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College of Law
Bar Reviewer
3RD WEEK
MERCANTILE
LAW
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UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW
C. Effects 56
A. Discharge of Negotiable Instrument 47 D. Presentment for Payment 57
B. By Payment in Due Course 47 D.1. Time 57
C. By Intentional Cancellation 48 E. Effect Of Delay 57
D. By Other Acts That Discharge a Simple
Contract 48 INSURANCE 58
E. By Reacquisition of Principal Debtor in
His Own Right 49 I. CONCEPT OF INSURANCE 59
F. By Material Alteration 49
G. Discharge of Parties Secondarily Liable 49 A. Contract of Insurance 59
H. Right of Party Who Discharged A.1. Definition 59
Instrument 50 A.2. Form 59
I. Renunciation By Holder 50 A.3. Insurance and gambling
distinguished 59
XV. MATERIAL ALTERATION 51 B. Doing or Transacting Insurance Business 60
C. Governing law 60
A. Concept 51 D. Parties to an Insurance Contract 60
B. Changes in the Following Constitute E. Bancassurance 61
Material Alterations 51 F. Pre-need plans 61
C. Effect of Material Alteration 51
II. ELEMENTS OF AN INSURANCE
XVI. ACCEPTANCE 52 CONTRACT 62
A. Definition 52 A. In General 62
B. Requisites 52 B. Subject Matter 62
C. Kinds of Acceptance 52 C. Cause and Risk of Loss or Damage 62
D. Proof of acceptance 52 D. Consideration 62
E. Manner 52 E. Risk-Distributing Scheme 62
E.1. Express acceptance 52 F. Meeting of the Minds 62
E.2. Implied acceptance 52
F. Time for Acceptance 52 III. CHARACTERISTICS OF AN INSURANCE
G. Rules Governing Acceptance 52 CONTRACT 63
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UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW
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UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW
I. CORPORATION 136
I. COMMON CARRIERS 101
A. Definition 136
A. Concept 101 B. Attributes of the Corporation 136
B. Diligence Required 103
C. Liabilities 104 II. CLASSES OF CORPORATIONS 137
A. Applicability 132
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UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW
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UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW
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UP LAW BOC TABLE OF CONTENTS MERCANTILE LAW
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UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW
MERCANTILE LAW
CREDIT
TRANSACTIONS
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UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW
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UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW
(a) 6 months from date if used in the the beneficiary that the confirming bank
Philippines will undertake the issuing bank's
obligation as its own according to the
(b) 12 months if abroad
terms and conditions of the credit [Feati
Bank and Trust Co. v. CA, G.R. No. 94209
(1991)]
A.6. TYPES OF LETTERS OF CREDIT
I. AS TO THE TYPE OF TH E MAIN
CONTRACT
B. PARTIES TO A LETTER OF CREDIT
Commercial Standby
Letter of Credit Letter of Credit
Method of payment Used to guarantee or B.1. RIGHTS AND OBLIGATIONS OF THE
in a contract of sale secure an obligation PARTIES
in a non-sale There would be at least three parties to a
transaction letter of credit:
Reduce the risk of Reduce the risk of
non-payment of non-performance of (1) Buyer/Exporter/Account Party
purchase price under a contractual one who procures the letter of credit and
a contract of sale obligation obliges himself to reimburse the issuing
bank upon receipt of documents of title.
The seller can obtain The credit is payable
payment from the upon certification of (2) Issuing Bank the bank which
issuer of L/C upon a partys non- undertakes: (1) to pay the seller upon
the presentation of performance of the receipt of the draft and proper documents
documents that show agreement of title; and (2) to surrender the
he has taken documents to the buyer upon
affirmative steps to reimbursement.
comply with the sale
The obligation of the issuing bank to pay
agreement
the seller is direct, primary, absolute,
Beneficiary must Beneficiary must
definite and solidary with the buyer, in
demonstrate that he certify that his
the absence of stipulation in the letter of
has performed the obligor has not
credit [Metropolitan Waterworks and
contract performed the
Sewerage System v. Daway, G.R. No.
contract
160732 (2004)]
(3) Seller/Im porter/Beneficiary one
II. AS TO REVOCABILITY
who ships the goods to the buyer in
(a) Revocable L/C - One which can be compliance with a contract of sale and
revoked by the issuing bank without the delivers the documents of title and draft
consent of the buyer and seller to the issuing bank to recover payment.
(b) Irrevocable L/C - One which the
issuing bank cannot revoke without the
Depending on the transaction, the number of
consent of the buyer and seller [Feati
parties to the letter of credit may be
Bank and Trust Co. v. CA, G.R. No. 94209
increased. Thus, the different types of
(1991)]
correspondent banks:
(1) Advising/Notifying Bank the bank
III. AS TO THE OBLIGATION ASSUMED which conveys to the seller the existence
BY CORRESPONDENT BANK of the credit.
(a) Unconfirm ed L/C - One which The bank assumes no liability except to
continues to be the obligation of the notify and/or transmit to the seller the
issuing bank existence of the letter of credit. A
notifying bank is not a privy to the
(b) Confirmed L/C - One which is
contract of sale between the buyer and
supported by the absolute assurance to
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the seller, its relationship is only with that falsification or legal effect of any documents,
of the issuing bank and not with the or for the general and/or particular
beneficiary to whom he assumes no conditions stipulated in the documents or
liability. superimposed thereon, nor do they assume
any liability or responsibility for the
The bank may suggest to the seller its
description, quantity, weight, quality,
willingness to negotiate, but this fact
condition, packing, delivery, value or
alone does not imply that the notifying
existence of the goods represented by any
bank promises to accept the draft drawn
documents, or for the good faith or acts
under the documentary credit [Feati Bank
and/or omissions, solvency, performance or
and Trust Co. v. CA, G.R. No. 94209
standing of the consignor, the carriers, or the
(1991)]
insurers of the goods, or any other person
(2) Confirming Bank the bank which whomsoever [Transfield Philippines v. Luzon
lends credence to the letter of credit Hydro, G.R. No. 146717 (2004]
issued by a lesser known issuing bank.
The bank assumes a direct obligation to
The independent nature of the letter of credit
the seller and its liability is a primary one
may be
as if the bank itself had issued the letter
of credit [Feati Bank and Trust Co. v. CA, (a) Independent in toto - the credit is
G.R. No. 94209 (1991)] independent from the justification aspect
and is a separate obligation from the
(3) Negotiating Bank the bank which
underlying agreement;
discounts the draft presented by the
seller. (b) Only as to the justification aspect like in a
commercial letter of credit or repayment
The bank buys or discounts a draft under
standby, which is identical with the same
the letter of credit. Its liability is
obligations under the underlying
dependent upon the stage of the
agreement. [Transfield Philippines v.
negotiation. If before negotiation, it has
Luzon Hydro, G.R. No. 146717 (2004]
no liability with respect to the seller but
after negotiation, a contractual
relationship will then prevail between
C.2. FRAUD EXCEPTION PRINCIPLE
the negotiating bank and the seller
[Feati Bank and Trust Co. v. CA, G.R. No. The principle that limits the application of the
94209 (1991)] independence principle only to instances
where it would serve the commercial function
(4) Paying Bank the bank which of the credit and not when fraud attends the
undertakes to encash the drafts drawn transaction.
by the seller.
In the case of Transfield Philippines v. Luzon
Hydro [G.R. No. 146717 (2004)], the petitioner
C. BASIC PRINCIPLES OF LETTER OF alleged misrepresentation as constituting
fraud. The Court, however, made no ruling as
CREDIT to whether the same indeed constitutes fraud.
Petitioner asserts that the "fraud exception"
C.1. DOCTRINE OF INDEPENDENCE exists when the beneficiary, for the purpose of
The principle of independence assures the drawing on the credit, fraudulently presents
seller or the beneficiary of prompt payment to the confirming bank, documents that
independent of any breach of the main contain, expressly or by implication, material
contract and precludes the issuing bank from representations of fact that to his knowledge
determining whether the main contract is are untrue. In such a situation, petitioner
actually accomplished or not. insists, injunction is recognized as a remedy
available to it.
Under this principle, banks assume no
liability or responsibility for the form, Citing Dolan's treatise on letters of credit,
sufficiency, accuracy, genuineness, petitioner argues that the independence
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(c) The proceeds shall be applied (a) to the charges enumerated so far as they are within
payment of the expenses thereof; (b) to Sec. 27 although the amount of the charges is
the payment of the expenses of re-taking, not stated in the receipt. [Act No. 2137, Sec.
keeping and storing the goods, 30]
documents or instruments; (c) to the
satisfaction of the entrustee's
indebtedness to the entruster. [PD 115, E.2. AGAINST WHAT PROPERTY THE LIEN
Sec. 7] MAY BE ENFORCED
(a) Against all goods, whenever deposited,
belonging to the person who is liable as
D.2. IN CASE OF FAILURE TO TURN OVER
debtor for the claims in regard to which
THE PROCEEDS OF THE SALE, OR FAILURE the lien is asserted, and
TO RETURN IN CASE OF NON-SALE
(b) Against all goods belonging to others
File a criminal case for estafa under RPC 315,
which have been deposited at any time by
par. 1 (b). [PD 115, Sec. 13]
the person who is liable as debtor for the
claims in regard to which the lien is
asserted if such person had been so
E. WAREHOUSEMANS LIEN entrusted with the possession of goods
The warehousemans lien under the that a pledge of the same by him at the
Warehouse Receipts Law is the time of the deposit to one who took the
warehousemans legal right or interest in the goods in good faith for value would have
depositors property. It is similar to the been valid. [Act No. 2137, Sec. 28]
depositarys right of retention, which is a
means or device by which the depositary is
able to obtain payment of what may be due E.3. SATISFACTION OF LIEN BY SALE
because of the deposit [Gomez-Somera] A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:
warehouseman for which he has a lien on the E.7. HOW LIEN MAY BE LOST
goods. [Act No. 2137, Sec. 33] (1) By surrendering possession of the goods
From the proceeds of such sale, the (2) By refusing to deliver the goods when a
warehouseman shall satisfy his lien including demand is made with which he is bound
the reasonable charges of notice, to comply [Act No. 2137, Sec. 29]
advertisement and sale. The balance, if any,
shall be held by the warehouseman and
delivered on demand to the person to whom E.8. LIEN DOES NOT PRECLUDE OTHER
he would have been bound to deliver or REMEDIES
justified in delivering goods. [Act No. 2137, Whether or not a warehouseman has a lien
Sec. 33] upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor
for the collection of all charges and advances
E.4. AT ANY TIME BEFORE THE GOODS
which the depositor has contracted to pay.
ARE SO SOLD [Act No. 2137, Sec. 32]
General rule: The warehouseman shall
retain the possession of the goods according
to the terms of the original contract of
deposit
Exception: At any time before the goods are
so sold, any person claiming a right of
property or possession may pay the
warehouseman the amount necessary to
satisfy his lien and to pay the reasonable
expenses and liabilities incurred. The
warehouseman shall deliver the goods to the
person making payment. [Act No. 2137, Sec.
33]
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MERCANTILE LAW
NEGOTIABLE
INSTRUMENTS LAW
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The drawee pays the The drawee pays SUM PAYABLE MUST BE CERTAIN
payee from his own directly from the
funds. Afterwards, particular fund Sec. 2, NIL. What constitutes certainty as to
the drawee pays indicated. sum. - The sum payable is a sum certain within
himself from the the meaning of this Act, although it is to be
indicated fund. paid:
Note: A sum is certain if from the face of the interest, if any, but the obligation to pay the
instrument it can be determined even if it note remains.
requires mathematical computation.
(Sundiang and Aquino)
AT A FIXED TIME
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UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW
B. DETERMINATION OF
Fictitious Payee Rule NEGOTIABILITY
It is not necessary that the person
referred to in the instrument is really non- In determining the negotiability of an
existent or fictitious to make the instrument, the instrument in its entirety
instrument payable to bearer. The person and by what appears on its face must be
to whose order the instrument is made considered. It must comply with the
payable may in fact be existing but he is requirements of Sec. 1 of the Negotiable
still fictitious or non-existent under Sec. Instruments Law. [Caltex Phils. v. CA, G.R.
9(c) of the NIL if the person making it so No. 97753 (1992)]
payable does not intend to pay the
specified persons. [PNB v. Rodriguez, G.R. The acceptance of a bill of exchange is
No. 170325 (2008)] not important in the determination of its
negotiability. The nature of acceptance is
A check drawn payable to the order of important only on the determination of
"CASH" is a check payable to bearer, and the kind of liabilities of the parties
the bank may pay it to the person
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involved. [PBCOM vs. Aruego, G.R. Nos. Manila Oil Refining, G.R. No. L-18103
L-25836-37 (1993)] (1922)]
Omissions and
Additional Provisions
Provisions That Do
That Do Not Affect
Not Affect
Negotiability
Negotiability
Note: Negotiability is
affected when
instrument contains a
promise or order to do
any act in addition to
the payment of
money.
Note:
A confession of judgment is provision
given by the maker authorizing the
plaintiff's attorney to sign judgment and
issue execution for the value of the
instrument, costs, and attorney's fees.
This is also called a judgment cognivit
actionem. If accompanied by withdrawal
of plea, it is called judgment relicta
verificatione.
A confession of judgment is not
recognized in our country, as it is against
public policy. It denies due process, and
deprives the right of appeal. [PNB v.
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C. EFFECT OF ANTE-DATING AND In this case a real defense exists and not even
POST-DATING a holder in due course can recover on the
instrument, for the law is specific that it is not
a valid contract in the hands of any holder.
Sec. 12, NIL. Ante-dated and post-dated. - The (Campos)
instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided Note: A drawee bank whose negligent
custody of the checks, after partial execution,
this is not done for an illegal or fraudulent
purpose. The person to whom an instrument contributed to its escape, is estopped from
so dated is delivered acquires the title thereto raising the real defense under Sec. 15 of the
NIL. (Campos)
as of the date of delivery.
Delivery
Completeness
When Enforceable
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Kind of Defense
Rights of Holder
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Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.
Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.
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G. ACCEPTANCE AND PAYMENT Rule: The drawee who pays the holder of the
UNDER MISTAKE bill cannot recover from the holder what he
paid under mistake. (Campos)
Sec. 62, NIL. Liability of acceptor. - The b) Stop Paym ent Order is one issued by
the drawer of a check countermanding
acceptor, by accepting the instrument,
engages that he will pay it according to the his first order to the drawee bank to pay
the check.
tenor of his acceptance and admits:
(1) The existence of the drawer, the Rule: The drawee bank is bound to follow the
genuineness of his signature, and his order, provided it is received prior to its
certification or payment of the check.
capacity and authority to draw the
instrument; and (Campos)
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VI. Consideration
B. BURDEN OF PROOF -
Sec. 25, NIL. Value, what constitutes. Value PRESUMPTION OF CONSIDERATION
is any consideration sufficient to support a
simple contract. An antecedent or pre-existing Sec. 24, NIL. Presumption of consideration. -
debt constitutes value; and is deemed such Every negotiable instrument is deemed prima
whether the instrument is payable on demand facie to have been issued for a valuable
or at a future time. consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
Because of the presumption, it is immaterial
otherwise requires:
whether or not for value received appears in
x---x
the instrument.
"Value" means valuable consideration;
x---x
C. EFFECT OF WANT OF
Value and consideration are generally
convertible terms. However, they may have CONSIDERATION
different implications.
Consideration is the proper term when the Sec. 28, NIL. Effect of want of consideration. -
payee of a note sues the maker, or the payee Absence or failure of consideration is a matter
of a bill sues the drawer, or an indorsee sues of defense as against any person not a holder
his immediate indorser. in due course; and partial failure of
consideration is a defense pro tanto, whether
Value is the proper term when a holder the failure is an ascertained and liquidated
sues any party to the instrument with whom amount or otherwise.
he himself has not dealt, the term value is
more appropriate.
An antecedent or pre-existing debt Absence or failure of consideration is a
constitutes value; and is deemed such matter of defense as against any person not a
whether the instrument is payable on holder in due course, hence, it is a personal
demand or at a future time. [Sec. 25, NIL] defense.
Value need not be full and a holder will be Partial failure of consideration is a defense
one for value even if he gave less than the pro tanto, meaning a defense to the extent of
face value of the instrument, provided the the failure. (Abad)
intention of the transferor is to transfer the
full amount represented by the instrument.
Effect of an illicit or unlawful
consideration: Illicit or illegal
A. WHO IS A HOLDER FOR VALUE consideration does not affect the negotiability
(HFV)? of the instrument as validity of consideration
is not one of the requisites of a negotiable
instrument. It is merely constitutes a defect of
1. A holder of an instrument for which value, title hence such illegality of consideration is
which need not be in full, has been given
merely a personal defense which cannot be
at any given time but only with respect to raised against a holder in due course. [Sec. 55
all parties who have become parties to
and 57, NIL] [2009 bar question]
the instrument prior to the time at which
value has been given. [Sec 26, NIL]
2. A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27,
NIL] (2011 Bar Question)
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Sec. 30, NIL. What constitutes negotiation. - Sec. 191, NIL. Definition and meaning of
An instrument is negotiated when it is terms. - In this Act, unless the contract
transferred from one person to another in such otherwise requires:
manner as to constitute the transferee the x---x
holder thereof. If payable to bearer, it is "Delivery" means transfer of possession,
negotiated by delivery; if payable to order, it is actual or constructive, from one person to
negotiated by the indorsement of the holder another;
and completed by delivery. x---x
"Issue" means the first delivery of the
instrument, complete in form, to a person who
A. NEGOTIATION DISTINGUISHED takes it as a holder;
FROM ASSIGNMENT x---x
Requisites
Negotiation Assignment (1) Mechanical act of writing the instrument
completely and in accordance with the
The transfer of the The transferee does requirements of Section 1 of the NIL; and
instrument from one not become a holder,
person to another so nor can he become a (2) The delivery of the complete instrument
as to constitute the holder in due course; by the maker or drawer, with the
transferee the holder and he merely steps intention of giving effect to it, to the
thereof. [Sec.30, NIL] into the shoes of the payee or holder.
transferor. As such,
any defense available
against the transferor Presumption of delivery
is available against Where the instrument is no longer in the
the transferee. possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the
B. MODES OF NEGOTIATION contrary is proved [Sec. 16, NIL]
If it is in the hands of a holder in due
Sec. 30, NIL. What constitutes negotiation. - course, the presumption of a valid
An instrument is negotiated when it is delivery is conclusive [Sec. 16, NIL]
transferred from one person to another in such
manner as to constitute the transferee the
holder thereof. If payable to bearer, it is Presumption as to date
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder Date is not an essential element of
negotiability; it is not included in the
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B.2.A. INDORSEM ENT; HOW DONE Sec. 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of
Sec. 31, NIL. Indorsement; how made. - The a payee or indorsee is wrongly designated or
indorsement must be written on the misspelled, he may indorse the instrument as
instrument itself or upon a paper attached therein described adding, if he thinks fit, his
thereto. The signature of the indorser, without proper signature.
additional words, is a sufficient indorsement.
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and it may also be either restrictive or qualified Specifies the person to whom/to whose
or conditional. order the instrument is to be payable; and
the indorsement of such indorsee is
necessary to further negotiation.
Four bases of classification of A special indorser is liable to all
indorsem ents under the NIL: subsequent holders, unless the
(1) Special or in blank instrument is an originally bearer
instrument, in which case he is liable only
(2) Restrictive or Non-Restrictive to those who take title through his
(3) Qualified or unqualified indorsement. [Sec. 40, NIL]
restrictive.
(1) Qualified
Constitutes indorser as mere assignor of
Sec. 37, NIL. Effect of restrictive indorsement; title
rights of indorsee. - A restrictive indorsement Made by adding the words without
confers upon the indorsee the right: recourse, sans recourse, indorser not
(a) to receive payment of the instrument; holder, at the indorsers own riske, and
other terms of similar import. [Sec. 38,
(b) to bring any action thereon that the NIL].
indorser could bring;
But this does not mean that the
(c) to transfer his rights as such indorsee, transferee only has the rights of an
where the form of the indorsement assignee; transfer remains a negotiation
authorizes him to do so. and transferee can still be a holder
But all subsequent indorsees acquire only the capable of acquiring a title free from
title of the first indorsee under the restrictive defenses of prior parties.
indorsement. Effects:
1. Relieves the qualified indorser of his
(1) Restrictive Such indorsement either: liability to pay the instrument should the
maker be unable to pay
(a) Prohibits further negotiation of
instrument 2. The qualified indorser does not guarantee
the solvency of the maker, but merely his
(b) Constitutes indorsee as agent of legal title to the instrument
indorser
3. A qualified indorsement does not impair
Vests title in indorsee in trust for another [Sec the negotiable charater of the
36, NIL] intstrument
(2) Non-qualified
RIGHTS OF RESTRICTIVE INDORSEE
Receive payment C.4. AS TO PRESENCE/ABSENCE OF
Bring any action thereon that the indorser EXPRESS LIMITATIONS
could bring.
Sec. 39, NIL. Conditional indorsement. - Where
Transfer his rights as such indorsee, but an indorsement is conditional, the party
all subsequent indorsees acquire only the required to pay the instrument may disregard
title of first indorsee under restrictive the condition and make payment to the
indorsement. [Sec 37, NIL] indorsee or his transferee whether the
condition has been fulfilled or not. But any
(2) Non-restrictive
person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
C.3. AS TO KIND OF LIABILITY ASSUMED
indorsing conditionally.
BY INDORSER
Sec. 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser (1) Conditional
a mere assignor of the title to the instrument.
It may be made by adding to the indorser's Additional condition annexed to
signature the words "without recourse" or any indorsers liability; such condition must
words of similar import. Such an indorsement be expressed
does not impair the negotiable character of Where an indorsement is conditional, a
the instrument. party required to pay the instrument may
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person adds to his signature words some person under whom he claims acquired
indicating that he signs for or on behalf of the title as holder in due course. But the last-
a principal or in a representative capacity, mentioned rule does not apply in favor of a
he is not liable on the instrument if he party who became bound on the instrument
was duly authorized; but the mere prior to the acquisition of such defective title.
addition of words describing him as an
agent, or as filling a representative
character, without disclosing his principal, B.1. WHO ARE HOLDERS IN DUE COURSE
does not exempt him from personal
(1) Holder in due course [HDC] under Sec. 52,
liability.
NIL
(2) Payment in due course to the
(2) HDC under Sec. 58, NIL: A holder who
holder discharges instrum ent
DERIVES title to the instrument through
a HDC has all the rights of the latter even
though he himself satisfies none of the
B. HOLDER IN DUE COURSE [HDC] requirements of due course holding
(2nd Most Frequently Asked since 1992)
HDC under Sec. 59, NIL
[presum ption]: Every holder is deemed
Sec. 52, NIL. What constitutes a holder in due prima facie to be a holder in due course
course. - A holder in due course is a holder Sec. 191 of the NIL defines holder as the
who has taken the instrument under the payee or indorsee of a bill or note, who is in
following conditions: possession of it, or the bearer thereof. The
(a) That it is complete and regular upon word holder in the first clause of Sec. 52
its face; and in the second subsection thereof may be
(b) That he became the holder of it replaced by the definition in Sec. 191 so as to
before it was overdue, and without read a holder in due course is a payee or an
notice that it has been previously indorsee in possession, etc. [De Ocampo vs.
dishonored, if such was the fact, Gatchalian, G.R. No. L-15126 (1961)]
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to B.2. THE SIGNIFICANCE OF DUE COURSE
him he had no notice of any infirmity HOLDING
in the instrument or defect in the title The question of whether a holder is a
of the person negotiating it. holder in due course or not is significant
only when there is an existing defense
Sec. 58, NIL. When subject to original between prior parties. (Campos)
defense. - In the hands of any holder other A holder in due course can acquire a
than a holder in due course, a negotiable better title than his predecessors because
instrument is subject to the same defenses as he takes the instrument free from any
if it were non-negotiable. But a holder who defect of title of prior parties. He is
derives his title through a holder in due furthermore free from defenses available
course, and who is not himself a party to any to prior parties among themselves.
fraud or illegality affecting the instrument, (Campos)
has all the rights of such former holder in
respect of all parties prior to the latter. A holder not in due course, on the other
hand, takes the instrument subject to all
defenses because he is treated as a
Section 59, NIL. Who is deemed holder in due transferee of a non-negotiable paper.
course. - Every holder is deemed prima facie Real defenses, however, which attach to
to be a holder in due course; but when it is the instrument itself would be available
shown that the title of any person who has even against a holder in due course.
negotiated the instrument was defective, the (Campos)
burden is on the holder to prove that he or
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B.5. PRESUMPTION IN FAVOR OF DUE Holder in Due Course Not Holder in Due
COURSE HOLDING Course
Every holder is deemed prima facie to be a
Rights
holder in due course. [Sec. 59, NIL]
(1) Burden shifts when it is shown that the Has the right to Has the right to
title of any person who has negotiated enforce payment, sue enforce payment, sue
the instrument was defective. Holder in his own name, and in his own name, and
must then prove that he or some person negotiate the negotiate the
under whom he claims acquired the title instrument instrument
as a holder in due course.
(2) But the last mentioned rule does not
apply in favor of a party who became C. DEFENSES AGAINST THE HOLDER
bound on the instrument prior to the
acquisition of such defective title.
Real Defenses Personal Defenses
Defenses
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should the primary party have refused to pay take, he will pay the amount thereof to the
upon such presentment. (Campos) holder, or to any subsequent indorser who
may be compelled to pay it.
B.1. DRAWER
W ho is a qualified indorser? One who is
Sec. 61, NIL. Liability of drawer. The drawer
constituted as a mere assignor of the title to
by drawing the instrument admits the
existence of the payee and his then capacity the instrument by adding to his signature the
words "without recourse" or any words of
to indorse; and engages that on due
similar import.
presentment the instrument will be accepted
or paid, or both, according to its tenor, and A qualified indorser does not assume the
that if it be dishonored, and the necessary liability to pay the instrument since he is
proceedings on dishonor be duly taken, he merely an assignor of the title to the
will pay the amount thereof to the holder, or instrument. However, he becomes liable once
to any subsequent indorser who may be he breaches a warranty.
compelled to pay it. but the drawer ay insert
in the instrument an express stipulation
negativing or limiting his own liability to the W ho is a general or unqualified
holder. indorser? Every person who indorses
without qualification [Sec. 66, NIL]
A person placing his signature upon an
The drawer warrants the existence of the
instrument other than as a maker, drawer, or
payee and the latters capacity to indorse the
acceptor unless he indicates by appropriate
instrument at the time of its issuance.
words his intention to be bound in some other
(Campos)
capacity [Sec. 63, NIL]
A person, who places his signature on an
B.2. INDORSERS instrument negotiable by delivery, incurs all
the liabilities of an indorser [Sec. 67, NIL]
The following indorsers assume the liability
to pay the instrument: The general indorser makes two contracts:
(1) General or Unqualified Indorser; and (1) An assignment or sale of the
instrument; and
(2) Irregular Indorser
(2) A special contract of indorsement
XI. Warranties
B.3. ORDER OF LIABILITY AMONG
INDORSERS
The primary or secondary liability of the
Sec. 68, NIL. Order in which indorsers are
liable. As respects one another, indorsers parties should be distinguished from their
are liable prima facie in the order in which warranties.
they indorse; but evidence is admissible to (1) Primary or secondary liability of the
show that as between or among themselves parties makes them liable to pay the
they have agreed otherwise. Joint payees or sum certain in money stated in the
joint indorsees who indorse are deemed to instrument.
indorse jointly and severally.
(2) Warranties are affirmations of the
fact on the part of the parties that
impose no direct obligation to pay in
Among themselves, indorsers are liable prima
the absence of breach thereof.
facie in the order they indorse.
(Aquino)
Sec. 68 does not bind the holder, and he may
In case of breach of warranties, the person
sue any of the indorsers, regardless of the
who breached the same may either be liable
order of their indorsement. (Campos)
or he may be barred from asserting a
particular defense.
Promissory Note Bill of Exchange
C. ACCEPTORS WARRANTIES
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A. PRESENTMENT; MEANING
D. GENERAL INDORSERS
WARRANTIES Presentment for payment is the presentation
of the instrument, whether a note or a bill, to
the person primarily liable for the purpose of
(1) That the instrument is genuine in and
demanding and obtaining payment thereof.
in all respects what it purports to be (Campos)
(2) That he has a good title to it
(1) The production of a Bill of Exchange to
(3) That all prior parties had capacity to the drawer or acceptor for payment; or
contract
(2) The production of a Promissory Note to
(4) That the instrument is, at the time of the party liable for payment.
his indorsement, valid and subsisting
[Sec. 66, NIL]
These warranties are in favor of all
B. DATE AND TIME OF PRESENTMENT
subsequent holders in due course. [Ang Tiong
v. Ting, G.R. No. L-26767 (1968)] Sec. 72, NIL. What constitutes sufficient
presentment. - Presentment for payment, to
be sufficient, must be made:
E. QUALIFIED INDORSERS (a) By the holder, or by some person
WARRANTIES authorized to receive payment on his
behalf;
(1) That the instrument is genuine in and in (b) At a reasonable hour on a business
all respects what it purports to be day;
(c) At a proper place as herein defined;
(2) That he has a good title to it (d) To the person primarily liable on the
(3) That all prior parties had capacity to instrument, or if he is absent or
contract inaccessible, to any person found at
the place where the presentment is
(4) That he has no knowledge of any fact made.
which would impair the validity of the
instrument or render it valueless. [Sec. 68,
NIL] (1) Bearing fixed m aturity/not
payable on demand on the day it
falls due [Secs. 71 and 85, NIL]
(2) Payable on demand within a
reasonable time after its issue [Sec. 7,
NIL]
(3) Dem and bill of exchange within a
reasonable time after the last negotiation.
[Sec. 71, NIL]
Presentment for payment cannot be made on
a Sunday or legal holiday, and if the note
matures on such a day, since the maker
cannot be compelled to pay sooner than he
promised, the note or bill will have to be
presented on the next business day. (Campos)
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Note: Notice must be given to persons Notice may be given as soon as the
secondarily liable. Otherwise, such parties instrument is dishonored [Sec. 102, NIL]
are discharged. Notice may be given to the
party himself or to his agent.
C. WHEN NOT NECESSARY TO GIVE TO
A.1. TO WHOM IN GENERAL DRAWER
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I. WAIVER
XIV. Discharge of
Notice of dishonor may be waived either
before the time of giving notice has arrived or
Negotiable Instrument
after the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109, Discharge: The release of all parties,
NIL] whether primary or secondary, from the
Where the waiver is embodied in the obligation on the instrument. It renders the
instrument itself, it is binding upon all instrument without force and effect and,
parties; but, where it is written above the consequently, non-negotiable (De Leon)
signature of an indorser, it binds him only.
[Sec. 110, NIL]
A. DISCHARGE OF NEGOTIABLE
INSTRUMENT
J. DISPENSATION WITH NOTICE
Notice of dishonor is dispensed with: Sec. 119, NIL. Instrument; How discharged. - A
(1) When party to be notified knows about negotiable instrument is discharged:
the dishonor, actually or constructively (1) By payment in due course by or on behalf
[Secs. 114-117, NIL] of the principal debtor;
(2) If waived [Sec. 109, NIL] (2) By payment in due course by the party
(3) When after due diligence, it cannot be accommodated, where the instrument is
given [Sec. 112, NIL] made or accepted for his
accommodation;
(3) By the intentional cancellation thereof by
K. EFFECT OF FAILURE TO GIVE the holder;
NOTICE (4) By any other act which will discharge a
simple contract for the payment of
Failure to give notice to parties secondarily money;
liable discharges such parties
(5) When the principal debtor becomes the
An omission to give notice of dishonor by holder of the instrument at or after
non-acceptance does not prejudice the rights maturity in his own right.
of a holder in due course subsequent to the
omission [Sec. 117, NIL]
Note: A holder in due course cannot be B. BY PAYMENT IN DUE COURSE
prejudiced by the failure or neglect of a (2000 Bar Question)
previous holder to give notice of dishonor by
Sec. 51, NIL. Right of Holder to Sue for
non-acceptance.
Payment. The holder of a negotiable
A dishonor by non-payment necessarily instrument may sue thereon in his own name;
presupposes the instrument has matured, and payment to him in due course discharges
and therefore, no holder subsequent thereto the instrument.
can be a holder in due course. Such dishonor
by non-payment will thus prejudice al
subsequent holders. (Campos) Sec. 88, NIL. 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.
(Sec. 88)
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accommodation and has been paid by third person, and has been paid by the
the party accommodated. drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by
Where instrument negotiated back to a the party accommodated.
prior party, such party may reissue and
further negotiate, but he is not entitled
to enforce payment against any
The discharge of a secondary party is not
intervening party to whom he was
the same as the discharge of the
personally liable
instrument. The discharge of the
instrument prevents subsequent holders
from becoming holders in due course.
Sec. 50, NIL. When prior party may negotiate
instrument. - Where an instrument is
negotiated back to a prior party, such party
I. RENUNCIATION BY HOLDER
may, subject to the provisions of this Act,
reissue and further negotiable the same. But
he is not entitled to enforce payment thereof Sec. 122, NIL. Renunciation by Holder. - The
against any intervening party to whom he holder may expressly renounce his rights
was personally liable. against any party to the instrument before,
at, or after its maturity. An absolute and
unconditional renunciation of his rights
Where instrument is paid by party against the principal debtor made at or after
secondarily liable, it is not discharged, the maturity of the instrument discharges the
but instrument. But a renunciation does not
affect the rights of a holder in due course
(a) the party so paying it is remitted to without notice. A renunciation must be in
his former rights as regard to all prior writing, unless the instrument is delivered up
parties to the person primarily liable thereon.
(b) and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where Two forms of renunciation
it is payable to order of 3rd party and (1) A written declaration to that effect; or
has been paid by drawer or where its
made/accepted for accommodation (2) By surrender of the instrument to the
and has been paid by party primary party.
accommodated
C. KINDS OF ACCEPTANCE
E.2. IMPLIED ACCEPTANCE
(1) General assents without qualification
to the order of the drawer [Sec. 139, NIL] (1) If the drawee refuses to return the
instrument within 24 hours after it was
(2) Qualified which in express terms
delivered for acceptance.
varies the effect of the bill as drawn [Secs.
141 & 142, NIL]: (2) If the drawee destroys the same.
(a) Conditional makes payment by (3) If the drawee makes an unconditional
the acceptor dependent on the promise in writing before the instrument is
fulfillment of a condition therein drawn, with respect to every person who,
stated upon the faith thereof, receives the bill for
value.
(b) Partial an acceptance to pay part
only of the amount for which the bill
is drawn.
F. TIME FOR ACCEPTANCE
(c) Local an acceptance to pay only at [Sec. 136, NIL]
a particular place.
The drawee is allowed twenty-four hours
(d) Qualified as to time after presentment in which to decide
(e) The acceptance of some one or more whether or not he will accept the bill.
of the drawees but not of all. The acceptance, if given, dates as of the
day of presentation.
D. PROOF OF ACCEPTANCE
(Sundiang and Aquino) G. RULES GOVERNING ACCEPTANCE
The written acceptance may be in the
instrument itself or in a separate instrument. Implication of payment without acceptance
However, under Sec. 133, the holder of a bill by a drawee [FEBTC vs. Gold Palace Jewellery
presenting the same for acceptance may Co,, Nachura, G.R. No. 168274 (2008)]
require the acceptance be written on the bill,
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person not having capacity to contract by on demand may, at the option of the holder
bill. be presented for payment before twelve
oclock noon on Saturday when that entire day
(2) Where, after the exercise of reasonable
is not a holiday. [Sec. 85, NIL]
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on F. HOW MADE
some other ground. [Sec. 148,NIL] [Sec. 145, NIL]
In general:
D. TIME/PLACE/MANNER OF (1) By or on behalf of the holder
PRESENTMENT (2) At a reasonable hour
H. DISHONOR BY NON-ACCEPTANCE
Time of maturity: Every negotiable
instrument is payable at the time fixed therein W hen dishonored by non-acceptance:
without grace. When they day of maturity A bill is dishonored by non-acceptance:
falls upon Sunday, or a holiday, the
instrument is payable on the next succeeding (1) When it is duly presented for acceptance
business day. Instruments falling due or and such an acceptance as is prescribed
becoming payable on Saturday are to be by this Act is refused or cannot be
presented for payment on the next succeeding obtained; or
business day, except that instrument payable
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D.1. TIME
When to present? A check must be presented
for payment within reasonable time after its
issue.
E. EFFECT OF DELAY
Effects:
(1) Equivalent to acceptance [Sec. 187, NIL]
and is the operative act that makes banks
liable
(2) Assignment of the funds of the drawer in
the hands of the drawee [Sec. 189, NIL]
(3) If obtained by the holder, discharges the
persons secondarily liable thereon [Sec.
188, NIL]
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MERCANTILE LAW
INSURANCE
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The insured is not always the person whom Exceptions: Insurance contracts particularly
the proceeds are paid. Such person is the liability insurance, may be required by law in
beneficiary. [Vance (1951)] certain instances:
(1) For motor vehicles [Compulsory
Motor Vehicle Liability Insurance,
Secs 386-402, Insurance Code);
III. Characteristics of an (2) For employees [Compulsory Coverage
Insurance Contract in State Insurance Fund, Articles 168-
184, Labor Code];
(3) As a condition to granting a license to
A. IN GENERAL conduct business or calling affecting
the public safety or welfare [De Leon
An insurance contract is:
(2014)].
(1) Consensual;
(4) Social Insurance for members of the
(2) Voluntary; Government Service Insurance
System (GSIS) and for the employees
(3) Aleatory;
of the private Sector covered by the
(4) Executory and unilateral, but Social Security System (SSS).
synallagmatic;
(5) Conditional;
D. ALEATORY
(6) Contract of indemnity;
It is aleatory because it depends upon some
(7) Contract of adhesion; contingent event. The obligation of the
(8) Personal contract; insurer to pay depends on the happening of
an event which is uncertain, or though certain,
(9) Property; is to occur at an indeterminate time [Article
(10) Uberrimae fides contract (a contract of the 2010, Civil Code].
highest degree of good faith).
E. EXECUTORY AND UNILATERAL BUT
B. CONSENSUAL SYNALLAGMATIC
It is perfected by the meeting of the minds of Once the insured pays the premium, the
the parties. There must be concurrence of contract already takes effect. After the
offer and acceptance. Unless otherwise payment of premiums, the insurance imposes
stipulated, the policy is not essential to the a unilateral obligation on the insurer who
existence of the contract. It merely evidences promise to indemnify in case of loss.
the terms and conditions thereof [Campos, It is also synallagmatic and reciprocal such
Insurance (1983)] that even if the contingent event or
designated peril does not occur, the insurer
has still provided protection against the risk
C. VOLUNTARY for the period covered by the insurance
General rule: In general, contracts of contract.
Insurance are not compulsory and the parties
are free to incorporate such terms and
conditions they may deem convenient F. CONDITIONAL
provided they are not contrary to law, morals, It is conditional because the insurer incurs
good customs, public order, or public policy. liabilityonly upon the happening of the event
[De Leon (2014)] insured against. However, many other
conditions are usually required (such as
payments of premium or performance of
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other act) as precedent to the right of the J. PROPERTY (FOR LIFE INSURANCE)
insured to claim benefit under the insurance.
Life insurance policies, unlike property
insurance, are generally assignable or
transferrable (Sec. 81) as they are in the
G. CONTRACT OF INDEMNITY (FOR
nature of property.
NON-LIFE INSURANCE)
The insured who has insurable interest over
the property is only entitled to recover the K. UBERRIMAE FIDES CONTRACT
amount of actual loss sustained. The burden
Each party is required to deal with each other
is upon him to establish the amount of such
in utmost good faith and disclose conditions
loss.
affecting the risk, of which he is aware, or any
General rule: Only non-life insurance or material fact which the applicant knows and
property insurance contracts are contracts of those which he ought to know. Violation of
indemnity. Life insurance contracts are not this duty gives the aggrieved party the right
contracts of indemnity because the value of a to rescind the contract. Where the aggrieved
life is immeasurable. party is the insured, the bad faith of the
insurer will preclude it from denying liability
Exception: Where the basis of the insurable
on the policy based on breach of warranty
interest of the policy owner on the life of the
[Campos (1983)].
insured is a commercial relationship (e.g.,
creditor-debtor, mortgagor/guarantor-
mortgagee, supporter and supportee), then
such contract is an indemnity contract.
I. PERSONAL CONTRACT
The contract of insurance is basically
between the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent
of the insurer (Secs 20, 58, and 83).
Property insurance is personal in the sense
that it is the damage to the personal interest
not the property that is being reimbursed.
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A.3. BOTTOMRY AND RESPONDENTIA without the consent of the owner, and to the
DISTINGUISHED prejudice of his interest (e.g., burning the ship,
unlawfully selling the cargo).
No honest error of judgment or mere
A Bottomry loan is a loan that is obtained for
negligence, unless criminally gross, can be
the value of the vessel on a voyage and the
considered as barratry [Roque v. IAC, (1985)]
lender is repaid only if the vessel subject of
the loan arrives safely at its destination. The Exception: The exception to a perils of the
insurable interest of a ship owner on its sea condition for insurer liability is when
bottomed boat is the difference between the there is an all-risk policy [Malayan
amount of the loan and the value of the boat. Insurance Corp v. CA, G.R. No. 119599 (1997)]
Thus, if the amount of the loan does not cover
the total value of the boat, the owner can still
insure the boat. A.4.B. PERILS OF THE SHIP
A Respondentia loan is a loan that is obtained Perils of the ship are those which cause a loss
as Security for the value of the cargo to be which in the ordinary course of events,
transported and the lender is repaid only if results:
the cargo arrives safely at its destination.
(1) From the ordinary, natural and inevitable
action of the sea;
A.4. RISKS (2) From ordinary wear and tear of the ship;
and
A.4.A. PERILS OF THE SEA
(3) From the negligent failure of the ships
Ocean marine insurance protects ships at sea
owner to provide the vessel with the
and the cargo or freight on such ships from
proper equipment to convey the cargo
standard perils of the sea or perils of
under ordinary conditions. [De Leon
navigation which includes casualties arising
(2014)]
from the violent action of the elements and
does not cover ordinary wear and tear or
other damage usually incident to the voyage.
A.4.C. RULE ON RISKS COVERED
The mere fact that an injury is due to violence
of some marine force does not necessarily General Rule: In the absence of stipulation,
bring it within the protection of the policy if the risks insured against are only perils of the
such violence was not unusual or unexpected. sea [Go Tiaco y Hermanos v. Union Ins. Society
of Canton, G.R. No. 13983(1919)]
General Rule: The term perils of the sea
extends only to losses caused by sea damage, Exception: However, in an all risk policy, all
or by the violence of the elements, and does risks are covered unless expressly excepted.
not embrace all losses happening at sea. The burden rests on the insurer to prove that
They insure against losses from extraordinary the loss is caused by a risk that is excluded
occurrences only. It thus includes only such [Filipino Merchants Ins. Co. v. CA, G.R. No.
losses as are of extraordinary nature or arise 85141(1989)]
from some overwhelming power which
cannot be guarded against by the ordinary
exertion of human skill or prudence, as A.5. LOSS
distinguished from the ordinary wear and tear Loss may be total or partial.
of the voyage and from injuries suffered by
the vessel in consequence of her not being Total loss may be actual or constructive.
unseaworthy [Roque v. IAC, G.R. No. L-66935,
(1985)] Sec. 132. An actual total loss is caused by:
The phrase also extends to barratry which (a) A total destruction of the thing insured;
refers to the willful and intentional act on the (b) The irretrievable loss of the thing by
part of the master or the crew, in pursuance sinking, or by being broken up;
of some unlawful or fraudulent purpose,
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(1) If more than three-fourths thereof in (3) Philippine rule: the insured may not
value is actually lost, or would have to be abandon the thing insured unless the loss
expended to recover it from the peril; or damage is more than three-fourths of
its value. [De Leon (2014)]
(2) If it is injured to such an extent as to
reduce its value more than three-fourths;
(3) If the thing insured is a ship, and the A.6. ABANDONMENT
contemplated voyage cannot be lawfully A.6.A. DEFINITION
performed without incurring either an
expense to the insured of more than Sec. 140. Abandonment, in marine insurance,
three-fourths the value of the thing is the act of the insured by which, after a
abandoned or a risk which a prudent man constructive total loss, he declares the
would not take under the circumstances; relinquishment to the insurer of his interest in
or the thing insured.
(4) If the thing insured, being cargo or
freightage, and the voyage cannot be
performed, nor another ship procured by A.6.B. CONDITIONS
the master, within a reasonable time and
Aside from the requirement under Sec 141
with reasonable diligence, to forward the
already mentioned:
cargo, without incurring either an
expense to the insured of more than (1) An abandonment must be neither partial
three-fourths the value of the thin nor conditional [Sec 142];
abandoned or a risk which a prudent man
(2) An abandonment must be made within a
would not take under the circumstances.
reasonable time after receipt of reliable
But freightage cannot in any case be
information of the loss, but where the
abandoned unless the ship is also
information is of a doubtful character, the
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insured is entitled to a reasonable time to (2) If a marine insurer pays for a loss as if it
make inquiry [Sec 142]; were an actual total loss, he is entitled to
whatever may remain of the thing
(3) Abandonment is made by giving notice
insured, or its proceeds or salvage, as if
thereof to the insurer, which may be done
there had been a formal abandonment
orally, or in writing: Provided, That if the
[Sec 149];
notice be done orally, a written notice of
such abandonment shall be submitted (3) Upon an abandonment, acts done in
within seven days from such oral notice good faith by those who were agents of
[Sec 145]; the insured in respect to the thing
insured, subsequent to the loss, are at the
(4) Abandonment must be absolute and
risk of the insurer, and for his benefit [Sec
total.
150].
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
A.7. AVERAGE
Where the information upon which an
abandonment has been made proves An Average is defined as the extraordinary or
incorrect, or the thing insured was so far accidental expense incurred during the
restored when the abandonment was made voyage for the preservation of the vessel,
that there was in fact no total loss, the cargo or both and all the damages to the
abandonment becomes ineffectual. vessel and cargo from the time it is loaded
and the voyage commenced until it ends and
the cargo is unloaded. [Art. 806, Code of
A.6.C. CHARACTERISTICS Commerce]
A valid abandonment has the following There are two kinds of averages:
characteristics:
(1) Gross or general averages; and
(1) There must be an actual relinquishment
(2) Simple or particular averages.
by the person insured of his interest in the
thing insured;
(2) There must be a constructive total loss; Gross averages include damages and
expenses which are deliberately caused by
(3) The abandonment be neither partial nor
the master of the vessel or upon his authority,
conditional [Sec. 142];
in order to save the vessel, her cargo, or both
(4) It must be made within a reasonable time at the same time from a real and known risk.
after receipt of reliable information of the [Art. 811, Code of Commerce] This must be
loss [Sec. 143]; borne equally by all of the interests
concerned in the venture.
(5) It must be factual [Sec. 144];
To claim general average contributions, the
(6) It must be made by giving notice thereof
requisites are:
to the insurer which may be done orally or
in writing [Sec. 145]; and (1) There must be a common danger to the
vessel or cargo;
(7) The notice of abandonment must be
explicit and must specify the particular (2) Part of the vessel or cargo was sacrificed
cause of the abandonment [Sec. 146]. deliberately;
(3) The sacrifice must be for the common
safety or for the benefit of all;
A.6.D. EFFECTS
(4) It must be made by the master or upon
(1) An abandonment is equivalent to a
his authority;
transfer by the insured of his interest to
the insurer, with all the chances of (5) It must not be caused by any fault of the
recovery and indemnity [Sec 148]; party asking contribution;
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(b) It is provided with a competent Sec. 169. Fire insurance includes insurance
master against loss by fire, lightning, windstorm,
(c) It is provided with a sufficient number tornado or earthquake and other allied risks,
of competent officers and seamen when such risks are covered by extension to
fire insurance policies or under separate
(d) It is provided with the requisite policies.
appurtenances and equipment
[Sec.118]
Where different portions of the voyage A fire insurance is a contract of indemnity by
contemplated by a policy differ in respect which the insurer, for a stipulated premium,
to the things requisite to make the ship agrees to indemnify the insured against loss
seaworthy therefor, a warranty of of, or damage to, a property caused by hostile
seaworthiness is complied with if, at the fire.
commencement of each portion, the ship
Fire or other so-called allied risks
is seaworthy with reference to that
portion [Sec. 119] enumerated in Sec. 169 must be the
proximate cause of the damage or loss.
(2) Implied Warranty Against Improper
deviation A Deviation is a departure Fire is oxidation which is so rapid as to
from the course of the voyage insured, or produce either a flame or a glow.
an unreasonable delay in pursuing the Spontaneous combustion is usually rapid
voyage or the commencement of an oxidation. Fire is always caused by
entirely different voyage [Sec.125] combustion, but combustion does not always
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(2) In a valued policy, the parties are marine, suretyship and life. It includes, but is
bound by the valuation, in the absence of not limited to, employers liability insurance,
fraud or mistake, similar to marine workmens compensation insurance, public
insurance. [Sec. 173] liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary
If there is a valuation, the effect shall be
and theft insurance, personal accident and
similar to a marine insurance policy wherein
health insurance as written by non-life
the valuation is conclusive between the
insurance companies, and other substantially
parties in adjusting the loss [Sec. 158]
similar kinds of insurance (e.g., robbery and
In the absence of express valuation in a fire theft insurance).
insurance policy, the insured is only entitled
It is governed by the general provisions
to recover the amount of actual loss
applicable to all types of insurance plus
sustained and the burden of proof is upon
stipulations in the insurance contract
him to establish the amount of such loss by
[Fortune Insurance & Surety Co v. CA G.R. No.
preponderance of evidence.
115278 (1995)]
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 C.2. INTENTIONAL AND ACCIDENTAL
the policys face value, which is always the INJURY DISTINGUISHED
maximum limit of the insurers liability [Tan
Intentional implies the exercise of the
Chuco v. Yorkshire Fire & Life Ins. Co.G.R. No.
reasoning faculties, consciousness and
L-5069(1909)]
volition. Where a provision of the policy
In an open policy, the actual loss, as excludes intentional injury, it is the intention
determined, will represent the total of the person inflicting the injury that is
indemnity due the insured except only that controlling. If the injuries suffered by the
the total indemnity shall not exceed the total insured clearly resulted from the intentional
value of the policy [Devt. Ins. Corp. v. IAC, G.R. act of the third person, the insurer is relieved
No. 71360 (1986)] from liability as stipulated.
Accidental means that which happens by
chance or fortuitously, without intention or
C. CASUALTY INSURANCE design, which is unexpected, unusual and
C.1. DEFINITION unforeseen. The terms do not, without
qualification, exclude events resulting in
Sec. 176. Casualty insurance is insurance damage due to fault, recklessness or
covering loss or liability arising from accident negligence of third parties. The concept is not
or mishap, excluding certain types of loss necessarily synonymous with no fault. It
which by law or custom are considered as may be utilized simply to distinguish
falling exclusively within the scope of other intentional or malicious acts from negligent
types of insurance such as fire or marine. It or careless acts of man.
includes, but is not limited to, employers
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary C.3. DIVISIONS
and theft insurance, personal accident and Casualty insurance has two general divisions:
health insurance as written by non-life liability and indemnity insurance.
insurance companies, and other substantially
similar kinds of insurance.
C.3.A. LIABILITY INSURANCE
Under policies of this type, the insurer
Casualty insurance includes all forms of assumes the obligation to pay the third party
insurance against loss or liability arising from in whose favor the liability of the insured
accident or mishap excluding certain types of arises. The liability of the insurer attaches as
loss or liability which are not within the scope soon as the liability of the insured to the third
of other types of insurance such as fire,
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party is established. It covers liability incurred miscarriage of the principal or obligor, such
from quasi-delict or criminal negligence but as failure to perform, or breach of trust,
cannot cover deliberate criminal acts. [De negligence and the like, in favor of a third
Leon (2014)] party.
It shall be deemed as insurance contract if
the suretys main business is that of
C.3.B. INDEMNITY INSURANCE
suretyship, and not where the contract is
Under this kind of insurance, no action will lie merely incidental to any other legitimate
against the insurer unless brought by the business or activity of the surety.
insured for loss actually sustained and paid
The contract of a surety is evidenced by a
by him. Liability of the insurer attaches only
document called surety bond which is
after the insured has paid his liability to the
essentially a promise to guarantee the
third party. [De Leon (2014)]
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor
of the insurer. [De Leon (2014)]
C.4. NO ACTION CLAUSE
It is an accessory contract unlike a contract of
A no action clause is a requirement in a policy
insurance which is the principal contract itself.
of liability insurance which provides that a
suit must first be instituted and a final The liability of the surety or sureties under a
judgment be first obtained against the bond is joint and several, or solidary[Sec. 178].
insured; that only thereafter can the person This means that upon the default of the
injured recover on the policy [Guingon v. Del principal obligor, the surety becomes
Monte, G.R. No. L-22042(1967)] primarily liable. Unlike a guarantor, a surety
is not entitled to the benefit of exhaustion of
But, the no-action clause cannot prevail over
the principal obligors assets and assumes a
the Rules of Court provisions which are aimed
regular party to the undertaking.
at avoiding multiplicity of suits. Parties (the
insured and the insurer) may be joined as It is limited or fixed to the amount of the bond.
defendants in a case commenced by the third
What is unique to a contract of suretyship is
party claiming under a liability insurance, as
that when the obligee accepts the bond, the
the right to relief in respect to the same
bond becomes valid and enforceable whether
transactions is alleged to exist [See Sec 5,
or not the premium has been paid by the
Rule 2 and Sec 6, Rule 3, 1997 Rules of Civil
obligor unlike in an insurance contract where
Procedure]
payment of premium is necessary for the
contract to be valid. If the obligee has not yet
accepted, then payment of premium is still
D. SURETYSHIP necessary for the contract of suretyship to be
valid.
Sec. 177. A contract of suretyship is an
agreement whereby a party called the surety
guarantees the performance by another party
called the principal or obligor of an obligation
E. LIFE INSURANCE
or undertaking in favor of a third party called E.1. DEFINITION
the obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by Sec. 181. Life insurance is insurance on human
any company by virtue of and under the lives and insurance appertaining thereto or
provisions of Act. No 536, as amended by connected therewith.
2206.
Every contract or undertaking for the
payment of annuities including contracts for
the payment of lump sums under a
A suretyship is an agreement whereby a retirement program where a life insurance
surety guarantees the performance or company manages or acts as a trustee for
undertakes to answer, under specified terms such retirement program shall be considered
and conditions, for the debt, default or
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Since suicide is contrary to the laws of the death or injury is not the natural or
nature and the ordinary rules of conduct, it is probable result of the insureds voluntary act,
never presumed. The burden of proving lies or if something unforeseen occurs in the
with the insurer who seeks to avoid liability doing of the act which produces the injury,
under a life policy excepting it from coverage the resulting death is within the protection of
[Campos (1983)] the policies insuring against death or injury
from accident [Carale(2014)]
(1) Life, health, and accident insurance; (2) Of any person on whom he depends
wholly or in part for education or
(2) A change of interest in the thing insured support, or in whom he has a
after the occurrence of an injury which pecuniary interest;
results in a loss does not affect the policy
[Sec. 21]; (3) Of any person under a legal
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General Rule: The insured shall have the Sec. 13. Every interest in property, whether
right to change the beneficiary he designated real or personal, or any relation thereto, or
in the policy [Sec. 11] liability in respect thereof, of such nature that
a contemplated peril might directly damnify
Exception: If the insured expressly waived the insured, is an insurable interest.
his right to change the beneficiary, this
makes the latter an irrevocable beneficiary.
But despite the waiver, he can still change Sec. 14. An insurable interest in property may
the beneficiary, provided he obtained the consist in:
beneficiarys consent. [Sec. 11]
(1) An existing interest;
Under the Slayer Statute, when the
(2) An inchoate interest founded on an
beneficiary is the principal, accomplice or
accessory in willfully bringing about the death existing interest; or
of the insured, interest of beneficiary in life (3) An expectancy, coupled with an
insurance policy is forfeited [Sec. 12] existing interest in that out of which
the expectancy arises.
(2) In the case of a companys insurance (1) An existing interest - may be a legal title
taken on the life of an employee, or equitable title. Examples of those
insurable interest disappears once the having existing interest are owners as
employee leaves the company, in which regards their properties, trustees in the
case, the company can no longer recover case of the seller of property not yet
on the policy. delivered, mortgagors over the property
mortgaged, and lessor, lessee and sub-
lessee over the property leased.
B.3. TRANSFER OF POLICY (2) An inchoate interest must be founded on
The life insurance policy can be transferred existing interests. It exists but is
whether the transferee has insurable interest incomplete or unripe until the happening
or not. Notice of the transfer to the insurer is of an event. Examples of inchoate
not required for the validity of the same. [Sec. interests are the interest of stockholders
184 and 185] with respect to dividends in case of profits
and shares in the assets, and the interest
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of a partner in the properties belonging by one policy. This does not avoid the
to the partnership. insurance as to the others [Sec. 22];
(3) An expectancy must be coupled with an (3) A change in interest by will or succession
existing interest out of which the upon the death of the insured [Sec. 23]
expectancy arises. For example, a farmer
(4) A transfer of interest by one of several
who planted crops has insurable interest
partners, joint owners, or owners in
over his harvest which can be expected.
common who are jointly insured. The
[De Leon (2014)]
acquiring co-owner has the same
A mere contingent or expectant interest in interest; his interest merely increases
anything, not founded on an actual right to upon acquiring other co-owners interest
the thing, nor upon any valid contract for it, is (Sec. 24).
not insurable. [German Insurance v. Hyman,
34 Neb. 704, 52 N.W. 401 (1982)]
C.2. TRANSFER OF POLICY
A son has no insurable interest over the
property of his father because such is just a The policy cannot be transferred without the
mere expectancy and has no legal basis insurers consent, because the insurer has
before he inherits such property. approved the policy based on the personal
qualifications and insurable interest of the
Insurable interest in property may be based
insured.
on a perfected contract of sale, vesting an
equitable title even before delivery of the When there is an express prohibition against
goods. [Filipino Merchants Ins. Co. v. CA, alienation in the policy, and there is
(1989)] alienation, the contract of insurance is not
merely suspended but avoided.
When the seller retains ownership only to
ensure that the buyer will pay its debt, the
risk of loss is borne by the buyer. Insurable
C.3. MEASURE OF INDEMNITY
interest in property does not imply a property
interest in, or a lien upon, or possession of the Being a contract of indemnity, the measure of
subject matter of the insurance, and neither insurable interest in property is the extent to
ownership nor a beneficial interest is requisite which the insured might be damnified by the
to the existence of such an interest. Anyone loss of injury thereof. [Sec. 17] The insured
has an insurable interest in property who cannot recover a greater value than that of
derives a benefit from its existence or would his actual loss because it would be a
suffer loss from its destruction [Gaisano wagering policy contrary to public policy and
Cagayan Ins. v. Ins. Co. of North America, G.R. void.
No. 14379(2006)]
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the same peril. If the loss is greater than the D.4.B. REINSURANCE TREATY AND
sum total of all the policies issued, each POLICY DISTINGUISHED
insurer is liable for the amount of his policy.
A reinsurance treaty is an agreement
between two insurance companies whereby
one agrees to cede and the other to accept
D.3. DOUBLE AND OVER INSURANCE
reinsurance business pursuant to provisions
DISTINGUISHED
specified in the treaty. [De Leon (2014)]
Double insurance Over insurance
A reinsurance policy is a contract of
Amount of Amount of indemnity one insurer makes with another to
protect the first insurer from a risk it has
insurance may or insurance exceeds
may not exceed the the value of the already assumed.
value of the insureds insurable Reinsurance treaties and reinsurance policies
insureds insurable interest are not synonymous. Treaties are contracts
interest for insurance; policies are contracts of
insurance. [Philamlife v. Auditor General, G.R.
There are always There may be one or No. 19255(1968)]
several insurers more insurers
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payment of the premium (Sec 77). Any B.1. AUTHORITY OF AGENT TO RECEIVE
agreement to the contrary is void. PREMIUM
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
Sec. 77. Notwithstanding any agreement to insured, it is deemed to have authorized said
the contrary, no policy or contract of agent to receive the premium in its behalf.
insurance issued by an insurance company is
The insurer is bound by its agents
valid and binding unless and until the
acknowledgement of receipt of payment of
premium thereof has been paid, except in
premium [American Home Assurance Co. v.
the case of a life or an industrial life policy
Chua, G.R. No. 130421 (1999)]
whenever the grace period provision applies
or whenever under the broker and agency
agreements with duly licensed
B.2. PAYMENT BY POST-DATED CHECK
intermediaries, a 90 day credit extension is
given. No credit extension to a duly licensed The payment of premium by a postdated
intermediary should exceed 90 days from the check at a stated maturity subsequent to the
date of issuance of the policy. loss is insufficient to put the insurance into
effect.
But payment by a check bearing a date prior
Sec. 79. An acknowledgment in a policy or
to the loss, assuming availability of funds,
contract of insurance or the receipt of
would be sufficient, even if it remains
premium is conclusive evidence of its
unencashed at the time of the loss. The
payment, so far as to make the policy
subsequent effects of encashment would
binding, notwithstanding nay stipulation
retroact to the date of the instrument and its
therein that it shall not be binding until the
acceptance by the creditor [Vitug, Commercial
premium is actually paid.
Laws and Jurisprudence (2006)]
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(3) Automatic premium loan (APL) - where, (2) When the contract is voidable due to the
upon default, the insurer lends/advances fraud or misrepresentation of insurer or
to the insured without any need of his agent, the whole premium should be
application on his part, the amount refunded [Sec. 82]
necessary to pay overdue premium, but (3) When by any default of the insured other
not to exceed the CSV of the policy. It only than actual fraud, the insurer never
applies if requested in writing by the incurred any liability under the policy, the
insured either in the application or at any whole premium should be refunded [Sec.
time before expiration of the grace period. 82];
In effect, the insurance policy continues in
force for a period covered by the payment. (4) When the contract is voidable because of
After the period, if insured still does not the existence of facts of which the insured
resume paying his premiums, policy was ignorant without his fault, the whole
lapses, unless CSV still remains. If there premium should be refunded [Sec. 82];
is still CSV, APL continues until CSV is (5) Where the insurance is for a definite
exhausted. This is beneficial for the period and the insured surrenders his
insured because it continues the contract policy, the portion of the premium that
and all its features with full force and corresponds to the unexpired time at a
effect. pro rata rate, unless a short period rate
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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.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. l-4611(1955)]
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A.6. MATTERS WHICH MUST BE are open to his inquiry, equally with that of
DISCLOSED EVEN IN THE ABSENCE OF the other, and which may affect the political
INQUIRY or material perils contemplated; and all
general usages of trade.
Sec. 28. Each party to a contract of insurance
must communicate to the other, in good
faith, all facts within his knowledge which are
material to the contract and as to which he
makes no warranty, and which the other has B.MISREPRESENTATION/OMISSIONS
not the means of ascertaining.
Sec. 41. A representation may be altered or
withdrawn before the insurance is effected
but not afterwards.
Note:If the applicant is aware of the existence
of some circumstance which he knows would
influence the insurer in acting upon his Sec. 42. A representation must be presumed
application, good faith requires him to to refer to the date on which the contract
disclose that circumstance, though unasked. goes into effect.
[Vance (1951)]
The fact of being a mongoloid is a material
fact that needs to be disclosed [Great Pacific Sec. 44. A representation is to be deemed
Life v. CA, G.R. No. L-31845(1979)]. false when the facts fail to correspond with its
assertions or stipulations.
Mere possibility of previous hypertension is
not enough to establish concealment [Great
Pacific Life v. CA, G.R. No. 113899(1999)]. Sec. 45. If a representation is false in a
material point, whether affirmative or
promissory, the injured party is entitled to
A.7. MATTERS WHICH NEED NOT BE rescind the contract from the time when the
DISCLOSED representation becomes false.
(1) Matters already known to the insurer [Sec
30(a)];
(2) Matters which each party are bound to Representations are factual statements
know [Sec 30(b) and Sec 32]; made by the insured at the time of, or prior to,
the issuance of the policy, which give
(3) Matters of which the insurer waives information to the insurer and induce him to
communication [Sec 30(c) and Sec 33]; enter into the insurance contract.
(4) Matters which prove or tend to prove the There is false representation if the matter is
existence of a risk excluded by a warranty true at the time it was made/represented but
and which are not otherwise material [Sec false at the time the contract takes effect(Sec
30(d)]; 44). There is no false representation if the
(5) Matters which relate to a risk excepted in matter is true at the time the contract takes
the policy, and which are not otherwise effect although false at the time it was
material [Sec 30(e)]; made/represented.
Sec. 32. Each party to a contract of insurance (2) Promissory, which is any promise to be
is bound to know all the general causes which fulfilled after the contract has come into
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General rule:The injured party is entitled to There is fraud and misrepresentation when
rescind from the time when the another person takes the place of the insured
representation becomes false [Sec 45]. in the medical examination [Eguaras v. Great
EasternG.R. No. L-10436(1916)].
Exceptions:
The insurer is not entitled to rescission for
(1) Incontestability clause; misrepresentation of age if the birth date on
(2) Misrepresentation after contract takes the policy leads to the conclusion that the
effect; insured is beyond the age covered and yet the
insurer continued to accept payment and
(3) Waiver, made by acceptance of insurer of issued the policy. Insurer is deemed estopped
premium payments despite knowledge of [Edillon v. Manila Bankers Life G.R. No. L-
the ground for rescission [Sec 45]; 34200 (1982)].
(4) A representation of the expectation, Despite not answering the questions and
belief, opinion, or judgment of the keeping blank certain questions in the
insured, although false, and even if application regarding ailments he has
material to the risk [Philamcare Health suffered, when the insured signed the
Systems, Inc. v. CA, G.R. No. 125678. pension plan application, he adopted the
(2002)]; written representations and declarations
embodied in as his own. Therefore, it is clear
from these representations that he concealed
his chronic heart ailment and diabetes.
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B.1.A. PURPOSE
Its purpose is to apprise the insurance
company so that it may make proper
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However, it has been held that formal notice Its purpose is to give the insurer information
of loss is not necessary if insurer has actual by which he may determine the extent of his
notice of loss [Fidelity Phoenix Insurance v liability but also; to afford him a means of
Friedman, 174 SW 215] but there is a ruling to detecting any fraud that may have been
the contrary [Col. Sav. Bank v American practiced upon him, and to operate as a
Surety 87 P 118] check upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
B.1.B. FORM orally or in writing.
In case of loss as regards fire insurance, there The insured is not bound to give such proof as
must be a written notice thereof. [Sec. 90] would be necessary in a court of justice; but it
But as to other non-life insurance policies, is sufficient for him to give the best evidence
the law does not provide for a necessity of which he has in his power at the time [Sec 91].
written notice [De Leon (2014)]
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Effect of refusal 1. This entitles the beneficiary to collect interest on the proceeds of policy for
or failure to pay the duration of the delay at rate of twice the ceiling prescribed by the
claim within monetary board (unless refusal to pay is based on ground that claim is
time prescribed fraudulent)
2. In case damages are awarded, this includes attorneys fees and other
expenses incurred due to delay (plus the interest) [Sec. 248 and 249]
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C.1. UNFAIR CLAIMS SETTLEMENT; Sec. 247 lists the grounds which are sufficient
SANCTIONS cause for the suspension or revocation of the
insurers certificate of authority [Sec. 247(c)].
Sec. 247. No insurance company doing
business in the Philippines shall refuse,
without just cause, to pay or settle claims C.2. PRESCRIPTION OF ACTION
arising under coverages provided by its
In the absence of an express stipulation in the
policies, nor shall any such company engage
policy, it being based on a written contract,
in unfair claim settlement practices.
the action prescribes in ten years [Article 1144,
Any of the following acts by an insurance Civil Code].
company, if committed without just cause and
However, the parties may validly agree on a
performed with such frequency as to indicate a
shorter period provided it is not less than one
general business practice, shall constitute
year from the time the cause of action
unfair claim settlement practices:
accrues [Sec 63].
Knowingly misrepresenting to claimants
In compulsory motor vehicle insurance, the
pertinent facts or policy provisions relating to
action prescribes in one year from the denial
coverage at issue;
of the claim [Sec. 397]
Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies; C.3. SUBROGATION
Failing to adopt and implement reasonable Subrogation is a process of legal substitution.
standards for the prompt investigation of The insurer, after paying the amount covered
claims arising under its policies; by the insurance policy, steps into the shoes
of the insured and avails himself of the
Not attempting in good faith to effectuate
latter's rights that exist against the
prompt, fair and equitable settlement of
wrongdoer at the time of loss.
claims submitted in which liability has
become reasonably clear; or The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
Compelling policyholders to institute suits to
have paid to the insured.
recover amounts due under its policies by
offering without justifiable reason The Right of Subrogation stems from Art.
substantially less than the amounts 2207 of the Civil Code.
ultimately recovered in suits brought by
Note:Subrogation applies only to property
them.
insurance and non-life insurance.
Evidence as to numbers and types of valid
and justifiable complaints to the
Commissioner against an insurance C.3.A. RIGHTS TRANSFERRED
company, and the Commissioners complaint The subrogee-insurer cannot acquire any
experience with other insurance companies claim, Security, or remedy the subrogor did
writing similar lines of insurance shall be not have (or a greater claim than the original
admissible in evidence in an administrative or insured). In other words, a subrogee cannot
judicial proceeding for the purpose of succeed to a right not possessed by the
determining whether unfair claim settlement subrogor. A subrogee can recover only if the
practices have been committed. insured likewise could have recovered.
If it is found, after notice and an opportunity [Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
to be heard, that an insurance company has Corp. G.R. No. 140349 (2005)]
violated this section, each instance of The insured can no longer recover from the
noncompliance may be treated as a separate offended party what was paid to him by the
violation and shall be considered sufficient insurer but he can recover any deficiency if
cause for the suspension or revocation of the the damages suffered are more than what
companys certificate of authority
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MERCANTILE LAW
TRANSPORTATION
LAW
duties and obligations that the law imposes Common carrier Private carrier
[Teodoro v. Nicolas (2012)].
Governing law
A common carrier need not have fixed and
Civil Code; Code of Law on obligations
publicly known routes. Neither does it have
Commerce and and contracts
to maintain terminals or issue tickets [Asia
special laws, if not
Lighterage and Shipping v. CA (2003)].
regulated by the
One engaged in the business of Civil Code (Art.
transporting petroleum products from 1766); law of the
refineries via pipeline is a common carrier. country to which the
It is engaged in the business of transporting goods are to be
or carrying goods, i.e., petroleum products, transported, if
for hire as a public employment. It regarding liability
undertakes to carry for all persons for loss, destruction,
indifferently, that is, to all persons who or deterioration of
choose to employ its services, and goods
transports the goods by land and for Regulation
compensation. The fact that it has a limited
clientele does not exclude it from the A public service, Not subject to
definition of a common carrier [First Phil. therefore subject to regulation as a
Industrial v. CA (1998)]. provisions common carrier
governing common
A travel agency is not a common carrier. carriers and public
It is not an entity engaged in the business of utilities.
transporting either passengers or goods
and is therefore neither a private nor a
common carrier. Its covenant with its It is not necessary that the carrier be issued
customers is simply to make travel a certificate of public convenience [Loadstar
arrangements on their behalf [Crisostomo v. Shipping Co., Inc. v. CA (1999)].
CA (2003)].
Kabit system:
Common carrier Private carrier (1) It is an arrangement whereby a person
Availability who has been granted a certificate of
convenience allows another person who
Holds himself out in Agrees in some
owns motor vehicles to operate under
common, that is, to special case with
such franchise for a fee [Lita Enterprises,
all persons who some private
Inc. v. IAC (1984)].
choose to employ individual to carry
him, as ready to for hire (2) It is invariably recognized as being
carry for hire contrary to public policy and therefore
Binding effect void and inexistent under Art. 1409.
Thus, for the safety of passengers and
Bound to carry all Not bound to carry the public, the registered owner of the
who offer and for any reason, such vehicle is not allowed to prove that
tender reasonable goods as it is another person has become the owner
compensation for accustomed to so that he may be thereby relieved of
carrying them carry, unless it responsibility [Lim v. CA (2002)].
enters into a special
agreement to do so (3) One of the primary factors considered in
the granting of a certificate of public
Diligence required convenience for the business of public
Extraordinary Ordinary transportation is the financial capacity
The obligation of the common carrier (2) If not, whether or not the common
consists in the transportation of passengers carrier exercised extraordinary diligence.
or goods or both [Art. 1732].
The liabilities of a common carrier arises B. EXEMPTING CAUSES
from a contract of carriage. Thus, the cause
of action, when there is failure on its part to
exert extraordinary diligence according to General Rule: Common carriers are
all circumstances, is for breach of contract responsible for the loss, destruction, or
[Isaac v. A.L. Ammen (1957)]. deterioration of the goods
In what follows, these liabilities in case of Exception: The same is due to any of the
breach, both with respect to vigilance over following causes only:
the goods and safety of the passengers
transported, will be discussed. (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 occurrence of the natural disaster, for it to
of the goods; be exempt from liability under the law for
the loss of the goods [Art. 1739].
(4) The character of the goods or defects in
the packing or in the containers; Fire may not be considered a natural
disaster or calamity. This must be so as it
(5) Order or act of competent public
arises almost invariably from some act of
authority [Art. 1734].
man or by human means. It does not fall
In all other cases of loss, destruction, or within the category of an act of God unless
deterioration, the common carrier is caused by lightning or by other natural
presumed to have been at fault or to have disaster or calamity. It may even be caused
acted negligently, unless they prove that by the actual fault or privity of the carrier
they observed extraordinary diligence [Art. [Eastern Shipping Lines v. IAC (1987)].
1735].
Note: If the common carrier negligently
Thus, in De Guzman v. CA (1988), it was held incurs in delay in transporting the goods, a
that hijacking, not being included in Art. natural disaster shall not free such carrier
1734, must be dealt with under the from responsibility [Art. 1740].
provisions of Art. 1735, and thus, the
common carrier is presumed to have been
at fault or negligent. B.2. ACT OF PUBLIC ENEMY
Requisites:
B.1. NATURAL DISASTER OR CALAMITY (1) The act of the public enemy was
committed either in an international or
Requisites:
civil war [Art. 1734];
(1) The natural disaster must have been the
(2) The act of the public enemy must have
proximate and only cause of the loss;
been the proximate and only cause;
(2) The common carrier must exercise due
(3) The common carrier must exercise due
diligence to prevent or minimize the
diligence to prevent or minimize the
loss before, during and after the
loss before, during and after the act of
occurrence of the flood, storm or
the public enemy causing the loss,
natural disaster [Art. 1739];
destruction or deterioration of the
(3) The common carrier must not have goods [Art. 1739].
negligently incurred delay [Art. 1740];
In order that a common carrier may be
B.3. ACT OR OMISSION OF SHIPPER OR
absolved from liability where the loss,
OWNER
destruction or deterioration of the goods is
due to a natural disaster or calamity, it must The act or omission of the shipper must
be shown that such natural disaster or have been the proximate and only cause of
calamity was the proximate and only cause the loss, destruction, or deterioration of the
of the loss; there must be an entire goods.
exclusion of human agency from the cause
If the shipper or owner merely contributed
of the injury of the loss [Philippine American
to the loss, destruction or deterioration of
General Insurance Co., Inc. v. MGG Marine
the goods, the proximate cause being the
Services, Inc. (2002)].
negligence of the common carrier, the latter
Moreover, even in cases where a natural shall be liable for the damages, which shall,
disaster is the proximate and only cause of however, be equitably reduced [Art. 1741].
the loss, a common carrier is still required
to exercise due diligence to prevent or
minimize loss before, during and after the
Art. 1738 provides that the extraordinary Stoppage in transitu is the act by which
liability of the common carrier continues to the unpaid vendor of goods stops their
be operative even during the time the goods progress and resumes possession of them
are stored in a warehouse of the carrier at constructively while they are in the course of
the place of destination, until the consignee transit from him to the purchaser, and not
has: yet actually delivered to the latter [Agbayani
(1987)].
(1) Been advised of the arrival of the goods;
and Basis: Under Art. 1530, when the buyer of
the goods becomes insolvent, the unpaid
(2) Had reasonable opportunity thereafter
seller who has parted with the possession of
to remove them or otherwise dispose of
the goods at any time while they are in
them.
transit, may resume the possession of the
Delivery of the cargo to the customs goods as he would have had if he had never
authorities is not delivery to the consignee parted with the possession.
or to the person who has a right to receive
When the right of stoppage in transitu is
them as contemplated in Art. 1736 because
exercised, the common carrier holds the
in such case the goods are still in the hands
goods in the capacity of an ordinary bailee
of the government and the owner cannot
or warehouseman upon the theory that the
exercise dominion over them. However, the
exercise of the right of stoppage in transitu
parties may agree to limit the liability of the
terminates the contract of carriage. Hence,
carrier considering that the goods still have
only ordinary diligence is required
to go through the inspection of the customs
[Agbayani (1987)].
authorities before they are actually turned
over to the consignee. This stipulation is not
contrary to morals or public policy. This is a
situation where it may be said that the
E. STIPULATION FOR LIMITATION OF
carrier loses control of the goods because of LIABILITY
a custom regulation and it is unfair that it
be made responsible for what may happen
during the interregnum [Lu Do v. Binamira There are two possible stipulations limiting
(1957)]. the liability of the common carrier:
(1) Stipulation limiting the common
carriers liability as to the diligence
D.3. TEMPORARY UNLOADING OR required; and
STORAGE
(2) Stipulation limiting the common
The common carriers duty to observe carriers liability as to the amount of
extraordinary diligence over the goods liability.
remains in full force and effect even when
they are temporarily unloaded or stored in An agreement limiting the common carriers
transit, unless the shipper or owner has liability for delay on account of strikes or
made use of the right of stoppage in riots is also valid [Art. 1748].
transitu [Art. 1737].
General rule: Extraordinary diligence over E.1. AS TO DILIGENCE REQUIRED
the goods remains even when the goods are
temporarily unloaded or stored in transit. A stipulation between the common carrier
and the shipper or owner limiting the
Exception: The duty to observe such liability of the former for the loss,
diligence ceases when shipper or owner destruction, or deterioration of the goods to
made use of the right of stoppage in a degree less than extraordinary diligence
transitu. shall be valid, provided it be:
(1) In writing, signed by the shipper or (2) Stipulation providing for an unqualified
owner; limitation of such liability to an agreed
stipulation [Heacock v. Macondray
(2) Supported by a valuable
(1921)].
consideration other than the service
rendered by the common carrier;
and
E.2. LIMITATION OF LIABILITY TO FIXED
(3) Reasonable, just and not contrary to AMOUNT
public policy [Art. 1744].
A stipulation that the common carriers
liability is limited to the value of the goods
appearing in the bill of lading, unless the
Any of the following or similar stipulations
shipper or owner declares a greater value, is
shall be considered unreasonable, unjust
binding [Art. 1749].
and contrary to public policy:
A contract fixing the sum that may be
(1) That the goods are transported at the
recovered by the owner or shipper for the
risk of the owner or shipper;
loss, destruction or deterioration of the
(2) That the common carrier will not be goods is valid if:
liable for any loss, destruction, or
(1) It is reasonable and just under the
deterioration of the goods;
circumstances; and
(3) That the common carrier need not
(2) It has been fairly and freely agreed upon
observe any diligence in the custody of
[Art. 1750].
the goods;
While a passenger may not have signed the
(4) That the common carrier shall exercise
plane ticket, he is nevertheless bound by
a degree of diligence less than that of a
the provision thereof; such provisions have
good father of a family, or of a man of
been held to be part of the contract of
ordinary prudence in the vigilance over
carriage and valid and binding upon the
the movables transported;
passenger regardless of the latters lack of
(5) That the common carrier shall not be knowledge or assent to the regulation. It is
responsible for the acts or omission of what is known as a contract of adhesion
his or its employees; wherein one party imposes a ready-made
form of contract on the other. The one who
(6) That the common carriers liability for
adheres to the contract is in reality free to
acts committed by thieves, or of robbers
reject it entirely. A contract limiting liability
who do not act with grave or irresistible
upon an agreed valuation does not offend
threat, violence or force, is dispensed
against the policy of the law forbidding one
with or diminished;
from contracting against his own
(7) That the common carrier is not negligence [Ong Yiu v. CA (1979)].
responsible for the loss, destruction, or
[However], the fact that the conditions are
deterioration of goods on account of the
printed at the back of the ticket stub in
defective condition of the car, vehicle,
letters so small that they are hard to read
ship, airplane or other equipment used
would not warrant the presumption that the
in the contract of carriage [Art. 1745].
[shipper] was aware of those conditions
such that he had fairly and freely agreed
The following stipulations are also void: to those conditions [Shewaram v. PAL
(1966)].
(1) Stipulation exempting the common
carrier from any and all liability for loss
or damage occasioned by its own
negligence;
(a) He may not be required to pay any In this connection, however, a person
increased price of passage; but boarding a moving car must be taken to
assume the risk of injury from boarding the
(b) His living expenses during the stay
car under the conditions open to his view,
shall be for his own account.
but he cannot fairly be held to assume the
(3) In case of delay in the departure of risk that the motorman, having the situation
the vessel, the passengers have: in view, will increase the peril by
accelerating the speed of the car before he
(a) The right to remain on board;
is planted safely on the platform [Del Prado
(b) If the delay is not due to a fortuitous v. Manila Railroad (1929)].
event or force majeure, with the right
to be furnished with food for the
account of the vessel; C.2. ARRIVAL AT DESTINATION
(c) If the delay should exceed ten days: As to the termination of the duty of the
common carrier, it has been held that the
(i) Passengers requesting the
relation of carrier and passenger does not
same shall be entitled to the
cease at the moment the passenger alights
return of the fare; and
from the carriers vehicle at a place selected
(ii) If it is due exclusively to the by the carrier at the point of destination, but
fault of the captain or ship continues until the passenger has had a
agent, they may also demand reasonable time or a reasonable
indemnity for losses and opportunity to leave the carriers premises.
damages. What is a reasonable time or a reasonable
A vessel exclusively devoted to the delay within this rule is to be determined
transportation of passengers must take from all the circumstances:
them directly to the port or ports of (1) A person who, after alighting from a
destination, no matter what the number of train, walks along the station platform
passengers may be, making all the stops is considered still a passenger;
indicated in its itinerary.
(2) A passenger, who has alighted at his
destination and is proceeding by the
C.1. WAITING FOR CARRIER OR usual way to leave the companys
BOARDING OF CARRIER premises, but before actually doing so is
halted by the report that his brother, a
As to the commencement of the duty of the fellow passenger, has been shot, and he
common carrier, in Del Prado v. Manila in good faith and without intent of
Railroad (1929), it was held that the duty engaging in the difficulty, returns to
extends to persons boarding the cars as relieve his brother, is deemed
well as those alighting therefrom. reasonably and necessarily delayed and
Thus, it is the duty of common carriers of thus continues to be a passenger
passengers to stop their conveyances at a entitled as such to the protection of the
reasonable length of time in order to afford railroad and company and its agents [La
passengers an opportunity to board and Mallorca v. CA (1966)].
enter, and they are liable for injuries The reasonableness of time should be made
suffered by boarding passengers resulting to depend on the attending circumstances
from the sudden starting up or jerking of of the case, such as the kind of common
their conveyances while they are doing so carrier, the nature of its business, the
[Dangwa Transportation v. CA (1991)]. customs of the place, and so forth, and
therefore precludes a consideration of the
time element per se without taking into
account such other factors. The primary
factor to be considered is the existence of a This liability does not cease even upon proof
reasonable cause as will justify the presence that they exercised all the diligence of a
of the victim on or near the petitioners good father of a family in the selection and
vessel. supervision of their employees [Art. 1759].
In the case of a shipper, the passengers of Also, this liability cannot be eliminated or
vessels are allotted a longer period of time limited by stipulation, by the posting of
to disembark from the ship than other notices, by statements on the tickets or
common carriers such as a passenger bus, otherwise [Art. 1760].
since such vessels are capable of
Ratio: The servant is clothed with
accommodating a bigger volume of both
delegated authority and charged with the
passenger and baggage as compared to the
duty to execute the carriers undertaking to
capacity of a regular commuter bus.
carry the passenger safely [Agbayani (1987)].
Consequently, a ship passenger will need at
Also, the defense of diligence in the
least an hour as is the usual practice, to
selection and supervision of employees
disembark from the vessel and claim his
does not obtain because the liability is not
baggage whereas a bus passenger can
based on quasi-delict, but on culpa
easily get off the bus and retrieve his
contractual. However, there must be a
luggage in a very short period of time
reasonable connection between the act and
[Aboitiz Shipping v. CA (1989)].
the contract of carriage.
The relation of carrier and passenger
Note: The employee must be on duty at the
continues until the latter has been landed
time of the act.
at the port of destination and has left the
carriers premises. Hence, the carrier It is enough that the assault happens
necessarily would still have to exercise within the course of the employees
extraordinary diligence in safeguarding the duty. It is no defense for the carrier that the
comfort, convenience and safety of its act was done in excess of authority or in
stranded passengers until they have disobedience of the carriers orders. The
reached their final destination [PAL v. CA carriers liability here is absolute in the
(1993)]. sense that it practically secures the
passengers from assaults committed by its
Note: Despite the Courts pronouncement
own employees [Maranan v. Perez (1967)].
in PAL v. CA, note that common carriers are
bound to observe extraordinary diligence in
the safety of its passengers. The law does
D.2. OTHER PASSENGERS AND
not mention the words comfort and
STRANGERS
convenience.
A common carrier is responsible for injuries
suffered by a passenger on account of the
D. LIABILITY FOR ACTS OF OTHERS willful acts or negligence of other
passengers or of strangers, if the common
carriers employees through the exercise of
D.1. EMPLOYEES the diligence of a good father of a
fam ily could have prevented or stopped
Common carriers are liable for the death of the act or omission [Art. 1763].
or injuries to passengers through the
negligence or willful acts of the formers Note: The law speaks of injuries suffered by
employees, although such employees may the passenger but not death. However,
have acted beyond the scope of their there appears to be no reason why the
authority or in violation of the orders of the common carrier should not be held liable
common carriers. under such circumstances. The word
injuries should be interpreted to include
death [Agbayani (1987)].
Under Art. 2201, the liability for damages (2) The common carrier acted in bad faith
include: [Art. 2220];
(1) In case the common carrier acted in (3) Death of a passenger resulted even in
good faith: the absence of bad faith or fraud [Art.
2206].
(a) The natural and probable
consequence of the breach of the Bad faith contemplates a state of mind
obligation; and affirmatively operating with furtive design
or with some motive of self-interest or will
(b) Those which the parties have
or for ulterior purpose [Air France v.
foreseen or could have reasonably
Carrascoso (1966)].
foreseen at the time the obligation
was constituted; When it comes to contracts of common
carriage, inattention and lack of care on the
(2) In case of fraud, bad faith, malice or
part of the carrier resulting in the failure of
wanton attitude, all damages which
the passenger to be accommodated in the
may be reasonably attributed to the
class contracted for amounts to bad faith or
non-performance of the obligation.
fraud which entitles the passenger to the
In case of death, actual damages also award of moral damages in accordance
include: with Art. 2220 [Ortigas v. Lufthansa (1975)].
(1) Loss of earning capacity, unless the Willful and deliberate overbooking on the
deceased had no earning capacity at the part of the airline carrier constitutes bad
time of death; and faith. Under Section 3, Economic
Regulations No. 7 of the Civil Aeronautics
(2) Support for a period not exceeding five
Board, overbooking, which does not exceed
years [Art. 2206].
ten percent, is not considered as deliberate
Note: Art. 2206 applies only in case of and therefore does not amount to bad
death of the passenger. faith [United Airlines v. CA (2001)].
In the absence of a showing that common
carriers attention was called to the special
F.3. EXEMPLARY DAMAGES
circumstances requiring prompt delivery of
a passengers luggage, the common carrier In a contract of carriage, exemplary
cannot be held liable for the cancellation of damages may be awarded if the common
passengers contracts [for exhibition of carrier acted in wanton, fraudulent, reckless,
films] as it could not have foreseen such an oppressive, or malevolent manner [Art.
eventuality when it accepted the luggage 2232].
for transit [Pan-Am World Airways v. IAC
Exemplary damages serves as an
(1988)].
instrument to serve the ends of law and
public policy by reshaping socially
deleterious behaviors, specifically, in the
F.2. MORAL DAMAGES
case, to compel the common carrier to
Moral damages, though incapable of control their employees, to tame their
pecuniary computation, if they are the reckless instincts, and to force them to take
proximate result of the common carriers adequate care of human beings and their
wrongful act or omission, may be recovered property [Mecenas v. CA].
[Art. 2217].
In cases of breach of contract of carriage,
moral damages may be recovered where:
(1) The common carrier acted fraudulently;
The bill of lading constitutes the legal merchandise which he may make to the
evidence of the contract of transportation, point of delivery. Should he not do so, he
and all disputes between the parties shall be liable for damages cause by the
regarding the execution and performance of delay [Art. 358].
the contract shall be decided by the
If no indemnity is fixed and there is delay,
contents of the bill of lading issued by the
the carrier shall be liable for the damages
carrier. The law admits no exceptions other
which may have been caused by the delay
than the falsity and material error in its
[Art. 370].
drafting [Art. 353].
the consignee may refuse to receive only governing their actions. Understandably,
the damaged goods [Art. 365]. when the goods were delivered, the
necessary clearance had to be made before
(4) Where the delay is through the fault of
the package was opened. Upon opening
the carrier [Art. 371].
and discovery of the damaged condition of
In case of dispute as to the condition of the the goods, a report to this effect had to pass
goods, the same shall be examined by through the proper channels before it could
experts appointed by the parties, and the be finalized and endorsed by the institution
third one, in case of disagreement, to the claims department of the shipping
appointed by the judicial authority. company.
If the persons interested should not agree No claim whatsoever shall be admitted
with the report, said judicial authority shall against the carrier with regard to the
order the deposits of the merchandise in a condition in which the goods transported
safe warehouse, and the parties interested were delivered:
shall make use of their rights in the proper
(1) After the periods mentioned have
manner. [Art. 367].
elapsed; or
(2) After the transportation charges have
D. PERIOD FOR FILING CLAIMS been paid.
The periods mentioned commence upon
Pursuant to Art. 366, Code of Commerce, a delivery of cargo to the consignee at the
claim , on account of damage found upon place of destination.
opening the packages, must be made Thus, Art. 366 is limited to cases of claims
against the carrier: for damage to goods actually turned over by
(1) Within 24 hours, if the indications of the the carrier and received by the consignee. It
damage cannot be ascertained from the does not apply to misdelivery of goods.
exterior of the packages (i.e., latent Failure to file a claim bars recovery (Aquino
damage); or (2011)].
(2) At the time of receipt, if the indications
damage can be so ascertained (i.e.,
patent damage). Ratio: The rule protects the carrier by
affording it an opportunity to make an
investigation of a claim while the matter is
But the Court in Aboitiz v Insurance still fresh and easily investigated so as to
Company of North America [GR No. 168402, safeguard itself from false and fraudulent
6 Aug 2008] made a pro hac vice ruling, in claims [UCPB General Ins. Co., Inc. v. Aboitiz
that even if the notice was given more than Shipping (2009)].
24 hrs after the receipt of the goods, the However, the periods prescribed may be
notice requirement was held nevertheless to subject to modification by agreement of the
have been complied with, due to the parties. [PHILAMGEN v. Sweet Lines, Inc.
peculiar circumstances: (1992)].
Provisions specifying a time to give notice The value of the goods stated in the bill of
of damage to common carriers are lading is conclusive between the parties,
ordinarily to be given a reasonable and and the shipper is not allowed to prove a
practical, rather than a strict construction. higher value [Art. 372]. It is only when the
We give due consideration to the fact that carriers fault is so gross as to amount to
the final destination of the damaged cargo actual fraud that the actual amount of the
was a school institution where authorities losses an damages suffered may be proved
are bound by rules and regulations by the shipper against the carrier.
(1) After delivery of the goods; or All damages and impairment suffered by
the goods during the transportation, by
(2) From the date when the goods should reason of fortuitous event or by the nature
have been delivered. or defect of the articles, shall be for the
Otherwise, the carrier and the ship shall be account of the shipper. Proof of these
discharged from all liability in respect of accidents is incumbent on the carrier [Art.
loss or damage. 361].
The absence of notice shall not affect or Note: Common carriers are responsible
prejudice the right of the shipper to bring for loss, destruction or deterioration of the
suit within one year after the delivery of the goods, unless it exercised extraordinary
goods or the date when the goods should diligence, or the loss is due to Art. 1734 of
have been delivered [Section 3(6), Carriage the Civil Code.
of Goods by Sea Act].
The period for filing the claim is one year, in
accordance with the Carriage of Goods by
Sea Act. The Carriage of Goods by Sea Act,
as adopted and embodied in
Commonwealth Act No. 65, applies
because it is a special law, and, as such,
prevails over the general provisions of the
Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA].
A crew is a person on board who is involved B.1. LIABILIITY FOR ACTS OF CAPTAIN
in highly technical tasks and in manning of
Three (3) distinct roles of a captain:
the vessel (e.g. master, mate).
(1) General agent of the ship owner;
A com plem ent is a person, not a crew,
who is not directly involved in the manning (2) Commander and technical director of
of the vessel (e.g. cook). the vessel;
Supercargo is a person on board the (3) Representative of the country under
vessel, who functions as an agent of the whose flag he navigates [Inter-Orient
owner of the goods shipped as cargo on a Marine Enterprises v. NLRC (1994)].
vessel, who has charge of the cargo on
board, sells the same to the best advantage
in the foreign markets, buys cargo to be The captain shall be liable to the
brought back on the return voyage of the agent, and the latter to third
ship, and comes home with it. persons:
The powers and liabilities of the captain (1) For all the damages suffered by the
shall cease, when there is a supercargo, vessel and his cargo by reason of want
with regard to that part of the of skill or negligence on his part;
administration legitimately conferred upon (2) For all the thefts committed by the crew,
the latter, but shall continue in force for all reserving his right of action against the
acts which are inseparable from his guilty parties;
authority and office [Art. 649].
(3) For the losses, fines, and confiscations
imposed on account of violation of the
The ship owner or ship agent is laws and regulations of customs, police,
liable: health, and navigation;
(1) For the acts of the captain, unless the (4) For the losses and damages caused by
latter exceeds his authority [Art. 586]. mutinies on board the vessel, or by
reason of faults committed by the crew
(2) For contracts entered into by the
in the service and defense of the same,
captain to repair, equip and provision
if he does not prove that he made full
the vessel, provided that the amount
use of his authority to prevent or avoid
claimed was invested for the benefit of
them;
the vessel [Art. 586].
(5) For those arising by reason of an undue
(3) For the indemnities in favor of third
use of powers and non-fulfillment of the
persons which may arise from the
obligations which are his;
conduct of the captain in the care of the
goods transported, as well as for the (6) For those arising by reason of his going
safety of passengers transported [Art. out of his course or taking a course
587]. which he should not have taken without
sufficient cause, in the opinion of the
(4) For damages to third persons for tort or
officers of the vessel at a meeting with
quasi-delict committed by the captain,
the shippers or supercargoes who may
except collision with another vessel [Art.
be on board;
1759, Civil Code].
(7) For those arising by reason of his
(5) For damages in case of collision due to
voluntarily entering a port other than
the fault, negligence, or want of skill of
that of his destination;
the captain, sailing mate, or any other
member of the complement [Art. 826]. (8) 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 contribution to the common fund, for
preventing collisions [Art. 618]. the results of the acts of the captain,
referred to in Art. 587. Each part owner
may exempt himself from this liability
B.2. EXCEPTIONS TO LIMITED LIABILITY by the abandonment before a notary of
the part of the vessel belonging to him
The Doctrine of Limited Liability
[Art. 590].
(Hypothecary Rule)
(3) In case of collision, the liability of the
The real and hypothecary nature of
ship owner shall be understood as
maritime law simply means that the liability
limited to the value of the vessel with all
of the carrier in connection with losses
her appurtenances and all the freight
related to maritime contracts is confined to
earned during the voyage [Art. 837].
the vessel, which is hypothecated for such
obligations or which stands as the guaranty (4) If the vessel and her freight should be
for their settlement. totally lost, by reason of capture or
wreck, all rights of the crew to demand
It has its origin by reason of the conditions
any wages whatsoever shall be
and risks attending maritime trade in its
extinguished, as well as the agent for
earliest years when such trade was replete
the recovery of the advances made [Art.
with innumerable and unknown hazards
643].
since vessels had to go through largely
uncharted waters to ply their trade. It was If the ship owner or agent may in any way be
designed to offset such adverse conditions held civilly liable at all for injury to or death
and to encourage people and entities to of passengers arising from the negligence
venture into maritime commerce despite of the captain in cases of collisions or
the risks and the prohibitive cost of shipwrecks, his liability is merely co-
shipbuilding. extensive with his interest in the vessel such
that a total loss thereof results in its
Thus, the liability of the vessel owner and
extinction. This is based on the exclusively
agent arising from the operation of such
real and hypothecary nature of maritime
vessel were confined to the vessel itself, its
law, which operates to limit such liability to
equipment, freight, and insurance, if any,
the value of the vessel, or to the insurance
which limitation served to induce capitalists
thereon, if any. [Yangco v. Laserna (1941)]
into effectively wagering their resources
against the consideration of the large
profits attainable in the trade [Aboitiz
Exceptions:
Shipping Corp. v. General Accident Fire and
Life Assurance Corp. (1993)]. (1) Claims under the Workmens
Compensation Act [Abueg v. San Diego];
(2) Expenses for repairing, provisioning and
Thus, under the doctrine of abandonment:
equipping the vessel;
(1) The agent shall be civilly liable for the
(3) There is an actual finding of negligence
indemnities in favor of third persons
on the part of the vessel owner or agent
which arise from the conduct of the
[Aboitiz Shipping v. General Accident Fire
captain in the care of the goods which
and Life Assurance Corp. (1993)];
the vessel carried, but he may exempt
himself therefrom by abandoning the (4) Vessel is insured, to the extent of the
vessel with all her equipment and the insurance proceeds [Vasquez v. CA
freight he may have earned during the (1985)];
voyage [Art. 587];
(5) There was no total loss;
(2) The owners of a vessel shall be civilly
(6) Collision between two negligent vessels.
liable in the proportion of their
(3) The cables and masts which are cut or cargo should be transferred to lighters
rendered useless, the anchors and the or barges and be lost, the owner of said
chains which are abandoned in order to part shall be entitled to indemnity, as if
save the cargo, the vessel, or both; the loss has originated from a gross
average [Art. 817];
(4) The expenses of removing or
transferring a portion of the cargo in (14) If, as a necessary measure to extinguish
order to lighten the vessel and place her a fire in a port; roadstead; creek, or bay,
in condition to enter a port or roadstead, it should be decided to sink any vessel,
and the damage resulting therefrom to this loss shall be considered gross
the goods removed or transferred; average, to which the vessels saved
shall contribute.
(5) The damage suffered by the goods of
the cargo through the opening made in (15)
the vessel in order to drain her and
3. JETTISON
prevent her sinking;
The captain shall direct the jettison, and
(6) The expenses caused through floating a
shall order the goods cast overboard in the
vessel intentionally stranded for the
following order:
purpose of saving her;
(1) Goods on deck - beginning with those
(7) The damage caused to the vessel which
which embarrass the maneuver or
it is necessary to break open, scuttle, or
damage the vessel, preferring if
smash in order to save the cargo;
possible, the heaviest ones with the
(8) The expenses of curing and maintaining least utility and value;
the members of the crew who may have
(2) Goods below the upper deck - always
been wounded or crippled in defending
beginning with those of the greatest
or saving the vessel;
weight and smallest value, to the
(9) The wages of any member of the crew amount and number absolutely
detained as hostage by enemies, indispensable [Art. 815].
privateers, or pirates, and the necessary
expenses which he may incur in his
imprisonment, until he is returned to To include the goods jettisoned in the
the vessel or to his domicile, should he general or gross average, the existence of
prefer it; the cargo or goods must be proved:
(10) The wages and victuals of the crew of a (1) For cargo by means of bill of lading;
vessel chartered by the month during
(2) For good belonging to the vessel by
the time it should be embargoed or
means the inventory prepared prior to
detained by force majeure or by order of
departure [Art. 816].
the Government, or in order to repair
the damage caused for the common
good; 4. JASON CLAUSE
(11) The loss suffered in the value of the Jason clause is a provision in the contract
goods sold at arrivals under stress in of carriage that requires the cargo owners
order to repair the vessel because of to contribute in general average though the
gross average; event which gave rise to the sacrifice or
(12) The expenses of the liquidation of the expenditure may have been due to the fault
average [Art. 811]; of one of the parties to the adventure [Rule
D, York Antwerp Rules].
(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
III. INSCRUTABLE FAULT Note: Expenses for arrival under stress are
particular averages [see Art. 821].
In case of inscrutable fault, that is, if it
cannot be decided which of the two vessels
was the cause of the collision, each shall
C.4. SHIPWRECKS
bear his own damage and both shall be
jointly responsible for the losses and Shipwreck denotes loss or wreck of a
damages suffered by their cargoes [Art. vessel at sea as a consequence of running
828]. against another vessel or thing at sea or on
coast where the vessel is rendered
incapable of navigation.
C.3. ARRIVAL UNDER STRESS
The losses and deterioration suffered by the
Arrival under stress is the arrival of a vessel and her cargo shall be individually for
vessel at the nearest and most convenient the account of the owners [Art. 840].
port instead of the port of destination, if
If the wreck was due to malice, negligence
during the voyage the vessel cannot
or lack of skill of the captain, or because the
continue the trip to the port of destination.
vessel put to sea was insufficiently repaired
It is lawful when the inability to continue and equipped, the ship agent or the
voyage is due to: shippers may demand indemnity from said
captain. [Art. 841].
(1) Lack of provisions;
(2) Well-founded fear of seizure, privateers,
or pirates; or C.5. SALVAGE
(3) Any accident of the sea disabling it to Salvage is defined as the service which one
navigate [Art. 819]. person renders to the owner of a ship or
goods, by his own labor, preserving the
It is unlawful when:
goods or the ship which the owner or those
(1) The lack of provisions should arise from entrusted with the care of them have either
the failure to take the necessary abandoned in distress at sea, or are unable
provisions for the voyage, according to to protect and secure. It is founded on
usage and custom, or if they should equity and is compensation for actual
have been rendered useless or lost services rendered.
through bad stowage or negligence in
Three elements are necessary to a valid
their care;
salvage claim:
(2) The risk of enemies, privateers, or
(1) A marine peril;
pirates should not have been well
known or manifest, and based on (2) Service voluntarily rendered when not
positive and justifiable facts; required as an existing duty or from a
special contract;
(3) The injury to the vessel should have
been caused by reason of her not being (3) Success, in whole or in part, or that the
repaired, rigged, equipped, and service rendered contributed to such
arranged in a convenient manner for the success [Erlanger & Galinger v. Swedish
voyage, or by reason of some erroneous East Asiatic Co. Ltd (1916)].
order of the captain; or
The goods saved from the wreck shall be
(4) Malice, negligence, want of foresight, or specially bound for the payment of the
lack of skill on the part of the captain is expenses of the respective salvage, and the
the reason for the act causing the amount thereof must be paid by the owners
damage [Art. 820]. of the former before they are delivered to
them [Art. 842].
Where a personal action is brought by the (2) If the private carrier is coming to the
salvor against the owner of the ship, the Philippines:
liability of the latter is limited to such part
(a) First: COGSA;
of the salvage compensation due for the
entire service as is proportionate to the (b) Second: Code of Commerce;
value of the ship.
(c) Third: Civil Code (excluding
Distinction between salvage and rules on com m on carriers);
towage:
(3) If the private or common carrier is from
Towage a vessel is engaged to tow the Philippines to a foreign country, the
another vessel from one port to another for law of the foreign country applies [Art.
consideration. 1753, Civil Code] unless the parties
make COGSA applicable.
In contract for towage, the crew does not
have any interest or rights with the Under Art. 1766, in all matters not regulated
remuneration pursuant to the contract; only by the Civil Code, the rights and obligations
the owner of the towing vessel is entitled to of common carriers shall be governed by
remuneration. the Code of Commerce and special laws.
Thus, although a special law, COGSA only
Salvage a person preserves the goods or
applies when the Civil Code has no provision
the ship which the owner either abandoned
dealing with the matter.
in distress at sea, or is unable to protect and
secure.
In salvage, the crew of the salvaging ship is D.2. NOTICE OF LOSS OR DAMAGES
entitled to salvage, and can look to the
Notice of claim and the general nature of
salvage vessel for its share [Barrios v. Go
the loss or damage must be given in writing
Thong (1963)].
to the carrier or his agent at the port of
discharge before or at the time of the
removal of the goods [Section 3(6), COGSA].
D. CARRIAGE OF GOODS BY SEA ACT
(COGSA) If damage is not patent or cannot be
ascertained from the package, the shipper
should file the claim with the carrier within
D.1. APPLICATION three days from delivery.
COGSA [Commonwealth Act No. 65] is a Under Section 3(6), COGSA, a failure to file a
special law that governs all contracts of notice of claim within three (3) days will not
carriage of goods by sea between or to and bar recovery if it is nonetheless filed within
from the Philippine ports. one year. This one-year prescriptive period
Its application is according to the following also applies to the shipper, the consignee,
scheme: the insurer of the goods or any legal holder
of the bill of lading. Inasmuch as the neither
(1) If the com m on carrier is coming to the the Civil Code nor the Code of Commerce
Philippines: states a specific prescriptive period on the
(a) First: Civil Code; matter, the COGSA may be applied [Belgian
Overseas Chartering and Shipping v.
(b) Second: COGSA (in foreign Philippine First Ins. Co. (2002)].
trade);
Note: In the Warsaw Convention, as well
(c) Third: Code of Commerce; as the Code of Commerce, the notice
requirement is a condition precedent for the
right of action against the shipowner to
accrue.
principal and interest, though the ship the return of the fare upon request. If
perishes, provided that the goods are saved. the delay is due to the sole fault of the
captain or ship agent, they may demand
indemnity for losses and damages.
PASSENGERS ON SEA VOYAGE (4) To be taken directly to the port or ports
The right to passage issued to a specified of destination, making all the stops
person is non-transferrable without the indicated in its itinerary [Art. 698].
consent of the captain or of the consignee
[Art. 695].
any agent of the carrier acting within The Guatemala Protocol of 1971 increased
the scope of his employment. the limit for passengers to $100,000 and to
$1,000 for baggage. However, the Supreme
Under Art. 29, Warsaw Convention, the right
Court noted in Santos III v. Northwest Orient
to damages under the WC is extinguished
Airlines (1992), that the Guatemala Protocol
after two years from the date of arrival at
is still ineffective [Sundiang and Aquino
the destination or from the date on which
(2013)].
the aircraft ought to have arrived, or from
the date on which the carriage stopped. The The Warsaw Convention should be deemed
method of calculating the period of a limit of liability only in those cases where
limitation shall be determined by the law of the cause of death or injury to person, or
the court seized of the case. destruction, loss or damage to property or
delay in its transport is not attributable to or
attended by any willful misconduct, bad
B.1. LIABILITY TO PASSENGERS faith, recklessness, or otherwise improper
conduct on the part of any official or
General rule: In the carriage of
employee for which the carrier is
passengers, the liability of the carrier for
responsible; and there is otherwise no
each passenger is limited to 250,000 francs
special or extraordinary form of resulting
passenger.
injury [Alitalia Airways v. CA (1990)].
Exception: By special contract, the carrier
and the passenger may agree to a higher
limit [Art. 22(1), Warsaw Convention]. C. WILLFUL MISCONDUCT
B.2. LIABILITY FOR CHECKED BAGGAGE A common carrier may not avail of the
General rule: In the carriage of baggage limitation in the following cases:
and goods, the liability of the carrier is (1) Willful misconduct;
limited to 250 francs per kilogram.
(2) Default amounting to willful
Exception: The limit does not apply when misconduct [Art. 25, Warsaw
the consignor has made, at the time when Convention];
the package was handed over to the carrier,
a special declaration of the value at delivery (3) Accepting passengers without ticket
and has paid a supplementary sum if the [Art. 3(2), Warsaw Convention];
case so requires. In that case the carrier will (4) Accepting goods without airway bill or
be liable to pay a sum not exceeding the baggage without baggage check.
declared sum, unless he proves that that
sum is greater than the actual value to the Receipt by the person entitled to the
consignor at delivery [Art. 22(2), Warsaw delivery of baggage or cargo without
Convention]. complaint is prima facie evidence that the
same have been delivered in good condition
and in accordance with the document of
B.3. LIABILITY FOR HAND-CARRIED carriage [Art. 26, Warsaw Convention].
BAGGAGE
As regards hand-carried baggage, the
liability of the carrier is limited to 5,000
francs per passenger [Art. 22(3), Warsaw
Convention].
D. JURISDICTION
An action for damages must be brought at
the option of the plaintiff:
(1) Before the court of the domicile of the
carrier;
(2) The court of its principal place of
business;
(3) The court where it has a place of
business through which the contract
had been made; or
(4) The court of the place of destination
[Art. 28 (2) WC].
When a passenger buys a roundtrip ticket,
the place of destination is the place of first
departure. E.g. In a round-trip ticket from
San Francisco Manila, the place of
destination is San Francisco [Santos v
Northwest Airlines (1992)].
Note: The Montreal Convention adds a 5th
jurisdiction: residence of the plaintiff.
MERCANTILE LAW
CORPORATION
CODE
by its own charter for the exercise of a public trustee, the affairs, property and
function, then GOCC; if by incorporation temporalities of any religious denomination,
under the general corporation law, then sect, or church, by the chief archbishop,
private corporation. [Baluyot v. Holganza bishop, priest, rabbi, or other presiding elder
(2000)] of such religious denomination, sect or
church [Sec.110].
A corporation sole has no nationality but for
C.3. CLOSE CORPORATION
the purpose of applying nationalization laws,
Close corporation - One whose articles of nationality is determined not by the
incorporation provide that: nationality of its presiding elder but by the
nationality of its members constituting the
(1) All issued stock, exclusive of treasury
sect in the Philippines. Thus, the Roman
shares, shall be held by persons not
Catholic Church can acquire lands in the
exceeding 20;
Philippines even if it is headed by the Pope.
(2) All issued stock shall be subject to one or [Roman Catholic Apostolic, etc v. Register of
more specified restrictions on transfer; Deeds of Davao City (1957)]
and
II. CORPORATION AGGREGATE
(3) The corporation shall not list in any stock
Corporation aggregate is a religious
exchange or make any public offering of
corporation incorporated by more than one
any of its stock of any class.
person.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation
when at least 2/3 of its voting stock or voting C.6. ELEEMOSYNARY CORPORATION
rights is owned or controlled by another
Eleemosynary corporation One
corporation which is not a close corporation.
organized for a charitable purpose.
[Sec. 96]
Any corporation may be incorporated as a
close incorporation, except: C.7. DOMESTIC CORPORATION
(1) mining or oil companies; Dom estic corporation One formed,
organized, or existing under the laws of the
(2) stock exchanges;
Philippines.
(3) banks;
(4) insurance companies;
C.8. FOREIGN CORPORATION
(5) public utilities;
Foreign corporation One formed,
(6) educational institutions; and organized or existing under any laws other
than those of the Philippines and whose law
(7) corporations declared to be vested with
allows Filipino citizens and corporations to do
public interest [Sec. 96]
business in its own country and state [Sec.
123].
C.4. EDUCATIONAL CORPORATION
Educational corporation One C.9. CORPORATION CREATED BY SPECIAL
organized for educational purposes [Sec. 106]. LAWS OR CHARTER
Corporation created by special laws or
C.5. RELIGIOUS CORPORATIONS charter - Corporations which are governed
primarily by the provisions of the special law
I. CORPORATION SOLE or charter creating them. Corporation Code
Corporation sole is one formed for the has suppletory application [Sec. 4].
purpose of administering and managing, as
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UP LAW BOC CORPORATION CODE MERCANTILE LAW
As to third party
One who assumes an obligation to an III. Nationality of
ostensible corporation as such, cannot resist
performance thereof on the ground that there Corporations
was in fact no corporation. [Sec. 21]
The doctrine of estoppel applies to a third
party only when he tries to escape liability on A. PLACE OF INCORPORATION TEST
a contract from which he has benefited on the
ground of defective incorporation. It does not
apply to a third party who is not trying to The corporation is a national of the country
under whose laws it is organized or
escape liability from the contract, but rather
is the one claiming from the contract. incorporated [Sec. 123].
[International Express Travel v. CA (2000)] Dom estic corporations organized and
governed under and by Philippine laws
capital is owned by such citizens. [Sec. 11, SEC Mem orandum Circular No. 8 dated
Art. XII, Const.] 20 May 2013
The term "capital" in Sec. 11, Article XII of Sec. 1. Covered corporations: All corporations
the 1987 Constitution refers only to shares engaged in identified areas of activities or
of stock entitled to vote in the enterprises specifically reserved, wholly or
election of directors, and thus in the partly, to Philippine Nationals by the
present case only to common shares, and not Constitution, the FIA and other existing laws,
to the total outstanding capital stock amendments thereto and IRRs of said laws
[common and non-voting preferred shares]. except as may otherwise be provided therein.
Compliance with the required Filipino Sec. 2. All covered corporations shall, at all
ownership of a corporation shall be times, observe the constitutional or statutory
determined on the basis of outstanding ownership requirement. For purposes of
capital stock whether fully paid or not, determining compliance therewith, the
but only such stocks which are generally required percentage of Filipino ownership
entitled to vote are considered. shall be applied to both
For stocks to be deemed owned and (1) the total number of outstanding shares of
held by Philippine citizens or stock entitled to vote in the election of
Philippine nationals, mere legal title directors; AND
is not enough to m eet the required
(2) the total number of outstanding shares of
Filipino equity. Full beneficial
stock, whether or not entitled to vote in
ownership of the stocks, coupled with
the election of directors.
appropriate voting rights is essential.
Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot
be considered held by Philippine citizens or
C. GRANDFATHER RULE
Philippine nationals. [Gamboa v. Teves (2011)]
The SC, however, reversed its ruling in 2012. Method used when a domestic corporation
has both domestic and foreign stockholders
The term capital is not lim ited to
to determine whether or not said corporation
voting shares since the constitutional
is qualified to engage in a partially
requirement of at least 60 % Filipino
nationalized business [Campos].
ownership applies not only to voting
control of the corporation, but also to It involves the computation of Filipino
the beneficial ownership of the ownership of a corporation in which another
corporation. It is therefore imperative that corporation of partly Filipino and partly
such requirement apply uniformly and across foreign equity owns capital stock. The
the board to all classes of shares, regardless percentage of shares held by the second
of nomenclature and category, comprising corporation in the first is multiplied by the
the capital of a corporation. latters own Filipino equity, and the product
of these percentages is determined to be the
Preferred shares, denied the right to vote in
ultimate Filipino ownership of the subsidiary
the election of directors, are anyway still
corporation.
entitled to vote on the eight specific
corporate matters under Sec. 6. of the The Grandfather Rule must be applied to
Corporation Code. accurately determine the actual participation,
both direct and indirect, of foreigners in a
Thus, the 60-40 ownership
corporation engaged in a nationalized activity
requirem ent in favor of Filipino
or business. [SEC Opinion re: Silahis Intl Hotel
citizens m ust apply separately to each
(1987)]
class of shares, whether com m on,
preferred non-voting, preferred voting Compliance with the constitutional
or any other class of shares. [Gamboa v. limitation[s] on engaging in nationalized
Teves, (2012)] activities must be determined by ascertaining
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UP LAW BOC CORPORATION CODE MERCANTILE LAW
FULLY/PARTIALLY NATIONALIZED
AREAS
IV. Corporate Juridical
Nationality Industry
Requirement Personality
100% Filipino Retail Trade It commences from the date the SEC issues a
ownership certificate of incorporation under its official
Rural Banks seal [Sec. 19].
Mass Media
75% Filipino Inter-island
ownership shipping industry A. DOCTRINE OF SEPARATE JURIDICAL
70% voting stock Banks [except PERSONALITY
Filipino ownership Rural Banks]
[but may be reduced CONCEPT
to 60%] A corporation has a personality separate
60% capital stock Public utilities, and distinct from that of its stockholders
Filipino ownership corporations and members and is not affected by the
engaged in personal rights, obligations, and transactions
exploration, of the latter.
exploitation and A corporation, upon coming into existence, is
utilization of invested by law with a personality separate
natural resources and distinct from the persons comprising it as
well as from any other legal entity to which it
Educational may be related. By this attribute, a
institutions stockholder may not, generally, be made to
answer for acts or liabilities of said
corporation, and vice versa. [Land Bank of the
Philippines v. CA (2001)]
PROPERTY
Stockholders 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 lim ited
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 and Co. v.
Man Sun Lung (1940)]
A.2. RECOVERY OF MORAL DAMAGES personally liable for corporate liabilities. The
mere fact that a stockholder owns majority of
General rule: A corporation has the power
the stock of a corporation is not a ground to
to sue in its corporate name. [Sec. 36]
conclude that said stockholder and
Exception: Moral damages cannot be corporation are one and the same. [Land
awarded in favor of corporations because Bank of the Philippines v. CA (2001)]
they do not have feelings and cannot
The veil of corporate fiction treats as separate
experience mental suffering. They may not
and distinct the affairs of a corporation and
even claim moral damages for besmirched
its officers and stockholders. As a general
reputation. [NAPOCOR v. Philipp Brothers
rule, a corporation will be looked upon as a
Oceanic (2001)]
legal entity, unless and until sufficient reason
Exception to the Exception: However, to the contrary appears. When the notion of
a corporation can recover moral damages legal entity is used to defeat public
under Art 2219 [7] if it was the victim of convenience, justify wrong, protect fraud, or
defamation, as it does not qualify whether defend crime, the law will regard the
the plaintiff is a natural or juridical person. corporation as an association of
[Pilipinas Broadcasting Network v. Ago persons. Also, the corporate entity may be
Medical and Educational Center (2005)] disregarded in the interest of justice in such
cases as fraud that may work inequities
among members of the corporation
CONSTITUTIONAL RIGHTS internally, involving no rights of the public or
Corporate entities are entitled to due process, third persons. In both instances, there must
equal protection, and protection against have been fraud and proof of it. [Suldao v.
unreasonable searches and seizures. Cimech System Construction, Inc. (2006)]
However, a corporation is not entitled to the
privilege against self-incrimination. [Bataan
B.1. GROUNDS FOR APPLICATION OF
Shipyard and Engg Co. v. PCGG (1987)]
DOCTRINE
The corporate fiction may be pierced if used:
B. DOCTRINE OF PIERCING THE (1) to defraud the government of taxes due
CORPORATE VEIL it;
(2) to evade payment of civil liability;
Piercing the veil of corporate entity is merely
an equitable remedy, and may be granted (3) by a corporation which is merely a
only in cases: conduit or alter ego of another
corporation;
(1) when the corporate fiction is used to
defeat public convenience, justify (4) to evade compliance with contractual
wrong, protect fraud or defend crime obligations; or
[Koppel Phil v. Yatco (1946)]; or (5) to evade financial obligation to its
(2) where the corporation is a mere alter employees.
ego; or Only in these and similar instances may the
(3) where the corporation is a business veil be pierced and disregarded: to ward off a
conduit of a person. [Yutivo Sons v. judgment credit, to avoid inclusion of
CTA, (1961)] corporate assets as part of the estate of the
decedent, to escape liability arising from a
In order to disregard the separate juridical debt, or to perpetuate fraud and/or confuse
personality of a corporation, the legitimate issues either to promote or to
wrongdoing must be clearly and shield unfair objectives to cover up an
convincingly established. In the absence otherwise blatant violation of the prohibition
of any malice or bad faith, a stockholder or an against forum shopping. [PNB v. Andrada
officer of a corporation cannot be made Electric and Engineering Co. (2002)]
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UP LAW BOC CORPORATION CODE MERCANTILE LAW
STEPS IN INCORPORATION
Steps Comments
a. Prom otional Stage Prom oter
(See SEC. 2. Definitions) brings together persons who become interested in the
enterprise
aids in procuring subscriptions and sets in motion the
machinery which leads to the formation of the corporation itself
formulates the necessary initial business and financial plans
and, if necessary, buys the rights and property which the
business may need, with the understanding that the
corporation when formed, shall take over the same.
b. Drafting articles of (see chart below)
incorporation. (See SEC. 14)
c. Filing of articles; AOI & the treasurers affidavit duly signed & acknowledged
payment of fees.
must be filed w/ the SEC & the corresponding fees paid
failure to file the AOI will prevent due incorporation of the
proposed corporation & will not give rise to its juridical
personality. It will not even be a de facto corp.
Under present SEC rules, the AOI once filed , will be published
in the SEC Weekly Bulletin at the expense of the corp.
(SEC Circular # 4, 1982).
d. Exam ination of Process:
articles; approval or
(a) SEC shall examine them in order to determine whether they are
rejection by SEC.
in conformity w/ law.
(b) If not, the SEC must give the incorporators a reasonable time
w/in w/c to correct or modify the objectionable portions.
Steps Comments
(b) purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules & regulations;
(c) Treasurers Affidavit is false;
(d) required percentage of ownership has not been complied
with (Sec. 17)
(e) corp.s establishment, organization or operation will not be
consistent w/ the declared national economic policies (to be
determined by the SEC, after consultation w/ BOI, NEDA or any
appropriate government agency -- PD 902-A as amended by
PD 1758, Sec. 6 (k))
Decisions of the SEC disapproving or rejecting AOI may be appealed
to the CA by petition for review in accordance w/ the ROC.
e. Issuance of certificate Certificate of Incorporation will be issued if:
of incorporation.
(a) SEC is satisfied that all legal requirements have been complied
with; and
(b) there are no reasons for rejecting or disapproving the AOI.
(2) Any number from 5-15 (1) Must not be identical or deceptively or
confusingly similar to that of any existing
(3) Majority are residents of the Philippines corporation or to any other name already
(4) Each incorporator must own or be a protected by law
subscriber to at least 1 share of the (2) Not patently deceptive, confusing or
capital stock of the corporation [Sec. 20] contrary to existing laws [Sec. 18]
It also regulates the affairs and relationship II. HOW DELEGATION REVOKED:
between and among stockholders, BOD and
Any power delegated to the BOD or trustees
corporation [Lopez].
to amend or repeal any by-laws or adopt new
by-laws shall be considered as revoked
whenever stockholders owning or
H.2. REQUISITES OF VALID BY-LAWS
representing a majority of the outstanding
Approval requirement: Must be approved capital stock or a majority of the members in
by the affirmative vote of the stockholders non-stock corporations, shall so vote at a
representing MAJORITY of the outstanding regular or special meeting. [Sec. 48]
capital stock or majority of members
If filed pre-incorporation: must be approved
and signed by all incorporators
Record-Keeping: Must be kept in the
principal office of the corporation, subject to
inspection of stockholders or members during
office hours [Sec. 74]
No provision of the by-laws can be adopted if
it is contrary to law. [Grace Christian High
School v. CA (1997)]
(5) Adopt and amend by-laws; (2) Power to Increase or Decrease Capital
Stock or Incur, Create, Increase Bonded
(6) For stock corporations - issue or sell Indebtedness
stocks to subscribers and sell treasury
stocks; for non-stock corporation - admit (3) Power to Deny Pre-Emptive Rights
members to the corporation; (4) Power to Sell or Dispose of Corporate
(7) Purchase, receive, take or grant, hold, Assets
convey, sell, lease, pledge, mortgage and (5) Power to Acquire Own Shares
otherwise deal with such real and
personal property, pursuant to its lawful (6) Power to Invest Corporate Funds in
business; Another Corporation or Business
(8) Enter into merger or consolidation with (7) Power to Declare Dividends
other corporations as provided in the (8) Power to Enter Into Management
Code; Contract
(9) Make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or B.1. EXTEND OR SHORTEN THE
similar purposes: Provided, no CORPORATE TERM [SEC. 37]
corporation, domestic or foreign, shall (1) Must be approved by majority vote of the
give donations in aid of any political party BOD/ BOT
or candidate or for purposes of partisan
(2) Ratified at a meeting by shareholders
political activity;
representing 2/3 of the outstanding
(10) Establish pension, retirement, and other capital stock/ 2/3 of members of non-
plans for the benefit of its directors, stock corporations
trustees, officers and employees; and
(3) Written notice of meeting (includes
(11) Exercise such other powers as may be proposed action, time and place of
essential or necessary to carry out its meeting) shall be addressed to each
purposes shareholders/member at his place of
residence and deposited to the addressee
in the post office, or served personally
NOTE:
(4) Appraisal right may be exercised by the
The Corporation has implied powers which dissenting stockholder for BOTH
are deemed to exist because of the following extension and shortening of corporate
provisions: term [See also Sec. 81]
(1) Except such as are necessary or
incidental to the exercise of the powers so
conferred [Sec. 45]
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B.2. INCREASE OR DECREASE CAPITAL (a) From and after approval of the SEC of
STOCK OR INCUR, CREATE, INCREASE its certificate of filing, the capital
BONDED INDEBTEDNESS [SEC. 38] stock shall stand increased or
decreased and the incurring, creating
(1) Same requirements above from 1-3
or increasing of any bonded
(2) A certificate in duplicate must be signed indebtedness authorized
by a majority of the directors of the
(b) SEC shall not accept for filing any
corporation (countersigned by the
certificate of increase unless
chairman and the secretary of the
accompanied by the sworn statement
shareholders meeting), setting forth:
of the treasurer of the corporation
(a) That requirements of this section showing:
have been complied with
(i) That at least 25% of such
(b) The amount of the increase or increased capital stock have been
diminution of the capital stock subscribed and
(c) In case of increase, (ii) that at least 25% of the amount
subscribed has been paid or that
(i) the amount of capital stock or
there has been transferred to the
number of shares of no-par stock
corporation property the value of
actually subscribed
which is equivalent to 25% of the
(ii) names, nationalities and subscription
residences of the persons
(c) SEC shall not approve any decrease
subscribing
in the capital stock if its effect shall
(iii) the amount of no-par stock prejudice the rights of corporate
subscribed by each creditors
(iv) the amount paid by each on his (5) Bonds issued by a corporation shall be
subscription, or the amount of registered with the SEC
capital stock or number of shares
of no-par stock allotted to each
stockholder if such increase is for B.3. DENY PREEMPTIVE RIGHT [SEC. 39]
the purpose of making effective
General Rule: All shareholders of a stock
stock dividend
corporation have preemptive right to
(d) any bonded indebtedness to be subscribe to all issues or disposition of shares
incurred, created or increased of any class, in proportion to their respective
shareholdings
(e) the actual indebtedness of the
corporation on the day of the meeting Exception: If such right is denied by the
Articles of Incorporation or an amendment
(f) the amount of stock represented at
thereto
the meeting
Pre-emptive right shall not extend to:
(g) the vote authorizing the increase or
diminution of the capital stock, or the (1) shares to be issued in compliance
incurring, creating or increasing of with laws requiring stock offerings or
any bonded indebtedness minimum stock ownership by the
public
(3) prior approval of SEC is required
(2) shares to be issued in good faith with
(4) duplicate certificates shall be kept on file
the approval of 2/3 of the
in the office of the corporation and the
stockholders representing
other shall be filed with the SEC,
outstanding capital stock, in
attached in the original articles of
exchange for property needed for
incorporation.
corporate purposes or in payment of
a previously contracted debt
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B.4. SELL OR DISPOSE OF B.5. ACQUIRE ITS OWN SHARES [SEC. 41]
SUBSTANTIALLY ALL ITS ASSETS [SEC. 40]
(1) For a legitimate corporate purpose/s,
(1) Same requirements from 1-3 as Sec. 37 including but not limited to the following:
above
(a) To eliminate fractional shares arising
(2) Any dissenting shareholders may exercise out of stock dividends
his appraisal right
(b) To collect or compromise an
(3) Deemed to cover substantially all the indebtedness to the corporation,
corporate property and assets arising out of unpaid subscription, in
a delinquency sale, and to purchase
(4) After authorization by the
delinquent shares sold during said
shareholders/members, the BOD/BOT
sale; and
may abandon such sale, lease, exchange,
mortgage, pledge or other disposition, (c) To pay dissenting or withdrawing
subject to the rights of third parties under stockholders
any contract relating thereto, without
(2) Provided there are unrestricted retained
further action or approval by the
earnings in the corporate books to cover
shareholders/ members
the shares purchased or acquired
(5) Corporation is not restricted in its power
to sell or dispose of its assets without the
authorization of shareholders or B.6. INVEST IN ANOTHER CORPORATION
members: OR BUSINESS [SEC. 42]
(a) if the same is necessary in the usual (1) Same requirements from 1-3 as Sec. 37
and regular course of business of the above
corporation or
(2) Any dissenting shareholders shall have
(b) if the proceeds of the sale will be appraisal right
appropriated for the conduct of its
(3) Where the investment is reasonably
remaining business
necessary to accomplish the corporations
While the Corporation Code allows the primary purpose, the approval of the
transfer of all or substantially all the shareholders/ members is not necessary
properties and assets of a corporation, the
Notes:
transfer should not prejudice the creditors of
the assignor. The only way the transfer can If it is for the same purpose, or incidental, or
proceed without prejudice to the creditors is related to its PRIMARY purpose, the board
to hold the assignee liable for the obligations can invest the corporate fund WITHOUT the
of the assignor. The acquisition by the consent of the stockholders. No appraisal
assignee of all or substantially all of the right.
assets of the assignor necessarily includes If the investment is in another corporation of
the assumption of the assignors liabilities, different business or purpose BUT in
unless the creditors who did not consent to pursuance of the SECONDARY purpose, the
the transfer choose to rescind the transfer on affirmative vote of majority of the board
the ground of fraud. To allow an assignor to consented by stockholders/ members is
transfer all its business, properties and assets required.
without the consent of its creditors and
without requiring the assignee to assume the If the investment is OUTSIDE the purpose/s
assignors obligations will defraud the for which the corporation was organized,
creditors. The assignment will place the Articles of Incorporation must be amended
assignors assets beyond the reach of its first, otherwise it will be an Ultra Vires act.
creditors. [Caltex (Phils.) Inc. v. PNOC A private corporation, in order to accomplish
Shipping and Transport Corp. (2006)] its purpose as stated in its articles of
incorporation, and subject to the limitations
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imposed by the Corporation Law, has the Stock dividends cannot be issued to a person
power to acquire, hold, mortgage, pledge or who is not a stockholder in payment of
dispose of shares, bonds, securities, and services rendered.
other evidences of indebtedness of any
A corporation may legally issue shares of
domestic or foreign corporation. Such an act,
stock in consideration of services rendered to
if done in pursuance of the corporate
it by a person not a stockholder, or in
purpose, does not need the approval of the
payment of its indebtedness. A share of stock
stockholders; but when the purchase of
issued to pay for services rendered is
shares of another corporation is done solely
equivalent to a stock issued in exchange of
for investment and not to accomplish the
property, because services is equivalent to
purpose of its incorporation, the vote of
property. It is the shares of stock that are
approval of the stockholders is necessary. [De
originally issued by the corporation and
La Rama v. Ma-ao Sugar Central Co. (1969)]
forming part of the capital that can be
exchanged for cash or services rendered, or
property. A share of stock coming from stock
B.7. DECLARE DIVIDENDS [SEC. 43]
dividends declared cannot be issued to one
(1) Out of unrestricted retained earnings who is not a stockholder of a corporation.
[Nielson and Co. v. Lepanto Consolidated
(2) Payable in cash, in property, or in stock to
Mining (1968)]
all shareholders on the basis of
outstanding stock held by them
(3) Any cash dividend due on delinquent Cash Dividends v. Stock Dividends
stock shall first be applied to the unpaid
Cash Stock
balance on the subscription plus costs
Dividend Dividend
and expenses
(4) Stock dividends shall be withheld from Voting Board of Board of
the delinquent stockholder until his Requirements Directors Directors +
unpaid subscription is fully paid for issuance 2/3 of SH
holding OCS
(5) Should be approved by 2/3 of
shareholders representing the Effect on Shall be Shall be
outstanding capital stock at a delinquent applied to withheld
regular/special meeting called for that stock the unpaid from the
purpose balance on delinquent
the stockholder
(6) Stock corporations- prohibited from subscription until his
retaining surplus profits in excess of plus costs unpaid
100% of their paid-in capital stock, and subscription
except: expenses. is fully paid.
(a) When justified by definite corporate Can be issued No. [Sec. No, since this
expansion projects or programs by Executive 35] requires SH
approved by the BOD Committee? approval.
(b) When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from B.8. ENTER INTO MANAGEMENT
declaring dividends without its CONTRACTS [SEC. 44]
consent, and such consent has not (1) Should be approved by the BOD and by
yet been secured shareholders owning at least the
(c) When it can be clearly shown that majority of the outstanding capital
such retention is necessary under stock or at least a majority of the
special circumstances obtaining in members of both the managing and the
the corporation
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Not necessarily Unlawful; against law, Voting and non-voting shares shall be
unlawful, but morals, public policy, entitled to vote in the following cases:
outside the powers and public order (1) Amendment of Articles of Incorporation
of the corporation
(2) Adoption, Amendment and Repeal of By-
Can be ratified Cannot be ratified Laws [Sec. 48]
Can bind the parties Cannot bind the (3) Sale, Lease, Mortgage or Other
if wholly or partly parties Disposition of Substantially all corporate
executed assets [Sec. 40]
Voidable, and may Void and cannot be (4) Incurring, Creating or Increasing Bonded
be enforced by validated Indebtedness [Sec. 38]
performance,
(5) Increase or Decrease of Capital Stock [Sec.
ratification or
38]
estoppel
(6) Merger and Consolidation [Sec. 76-80]
(7) Investment of funds in another
Rem edies in Case of Ultra Vires Acts
corporation or business or for any
(1) State purpose other than the primary purpose
for which it was organized [Sec. 42]
(a) Dissolution of the corporation thru a
quo warranto proceeding Requisites [Sec. 42] (Bar 1995):
(b) Injunction (a) Approval of majority of the BOD or
trustees
(c) Suspension or revocation of the
certificate of registration by the SEC (b) Ratification by the stockholders
representing at least 2/3 of the
(2) Stockholders
Outstanding Capital Stock or the
(a) Injunction members at a meeting duly called for
the purpose
(b) Derivative suit
(c) Written notice addressed to each
(c) Ratification (except when a 3rd party
stockholder or member at his place of
is prejudiced or the act is illegal)
residence as shown on the books of
(3) Creditors the corporation
(a) Nullification of contract in fraud of (d) Appraisal right available to
creditors dissenting stockholders or members
(8) Dissolution of the Corporation [Sec. 118- Requisites of a VALID Corporate Act
121] by the BOD [Sec. 25]:
(a) The Board must act as a BODY in a
meeting. Note: Current SEC regulations
ii. CORPORATE ACTS REQUIRING
allow BOD meetings by teleconferencing
APPROVAL OF STOCKHOLDERS OR
or videoconferencing (SEC Memo Circular
MEMBERS (VOTING SHARES ONLY)
No.15, series of 2001, in relation to Sec. 16
(1) Declaration of Stock Dividends [Sec. 43] of R.A. 8792)
(2) Management Contracts [Sec. 44] (b) There must be a VALIDLY constituted
meeting.
(3) Fixing the Consideration of No-Par shares
[Sec. 62] (c) Their act must be supported by a
MAJORITY OF THE QUORUM duly
(4) Fixing the Compensation of Directors [Sec.
assembled (Exception: Election of
30]
officers requires a vote of majority of ALL
the members of the board)
C.2. BY THE BOD (d) The act must be within the powers
Board as Repository of Corporate conferred to the Board.
Powers
General Rule (Doctrine Of Centralized C.3. BY THE OFFICERS
Management): The corporate powers of the
corporation shall be exercised, all business Corporate Officer Corporate Employee
conducted, and all property of controlled and Position is provided Employed through
held by the BOD or trustees. [Sec. 23] for in the by-laws or the action of the
Exceptions: under the Corp. Code managing officer of
the corporation
(1) Executive Committee duly authorized in
the by-laws [Sec. 35]; RTC has jurisdiction NLRC has jurisdiction
in case of labor in case of labor
(2) A contracted manager which may be an dispute disputes
individual, a partnership, or another
corporation.
NOTE: In case the contracted manager I. W HO ARE CORPORATE OFFICERS
is another corporation, the special rule in [SEC. 25]
Sec. 44 applies. President Secretary Treasurer
(3) In case of close corporations, the Director YES NO NO
stockholders may manage the business of
the corporation rather than by a BOD, if Filipino NO YES YES
the Articles of Incorporation so provide Citizen
[Sec. 97] Residency NO YES YES
The power to purchase real property is vested Prohibited Secretary President President
in the BOD or trustees. While a corporation concurren or
may appoint agents to negotiate for the t positions Treasurer
purchase of real property needed by the
corporation, the final say will have to be with (1) President must be a director;
the board, whose approval will finalize the (2) Treasurer may or may not be a director;
transaction. [Spouses Constantine Firme v. as a matter of sound corporate practice,
Bukal Enterprises and Development must be a resident and citizen of the Phil
Corporation (2003)] (SEC opinion)
(3) Secretary need not be a director unless Corporation Code. These are the president,
required by the by-laws; must be a secretary and the treasurer. The number
resident and citizen of the Philippines; of officers is not lim ited to these
and three. A corporation may have such other
officers as may be provided for by its by-laws
(4) Other officers as may be provided in the
like, but not limited to, the vice-president,
by-laws.
cashier, auditor or general manager. The
NOTE: Any 2 or more positions may be held number of corporate officers is thus limited
concurrently by the same person, EXCEPT by law and by the corporations by-laws
that no one shall act as president and (citing Garcia v. Eastern Telecommunications
secretary or as president and treasurer at the Philippines, Inc., 2009).
same time.
Additional qualifications of officers may be
ii. DISQUALIFICATIONS [SEC. 27]
provided for in the by-laws [Sec. 47(5)]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
Conformably with Sec. 25 of the Corporation exceeding 6 years
Code, a position must be expressly
(2) Convicted by final judgment of a violation
mentioned in the by-Laws in order to be
of the Corporation Code committed
considered as a corporate office. Thus, the
within 5 years prior to the date of his
creation of an office pursuant to or under a
election or appointment. This includes
by-Law enabling provision is not enough to
violations of rules and regulations issued
make a position a corporate office. Guerrea v.
by the SEC to implement the provisions of
Lezama (1958), the first ruling on the matter,
the Corporation Code.
held that the only officers of a corporation
were those given that character either by
the Corporation Code or by the By-Laws; the
III. AUTHORITY OF CORPORATE
rest of the corporate officers could be
OFFICERS
considered only as employees or subordinate
officials. [Matling Industrial and Commercial A person dealing with a corporate officer is
Corp. v. Coros (2010)] 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
A different interpretation can easily leave the under the circumstances the authority of the
way open for the BOD to circumvent the acting officers.
constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in
the By-Laws of an enabling clause on the Associated Bank v. Pronstroller (2008,
creation of just any corporate officer position. Nachura):
An office is created by the charter of the Q: What is the Doctrine of Apparent
corporation and the officer is elected (or Authority?
appointed) by the directors or stockholders
A: If a corporation knowingly permits one of
[Real v. Sangu Philippines citing Easycall
its officers, or any other agent, to act within
Communications Phils., Inc. v. King, 2005,
the scope of an apparent authority, it holds
(2011)]
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
Corporate officers in the context of PD No.
with it through such agent, be estopped from
902-A are those officers of the corporation
denying the agents authority.
who are given that character by the
Corporation Code or by the corporations by-
laws. There are three specific officers whom
a corporation must have under Sec. 25 of the
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the board, whose approval will finalize the (g) Fixing of compensation of directors
transaction. [Spouses Constantine Firme v. [Sec. 30]
Bukal Enterprises and Development
(3) Cannot exercise powers not possessed by
Corporation (2003)]
the corporation.
Indisputably, one of the rights of a
stockholder is the right to participate in the
control or management of the corporation. A.2. PRINCIPLE ON DELEGATION OF
This is exercised through his vote in the BOARD POWER
election of directors because it is the BOD
Under Sec 23, the power and the
that controls or manages the corporation.
responsibility to decide whether the
[Gamboa v. Teves, (2011)]
corporation should enter into a contract that
will bind the corporation is lodged in the
board, subject to the articles of incorporation,
i. REQUISITES OF A VALID
by-laws, or relevant provisions of law.
CORPORATE ACT BY THE BOD
However, just as a natural person may
(a) The Board must act as a BODY in a authorize another to do certain acts for and
meeting. on his behalf, the BOD may validly delegate
some of its functions and powers to officers,
(b) There must be a VALIDLY constituted
committees or agents. The authority of such
meeting.
individuals to bind the corporation is
(c) There act must be supported by a generally derived from law, corporate by-laws
MAJORITY OF THE QUORUM duly or authorization from the board, either
assembled (Exception: Election of expressly or impliedly by habit, custom or
officers requires a vote of majority of ALL acquiescence in the general course of
the members of the board) business. [Peoples Aircargo v. CA, (1998)]
(d) The act must be within the powers
conferred to the Board.
B. BUSINESS JUDGMENT RULE
(a) Removal of director [Sec. 28] (1) If the contracts are so unconscionable
and oppressive as to amount to a wanton
(b) Amendments of Articles of destruction of the rights of the minority
Incorporation [Sec. 16] [Ingersoll v. Malabon Sugar (1927)];
(c) Fundamental changes [Sec. 6] (2) if they violate their duties under Sec. 31
(d) Declaration of stock dividends [Sec. (director willfully and knowingly assents
43] to patently unlawful acts of the
corporation, or are guilty of gross
(e) Entering into management contracts negligence or bad faith); and
[Sec. 44]
(3) if they violate Sec. 34 (disloyalty of a
(f) Fixing of consideration of non-par director who acquires for himself a
shares [Sec. 62] business opportunity that should have
belonged to the corporation, unless his
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(1) Convicted by final judgment of an offense In the illustration above, Pedro instead may
punishable by imprisonment for a period choose to give 100 votes to candidate 1, 100
exceeding 6 years; or votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
(2) A violation of the Corporation Code, candidate 5.
committed within 5 years prior to the
date of his election. This includes
violations of rules and regulations issued iii. STRAIGHT VOTING
by the SEC to implement the provisions of
the Corporation Code. Every stockholder may vote such number of
shares for as many persons as there are
An amendment to the corporations by-laws directors to be elected.
which renders a stockholder ineligible to be a
director, if he be also a director in a
corporation whose business is in competition D.2. QUORUM
with that of the other corporation, has been
sustained as valid. This is based upon the There must be present, in person or by
principle that where the director is so representative authorized to act by written
employed in the service of a rival company, he proxy, the owners of majority of the
cannot serve both, but must betray one or the Outstanding Capital Stock or majority of the
other. Such an amendment "advances the members entitled to vote in the meeting.
benefit of the corporation and is good." Election must be by ballot if requested.
[Gokongwei, Jr. v. SEC (1979)]
net income of the corporation would not by the corporation, its stockholders or
apply to the compensation given to such members and other persons. [Sec 31]
positions since it is being given in their
The conditions for the application of Sec. 31 of
capacity as officers of the corporation and not
the Corporation Code require factual
as board members. [Western Institute of
foundations to be first laid out in appropriate
Technology v. Salas (1997)]
judicial proceedings. Hence, concluding that
a person breached fiduciary duties as an
officer and member of the BOD of a
H. FIDUCIARY DUTIES AND LIABILITY corporation without com petent evidence
RULES thereon would be unwarranted and
unreasonable. [Republic of the Philippines v.
H.1. DUTIES Sandiganbayan (First Division) et al. (2011)]
Duty of Obedience
Doctrine of Corporate Opportunity
The Directors or Trustees and Officers to be
elected shall perform the duties enjoined on Unless his act is ratified, a director shall
them by law and by the by-laws of the refund to the corporation all the profits he
corporation [Sec. 25] realizes on a business opportunity which:
(1) corporation is financially able to
undertake
Duty of Diligence
(2) from its nature, is in line with
Directors or trustees who (i) willfully and corporations business and is of practical
knowingly vote for or assent to patently advantage to it; and
unlawful acts of the corporation or (ii) who
are guilty of gross negligence or bad faith in (3) one in which the corporation has an
directing the affairs of the corporation or (iii) interest or a reasonable expectancy.
acquire any personal or pecuniary interest in The rule shall be applied notwithstanding the
conflict with their duty as such directors or fact that the director risked his own funds in
trustees shall be liable jointly and severally the venture. [Sec. 34]
for all damages resulting therefrom suffered
in a meeting called for the purpose voted to in this case are silent as to the creation by its
ratify the contract, provided that: BOD of an executive committee.
(a) Full disclosure of the adverse interest of (1) Notwithstanding the silence of the by-
the directors/trustees involved is made laws on the matter, the SC did not rule
on such meeting; that the BODs creation of the executive
committee is illegal or unlawful.
(b) The contract is fair and reasonable under
the circumstances. (2) One reason is the absence of a showing
as to the true nature and functions of said
executive committee considering that the
K.3. MANAGEMENT CONTRACTS [SEC 44] "executive committee," referred to in Sec.
35 of the Corporation Code which is as
See: Corporate Powers (2)(h) above
powerful as the BOD and in effect acting
for the board itself, should be
distinguished from other committees
L. EXECUTIVE COMMITTEE
which are within the competency of the
board to create at anytime and whose
L.1. CREATION actions require ratification and
confirmation by the board.
The by-laws of a corporation may create an
executive committee, composed of not less (3) Another reason is that the BOD has the
than three members of the board, to be power to create positions not provided for
appointed by the board. in the by-laws since the board is the
corporations governing body. [Filipinas
Said committee may act, by majority vote of Port Services Inc. v. Go (2007)]
all its members, on such specific matters
within the competence of the board, as may
be delegated to it in the by-laws or on a
M. MEETINGS OF BOD
majority vote of the board [Sec. 35]
(2) Special m eetings of the BOD or (1) In stock corporations, shareholders may
trustees may be held at any time upon generally transfer their shares. Thus, on
the call of the president or as provided in the death of a shareholder, the executor
the by-laws. or administrator duly appointed by the
Court is vested with the legal title to the
W here? [Sec. 53]
stock and entitled to vote it. Until a
Meetings of directors or trustees of settlement and division of the estate is
corporations may be held anywhere in or effected, the stocks of the decedent are
outside of the Philippines, unless the by-laws held by the administrator or executor.
provide otherwise.
(2) On the other hand, membership in and
all rights arising from a non-stock
corporation are personal and non-
ii. NOTICE
transferable, unless the articles of
Notice of regular or special meetings stating incorporation or the bylaws of the
the date, time and place of the meeting must corporation provide otherwise. In other
be sent to every director or trustee at least 1 words, the determination of whether or
day prior to the scheduled m eeting, not dead members are entitled to
unless otherwise provided by the by- exercise their voting rights (through their
laws. executor or administrator), depends on
A director or trustee may waive this the Articles of Incorporation or by-laws.
requirement, either expressly or impliedly.
[Sec. 50]
M.4. RULE ON ABSTENTION
A vote of abstention is considered to be a vote
M.2. WHO PRESIDES in itself. Abstentions will not be counted
The president presides, unless the by-laws towards the affirmative and such refusal to
provide otherwise. [Sec. 54] vote does not indicate acquiescence in the
action of those who vote.
Regular BOD Special BOD
M.3. QUORUM Meetings Meetings
General Rule: Majority of the number of W HEN
directors or trustees as fixed in the articles of
incorporation. [Sec. 25] Held monthly, unless at any time upon the
the by-laws provide call of the president
Exceptions: otherwise or as provided in the
(1) Unless the articles of incorporation or the by-laws
by-laws provide for a GREATER majority, W HERE
or
anywhere in or outside of the Philippines,
(2) In case of election of officers where a vote unless the by-laws provide otherwise
of a majority of all the members of the
board is needed. NOTICE
Whether or not "dead members" are entitled Notice of regular or special meetings stating
to exercise their voting rights (through their the date, time and place of the meeting
executor or administrator), depends on the must be sent to every director or trustee at
articles of incorporation or by-laws. [Tan v. least 1 day prior to the scheduled
Sycip (2006)] meeting, unless otherwise provided
by the by-laws.
The quorum in a members meeting is to be
reckoned as the actual number of members of A director or trustee may waive this
the corporation. W hat happens in the requirement, either expressly or
event of the death of one of them? impliedly
QUORUM
General Rule: Majority of the number of VIII. Stockholders and
directors or trustees as fixed in the articles
of incorporation. [Sec. 25]
Members
Exceptions:
A. RIGHTS OF A STOCKHOLDER AND
(3) Unless the articles of incorporation or MEMBERS
the by-laws provide for a GREATER
majority, or
(4) In case of election of officers where a (1) Direct or indirect participation in
vote of a majority of all the members of management (Sec. 6)
the board is needed. (2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and 71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock certificate
for fully paid shares (Sec. 64)
(d) Proportionate participation in the
distribution of assets in liquidation
(Sec. 122)
(e) Right to transfer of stocks in
corporate books (Sec. 63)
(f) Pre-emptive right (Sec. 39)
(5) Right to inspect books and records (Sec
74)
(6) Right to be furnished with the most
recent financial statements/reports (Sec.
75)
(7) Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec.
69)
(8) Right to file individual suit, representative
suit and derivative suits
provide for any distinction of the shares of the extent specified in the articles of
stock, all shares issued by the corporation are incorporation or the by-laws.
presumed to be equal and enjoy the same
The SEC has opined that the rule in Sec. 6
rights and privileges and are also subject to
allowing non-voting shares to vote on
the same liabilities. [Sundiang and Aquino]
specified fundamental matters does not apply
The default rule is that all stockholders have to non-voting members of a non-stock
equal right and obligations, expressed in the corporation; that insofar as members of a
last paragraph of Sec. 6 of the Corporation non-stock corporation, the applicable
Code which provides, each share shall be provision is Sec. 89, which specifically
equal in all respects to every other share. provides that members may be denied
[Villanueva] entirely their voting rights in the articles of
incorporation or by-laws of the corporation.
[SEC Opinion, 4 September 1995]
Note:
However, when preferences or restrictions are
made to apply to a class of shares, then such B. PARTICIPATION IN MANAGEMENT
preferences on restrictions shall exist and be
valid only when provided in the articles of B.1. PROXY
incorporation and stated in the certificate of
stock. [Villanueva] Stockholders and members may vote in
person or by proxy in all meetings of
Sec. 6 of the Corporation Code also contains stockholders or members (Sec. 58).
a Board-enabling clause that although the
default rule is that all shareholders have The right to issue a proxy is vested with public
equal rights and obligations, nevertheless, interest when it comes to stock corporations;
when authorized by the articles of although it may be regulated under the by-
incorporation, the BOD, may fix the terms and laws, it cannot be denied, since it is an aspect
conditions of preferred shares of stock or any of ownership interest of stockholders.
series thereof, or to classify its shares for the However, the right of members to vote by
purpose of insuring compliance with proxy may be denied under the articles of
constitutional or legal requirements; but such incorporation or by-laws of a non-stock
terms and conditions shall be effective upon corporation (Sec. 89)
filing of a certificate thereof with the SEC.
Thus, a preference or restriction on shares
may be valid and effective only if the same Requisites for a Valid and Enforceable
has formally been registered with the SEC Proxy:
and thereby becomes public records binding
on the public. [Villanueva] (1) It must be in writing
(2) Signed by the stockholder or member of
record; and
Nature of the Rights of Members
(3) Filed with the corporation before the
The eleemosynary nature (i.e. charitable) of scheduled meeting with the Corporate
every non-stock corporation defines the Secretary [Sec. 58]
characteristic of membership therein as being
essentially personal in character and Note: Unless otherwise provided in the proxy,
therefore essentially non-transferable in it shall be valid only for the meeting for which
nature. it is intended. No proxy shall be valid and
effective for a period longer than five (5) years
Sec. 89 of the Corporation Code specifically at any one time. [Sec. 58]
provides that in a non-stock corporation, the
right of members of any class or classes to
vote may be limited, broadened or denied to
Election of Directors or Trustees (Sec. Right to withdraw from the corporation and
24) - A stockholder may vote such number of demand payment of the fair value of the
shares for as many persons as there are shares after dissenting from certain corporate
directors to be elected or he may cumulate acts involving fundamental changes in
said shares and give one candidate as many corporate structure (Sec. 81). The amount
votes as the number of directors to be elected paid to the stockholder is the fair value of his
multiplied by the number of his shares shall shares as of the day prior to the date on
equal, or he may distribute them on the same which the vote was taken, excluding any
principle among as many candidates as he appreciation or depreciation in anticipation of
shall see fit: the corporate action (Sec. 82).
(4) Sale or disposal of all or substantially all 10 days after demand for payment, at the
assets of the corporation (Sec. 81) option of the corporation [Sec. 86]
(5) Merger or consolidation (Sec. 81) Effect of Extinguishment
(1) Right of dissenting stockholder to be paid
the fair value of his shares shall cease;
II. REQUIREMENTS FOR EXERCISE OF
APPRAISAL RIGHT (SECS. 82, 86) (2) His status as a stockholder shall
thereupon be restored; and
(1) Stockholder must have voted against the
corporate act. (3) All dividend distributions which would
have accrued on his shares shall be paid
(2) Stockholder must make a written
to him. [Sec. 84]
demand on the corporation within 30
days after the vote was taken for payment Note: If shares represented by the certificates
of the fair value of his shares (failure to bearing such notation are transferred, and
make demand within such period shall be the certificates consequently cancelled, the
deemed waiver of the appraisal right). rights of the transferor as a dissenting
stockholder under this Title shall cease and
(3) Stockholder must submit his certificates
the transferee shall have all the rights of a
of stock to the corporation for notation
regular stockholder; and all dividend
within 10 days after demand for payment.
distributions which would have accrued on
Otherwise, right to appraisal may be
such shares shall be paid to the transferee.
terminated at the option of corporation.
[Sec. 86]
(3) Minute book for meetings of the its officers contest such purpose or
board/trustees; contend that there is evil motive behind
the inspection, the burden of proof is with
(4) Stock and transfer book
the corporation or such officer to show
Stock transfer agent - One engaged the same.
principally in the business of registering
TEST to determine whether the purpose is
transfers of stocks in behalf of a stock
legitimate A legitimate purpose is one
corporation (licensed by the SEC).
which is germane to the interests of the
The corporate secretary is the one duly stockholder as such and not contrary to the
authorized to make entries in the stock and interests of the corporation. [Gokongwei v.
transfer book. SEC (1979)]
It is the corporate secretary's duty and Among the changes introduced in the new
obligation to register valid transfers of stocks Code with respect to the right of inspection
and if said corporate officer refuses to comply, granted to a stockholder are the following:
the transferor-stockholder may rightfully
(1) The records must be kept at the
bring suit to compel performance. [Torres et
principal office of the corporation;
al v. CA (1997)]
(2) The inspection must be made on
business days;
III. FINANCIAL STATEMENTS (SEC. 75)
(3) The stockholder may demand a copy
Within 10 days from written request, the of the excerpts of the records or
corporation shall furnish its most recent minutes;
financial statement (balance sheet and profit
(4) The refusal to allow such inspection
or loss statement as of last taxable year)
shall subject the erring officer or
At a regular meeting, the Board shall present agent of the corporation to civil and
a financial report of the operations of the criminal liabilities.
corporation for the preceding year, which
However, while seemingly enlarging the right
shall include financial statements duly signed
of inspection, the new Code has prescribed
and certified by an independent CPA.
limitations to the same. It is now expressly
Exception required as a condition for such examination
that the one requesting it must not have been
If the paid-up capital is less than P50,000
guilty of using improperly any information
the financial statements may be certified
through a prior examination, and that the
under oath by the treasurer or any
person asking for such examination must be
responsible officer of the corporation (instead
"acting in good faith and for a legitimate
of an independent CPA).
purpose in making his demand." [Gonzales v.
PNB (1983)]
IV. REQUIREMENTS FOR THE Directors of a corporation have the
EXERCISE OF THE RIGHT OF unqualified right to inspect the books and
INSPECTION (SEC. 74) records of the corporation at all reasonable
(1) It must be exercised at reasonable hours times. The right of inspection is not to be
on business days and in the place where denied on the ground that the director or
the corporation keeps all its records (i.e., shareholder is on unfriendly terms with the
principal office). officers of the corporation whose records are
sought to be inspected. A director or
(2) The stockholder has not improperly used stockholder can make copies, abstracts, and
any information he secured through any memoranda of documents, books, and
previous examination. papers as an incident to the right of
(3) Demand is made in good faith or for a inspection, but cannot, without an order of a
legitimate purpose. If the corporation or court, be permitted to take books from the
office of the corporation. However, a director
PAGE 184 OF 320
81
or stockholder does not have any absolute contract stipulations, by which the right is
right to secure certified copies of the minutes strictly construed against the right of person
of the corporation until these minutes have to dispose or deal with their property.
been written up and approved by the
Stockholders of a corporation shall enjoy pre-
directors. [Veraguth v. Isabela Sugar (1932)]
emptive right to subscribe to ALL ISSUES OR
A stockholder of a sequestered company has DISPOSITIONS OF SHARES OF ANY CLASS,
the right to inspect and/or examine the in proportion to their respective
records of the corporation pursuant to Sec. 74 shareholdings. The purpose is to enable the
of the Corporation Code. [Africa v. PCGG shareholder to retain his proportionate
(1992)] control in the corporation and to retain his
equity in the surplus.
Note: The broad phrase all issues or
V. REMEDIES W HEN INSPECTION IS
disposition of shares of any class is
REFUSED
construed to include not only new shares
(1) Mandamus issued in pursuance of an increase in capital
stock or from the unissued shares which form
(2) Injunction
part of the ACS, but also covers treasury
(3) Action for damages shares. Treasury shares would come under
(4) File an action under Sec. 144 to the term disposition. Likewise considering
impose a penal offense by fine and/or that it is not included among the exceptions
imprisonment enumerated therein, where pre-emptive right
shall not extend, the intention is to include it
Refusal to allow inspection is a criminal in its application. (SEC Opinion, 14 January
offense. Such refusal, when done in violation 1993).
of Sec 74(4) of the Corporation Code, properly
falls within the purview of Sec. 144 of the A pre-emptive right is a right claimed against
same code and thus may be penalized as an the corporation on unissued shares of its
offense. [Yujuico and Sumbilla v Quiambao capital stock, and likewise on treasury shares
and Pilapil (2014)] held by the corporation; while the right of first
refusal is a right exercisable against another
Because the obligations provided for in Sec. stockholder on his shares of stock.
74 fall on the corporation, violation of the [Villanueva]
same is done by the corporation; thus
criminal action based on such violation can Basis of Preemptive Right: to preserve the
only be maintained against corporate officers existing proportional rights of the
or other such persons acting on behalf of the stockholders [Campos]
corporations.
II. LIMITATIONS TO EXERCISE OF
C.4. PRE-EMPTIVE RIGHT PRE-EMPTIVE RIGHT (SEC. 39)
It shall not take effect if denied in the corporation. Some new investors may be
Articles of Incorporation or an willing to invest only if all the new shares
amendment thereto. will be issued to them [Campos].
If one shareholder does not want to
exercise his pre-emptive right, the other C.5. RIGHT TO VOTE
shareholders are not entitled to purchase
the corresponding shares of the Non-voting shares are not entitled to vote
shareholder who declined. But if nobody except as provided for in the last
purchased the same and later on the paragraph of Sec. 6.
board re-issued the shares, the pre-
Preferred or redeemable shares may be
emptive right applies. [Sundiang and
deprived of the right to vote
Aquino]
Fractional shares of stock cannot be
voted
III. REMEDIES IN CASE OF
UNW ARRANTED DENIAL Treasury shares have no voting rights as
long as they remain in the treasury.
Injunction
No delinquent stock shall be voted (Sec.
Mandamus 71)
The suit should be individual and not A transferee of stock cannot vote if his
derivative because the wrong done is to transfer is not registered in the stock and
the stockholders individually transfer book of the corporation.
SEC can cancel shares if the 3rd party is
not innocent
C.6. RIGHT OF FIRST REFUSAL
The right of first refusal provides that a
IV. W AIVER/ DENIAL OF PREEMPTIVE stockholder who may wish to sell or assign
RIGHT his shares must first offer the shares to the
corporation or to the other existing
Allowed by the Code provided that it is stockholders under terms and conditions
made in the Articles of Incorporation which are reasonable; and that only when the
o Waiver made through Articles of corporation or the other stockholders do not
Incorporation would bind or fail to exercise their option, is the offering
present and subsequent stockholder at liberty to dispose of his shares
shareholders to third parties.
o 2/3 vote of the outstanding An agreement entered into between the two
capital stock is necessary before majority stockholders of a corporation
waiver is binding whereby they mutually agreed not to sell,
transfer, or otherwise dispose of any part of
o Result of Non-placement of their shareholdings till after one year from
waiver clause in Articles of the date of the agreement. [Lambert v. Fox
Incorporation: waiver shall not (1914)]
bind future stockholders but only
those who agreed to it The right of first refusal is primarily an
attribute of ownership, and consequently can
The shareholders must be given be effected only through a contractual
reasonable time within which to exercise commitment by the owner of the shares;
their pre-emptive rights. Upon expiration consequently, the waiver of a right of first
of such period, any shareholders who did refusal when duly constituted can be effected
not exercise such will be deemed to have only by the registered owner. [PCGG v. SEC,
waived it. This is necessary so as to not unreported (1988)]
hinder future financing plans of the
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UP LAW BOC CORPORATION CODE MERCANTILE LAW
Corporation should be made a party to the guilty of a breach of trust, not of mere error of
suit, either as plaintiff or defendant, for res judgment or abuse of discretion, and intra-
judicata to apply. corporate remedy is futile or useless, a
shareholders may institute a derivative suit in
BUT the personal injury suffered by the
behalf of himself and other stockholders and
stockholder cannot disqualify him from filing
for the benefit of the corporation, to bring
a derivative suit in behalf of the corporation.
about a redress of the wrong inflicted directly
It merely gives rise to an additional cause of
upon the corporation and indirectly upon the
action for damages against the erring
stockholders. [Bitong v. CA (1998)]
corporate officers. [Gochan v. Young (2001)]
Jurisdiction over derivative suits lies with the
RTC (Sec. 5.2, Securities Regulation Code)
Requisites based on jurisprudence
The cause of action actually devolves on
E. OBLIGATION OF A STOCKHOLDER
the corporation, the wrong or harm
having been, or being caused to it and
not the shareholder filing the suit. E.1. LIABILITY TO THE CORPORATION FOR
[Evangelista vs. Santos (1950); SMC v. UNPAID SUBSCRIPTION (SEC. 67)
Kahn (1989)]
A subscription contract is unconditional (i.e.,
The reliefs sought pertain to the obligation to pay is not be subject to any
corporation. [Symaco Trading Corp. v. contingency) and indivisible (as to the
Santos (2005)] amount and transferability [Fua Cun v.
Summers, (1923)]. Hence, if the subscriber
paid 20% of his subscription, he is not
Recent rulings on the matter entitled to the issuance of certificates
corresponding to 20% of the shares.
Status of heirs as co-owners of shares
before partition of estate does not make Unpaid claim refers to any unpaid
them shareholders until there is subscription and not to any indebtedness
compliance with Sec. 63 on the manner which a subscriber may owe the corporation
of transferring shares, thus the heirs are rising from any other transaction. [China
not automatically registered Banking Corp. v. CA (1997)]
shareholders of the corporation. [Reyes v.
RTC of Makati (2008)]
E.2. LIABILITY TO THE CORPORATION FOR
Stockholder may commence a derivative INTEREST ON UNPAID SUBSCRIPTION IF
suit for mismanagement, waste or SO REQUIRED BY THE BY-LAWS (SEC. 66)
dissipation of corporate assets because of
a special injury to him for which he is General Rule: Subscribers for stock are
otherwise without redress. In effect, the NOT liable to pay interest on his unpaid
suit is an action for specific performance subscription
of an obligation owed by the corporation Exception: If so required in the by-laws at
to the stockholders to assist its right of the rate fixed in the by-laws. If no rate is fixed
action when the corporation is put on in the by-laws, such rate shall be deemed to
default by the wrongful refusal of the be the legal rate (Sec. 66)
directors or management to make
suitable measures for its protection. [Yu Notes: Transfer for consideration of treasury
v. Yukayguan (2009)] shares is a sale (or disposition) by the
corporation (not subscription). A transfer of
The power to sue and be sued in any court by previously issued shares by a stockholder to a
a corporation even as a stockholder is lodged third person is a sale (or disposition).
in the BOD that exercises its corporate Transfer of unissued shares is subscription.
powers and not in the president or officer
thereof. But where corporate directors are Shareholders are not creditors of the
corporation with respect to their
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UP LAW BOC CORPORATION CODE MERCANTILE LAW
shareholdings thereto and the principle of It is hornbook principle that personal liability
compensation or set-off has no application. of corporate directors, trustees or officers
attaches only when: (a) they assent to a
Subscription contract is NOT required to be in
patently unlawful act of the corporation, or
writing.
when they are guilty of bad faith or gross
negligence in directing its affairs, or when
there is a conflict of interest resulting in
E.3. LIABILITY FOR WATERED STOCKS
damages to the corporation, its stockholders
(SEC. 65)
or other persons; (b) they consent to the
I. DEFINITION issuance of watered down stocks or
These are shares issued as fully paid when in when, having knowledge of such
truth no consideration is paid, or the issuance, do not forthwith file with
consideration received is known to be less the corporate secretary their written
than the par value or issued value of the objection; (c) they agree to hold themselves
shares. (Sec. 65) personally and solidarily liable with the
corporation; or (d) they are made by specific
These include the following: provision of law personally answerable for
their corporate action. [SPI Technologies Inc. v
Issued without consideration (bonus
Mapua (2014)]
share)
Issued as fully paid when the corporation
has received less sum of money than its E.4. LIABILITY FOR DIVIDENDS
par or issued value (discounted share) UNLAWFULLY PAID
Issued for consideration other than actual When a director, trustee or officer attempts to
cash (i.e., property or services), the fair acquire or acquires, in violation of his duty,
valuation of which is less than its par or any interest adverse to the corporation in
issued value respect of any matter which has been
reposed in him in confidence, as to which
Issue stock dividend when there are no equity imposes a disability upon him to deal
sufficient retained earnings or surplus in his own behalf, he shall be liable as a
profit to justify it. trustee for the corporation and must account
Note: Subsequent increase in the value of for the profits which otherwise would have
the property used in paying the stock does accrued to the corporation (Sec. 31).
not do away with the watered stocks. Violations of any of the provisions of the
Subsequent increase in the value of the Corporation Code not otherwise specifically
property used in paying the stock does not penalized therein shall be punished by a fine
cure the defect in issuance. The existence of of not less than one thousand (P1,000.00)
watered stocks is determined at the time of pesos but not more than ten thousand
issuance of the stock. (P10,000.00) pesos or by imprisonment for
not less than thirty (30) days but not more
than 5 years, or both, in the discretion of the
II. LIABILITY OF DIRECTORS OR court (Sec. 144).
OFFICERS
Any director or officer of a corporation
consenting to the issuance of watered stocks E.5. LIABILITY FOR ASSUMING TO ACT AS
or who, having knowledge thereof, does not A CORPORATION KNOWING IT TO BE
forthwith express his objection in writing and WITHOUT AUTHORITY
file the same with the corporate secretary All persons who assume to act as a
shall be SOLIDARILY liable with the corporation knowing it to be without
stockholder concerned to the corporation and authority to do so shall be liable as general
its creditors for the difference in value (Sec. partners for all debts, liabilities and damages
65). incurred or arising as a result thereof.
PAGE 189 OF 320
UP LAW BOC CORPORATION CODE MERCANTILE LAW
When any such ostensible corporation is sued date in April of every year as determined by
on any transaction entered or on any tort the BOD or trustees.
committed by it as a corporation, it shall not
Special meetings of stockholders or members
be allowed to use as a defense its lack of
shall be held at any time deemed necessary
corporate personality.
or as provided in the by-laws.
One who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there W here?
was in fact no corporation (Sec. 21).
Stock: City or municipality where the
principal office of the corporation is
located, or, if practicable, in the principal
F. MEETINGS office of the corporation: Provided, Metro
Manila shall be considered a city or
General Rule: Stockholders or members municipality. (Sec. 51)
approval is expressed in a meeting duly
Non-stock: Any place even outside the
called and held for the purpose.
place where the principal office is located,
Exception: In case of amendment of within the Philippines (Sec. 93)
Articles of Incorporation, approval may be
expressed by referendum or written assent of
the stockholders or members (Sec. 16) II. NOTICE (SEC. 50)
W HO MAY ATTEND AND VOTE? Regular M eetingwritten notice sent
to all shareholders or members at least 2
Stockholders, either in person or by proxy
weeks prior to the meeting, unless a
Pledgors or mortgagors (Sec. 55) different period is required by the by-laws
Pledgee or mortgagee, IF expressly given Special Meetingwritten notice sent
such right by the pledgor or mortgagor in at least 1 week prior to the meeting,
writing which is recorded on the unless otherwise provided in the by-laws.
corporate books(Sec. 55)
Subject to waiver, expressly or impliedly
Executors, administrators, receivers, and (i.e., attendance despite no notice)
other legal representatives duly Effect of Failure to Give Notice: Failure
appointed by the court, without need of to give notice would render a meeting
any written proxy(Sec. 55) VOIDABLE at the instance of an absent
ALL joint owners of stocks, or any one of stockholder, who was not notified of the
them with the consent of ALL the co- meeting (Board v. Tan, 1959).
owners, unless there is a written proxy,
signed by all the co-owners(Sec. 56)
Any one of the joint owners of shares
owned in an "and/or" capacity or a proxy F.2. WHO CALLS THE MEETINGS
thereof(Sec. 56)
Any petitioning stockholder or member upon
F.1. REGULAR OR SPECIAL order of the SEC when there is no person
authorized to call a meeting. (Sec. 50)
I. W HEN AND W HERE
W hen? (Sec. 50)
F.3. WHO PRESIDES AT THE MEETINGS
Regular meetings of stockholders or
members shall be held annually on a date The president, unless the by-laws provide
fixed in the by-laws, or if not so fixed, on any otherwise.(Sec. 54)
Exception: The Code or the by-laws provide General Rule: Stockholders representing
otherwise majority of the Outstanding Capital Stock or
majority of the members
Where quorum is present at the start of a
lawful meeting, stockholders present cannot Exception: The Code or the by-laws provide
without justifiable cause break the quorum by otherwise
walking out from said meeting so as to defeat
the validity of any act proposed and approved
by the majority. (However, stockholders can F.5. MINUTES OF THE MEETINGS
break the quorum for justifiable causes.) A record of all the minutes of all meetings of
(Johnston vs. Johnston, 1965 CA decision) stockholders or members, or of the BOD or
trustees shall be kept and preserved at the
principal office of every corporation.
Regular Stockholders Special Stockholders
Meetings Meetings Contents:
held annually on a at any time upon the how the meeting was authorized;
date fixed in the by- call of the president the notice given;
laws, or if not so fixed, or as provided in the
on any date in April of by-laws whether the meeting was regular or
every year as special, if special its object;
determined by the
those present and absent; and
BOD or trustees
every act done or ordered done at the
W HERE
meeting.
STOCK - City or municipality where the
principal office of the corporation is located,
or, if practicable, in the principal office of the Upon dem and by any director/trustee
corporation: Provided, Metro Manila shall be or shareholders/m em ber, the
considered a city or municipality (sec. 51) following shall also be noted in the
minutes:
NON-STOCK - Any place even outside the
place where the principal office is located, the time when any director, trustee,
within the Philippines (sec. 93) stockholder or member entered or left the
meeting;
NOTICE
the yeas and nays on any motion or
proposition;
Any contract for the acquisition of unissued (a) purchase of TREASURY SHARES
stock in an existing corporation or a from the corporation
corporation still to be formed shall be (b) acquisition of shares from existing
deemed a subscription contract (Sec. 60). shareholders by SALE OR ANY
OTHER CONTRACT [Sundiang and
Aquino]
Notes Notes
Transfer of unissued shares = Shareholders are NOT creditors of the
SUBSCRIPTION corporation with respect to their
shareholdings thereto and the principle of
Transfer of already issued shares = NOT
compensation or set-off has no application.
SUBSCRIPTION; can either be:
Subscription contract is NOT required to be in
SALE/DISPOSITION BY CORPORATION writing.
of treasury shares
SALE/DISPOSITION BY STOCKHOLDER
TO A THIRD PERSON B. CONSIDERATION FOR STOCKS
(2) After the submission of the Articles of Amounts transferred from unrestricted
Incorporation to the SEC. retained earnings to stated capital
(declaration of stock dividends); and
Outstanding shares exchanged for
II. POST-INCORPORATION stocks in the event of reclassification or
SUBSCRIPTION conversion;
It is entered into after incorporation. Previously incurred indebtedness of the
corporation;
A. 4. INTEREST ON UNPAID
SUBSCRIPTION B. 2. LIMITATIONS ON CONSIDERATION
General Rule Stocks shall NOT be issued:
Stockholder is NOT liable to pay interest on for a consideration less than the par or
his unpaid subscription. issued price thereof
Exception in exchange for promissory notes or
If so required by the by-laws future service
RATE: that fixed in the by-laws, otherwise,
the legal rate (Sec. 66)
forthwith express his objection in writing and with the statutory regulations is necessary.
file the same with the corporate secretary [Philippine Trust Corp. v. Rivera (1923)]
shall be solidarily liable with the
stockholder concerned to the corporation and
its creditors for the difference in value (Sec. C. 5. SITUS OF THE SHARES OF STOCK
65).
It is a general rule that for purposes of
execution, attachment and garnishment, it is
not the domicile of the owner of a certificate
III. TRUST FUND DOCTRINE FOR
but the domicile of the corporation which is
LIABILITY FOR W ATERED STOCKS
decisive. [Chua Guan v. Samahang
Where the corporation issues watered stock Magsasaka, Inc. (1935)]
and thereby assumes an ostensible
capitalization in excess of its real assets, the
transaction necessarily involves the C. 6. CLASSES OF SHARES OF STOCK
misleading of subsequent creditors, and
Shares of stock of stock corporations may be
whether done with that purpose actually in
divided into classes or series of shares or both.
mind or not, is at least a constructive fraud
Each class or series of shares may have rights,
upon creditors. Hence, it is held that recovery
privileges or restrictions, as stated in the
may be had by a creditor in such case, even
Articles of Incorporation.
though the corporation itself has no cause of
action against the stockholders. Some of the Classification of shares:
earlier decisions put the right of recovery in (1) Common shares
such a case upon the so-called trust fund
doctrine. In any view of the matter, however, (2) Preferred shares
the creditors right of action to compel the (a) Preference as to dividends
making good of the representation as to the
corporations capital is based on fraud, and (i) Participating and non-
the trust fund doctrine is only another way of participating
expressing the same underlying idea. [De (ii) Cumulative and non-cumulative
Leon]
(3) Par value shares
Despite the view of foreign authors that the
fraud theory is the prevailing view, it would (4) No-par value shares
seem that in the Philippine jurisdiction, the (5) Founders shares
trust fund doctrine on watered stock prevails.
(6) Redeemable shares
It is established doctrine that subscription to
the capital of a corporation constitute a fund (7) Treasury shares
to which creditors have a right to look for (8) Convertible shares
satisfaction of their claims and that the
assignee in insolvency can maintain an action (9) Non-voting shares
upon any unpaid stock subscription in order
to realize assets for the payment of its debts
(citing Velasco v. Poizat, 1918). A corporation General Rule
has no power to release an original No share may be deprived of voting rights
subscriber to its capital stock from the (Sec. 6)
obligation of paying for his shares, without a
valuable consideration for such release; and Exceptions
as against creditors a reduction of the capital Preferred non-voting or
stock can take place only in the manner and
under the conditions prescribed by the Redeemable shares,
statute or the charter or the articles of
Provided by the Code (e.g., Treasury
incorporation. Moreover, strict compliance
shares)
These are shares which have been issued and Non-Voting Shares are not entitled to vote.
fully paid for, but subsequently re-acquired Exceptions
by the issuing corporation by purchase,
redemption, donation or through some other Amendment of the Articles of
lawful means. Such shares may again be Incorporation
disposed of for a reasonable price fixed by the Adoption and amendment of by-laws
BOD.
Sale, lease, exchange, other
They are excluded from the definition of
disposition of all or substantially all
outstanding capital stock [Sec. 137]
of the corporate property
Treasury shares shall have no voting right as
Incurring, creating or increasing
long as such shares remain in the Treasury.
bonded indebtedness
[Sec. 57]
Pre-emptive right of stockholders in close Increase or decrease of capital stock
corporations shall extend to reissuance of Merger and consolidation
treasury shares unless otherwise provided in
the Articles of Incorporation. [SEC. 102] Investment of corporate funds in
another corporation or business
Treasury shares are issued shares, but being
in the treasury, do not have the status of Dissolution of the corporation
A.1. VOLUNTARY
I. W HERE 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 BOD/BOT
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UP LAW BOC CORPORATION CODE MERCANTILE LAW
If SEC fails to act within 6 months from By-laws should be adopted within one
filing of the amended Articles of month of receipt of official notice of the
Incorporation and shortened term expires issuance of the certificate of
after the 6-month period the incorporation, otherwise the certificate
corporation will be dissolved upon the may be suspended or revoked [PD 902-A,
expiration of the shortened term. Sec. 6 (i)(5)]
If SEC fails to act within 6 months from Failure to operate for at least 5 consecutive
filing of the amended Articles of years after commencement of business -
Incorporation and shortened term expires ground for suspension or revocation of its
before the 6-month period the corporate franchise or certificate of
corporation will be dissolved at the end of incorporation.
the 6-month period. [Campos] Note:
Dissolution in this case is not automatic.
A.2. INVOLUNTARY [Campos]
I. BY EXPIRATION OF CORPORATE The corporation may show that the failure to
TERM commence its business or to continuously
operate is due to causes beyond its control
Once the period expires, the corporation is [Sec. 22]
automatically dissolved without any other
proceeding and it cannot thereafter be
considered a de facto corporation. III. LEGISLATIVE DISSOLUTION
The inherent power of Congress to make laws
II. FAILURE TO ORGANIZE AND carries with it the power to amend or repeal
COMMENCE BUSINESS W ITHIN 2 them. Involuntary corporate dissolution may
YEARS FROM INCORPORATION be effected through the amendment or repeal
of the Corporation Code. [implied from Sec.
Failure to formally organize and commence 145, De Leon]
the transaction of its business or construction
of its works within 2 years - its corporate The limitations on the power to dissolve
powers shall cease and the corporation shall corporations by legislative enactment are as
be deemed dissolved [Sec. 22] follows:
Dissolution in this case is automatic (1) Under the Constitution, the amendment,
[Campos]. alteration, or repeal of the corporate
franchise of a public utility shall be made
Contrary view : Since there is a defense only when the common good so
available to the corporation, that is, if its requires;
failure to organize and commence its
business is due to causes beyond the (2) Under Sec. 145 of the Code, it is provided
control of the corporation as may be that: No right or remedy in favor of or
determined by the SEC, therefore, the against any corporation, its stockholders,
dissolution is not automatic. members, directors, trustees, or officers,
nor any liability incurred by any such
Transacting business implies a continuity of corporation, stockholders, members,
acts or dealings in the accomplishment of the directors, trustees, or officers, shall be
purpose for which the corporation was removed or impaired either by the
formed. [Mentholatum v. Mangaliman (1946)] subsequent dissolution of said
Formal organization includes not only the corporation or by any subsequent
adoption of the by-laws but also the amendment or repeal of this Code or of
establishment of the body which will any part thereof;
administer the affairs of the corporation and (3) While Congress may provide for the
exercise its powers dissolution of a corporation, it cannot
PAGE 208 OF 320
UP LAW BOC CORPORATION CODE MERCANTILE LAW
XI. Other Corporations Also note that, even after satisfying the 3
mandatory provisions, a corporation shall not
be deemed a close corporation when at least
2/3 of its voting stock or voting rights is
A. CLOSE CORPORATIONS owned or controlled by another corporation
which is not a close corporation within the
General concept: meaning of this Code.
Most characteristic feature is the identity of A narrow distribution of ownership does not,
stock ownership and active management, i.e., by itself, make a close corporation.
all or most of the stockholders are active in When a corporations Articles of
the corporate business either as directors, Incorporation does not contain the provisions
officers or other key men in management enumerated under Sec. 96 of the Code, such
[Campos] corporation is not a close corporation. It
Statutory definition: [Sec. 96] does not become one either, just because
only a few individuals owned 99.866% of its
A close corporation is one whose articles of subscribed capital stock. [San Juan Structural
incorporation provide that: and Steel Fabricators v. CA (1998)]
(1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall
be held of record by not more than a General Rule
specified number of persons, not Free transferability of shares - Shares of stock
exceeding 20; so issued are personal property and may be
(2) All the issued stock of all classes shall be transferred
subject to one or more specified Exception
restrictions on transfer permitted by this
Title; and In close corporations:
(3) The corporation shall not list in any stock Restriction on transfer provided in Articles of
exchange or make any public offering of Incorporation
any of its stock of any class. Lim it: Restriction on the transfer must NOT
be more onerous than granting the existing
shareholders or corporation the option to
General Rule: Any corporation may purchase the shares (Right of First Refusal).
incorporate as a close corporation
Rationale: Considering the special
Exceptions: mining or oil companies, stock circumstances attending a close corporation
exchanges, banks, insurance companies, (e.g. formed by persons who know each other
public utilities, educational institutions and well, thus they would want to choose the
corporations declared to be vested with persons who will be allowed in their group), it
public interest is justifiable and even imperative for its
stockholders to protect themselves from
future conflicts by placing restrictions on the
Notes right of each one of them to transfer his
Under Sec. 96, the 3 provisions MUST appear shares to an outsider.
in the Articles of Incorporation, otherwise, a The stocks cannot be listed in the stock
corporation is not considered as a close exchange nor be publicly offered.
corporation. [San Juan Structural and Steel
Fabricators v CA (1998)]
However, do note that in the earlier case of
Dulay v CA (1993), the court did not look at
Sec. 96 in concluding that the corporation
involved was a close corporation.
PAGE 211 OF 320
UP LAW BOC CORPORATION CODE MERCANTILE LAW
(1) Stockholders of record not more than 20 If a stock certificate of any close corporation
conspicuously shows a restriction on transfer
(2) Stocks not publicly listed of stock of the corporation, the transferee
(3) Restricted transfer of ownership of the stock is conclusively presum ed
to have notice of the fact that he has
acquired stock in violation of the
A.2. VALIDITY OF RESTRICTIONS ON restriction, if such acquisition violates
TRANSFER OF SHARES the restriction.
There can be classification of directors into There is no such classification as in the case of close
one or more classes, each of whom may be corporations.
voted for and elected solely by a particular
class of stock; and
The articles of incorporation of a close Corporate Powers devolved upon BOD whose powers are
corporation may provide that the business executed by officers. Cannot provide that it be managed by
of the corporation shall be managed by stockholders
the stockholders of the corporation rather
BOD must be elected in a stockholders meeting
than by a BOD. So long as this provision
continues in effect: Stockholders of a corporation are separate and distinct from
directors
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.
The articles of incorporation may likewise Officers must be elected by the BOD
provide that all officers or employees or
that specified officers or employees shall
be elected or appointed by the
stockholders, instead of by the BOD.
2. MEETINGS
Unless the by-laws provide otherwise, any The directors or trustees shall not act individually nor
action by the directors of a close separately but as a body in a lawful meeting. They will act
corporation without a meeting shall only after discussion and deliberation of matters before
nevertheless be deemed valid if: them. Contracts entered into without a formal board
resolution does not bind the corporation except when
(1) Before or after such action is taken,
ratified or when majority of the board has knowledge of the
written consent thereto is signed by all
contract and the contract benefited the corporation.
the directors; or
Absence of a prompt objection in writing does not ratify acts
(2) All the stockholders have actual or
done by directors without a valid meeting. There must be
implied knowledge of the action and
express or implied ratification.
make no prompt objection thereto in
writing; or Express ratification may consist of a Board Resolution to
that effect
(3) The directors are accustomed to take
informal action with the express or Implied ratification may consist of acceptance of benefits
implied acquiescence of all the from said unauthorized act while having knowledge of said
stockholders; or act
(4) All the directors have express or Failure to give notice would render a meeting voidable.
implied knowledge of the action in
Attendance to a meeting despite want of notice will be
3. VOTING/ QUORUM
The Articles of Incorporation may provide No share may be deprived of voting rights, except Preferred
for a classification of directors into one or or Redeemable shares, unless otherwise provided by the
more classes, each of which may be voted Code
for and elected solely by a particular class
There shall always be a class/series of shares which have
of stock.
COMPLETE VOTING RIGHTS
EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO
EVERY OTHER SHARE, except as otherwise provided in the
Articles of Incorporation
The Articles of Incorporation may provide For BOD, the by-laws or Articles of Incorporation can
for a greater quorum or voting provide for a greater majority in quorum
requirements in meetings of stockholders
For stockholders, the Articles of Incorporation can provide
or directors than those provided in this
for a different percentage in quorum
Code.
4. PRE-EMPTIVE RIGHT
5. TRANSFERABILITY
Restrictions on the right to transfer shares Restrictions on the right to transfer not allowed
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
6. APPRAISAL RIGHT
Any stockholder of a close corporation Stockholders may require the corporation to buy-back their
may, for any reason, compel the said shares at fair value when the Corporation has Unrestricted
corporation to purchase his shares at their Retained Earnings:
fair value, which shall not be less than
(a) In case of any amendment to the articles of
their par or issued value, when the
incorporation which has the effect of:
corporation has sufficient assets in its
books to cover its debts and liabilities (i) changing or restricting the rights of any
exclusive of capital stock stockholder or class of shares, or
Any stockholder of a close corporation (ii) authorizing preferences in any respect superior
may, by written petition to the SEC, to those of outstanding shares of any class, or
compel the dissolution of such corporation
(iii) extending or shortening the term of corporate
whenever:
existence
(a) Any of acts of the directors, officers or
(b) In case of sale, lease, exchange, transfer, mortgage,
those in control of the corporation is
pledge or other disposition of all or substantially all of
illegal, or fraudulent, or dishonest, or
the corporate property and assets as provided in the
oppressive or unfairly prejudicial to
Code; and
the corporation or any stockholder, or
(c) In case of merger or consolidation
Corporate assets are being misapplied or
wasted. (d) Investment of corporate funds in another corporation or
business
(e) Diversion of funds of corporation from primary purpose
to secondary purpose (Sec. 41)
B. NON-STOCK CORPORATIONS
Stock Corporations Non-Stock Corporations
DEFINITION
Corporations which have capital stock divided All other private corporations (Sec. 3)
into shares and are authorized to distribute to
One where no part of its income is distributable as
the holders of shares dividends or allotments of
dividends to its members, trustees or officers. (Sec. 87)
the surplus profits on the basis of the shares
(Sec. 3)
PURPOSE
Primarily to make profits for its shareholders May be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes like
trade, industry, agricultural and like chambers, or any
combination thereof. (Sec. 88)
B.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]
C. RELIGIOUS CORPORATIONS
B.3. TREATMENT OF PROFITS
Any profit which a non-stock corporation may C.1. CORPORATION SOLE (SEC. 110)
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the One formed for the purpose of administering
furtherance of the purpose or purposes for and managing, as trustee, the affairs,
which the corporation was organized. [Sec. property and temporalities of any religious
87,2nd sentence] denomination, sect or church by the chief
archbishop, bishop, priest, minister, rabbi or
other presiding elder of such religious
B.4. DISTRIBUTION OF ASSETS UPON denomination, sect or church. [Sec. 110]
DISSOLUTION A special form of corporation, usually
Order of distribution of assets upon associated with clergy and consists of one
dissolution of non-stock corporation person only and his successors, who are
incorporated by law to give some legal
(1) All liabilities and obligations of the capacities and advantages.
corporation shall be paid, satisfied and
discharged, or adequate provision shall A registered corporation sole can acquire
be made therefore land if its members constitute at least 60%
Filipinos [SEC Opinion, 8 August 1994].
(2) Assets held subject to return on
dissolution shall be delivered back to the NATIONALITY
givers. A corporation sole does not have any
(3) Assets held for charitable, religious nationality but for purposes of applying our
purposes, etc., without a condition for nationalization laws, nationality is
their return on dissolution, shall be determined by the nationality of the members.
conveyed to one or more organizations [Roman Catholic Apostolic Church v. Land
engaged in similar activities as dissolved Registration Commission (1957)]
corporation
No foreign corporation transacting business NOT doing business May sue, and may be
in the Philippines without a license, or its in the PH, on isolated sued
successors or assigns, shall be permitted to transactions
maintain or intervene in any action, suit or
proceeding in any court or administrative
agency of the Philippines; but such D.6. GROUNDS FOR REVOCATION OF
corporation m ay be sued or proceeded LICENSE
against before Philippine courts or
administrative tribunals on any valid I. UNDER THE CORPORATION CODE
cause of action recognized under Failure to file its annual report or pay any
Philippine laws. [Sec 133] fees as required by this Code;
Indeed if a foreign corporation, not engaged Failure to appoint and maintain a
in business in the Philippines, is not barred resident agent in the Philippines as
from seeking redress from courts in the required by this Title;
Philippines, a fortiori, that same corporation
cannot claim exemption from being sued in Failure, after change of its resident agent
Philippine courts for acts done against a or of his address, to submit to the
person or persons in the Philippines. Securities and Exchange Commission a
[Facilities Management Corporation v. De La statement of such change as required by
Osa (1979)] this Title;
Failure to submit to the Securities and
Exchange Commission an authenticated
D.5. INSTANCES WHEN UNLICENSED
copy of any amendment to its articles of
FOREIGN CORPORATIONS MAY BE
incorporation or by laws or of any articles
ALLOWED TO SUE
of merger or consolidation within the
When the corporation is considered not time prescribed by this Title;
doing business in the PH
A misrepresentation of any material
When the Philippine citizen or entity is matter in any application, report, affidavit
estopped from challenging the foreign or other document submitted by such
corporations personality to sue [Merrill corporation pursuant to this Title;
Lynch Futures v. Court of Appeals (1992)]
Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any
Sum m ary of Rules on Capacity to Sue
of its agencies or political subdivisions;
[Agilent Technologies Singapore v. Integrated
Silicon Technologies (2004)]: Transacting business in the Philippines
outside of the purpose or purposes for
Status Consequence
which such corporation is authorized
Doing Business in the Can sue and be sued under its license;
PH, WITH a license
Transacting business in the Philippines as
Doing Business in the GR: Cannot sue, but agent of or acting for and in behalf of any
PH, WITHOUT a may be sued in the foreign corporation or entity not duly
license PH licensed to do business in the Philippines;
Exception: Capacity or
MERCANTILE LAW
BANKING
it is able to pay its liabilities when they fall (3) The Board of Directors must be informed
due. in writing of the order of the Monetary
Board directing conservatorship.
o Illiquidity is handled by
conservatorship.
III. DURATION
Insolvency When the actual market value Shall not exceed 1 year [Sec. 29, NCBA]
of assets are insufficient to pay its liabilities,
IV. EXPENSES
not considering capital stock and surplus
which are not liabilities for such purpose. An The expenses attendant to the
entity is insolvent when it is unable to meet conservatorship shall be borne by the bank or
current and long-term obligations. quasi-bank concerned [Sec. 29, NCBA]
o In contrast, a bank is solvent when
current assets are more than current
V. GROUNDS FOR TERMINATION OF
liabilities, providing the ability to pay
CONSERVATORSHIP BY MB
debts. It is able to meet its long term
obligations/liabilities. (1) When MB is satisfied that the institution
can continue to operate on its own and
o Insolvency is handled by receivership
the conservatorship is no longer
and/or closure.
necessary; or
(2) When, on the basis of the report of the
F.1. CONSERVATORSHIP conservator or of its own findings, the MB
Conservatorship involves the appointment of determines that the continuance in
a conservator to preserve the assets of the business of the institution would involve
bank when the latter is illiquid, and take probable loss to its depositors or
measures creditors (effect: the bank or quasi-bank
would then be placed under receivership)
[Sec. 29, NCBA]
I. GROUNDS FOR APPOINTMENT OF
A CONSERVATOR
VI. EFFECTS OF CONSERVATORSHIP
Whenever, on the basis of a report submitted
by the appropriate supervising or examining (1) Bank/Quasi-bank retains juridical
department, the MB finds that a bank or personality
quasi-bank is: (2) Not a precondition to the designation of a
(1) In a state of continuing inability; or receiver [Sec. 30, NCBA], and;
(2) Unwillingness to maintain a condition of (3) Perfected transactions cannot be
liquidity deemed adequate to protect the repudiated [First Philippine International
interest of depositors and creditors [Sec. Bank v. CA, G.R. No. 115849 (1996)]
29, NCBA] While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the
II. REQUISITES IN PLACING A BANK preservation of the assets of the bank, the
UNDER CONSERVATORSHIP reorganization of the management and the
(1) There must be a report submitted by the restoration of viability. Such powers cannot
appropriate supervising or examining extend to the post-facto repudiation of
department of the BSP; perfected transactions, otherwise they would
infringe against the non-impairment clause
(2) There must be a finding that the bank or of the Constitution. [First Philippine
quasi-bank falls under either of the International Bank v. CA, G.R. No. 115849
grounds for conservatorship. (1996)]
F.2. CLOSURE
VIII. POW ERS AND DUTIES OF A
CONSERVATOR I. CONCEPT
(1) To take charge of the assets, liabilities, The MB may summarily and without need for
and the management thereof; prior hearing close a banking institution and
place it under receivership.
(2) To reorganize the management;
Receivership is equivalent to an injunction to
(3) To collect all monies and debts due said restrain the bank in any way. Thus, the
institution; appointment of a receiver operates to
(4) To exercise all powers necessary to suspend the authority of the bank and of its
restore its viability; directors and officers over its property and
effects [Villanueva v. CA, G.R. No. 114870
(5) To report and be responsible to the MB; (1995)]
(6) To overrule or revoke the actions of the Receivership refers to the stage within which
previous management and board of the PDIC manages the affairs of the closed
directors of the bank or quasi-bank. [Sec. bank and preserves its assets for the benefit
29, NCBA] of creditors [RA 9302, Sec. 10(a,b)]
However, note that the management of the
bank is still with its board of directors and
management. However, the conservator may III. GROUNDS
revoke their actions. In contrast, in Under the GBL
receivership, the receiver takes over the
management of the bank. When a banking institution:
(1) Notifies the BSP or publicly announces a
bank holiday; or
IX. THE CONSERVATOR CANNOT
REPUDIATE PERFECTED CONTRACTS (2) Suspends the payment of its deposit
liabilities continuously for more than 30
While the Central Bank law gives vast and far days in any manner[Sec. 53, GBL]
reaching powers to the conservator of a bank,
such powers must be related to the (3) Persistence in conducting business in an
preservation of the assets of the bank, the unsafe or unsound manner [Sec. 56, GBL]
reorganization of the management and the
restoration of viability. Such powers cannot
extend to the post-facto repudiation of Under the NCBA
perfected transactions, otherwise they would Whenever the MB finds that a bank or quasi-
infringe against the non-impairment clause bank:
of the Constitution. [First Philippine
International Bank v. CA, G.R. No. 115849 (1) Is unable to pay its liabilities as they
(1996)] become due in the ordinary course of
business.
(a) Except for inability to pay caused by (3) Cannot continue in business without
extraordinary demands induced by involving probable losses to its depositors
financial panic in the banking or creditors; or
community; (bank run)
(4) Has willfully violated a cease-and-desist
(b) Has insufficient realizable assets, as order under Sec. 37 that has become
determined by the BSP, to meet its final, involving acts or transactions which
liabilities; or amount to fraud or a dissipation of the
assets of the institution. Special rule:
(c) Cannot continue in business without
in this situation, the MB may act
involving probable losses to its depositors
summarily and without hearing [Sec. 30,
or creditors; or
NCBA]
(d) Has willfully violated a cease-and-desist
order under Sec. 37 that has become
final, involving acts or transactions which III. W HO ACTS AS RECEIVER
amount to fraud or a dissipation of the
(1) If a banking institution: the PDIC
assets of the institution.
(2) If a quasi-bank: any person of recognized
(a) Special rule: in this situation, the
competence in banking or finance [Sec.
MB may act summarily and without
30, NCBA]
hearing [Sec. 30, NCBA]
(5) Subject to prior approval of the MB, In other words, when there is a ground for
determine, as soon as possible, but not closure and receivership, such closure may be
later than 90 days from take-over, effected without notice and hearing. The
whether the institution may be validity of closure may be challenged
rehabilitated or otherwise placed in such afterwards.
a condition so that it may be permitted to
resume business with safety to its
depositors and creditors and the general F.4. LIQUIDATION
public. [Sec. 30, NCBA] I. CONCEPT
Exceptions: After undergoing conservatorship, closure,
and/or receivership, if the bank cannot be
(1) Administrative expenditures; rehabilitated, it shall be liquidated
(2) Receiver may deposit or place funds Liquidation refers to the recovery and
in non-speculative investments.[Sec. 30, conversion of assets into cash for distribution
NCBA] to all creditors in accordance with the rules
on concurrence and preference of credits.
The assets of the institution under
receivership and liquidation shall be deemed II. KINDS OF LIQUIDATION
in custodia legis and shall be exempt from
any order of garnishment, levy, attachment, (1) Voluntary liquidation, and
or execution. [Sec. 30, NCBA] (2) Involuntary liquidation
So, in contrast to a conservator, the receiver
takes over the operations of the bank and the
management of its assets. III. VOLUNTARY LIQUIDATION
However, the main duty of a receiver is to, The Stockholders and the Board of Directors
within 90 days of takeover, to determine can decide to liquidate a bank in accordance
whether the bank can be rehabilitated or not. with the procedure under the Corporation
If it can, receivership will continue, or the Code.
bank will be placed under conservatorship. If However, as an additional requirement,
it cannot, the bank will be liquidated. written notice of the liquidation should be
sent to the MB before the liquidation is
undertaken.
VII. CLOSE NOW , HEAR LATER
SCHEME Further, the MB shall have the right to
intervene and take such steps as may be
Sec. 29 of the Central Bank Act does not necessary to protect the interests of creditors.
contemplate prior notice and hearing before [Sec. 68, GBL]
a bank may be directed to stop operations
and placed under receivership. It is enough
that such action is made subject of a IV. GROUNDS FOR LIQUIDATION
subsequent judicial review. When the law
provides for the filing of a case within 10 days (1) The condition of the bank is one of
after the receiver takes charge of the assets of insolvency,
the bank, it is unmistakable that the assailed (2) Its continuance would involve probable
actions should precede the filing of the case. loss to its creditors
The legislature could not have intended to
authorize no prior notice and hearing in the (3) In both cases, the MB determines that the
banks closure and at the same time allow a bank cannot be rehabilitated.
suit to annul it on the basis of absence
thereof [Central Bank vs. CA and Triumph
Savings Bank, GR No. 76118, March 30, 1993]
G. HOW THE BSP HANDLES EXCHANGE G.2. RETIREMENT OF OLD NOTES AND
CRISIS COINS
The BSP may call in for replacement:
G.1. LEGAL TENDER POWER (1) Notes which are more than 5 years old,
and
All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the (2) Coins which are more than 10 years old.
Republic of the Philippines and shall be legal
Those called in for replacement remain legal
tender in the Philippines for all debts, both
tender until one year from call
public and private. [Sec. 52, NCBA]
After that period, they will no longer be legal
Lim itation: Coins shall be legal tender in
tender, but may be exchanged for new
amounts not exceeding P50 for
tender, for a period to be determined by the
denominations of 25 centavos and above,
BSP.
and in amounts not exceeding P20 for
denominations of 10 centavos or less. After the period for exchange, they cease to
be a liability of the BSP and will be
Exception to Lim itation: MB may fix
demonetized.
otherwise. [Sec. 52, NCBA]
In times of exchange crises, the BSP may, in
The maximum amount of coins to be
its discretion, stop issuing legal tender, or
considered as legal tender is: [BSP Circular
issue more legal tender, as the case may be,
537 (2006)]
in order to achieve exchange stability.
(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.
C. PROHIBITED ACTS
These restrictions the BSP may choose to
impose are:
(1) Examination, inquiry, or looking into
(1) Temporary suspension or restriction of deposits by persons, government
sales of exchange by the BSP. officials, bureaus, or offices; [Sec. 2, RA
(2) Subjecting all transactions in gold and 1405]
foreign to license by the BSP, or (2) Disclosure by banking institutions'
(3) Requiring that any foreign exchange officials or employees to unauthorized
thereafter obtained by any person persons regarding information about
residing in or any entity operating in the covered accounts. [Sec. 3, RA 1405]
Philippines be delivered to the BSP or to
an agent bank, at effective exchange
rates.(Sec. 74)
Note: These restrictions do not apply to
Foreign Currency Deposits under RA 6426.
Deposits:
D. 2 TRUST ACCOUNTS
(1) Upon written permission of the depositor
The term "deposits" is to be understood
broadly and not limited to accounts giving (2) In cases of impeachment
rise to creditor-debtor relations between the
(3) Upon order of competent court in cases of
bank and depositor. The deposit of money
bribery and dereliction of duty.
which may be used by banks for authorized
loans to 3rd persons also falls under RA (4) In cases where the money deposited or
1405. Therefore, trust accounts are also invested is the subject matter of litigation
covered. [Ejercito v. SB Special Division, G.R.
If the case is for the recovery of money as a
Nos. 157294-95 (2006)]
result of failure to inform regarding improper
crediting, the money in the account is not the
subject matter of litigation. This is because
D.3 CONSTRUCTION OF CONFIDENTIALITY
the amount sought to be recovered is
By force of statute, all bank deposits are different from the amount that is already in
absolutely confidential, and that nature is the account. By the terms of RA 1405, the
unaltered even by the legislated exceptions. money deposited itself should be the
There is disfavor towards construing these subject matter of the litigation [Union
exceptions in such a manner that would Bank v. Court of Appeals, G.R. No. 134699
authorize unlimited discretion on the part of (1999)]
the government or of any party seeking to
In contrast, where the case is for the recovery
enforce those exceptions and inquire into
of amounts converted by the depositors, the
bank deposits. If there are doubts in
amount sought to be recovered is exactly the
upholding the absolutely confidential nature
money that is supposedly in the account. If
of bank deposits against affirming the
the case necessarily involves inquiring into
PAGE 239 OF 320
UP LAW BOC BANKING MERCANTILE LAW
(iv) Destructive arson and murder, (4) Such inspection may cover only the
account identified in the pending case.
are exceptions to the requirement of a
court order in order to examine the
accounts.
(4) BSP inquiry or examination in the course
of its periodic or special examination of
the bank. [Sec. 11, AMLA]
H. CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS
(3) discounting and negotiating promissory o A 3% monthly interest rate has been
notes, drafts, bills of exchange, and other ruled iniquitous. [Macalinao v. BPI, G.R.
evidences of debt; No. 175490 (2009)]
(4) accepting or creating demand deposits; o Also, while it is acceptable for banks to
stipulate that interest rates on a loan not
(5) receiving other types of deposits and
be fixed and instead be made dependent
deposit substitutes;
on market conditions, there should
(6) buying and selling foreign exchange and always be a reference rate upon which to
gold or silver bullion; peg the rates.[Consolidated Bank v. CA,
G.R. No. 114286 (2011)]
(7) acquiring marketable bonds and other
debt securities; and
(8) extending credit. B. 4. INCIDENTAL BANKING POWERS
In addition to the operations specifically
authorized in this Act, a bank may perform
B.1 CORPORATE POWERS
the following services:
Aside from the powers listed above, banks,
(1) Receive in custody funds, documents and
generally being in the form of a corporation,
valuable objects;
also have all the powers a corporation has.
(2) Act as financial agent and buy and sell,
o The exception is cooperative banks, which
by order of and for the account of their
are in the form of a cooperative, and have
customers, shares, evidences of
all the powers of a cooperative under the
indebtedness and all types of securities;
Cooperatives Code.
(3) Make collections and payments for the
account of others and perform such other
B.2. GRANTING OF LOANS; SECURITY services for their customers as are not
REQUIREMENT incompatible with banking business;
The GBL no longer requires credit to be (4) Upon prior approval of the Monetary
secured. Board, act as managing agent, adviser,
o This is in contrast to the General Banking consultant or administrator of investment
Act it replaced, which requires all loans to management/advisory/consultancy
be secured. accounts; and
(5) Rent out safety deposit boxes.
B. 3. STIPULATIONS ON INTEREST
As an accessory to its power to grant loans, C. DISTINCTION OF BANKS FROM
banks may stipulate interests. QUASI-BANKS AND TRUST
o With the removal of the limit on ENTITIES
imposable interest under CB Circular 905, See p. 243, supra
banks may impose interest past the legal
interest rate of 6% (CB Circular 799-13)
o However, this does not give banks the
right to impose excessive interests. A
stipulated interest rate may nevertheless
be equitably reduced should the same be
found to be iniquitous, unconscionable,
and exorbitant under Art. 1556 of the CC.
If such is the case, there is no stipulated
rate, and the legal rate applies. [Dio v.
Japor, G.R. No. 154129 (2005)]
upon his order, and cannot be liable to any (4) Negotiable Order of W ithdrawal
other person as the true owner. [Fulton Iron Accounts Interest-bearing deposit
Works Co. v. China Banking Corporation, G.R. accounts that combine the payable on
No. 32576 (1930)] demand feature of checks and
investment feature of savings accounts
[Sec. X223, Manual of Regulations for
No duty to set-off Banks]
A bank is under no duty or obligation to make
an application or set-off against the deposit
VI. BUYING AND SELLING FOREIGN
accounts of a borrower. To apply the deposit
EXCHANGE AND GOLD OR SILVER
to the payment of a loan is a privilege, a right
BULLION
of set-off which the bank has the option [but
not the obligation] to exercise. [BPI v. CA and
Eastern Plywood, G.R. No. 104612 (1994)]
VII. ACQUIRING MARKETABLE BONDS
AND OTHER DEBT SECURITIES
Safety deposit boxes
The rent of safety deposit boxes is a special VIII. EXTENDING CREDIT
kind of deposit and cannot be characterized
as an ordinary contract of lease because the
full and absolute possession and control of Know your customer rule
the deposit box is not given to the renters.
Before granting a loan or other credit
The prevailing rule is that the relation
accommodation, a bank must ascertain that
between the bank renting out and the renter
the debtor is capable of fulfilling its
is that of bailor and bailee the bailment being
commitments to the bank. [Sec. 40, GBL]
for hire and mutual benefit. [CA Agro-
industrial Dev. Corp. v. CA, G.R. No. 90027 The bank may demand from its credit
(1993)] applicants a statement of their assets and
liabilities and of their income and
expenditure and such information as may be
V. RECEIVING OTHER TYPES OF prescribed by law or by rules and regulations
DEPOSITS AND DEPOSIT of MB to enable the bank to properly evaluate
SUBSTITUTES the credit application which includes the
corresponding financial statements
Types of Deposits
submitted for taxation purposes to the BIR.
(1) Time Deposit - Interest rate stipulated [Sec. 40, GBL]
depending on the number of days. During
this period, the money deposited may not
be withdrawn without incurring penalty. Credit enhancement
High interest rates.
If the borrower is less than creditworthy, third
(2) Savings Deposit - Bank pays an persons may enhance his credit by providing
interest rate, but not as high as time guarantees and other security devices in favor
deposits. of the bank. [Morales (2004)]
(3) Dem and Deposits/Current A bank cannot lend pesos to a non-resident
Accounts - No interest is paid by the [BSP Circular No. 22; Sec. 22, Manual of
bank because the depositor can take out Regulations on Foreign Exchange
his funds any time. It is called demand Transactions]. [Morales (2004)]
deposit because the depositor can
withdraw the money he deposited on the
very same day when he deposited it or at
any time thereafter. [Villanueva,
Commercial Law Review (2012)]
These standards apply not only to the bank concerned. [PNB v. Tria, G.R. No. 193250
per se, but also to its employees. [Cadiz v. CA, (2012)]
G.R. No. 153784 (2005)]
Banks assume a degree of diligence higher
than that of a good father of a family. Its
fiduciary duty imposes upon it a higher level
E.2. ACTS NOT CONSTITUTING
of accountability than that expected of a
NEGLIGENCE
depositor.[Philippine Banking Corporation vs.
Closing a bank account after the depositor CA, G.R. No. 127469 (2004)]
handled his account improperly. [Far East
The General Banking Law of 2000 requires of
Bank and Trust v. Pacilan, G.R. No. 157314
banks the highest standards of integrity and
(2005)]
performance. The banking business is
Failure to pay interest after bank suspension impressed with public interest. Of paramount
by the BSP (Fidelity Savings v. Cenzon, G.R. importance is the trust and confidence of the
No. L-46208 (1990)) public in general in the banking industry.
Consequently, the diligence required of banks
The banking industry is impressed with public
is more than that of a bonus pater familias or
interest. As such, the highest degree of
a good father of a family. The highest degree
diligence is expected, and high standards of
of diligence is expected. [Philippine
integrity and performance are even required.
Commercial Bank vs. Balmaceda, G.R. No.
Banks must treat depositors accounts with
158143, September 21, 2011]
meticulous care and always to have in mind
the fiduciary nature of its relationship with Notwithstanding the degree of diligence
them. [Metrobank v. Rosales, G.R. No. 183204 required, a bank is not expected to be
(2014); Comsavings Bank v. Sps. Capistrano, infallible [Prudential Bank vs. CA, G.R. No.
G.R. No. 170942 (2013); Equitable Banking v. 125536 (2000)].
Special Steel Products, G.R. No. 175350 (2012)]
The Rural Bank of Cabadbaran should not
have simply relied on the face of SPAs since F. FIDUCIARY DUTY
its undertaking to lend P200k as a banking
institution requires a greater degree of (1) Failure on the part of the bank to satisfy
diligence. [RBCI v. Melecio-Yap, G.R. No. the degree of diligence required of banks
178451 (2014)] may warrant the award of damages.
The fiduciary nature of banking requires (2) Under Sec. 2, the degree of diligence is
banks to assume a degree of diligence higher high standards of integrity and
than that of a good father of a family. [People performance and no longer highest
v. Go, G.R. No. 168539 (2014); Metrobank v. degree of diligence as was decided prior
Centro Development, G.R. No. 180974 (2012)] to the effectivity of the General Banking
Banks are required to observe a higher Law of 2000 but also [mistakenly] even
standard of diligence. [Land Bank v. Poblete, thereafter. In numerous cases, the
G.R. No. 178347 (2013)] Supreme Court has held that the highest
degree of diligence and care is expected
The banking business is so impressed with from banks [Simex International v. CA,
public interest where the trust and G.R. No. 88013 (1990); Philippine Bank of
confidence of the public in general is of Commerce v. CA, G.R. No. 97626. (1997);
paramount importance such that the Philippine Savings Bank v. Chowking Food
appropriate standard of diligence must be Corporation, G.R. No. 177526 (2008); Bank
very high, if not the highest degree of of America NT &SA v. Philippine Racing
diligence. [Far East Bank and Trust Company Club (2009)].
v. Tentmakers, G.R. No. 171050 (2012)]
The fiduciary nature of banking requires
The degree of diligence required of banks is banks to assume a degree of diligence higher
more than that of a good father of a family than that of a good father of a family. [People
where the fiduciary nature of their
relationship with their depositors is
PAGE 249 OF 320
UP LAW BOC BANKING MERCANTILE LAW
v. Go, G.R. No. 168539 (2014); Metrobank v. trust and confidence of the public in general
Centro Development, G.R. No. 180974 (2012)] in the banking industry. Consequently, the
diligence required of banks is more than that
The degree of diligence required of banks is
of a Roman pater familias or a good father of
more than that of a good father of a family
a family. The highest degree of diligence is
where the fiduciary nature of their
expected [Phil. Savings Bank v. Chowking
relationship with their depositors is
Food Corporation, G.R. No. 177526 (2008)
concerned. [PNB v. Tria, G.R. No. 193250
(2012)]
The banking business is so impressed with
The laws policy recognizes the fiduciary
public interest where the trust and
nature of banking. [Sps. Serfino v. Far East
confidence of the public in general is of
Bank and Trust Company, G.R. No. 171845
paramount importance such that the
(2012)]
appropriate standard of diligence must be a
As a business affected with public interest high degree of diligence, if not the utmost
and because of the nature of its functions, the diligence [Bank of America NT&SA v. Phil.
bank is under obligation to treat the accounts Racing Club, GR No. 150228 (2009)].
of its depositors with meticulous care, always
Under the doctrine of last clear chance, a
having in mind the fiduciary nature of their
bank may be held liable for loss despite the
relationship.
negligence of a depositor. Examples of these
In every case, the depositor expects the bank cases are the following:
to treat his account with the utmost fidelity,
(1) For disbursing funds to a dishonest
whether such account consists only of a few
employee despite the employees failure
hundred pesos or of millions. The bank must
to strictly abide with the banks internal
record every single transaction accurately,
procedure. [Philippine Bank of Commerce
down to the last centavo, and as promptly as
v. CA, G.R. No. 97626 (1997)]
possible. This has to be done if the account is
to reflect at any given time the amount of (2) Allowing the execution of a mortgage on
money the depositor can dispose as he sees parcels of land as security for a loan not
fit, confident that the bank will deliver it as owned by the prospective borrower.
and to whomever he directs. A blunder on the [Canlas v. CA, G.R. No. 112160 (2000)]
part of the bank, such as the failure to duly
(3) Crediting the deposit in favor of another
credit him his deposits as soon as they are
depositor, a check where the signature of
made, can cause the depositor not a little
the drawer was forged. [Westmont Bank
embarrassment if not financial loss and
v. Ong, G.R. No. 132560 (2002)]
perhaps even civil and criminal litigation
[Simex International v. CA, G.R. No. 88013
(1990)].
G. NATURE OF BANK FUNDS AND
This fiduciary relationship means that the BANK DEPOSITS
banks obligation to observe high standards
of integrity and performance is deemed
written into every deposit agreement The relationship between a depositor and a
between a bank and its depositor [Philippine bank is that of a creditor and debtor in
Banking Corporation vs. CA, G.R. No. 127469, relation to the banks deposit functions
January 15, 2004]. [Gullas vs. PNB, G.R. No. L-43191, (1935)] and
Banks are expected to exercise the highest not that of depositor and depositary.
degree of diligence in the selection and The contract between the bank and its
supervision of their employees [Philippine depositor is governed by the provisions of the
Commercial International Bank v. CA, G.R. No. NCC on simple loan [Consolidated Bank
121413, 121479 and 128604 (2001)]. and Trust Corporation vs. CA, G.R. No. 138569
It cannot be over emphasized that the (2003)].
banking business is impressed with public Bank deposits are in the nature of irregular
interest. Of paramount importance is the deposits [Serrano vs. Central Bank, G.R. No. L-
PAGE 250 OF 320
UP LAW BOC BANKING MERCANTILE LAW
30511 (1980)]. Therefore, Art. 1287 of the Civil General rule: A bank must conform to the
Code, which prohibits compensation when risk-based capital ratio prescribed by the MB
one of the debts arises from depositum, does
Expectations: The MB may alter or suspend
not apply.
compliance with such ratio whenever
Current and savings deposits are loans to a necessary for a maximum period of 1 year.
bank because the bank can use the same and
(1) In case of a bank merger or consolidation;
they earn interest [BPI vs. CA, G.R. No. 104612
OR
(1994)].
(2) When a bank is under rehabilitation
The relationship being contractual in nature,
under a program approved by the BSP;
mandamus is therefore not an available
[Sec. 34]
remedy since mandamus does not lie to
enforce the performance of contractual
obligations [Maclaring Lucman vs. Alimatar
I.2. PURPOSE
Malawi, G.R. No. 159794 (2006)]
A bank must not be allowed to expand the
Money deposited is commingled with other volume of its loans and investments in a
money constituting a common fund. manner that is disproportionate to its net
worth. [Morales (2004)]
H. STIPULATION ON INTERESTS
I.3. EFFECT OF NON-COMPLIANCE
(1) The MB may limit or prohibit the
The Monetary Board may prescribe the distribution of net profits by such bank
maturities, as well as related terms and and may require that part or all of the net
conditions for various types of bank loans and profits be used to increase the capital
other credit accommodations. accounts of the bank until the minimum
Any change by the Board in the maximum requirement has been met.
maturities shall apply only to loans and other (2) The MB may restrict or prohibit the
credit accommodations made after the date acquisition of major assets and the
of such action. making of new investments by the bank,
The Monetary Board shall regulate the with the exception of purchases of readily
interest imposed on micro finance borrowers marketable evidences of indebtedness of
by lending investors and similar lenders such the RP and the BSP and any other
as, but not limited to, the unconscionable evidences of indebtedness or obligations
rates of interest collected on salary loans and the servicing and repayment of which are
similar credit accommodations [Sec. 43, GBL] fully guaranteed by the RP, until the
minimum required capital ratio has been
restored. [Sec. 34, GBL]
I. GRANT OF LOANS AND SECURITY
REQUIREMENTS (PRUDENTIAL
I.4. SINGLE BORROWERS LIMIT
MEASURES)
General rule: The total loans, credit
accommodations and guarantees that may
I.1. RATIO OF NET WORTH TO TOTAL RISK be extended by a bank to any person,
partnership, association, or corporation or
ASSETS
other entity shall at no time exceed 20% of
Concept: The minimum ratio which the net the net worth of such bank. [Sec. 35.1, GBL]
worth of a bank must bear to its total risk
assets which may include contingent Exceptions:
accounts [i.e. net worth: total risk assets] (1) The Monetary Board otherwise prescribes
[Sec. 34, GBL] for reasons of national interest. [Sec. 35.1]
Now, the single borrowers limit is 25% of
the net worth of the lending bank.
PAGE 251 OF 320
UP LAW BOC BANKING MERCANTILE LAW
(2) The writing off of loans, other credit Circular No. 444 dated August 18,
accommodations, advances and other 2004]
assets. [Sec. 49, GBL]
(b) For foreign currency deposit units:
100% [BSP Circular No. 1389 dated
April 13, 1993, as amended]; 30% of
I. PURPOSE
this cover must be in the form of
For effective banking supervision. There is a liquid assets [BSP Circular-Letter
problem of mismatch when a loan becomes dated June 6, 1997, as cited in Morales
non-performing. The bank is paying interest (2004)]
on the money it borrowed from the depositors
(2) Reserve: The required reserves are to be
or other placers of funds, but is not recouping
kept in the form of deposits placed in the
that interest from the loan it made.
banks Demand Deposit Account with the
Eventually, the bank may have to write off
BSP [BSP Circular No. 753 dated March
loan losses against profits. To cushion this
29, 2012]
eventuality, the bank is required to set aside
reserved for bad debts and other doubtful
accounts or contingencies. [Morales (2004)]
III. INTEREST ON RESERVES [SEC. 94,
To address the non-performing asset NCBA]
problem, RA 9182 Special Purpose Vehicle
General rule: The BSP shall not pay
Act was passed. The Monetary Board
interest on the reserves maintained with it.
approved certain accounting guidelines on
the sale by banks and other financial Exception: Unless the Monetary Board
institutions for housing under the said Act. decides otherwise as warranted by
[Morales (2004)] [N.B. RA 9182 is no longer in circumstances.
effect.]
MERCANTILE LAW
INTELLECTUAL
PROPERTY LAW
(5) Public Display of the original or a copy iv. Integrated Circuit a product, in its
of the work. final form, or an intermediate form, in which
(6) Public Performance of the Work; the elements, at least one of which is an
(7) Other Communication to the public of active element and some or all of the
the work. [Sec. 177, IPC] interconnections are integrally formed
and/or on a piece of material, and which is
Copyright is confined to literary and artistic intended to perform an electronic function.
works which are original intellectual (Sec. 112.2, RA 8293)
creations in the literary and artistic domain
protected from the moment of their creation. v. Undisclosed Inform ation
[Kho v. CA, G.R. No. 115758 (2002)] It is Information which:
vested from the moment of creation. (1) Is a secret in a sense that it is not, as a
body or in the precise configuration and
assembly of components, generally
D.5. OTHER FORMS OF
known among or readily accessible to
INTELLECTUAL PROPERTY persons within the circles that normally
deal with the kind of information in
i. Geographic Indication question;
One which identifies a good as originating (2) Has a commercial value because it is
in the territory of a TRIPS member, or a secret; and
region or locality in that territory where a (3) Has been subject to reasonable steps
given quality, reputation or other under the circumstances, by the person
characteristic of a good is essentially lawfully in control of the information, to
attributable to its geographical origin [Art. keep it secret [Art. 39, TRIPS]
22, TRIPS Agreement]
E. TECHNOLOGY TRANSFER
ii. Industrial Design
ARRANGEMENTS
Any composition of lines or colors or any
three-dimensional form, whether or not
Refers to contracts or agreements involving:
associated with lines or colors: Provided,
(1) the transfer of systematic knowledge for
that such composition or form gives a
the manufacture of a product;
special appearance to and can serve as
(2) the application of a process, or
pattern for an industrial product or
rendering of a service including
handicraft. (Sec. 112.1, RA 8293)
management contracts;
(3) The transfer, assignment or licensing of
iii. Layout Design (Topography) of an
all forms of intellectual property rights,
Integrated Circuit
including licensing of computer
Layout Design (Topography) The
software except computer software
three-dimensional disposition, however
developed for mass market. [Sec. 4.2,
expressed, of the elements, at least one of
RA 8293]
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)
or the mere use of a known process unless (3) That any drawing which is necessary for
such known process results in a new the understanding of the invention has
product that employs at least one reactant. not been furnished;
[Sec. 26.2, RA 8293 as amended by RA (4) That the owner of the utility model
9502] registration is not the inventor or his
successor in title [Sec 109.4, RA 8293]
(3) Industrial Applicability An
invention that can be produced and used in A.3. INDUSTRIAL DESIGNS
any industry shall be industrially applicable.
[Sec. 27, RA 8293] An industrial design is any composition of
lines or colors or any three-dimensional
A.2. UTILITY MODEL form, whether or not associated with lines
or colors: Provided that such composition or
It is any technical solution of a problem in form gives a special appearance to and can
any field of human activity which is new and serve as pattern for an industrial product or
industrially applicable. Unlike an invention handicraft. [Sec. 112.1, RA 8293 as amended
patent, a utility model need not be inventive. by RA 9150]
The law merely requires that it be novel and
industrially applicable. [Sec. 109.1, RA 8293] A.4. LAY-OUT DESIGNS
(TOPOGRAPHIES OF INTEGRATED
A utility model registration shall expire, CIRCUITS)
without any possibility of renewal, at the
end of the seventh year after the date of the Integrated Circuit means a product, in
filing of the application. [Sec. 109.3, RA its final form, or an intermediate form, in
8293] which the elements, at least one of which is
Statutory Classes of Utility Models an active element and some or all of the
interconnections are integrally formed in
A Utility Model may be, or may relate to: and/or on a piece of material, and which is
(1) A useful machine; intended to perform an electronic function.
(2) An implement or tool; [Sec. 112.2, RA 8293 as amended by RA
(3) A product or composition; 9150]
(4) A method or process; or
(5) An improvement of any of the foregoing. Layout-Design is synonymous with
[Rule 201, Rules and Regulations on 'Topography' and means the three-
Utility Models and Industrial Designs as dimensional disposition, however expressed,
amended] of the elements, at least one of which is an
active element, and of some or all of the
Grounds for Cancellation of Utility interconnections of an integrated circuit, or
Models such a three-dimensional disposition
prepared for an integrated circuit intended
(1) That the claimed invention does not for manufacture. [Sec. 112.3, RA 8293 as
qualify for registration as a utility model amended by RA 9150]
and does not meet the requirements of
registrability;
(2) That the description and the claims do
not comply with the prescribed
requirements;
PAGE 261 OF 320
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW
B. NON-PATENTABLE INVENTIONS
Cheaper Medicines Act: In addition to
discoveries, scientific theories and
The following shall be excluded from patent
mathematical methods, the IP Code now
protection:
includes (as non-patentable), in case of
(1) Discoveries, scientific theories and
drugs and medicines:
mathematical methods, and in the case
(1) The mere discovery of a new form or
of drugs and medicines, the mere
new property of a known substance
discovery of a new form or new property
which does not result in the
of a known substance which does not
enhancement of the known efficacy of
result in the enhancement of the known
that substance
efficacy of that substance, or the mere
(2) the mere discovery of any new property
discovery of any new property or new
or new use of a known substance
use for a known substance, or the mere
(3) the mere use of a known process unless
use of a known process unless such
such known process results in a new
known process results in a new product
product that employs at least one
that employs at least one new reactant.
reactant [Sec. 26.2, RA 8293 as
Salts, esters, ethers, polymorphs,
amended by RA 9502]
metabolites, pure form, particle size,
isomers, mixtures of isomers,
C. OWNERSHIP OF A PATENT
complexes, combinations, and other
derivatives of a known substance shall
C.1. RIGHT TO A PATENT
be considered to be the same substance,
unless they differ significantly in
General Rule: The right to patent belongs
properties with regard to efficacy; [Sec.
to the inventor, his heirs, or assigns. When
22.1, RA 8293 as amended by RA 9502]
two (2) or more persons have jointly made
(2) Schemes, rules and methods of
an invention, the right to a patent shall
performing mental acts, playing games
belong to them jointly. [Sec.28, RA 8293]
or doing business, and programs for
computers; [Sec. 22.2, RA 8293]
Exception: Inventions created pursuant to
(3) Methods for treatment of the human or
a commission (Work for Hire Doctrine)
animal body by surgery or therapy and
(1) The employer has the right to the
diagnostic methods practiced on the
patent if the invention is the result of
human or animal body. This provision
the performance of the employees
shall not apply to products and
regularly assigned duties [Sec. 30.2, RA
composition for use in any of these
8293]
methods; [Sec. 22.3, RA 8293]
(2) In case of inventions created pursuant
(4) Plant varieties or animal breeds or
to a commission, the person who
essentially biological process for the
commissions the work shall own the
production of plants or animals. This
patent [Sec. 30.1, RA 8293]
provision shall not apply to micro-
organisms and non-biological and C.2. FIRST-TO-FILE RULE
microbiological processes; [Sec. 22.4,
RA 8293] If two (2) or more persons have made the
(5) Aesthetic creations; [Sec. 22.5, RA invention separately and independently of
8293] each other, the right to the patent shall
(6) Anything which is contrary to public belong to the person who filed an
order or morality. [Sec. 22.6, RA 8293]
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application for such invention, or where two C.5. REMEDY OF PERSONS NOT
or more applications are filed for the same HAVING THE RIGHT TO A PATENT
invention, to the applicant who has the
earliest filing date or, the earliest priority If a person other than the applicant, is
date. [Sec. 29, RA 8293] declared by final court order or decision as
having the right to the patent, such person
C.3. INVENTIONS CREATED
may, within three (3) months after the
PURSUANT TO A COMMISSION decision has become final:
Commission: Person who commissions
the work shall own the patent, unless (1) Prosecute the application as his
otherwise provided in the contract [Sec. 30.1, own application in place of the applicant;
RA 8293) (2) File a new patent application in
respect of the same invention;
Employm ent Contract: Patent belongs (3) Request that the application be
to the employee if the inventive activity is refused; or
not a part of his regular duties even if the (4) Seek cancellation of the patent, if
employee uses the time, facilities and one has already been issued. [Sec. 67, RA
materials of the employer. [Sec. 30.2 (a), RA 8293]
8293]
D. TERM OF PATENT
Patent belongs to the employer if the
invention is the result of the performance of D.1. TERM OF INVENTION PATENT
his regularly-assigned duties, unless there
is an agreement, express or implied, to the The term of a patent shall be twenty (20)
contrary. [Sec. 30.2 (b), RA 8293] years from the filing date of the application.
[Sec. 54, RA 8293]
C.4. RIGHT OF PRIORITY
A patent shall take effect on the date of the
An application for patent filed by any publication of the grant of the patent in the
person who has previously applied for the IPO Gazette. [Sec. 50.3, RA 8293]
same invention in another country which by
treaty, convention, or law affords similar D.2. TERM OF UTILITY MODEL
privileges to Filipino citizens, shall be
considered as filed as of the date of filing A utility model registration shall expire,
the foreign application: Provided, That: (a) without any possibility of renewal, at the
the local application expressly claims end of the seventh year after the date of the
priority; (b) it is filed within twelve (12) filing of the application. [Sec. 109.3, RA
months from the date the earliest foreign 8293]
application was filed; and (c) a certified
copy of the foreign application together D.3. TERM OF INDUSTRIAL DESIGN
with an English translation is filed within six
(6) months from the date of filing in the The registration of an industrial design shall
Philippines. [Sec. 31, RA 8293] be for a period of five (5) years from the
filing date of the application. [Sec. 118.1, RA
8293]
A patent shall confer on its owner the The owner of a patent has no right to
following exclusive rights: prevent third parties from performing,
(1) Where the subject matter of a patent is without his authorization, the acts referred
a product, to restrain, prohibit and to in Section 71 hereof in the following
prevent any unauthorized person or circumstances:
entity from making, using, offering for (1) Using a patented product which has
sale, selling or importing that product. been put on the market in the
[Sec. 71.1(a), RA 8293] Philippines by the owner of the product,
(2) Where the subject matter of a patent is or with his express consent, insofar as
a process, to restrain, prevent or such use is performed after that product
prohibit any unauthorized person or has been so put on the said market:
entity from using the process, and from Provided, That, with regard to drugs
manufacturing, dealing in, using, and medicines, the limitation on patent
selling or offering for sale, or importing rights shall apply after a drug or
any product obtained directly or medicine has been introduced in the
indirectly from such process. [Sec. Philippines or anywhere else in the
71.1(b), RA 8293] world by the patent owner, or by any
(3) Patent owners shall also have the right party authorized to use the invention:
to assign, or transfer by succession the Provided, further, That the right to
patent, and to conclude licensing import the drugs and medicines
contracts for the same. [Sec. 71.2, RA contemplated in this section shall be
8293] available to any government agency or
any private third party; [Sec. 72.1, RA
To be able to effectively and legally 8293 as amended by RA 9502]
preclude others from copying and profiting (2) Where the act is done privately and on a
from the invention, a patent is a primordial non-commercial scale or for a non-
requirement. No patent, no protection. The commercial purpose: Provided, That it
ultimate goal of a patent system is to bring does not significantly prejudice the
new designs and technologies into the economic interests of the owner of the
public domain through disclosure Ideas, patent; [Sec. 72.2, RA 8293 as amended
once disclosed to the public without the by RA 9502]
protection of a valid patent, are subject to (3) Where the act consists of making or
appropriation without significant restraint. using exclusively for experimental use
[Pearl Dean, Inc. v. Shoemart, Inc., G.R. No. of the invention for scientific purposes
148222 (2003)] or educational purposes and such other
activities directly related to such
scientific or educational experimental
use; [Sec. 72.3, RA 8293 as amended by
RA 9502]
(4) In the case of drugs and medicines,
where the act includes testing, using,
making or selling the invention
including any data related thereto,
All cases arising from the implementation I.3. TESTS IN PATENT INFRINGEMENT
of this provision shall be cognizable by
courts with appropriate jurisdiction i. Literal infringem ent
provided by law. No court except the In using literal infringement as a test, resort
Supreme Court of the Philippines, shall must be had in the first instance to the
issue any temporary restraining order or words of the claim. To determine whether
preliminary injunction or such other the particular item falls within the literal
provisional remedies that will prevent its meaning of the patent claims, the court
immediate execution. [Sec. 74.3, RA 8293 as must juxtapose the claims of the patent and
amended by RA 9502] the accused product within the overall
context of the claims and specifications, to
determine whether there is exact identity of
I. PATENT INFRINGEMENT all material elements. [Godinez v. CA, G.R.
No. L-97343 (1993)]
It is the making, using, offering for sale,
ii. Doctrine of equivalents
selling, or importing a patented product or
Under the doctrine of equivalents, an
a product obtained directly or indirectly
infringement also occurs when a device
from a patented process, or the use of a
appropriates a prior invention by
patented process without the authorization
incorporating its innovative concept and,
of the patentee. [Sec 76.1, RA 8293 as
albeit with some modification and change,
amended by RA 9502]
performs substantially the same function in
I.1. CONTRIBUTORY INFRINGER substantially the same way to achieve
substantially the same result. [Godinez v.
One who actively induces the infringement CA, G.R. No. L-97343 (1993)]
of a patent or provides the infringer with a
component of a patented product or of a In order to infringe a patent, a machine or
product produced because of a patented device must perform the same function, or
process knowing it to be especially adopted accomplish the same result by identical or
for infringing and not suitable for substantially identical means and the
substantial non-infringing. He is jointly and principle or mode of operation must be
severally liable with the infringer. [Sec. 76.6, substantially the same. [Del Rosario v. CA,
RA 8293] G.R. No. 115106 (1996)]
Any foreign national or juridical entity who ii. Doctrine of File W rapper Estoppel
meets the requirements of Section 3 (RA Patentee is precluded from claiming as part
8293) and not engaged in business in the of patented product that which he had to
Philippines, to which a patent has been excise or modify in order to avoid patent
granted or assigned under RA 8293, may office rejection, and he may omit any
bring an action for infringement of patent, additions he was compelled to add by
whether or not it is licensed to do business patent office regulations. [Advance
in the Philippines under existing law. [Sec. Transformer Co. v. Levinson 837 F.2d
77, RA 8293] 1081(1988)]
(2) Where the public interest, in particular, Provided, That, a compulsory license
national security, nutrition, health or has been granted by such country or
the development of other vital sectors of such country has, by notification or
the national economy as determined by otherwise, allowed importation into its
the appropriate agency of the jurisdiction of the patented drugs and
Government, so requires; [Sec. 93.2, RA medicines from the Philippines in
8293 as amended by RA 9502] compliance with the TRIPS Agreement.
(3) Where a judicial or administrative body [Sec. 93-A.2, RA 8293 as amended by
has determined that the manner of RA 9502]
exploitation by the owner of the patent
or his licensee is anti-competitive; [Sec. ii. Period of filing a Petition for
93.3, RA 8293 as amended by RA 9502] Compulsory License
(4) In case of public non-commercial use of At any time after the grant of patent.
the patent by the patentee, without However, a compulsory license may not be
satisfactory reason; [Sec. 93.4, RA 8293 applied for on the ground stated in Sec. 93.5
as amended by RA 9502] before the expiration of a period of four (4)
(5) If the patented invention is not being years from the date of filing of the
worked in the Philippines on a application or three (3) years from the date
commercial scale, although capable of of the patent whichever period expires last.
being worked, without satisfactory [Sec. 94, RA 8293 as amended by RA 9502]
reason: Provided, That the importation
iii. Requirem ent to Obtain a License
of the patented article shall constitute
on Reasonable Com m ercial Term s
working or using the patent; [Sec. 93.5,
General Rule: The license will only be
RA 8293 as amended by RA 9502]
granted after the petitioner has made
(6) Where the demand for patented drugs
efforts to obtain authorization from the
and medicines is not being met to an
patent owner on reasonable commercial
adequate extent and on reasonable
terms and conditions but such efforts have
terms, as determined by the Secretary
not been successful within a reasonable
of the Department of Health. [Sec. 93.6,
period of time. [Sec. 95.1, RA 8293 as
RA 8293 as amended by RA 9502]
amended by RA 9502]
(7) If the invention protected by a patent,
hereafter referred to as the "second Exceptions: The requirement of
patent," within the country cannot be authorization shall not apply in the
worked without infringing another following cases:
patent, hereafter referred to as the "first (1) Where the petition for compulsory
patent," granted on a prior application license seeks to remedy a practice
or benefiting from an earlier priority, a determined after judicial or
compulsory license may be granted to administrative process to be anti-
the owner of the second patent to the competitive;
extent necessary for the working of his (2) In situations of national emergency or
invention, subject to certain conditions. other circumstances of extreme
[Sec. 97, RA 8293] urgency;
(8) Manufacture and export of drugs and (3) In cases of public non-commercial use.
medicines to any country having (4) In cases where the demand for the
insufficient or no manufacturing patented drugs and medicines in the
capacity in the pharmaceutical sector to Philippines is not being met to an
address public health problems: adequate extent and on reasonable
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Collective Marks
B. ACQUISITION OF OWNERSHIP
Any visible sign designated as such in the OF MARK
application for registration and capable of
distinguishing the origin or any other
common characteristic, including the The rights to a mark shall be acquired
quality of goods or services of different through registration made validly in
enterprises which use the sign under the accordance with law. [Sec. 122, RA 8293]
control of the registered owner of the
collective mark. (Sec. 121.2, RA 8293)
B.1. DURATION OF CERTIFICATE
Trade Name A certificate of registration shall remain in
force for 10 years and may be renewed for
The name or designation identifying or periods of 10 years at its expiration upon
distinguishing an enterprise (Sec. 121.3, RA payment of the prescribed fee and upon
8293). filing of a request. [Sec 145-146, RA 8293]
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to C. ACQUISITION OF OWNERSHIP
identify their businesses, vocations or OF TRADE NAME
occupations. [Converse Rubber Corp. v.
Universal Rubber Products, Inc., G.R. No. L-
27906 (1987)] Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even
A.2. FUNCTIONS OF A TRADEMARK prior to or without registration, against any
unlawful act committed by third parties.
(1) To point out distinctly the origin or [Sec. 165.2 (a), RA 8293) The ownership of a
ownership of the goods and to which it trade name is acquired through adoption
is affixed; and use.
(2) To secure him, who has been A name or designation may not be used as a
instrumental in bringing into the market trade name if by its nature or the use to
a superior article of merchandise, the which such name or designation may be put,
fruit of his industry and skill; it is contrary to public order or morals and if,
(3) To assure the public that they are in particular, it is liable to deceive trade
producing the genuine article; circles or the public as to the nature of the
enterprise identified by that name. [Sec.
(4) To prevent fraud and imposition; and 165.1, RA 8293]
(5) To protect the manufacturer against Any change in the ownership of a trade
substitution and sale of an inferior and name shall be made with the transfer of the
different article as its product [Mirpuri v. enterprise or part thereof identified by that
CA, G.R. No. 114508 (1999)] name. [Sec. 165.4, RA 8293]
The objects of a trademark are to point out
distinctly the origin or ownership of the
articles to which it is affixed, to secure to
him who has been instrumental in bringing
into market a superior article or
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or trade-name. [Ang vs. Teodoro, G.R. No. Trademark is a creation of use and,
L-48226 (1942)] therefore, actual use is a pre-requisite to
exclusive ownership; registration is only an
administrative confirmation of the existence
D.1. DOCTRINE OF SECONDARY of the right of ownership of the mark, but
MEANING does not perfect such right; actual use
thereof is the perfecting ingredient.
When the marks referred to in nos. 10, 11
[Shangri-La International Hotel v. Developers
and 12 has become distinctive, because of
Group of Companies, G.R. No. 159938
its long, continuous and exclusive use for 5
(2006)]
years, as used in connection with the
applicants goods or services in commerce
and in the mind of the public indicates a E.2. NON-USE OF MARK WHEN
single source to consumers, it may be
EXCUSED
registered. The Office may accept as prima
facie evidence that the mark has become (1) If caused by circumstances arising
distinctive, as used in connection with the independently of the will of the
applicant's goods or services in commerce, trademark owner. Lack of funds shall
proof of substantially exclusive and not excuse non-use of a mark; [Sec.
continuous use thereof by the applicant in 152.1, RA 8293]
commerce in the Philippines for five (5)
(2) A use which does not alter its distinctive
years before the date on which the claim of
character though the use is different
distinctiveness is made. [Sec 123.2, RA
from the form in which it is registered.
8293]
[Sec. 152.2, RA 8293]
The nature of the goods to which the mark
(3) Use of a mark in connection with one or
is applied will not constitute an obstacle to
more of the goods/services belonging
registration. [Sec 123.3, RA 8293]
to the class in which the mark is
registered. [Sec. 152.3, RA 8293]
E. PRIOR USE OF MARK AS A (4) The use of mark by a company related
REQUIREMENT to the applicant or registrant
(5) The use of mark by a person controlled
by the registrant. [Sec. 152.4, RA 8293]
E.1. USE OF MARK AS A
The use of a mark by a company related
REQUIREMENT
with the registrant or applicant shall inure
The applicant or the registrant shall file a to the latter's benefit, and such use shall
declaration of actual use of the mark with not affect the validity of such mark or of its
evidence to that effect, as prescribed by the registration: Provided, that such mark is not
Regulations within three (3) years from the used in such manner as to deceive the
filing date of the application. Otherwise, the public. [Sec.152.4, Ra 8293]
application shall be refused or the mark
shall be removed from the Register by the
Director. [Sec. 124.2, RA 8293] F. WELL-KNOWN MARKS
For the requirement of actual use in
commerce in the Philippines before one
A well-known mark is a mark which a
may register a trademark, trade name and
competent authority of the Philippines has
service mark under the law pertains to the
designated to be well-known internationally
territorial jurisdiction of the Philippines and
and in the Philippines.
is not only confined to a certain region,
province, city or barangay. [McDonalds In determining whether a mark is well-
Corporation v. MacJoy Fastfood, G.R. No. known, account shall be taken of the
166115 (2007)] knowledge of the relevant sector of the
public, rather than the public at large, registered here, as being already the mark
including knowledge in the Philippines of a person other than the applicant for
which has been obtained as a result of the registration and used for identical goods or
promotion of the mark. (Sec 123.1(e), RA services. [(Sec 123.1(e), RA 8293]
8293)
contract does not provide for such quality to cause confusion, or to cause mistake,
control, or if such quality control is not or to deceive; [Sec. 155.1, RA 8293]
effectively carried out, the license contract
(2) Reproduce, counterfeit, copy or
shall not be valid. [Sec. 150.1, RA 8293]
colorably imitate a registered mark or a
dominant feature thereof and apply
G.3. PROTECTION LIMITED TO GOODS such reproduction, counterfeit, copy or
colorable imitation to labels, signs,
SPECIFIED IN REGISTRATION
prints, packages, wrappers, receptacles
CERTIFICATE or advertisements intended to be used
The certificate of registration can confer in commerce upon or in connection with
upon the petitioner the exclusive right to the sale, offering for sale, distribution,
use its own symbol only to those goods or advertising of goods or services on or
specified in the certificate, subject to any in connection with which such use is
conditions a limitations stated therein. One likely to cause confusion, or to cause
who has adopted and used a trademark on mistake, or to deceive. [Sec. 155.2, RA
his goods does not prevent the adoption 8293]
and use of the same trademark by others for A crucial issue in any trademark
products which are of a different description. infringement case is the likelihood of
[Faberge, Inc. v. IAC and Co Beng Kay, G.R. confusion, mistake or deceit as to the
No. 71189 (1992)] identity, source or origin of the goods or
identity of the business as a consequence of
using a certain mark. Likelihood of
H. USE BY THIRD PARTIES OF confusion is admittedly a relative term, to
NAMES, ETC. SIMILAR TO be determined rigidly according to the
REGISTERED MARK particular (and sometimes peculiar)
circumstances of each case. In determining
likelihood of confusion, the court must
The IPC deems unlawful any subsequent consider: (a) the resemblance between the
use of the trade name by a third party, trademarks; (b) the similarity of the goods
whether as a trade name or a mark or to which the trademarks are attached; (c)
collective mark, or any such use of a similar the likely effect on the purchaser; and (d)
trade name or mark, likely to mislead the the registrants express or implied consent
public. [Sec. 165.2 (b), RA 8293] and other fair and equitable considerations.
[Mighty Corporation v. E. & J. Gallo Winery,
G.R. No. 154342 (2004)]
I. INFRINGEMENT AND REMEDIES
To establish trademark infringement, the
following elements must be shown: (1) the
validity of the mark; (2) the plaintiffs
I.1. TRADEMARK INFRINGEMENT ownership of the mark; and (3) the use of
Any person who shall, without the consent the mark or its colorable imitation by the
of the owner of the registered mark: alleged infringer results in likelihood of
confusion. Of these, it is the element of
(1) Use in commerce any reproduction,
likelihood of confusion that is the gravamen
counterfeit, copy, or colorable imitation
of trademark infringement. Two types of
of a registered mark or the same
confusion arise from the use of similar or
container or a dominant feature thereof
colorable imitation marks, namely,
in connection with the sale, offering for
confusion of goods (product confusion) and
sale, distribution, advertising of any
confusion of business (source or origin
goods or services including other
confusion). While there is confusion of
preparatory steps necessary to carry out
goods when the products are competing,
the sale of any goods or services on or in
confusion of business exists when the
connection with which such use is likely
products are non-competing but related
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enough to produce confusion or affiliation. similar. Under the dominancy test, courts
[McDonalds Corporation v. L.C. Big Mak give greater weight to the similarity of the
Burger, Inc., et al., G.R. No. 143993 (2004)] appearance of the product arising from the
adoption of the dominant features of the
In order to bring a civil action for
registered mark, disregarding minor
infringement, it is not required that there is
differences. Courts will consider more the
an actual sale of the goods or services using
aural and visual impressions created by the
the infringing material. [Sec. 155.2, RA
marks in the public mind, giving little
8293] Infringement takes place upon the
weight to factors like prices, quality, sales
mere use or reproduction of the registered
outlets and market segments. [McDonalds
mark.
Corporation v. L.C. Big Mak Burger, Inc., et al.,
No article of imported merchandise which G.R. No. 143993 (2004)]
shall copy or simulate the name of any
domestic product, or manufacturer, or
dealer, or which shall copy or simulate a Holistic test
mark registered in accordance with the
To determine whether a trademark has
provisions of this Act, or shall bear a mark
been infringed, we must consider the mark
or trade name calculated to induce the
as a whole and not as dissected. If the buyer
public to believe that the article is
is deceived, it is attributable to the marks as
manufactured in the Philippines, or that it is
a totality, not usually to any part of it. The
manufactured in any foreign country or
court therefore should be guided by its first
locality other than the country or locality
impression, for the buyer acts quickly and is
where it is in fact manufactured, shall be
governed by a casual glance, the value of
admitted to entry at any customhouse of
which may be dissipated as soon as the
the Philippines. [Sec. 166, RA 8293]
court assumed to analyze carefully the
A mere distributor and not the owner respective features of the mark. [Del Monte
cannot assert any protection from Corporation, et al. v. CA, G.R. No. L-78325
trademark infringement as it had no right in (1990)]
the first place to the registration of the
disputed trademarks. [Superior Commercial
Enterprises v. Kunnan Enterprises, G.R. No. Doctrine of Related Goods/Services
169974 (2010)]
(1) Goods are related when they belong to
the same class or have the same
descriptive properties or physical
I.2. TESTS TO DETERMINE attributes, or they serve the same
INFRINGEMENT purpose or flow through the same
channel of trade.
Dom inancy test (2) The use of identical marks on non-
competing but related goods may likely
Infringement is determined by the test of
cause confusion.
dominancy rather than by differences or
variations in the details of one trademark (3) Corollarily, the use of identical marks on
and of another. Similarity in size, form and non-competing and unrelated goods is
color, while relevant is not conclusive. If the not likely to cause confusion.
competing trademark contains the main or
essential or dominant features of another,
and confusion is likely to result, W hen Goods are Non-Competing
infringement takes place. [Asia Brewery v. Undoubtedly, the paints, chemical
CA and San Miguel, G.R. No. 103543 (1993)] products, toner and dyestuff of CKK that
The dominancy test considers the dominant carry the trademark CANON are unrelated
features in the competing marks in to sandals, the product of NSR. The 2
determining whether they are confusingly classes of products in this case flow through
Any person who, on or in connection with The use of the same without apparent
any goods or services, or any container for permission from the trademark owners
goods, uses in commerce any word, term, thereof shall be prima facie presumption
name, symbol, or device, or any that such possession or use is unlawful. [Sec.
combination thereof, or any false 3, RA 623 as amended by RA 5700]
designation of origin, false or misleading Exceptions:
description of fact, or false or misleading
representation of fact, which: (1) Use of the bottles as containers for sisi,
bagoong, patis, and similar native
(1) Is likely to cause confusion, or to cause products [Sec. 6 RA 623 as amended by
mistake, or to deceive as to the RA 5700]
affiliation, connection, or association of
such person with another person, or as (2) Persons in whose favor the containers
to the origin, sponsorship, or approval were sold [Distelleria Washington v. LA
of his or her goods, services, or Tondena Distillers, G.R. No. 120961
commercial activities by another (1997)]
person; [Sec. 169.1(a), RA 8293]
(2) In commercial advertising or promotion, I.5. DAMAGES
misrepresents the nature,
The owner of a registered mark may recover
characteristics, qualities, or geographic
damages from any person who infringes his
origin of his or her or another person's
rights, and the measure of the damages
goods, services, or commercial activities,
suffered shall be either the reasonable
shall be liable to a civil action for
profit which the complaining party would
damages and injunction [Sec. 169.1 (b),
have made, had the defendant not infringed
RA 8293]
his rights, or the profit which the defendant
Any goods marked or labeled in actually made out of the infringement, or in
contravention of the provisions of this the event such measure of damages cannot
Section shall not be imported into the be readily ascertained with reasonable
Philippines or admitted entry at any certainty, then the court may award as
customhouse of the Philippines. The owner, damages a reasonable percentage based
importer, or consignee of goods refused upon the amount of gross sales of the
entry at any customhouse under this section defendant or the value of the services in
may have any recourse under the customs connection with which the mark or trade
revenue laws or may have the remedy given name was used in the infringement of the
by this Act in cases involving goods refused rights of the complaining party. [Sec. 156.1,
entry or seized. [Sec. 169.2, RA 8293] RA 8293]
The owner of the registered mark shall not (3) Double damages in case of actual intent
be entitled to recover profits or damages to defraud or to mislead [Sec. 156.3];
unless the acts have been committed with
(4) Court order for the disposal or
knowledge that such imitation is likely to
destruction of the infringing goods [Sec.
cause confusion, or to cause mistake, or to
157];
deceive. Such knowledge is presumed if the
registrant gives notice that his mark is (5) Criminal Action;
registered by displaying with the mark the
(6) Administration sanctions
words '"Registered Mark" or the letter R
within a circle or if the defendant had Any foreign national, who qualifies under
otherwise actual notice of the registration. the principle on reciprocity and does not
[Sec. 158, RA 8293] engage in business in the Philippines,
whether or not it is licensed to do business
Should damages be recoverable, the
in the Philippines, may bring civil or
measure of the damages suffered shall be
administrative action for:
either:
(1) Opposition
(1) The reasonable profit which the
complaining party would have made, (2) Cancellation
had the defendant not infringed his (3) Infringement
rights; or
(4) Unfair Competition
(2) The profit which the defendant actually
made out of the infringement; or (5) False designation of origin or false
description (Sec. 160. RA 8293)
(3) A reasonable percentage based upon
the amount of gross sales of the
defendant or the value of the services in I.8. LIMITATIONS TO ACTIONS FOR
connection with which the mark or trade INFRINGEMENT
name was used in the infringement of
the rights of the complaining party if The remedies given to the owner of a right
such measure of damages cannot be infringed shall be limited as follows:
readily ascertained with reasonable (1) Registered mark shall have no effect
certainty. [Sec. 156.1, RA 8293] against any person who, in good faith,
before the filing date or the priority date,
was using the mark for the purposes of
I.6. REQUIREMENT OF NOTICE
his business or enterprise: Provided,
Notice of registration of trademark is That his right may only be transferred or
necessary for an owner of a trademark to assigned together with his enterprise or
recover damages in an action for business or with that part of his
infringement since knowledge that such enterprise or business in which the mark
imitation is likely to cause confusion, or to is used. [Sec. 159.1, RA 8293]
cause mistake, or to deceive is an element
(2) Where an infringer who is engaged
of infringement. Requirement of notice may
solely in the business of printing the
be complied by displaying with the mark the
mark or other infringing materials for
words '"Registered Mark" or the letter R
others is an innocent infringer, the
within a circle. [Sec. 158, RA 8293]
owner of the right infringed shall be
entitled as against such infringer only to
I.7. OTHER REMEDIES AVAILABLE: an injunction against future printing.
[Sec. 159.2, RA 8293]
(1) Injunction [Sec. 156.4];
(3) Where the infringement complained of
(2) Impounding of sales invoices and other is contained in or is part of paid
documents [Sec. 156.2]; advertisement in a newspaper,
magazine, or other similar periodical or
(3) Any person who shall make any false provided under Section 168.3(c) which
statement in the course of trade or who provides the general catch-all phrase that
shall commit any other act contrary to the petitioner cites. Under this phrase, a
good faith of a nature calculated to person shall be guilty of unfair competition
discredit the goods, business or services who shall commit any other act contrary to
of another. (Sec. 168.3(c), RA 8293) good faith of a nature calculated to
discredit the goods, business or services of
The elements of an action for unfair
another. [Coca-Cola v. Gomez, G.R. No.
competition are: (1) confusing similarity in
154491 (2008)]
the general appearance of the goods, and
(2) intent to deceive the public and defraud From jurisprudence, unfair competition has
a competitor. The confusing similarity may been defined as the passing off (or palming
or may not result from similarity in the off) or attempting to pass off upon the
marks, but may result from other external public the goods or business of one person
factors in the packaging or presentation of as the goods or business of another with the
the goods. The intent to deceive and end and probable effect of deceiving the
defraud may be inferred from the similarity public. It formulated the true test of
in appearance of the goods as offered for unfair competition: whether the acts of
sale to the public. Actual fraudulent intent defendant are such as are calculated to
need not be shown. [McDonalds deceive the ordinary buyer making his
Corporation v. L.G. Big Mak Burger, Inc., et purchases under the ordinary conditions
al., G.R. No. 143993 (2004)] which prevail in the particular trade to
which the controversy relates. One of the
An action for unfair competition is based on
essential requisites in an action to restrain
the proposition that no dealer in
unfair competition is proof of fraud; the
merchandise should be allowed to dress his
intent to deceive must be shown before the
goods in simulation of the goods of another
right to recover can exist. The advent of the
dealer, so that purchasers desiring to buy
IP Code has not significantly changed these
the goods of the latter would be induced to
rulings as they are fully in accord with what
buy the goods of the former. The most usual
Section 168 of the Code in its entirety
devices employed in committing this crime
provides. Deception, passing off and fraud
are the simulation of labels and the
upon the public are still the key elements
reproduction of form, color and general
that must be present for unfair competition
appearance of the package used by the
to exist.
pioneer manufacturer or dealer. [Caterpillar,
Inc v. Samson, G.R. No. 164605 (2006)]
Articles 168.1 and 168.2 provide the concept Infringement of
Unfair Competition
and general rule on the definition of unfair Trademark
competition. The law does not thereby
cover every unfair act committed in the Unauthorized use of Passing off of ones
course of business; it covers only acts a trademark goods as those of
characterized by deception or any other another
means contrary to good faith in the
passing off of goods and services as those Fraudulent intent is Fraudulent intent is
of another who has established goodwill in unnecessary essential
relation with these goods or services, or any
other act calculated to produce the same Prior registration of Registration is not
result. the trademark is a necessary
prerequisite to the
What unfair competition is, is further action
particularized under Section 168.3 when it
provides specifics of what unfair [In and Out Burger vs Sehwani, G.R. No.
competition is without in any way limiting 179127 (2008)]
the scope of protection against unfair
competition. Part of these particulars is
PAGE 283 OF 320
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW
The law on unfair competition is broader Right of owner: The IPC deems unlawful
and more inclusive than the law on any subsequent use of the trade name by a
trademark infringement. The latter is more third party, whether as a trade name or a
limited but it recognizes a more exclusive mark or collective mark, or any such use of a
right derived from the trademark adoption similar trade name or mark, likely to
and registration by the person whose goods mislead the public. [Sec. 165.2 (b), RA 8293]
or business is first associated with it. Hence,
Trade names, unlike trademarks, need not
even if one fails to establish his exclusive
be registered with the IPO before an
property right to a trademark, he may still
infringement suit may be filed by its owner
obtain relief on the ground of his
against the owner of an infringing
competitors unfairness or fraud. Conduct
trademark. All that is required is that the
constitutes unfair competition if the effect is
trade name is previously used in trade or
to pass off on the public the goods of one
commerce in the Philippines. [Prosource
man as the goods of another. [Mighty
International v. Horphag Research
Corporation v. E. & J. Gallo Winery, G.R. No.
Management, G.R. No. 180073 (2009)]
154342 (2004)]
(3) If the trade name is similar to a mark or (1) That only the registered owner uses the
a trade name owned by another person mark; or
and its use would likely mislead the (2) That he uses or permits its use in
public. [Sec.165.1, RA 8293] contravention of the agreements
Acquisition of ownership: Trade names referred to in Subsection 166.2; or
are protected even prior to or without (3) That he uses or permits its use in a
registration. The ownership of a trade name manner liable to deceive trade circles or
is acquired through adoption and use. the public as to the origin or any other
common characteristics of the goods or
PAGE 284 OF 320
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW
B. BASIC PRINCIPLES
The enjoyment and exercise of copyright, falling within the statutory enumeration or
including moral rights, shall not be the description. [Pearl and Dean vs. Shoemart,
subject of any formality; such enjoyment G.R. No. 148222 (2003)]
and such exercise shall be independent of
the existence of protection in the country of
origin of the work. [Article 5(2), Berne C. COPYRIGHTABLE WORKS
Convention for the Protection of Literary and
Artistic Works]
The Denicola Test in intellectual property
C.1. ORIGINAL LITERARY AND
law states that if design elements of an ARTISTIC WORKS
article reflect a merger of aesthetic and Literary and artistic works, hereinafter
functional considerations, the artistic referred to as "works", are original
aspects of the work cannot be conceptually intellectual creations in the literary and
separable from the utilitarian aspects; thus, artistic domain protected from the moment
the article cannot be copyrighted. of their creation and shall include in
particular:
D. NON-COPYRIGHTABLE WORKS
General Rule: Government cannot own
copyright
D.1. UNPROTECTED SUBJECT MATTER
Exceptions:
(1) Any idea, procedure, system method or
operation, concept, principle, discovery (1) When copyright is assigned or
or mere data as such, even if they are bequested in favor of the government
expressed, explained, illustrated or [Sec 176.3];
embodied in a work; (2) Author of speeches, lectures, sermons,
(2) News of the day and other addresses and dissertations shall have
miscellaneous facts having the exclusive right of making a collection of
character of mere items of press his work.
information; However, prior approval of the government
(3) Any official text of a legislative, agency or the office wherein the work is
administrative or legal nature, as well created shall be necessary for the
as any official translation thereof; exploitation of such work for profit. [Sec.
176.1]
(4) Pleadings;
Notwithstanding the foregoing provisions,
(5) Original decisions of courts and the Government is not precluded from
tribunals (This pertains to the original receiving and holding copyrights transferred
decisions not the SCRA published to it by assignment, bequest or otherwise;
volumes since these are protected under nor shall publication or republication by the
derivative works under Sec 173.1) [Sec. 175, Government in a public document of any
RA 8293] work in which copyright is subsisting be
The format or mechanics of a TV show is not taken to cause any abridgment or
copyrightable as copyright does not extend annulment of the copyright or to authorize
to ideas, procedures, processes, systems, any use or appropriation of such work
methods of operation, concepts, principles without the consent of the copyright owner.
or discoveries regardless of the form in [Sec. 176.3, RA 8293]
which they are described, explained,
illustrated or embodied. [Joaquin Jr. et al vs.
Drilon, et al, G.R. No. 108946 (1999)] D.3. WORKS OF THE PUBLIC DOMAIN
No one may claim originality as to facts as These include works whose term of
these do not owe their origin to an act of copyright has expired.
authorship. The first person to find and
report a particular fact has not created the
same; he has merely discovered its
D.4. USEFUL ARTICLES
existence. [Feist Publication v Rural Useful Article Doctrine: Works whose
Telephone Services, 499 U.S. 340 (1991)] sole purpose is utilitarian have no separate
artistic value. This can be distinguished
from a work of applied art, which has
D.2. WORKS OF THE GOVERNMENT utilitarian functions but there is an
OF THE PHILIPPINES identifiable artistic work or creation
incorporated thereto.
W ork 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]
PAGE 288 OF 320
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW
The painter, sculptor or other artist shall derogatory action in relation to, his
have dominion over the product of his art work which would be prejudicial to his
even before it is copyrighted. The scientist honor or reputation; [Sec. 193.3, RA
or technologist has the ownership of his 8293]
discovery or invention even before it is
(4) To restrain the use of his name with
patented. . [Art. 722, NCC]
respect to any work not of his own
Letters and other private communications creation or in a distorted version of his
in writing are owned by the person to whom work. [Sec. 193.4, RA 8293]
they are addressed and delivered, but they
In addition to the right to publish granted
cannot be published or disseminated
by the author, his heirs, or assigns, the
without the consent of the writer or his heirs.
publisher shall have a copyright consisting
However, the court may authorize their
merely of the right of reproduction of the
publication or dissemination if the public
typographical arrangement of the
good or the interest of justice so requires.
published edition of the work. [Sec.174, RA
[Art. 723, NCC]
8293]
The author of speeches, lectures, sermons,
E.2. WHEN COPYRIGHT VESTS addresses, and dissertations mentioned in
Works are protected by the sole fact of their the preceding paragraphs shall have the
creation, irrespective of their mode or form exclusive right of making a collection of his
of expression, as well as of their content, works. [Sec. 176.2, Ra 8293]
quality and purpose. [Sec. 172.2, RA 8293]
The issuance of the certificates of W aiver of Moral Rights
registration and deposit as provided by Sec.
General Rule: Moral rights can be waived
2, Rule 7 of the Copyright Safeguards and
in writing, expressly stating such waiver
Regulations, are purely for recording the
[Sec. 195, RA 8293] or by contribution to a
date of registration and deposit of the work,
collective work unless such is expressly
and are not conclusive as to copyright
reserved [Sec. 196, RA 8293].
ownership (nor does it determine the time
when copyright vests). [Manly Sportwear v. Exceptions:
Dadodette Enterprises, G.R. No. 165306
Even if made in writing, waiver is still not
(2005)]
valid if:
(1) Use of the name of the author, title of
E.3. MORAL RIGHTS his work, or his reputation with respect
The author of a work shall, independently of to any version or adaptation of his work,
the economic rights in Section 177 or the which because of alterations
grant of an assignment or license with substantially tends to injure the literary
respect to such right, have the right: or artistic reputation of another author;
[Sec. 195.1, RA 8293]
(1) To require that the authorship of the
works be attributed to him, in particular, (2) It uses the name of the author in a work
the right that his name, as far as that he did not create. [Sec. 195.1, RA
practicable, be indicated in a prominent 8293]
way on the copies, and in connection Moral rights are not assignable or subject to
with the public use of his work; [Sec. license. [Sec. 198, RA 8293]
193.1, RA 8293]
The right of an author under Section 193.1.
(2) To make any alterations of his work shall last during the lifetime of the author
prior to, or to withhold it from and in perpetuity after his death while the
publication; [Sec. 193.2, RA 8293] rights under Sections 193.2. 193.3. and 193.4.
(3) To object to any distortion, mutilation or shall be coterminous with the economic
other modification of, or other
PAGE 290 OF 320
UP LAW BOC INTELLECTUAL PROPERTY LAW MERCANTILE LAW
rights [Sec. 198, RA 8293 as amended by RA Such right shall be maintained and
10372] exercised fifty (50) years after his death,
by his heirs, and in default of heirs, the
government, where protection is
E.4. RIGHTS TO PROCEEDS IN claimed. [Sec. 204.2, RA 8293]
SUBSEQUENT TRANSFERS (DROIT DE
(2) The right of authorizing the direct or
SUITE OR FOLLOW UP RIGHTS) indirect reproduction of their
In every sale or lease of an original work of performances fixed in sound recordings,
painting or sculpture or of the original or audiovisual works or fixations in any
manuscript of a writer or composer, manner or form; [Sec. 203.2, RA 8293,
subsequent to the first disposition thereof as amended by 10372]
by the author, the author or his heirs shall (3) Subject to the provisions of Section 206,
have an inalienable right to participate in the right of authorizing the first public
the gross proceeds of the sale or lease to distribution of the original and copies of
the extent of five percent (5%). This right their performance fixed in the sound
shall exist during the lifetime of the author recording or audiovisual works or
and for fifty (50) years after his death. [Sec. fixations through sale or rental or other
200, RA 8293] forms of transfer of ownership; [Sec.
203.3, RA 8293, as amended by RA
10372]
W orks not covered
(4) The right of authorizing the commercial
Prints, etchings, engravings, works of
rental to the public of the original and
applied art, or works of similar kind wherein
copies of their performances fixed in
the author primarily derives gain from the sound recordings or audiovisual works
proceeds of reproductions. (Sec. 201, RA
or fixations, even after distribution of
8293) them by, or pursuant to the
authorization by the performer; [Sec.
203.4, RA 8293, as amended by RA
First Sale Doctrine
10372]
After the first sale of the lawfully made copy
(5) The right of authorizing the making
of the copyrighted work, anyone who is the
available to the public of their
owner of that copy can sell or dispose of
performances fixed in sound recordings
that copy in any way without any liability for
or audiovisual works or fixations, by wire
copyright infringement. The first sale of an
or wireless means, in such a way that
authorized copy of the work exhausts the
members of the public may access them
authors right to control distribution of
from a place and time individually
copies.
chosen by them. [Sec. 203.5, RA 8293,
as amended by RA 10372]
E.5. NEIGHBORING RIGHTS (6) Independently of a performer's
Performers Rights economic rights, the performer, shall, as
regards his live aural performances or
(1) As regards their performances, the right performances fixed in sound recordings
of authorizing: or audiovisual works or fixations, have
(a) The broadcasting and other the right to claim to be identified as the
communication to the public of performer of his performances, except
their performance; and where the omission is dictated by the
manner of the use of the performance,
(b) The fixation of their unfixed and to object to any distortion,
performance. [Sec. 203.1, RA mutilation or other modification of his
8293] performances that would be prejudicial
Single Creator of an Original Work Belongs to the author of the work [Sec. 178.1, RA 8293]
W orks Term
Original Literary and Artistic Works including Lifetime of author and for fifty (50) years after his
Posthumous Works 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]
Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA
8293]
Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA
8293]
Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA
8293]
Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA
8293]
The fact that a work is unpublished shall Code and/or the applicable Intellectual
not by itself bar a finding of fair use if such Property Law, including the act of any
finding is made upon consideration of all person who at the time when copyright
the above factors. [Sec 185.2, RA 8293] subsists in a work has in his possession an
article which he known, or ought to know, to
be an infringing copy of the work f or the
Factors to consider in determ ining purpose of:
Fair Use
(1) Selling, letting for hire, or by way of
(1) The purpose and character of the use, trade offering or exposing for sale, or
including whether such use is of a hire, the article
commercial nature or is for non-profit
educational purposes; (2) Distributing the article for purpose of
trade, or for any other purpose to an
(2) The nature of the copyrighted work; extent that will prejudice the rights of
(3) The amount and substantiality of the the copyright owner in the work; or
portion used in relation to the (3) Trade exhibit of the article in public.
copyrighted work as a whole; and [Sec. 1(l), Rule 1, Rules and Regulations
(4) The effect of the use upon the potential on Administrative Complaints for
market for or value of the copyrighted Violation of Laws involving Intellectual
work [Sec. 185.1, RA 8293; (Harper & Property Rights]
Row v. Nation Enterprise, 471 US 539,
(1985)]
Infringement consists in the doing by any
The format of a show is not copyrightable. person, without the consent of the owner of
[Joaquin vs Drilon, G.R. No. 108946 (1999)] the copyright, of anything the sole right to
A compilation is not copyrightable per se, do which is conferred by statute on the
but it is copyrightable only if its facts have owner of the copyright. For there to be
been selected, coordinated, or arranged in substantial reproduction of a book, it does
such a way that the resulting work as a not necessarily require that the entire
while constitutes an original work of copyrighted work, or even a large portion of
authorship. Otherwise known as the Sweat it, be copied. If so much is taken that the
of the Brow or Industrious Collection value of the original work is substantially
Test. [Feist Publications Inc vs. Rural Tel diminished, there is an infringement of
Service 499 US 340 (1991)] copyright and to an injurious extent, the
work appropriated. It is no defense that the
An exception is carved out for lawyers and pirate did not know whether or not he was
officers of the court against plagiarism infringing any copyright; he at least knew
when writing judicial documents that will be that what he was copying was not his, and
part of court record. [In the Matter of the he copied at his peril. In cases of
Charges of Plagiarism etc Against Associate infringement, copying alone is not what is
Justice Mariano C. Del Castillo AM No 10-7- prohibited. The copying must produce an
17-SC (2011)] injurious effect. [Habana et al vs. Robles et
al., G.R. No. 131522 (1999)]
Copyright infringement and unfair
competition are not limited to the act of
H. COPYRIGHT INFRINGEMENT
selling counterfeit goods. They cover a
whole range of acts from copying,
assembling, packaging to marketing,
Infringement of Copyright and
including the mere offering for sale of
Related Rights: means any violation of
counterfeit goods. [Microsoft Corp vs.
the rights under the Intellectual Property
Maxicorp Inc., G.R. No. 140946 (2004)]
General Rule: The private reproduction of (3) Where the making of such a copy is in
a published work in a single copy, where the order to preserve and, if necessary in the
reproduction is made by a natural person event that it is lost, destroyed or
exclusively for research and private study, rendered unusable, replace a copy, or to
shall be permitted, without the replace, in the permanent collection of
authorization of the owner of copyright in another similar library or archive, a copy
the work. [Sec. 187.1, RA 8293] which has been lost, destroyed or
rendered unusable and copies are not
available with the publisher. [Sec. 188.1,
Exceptions: Such permission shall not RA 8293]
extend to:
(1) A work of architecture in the form of It shall not be permissible to produce a
building or other construction; volume of a work published in several
(2) An entire book, or a substantial part volumes or to produce missing tomes or
thereof, or of a musical work in graphic pages of magazines or similar works, unless
form by reprographic means; the volume, tome or part is out of stock:
Provided, That every library which, by law, is
(3) A compilation of data and other entitled to receive copies of a printed work,
materials; shall be entitled, when special reasons so
(4) A computer program except as provided require, to reproduce a copy of a published
in Section 189; and work which is considered necessary for the
collection of the library but which is out of
(5) Any work in cases where reproduction stock. [Sec. 188.2, RA 8293)]
would unreasonably conflict with a
normal exploitation of the work or
would otherwise unreasonably Reproduction of Computer Program
prejudice the legitimate interests of the
The reproduction in one (1) back-up copy or
author. [187.2, RA 8293]
adaptation of a computer program shall be
permitted, without the authorization of the
Reprographic Reproduction by author of, or other owner of copyright in, a
Libraries computer program, by the lawful owner of
that computer program: Provided, That the
Any library or archive whose activities are copy or adaptation is necessary for:
not for profit may, without the authorization
of the author of copyright owner, make a (a) The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which (2) When such copies form parts of libraries
the computer program has been and personal baggage belonging to
obtained; and persons or families arriving from foreign
countries and are not intended for sale:
(b) Archival purposes, and, for the
Provided, that such copies do not
replacement of the lawfully owned copy
exceed three (3). [Sec. 190.1, RA 8293 is
of the computer program in the event
repealed by RA 10372]
that the lawfully obtained copy of the
computer program is lost, destroyed or
rendered unusable. [Sec. 189.1, RA Copies imported as allowed by this Section
8293] 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
No copy or adaptation mentioned in this
Act, and such unlawful use shall be deemed
Section shall be used for any purpose other
an infringement and shall be punishable as
than the ones determined in this Section,
such without prejudice to the proprietor's
and any such copy or adaptation shall be
right of action. [Sec. 190.2, RA 8293 is
destroyed in the event that continued
repealed by RA 10372]
possession of the copy of the computer
program ceases to be lawful. [Sec. 189.2, RA
8293]
Importation and Exportation of
Infringing Materials. Subject to the
Importation for Personal Purposes approval of the Secretary of Finance, the
Commissioner of Customs is hereby
The importation of a copy of a work by an empowered to make rules and regulations
individual for his personal purposes shall be for preventing the importation or
permitted without the authorization of the exportation of infringing articles prohibited
author of, or other owner of copyright in, the under Part IV of this Act and under relevant
work under the following circumstances: treaties and conventions to which the
(1) When copies of the work are not Philippines may be a party and for seizing
available in the Philippines and: and condemning and disposing of the same
in case they are discovered after they have
(a) Not more than one (1) copy at been imported or before they are exported
one time is imported for strictly [Sec. 190, RA 8293 as amended by RA
individual use only; or 10372]
(b) The importation is by authority
of and for the use of the
Philippine Government; or
(c) 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.
IV. Rules of Procedure (c) It shall be the duty of the Clerk of Court
to notify the Director-General of the
for Intellectual Intellectual Property Office of any action
involving a copyright, trademark,
Property Rights Cases service mark, patent, industrial design,
utility model, undisclosed information,
(A.M. No. 10-3-10 SC) and technology transfer agreement.
C. COMMENCEMENT OF CIVIL
A. IN WHAT COURTS APPLICABLE ACTION
organized association of persons that is goods, order the return of such goods. Such
made a party; motion must be filed within 60 days from
the expiration of the period to file cases.
(3) ultimate facts showing the cause of
action If the owner fails to file the motion, the
Court may dispose of the goods after notice
(4) reliefs sought;
and hearing.
(5) an affidavit in question-and-answer
format must be attached to the
complaint. Such affidavit shall state C.6. SUMMONS
only the facts of direct personal Summons shall be served no later than 5
knowledge to the affiants which are days from receipt of the complaint.
admissible in evidence, and shows the
competence of the affiants to testify.
(6) Certificate of non-forum shopping. C.7. ANSWER
Must be filed 15 days after service of
summons; 10 days if answer to compulsory
C.4. PROHIBITED PLEADINGS counterclaim or cross-claim.
(a) Motion to dismiss Should the defendant fail to answer, the
(b) Motion for bill of particulars Court may, motu proprio or upon motion of
the plaintiff, render judgment based on the
(c) Motion for reconsideration of a final
affidavits and the evidence on record unless
order judgment, except with regard to
it requires the submission of additional
an order of destruction
evidence.
(d) Reply
(e) Petition for relief from judgment
D. MODES OF DISCOVERY
(f) Motion for extention of time to submit
pleadings, except for meritorious
reasons A party may avail of the different modes of
(g) Motion for postponement intended for discovery not later than 30 days from the
delay joinder of issues.
(2) When the defendant makes a false (b) Where the statement is
statement in the course of trade to contradicted by another
discredit the goods and business of statement in the register.
another.
(3) Where the similarity of the goods as
L. ORDER OF DESTRUCTION
packed and offered for sale is so
striking.
At any time after the filing of the complaint
or information, the Court, upon motion and
K. EVIDENCE IN COPYRIGHT
after due notice and hearing where the
CASES violation of the intellectual property rights
of the owner is established, may order the
destruction of the seized infringing goods,
Presumption of Copyright objects and devices, including but not
Copyright is presumed to subsist and limited to, sales invoices, other documents
ownership thereof shall be presumed to evidencing sales, labels, signs, prints,
belong to the complainant if he so claims packages, wrappers, receptacles, and
through affidavit evidence, unless advertisements and the like used in the
defendant attaches proof to the contrary in infringing act.
his answer to the complaint. The hearing shall be summary in nature
Mere denial of the subsistence of the with notice of hearing addressed to
copyright based on lack of knowledge shall defendant to afford him opportunity to
not be sufficient to rebut the presumption. oppose the motion.
MERCANTILE LAW
SPECIAL LAWS
\
(28) Violation of Section 6 of Republic Act No. (32) Violations of Sections 5, 7, 8, 9, 10(c), (d)
8042, otherwise known as the Migrant and (e), 11, 12 and 14 of Republic Act No. 7610,
Workers and Overseas Filipinos Act of 1995, otherwise known as the Special Protection of
as amended by Republic Act No. 10022; Children Against Abuse, Exploitation and
Discrimination
B. DEFINITION OF TERMS
limited to a smaller percentage by existing BTRCP shall thereupon order the non-
law and/or under the provisions of this Act. complying export enterprise to reduce its
The SEC or BTRCP, as the case may be, shall sales to the domestic market to not more
not impose any limitations on the extent of than forty percent (40%) of its total
foreign ownership in an enterprise additional production; failure to comply with such SEC
to those provided in this Act: Provided, or BTRCP order, without justifiable reason,
however, That any enterprise seeking to avail shall subject the enterprise to cancellation of
of incentives under the Omnibus Investment SEC or BTRCP registration, and/or the
Code of 1987 must apply for registration with penalties provided in Section 14 hereof. (Sec.
the Board of Investments (BOI), which shall 6)
process such application for registration in
accordance with the criteria for evaluation E. FOREIGN INVESTMENT IN
prescribed in said Code: Provided, finally, DOMESTIC MARKET ENTERPRISE
That a non-Philippine national intending to
engage in the same line of business as an Non-Philippine nationals may own up to one
existing joint venture, in which he or his hundred percent (100%) of domestic market
majority shareholder is a substantial partner, enterprises unless foreign ownership therein
must disclose the fact and the names and is prohibited or limited by the Constitution
addresses of the partners in the existing joint existing law or the Foreign Investment
venture in his application for registration with Negative List under Section 8 hereof. (Sec. 7)
SEC. During the transitory period as provided
in Section 15 hereof, SEC shall disallow F. FOREIGN INVESTMENT NEGATIVE
registration of the applying non-Philippine LIST
national if the existing joint venture
enterprise, particularly the Filipino partners The Foreign Investment Negative List shall
therein, can reasonably prove they are have two (2) components lists; A, and B.
capable to make the investment needed for
the domestic market activities to be (1) List A shall enumerate the areas of
undertaken by the competing applicant. activities reserved to Philippine nationals
Upon effectivity of this Act, SEC shall effect by mandate of the Constitution and
registration of any enterprise applying under specific laws.
this Act within fifteen (15) days upon (2) List B shall contain the areas of activities
submission of completed requirements. (Sec. and enterprises regulated pursuant to
5) law:
a. which are defense-related activities,
requiring prior clearance and
D. FOREIGN INVESTMENTS IN EXPORT authorization from Department of
ENTERPRISE National Defense (DND) to engage in
such activity, such as the
Foreign investment in export enterprises manufacture, repair, storage and/or
whose products and services do not fall distribution of firearms, ammunition,
within Lists A and B of the Foreign lethal weapons, military ordinance,
Investment Negative List provided under explosives, pyrotechnics and similar
Section 8 hereof is allowed up to one materials; unless such manufacturing
hundred percent (100%) ownership. or repair activity is specifically
authorized, with a substantial export
Export enterprises which are non-Philippine component, to a non-Philippine
nationals shall register with BOI and submit national by the Secretary of National
the reports that may be required to ensure Defense; or
continuing compliance of the export b. which have implications on public
enterprise with its export requirement. BOI health and morals, such as the
shall advise SEC or BTRCP, as the case may manufacture and distribution of
be, of any export enterprise that fails to meet dangerous drugs; all forms of
the export ratio requirement. The SEC or gambling; nightclubs, bars,
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