6.
Preferred or redeemable shares may be
deprived of the right to vote
Fractional shares of stock cannot be voted.
Treasury shares have no voting rights as long as
they remain in the treasury.
No delinquent stock shall be voted (Sec. 71)
A transferee of stock cannot vote if his transfer
is not registered in the stock and transfer book
of the corporation.

D. Remedial Rights

1. Individual Suit

A suit brought by the shareholder in his own name
against the corporation when a wrong is directly
inflicted against him.

2. Representative Suit

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A suit brought by the stockholder in behalf of
himself and all other stockholders similarly situated
when a wrong is committed against a group of
stockholders.

3. Derivative Suit

A suit by a shareholder to enforce a corporate cause
of action. The corporation is a necessary party to the
suit, and the relief which is granted is a judgment
against a third person in favour of the corporation
(Chua v. CA, 2004)

Suits of stockholders based on wrongful or fraudulent
acts of directors or other persons.

Requisites of Derivative Actions
1) That the person instituting the action
stockholder or member at the time the acts or
transactions subject of the action occurred and
the time the action was filed;
2) That the stockholder exerted all reasonable
efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies
available under the AOI, by-laws, laws or rules
governing the corporation or partnership to
obtain the relief he desires.
3) That there is no appraisal right available for the
act(s) complained of; and
4) That the suit is not a nuisance or harassment
suit. (Rule 8, Interim Rules of Procedure for
Intra-Corporate Controversies)

Requisites based on jurisprudence
1) The cause of action actually devolves on the
corporation, the wrong or harm having been, or
being caused to it and not the shareholder filing
the suit. (Evangelista vs. Santos, 1950; SMC v.
Kahn, 1989).
2) The reliefs sought pertain to the corporation.
(Symaco Trading Corp. v. Santos, 2005).

Recent rulings on the matter
Status of heirs as co-owners of shares before
partition of estate does not make them
shareholders until there is compliance with Sec.
63 on the manner of transferring shares, thus
the heirs are not automatically registered
shareholders of the corporation. (Reyes v. RTC
of Makati, 2008)
Stockholder may commence a derivative suit
for mismanagement, waste or dissipation of
corporate assets because of a special injury to
him for which he is otherwise without redress.
In effect, the suit is an action for specific
performance of an obligation owed by the
corporation to the stockholders to assist its right
of action when the corporation is put on default
by the wrongful refusal of the directors or
management to make suitable measures for its
protection. (Yu v. Yukayguan, June 18, 2009)

Bitong v. CA (1998):
The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the
BOD that exercises its corporate powers and not in
the president or officer thereof. But where
corporate directors are guilty of a breach of trust,
not of mere error of judgment or abuse of
discretion, and intra-corporate remedy is futile or
useless, a SH may institute a derivative suit in behalf
of himself and other stockholders and for the benefit
of the corporation, to bring about a redress of the
wrong inflicted directly upon the corporation and
indirectly upon the stockholders.

Jurisdiction over derivative suits lies with the RTC
(Sec. 5.2, Securities Regulation Code)

E. Obligations of a Stockholder

a. Liability to the corporation for unpaid
subscription (Sec. 67)

A subscription contract is unconditional (i.e.,
obligation to pay must not be subject to any
contingencies) and indivisible (as to the amount and
transferabilityFua Cun v. Summers, 1923). Hence,
if the subscriber paid 20% of his subscription, he is
not entitled to the issuance of certificates
corresponding to 20% of the shares.

Unpaid claim refers to any unpaid subscription and
not to any indebtedness which a subscriber may owe
the corporation rising from any other transaction
(China Banking Corp. v. CA, 1997)

b. Liability to the corporation for interest on
unpaid subscription if so required by the
by-laws (Sec. 66)

GENERAL RULE
Subscribers for stock are NOT liable to pay interest
on his unpaid subscription

EXCEPTION
If so required in the by-laws at the rate fixed in the
by-laws. If no rate is fixed in the by-laws, such rate
shall be deemed to be the legal rate (Sec. 66)

NOTES
Transfer for consideration of treasury shares is a sale
by the corporation (not subscription). A transfer of
previously issued shares by a stockholder to a third
person is a sale. Transfer of unissued shares is
subscription.

Shareholders are not creditors of the corporation
with respect to their shareholdings thereto and the
principle of compensation or set-off has no
application.

Subscription contract is NOT required to be in
writing.

c. Liability for watered stocks (Sec. 65)

i. Definition

These are shares issued as fully paid when in truth
no consideration is paid, or the consideration

102
received is known to be less than the par value or
issued value of the shares. (Sec. 65)

These include the following:
Issued without consideration (bonus share)
Issued as fully paid when the corporation has
received less sum of money than its par or
issued value (discounted share)
Issued for consideration other than actual cash
(i.e., property or services), the fair valuation of
which is less than its par or issued value
Issue stock dividend when there are no
sufficient retained earnings or surplus to justify
it.

NOTE
Subsequent increase in the value of the property
used in paying the stock does not do away with the
watered stocks. Subsequent increase in the value of
the property used in paying the stock does not cure
the defect in issuance. The existence of watered
stocks is determined at the time of issuance of the
stock.

ii. Liability of directors or officers
Any director or officer of a corporation consenting to
the issuance of stocks or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate
secretary shall be SOLIDARILY liable with the
stockholder concerned to the corporation and its
creditors for the difference in value (Sec. 65).

d. Liability for dividends unlawfully paid
(Sec. 31 and 43)

e. Liability for assuming to act as a
corporation knowing it to be without
authority (Sec. 21)

F. Meetings

GENERAL RULE
Stockholders or members approval is expressed in a
meeting duly called and held for the purpose.

EXCEPTION
In case of amendment of AOI, approval may be
expressed by referendum or written assent of the
stockholders or members (Sec. 16)

Who May Attend and Vote?
Stockholders, either in person or by proxy
Pledgors or mortgagors (Sec. 55)
Pledgee or mortgagee, IF expressly given such
right by the pledgor or mortgagor in writing
which is recorded on the corporate books.
Executors, administrators, receivers, and other
legal representatives duly appointed by the
court, without need of any written proxy.
ALL joint owners of stocks, or any one of them
with the consent of ALL the co-owners, unless
there is a written proxy, signed by all the co-
owners
Any one of the joint owners of shares owned in
an "and/or" capacity or a proxy thereof

1. Regular or Special

a. When and Where

When? (Sec. 50)
Regular meetings of stockholders or members shall
be held annually on a date fixed in the by-laws, or if
not so fixed, on any date in April of every year as
determined by the board of directors or trustees.

Where?
Stock: City or municipality where the principal
office of the corporation is located, or, if
practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality. (Sec. 51)
Non-stock: Any place even outside the place
where the principal office is located, within the
Philippines (Sec. 93)

Notice (Sec. 50)
Regular Meetingwritten notice sent to all SH
or members at least 2 weeks prior to the
meeting, unless a different period is required by
the by-laws
Special Meetingwritten notice sent at least 1
week prior to the meeting, unless otherwise
provided in the by-laws.
Subject to waiver, expressly or impliedly (i.e.,
attendance despite no notice)

Effect of Failure to Give Notice: Failure to give
notice would render a meeting VOIDABLE at the
instance of an absent stockholder, who was not
notified of the meeting (Board v. Tan, 1959).

2. Who Calls the Meetings

The president, unless the by-laws provide otherwise.
(Sec. 54)

Any petitioning stockholder or member upon order of
the SEC when there is no person authorized to call a
meeting. Such petitioning stockholder or member
shall preside thereat until at least a majority of the
stockholders or members present have chosen one of
them as presiding officer. (Sec. 50)

3. Quorum (Sec. 50)

GENERAL RULE
Stockholders representing majority of the OCS or
majority of the members

EXCEPTION
The Code or the by-laws provide otherwise

Where quorum is present at the start of a lawful
meeting, stockholders present cannot without
justifiable cause break the quorum by walking out
from said meeting so as to defeat the validity of any
act proposed and approved by the majority.
(However, stockholders can break the quorum for
justifiable causes.) (Johnston vs. Johnston, 1965 CA
decision)

103
4. Minutes of Meetings

A record of all the minutes of all meetings of
stockholders or members, or of the board of
directors or trustees shall be kept and preserved at
the principal office of every corporation.

Contents:
time and place of holding the meeting;
how the meeting was authorized;
the notice given;
whether the meeting was regular or special, if
special its object;
those present and absent; and
every act done or ordered done at the meeting.

Upon demand by any director/trustee or
SH/member, the following shall also be noted in
the minutes:
the time when any director, trustee,
stockholder or member entered or left the
meeting;
the yeas and nays on any motion or proposition;
the protest of any director/trustee or
stockholder/member on any action or proposed
action.

NOTES
The minutes of any meetings shall be open to
inspection by any director/trustee or
stockholder/member at reasonable hours on business
days.

The director/trustee or stockholder/member may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.

Any officer or agent of the corporation refusing to
allow the examination and copying of the minutes
shall be:
(1) liable to the director/trustee or stockholder/
member; and
(2) guilty of an offense punishable under Sec. 144
(Sec. 74)

HOWEVER, the officer of agent may use as a defense
that:
(1) the person demanding examination or copy
thereof made improper use of any information
secured through any prior examination of the
records or minutes of such corporation or of any
other corporation thereby;
(2) the person demanding examination or copy acts
in bad faith or has no legitimate purpose in
making his demand.

IX. Board of directors and
trustees

A. Repository of Corporate Powers

GENERAL RULE
The corporate powers of the corporation shall be
exercised, all business conducted and all property of
such corporation controlled and held by the board of
directors or trustees. (Sec. 23)

EXCEPTIONS
In case of an Executive Committee duly
authorized in the by-laws; (Sec. 35)

In case of a contracted manager which may be
an individual, a partnership, or another
corporation.
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.

In case of close corporations, the stockholders
may manage the business of the corporation
instead by a board of directors, if the articles of
incorporation so provide. (Sec. 97)

Spouses Constantine Firme v. Bukal Enterprises and
Development Corporation (2003):
The power to purchase real property is vested in the
board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of
real property needed by the corporation, the final
say will have to be with the board, whose approval
will finalize the transaction.

a. Requisites of a VALID Corporate Act by
the Board of Directors

1) The Board must act as a BODY in a meeting.
2) There must be a VALIDLY constituted meeting.
3) There act must be supported by a MAJORITY OF
THE QUORUM duly assembled (Exception:
Election of officers requires a vote of majority
of all the members of the board)
4) The act must be within the powers conferred on
the Board.

b. Limitations on Powers of Board of
Directors/Trustees

Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws;
Certain acts of the corporation that require
joint action of the stockholders and board of
directors:
- Removal of director (Sec. 28)
- Amendments of AOI (Sec. 16)
- Fundamental changes (Sec. 6)
- Declaration of stock dividends (Sec. 43)
- Entering into management contracts (Sec.
44)
- Fixing of consideration of non-par shares
(Sec. 62)
- Fixing of compensation of directors (Sec. 30)

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Cannot exercise powers not possessed by the
corporation.

B. Tenure, Qualifications and
Disqualifications of Directors

a. Tenure

Directors shall hold office for one (1) year until their
successors are elected and qualified (Sec. 23).

Term: One (1) year
Tenure: The period within which the director
actually holds office, including the holdover period
after the end of his term.

Valle Verde Country Club v. Africa, 2009:
In several cases, we have defined "term" as the time
during which the officer may claim to hold the office
as of right, and fixes the interval after which the
several incumbents shall succeed one another. The
term of office is not affected by the holdover. The
term is fixed by statute and it does not change
simply because the office may have become vacant,
nor because the incumbent holds over in office
beyond the end of the term due to the fact that a
successor has not been elected and has failed to
qualify.

Term is distinguished from tenure in that an officers
"tenure" represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the
incumbent.

Based on the above discussion, when Section 239 of
the Corporation Code declares that "the board of
directorsshall hold office for one (1) year until
their successors are elected and qualified," we
construe the provision to mean that the term of the
members of the board of directors shall be only for
one year; their term expires one year after election
to the office. The holdover period that time from
the lapse of one year from a members election to
the Board and until his successors election and
qualification is not part of the directors original
term of office, nor is it a new term; the holdover
period, however, constitutes part of his tenure

b. Qualifications

If STOCK, director must own at least 1 share of
the capital stock, which stock shall stand in his
own name (Sec. 23).
If NON-STOCK, trustee must be a member.
Majority of the directors/trustees must be
residents of the Philippines.
Natural person
Of Legal Age
Other qualifications as may be prescribed in the
by-laws of the corporation.

c. Disqualifications
Not have been convicted by final judgment of an
offense punishable by imprisonment for a period
exceeding 6 years; or
A violation of the Corporation Code, committed
within five years from the date of his election.
(Sec. 27)

C. Elections (Sec. 24)

a. Quorum

There must be present, in person or by
representative authorized to act by written proxy,
the owners of majority of the OCS or majority of the
members entitled to vote in the meeting.

Election must be by ballot if requested.

A stockholder cannot be deprived in the articles of
incorporation or in the by-laws of his statutory right
to use any of the methods of voting in the election
of directors.

No delinquent stock shall be voted.

The candidates receiving the highest number of
votes shall be declared elected.

b. Methods of Voting

i. Straight Voting
Every stockholder may vote such number of shares
for as many persons as there are directors to be
elected.

ii. Cumulative voting for one candidate
A stockholder is allowed to concentrate his votes and
give one candidate as many votes as the number of
directors to be elected multiplied by the number of
his shares shall equal.

ILLUSTRATION
If there are 5 directors to be elected and Pedro, as
shareholder, has 100 shares, Pedro can give 500 (5 x
100 shares) votes to just one candidate.

iii. Cumulative voting by distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the number
of directors to be elected and distribute the same
among as many candidates as he shall see fit.

ILLUSTRATION
In the illustration in (b), Pedro may choose to give
100 votes to candidate 1, 100 votes to candidate 2,
100 votes to candidate 3, 150 votes to candidate 4,
and 50 votes to candidate 5.

105
D. Removal (Sec. 28)

GENERAL RULE
Removal may be with or without cause.

But
Removal without cause may not be used to deprive
minority stockholders or members of the right of
representation to which they may be entitled under
Section 24

Other requisites:
Vote of the stockholders representing at least
2/3 of the OCS or the members entitled to vote
At a regular or special meeting after proper
notice is given

E. Filling of Vacancies (Sec.29)

a. Vacancy (1) by removal; or (2) by
expiration of term; or (3) when the
remaining directors do not constitute a
quorum

Vacancy/ies must be filled by the stockholders in a
regular or special meeting called for that purpose.

A director or trustee elected to fill a vacancy in shall
be elected only for the unexpired term of his
predecessor in office.

b. Vacancy by reason of increase in the
number of the directors/trustees

Vacancy/ies must be filled by the stockholders:
in a regular or special meeting called for that
purpose; or
in the same meeting authorizing the increase of
directors or trustees if so stated in the notice
of the meeting.

c. Vacancy by other cause
Vacancy/ies may be filled by the vote of at least a
majority of the remaining directors or trustees, if
still constituting a quorum.

A director or trustee elected to fill a vacancy in shall
be elected only for the unexpired term of his
predecessor in office.

F. Compensation (Sec. 30)

GENERAL RULE
Directors are only entitled to per diems, which are
reasonable.

EXCEPTION
When AOI, by-laws, or an advance contract provides
for compensation.
Compensation other than per diems may also be
granted to directors by the vote of the stockholders
representing at least a majority of the OCS at a
regular or special stockholders meeting.

The total yearly compensation of directors shall not
exceed 10% of the net income before income tax of
the corporation during the preceding year.

Western Institute of Technology v. Salas (1997):
The position of being chairman and Vice-Chairman,
like that of treasurer and secretary, are not
considered directorship positions but officership
positions that would entitle the occupants to
compensation. Likewise, the limitation placed under
Sec. 30 of the Corporation Code that directors
cannot receive compensation exceeding 10% of the
net income of the corporation would not apply to
the compensation given to such positions since it is
being given in their capacity as officers of the
corporation and not as board members.

G. Disloyalty

Duty of Loyalty
Directors and trustees should not acquire any
personal or pecuniary interest in conflict with their
duty as such directors or trustees, otherwise they
shall be held liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons. (Sec. 31)

Where a director, by virtue of his office, acquires
for himself a business opportunity which should
belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, he must
account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote
of the stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital stock
(Sec. 34)

Doctrine of Corporate Opportunity
Unless his act is ratified, a director shall refund to
the corporation all the profits he realizes on a
business opportunity which:
corporation is financially able to undertake
from its nature, is in line with corporations
business and is of practical advantage to it; and
one in which the corporation has an interest or a
reasonable expectancy.

The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture.
(Sec. 34)

By embracing the opportunity, the self-interest of
the officer or director will be brought into conflict
with that of his corporation. Hence, the law does
not permit him to seize the opportunity even if he
will use his own funds in the venture. (SUNDIANG
AND AQUINO)

NOTE:
Differences between Section 31 and Section 34:

First, while both involve the same subject matter
(business opportunity) they concern different
personalities; Sec. 34 is applicable only to directors

106
and not to officers, whereas Sec. 31 applies to
directors, trustees and officers.

Second. Sec. 34 allows a ratification of a transaction
by a self-dealing director by vote of stockholders
representing at least 2/3 of the outstanding capital
stock
(VILLANUEVA)

H. Business Judgment Rule

GENERAL RULE
Directors cannot be held liable for mistakes or errors
in the exercise of their business judgment if they
acted in good faith, with due care & prudence.
Contracts intra vires entered into by the board of
directors are binding upon the corporation & courts
will not interfere.

EXCEPTION
If the contracts are so unconscionable & oppressive
as to amount to a wanton destruction of the rights of
the minority or if they violate their duties under
Sections 31 & 34.

Note:
Dean Villanueva opined that a derivative suit may be
an exception to such Rule: this occurs when it is
apparent that the Board is not in a position to validly
exercise its business judgment for the protection of
the corporation, e.g., when the Board itself has
committed an act causing damage to the corporation
or when the Board is placed in a conflict of interests
scenario whereby it is unlikely that it would use such
business discretion to file such suit for the best
interest of the corporation.

CONSEQUENCES OF THE BUSINESS JUDGMENT
RULE:
Resolutions and transactions entered into by the
Board within the powers of the corporation
cannot be reversed by the court not even on the
behest of the stockholders.
Directors and officers acting within such
business judgment cannot be held personally
liable for such acts. (Philippine Corporate Law,
Cesar Villanueva, 2009 ed. P.328)

I. Solidary Liability for Damages

Willful and knowingly voting for and assenting to
patently unlawful acts of the corporation; (Sec.
31)
Gross negligence or bad faith in directing the
affairs of the corporation; (Sec. 31)
Aquiring any personal or pecuniary interest in
conflict of duty; (Sec. 31)
Consenting to the issuance of watered stocks,
or, having knowledge thereof, failing to file
objections with secretary; (Sec. 65)
Agreeing or stipulating in a contract to hold
himself liable with the corporation; or
By virtue of a specific provision of law

J. Liability for Watered Stocks

Watered Stocks stocks issued for a consideration
less than its par or issued value or for a
consideration in any form other than cash, valued in
excess of its fair value.

the issuance of watered stocks or who, having
knowledge thereof, does not forthwith express his
objection in writing and file the same with the
corporate secretary shall be solidarily liable with
the stockholder concerned to the corporation and its

K. Personal Liabilities

GENERAL RULE
Members of the Board, who purport to act in good
faith for and in behalf of the corporation within the
lawful scope of their authority, are not liable for the
consequences of their acts. When the acts are of
such nature and done under those circumstances,
they are attributed to the corporation alone and no
personal liability is incurred. (Price v. Innodata
Phils., Inc., 2008)

The provisions on seizing corporate opportunity and
disloyalty (Secs. 31 and 34) shall also apply to
corporate officers

NOTE
Members of the BOD who are also officers are held
to a more stringent liability because they are in-
charge of day-to-day activities (CAMPOS)

DOCTRINE OF LIMITED
LIABILITY
DOCTRINE OF
IMMUNITY
Shields the corporators
from corporate liability
beyond their agreed
contribution to the
capital or shareholding in
the corporation.
Protects a person acting
for and in behalf of the
corporation from being
himself personally liable
for his authorized
actions

Tramat Mercantile, Inc. vs. CA, (1994), reiterated in
Atrium Management Corp. v. CA, (2001):
Liability of Director, Trustee or Officer (Asked in
96 and 97)
Personal liability of a corporate director, trustee or
officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only
when:
He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
He consents to the issuance of watered stocks or
who, having knowledge thereof, does not
forthwith file with the corporate secretary his
written objection thereto;
He agrees to hold himself personally and
solidarily liable with the corporation; or

107
He is made, by a specific provision of law, to
personally answer for his corporate action

L. Responsibility for Crimes

Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against criminally
because it cannot commit a crime in which personal
violence or malicious intent is required.

Criminal action is limited to the corporate agents
guilty of an act amounting to a crime and never
against the corporation itself (West Coast Life Ins.
Co. v. Hurd [1914], Time Inc. v. Reyes [1971]).

Since the BOD is the repository of corporate powers
and acts as the agent of the corporation, the
directors may be held criminally liable.

The Trust Receipts Law recognizes the impossibility
of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a
corporation, the law makes the officers or
employees or other persons responsible for the
offense liable to suffer the penalty of imprisonment.
The reason is obvious: corporations, partnerships,
associations and other juridical entities cannot be
put to jail. Hence, the criminal liability falls on the
human agent responsible for the violation of the
Trust Receipts Law. (Ong v. CA, 2003)

M. Special Facts Doctrine

Even though a director may not be under the
obligation of a fiduciary nature to disclose to a
shareholder his knowledge affecting the value of
the shares, that duty may exist in special cases.
(Strong v. Repide, 1909)

GENERAL RULE
(Majority view) Directors owe no fiduciary duty to
stockholders but they may deal with each other at
fair and reasonable terms, as if they were unrelated.
No duty to disclose facts known to the director or
officer.

EXCEPTION
Special Facts Doctrine: Conceding the absence of a
fiduciary relationship in the ordinary case, courts
nevertheless hold that where special circumstances
or facts are present which make it inequitable for
the director to withhold information from the
stockholder, the duty to disclose arises and
concealment is fraud. (Strong v. Repide, 1909)

N. Inside Information

The fiduciary position of insiders
1
, directors, and
officers prohibits them from using confidential

1
Insider means: (a) the issuer; (b) a director or officer (or
person performing similar functions) of, or a person
controlling the issuer; (c) a person whose relationship or
former relationship to the issuer gives or gave him access to
material information about the issuer or the security that is
information relating to the business of the
corporation to benefit themselves or any competitor
corporation in which they may have a mere
substantial interest.

Since loss and prejudice to the corporation is not a
requirement for liability, the corporation has a cause
of action as long as there is unfair use of inside
information

It is inside information if it is not generally available
to others and is acquired because of the close
relationship of the director or officer of the
corporation

O. Contracts

1. By self-dealing directors with the
corporation

GENERAL RULE
A contract of the corporation with one or more of its
directors or trustees is VOIDABLE, at the option of
such corporation. (Sec. 32)

EXCEPTION
Such contract is VALID if all of the following
conditions are present:
That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
That the vote of such director or trustee was
not necessary for the approval of the contract;
That the contract is fair and reasonable under
the circumstances; and
That in case of an officer, the contract has been
previously authorized by the board of directors.

Ratification
In case of absence of the first two conditions above,
contract may be ratified if:
Stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the
members in a meeting called for the purpose
voted to ratify the contract.
Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting.
Contract is fair and reasonable under the
circumstances

2. Between corporations with
interlocking directors

i. If the interests of the interlocking
director in the corporations are both

not generally available to the public; (d) a government
employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access
to material information about an issuer or a security that is
not generally available to the public; or (e) a person who
learns such information by a communication from any of the
foregoing insiders (3.8, Sec Regulations Code)

108
substantial (stockholdings exceed 20%
of outstanding capital stock).

GENERAL RULE
A contract between two or more corporations having
interlocking directors shall not be invalidated on
that ground alone. (Sec. 32)

EXCEPTION
If contract is fraudulent or not fair and reasonable

ii. If the interest of the interlocking
director in one of the corporations is
nominal (stockholdings 20% or less)
while substantial in the other, the
contract shall be VALID, if the
following conditions are met:

1) The presence of such director or trustee in the
board meeting in which the contract was
approved was NOT necessary to constitute a
quorum for such meeting
2) That the vote of such director or trustee was
not necessary for the approval of the contract
3) That the contract is fair and reasonable under
the circumstances.

Where (1) and (2) are absent, the contract can be
ratified by the vote of the stockholders representing
at least 2/3 of the outstanding capital stock or at
least 2/3 of the members in a meeting called for the
purpose voted to ratify the contract, provided that:
full disclosure of the adverse interest of the
directors/trustees involved is made on such
meeting;
the contract is fair and reasonable under the
circumstances.

P. Executive Committee

1. Creation

A body created by the by-laws and composed of
some members of the board which, subject to the
statutory limitations, has all the authority of the
board to the extent provided in the board resolution
or by-laws (See Sec. 35).

2. Limitations on its Powers

Must be provided for in the by-laws and composed of
at least 3 members of the board appointed by the
board.

Must act by a majority vote of all of its members.

CANNOT act on the following:
Matters needing stockholder approval (Sec. 35);
Filling up of board vacancies;
Amendment, repeal or adoption of by-laws (Sec.
35);
Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable (Sec. 35);
Cash dividend distribution (Sec. 35); and
Acts which would render the BOD powerless and
free from all responsibilities imposed on it by
law (CAMPOS)

Q. Meetings

1. Regular or Special

Who May Attend?
The members of the Board themselves; directors in
Board meetings cannot be represented or voted by
proxies.

a. When and Where

When? (Sec.53)
Regular meetings of directors or trustees shall
be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the call
of the president or as provided in the by-laws.

Where? (Sec. 53)
Meetings of directors or trustees of corporations may
be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise.

b. Notice (Sec. 53)

Notice of regular or special meetings stating the
date, time and place of the meeting must be sent to
every director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise
provided by the by-laws.

Notice of meeting is subject to waiver.

2. Who Presides (Sec. 54)

The president presides, unless the by-laws provide
otherwise.

3. Quorum (Sec. 25)

GENERAL RULE
Majority of the number of directors or trustees as
fixed in the articles of incorporation.

EXCEPTION
Unless the articles of incorporation or the by-laws
provide for a greater majority, or in case of election
of officers where a vote of a majority of all the
members of the board is needed.

4. Rule on Abstention

An abstention is counted as an affirmative vote
insofar as it may be construed as an acquiescence in
the action of those who vote affirmatively. This
manner of counting is obviously based on what is
deemed to be a presumption as to the intent of the
one abstaining, namely, to acquiesce in the action of
those who vote affirmatively, but which
presumption, being merely prima facie, would not

109
hold in the face of clear evidence to the contrary. It
is pertinent to inquire into the facts and
circumstances which attended the voting by the
members to determine whether or not such a
construction would govern. (Lopez v. Ericta, G.R.
No. L-32991, June 29, 1972)

X. Capital affairs

A. Certificate of Stock

1. Nature of the Certificate

A certificate of stock is an instrument formally
issued by the corporation with the intention that the
same constitute the best evidence of the rights and
status of a SH (not a condition precedent to the
acquisition of such rights).

2. Uncertificated Shares

Uncertificated Shares/Securities
Security evidenced by electronic or similar records
(Sec. 3.14, Securities Regulation Code)

Notwithstanding Sec. 63 of the Corporation Code
(certificate of stock and transfer of shares), a
corporation whose securities are registered pursuant
to the SRC or listed on securities exchange may:
If so resolved by the Board of Directors and
agreed by a shareholder, investor or securities
intermediary, issue shares to, or record the
transfer of some or all its shares into the name
of such shareholders, investors or, securities
intermediary in the form of uncertified
securities,

The use of uncertified securities in these
circumstances shall be without prejudice to the
rights of the securities intermediary
subsequently to require the corporation to issue
a certificate in respect of any shares recorded in
its name; and

If so provided in its articles of incorporation
and by-laws, issue all of the shares of a
particular class in the form of uncertificated
securities and subject to a condition that
investors may not require the corporation to
issue a certificate in respect of any shares
recorded in their name.

Transfers of uncertificated securities, how made
Valid as between parties - validly made and
consummated by appropriate book-entries in the
securities intermediaries, or in the stock and
transfer book held by the corporation or the
stock transfer agent.

A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer
form or duly indorsed in blank representing the
amount of security or right transferred,
including the unrestricted negotiability of that
security by reason of such delivery.

Valid as to corporation when the transfer is
recorded in the books of the corporation so as to
show the names of the parties to the transfer
and the number of shares transferred (Sec. 43,
Securities Regulation Code).

3. Negotiability

Theory of Quasi-Negotiability
Certificates indorsed in blank where the
stockholder indorses his certificate in blank in such a
manner as to clothe whoever may be in possession of
it with apparent authority to deal with the shares as
the latters own, he will be estopped from claiming
the shares as against a bonafide purchaser.
(Santamaria v. Hongkong & Shanghai Bank, 1951)

i. Requirements for Valid Transfer of
Stocks (Sec. 63)
For a valid transfer of stocks, the requirements are
as follows:
There must be delivery of the stock certificate;
The certificate must be endorsed by the owner
or his attorney-in-fact or other persons legally
authorized to make the transfer; and
To be valid against third parties, the transfer
must be recorded in the books of the
corporation. (Bitong v. Court of Appeals, G.R.
No. 123553, July 13, 1998)

No shares of stock against which the corporation
holds an unpaid claim shall be transferable in the
books of the corporation.

4. Issuance

i. Full Payment

GENERAL RULE
No certificate of stock shall be issued to a subscriber
until the full amount of his subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid (Sec. 64)

EXCEPTION
In Baltazar v Lingayen Gulf Electric Power Company,
1965), where it was the practice of the corporation
since its inception to issue certificates of stock to its
individual SHs for unpaid shares of stock and to give
full voting power to shares fully paid.

ii. Payment Pro-rata

Nava Peers Mktg. Corp. and Fua Cun v. Summers
(1923):
The entire subscription must be paid first before the
certificates of stock can be issued. Partial payments
are to be applied pro rata to each share of stock
subscribed.

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5. Stock and Transfer Book (Sec. 74,
par. 4)

i. Contents

a record of all stocks in the names of the
stockholders alphabetically arranged;
the installments paid and unpaid on all stock for
which subscription has been made, and the date
of payment of any installment;
a statement of every alienation, sale or transfer
of stock made, the date thereof, and by and to
whom made; and
such other entries as the by-laws may prescribe.

ii. Who May Make Valid Entries

a licensed stock transfer agent; or
the Secretary of the stock corporation provided
all rules and regulations imposed on stock
transfer agents shall be applicable, except
payment of license fee.

6. Lost or Destroyed Certificates
(Sec. 73)

Procedure for re-issuance in case of loss, stolen or
destroyed certificates:
Registered owner to file an affidavit of loss with
the corporation.
Publication of notice of loss in a newspaper of
general circulation published in the place where
the corporation has its principal office, once a
week for 3 consecutive weeks at the expense of
the owner of the certificate of stock
Cancellation of the certificate in the books of
the corporation and issuance of new
certificates, after the expiration of 1 year from
the date of the last publication and there is no
contest. The right to make such contest shall be
barred after the expiration of the one-year
period.
Issuance of new certificates before 1 year
period if the registered owner files a bond and
there is no pending contest regarding the
ownership of said certificates.

NOTE
Except in cases of fraud, bad faith, or negligence on
the part of the corporation and its officers, no
action may be brought against the corporation which
shall have issued certificates of stock in lieu of those
lost, stolen or destroyed pursuant to the above
procedure.

7. Situs of the Shares of Stock

It is a general rule that for purposes of execution,
attachment and garnishment, it is not the domicile
of the owner of a certificate but the domicile of the
corporation which is decisive. (Chua Guan v.
Samahang Magsasaka, Inc., G.R. No. 42091,
November 2, 1935)

B. Watered Stocks

1. Definition

These are shares issued as fully paid when in truth
con consideration is paid, or the consideration
received is known to be less than the par value or
issued value of the shares. (Sec. 65)

These include the following:
Issued without consideration (bonus share)
Issued as fully paid when the corporation has
received less sum of money than its par or
issued value (discounted share)
Issued for consideration other than actual cash
(i.e., property or services), the fair valuation of
which is less than its par or issued value
Issue stock dividend when there are no
sufficient retained earnings or surplus to justify
it.

NOTE
Subsequent increase in the value of the property
used in paying the stock does not do away with the
watered stocks. Subsequent increase in the value of
the property used in paying the stock does not cure
the defect in issuance. The existence of watered
stocks is determined at the time of issuance of the
stock

2. Liability of Directors for Watered
Stocks

the issuance of stocks or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate
secretary shall be solidarily liable with the
stockholder concerned to the corporation and its

3. Trust Fund Doctrine for Liability
for Watered Stocks

Where the corporation issues watered stock and
thereby assumes an ostensible capitalization in
excess of its real assets, the transaction necessarily
involves the misleading of subsequent creditors, and
whether done with that purpose actually in mind or
not, is at least a constructive fraud upon creditors.
Hence, it is held that recovery may be had by a
creditor in such case, even though the corporation
itself has no cause of action against the
stockholders. Some of the earlier decisions put the
right of recovery in such a case upon the so-called
trust fund doctrine. In any view of the matter,
however, the creditors right of action to compel the
making good of the representation as to the
corporations capital is based on fraud, and the trust
find doctrine is only another way of expressing the
same underlying idea. (De Leon, 2010)

Despite the view of foreign authors that the fraud
theory is the prevailing view, it would seem that in
the Philippine jurisdiction, the trust fund doctrine on

111
watered stock prevails. In Philippine Trust Corp. v.
Rivera, the Supreme Court held

It is established doctrine that subscription to the
capital of a corporation constitute a fund to
which creditors have a right to look for
satisfaction of their claims and that the assignee
in insolvency can maintain an action upon any
unpaid stock subscription in order to realize
assets for the payment of its debts. A
corporation has no power to release an original
subscriber to its capital stock from the
obligation of paying for his shares, without a
valuable consideration for such release; and as
against creditors a reduction of the capital stock
can take place only in the manner an under the
conditions prescribed by the statute or the
charter or the articles of incorporation.
Moreover, strict compliance with the statutory
regulations is necessary. (Villanueva, 2001)

C. Payment of Balance of
Subscription (Sec. 66 & 67)

1. Call by Board of Directors

The board of directors of any stock corporation may
at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage
thereof, in either case with accrued interest, if any,
as it may deem necessary.

Payment shall be made on the date specified in the
contract of subscription or on the date stated in the
call. Failure to pay on such date shall render the
entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is
provided for in the by-laws. If within 30 days from
said date no payment is made, all stocks covered by
said subscription shall become delinquent and
subject to sale under Sec. 68 unless the BOD orders
otherwise.

There are two (2) instances when call is not
necessary to make the subscriber liable for payment
of the unpaid subscription:
When, under the terms of the subscription
contract, subscription is payable, not upon call,
but immediately, or on a specified day, or when
it is payable in installments at specified times;
and
If the corporation becomes insolvent, which
makes the liability on the unpaid subscription
due and demandable regardless of any
stipulation to the contrary in the subscription
agreement. (Villanueva, 2001)

2. Notice Requirement

Where call is necessary, notice must be given to the
stockholder concerned. A call without notice to the
subscriber is practically no call at all.

The notice is regarded as a condition precedent to
the right of recovery. It must, therefore, be alleged
and proved to maintain an action for the call
(Baltazar v. Lingayen Gulf Electric Power Co., Inc.).
The right to notice of call, however, may be waived
by the subscriber. (De Leon, 2010)

D. Sale of Delinquent Shares (Sec.
68)

Delinquent Shares - These are shares for which the
corresponding subscription or balance remains
unpaid after a grace period of 30 days from the date
specified in the contract of subscription or from the
date stated in the call made by the BOD. (Sec 67)

1. Effect of Delinquency (Sec. 71)

No delinquent stock shall be voted for or be entitled
to vote or to representation at any stockholders
meeting

The holder thereof shall NOT be entitled to any of
the rights of a stockholder except the right to
dividends.

Such shares shall be subject to delinquency sale.

2. Call by Resolution of the Board of
Directors (Sec. 68)

The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state
the amount due on each subscription plus all accrued
interest, and the date, time and place of the sale
which shall not be less than 30 days nor more than
60 days from the date the stocks became delinquent.

3. Notice of Sale

If the BOD resolves to proceed with the sale:
1. Notice of sale and a copy of the resolution shall
be sent to every delinquent stockholder either
personally or by registered mail.
2. Notice of sale shall furthermore be published
once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province
or city where the principal office of the
corporation is located.

4. Auction Sale

Procedure for delinquency sale (Sec. 68)
Call for payment made by the BOD.
Notice of call served on each stockholder.
Notice of delinquency issued by the BOD upon
failure of the stockholder to pay within 30 days
from date specified.
Service of notice of delinquency on the non-
paying subscriber, PLUS publication in a
newspaper of general circulation in the province
or city where the principal office of the
corporation is located, once a week for two (2)
consecutive weeks.

112

Note:
Requirements on notice and publication are
mandatory. Lacking such requirements, the
stockholder may question the sale as provided
under Sec. 69.

Public auction - the highest bidder is one who is
willing to pay the balance of the subscription for
the least number of shares. If there are no
bidders, the corporation must bid for the whole
number of shares regardless of how much the SH
has paid. Such stocks will pertain to the
corporation as fully paid treasury stocks.

The delinquent stockholder may stop the auction by
paying to the corporation or before the date
specified for the sale the balance due on his
subscription, plus accrued interest, costs of
advertisement and expenses of the sale.

Otherwise, the public auction shall proceed and be
sold to the bidder that will pay the full amount of
the balance of subscription with accrued interest,
costs and expenses of the sale, for the smallest
number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchases in
the books of the corporation and a certificate of
such stuck shall be issued in his favor. The remaining
shares, if any,shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares.

Irregularities in the delinquency sale (Sec. 69)
Action to recover delinquent stock must be on
the ground of irregularity or defect in the notice
of sale.
Party seeking to recover must first pay or tender
to the party holding the stock the sum for which
the same was sold, with interest from the date
of sale at the legal rate.
The action shall be commenced within six
months from the date of sale.

E. Alienation of Shares

1. Allowable Restrictions on the Sale
of Shares

GENERAL RULE
Shares of stock so issued are personal property and
may be transferred (Sec. 63). (FREE
TRANSFERABILITY OF SHARES)

EXCEPTION
In CLOSE corporations, restrictions on the right to
transfer shares may be provided in the AOI, by-laws
and certificates (Sec. 98).

2. Sale of Partially Paid Shares

Under Section 63 of the Corporation Code, no shares
of stock against which the corporation holds any
unpaid claim shall be transferable in the books of
the corporation. Therefore, a corporation may
refuse to acknowledge and register a sale or
assignment of shares which are not fully paid, and
may continue to hold the original subscriber liable
on the payment of the subscription.

However, in China Banking Corp. v. CA, the court
said that the above principle in section 63 cannot be
utilized by the corporation to refuse to recognize
ownership over pledged shares purchased at public
auction. The term unpaid claims refers to any
unpaid claims arising from unpaid subscription, and
not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from
any other transactions. Obligations arising from
unpaid monthly dues do not fall within the coverage
of Section 63. (Villanueva, 2001)

3. Sale of a Portion of Shares not
Fully Paid

The SEC has opined on several occasions that a
stockholder who has not paid the full amount of his
subscription cannot transfer part of his subscription
in view of the indivisible nature of a subscription
contract. The reason behind the principle of
disallowing transfer of not fully paid subscription to
several transferee is that it would be difficult to
determine whether or not the partial payments
made should be applied as full payment for the
corresponding number of shares which can only be
covered by such payment or as proportional payment
to each and all of the entire number of subscribed
shares, and it would be difficult to determine the
unpaid balance to be assumed by each transferee.
(Villanueva, 2001)

4. Sale of All of Shares Not Fully Paid

On the other hand, the SEC has opined that the
entire subscription, although not yet fully paid, may
be transferred to a single transferee, who as a result
of the transfer must assume the unpaid balance. It is
necessary, however, to secure the consent of the
corporation since the transfer of subscription rights
and obligations contemplates a novation of contract
which under Article 1293 of the Civil code cannot be
made without the consent if the creditor.
(Villanueva, 2001)

5. Sale of Fully Paid Shares

Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the
transfer. No transfer however shall be valid except
as between the parties until the transfer is recorded
in the books of the corporation showing the names of
the parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares transferred
(Sec. 63, Code)

6. Requisites of a Valid Transfer

Same as requirements for valid transfer of stocks

113

7. Involuntary Dealings

The right of a stockholder to pledge, mortgage or
otherwise encumber his shares is recognized under
Section 55 of the Corporation Code, which regulates
the manner of voting on pledged or mortgaged
shares.

If the restriction on the right to pledge or mortgage
shares of stock absolutely prohibits the stockholders
from pledging or mortgaging their shares without the
consent of the board of directors, it would be
violative of the statutory right of the stockholders to
encumber shares of stock as allowed in Section 55.
However, when the restriction merely allows the
corporation or existing stockholders to accept the
offer within the option period, and thereafter, if no
one accepts the offer, the stockholder is free to
pledge or mortgage his shares in favor of any third
party, such provision is reasonable, valid and
binding.

By the strict application of Section 63 of the
Corporation Code to cover only the sale, assignment
or absolute disposition of shares of stock, the
Supreme Court has placed a bias against voluntary
sales, assignments or dispositions of shares of stock
vis--vis pledges, mortgages, attachment or levy
thereof. To be valid and binding on third parties, the
voluntary sale, assignment or disposition of shares
requires the essential element of registration in the
stock and transfer book; otherwise the sale,
assignment or disposition is considered void as to
third parties, even when they have actual notice.
Whereas, when it comes to pledge, mortgage,
encumbrance, attachment or levy of shares,
registration thereof in the stock and transfer book is
not essential either for validity or as a species of
notifying third parties. (Villanueva, 2001)

XI. Dissolution and liquidation

Dissolution of a corporation is the extinguishment of
its franchise and the termination of its corporate
existence or business purpose.

A. Modes of Dissolution

1. Voluntary

i. Where No Creditors are Affected (Sec.
118)

Notice of the meeting should be given to the
stockholders or members by personal delivery or
registered mail at least 30 days prior to the meeting.

The notice of meeting should also be published for 3
consecutive weeks in a newspaper published in the
place, where the principal office of said corporation
is located. If no newspaper is published in such
place, then in a newspaper of general circulation in
the Philippines.

The resolution to dissolve must be approved by the
majority of the directors/trustees and approved by
the stockholders representing at least 2/3s of the
OCS or 2/3 of members.

A copy of the resolution shall be certified by the
majority of the directors or trustees and
countersigned by the secretary.

The signed and countersigned copy will be filed with
the SEC and the latter will issue the certificate of
dissolution.

NOTE
Thus, except for the expiration of its term, no
dissolution can be effective without some act of the
state (Daguhoy Enterprises v. Ponce, 1954)

ii. Where Creditors are Affected (Sec.
119)

A petition shall be signed by a majority of its board
of directors or trustees or other officers having
management of its affairs.

The petition must be verified by its president, or
secretary or one of its director or trustees.

Approval of the stockholders representing at least
2/3 of the OCS or 2/3 of members in a meeting
called for that purpose.

Filing of a petition with the SEC signed by majority
of directors or trustees or other officers having the
management of its affairs verified by the President
or Secretary or Director. Claims and demands must
be stated in the petition.

If the petition is sufficient in form and substance,
the SEC shall issue an order fixing a hearing date for
objections.

A copy of the order shall be published at least once a
week for 3 consecutive weeks in a newspaper of
general circulation, or if there is no newspaper in
the city or municipality of the principal office,
posting for 3 consecutive weeks in 3 public places is
sufficient.

Objections must be filed no less than 30 days nor
more than 60 days after the entry of the Order.

After the expiration of the time to file objections, a
hearing shall be conducted upon prior 5 day notice
to hear the objections.

Judgment shall be rendered dissolving the
corporation and directing the disposition of assets.
The judgment may include appointment of a
receiver.

iii. By Shortening of Corporate Term
(Sec. 120)

A voluntary dissolution may be effected by amending
the AOI. Upon approval of the amended AOI or the

114
expiration of the shortened term, as the case may
be, the corporation shall be deemed dissolved
without any further proceedings

2. Involuntary

i. By Expiration of Corporate Term

Once the period expires, the corporation is
automatically dissolved without any other
proceeding and it cannot thereafter be considered a
de facto corporation.

ii. Failure to Organize and Commence
Business within Two Years from
Incorporation (Sec. 22)

Failure to formally organize and commence the
transaction of its business or construction of its
works within two years - its corporate powers shall
cease and the corporation shall be deemed dissolved

Transacting business implies a continuity of acts or
dealings in the accomplishment of the purpose for
which the corporation was formed (Mentholatum v.
Mangaliman, 1946)

Formal organization includes not only the adoption
of the by-laws but also the establishment of the
body which will administer the affairs of the
corporation and exercise its powers

Failure to operate for at least 5 consecutive years
after commencement of business - ground for
suspension or revocation of its corporate franchise or
certificate of incorporation.

NOTE
The corporation may show that the failure to
commence its business or to continuously operate is
due to causes beyond its control (Sec. 22).

iii. Legislative Dissolution

The inherent power of Congress to make laws carries
with it the power to amend or repeal them.
Involuntary corporate dissolution may be effected
through the amendment or repeal of the Corporation
Code.

The limitations on the power to dissolve corporations
by legislative enactment are as follows:
1. Under the Constitution, the amendment,
alteration, or repeal of the corporate franchise
of a public utility shall be made only when the
common good so requires;
2. Under Section 145 of the Code, it is provided
that: No right or remedy in favor of or against
any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall
be removed or impaired either by the
subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this
Code or of any part thereof;
3. While Congress may provide for the dissolution
of a corporation, it cannot impair the obligation
of existing contracts between the corporation
and third persons, or take away the vested
rights of its creditors. (De Leon, 2010)

iv. Dissolution by the SEC on Grounds
Under Existing Laws (Sec. 121)

A corporation may be dissolved by the SEC, upon a
verified complaint and after proper notice and
hearing, on the following grounds (Sec. 6, par i, PD
902-A):
Fraud in procuring its certificate of registration
Serious misrepresentation as to what the
corporation can or is doing to the great
prejudice of or damage to the general public
Refusal to comply or defiance of any lawful
order of the Commission restraining commission
of acts which would amount to a grave violation
of its franchise
Continuous inoperation for a period of at least
five years
Failure to file by-laws within the required
period
Failure to file required reports in appropriate
forms as determined by the Commission within
the prescribed period
Other grounds

Other grounds:
Violation by the corporation of any provision of
the Corporation Code (Sec. 144 BP 68)
In case of a deadlock in a close corporation, and
the SEC deems it proper to order the dissolution
of the corporation as the only practical solution
to the dispute (Sec. 104 BP 68)

B. Methods of Liquidation

Liquidation is the process by which all the assets of
the corporation are converted into liquid assets
(cash) in order to facilitate the payment of
obligations to creditors, and the remaining balance if
any is to be distributed to the stockholders. It is a
proceeding in rem.

1. By the Corporation Itself

Under Section 122 of the Corporation Code, a
corporation whose corporate existence is terminated
in any manner continues to be a body corporate for
three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and
to enable it to settle and close its affairs,
culminating in the disposition and distribution of its
remaining assets. It may, during the three-year
term, appoint a trustee or a receiver who may act
beyond that period.

The termination of the life of a corporate entity
does not by itself cause the extinction or diminution
of the rights and liabilities of such entity. If the
three-year extended life has expired without a
trustee or receiver having been expressly designated
by the corporation, within that period, the board of
directors (or trustees) itself, may be permitted to so

115
continue as "trustees" by legal implication to
complete the corporate liquidation. (Pepsi-Cola
Products Philippines, Inc. v. Court of Appeals, G.R.
No. 145855, November 24, 2004)

2. Conveyance to a Trustee within a
3-Year Period

From and after any such conveyance by the
corporation of its property in trust for the benefit of
its SH/members/creditors and others in interest, all
interest which the corporation had in the property
terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders,
members, creditors or other persons in interest.

"the trustee (of a dissolved corporation) may
commence a suit which can proceed to final
judgment even beyond the three-year period (of
liquidation) . . . , no reason can be conceived why a
suit already commenced by the corporation itself
during its existence, not by a mere trustee who, by
fiction, merely continues the legal personality of the
dissolved corporation, should not be accorded
similar treatment to proceed to final judgment
and execution thereof." (Reburiano v. Court of
Appeals, G.R. No. 102965, January 21, 1999)

3. By Management Committee or
Rehabilitation Receiver

However, the mere appointment of a receiver,
without anything more does not result in the
dissolution of the corporation nor bar it from the
existence of its corporate rights (Leyte Asphalt &
Mineral Oil Co. Ltd., v. Block Johnston &
Breenbrawn, 1928)

Upon five (5) day's notice, given after the date on
which the right to file objections as fixed in the
order has expired, the Commission shall proceed to
hear the petition and try any issue made by the
objections filed; and if no such objection is
sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving
the corporation and directing such disposition of its
assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of
the corporation (Sec. 119, Code)

4. Liquidation after Three Years

Phil. Veterans Bank v. Employees Union (2001):
Q: What is the difference between Liquidation and
Rehabilitation?

A: Liquidation is the winding up of a corporation so
that assets are distributed to those entitled to
receive them. It is the process of reducing assets to
cash, discharging liabilities and dividing surplus or
loss. On the other hand, rehabilitation
contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the
corporation to its former position of successful
operation and solvency. Both cannot be undertaken
at the same time.

XII. Other corporations

A. Close Corporations
(Corporation Code, Title XII)

Section 96: Close corporations are those whose AOI
provide the following:
a) all of the corporations issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more that a specified number of
persons, not exceeding 20
b) all of the issued stock of all classes shall be
subject to one or more specified restrictions on
transfer permitted by the Code
c) the corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class
d) at least 2/3 of its voting stock must not be owned
or controlled by another corporation which is
not a close
e) must not be a mining or oil company, stock
exchange, bank, insurance company, public
utility, educational institution or corporation
vested with public interest

The AOI must state that the number of stockholders
shall not exceed 20.

The AOI must contain restriction on the transfer of
issued stocks (which must appear in the AOI, by-laws
and certificate of stock)

GENERAL RULE
Free transferability of shares - Shares of stock so
issued are personal property and may be transferred

EXCEPTION
In close corporations: Considering the special
circumstances attending a close corporation (e.g.
formed by persons who know each other well, thus
they would want to choose the persons who will be
allowed in their group), it is justifiable and even
imperative for its stockholders to protect themselves
from future conflicts by placing restrictions on the
right of each one of them to transfer his shares to an
outsider.

Restriction on the transfer must NOT be more
onerous than granting the existing SH or
corporation the option to purchase the shares.

The stocks cannot be listed in the stock exchange
nor be publicly offered.

The corporation must NOT be mining company, stock
exchange, oil company, bank, insurance company,
public utility, educational institution or other
corporation declared to be vested with public
interest.

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At least 2/3 of its voting stock or voting rights must
NOT be owned or controlled by another corporation
which is not a close corporation.

1. Characteristics of a Close
Corporation

The stockholders themselves can directly manage
the corporation and perform the functions of
directors without need of election (Sec. 97):
When they manage, stockholders are liable as
directors;
There is no need to call a meeting to elect
directors;
The stockholders are liable for tort.

2. Validity of Restrictions on Transfer
of Shares

Validity of Restrictions (AO) (Sec. 98)
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof in
good faith.
Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein. After expiration of said period and upon
failure of the existing stockholders or the
corporation to purchase said shares, the
transferring stockholder may sell his shares to
any third person.

Presumptions (Sec. 99):
If the stock certificate CONSPICUOUSLY shows
the restriction, the purchaser or transferee is
CONCLUSIVELY presumed to have notice of the
restriction, provided this appears in the AOI.
Where a conclusive presumption of notice
arises, the corporation may, at its option, refuse
to register the transfer, unless
- all the stockholders have consented to the
transfer, or
- the AOI has been properly amended to
remove the restriction.
If it appears in the certificate, but NOT
CONSPICUOUSLY, then although he may be
presumed to have notice of the restriction, he
can prove the contrary.

3. Issuance or Transfer of Stock in
Breach of Qualifying Conditions

If stock of a close corporation is issued or
transferred to any person who is not entitled under
any provision of the articles of incorporation to be a
holder of record of its stock, and if the certificate
for such stock conspicuously shows the qualifications
of the persons entitled to be holders of record
thereof, such person is conclusively presumed to
have notice of the fact of his ineligibility to be a
stockholder.

If the articles of incorporation of a close corporation
states the number of persons, not exceeding twenty
(20), who are entitled to be holders of record of its
stock, and if the certificate for such stock
conspicuously states such number, and if the
issuance or transfer of stock to any person would
cause the stock to be held by more than such
number of persons, the person to whom such stock
is issued or transferred is conclusively presumed
to have notice of this fact.

If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of stock
of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact
that he has acquired stock in violation of the
restriction, if such acquisition violates the
restriction.

Whenever any person to whom stock of a close
corporation has been issued or transferred has, or is
conclusively presumed under this section to have,
notice either (a) that he is a person not eligible to
be a holder of stock of the corporation, or (b) that
transfer of stock to him would cause the stock of the
corporation to be held by more than the number of
persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the
transfer of stock is in violation of a restriction on
transfer of stock, the corporation may, at its
option, refuse to register the transfer of stock in
the name of the transferee.

The provisions of subsection (4) shall not applicable
if the transfer of stock, though contrary to
subsections (1), (2) of (3), has been consented to by
all the stockholders of the close corporation, or if
the close corporation has amended its articles of
incorporation in accordance with this Title.

The term "transfer", as used in this section, is not
limited to a transfer for value.

The provisions of this section shall not impair any
right which the transferee may have to rescind the
transfer or to recover under any applicable
warranty, express or implied (Sec. 99)

4. When Board Meeting is
Unnecessary or Improperly Held

i. When Unnecessary
Any action by the directors of a close corporation
without a meeting shall nevertheless be deemed
valid if:
Before or after such action is taken, written
consent thereto is signed by all the directors; or
All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
The directors are accustomed to take informal
action with the express or implied acquiescence
of all the stockholders; or
All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing
(Sec. 101)

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ii. When Improperly Held

When a directors meeting is held without proper
call or notice, an action taken therein within the
corporate powers is deemed ratified by a director
who failed to attend.

UNLESS he promptly files his written objection with
the secretary of the corporation after having
knowledge thereof (Sec. 101)

5. Preemptive Right

The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, UNLESS the articles of
incorporation provide otherwise (Sec. 102).

6. Amendment of Articles of
Incorporation

Amendment to the AOI which seeks to:
delete or remove any provision required to be
contained in the AOI of Close Corporations
(under the Title on Close Corporations); or
to reduce a quorum or voting requirement
stated in said AOI
requires the affirmative vote of at least 2/3 of the
outstanding capital stock, whether with or without
voting rights, or of such greater proportion of shares
as may be specifically provided in the AOI at a
meeting duly called.

7. Deadlocks

Requisites
1) The directors or stockholders are so divided
respecting the management of the corporation's
business and affairs
2) The votes required for any corporate action
cannot be obtained that the business and affairs
of the corporation can no longer be conducted
to the advantage of the stockholders generally

Powers of the SEC in case of Deadlock in Close
Corporations
Cancel or alter any provision in the articles of
incorporation or by-laws
Cancel, alter or enjoin any resolution of the
corporation
Direct or prohibit any act of the corporation
Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation regardless of
the availability of unrestricted retained
earnings.
Appoint a provisional director
Dissolve the corporation
Granting such other relief as the circumstances
may warrant.

CLOSE CORPORATIONS REGULAR CORPORATIONS
1. Management / Board Authority
There can be classification of directors into one or
more classes, each of whom may be voted for and
elected solely by a particular class of stock; and

There are no classification of board of directors

The articles of incorporation of a close corporation
may provide that the business of the corporation shall
be managed by the stockholders of the corporation
rather than by a board of directors. So long as this
provision continues in effect:

No meeting of stockholders need be called to elect
directors.

Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of
this Code.

The stockholders of the corporation shall be subject to
all liabilities of directors.

Corporate Powers devolved upon board of directors
whose powers are executed by officers. Cannot provide
that it be managed by stockholders

Board of directors must be elected in a stockholders
meeting

Stockholders of a corporation are separate and distinct
from directors

The articles of incorporation may likewise provide that
all officers or employees or that specified officers or
employees shall be elected or appointed by the
stockholders, instead of by the board of directors.

Officers must be elected by the Board of Directors
2. Meetings
Unless the by-laws provide otherwise, any action by
the directors of a close corporation without a meeting
shall nevertheless be deemed valid if:

The directors or trustees shall not act individually nor
separately but as a body in a lawful meeting. They will
act only after discussion and deliberation of matters
before them. Contracts entered into without a formal

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1. Before or after such action is taken, written
consent thereto is signed by all the directors; or

2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or

3. The directors are accustomed to take informal
action with the express or implied acquiescence
of all the stockholders; or

4. All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in writing.

If a director's meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection
with the secretary of the corporation after having
knowledge thereof.
board resolution does not bind the corporation except
when ratified or when majority of the board has
knowledge of the contract and the contract benefited
the corporation.

Absence of a prompt objection in writing does not ratify
acts done by directors without a valid meeting. There
must be express or implied ratification.

Express ratification may consist of a Board Resolution to
that effect

Implied ratification may consist of acceptance of
benefits from said unauthorized act while having
knowledge of said act

Failure to give notice would render a meeting voidable.

Attendance to a meeting despite want of notice will be
deemed implied waiver

All proceedings had and any business transacted at any
meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid
even if the meeting be improperly held or called,
provided all the stockholders or members of the
corporation are present or duly represented at the
meeting. (51)
3. Voting / Quorum

The AOI may provide for a classification of directors
into one or more classes, each of which may be voted
for and elected solely by a particular class of stock.
No share may be deprived of voting rights, except
Preferred or Redeemable shares, unless otherwise
provided by the Code

There shall always be a class/series of shares which have
a COMPLETE VOTING RIGHTS

EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY
OTHER SHARE, except as otherwise provided in the AOI

The AOI may provide for a greater quorum or voting
requirements in meetings of stockholders or directors
than those provided in this Code.
For Board of directors, the by-laws or AOI can provide for
a greater majority in quorum

For stockholders, the AOI can provide for a different
percentage in quorum
4. Pre-emptive Right

The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services, or in payment
of corporate debts, unless the articles of incorporation
provide otherwise.
Limitations on the exercise of pre-emptive right:
a. Such pre-emptive right shall not extend to shares to
be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public;
b. Not extend to shares to be issued in good faith with
the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously contracted
debt
c. Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
5. Transferability
Restrictions on the right to transfer shares must
appear in the AOI and in the by-laws as well as in the
certificate of stock otherwise the same shall not be
binding on any purchaser thereof in good faith

Restrictions on the right to transfer not allowed

6. Withdrawal Right

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Any stockholder of a close corporation may, for any
reason, compel the said corporation to purchase his
shares at their fair value, which shall not be less than
their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock

Any stockholder of a close corporation may, by written
petition to the SEC, compel the dissolution of such
corporation whenever:
a. Any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or
b. Corporate assets are being misapplied or
wasted.
Stockholders may require the corporation to buy-back
their shares at fair value when the Corporation has
unrestricted Retained Earnings:
a. In case any amendment to the articles of
incorporation which has the effect of:
i. changing or restricting the rights of any
stockholder or class of shares, or
ii. authorizing preferences in any respect
superior to those of outstanding shares of
any class, or
iii. extending or shortening the term of
corporate existence
b. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all
of the corporate property and assets as provided in
the Code; and
c. In case of merger or consolidation
d. Extension or shortening of the term of the
corporation (37)
e. Diversion of funds of corporation from primary
purpose to secondary purpose (41)

The corporation may buy-back shares of stockholders
subject to the following limitations (Treasury shares):
a. There must be unrestricted retained earnings
b. Must be for a legitimate purpose

B. Non-Stock Corporations
(Corporation Code, Title XI)

1. Definition

One where no part of its income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of this Code on dissolution.
(Sec.87)

2. Purposes (sec. 88)

Charitable
Religious
Educational
Professional
Cultural
Fraternal
Literary
Scientific
Social
Civic services
Similar purposes, such as chambers or
combinations trade, industry or agriculture

3. Treatment of Profits

Any profit which a non-stock corporation may obtain
as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation
was organized, subject to the provisions of this Title.
(Sec. 87,2
nd
sentence)

4. Distribution of Assets Upon
Dissolution

Order of Distribution of Assets Upon Dissolution of
Non-Stock Corporation
All its creditors shall be paid.
Assets held subject to return on dissolution shall
be delivered back to the givers.
Assets held for charitable, religious purposes,
etc., without a condition for their return on
dissolution, shall be conveyed to one or more
organizations engaged in similar activities as
dissolved corporation
All other assets shall be distributed to members,
as provided in the AOI or by-laws (Sec. 94)

C. Religious Corporations

1. Corporation Sole (Sec. 110)

A special form of corporation, usually associated
with clergy and consists of one person only and his
successors, who are incorporated by law to give
some legal capacities and advantages.

A registered corporation sole can acquire land if its
members constitute at least 60% Filipinos (SEC
Opinion, 8 August 1994).

i. Nationality

A corporation sole does not have any nationality but
for purposes of applying our nationalizations laws,
nationality is determined by the nationality of the
members (Roman Catholic Apostolic Church v.
Land Registration Commission, 1957).

120

ii. Religious Societies

Non-stock corporation formed by a religious society,
group, diocese, synod, or district of any religious
denomination, sect, or church after getting the
approval of 2/3 of its members.

D. Foreign Corporations

Foreign Corporation are those formed, organized,
or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or
state (Sec. 123).

1. Bases of Authority Over Foreign
Corporations

i. Consent

As a rule, a foreign corporation can have no legal
existence or status beyond the bounds of the State
or sovereignty by which it is created or incorporated
and organized. It exists only in contemplation of law
and by force of the law and where that law ceases to
operate, the corporation can have no existence. This
principle, however, does not prevent a corporation
from acting in another State or country with the
latters express or implied consent. This is the
consent doctrine which is provided in Sections 125
and 126. But every power which a corporation
exercises as such in another State depends for its
validity upon the laws of the sovereignty in which it
is exercised. A corporation can exercise none of the
functions and privileges conferred by its charter in
another State or country except by the comity and
consent of such State or country. (De Leon, 2010)

ii. Doctrine of Doing Business (relate
to definition under the Foreign Investments
Act, RA 7042)

Tests of Doing Business in the Philippines
Twin Characterization Test
- Under the Continuity Test, doing business
implies a continuity of commercial dealings
and arrangements, or performance of acts
normally incidental to the purpose and
object of the organization.
- Under the Substance Test, a foreign
corporation is doing business in the country if
it is continuing the body or substance of the
enterprise of business for which it was
organized (Mentholatum v. Mangaliman,
1941)

Contract test
A foreign corporation is doing business in the
Philippines if the contracts entered into by the
foreign corporation or by an agent acting under the
control and direction of the foreign corporation are
consummated in the Philippines (Pacific Vegetable
Oil v. Singson, 1955).

Doing Business Under the Foreign investment
Act of 1991 (RA 7042, Sec. 3(d)) (Asked in 98 and
02)
Doing Business
Soliciting orders, service contracts, or opening
offices;
Appointing representatives, distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more;
Participating in the management, supervision,
or control of any domestic business, firm,
entity, or corporation in the Philippines;
Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions,
normally incident to and in progressive
prosecution of the purpose and object of its
organization.

Not Doing Business
Mere investment as shareholder and exercise of
rights as investor;
Having a nominee director or officer to
represent its interest in the corporation;
Appointing a representative or distributor which
transacts business in its own name and for its
own account.

Jurisprudential Rules on Not Doing Business in
the Philippines
Products manufactured off-shore and returned
back to foreign corporation (Agilent Tech.
Singapore Ltd. v. Integrated Silicon Tech.
Phils. Corp., 2004)
Single isolated transaction (Marshall-Wells Co.
v. Henry Eiser & Co, 1924). Multiple
transactions are still considered a single
transaction where there are constantly failed
attempts in complying with the contract by one
of the contracting parties (Antam Consolidated
v. CA, 1986).
Trademark protection; foreign corporations not
doing business are merely protecting their
property rights (General Garments v. Director
of Patents, 1971).
A foreign firm which does business through
middlemen acting on their own names shall not
be deemed doing business in the Philippines. (Le
Chemise Lacoste v. Fernandez, 1984).

2. Necessity of a License to Do
Business

i. Requisites for Issuance of a License

The foreign corporation should file a copy of its
articles of incorporation and by-laws, and a
verified application (See Sec. 125) accompanied
by the following:
- Name and address of its designated resident
agent who will receive summons and notices
for the corporation; a special power of
attorney should also be submitted for such
purpose

121
- An agreement that if it ceases to transact
business or if there is no more resident
agent, summons shall then be served through
the SEC
- Oath of Reciprocity stating that the foreign
corporations country allows Filipino citizens
and corporations to do business in said
country
Within 60 days from issuance of license, the
corporation should deposit at least P100,000
(cash, property, bond) for the benefit of
creditors subject to further deposit every six
months (See Sec. 126).

ii. Resident Agent

Resident Agent is an individual, who must be of
good moral character and of sound financial
standing, residing in the Philippines, or a domestic
corporation lawfully transacting business in the
Philippines, designated in a written power of
attorney by a foreign corporation authorized to do
business in the Philippines, on whom any summons
and other legal processes may be served in all
actions or other legal proceedings against the
foreign corporation (Sec. 127-128).

3. Personality to Sue

A foreign corporation transacting business in the
Philippines is required to secure a license to have
the personality to sue before, or intervene in, any
court or administrative proceeding. (Campos,
rephrased; Sec. 133, Corporation Code)

Agilent Technologies Singapore v. Integrated Silicon
Technologies, 2004:
The principles regarding the right of a foreign
corporation to bring suit in Philippine courts may
thus be condensed in four statements:
if a foreign corporation does business in the
Philippines without a license, it cannot sue
before the Philippine courts (Sec. 133,
Corporation Code);
if a foreign corporation is not doing business in
the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or
on a cause of action entirely independent of any
business transaction (Eastboard Navigation, Ltd.
v. Juan Ysmael & Company, Inc., 102 Phil. 1,
1957);
Philippines without a license, a Philippine
citizen or entity which has contracted with said
corporation may be estopped from challenging
the foreign corporations corporate personality
in a suit brought before Philippine courts
(Merrill Lynch Futures v. Court of Appeals, G.R.
No. 97816, 24 July 1992, 211 SCRA 824); and
Philippines with the required license, it can sue
before Philippine courts on any transaction.

4. Suability of Foreign Corporations

A Foreign Corporation whether or not doing
business in the Philippines may be sued for acts
done against persons in the Philippines.

Facilities Management Corporation v. De La Osa,
1979:
Indeed if a foreign corporation, not engaged in
business in the Philippines, is not barred from
seeking redress from courts in the Philippines, a
fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for
acts done against a person or persons in the
Philippines

5. Instances When Unlicensed
Foreign Corporations May Be
Allowed to Sue

Isolated transactions, i.e. not doing business
in the Philippines, (Sec. 133, Corporation Code);
Action to protect good name, goodwill, and
reputation of a foreign corporation;
The subject contracts provide that Philippine
courts will be the venue to controversies;
A license subsequently granted enables the
foreign corporation to sue on contracts
executed before the grant of the license;
Recovery of misdelivered property;
Where the unlicensed foreign corporation has a
domestic corporation.
When the Philippine citizen or entity is estopped
from challenging the foreign corporations
personality to sue (Merrill Lynch Futures v.
Court of Appeals, G.R. No. 97816, 24 July
1992, 211 SCRA 824)

6. Grounds for Revocation of License

i. Under the Corporation Code

Failure to file its annual report or pay any fees
as required by this Code;
Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
Failure to submit to the Securities and Exchange
Commission an authenticated copy of any
amendment to its articles of incorporation or by
laws or of any articles of merger or
consolidation within the time prescribed by this
Title;
A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;

122
Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;
Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
Any other ground as would render it unfit to
transact business in the Philippines (Sec. 134)

ii. Under Special Laws

Insurance Code
The Insurance Commissioner is authorized to suspend
or revoke all certificates of authority granted to an
insurance company, whether domestic or foreign,
when:
it is in unsound condition; or
it has failed to comply with the provisions of
law or regulations obligatory upon it; or
its condition or method of business is such as to
render its proceedings hazardous to the public
or to its policyholders; or
its paid-up capital stock, in the case of a foreign
company, is impaired or deficient, or that the
margin of solvency required of such company is
deficient (Sec. 247, Insurance Code)

General Banking Act
The Monetary Board may revoke the license to
transact business in the Philippines of any foreign
bank, if it finds that:
the foreign bank is insolvent; or
in imminent danger thereof; or
its continuance in business will involve probable
loss to those transacting business with it.

XIII. Merger and consolidation

A. Definition and Concept
(Corporation Code, Title IX)

Merger a corporation absorbs the other and
remains in existence while the others are dissolved.
One of the constituent corporations remains as
an existing juridical person, whereas the other
corporation shall cease to exist. Merger is the
disappearance of one of the corporations with
the other corporation acquiring all the assets,
rights of action, and assuming all the liabilities
of the disappearing corporation.

Consolidation a new corporation is created, and
consolidating corporations are extinguished
If there is consolidation, there will be
disappearance of both the constituent
corporations with the emergence of a new
corporate entity which shall obtain all the assets
of the disappearing corporations, and likewise
shall assume all their liabilities.

B. Constituent v. Consolidated
Corporation

Constituent Corporations the parties to a merger
or consolidation

Consolidated Corporation - The new single
corporation created through consolidation.

Surviving Corporation one of the constituent
corporations which remain in existence after the
merger

C. Plan of Merger or Consolidation
(Sec. 76)

Each of the constituent corporations must draw up a
Plan of Merger or Consolidation which shall set forth:
Names of the corporation involved;
Terms and mode of carrying it;
Statement of changes, if any, in the present
articles of the surviving corporation to be
formed in the case of merger; and with respect
to the consolidated corporation in case of
consolidation

D. Articles of Merger or
Consolidation (Sec. 78)

Each of the constituent corporation shall execute
Articles of Merger or Consolidation signed by the
president/vice-president, and certified by the
secretary/assistant secretary setting forth:
Plan of merger or consolidation;
For stock corporation, the number of shares
outstanding; for non-stock, the number of
members;
As to each corporation, number of shares or
members voting for and against such plan
respectively.

The Articles of Merger or Consolidation:
take the place of the Articles of Incorporation
of the consolidated corporation; or
amend the Articles of Incorporation of the
surviving corporation.

E. Procedure

The board of each corporation shall draw up a
plan of merger or consolidation.
The plan of merger or consolidation shall be
approved by majority vote of each of the board
of the concerned corporations at separate
meetings, and a vote of 2/3 of the members or
of stockholders representing 2/3 of the
Any amendment to the plan must be approved
by the majority vote of the board members or
trustees of the constituent corporations and
affirmative vote of 2/3 of the outstanding
capital stock or members.

123
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
Submission of Four (4) copies of the Articles of
Merger or Articles of Consolidation to the SEC
for approval.
If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least two
(2) weeks before.
Issuance of certificate of merger or
consolidation.

Procedure under Sec. 77:
1. Approval by majority vote of each of the
board of directors or trustees of the
constituent corporations of the plan of
merger or consolidation.
2. Approval by the stockholders or members of
each of such corporations. The affirmative
vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of
stock corporations or at least two-thirds
(2/3) of the members in the case of non-
stock corporations shall be necessary for
the approval of such plan
3. Notice of such meetings shall be given to all
stockholders or members of the respective
corporations, at least two (2) weeks prior to
the date of the meeting, either personally
or by registered mail. Said notice shall state
the purpose of the meeting and shall
include a copy or a summary of the plan of
merger or consolidation.
4. Any dissenting stockholder in stock
corporations may exercise his appraisal
right in accordance with the Code.
Provided, that if after the approval by the
stockholders of such plan, the board of
directors decides to abandon the plan, the
appraisal right shall be extinguished.
5. Amendment to the plan of merger or
consolidation may be made by approved of
the majority vote of the respective boards
of directors or trustees of all the
constituent corporations and ratified by the
affirmative vote of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds
(2/3) of the members of each of the
constituent corporations. Such plan,
together with any amendment, shall be
considered as the agreement of merger or
consolidation.

F. Effectivity

Upon issuance of the certificate of merger or
consolidation, such merger or consolidation shall
become effective (Sec. 79).

PNB v. Andrada Electric & Engr. Co., Inc. (2002):
Merger or consolidation does not become effective
by mere agreement of the constituent corporations.
The approval of the SEC is required.

G. Limitations

In the case of merger or consolidation of banks or
banking institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other special
corporations governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained (Sec. 79, Code)

H. Effects

The constituent corporations shall become a
single corporation.
The separate existence of the constituents shall
cease, except that of the surviving or the
consolidated corporation.
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject to
all the duties and liabilities of a corporation.
The surviving or the consolidated corporation
shall possess all rights, privileges, immunities
and franchises of each constituent corporation
and the properties shall be deemed transferred
to and vested in the surviving or consolidated
corporation without further act or deed.
All liabilities of the constituents shall pertain to
the surviving or the consolidated corporation.
Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation; and
The rights of the creditors or lien upon the
property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.

124

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS

OPERATIONS HEADS

Securities Regulation Code
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Subject Heads Anna Katarina
Rodriguez Mickey Chatto

LAYOUT TEAM 2012
Mara Villegas Naomi
Timothy Reyes

125
Code
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Securities
Regulation Code
Banking and Finance
I. State policy
II. Powers and functions of the SEC
III. Securities required to be
registered
IV. Procedure for registration of
securities
V. Prohibitions on fraud,
manipulation, and insider trading
VI. Protection of investors
VII. Civil liability

I. State policy

Purpose
The establishment of a socially conscious, free
market that:
(1) regulates itself;
(2) encourage the widest participation of ownership
in enterprises;
(3) enhance the democratization of wealth;
(4) promote the development of the capital
market;
(5) protect investors;
(6) ensure full and fair disclosure about securities;
(7) minimize if not totally eliminate insider trading
and other fraudulent or manipulative devices
and practices which create distortions in the
free market (Sec. 2).

II. Powers and functions of the
SEC

a. Regulatory
b. Adjudicative

The SEC shall have the powers and functions
provided by the SRC, P.D. 902-A, the Corporation
Code, the Investment Houses Law, the Financing
Company Act and other existing laws.

A. Under the SRC

(a) Exercise jurisdiction and supervision over all
corporations, partnership or associations who
are the grantees of primary franchises and/or a
license or a permit issued by the Government;
(b) Formulate policies and recommendations on
issues concerning the securities market, advise
Congress and other government agencies on all
aspect of the securities market and propose
legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require
amendments to registration statements, and
registration and licensing applications;
(d) Regulate, investigate or supervise the activities
of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and
other SROs;
(f) Impose sanctions for the violation of laws and
rules, regulations and orders, and issued
pursuant thereto;
(g) Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions and
provide guidance on and supervise compliance
with such rules, regulation and orders;
(h) Enlist the aid and support of and/or deputize
any and all enforcement agencies of the
Government, civil or military as well as any
private institution, corporation, firm,
association or person in the implementation of
its powers and function under its Code;
(i) Issue cease and desist orders to prevent fraud or
injury to the investing public;
(j) Punish for the contempt of the Commission,
both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed
by the Rules of Court;
(k) Compel the officers of any registered
corporation or association to call meetings of
stockholders or members thereof under its
supervision;
(l) Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the
examination, search and seizure of all
documents, papers, files and records, tax
returns and books of accounts of any entity or
person under investigation as may be necessary
for the proper disposition of the cases before it,
subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and
hearing the franchise or certificate of
registration of corporations, partnership or
associations, upon any of the grounds provided
by law; and
(n) Exercise such other powers as may be provided
by law as well as those which may be implied
from, or which are necessary or incidental to
the carrying out of, the express powers granted
the Commission to achieve the objectives and
purposes of these laws (Sec. 5.1)

B. Under PD 902-A

The SECs jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-A
is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial
Court (Sec. 5.2)
Sections 2, 4 and 8 of Presidential Decree 902-A
as amended, are hereby repealed. (Sec. 76)
Insofar as not inconsistent with the SRC, the SEC
retains its powers under Sec. 6 of P.D. 902-A:

126
[List does not include those which are also
enumerated under the SRC, i.e. Subsections (b),
(c), (e), (f), (i) and (j)]

(a) To issue preliminary or permanent
injunctions, whether prohibitory or
mandatory, in all cases in which it has
jurisdiction, and in which cases the pertinent
provisions of the Rules of Court shall apply;
(d) To pass upon the validity of the issuance and
use of proxies and voting trust agreements
for absent stockholders or members;
(g) To authorize the establishment and operation
of stock exchanges, commodity exchanges
and such other similar organization and to
supervise and regulate the same; including
the authority to determine their number,
size and location, in the light of national or
regional requirements for such activities with
the view to promote, conserve or rationalize
investment; (see Sec. 5(e), SRC)
(h) To pass upon, refuse or deny, after
consultation with the Board of Investments,
Department of Industry, National Economic
and Development Authority or any other
appropriate government agency, the
application for registration of any
corporation, partnership or association or any
form of organization falling within its
jurisdiction, if their establishment,
organization or operation will not be
consistent with the declared national
economic policies;

C. Under the Corporation Code

Among others,
To implement the provisions of this Code, and to
promulgate rules and regulations reasonably
necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud
and abuses on the part of the controlling
stockholders, members, directors, trustees or
officers (Sec. 143, Corporation Code)
To collect and receive fees as authorized by law
or by rules and regulations promulgated by the
Commission (Sec. 139, Corporation Code)

III. Securities required to be
registered

GENERAL RULE: Securities shall not be sold or
offered for sale or distribution within the
Philippines, without a registration statement duly
filed with and approved by the Commission (Sec.
8.1)

EXCEPTIONS:

a. Exempt securities (Sec. 9)
(a) Any security issued or guaranteed by the
Government of the Philippines/ its political
subdivision or agency/its instrumentality/
or any person controlled or supervised
thereby;
(b) Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations,
or by any state, province or political
subdivision thereof on the basis of
reciprocity: Provided, That the Commission
may require compliance with the form and
content for disclosures the Commission may
prescribe;
(c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body;
(d) Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
(e) Any security issued by a bank except its
own shares of stock (Sec. 9.1)

NOTE: The foregoing exempt securities are
exempt only as a general rule (Sec. 9.1)

(f) Any class of security with respect to which
the SEC finds that registration is not
necessary in the public interest and for the
protection of investors (Sec. 9.2)

NOTE: The exemption of securities by the
SEC must be made through the issuance of a
rule or regulation (Sec. 9.2)

b. Exempt transactions
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or
mortgagee or any of a pledge lien holder
selling of offering for sale or delivery in the
ordinary course of business and not for the
purpose of avoiding the provision of this
Code, to liquidate a bonafide debt, a
security pledged in good faith as security
for such debt.
(c) An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
therefore, or by his representative for the
owners account, such sale or offer for sale
or offer for sale, subscription or delivery
not being made in the course of repeated
and successive transaction of a like
character by such owner, or on his account
by such representative and such owner or
representative not being the underwriter of
such security.
(d) The distribution by a corporation actively
engaged in the business authorized by its
articles of incorporation, of securities to its
stockholders or other security holders as a
stock dividend or other distribution out of
surplus.
(e) The sale of capital stock of a corporation to
its own stockholders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly in connection
with the sale of such capital stock.

127
(f) The issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, when the entire
mortgage together with all the bonds or
notes secured thereby are sold to a single
purchaser at a single sale.
(g) The issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion
entitling the holder of the security
surrendered in exchange to make such
conversion: Provided, That the security so
surrendered has been registered under this
Code or was, when sold, exempt from the
provision of this Code, and that the security
issued and delivered in exchange, if sold at
the conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under this
Code. Upon such conversion the par value
of the security surrendered in such
exchange shall be deemed the price at
which the securities issued and delivered in
such exchange are sold.
(h) Brokers transaction, executed upon
customers orders, on any registered
Exchange or other trading market.
(i) Subscriptions for shares of the capitals
stocks of a corporation prior to the
incorporation thereof or in pursuance of an
increase in its authorized capital stocks
under the Corporation Code, when no
expense is incurred, or no commission,
compensation or remuneration is paid or
given in connection with the sale or
disposition of such securities, and only
when the purpose for soliciting, giving or
taking of such subscription is to comply with
the requirements of such law as to the
percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized, capital
increase.
(j) The exchange of securities by the issuer
with the existing security holders
exclusively, where no commission or other
remuneration is paid or given directly or
indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines
during any twelve-month period.
(l) The sale of securities to any number of the
following qualified buyers:

(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan
maintained by the Government of the
Philippines or any political subdivision
thereof or manage by a bank or other
persons authorized by the Bangko
Sentral to engage in trust functions;
(v) Investment company or;
(vi) Such other person as the Commission
may rule by determine as qualified
buyers, on the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in financial
and business matters, or amount of
assets under management. (Sec. 10.1)

(m) Any transaction with respect to which the
SEC finds that registration is not necessary
in the public interest and protection of
investors such as by the reason of the small
amount involved or the limited character of
the public offering (Sec. 10.2)

NOTE: Application for exemption under this
Section must be accompanied by: (1) notice
of the exemption relied upon; (2) payment
of fee equivalent to 1/10 of 1% of the
maximum value aggregate price or issued
value of the securities.

IV. Procedure for registration of
securities

1. Filing of a sworn registration statement with
the SEC (Sec. 12.1)
Shall include any prospectus required or
permitted to be delivered under Subsections
8.2, 8.3, and 8.4 (Sec. 12.1)

Chapter III, Section 8. Requirement of Registration
of Securities
x x x
8.2 The Commission may conditionally approve the
registration statement under such terms as it may
deem necessary.

8.3 The Commission may specify the terms and
conditions under which any written communication,
including any summary prospectus, shall be deemed
not to constitute an offer for sale under this
Section.

8.4. A record of the registration of securities shall
be kept in Register Securities in which shall be
recorded orders entered by the Commission with
respect such securities. Such register and all
documents or information with the respect to the
securities registered therein shall be open to public
inspection at reasonable hours on business days.

Shall include the effect of the securities issue
on ownership, on the mix of ownership,
especially foreign and local ownership (Sec.
12.3)
Shall be signed by the issuers executive
officer, its principal operating officer, its
principal financial officer, its comptroller, its
principal accounting officer, its corporate
secretary, or persons performing similar
functions accompanied by a duly verified
resolution of the board of directors of the
issuer corporation (Sec. 12.4)
Shall be accompanied by: (a) written consent
of the expert named as having certified any

128
part of the registration statement or any
document used in connection therewith; and
(b) Where the registration statement shares
to be sold by selling shareholders, a written
certification by such selling shareholders as
to the accuracy of any part of the
registration statement contributed to by such
selling shareholders (Sec. 12.4).

2. Payment to the SEC a fee of not more than
one-tenth (1/10) of one per centum (1%) of
the maximum aggregate price at which such
securities are proposed to be offered (Sec.
12.5a)

3. Publication of the notice of the filing of
registration statement. The publication must
be in two (2) newspapers of general
circulation in the Philippines, once a week for
two (2) consecutive weeks, or in such other
manner as the Commission by the rule shall
prescribe (Sec. 12.5b)

4. Declaration by the SEC whether the
registration statement is effective or rejected,
Declaration is made within 45 days from filing
of the registration statement or on such later
date to which the issuer has consented unless
applicant has been allowed to amend the
registration statement under Sec. 14 (Sec.
12.6).

NOTE: Grounds for: (1) rejection/revocation of
registration statement and (2) refusal of
registration/revocation of securities thereunder:

(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provision of this
Code, the rules promulgate pursuant
thereto, or any order of the
Commission of which the issuer has
notice in connection with the offering
for which a registration statement has
been filed
(iii) Has been or is engaged or is about to
engage in fraudulent transactions;
(iv) Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities;
(v) Has failed to comply with any
requirements that the Commission may
impose as a condition for registration
of the security for which the
registration statement has been filed;
or

(b) The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statements
of a material fact required to be stated
therein or necessary to make the statement
therein not misleading; or

(c) The issuer, any officer, director or
controlling person performing similar
functions, or any under writer has been
convicted, by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and /or fraud or is enjoined or
restrained by the Commission or other
competent or administrative body for
violations of securities, commodities, and
other related laws (Sec. 13.1)

(d) If any issuer shall refuse to permit an
examination to be made by the Commission
(Sec. 13.3)

NOTE: A registration statement may be
withdrawn by the issuer only with the consent of
the Commission (Sec. 13.6).

5. Statement under oath by the issuer in all
prospectus that registration requirements
have been met and that all information are
true and correct as represented by the issuer
or the one making the statement. Statement
under oath must be made upon effectivity of
the registration statement. (Sec. 12.7)

V. Prohibitions on fraud,
manipulation and insider trading

A. Manipulation of security prices

It shall be unlawful for any person acting for himself
or through a dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of
active trading in any listed security traded in an
Exchange of any other trading market (hereafter
referred to purposes of this Chapter as
"Exchange"):
(i) By effecting any transaction in such security
which involves no change in the beneficial
ownership thereof;
(ii) By entering an order or orders for the
purchase or sale of such security with the
knowledge that a simultaneous order or
orders of substantially the same size, time
and price, for the sale or purchase of any
such security, has or will be entered by or
for the same or different parties; or
(iii) By performing similar act where there is no
change in beneficial ownership.

(b) To affect, alone or with others, securities or
transactions in securities that:
(i) Raises their price to induce the purchase of
a security, whether of the same or a
different class of the same issuer or of
controlling, controlled, or commonly
controlled company by others; or
(ii) Creates active trading to induce such a
purchase or sale through manipulative
devices such as marking the close, painting
the tape, squeezing the float, hype and
dump, boiler room operations and such
other similar devices.

129
(c) To circulate or disseminate information that the
price of any security listed in an Exchange will
or is likely to rise or fall because of
manipulative market operations of any one or
more persons conducted for the purpose of
raising or depressing the price of the security
for the purpose of inducing the purpose of sale
of such security.

(d) To make false or misleading statement with
respect to any material fact, which he knew or
had reasonable ground to believe was so false or
misleading, for the purpose of inducing the
purchase or sale of any security listed or traded
in an Exchange.

(e) To effect, either alone or others, any series of
transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose
of pegging, fixing or stabilizing the price of such
security; unless otherwise allowed by this Code
or by rules of the Commission (Sec. 24.1)

B. Short sales

(a) No person shall use or employ, in connection
with the purchase or sale of any security any
manipulative or deceptive device or
contrivance.

(b) No short sale shall be effected nor any stop-loss
order be executed in connection with the
purchase or sale of any security except if
allowed by the SEC (Sec. 24.2)

NOTE: The SEC may allow certain acts or
transactions under Sec. 24 (on Manipulation of
Security Prices and Short Sales), for public interest
and protection of investors (Sec. 24.3)

C. Fraudulent transactions

It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale of
any securities to:

(a) Employ any device, scheme, or artifice to
defraud; (Sec. 26.1)

(b) Obtain money or property by means of any
untrue statement of a material fact of any
omission to state a material fact necessary in
order to make the statements made, in the light
of the circumstances under which they were
made, not misleading (Sec. 26.2)

(c) Engage in any act, transaction, practice or
course of business which operates or would
operate as a fraud or deceit upon any person
(Sec. 26.3)

D. Insider trading

An Insider means:
(a) the issuer;
(b) a director or officer (or any person performing
similar functions) of, or a person controlling the
issuer; gives or gave him access to material
information about the issuer or the security that
is not generally available to the public;
(c) a government employee, director, or officer of
an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or
(d) a person who learns such information by a
communication from any foregoing insiders (Sec.
3.8)

Material non-public information means:
(a) it has not been generally disclosed to the public
and would likely affect the market price of the
security after being disseminated to the public
and the lapse of a reasonable time for the
market to absorb the information; or
(b) would be considered by a reasonable person
important under the circumstances in
determining his course of action whether to buy,
sell or hold a security (Sec. 27.2)

It shall be unlawful for an insider:
(a) to sell or buy a security of the issuer, while
in possession of material information with
respect to the issuer or the security that is
not generally available to the public,
unless:
(i) The insider proves that the
information was not gained from such
relationship; or
(ii) If the other party selling to or buying
from the insider (or his agent) is
identified, the insider proves:
(1) that he disclosed the information
to the other party, or
(2) that he had reason to believe
that the other party otherwise is
also in possession of the
information (Sec. 27.1)

NOTE: Presumption that purchase or sale is
effected while in possession of material
non-public information arises:
(1) if the purchase or sale is transacted
after such information came into
existence but prior to dissemination of
such information to the public; and
(2) the lapse of a reasonable time for
market to absorb such information.

Presumption may be rebutted by showing of
purchasers or sellers awareness of the
material non-public information at the time
of purchase or sale (Sec. 27.1)

(b) to communicate material nonpublic
information about the issuer or the security
to any person who, by virtue of the
communication, becomes an insider where
the insider communicating the information
knows or has reason to believe that such

130
person will likely buy or sell a security of
the issuer whole in possession of such

VI. Protection of investors

A. Tender offer rule

When a tender offer has commenced or is about to
commence, It shall be unlawful for:

(a) Any person (except the tender offeror) who is in
possession of material nonpublic information
relating to such tender offer, to buy or sell the
securities of the issuer that are sought or to be
sought by such tender offer if:
(i) such person knows or has reason to believe
that the information is nonpublic and has
been acquired directly or indirectly from the
tender offeror, those acting on its behalf,
the issuer of the securities sought or to be
sought by such tender offer, or any insider of
such issuer

(b) Any tender offeror, those acting on its behalf,
the issuer of the securities sought or to be
sought by such tender offer, and any insider of
such issuer to communicate material nonpublic
information relating to the tender offer to any
other person where such communication is likely
to result in a violation of (a) (Sec. 27.4).

B. Rules on proxy solicitation

Proxies shall be:
(a) issued in accordance with SEC rules and
regulations; Proxy solicitations shall also be
made in accordance with the said rules and
regulations (Sec. 20.1)
(b) in writing (Sec. 20.2)
(c) signed by the stockholder or his duly
authorized representatives (Sec. 20.2)
(d) filed before the scheduled meeting with the
corporate secretary (Sec. 20.2)
(e) valid only for the meeting for which it is
intended unless otherwise provided in the
proxy (Sec. 20.3)

NOTE: No proxy shall be valid and effective for a
period longer than five (5) years at one time (Sec.
20.3)

A broker or dealer shall:
(a) not give any proxy, consent or any
authorization, in respect of any security
carried for the account of the customer, to
a person other than the customer, without
written authorization of such customer
(Sec. 20.4)
(b) if he holds or acquires the proxy for at least
ten percent (10%) or such percentage as the
commission may prescribe of the
outstanding share of such issuer, submit a
report identifying the beneficial owner of
ten days after such acquisition, for its own
account or customer, to the issuer of
security, to the exchange where the
security is traded and to the Commission
(Sec. 20.5)

C. Disclosure rule

Disclosure by the Issuer

- To the SEC

Every issuer shall file with the Commission:
(a) Annual Report within one hundred thirty-
five (135) days, after the end of the
issuers fiscal year, or such other time as
the Commission may prescribe
(b) Such other periodical reports for interim
fiscal periods and current reports on
significant developments of the issuer as
the Commission may prescribe as
necessary to keep current information on
the operation of the business and
financial condition of the issuer (Sec.
17.1)

NOTE: Under this Section, issuer includes:
(a) An issuer which has sold a class of its
securities pursuant to a registration
under section 12 hereof.

BUT the requirement shall be suspended
for any fiscal year if such issuer, as of
the first day of any such fiscal year, has
less than one hundred (100) holder of
such class securities or such other
number as the Commission shall
prescribe and it notifies the Commission
of such;

(b) An issuer with a class of securities listed
for trading on an Exchange; and

(c) An issuer with assets of at least Fifty
million pesos (50,000,000.00) or such
other amount as the Commission shall
prescribe, and having two hundred (200)
or more holder each holding at least one
hundred (100) share of a class of its
equity securities.

The obligation of such issuer to file
report shall be terminate ninety (90)
days after notification to the Commission
by the issuer that the number of its
holders holding at least one hundred
(100) share reduced to less than one
hundred (100) (Sec. 17.2)

- To the equity holders
An annual report shall be furnished by every
issuer which has a class of equity securities
satisfying any of the requirements in
Subsection 17.2 to each holder of such equity
security (Sec. 17.5)

Disclosure by Equity Holders

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Any person who acquires directly or indirectly
the beneficial ownership of more than five of
per centum (5%) of such class or in excess of
such lesser per centum as the Commission by
rule may prescribe, shall, within ten (10) days
after such acquisition or such reasonable time as
fixed by the Commission, submit to: (1) the
issuer of the securities; (2) to the Exchange
where the security is traded; and (3) to the
Commission, the following information:

(a) The personal background, identity,
residence, and citizenship of, and the
nature of such beneficial ownership by,
such person and all other person by whom
or on whose behalf the purchases are
effected; in the event the beneficial owner
is a juridical person, the of business of the
beneficial owner shall also be reported;

(b) If the purpose of the purchases or
prospective purchases is to acquire control
of the business of the issuer of the
securities, any plans or proposals which
such persons may have that will effect a
major change in its business or corporate
structure;

(c) The number of shares of such security which
are beneficially owned, and the number of
shares concerning which there is a right to
acquire, directly or indirectly, by; (i) such
person, and (ii) each associate of such
person, giving the background, identity,
residence, and citizenship of each such
associate; and

(d) Information as to any contracts,
arrangements, or understanding with any
person with respect to any securities of the
issuer including but not limited to transfer,
joint ventures, loan or option
arrangements, puts or call guarantees or
division of losses or profits, or proxies
naming the persons with whom such
contracts, arrangements, or understanding
have been entered into, and giving the
details thereof.

NOTE: If it appears to the SEC that
securities were acquired by person in the
ordinary course of his business and were not
acquired for the purpose of and do not have
the effect of changing or influencing the
control of the issuer nor in connection with
any transaction having such purpose or
effect it may permit any person to file in
lieu of the statement required by
subsection 17.1 hereof, a notice stating:
(1) the name of such person;

(2) the shares of any equity securities
subject to Subsection 17.1 which are
owned by him;

(3) the date of their acquisition; and

(4) such other information as the
commission may specify (Sec. 18.3)

Disclosure by Insider
An insider has the duty to disclose material
information with respect to the issuer or the
security that is not generally available to the
public (Sec. 27.1) (See definitions of insider
and material non-public information at pp.
132-133)

VII. Civil liability

A. Civil Liabilities on Account of
False Registration Statement
(Sec. 56)

Civil liabilities arise when the registration
statement or any part thereof contains on its
effectivity:
- An untrue statement of a material fact; or
- Omission to state a material fact required to
be stated therein or necessary to make such
statements not misleading

Who may be liable? (NUPSAID)
(a) Issuer and every person who signed the
registration statement;
(b) Director of/partner in the issuer at the time of
the filing of the registration statement or any
part, supplement or amendment thereof;
(c) One who is named in the registration statement
as being or about to become (b);
(d) Auditor/auditing firm named as having certified
any financial statements used in connection
with the registration statement or prospectus;
(e) One who, with his written consent filed with the
registration statement, has been named as
having prepared or certified any part of the
registration statement/any report or valuation
which is used in connection with the registration
statement;
(f) Selling shareholder who contributed to and
certified as to the accuracy of a portion of the
(g) Underwriter with respect to such security (Sec.
56.1)

Who may sue?
Any person who acquires the security and who
suffers damage unless it is proved that at the time of
such acquisition he knew of such untrue statement
or omission (Sec. 56.1)

NOTE: When the security is acquired after the issuer
has made generally available to its security holders
an income statement covering a period of at least
twelve (12) months beginning from the effective
date of the registration statement, the right of
recovery under this subsection shall be conditioned
on proof that such person acquired the security
relying upon such untrue statement in the

132
registration statement or relying upon the
registration statement and not knowing of such
income statement (Sec. 56.2)

B. Civil Liabilities Arising in
Connection With Prospectus,
Communications and Reports
(Sec. 57)

1. Liability of Sellers/Offerors

Who may be liable?
(a) Offeror or seller of a security in violation of
Chapter on Registration of Securities;
(b) Offeror or seller of a security, whether or
not exempted by the provisions of this
Code, by means of a prospectus or other
written or oral communication which
includes an untrue statement of a material
fact or omits to state a material fact
necessary in order to make the statements,
in the light of the circumstances under
which they were made, not misleading (the
purchaser not knowing of such untruth or
omission).

Defense: No knowledge of untruth or
omission, despite the exercise of reasonable
care (Sec. 57.1).

Who may sue?
Purchaser of the security may sue to recover:
(1) consideration paid for such security with
interest thereon, less the amount of any income
received thereon, upon the tender of such
security; or
(2) for damages if he no longer owns the security
(Sec. 57.1).

2. Liability of Makers of False
Misleading Statements

Who may be liable?
Any person who shall make or cause to be made any
statement in any report, or document filed pursuant
to this Code or any rule or regulation thereunder,
which statement as at the time and in the light of
the circumstances under which it was made false or
misleading with respect to any material fact, shall
be liable to

Defense: Good faith and lack of knowledge of the
false and misleading statement (Sec. 57.2).

Who may sue?
Purchaser or seller of security who purchased or sold
at a price which was affected by such statement
knowing that such statement was false or
misleading, and relying upon such statement may
sue for damages caused by such reliance (Sec. 57.2).

C. Civil Liability of Fraud in
Connection with Securities
Transactions (Sec. 58)

Who may be liable?
Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26, or any rule or
regulation of the Commission thereunder

Who may sue?
Any other person who purchases or sells any
security, grants or refuses to grant any proxy,
consent or authorization, or accepts or declines an
invitation for tender of a security who sustained
damages as a result of the transaction.

D. Civil Liability for Manipulation
of Security Prices (Sec. 59)

Who may be liable?
Any person who willfully participates in any act or
transaction in Section 24 (Manipulation of Security
Prices).

Who may sue?
Any person who shall purchase or sell any security at
a price which was affected by such act or
transaction

E. Civil Liability with Respect to
Commodity Futures Contracts
and Pre-need Plans (Sec. 60)

Who may be liable?
Any person who engages in any act or transactions in
willful violation of any rule or regulation
promulgated by the Commission under Section 11 (on
Commodity Future Contracts) or 16 (on Pre-Need
Plans) (Sec. 60.1)

Who may sue?
Any person sustaining damages as a result of such
act or transaction (Sec. 60.1)

F. Civil Liability on Account of
Insider Trading

1. Liability for non-disclosure

Who may be liable?
- Any insider who violates Subsection 27.1;
- and any person in the case of a tender offer
who violates Subsection 27.4 (a)(I), or any
rule or regulation thereunder, by purchasing
or selling a security while in possession of
material information not generally available
to the public (Sec. 61.1)

Who may sue?
Any investor who, contemporaneously with the
purchase or sale of securities that is the subject of
the violation, purchased or sold securities of the
same class unless such insider, or such person in the

133
case of a tender offer, proves that such investor
knew the information or would have purchased or
sold at the same price regardless of disclosure of the
information to him (Sec. 61.1)

2. Liability for communicating non-
public information about issuer

Who may be liable?
- An insider who violates Subsection 27.3;
- or any person in the case of a tender offer
who violates Subsection 27.4 (a), or any rule
or regulation thereunder communicating
material nonpublic information shall be
jointly and severally liable under Subsection
61.1 with, and to the same extent as, the
insider, or person in the case of a tender
offer, to whom the communication was
directed and who is liable under Subsection
61.1 by reason of his purchase or sale of a
security (Sec. 61.2).

G. Liabilities of Controlling
Persons, Aider and Abettor and
Other Secondary Liability

1. Liability of Controlling Persons

Who may be liable?
Every person who controls any person liable under
this Code or the rules or regulations of the
Commission thereunder, shall also be liable jointly
and severally with and to the same extent as such
controlled persons to any person to whom such
controlled person is liable (Sec. 51.1)

NOTE: Control may be by or through stock
ownership, agency, or otherwise, or in connection
with an agreement or understanding with one or
more other persons (Sec. 51.1)

Defense: Lack of knowledge of the existence of facts
by reason of which the liability of the controlled
person is alleged to exist (Sec. 51.1)

2. Liability of Director/Officer for
Delay in the Filing of Required
Documents

It shall be unlawful for any director or officer of, or
any owner of any securities issued by, any issuer
required to file any document, report or other
information under this Code or any rule or regulation
of the Commission thereunder, without just cause,
to hinder, delay or obstruct the making or filing of
any such document, report, or information (Sec.
51.2)

3. Liability of Aider/Abettor

It shall be unlawful for any person to aid, abet,
counsel, command, induce or procure any violation
of this Code, or any rule, regulation or order of the
Commission thereunder (Sec. 51.3)

Every person who substantially assists the act or
omission of any person primarily liable under
Sections 57, 58, 59 and 60 of this Code, with
knowledge or in reckless disregard that such act or
omission is wrongful, shall be jointly and severally
liable as an aider and abettor for damages resulting
from the conduct of the person primarily liable (Sec.
51.4)

BUT an aider and abettor shall be liable only to the
extent of his relative contribution in causing such
damages in comparison to that of the person
primarily liable, or the extent to which the aider and
abettor was unjustly enriched thereby, whichever is
greater (Sec. 51.4)

NOTE: It shall be unlawful for any person, directly,
or indirectly, to do any act or thing which it would
be unlawful for such person to do under the
provisions of this Code or any rule or regulation
thereunder (Sec. 51.2)

134
Civil Liability Arising Who may be liable? Who may Sue?
when the registration statement
or any part thereof contains on
its effectivity:
o An untrue statement of a
material fact; or
o Omission to state a material
fact required to be stated
therein or necessary to make
such statements not
misleading

(a) Issuer and every person who
signed the registration
statement;
(b) Director of/partner in the
issuer at the time of the filing
of the registration statement
or any part, supplement or
amendment thereof;
(c) One who is named in the
registration statement as
being or about to become (b);
(d) Auditor/auditing firm named
as having certified any
financial statements used in
connection with the
registration statement or
prospectus;
(e) One who, with his written
consent filed with the
registration statement, has
been named as having
prepared or certified any part
of the registration
statement/any report or
valuation which is used in
connection with the
(f) Selling shareholder who
contributed to and certified as
to the accuracy of a portion of
the registration statement;
(g) Underwriter with respect to
such security (Sec. 56.1)

Any person who acquires the
security and who suffers damage
unless it is proved that at the time
of such acquisition he knew of such
untrue statement or omission (Sec.
56.1)

NOTE: When the security is
acquired after the issuer has made
generally available to its security
holders an income statement
covering a period of at least twelve
(12) months beginning from the
effective date of the registration
statement, the right of recovery
under this subsection shall be
conditioned on proof that such
person acquired the security relying
upon such untrue statement in the
registration statement or relying
upon the registration statement
and not knowing of such income
statement (Sec. 56.2)

in Connection With Prospectus,
(Sec. 57)

A. Liability of Sellers/Offerors

(a) Offeror or seller of a security in
violation of Chapter on
Registration of Securities;
(b) Offeror or seller of a security,
whether or not exempted by
the provisions of this Code, by
means of a prospectus or other
written or oral communication
which includes an untrue
statement of a material fact or
omits to state a material fact
necessary in order to make the
statements, in the light of the
circumstances under which
they were made, not
misleading (the purchaser not
knowing of such untruth or
omission).

Defense: No knowledge of
untruth or omission, despite
the exercise of reasonable care
(Sec. 57.1).

Purchaser of the security may sue
to recover:
(1) consideration paid for such
security with interest thereon,
less the amount of any income
received thereon, upon the
tender of such security; or
(2) for damages if he no longer
owns the security (Sec. 57.1).

135
in Connection With Prospectus,
(Sec. 57)
B. Liability of Makers of False
Misleading Statements

Any person who shall make or cause
to be made any statement in any
report, or document filed pursuant
to this Code or any rule or
regulation thereunder, which
statement as at the time and in the
light of the circumstances under
which it was made false or
misleading with respect to any
material fact, shall be liable to

Defense: Good faith and lack of
knowledge of the false and
misleading statement (Sec. 57.2).

Purchaser or seller of security who
purchased or sold at a price which
was affected by such statement
knowing that such statement was
false or misleading, and relying
upon such statement may sue for
damages caused by such reliance
(Sec. 57.2).

Fraud in Connection with
Securities Transactions (Sec.
58)

Any person who engages in any act
or transaction in violation of
Sections 19.2, 20 or 26, or any rule
or regulation of the Commission
thereunder

Any other person who purchases or
sells any security, grants or refuses
to grant any proxy, consent or
authorization, or accepts or
declines an invitation for tender of
a security who sustained damages
as a result of the transaction.

Manipulation of Security Prices
(Sec. 59)

Any person who willfully
participates in any act or
transaction in Section 24
(Manipulation of Security Prices).
Any person who shall purchase or
sell any security at a price which
was affected by such act or
transaction

with Respect to Commodity
Futures Contracts and Pre-
need Plans (Sec. 60)

Any person who engages in any act
or transactions in willful violation
of any rule or regulation
promulgated by the Commission
under Section 11 (on Commodity
Future Contracts) or 16 (on Pre-
Need Plans) (Sec. 60.1)

Any person sustaining damages as a
result of such act or transaction
(Sec. 60.1)

on Account of Insider Trading

A. Liability for non-disclosure

(a) Any insider who violates
Subsection 27.1;
(b) and any person in the case of a
tender offer who violates
Subsection 27.4 (a)(I), or any rule
or regulation thereunder, by
purchasing or selling a security
while in possession of material
information not generally available
to the public (Sec. 61.1)

Any investor who,
contemporaneously with the
purchase or sale of securities that is
the subject of the violation,
purchased or sold securities of the
same class unless such insider, or
such person in the case of a tender
offer, proves that such investor
knew the information or would
have purchased or sold at the same
price regardless of disclosure of the
information to him (Sec. 61.1)

136
on Account of Insider Trading
B. Liability for communicating
non-public information about
issuer

(a) An insider who violates
Subsection 27.3;
OR
(b) any person in the case of a
tender offer who violates
Subsection 27.4 (a), or any rule or
regulation thereunder
communicating material nonpublic
information shall be jointly and
severally liable under Subsection
61.1 with, and to the same extent
as, the insider, or person in the
case of a tender offer, to whom the
communication was directed and
who is liable under Subsection 61.1
by reason of his purchase or sale of
a security (Sec. 61.2).

7. Liabilities of Controlling
Persons, Aider and Abettor
and Other Secondary Liability

A. Liability of Controlling
Persons
Every person who controls any
person liable under this Code or the
rules or regulations of the
Commission thereunder, shall also
be liable jointly and severally with
and to the same extent as such
controlled persons to any person to
whom such controlled person is
liable (Sec. 51.1)

NOTE: Control may be by or
through stock ownership, agency,
or otherwise, or in connection with
an agreement or understanding
with one or more other persons
(Sec. 51.1)
Defense: Lack of knowledge of the
existence of facts by reason of
which the liability of the controlled
person is alleged to exist (Sec.
51.1)


B. Liability of Director/Officer
for Delay in the Filing of
Required Documents

It shall be unlawful for any director
or officer of, or any owner of any
securities issued by, any issuer
required to file any document,
report or other information under
this Code or any rule or regulation
of the Commission thereunder,
without just cause, to hinder, delay
or obstruct the making or filing of
any such document, report, or

137

C. Liability of Aider/Abettor

It shall be unlawful for any person
to aid, abet, counsel, command,
induce or procure any violation of
this Code, or any rule, regulation
or order of the Commission
thereunder (Sec. 51.3)

Every person who substantially
assists the act or omission of any
person primarily liable under
Sections 57, 58, 59 and 60 of this
Code, with knowledge or in
reckless disregard that such act or
omission is wrongful, shall be
jointly and severally liable as an
aider and abettor for damages
resulting from the conduct of the
person primarily liable (Sec. 51.4)

BUT an aider and abettor shall be
liable only to the extent of his
relative contribution in causing
such damages in comparison to that
of the person primarily liable, or
the extent to which the aider and
abettor was unjustly enriched
thereby, whichever is greater (Sec.
51.4)

NOTE: It shall be unlawful for any
person, directly, or indirectly, to
do any act or thing which it would
be unlawful for such person to do
under the provisions of this Code or
any rule or regulation thereunder
(Sec. 51.2)

138

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS

OPERATIONS HEADS

Banking and Finance
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Subject Head | Karina Pulido

LAYOUT TEAM 2012
Mara Villegas Naomi
Timothy Reyes

139
Banking and Finance
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance
I. The New Central Bank Act (RA
7653)
II. Law on Secrecy of Bank Deposits
(RA 1405)
III. General Banking Law of 2000 (RA
8791)
Corporation Act (RA 3591, as
amended)
V. Foreign Currency Deposit Act (RA
6426)

I. The New Central Bank Act (RA
7653)

A. State policies

The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in the
discharge of its mandated responsibilities concerning
money, banking and credit. (Sec. 1)

B. Salient features of the NCBA

1. Assurance of BSP independence by providing for
the majority of the members of the Monetary
Board to come from the private sector. (Sec. 6,
NCBA)

2. The BSP may now concentrate on monetary
policy, and will shed itself of fiscal
responsibilities which in the past, had distracted
it from its primary function. (Secs. 3, 129, &
130, NCBA)

3. Provides safeguards to ensure that unlike the old
Central Bank which sustained huge losses, the
BSP would have a positive net income position by
the following provisions:
a. Capitalization of P50B of which P10B will be
paid upon effectivity of the Act; (Sec.2,
NCBA)
b. Maintenance of positive net foreign asset
position; (Sec.71, NCBA)
c. Charging interests on all loans and advances
to banks; (Sec. 85, NCBA)
d. Authority to collect interests on loans and
advances to closed financial institutions; and
e. BSP cant acquire any shares in banking
enterprise, in development banking and
financing (Sec. 128, NCBA)

C. Creation of the Bangko Sentral
ng Pilipinas (BSP)

Nature of the BSP
A. A central monetary authority;
B. An independent and accountable body; and
C. A government-owned corporation but enjoys
fiscal and administrative autonomy. (Secs. 1 &
2, NCBA)

The BSP shall have a capitalization of P50B to be
fully subscribed by the Government. P10B of which
shall be paid upon effectivity of the NCBA and the
balance payable within two (2) years from the
effectivity of the NCBA (Sec. 2)

D. Responsibility and primary
objective

1. Primary Objectives

A. To maintain price stability conducive to a
balanced and sustainable growth of the
economy.
B. To promote and maintain monetary stability and
the convertibility of the peso.

2. Other Responsibilities

A. To provide policy directions in the areas of
money, banking, and credit
B. To supervise operations of banks (Sec. 3, NCBA)

All powers, duties and functions vested by
law in the Central Bank of the Philippines not
inconsistent with the NCBA shall be deemed
transferred to the BSP. All references to the
Central Bank of the Philippines in any law or
special charters shall be deemed to refer to
the BSP. (Sec. 136, NCBA)

E. Monetary Board

The body through which the powers and functions of
the Bangko Sentral are exercised (Sec 6, NCBA)

1. Powers and Functions (Sec. 15,
NCBA)

1. Issue rules and regulations it considers necessary
for the effective discharge of the responsibilities
and exercise of the powers vested in it;

2. Direct the management, operations, and
administration of Bangko Sentral, organize its
personnel and issue such rules and regulations as
it may deem necessary or desirable for this
purpose;

3. Establish a human resource management system
which governs the selection, hiring,
appointment, transfer, promotion, or dismissal
of all personnel;

140
4. Adopt an annual budget for and authorize such
expenditures by Bangko Sentral as are in the
interest of the effective administration and
operations of Bangko Sentral in accordance with
applicable laws and regulations; and

5. Indemnify its members and other officials of
Bangko Sentral, including personnel of the
departments performing supervision and
examination functions, against all costs and
expenses reasonably incurred by such persons in
connection with any civil or criminal action, suit
or proceeding, to which any of them may be
made a party by reason of the performance of
his functions or duties, unless such members or
other officials is found to be liable for
negligence or misconduct

2. Composition (Sec. 6, NCBA)

The MB shall be composed of 7 members with 6-year
terms.

3. Members (Sec. 6, NCBA)

1. The BSP Governor or his designated alternate (a
deputy governor);
2. A Cabinet member to be designated by the
President or his designated alternate (an
Undersecretary in his department); and
3. 5 members from the private sector (Sec. 6)

No member of the MB may be reappointed more
than once.

4. Qualifications (Sec. 8, NCBA)

1. Natural-born citizens of the Philippines;
2. At least 35 years old (the Governor must be at
least 40 years old);
3. Of good moral character;
4. Of unquestionable integrity;
5. Of known probity and patriotism; and
6. With recognized competence in social and
economic disciplines.

5. Disqualifications (Sec. 9, NCBA)

In addition to the disqualifications under the Code of
Conduct and Ethical Standards for Public Officials
and Employees (RA 6713), a member of the Monetary
Board is disqualified:
1. Direct connection with any multilateral banking
or financial institution; or
2. Substantial interest in any private bank in the
Philippines, within 1 year prior to his
appointment

6. Prohibitions on members of the
MB (Sec. 9, NCBA)

1. To be a director, officer, employee, consultant,
lawyer, agent or stockholder of any bank, quasi-
bank, or any other institution which is subject
to supervision or examination by the BSP;
2. To hold any other public office or public
employment during their tenure; and
3. To be employed in any multilateral banking or
financial institution within 2 years after the
expiration of his term.
Exception: when he serves as an official
representative of the government to such
institution.

7. Grounds for Removal of any
member of the MB (Sec. 10, NCBA)

1. If the member is subsequently disqualified under
Sec. 8;
2. If he is physically or mentally incapacitated that
he cannot properly discharge his duties and
responsibilities and such incapacity has lasted
for more than 6 months;
3. If he is guilty of acts or operations which are of
fraudulent or illegal character or which are
manifestly opposed to the aims and interests of
the BSP; and
4. If he no longer possesses the qualifications
under Sec. 8.

8. Vacancies, how filled (Sec. 7,
NCBA)

Cause: death, resignation, or removal of any
member

Effect: a new member will be appointed to complete
the unexpired period of the term of the member
concerned.

9. Salaries (Sec. 13, NCBA)

Fixed by the Phil. President at a sum commensurate
to the importance and responsibility attached (Sec.
13, NCBA)

10. Meetings (Sec. 11, NCBA)

1. held at least once a week;
2. called by the Governor or by 2 MB members;
3. the complete records of the proceedings and
deliberations of the MB including the tapes and
transcripts of stenographic notes are to be
maintained and preserved;
4. four (4) members constitute a quorum; and
5. all decisions by the MB shall require the
concurrence of four (4) of its members unless
otherwise provided by the NCBA;
deputy governors may attend (Sec. 12,
NCBA).
any member with personal or pecuniary
interest in any matter in the agenda shall
disclose his interest and shall retire from
the meeting when the matter is taken up
(Sec. 14, NCBA).

141
11. Civil Liability of Members of the
MB (Sec. 16, NCBA)

Members of the MB, officials, examiners, and
employees of the BSP are liable when:
1. they willfully violate the provisions of the NCBA;
2. they are guilty of negligence, abuses or acts of
malfeasance or misfeasance; or
3. fail to exercise extraordinary diligence in the
performance of his duties.

F. How the BSP handles banks in
distress

Liquidity Ability of an asset to be converted into
cash

Solvency When liabilities amount to less than total
assets, providing the ability to pay debts

Insolvency When the actual market value of assets
are insufficient to pay its liabilities, not considering
capital stock and surplus which are not liabilities for
such purpose

1. Conservatorship

Applicability:
when a bank or a quasi-bank is in a state of
continuing inability or unwillingness to maintain
a condition of liquidity deemed adequate to
protect the interest of depositors and creditors
(Sec. 29)
determination is to be made by the MB on the
basis of a report submitted by the appropriate
supervising or examining department (Sec. 29)

Period and Termination:
Period: shall not exceed 1 year (Sec. 29)
The expenses attendant to the conservatorship
shall be borne by the bank or quasi-bank
concerned (Sec. 29)
Grounds for termination of conservatorship by
MB:
a. When it is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary
b. When, on the basis of the report of the
conservator or of its own findings, the MB
determines that the continuance in business
of the institution would involve probable
loss to its depositors or creditors (the bank
or quasi-bank would then be placed under
receivership) (Sec. 29)

Effects of Conservatorship
1. Bank/Quasi-bank retains juridical personality
2. Not a precondition to the designation of a
receiver, and;
3. Perfected transactions cannot be repudiated

Qualifications of a Conservator:
The conservator should be competent and
knowledgeable in bank operations and management.
(Sec. 29)
The appointment of a conservator shall be
vested exclusively in the MB. (Sec. 30)

Powers and Duties of a Conservator:
a. To take charge of the assets, liabilities, and the
management thereof
b. To reorganize the management
c. To collect all monies and debts due said
institution, and
d. To exercise all powers necessary to restore its
viability
e. To report and be responsible to the MB
f. To overrule or revoke the actions of the
previous management and board of directors of
the bank or quasi-bank. (Sec. 29)

First Philippine International Bank v. CA, 1996:
While the Central Bank law gives vast and far
reaching powers to the conservator of a bank, such
powers must be related to the preservation of the
assets of the bank, the reorganization of the
management and the restoration of viability. Such
powers cannot extend to the post-facto repudiation
of perfected transactions, otherwise they would
infringe against the non-impairment clause of the
Constitution.

Remunerations:
General Rule
The conservator shall receive remuneration in
an amount not to exceed 2/3 of the salary of
the president of the institution in 1 year,
payable in 12 equal monthly payments

Exception
A conservator connected with the BSP, in which
case said conservator shall not be entitled to
receive any remuneration or emolument. (Sec.
29, NCBA)

2. Receivership

Grounds:
Whenever the MB finds that a bank or quasi-bank:
a. Is unable to pay its liabilities as they become
due in the ordinary course of business: Provided,
That this shall not include inability to pay
caused by extraordinary demands induced by
financial panic in the banking community;
b. Has insufficient realizable assets, as determined
by the BSP, to meet its liabilities; or
c. Cannot continue in business without involving
probable losses to its depositors or creditors; or
d. Has willfully violated a cease-and-desist order
under Sec. 37 that has become final, involving
acts or transactions which amount to fraud or a
dissipation of the assets of the institution

Receiver:
a. if a banking institution: the PDIC
b. if a quasi-bank: any person of recognized
competence in banking or finance

The appointment of a receiver shall be vested
exclusively in the MB. And the designation of a

142
conservator is not a precondition to the designation
of a receiver.

Powers and Duties of a Receiver:
a. Immediately gather and take charge of all the
assets and liabilities of the institution
b. Administer the assets for the benefit of the
creditors
c. Exercise the general powers of a receiver under
the Revised Rules of Court
d. Not to pay or commit any act that will involve
the transfer or disposition of any asset of the
institution, except:
1. administrative expenditures
2. receiver may deposit or place funds in non-
speculative investments
e. Subject to prior approval of the MB, determine,
as soon as possible, but not later than 90 days
from take-over, whether the institution may be
rehabilitated or otherwise placed in such a
condition so that it may be permitted to resume
business with safety to its depositors and
creditors and the general public

The assets of the institution under receivership and
liquidation shall be deemed in custodia legis and
shall be exempt from any order of garnishment,
levy, attachment, or execution.

Close Now, Hear Later Scheme
Sec. 29 of the Central Bank Act does NOT
contemplate prior notice and hearing before a bank
may be directed to stop operations and placed under
receivership. It is enough that such action is made
subject of a subsequent judicial review. When the
law provides for the filing of a case within 10 days
after the receiver takes charge of the assets of the
bank, it is unmistakable that the assailed actions
should precede the filing of the case. The legislature
could not have intended to authorize no prior
notice and hearing in the banks closure and at the
same time allow a suit to annul it on the basis of
absence thereof (Central Bank vs. Cam GR No.
76118, March 30, 1993)

3. Liquidation / Closure

Should the determination be that the institution
cannot be rehabilitated or permitted to resume
business, the MB shall notify in writing the board of
directors of the institution of its findings and direct
the receiver to proceed with the liquidation of the
institution.

Procedure:
1. The receiver shall file ex parte with the proper
RTC, and without requirement of prior notice or
any other action, a petition for assistance in the
liquidation of the institution pursuant to the
liquidation plan adopted by the PDIC (if quasi-
bank, liquidation plan adopted by the MB)
2. Upon acquiring jurisdiction, the court shall,
upon motion by the receiver after due notice,
a. adjudicate disputed claims against the
institution,
b. assist the enforcement of individual
liabilities of the stockholders, directors,
and officers, and
c. decide on other issues as may be material
to implement the liquidation plan
3. The receiver shall convert the assets of the
institutions to money, dispose of the same to
creditors and other parties, for the purpose of
paying the debts of such institution in
accordance with the rules on concurrence and
preference of credit under the Civil Code

The assets of the institution under receivership and
liquidation shall be deemed in custodia legis and
shall be exempt from any order of garnishment,
levy, attachment, or execution.

Dispositions:
In case of a liquidation of a bank or quasi-bank, after
payment of the cost of proceedings, including
reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall pay the
debts of such institution, under order of the court,
in accordance with the rules on concurrence and
preference of credit in the Civil Code. (Sec. 31,
NCBA)

All revenues and earnings realized by the receiver in
winding up the affairs and administering the assets
of any bank or quasi-bank shall be used to pay the
costs of proceedings, salaries of such personnel
whose employment is rendered necessary in the
discharge of the liquidation together with other
additional expenses caused thereby. The balance of
revenues and earnings, after the payment of all said
expenses, shall form part of the assets available to
creditors. (Sec. 32, NCBA)

Effects of Appointment of Receiver/Liquidation
1. Retention of juridical personality
2. Suspension of operations/ Stoppage of business
3. Assets are deemed in custodial legis, i.e.,
exempt from garnishment, levy or execution
4. Stay of execution of judgment to prevent
depletion of bank assets
5. Bank is not liable to pay interest on deposits
which accrued during the period of suspension
of operation
6. Restriction of banks capacity to do new
business (new loans, deposits) but with
obligation to collect pre-existing debts

G. How the BSP handles exchange
crisis

1. Legal Tender Power (Sec. 52)

All notes and coins issued by the BSP shall be fully
guaranteed by the Government of the Republic of
the Philippines and shall be legal tender in the
Philippines for all debts, both public and private.

Limitation: Coins shall be legal tender in amounts
not exceeding P50 for denominations of 25 centavos
and above, and in amounts not exceeding P20 for

143
denominations of 10 centavos or less unless
otherwise fixed by the MB,

The maximum amount of coins to be considered as
legal tender is: [BSP Cicular 537 (2006) ]
1. P1,000.00 for denominations of 1-Piso, 5-Piso
and 10-Piso coins; and
2. P100.00 for denominations of 1-sentimo, 5-
sentimo, 10-sentimo, and 25-sentimo coins.

2. Rate of Exchange (Sec. 74)

The MB shall:
1. Determine the exchange rate policy of the
country;
2. Determine the rates at which the Bangko Sentral
shall buy and sell spot exchange;
3. Establish deviation limits from the effective
exchange rate or rates as it may deem proper.
4. Determine the rates for other types of foreign
exchange transactions by the BSP, including
purchases and sales of foreign notes and coins.

Limitation: The margins between the effective
exchange rates and the rates established by the MB
may not exceed the corresponding margins for spot
exchange transactions by more than the additional
costs or expenses involved in each type of
transactions.

II. Law on Secrecy of Bank
Deposits (RA 1405)

A. Purpose (Sec. 1)

1. To give encouragement to the people to deposit
their money in banking institutions and to
discourage private hoarding; and

2. So that the peoples money may be properly
utilized by banks in authorized loans to assist in
the economic development of the country.

China Banking Corporation v. Ortega, 1973:
The absolute confidentiality rule in R.A. No. 1405
actually aims at protection from unwarranted
inquiry or investigation if the purpose of such
inquiry or investigation is merely to determine the
existence and nature, as well as the amount of the
deposit in any given bank account.

B. Prohibited acts (Sec. 3)

1. No person, government official, bureau or office
may examine, inquire into or look into such
deposits; and
2. No official or employee of any banking
institution may disclose to any unauthorized
person any information concerning said
deposits.

C. Deposits covered (Sec. 2)

All deposits of whatever nature with banks or
banking institutions in the Philippines are hereby
considered as of an absolutely confidential nature
and may not be examined.

Includes investments in bonds issued by the
Philippine Government, its political subdivisions and
its instrumentalities.

Under the RA 1405, bank deposits are
statutorily protected or recognized zones of
privacy. (People v. Estrada, G.R. No. 164368,
April 2, 2009; Marquez v. Desierto, G.R. No.
135882, June 27, 2001, 359 SCRA 772; Ople v.
Torres, G.R. No. 107737. October 1, 1999, 316
SCRA 43)

Ejercito v. Sandiganbayan (Special Division), 2006:
The term deposits as used in RA 1405 is to be
understood broadly and not limited only to accounts
which give rise to a creditor-debtor relationship
between the depositor and the bank.

If the money deposited under an account may be
used by banks for authorized loans to third persons,
then such account, regardless of whether it creates
a creditor-debtor relationship between the
depositor and the bank, falls under the category of
accounts which the law precisely seeks to protect
for the purpose of boosting the economic
development of the country.

Considering the use of the phrase of whatever
nature RA 1405 applies not only to money which is
deposited but also to those which are invested.
Thus, the protection afforded by RA 1405 extends to
trust accounts.

D. Exceptions (Sec. 2)

A. Upon written permission of the depositor;
B. In cases of impeachment;
C. Upon order of a competent court in cases of:
a. Bribery;
b. dereliction of duty of public officials; or
D. Where the money deposited or invested is the
subject matter of the litigation.

Union Bank v. Court of Appeals, 1999:
By the phrase "subject matter of the action" is meant
"the physical facts, the things real or personal, the
money, lands, chattels, and the like, in relation to
which the suit is prosecuted, and not the delict or
wrong committed by the defendant. (Mathay v.
Consolidated Bank and Trust Company, 1974).

We note with approval the difference between the
"subject of the action" from the "cause of action."
We also find petitioner's definition of the phrase
"subject matter of the action" is consistent with the
term "subject matter of the litigation," as the latter
is used in the Bank Deposits Secrecy Act.

144
Where the plaintiff is fishing for information so it
can determine the culpability of private respondent
and the amount of damages it can recover from the
latter. It does not seek recovery of the very money
contained in the deposit. The subject matter of the
dispute may be the amount of P999,000.00 that
petitioner seeks from private respondent as a result
of the latter's alleged failure to inform the former of
the discrepancy; but it is not the P999,000.00
deposited in the drawer's account. By the terms of
R.A. No. 1405, the "money deposited" itself should
be the subject matter of the litigation.

Banco Filipino v. Purisima, 1988:
The exception applies to cases of concealment of
illegally acquired property in anti-graft cases. The
inquiry into illegally acquired property or property
NOT "legitimately acquired" extends to cases where
such property is concealed by being held by or
recorded in the name of other persons.

Mellon Bank, N.A. v. Magsino, 1990:
The exception even extends to cases of concealment
of illegally acquired property not involving anti-graft
cases as long as money deposited was the subject
matter of litigation.

Other exceptions:
1. upon order of a competent court in cases of
unexplained wealth under Sec. 8 of RA 3019 or
the Anti-Graft and Corrupt Practices Act (PNB v.
Gancayco, 1965; Banco Filipino v. Purisima,
1988; Marquez v. Desierto, 2001)
2. when inquiry is conducted under the authority
of the Commissioner of Internal Revenue into
the bank accounts of the following:
a. a decedent in order to determine his gross
estate
b. any taxpayer who has filed an application
for compromise of his tax liability, which
application shall include a written waiver of
his privilege under RA 1405 or under other
general or special laws
information obtained from banks and
financial institutions may be furnished to
a foreign tax authority pursuant to an
existing convention or agreement. (Sec.
6(F), NIRC, as amended by RA 10021)
3. upon order of a competent court in cases under
the Anti-Money Laundering Act of 2001 (RA
9160, hereinafter AMLA), when there is
probable cause that the deposits or investments
involved are in any way related to an unlawful
activity or a money laundering offense, except
that no court order required if:
a. funds or property involved consists of
investments; or
b. said investments are related to:
i. kidnapping for ransom
ii. unlawful activities under
Comprehensive Drugs Act of 2002 (RA
9165);
iii. hijacking and other violations under RA
6235; and
iv. destructive arson and murder, including
those perpetrated by terrorists against
non-combatants and similar targets.
4. BSP inquiry or examination in the course of its
periodic or special examination of the bank
(Sec. 11, AMLA).
5. Disclosure of certain information about bank
deposits which have been dormant for at least
10 years, to the Treasurer of the Philippine in a
sworn statement, a copy of which is posted in
the bank premises. (Sec. 2, Unclaimed Balances
Law [Act No. 3926, as amended])
6. The PDIC and/or the BSP can inquire into or
examine deposit accounts and all information
related thereto in case there is a finding of
unsafe and unsound banking practice (Sec. 8,
paragraph 8, R.A. 3591, as amended by R.A.
9576).

[NOT considered as EXCEPTIONS]:

a. In 1981, PD 1792 added the following grounds
when the bank can be compelled to reveal the
amount of a depositor:
i. made in the course of a special or general
examination of a bank and is specifically
authorized by the Monetary Board after
being satisfied that there is reasonable
ground to believe that a bank fraud or
serious irregularity has been or is being
committed and that it is necessary to look
into the deposit to establish such fraud or
irregularity, or
ii. made by an independent auditor hired by
the bank to conduct its regular audit
provided that the examination is for audit
purposes only and the results thereof shall
be for the exclusive use of the bank.
However, Sec. 135 of RA 7653 or the New
Central Bank Act expressly repealed PD
1792 thereby reverting RA 1405 to its
version prior to the promulgation of the
Decree.

a) Thus, Villanueva says that these two
instances are excluded from the
enumeration of exceptions to the
secrecy of bank deposits (VILLANUEVA,
Commercial Law Review, opinion).

b) Morales, however, notes that with the
enactment of the AMLA, exception (i)
has been substantially resurrected.
While there is no similar development
of exception (ii), the exclusion of the
BSP examiners and independent
auditors from the coverage of the
Secrecy of Bank Deposits Law finds
basis in Opinion No. 243 (s. 1975) of
then Secretary of Justice Pedro Tuason.
(MORALES, The Philippine General
Banking Law, opinion)

b. It used to be believed that the RA 1405 did not
apply to the Ombudsman, on account of his
authority under Sec. 15(8) of RA 6770 or the
Ombudsman Act of 1989 to examine and have

145
access to bank accounts and records. However,
the SC in Marquez v. Desierto (G.R. No.135882,
June 27, 2001) and Ombudsman v. Ibay (G.R.
No. 137538, September 3, 2001) restricted the
Ombudsmans power as follows:
[B]efore an in camera inspection may be
allowed, there must be a pending case before
a court of competent jurisdiction. Further, the
account must be clearly identified, the
inspection limited to the subject matter of the
pending case before the court of competent
jurisdiction. The bank personnel and the
account holder must be notified to be present
during the inspection, and such inspection may
cover only the account identified in the pending
case. (MORALES, The Philippine General
Banking Law)

Further, it is interesting to note that the
Secretary of Justice in his Opinion No. 13 (s.
1987) concluded that the Presidential
Commission on Good Government can compel
banks to disclose or produce bank records
without violating the bank secrecy laws.
(MORALES, The Philippine General Banking Law)

Moreover, under Sec. 1(d) of RA 6382 (1990),
which created the Davide Commission that
conducted a fact finding investigation of the
failed coup d etat of December 1989, the
commission had the power to ask the Monetary
board to disclose information on and/or grant
authority to examine bank deposits, trust finds,
or banking transactions in the name of and/or
utilized by a person, natural or juridical, under
investigation by the Commission, in any bank or
banking institution in the Philippines, when the
Commission has reasonable ground to believe
that said deposits, trust or investment funds, or
banking transactions have been used in support
of furtherance of the objectives of the coup d
etat. (MORALES, The Philippine General
Banking Law)

Notwithstanding the exceptions enumerated by law,
the prevailing policy on the matter is to preserve the
absolute confidentiality enjoyed by bank deposits.

Republic v. Eugenio, 2008:
Indeed, by force of statute, all bank deposits are
absolutely confidential, and that nature is unaltered
even by the legislated exceptions referred to above.
There is disfavor towards construing these
exceptions in such a manner that would authorize
unlimited discretion on the part of the government
or of any party seeking to enforce those exceptions
and inquire into bank deposits. If there are doubts in
upholding the absolutely confidential nature of bank
deposits against affirming the authority to inquire
into such accounts, then such doubts must be
resolved in favor of the former. Such a stance would
persist unless Congress passes a law reversing the
general state policy of preserving the absolutely
confidential nature of Philippine bank accounts.

BSB Group, Inc., v. Go, 2010:
It is conceded that while the fundamental law has
not bothered with the triviality of specifically
addressing privacy rights relative to banking
accounts, there, nevertheless, exists in our
jurisdiction a legitimate expectation of privacy
governing such accounts. The source of this right of
expectation is statutory, and it is found in R.A. No.
1405, otherwise known as the Bank Secrecy Act of
1955.

Subsequent statutory enactments have expanded the
list of exceptions to this policy yet the secrecy of
bank deposits still lies as the general rule, falling as
it does within the legally recognized zones of
privacy. There is, in fact, much disfavor to
construing these primary and supplemental
exceptions in a manner that would authorize
unbridled discretion, whether governmental or
otherwise, in utilizing these exceptions as authority
for unwarranted inquiry into bank accounts. It is
then perceivable that the present legal order is
obliged to conserve the absolutely confidential
nature of bank deposits.

E. Garnishment of deposits

General Rule
The prohibition against examination of or inquiry
into a bank deposit under Republic Act 1405 does
not preclude its being garnished to insure
satisfaction of a judgment (China Banking
Corporation v. Ortega, 1973; Philippine Commercial
and Industrial Bank v. Court of Appeals, 1991)

China Banking Corporation v. Ortega (1973):
the prohibition against examination of or inquiry
into a bank deposit under Republic Act 1405 does not
preclude its being garnished to insure satisfaction of
a judgment. Indeed there is no real inquiry in such a
case, and if the existence of the deposit is disclosed
the disclosure is purely incidental to the execution
process. It is hard to conceive that it was ever within
the intention of Congress to enable debtors to evade
payment of their just debts, even if ordered by the
Court, through the expedient of converting their
assets into cash and depositing the same in a bank.

Exception - Foreign Currency Deposits.
The foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or
process of any court, legislative body, government
agency or any administrative body whatsoever. (Sec.
8, Foreign Currency Deposit Act)

Exceptions to exception

1. upon written permission of the depositor (Sec.
8, Foreign Currency Deposit Act ; Intengan vs CA
; 2002)
violation of the Anti-Money Laundering Act of
2001 [as in the case of peso deposits, supra]

146
3. during Bangko Sentrals periodic or special
examinations [as in the case of peso deposits,
supra], and
4. disclosure of the Treasurer of the Philippines
when the unclaimed balances law applies (Act
3936, as amended by PD 679)
5. BSP/PDIC inquiry if there is a finding of unsafe
and unsound banking practice (as in the case of
peso deposits, supra)
6. In Salvacion vs. CB (1997), where a Filipino child
was raped by a foreigner, the SC allowed
garnishment of foreign currency deposits
stating: If we rule that the questioned Section
113 of CB Circular No. 960 which exempts from
process of any court, legislative body,
government agency or any administrative body
whatsoever, is applicable to a foreign transient,
injustice would result especially to a citizen
aggrieved by a foreign guest.

F. Penalties for violation (Sec. 5)

Imprisonment of not more than 5 years or a fine of
not more than P20,000 or both, in the discretion of
the court.

III. General Banking Law of 2000
(RA 8791)

A. Policy

To promote and maintain a stable and efficient
banking and financial system that is globally
competitive, dynamic and responsive to the demands
of a developing economy. (Sec. 2)

B. Definition and classification of
banks

Banks shall refer to entities engaged in the lending
of funds obtained in the form of deposits. (Sec. 3.1,
GBL)

Classification of Banks (Sec. 3.2)

1) Universal Banks. (UB)
These used to be called expanded commercial banks
and their operations are primarily governed by the
GBL. They can exercise the powers of an investment
house and invest in non-allied enterprises. They
have the highest capitalization requirement.

2) Commercial Banks. (KB)
These are ordinary or regular commercial banks, as
distinguished from a universal bank. They have a
lower capitalization requirement than a UB and
cannot exercise the powers of an investment house
and invest in non-allied enterprises.

3) Thrift Banks.
These are
a. savings and mortgage banks;
b. stock savings and loan associations; and
c. private development banks

NOTE
The term thrift banks also refers to any banking
corporation organized for the following purposes:
(1) Accumulating the savings of depositors and
investing them, together with capital loans
secured by bonds, mortgages in real estate and
insured improvements thereon, chattel
mortgage, bonds and other forms of security or
in loans for personal or household finance,
whether secured or unsecured, or in financing
for homebuilding and home development; in
readily marketable and debt securities; in
commercial papers and accounts receivables,
drafts, bills of exchange, acceptances or notes
arising out of commercial transactions; and in
such other investments and loans which the
Monetary Board may determine as necessary in
the furtherance of national economic objectives;
(2) Providing short-term working capital, medium-
and long-term financing, to businesses engaged
in agriculture, services, industry and housing;
and
(3) Providing diversified financial and allied services
for its chosen market and constituencies
especially for small and medium enterprises and
individuals. (Sec.3(a), R.A. 7906)

4) Cooperative Banks.
These are banks organized primarily to make
financial and credit services available to cooperative
banks.

NOTE
A cooperative bank is one organized by the majority
shares of which is owned and controlled by
cooperatives primarily to provide financial and
credit services to cooperatives. The term
"cooperative bank" shall include cooperative rural
banks. (Sec. 100, R.A. 6938)

5) Islamic Banks
These are banks the business dealings and activities
of which are subject to the basic principles and
rulings of Islamic Sharia. The Al Amanah Islamic
Investment Bank of the Philippines, which was
created by RA 6848, is the only Islamic bank in the
country at this time.

NOTE
Islamic Bank refers to the Al-Amanah Islamic
Investment Bank of the Philippines, created under
R.A. 6848. (See Sec. 44(1) and Sec. 2, R.A. 6848)

6) Rural Banks
Mandated to make needed credit available and
readily accessible in the rural areas on reasonable
terms and which are primarily governed by the Rural
Banks Act of 1992 (RA 7353)

7) Other classifications of banks
As determined by the Monetary Board, i.e.,
Philippine Veterans Bank (RA 3518), Landbank of the

147
Philippines (RA 3844), Development Bank of the
Philippines (RA 85)

C. Distinction between banks and
quasi-banks and trust entities

As opposed to Quasi-banks
Quasi-banks (QB) refer to entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of
relending or purchasing of receivables and other
obligations. (last paragraph of Sec. 4)

The term deposit substitutes is defined as an
alternative form of obtaining funds from the public,
other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of
relending or purchasing of receivables and other
obligations. It includes bankers acceptances,
promissory notes, participations, certificates of
assignment and similar instruments with recourse,
and repurchase agreements. (Sec. 95, New Central
Bank Act, hereinafter NCBA)

As opposed to Trust Entities
A Trust Entity is a stock corporation or a person duly
authorized by the Monetary Board to engage in trust
business. (Sec. 79, GBL)

A Trust Business is any activity resulting from
trusteeship involving the appointment of a trustee
by a trustor for the administration, holding,
management of funds and/or properties of the
trustor by the trustee for the use, benefit or
advantage of the trustor or of beneficiaries.

D. Bank powers and liabilities

Classification of Banks:
Universal Banks. (UB)
These used to be called expanded commercial
banks and their operations are primarily
governed by the GBL. They can exercise the
powers of an investment house and invest in
non-allied enterprises. They have the highest
capitalization requirement.

Commercial Banks. (KB)
These are ordinary or regular commercial banks,
as distinguished from a universal bank. They
have a lower capitalization requirement than a
UB and cannot exercise the powers of an
investment house and invest in non-allied
enterprises.

KB UB
Powers a. Corporate
Powers (Sec.
29, GBL)
b. Banking and
Incidental
Powers (Sec.
29, GBL)
a. Corporate
Powers (Sec.
29, GBL)
b. Banking and
Incidental
Powers (Sec.
23, GBL)
c. Power to
Invest in
Allied
enterprises
(financial or
non-
financial)
(Sec. 30,
GBL)
c. Power to
invest in
Allied
(financial or
non-financial)
(Sec. 24, GBL)
d. Power to
invest in Non-
allied
enterprises
(Sec. 24, GBL)
e. Powers of an
investment
house (Sec.
23, GBL)

1) Corporate powers

General powers incident to corporations (Sec. 36,
Corporation Code)
1. To sue and be sued in its corporate name;
2. Succession by its corporate name for the period
stated in the AOI and the certificate of
incorporation
3. To adopt and use a corporate seal
4. To amend its AOI
5. To adopt by-laws, not contrary to law, morals,
or public policy, and to amend or repeal them
6. To issue or sell stocks to subscribers and to sell
treasury stocks.
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of other
corporations, as the transaction of the lawful
business of the corporation may reasonably and
necessarily require, subject to the limitations
prescribed by law and the Constitution
8. To enter into merger or consolidation
9. To make reasonable donations, including those
for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: provided that no corporation,
domestic or foreign, shall give donations in aid
of any political party or candidate or for
purposes of partisan political activity
10. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees
11. To exercise such other powers as may be
essential or necessary to carry out its purposes
as stated in the AOI.

2) Banking and incidental powers
All such powers as may be necessary to carry on the
business of commercial banking (Sec. 29)

a. Accepting drafts

b. Issuing letters of credit

c. Discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidence of
debt

d. Accepting or creating demand deposits

148

Deposit Function:
GENERAL RULE
Only a Universal Bank (UB) Commercial Bank
(KB) can accept or create demand deposits

EXCEPTION
Banks other than a UB or KB with prior approval
of, and subject to such conditions and rules as
may be prescribed by the Monetary Board (Sec.
33, GBL)

Presumption of ownership of deposits:
It is presumed that money deposited in a bank
account belongs to the person in whose name
the deposit account is opened.

Fultron Iron Works Co. v. China Banking
Corporation, 1930
A depositor is presumed to be the owner of funds
standing in his name in a bank deposit; and where a
bank is not chargeable with notice that the money
deposited in such account is the property of some
other person than the depositor, the bank is justified
in paying out the money to the depositor or upon his
order, and cannot be liable to any other person as
the true owner.

BPI v. CA, 1994
A bank is under no duty or obligation to make an
application or set-off against the deposit accounts of
a borrower. To apply the deposit to the payment of
a loan is a privilege, a right of set-off which the bank
has the option to exercise, but not the obligation.

CA Agro-industrial Dev. Corp. v. CA, 1983
The rent of safety deposit boxes is a special kind of
deposit and cannot be characterized as an ordinary
contract of lease because the full and absolute
possession and control of the deposit box is not given
to the renters. The prevailing rule is that the
relation between the bank renting out and the
renter is that of bailor and bailee the bailment being
for hire and mutual benefit.

e. Receiving other types of deposits and deposit
substitutes
Types of Deposits:
1. Time Deposit - Interest rate stipulated
depending on the number of days. During
this period, the money deposited may not
be withdrawn. High interest rates.
2. Savings Deposit - Bank pays an interest rate,
but not as high as time deposits.
3. Demand Deposits/Current Accounts - No
interest is paid by the bank because the
depositor can take out his funds any time. It
is called demand deposit because the
depositor can withdraw the money he
deposited on the very same day when he
deposited it. (VILLANUEVA, Commercial Law
Review, opinion)

f. Buying and selling foreign exchange and gold or
silver bullion

g. Acquiring marketable bonds and other debt
securities

h. Extending credit
Loan Function
Know your customer rule:
Before granting a loan or other credit
accommodation, a bank must ascertain that the
debtor is capable of fulfilling its commitments
to the bank. (Sec. 40)

The bank may demand from its credit applicants
a statement of their assets and liabilities and of
their income and expenditure and such
information as may be prescribed by law or by
rules and regulations of MB to enable the bank
to properly evaluate the credit application
which includes the corresponding financial
statements submitted for taxation purposes to
the BIR. (Sec. 40)

Credit enhancement
If the borrower is less than creditworthy, third
persons may enhance his credit by providing
guarantees and other security devices in favor
of the bank. (MORALES, The Philippine General
Banking Law, opinion)

If there is material misrepresentation, the bank
may:
a. Terminate any loan or other credit
accommodation granted on the basis of said
statements; and
b. Shall have the right to demand immediate
repayment or liquidation of the obligation (Sec.
40)

Limit on Loans, Credit Accommodations and
Guarantees:
Real Estate GENERAL RULE
Shall not exceed 75% of the
appraised value of the respective
real estate security, plus 60% of
the appraised value of the insured
improvements, and such loans may
be made to the owner of the real
estate or to his assignees

EXCEPTION
The Monetary Board otherwise
prescribes (Sec. 37)
Security of
chattels and
intangible
properties
(patents,
trademarks,
trade names,
and
copyrights)
GENERAL RULE
Shall not exceed 75% of the
appraised value of the security,
and such loans and other credit
accommodations may be made to
the title-holder of the chattels and
intangible properties or his
assignees

EXCEPTION
The Monetary Board otherwise
prescribes (Sec. 38)

149
Grant of Loans (Sec. 39)
a. Only in amounts and for the periods of time
essential for the effective completion of the
operations to be financed; and
b. Consistent with safe and sound banking
practices.

Purpose of Loans
Purpose must be stated in the application and in the
contract between the bank and the borrower. (Sec.
39)

Effect of usage of loan proceeds for purposes
under than those agreed upon with the bank
The bank shall have the right to terminate the loan
or other credit accommodation and demand
immediate repayment of the obligation. (Sec. 39)

Amortization on Loans and Other Credit
Accommodations (Sec. 44)
a. In case of loans and other credit
accommodations with maturities of more than 5
years, provisions must be made for periodic
amortization payments, but such payments must
be made at least annually:
Provided, however, That when the
borrowed funds are to be used for purposes
which do not initially produce revenues
adequate for regular amortization payments
therefrom, the bank may permit the initial
amortization payment to be deferred until such
time as said revenues are sufficient for such
purpose, but in no case shall the initial
amortization date be later than 5 years from the
date on which the loan or other credit
accommodation is granted.
b. In case of loans and other credit
accommodations to microfinance sectors, the
schedule of loan amortization shall take into
consideration the projected cash flow of the
borrower and adopt this into the terms and
conditions formulated by banks.

All are subject to such rules as the Monetary Board
may promulgate. (Sec. 29, GBL)

E. Diligence required of banks

Banks should observe the highest degree of
diligence.

Notwithstanding the degree of diligence required, a
bank is not expected to be infallible (Prudential
Bank vs. CA, 2000)

Fiduciary Nature of Banks
Failure on the part of the bank to satisfy the
degree of diligence required of banks may
warrant the award of damages.
Under Sec. 2, the degree of diligence is high
standards of integrity and performance. In
numerous cases, the Supreme Court has held
that the highest degree of diligence and care is
expected from banks (Simex International v. CA
[1990]; Philippine Bank of Commerce v. CA
[1997]; Westmont Bank v. Ong [2002]; Solidbank
v. Spouses Tan [2003]; Samsung Construction v.
FEBTC [2004]; Citibank, N.A. v. Spouses
Cabamongan [2006]; Philippine Savings Bank v.
Chowking Food Corporation [2008]; Bank of
America NT &SA v. Philippine Racing Club
[2009].

Simex International v. CA, 1990:
As a business affected with public interest and
because of the nature of its functions, the bank is
under obligation to treat the accounts of its
depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.

In every case, the depositor expects the bank to
treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or
of millions. The bank must record every single
transaction accurately, down to the last centavo,
and as promptly as possible. This has to be done if
the account is to reflect at any given time the
amount of money the depositor can dispose as he
sees fit, confident that the bank will deliver it as
and to whomever he directs. A blunder on the part
of the bank, such as the failure to duly credit him his
deposits as soon as they are made, can cause the
depositor not a little embarrassment if not financial
loss and perhaps even civil and criminal litigation.

PCI Bank v. CA, 2001:
Banks are expected to exercise the highest degree
of diligence in the selection and supervision of their
employees.

Philippine Savings Bank v. Chowking Food
Corporation, 2008:
It cannot be over emphasized that the banking
business is impressed with public interest. Of
paramount importance is the trust and confidence of
the public in general in the banking industry.
Consequently, the diligence required of banks is
more than that of a Roman pater familias or a good
father of a family. The highest degree of diligence
is expected.

Bank of America NT&SA v. Philippine Racing Club,
2009:
The banking business is so impressed with public
interest where the trust and confidence of the public
in general is of paramount importance such that the
appropriate standard of diligence must be a high
degree of diligence, if not the utmost diligence.

Under the doctrine of last clear chance, a bank may
be held liable for loss despite the negligence of a
depositor. Examples of these cases are the
following:
For disbursing funds to a dishonest employee
despite the employees failure to strictly abide
with the banks internal procedure. (PBC v. CA,
1997)
Allowing the execution of a mortgage on parcels
of land as security for a loan not owned by the
prospective borrower. (Canlas v. Court of
Appeals, 2000)

150
Crediting the deposit in favor of another
depositor, a check where the signature of the
drawer was forged. (Westmont Bank v. Ong,
2002)
Encashing pre-signed checks of the depositor
which were stolen by its employee. (Bank of
America NT & SA v. Philippine Racing Club,
2009)

A bank is liable to a depositor when it honored and
paid on a forged check against the depositors
account even if the bank followed its internal
procedure in preventing a faulty discharge. (Samsung
Construction v. FEBTC, 2004)
In Gempesaw v. Court of Appeals (1993), a bank
was held liable for damages for failing to follow
its internal procedures in paying on a forged
check despite the gross negligence on the part
of the depositor.

F. Nature of bank funds and bank
deposits

Confidentiality of Bank Deposits. The prevailing
policy on the matter is to preserve the absolute
confidentiality enjoyed by bank deposits.

Republic v. Eugenio, 2008:
Indeed, by force of statute, all bank deposits are
absolutely confidential, and that nature is unaltered
even by the legislated exceptions referred to above.
There is disfavor towards construing these
exceptions in such a manner that would authorize
unlimited discretion on the part of the government
or of any party seeking to enforce those exceptions
and inquire into bank deposits. If there are doubts in
upholding the absolutely confidential nature of bank
deposits against affirming the authority to inquire
into such accounts, then such doubts must be
resolved in favor of the former. Such a stance would
persist unless Congress passes a law reversing the
general state policy of preserving the absolutely
confidential nature of Philippine bank accounts.

BSB Group, Inc., v. Go, 2010:
It is conceded that while the fundamental law has
not bothered with the triviality of specifically
addressing privacy rights relative to banking
accounts, there, nevertheless, exists in our
jurisdiction a legitimate expectation of privacy
governing such accounts. The source of this right of
expectation is statutory, and it is found in R.A. No.
1405, otherwise known as the Bank Secrecy Act of
1955.

Subsequent statutory enactments have expanded the
list of exceptions to this policy yet the secrecy of
bank deposits still lies as the general rule, falling as
it does within the legally recognized zones of
privacy. There is, in fact, much disfavor to
construing these primary and supplemental
exceptions in a manner that would authorize
unbridled discretion, whether governmental or
otherwise, in utilizing these exceptions as authority
for unwarranted inquiry into bank accounts. It is
then perceivable that the present legal order is
obliged to conserve the absolutely confidential
nature of bank deposits.

G. Stipulation on interests

The Monetary Board may prescribe the maturities, as
well as related terms and conditions for various
types of bank loans and other credit
accommodations.

Any change by the Board in the maximum maturities
shall apply only to loans and other credit
accommodations made after the date of such action.

The Monetary Board shall regulate the interest
imposed on micro finance borrowers by lending
investors and similar lenders such as, but not limited
to, the unconscionable rates of interest collected on
salary loans and similar credit accommodations (Sec.
43, GBL)

H. Grant of loans and security
requirements (Prudential
measures)

1. Ratio of Net Worth to Total Risk Assets

Risk-based capital ratio:
The minimum ratio which the net worth of a bank
must bear to its total risk assets which may include
contingent accounts [i.e. net worth: total risk
assets] (Sec. 34, GBL)

General Rule
A bank must conform to the risk-based capital
ratio prescribed by the MB
Exceptions
The MB may alter or suspend compliance with
such ratio whenever necessary for a maximum
period of 1 year.
a. In case of a bank merger or consolidation;
OR
b. When a bank is under rehabilitation under a
program approved by the BSP; (Sec. 34,
GBL)

Purpose:
A bank must not be allowed to expand the volume of
its loans and investments in a manner that is
disproportionate to its net worth. (MORALES, The
Philippine General Banking Law, Opinion)

Effect of non-compliance (Sec. 34, GBL):
1. The MB may limit or prohibit the distribution of
net profits by such bank and may require that
part or all of the net profits be used to increase
the capital accounts of the bank until the
minimum requirement has been met.
2. The MB may restrict or prohibit the acquisition
of major assets and the making of new
investments by the bank, with the exception of
purchases of readily marketable evidences of
indebtedness of the RP and the BSP and any
other evidences of indebtedness or obligations

151
the servicing and repayment of which are fully
guaranteed by the RP, until the minimum
required capital ratio has been restored.

2. Single Borrowers Limit

General Rule
The total loans, credit accommodations and
guarantees that may be extended by a bank to any
person, partnership, association, or corporation or
other entity shall at no time exceed 20% of the net
worth of such bank. (Sec. 35.1,GBL)

Exceptions
1. The Monetary Board otherwise prescribes for
reasons of national interest. (Sec. 35.1, GBL)
2. Wholesale lending activities of government
banks to participating institutions for relending
to end-user borrowers: separate limit of 35% net
worth. (BSP Circular No. 425 dated March 25,
2004)

Increase of limit:
The Monetary Board may increase the limit
prescribed by an additional 10% of the net worth,
when:
a. The additional liabilities of any borrower are
adequately secured by trust receipts, shipping
documents, warehouse receipts or other similar
documents transferring or securing title;
b. Covering readily marketable, non-perishable
goods; and
c. Which must be fully covered by insurance (Sec.
35.2, GBL)

Purpose:
To prevent the bank from making excessive loans
and other credit accommodations to a single
borrower or corporate group, including guarantees
for the account of such borrower or group. The bank
is prohibited from placing many eggs in the basket
of one client. [It] is a damage-control mechanism
[and] a device for risk amelioration. (MORALES, The
Philippine General Banking Law, Opinion)

Basis for determining compliance:
The basis for determining compliance with the SBL is
the total credit commitment of the bank to the
borrower. (Sec. 35.1, GBL)

Inclusions in the ceiling:
a. the direct liability of the maker or acceptor of
paper discounted with or sold to such bank and
the liability of a general indorser, drawer or
guarantor who obtains a loan or other credit
accommodation from or discounts paper with or
sells papers to such bank;
b. in the case of an individual who owns or controls
a majority interest in a corporation,
partnership, association or any other entity, the
liabilities of said entities to such bank;
c. in the case of a corporation, all liabilities to
such bank of all subsidiaries in which such
corporation owns or controls a majority interest;
and
d. in the case of a partnership, association or other
entity, the liabilities of the members thereof to
such bank. (Sec. 35.3, GBL)

Guidelines on the wholesale lending of
government banks:
a. it shall apply only to loans granted by
participating financial institutions (PFIs) on a
wholesale basis for on-lending to end-user
borrowers;
b. it shall apply only to loan programs funded by
multilateral, international, or local development
agencies, organizations, or institutions,
especially designed for wholesale lending
activities of government banks;
c. the end-user borrowers of the PFIs shall be
subject to the 25% SBL, not the increased ceiling
of 35%; and
d. government banks shall observe appropriate
criteria for accrediting PFIs and for the
grant/renewal of credit lines to accredited PFIs.
(BSP Circular No. 425 dated Mach 25, 2004)

Exclusions from the ceiling:
Loans and other credit accommodations
a. secured by obligations of the BSP or of the
Philippine Government;
b. fully guaranteed by the government as to the
payment of principal and interest;
c. covered by assignment of deposits maintained in
the lending bank and held in the Philippines;
d. under letters of credits to the extent covered by
margin deposits; and
e. specified by the Monetary Board as non-risk
items (Sec. 35.5, GBL)

Combination of liabilities:
The MB may prescribe the combination of the
liabilities of subsidiary corporations or members of
the partnership, association, entity or such
individual under certain circumstances, including but
not limited to any of the following situations:
a. the parent corporation, partnership,
association, entity or individual guarantees the
repayment of the liabilities;
b. the liabilities were incurred for the
accommodation of the parent corporation or
another subsidiary or of the partnership or
association or entity or such individual; or
c. the subsidiaries though separate entities
operate merely as departments or divisions of a
single entity. (Sec. 35.4, GBL)

Loans and other credit accommodations,
deposits maintained with, and usual guarantees
by a bank to any other bank or non-bank entity,
whether locally or abroad, shall be subject to
the limits as herein prescribed. (Sec. 35.6, GBL)

3. Restrictions on Bank Exposure to Directors,
Officers, Stockholders and their Related
Interests (DOSRI)

General Rule
No director or officer of any bank

152
a. shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from
such bank, nor
b. shall he become a guarantor, endorser or surety
for loans from such bank to others, or in any
manner be an obligor or incur any contractual
liability to the bank

Exceptions
1. valid insider lending (Sec. 36, GBL)
2. loans, credit accommodations and guarantees
extended by a cooperative bank to its
cooperative shareholders (Sec. 36, GBL)

Requirements for valid insider lending (Sec. 36,
GBL):
a. in the regular course of business ;
b. upon terms not less favorable to the bank than
those offered to others;
c. there is a written approval of the majority of all
the directors of the bank, excluding the director
concerned;
(Except: granted to officers under a fringe
benefit plan approved by the BSP;
d. the required approval shall be entered upon the
record of the bank and a copy of such entry
shall be transmitted forthwith to the
appropriate supervising and examining
department of the BSP;
e. limited to an amount equivalent to the DOSRI
borrowers unencumbered deposits and book
value of his paid-in capital contribution in the
bank

Exceptions
1. non-risk items; and
2. loans in the form of fringe benefits.

A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in
all banks in the Philippines. (Sec. 26, NCBA)

Purpose:
The general policy behind DOSRI rules is to level the
lending field between the insiders and the
outsiders. The objective is to prevent the bank
from becoming a captive source of finance for
DOSRI. (MORALES, The Philippine General Banking
Law, Opinion)

4. Loan-Loss Provisioning (Sec. 49, GBL)

The following are subject to regulation by the
Monetary Board:
a. the amount of reserves for bad debts or
doubtful accounts or other contingencies; and
b. the writing off of loans, other credit
accommodations, advances and other assets.

Purpose:
For effective banking supervision. There is a problem
of mismatch when a loan becomes non-performing.
The bank is paying interest on the money it
borrowed from the depositors or other placers of
funds, but is not recouping that interest from the
loan it made. Eventually, the bank may have to
write off loan losses against profits. To cushion this
eventuality, the bank is required to set aside
reserved for bad debts and other doubtful accounts
or contingencies. (MORALES, The Philippine General
Banking Law, Opinion)

5. Reserves

Purposes:
a. To control the volume of money created by the
credit operations of the banking system, the BSP
requires all banks to maintain reserves against
their deposit and deposit-substitute liabilities.
b. As a ready source of funds that will respond to
unusually large number of withdrawals or
preterminations of deposits or deposit-
substitutes, taking in the shape of a bank run.
(MORALES, The Philippine General Banking Law,
Opinion)

Two types of reserves:
a. Statutory legal reserve
10% for deposits and deposit substitutes (BSP
Circular No. 491 dated July 12, 2005)

For deposit-substitutes evidenced by repurchase
agreements covering government securities: 2%
(BSP Circular No. 444 dated August 18, 2004)

For foreign currency deposit units: 100% (BSP
Circular No. 1389 dated April 13, 1993, as
amended); 30% of this cover must be in the form
of liquid assets (BSP Circular-Letter dated June
6, 1997, as cited in MORALES)

b. Liquidity reserve
11% (BSP Circular No. 491). This consists of
deposits placed in the Reserve Deposit Account
with the BSP for at least 3 months (BSP Circular
No. 539 dated August 9, 2006)

The BSP shall not pay interest on the reserves
maintained with it unless the Monetary Board
decides otherwise as warranted by circumstances.
(Sec. 94, NCBA)

6. PDIC Insurance
Banks are required to insure their deposit liabilities
with the PDIC.

Partial Insurance:
Each depositor is a beneficiary of the insurance for a
maximum amount of P500,000, or its foreign
currency equivalent in the case of an FCDU deposit.
(RA 9576, 2009)

NOTE
PDIC only insures deposit (not deposit substitutes)
liabilities of a bank or banking institution which is
engaged in the business of receiving deposits, or
which thereafter may engage in the business of
receiving deposits (Sec.5, RA 3591, as amended)

Purpose:
Full insurance might encourage risky banking
activities. A limited insurance of bank deposits
serves to limit moral hazard.

153
I. Penalties for violation

Violation of any of the provisions of the GBL shall be
subject to Sections 34, 35, 36 and 37 of the New
Central Bank Act, unless otherwise provided under
therein.

1. Fine, Imprisonment

Criminal Sanctions
a. Refusal by an institution subject to
examination and supervision by the Monetary
Board to file the required report or permit
any lawful examination into its affairs (Sec.
34, NCBA)

Fine: Not less than Fifty thousand pesos
(P50,000) nor more than One hundred thousand
pesos (P100,000); or

Imprisonment: Not less than one (1) year nor
more than five (5) years; or

Both fine and imprisonment, in the discretion
of the Court.

2. Willful making of a false or misleading
statement on a material fact to the Monetary
Board or to the examiners of the Bangko
Sentral (Sec. 35, NCBA)

Fine: Not less than One hundred thousand
pesos (P100,000) nor more than One hundred
thousand pesos (P200,000); or

Imprisonment: Not more than five (5) years; or

of the Court.

3. Willful violation of the NCBA and other
pertinent banking laws (including the GBL)
being enforced or implemented by the
Bangko Sentral or any order, instruction, rule
or regulation issued by the Monetary Board
(Sec. 36, NCBA)

Fine: Not less than Fifty thousand pesos
(P50,000) nor more than One hundred thousand
pesos (P200,000); or

Imprisonment: Not less than two (2) years nor
more than ten (10) years; or

of the Court.

Administrative Sanctions
1. Willful violation of its charter or by-laws; willful
delay in the submission of reports or
publications thereof as required by law, rules
and regulations; Criminal Acts in Nos. 1 to 3
above; and/or conducting business in an unsafe
or unsound manner as may be determined by
the Monetary Board

(a) Fine not exceeding Thirty thousand pesos
(P30,000) a day for each violation, taking into
consideration the attendant circumstances, such
as the nature and gravity of the violation or
irregularity and the size of the bank or quasi-
bank; or

(b) Suspension of rediscounting privileges or
access to Bangko Sentral credit facilities;

(c) Suspension of lending or foreign exchange
operations or authority to accept new deposits or
make new investments;

(d) Suspension of interbank clearing privileges;
and/or

(e) Revocation of quasi-banking license.

2. Suspension or Removal of Director

If the offender is a director or officer of a bank,
quasi-bank or trust entity, the Monetary Board may
also suspend or remove such director or officer (Sec.
66, GBL).

Resignation or termination from office shall not
exempt such director or officer from
administrative or criminal sanctions. (Sec. 37, NCBA)

3. Dissolution of Bank

If the violation is committed by a corporation,
such corporation may be dissolved by quo
warranto proceedings instituted by the Solicitor
General (Sec. 66, GBL)

Whenever a bank or quasi-bank persists in
carrying on its business in an unlawful or unsafe
manner, the Monetary Board may commence
proceedings in liquidation. (Sec. 36, NCBA in
relation to Sec. 30, NCBA)

Corporation Act (RA 3591, as
amended)
A.. BASIC POLICY
B.. CONCEPT OF INSURED DEPOSITS
C.. LIABILITY OF DEPOSITORS

A. Basic Policy

Promote and safeguard the interests of the
depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits
(Sec. 1, as amended)

B. Concept of Insured Deposits

Insured deposit means the amount due to any bona
fide depositor for legitimate deposits in an insured
bank net of any obligation of the depositor to the

154
insured bank as of the date of closure, but not to
exceed 500,000 (Sec. 4(g), as amended)

C. Liability of Depositors

1. Deposit Liabilities Required to be Insured with
PDIC

The deposit liabilities of any bank or banking
institution, which is engaged in the business of
receiving deposits on the effective date of this
Act, or which thereafter may engage in the
business of receiving deposits, shall be insured
with the Corporation (Sec. 5)

NOTE
Bank' and 'Banking Institution' shall include
banks, commercial banks, savings bank,
mortgage banks, rural banks, development
banks, cooperative banks, stock savings and loan
associations and branches and agencies in the
Philippines of foreign banks and all other
corporations authorized to perform banking
functions in the Philippines (Sec. 4(b), as
amended)

Deposit means the unpaid balance of money or
its equivalent received by a bank in the usual
course of business and for which it has given or
is obliged to give credit to a commercial,
checking, savings, time or thrift account, or
issued in accordance with Bangko Sentral rules
and regulations and other applicable laws,
together with such other obligations of a bank,
which, consistent with banking usage and
practices, the Board of Directors shall determine
and prescribe by regulations to be deposit
liabilities of the bank (Sec. 4(f), as amended).

What is not considered a deposit?
Any obligation of a bank which is payable at the
office of the bank located outside of the
Philippines (Sec. 4(f), as amended).

2. Commencement of Liability

Liability commences upon the approval of
application.

3. Deposit Account not Entitled to Payment

The Corporation shall not pay deposit insurance
for the following accounts or transactions,
whether denominated, documented, recorded
or booked as deposit by the bank:

(1) Investment products such as bonds and
securities, trust accounts, and other similar
instruments;

(2) Unfunded, fictitious or fraudulent deposit
accounts or transactions;

(3) Deposits accounts or transactions
constituting, and/or emanating from, unsafe
and unsound banking practice/s, as determined
by the Corporation, in consultation with the
BSP, after due notice and hearing, and
publication of a cease and desist order issued by
the Corporation against such deposit accounts or
transactions; and

(4) Deposits that are determined to be the
proceeds of an unlawful activity as defined
under republic act 9160, as amended.

NOTE
Unlawful Activity refers to any act or omission
or series or combination thereof involving or
having direct relation to following:
1) Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Act of 2002;
3) Section 3 paragraphs B, C, E, G, H and I of
republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
4) Plunder under Republic Act No. 7080, as
amended;
5) Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
under the Revised Penal Code, as amended
and Presidential Decree No. 532;
8) Qualified theft under Article 310 of the
Revised penal Code, as amended;
9) Swindling under Article 315 of the Revised
Penal Code, as amended;
10) Smuggling under Republic Act Nos. 455 and
1937;
11) Violations under Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000;
12) Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
13) Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
known as the Securities Regulation Code of
2000;
14) (14) Felonies or offenses of a similar
nature that are punishable under the penal
laws of other countries (Sec. 3(i) of R.A.
9160, as amended).

4. Extent of Liability

Liability of the Corporation is to the extent of
the insured deposit (Sec.14)

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Whenever an insured bank shall have been
closed by the Monetary Board pursuant to
Section 30 of R.A. 7653, payment of the insured
deposits on such closed bank shall be made by
the Corporation as soon as possible either (1) by
cash or (2) by making available to each
depositor a transferred deposit in another
insured bank in an amount equal to insured
deposit of such depositor (Sec. 14).

NOTE
Insured deposit shall not exceed 500,000 (Sec.
4(g), as amended)

5. Determination of Insured Deposit

The determination of insured deposits shall
commence upon the Corporations actual
takeover of the closed bank (Sec. 16(a), as
amended).

The amount of the insured deposit shall be
determined according to such regulations as the
Board of Directors may prescribe, In determining
such amount due to any depositor, there shall
be added together all deposits in the bank
maintained in the same right and capacity for
his benefits either in his own name or in the
name of others (Sec. 4(g), as amended).

NOTE
The Corporation may require proof of claims to
be filed before paying the insured deposits, and
that in any case where the Corporation is not
satisfied as to the viability of a claim for an
insured deposit, it may require final
determination of a court of competent
jurisdiction before paying such claim (Sec. 14)

Notice and Publication Requirement:

(1) The Corporation shall give notice to the
depositors of the closed bank of the insured
deposits due them by whatever means
deemed appropriate by the Board of
Directors.
(2) The Corporation shall publish the notice
once a week for at least three (3)
consecutive weeks in a newspaper of
general circulation or, when appropriate, in
a newspaper circulated in the community or
communities where the closed bank or its
branches are located (Sec. 16(a), as
amended).

6. Calculation of Liability

a. Per depositor, per capacity rule

In determining the amount due to any depositor,
there shall be added together all deposits in the
bank maintained in the same right and capacity
for his benefits either in his own name or in the
name of others (Sec. 4(g), as amended)

b. Joint Accounts

A joint account regardless of whether the
conjunction 'and,' 'or,' 'and/or' is used, shall be
insured separately from any individually-owned
deposit account (Sec. 4(g), as amended).

i. If the account is held by two or more
natural persons or two or more juridical
persons

General Rule
The maximum insured deposit shall be
divided into as many equal shares as
there are individuals or juridical
persons (Sec. 4(g), as amended).

Exception
Unless a different sharing is stipulated
in the document of deposit (Sec. 4(g),
as amended).

i. If the account is held by a juridical person
or entity jointly with one or more natural
persons

The maximum insured deposits shall be
presumed to belong entirely to such juridical
person or entity (Sec. 4(g), as amended).

NOTE
The aggregate of the interest of each co-
owner over several joint accounts, whether
owned by the same or different combinations
of individuals, juridical persons or entities,
shall likewise be subject to the maximum
insured deposit of P500,000.00 (Sec. 4(g), as
amended).

c. Mode of Payment

Payment of the insured deposits on such closed
bank shall be made by the Corporation as soon
as possible either:
(1) by cash;
(2) by making available to each depositor a
transferred deposit in another insured
bank in an amount equal to insured
deposit of such depositor (Sec. 14)

NOTE
Transfer Deposit means a deposit in an insured
bank made available to a depositor by the
Corporation as payment of insured deposit of such
depositor in a closed bank and assumed by another
insured bank (Sec. 4(h), as amended)

d. Effect of Payment of Insured Deposit

Discharge from Liability to the Depositor
The Corporation shall be discharged from
liability upon payment under Sec. 14, ie:

(1) Payment of an insured deposit to any
person by the Corporation;

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(2) Payment of a transferred deposit to any
person by the new bank or by an insured
bank in which a transferred deposit has
been made available (Sec.16(b), as
amended)

Subrogation to All the Rights of the Depositor

The Corporation, upon payment of any depositor
as provided for in Section 14 shall be
subrogated to all rights of the depositor
against the closed bank to the extent of such
payment. Such subrogation shall include the
right on the part of the Corporation to receive
the same dividends and payments from the
proceeds of the assets of such closed bank and
recoveries on account of stockholders liability as
would have been payable to the depositor on a
claim for the insured deposits.

BUT, the depositor shall retain his claim for any
uninsured portion of his deposit (Sec. 15).

e. Payments of Insured Deposits as Preferred
Credit under Art. 2244 of the Civil Code

All payments by the Corporation of insured
deposits in closed banks partake of the nature
of public funds, and as such, must be
considered a preferred credit similar to taxes
due to the National Government in the order of
preference under Article 2244 of the New Civil
Code (Sec. 15)

f. Failure to Settle Claim of Insured Depositor

General Rule
Failure to settle the claim within six (6)
months from the date of filing of claim for
insured deposit shall, upon conviction,
subject the directors, officers or employees
of the Corporation responsible for the delay
to imprisonment from six (6) months to one
(1) year.

Exceptions
Such failure was not due to grave
abuse of discretion, gross
negligence, bad faith, or malice of
the directors, officers or
employees; or

The validity of the claim requires
the resolution of issues of facts
and or law by another office, body
or agency including the case
mentioned in the first proviso or by
Corporation together with such
other office, body or agency.

g. Failure of Depositor to Claim Insured Deposits

All rights of the depositor against the
Corporation with respect to the insured deposit
shall be barred:

(1) If he fails to claim the insured deposits
within two (2) years from actual takeover of
the closed bank by the receiver; or

(2) If he does not enforce his claim filed with
the corporation within two (2) years after
the two-year period to file a claim.

BUT, all rights of the depositor against the
closed bank and its shareholders or the
receivership estate to which the Corporation
may have become subrogated, shall thereupon
revert to the depositor.

Thereafter, the Corporation shall be discharged
from any liability on the insured deposit (Sec.
16(e), as amended)

Chapter V. Foreign Currency
Deposit Act (RA 6426)
A. CONFIDENTIALITY
B. PRIVILEGES

The FCDA allowed any person to deposit, and
banks to accept deposit, any foreign currency
acceptable as part of the Philippines
international reserve.

A. Confidentiality

All foreign currency deposits are declared as and
considered of an absolutely confidential nature and,
except upon the written permission of the depositor,
in no instance shall be examined, inquired or looked
into by any person, government official, bureau or
office, whether judicial or administrative, or
legislative or any other entity whether public or
private. (Sec. 8)

The foreign currency deposits shall be exempt from
process of any court, legislative body, government
agency or any administrative body whatsoever. (Sec.
8)

Exceptions
1. upon written permission of the depositor (Sec.
8, Foreign Currency Deposit Act ; Intengan vs CA
; 2002)
violation of the Anti-Money Laundering Act of
2001 [as in the case of peso deposits, supra]
3. during Bangko Sentrals periodic or special
examinations [as in the case of peso deposits,
supra], and
4. disclosure of the Treasurer of the Philippines
when the unclaimed balances law applies (Act
3936, as amended by PD 679)
5. BSP/PDIC inquiry if there is a finding of unsafe
and unsound banking practice (as in the case of
peso deposits, supra)
6. In Salvacion vs. CB (1997), where a Filipino child
was raped by a foreigner, the SC allowed
garnishment of foreign currency deposits stating

157
: If we rule that the questioned Section 113 of
CB Circular No. 960 which exempts from
process of any court, legislative body,
government agency or any administrative body
whatsoever, is applicable to a foreign transient,
injustice would result especially to a citizen
aggrieved by a foreign guest.

B. Privileges

1. Tax exemption the FCD, including interests
and all other income or earnings of such
deposits, are exempt from any and all taxes
whatsoever if these deposits are made by non-
residents and irrespective of whether or not the
non-residents are engaged in trade or business
in the Philippines (Sec. 6 as amended). FCDs of
residents are subject to 7.5% withholding tax.

2. Exemption from attachment, garnishment or any
other order or process of any court, legislative
or administrative body, or government agency
whatsoever (Sec. 8)

EXC: The CA, upon application ex parte by the AMLC
and after determination that a probable cause exists
that any monetary instrument or property is in any
way related to an unlawful activity, the AMLC,
may freeze the account (Sec. 10, RA9160).

158

M
MME
EER
RRC
CCA
AAN
NNT
TTI
IIL
LLE
EE
LAW

EXECUTIVE COMMITTEE

COMMITTEE HEADS

OPERATIONS HEADS

Intellectual Property Law
BAR REVIEWER
UP LAW
2012
MERCANTILE LAW TEAM
2012
Chatto

LAYOUT TEAM 2012
Mara Villegas Naomi
Timothy Reyes

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159
MERCANTILE LAW
Letters of Credit
Warehouse Receipts
Law
Trust Receipts Law
Negotiable
Instruments Law
Insurance Code
Transportation Law
Corporation Law
Code
Banking and Finance

I. Intellectual Property in general
II. Patents
III. Trademarks
IV. Copyright

I. Intellectual Property in General
A. Intellectual property Rights
B. Differences between copyrights,
trademarks and patent
C. Technology transfer arrangements
D. International Conventions and Reciprocity

A. Intellectual Property Rights


State Policies
1. To protect and secure the exclusive rights
of scientists, inventors, artists and other
gifted citizens to their intellectual property
and creations, particularly when beneficial
to the people, for such periods as provided
in this Act.
2. To promote the diffusion of knowledge and
information for the promotion of national
development and progress and the common
good.
3. To streamline administrative procedures of
registering patents, trademarks and
copyright, to liberalize the registration on
the transfer of technology, and to enhance
the enforcement of intellectual property
rights in the Philippines. [Sec. 2, RA 8293]

Intellectual Property Rights under the
Intellectual Property Code
1. Copyright;
2. Related Rights of copyright;
3. Trademarks and Service Marks;
4. Geographic Indications;
5. Industrial Designs;
6. Patents;
7. Layout-Designs (Topographies) of Integrated
Circuits; [Sec. 4, RA 8293]
8. Protection of Undisclosed Information
[TRIPS Agreement].

B. Differences between
copyrights, trademarks and
patent

Patentable Inventions: refer to any technical
solution of a problem in any field of human activity,
which is new, involves an inventive step and is
industrially applicable. It may be, or refer to, any
product, process, or an improvement of any of the
foregoing. [Sec. 21, RA 8293] It is vested from the
issuance of letters of patent.

Trademark: any visible sign capable of distinguishing
the goods (trademark) or services (service mark) of
an enterprise and shall include a stamped or marked
container of goods. [Kho v. CA, et al. (2002)] It is
vested from registration.

Trade Name: the name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA 8293]

Copyright: right granted by statute to the author or
originator of literary, scholarly, scientific, or artistic
productions, including computer programs. A
copyright gives him the legal right to determine how
the work is used and to obtain economic benefits
from the work. For example, the owner of a
copyright for a book or a piece of software has the
exclusive rights to use, copy, distribute, and sell
copies of the work, including later editions or
versions of the work. If another person improperly
uses material covered by a copyright, the copyright
owner can obtain legal relief. [Rule 2, Copyright
Safeguards and Regulations]

Copyright is confined to literary and artistic works
which are original intellectual creations in the
literary and artistic domain protected from the
moment of their creation. [Kho v. CA, et al. (2002)]
It is vested from the moment of creation.

Other forms of Intellectual Property

Geographic Indication

One which identifies a good as originating in the
territory of a TRIPS member, or a region or locality
in that territory where a given quality, reputation or
other characteristic of a good is essentially
attributable to its geographical origin [Art. 22, TRIPS
Agreement]

Industrial Design

Any composition of lines or colors or any three-
dimensional form, whether or not associated with
lines or colors: Provided, that such composition or
form gives a special appearance to and can serve as
pattern for an industrial product or handicraft. [Sec.
112.1, RA 8293]

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Layout Design (Topography) of an Integrated
Circuit

Layout Design (Topography): The three-dimensional
disposition, however expressed, of the elements, at
least one of which is an active element, and of some
or all the interconnections of an integrated circuit,
or such a three-dimensional disposition prepared for
an integrated circuit intended for manufacture.
[Sec. 112.3, RA 8293]

Integrated Circuit: a product, in its final form, or an
intermediate form, in which the elements, at least
one of which is an active element and some or all of
the interconnections are integrally formed and/or on
a piece of material, and which is intended to
perform an electronic function. [Sec. 112.2, RA
8293]

Undisclosed Information

Information which:
1. Is a secret in a sense that it is not, as a
body or in the precise configuration and
assembly of components, generally known
among or readily accessible to persons
within the circles that normally deal with
the kind of information in question;
2. Has a commercial value because it is secret;
and
3. Has been subject to reasonable steps under
the circumstances, by the person lawfully in
control of the information, to keep it secret
[Art. 39, TRIPS]

C. Technology Transfer
Arrangement

Refers to contracts or agreements involving:
1. the transfer of systematic knowledge for
the manufacture of a product
2. the application of a process, or rendering of
a service including management contracts;
3. the transfer, assignment or licensing of all
forms of intellectual property rights,
including licensing of computer software
except computer software developed for
mass market. [Sec. 4.2, RA 8293]

D. International Conventions and
Reciprocity

Reciprocity Rule
Any person who is a national or who is domiciled or
has a real and effective industrial establishment in a
country which:
1. is a party to any convention, treaty or
agreement relating to intellectual property
rights or the repression of unfair competition,
to which the Philippines is also a party, or
2. extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to
benefits to the extent necessary to give effect
to any provision of such convention, treaty or
reciprocal law, in addition to the rights to
which any owner of an intellectual property
right is otherwise entitled by this Act. [Sec. 3,
RA 8293]

Reverse Reciprocity of Foreign Laws
Any condition, restriction, limitation, diminution,
requirement, penalty or any similar burden imposed
by the law of a foreign country on a Philippine
national seeking protection of intellectual property
rights in that country, shall reciprocally be
enforceable upon nationals of said country, within
Philippine jurisdiction. [Sec. 231, RA 8293]

Philip Morris v. Fortune Tobacco (2006). True, the
Philippines adherence to the Paris
Convention effectively obligates the country to
honor and enforce its provisions as regards the
protection of industrial property of foreign
nationals in this country. However, any protection
accorded has to be made subject to the limitations
of Philippine laws. Hence, despite Article 2 of the
Paris Convention which substantially provides that
(1) nationals of member-countries shall have in this
country rights specially provided by the Convention
as are consistent with Philippine laws, and enjoy the
privileges that Philippine laws now grant or may
hereafter grant to its nationals, and (2) while no
domicile requirement in the country where
protection is claimed shall be required of persons
entitled to the benefits of the Union for the
enjoyment of any industrial property rights, foreign
nationals must still observe and comply with the
conditions imposed by Philippine law on its
nationals.

Principles under the TRIPS Agreement:

1. National Treatment: It is a principle which
states that each member of the WTO must
treat the nationals of every other member
as favorably as its own with respect to
intellectual property, i.e. no discrimination
may be made against foreign nationals of
members.[Art. 3, TRIPS]

2. Most-favored Nation Treatment: It requires
that each member give other members
nationals the same treatment as its own,
but that each member should not prefer
any other members nationals or those of
any non0member country, over the
nationals of any member.[Art.4,TRIPS]

3. Exhaustion of First Sale Doctrine: The term
generally refers to doctrine that extinguish
certain exclusive rights of the holder of
intellectual property with respect to a
particular physical item embodying the
intellectual property after the item has first
been sold under the holders authority. The
TRIPS Agreement explicitly disclaims in
Article 6 an intent to impose any particular
requirements regarding the issue of the
exhaustion of intellectual property rights,
thus, members of the WTO are free to
implement exhaustion of intellectual

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161
property rights as they please. [Art.6
subject to Arts. 3 and 4, TRIPS]

II. Patents
A. Patentable Inventions
B. Non-patentable Inventions
C. Ownership of a Patent
D. Cancellation of a Patent
E. Remedy of the True and Actual Inventor
F. Rights conferred by a Patent
G. Limitations on Rights of Patentees
H. Patent Infringement
I. Licensing
J. Assignment and Transmission of Rights

A. Patentable Inventions

A patentable invention is any technical solution of
a problem in any field of human activity which is
new, involves an inventive step and is industrially
applicable shall be Patentable. It may be, or may
relate to, a product, or process, or an
improvement of any of the foregoing. [Sec. 21, RA
8293]

1. Invention Patent

Standards:
a. Novelty - An invention shall not be
considered new if it forms part of a prior
art. [Sec. 23, RA 8293]

Prior art shall consist of:
i. Everything which has been made
available to the public anywhere in
the world, before the filing date or
the priority date of the application
claiming the invention; [Sec. 24.1,
RA 8293]
ii. The whole contents of an application
for a patent, utility model, or
industrial design registration,
published in accordance with this
Act, filed or effective in the
Philippines, with a filing or priority
date that is earlier than the filing or
priority date of the application:
Provided, That the application which
has validly claimed the filing date of
an earlier application under Section
31 of this Act, shall be prior art with
effect as of the filing date of such
earlier application: Provided further,
That the applicant or the inventor
identified in both applications are
not one and the same. [Sec. 24.2, RA
8293]

Non-Prejudicial Disclosures: This is an
exception to the General Rule on Prior
Art under Sec. 24. It provides that the
disclosure of the information contained
in the application during the 12 months
preceding the filing date or the priority
date of the application shall not
prejudice the applicant on the ground of
lack of novelty if such disclosure was
made by:
1. The inventor
2. A patent office and the
information contained (1) in
another application filed by the
inventor and should not have been
disclosed by the office, or (2) in an
application filed without the
knowledge or consent of the
inventor by a third party which
obtained the information directly
or indirectly from the inventor
3. A third party which obtained the
information directly or indirectly
from the inventor [Sec. 25, RA
8293]

b. Inventive Step - An invention involves an
inventive step if, having regard to prior
art, it is not obvious to a person skilled
in the art at the time of the filing date
or priority date of the application
claiming the invention. [Sec. 26.1, RA
8293, as amended by RA 9502]

Cheaper Medicines Act: In case of drugs
and medicines, there is no inventive
step if the invention results from the
mere discovery of a new form or new
property of a known substance which
does not result in enhancement of the
known efficacy of that substance, or the
mere discovery of any new property or
new use of a known substance or the
mere use of a known process unless such
known process results in a new product
that employs at least one reactant. [Sec.
26.2, RA 8293 as amended by RA 9502]

c. Industrial Applicability - An invention
that can be produced and used in any
industry shall be industrially applicable.
[Sec. 27, RA 8293]

2. Utility Model

It is any technical solution of a problem in any field
of human activity which is new and industrially
applicable. Unlike an invention patent, a utility
model need not be inventive. The law merely
requires that it be novel and industrially applicable.
[Sec. 109.1, RA 8293]

A utility model registration shall expire, without any
possibility of renewal, at the end of the seventh year
after the date of the filing of the application. [Sec.
109.3, RA 8293]

Statutory Classes of Utility Models

A Utility Model may be, or may relate to:

162
a. A useful machine;
b. An implement or tool;
c. A product or composition;
d. A method or process; or
e. An improvement of any of the foregoing.
[Rule 201, Rules and Regulations on Utility
Models and Industrial Designs as amended]

Grounds for Cancellation of Utility Models

a. That the claimed invention does not qualify
for registration as a utility model and does
not meet the requirements of registrability;
b. That the description and the claims do not
comply with the prescribed requirements;
c. That any drawing which is necessary for the
understanding of the invention has not been
furnished;
d. That the owner of the utility model
registration is not the inventor or his
successor in title [Sec 109.4, RA 8293]

3. Industrial Design

An industrial design is any composition of lines or
colors or any three-dimensional form, whether or
not associated with lines or colors: Provided that
such composition or form gives a special appearance
to and can serve as pattern for an industrial product
or handicraft. [Sec. 112.1, RA 8293 as amended by
RA 9150]

4. Lay-out Designs (Topographies) of
Integrated Circuits

Integrated Circuit means a product, in its final
form, or an intermediate form, in which the
elements, at least one of which is an active element
and some or all of the interconnections are
integrally formed in and/or on a piece of material,
and which is intended to perform an electronic
function. [Sec. 112.2, RA 8293 as amended by RA
9150]

Layout-Design is synonymous with 'Topography' and
means the three-dimensional disposition, however
expressed, of the elements, at least one of which is
an active element, and of some or all of the
interconnections of an integrated circuit, or such a
three-dimensional disposition prepared for an
integrated circuit intended for manufacture. [Sec.

B. Non-patentable Inventions

The following shall be excluded from patent
protection:

1. Discoveries, scientific theories and
mathematical methods, and in the case of
drugs and medicines, the mere discovery of
a new form or new property of a known
substance which does not result in the
enhancement of the known efficacy of that
substance, or the mere discovery of any
new property or new use for a known
substance, or the mere use of a known
process unless such known process results in
a new product that employs at least one
new reactant.

Salts, esters, ethers, polymorphs,
metabolites, pure form, particle size,
isomers, mixtures of isomers, complexes,
combinations, and other derivatives of a
known substance shall be considered to be
the same substance, unless they differ
significantly in properties with regard to
efficacy; [Sec. 22.1, RA 8293 as amended by
RA 9502]

2. Schemes, rules and methods of performing
mental acts, playing games or doing
business, and programs for computers; [Sec.
22.2, RA 8293]

3. Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human
or animal body. This provision shall not
apply to products and composition for use
in any of these methods; [Sec. 22.3, RA
8293]

4. Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to micro-organisms
and non-biological and microbiological
processes; [Sec. 22.4, RA 8293]

5. Aesthetic creations; [Sec. 22.5, RA 8293]

6. Anything which is contrary to public order
or morality. [Sec. 22.6, RA 8293]

Cheaper Medicines Act: In addition to discoveries,
scientific theories and mathematical methods, the IP
Code now includes, in case of drugs and medicines:
1. The mere discovery of a new form or new
property of a known substance which does
not result in the enhancement of the known
efficacy of that substance
2. the mere discovery of any new property or
new use of a known substance
3. the mere use of a known process unless
such known process results in a new product
that employs at least one reactant [Sec.

C. Ownership of a Patent

1. Right to a Patent

General Rule: The right to patent belongs to the
inventor, his heirs, or assigns. When two (2) or more
persons have jointly made an invention, the right to
a patent shall belong to them jointly. [Sec.28, RA
8293]

Exception: Inventions created pursuant to a
commission (Work for Hire Doctrine)

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163
i. The employer has the right to the patent if
the invention is the result of the
performance of the employees regularly
assigned duties [Sec. 30.2, RA 8293]
ii. In case of inventions created pursuant to a
commission, the person who commissions
the work shall own the patent [Sec. 30.1,
RA 8293]

2. First-to-file Rule

If two (2) or more persons have made the invention
separately and independently of each other, the
right to the patent shall belong to the person who
filed an application for such invention, or where two
or more applications are filed for the same
invention, to the applicant who has the earliest
filing date or, the earliest priority date. [Sec. 29, RA
8293]

3. Inventions created pursuant to a
Commission

Commission: Person who commissions the work shall
own the patent, unless otherwise provided in the
contract [Sec. 30.1, RA 8293]

Employment Contract: Patent belongs to the
employee if the inventive activity is not a part of his
regular duties even if the employee uses the time,
facilities and materials of the employer. [Sec.
30.2(a), RA 8293]

Patent belongs to the employer if the invention is
the result of the performance of his regularly-
assigned duties, unless there is an agreement,
express or implied, to the contrary. [Sec. 30.2(b), RA
8293]

4. Right of priority

An application for patent filed by any person who
has previously applied for the same invention in
another country which by treaty, convention, or law
affords similar privileges to Filipino citizens, shall be
considered as filed as of the date of filing the
foreign application: Provided, That: (a) the local
application expressly claims priority; (b) it is filed
within twelve (12) months from the date the earliest
foreign application was filed; and (c) a certified
copy of the foreign application together with an
English translation is filed within six (6) months from
the date of filing in the Philippines. [Sec. 31, RA
8293]

D. Cancellation of a Patent

1. Grounds for Cancellation of Patent

Any interested person may, upon payment of the
required fee, petition to cancel the patent or any
claim thereof, or parts of the claim, on any of the
following grounds:

a. That what is claimed as the invention is not
new or patentable;
b. That the patent does not disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any
person skilled in the art; or
c. That the patent is contrary to public order
or morality. [Sec. 61.1, RA 8293]

Where the grounds for cancellation relate to some of
the claims or parts of the claim, cancellation may be
effected to such extent only. [Sec. 61.2, RA 8293]

2. Requirement of the Petition

The petition for cancellation shall be in writing,
verified by the petitioner or by any person in his
behalf who knows the facts, specify the grounds
upon which it is based, include a statement of the
facts to be relied upon, and filed with the Office.
Copies of printed publications or of patents of other
countries, and other supporting documents
mentioned in the petition shall be attached thereto,
together with the translation thereof in English, if
not in English language. [Sec. 62, RA 8293]

3. Notice of Hearing

Upon filing of a petition for cancellation, the
Director of Legal Affairs shall forthwith serve notice
of the filing thereof upon the patentee and all
persons having grants or licenses, or any other right,
title or interest in and to the patent and the
invention covered thereby, as appears of record in
the Office, and of notice of the date of hearing
thereon on such persons and the petitioner. Notice
of the filing of the petition shall be published in the
IPO Gazette. [Sec. 63, RA 8293]

4. Effect of Cancellation of Patent or
Claim.

The rights conferred by the patent or any specified
claim or claims cancelled shall terminate. Notice of
the cancellation shall be published in the IPO
Gazette. Unless restrained by the Director General,
the decision or order to cancel by Director of Legal
Affairs shall be immediately executory even pending
appeal. [Sec. 66, RA 8293]

E. Remedy of the True and Actual
Inventor

If a person, who was deprived of the patent without
his consent or through fraud is declared by final
court order or decision to be the true and actual
inventor, the court shall order for his substitution as
patentee, or at the option of the true inventor,
cancel the patent, and award actual and other
damages in his favor if warranted by the
circumstances. [Sec. 68, RA 8293]

Time to file action in court: The actions indicated in
Sections 67 and 68 shall be filed within one (1) year
from the date of publication made in accordance

164
with Sections 44 and 51, respectively. [Sec. 70, RA
8293]

Remedy of persons not having the right to a
patent: If a person other than the applicant, is
declared by final court order or decision as having
the right to the patent, such person may, within
three (3) months after the decision has become
final:
1. Prosecute the application as his own
application in place of the applicant;
2. File a new patent application in respect of
the same invention;
3. Request that the application be refused; or
4. Seek cancellation of the patent, if one has
already been issued. [Sec. 67, RA 8293]

F. Rights conferred by a Patent

A patent shall confer on its owner the following
exclusive rights:
1. Where the subject matter of a patent is a
product, to restrain, prohibit and prevent any
unauthorized person or entity from making,
using, offering for sale, selling or importing
that product. [Sec. 71.1(a), RA 8293]

2. Where the subject matter of a patent is a
process, to restrain, prevent or prohibit any
unauthorized person or entity from using the
process, and from manufacturing, dealing in,
using, selling or offering for sale, or importing
any product obtained directly or indirectly
from such process. [Sec. 71.1(b), RA 8293]

3. Patent owners shall also have the right to
assign, or transfer by succession the patent,
and to conclude licensing contracts for the
same. ( Sec. 71.2, RA 8293]

To be able to effectively and legally preclude
others from copying and profiting from the
invention, a patent is a primordial requirement.
No patent, no protection. The ultimate goal of a
patent system is to bring new designs and
technologies into the public domain through
disclosure. Ideas, once disclosed to the public
without the protection of a valid patent, are
subject to appropriation without significant
restraint. [Pearl Dean, Inc. v. Shoemart,
Inc.(2003)]

G. Limitations on the Rights of
Patentees

1. Limitation on Patent Rights

The owner of a patent has no right to prevent
third parties from performing, without his
authorization, the acts referred to in Section 71
hereof in the following circumstances:

a. Using a patented product which has been
put on the market in the Philippines by the
owner of the product, or with his express
consent, insofar as such use is performed
after that product has been so put on the
said market: Provided, That, with regard to
drugs and medicines, the limitation on
patent rights shall apply after a drug or
medicine has been introduced in the
Philippines or anywhere else in the world by
the patent owner, or by any party
authorized to use the invention: Provided,
further, That the right to import the drugs
and medicines contemplated in this section
shall be available to any government agency
or any private third party; [Sec. 72.1, RA
8293 as amended by RA 9502]

b. Where the act is done privately and on a
non-commercial scale or for a non-
commercial purpose: Provided, That it does
not significantly prejudice the economic
interests of the owner of the patent; [Sec.

c. Where the act consists of making or using
exclusively for experimental use of the
invention for scientific purposes or
educational purposes and such other
activities directly related to such scientific
or educational experimental use; [Sec.

d. In the case of drugs and medicines, where
the act includes testing, using, making or
selling the invention including any data
related thereto, solely for purposes
reasonably related to the development and
submission of information and issuance of
approvals by government regulatory
agencies required under any law of the
Philippines or of another country that
regulates the manufacture, construction,
use or sale of any product: Provided, That,
in order to protect the data submitted by
the original patent holder from unfair
commercial use provided in Article 39.3 of
the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS
Agreement), the Intellectual Property
Office, in consultation with the appropriate
government agencies, shall issue the
appropriate rules and regulations necessary
therein not later than one hundred twenty
(120) days after the enactment of this law;
[Sec. 72.4, RA 8293 as amended by RA 9502]

e. Where the act consists of the preparation
for individual cases, in a pharmacy or by a
medical professional, of a medicine in
accordance with a medical shall apply after
a drug or medicine has been introduced in
the Philippines or anywhere else in the
world by the patent owner, or by any party
authorized to use the invention: Provided,
further, That the right to import the drugs
and medicines contemplated in this section
shall be available to any government agency
or any private third party; [Sec. 72.5, RA

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There shall be no infringement of trademarks or
tradenames of imported or sold drugs and medicines
allowed as well as imported or sold off-patent drugs
and medicines: Provided, That said drugs and
medicines bear the registered marks that have not
been tampered, unlawfully modified, or infringed.
[Sec.159.4 RA 8293 as amended by RA 9502]

2. Prior User

Notwithstanding Section 72 hereof, any prior user,
who, in good faith was using the invention or has
undertaken serious preparations to use the invention
in his enterprise or business, before the filing date
or priority date of the application on which a patent
is granted, shall have the right to continue the use
thereof as envisaged in such preparations within the
territory where the patent produces its effect. [Sec.
73.1, RA 8293]

The right of the prior user may only be transferred
or assigned together with his enterprise or business,
or with that part of his enterprise or business in
which the use or preparations for use have been
made. [Sec. 73.2, RA 8293]

3. Use by the government

A Government agency or third person authorized by
the Government may exploit the invention even
without agreement of the patent owner where:

a. the public interest, in particular, national
security, nutrition, health or the
development of other sectors, as
determined by the appropriate agency of
the government, so requires; [Sec. 74.1(a),
RA 8293]
b. A judicial or administrative body has
determined that the manner of
exploitation, by the owner of the patent or
his licensee, is anti-competitive. [Sec.
74.1(b), RA 8293]

The use by the Government, or third person
authorized by the Government shall be subject,
mutatis mutandis, to the conditions set forth in
Sections 95 to 97 and 100 to 102 on compulsory
licensing. [Sec. 74.2, RA 8293]

All cases arising from the implementation of this
provision shall be cognizable by courts with
appropriate jurisdiction provided by law. No court
except the Supreme Court of the Philippines, shall
issue any temporary restraining order or preliminary
injunction or such other provisional remedies that
will prevent its immediate execution. [Sec. 74.3, RA

H. Patent Infringement

It is the making, using, offering for sale, selling, or
importing a patented product or a product obtained
directly or indirectly from a patented process, or the
use of a patented process without the authorization
of the patentee. [Sec 76.1, RA 8293 as amended by
RA 9502]

Contributory Infringer: One who actively induces the
infringement of a patent or provides the infringer
with a component of a patented product or of a
product produced because of a patented process
knowing it to be especially adopted for infringing
and not suitable for substantial non-infringing. He is
jointly and severally liable with the infringer. [Sec.
76.6, RA 8293]

Doctrine of Patent Exhaustion: It espouses that the
patentee who has already sold his invention and has
received all the royalty and consideration for the
same will be deemed to have released the invention
from his monopoly. The invention thus becomes
open to use of the purchaser without further
restriction. [Adams v. Burke, in Notes on Selected
Commercial Laws, Catindig 2003 ed.]

1. Tests in patent infringement

a. Literal infringement

In using literal infringement as a test, resort must be
had in the first instance to the words of the claim.
To determine whether the particular item falls
within the literal meaning of the patent claims, the
court must juxtapose the claims of the patent and
the accused product within the overall context of
the claims and specifications, to determine whether
there is exact identity of all material elements.
[Godinez v. CA (1993)]

b. Doctrine of equivalents

Under the doctrine of equivalents, an infringement
also occurs when a device appropriates a prior
invention by incorporating its innovative concept
and, albeit with some modification and change,
performs substantially the same function in
substantially the same way to achieve substantially
the same result. [Godinez v. CA (1993)]

In order to infringe a patent, a machine or device
must perform the same function, or accomplish the
same result by identical or substantially identical
means and the principle or mode of operation must
be substantially the same. [Del Rosario v. CA (1996)]

The doctrine of equivalents provides that an
infringement also takes place when a device
appropriates a prior invention by incorporating its
innovative concept and, although with some
modification and change, performs substantially the
same function in substantially the same way to
achieve substantially the same result. The principle
or mode of operation must be the same or
substantially the same. The doctrine of equivalents
thus requires satisfaction of the function-means-and-
result test, the patentee having the burden to show
that all three components of such equivalency test
are met. [Smith Klein Beckman Corp. v. CA (2003)]

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2. Remedies against Infringement

a. Civil Action for damages

If the damages are inadequate or cannot be readily
ascertained with reasonable certainty, the court
may award by way of damages a sum equivalent to
reasonable royalty. [Sec. 76.3, RA 8293]

The court may, according to the circumstances of
the case, award damages in a sum above the amount
found as actual damages sustained: Provided, that
the award does not exceed three (3) times the
amount of such actual damages. [Sec. 76.4, RA 8293]

Civil action for infringement shall not apply to
instances covered by the Limitations of Patent Rights
(Sec. 72); Use of Invention by Government (Sec. 74);
Compulsory Licensing (Sec. 93.6); and Procedures on
Issuance of a Special Compulsory License under the
TRIPS Agreement (Sec. 93-A). [Sec.76.1, RA 8293 as
amended by RA 9052]

Notice Requirement: Damages cannot be recovered
for acts of infringement committed before the
infringer had known, or had reasonable grounds to
know of the patent. It is presumed that the infringer
had known of the patent. [Sec. 80, RA 8293]

Infringement Action by a Foreign National: Any
foreign national or juridical entity who meets the
requirements of Section 3 and not engaged in
business in the Philippines, to which a patent has
been granted or assigned under this Act, may bring
an action for infringement of patent, whether or not
it is licensed to do business in the Philippines under
existing law. [Sec.77, RA 8293]

Prescription: No damages can be recovered for acts
of infringement committed more than four (4) years
before the institution of the action for infringement.
[Sec. 79, RA 8293]

b. Injunction

Any patentee, or anyone possessing any right, title
or interest in and to the patented invention, whose
rights have been infringed, may bring a civil action
before a court of competent jurisdiction, to recover
from the infringer such damages sustained thereby,
plus attorneys fees and other expenses of litigation,
and to secure an injunction for the protection of his
rights. [Sec. 76.2, RA 8293]

c. Destruction or disposal of infringing
goods

The court may, in its discretion, order that the
infringing goods, materials and implements
predominantly used in the infringement be disposed
of outside the channels of commerce or destroyed,
without compensation. [Sec. 76.5, RA 8293]

d. Criminal Action for repeated
infringement

If infringement is repeated by the infringer or by
anyone in connivance with him after finality of the
judgment of the court against the infringer, the
offenders shall, without prejudice to the institution
of a civil action for damages, be criminally liable
therefore and, upon conviction, shall suffer
imprisonment for the period of not less than six (6)
months but not more than three (3) years and/or a
fine of not less than One hundred thousand pesos
(P100,000) but not more than Three hundred
thousand pesos (P300,000), at the discretion of the
court.

Prescription: The criminal action herein provided
shall prescribe in three (3) years from date of the
commission of the crime. [Sec 84, RA 8293]

3. Defenses in action for
infringement

In an action for infringement, the defendant, in
addition to other defenses available to him, may
show the invalidity of the patent, or any claim
thereof, on any of the grounds on which a petition of
cancellation can be brought under Section 61. [Sec
81, RA 8293]

Patent found invalid may be cancelled: In an action
for infringement, if the court shall find the patent or
any claim to be invalid, it shall cancel the same, and
the Director of Legal Affairs upon receipt of the final
judgment of cancellation by the court, shall record
that fact in the register of the Office and shall
publish a notice to that effect in the IPO Gazette.
[Sec 82, RA 8293]

Doctrine of File Wrapper Estoppel: Patentee is
precluded from claiming as part of patented product
that which he had to excise or modify in order to
avoid patent office rejection, and he may omit any
additions he was compelled to add by patent office
regulations. [Advance Transformer Co. v. Levinson
837 F.2d 1081(1988)]

I. Licensing

1. Voluntary Licensing

Voluntary Licensing is the grant by the patent owner
to a third person of the right to exploit the patented
invention. [Sec. 85, RA 8293]

Mandatory Provisions

The following provisions shall be included in
voluntary license contracts:

a. That the laws of the Philippines shall govern
the interpretation of the same and in the
event of litigation, the venue shall be the
proper court in the place where the
licensee has its principal office; [Sec. 88.1,
RA 8293]

b. Continued access to improvements in
techniques and processes related to the

1
167
technology shall be made available during
the period of the technology transfer
arrangement; [Sec. 88.2, RA 8293]

c. In the event the technology transfer
arrangement shall provide for arbitration,
the Procedure of Arbitration of the
Arbitration Law of the Philippines or the
Arbitration Rules of the United Nations
Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation and
Arbitration of the International Chamber of
Commerce (ICC) shall apply and the venue
of arbitration shall be the Philippines or any
neutral country; [Sec. 88.3, RA 8293]

d. The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the licensor.
[Sec. 88.4, RA 8293]

Prohibited clauses

The following provisions shall be deemed prima facie
to have an adverse effect on competition and trade:

a. Those which impose upon the licensee the
obligation to acquire from a specific source
capital goods, intermediate products, raw
materials, and other technologies, or of
permanently employing personnel indicated
by the licensor; [Sec. 87.1, RA 8293]

b. Those pursuant to which the licensor
reserves the right to fix the sale or resale
prices of the products manufactured on the
basis of the license; [Sec. 87.2, RA 8293]

c. Those that contain restrictions regarding
the volume and structure of production;
[Sec. 87.3, RA 8293]

d. Those that prohibit the use of competitive
technologies in a non-exclusive technology
transfer agreement; [Sec. 87.4, RA 8293]

e. Those that establish a full or partial
purchase option in favor of the licensor;
[Sec. 87.5, RA 8293]

f. Those that obligate the licensee to transfer
for free to the licensor the inventions or
improvements that may be obtained
through the use of the licensed technology;
[Sec. 87.6, RA 8293]

g. Those that require payment of royalties to
the owners of patents for patents which are
not used; [Sec. 87.7, RA 8293]

h. Those that prohibit the licensee to export
the licensed product unless justified for the
protection of the legitimate interest of the
licensor such as exports to countries where
exclusive licenses to manufacture and/or
distribute the licensed product(s) have
already been granted; [Sec. 87.8, RA 8293]
i. Those which restrict the use of the
technology supplied after the expiration of
the technology transfer arrangement,
except in cases of early termination of the
technology transfer arrangement due to
reason(s) attributable to the licensee; [Sec.
87.9, RA 8293]

j. Those which require payments for patents
and other industrial property rights after
their expiration, termination arrangement;
[Sec. 87.10, RA 8293]

k. Those which require that the technology
recipient shall not contest the validity of
any of the patents of the technology
supplier; [Sec. 87.11, RA 8293]

l. Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred technology to local conditions
or to initiate research and development
programs in connection with new products,
processes or equipment; [Sec. 87.12, RA
8293]

m. Those which prevent the licensee from
adapting the imported technology to local
conditions, or introducing innovation to it,
as long as it does not impair the quality
standards prescribed by the licensor; [Sec.
87.13, RA 8293]

n. Those which exempt the licensor for
liability for non-fulfillment of his
responsibilities under the technology
transfer arrangement and/or liability arising
from third party suits brought about by the
use of the licensed product or the licensed
technology; [Sec. 87.14, RA 8293]

o. Other clauses with equivalent effects. [Sec.
87.15, RA 8293]

Effect of Non-compliance with any provisions
of Secs. 87 and 88

The technology transfer arrangement shall
automatically be rendered unenforceable, unless
said technology transfer arrangement is approved
and registered with the Documentation, Information
and Technology Transfer Bureau under the provisions
of Section 91 on exceptional cases. [Sec. 92, RA
8293]

Right of Licensor: Unless otherwise provided in the
technology transfer agreement, the licensor shall
have the right to:
a. Grant further licenses to third person
b. Exploit the subject matter of the
technology transfer agreement [Sec. 89, RA
8293]

168
Right of the Licensee: To exploit the subject matter
of the technology transfer agreement during the
whole term of the agreement. [Sec. 90, RA 8293]

Exceptional cases

a. In exceptional or meritorious cases where
substantial benefits will accrue to the
economy, such as high technology content,
increase in foreign exchange earnings,
employment generation, regional dispersal
of industries and/or substitution with or use
of local raw materials
b. The case of BOI-registered companies with
pioneer status [Sec. 91, RA 8293]

2. Compulsory Licensing

Compulsory Licensing is the grant of the Director of
Legal Affairs of a license to exploit a patented
invention, even without the agreement of the patent
owner, in favor of any person who has shown his
capability to exploit the invention. [Sec. 93, Ra 8293
as amended by RA 9502]

Grounds

The Director General of the Intellectual Property
Office may grant a license to exploit a patented
invention, even without the agreement of the patent
owner, in favor of any person who has shown his
capability to exploit the invention, under any of the
following circumstances:

a. National emergency or other circumstances
of extreme urgency; [Sec. 93.1, RA 8293 as
amended by RA 9502]

b. Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of the
national economy as determined by the
appropriate agency of the Government, so
requires; [Sec. 93.2, RA 8293 as amended
by RA 9502]

c. Where a judicial or administrative body has
determined that the manner of exploitation
by the owner of the patent or his licensee is
anti-competitive; ; [Sec. 93.3, RA 8293 as
amended by RA 9502]

d. In case of public non-commercial use of the
patent by the patentee, without
satisfactory reason; [Sec. 93.4, RA 8293 as
amended by RA 9502]

e. If the patented invention is not being
worked in the Philippines on a commercial
scale, although capable of being worked,
without satisfactory reason: Provided, That
the importation of the patented article
shall constitute working or using the patent;

f. Where the demand for patented drugs and
medicines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health. [Sec. 93.6, RA 8293
as amended by RA 9502]

g. If the invention protected by a patent,
hereafter referred to as the "second
patent," within the country cannot be
worked without infringing another patent,
hereafter referred to as the "first patent,"
granted on a prior application or benefiting
from an earlier priority, a compulsory
license may be granted to the owner of the
second patent to the extent necessary for
the working of his invention, subject to
certain conditions. [Sec. 97, RA 8293]

h. Manufacture and export of drugs and
medicines to any country having insufficient
or no manufacturing capacity in the
pharmaceutical sector to address public
health problems: Provided, That, a
compulsory license has been granted by
such country or such country has, by
notification or otherwise, allowed
importation into its jurisdiction of the
patented drugs and medicines from the
Philippines in compliance with the TRIPS
Agreement. [Sec. 93-A.2, RA 8293 as
amended by RA 9502]

Period of filing a Petition for Compulsory License: At
any time after the grant of patent. However, a
compulsory license may not be applied for on the
ground stated in Sec. 93.5 before the expiration of a
period of four (4) years from the date of filing of the
application or three (3) years from the date of the
patent whichever period expires last. [Sec. 94, RA

Requirement to Obtain a License on
Reasonable Commercial Terms

General Rule: The license will only be granted after
the petitioner has made efforts to obtain
authorization from the patent owner on reasonable
commercial terms and conditions but such efforts
have not been successful within a reasonable period
of time. [Sec. 95.1, RA 8293 as amended by RA 9502]

Exceptions: The requirement of authorization shall
not apply in the following cases:
a. Where the petition for compulsory license
seeks to remedy a practice determined
after judicial or administrative process to
be anti-competitive;
b. In situations of national emergency or other
circumstances of extreme urgency;
c. In cases of public non-commercial use.
d. In cases where the demand for the patented
drugs and medicines in the Philippines is not
being met to an adequate extent and on
reasonable terms, as determined by the
Secretary of the Department of Health.

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169
Terms and Conditions of Compulsory License

a. The scope and duration of such license shall
be limited to the purpose for which it was
authorized;[Sec. 100.1, RA 8293]

b. The license shall be non-exclusive; [Sec.
100.2, RA 8293]

c. The license shall be non-assignable, except
with that part of the enterprise or business
with which the invention is being exploited;
;[Sec. 100.3, RA 8293]

d. Use of the subject matter of the license
shall be devoted predominantly for the
supply of the Philippine market: Provided,
that this limitation shall not apply where
the grant of the license is based on the
ground that the patentee's manner of
exploiting the patent is determined by
judicial or administrative process, to be
anti-competitive. ;[Sec. 100.4, RA 8293]

e. The license may be terminated upon proper
showing that circumstances which led to its
grant have ceased to exist and are unlikely
to recur: Provided, That adequate
protection shall be afforded to the
legitimate interest of the licensee; ;[Sec.
100.5, RA 8293]

f. The patentee shall be paid adequate
remuneration taking into account the
economic value of the grant or
authorization, except that in cases where
the license was granted to remedy a
practice which was determined after
judicial or administrative process, to be
anti-competitive, the need to correct the
anti-competitive practice may be taken into
account in fixing the amount of
remuneration. (;[Sec. 100.6, RA 8293]

J. Assignment and Transmission of
Rights

Assignment of Rights: The assignment may be of the
entire patent or a portion thereof, or be limited to a
specified territory. [Sec. 104, RA 8293]

Transmission of Rights: Patents or applications for
patents and invention to which they relate, shall be
protected in the same way as the rights of other
property under the Civil Code. [Sec. 103.1, RA 8293]

Inventions and any right, title or interest in and to
patents and inventions covered thereby, may be
assigned or transmitted by inheritance or bequest or
may be the subject of a license contract. [Sec.
103.2, RA 8293]

Requirements for Recording of Assignment

a. It must be in writing and accompanied by an
English translation, if it is in a language
other than English of Filipino
b. It must be notarized
c. It must be accompanied by an appointment
of a resident agent, if the assignee is not
residing in the Philippines
d. It must identify the letters patent involved
by number and date and give the name of
the owner of the patent and the title of the
invention. In the case of an application for
a patent, it should state the application
number and the filing date of the
application and give the name of the
applicant and the title of the invention. If
the assignment was executed concurrently
with or subsequent to the execution of the
application but before the application is
filed or before its application number is
ascertained, it should adequately identify
the application by its date of execution, the
name of the applicant, and the title of the
invention.
e. It must be accompanied by the required
fees. [Sec. 105; Rules and Regulations on
Inventions, Rule 1200]

Effect of non-recording of assignment with
the IPO

The non-recording will not affect the binding
agreement between the assignor and assignee.
However, such registration would be necessary to
bind third parties. An assignment would be void as
against any subsequent purchaser or mortgagee for
valuable consideration and without notice unless
recorded in the IPO within 3 months from the date of
the assignment or prior to the subsequent purchase
or mortgage. [Sec. 106, RA 8293]

III. Trademarks
A. Definitions of Marks, Collective Marks, Trade
Names
B. Acquisition of Ownership of Marks
C. Acquisition of Ownership of Trade Name
D. Non-registrable Marks
E. Tests to Determine Confusing Similarity
between Marks
F. Well-known Marks
G. Rights conferred by Registration
H. Use by Third Parties of names etc. similar to
Registered Marks
I. Cancellation of Trademark
J. Infringement and Remedies
K. Unfair Competition
L. Trade Names or Business Names
M. Collective Marks
N. Criminal Penalties

170
A. Definitions of Marks, Collective
Marks, Trade Names

Marks: Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods [Sec. 121.1, RA 8293]

Trademark Service Mark
Any visible sign which is
adopted and used to
identify the source of
origin of goods, and
which is capable of
distinguishing them from
goods emanating from a
competitor.
Any visible sign capable
of distinguishing the
services of an enterprise
from the service of other
enterprises.

Collective Marks: Any visible sign designated as such
in the application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or
services of different enterprises which use the sign
under the control of the registered owner of the
collective mark. [Sec. 121.2, RA 8293]

Trade Name: The name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA 8293].

Any individual name or surname, firm name, device
or word used by manufacturers, industrialists,
merchants, and others to identify their businesses,
vocations or occupations. [Converse Rubber Corp. v.
Universal Rubber Products, Inc. (1980)]

Functions of a Trademark

1. To point out distinctly the origin or
ownership of the goods and to which it is
affixed;
2. To secure him, who has been instrumental
in bringing into the market a superior
article of merchandise, the fruit of his
industry and skill;
3. To assure the public that they are producing
the genuine article;
4. To prevent fraud and imposition; and
5. To protect the manufacturer against
substitution and sale of an inferior and
different article as its product [Mirpuri v.
CA (1998)]

B. Acquisition of Ownership of
Marks

The rights to a mark shall be acquired through
registration made validly in accordance with law.
[Sec. 122, RA 8293]

Use of mark as a requirement: The applicant or the
registrant shall file a declaration of actual use of the
mark with evidence to that effect, as prescribed by
the Regulations within three (3) years from the filing
date of the application. Otherwise, the application
shall be refused or the mark shall be removed from
the Register by the Director. [Sec. 124.2, RA 8293]

For the requirement of actual use in commerce in
the Philippines before one may register a
trademark, trade name and service mark under the
law pertains to the territorial jurisdiction of the
Philippines and is not only confined to a certain
region, province, city or barangay. [McDonalds
Corporation v. MacJoy Fastfood(2007)]

Trademark is a creation of use and, therefore,
actual use is a pre-requisite to exclusive ownership;
registration is only an administrative confirmation of
the existence of the right of ownership of the mark,
but does not perfect such right; actual use thereof is
the perfecting ingredient. [Shangri-La International
Hotel v. DCC (2006)]

Non-use of mark when excused

1. If caused by circumstances arising
independently of the will of the trademark
owner. Lack of funds shall not excuse non-
use of a mark; [Sec. 152.1, RA 8293]
2. A use which does not alter its distinctive
character thought he use is different from
the form in which it is registered. [Sec.
152.2, RA 8293]
3. Use of a mark in connection with one or
more of the goods/services belonging to the
class in which the mark is registered. [Sec.
152.3, RA 8293]
4. The use of mark by a company related to
the applicant or registrant
5. The use of mark by a person controlled by
the registrant. [Sec. 152.4, RA 8293]

The use of a mark by a company related with the
registrant or applicant shall inure to the latter's
benefit, and such use shall not affect the validity of
such mark or of its registration: Provided, that such
mark is not used in such manner as to deceive the
public. [Sec.152.4, Ra 8293]

A certificate of registration shall remain in force for
10 years [Sec. 145, RA 8293] and may be renewed for
periods of 10 years at its expiration upon payment of
the prescribed fee and upon filing of a request. [Sec
146, RA 8293]

C. Acquisition of Ownership of
Trade Name

Notwithstanding any laws or regulations providing for
any obligation to register trade names, such names
shall be protected, even prior to or without
registration, against any unlawful act committed by
third parties. [Sec. 165.2 (a), RA 8293] The
ownership of a trade name is acquired through
adoption and use.

A name or designation may not be used as a trade
name if by its nature or the use to which such name
or designation may be put, it is contrary to public
order or morals and if, in particular, it is liable to
deceive trade circles or the public as to the nature
of the enterprise identified by that name. [Sec.
165.1, RA 8293]

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Any change in the ownership of a trade name shall
be made with the transfer of the enterprise or part
thereof identified by that name. [Sec. 165.4, RA
8293]

D. Non-registrable Marks

A mark cannot be registered if it:

1. Consists of immoral, deceptive or
scandalous matter, or matter which may
disparage or falsely suggest a connection
with persons, living or dead, institutions,
beliefs, or national symbols, or bring them
into contempt or disrepute; [Sec 123.1(a),
RA 8293]

2. Consists of flags, coat of arms or other
insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293]

3. Consists of a name, portrait or signature
identifying a particular living individual
except by his written consent, or of a
deceased President of the Philippines,
during the life of his widow, except by
written consent of the widow; [Sec
123.1(c), RA 8293]

4. Is identical with a registered mark of
another or a mark with an earlier filing or
priority date, in respect of:
a. The same goods or services, or
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to
be likely to deceive or cause
confusion; [Sec 123.1(d), RA 8293]

5. Is identical with, or confusingly similar to,
or constitutes a translation of a well-known
mark, whether or not registered in the
Philippines, and used for identical or similar
goods or services; [Sec 123.1(e), RA 8293]

6. Is identical with, or confusingly similar to,
or constitutes a translation of a well-known
mark which is registered in the Philippines,
and used for goods or services which are not
similar; [Sec 123.1(f), RA 8293]

7. Likely to mislead the public, particularly as
to the nature, quality, characteristics or
geographical origin of the goods or services;
[Sec 123.1(g), RA 8293]

8. Consists exclusively of signs that are generic
for the goods or services that they seek to
identify; [Sec 123.1(h), RA 8293]

9. Consists exclusively of signs or of
indications that have become customary or
usual to designate the goods or services in
everyday language or in a bona fide and
established trade practice; [Sec 123.1(i), RA
8293]

10. Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods or
rendering of the services, or other
characteristics of the goods or services;
[Sec 123.1(j), RA 8293]

11. Consists of shapes that may be necessitated
by technical factors or by the nature of the
goods themselves or factors that affect
their intrinsic value; [Sec 123.1(k), RA 8293]

12. Consists of color alone, unless defined by a
given form; [Sec 123.1(l), RA 8293]

13. Is contrary to public order or morality. [Sec
123.1(m), RA 8293]

Doctrine of Secondary Meaning: When the marks
referred to in nos. 10, 11 and 12 has become
distinctive, because of its long, continuous and
exclusive use for 5 years, as used in connection with
the applicants goods or services in commerce and in
the mind of the public indicates a single source to
consumers, it may be registered. The Office may
accept as prima facie evidence that the mark has
become distinctive, as used in connection with the
applicant's goods or services in commerce, proof of
substantially exclusive and continuous use thereof by
the applicant in commerce in the Philippines for five
(5) years before the date on which the claim of
distinctiveness is made. [Sec 123.2, RA 8293]

The nature of the goods to which the mark is applied
will not constitute an obstacle to registration. [Sec
123.3, RA 8293]

E. Tests to Determine Confusing
Similarity between Marks

1. Colorable Imitation

Colorable imitation denotes such a close or ingenious
imitation as to be calculated to deceive ordinary
persons, or such a resemblance to the original as to
deceive an ordinary purchaser giving such attention
as a purchaser usually gives, as to cause him to
purchase the one supposing it to be the other. In
ascertaining whether one mark is confusingly similar
to or is a colorable imitation of another, no set rules
can be deduced. Each case must be decided on its
own merits. The complexities attendant to an
accurate assessment of likelihood of confusion
requires that the entire panoply of elements
constituting the relevant factual landscape be
comprehensively examined. [Societe des Produits
Nestl, S.A. v. CA (2001)]

2. Dominancy test

Infringement is determined by the test of
dominancy rather than by differences or variations

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in the details of one trademark and of another.
Similarity in size, form and color, while relevant is
not conclusive. If the competing trademark contains
the main or essential or dominant features of
another, and confusion is likely to result,
infringement takes place. [Asia Brewery v. CA and
San Miguel (1993)]

3. Holistic test

To determine whether a trademark has been
infringed, we must consider the mark as a whole and
not as dissected. If the buyer is deceived, it is
attributable to the marks as a totality, not usually to
any part of it. The court therefore should be guided
by its first impression, for the buyer acts quickly and
is governed by a casual glance, the value of which
may be dissipated as soon as the court assumed to
analyze carefully the respective features of the
mark. [Del Monte Corporation, et al. v. CA (1990)]

The dominancy test considers the dominant features
in the competing marks in determining whether they
are confusingly similar. Under the dominancy test,
courts give greater weight to the similarity of the
appearance of the product arising from the adoption
of the dominant features of the registered mark,
disregarding minor differences. Courts will consider
more the aural and visual impressions created by the
marks in the public mind, giving little weight to
factors like prices, quality, sales outlets and market
segments. [McDonalds Corporation v. L.C. Big Mak
Burger, Inc., et al. (2004)]

As to the goods or services in connection with
which the marks are used (Doctrine of Related
Goods/Services):

1. Goods are related when they belong to the
same class or have the same descriptive
properties or physical attributes, or they
serve the same purpose or flow through the
same channel of trade.
2. The use of identical marks on non-
competing but related goods may likely
cause confusion.
3. Corollarily, the use of identical marks on
non-competing and unrelated goods is not
likely to cause confusion. [UP 2011 Bar
Reviewer]

F. Well-known Marks

A mark which a competent authority of the
Philippines has designated to be well-known
internationally and in the Philippines.

In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than the public
at large, including knowledge in the Philippines
which has been obtained as a result of the promotion
of the mark. [Sec 123.1(e), RA 8293]

Determinants (need not concur)

a. The duration, extent and geographical area
of any use of the mark;
b. The market share in the Philippines and
other countries of the goods/services to
which the mark applies;
c. The degree of the inherent or acquired
distinction of the mark;
d. The quality-image or reputation acquired by
the mark;
e. The extent to which the mark has been
registered in the world;
f. The exclusivity of the registration attained
by the mark in the world;
g. The extent of use of the mark in the world;
h. The exclusivity of use in the world;
i. The commercial value attributed to the
mark in the world;
j. The record of successful protection of the
rights in the mark;
k. The outcome of litigations dealing with the
issue of whether the mar is well-known; and
l. The presence or absence of identical or
similar testmarks validly registered or used
on other similar goods [Rule 102, Rule on
Trademarks]

Protection extended to Well-Known Marks

a. If not registered in the Philippines
A mark cannot be registered if it is identical with or
confusingly similar to, or constitutes a translation of
a mark which is considered by the competent
authority of the Philippines to be well-known
internationally and in the Philippines, whether or
not it is registered here, as being already the mark
of a person other than the applicant for registration
and used for identical goods or services. ([Sec
123.1(e), RA 8293]

b. If registered in the Philippines
A mark cannot be registered if it is identical with or
confusingly similar to, or constitutes a translation of
a mark considered well-known in accordance with
the Sec. 123.1 (e), which is registered in the
Philippines with respect to goods or services which
are not similar to those with respect to which
registration is applied for. [Sec 123.1(f), RA 8293]

Priority Right: An application for registration of a
mark filed in the Philippines by a person referred to
in Section 3, and who previously duly filed an
application for registration of the same mark in one
of those countries, shall be considered as filed as of
the day the application was first filed in the foreign
country. [Sec. 131.1, RA 8293]

No registration of a mark in the Philippines by a
person described in this section shall be granted
until such mark has been registered in the country of
origin of the applicant. [Sec. 131.2, RA 8293]

Significance of Priority Right: A Philippine
application filed by another applicant after the

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priority date but earlier than the foreign applicants
actual filing may be refused registration if it is
identical to the mark with a priority date. [The Law
on Trademark, Infringement and Unfair
Competition, Agpalo (2000)]

Rights Conferred by a Well-Known Mark

1. Right to be protected whether or not it is
registered in the Philippines;
2. If registered under Sec 123.1(e), extension
of protection to goods and services which
are not similar to those in respect of which
the mark is registered, provided that:
a. The use of the mark in relation to
unrelated or dissimilar goods or services
would indicate a connection between
those goods or services and the owner of
the mark; and
b. The interests of the owner of the
registered mark are likely to be
damaged by such use. [Sec. 147.2, RA
8293]

G. Rights Conferred by
Registration

Except in cases of importation of drugs and
medicines allowed under Section 72.1 of this Act and
of off-patent drugs and medicines, the owner of a
registered mark shall have the exclusive right to
prevent all third parties not having the owner's
consent from using in the course of trade identical
or similar signs or containers for goods or services
which are identical or similar to those in respect of
which the trademark is registered where such use
would result in a likelihood of confusion. In case of
the use of an identical sign for identical goods or
services, a likelihood of confusion shall be
presumed. [Sec. 147.1, RA 8293 as amended by RA
9502]

Limitations on such rights

1. Duration (except that, inasmuch as the
registration of a trademark could be
renewed every 10 years, a trademark could
conceivably remain registered forever);
2. Territorial (except well-known marks).

Registration of the mark shall not confer on the
registered owner the right to preclude third parties
from using bona fide their names, addresses,
pseudonyms, a geographical name, or exact
indications concerning the kind, quality, quantity,
destination, value, place of origin, or time of
production or of supply, of their goods or services:
Provided, That such use is confined to the purposes
of mere identification or information and cannot
mislead the public as to the source of the goods or
services. [Sec. 148, RA 8293]

Assignment and Transfer of Application and
Registration

1. An application for registration of a mark, or
its registration, may be assigned or
transferred with or without the transfer of
the business using the mark. [Sec. 149.1, RA
8293]
2. Such assignment or transfer shall, however,
be null and void if it is liable to mislead the
public, particularly as regards the nature,
source, manufacturing process,
characteristics, or suitability for their
purpose, of the goods or services to which
the mark is applied. [Sec. 149.2, RA 8293]
3. The assignment of the application for
registration of a mark, or of its registration,
shall be in writing and require the
signatures of the contracting parties.
Transfers by mergers or other forms of
succession may be made by any document
supporting such transfer. [Sec. 149.3, RA
8293]
4. Assignments and transfers of registrations of
marks shall be recorded at the Office on
payment of the prescribed fee; assignment
and transfers of applications for registration
shall, on payment of the same fee, be
provisionally recorded, and the mark, when
registered, shall be in the name of the
assignee or transferee. [Sec. 149.4, RA
8293]
5. Assignments and transfers shall have no
effect against third parties until they are
recorded at the Office. [Sec. 149.5, RA
8293]

Any license contract concerning the registration of a
mark, or an application therefor, shall provide for
effective control by the licensor of the quality of the
goods or services of the licensee in connection with
which the mark is used. If the license contract does
not provide for such quality control, or if such
quality control is not effectively carried out, the
license contract shall not be valid. [Sec. 150.1, RA
8293]

Protection limited to goods specified in
registration certificate

The certificate of registration can confer upon the
petitioner the exclusive right to use its own symbol
only to those goods specified in the certificate,
subject to any conditions a limitations stated
therein. One who has adopted and used a trademark
on his goods does not prevent the adoption and use
of the same trademark by others for products which
are of a different description. [Faberge, Inc. v. IAC
and Co Beng Kay (1992)]

H. Use by Third Parties of names,
etc. similar to Registered Marks

The IPC deems unlawful any subsequent use of the
trade name by a third party, whether as a trade
name or a mark or collective mark, or any such use
of a similar trade name or mark, likely to mislead
the public. [Sec. 165.2(b), RA 8293]

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I. Cancellation of Trademark

Upon petition, with due process and hearing, based
on the following grounds:

1. Within 5 years from registration: Belief that
the registered mark has damaged or will
damage the petitioner
2. At any time
a. Becomes the generic name for the
goods or services for which it has
registered; or
b. Has been abandoned; or
c. The registration was obtained
fraudulently or contrary to the
provisions of the IPC; or
d. Is being used by, or with the permission
of the registrant so as to misrepresent
the source of the goods or services in
connection with which the mark is used
e. If the registered owner of the mark,
without legitimate reason, fails to use
the mark within the Philippines, or to
cause it to be used in the Philippines by
virtue of a license, for an uninterrupted
period of at least 3 years. [Sec. 151, RA
8293]

The use of the mark in a form different from the
form in which it is registered, which does not alter
its distinctive character, shall not be ground for
cancellation or removal of the mark and shall not
diminish the protection granted to the mark. [Sec.
152.2, RA 8293]

The use of a mark in connection with one or more of
the goods or services belonging to the class in
respect of which the mark is registered shall prevent
its cancellation or removal in respect of all other
goods or services of the same class. [Sec. 152.3, RA
8293]

J. Infringement and Remedies

1. Trademark infringement

Any person who shall, without the consent of the
owner of the registered mark:

1. Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of
a registered mark or the same container or
a dominant feature thereof in connection
with the sale, offering for sale, distribution,
advertising of any goods or services
including other preparatory steps necessary
to carry out the sale of any goods or
services on or in connection with which
such use is likely to cause confusion, or to
cause mistake, or to deceive; [Sec. 155.1,
RA 8293]
2. Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such
reproduction, counterfeit, copy or colorable
imitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements
intended to be used in commerce upon or in
connection with the sale, offering for sale,
distribution, or advertising of goods or
services on or in connection with which
such use is likely to cause confusion, or to
cause mistake, or to deceive. [Sec. 155.2,
RA 8293]

Mighty Corporation v. E. & J. Gallo Winery
(2004). A crucial issue in any trademark
infringement case is the likelihood of confusion,
mistake or deceit as to the identity, source or
origin of the goods or identity of the business as a
consequence of using a certain mark. Likelihood of
confusion is admittedly a relative term, to be
determined rigidly according to the particular (and
sometimes peculiar) circumstances of each case.
In determining likelihood of confusion, the court
must consider: (a) the resemblance between the
trademarks; (b) the similarity of the goods to
which the trademarks are attached; (c) the likely
effect on the purchaser; and (d) the registrants
express or implied consent and other fair and
equitable considerations.

McDonalds Corporation v. L.C. Big Mak Burger,
Inc., et al., (2004). To establish trademark
infringement, the following elements must be
shown: (1) the validity of the mark; (2) the
plaintiffs ownership of the mark; and (3) the use of
the mark or its colorable imitation by the alleged
infringer results in likelihood of confusion. Of
these, it is the element of likelihood of confusion
that is the gravamen of trademark infringement.
Two types of confusion arise from the use of similar
or colorable imitation marks, namely, confusion of
goods (product confusion) and confusion of business
(source or origin confusion). While there is
confusion of goods when the products are
competing, confusion of business exists when the
products are non-competing but related enough to
produce confusion or affiliation.

In order to bring a civil action for infringement, it is
not required that there is an actual sale of the goods
or services using the infringing material. [Sec. 155.2,
RA 8293] Infringement takes place upon the mere
use or reproduction of the registered mark.

No article of imported merchandise which shall copy
or simulate the name of any domestic product, or
manufacturer, or dealer, or which shall copy or
simulate a mark registered in accordance with the
provisions of this Act, or shall bear a mark or trade
name calculated to induce the public to believe that
the article is manufactured in the Philippines, or
that it is manufactured in any foreign country or
locality other than the country or locality where it is
in fact manufactured, shall be admitted to entry at
any customhouse of the Philippines. [Sec. 166, RA
8293]

A mere distributor and not the owner cannot assert
any protection from trademark infringement as it
had no right in the first place to the registration of

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the disputed trademarks. [Superior Commercial
Enterprises v. Kunnan Enterprises (2010)]

False Designations of Origin; False
Description or Representation

Any person who, on or in connection with any goods
or services, or any container for goods, uses in
commerce any word, term, name, symbol, or device,
or any combination thereof, or any false designation
of origin, false or misleading description of fact, or
false or misleading representation of fact, which:

a. Is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation,
connection, or association of such person
with another person, or as to the origin,
sponsorship, or approval of his or her goods,
services, or commercial activities by
another person;[Sec. 169.1(a), RA 8293]

b. In commercial advertising or promotion,
misrepresents the nature, characteristics,
qualities, or geographic origin of his or her
or another person's goods, services, or
commercial activities, shall be liable to a
civil action for damages and injunction
[Sec. 169.1(b), RA 8293]

Any goods marked or labeled in contravention of the
provisions of this Section shall not be imported into
the Philippines or admitted entry at any
customhouse of the Philippines. The owner,
importer, or consignee of goods refused entry at any
customhouse under this section may have any
recourse under the customs revenue laws or may
have the remedy given by this Act in cases involving
goods refused entry or seized. [Sec. 169.2, RA 8293]

Infringement of Name and Marks of
Ownership Stamp on Containers

General Rule: It is unlawful for any person, without
the consent of the manufacturer, bottler or seller
who has registered the mark of ownership to fill such
bottles, boxes, kegs, barrels or other containers so
marked and stamped, for the purpose of sale,
dispose of, or wantonly destroy the same, whether
filled or not, to use the same for drinking vessels or
drain pipes, foundation pipes, for any other purpose
than that registered. [Sec. 2, RA 623 as amended by
RA 5700]

The use of the same without apparent permission
from the trademark owners thereof, shall be prima
facie presumption that such possession or use is
unlawful. [Sec. 3, RA 623 as amended by RA 5700]

Exceptions:
1. Use of the bottles as containers for sisi,
bagoong, patis, and similar native products
[Sec. 6 RA 623 as amended by RA 5700]
2. Persons in whose favor the containers were
sold [Distelleria Washington v. LA Tondena
Distillers (1997)]

2. Actions, Damages and Injunction
for Infringement

The owner of a registered mark may recover
damages from any person who infringes his rights,
and the measure of the damages suffered shall be
either the reasonable profit which the complaining
party would have made, had the defendant not
infringed his rights, or the profit which the
defendant actually made out of the infringement, or
in the event such measure of damages cannot be
readily ascertained with reasonable certainty, then
the court may award as damages a reasonable
percentage based upon the amount of gross sales of
the defendant or the value of the services in
connection with which the mark or trade name was
used in the infringement of the rights of the
complaining party. [Sec. 156.1, RA 8293]

The owner of the registered mark shall not be
entitled to recover profits or damages unless the
acts have been committed with knowledge that such
imitation is likely to cause confusion, or to cause
mistake, or to deceive. Such knowledge is presumed
if the registrant gives notice that his mark is
registered by displaying with the mark the words
'"Registered Mark" or the letter R within a circle or if
the defendant had otherwise actual notice of the
registration. [Sec. 158, RA 8293]

Should damages be recoverable, the measure of the
damages suffered shall be either:
a. the reasonable profit which the complaining
party would have made, had the defendant
not infringed his rights; or
b. the profit which the defendant actually
made out of the infringement; or
c. a reasonable percentage based upon the
amount of gross sales of the defendant or
the value of the services in connection with
which the mark or trade name was used in
the infringement of the rights of the
complaining party if such measure of
damages cannot be readily ascertained with
reasonable certainty. [Sec. 156.1, RA 8293]

3. Other remedies available:

1. Injunction (Sec. 156.4);
2. Impounding of sales invoices and other
documents (Sec. 156.2);
3. Double damages in case of actual intent to
defraud or to mislead (Sec. 156.3);
4. Court order for the disposal or destruction
of the infringing goods (Sec. 157);
5. Criminal Action;
6. Administration sanctions

Any foreign national who qualifies under the
principle on reciprocity and does not engage in
business in the Philippines, whether or not it is
licensed to do business in the Philippines, may bring
civil or administrative action for:
1. Opposition
2. Cancellation
3. Infringement

176
4. Unfair Competition
5. False designation of origin or false
description [Sec. 160. RA 8293]

Notice of registration of trademark is necessary for
an owner of a trademark to recover damages in an
action for infringement since knowledge that such
imitation is likely to cause confusion, or to cause
mistake, or to deceive is an element of
infringement. Requirement of notice may be
complied by displaying with the mark the words
'"Registered Mark" or the letter R within a circle.
[Sec. 158, RA 8293]

4. Limitations to actions for
infringement

The remedies given to the owner of a right infringed
shall be limited as follows:

a. registered mark shall have no effect
against any person who, in good faith,
before the filing date or the priority date,
was using the mark for the purposes of his
business or enterprise: Provided, That his
right may only be transferred or assigned
together with his enterprise or business or
with that part of his enterprise or business
in which the mark is used. [Sec. 159.1, RA
8293]

b. Where an infringer who is engaged solely in
the business of printing the mark or other
infringing materials for others is an
innocent infringer, the owner of the right
infringed shall be entitled as against such
infringer only to an injunction against
future printing. [Sec. 159.2, RA 8293]

c. Where the infringement complained of is
contained in or is part of paid
advertisement in a newspaper, magazine,
or other similar periodical or in an
electronic communication, the remedies of
the owner of the right infringed as against
the publisher or distributor of such
newspaper, magazine, or other similar
periodical or electronic communication
shall be limited to an injunction against the
presentation of such advertising matter in
future issues of such newspapers,
magazines, or other similar periodicals or in
future transmissions of such electronic
communications.

The limitations shall apply only to innocent
infringers: Provided, That such injunctive
relief shall not be available to the owner of
the right infringed with respect to an issue
of a newspaper, magazine, or other similar
periodical or an electronic communication
containing infringing matter where
restraining the dissemination of such
infringing matter in any particular issue of
such periodical or in an electronic
communication would delay the delivery of
such issue or transmission of such electronic
communication is customarily conducted in
accordance with the sound business
practice, and not due to any method or
device adopted to evade this section or to
prevent or delay the issuance of an
injunction or restraining order with respect
to such infringing matter. [Sec. 159.3, RA
8293]

d. There shall be no infringement of
trademarks or tradenames of imported or
sold drugs and medicines allowed under
Section 72.1 as well as imported or sold off-
patent drugs and medicines: Provided, That
said drugs and medicines bear the
registered marks that have not been
tampered, unlawfully modified, or infringed
upon as defined under Section 155. [Sec.
159.4 RA 8293 as amended by RA 9502]

K. Unfair Competition

A person who has identified in the mind of the public
the goods he manufactures or deals in, his business
or services from those of others, whether or not a
registered mark is employed, has a property right in
the goodwill of the said goods, business or services
so identified, which will be protected in the same
manner as other property rights. [Sec. 168.1, RA
8293]

Any person who shall employ deception or any other
means contrary to good faith by which he shall pass
off the goods manufactured by him or in which he
deals, or his business, or services for those of the
one having established such goodwill, or who shall
commit any acts calculated to produce said result,
shall be guilty of unfair competition, and shall be
subject to an action therefor. [Sec. 168.2, RA 8293]

The following shall be deemed guilty of unfair
competition:

a. Any person, who is selling his goods and
gives them the general appearance of goods
of another manufacturer or dealer, either
as to the goods themselves or in the
wrapping of the packages in which they are
contained, or the devices or words thereon,
or in any other feature of their appearance,
which would be likely to influence
purchasers to believe that the goods
offered are those of a manufacturer or
dealer, other than the actual manufacturer
or dealer, or who otherwise clothes the
goods with such appearance as shall deceive
the public and defraud another of his
legitimate trade, or any subsequent vendor
of such goods or any agent of any vendor
engaged in selling such goods with a like
purpose;[Sec. 168.3(a), RA 8293]

b. Any person who by any artifice, or device,
or who employs any other means calculated
to induce the false belief that such person
is offering the services of another who has

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identified such services in the mind of the
public; [Sec. 168.3(b), RA 8293]

c. Any person who shall make any false
statement in the course of trade or who
shall commit any other act contrary to good
faith of a nature calculated to discredit the
goods, business or services of another. [Sec.
168.3(c), RA 8293]

McDonalds Corporation v. L.G. Big Mak Burger,
Inc., et al. (2004). The elements of an action for
unfair competition are: [1] confusing similarity in
the general appearance of the goods, and [2] intent
to deceive the public and defraud a competitor. The
confusing similarity may or may not result from
similarity in the marks, but may result from other
external factors in the packaging or presentation of
the goods. The intent to deceive and defraud may be
inferred from the similarity in appearance of the
goods as offered for sale to the public. Actual
fraudulent intent need not be shown.

An action for unfair competition is based on the
proposition that no dealer in merchandise should be
allowed to dress his goods in simulation of the goods
of another dealer, so that purchasers desiring to buy
the goods of the latter would be induced to buy the
goods of the former. The most usual devices
employed in committing this crime are the
simulation of labels and the reproduction of form,
color and general appearance of the package used
by the pioneer manufacturer or dealer. [Caterpillar,
Inc v. Samson (2006)]

Articles 168.1 and 168.2 provide the concept and
general rule on the definition of unfair competition.
The law does not thereby cover every unfair act
committed in the course of business; it covers only
acts characterized by deception or any other means
contrary to good faith in the passing off of goods
and services as those of another who has established
goodwill in relation with these goods or services, or
any other act calculated to produce the same result.

What unfair competition is, is further particularized
under Section 168.3 when it provides specifics of
what unfair competition is without in any way
limiting the scope of protection against unfair
competition. Part of these particulars is provided
under Section 168.3(c) which provides the general
catch-all phrase that the petitioner cites. Under
this phrase, a person shall be guilty of unfair
competition who shall commit any other act
contrary to good faith of a nature calculated to
discredit the goods, business or services of another.

From jurisprudence, unfair competition has been
defined as the passing off (or palming off) or
attempting to pass off upon the public the goods or
business of one person as the goods or business of
another with the end and probable effect of
deceiving the public. It formulated the true test
of unfair competition: whether the acts of defendant
are such as are calculated to deceive the ordinary
buyer making his purchases under the ordinary
conditions which prevail in the particular trade to
which the controversy relates. One of the essential
requisites in an action to restrain unfair competition
is proof of fraud; the intent to deceive must be
shown before the right to recover can exist. The
advent of the IP Code has not significantly changed
these rulings as they are fully in accord with what
Section 168 of the Code in its entirety provides.
Deception, passing off and fraud upon the public are
still the key elements that must be present for
unfair competition to exist. [Coca-Cola v. Gomez
(2008)]

Infringement of
Trademark
Unfair Competition
Unauthorized use of a
trademark
passing off of ones
goods as those of
another
Fraudulent intent is
unnecessary
Fraudulent intent is
essential
prior registration of the
trademark is a
prerequisite to the
action
registration is not
necessary
[Del Monte Corporation, et al. v. CA (1990)]

The law on unfair competition is broader and more
inclusive than the law on trademark infringement.
The latter is more limited but it recognizes a more
exclusive right derived from the trademark adoption
and registration by the person whose goods or
business is first associated with it. Hence, even if
one fails to establish his exclusive property right to a
trademark, he may still obtain relief on the ground
of his competitors unfairness or fraud. Conduct
constitutes unfair competition if the effect is to pass
off on the public the goods of one man as the goods
of another. [Mighty Corporation v. E. & J. Gallo
Winery (2004)]

L. Trade Names and Business
Names

It is the name or designation identifying or
distinguishing an enterprise. [Sec. 121.3, RA 8293]

Any individual name or surname, firm name, device
or word used by manufacturers, industrialists,
merchants, and others to identify their businesses,
vocations or occupations [Converse Rubber Corp. v.
Universal Rubber Products, Inc. (1980)]

What may NOT be used as trade name

1. If by its nature or the use to which the
name or designation may be put, it is
contrary to public order or morals.
2. If it is liable to deceive trade circles or the
public as to the nature of the enterprise
identified by the name
3. If the trade name is similar to a mark or a
trade name owned by another person and
its use would likely mislead the public.
[Sec.165.1, RA 8293]

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Acquisition of ownership: Trade names are protected
even prior to or without registration. The ownership
of a trade name is acquired through adoption and
use.

Right of owner: The IPC deems unlawful any
subsequent use of the trade name by a third party,
whether as a trade name or a mark or collective
mark, or any such use of a similar trade name or
mark, likely to mislead the public. [Sec. 165.2(b), RA
8293]

Trade names, unlike trademarks, need not be
registered with the IPO before an infringement suit
may be filed by its owner against the owner of an
infringing trademark. All that is required is that the
trade name is previously used in trade or commerce
in the Philippines. [Prosource International v.
Horphag Research Management (2009)]

M. Collective Marks

Any visible sign designated as such in the application
for registration and capable of distinguishing the
origin or any other common characteristic, including
the quality of goods or services of different
enterprises which use the sign under the control of
the registered owner of the collective mark [Sec.
121.2, RA 8293]

An application for registration of a collective mark
shall designate the mark as a collective mark and
shall be accompanied by a copy of the agreement, if
any, governing the use of the collective mark. [Sec.
167.2, Ra 8293]

Grounds for Cancellation

In addition to the grounds under Section 149, the
Court shall cancel the registration of a collective
mark if the person requesting the cancellation
proves:

1. that only the registered owner uses the
mark; or
2. that he uses or permits its use in
contravention of the agreements referred
to in Subsection 166.2; or
3. that he uses or permits its use in a manner
liable to deceive trade circles or the public
as to the origin or any other common
characteristics of the goods or services
concerned. [Sec. 167.3, RA 8293]

The registration of a collective mark, or an
application therefor shall not be the subject of a
license contract. [Sec. 167.4, RA 8293]

N. Criminal Penalties

Independent of the civil and administrative sanctions
imposed by law, a criminal penalty of imprisonment
from two (2) years to five (5) years and a fine
ranging from Fifty thousand pesos (P50,000) to Two
hundred thousand pesos (P200,000), shall be
imposed on any person who is found guilty. [Sec.
170, RA 8293]

IV. Copyright
A. Basic Principles
B. Copyrightable Works
C. Non-copyrightable Works
D. Rights of Copyright Owner
E. Rules on Ownership of Copyright
F. Deposit of Copyrightable Materials
G. Limitations on Copyright

A. Basic Principles

1. Works are protected by the sole fact
of their creation

Principle of Automatic Protection: Copyright is
vested from the very moment of creation. [Sec.
172.2, RA 8293]

The enjoyment and exercise of copyright, including
moral rights, shall not be the subject of any
formality; such enjoyment and such exercise shall be
independent of the existence of protection in the
country of origin of the work. [Article 5(2), Berne
Convention for the Protection of Literary and Artistic
Works]

The Denicola Test in intellectual property law states
that if design elements of an article reflect a merger
of aesthetic and functional considerations, the
artistic aspects of the work cannot be conceptually
separable from the utilitarian aspects; thus, the
article cannot be copyrighted. [UP 2011 Bar
Reviewer]

2. Protection extends only to the
expression of an idea, not the idea
itself.

No protection shall extend, under this law, to any
idea, procedure, system method or operation,
concept, principle, discovery or mere data as such,
even if they are expressed, explained, illustrated or
embodied in a work. [Sec 175, RA 8293]

3. The copyright is distinct from the
property in the material object
subject to it. [Sec 181, RA 8293]

4. Copyright is a statutory right.

Copyright, in the strict sense of the term is purely a
statutory right. Being a mere statutory grant, the
rights are limited to what the statute confers. It may
be obtained and enjoyed only with respect to the
subjects and by the persons, and on terms and
conditions specified in the statute. Accordingly, it
can cover only the works falling within the statutory
enumeration or description. [Pearl and Dean vs.
Shoemart (2003)]

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B. Copyrightable Works

1. Original Literary and Artistic Works

Sec. 172.1, RA 8293. Literary and artistic works,
hereinafter referred to as "works", are original
intellectual creations in the literary and artistic
domain protected from the moment of their creation
and shall include in particular:

a. Books, pamphlets, articles and other
writings;
b. Periodicals and newspapers;
c. Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form;
d. Letters;
e. Dramatic or dramatico-musical
compositions; choreographic works or
entertainment in dumb shows;
f. Musical compositions, with or without
words;
g. Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works of
art;
h. Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and
other works of applied art;
i. Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to
geography, topography, architecture or
science;
j. Drawings or plastic works of a scientific or
technical character;
k. Photographic works including works
produced by a process analogous to
photography; lantern slides;
l. Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any process
for making audio-visual recordings;
m. Pictorial illustrations and advertisements;
n. Computer programs; and
o. Other literary, scholarly, scientific and
artistic works.

When a work is considered original:
1. the work is an independent creation of the
author; and
2. it must not be copied from the work of
another.

A person to be entitled to a copyright must be the
original creator of the work. He must have created it
by his own skill, labor and judgment without directly
copying or evasively imitating the work of another.
[Ching Kian Chuan vs. CA (2001)]

By originality is meant that the material was not
copied, and evidences at least minimal creativity;
that it was independently created by the author and
that it possesses at least some minimal degree of
creativity. Copying is shown by proof of access to
copyrighted material and substantial similarity
between the two works. The applicant must thus
demonstrate the existence and validity of copyright
because in the absence of copyright protection, even
the original creation may be freely copied. [Ching v.
Salinas (2005)]

Originality is not determined by novelty, aesthetic
merit or ingenuity but that it is an independent
creation. [2011 UP Bar Reviewer]

The requirement in US Law that the expression
should be fixed in a tangible medium is not
applicable here since our law expressly provides that
works are protected irrespective of their mode or
form of expression. [Sec. 172.2, RA 8293]

2. Derivative Works

The following derivative works shall also be
protected by copyright:
a. Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
b. Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of
the selection or coordination or
arrangement of their contents. [Sec. 173.1,
RA 8293]

Derivative works are protected as new works
provided they shall not:
a. affect the force of any subsisting copyright
upon the original works employed or any
part thereof; or
b. be construed to imply any right to such use
of the original works, or to secure or extend
copyright in such original works. [Sec.
173.2, RA 8293]

C. Non-copyrightable Works

1. Unprotected Subject matter

a. Any idea, procedure, system method or
operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work.

b. News of the day and other miscellaneous
facts having the character of mere items of
press information;

c. Any official text of a legislative,
administrative or legal nature, as well as
any official translation thereof;

d. Pleadings;
e. Original decisions of courts and tribunals
(This pertains to the original decisions
not the SCRA published volumes since these

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are protected under derivative works under
Sec 173.1) [Sec. 175, RA 8293]

The format or mechanics of a TV show is not
copyrightable as copyright does not extend to ideas,
procedures, processes, systems, methods of
operation, concepts, principles or discoveries
regardless of the form in which they are described,
explained, illustrated or embodied. [Joaquin Jr. et
al vs. Drilon, et al (1999)]

No one may claim originality as to facts as these do
not owe their origin to an act of authorship. The first
person to find and report a particular fact has not
created the same; he has merely discovered its
existence. [Feist Publication v Rural Telephone
Services (1991)]

2. Works of the Government of the
Philippines

Work of the Government of the Philippines: is a
work created by an officer or employee of the
Philippine Government or any of its subdivisions and
instrumentalities, including government-owned or
controlled corporations as a part of his regularly
prescribed official duties. [Sec. 171.11, RA 8293]

General Rule: Government cannot own copyright

Exceptions:
1. When copyright is assigned or bequested
in favor of the government (Sec 176.3);
2. Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of
his work.

However, prior approval of the government agency
or the office wherein the work is created shall be
necessary for the exploitation of such work for
profit. (Sec. 176.1)

Notwithstanding the foregoing provisions, the
Government is not precluded from receiving and
holding copyrights transferred to it by assignment,
bequest or otherwise; nor shall publication or
republication by the Government in a public
document of any work in which copyright is
subsisting be taken to cause any abridgment or
annulment of the copyright or to authorize any use
or appropriation of such work without the consent of
the copyright owner. [Sec. 176.3, RA 8293]

In writing judicial decisions, a judge should make the
proper attribution in copying passages from
any judicial decision, statute, regulation, or other
Works of the Government. However, the failure to
make such attribution does not violate the Law on
Copyright. The law expressly provides that Works of
the Government are not subject to copyright. This
means that there is neither a legal right by anyone
to demand attribution, nor any legal obligation from
anyone to make an attribution, when Works of the
Government are copied. The failure to make the
proper attribution of a Work of the Government is
not actionable but is merely a case of sloppy writing.
Clearly, there is no legal obligation, by a judge or by
any person, to make an attribution when copying
Works of the Government. However, misquoting or
twisting, with or without attribution, any judicial
decision, statute, regulation or other Works of the
Government in judicial writing, if done to mislead
the parties or the public, is actionable. [J. Carpio
Dissenting Opinion, In The Matter Of the Charges of
Plagiarism, Etc., Against Assoc. Justice Mariano Del
Castillo, A.M. 10-7-17-SC (2011)]

3. Works of the Public domain
These include works whose term of copyright has
expired. [2011 UP Bar Reviewer]

4. Useful articles

Useful Article Doctrine: Works whose sole purpose
is utilitarian have no separate artistic value. This can
be distinguished from a work of applied art, which
has utilitarian functions but there is an identifiable
artistic work or creation incorporated thereto. [2011
UP Bar Reviewer]

D. Rights of Copyright Owner

1. Copyright or Economic Rights

Copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent the
following acts:

a. Reproduction of the work or substantial
portion of the work; [Sec. 177.1, RA 8293]

b. Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work; [Sec. 177.2, RA
8293]

c. The first public distribution of the original
and each copy of the work by sale or other
forms of transfer of ownership; [Sec. 177.3,
RA 8293]

d. Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of data
and other materials or a musical work in
graphic form, irrespective of the ownership
of the original or the copy which is the
subject of the rental; [Sec. 177.4, RA 8293]

e. Public display of the original or a copy of
the work; [Sec. 177.5, RA 8293]

f. Public performance of the work; [Sec.
177.6, RA 8293]

g. Other communication to the public of the
work [Sec. 177.7, RA 8293]

Economic rights also give the author the right to
assign the copyright and/or the material object in

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whole or in part, and they allow the owner to derive
financial reward from the use of his works by others.
[Sec. 180.1, RA 8293]

Copyright in a work of architecture shall include the
right to control the erection of any building which
reproduces the whole or a substantial part of the
work either in its original form or in any form
recognizably derived from the original: Provided,
That the copyright in any such work shall not include
the right to control the reconstruction or
rehabilitation in the same style as the original of a
building to which that copyright relates. [Sec. 186,
RA 8293]

Communication to the Public of Copyrighted Works:
includes point-to-point transmission of a work,
including video on demand, and providing access to
an electronic retrieval system, such as computer
databases, servers, or similar electronic storage
devices. Broadcasting, rebroadcasting,
retransmission by cable, and broadcast and
retransmission by satellite are all acts of
communication to the public within the meaning
of the IPC. [Rule 11, Copyright Safeguards and
Regulations]

First Public Distribution of Work: An exclusive right
of first distribution of work includes all acts
involving distribution, specifically including the first
importation of an original and each copy of the work
into the jurisdiction of the Republic of the
Philippines. [Rule 12, Copyright Safeguards and
Regulations]

Civil Code Provisions on Ownership of
Intellectual Creation:

Article 721. By intellectual creation, the following
persons acquire ownership:
(1) The author with regard to his literary,
dramatic, historical, legal, philosophical,
scientific or other work;
(2) The composer; as to his musical composition;
(3) The painter, sculptor, or other artist, with
respect to the product of his art;
(4) The scientist or technologist or any other
person with regard to his discovery or invention.

Article 722. The author and the composer,
mentioned in Nos. 1 and 2 of the preceding article,
shall have the ownership of their creations even
before the publication of the same. Once their works
are published, their rights are governed by the
Copyright laws.

The painter, sculptor or other artist shall have
dominion over the product of his art even before it is
copyrighted.
The scientist or technologist has the ownership of his
discovery or invention even before it is patented.

Article 723. Letters and other private
communications in writing are owned by the person
to whom they are addressed and delivered, but they
cannot be published or disseminated without the
consent of the writer or his heirs. However, the
court may authorize their publication or
dissemination if the public good or the interest of
justice so requires.

2. Moral Rights (Sec. 193)

The author of a work shall, independently of the
economic rights in Section 177 or the grant of an
assignment or license with respect to such right,
have the right:

a. To require that the authorship of the works
be attributed to him, in particular, the right
that his name, as far as practicable, be
indicated in a prominent way on the copies,
and in connection with the public use of his
work; [Sec. 193.1, RA 8293]

b. To make any alterations of his work prior
to, or to withhold it from publication; [Sec.
193.2, RA 8293]

c. To object to any distortion, mutilation or
other modification of, or other derogatory
action in relation to, his work which would
be prejudicial to his honor or reputation;
[Sec. 193.3, RA 8293]

d. To restrain the use of his name with respect
to any work not of his own creation or in a
distorted version of his work. [Sec. 193.4,
RA 8293]

In addition to the right to publish granted by the
author, his heirs, or assigns, the publisher shall have
a copyright consisting merely of the right of
reproduction of the typographical arrangement of
the published edition of the work. [Sec.174, RA
8293]

The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive right
of making a collection of his works. [Sec. 176.2, Ra
8293]

Waiver of Moral Rights

General Rule: Moral rights can be waived in writing,
expressly stating such waiver [Sec. 195, RA 8293] or
by contribution to a collective work unless such is
expressly reserved [Sec. 196, RA 8293].

Exceptions:
Even if made in writing, waiver is still not valid if:
a. use of the name of the author, title of his
work, or his reputation with respect to any
version or adaptation of his work, which
because of alterations substantially tends to
injure the literary or artistic reputation of
another author; [Sec. 195.1, RA 8293]

182
b. it uses the name of the author in a work
that he did not create. [Sec. 195.1, RA
8293]

Moral rights are not assignable or subject to license.
[Sec. 198, RA 8293]

3. Rights to Proceeds in Subsequent
Transfers (Droit de Suite or Follow
Up Rights)

In every sale or lease of an original work of painting
or sculpture or of the original manuscript of a writer
or composer, subsequent to the first disposition
thereof by the author, the author or his heirs shall
have an inalienable right to participate in the gross
proceeds of the sale or lease to the extent of five
percent (5%). This right shall exist during the
lifetime of the author and for fifty (50) years after
his death. [Sec. 200, RA 8293]

Works not Covered: Prints, etchings, engravings,
works of applied art, or works of similar kind
wherein the author primarily derives gain from the
proceeds of reproductions. [Sec. 201, RA 8293]

First Sale Doctrine: After the first sale of the
lawfully made copy of the copyrighted work, anyone
who is the owner of that copy can sell or dispose of
that copy in any way without any liability for
copyright infringement. The first sale of an
authorized copy of the work exhausts the authors
right to control distribution of copies. [US
Jurisprudence; UP Law 2011 Reviewer]

4. Neighboring Rights

Performers Rights

1. As regards their performances, the right of
authorizing:
a. The broadcasting and other
communication to the public of their
performance; and
b. The fixation of their unfixed
performance. [Sec. 203.1, RA 8293]

Such right shall be maintained and exercised
fifty (50) years after his death, by his heirs, and
in default of heirs, the government, where
protection is claimed. [Sec. 204.2, RA 8293]

2. The right of authorizing the direct or
indirect reproduction of their performances
fixed in sound recordings, in any manner or
form; [Sec. 203.2, RA 8293]

3. Subject to the provisions of Section 206,
the right of authorizing the first public
distribution of the original and copies of
their performance fixed in the sound
recording through sale or rental or other
forms of transfer of ownership; [Sec. 203.3,
RA 8293]

4. The right of authorizing the commercial
rental to the public of the original and
copies of their performances fixed in sound
recordings, even after distribution of them
by, or pursuant to the authorization by the
performer; [Sec. 203.4, RA 8293]

5. The right of authorizing the making
available to the public of their
performances fixed in sound recordings, by
wire or wireless means, in such a way that
members of the public may access them
from a place and time individually chosen
by them. [Sec. 203.5, RA 8293]

6. Independently of a performer's economic
rights, the performer, shall, as regards his
live aural performances or performances
fixed in sound recordings, have the right to
claim to be identified as the performer of
his performances, except where the
omission is dictated by the manner of the
use of the performance, and to object to
any distortion, mutilation or other
modification of his performances that would
be prejudicial to his reputation. [Sec.
204.1, RA 8293]

7. Unless otherwise provided in the contract,
in every communication to the public or
broadcast of a performance subsequent to
the first communication or broadcast
thereof by the broadcasting organization,
the performer shall be entitled to an
additional remuneration equivalent to at
least five percent (5%) of the original
compensation he or she received for the
first communication or broadcast. [Sec.
206, RA 8293]

Rights of Producers of Sound Recording

1. The right to authorize the direct or indirect
reproduction of their sound recordings, in
any manner or form; the placing of these
reproductions in the market and the right of
rental or lending; [Sec. 208.1, RA 8293]

2. The right to authorize the first public
distribution of the original and copies of
their sound recordings through sale or
rental or other forms of transferring
ownership; [Sec. 208.2, RA 8293]

3. The right to authorize the commercial
rental to the public of the original and
copies of their sound recordings, even after
distribution by them by or pursuant to
authorization by the producer. [Sec. 208.3,
RA 8293]

4. If a sound recording published for
commercial purposes, or a reproduction of
such sound recording, is used directly for
broadcasting or for other communication to
the public, or is publicly performed with
the intention of making and enhancing

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profit, a single equitable remuneration for
the performer or performers, and the
producer of the sound recording shall be
paid by the user to both the performers and
the producer, who, in the absence of any
agreement shall share equally. [Sec. 209,
RA 8293]

Rights of Broadcasting Organizations

1. The rebroadcasting of their broadcasts;
[Sec. 211.1, RA 8293]

2. The recording in any manner, including the
making of films or the use of video tape, of
their broadcasts for the purpose of
communication to the public of television
broadcasts of the same; [Sec. 211.2, RA
8293]

3. The use of such records for fresh
transmissions or for fresh recording. [Sec.
211.3, RA 8293]

Must-Carry Rule: prevents cable television
companies from excluding broadcasting organization
especially in those places not reached by signal.
Also, the rule prevents cable television companies
from depriving viewers in far-flung areas the
enjoyment of programs available to city viewers.
[ABS-CBN Broadcasting vs. Philippine Multi-Media
System (2009)]

Limitations on Protection

Sections 203, 208 and 209 shall not apply where the
acts referred to in those Sections are related to:
1. The use by a natural person exclusively for
his own personal purposes;
2. Using short excerpts for reporting current
events;
3. Use solely for the purpose of teaching or for
scientific research; and
4. Fair use of the broadcast subject to certain
conditions. [Sec. 212, RA 8293]

Term of Protection

Works Term
For performances not
incorporated in
recordings
fifty (50) years from the
end of the year in which
the performance took
place [Sec. 215.1(a), RA
8293]
For sound or image and
sound recordings and for
performances
incorporated therein
fifty (50) years from the
end of the year in which
the recording took
place. [Sec. 215.1(b), RA
8293]

Broadcasts twenty (20) years from
the date the broadcast
took place[Sec. 215.2,
RA 8293]

E. Rules on Ownership of
Copyright

1. Ownership of Copyright

Work Ownership
Single Creator of an
Original Work
Belongs to the author of the
work [Sec. 178.1, RA 8293]
Works of Joint
Authorship
Belongs of the co-authors; in
the absence of agreement,
their rights shall be governed
by the rules on co-ownership.
However, if the work consists
of parts that can be used
separately and identified,
the author of each part owns
the copyright of the part he
has created. [Sec. 178.2, RA
8293;BAR Question (1995,
2004)]
Work created during
the course of
employment
Belongs to the employee if
the creation is not a part of
his regular duties, even if he
used the time, facilities and
materials of the employer.
However, belongs to the
employer if the work is in the
performance of the
employees regular duties
unless there is an agreement
to the contrary. [Sec. 178.3,
RA 8293; BAR Question
(2008)]
Work commissioned
by a person other
than the employer
The person who
commissioned the work holds
ownership of the work per
se, but copyright remains
with the creator unless there
was a stipulation to the
contrary. [Sec. 178.4, RA
8293; BAR Question (1995,
2004)]
Audio visual works
Belongs to the producer,
author of the scenario,
composer of the music, film
director, and author of the
adapted work. However,
subject to stipulations, the
producers shall exercise the
copyright as may be required
for the exhibition of the
work, except for the right to
collect license fees for the
performance of musical
compositions in the work.
[Sec. 178.5, RA 8293]
Letters
Belongs to the writer, but
the court may authorize their
publication or dissemination
of the public good or interest
of justice requires, pursuant
to Art. 723, New Civil Code.
[Sec. 178.6, RA 8293
Anonymous and
pseudonymous works
Publishers are deemed to
represent the authors, unless

184
the contrary appears, the
pseudonyms or adopted
names leave no doubt as to
the authors identity or if the
author discloses his identity.
[Sec. 179, RA 8293]
Collective works
A contributor is deemed to
have waived his right unless
he expressly reserves it.
[Sec. 196, RA 8293]

2. Duration of Copyright

Works Term
Original Literary and
Artistic Works including
Posthumous Works
Lifetime of author and
for fifty (50) years after
his death [Sec 213.1,
RA 8293]
Derivative Works including
Posthumous Works
Lifetime of author and
for fifty (50) years after
his death [Sec 213.1,
RA 8293]
Joint Authorship Lifetime of the last
surviving author and for
fifty (50) years after his
death [Sec 213.2, RA
8293]
Anonymous or
Pseudonymous Works
Fifty (50) years from
date of first lawful
publication [Sec. 213.3,
RA 8293]
Applied Art Twenty-five (25) years
from date of making
[Sec. 213.4, RA 8293]
Published Photographic
Works
RA 8293]
Unpublished Photographic
Works
the making [Sec. 213.5,
RA 8293]
Published Audio-visual
Works
RA 8293]
Unpublished Audio-visual
Works
the making [Sec. 213.6,
RA 8293]

3. Presumption of Authorship

The natural person whose name is indicated on a
work in the usual manner as the author shall, in the
absence of proof to the contrary, be presumed to be
the author of the work. This provision shall be
applicable even if the name is a pseudonym, where
the pseudonym leaves no doubt as to the identity of
the author. The person or body, corporate whose
name appears on an audio-visual work in the usual
manner shall, in the absence of proof to the
contrary, be presumed to be the maker of said work.
[Sec. 219, RA 8293]

The term of protection subsequent to the death of
the author shall run from the date of his death or of
publication, but such terms shall always be deemed
to begin on the first day of January of the year
following the event which gave rise to them. [Sec.
214, RA 8293]

4. Transfer or Assignment of Copyright

The copyright may be assigned in whole or in part.
Within the scope of the assignment, the assignee is
entitled to all the rights and remedies which the
assignor had with respect to the copyright. [180.1,
RA 8293]

The copyright is not deemed assigned inter vivos in
whole or in part unless there is a written indication
of such intention. [180.2, RA 8293]

The submission of a literary, photographic or artistic
work to a newspaper, magazine or periodical for
publication shall constitute only a license to make a
single publication unless a greater right is expressly
granted. If two (2) or more persons jointly own a
copyright or any part thereof, neither of the owners
shall be entitled to grant licenses without the prior
written consent of the other owner or owners.
[180.3, RA 8293]

The transfer or assignment of copyright shall not
itself constitute a transfer of the materials object. A
transfer or assignment of the copyright of the sole
copy or one of the several copies of the work shall
not imply transfer or assignment of copyright
[Sec.181, RA 8293]

The copyright owners or their heirs may designate a
society of artists, writers or composers to enforce
their economic rights and moral rights on their
behalf. [Sec. 183, RA 8293]

F. Deposit on Copyrightable
Materials

Rule 5, Copyright Safeguards and Regulations

SECTION 4. Works That Shall Be Registered and
Deposited. Two (2) copies or reproductions of the
following classes of works, and transfers and
assignments related thereto, shall be registered and
deposited with TNL Copyright Division and another
two (2) copies with the SCL:
a. Books, pamphlets, articles and other
writings;
b. Periodicals and newspapers;
c. Lectures, sermons, addresses, dissertations
prepared for oral delivery whether or not
reduced in writing or other material form;
d. Letters;
e. Musical compositions with or without words

SECTION 5. Replicas and Pictures. For practical
purposes, only replicas and pictures of the following
classes of works, shall be registered and deposited
with The National Library Copyright Division:

a. Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art, models or designs for works of

1
185
art;
b. Original ornamental designs or models for
articles of manufacture, whether or not
registerable as an industrial design, and
other works of applied art;
c. Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to
geography, topography, architecture or
science;
d. Drawings or plastic works of a scientific or
technical character.

SECTION 6. Works that May be Registered and
Deposited. The following works may be registered
and deposited:
a. Dramatic or dramatic-musical compositions,
choreographic works or entertainment in
shows;
b. Photographic works including works
produced by a process analogous to
photography, lantern slides;
c. Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any process
for making audio-visual recordings;
d. Pictorial illustrations and advertisements;
e. Computer programs;
f. Other literary, scholarly, scientific and
artistic works;
g. Sound recordings;
e. Broadcast recording [Sec. 6, Rule 5,
Copyright Safeguards and Regulations

Registration and Deposit with the National
Library and the Supreme Court Library

After the first public dissemination of performance
by authority of the copyright owner of a work there
shall, for the purpose of completing the records of
the National Library and the Supreme Court Library,
within three (3) weeks, be registered and deposited
with it, by personal delivery or by registered mail
two (2) complete copies or reproductions of the
work in such form as the directors of said libraries
may prescribe. A certificate of deposit shall be
issued for which the prescribed fee shall be
collected and the copyright owner shall be exempt
from making additional deposit of the works with the
National Library and the Supreme Court Library
under other laws.

If, within three (3) weeks after receipt by the
copyright owner of a written demand from the
directors for such deposit, the required copies or
reproductions are not delivered and the fee is not
paid, the copyright owner shall be liable to pay a
fine equivalent to the required fee per month of
delay and to pay to the National Library and the
Supreme Court Library the amount of the retail price
of the best edition of the work. Only the above
mentioned classes of work shall be accepted for
deposit by the National Library and the Supreme
Court Library. [Sec. 191, RA 8293}

All copies deposited and instruments in writing filed
with the National Library and the Supreme Court
Library shall become the property of the
Government [Sec. 227, RA 8293]

Notice of Copyright

Each copy of a work published or offered for sale
may contain a notice bearing the name of the
copyright owner, and the year of its first
publication, and, in copies produced after the
creator's death, the year of such death. [Sec. 192,
RA 8293]

G. Limitations on Copyright

1. Doctrine of Fair Use

The fair use of copyrighted work for criticism, news
reporting, teaching (including multiple copies for
classroom use), research and similar purposes is not
an infringement of copyright.

A privilege, in persons other than the owner of the
copyright, to use the copyrighted material in a
reasonable manner without his consent,
notwithstanding the monopoly granted to the owner
by the copyright. It is meant to balance the
monopolies enjoyed by the copyright owner with the
interests of the public and of society.

Decompilation: Refers to the reproduction of the
code and translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with other
programs. This may also constitute fair use [Sec.
185.1, RA 8293].

The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is made
upon consideration of all the above factors. [Sec
185.2, RA 8293]

Factors to consider in determining Fair Use

1. The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
2. The nature of the copyrighted work;
3. The amount and substantiality of the
portion used in relation to the copyrighted
work as a whole; and
4. The effect of the use upon the potential
market for or value of the copyrighted work
[Sec. 185.1, RA 8293; [Harper & Row v.
Nation Enterprise, 471 US 539, 105 S.Ct.
2218, 85 L.Ed.2d 588]

2. Copyright infringement

Infringement of Copyright and Related Rights means
any violation of the rights under the Intellectual
Property Code and/or the applicable Intellectual
Property Law, including the act of any person who at
the time when copyright subsists in a work has in his
possession an article which he known, or ought to

186
know, to be an infringing copy of the work f or the
purpose of:

a. Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article
b. Distributing the article for purpose of trade,
or for any other purpose to an extent that
will prejudice the rights of the copyright
owner in the work; or
c. Trade exhibit of the article in public. [Sec.
1(l), Rule 1, Rules and Regulations on
Administrative Complaints for Violation of
Laws involving Intellectual Property Rights]

Habana et al vs. Robles et al. (1999). Infringement
consists in the doing by any person, without the
consent of the owner of the copyright, of anything
the sole right to do which is conferred by statute on
the owner of the copyright. For there to be
substantial reproduction of a book, it does not
necessarily require that the entire copyrighted work,
or even a large portion of it, be copied. If so much is
taken that the value of the original work is
substantially diminished, there is an infringement of
copyright and to an injurious extent, the work
appropriated. It is no defense that the pirate did not
know whether or not he was infringing any
copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In
cases of infringement, copying alone is not what is
prohibited. The copying must produce am injurious
effect.

Copyright infringement and unfair competition are
not limited to the act of selling counterfeit goods.
They cover a whole range of acts from copying,
assembling, packaging to marketing, including the
mere offering for sale of counterfeit goods.
[Microsoft Corp vs. Maxicorp Inc.(2004)]

Columbia Pictures v. CA (1996). A copy of a piracy
is an infringement of the original, and it is no
defense that the pirate, in such cases, did not know
what works he was indirectly copying, or did not
know whether or not he was infringing any
copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In
determining the question of infringement, the
amount of matter copied from the copyrighted work
is an important consideration. To constitute
infringement, it is not necessary that the whole or
even a large portion of the work shall have been
copied. If so much is taken that the value of the
original is sensibly diminished, or the labors of the
original author are substantially and to an injurious
extent appropriated by another, that is sufficient in
point of law to constitute a
piracy.

The following shall NOT constitute
infringement of copyright:
a. Recitation or performance of a work once it
has been made accessible to the public if
(1) privately done AND free of charge OR (2)
strictly for a charitable or religious
institution; [Sec. 184.1(a), RA 8293]

b. Making of quotations from a published
work: (i) compatible with fair use, (ii)
extent is justified by the purpose, (iii)
source and name of the author, appearing
on work, must be mentioned; [Sec.
184.1(b), RA 8293]

c. Reproduction or communication to the
public by mass media of articles on current
political, social, economic, scientific or
religious topic, lectures, addresses and
other works, delivered in public: (i) for
information purposes, (ii) not expressly
reserved, and (iii) source is already
indicated; [Sec. 184.1(c), RA 8293]

d. Reproduction and communication to the
public of literary, scientific or artistic works
as part of reports of current events by
means of photography, cinematography or
broadcasting to the extent necessary for
the purpose; [Sec. 184.1(d), RA 8293]

e. Inclusion of a work in a publication,
broadcast or other communication to the
public, sound recording or film if made by
way of illustration for teaching purposes
compatible with fair use and the source and
the name of the author appearing on work,
must be mentioned; [Sec. 184.1(e), RA
8293]

f. Recording made in schools, universities, or
educational institutions of a work included
in a broadcast for the use of schools,
universities or educational institutions.
Such recording must be deleted within a
reasonable period; such recording may not
be made from audio-visual works which are
part of the general cinema, repertoire of
feature films except of brief excerpts of the
work; [Sec. 184.1(f), RA 8293]

g. Making of ephemeral recordings; (i) by a
broadcasting organization, (ii) by means of
its work or facilities, (iii) for use in its own
broadcast; [Sec. 184.1(g), RA 8293]

h. Use made of a work by or under the
direction or control of the government for
public interest compatible with fair use;
[Sec. 184.1(h), RA 8293]

i. Public performance or the communication
to the public of a work in a place where no
admission fee is charged by a club on
institution for charitable or educational
purpose only and the aim is not profit-
making; [Sec. 184.1(i), RA 8293]

j. Public display of the original or a copy of
the work not made by means of a film,
slide, television, image or otherwise on
screen or by means of any other device or
process either the work has been published,
sold, given away, or transferred to another

1
187
person by the author or his successor in
title; [Sec. 184.1(j), RA 8293]

k. Use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner.
[Sec. 184.1(k), RA 8293]

Reproduction of Published Work

General Rule: The private reproduction of a
published work in a single copy, where the
reproduction is made by a natural person exclusively
for research and private study, shall be permitted,
without the authorization of the owner of copyright
in the work. [Sec. 187.1, RA 8293]

Exceptions: Such permission shall not extend to:
a. A work of architecture in the form of
building or other construction;
b. An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
c. A compilation of data and other materials;
d. A computer program except as provided in
Section 189; and
e. Any work in cases where reproduction
would unreasonably conflict with a normal
exploitation of the work or would otherwise
unreasonably prejudice the legitimate
interests of the author. [187.2, RA 8293]

Reprographic Reproduction by Libraries

Any library or archive whose activities are not for
profit may, without the authorization of the author
of copyright owner, make a single copy of the work
by reprographic reproduction:
a. Where the work by reason of its fragile
character or rarity cannot be lent to user in
its original form;
b. Where the works are isolated articles
contained in composite works or brief
portions of other published works and the
reproduction is necessary to supply them,
when this is considered expedient, to
persons requesting their loan for purposes
of research or study instead of lending the
volumes or booklets which contain them;
and
c. Where the making of such a copy is in order
to preserve and, if necessary in the event
that it is lost, destroyed or rendered
unusable, replace a copy, or to replace, in
the permanent collection of another similar
library or archive, a copy which has been
lost, destroyed or rendered unusable and
copies are not available with the publisher.
[Sec. 188.1, RA 8293]

It shall not be permissible to produce a volume of a
work published in several volumes or to produce
missing tomes or pages of magazines or similar
works, unless the volume, tome or part is out of
stock: Provided, That every library which, by law, is
entitled to receive copies of a printed work, shall be
entitled, when special reasons so require, to
reproduce a copy of a published work which is
considered necessary for the collection of the library
but which is out of stock. [Sec.188.2, RA 8293]

Reproduction of Computer Program

The reproduction in one (1) back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the author
of, or other owner of copyright in, a computer
program, by the lawful owner of that computer
program: Provided, That the copy or adaptation is
necessary for:
a. The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which the
computer program has been obtained; and
b. Archival purposes, and, for the replacement
of the lawfully owned copy of the computer
program in the event that the lawfully
obtained copy of the computer program is
lost, destroyed or rendered unusable.
[189.1, RA 8293]

No copy or adaptation mentioned in this Section
shall be used for any purpose other than the ones
determined in this Section, and any such copy or
adaptation shall be destroyed in the event that
continued possession of the copy of the computer
program ceases to be lawful. [189.2, RA 8293]

Importation for Personal Purposes

The importation of a copy of a work by an individual
for his personal purposes shall be permitted without
the authorization of the author of, or other owner of
copyright in, the work under the following
circumstances:
a. When copies of the work are not available
in the Philippines and:
i. Not more than one (1) copy at one
time is imported for strictly
individual use only; or
ii. The importation is by authority of
and for the use of the Philippine
Government; or
iii. The importation, consisting of not
more than three (3) such copies or
likenesses in any one invoice, is
not for sale but for the use only of
any religious, charitable, or
educational society or institution
duly incorporated or registered, or
is for the encouragement of the
fine arts, or for any state school,
college, university, or free public
library in the Philippines.
b. When such copies form parts of libraries
and personal baggage belonging to persons
or families arriving from foreign countries
and are not intended for sale: Provided,
That such copies do not exceed three (3).
[Sec. 190.1, RA 8293]

188
Copies imported as allowed by this Section may not
lawfully be used in any way to violate the rights of
owner the copyright or annul or limit the protection
secured by this Act, and such unlawful use shall be
deemed an infringement and shall be punishable as
such without prejudice to the proprietor's right of
action. [Sec. 190.2, RA 8293]

a. Remedies

Nature Remedy
Civil

Injunction,; Actual, Moral and
Exemplary Damages; Impounding
of documents evidencing sales,
articles and packaging that
infringe copyright and
implements for making them;
Destruction without
compensation of infringing copies
and devices and the means of
making infringing copies. [Sec.
216, RA 8293]
Criminal
Imprisonment and fine-
depending on the value of the
infringing materials produced and
the damage the copyright owner
has suffered by reason of the
infringement. [Sec. 217, RA 8293]
Administrative
Administrative action; Cease and
Desist Orders; Forfeiture of the
paraphernalia used in committing
the offense; Administrative fines
[Sec. 10, RA 8293]

General Rule: Mere possession of infringing goods is
not punishable

Exception: Unless one can prove that the possessor
knows or ought to know that the goods in his
possession are infringing copies of the work and are
held for the purpose of:
1. Selling, letting for hire or by way of trade,
offering or exposing the article for sale or
hire;
2. Distributing the article for trade or for any
other purpose to an extent that will
prejudice the rights of the copyright owner;
3. Trade exhibit of the article [Sec. 217.3, RA
8293]
No damages may be recovered under this Act after
four (4) years from the time the cause of action
arose. [Sec. 226, RA 8293]

Rule on Search and Seizure in Civil
Actions for Infringement of Intellectual
Property Rights
(A.M. No. 02-1-06-SC)

Contents of Application
a. Ground upon which application is based
b. Specific description and location of
documents
c. Articles to be searched, inspected copied or
seized
d. Names of applicant, representative, witness
and counsel
e. Other information necessary for identification
of articles [Sec. 4]

Grounds for Issuance of Writ
a. Applicant is the right holder or his duly
authorized representative
b. There is probable cause to believe that the
applicants right is being infringed
c. Damage likely to be caused is irreparable
d. Demonstrable risk of evidence that the
alleged defendant may destroy, hide or
remove the document
e. Documents and articles to be seized
constitute evidence of the alleged
defendants infringing activity or that they
infringe or are used or intended to be used as
means of infringing the applicants
intellectual property right [Sec. 6]

Contents of Writ
a. An order to the alleged defendant to permit
Application for Search and Seizure [Sec. 3]
Examination of Applicant and Witnesses [Sec. 5]
Issuance of Writ [Sec. 7]
Search conducted in the presence of defendant,
his representative or witnesses [Sec. 13]
Verified Return filed by Sheriff to the court w/in
3 days from enforcement [Sec. 17]
Judge shall ascertain WON writ was served or
return made w/in 5 days
Trial/Hearing
Judgment [Sec. 22]

1
189
persons named in the writ to enter into the
premises for purpose of searching, inspecting,
copying or removing from the premises the
documents and articles subject to the control
of the court
b. An order to the alleged defendant to disclose
to the sheriff the location of the documents
and articles subject of the writ
c. Period when writ shall be enforced (w/in 10
days from issuance)
d. Names of applicants or his agent and the
Commissioner who will supervise the
enforcement of writ
e. Other terms and conditions that will ensure
proper execution of the writ [Sec. 8]

Discharge of Writ
a. Writ was improperly or irregularly issued or
excessively enforced
b. Bond was insufficient
c. Safeguards in the writ was violated by the
applicant or the sheriff
f. Documents and articles seized are not
infringing copies or means for making the
materials alleged to infringe the applicants
intellectual property right [Sec. 18]

Failure to file the complaint the writ, upon motion,
shall be set aside [Sec. 20]

Alleged defendant may claim for damages
a. Writ was discharged
b. Finding or no infringement or threat of
infringement of an intellectual property right
[Sec. 21]

Judgment
a. Finding of Infringement Court shall order the
destruction of goods or donation to
charitable, educational institution with
prohibition against bringing the same into
channels of commerce
b. Finding of no infringement Seized materials
shall be immediately returned to defendant
[Sec. 22]

b. Criminal penalties

Any person infringing any right secured by provisions
of Part IV of this Act or aiding or abetting such
infringement shall be guilty of a crime punishable
by:

First Offense: Imprisonment of one (1) year to three
(3) years plus a fine ranging from Fifty thousand
pesos (P50,000) to One hundred fifty thousand pesos
(P150,000). [Sec. 217.1(a), RA 8293]

Second Offense: Imprisonment of three (3) years and
one (1) day to six (6) years plus a fine ranging from
One hundred fifty thousand pesos (P150,000) to Five
hundred thousand pesos (P500,000) for the second
offense. [Sec. 217.1(b), RA 8293]

Third and Subsequent Offenses: Imprisonment of six
(6) years and one (1) day to nine (9) years plus a fine
ranging from five hundred thousand pesos (P500,000)
to One million five hundred thousand pesos
(P1,500,000). ). [Sec. 217.1 (c), RA 8293]

In all cases, subsidiary imprisonment in cases of
insolvency. [Sec. 217.1(d), RA 8293]

In determining the number of years of imprisonment
and the 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. [Sec. 217.2, RA 8293]

190
A. Patent Application
B. Utility Model and Industrial Design
C. Copyright Registration and Deposit
D. Trademark

A. Patent Application [Source: http://ipophil.gov.ph; Secs. 32-39, RA 8293]

Application
Formality Examination
Classification and Search
Substantive Examination
Request for Substantive Exam (w/in 6 months from
date of publication)
Publication of Unexamined Application in the IPO
Gazette after 18 months from filing or priority date
Applicant is notified of reasons for refusal
Opinion and/or Amendment
Decision to Grant
Patent
Publication of Patent in
the IPO Gazette
Issuance of Patent
Certification
Final Refusal by Examiner
Final Refusal by Director
Final Refusal
Refusal
Appeal to Supreme Court
Refusal
Court of Appeals
Appeal to Director of Patents
Appeal to Director General
Requirements to get a filing date [Sec.
40, RA 8293]
1. Request for Philippine Patent
2. Description of Invention
3. Drawings necessary
4. Claim(s)
5. Abstract
6. Identification of Inventor (NRA shall
appoint an agent in the Philippines)

1
191

B. Utility Model and Industrial Design [Source: http://ipophil.gov.ph]

No Opposition Filed
Decision
Application is Received
Application is subjected to
Formality Examination
Application is recommended
for Publication
Application is published
Application is confirmed for
Registration
Applicant is Notified of the
Result of Examination
Application Deemed
Withdrawn
BOP Director
Application Revived
Application is not Formal
With Response No Response
Petition for Revival
Application is Formal
Application is Received
Applicants Request
Opposition Filed Directors Request
BOP Director
Application is
Refused
Application is
Affirmed for
Registration
Decision
Appeal on the Decision of
the Director
Director General
Application is
Refused
Application is
Affirmed for
Registration
Issuance of Certificate Registrability Report
Third Partys Request
Request

192

C. Copyright Registration and Deposit [Source: IPOPHL Office Order No. 93 Series of 2011]

Submission of Registration and Deposit Form (RDF) with
IP Satellite Office (IPSO)
IPSO Field Specialist shall review entries and documents
Statement of Account (SOA) is issued to Applicant
Payment of Filing Fee to Landbank
IPSO Field Specialist received RDF and RDF Number and
date of filing upon showing of validated deposit slip
IPSO Field Specialist issues Acknowledgment Receipt
(AR) pending release of Official Receipt (OR)
IPSO Field Specialist encodes bibliographic entry in data
base and scan documents including AR, SOA and deposit
slip
IPSO Field Specialist transmit scanned documents to IP
Field Operations Unit (IPFOU) to verity completeness of
documents
IPFOU transmit documents to IP Office Philippines
(IPOPHL) Cashier for preparation of Official Receipt (OR)
Notification by IPOPHL Cashier of the release of OR
Copyright Support Services (CSS) shall print the
Certificate of Registration and Deposit
Certificate released to applicant after 5 working days
from filing

1
193

D. Trademark [Source: http://ipophil.gov.ph]

Filing of Application
Requirements [Sec.
124, RA 8293]
According of Filing or
Priority
Search and Examination
Actions and
Responses
Allowance for Publication
Publication
Issuance of Certificate of
Registration
Publication
Opposition
Decision
Is there an
opposition?
Favorable to
Applicant
Motion for Reconsideration or
Appeal to the Director General

l
NO
YES
YES
NO
1. Request for Registration
2. Applicants Name and address
3. Nationality or Domicile and
Place of Business
4. Reproduction of Marks
5. Translation or marks
6. Names of goods or services for
w/c registration is sought
7. Signature of Applicant
8. Juridical Entity: law under w/c
organized
9. NRA: appointment of agent
10. Claims of Priority Right
11. Claims of color as distinctive
feature of mark
12. 3D mark, statement to that
effect
Certificate of Registration [Sec.
138, RA 8293]
Prima Facie evidence of:
1. Validity of registration
2. Registrants ownership of the
mark
3. Registrants exclusive right to
use the same in connection with
the goods or services and those
that are related thereto

Mercantile 2012 Start

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