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University of Santo Tomas

Faculty of Civil Law

Pre-week Notes 2017







LETTERS OF CREDIT beneficiary is the one who in compliance with the
contract of sale ships the goods to the buyer and
It is any arrangement, however named or described, delivers the documents of title and draft to the
whereby the issuing bank acting at the request and on issuing bank to recover payment for the goods. The
the instructions of a customer (applicant) or on its own relationship between them is governed by the law
behalf, binds itself to: (PAN) on sales if it is a commercial L/C but if it is a stand-
by letter of credit it is governed by the law on
1. Pay to the order of, or accept and pay drafts drawn obligations and contract.
by a third party (Beneficiary), or 2. Between the issuing bank and the beneficiary/
2. Authorize another bank to pay or to accept and pay seller/exporter – The issuing bank is the one that
such drafts, or issues the letter of credit and undertakes to pay the
3. Authorizes another bank to Negotiate, against beneficiary upon strict compliance of the latter to
stipulated documents the requirements set forth in the letter of credit. On
the other hand, the beneficiary surrenders
Three (3) distinct but intertwined contracts in a document of title to the bank in compliance with the
Letter of Credit transaction (2002, 2008 BAR) terms of the L/C. Their relationship is governed by
the terms of the L/C.
1. Between the applicant/buyer/importer/account 3. Between the issuing bank and the applicant/
party and the beneficiary/seller/exporter – The buyer/importer – The applicant obliges himself to
applicant is the one who procures the letter of credit reimburse the issuing bank upon receipt of the
and obliges himself to reimburse the issuing bank documents of title. Their relationship is governed by
upon receipt of the documents of title while the the terms of the application and agreement for the
issuance of the L/C by the bank.


Notifying/ Serves as an agent of the issuing bank; Does not incur any obligation more than just notifying the
Advising Bank seller/beneficiary of the opening of the L/C after it has
Warrants the apparent authenticity of determined its apparent authority. It does not guarantee the
the L/C (Bank of America NT & SA v. CA, genuineness or due execution of the L/C. It is not liable for
G.R. No. 105395, December 10, 1993). damages even if the L/C turns out to be spurious provided
the spurious character is not apparent on the face of the
Confirming Lends credence to the L/C issued by a Direct obligation, as if it is the one which issued the L/C.
bank lesser-known bank.
Its obligation is similar to the issuing banks. Thus,
The confirming bank collects fees for beneficiary may tender documents to the confirming bank
such engagement and obtains and collect payment.
reimbursement from the issuing bank.
Negotiating Buys the seller’s draft and later on sells Depends on the stage of negotiation, thus:
bank the draft to the issuing bank.
1. Before negotiation – No liability with respect to the seller.
Merely suggests its willingness to negotiate.

2. After negotiation – A contractual relationship will then

arise, making the bank liable. As holder, it has the right to
payment from the bank primarily liable on the draft (either
the issuing or confirming bank). If the party primarily liable
on the L/C refuses to honor the draft, the negotiating bank
has the right to proceed against the drawer thereof.
Paying bank May either be the issuing bank or any
other bank in the place of the issuing
bank to facilitate payment to the

Doctrine of Independence/ Independence Principle

Fraud Exception Principle: It provides that the
The relationship of the buyer and the bank is separate untruthfulness of a certificate accompanying a demand
and distinct from the relationship of the buyer and for payment under a standby letter of credit may qualify
seller in the main contract; the bank is not required to as fraud sufficient to support an injunction against
investigate if the contract underlying the L/C has been payment.
fulfilled or not because in transactions involving L/C,
banks deal only with documents and not goods (BPI v. Under the fraud exception principle, the beneficiary may
De Reny Fabric Industries, Inc., L-2481, October 16, 1970). be enjoined from collecting on the letter of credit if the
In effect, the buyer has no course of action against the beneficiary committed fraud by substituting fraudulent
issuing bank. documents even if on their face the documents complied
with the requirements.
Exception to the Independence Principle (2010

This principle refers to fraud in relation with the (Rosario Textile Mills Corp. v. Home Bankers Savings
independent purpose or character of the L/C and not and Trust Company, G.R. No. 137232, June 29, 2005).
only fraud in the performance of the obligation or
contract supporting the letter of credit (Transfield vs. Real owner of the articles subject of the Trust
Luzon Hydro Corp., supra). Receipt transaction: The real owner of the articles
subject of the TR is the entrustee who binds himself to
The documents tendered by the seller/beneficiary must hold the designated GDI. The entruster merely holds a
strictly conform to the terms of the L/C. The tender of security interest.
documents must include all documents required by the
letter. It is not a question of whether or not it is fair or Entrustee cannot mortgage the goods because one of the
equitable to require submission of documents but requisites of a valid mortgage is that the mortgagor must
whether or not the documents were agreed upon. Thus, be the absolute owner of the property mortgaged or
a correspondent bank which departs from what has must have free disposal thereof. The entrustee is not
been stipulated under the L/C acts on its own risk and responsible as principal or vendor under any sale or
may not thereafter be able to recover from the buyer or contract to sell made by the entrustee.
the issuing bank, as the case may be, the money thus
paid to the beneficiary (Feati Bank and Trust Company v. Entrustee shall bear the loss of the goods,
CA) documents, or instruments which are the subject of
a Trust Receipt
Explain the Independence Principle under a letter of
credit transaction. Res perit domino in trust receipt: not a valid defense
against an Entrustee in cases of loss or destruction of the
In determining compliance with the letter of credit, the goods, documents, or instruments secured by a Trust
bank is obliged to examine only the shipping documents Receipt. For the principle of res perit domino to apply the
presented by the seller. It is precluded from determining entrustee must be the owner of the goods at the time of
whether the main contract of sale (between buyer and the loss. A TR is a security agreement, pursuant to which
seller) has been strictly complied with. Banks deal only a bank acquires a ‘security interest’ in the goods. It
with documents and not with goods or obligations to secures an indebtedness and there can be no such thing
which they relate. as security interest that secures no obligation. If under a
trust receipt transaction, the entruster is made to
The seller is assured of prompt payment independent of appear as the owner, it was but an artificial expedient,
any breach in the main contract. Thus, the bank has no more of legal fiction than fact, for if it were really so, it
duty to verify whether the goods described in the letter could dispose of the goods in any manner it wants. Thus,
of credit or in the shipping documents actually tallies the ownership of the goods remaining with the
with what was loaded aboard the ship. This may be entrustee, he cannot be relieved of the obligation to pay
invoked by both the seller and the issuing bank. his/her loan in case of loss or destruction (Rosario
(Dimaampao, 2017) Textile Mills vs. Home Bankers Association, supra).

TRUST RECEIPT LAWS Defenses available to negate CRIMINAL liability of

the Entrustee (CoCo CaCo No LP)
Trust Receipt (TR) transaction
1. Compliance with the terms of the TR either by
It is any transaction between the entruster and payment, return of the proceeds or return of the
entrustee: goods (P.D. 115, Sec. 13).
2. Consignment.
1. Whereby the entruster who owns or holds title or 3. Cancellation of the TR agreement and taking into
security interests over certain specified goods, possession of the goods by the entruster.
documents or instrument (GDI), releases the same
to the possession of entrustee upon the latter’s NOTE: Repossession of the goods will extinguish
execution of a TR agreement. only the criminal liability.
2. Wherein the entrustee binds himself to hold the GDI
in trust for the entruster and, in case of default, 4. Compromise by parties before filing of information
a. to sell or otherwise dispose such GDI with the in court. Compromise of estafa case arising from TR
obligation to turn over to the entruster the transaction, after the case has been filed in court
proceeds to the extent of the amount owing to it does not amount to novation and does not erase the
or criminal liability of the accused (Ong vs. CA, G.R. No.
b. to turn over the GDI itself if not sold or L-58476, September 2, 1983).
otherwise disposed of in accordance with the 5. Non-receipt of the goods by the entrustee or where
terms and conditions specified in the TR. proof of delivery of goods to the accused is
insufficient. (Ramos vs. CA, supra).
Two features of a Trust Receipt transaction 6. Loss of goods without fault of the entrustee.

1. Loan feature – is brought about by the fact that the Where the debtor received the goods subject of the
entruster financed the importation or purchase of trust receipt before the trust receipt was entered
the goods under TR (Sps. Vintola vs. Insular Bank of into, the transaction in question was a simple loan
Asia and America, G.R. No. 73271, May 29, 1987). and not a trust receipt agreement. Prior to the date of
2. Security feature – property interest in the GDI to execution of the trust receipt, ownership over the goods
secure performance of some obligation of the was already transferred to the debtor. This situation is
entrustee or of some third persons to the entruster inconsistent with what normally obtains in a pure trust
receipt transaction, wherein the goods belong in
ownership to the bank and are only released to the

importer in trust after the loan is granted. (Colinares vs. guarantee foreign loans but with the prior
CA, G.R. No. 90828, September 5, 2000) concurrence of the Monetary Board.
4. Government agent (NCBA, Secs. 117-122)
Correlate the letter of credit transaction with the 5. Source of credit (NCBA, Secs. 61-63, 81-89, 109)
trust receipt arrangement. 6. Issuer of Currency (NCBA, Sec. 49-60)
7. Clearing channel or House; especially where the
The bank extends a loan covered by the letter of credit PCHC does not operate (NCBA, Sec. 102)
with the trust receipt as security for the loan. The 8. Supervisor of the Banking system (NCBA, Sec. 25) –
transaction involves a loan feautere represented by the shall include the power to:
letter of credit, and a security feature covered by the a. Examine, which power extends to enterprises
trust receipt. (Dimaampao, 2017) wholly or majority-owned or controlled by the
bank (GBL, Sec. 7); this power may not be
Upon failure to return the goods released under the restrained by a writ of injunction unless there is
trust receipt transaction, the bank instituted against convincing proof that the action of the BSP is
the borrower who insisted that he could not be plainly arbitrary (NCBA, Sec. 25)
imprisoned for non-paymnet of debt. Is he correct? b. Place a bank under receivership or liquidation
(NCBA, Sec. 30)
NO. Violation of Trust Receipts Law is an act malum
prohibitum. Hence, he may be prosecuted criminally. CONSERVATORSHIP
Estafa results because of failure (1) to return the goods
unsold; or (2) to turn over the proceeds of the sale. One appointed if the bank is in the state of illiquidity or
(Dimaampao, 2017) the bank fails or refuses to maintain a state of liquidity
adequate to protect its depositors and creditors. The
C contracted with D to renovate his commercial bank still has more assets than its liabilities but its assets
building. D ordered construction materials from E are not liquid or not in cash thus it cannot pay its
and received delivery thereof. The following day, C obligation when it falls due. The bank, not the BSP, pays
went to F bank to apply for a loan to pay the for fees.
construction materials. As security for the loan, C
was made to execute a trust receipt. One year later, Powers of a conservator do not extend to the
after C failed to pay the balance on the loan, F bank revocation of valid and perfected contracts. The law
charged him with violation of the Trust Receipts merely gives the conservator power to revoke contracts
Law. Will the case prosper? Reason briefly. that are deemed to be defective – void, voidable,
unenforceable or rescissible. Hence, the conservator
NO. It is not covered by the Trust Receipts Law. Where merely takes the place of the bank’s board.
the debtor received the goods before the trust receipt
itself was entered into, the transaction in question must The officers of X Bank entered into a contract with Y
be considered a simple loan. The Trust Receipts Law Corporation. Later, the bank was placed under
does not seek to enforce payment of a loan, rather it conservatorship. The conservator took charge of
punishes dishonesty and abuse of confidence in and managed the assets and liabilities of the bank. It
handling money or goods to the prejudice of another likewise revoked the contract of X Bank with Y
regardless of whether the latter is the owner. Corporation. Was the revocation proper?
(Dimaampao, 2017)
NO. The powers of a conservator relates only to the
BANKING LAWS preservation of the assets of the bank, management
thereof, and restoration to viability. The conservator
THE NEW CENTRAL BANK ACT may not revoke a contract already perfected and
(NCBA, R.A. 7653) enforceable at the time he was appointed. The only
remaining remedy available to the conservator is to file
BANKO CENTRAL NG PILIPINAS a case to revoke or nullify the contract. (Dimaampao,
Responsibilities (1992, 1998 BAR)
When is conservatorship terminated?
1. To provide policy directions in the areas of money,
banking, and credit When the MB is satisfied that the bank can continue to
2. To supervise bank operations operate on its own, conservatorship shall be terminated.
3. To regulate the operations of finance companies Otherwise, the bank shall be placed in receivership.
and non-bank financial institutions performing (Dimaampao, 2017)
quasi-banking functions, and similar institutions
(NCBA, Sec. 3). Powers of a conservator (CARe BEAr)

Functions 1. Collect all monies and debts due to the said bank
1. Banker of the government – the BSP shall be the 2. To take charge of the Assets, liabilities, and the
official depository of the Government and shall management thereof
represent it in all monetary fund dealings (NCBA, 3. REorganize, the management thereof
Secs. 110- 116). 4. And such other powers as the monetary Board
2. Custodian of Reserves (NCBA, Secs. 64-66, 94, 103) deems necessary
3. Financial Advisor of the government (NCBA, Secs. 5. Exercise all powers necessary to restore its viability,
123-124) – Under Article VII, Sec. 20 of the 1987 with the power to overrule or revoke the actions of
Constitution, the President may contract or the previous management and board of directors of
the bank or quasi-bank

6. To bring court actions to Assail or Repudiate
contracts entered into by the bank. (First Philippine 1. It is unable to pay its liabilities as they fall due in the
International Bank v. CA, G.R. No. 115849, Jan. 24, ordinary course of business, excluding financial
1996). panic in the banking community;
2. It has insufficient realizable assets to meet its
Conservatorship shall not exceed 1 year. liabilities;
3. It cannot continue in business without involving
Grounds for closure of a bank or a quasi-bank probable losses to its depositors or creditors; or
4. It has violated a final cease and desist order that has
1. Cash Flow test – Inability to pay liabilities as they become final involving acts or transactions
become due in the ordinary course of business amounting to fraud or dissipation of assets.
(NCBA, Sec. 30 [a], 1997 Bar). (Dimaampao, 2017)
2. Balance sheet test – Insufficiency of realizable
assets to meet its liabilities (NCBA, Sec 30 [b], 1997 For how long may a bank be placed under
Bar). receivership?
3. Inability to continue business without involving
probable losses to its depositors and creditors The bank may be placed under receivership for a
(NCBA, Sec 30 [c], 1997 Bar). maximum period of 90 days from take over.
4. Willful violation of a cease and desist order under (Dimaampao, 2017)
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation RECEIVER
of the assets (NCBA, Sec 30 [d], 1997 Bar).
5. Notification to the BSP or public announcement of a One appointed if the bank is already insolvent which
bank holiday (GBL, Sec 53). means that its liabilities are greater than its assets. The
6. Suspension of payment of its deposit liabilities Court has no authority to appoint a receiver for a bank if
continuously for more than 30 days (GBL, Sec 53). the latter will function as such under BSP law. The
7. Persisting in conducting its business in an unsafe or power to appoint belongs to BSP.
unsound manner (GBL, Sec 56).
NOTE: For banks, the receiver would be the Philippine
The Monetary Board may preventively suspend any Deposit Insurance Corporation; for quasi-banks, it could
director or officer of a bank or quasi-bank pending be any person of recognized competence in banking or
investigation up to 120 days but any delay due to the finance (NCBA, Sec. 30).
fault of the director or offcer shall not be counter in
computing the period of suspension. A receiver can only perform acts of administration and
not acts of dominion. The receiver cannot approve an
Close now-hear later doctrine option to purchase real property. He has only the
authority to administer the same for the benefit of its
It is to prevent unwarranted dissipation of the bank’s creditors (Abacus Real Estate Development Center, Inc. v.
assets and as a valid exercise of police power to protect Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005).
the depositors, creditors, stockholders and the general
public. No prior hearing is necessary in appointing a Designation of conservator is not a precondition to
receiver and in closing the bank. It is enough that the designation or receiver. (Sec. 31)
subsequent judicial review is provided for.
Injunction does not lie against BSP in the exercise of the
power and function. A contrary rule may lead to Acts of liquidation are those which constitute the
dissipation of assets and trigger bank run. Judicial conversion of the assets of the banking institution to
review comes only after action of the Monetary Board if money or the sale, assignment or disposition of the same
the same was attended with bad faith and grave abuse to creditors and other parties for the purpose of paying
of discretion (Bangko Sentral ng Pilipinas v. Valenzuela, debts of such institution (Banco Filipino v. Central Bank,
G.R. No. 184778, October 2, 2009). G.R. No. 70054, December 11, 1991).

However, the closure and liquidation of a bank, If the receiver determines that the institution can no
which is considered an exercise of police power may longer be rehabilitated, the Monetary Board shall notify
be the subject of judicial inquiry. The order of closure the board of directors and direct the receiver to proceed
(receivership or conservatorship) may be assailed: a) by with its liquidation.
the stockholders representing at least majority of the
outstanding capital stock; b) within ten days from Liquidator of a distressed bank can prosecute and
receipt by the board of directors of the order; c) thru a defend suits against the bank
petition for certiorari on the ground that the action
taken by the BSP was in excess of jurisdiction or with Prosecution of suits, collection and the foreclosure of
grave abuse of discretion as to amount to lack of mortgages against debtors of the bank by the liquidator
jurisdiction. are among the usual and ordinary transactions
pertaining to the administration of a bank (Banco
RECEVIERSHIP Filipino v. Central Bank, ibid).

Enumerate the grounds for placement under Filing of the claims against the insolvent bank
GR: All claims against the insolvent bank should be filed
A bank may be placed under receivership once the MB in the liquidation proceeding. It is not necessary that a
finds that: claim be initially disputed in a court or agency before it

is filed with the liquidation court (Ong v. CA, G.R. No.
112830, Feb. 1, 1996). Rationale for the stay order: The reason behind the
indiscriminate suspension or stay order in relation to
XPN: Where it is the bank that files a claim against the creditors’ claim is to expedite the rehabilitation of
another person or legal entity, the claim should be filed the distressed corporation by enabling the management
in the regular courts. committee or the rehabilitation receiver to effectively
exercise its/his powers free from any judicial or
STAY ORDER extrajudicial interference that might unduly hinder or
prevent the rescue of the debtor company. It also
After the Monetary Board has declared that a bank is recognizes the assets of a corporation under
insolvent and has ordered it to cease operations, the rehabilitation held under trust for the equal benefit of all
assets of the insolvent bank are held in trust for the creditors under the doctrine equality is equity, whereby
equal benefit of all creditors. One cannot obtain an all the creditors ought to stand on equal footing, and not
advantage or preference over another by attachment, one of them should be paid ahead of others. (2006 BAR)
execution or otherwise. The final judgment against the
bank should be stayed as to execute the judgment would Appointment of receiver operates to suspend the
unduly deplete the assets of the banks to the obvious authority of the bank and its officers over its properties
prejudice of other depositors and creditors (Lipana v. and effects.
Development Bank of Rizal, G.R. No. L-73884, Sept. 24,


Grounds 1. Continuing inability 1. Inability to pay liabilities as they 1. Insolvency
2. Unwillingness to fall due e.g: bank run, rumors, etc. 2. Bank cannot be rehabilitated
maintain condition of 2. Assets are less than its liabilities
liquidity 3. Cannot continue business
4. without causing damage;
5. Violation of a cease and desist
6. “Bank holiday” for more than 30
days (NCBA, Sec. 30).
Effects 1. Juridical personality is 1. Juridical personality is retained Same with conservatorship
retained. 2. Suspension of operation
2. Perfected transactions /stoppage of business
cannot be repudiated 3. Assets deemed in custodia legis
(Domingo v. NLRC, G.R. 156761,
October 17, 2006).

How BSP handles crisis 1. Granting emergency loans in an amount not

exceeding 50% of its total deposits and deposit
To protect the international reserves of the Bangko substitutes;
Sentral in the imminence of, or during an exchange 2. Appointing a conservator;
crisis, or in time of national emergency and to give the 3. Appointing a receiver and order liquidation of the
Monetary Board and the Government time in which to bank. (Dimaampao, 2017)
take constructive measures to forestall, combat, or
overcome such a crisis or emergency, the Monetary The relationship between a bank and its depositor is
Board, with the concurrence of at least five (5) of its that of creditor and debtor. For this reason, a bank has
members and with the approval of the President of the the right to set-off the deposits in its hands for the
Philippines, may: payment of a depositor’s indebtedness (Equitable PCI
Bank v. Ng Sheung Ngor, et al., 171545, December 19,
1. temporarily suspend or restrict sales of exchange by 2007).
the Bangko Sentral, and
2. may subject all transactions in gold and foreign Loan to Banks
exchange to license by the Bangko Sentral, and
3. may require that any foreign exchange thereafter Bangko Sentral may buy and sell credit instruments with
obtained by any person residing or entity operating maturities of not more than 180 days from their
in the Philippines be delivered to the Bangko Sentral acquisition. [Sec. 82(a)] It may also buy and sell credit
or to any bank or agent designated by the Bangko instruments with maturities of not more than 360 days
Sentral for the purpose, at the effective exchange from their acquisition, if they are related to the
rate or rates: production and processing of agricultural, animal,
mineral or industrial products. [Sec. 82(b)]
Provided, however, that foreign currency deposits made
under Republic Act No. 6426 shall be exempt from these Bangko Sentral may extend loands to banks for not more
requirements. (NCBA, Sec. 72) than 7 days without any collateral to provide liquidity
(Sec. 83)
How does the BSP extend help to banks in distress
or banks with liquidity problems? LAW ON SECRECY OF BANK DEPOSITS
(R.A. 1405, AS AMENDED)
The BSP may help banks having liquidity problems by:

1. Examination/inquiry/looking into all deposits of material to its investigation (Opinion of the
whatever nature with banks or banking institutions Secretary of Justice, February 27, 1987)
in the Philippines (including investment in bonds 8. The Anti-Money Laundering Council (AMLC) may
issued by the government) by any person, inquire into any deposit with any bank in case of
government official or office (RA 1405, Sec. 2). violation of the RA 9160 or the AMLA if there is
2. Disclosure by any official or employee of any probable cause that it is related to an unlawful
banking institution to any unauthorized person of activity (RA 9160, as amended, Sec. 11)
any information concerning said deposit (RA 1405, 9. The PDIC and the BSP may examine deposit
Sec. 3). accounts and all information related to them in case
of a finding of unsafe or unsound banking practices
However, non-bank official or employee is not covered (RA 3591, as amended, Sec. 8)
by the prohibition. Neither is disclosure by a bank 10. With court order:
official or employee of information about bank deposit a. In cases of unexplained wealth under Sec. 8 of
in favor of a co-employee in the course of the the Anti-Graft and Corrupt Practices Act (PNB v.
performance of his duties covered by the prohibition. Gancayco, L-18343, September 30, 1965)
11. Without court order: If the AMLC determines that a
Confidentiality granted by RA 1405 does NOT extend particular deposit or investment with any banking
to Letters of Credit and Trust Receipts institution is related to the following (HK-MADS):
a. Hijacking,
c. Murder,
1. All deposits of whatever nature with banks or d. Destructive Arson, and
banking institutions found in the Philippines; or e. Violation of the Dangerous Drugs Act.
2. Investments in bonds issued by the Philippine f. Acts of Terrorism or in violation of Human
government, its branches, and institutions. (R.A. Security Act.
1405, Sec. 2)
3. Trust accounts are included in the scope of the law. Improper cases:
1. The examination of bank account to which the
Instances where examination or disclosure of money paid by an insurance company for treasury
information about deposits can be allowed bills it purchased was deposited is improper, even if
the insurance company sued the seller for failure to
1. Upon written consent of the depositor (RA 1405, Sec. deliver treasury bills. The money paid is not subject
2) matter of litigation. (Onate v. Abrogar)
2. In cases of impeachment (ibid) 2. A collecting bank which sued the drawee bank to
3. Upon order of competent court in cases of bribery recover the deficiency for the payment of a check for
or dereliction of duty of public officials (ibid) failure of the drawee bank to notify the collecting
4. In cases where the money deposited or invested is bank that it had erroneously undercoded the
the subject matter of the litigation (ibid) amount of the check presented for clearing is not
a. In an action filed by the bank to recover the entitled to examination because the money in the
money transmitted by mistake, necessarily, an account of the drawee is not the subject matter of
inquiry into the whereabouts of the amount the case. The subject matter is the deficiency of
extends to whatever is concealed by being held payment. (Union Bank of the Philippines v. Court of
or recorded in the name of the persons other Appeals)
than the one responsible for the illegal 3. Ombudsman cannot inspect an account as there is
acquisition. (1992 Bar) yet no pending litigation before any court of
b. In a case of plunder, it necessarily involves an competent authority. Mere investigation of
inquiry into the whereabouts of the amount Ombudsman is not enough, inspection during an
purportedly acquired illegally. (Ejercito vs. investigation merely amounts to a fishing
Sandiganbayan, G.R. No. 157294, Nov. 30, 2006) expedition. (Marquez vs. Desierto)
c. In a special proceeding to settle the estate of
deceased depositor, his bank deposits may be FOREIGN CURRENCY DEPOSIT
inquired into, since his bank deposits are (R.A. 6426, AS AMENDED)
subject matter of the case, because all of his
assets are supposed to be collated. (Sy v RTC GR: Foreign currency deposits cannot be inquired or
Judge of Iloilo) looked into. All foreign currency deposits are absolutely
confidential (RA 6426, Sec. 8).
5. Upon order of the Commissioner of Internal
Revenue: The surety which issued a bond to secure the obligation
a. A decedent to determine his estate; and of the principal debtor cannot inquire into the foreign
b. Any taxpayer who has filed for an application currency deposits of the debtor even if its purpose is to
for compromise of his tax liability determine whether or not the loan proceeds were used
c. A specific taxpayer upon request for tax for the purpose specified in the surety agreement. The
information from a foreign tax authority foreign currency deposits cannot be examined without
pursuant to an international convention or the consent of the depositor. The subpoena issued by the
agreement on tax matters to which the bank should be quashed because foreign currency
Philippines is a party. (NIRC, Sec. 6 [f]) deposits are not subject to court order except for
6. In case of dormant accounts/deposits for at least 10 violation of the anti-money laundering law (GSIS v. Court
years under the Unclaimed Balances Act (Act No. of Appeals, G.R. No. 189206, June 8, 2011).
3936, Sec. 2)
7. Presidential Commission on Good Government XPNs:
(PCGG) may require the production of bank records Based on law

1. The depositor has given his written permission case yet filed before the court since it is still in the
(ibid.) preliminary investigation stage.
2. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of the GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN
following: DEPOSITS
a. A decedent to determine his estate; and
b. Any taxpayer who has filed for an application for The prohibition against examination or inquiry does not
compromise of his tax liability preclude its being garnished for satisfaction of
c. A specific taxpayer upon request for tax judgment. The disclosure is purely incidental to the
information from a foreign tax authority pursuant execution process and it was not the intention of the
to an international convention or agreement on legislature to place bank deposits beyond the reach of
tax matters to which the Philippines is a party. judgment creditor (PCIB v. CA, G.R. No. 84526, January 28,
(NIRC, Sec. 6 [f]) 1991).
3. AMLC may inquire into any deposit with a bank or
financial institution in case of violation of RA 9160 With respect to foreign deposits, they shall be exempt
if there is probable cause that it is related to an from attachment, garnishment, or any other order or
unlawful activity (RA 9160, Sec. 11). AMLC can process of any court, legislative body, government
investigate (a) any property of funds related to agency or any administrative body whatsoever (RA
financing terrorism; (b) property or funds of any 6426, Sec 8).
person if there is probable cause to believe he is
committing or attempting or conspiring to commit XPN: The garnishment of a foreign currency deposit
terrorism or financing terrorism (RA 10168, Sec. 10). should be allowed to prevent injustice and for equitable
4. Upon ex parte application by a law enforcer grounds
authorized by the Anti-Terrorism Council, the
justices of the CA designated as special court to GENERAL BANKING LAW OF 2000 (RA 8791)
handle anti-terrorism cases may authorize the
examination of deposits in a financial institution Banks and their ownership
upon finding probable cause of the commission of
terrorism or conspiracy to commit terrorism (RA Banks refer to entities engaged in the lending of funds
9372, Sec. 27-28). obtained in the form of deposits.
5. PDIC and BSP may examine deposit accounts and
all information related to them in case of a finding of Quasi-bank are entities engaged in the borrowing of
unsafe or unsound banking practices (RA 3591, as funds through the issuance, endorsement or assignment
amended, Sec. 8). with recourse or acceptance of deposit substitutes for
purposes of re-lending or purchasing of receivables and
Based on jurisprudence other obligations (GBL, Sec 4). Unlike banks, quasi-banks
1. Where the funds deposited in a joint foreign do not accept deposits. Neither are funds obtained
currency savings account belonged exclusively to insured with the PDIC.
one of the depositors and were held in trust for him
by the other depositor and the other depositor Ownership of a bank
unilaterally closed the joint account and transferred
the funds to her personal account, the latter cannot Individuals and non-bank corporations, whether foreign
invoke the exemption from court processes under or Filipino, ay own or control up to 40% of the voting
RA 6426 because she is not the owner of the deposit stock of a domestic bank.
in the account. (Van Twest v. Court of Appeals, G.R. i. The percentage of foreign-owned stocks shall be
No. 106235, February 10, 1994). determined by the citizenship of the individual
2. A father who sued his daughter for illegally stockholder.
withdrawing funds from his foreign currency ii. The citizenship of the non-bank corporation shall
deposit and transferring to another bank in the follow the citizenship of its controlling
name of her sister, can inquire into the deposit of the stockholders.
sister, because the money deposited belongs to him
(China Banking Corp. v. CA, G.R. No. 140687, FIT AND PROPER RULE: The Monetary Board shall take
December 18, 2006). into consideration the capability in terms of financial
3. The exemption from court process of foreign resources and technical expertise and intergrity of
currency deposits under RA 6426 cannot be banks before they may be allowed to operate.
invoked by a foreign transient who raped a minor,
escaped and was held liable for damages to the Explain money market placement.
victim. The garnishment of his foreign currency
deposit should be allowed to prevent an injustice Money market placement is a simple loan or mutuum. It
and for equitable grounds. The law was enacted to is a market dealing in standardized short-term credit
encourage foreign currency deposit and not to instruments (involving large amounts) where lenders
benefit a wrongdoer (Salvacion v. Central Bank of and borrowers do not deal directly with each other but
the Philippines, G.R. No. 94723, August 21, 1997). through a middle man or dealer in open market. In a
money market transaction, the investor is a lender who
During a preliminary investigation for estafa, the loans his money to a borrower through a middleman or
investigating fiscal issued subpoena for production dealer. (Allied Bank v. Lim Sio Wan, 549 SCRA 504, March
of bank account. Is this proper? 27, 2008)

NO. The investigating fiscal may not issue a subpoena to Classifications of banks (2002, 2010 BAR)
inquire into the bank deposit. It is only a court of
competent jurisdiction which may do so. There is no

1. Universal banks – Primarily governed by the GBL. by an additional 10% of the net worth of such bank
They can exercise the powers of an investment provided that additional liabilities are adequately
house and invest in non-allied enterprises and have secured by trust receipt, shipping documents,
the highest capitalization. warehouse receipts and other similar documents
2. Commercial banks – Ordinary banks governed by which must be fully covered by an insurance (GBL,
the GBL which have a lower capitalization Sec. 35.2).
requirement than universal banks and can neither 3. Loans and other credit accommodations secured by
exercise the powers of an investment house nor REM shall not exceed 75% of the appraised value of
invest in non-allied enterprises. the real estate security plus 60% of the appraised
3. Thrift banks – These are a) Savings and mortgage value of the insured improvements (GBL, Sec. 37)
banks; b) Stock savings and loan associations; and CM/intangible property such as patents,
c) Private development banks, which are primarily trademarks, etc. shall not exceed 75% of the
governed by the Thrift Banks Act (RA 7906). appraised value of the security (GBL, Sec. 38).
4. Rural banks – These are mandated to make needed 4. Loans being contractual, the period of payment may
credit available and readily accessible in the rural be subject to stipulation by the parties. In the case
areas on reasonable terms and which are primarily of amortization, the amortization schedule has no
governed by the Rural Banks Act of 1992 (RA 7353). fixed period as it depends on the project to be
5. Cooperative banks – Banks whose majority shares financed such that if it was capable of raising
are owned and controlled by cooperatives primarily revenues, it should be at least once a year with a
to provide financial and credit services to grace period of 3 years if the project to be financed
cooperatives. It shall include cooperative rural is not that profitable which could be deferred up to
banks. They are governed primarily by the 5 years if the project was not capable of raising
Cooperative Code (RA 6938). revenues (GBL, Sec. 44).
6. Islamic banks – Banks whose business dealings and 5. Loans granted to DOSRI:
activities are subject to the basic principles and a. Director
rulings of Islamic Shari’ a, such as the Al Amanah b. Officer
Islamic Investment Bank of the Philippines which c. Stockholder, having at least 1% ownership over
was created by RA 6848. the bank
7. Other classification of banks as determined by the d. Related Interests, such as DOS’s spouses, their
Monetary Board of the BSP. relatives within the first degree whether by
consanguinity or affinity, partnership whereby
Directors DOS is a partner or a corporation where DOS
owns at least 20%.
1. Composition: 5 to 15
2. At least 2 directors shall be independent RESTRICTIONS ON BANK EXPOSURE TO DOSRI
3. Foreigners may become directors to the extent of (DIRECTORS, OFFICERS, STOCKHOLDERS AND
foreign participation in the equity of the bank THEIR RELATED INTERESTS)
4. In case of bank merger or consolidation. Directors
shall not exceed 21. Requirements that must be complied with in case of
DOSRI accounts (2002 BAR)
APPROVAL REQUIREMENT: Loan must be approved by
For its own use: Total investment in real estate and the majority of all the directors not including the
improvements, including equipment, for the own use of director concerned.
the bank shall not exceed 50% of combined capital
a. Loan must be entered in the books of the
For satisfaction of debt: Real property acquired by corporation (GBL, Sec. 36)
bank because of a mortgage, conveyance in satisfaction b. CB must be informed of the prior to the transaction.
of debt, or under judgement shall be dispoed within 5
years. (Sec. 52) CEILING REQUIREMENT: The amount of the loan shall
not exceed the book valued of the paid-in contribution
SINGLE BORROWER’S LIMIT and the amount of the unencumbered deposits. (Go v.
Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23,
Limitations imposed upon banks with respect to its 2009)
loan function
ARMS-LENGTH RULE: It provides that any dealings of a
1. GR: Single borrower’s limit – The total amount of bank with any of its DOSRI shall be upon terms not less
loans, credit accommodations and guarantees that favorable to the bank than those offered to others (GBL,
the bank could grant should at no time exceed 25% Sec. 36 [2]).
of the bank’s net worth (GBL, Sec 35.1, 2002, 2015
BAR). Effect of non-compliance with the foregoing
requirement: Violation of DOSRI is a crime and carries
XPN: with it penal sanction. It does not make the transaction
a. As the Monetary Board may otherwise void but only renders the responsible officers and
prescribe for reasons of national interest directors criminally liable. (Republic v. Sandiganbayan,
b. Deposits of rural banks with GOCC financial G.R. No. 166859, 169203, 180702, April 12, 2011).
institutions like LBP, DBP, and PNB.
A bank officer violates the DOSRI law when he acquires
2. The total amount of loans, credit accommodations bank funds for his personal benefit, even if such
and guarantees prescribed in (a) may be increased acquisition was facilitated by a fraudulent loan

application. Directors, officers, stockholders, and their client's transaction is
related interests cannot be allowed to interpose the structured in order to
fraudulent nature of the loan as a defense to escape avoid being the subject of
culapability or their circumvention of the law. The reporting requirements
prohibition under the law covers loan by a bank director under the Act;
or officer which are made directly, indirectly, for himself 5. Any circumstances
or as the representative or agent of others. At the same relating to the transaction
time, he is liable for estafa through falsification of which is observed to
commercial documents. The bank money which came to deviate from the profile of
his possession as a result of the fraudulent loan the client and/or the
application was not his. He remained bank’s fiduciary client's past transactions
with respect to that money, which makes it capable of with the covered
misappropriation or conversion in his hands (Soriano v. institution;
People of the Philippines, et al., G.R. No. 162336, February 6. The transactions are in a
1, 2010) way related to an
unlawful activity or
SPECIAL LAWS offense under this Act
that is about to be, is
ANTI-MONEY LAUNDERING ACT OF 2001 being or has been
(R.A. 9160, AS AMENDED BY RA 9194, committed; or
10167, 10365) 7. Any transactions that is
similar or analogous to
Money laundering is committed by any person who, any of the foregoing." (RA
knowing that any monetary instrument or property 9160, Sec. 3[b-1]).
represents, involves, or relates to the proceeds of any

a. transacts said monetary instrument or property; Upon a verified ex parte petition by the AMLC and after
b. converts, transfers, disposes of, moves, acquires, determination that probable cause exists that any
possesses or uses said monetary instrument or monetary instrument or property is in any way related
property; to an unlawful activity as defined in Section 3(i) hereof,
c. conceals or disguises the true nature, source, the Court of Appeals may issue a freeze order which
location, disposition, movement or ownership of or shall be effective immediately, and which shall not
rights with respect to said monetary instrument or exceed six (6) months depending upon the
property; circumstances of the case: Provided, That if there is no
d. attempts or conspires to commit money laundering case filed against a person whose account has been
offenses referred to in paragraphs (a), (b) or (c); frozen within the period determined by the court, the
e. aids, abets, assists in or counsels the commission of freeze order shall be deemed ipso facto lifted: Provided,
the money laundering offenses referred to in further, That this new rule shall not apply to pending
paragraphs (a), (b) or (c) above; and cases in the courts. In any case, the court should act on
f. performs or fails to perform any act as a result of the petition to freeze within twenty-four (24) hours
which he facilitates the offense of money laundering from filing of the petition. If the application is filed a day
referred to in paragraphs (a), (b) or (c) above. before a nonworking day, the computation of the
twenty-four (24)-hour period shall exclude the
“Money laundering is also committed by any covered nonworking days.
person who, knowing that a covered or suspicious
transaction is required under this Act to be reported to A person whose account has been frozen may file a
the Anti-Money Laundering Council (AMLC), fails to do motion to lift the freeze order and the court must resolve
so.” (Sec. 4, RA 10365, amending Sec. 4, RA 9160). this motion before the expiration of the freeze order.

COVERED SUSPICIOUS No court shall issue a temporary restraining order or a

'Covered 'Suspicious transaction' are writ of injunction against any freeze order, except the
transaction' is a transactions with covered Supreme Court. (Sec. 8, RA 10365, amending RA 9160.)
transaction in cash institutions, regardless of the
or other equivalent amounts involved, where any Safe Harbor Provision
monetary of the following
instrument circumstances exist: No administrative, criminal or civil proceedings, shall lie
involving a total 1. There is no underlying against any person for having made a COVERED
amount in excess of legal or trade obligation, transaction report or a SUSPICIOUS transaction report
Five hundred purpose or economic in the regular performance of his duties and in good
thousand pesos (PhP justification; faith, whether or not such reporting results in any
500,000.00) within 2. The client is not properly criminal prosecution under this Act or any other
one (1) banking day. identified; Philippine law.
(RA 9160, Sec. 3 [b]). 3. The amount involved is
the business or financial ACT (R.A. 10142)
capacity of the client;
4. Taking into account all Rehabilitation
known circumstances, it
may be perceived that the Rehabilitation refers to the restoration of the debtor to
a condition of successful operation and solvency, if it is

shown that its continuance of operation is economically to another (Pre-Week Reviewer in Commercial Law,
feasible and its creditors can recover by way of the Dimaampao & Dumlao-Escalante, 2014).
present value of payments projected in the plan, more if
the debtor continues as a going concern than if its What are the requisites of negotiability? (WUPOA)
immediately liquidated. (Dimaampao, 2017)
1. It must be in Writing and signed by the maker or
Can a distressed corporation file a petition for drawer;
corporate rehabilitation after the dismissal of its 2. Must contain an Unconditional promise or order to
earlier petition for liquidation? Explain. pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
YES. The dismissal of a petition for liquidation does not determinable future time;
preclude the distressed corporation from filing a 4. Must be payable to Order or to bearer; and
petition for corporate rehabilitation. The dismissal of 5. Where the instrument is Addressed to a drawee, he
the petition for liquidation implies that corporation may must be named or otherwise indicated therein with
still be restored to successful operation and solvency. reasonable certainty (NIL, Sec.1).
(Dimaampao, 2017)
When is an instrument payable to order?
Can the corporation file a petition for rehabilitation
first, and after it is dismissed, file a petition for The instrument is payable to order where it is drawn
liquidation? payable to the order of a specified person or to him or to
his order. It may be drawn payable to the order of:
YES. The dismissal of a petition for rehabilitation
connotes that the corporation can no longer be restored. 1. A Payee who is not a maker, drawer, or drawee;
Ergo, it can file a petition for liquidation. (Dimaampao, 2. The Drawer or maker; or
2017) 3. The Drawee; or
4. Two or more payees Jointly; or
Explain the phrase “equality is equity” in corporate 5. One or some of Several payees; or
rehabilitation proceedings. 6. The Holder of an office for the time being (Sec. 8,
“Equality is Equity” means that once the corporation is
taken over by a receiver, all the creditors stand on equal An order instrument is negotiated by indorsement
footing and no one may be paid ahead of the others. This completed by delivery (Sec. 30, NIL). If an order
is consistent with the “pari passu” principle in that all instrument is not indorsed, the negotiation is
assets of a corporation under rehabilitation receivership incomplete and the instrument is in effect, merely
are held in trust for the benefit of all creditors, assigned. The transferee acquires the right to have the
precluding one from obtaining an advantage or indorsement of the transferor. It is only at the time of
preference over another by the expediency of indorsement that negotiation takes effect and the
attachment, execution or otherwise. (Dimaampao, 2017) transferee acquires all the rights of a holder.
(Dimaampao & Dumlao-Escalante, 2014).
When is an instrument payable to bearer? (ENaF
In a broad sense, it is equivalent to winding up, that is, PaLa)
the comprehensive process of settling accounts,
ascertaining and adjusting debts, collecting assets and 1. When it is Expressed to be so payable; (e.g. I
paying off claims. It is a declaration by the trial court of promise to pay to bearer P10,000.00)
the corporation’s insolvency so that its creditors may be 2. When it is payable to a person Named therein or
able to file their claims in the settlement of corporation’s bearer; (e.g. Pay to P or bearer P10,000.00)
debts and obligations. (Pacific Banking Corporation 3. When it is payable to the order of a Fictitious person
Employees Oraganization v. CA, 312 Phil. 578, 592-593) or non-existing person, and such fact was known to
the person making it so payable; (e.g. Pay to John
4. When the name of the Payee does not purport to be
What is Negotiable Instrument? the name of any person; (Pay to cash)
5. When the only or the Last indorsement is an
It is a written contract for the payment of money which indorsement in blank (NIL, Sec 9).
is intended as a substitute for money and passes from
one person to another as money, in such a manner as to What is Fictitious-Payee rule?
give a holder in due course the right to hold the
instrument free from defenses available to prior parties The fictitious-payee rule contemplates that the payee is
(Sundiang Sr. & Aquino, 2011). fictitious or not intended to be true recipient of the
proceeds. The check is considered a bearer instrument
What are the characteristics or features of a negotiable by delivery alone. The underlying theory is
negotiable instrument? that the maker of the check knew that the fictitious
payee cannot indorse the instrument so that he must
1. Negotiability – the negotiable instrument passes have intended for it to be negotiated by mere delivery.
from hand to hand as money so as to give the holder (PNB v. Rodriguez, G.R. No. 170325, September 26, 2008)
in due course the right to hold the instrument and
collect the sum for himself. GR: In case of controversy, the drawer is liable and the
2. Accumulation of secondary contracts– contracts are drawee bank is absolved from liability.
created as the instrument passes from one person
XPN: When there is commercial bad faith, whereby the

drawee bank acts dishonestly and is a party to the promise to repay the same to the depositor or
fraudulent scheme. The check is deemed payable to bearer thereof at a specific time (Caltex
order, and consequently, the drawee bank bears the loss (Philippines), Inc. vs. Court of Appeals and Security
(Ibid). Bank and Trust Company, G.R. No. 97753, August 10,
What are the kinds of negotiable instruments? c. A letter of credit is not negotiable because it is
generally conditional and has limited negotiability
1. Promissory notes (PN) – An unconditional promise because it is issued in favor of a specific person. But
in writing made by one person to another, signed by the Supreme Court held in Lee vs. Court of Appeals,
the maker, engaging to pay on demand, or at a fixed that the drafts issued in connection with the letters
or determinable future time, a sum certain in money of credit are negotiable instruments.
to order or to bearer (NIL, Sec. 184). d. A warehouse receipt is not a negotiable
2. Bill of exchange (BOE) – An unconditional order in instrument because the obligation of a
writing addressed by one person to another signed warehouseman is not to pay but to deliver the goods
by the person giving it, requiring the person to under the warehouse receipt which fails to comply
whom it is addressed to pay on demand or at a fixed with the requirements set forth under Sec. 1 of the
or determinable future time a sum certain in money NIL.
to order or to bearer (NIL, Sec. 126). e. A treasury warrant require appropriations from the
3. Check – A bill of exchange drawn on a bank payable national government which means that the
on demand (NIL, Sec. 185). particular fund may or may not exists which renders
it conditional, thereby non-negotiable.
PARTIES TO A NEGOTIABLE INSTRUMENT f. A certificate of indebtedness is not negotiable. It
merely acknowledges to pay a sum of money to a
Who are the parties to a negotiable instrument? specified persons or entity. Since a certificate of
What are their liabilities? indebtedness which is not payable to order or
bearer but is payable to a specific person is not
In a promissory note there are two parties. negotiable, the assignee takes it subject to the
defect in the title of the assignor.
 The maker who makes the promise and signs the g. The electronic messages are not signed by the
instrument and is primarily liable for the payment investor-clients as supposed drawers of a bill of
of the obligation; exchange; they do not contain an unconditional
 The payee to whom payment is originally payable. order to pay a sum certain in money as the
payment is supposed to come from a specific fund
In a bill of exchange there are four parties. or account of the investor-clients; and, they are not
payable to order or bearer but to a specifically
 The drawer who issues and draws the bill and designated third party. Thus, the electronic
whose liability to pay is only secondary, except messages are not bills of exchange (Hongkong &
when drawee refused to accept; can limit his Shanghai Banking Corporation v. CIR, G.R. Nos.
liability by putting “without recourse”; 166018 & 167728, 04 June 2014).
 The drawee upon whom the bill is drawn may not
be held liable until he becomes acceptor; COMPLETION AND DELIVERY
 The payee to whom payment is originally payable;
 The acceptor who is the drawee who accepts the
bill. Where the instrument is wanting in any material
particular, the person in possession thereof has a prima
PROMISSORY NOTE v. BILL OF EXCHANGE facie authority to complete it by filling up the blanks
therein. (NIL, Sec. 14).
When can you treat a bill of exchange as a
promissory note? (2015 BAR) In order that any such instrument when completed may
be enforced against any person who became a party
1. Where in a bill the drawer and the drawee are the thereto prior to its completion, it must be filled up
same person (NIL, Sec. 130) strictly in accordance with the authority given and
2. The drawee is a fictitious person (NIL, Sec. 130) within reasonable time. If such instrument, after
3. The drawee does not have the capacity to contract completion, is negotiated to a holder in due course, it is
(NIL, Sec. 130) valid and effectual for all purposes in his hands, and he
4. Whether the instrument is so ambiguous that there may enforce it as if it had been filled up strictly in
is doubt whether it is a bill or a note, the holder may accordance with the authority given and within
treat it either at his election (NIL, Sec. 17[e]) reasonable time (Ibid).


Determine the negotiability of the following Where an incomplete instrument has not been
documents. delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of any
a. Postal money order is not a negotiable holder, as against any person whose signature was
instrument. It is governed by postal rules and placed thereon before delivery (NIL, Sec. 15).
regulation and it may only be negotiated once.
b. The certificate of time deposit is a negotiable Q: PN makes a promissory note for P5, 000.00, but
instrument because it is an acknowledgement in leaves the name of the payee in blank because he
writing by the bank of the amount of deposit with a wanted to verify its correct spelling first. He

mindlessly left the note on top of his desk at the end 2. Where the forged signature is not necessary to the
of the workday. When he returned the following holder’s title, in which case, the forgery may be
morning, the note was missing. It turned up later disregarded (NIL, Sec. 48).
when X presented it to PN for payment. Before X, T
who turned out to have filched the note from PN’s What is Cut-off Principle?
office, had endorsed the note after inserting his own
name in the blank space as the payee. PN dishonored In order instruments, parties prior to forgery are
the note, contending that he did not authorize its relieved or cut-off of liability. They cannot be held liable
completion and delivery. But X said he had no by any holder, including a holder in due course.
participation in, or knowledge about the pilferage
and alteration of the note and therefore he enjoys What are the legal consequences when a bank
the rights of a holder in due course under the honors a forged check?
Negotiable Instruments Law. Who is correct and
why? If the drawer's signature is forged, then the drawee
bank is liable because the bank is bound to know the
A: Since the negotiable instrument is still incomplete signature of its customers and if it pays a forged check,
and has not yet been delivered, PN is correct in it must be considered as making the payment out of its
dishonoring the said instrument. Sec. 15 of Act 2031 own funds and cannot ordinarily charge the amount so
provides that where an incomplete instrument has not paid to the account of the depositor whose name was
been delivered, it will not, if completed and negotiated forged. It is also in a superior position to detect the
without authority, be a valid contract in the hands of any forgery because it has a specimen of the signature of the
holder, as against any person whose signature was maker. Lastly, by accepting the instrument, it becomes
placed thereon before delivery. Thus, under this section, an acceptor who admits the genuineness of the drawer’s
it is a real defense that can even be interposed against a signature.
holder in due course.
If the payee’s signature is forged, then drawee bank is
COMPLETE BUT DELIVERED (Sec. 16) liable because it owes to the drawer-depositor an
absolute and contractual duty to pay the check only to
It is incomplete and revocable until delivery of the the person to whom it is made payable. Drawee bank, in
instrument for the purpose of giving it effect (NIL, Sec. such case, should credit back and restore to drawer’s
16). Delivery is essential to the validity of any negotiable account the value of the check wrongfully encashed.
instrument (Sundiang Sr. & Aquino, 2009).
If the indorser’s signature is forged Drawee bank
Q: Jun was to leave for a business trip. As his usual bears the loss as it is under strict liability to pay the
practice, he signed several blank checks. He check to the order of the payee. Payment under forged
instructed Ruth, his secretary, to fill them as indorsement is not to the drawer’s order. Ensuingly, if
payment for his obligations. Ruth filled one check the drawee bank pays a check bearing forged signature
with her name as payee, placed P30, 000 thereon, of indorser, it does so at its own peril.
endorsed and delivered it to Marie. She accepted the
check in good faith as payment for goods she However, the drawee bank may pass the liability to
delivered to Ruth. Eventually, Ruth regretted what the collecting bank who cannot interpose the defense
she did and apologized to Jun. immediately, he of forgery. The collecting bank is an indorser who
directed the drawee bank to dishonor the check. warrants that the instrument is genuine and in all
When Marie encashed the check, it was dishonored. respect what it purports to be (NIL, Sec. 16). The
Is Jun liable to Marie? (2006 BAR) collecting bank had no right to be paid by the drawee
bank since the forged indorsement is inoperative. The
A: YES. Considering that Marie accepted the check in collecting bank my ultimately recover from the forger.
good faith and for value, she is a holder in due course,
who has the right to enforce payment of the check for Who are the persons precluded from setting up the
the full amount thereof against Jun. That the blank check defense of forgery? (2010 BAR)
was filled-up not in accordance with the authority given
is only a personal defense that cannot be used against a 1. Those who admit/warrant the genuineness of the
holder in due course. signature such as indorsers, persons negotiating by
delivery and acceptor; (NIL, Sec 56).
FORGERY 2. Those who by their acts, silence, or negligence, are
estopped from claiming forgery;
What is the effect of forgery in a negotiable 3. A holder of a bearer instrument who subsequently
instrument? negotiates such instrument with a prior forged
indorsement (forged indorsement is not necessary to
GR: It does not avoid the instrument but only the forged his title it being a bearer instrument).
signature. The signature is wholly inoperative. In other
words, rights may still exist and be enforced by virtue of ACCOMODATION PARTY
such instrument as to those signatures thereto are found
to be genuine. Who is an accommodation party?

XPNs: An accommodation party is one who has signed the

instrument as maker, drawer, acceptor, or indorser,
1. If the party against whom it is sought to enforce without receiving value therefor, and for the purpose of
such right is precluded from setting up forgery or lending his name to some other person (NIL, Sec. 29).
want of authority (NIL, Sec. 23).

What are the requisites to be an accommodation Under the "shelter principle," the HIDC, by negotiating
party? the instrument, to a party not an HIDC, transfers all his
rights as such holder to the latter and acquires the right
1. Accommodation party must sign as maker, drawer, to enforce the instrument as if he was an HIDC. The
acceptor or indorser; principle applies to a "sheltered" holder who is not a
2. No value is received by the accommodation party party to any fraud or illegality impairing the validity of
from the accommodated party; and the instrument.
3. The purpose is to lend the name.
Q: A drawer issued a check for the payment of a car,
The accommodation party, as surety, is deemed an which check was delivered to the agent of the owner
original promisor and debtor from the beginning; he is of the car for safekeeping. The check was then used
considered in law as the same party as the debtor in by the agent to pay the medical bills of his wife in a
relation to whatever is adjudged touching the obligation clinic. The projected purchase did not materialize. Is
of the latter since their liabilities are interwoven as to be the clinic considered a holder in due course?
inseparable. Although a contract of suretyship is in
essence accessory or collateral to a valid principal A: NO, the rule that a possessor of the instrument is
obligation, the surety’s liability to the creditor is prima facie a HIDC does not apply to the clinic because it
immediate, primary and absolute; he is directly and cannot be said to have acquired the negotiable
equally bound with the principal. As an equivalent of a instrument in good faith for there was a defect in the title
regular party to the undertaking, a surety becomes liable of the holder (agent), since the instrument was not
to the debt and duty of the principal obligor even payable “to the agent or to bearer;” also the drawer had
without possessing a direct or personal interest in the no account with the clinic, the agent did not show or tell
obligations nor does he receive any benefit therefrom. the payee why he had the check in his possession and
why he was using it for the payment of his own account.
Can a corporation act as an accommodation party?
As the holder’s title was defective or suspicious, it
NO. A corporation cannot act as an accommodation cannot be stated that the payee acquired the check
party. The issue or endorsement of negotiable without knowledge of said defect in holder’s title, the
instrument by a corporation without consideration and presumption that the clinic is a HIDC does not exist (De
for accommodation of another is ultra vires. In such Ocampo & Co. v. Gatchalian, G.R. No. L-15126, November
case, the corporation incurs no liability. The officer who 30, 1961).
signed shall be personally liable. (Dimaampao &
Dumlao-Escalante, 2014) What are the defenses against a Holder?

An accommodation party cannot set up lack of 1. Real or Absolute Defenses – those that are attached
consideration against any holder, even as to one who is to the instrument itself and are available against all
not a holder in due course. parties, both immediate and remote, including
holders in due course.
HOLDER IN DUE COURSE (HIDC) 2. Personal or Equitable Defenses – defenses which are
only available against a holder not in due course.
GR: Every holder is deemed prima facie to be an HIDC. Those which grow out of the agreement or conduct
of a particular person which renders it inequitable
XPN: When it is shown that the title of any person who for him, though holding the legal title, to enforce it
has negotiated the instrument was defective. But this is against the party sought to be made liable.
only as regards a party who became such after the
acquisition of the defective title (NIL, Sec.59). What are the Real or Absolute Defenses available
against the Holder?
What constitutes a Holder in Due Course?
1. Incomplete and undelivered instrument
A holder in due course is a holder who has taken the 2. Minority (available only to the minor)
instrument under the following conditions: 3. Incapacity as far as incapacitated persons are
1. That is Complete and regular upon its face; 4. Ultra–vires acts of a corporation
2. Became the holder before it was Overdue, and 5. Want of Authority, apparent and real
without notice that it has been previously 6. Fraudulent alteration
dishonored, if such was the fact; 7. Forgery
3. Took it in good Faith and for value; 8. Duress amounting to Forgery
4. At the time it was negotiated to him, he had no 9. Prescription
notice of any Infirmity in the instrument or defect in 10. Other infirmities appearing on the face of the
the title of the person negotiating it. (NIL, Sec. 52) instrument
11. Discharge in insolvency
A holder in due course holds the instrument free from 12. Illegal Contract
any defect of title of prior parties and from defenses 13. Fraud in Factum or Esse Contractus
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount What are the Personal or Equitable Defenses
thereof. available against the Holder?

Discuss the Shelter principle or Holder in Due 1. Innocent alteration or spoliation

Course by Subrogration. 2. Discharge of party Secondarily liable by discharge of
prior party.
3. Set-off between immediate parties

4. Filling up of blanks not in accordance with the a. Instrument is genuine;
Authority given b. He has good title to it;
5. Acquisition of instrument by Duress or force and c. Capacity to contract of all prior parties; and;
fear; unlawful means or for an illegal consideration d. No knowledge of any fact which would impair the
6. Discharge by payment or renunciation or release validity of the instrument. (NIL, Sec.65)
before maturity
7. Failure or absence of consideration. NOTE: He is liable to all parties who derive their title
8. Undelivered complete instrument through his indorsement.
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud A person negotiating by delivery has the same
warranties as a qualified indorser. But unlike a qualified
LIABILITIES OF PARTIES indorser, a person negotiating by mere delivery is liable
only to his immediate transferee. (NIL, par. 2, Sec. 65)
A party primarily liable is unconditionally bound and
absolutely required to pay the instrument upon NOTE: Person negotiating by mere delivery and a
maturity. While a party secondarily liable is qualified indorser’s secondary liability is limited,
conditionally bound to pay only after the ff. conditions namely, to their warranties.
have been fulfilled:
How are negotiable instruments discharged?
1. Due presentment for payment or acceptance to
primary party (NIL, Sec. 143); a. By payment in due course by or on behalf of the
2. Dishonor by such party (NIL, Sec.70); principal debtor;
3. Taking of proceedings required by law (NIL, b. By payment in due course by the party
Sec.152) accommodated, where the instrument is made or
accepted for his accommodation
Negotiable instrument should be presented for payment c. By the intentional cancellation thereof by the holder
to the party primarily liable (NIL, Sec. 72[d]): d. By any other act which will discharge a simple
contract for the payment of money
What are the warranties and liabilities of parties e. When the principal debtor becomes the holder of
who are secondarily liable? the instrument at or after maturity in his own right
(Sec. 119, NIL).
Absolute Liability
What are the requisites of payment in due course?
A drawer of a Bill of Exchange warrants:
a. The existence of payee and his then capacity to 1. It is made at or after the date of Maturity;
indorse; 2. To the Holder thereof;
b. That the instrument will be accepted or paid upon 3. In Good faith and without notice that holder’s title is
due presentment by the party primarily liable defective (NIL, Sec. 88).
according to its tenor; and
c. That if dishonored, he will pay the party entitled to The term “in good faith” refers to the maker or acceptor
be paid. (NIL, Sec. 61.) and not to the holder.

A general indorser warrants that: What is reasonable time as applied to presentment?

i. Instrument is genuine
ii. He had good title to it Reasonable time is relative. Regard is to be had to the
iii. All prior parties had capacity to contract facts of each case, usage of business and trade, and the
iv. Instrument, at the time of indorsement, was valid nature of the instrument. With respect to checks, current
and subsisting; banking practice dictates that the check becomes stale if
v. On due presentment, it shall be accepted or paid, or it is not presented for payment within 6 months (180
both according to its tenor days) from issuance.

If the instrument is dishonored and the necessary NOTICE OF DISHONOR

proceedings on dishonor be duly taken, he will pay the
holder. (NIL, Sec. 66.) What is a notice of dishonor?

An irregular indorser is not a party to the instrument It is a notice given by the holder to the parties
but he places his signature in blank before delivery. He secondarily liable, drawer and each indorser, that the
is not a party but he becomes one because of his instrument was dishonored by non-payment or non-
signature in the instrument. acceptance by the drawee/maker.
a. In an order instrument, liable to the payee and all
subsequent parties Persons primarily liable need not be given notice of
b. If bearer instrument or payable to order of maker or dishonor because they are the ones who dishonored the
drawer, liable to all parties subsequent to the maker instrument.
or drawer
What are the instances when notice of dishonor is
If he signs for accommodation of the payee, liable to all NOT necessary?
parties subsequent to payee. (NIL, Sec. 64.)
1. Waiver of notice (NIL, Sec. 109)
Limited Liability 2. Waiver of protest (NIL, Sec. 111)
3. When notice is dispensed with when after exercise
A qualified indorser warrants that the: of reasonable diligence, notice cannot be given or

does not reach the parties sought to be charged 3. Where the bill is drawn payable elsewhere than at
(NIL, Sec. 112) the residence or place of business of the drawee
4. Drawer in cases under Sec. 114, NIL. (NIL, Sec. 143, par. 1).
5. Indorser in cases under Sec. 115, NIL.; and
6. Where due notice of dishonor by non-acceptance The holder must either present it for acceptance or
has been given (notice of dishonor by non-payment negotiate it within a reasonable time, otherwise, the
not necessary). (NIL, Sec. 116.) drawer and all indorsers are discharged (NIL, Sec. 144).

ACCEPTANCE What is constructive acceptance?

What is an acceptance of a bill? The drawee is deemed to have accepted the instrument
if he destroys the same, refuses within 24 hours after
It is a signification by the drawee of his assent to the delivery or within such other period as the holder may
order of the drawer (NIL, Sec. 132). allow, to return the bill accepted or not accepted to the
holder. (Sec. 137)
What are the requisites of acceptance?
1. In writing, except constructive acceptance and to a
foreign bill payable in another state (unless the What is a promissory note?
other state requires for written acceptance);
2. Signed by the drawee (without it, he is not liable); An unconditional promise in writing made by one
3. Must express a promise to pay money (not goods); person to another, signed by the maker, engaging to pay
4. Delivered to the holder (before delivery or on demand, or at a fixed or determinable future time, a
notification, acceptor may revoke or cancel his sum certain in money to order or to bearer (NIL, Sec.
acceptance). 184).

Upon acceptance, the bill, in effect becomes a note. The What is a check?
drawee who thereby becomes an acceptor assumes the
liability of the maker (who has primary liability) and the It is a bill of exchange drawn on a bank and payable on
drawer, that of the first indorser. demand (NIL, Sec. 185). A check must be presented for
payment within a reasonable time after its issue or the
Is acceptance necessary to make any party to the bill drawer will be discharged from liability thereon to the
liable? extent of the loss caused by the delay.

GR: Acceptance is not necessary to render any party to What are the essential characteristics of checks?
the bill liable (NIL, Sec. 143, par. 2).
1. They are drawn on a bank; and
XPNs: 2. Payable instantly on demand.
1. Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the What is the distinction between a check and a bill of
instrument; exchange?
2. When bill expressly stipulates that it shall be
presented for acceptance; or


Drawee Always drawn on a bank or banker May or may not be drawn on a bank and need not be
against a previous deposit of funds drawn against a deposit
Payability Always payable on demand Either payable on demand or at a fixed or determinable
future time (NIL, Sec.4)
Function Ordinarily intended for immediate Intended for circulation as instrument of credit
Presentment for Must be presented for payment Must be presented for payment within a reasonable time
Payment within a reasonable time after its after its last negotiation
issue(NIL, Sec.186) (NIL, Sec. 171)
Discharge of When a check is accepted or certified, They remain liable despite acceptance
Liability the drawer & indorsers are (NIL, Sec. 84)
discharged from liability thereon
(NIL, Sec. 188)
Effect of the Death of the drawer of a check with Death of the drawer of an ordinary bill does not revoke
Death of the the knowledge of the bank revokes the authority of the drawee to pay.
Drawer the authority of the bank to pay.
Presentment for Need not be presented for Must be presented for acceptance in certain cases (NIL,
Acceptance acceptance (NIL, Sec. 185) Sec. 143)

What is the effect of erasure or alteration on checks? b. That the check may be negotiated only once - to one
who has an account with a bank;
Pursuant to Philippine Clearing House Corporation c. That the act of crossing the check serves as a warning
Memorandum Circular No. 15-460A effective January to the holder that the check has been issued for
4, 2016, the following shall no longer be eligible or definite purpose so that he must inquire if he has
acceptable for clearing: received the check pursuant to the purpose.
Otherwise, he is not an HIDC (State Investment House
a. Any check that shows or indicates on its face erasure v. IAC, G.R. No. 72764, July 13, 1989).
or alteration regardless of any signature or initials
that appear to indicate authorization of the NOTE: Manager’s and cashier’s checks are still the
alteration or erasure; or subject of clearing to ensure that the same have not been
b. Does not indicate the date, payee, amount payable materially altered or otherwise completely
in figures, amount payable in words, or signature of counterfeited. However, manager’s and cashier’s checks
the drawer are preaccepted by the mere issuance thereof by the
bank, which is both its drawer and drawee. Thus, while
Material alteration on checks manager’s and cashier’s checks are still subject to
clearing, they cannot be countermanded for being
When the drawee bank pays a materially altered check, drawn against a closed account, for being drawn against
it violates the terms of the check, as well as its duty to insufficient funds, or for similar reasons such as a
charge its client’s account only for bona fide condition not appearing on the face of the check
disbursements he had made. If the drawee did not pay (Metrobank and Trust Company vs Chiok, GR No. 172652,
according to the original tenor of the instrument, as November 26, 2014).
directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to Q: Po Press issued in favor of Jose a postdated
deduct the erroneous payment it made from the crossed check, in payment of newsprint which Jose
drawer’s account which it was expected to treat with promised to deliver. Jose sold and negotiated the
utmost fidelity. The drawee, however, still has recourse check to Excel Inc. at a discount. Excel did not ask
to recover its loss. The collecting banks are ultimately Jose the purpose of crossing the check. Since Jose
liable for the amount of the materially altered check failed to deliver the newsprint, Po ordered the
(Areza vs. Express Savings Bank, Inc., G.R. No. 176697, drawee bank to stop payment on the check. Efforts
September 10, 2014). of Excel to collect from Po failed. Excel wants to
know from you as counsel:
Is a manager’s check as good as cash? Why or why
not? (2015 BAR) a. Whether as second indorser and holder of the
crossed check, is it a holder in due course?
YES, the Supreme Court held in various decisions that a b. Whether Po’s defense of lack of consideration as
manager’s check is good as cash. A manager’s check is a against Jose is also available as against Excel?
check drawn by the bank against itself. It is deemed pre- (1994, 1995, 2005 BAR)
accepted by the bank from the moment of issuance. The
check becomes the primary obligation of the bank which A:
issues it and constitutes its written promise to pay. By
issuing it, the bank in effect commits its total resources, a. Excel Inc. is not a holder in due course. The act of
integrity and honor behind the check. (Tan v. Court of crossing the check imposes upon the holder thereof
Appeals, 239 SCRA 310; International Corporate Bank vs the duty to ascertain the indorser’s, title to the check
Gueco, 351 SCRA 516; Metrobank and Trust Company vs or the nature of his possession or the purpose for
Chiok, GR No. 172652, November 26, 2014). which it was issued. Excel is guilty of gross
negligence amounting to legal absence of good faith
What is a cross check? for its failure to inquire from Jose the purpose for
which the three checks were crossed despite the
Done by writing 2 parallel lines on the left top portion of warning of the crossing, hence, it is not deemed a
the check. The marking signifies that the bank should holder in due course.
pay only with the intervention of the company only. b. YES, the defense of lack of consideration as against
Jose is also available as against Excel. For not being
What is the effect of crosschecking? a holder in due course, Excel is subject to personal
defenses as if the check were non-negotiable, such
a. That the check may not be encashed but only as lack of consideration between Po Press and Jose.
deposited in the bank; In this case, Jose’s failure to deliver the newsprint
resulted in the absence of consideration for the

issuance of the check. Consequently, Po Press against all risk or contingencies of loss arising from
cannot be made liable to pay the face value of the any unsound or unsafe banking practices including
check. unforeseen adverse effects of the continuing crisis
involving the banking and financial sector in the
What is the meaning of the notation “Account Payee Asian region. Does BD have an insurable interest
Only” in a crossed check? within the meaning the Insurance Code of the
Philippines? (2000 BAR)
A crossed check with the notation account payee can
only be deposited in the named payees account. It is A: YES. BD has insurable interest in his bank deposit. In
gross negligence for a bank to ignore this rule solely on case of loss of said deposit, more particularly to the
the basis of a third partys’ oral representations of having extent of the amount in excess of the limit covered by the
a good title thereto (Equitable Banking Corporation v. PDIC Act, BD will be damnified. He will suffer pecuniary
Special Steel Products, G.R. No. 175350, June 13, 2012, in loss of P400, 000, that is, his bank deposit of half a
Divina, 2014). million pesos minus P100, 000 which is the maximum
amount recoverable from the PDIC.
Distinguish clearly crossed checks from cancelled
checks (2004 BAR) Q: In return for the 20 years of faithful service of X as
a house helper to Y, the latter promised to pay P100,
A crossed check is one with two parallel lines drawn 000 to X’s heirs if he (X) dies in an accident by fire. X
diagonally on the left portion of the check. On the other agreed. Is this an insurance contract? (2011 BAR)
hand, a cancelled check is one marked or stamped "paid"
and/or "cancelled" by or on behalf of a drawee bank to a. Yes, since all the elements of an insurance contract
indicate payment thereof. are present.
b. Yes, since X’s services may be regarded as the
Stale check: A check which has not been presented for consideration.
payment within a reasonable time after its issue. It is c. No, since Y actually made a conditional donation
valueless and thus, should not be paid. A check becomes in X’s favor.
stale 6 months from date of issue. d. No, since it is in fact an innominate contract
between X and Y.
A: b) No, since Y actually made a conditional donation in

Q: What is a Contract of Insurance? Elements of an Insurance Contract

A: It is an agreement whereby one undertakes for a 1. Scheme to distribute losses – Such assumption of risk
consideration to indemnify another against the loss, is part of a general scheme to distribute actual losses
damage or liability arising from an unknown or among a large group or substantial number of
contingent event (IC, Sec. 2[a]). persons bearing a similar risk.
2. Payment of premium – As consideration for the
Q: May a member of the MILF or its breakaway insurer’s promise, the insured makes a ratable
group, the Abu Sayyaf, be insured with a company contribution called “premium,” to a general
licensed to do business under the Insurance Code of insurance fund.
the Philippines? Explain. 3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible of
A: YES. A member of the MILF or the Abu Sayyaf may be pecuniary estimation, known as “insurable
insured with a company licensed to do business under interest.”
the Insurance Code of the Philippines. What is 4. Assumption of Risk – The insurer assumes that risk
prohibited to be insured is a public enemy. A public of loss for a consideration.
enemy is a citizen or national of a country with which the 5. Risk of loss – The insured is subject to a risk of loss
Philippines is at war. Such member of the MILF or the through the destruction or impairment of that
Abu Sayyaf is not a citizen or national of another interest by the happening of designated peril.
country, but of the Philippines.
Parties to an Insurance Contract
Q: BD has a bank deposit of half a million pesos.
Since the limit of the insurance coverage of the PDIC 1. Insurer – party who assumes or accepts the risk of
is only 1/10 of BD’s deposit, he would like some loss and undertakes for a consideration to
protection for the excess by taking out an insurance indemnify the insured on the happening of a

specified contingency or event. The term “insurer” determine who should be entitled to the proceeds of
no longer includes “individuals” under RA 10607 the policy.
2. Insured – person in whose favor the contract is
operative and is indemnified. If you were the judge, how would you decide the said
interpleader action? Explain. (1985 BAR)
The insured is not always the person to whom the
proceeds are paid. A: If I were the judge, I would decide that the legal wife,
Clara, be entitled to the proceeds of insurance taken by
3. Assured/Beneficiary – a person designated by the Eduardo Fernandez who named his common-law wife,
terms of the policy to receive the proceeds of the Diana, as his revocable beneficiary, at the time they were
insurance. He may be the insured or a third party in guilty of concubinage. In that case, the designation of
the contract for whose benefit the policy is issued Diana is void, being prohibited by the New Civil Code
and to whom the loss is payable. (Art. 739 and 2012). The guilt of Eduardo and Diana for
concubinage may be proved by mere preponderance of
Q: On July 1, 1979, Crispulo, married to Laura with evidence in the same action and there is no need for a
whom he has two legitimate children, was issued criminal conviction for concubinage.
Policy No. 8008 of the Midland Life Insurance Co. on
a whole-life plan for P10, 000. He designated Angie, Q: What are the effects of an irrevocable designation
his common-law wife as the recoverable beneficiary. of a beneficiary under the Insurance Code? Explain.
He referred to her, in his application and policy, as (2005 BAR)
his wife. Two years later, Crispulo died. Angie filed
her claim for the proceeds of the policy as the A: The irrevocable beneficiary has a vested interest in
designated beneficiary therein. The widow, Laura, the policy, including its incident such as the policy loan
also filed her claim as legal wife. and cash surrender value.

If you were the Legal Counsel for the Insurance MARINE INSURANCE
Company, to whom would you adjudicate the
proceeds of the insurance policy? Reason out your Risk insured against in marine insurance
answer briefly. (1981 BAR)
GR: In the usual form of a marine policy, the risks
A: I would adjudicate the proceeds of the insurance insured against are only “perils of the sea”.
policy to Laura, the legal wife. In the appointment of
beneficiary, the New Civil Code imposed certain XPN: When the insurance is an “all risk policy” and thus
limitations; one of them being that the insured may not covers even “perils of the ship”.
appoint, as his beneficiary, one with whom he is guilty of
concubinage, at the time of designation. Since Crispulo XPN to XPN: When the risks are expressly excepted by
was married to Laura at the time when he designate as the “all risk policy”.
his beneficiary his concubine Angie, with whom he was
guilty of concubinage at the time of designation, Laura Q: What warranties are implied in marine
may have said designation of Angie nullified, by mere insurance? (2000 BAR)
preponderance of evidence in the same action for
nullification. There is even no need of the criminal A: The following warranties are implied in marine
conviction for concubinage. (Arts. 739 and 2012, N.C.C.; insurance:
Insular Life assn. Co., Ltd. v. Ebrado, Oct. 28, 1977; 80 SCRA
181) 1. That the ship is seaworthy to make the voyage
and/or to take in certain cargoes;
Q: Eduardo Fernandez applied for and was issued 2. That the ship shall not deviate from the voyage
Policy No. 0777 by Atlas Life Insurance Corporation insured;
on a whole-life plan for P200, 000. Although he was 3. That the ship shall carry the necessary documents
married to Clara, with whom he had 5 legitimate to show nationality or neutrality and that it will not
children, he designated his common-law wife, Diana carry document which will cast reasonable
Cruz, as his revocable beneficiary in the policy, and suspicion thereon;
referred to Diana in his application and policy, as his 4. That the ship shall not carry contraband, especially
wife. 5 years thereafter, he died. Diana immediately if it is making voyage through belligerent waters.
filed her claim for the proceeds of the policy as the
designated beneficiary. Clara also filed her claim as Q: Paolo, the owner of an ocean-going vessel, offered
legal wife. The insurance company filed a petition to transport the logs of Constantino from Manila to
for Interpleader before the RTC of Rizal to Nagoya. Constantino accepted the offer, not knowing

that the vessel was manned by an irresponsible crew b. YES, the heirs of the 3 crew members perished can
with deep-seated resentments against Paolo, their recover from CSC for negligence which constitutes a
employer. quasi-delict in this case.

Constantino insured the cargo of logs against both Perils of the Sea and Perils of the Ship
perils of the sea and barratry. The logs were
improperly loaded on one side, thereby causing the The rusting of steel pipes in the course of a voyage is a
vessel to tilt on one side. On the way to Nagoya, the “peril of the sea” in view of the toll on the cargo of wind,
crew unbolted the sea valve of the vessel causing water, and salt conditions. Moreover, it is a cardinal rule
water to flood the ship hold. The vessel sank. in the interpretation of contracts that any ambiguity
therein should be construed against the
Constantino tried to collect from the insurance maker/issuer/drafter thereof, namely, the insurer.
company which denied liability, given the Besides the precise purpose of insuring cargo during a
unworthiness of both the vessel and its crew. voyage would be rendered fruitless. (Cathay Insurance
Constantino countered that he was not the owner of Co., v. CA, et. al., G.R. No. L-76145, June 30, 1987)
the vessel and he could therefore not be responsible
for conditions about which he was innocent. Is the Q: A marine insurance policy on a cargo states that
insurance company liable? (2010 BAR) “the insurer shall be liable for losses incident to
perils of the sea”. During the voyage, seawater
A: NO. The insurance company is not liable because entered the compartment where the cargo was
there is an implied warranty in every marine insurance stored due to the defective drainpipe of the ship. The
that the ship is seaworthy whoever is insuring the cargo, insured filed an action on the policy for recovery of
whether it be the shipowner or not. There was a breach the damages caused to the cargo. May the insured
of warranty, because the logs were improperly loaded recover damages? (1998 BAR)
and the crew was irresponsible. It is the obligation of the
owner of the cargo to look for a reliable common carrier A: NO. the proximate cause of the damage to the cargo
which keeps its vessel in seaworthy condition. insured was the defective drainpipe of the ship. This is
peril of the ship, and not peril of the sea. The defect in
Q: On October 30, 2007, M/V Pacific, a Philippine the drainpipe was the result of the ordinary use of the
registered vessel owned by Cebu Shipping Company ship. To recover under a marine insurance policy, the
(CSC), sank on her voyage from Hong Kong to Manila. proximate cause of the loss or damage must be peril of
Empire Assurance Company (Empire) is the insurer the sea.
of the lost cargoes loaded on board the vessel which
were consigned to Debenhams Company. After it Q: Perils of the ship, under marine insurance law,
indemnified Denbenhams, Empire as subrogee filed refer to loss which in the ordinary course of events
an action for damages against CSC. results from (2011 BAR)

a) Assume the vessel was not seaworthy as in fact a. Natural and inevitable actions of the sea.
its hull had leaked, causing flooding in the b. Natural and ordinary actions of the sea.
vessel. Will your answer be the same? Explain. c. Unnatural and inevitable actions of the sea.
b) Assume the facts in question (a). Can the heirs of d. Unnatural and ordinary actions of the sea.
the 3 crew members who perished recover from
CSC? Explain fully. (2008 BAR) A: a. Natural and inevitable actions of the sea.

A: Q: T Shipping, Co. insured all of its vessels with R

insurance, Co. The insurance policies stated that the
a. NO, my answer will be different. Allowing the vessel insurer shall answer for all damages due to perils of
to depart on a voyage when it is not seaworthy is a the sea. One of the insured’s ship, the MV Don
violation of the implied warranty of seaworthiness, Priscilla, ran aground in the Panama Canal when its
and thus constitutes negligence on the part of owner engine pipes leaked and the oil seeped into the cargo
of the ship and the ship captain. The hypothecary compartment. The leakage was caused by the
principle in maritime commerce—limiting the ship extensive mileage that the ship had accumulated.
owner’s liability to the amount of insurance May the insurer be made to answer for the damage
proceeds—is not applicable when the to the cargo and the ship? (2011 BAR)
unseaworthiness of the vessel is due to the owner’s
fault or negligence. a. Yes, because the insurance policy covered any or
all damage arising from perils of the sea.

b. Yes, since there appears to have been no fault on SURETYSHIP
the part of the shipowner and ship captain.
c. No, since the proximate cause of the damage was It is an agreement whereby a party called the “surety”
the breach of warranty of seaworthiness of the ship. guarantees the performance by another party called the
d. No, since the proximate cause of the damage was “principal or obligor” of an obligation or undertaking in
due to ordinary usage of the ship, and thus not due favor of a third party called the “obligee”. It includes
to perils of the sea. official recognizances, stipulations, bonds or
undertakings issued by any company by virtue and
A: d. No, since the proximate cause of the damage was under the provisions of Act No. 536, as amended by Act
due to ordinary usage of the ship, and thus not due to No. 2206 (IC, Sec. 177).
perils of the sea.
Nature of liability of surety
1. Solidary – Joint and several with the obligor and
Third party liability insurance 2. Limited or fixed – Limited to the amount of the bond
(It cannot be extended by implication).
The insurer assumes the obligation by paying the 3. Contractual – It is determined strictly by the terms
injured third party to whom the insured is liable. Prior of the contract of suretyship in relation to the
payment by the insured to the injured third person is not principal contract between the obligor and the
necessary in order that the obligation of the insurer may obligee (IC, Sec. 178).
arise. The moment the insured becomes liable to third
persons, the insured acquires an interest in the LIFE INSURANCE
insurance contract which may be garnished like any
other credit (Perla Compania de Seguros, Inc. vs. Kinds of life insurance policies
Ramolete, G.R. No. L-60887, November 13, 1991).
1. Ordinary life, general life or old line policy – Insured
Source of liability: The direct liability of the insurer pays a premium every year until he dies. Cash
under indemnity contract against third party liability surrender value after 3 years.
does not mean that the insurer can be held solidarily 2. Limited payment – Insured pays premium for a
liable with the insured. The insurer’s liability is based on limited period. If he dies within the period, his
contract; that of the insured is based on tort. (1996, beneficiary is paid; if he outlives the period, he does
2000 BAR) not get anything.
3. Endowment – insured pays premium for specified
Liability of the insurer v. Liability of the insured period. If he outlives the period, the face value of the
policy is paid to him; if not, his beneficiaries receive
INSURER INSURED the benefit.
The liability is direct but Liability is direct and can be 4. Term insurance – insured pays premium only once,
the insurer cannot be held liable with all the parties and he is insured for a specified period. If he dies
held solidarily liable at fault. within the period, his beneficiaries benefit. If he
with the insured and outlives the period, no person benefits from the
other parties at fault. insurance.
The third-party liability The liability extends to the 5. Industrial life – entitles the insured to pay premiums
is only up to the extent amount of actual and other weekly, or where premiums are payable monthly or
of the insurance policy damages. (Heirs Poe v. oftener (Sundiang Sr. & Aquino, 2014).
and that required by Malayan Insurance, G.R. No.
Indemnity against third party liability: The third
persons to whom the insured is liable, can sue directly No fault indemnity clause (1994 BAR)
the insurer upon the occurrence of the injury or event
upon which the liability depends.The purpose is to It is a clause where the insurer is required to pay a third
protect the injured person against the insolvency of the party injured or killed in an accident without the
insured who causes such injury and to give him a certain necessity of proving fault or negligence on the part of the
beneficial interest in the proceeds of the policy. It is as if insured. There is a stipulated maximum amount to be
the injured person were especially named in the policy recovered.
(Shafer vs. RTC Judge, G.R. No. 78848, November 14, 1988;
1996 BAR). Rules under the “no fault indemnity clause”

1. The total indemnity in respect of any one person with the law, and is not disqualified (Villacorta v.
shall not exceed P15, 000 for all motor vehicles (Ins. Insurance Commissioner, G.R. No. 54171, October 28,
Memo. Circ. No. 4-2006). 1980).

2. Proof of loss: The main purpose of this clause is to require a

a. Police report of accident person other than the insured, who drives the car on
b. Death certificate and evidence sufficient to the insured’s order or with his permission, to be
establish proper payee duly licensed drivers and have no disqualification to
c. Medical report and evidence of medical or drive a motor vehicle.
hospital disbursement (IC, Sec. 391 [3]).
3. Claim may be made against one motor vehicle only Theft clause
(Sec. 391 [c], ibid).
4. In case injury of an occupant of a vehicle, the claim There is theft if the vehicle is taken with intent to gain
shall lie against the insurer of the vehicle in which without the consent of the insured-owner. Thus, there is
the occupant is riding, mounting or dismounting theft even if:
from (ibid).
5. In any other case (not an occupant), claim shall lie 1. The vehicle is returned;
against the insurer of the directly offending vehicle 2. The vehicle was stolen by the driver of the insured
6. In all cases, the right of the party paying the claim to (Alpha Insurance and Surety Company v. Castor, G.R.
recover against the owner of the vehicle responsible 198174, September 2, 2013); (2014 BAR)
for the accident shall be maintained 3. The vehicle was taken to the owner of a repair shop
for the purpose of repair and in order to attach
Authorized driver clause accessories (Paramount Insurance v. Spouses
Remondeulaz, G.R. No. 173773, November 28, 2012)
It indemnifies the insured owner against loss or damage
to the car but limits the use of the insured vehicle to:

1. The insured himself; or

The insured need not prove that he has a driver’s

license at the time of the accident if he was the
driver (Sundiang Sr. & Aquino, 2014).

2. Any person who drives on his order or with his

permission; provided, that the person driving is
permitted to drive the motor vehicle in accordance



GR: Every person has an unlimited insurable Limited to the actual value of the property
interest in his own life

As to extent XPN: Where life insurance is taken out by a

creditor on the life of the debtor, insurable
interest is limited to the amount of debt
GR: Must exist both at the time the policy takes effect and
When must the time of loss, but need not exist in the period in
insurable Must exist at the time the policy takes effect between (Sec. 19, ibid).
interest and need not exist thereafter (IC, Sec. 19).
exist XPN: Secs. 21-24; 25, ibid.

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

INSURABLE INTEREST IN LIFE Irrevocable designation of the beneficiary to the

assignment of the policy: The insured cannot assign
1. Insurance upon one’s life – are those taken out by the policy if the designation of the beneficiary is
the insured upon his own life (IC, Section 10[a]) for irrevocable. The irrevocable beneficiary has a vested
the benefit of himself, or of his estate, in case it right (Sundiang Sr. & Aquino, 2014).
matures only at his death, for the benefit of third
person who may be designated as beneficiary. Effects of Irrevocable Designation of a Beneficiary:
2. Insurance upon life of another – are those taken out
by the insured upon the life of another. Where a a. The beneficiary designated in a life insurance
person names himself beneficiary in a policy he contract cannot be changed without the consent of
takes on the life of another, he must have insurable the beneficiary. (Gercio v. Sun Life Assurance of
interest in the life of the latter (De Leon, 2010). This Canada, 48 Phil. 53, 28 September 1925)
class includes the following: b. A new beneficiary cannot be added to the
irrevocably designated beneficiary for this would in
a. His spouse and of his children. effect reduce the latter’s vested rights. (Go v.
b. Any person on whom he depends wholly or in Redfern, 72 Phil. 71, 25 April 1941)
part for education or support, or in whom he c. The irrevocably designated beneficiary may obtain
has a pecuniary interest. a policy loan to the extent stated in the schedule of
c. Of any person under a legal obligation to him for values attached to the policy.
the payment of money, or respecting property d. The insured cannot take the cash surrender value
or services, of which death or illness might assign or even borrow on said policy without the
delay or prevent the performance. consent of the beneficiary.
d. Of any person upon whose life any estate or
interest vested in him depends (IC, Sec. 10). Q: Blanco took out a P1 M life insurance policy
naming his friend and creditor, Montenegro, as his
Persons prohibited from being designated as beneficiary. When Blanco died, his outstanding loan
beneficiaries (1998 BAR) obligation to Montenegro was only P50, 000.
Blanco’s executor contended that only P50, 000 out
1. Those made between persons who were guilty of of the insurance proceeds should be paid to
adultery or concubinage at the time of donation. Montenegro and the balance of P950, 000 should be
Finding of guilt in a civil case is sufficient. paid to Blanco’s estate.
2. Those made between persons found guilty of the
same criminal offense, in consideration thereof. Is the executor’s contention correct? Reason out
3. Those made to a public officer or his wife, your answer. (1987 BAR)
descendants or ascendants by reason of his office.
A: The contention of the executor is incorrect because it
If the designation beneficiaries are disqualified by law to was Blanco himself who took out the life insurance
receive the proceeds, the policy remains valid and policy on his own life, naming only Montenegro as the
binding but the proceeds will be given to the estate of beneficiary. It would have been different if it was
the insured. Montenegro, as creditor, who took out a life insurance
policy on the life of Blanco, as a debtor. In that case,
CHANGE IN BENEFICIARY Montenegro’s insurable interest in the life of Blanco
would be only to the extent of P50, 000, which is the
GR: The insured shall have the right to change the amount of his credit.
beneficiary he designated in the policy

XPN: If the insured expressly waived this right in the

said policy. In the event the insured does not change the
beneficiary during his lifetime, the designation shall be
deemed irrevocable (IC, Sec. 11).

Q: On July 14, 1985, X, a homosexual, took an A: a. A partner in a firm on its future profits.
insurance policy on the life of his boyfriend, Y. In the
insurance application, X misrepresented that Y was Mortgagor-mortgagee
in perfect health although he knew all the time that
Y was afflicted with AIDS. On October 18, 1987, Y Each has an insurable interest in the property
died in a motor accident. Shortly thereafter, X filed mortgaged and this interest is separate and distinct
his insurance claim. Should the insurer pay? from the other. Therefore, insurance taken by one in his
Reasons. (1987 BAR) name only and in his favor alone does not inure to the
benefit of the other. The same is not open to objection
A: The insurer is not obliged to pay. Friendship alone is that there is double insurance (RCBC vs. CA, 289 G.R. Nos.
not the insurable interest contemplated in life 128833-34, 128866, April 20, 1998; IC, Sec. 8).
insurance. Insurable interest in the life of others (other
than one’s own life, spouses or children) is merely to the 1. Mortgagor – The mortgagor of property, as owner,
extent of the pecuniary interest in that life. has an insurable interest to the extent of its value
even though the mortgage debt equals such value.
Assuming that such pecuniary interest exists, an insurer 2. Mortgagee – The mortgagee as such has an
would be liable despite concealment or insurable interest in the mortgaged property to the
misrepresentation if the insurance had been in effect for extent of the debt secured; such interest continues
more than 2 years (incontestability clause). until the mortgage debt is extinguished (Sundiang
Sr. & Aquino, 2014).
Q: X borrowed from CCC Bank. She mortgaged her
Every interest in property, whether real or personal, or house and lot in favor of the bank. X insured her
any relation thereto, or liability in respect thereof, of house. The bank also got the house insured.
such nature that contemplated peril might directly
damnify the insured, is insurable interest (IC, Sec. 13). a. Is this double insurance? Explain your answer.
b. Is this legally valid? Explain your answer.
Insurable interest must exist both at the time the c. In case of damage, can X and CCC bank
insurance contract takes effect and at the time of loss. separately claim for the insurance proceeds?
(2012 BAR)
Change of interest
A change of interest in any part of a thing insured
unaccompanied by a corresponding change of interest in a. NO, there is no double insurance. Double insurance
the insurance, suspends the insurance to an equivalent exists where the same person is insured by several
extent, until the interest in the thing and the interest in insurers separately with respect to the same subject
the insurance are vested in the same person. (Sec. 20) and interest.
b. YES, X and CCC Bank can both insure the house as
XPNS: they have different insurable interests therein. X,
the borrower-mortgagor, has an insurable interest
1. A change of interest in a thing insured, after the in the house being the owner thereof while CCC
occurrence of an injury which results in a loss, does Bank, the lender, also has an insurable interest in
not affect the right of the insured to indemnity for the house as mortgagee thereof.
the loss. (IC, Sec. 21) c. YES. If X obtained an open policy then she could
2. A change of interest in one or more of several claim an amount corresponding to the extent of the
distinct things, separately insured by one policy, damage based on the value of the house determined
does not avoid the insurance as to the others. (IC, as of the date the damaged occurred, but not to
Sec. 22) exceed the face value of the insurance policy;
3. A change of interest, by will or succession, on the however, if she obtained a valued policy then she
death of the insured, does not avoid an insurance; could claim an amount corresponding to the extent
and his interest in the insurance passes to the of the damage based on the agreed upon valuation
person taking his interest in the thing insured. (IC, of the house.
Sec. 23)
4. A transfer of interest by one of several partners, As for CCC Bank, it could claim an amount corresponding
joint owners, or owners in common, who are jointly to the extent of the damage but not to exceed the amount
insured, to the others, does not avoid an insurance of the loan it extended to X or so much thereof as may
even though it has been agreed that the insurance. remain unpaid.
(IC, Sec. 24)
Q: A person is said to have an insurable interest in
the subject matter insured where he has a relation Double insurance: Double insurance exists where the
or connection with, or concern in it that he will same person is insured by several insurers separately,
derive pecuniary benefit or advantage from its in respect to the same subject and interest (Sec. 95, ibid).
preservation. Which among the following subject It is not contrary to law and hence, in case of double
matters is not considered insurable? (2014 BAR) insurance, the insurers may still be made liable up to the
extent of the value of the thing insured but not to exceed
a. A partner in a firm on its future profits. the amount of the policies issued
b. A general creditor on the debtor’s property
c. A judgment creditor on debtor’s property In double insurance, the insurers are considered as co-
d. A mortgage creditor on debtor’s mortgaged insurers. Each one is bound to contribute ratably to the
property. loss in proportion to the amount for which he is liable

under his contract. This is known as the “principle of Reinsurance is where the insurer procures a third
contribution” or “contribution clause” party, called the reinsurer, to insure him against liability
by reason of such original insurance. Basically,
Overinsurance: There is overinsurance whenever the reinsurance is an insurance against liability which the
insured obtains a policy in an amount exceeding the original insurer may incur in favor of the original
value of his insurable interest insured.

The insurer may insert an “other insurance clause” which PERFECTION OF THE INSURANCE CONTRACT
will prohibit double insurance. The rationale is to
prevent the danger that the insured will over insure his The contract of insurance is perfected when the assent
property and thus avert the possibility of perpetration or consent is manifested by the meeting of the offer and
of fraud (ibid). It is lawful and specifically allowed under the acceptance upon the thing and the cause which are
Sec. 75 of the Insurance Code which provides that “a to constitute the contract. Mere offer or proposal is not
policy may declare that a violation or a specified contemplated (De Lim v. Sun Life Assurance Co., G.R. No.
provision thereof shall avoid it, otherwise the breach of L-15774, November 29, 1920).
an immaterial provision does not avoid it.”
Cognition Theory: acceptance made by letter shall not
Q: Terrazas de Pation Verde, a condominium bind the person making the offer except from the time it
building, has a value of P50 M. The owner insured came to his knowledge.
the building against fire with 3 insurance companies
for the following amounts: Delivery of Policy

Northern Insurance Corp.—P20 M Q: On September 25, 2013, Danny Marcial (Danny)

Southern Insurance Corp.—P30 M procured an insurance on his life with a face value of
Eastern Insurance Corp.—P50 M P5 M from RN Insurance Company (RN), with his
wife Tina Marcial (Tina) as sole beneficiary. On the
a. Is the owner’s taking of insurance for the same day, Danny issued an undated check to RN for
building with 3 insurers valid? Discuss. the full amount of the premium. On October 1, 2013,
b. The building was totally razed by fire. If the RN issued the policy covering Danny’s life insurance.
owner decides to claim from Eastern Insurance On October 5, 2013, Danny met a tragic accident and
Corp. only P50M, will the claim prosper? died. Tina claimed the insurance benefit, but RN was
Explain. (BAR 2008) quick to deny the claim because at the time of
Danny’s death, the check was not yet encashed and
A: therefore the premium remained unpaid. Is RN
correct? Will your answer be the same if the check is
a. The taking of insurance from the 3 insurers is valid. dated October 15, 2013? (2014 BAR)
It is a case of “double insurance”. The Insurance
Code provides that a double insurance exist where A: NO. RN is not correct. After the issuance of the check
the same person is insured by several insurers by Danny for the full amount of the premium, the
separately in respect to the same subject and unconditional delivery of an insurance policy of RN to
interest. Danny corresponding to the terms of the application
ordinarily consummates the contract, and the policy as
Double insurance is valid. What is prohibited is for delivered becomes the final contract between the
the insured to recover more than his interest or parties. Where the parties, so intend, the insurance
value of the property pursuant to the “principle of becomes effective at the time of the delivery of the policy
indemnity”. notwithstanding the fact that the check was not yet
encashed. My answer will still be the same even if the
b. YES, the owner may legally claim the entire P50 M check is dated October 15, 2013 since an
from Eastern Insurance, Corp. The Insurance Code acknowledgment in a policy of the receipt of premium is
provides that where the insured is overinsured by conclusive evidence of its payment for the purpose of
double insurance, the insured, unless the policy making the policy binding.
otherwise provides, may claim payment from the
insurers in such order as he may select, up to the Transfer of Policy
amount for which the insurers are severally liable
under their respective contracts. Each insurer is Q: The policy of insurance upon his life, with a face
bound, as between himself and the other insurers, value of P100, 000, was assigned by Jose, a married
to contribute ratably to the loss in proportion to the man with 2 legitimate children, to his nephew Y, as
amount for which he is liable under his contract. security for a loan of P50, 000. He did not give the
insurer any written notice of such assignment
Q: Distinguish co-insurance from re-insurance. despite the explicit provision to that effect in the
(1994 BAR) policy. Jose died. Upon the claim on the policy by the
assignee, the insurer refused to pay on the ground
A: Co-insurance is the percentage in the value of the that it was not notified of the assignment. Upon the
insured property which the insured himself assumes or other hand, the heirs of Jose contended that Y is not
undertakes to act as insurer to the extent of the entitled to any amount under the policy because the
deficiency in the insurance of the insured property. In assignment without due notice to the insurer was
case of loss or damage, the insurer will be liable only for void. Resolve the issues. (1991 BAR)
such proportion of the loss or damage as the amount of
insurance bears to the designated percentage of the full A: A life insurance is assignable. A provision, however,
value of the property insured. in the policy stating that written notice of such an
assignment should be given to the insurer is valid. The

failure of the notice of assignment would thus preclude express stipulation, it is provided that the policy shall in
the assignee from claiming rights under the policy. The that event be suspended or shall lapse (De Leon, 2010).
failure of notice did not, however, avoid the policy;
hence, upon the death of Jose, the proceeds would, in the Payment by post-dated check
absence of a designated beneficiary, go to the estate of
the insured. The estate, in turn, would be liable for the A postdated check bearing a date prior to the loss,
loan of P50, 000 owing in favor of Y. assuming availability of the funds thereof, would be
sufficient even if it remains unencashed at the time of
PREMIUM PAYMENT the loss, constitutes valid payment of premium. The
subsequent effects of encashment would retroact to the
“Cash and carry” rule date of the instrument and its acceptance by the
creditor. (2007 BAR)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and until The payment of a promissory note or postdated check at
the premium thereof has been paid. Any agreement to a stated maturity subsequent to the loss, is insufficient to
the contrary is void. put the insurance into effect. (Vitug, Commercial Laws
and Jurisprudence, 2006, Vol. I, p. 250)
XPN: A policy is valid and binding even when there is
non-payment of premium: Payments in addition to regular premium
1. In case of life or industrial life policy whenever the
An insurer may contract and accept payments, in
grace period provision applies, or whenever under
addition to regular premium, for the purpose of paying
the broker and agency agreements with duly
future premiums on the policy or to increase the
licensed intermediaries, a ninety (90)-day credit
benefits thereof (IC, Sec. 84)
extension is given. No credit extension to a duly
licensed intermediary should exceed ninety (90)
days from date of issuance of the policy (IC, Sec. 77).
2. When there is acknowledgment in a policy of a
Insured entitled to recover premiums already paid
receipt of premium, which the law declares to be
or a portion thereof
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding until
1. When no part of the thing insured has been exposed
the premium is actually paid. This is without
to any of the perils insured against (IC, Sec. 80).
prejudice however to right of insurer to collect
2. When the contract is voidable because of the fraud
corresponding premium (Sec. 77, ibid).
or misrepresentations of the insurer of his agent (IC,
Sec. 82).
Section 77 of the Insurance Code in effect allows
3. When the insurance is voidable because of the
waiver by the insurer of the condition
existence of facts of which the insured was ignorant
prepayment by making an acknowledgment in the
without his fault (IC, Sec. 82).
insurance policy of receipt of premium as
4. When the insurer never incurred any liability under
conclusive evidence of payment so far as to
the policy because of the default of the insured other
make the policy binding despite the fact that
than actual fraud (IC, Sec. 82).
premium is actually unpaid. (Makati Tuscany
5. When rescission is granted due to insurer’s breach
Condominium Corp. vs. Court of Appeals G.R. No.
of contract (IC, Sec. 74).
95546, November 6, 1992)
Insured is not entitled to return of premiums paid
3. When there is an agreement allowing the insured to
pay the premium in installments and partial
1. If the peril insured against has existed, and the
payment has been made at the time of loss (Makati
insurer has been liable for any period, the peril
Tuscany Condominium Corp. v. CA, G.R. No. 95546,
being entire and indivisible (IC, Sec. 81);
Nov. 6, 1992)
2. In life insurance policies (IC, Sec. 80 [b]);
4. When there is an agreement to grant the insured
3. If the policy is annulled, rescinded or if a claim is
credit extension for the payment of the premium.
denied by reason of fraud (IC, Sec. 82);
(Art. 1306, NCC), and loss occurs before the
4. If contract is illegal and the parties are in pari
expiration of the credit term (UCPB General
Insurance v. Masagana Telemart, G.R. No. 137172,
Apr. 4, 20012006, 2007 Bar).
5. When estoppel bars the insurer to invoke non-
recovery on the policy.
Persons who wish to be insured may get protection
6. When the public interest so requires, as determined
before the perfection of the insurance contract by
by the Insurance Commissioner
securing a cover note.
1. The cover note shall be issued or renewed only
Non-payment of premium
upon prior approval of the Insurance Commission;
2. The cover note shall be valid and binding for not
Non-payment of the first premium prevents the contract
more than sixty (60) days from the date of its
from becoming binding notwithstanding the acceptance
of the application or the issuance of the policy, unless
3. No separate premium (separate from the policy or
waived. But nonpayment of the balance of the premium
main contract) is required for the cover note;
due does not produce the cancellation of the contract.
4. The cover note may be canceled by either party
upon prior notice to the other of at least seven (7)
With respect to subsequent premiums, non-payment
does not affect the validity of the contracts unless, by

5. The policy should be issued within sixty (60) days Matters relating to the health of the insured are material
after the issuance of the cover note; and relevant to the approval of the issuance of the life
6. The sixty (60)-day period may be extended upon insurance policy as these definitely affect the insurer’s
written approval of the Insurance Commission; and action to the application. It is well-settled that the
7. The written approval of the Insurance Commission insured need not die of the disease he had failed to
is dispensed with upon the certification of the disclose to the insurer, as it is sufficient that his non-
president, vice-president or general manager of the disclosure misled the insurer in forming his estimates of
insurer that the risk involved, the values of such the risks of the proposed insurance policy or in making
risks and premium therefor, have not as yet been inquiries (Sunlife Assurance Company of Canada v. CA,
determined or established and the extension or G.R. No. 105135, June 22, 1995). (2001 BAR)
renewal is not contrary to or is not for the purpose
of violating the Insurance Code or any rule. If there is concealment, the remedy of the insurer is
rescission since concealment vitiates the contract of
BINDING RECEIPT insurance. Good faith is not a defense in concealment.
Concealment, whether intentional or unintentional
In a life insurance, a binding slip does not insure by itself. entitles the injured party to rescind the contract of
It is merely an acknowledgment on behalf of the insurer, insurance (IC, Sec. 27).
that the latter’s branch office had received from the
application the premium and had accepted the Requisites of misrepresentation:
application subject for processing; and that the latter
will either approve or reject the same. 1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is
RESCISSION OF INSURANCE CONTRACTS untrue and with intent to deceive or which he states
positively as true without knowing it to be true and
Instances wherein a contract of insurance may be which has a tendency to mislead;
cancelled by the insurer 3. Such fact in either case is material to the risk.

1. Nonpayment of premium; INCONTESTABILITY CLAUSE

2. Conviction of a crime arising out of acts increasing
the hazard insured against; After the policy of life insurance made payable on the
3. Discovery of fraud or material misrepresentation; death of the insured shall have been in force during the
4. Discovery of willful or reckless acts or omissions lifetime of the insured for a period of two (2) years from
increasing the hazard insured against; the date of its issue or its last reinstatement, the insurer
5. Physical changes in the property insured which cannot prove that the policy is void ab initio or is
result in the property becoming uninsurable; rescindible by reason of the fraudulent concealment or
6. Discovery of other insurance coverage that makes misrepresentation of the insured or his agent (IC, Sec.
the total insurance in excess of the value of the 48).
property insured; or
7. A determination by the Commissioner that the The “Incontestability Clause” regulates both the actions
continuation of the policy would violate or would of the insurers and prospective takers of life insurance.
place the insurer in violation of the Insurance Code It gives insurers enough time to inquire whether the
(IC, Sec. 64). policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns
No policy of insurance other than life shall be cancelled scheming individuals that their attempts at insurance
by the insurer except upon prior notice thereof to the fraud would be timely uncovered – thus deterring them
insured, and no notice of cancellation shall be effective from venturing into such nefarious enterprise (Manila
unless it is based on the occurrence, after the effective Bankers Life Insurance Corporation vs. Cresencia-Aban,
date of the policy, of one or more of the abovementioned G.R. No. 175666, July 29, 2013).
instances (Sec. 64, ibid).
The contract may be rescinded even beyond the
CONCEALMENT AND MISREPRESENTATION incontestability period based on the following grounds:
1. Non-payment of premiums.
Concealment is a neglect to communicate that which a 2. Violation of condition (IC, Secs. 233 [b], 234 [b]).
party knows and ought to communicate. 3. No insurable interest
4. Cause of death was excepted or not covered
Misrepresentation is an oral or written statement of a 5. Fraud of a vicious type
fact or condition affecting the risk made by the insured 6. Proof of death was not given (IC, Sec. 248).
to the insurance company, tending to induce the insurer 7. That the conditions of the policy relating to military
to assume the risk. or naval service (IC, Secs. 233 [b], 234 [b]).
8. That the action was not brought within the time
Requisites of concealment: specified (IC, Sec. 63).

1. A party knows a fact which he neglects to Defenses not barred by incontestability clause
communicate or disclose to the other party
2. Such party concealing is duty bound to disclose such 1. That the person taking the insurance lacked
fact to the other insurable interest as required by law;
3. Such party concealing makes no warranty as to the 2. That the cause of the death of the insured is an
fact concealed excepted risk;
4. The other party has no means of ascertaining the 3. That the premiums have not been paid (IC, Secs. 77,
fact concealed 233[b], 236[b]);
5. The fact must be material

4. That the conditions of the policy relating to military not malevolent (Rizal Commercial Bank Corporation v.
or naval service have been violated (IC, Secs. 233[b], Court of Appeals, supra).
5. That the fraud is of a particularly vicious type; PRESCRIPTION OF ACTIONS
6. That the beneficiary failed to furnish proof of death
or to comply with any condition imposed by the If there is no stipulation or the stipulation is void, the
policy after the loss has happened; or insured may bring the action within 10 years in case the
7. That the action was not brought within the time contract is written.
specified (Sundiang Sr. & Aquino, 2014).
Parties may validly agree that an action on the policy
should be brought within a limited period of time,
provided such period is not less than 1 year from the
time the cause of action accrues. If the period agreed
Statements or promises by the insured set forth in the
upon is less than 1 year from the time the cause of action
policy itself or incorporated in it by proper reference,
accrues, such agreement is void (IC, Sec. 63).
the untruth or non-fulfillment of which in any respect,
and without reference to whether the insurer was in fact
a. The stipulated prescriptive period shall begin to run
prejudiced by such untruth or non-fulfillment render
from the date of the insurer’s rejection of the claim
the policy voidable by the insurer.
filed by the insured or beneficiary and not from the
time of loss.
b. In case the claim was denied by the insurer but the
insured filed a petition for reconsideration, the
prescriptive period should be counted from the date
the claim was denied at the first instance and not
The injury, damage or liability sustained by the insured
from the denial of the reconsideration (Sun Life
in consequence of the happening of one or more of the
Office, Ltd. vs. CA, supra).
perils against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured. It
may be total, partial, or constructive in marine SUBROGATION
If the plaintiff’s property has been insured, and he has
Conditions before the insured may recover on the received indemnity from the insurance company for the
policy after the loss injury or loss arising out of wrong or breach of contract
complained of, the insurance company shall be
1. The insured or some person entitled to the benefit subrogated to the rights of the insured against the
of the insurance, without unnecessary delay, must wrongdoer or the person who has violated the contract
give written notice to the insurer (IC, Sec. 90); (NCC, Art. 2207). The insurer, upon happening of the risk
2. When required by the policy, insured must present insured against and after payment to the insured is
a preliminary proof loss which is the best evidence subrogated to the rights and cause of action of the latter.
he has in his power at the time (IC, Sec. 91). (Eastern Shipping Lines vs. Prudential Guarantee and
Assurance, Inc., G.R. No. 174116, September 1, 2009).
Effect of failure to give notice of loss
Instances when subrogation does not apply
Failure to give Failure to give notice will not 1. if the assured by his own act releases the wrongdoer
notice defeats the exonerate the insurer, unless or third party liable for the loss or damage, from
right of the insured there is a stipulation in the policy liability
to recover. requiring the insured to do so. 2. where the insurer pays the assured the value of the
lost goods without notifying the carrier who has in
Refusal or failure to pay the claim within the time good faith settled the assured’s claim for loss, the
prescribed settlement is binding on both the assured and the
insurer, and the latter cannot bring an action against
The insurer shall be liable to pay interest twice the the carrier on his right of subrogation
ceiling prescribed by the Monetary Board on the 3. where the insurer pays the assured for a loss which
proceeds of the insurance from the date following the is not a risk covered by the policy, thereby effecting
time prescribed under the Insurance Code, until the ‘voluntary payment,’ (Loadstar Shipping Co., v.
claim is fully satisfied (Prudential Guarantee and Malayan Insurance, G.R. No. 185565, November 26,
Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No. 2014)
151890, June 20, 2006).
Q: Will the subrogee be bound by the arbitration
NOTE: Refusal or failure to pay the loss or damage will clause between the insurer and insured?
entitle the assured to collect interest UNLESS such
refusal or failure to pay is based on the ground that the A: In Pan Malayan Insurance Corporation v. CA, April 3,
claim is fraudulent. 1990, SC held that that the right of insurance company
as subrogee was not based on the charter party or any
Where the mortgagor and the mortgagee were both other contract; rather, it accrued upon the payment of
claiming the proceeds of a fire insurance policy and the the insurance claim by private respondent to the
creditors of the mortgagor also attached the proceeds, insured. However, in California and Hawaiian Sugar Co.,
the insurance company cannot be held liable for v. Pioneer Insurance G.R. No. 139273, November 28, 2000,
damages for withholding payment since the delay was the Court clarified that there was nothing in Pan
Malayan that prohibited the applicability of the
arbitration clause to the subrogee. That case merely

discussed the accrual of the right of subrogation and the basis; and between a carrier offering its services to the
legal basis therefor. general public and one who offers services or solicits
business only from a narrow segment of the general
COLLATERAL SOURCE RULE population (Pedro de Guzman v. CA, G.R. No. L-47822
December 27, 1988)
If an injured person receives compensation for his
injuries from a source wholly independent of the Q: Spouses Dante and Leona Cruz lodged a
tortfeasor, the payment should not be deducted from the Complaint against Sun Holidays, Inc. with the RTC
damages which he would otherwise collect from the for damages arising from the death of their son who
tortfeasor. It finds no application to cases involving no- perished with his wife while on board the boat M/B
fault insurances under which the insured is indemnified Coco Beach III that capsized en route to Batangas
for losses by insurance companies, regardless of who from Puerto Galera, Oriental Mindoro where the
was at fault in the incident generating the losses. Here, it couple had stayed at Coco Beach Island Resort
is clear that MMPC is a no-fault insurer. Hence, it cannot owned by Sun Holidays.
be obliged to pay hospitalization expenses of the
dependents of its employees which had already been Spouses contended that as a common carrier, it was
paid by separate health insurance providers of said guilty of negligence in allowing M/B Coco Beach to
dependents. (Mitsubishi Motors Philippines Salaried sail notwithstanding storm warning bulletins issued
Employees Union vs. Mitsubishi Motors Corporation by PAGASA. Sun Holidays denied being a common
Gholder.R. No. 175773, June 17, 2013). carrier, alleging that its boats are not available to
the general public as they only ferry resort guests
TRANSPORTATION LAW and crew members.

COMMON CARRIERS Is Sun Holidays liable as a common carrier?

Define common carrier. A: YES. Sun Holiday’s ferry services are so intertwined
with its main business as to be properly considered
A common carrier is a person engaged in the business of ancillary thereto. The constancy of respondent’s ferry
services in its resort operations is underscored by its
carrying or transporting passengers or goods or both, by
having its own Coco Beach boats. And the tour packages
land, water, or air, for compensation, offering services to it offers, which include the ferry services, may be availed
the public. (Art. 1732 of the NCC) of by anyone who can afford to pay the same. These
services are thus available to the public (Spouses Dante
Enumerate the requisites for an entity to be Cruz v. Sun Holidays, G.R. No. 18312, June 29, 2010).
classified as a common carrier (1996, 1997, 2000,
2002 BAR) What is a private carrier?

(PBL-FP) A private carrier is one who, without making the activity

1. Must be a Person, corporation, firm or association a vocation, or without holding himself or itself out to the
2. Engaged in the Business of carrying or transporting public as ready to act for all who may desire his or its
passengers or goods or both; services, undertakes, by special agreement in a
3. The carriage or transport must either be by Land, particular instance only, to transport goods or persons
water or air; from one place to another either gratuitously or for hire
4. The service is for a Fee; (Spouses Pereña v. Spouses Zarate, G.R. No. 157917,
5. The service is offered to the Public (Art. 1732, NCC). August 29, 2012).

Q: AM Trucking, a small company, operates two VIGILANCE OVER GOODS

trucks for hire on a selective basis. It caters only to
a few customers, and its trucks do not make regular What is the presumption on the loss, destruction, or
or scheduled trips. It does not have a certificate of deterioration of goods
public convenience.
GR: The common carrier is presumed to have been at
On one occasion, Reynaldo contracted AM to fault or to have acted negligently when the goods
transport, for a fee, 100 sacks of rice from Manila to transported are lost, destroyed, or deteriorated (Art.
Tarlac. However, AM failed to deliver the cargo 1735, NCC).
because its truck was hijacked when the driver
stopped in Bulacan to visit his girlfriend. XPNs: When the same is due to any of the following
causes only: (FA2 – C O)
May Reynaldo hold AM liable as a common carrier?
1. Fortuitous events (flood, storm, earthquake,
A: YES. The fact that AM Trucking operates only two lightning, or other natural disaster or calamity).
trucks for hire on a selective basis, caters only to a few Provided, the following conditions are present:
customers, does not make regular or scheduled trips, a. Natural disaster was the proximate and only
and does not have a certificate of public convenience cause;
are of no moment. The law does not distinguish b. Carrier exercised due diligence to prevent or
between one whose principal business activity is the minimize loss before, during, and after the
carrying of persons or goods or both and anyone occurrence of the natural disaster; and
who does such carrying only as an ancillary activity; c. The common carrier has not negligently
between a person or enterprise offering incurred delay in transporting the goods (Art.
transportation service on a regular or scheduled basis 1739-1740, NCC).
and one on an occasional, episodic or unscheduled

2. Act of the public enemy in war, whether If the shipper or owner merely contributed to the loss,
international or civil, provided: destruction or deterioration of the goods, the proximate
a. Act was the proximate and only cause; and cause thereof being the negligence of the common
b. Carrier exercised due diligence to prevent or carrier, the latter shall be liable for damages, which
minimize loss before, during, and after the act however, shall be equitably reduced (NCC, Art. 1741).
(Art. 1739-1740, NCC).
Contributory negligence on the part of the passenger
3. Act or omission of the shipper or owner of the does NOT justify the common carrier’s exemption from
goods, provided: liability (Martin, 1989). It will only mitigate the liability
a. If proximate and only cause – exempting of the common carrier (J. Dimaampao)
b. If contributory negligence – mitigating
Explain the stipulations for limitation of liability.
4. The Character of the goods or defects in the packing
or in the containers; provided, carrier exercised due Even if there is an agreement limiting the liability of the
diligence to forestall or prevent loss (Art 1742, NCC). common carrier in the vigilance over the goods, the
common carrier is still disputably presumed to have
If the fact of improper packing is known to the been negligent in case of its loss, destruction or
carrier or its servants, or apparent upon ordinary deterioration (NCC, Art. 1752).
observation, but it accepts the goods
notwithstanding such condition, it is not relieved A contract fixing a sum that may be recovered for the
from responsibility for loss or injury resulting loss, destruction, and deterioration is binding provided
therefrom (Southern Lines Inc., v. CA, GR No. L-16629, it is:
January 31, 1962).
a. Just and reasonable under the circumstances
5. Order or act of competent authority; provided, the b. Has been fairly and freely agreed upon.
authority is with power to issue the order (Art. 1743,
NCC). If the officer acts without legal process, the GR: The liability of the common carrier shall not exceed
common carrier will be held liable (Ganzon v. CA, GR the stipulation in a contract of carriage even if the loss
No. L-48757, May 30, 1988). or damage results from the carrier's negligence (Eastern
and Australian Shipping Co. vs. Great American Insurance
In all cases other than those enumerated above, there is Co., GR No. L-37604, October 23, 1981).
presumption of negligence even if there is an agreement
limiting the liability of the common carrier in the XPN: Common carrier’s liability may be extended
vigilance over the goods. beyond the specified amount mentioned if:

ABSENCE OF DELAY a. the shipper or owner of the goods declares a greater

value and;
What are the rules regarding the time of delivery of b. pays corresponding freight (NCC, Art. 1749).
goods and delay?
The liability of an airline company for lost baggage is
1. If there is an agreement as to time of delivery – limited to the amount stated in the ticket unless the
delivery must be within the time stipulated in the passenger declared a higher valuation and paid
contract or bill of lading. additional fare (Pan American World Airways, Inc. vs.
2. If there is no agreement – delivery must be within a Intermediate Appellate Court, G.R. No. 70462, August 11,
reasonable time (Saludo, Jr. v. CA, G.R. No. 95536, 1988).
March 23, 1992).
What is the consequence of delay in the delivery of
goods? What is the diligence required of a passenger?

The carrier shall be liable for damages immediately and The passenger must observe the diligence of a good
proximately resulting from such neglect of duty (Ibid; father of a family or ordinary diligence to avoid injury to
Art. 1170, NCC). himself (NCC, Art. 1761). This means that if the
proximate cause of the passenger’s injury is his
In the absence of a special contract, a carrier is not an negligence, the common carrier is not liable.
insurer against delay in the transportation of goods. The
effects of delay are the following: Passengers must take such risks incident to the mode of
travel. Carriers are NOT insurers of any and all risks to
a. Excusable delay in carriage merely suspends and passengers and goods. It merely undertakes to perform
generally does not terminate the contract of certain duties to the public as the law imposes, and holds
carriage. itself liable for any breach thereof (Pilapil v. CA, G.R. No.
b. The carrier shall be made liable when vessel or 52159, Dec. 22, 1989).
vehicle is unreasonably delayed.
c. Carrier remains duty bound to exercise DURATION OF LIABILITY
extraordinary diligence.
d. Natural disaster shall not free the carrier from What are the duties of a common carrier?
responsibility. (Dimaampao & Dumlao-Escalante,
2014) It is the duty of common carriers of passengers,
including common carriers by railroad train, streetcar,
What is contributory negligence? or motorbus, to stop their conveyances a reasonable
length of time in order to afford passengers an

opportunity to board and enter, and they are liable for In case of death of a passenger, the common carrier is
injuries suffered by boarding passengers resulting from liable to pay P50, 000 as indemnity for the life of a
the sudden starting up or jerking of their conveyances passenger (Victory Liner vs. Gammad, G.R. No. 159636,
while they are doing so. (Dangwa vs. CA, G.R. No. 95582, November 25, 2004). Carrier is NOT liable for exemplary
October 7, 1991). damages where there is no proof that it acted in a
wanton, fraudulent, reckless, oppressive or malevolent
All persons who remain on the premises a reasonable manner.
time after leaving the conveyance are to be deemed
passengers, and what is a reasonable time or a Moral damages
reasonable delay within this rule is to be determined
from all the circumstances, and includes a reasonable GR: Moral damages are NOT recoverable for breach of
time to see after his baggage and prepare for his contract of carriage in view of Articles 2219-20 of the
departure (La Mallorca v. CA, G.R. No. L-21486, May 14, Civil Code.
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination and a. Where the mishap results in the death of the
has left the vessel-owner’s premises. The victim’s passenger; and
presence in a vessel after 1 hour from his b. Where it is proved that the common carrier was
disembarkation is not enough in order to absolve the guilty of fraud or bad faith, even if death does not
carrier from liability in his death. (Aboitiz Shipping result.
Corporation v. CA, GR No. 84458, November 6, 1989).
Defenses available in culpa contractual (FEC)
1. Exercise of extraordinary due diligence
What are the liabilities of the common carrier? 2. Fortuitous event
3. Contributory negligence of passengers – it does NOT
Acts of its employees – Common carriers are liable for bar recovery of damages for death or injury if the
the death of or injuries to passengers through the proximate cause is the negligence of the common
NEGLIGENCE OR WILLFUL ACTS of the former’s carrier but the amount of damages shall be
employees, although such employees may have acted equitably reduced (NCC, Art. 1762).
beyond the scope of their authority or in violation of the
orders of the common carriers. The liability of the BILL OF LADING
common carriers does NOT cease upon proof that they
exercised all the diligence of a good father of a family in What is a bill of lading?
the selection and supervision of their employees (NCC,
Art. 1759). It is a written acknowledgment of receipt of goods and
agreement to transport them to a specific place and to a
Acts of co-passengers or strangers – A common named person or to his order (Unsworth Transport
carrier is responsible for injuries suffered by a International [Phils] vs. CA, G.R. No. 166520, 26 July 2010;
passenger on account of the WILLFUL ACTS OR 1992, 1998 Bar).
NEGLIGENCE of other passengers or of strangers, if the
carrier’s employees through the exercise of the diligence Explain the three-fold character of a bill of lading.
of a good father of a family would have prevented or
stopped the act or omission (NCC, Art. 1763). 1. As a receipt, it recites the date and place of shipment,
describes the goods as to quantity, weight,
Acts of criminals – A common carrier is NOT absolved dimensions, identification marks and condition,
from liability committed by thieves or robbers. quality, and value.
2. As a contract, it names the contracting parties,
XPN: Where such thieves or robbers acted with grave or which include the consignee, fixes the route,
irrestible threat, violence, or force. destination, and freight rate or charges, and
stipulates the rights and obligations assumed by the
Hijacking is not considered as force majeure where only parties (Phoenix Assurance Co., Ltd. vs. United States
one of the two hijackers was armed with a bladed Lines, G.R. No. L-24033, Feb. 22, 1968).
weapon. The hijackers did not act with grave or 3. As a document of title, it regulates the relations
irresistible threat, violence, or force. between a carrier and a holder of the same.


Enumerate the kinds of damages that may be What are the periods for filing claims?
recovered in case of death of a passenger.
1. If the damage is apparent – Immediately after
1. An indemnity for the Death of the victim delivery; or
2. An indemnity for loss of Earning capacity of the 2. If the damage is not apparent – within 24 hours from
deceased; delivery (Code of Commerce, Art. 366)
3. Moral damages;
4. Exemplary damages; The filing of claim is a condition precedent for recovery
5. Attorney's fees and expenses of litigation; of damages.
6. Interest in proper cases (Briñas v. People, G.R. No. L-
30309, Nov. 25, 1983). Requisites:
7. Hospital and funeral expenses

1. Consignment of goods through a common carrier, consideration of the payment of freight (Caltex vs.
by a consignor in one place to a consignee in another Sulpicio Lines, G.R. No. 131166, September. 30, 1999).
place; and
2. The delivery of the merchandise by the carrier to State the persons involved in maritime commerce
the consignee at the place of destination (New
Zealand Ins. Co., Ltd. vs. Choa Joy, G.R. No. L-7311, 1. Ship-owners and ship agents
Sept. 30, 1955). 2. Captains and masters of the vessel
3. Officers and Crews of the vessel
Explain the Doctrine of combined or connecting 4. Supercargoes (Sundiang, Sr. & Aquino, 2011)
What are the classes of charter party?
The carrier which delivered the goods to the consignee
shall assume the obligations, rights and actions of those 1. Bareboat or demise - The ship owner gives
who preceded him in the conveyance of the goods. possession of the entire vessel to the charterer. In turn,
the charterer supplies, equips, and mans the vessel. The
The shipper or consignee should proceed against the charterer is the owner pro hac vice.
one who executed the contract or against the others who
received the goods without reservation. But even if The charterer assumes the rights and liabilities of the
there is reservation, they are not exempted from owner to third parties who deal with the vessel, it is the
liabilities that they may have incurred by reason of their charterer and its agent who are liable for the wages of
own acts (CC, Art. 373). seamen hired by the master of the vessel, as the master
of the vessel is acting in behalf of the charterer (Litonjua
Remedy: The carrier may then file a third-party Shipping Co., Inc. vs. National Seamen Board, G.R. No. L-
complaint against the one who is really responsible. The 51910, August 10, 1989).
carrier is an indispensable party. But the shipper or
consignee may sue all of them as alternative defendants. 2. Contract of affreightment- owner of the vessel
A claim against the arrastre operator must be filed leases a part or all of its space to haul goods for others.
within fifteen (15) days from the delivery of goods It can either be:
(International Container Terminal Services, Inc. vs.
Prudential Guarantee and Assurance Company, Inc. G.R. a. Time charter – Vessel is chartered for a particular
No. L-134514, December 8, 1999). time or duration. While the ship owner still retains
possession and control of the vessel, the charterer
Commencement of action if delivery was made to has the right to use all vessel’s facilitiesand
arrastre operator: Commencement of action should be designate vessel’s destination.
computed from the time of delivery to the arrastre b. Voyage charter– Vessel is chartered for a carriage
operator. To use as basis for computing the one year of goods from one or more ports of loading to one or
period, the delivery to the consignee would be more ports of unloading. An owner who retains
unrealistic and might generate confusion between the possession of the ship remains liable as carrier and
loss or damage sustained by the goods while in the must answer for loss or non-delivery of the goods
carrier’s custody and those occurring while in the received for transportation (Cebu Salvage Corp. vs.
arrastre operator’s possession (Martin, 1989). Philippine Home Assurance Corp., G.R. No. 150403,
Jan. 25, 2007).
The 1 year period of prescription is NOT applicable to
misdelivery or conversion of goods. BAREBOAT/DEMISE CONTRACT OF
Negligence of the
liable and carrier must
What are the periods for filing actions? charterer gives rise to
answer for any breach
its liability to others.
of duty.
1. For coastwise or carriage within the Philippines- Charterer is regarded as
within 6 years if no bill of lading has been issued or Charterer is not
owner pro hac vice. Ship
within 10 years if a bill of has been issued. regarded as owner.
owner temporarily
2. For international carriage from foreign port to the Ship owner retains
relinquishes possession
Philippines - within 1 year from delivery of goods or ownership over the
and ownership of the
the date when the goods have been delivered. vessel.

The compliance with a requirement in the bill of lading What is the liability of ship owners and shipping
that the consignee must file a claim for loss or damage to agents?
the goods shipped within thirty days from delivery is a
condition precedent to the accrual of a right of action Ship owner/agent is NOT liable for the obligations
against the carrier (Philippine American General contracted by the captain if the latter exceeds his
Insurance Co. v. Sweet Lines, Inc., G.R. No. 87434, August powers and privileges inherent in his position of those
5, 1992). which may have been conferred upon him by the former.
However, if the amount claimed were used for the
MARITIME COMMERCE benefit of the vessel, the ship owner or ship agent is
What is a charter party contract?
The shipping agent is civilly liable for damages in favor
A charter party is a contract by which an entire ship, or of third persons due to the conduct of the carrier's
some principal part thereof, is let by the owner to captain, and the shipping agent can exempt himself
another person for a specified time or use in therefrom only by abandoning the vessel with all his

equipment and the freight he may have earned during subject to the same danger both the vessel and the
the voyage. On the other hand, assuming there is cargo
bareboat charter, the stipulation in the charter party There is a deliberate Expenses and damages
exempting the owner from liability is not against public sacrifice of part of the are not deliberately made
policy because the public at large is not involved (Home vessel, cargo, or both
Insurance Co. vs. American Steamship Agencies, Inc., G.R. Damage or expenses Did not inure to common
No. L-25599, April 4, 1968). incurred to the vessel, its benefit and profit of all
cargo, or both, redounded to persons interested in the
The captain shall NOT be liable for the loss or injury to the benefit of the respective vessel and her cargo.
persons or cargo if the loss or the injury is based on the owners.
following causes: All those who have Only the owner of the
benefited shall satisfy the goods benefiting from the
1. Force majeure average. damage shall bear the
2. Obligations contracted for the vessel’s benefit, expense of average.
except when the captain expressly agrees to be
liable. What are the requisites of general average (CD-PS)

Discuss the Doctrine of Inscrutable Fault. 1. Common danger present;

2. Deliberate sacrifice of part of the vessel or cargo;
In collision of vessel, where fault is established but it 3. Successful saving of vessel and/or cargo; and
cannot be determined which of the two vessels were at 4. Proper procedure and legal steps.
fault, both shall be deemed to have been at fault. a. Assembly to be called by captain of all the cargo
owners and other officers of the vessel
Discuss the Doctrine of Limited Liability b. Deliberation
c. Resolution of the captain
It is also called the “no vessel, no liability doctrine”, it d. Entry of resolution in the logbook
provides that liability of ship owner is limited to ship e. Delivery of the minutes of the meeting to the
owner’s interest over the vessel. In case of loss, the ship maritime judicial authority of the first port of
owner’s liability is also extinguished. Limited liability arrival within 24 hours from arrival;
likewise extends to ship’s appurtenances, equipment, f. Ratification by captain under oath. (Dimaampao
freightage, and insurance proceeds. This can be availed & Dumlao-Escalante, 2014)
only by the shipowner and the shipping agent.
Who are the persons liable for the amount of loss?
What are the instances where Doctrine of Limited
Liability shall NOT apply? In general average: All persons having an interest in the
vessel and cargo therein at the time of the occurrence of
1. Repairs and provisioning of the vessel before the the average shall contribute (Art. 812, CC).
loss of the vessel; (CC, Art. 586)
2. Insurance proceeds. If the vessel is insured, the In particular average: The owner of the things which
proceeds will go to the persons entitled to claim gave rise to the expenses or suffered the damage shall
from the shipowner; (Vasquez vs. CA, G.R. No. L- bear the simple or particular averages (Art. 810, CC).
42926, Sept. 13, 1985)
3. Claims of the crew under the Workmen’s Enumerate the rules on collision of vessels.
Compensation Act;
4. When the shipowner is guilty of fault or negligence; a. Collision refers to the contact of two moving vessels.
5. When the vessel is not abandoned; and If one vessel is moving while the other is stationary,
6. When vessel is not seaworthy. this is known as allision.
b. The vessel at fault shall indemnify the damages
ACCIDENTS AND DAMAGES IN MARITIME sustained or losses incurred. (Art. 826, Code of
COMMERCE Commerce)
c. If both vessels are at fault, each shall be solidarily
What are the accidents in maritime commerce? liable for losses or damages to the cargoes. (Arts.
(CASA) 827 – 828, Code of Commerce)
 In this situation, the common carrier operating
1. Collision the vessel is precluded from interposing the
2. Averages defense of due diligence in the selection and
3. Shipwreck supervision of its employees in an action
4. Arrival under stress against it by a shipper of the other colliding
Differentiate General average from Particular
average Q: Two vessels figured in a collision resulting in
considerable loss of cargo. The damaged vessels
GENERAL AVERAGE PARTICULAR AVERAGE were safely conducted to a port. Kim, a passenger
Damages or expenses Damages or expenses and Ruby, a shipper who suffered damage to his
deliberately caused in order caused to the vessel or cargo, did not file maritime protest. Can Kim and
to save the vessel, its cargo cargo that did not inure to Ruby successfully maintain an action to recover
or both from real and the common benefit, and losses and damages arising from the collision?
known risk. borne by respective (2007 BAR)
Both the ship and cargo are No common danger to

A: Ruby, the shipper can successfully maintain an action 2. If damage resulted from Dangerous nature of
to recover losses and damages arising from the collision shipment loaded without consent of carrier
notwithstanding his failure to file a maritime protest 3. If Unseaworthiness not due to negligence
since the filing thereof is required only on the part of 4. If Deviation was to save life or property at sea.
Kim, who, being a passenger of the vessel at the time of
the collision, was expected to know the circumstances of Explain the procedure and prescriptive period for
the collision. Kim's failure to file a maritime protest will filing maritime claims in coastwise carriage and
therefore prevent him from successfully maintaining an international carriage
action to recover his losses and damages (CC, Art 836).
Coastwise International (foreign
CARRIAGE OF GOODS BY SEA ACT (COGSA) (within the port to Philippines)
When does COGSA apply? NOTICE of DAMAGE

COGSA applies only in terms of loss or damage of goods Condition precedent NOT a condition precedent
transported to and from Philippine ports in foreign before filing case in before filing
trade and to domestic trade when there is a paramount court
clause in the contract. When the damage is
When damage to apparent, the claim should
COGSA applies only in case of non-delivery or damage, goods is apparent, the be filed immediately upon
and not to misdelivery or conversion of goods (Ang v. shipper must discharge of the goods
American Steamship Agencies, Inc., G.R. No. L-22491, Jan. immediately file his
27, 1967). claim with the carrier When damage is not
apparent clam should be
Q: The goods imported from the United States were If not apparent, the filed within 3 days from
unloaded by the carrier in Manila. While in the shipper must file his delivery
custody of the arrastre operator, part of the claim withn 24 hours
shipment worth P1, 000 was lost. Does the case from delivery
involve admiralty and maritime commerce so that FILING of CASE in COURT
the action for short delivery has to be files in the
Court of First Instance regardless of the amount? Within 6 years if no billShipper has 1 year form
Reasons. (2013 BAR) of lading has been date of delivery (delivered
issued; or but damaged goods), or the
A: NO. The matter does not involve admiralty or date when the vessel left
maritime commerce which relate only to incidents Within 10 years, if a port, or from the date of
occurring during the sea voyage. bill of lading has been delivery to the arrastre
issued (non-delivery or loss)
Amount of the carrier’s liability under the COGSA within to file his case in
1. The liability limit is set at $500 per package or (Table form J. Dimaampao , supra, p. 158)
customary freight unless the nature and value of
such goods is declared by the shipper. Q: On December 1, 2010, Korea Corporation shipped
2. Shipper and carrier may agree on another from South Korea to LT Corporation in Manila some
maximum amount, but not more than amount of 300, 000 sheets of high-grade special steel. The
damage actually sustained. shipment was insured against all risk by NA
Insurance (NA). The carrying vessel arrived at the
The suit for loss or damage should be brought within one Port of Manila on January 10, 2011. When the
year from: shipment was discharged, it was noted that 25, 000
sheets were damaged and in bad order. The entire
1. Delivery of the goods, in case of damage; or shipment was turned over to the custody of ATI, the
2. The date when the goods should have been arrastre operator, on January 21, 2011 for storage
delivered, in case of loss. and safekeeping, pending its withdrawal by the
consignee’s authorized customs broker, RVM. On
The one-year period is computed from the delivery of January 26 and 29, 2011, the subject shipment was
goods to the operator and not to the consignee. The withdrawn by RVM from the custody of ATI.
parties may agree to extend the one-year period to file a
case under the Carriage of Goods by Sea (Universal On January 29, 2011, prior to the withdrawal of the
Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R. last batch of the shipment, a joint inspection of the
No. 74125, July 31, 1990). cargo was conducted per the Request for bad Order
Survey (RBO) dated January 28, 2011. The
The prescriptive period for an action against a broker is examination report showed that 30, 000 sheets of
ten (10) years and not one year under the COGSA, since steel were damaged and in bad order. NA Insurance
the broker is not a carrier, charterer or holder of the bill paid LT Corporation the amount of P30 M for the
of lading (Reyma Brokerage Inc. vs. Philippine Home 30,000 sheets that were damaged, as shown in the
Assurance Corporation, G.R. No. 93464, October 7, 1991). Subrogation Receipt dated January 13, 2013.
Thereafter, NA Insurance demanded reparation
What are the instances where there is NO liability against ATI for the goods damaged in its custody, in
under COGSA? (FDUD) the amount of P5M. ATI alleged that the COGSA
applies in this case since the goods were shipped
1. If the nature or value of goods knowingly and from a foreign port to the Philippines.
fraudulently misstated by shipper

NA Insurance claims that the COGSA does not apply, The act of the carrier in guessing which luggage
since ATI is not a shipper or carrier. Who is correct? contained the firearm constitutes willful
(2014 BAR) misconduct.The guessing of which luggage contained
the firearms amounted to willful misconduct under
A: NA Insurance is correct. ATI should be ordered to pay Section 25(1) of the Warsaw Convention (Northwest
NA Insurance notwithstanding the lapse of the one year Airlines v. CA, GR No. 120334, January 20, 1998).
prescriptive period for filing a suit under the COGSA. The
term “carriage of goods” under Section 1 in COGSA, The allegation of willful misconduct resulting in a tort is
covers the period from the time when the goods are insufficient to exclude the case from the realm of
loaded to the time when they are discharged from the Warsaw Convention. A cause of action based on tort did
ship infer that the period of time when the goods have not bring the case outside the sphere of the Warsaw
been discharged from the ship and given to the custody Convention (Lhuiller v. British Airways, GR No. 171092,
of the arrastre operator is not covered by the COGSA. March 15, 2010)
The COGSA does not mention that an arrastre operator
may invoke the prescriptive period of one year; hence, it THE CORPORATION CODE
does not cover the arrastre operator. (BP BLG. 68)

WARSAW CONVENTION Define corporation.

How do you apply Warsaw Convention? A corporation is an artificial being created by operation
of law, having the right of succession and the powers,
The WC applies to all international carriage of persons, attributes and properties expressly authorized by law or
luggage or goods performed by aircraft for reward. It incident to its existence. (Sec. 2, CC)
applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking (WC, Art. Distinguish the following classes of corporation.
As to existence of stocks
What are the limitations to the liability of air STOCK CORPORATION NON-STOCK
Organized under the All others are non-stock
1. Carriage of persons – 250,000 francs/$100, 000 Corporation Code corporation
for each passenger. Nevertheless, by special It has capital stock
contract, the carrier and the passenger may agree to divided into shares and is
a higher limit of liability. authorized to distribute
2. Carriage of registered baggage and of cargo –250 to the holders of such
francs per kilogram/ $1,000, unless the passenger shares dividends or
or consignor has made, at the time when the allotment of the surplus
package was handed over to the carrier, a special profits on basis of the
declaration of interest in delivery at destination and share held. (CC, Sec. 3)
has paid a supplementary sum if the case so
As to how it is created and its function
3. Objects which the passenger takes charge himself –
5,000 francs/ $1,000 per passenger.
Formed for some private Formed for the
NOTE: The amendatory Guatemala Protocol has not yet
purpose, benefit or end government of a portion
been ratified, so either of the two currencies is still
of the State for the
general good or welfare
If NOT created for If the corporation is
Carrier is NOT entitled to the foregoing limit if the
political or public created for political or
damage is caused by willful misconduct or default on its
purpose although whole public purpose
part (WC, Art. 25). Where the loss of the baggage of a
or substantially the connected with the
passenger was due to the fault or recklessness of an
whole interest in the administration of
airline company, the limitation on the liability of airline
corporation belongs to government
companies under the Warsaw Convention is not
the State
applicable (Alitalia v. IAC, G.R. No. 71929, December 4,
As to legal status
GR: Claim for damages must be brought within 2 years DE JURE DE FACTO
reckoned from the date of arrival at the destination, or CORPORATION CORPORATION
from the date on which the aircraft ought to have Organized in accordance A Corporation where
arrived, or from the date on which the carriage stopped, with the requirements of there exists a flaw in its
otherwise, right to damages shall be extinguished. the law. incorporation.

XPN: Where delaying tactics were employed by airline NOTE: If there is Requisites:
itself to deny the passenger time to file his complaint substantial compliance, a 1. Organized under a
(United Airlines vs. Uy, G.R. No. 127768, Nov. 19, 1999). de jure corporation valid Law.
results. (Dimaampao and 2. Attempt in good faith
Carrier is NOT entitled to the limitation of liability if the Escalante, 2017) to form a corporation
damage is caused by willful misconduct or default on its according to the
part (WC, Art. 25). requirements of the

law (Colorable the form of a corporation
Compliance) who know that the
corporation has not been
NOTE: Issuance of registered, there is NO
Certificate of corporation by estoppel.
Incorporation by SEC (Lozano v. Judge Delos
is a minimum Santos, G. R. No. 125221,
requirement for the June 19, 1997)
formation of the
corporation in good
Aquino, 2009)
How is the nationality of a corporation determined?
3. Use of corporate
Powers - The In Philippine jurisdiction, the nationality of a
corporation must corporation is primarily governed by the Place of
have performed the Incorporation Test. This means that a corporation is
acts which are considered a national of the country where it is
peculiar to a incorporated regardless of the nationality of the
corporation like controlling stockholders. (Sec. 123, CC)
entering into a
subscription In certain instances, however, the nationality of the
agreement, adopting corporation is determined by the Control Test.
by-laws, and electing
directors (Actual a) War – the nationality of the corporation is
User) determined by the nationality of the controlling
b) Exploitation of Natural Resources – only a Filipino
As to Laws of Incorporation corporation, that is, 60% of its capital stock are
DOMESTIC FOREIGN owned by Filipinos, may exploit natural resources
CORPORATION CORPORATION (Sec. 2, Art. XII of the 1987 Constitution);
Formed, organized or Formed, organized or c) Public utilities – only a Filipino corporation, 60% of
existing under Philippine existing under laws other its capital stock are owned by Filipinos, may be
law than those of the granted franchise or certificate to operate public
Philippines and whose utilities (Sec. 11, Art. XII of the 1987 Constitution);
laws allow Filipino d) Investment purposes – a Philippine national or
citizens and corporation corporation is one whereby 60% of the capital stock
to do business in its own outstanding and entitled to vote is owned and held
country or state (Sec. 123, by citizens of the Philippines. (Foreign Investment
CC) Act of 1991)

Corporation by Estoppel vs. Corporation Sole “Capital” should be interpreted to mean shares which
CORPORATION BY CORPORATION SOLE are entitled to vote. Non-voting shares must be
ESTOPPEL excluded. (Gamboa v. Teves, 652 SCRA 690, June 28, 2011;
1. All persons who as upheld in the Heirs of Wilson P. Gamboa v. Teves,
assume to act as a One established for the Resolution, 682 SCRA 397, October 9, 2012)
corporation purpose of administering
knowing it to be and managing, as trustee, Finally, under the Grandfather Rule, the percentage of
without authority to the affairs, property and Filipino equity in a corporation engaged in nationalized
do so shall be liable temporalities of any and/or partly nationalized areas of activities, provided
as general partners religious denomination, for under the Constitution and other nationalization
for all debts, sect or church. It may be laws, is computed, in cases where corporate
liabilities and formed by the chief shareholders are present in the situation, by attributing
damages incurred archbishop, bishop, priest, the nationality of the second or even subsequent tier of
or arising as a result. minister, rabbi or other ownership to determine the nationality of the corporate
2. One who assumes an presiding elder of such shareholder.
obligation to an religious denomination,
ostensible sect or church. If the percentage of Filipino ownership in the
corporation as such, corporation or partnership is less than 60%, only the
cannot resist number of shares corresponding to such percentage
performance thereof shall be counted as of Philippine nationality. Under the
on the ground that Strict Rule or Grandfather Rule Proper, the combined
there was in fact no totals in the Investing Corporation and the Investee
corporation (CC, Sec. Corporation must be traced (i.e., “grandfathered”) to
21) determine the total percentage of Filipino ownership.
(SEC Opinion, 27 October 2011); (Dimaampao and
Where there is no third Escalante, 2017)
person involved and the
conflict arises only Redmont Consolidated Mines Corp. (Redmont) took
among those assuming interest in mining and exploring certain areas of the
province of Palawan. After inquiring with the DENR,

it learned that the areas where it wanted to What is the interpretation of the below provision in
undertake exploration and mining activities were the Constitution?
already covered by Mineral Production Sharing
Agreement (MPSA) applications of Narra Corp., Section 11, Article XII of the Constitution: No
Tesoro Inc., and McArthur Inc., which were all franchise, certificate, or any other form of
domestic corporations. authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
Redmont, however, questioned these applications or to corporations or associations organized under
for MPSA arguing that at least 60% of the capital the laws of the Philippines at least sixty per centum
stock of these three corporations were owned and of whose capital is owned by such citizens.
controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation, which was disqualified from The Gamboa Decision already held, in no uncertain terms,
engaging in mining activities reserved only for that what the Constitution requires is "full [and legal]
Filipino citizens. beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights
Are Narra, Tesoro and McArthur Filipino must rest in the hands of Filipino nationals." And,
corporations? precisely that is what SEC-MC No. 8 provides, viz.: "For
purposes of determining compliance [with the
NO. A grave violation of the Constitution, specifically constitutional or statutory ownership], the required
Section 2 of Article XII, is being committed by a foreign percentage of Filipino ownership shall be applied to
corporation right under our country’s nose through a BOTH (a) the total number of outstanding shares of stock
myriad of corporate layering under different, allegedly, entitled to vote in the election of directors; AND (b) the
Filipino corporations. total number of outstanding shares of stock, whether or
not entitled to vote."
Basically, there are two acknowledged tests in
determining the nationality of a corporation: the control In construing "full beneficial ownership," the
test and the grandfather rule. Paragraph 7 of DOJ Implementing Rules and Regulations of the Foreign
Opinion No. 020, Series of 2005, adopting the 1967 SEC Investments Act of 1991 (FIA-IRR) provides:
Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling For stocks to be deemed owned and held by Philippine
interests in enterprises engaged in the exploitation of citizens or Philippine nationals, mere legal title is not
natural resources owned by Filipino citizens, provides: enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with
“Shares belonging to corporations or partnerships at appropriate voting rights is essential. Thus, stocks, the
least 60% of the capital of which is owned by Filipino voting rights of which have been assigned or transferred
citizens shall be considered as of Philippine nationality, to aliens cannot be considered held by Philippine citizens
but if the percentage of Filipino ownership in the or Philippine nationals.
corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage In turn, "beneficial owner" or "beneficial ownership" is
shall be counted as of Philippine nationality.” defined in the Implementing Rules and Regulations of the
Securities Regulation Code (SRC-IRR) as:
The first part of paragraph 7, DOJ Opinion No. 020,
stating "shares belonging to corporations or Any person who, directly or indirectly, through any
partnerships at least 60% of the capital of which is contract, arrangement, understanding, relationship or
owned by Filipino citizens shall be considered as of otherwise, has or shares voting power (which includes
Philippine nationality," pertains to the control test or the the power to vote or direct the voting of such security)
liberal rule. On the other hand, the second part of the and/or investment returns or power (which includes the
DOJ Opinion which provides, "if the percentage of the power to dispose of, or direct the disposition of such
Filipino ownership in the corporation or partnership is security).
less than 60%, only the number of shares corresponding
to such percentage shall be counted as Philippine Thus, the definition of "beneficial owner or beneficial
nationality," pertains to the stricter, more stringent ownership" in the SRC-IRR, which is in consonance with
grandfather rule. the concept of "full beneficial ownership" in the FIA-IRR,
is, as stressed in the Decision, relevant in resolving only
Under the liberal Control Test, there is no need to the question of who is the beneficial owner or has
further trace the ownership of the 60% (or more) beneficial ownership of each "specific stock" of the public
Filipino stockholdings of the Investing Corporation utility company whose stocks are under review. If the
since a corporation which is at least 60% Filipino-owned Filipino has the voting power of the "specific stock", i.e.,
is considered as Filipino. he can vote the stock or direct another to vote for him, or
the Filipino has the investment power over the "specific
Under the Strict Rule or Grandfather Rule Proper, the stock", i.e., he can dispose of the stock or direct another to
combined totals in the Investing Corporation and the dispose of it for him, or both, i.e., he can vote and dispose
Investee Corporation must be traced (i.e., of that "specific stock" or direct another to vote or
"grandfathered") to determine the total percentage of dispose it for him, then such Filipino is the "beneficial
Filipino ownership. Moreover, the ultimate Filipino owner" of that "specific stock." Being considered Filipino,
ownership of the shares must first be traced to the level that "specific stock" is then to be counted as part of the
of the Investing Corporation and added to the shares 60% Filipino ownership requirement under the
directly owned in the Investee Corporation. (Narra Constitution. The right to the dividends, jus fruendi - a
Nickel Mining and Development Corporation v. Redmont right emanating from ownership of that "specific stock"
Consolidated Mines, 722 SCRA 382, in Dimaampao and necessarily accrues to its Filipino "beneficial owner."
Escalante, 2017)

(Roy III v. Herbosa, G.R. No. 207246, April 18, 2017, EN 2. When the corporation has a reputation that is
BANC) debased, resulting in its humiliation in the business
realm. (Manila Electric Company v. T.E.A.M.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY Electronics Corporation, et. al., G.R. No. 131723,
December 13, 2007)
May a corporation own property and incur

YES. Stockholders merely have inchoate right over the What is the Doctrine of Piercing the Veil of
properties of the corporation. Likewise, the properties Corporate Entity?
of directors, officers and stockholders are not the
properties of the corporation. The Doctrine of Piercing the Corporate Veil is the
doctrine that allows the State to disregard for certain
Parenthetically, as a consequence of its status as a justifiable reasons the notion that a corporation has a
distinct legal entity, a corporation incurs its own personality separate and distinct from the persons
liabilities and is legally responsible for payment of its composing it.
obligations. In other words, by virtue of the separate
juridical personality of a corporation, the corporate NOTE: Any piercing of the corporate veil has to be done
debt or credit is not the debt or credit of the stockholder. with caution, albeit courts will not hesitate to disregard
This protection from liability for shareholders is the the corporate veil when it is misused or when necessary
Principle of Limited Liability. (Philippine National in the interest of justice. After all, the concept of corporate
Bank v. Hydro Resources Contractors Corporation, 693 entity was not meant to promote unfair objectives.
SCRA 294, March 13, 2013, in Dimaampao and Escalante, (Sarona v. National Labor Relations Commission, 663 SCRA
2017) 394, January 18, 2012)

May a corporation be held liable for tort? For crime? What are the tests in determining the applicability
of the Doctrine of Piercing the Corporate Veil?
As to tort. It may be held accountable for tort when the
act was committed by the officer or agent under the (ECAO)
express direction or authority from the stockholders or 1. When the corporation is used to defeat public
members acting as a body or generally from the convenience as when the corporate fiction is used as
directors as the governing body. a vehicle for the evasion of an existing obligation;
(Equity Cases)
As to crime. A corporation is an artificial being 2. In fraud cases or when the corporate entity is used
incapable of intent, and as such, it cannot commit to justify a wrong, protect fraud, or defend a crime;
felonies punishable under the Revised Penal Code. It (Control Test)
cannot also be held liable for crimes punishable under 3. In Alter ego cases, where a corporation is merely a
special laws because these crimes are personal in nature farce since it is a mere alter ego or business conduit
requiring personal performance of overt acts. A of a person, or where the corporation is so
corporation cannot be meted with the penalty of organized and controlled and its affairs are so
imprisonment because it exists by mere fiction of law. conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
Exception: By express provision of the Anti-Money (Timoteo H. Sarona v. National Labor Relations
Laundering Act, a corporation may be held criminally Commission, Royale Security Agency, et al., G.R. No.
liable for violation thereof. In such case, responsible 185280, January 18, 2012)
officers would be criminally liable. (Dimaampao and 4. The Objective test where the end result in piercing
Escalante, 2017) the veil of corporate fiction is to make the
stockholders liable for debts and obligations of the
RECOVERY OF MORAL DAMAGES Corporation not to make the Corporation liable for
the debts and obligations of the stockholders.
May a corporation seek for and be awarded moral (Umali v CA, G.R. No. 89561, September 13, 1990)
Explain the Alter Ego Theory/Instrumentality
A juridical person is, as a general rule, not entitled to Theory.
moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments This theory espouses that the corporate entity is a mere
as wounded feelings, serious anxiety, mental anguish or farce as it is the alter ego, business conduit or
moral shock instrumentality of a person or another entity. This
contemplates of:
However, there are exceptions:
1. Control, not mere majority or complete stock
1. Article 2219 paragraph 7 of the Civil Code expressly control, but complete domination, not only of
authorizes the recovery of moral damages in cases finances but of policy and business practice in
of libel, slander or any other form of defamation. respect to the transaction attacked so that the
This provision does not qualify whether the plaintiff corporate entity as to this transaction had at the
is a natural or juridical person. Therefore, a juridical time no separate mind, will or existence of its own
person such as the corporation can validly complain (Instrumentality or Control test);
for libel or any other form of defamation and claim 2. Such control must have been used by the defendant
for moral damages. (Filipinas Broadcasting Network, to commit fraud or wrong, to perpetuate the
Inc. v. AMEC-BCCM, G.R. No. 141994, January 17, violation of a statutory or other positive legal duty,

or dishonest and unjust act in contravention of Priority of adoption determines the right to the
plaintiff’s legal right; (Fraud test) and exclusive use of a corporate name with freedom from
3. The aforesaid control and breach of duty must have infringement. Further, to determine whether a given
proximately caused the injury or unjust loss corporate name is “identical” or “confusingly or
complained of (Harm test). (Philippine National v. deceptively similar” with another entity’s corporate
Hydro Resources Contractors Corporation, 693 SCRA name, the corporate names must be evaluated in their
294, March 133, 2013) entirety. (Lyceum of the Philippines v. CA, G.R. No. 101897,
March 5, 1993)
Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building. Morales Explain the Doctrine of Secondary Meaning.
tendered the winning bid and was awarded
contract. Despite his compliance with his It is the doctrine which states that a word or phrase
contractual undertakings, Morales was only paid originally incapable of exclusive appropriation with
half of the contract, which Kukan, Inc. refused to reference to an article on the market, because
pay despite demands. Morales filed a Complaint geographically or otherwise descriptive, might
with the RTC against Kukan, Inc. for a sum of money nevertheless have been used so long and so exclusively
which was later on granted. Morales secured a writ by one producer with reference to his article that, in that
of execution against Kukan, Inc. The sheriff then trade and to that branch of the purchasing public, the
levied upon various personal properties found at word or phrase has come to mean that the article was
what was supposed to be Kukan, Inc.’s office. his product. (Philippine Nut Industry, Inc. v. Standard
Alleging that it owned the properties thus levied Brands. Inc. G.R. No.L-23035, July 31, 1975)
and that it was a different corporation from Kukan,
Inc., Kukan International Corporation (KIC) filed an BY-LAWS
Affidavit of Third-Party Claim. Morales filed an
Omnibus Motion praying to apply the principle of What are the requisites for valid by-laws?
piercing the veil of corporate entity. Rule on the
motion. (CoMorO-RAG)
1. Must be consistent with the COrporation Code,
The motion should be denied. A corporation not other pertinent laws and regulations;
impleaded in a suit cannot be subject to the court’s 2. Must not be contrary to MORals and public policy;
process of piercing the veil of its corporate fiction. In 3. Must not impair Obligations and contracts or
that situation, the court has not acquired jurisdiction property rights of stockholders;
over the corporation and, hence, any proceedings taken 4. Must be Reasonable;
against that corporation and its property would 5. Must be consistent with the charter or AOI;
infringe on its right to due process. The doctrine of 6. Must be of General application and not directed
piercing the veil of corporate fiction comes to play only against a particular individual.
during the trial of the case after the court has already
acquired jurisdiction over the corporation. Before this What are the binding effects of by-laws?
doctrine can be applied:
As to board of directors and officers, stockholders
a. the court must first acquire jurisdiction over the and members. They are bound by the terms thereof, but
corporation or corporations involved before its or subordinate employees without actual knowledge are
their separate personalities are disregarded; and not bound.
b. the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a As to third persons. By-laws are not binding on them,
cause of action duly commenced involving parties unless they have actual knowledge. (Dimaampao and
duly brought under the authority of the court by Escalante, 2017)
way of service of summons or what passes as such
service. (Kukan International Corporation v. Hon. What is the effect of non-filing of the by-laws within
Amor Reyes, G.R. No. 182729 September 29, 2010) the required period?

CORPORATE NAME Failure to submit the by-laws within 30 days from

incorporation does not automatically dissolve the
State the rules on adoption of a corporate name. corporation. It is merely a ground for suspension or
revocation of its charter after proper notice and hearing,
The SEC shall not approve the proposed corporate name under Section 6(I) of PD 902-A. The corporation is, at the
if: very least, a de facto corporation whose existence may
1. there is already a prior right over the use of such not be collaterally attacked. (Sawadjaan v. CA, G.R. No.
corporate name; and 142284, June 8, 2005)
2. the proposed name is either:
a) identical, or CORPORATE POWERS
b) deceptively or confusingly similar to that of
any existing corporation or to any other name Enumerate the express or general powers of a
already protected by law; or corporation (Theory of General Capacity).
c) patently deceptive, confusing or contrary to
existing law. (Industrial Refractories A corporation has no power except those expressly
Corporation of the Philippines v. CA, et al., G.R. conferred upon it by the Corporation Code and those
No. 122174, October 3, 2002) that are implied or incidental to its existence. Every
corporation has the following general powers:
What is the Principle of Priority of Adoption? (SuSuCo-ABS-PEDRO)

1. To SUe and be sued; If a corporation knowingly permits one of its officers, or
2. Of Succession; any other agent, to act within the scope of an apparent
3. To adopt and use of Corporate seal; authority, it holds him out to the public possessing the
4. To amend its Articles of Incorporation; power to do those acts; and thus, the corporation will, as
5. To adopt its By-laws; against anyone who has in good faith dealt with it
6. For Stock corporations: issue and sell stocks to through such agent, be estopped from denying the
subscribers and treasury stocks; for non-stock agent’s authority.
corporations: admit members;
7. To Purchase, receive, take or grant, hold, convey, Apparent authority is derived not merely from practice.
sell, lease, pledge, mortgage and deal with real and Its existence may be ascertained through:
personal property, securities and bonds;
8. To Enter into merger or consolidation; 1. The general manner in which the corporation
9. To make reasonable Donations for public welfare, holds out an officer or agent as having the power to
hospital, charitable, cultural, scientific, civic or act, or in other words, the apparent authority to act
similar purposes, provided that no donation is given in general, with which it clothes him; or
to any: 2. The acquiescence in his acts of a particular nature,
a. Political party, with actual or constructive notice thereof, within or
b. Candidate and beyond the scope of his ordinary powers.
c. Partisan political activity.
10. To establish pension, Retirement, and other plans It is not the quantity of similar acts which establishes
for the benefit of its directors, trustees, officers and apparent authority but the vesting of a corporate officer
employees – basis of which is the Labor code; with the power to bind the corporation. (Advance Paper
11. To exercise Other powers essential or necessary to Corporation v. Arma Traders Corporation, GR No.
carry out its purposes. (CC, Sec. 36) 176897, December 11, 2013)

Enumerate the specific powers of a corporation TRUST FUND DOCTRINE

(Theory of Specific Capacity).
Explain the Trust Fund Doctrine.
The specific powers of a corporation are the following:
1. extend or shorten corporate term (Sec. 37, CC); The subscribed capital stock of the corporation is a trust
2. increase or decrease capital stock (Sec. 38, CC); fund for the payment of debts of the corporation which
3. incur, create or increase bonded indebtedness (Sec. the creditors have the right to look up to satisfy their
38, CC); and credits, and which the corporation may not dissipate.
4. deny pre-emptive rights (Sec. 39, CC); The creditors may sue the stockholders directly for the
5. Sell, lease, exchange, mortgage, pledge or latter’s unpaid subscription.
otherwise dispose of all or substantially all of its
property, assets, and goodwill (Sec. 40); Exceptions to the trust fund doctrine
6. purchase or acquire own shares (Sec. 41, CC);
7. invest in another corporation or business or for any The Code allows distribution of corporate capital only in
purpose other than the primary purpose (Sec. 42, these instances:
8. declare dividends (Sec. 43,CC); 1. Amendment of the AOI to reduce authorized capital
9. enter into management contract (Sec. 44, CC); stock;
10. amend the Articles of Incorporation (Sec. 16, CC). 2. Purchase of redeemable shares by the corporation
regardless of existence of unrestricted retained
Explain ultra vires act. earnings;
3. Dissolution and eventual liquidation of the
An ultra vires act refers to an act outside or beyond corporation;
express, implied and incidental corporate powers. The 4. Dividends from investments in wasting asset
concept also includes those acts that may ostensibly be corporation (one solely or principally engaged in
within such powers but are, by general or special laws, the exploitation of “wasting assets,” distributing net
either proscribed or declared illegal. (Rural Bank of proceeds from exploitation of their holdings, such as
Milaor v. Ocefemia, G.R. No. 137686, February 8, 2000) mines, oil wells, without allowance or deduction for
Acts which are clearly beyond the scope of the 5. In close corporation, where there is a deadlock (Sec.
corporation’s authority are null and void and cannot be 104, CC)
given any effect. (Gancayco v. City Government of Quezon 6. Purchase own shares of stock
City, 658 SCRA 853, October 11, 2011) 7. Payment for the fair value of the shares of dissenting
stockholders. (Dimaampao and Escalante, 2017)
May an ultra vires act be ratified?
YES. For valid ratification, all the stockholders must give
their consent to such ratification; the rights of the State GR: Contracts intra vires entered into by the board of
are not involved; the creditors are not prejudiced; and directors are binding upon the corporation beyond the
the act or contracts must be wholly executed. interference of courts. The courts are barred from
(Dimaampao and Escalante, 2017) intruding into business judgments of corporations,
when the same are made in good faith. (Ong v Tiu, G.R.
Explain the Doctrine of Apparent Authority. (2015 No. 144476. April 8, 2003)
XPNs: The director/trustee or officer is personally and
solidary liable if he:

1. Willfully and knowingly votes for or assent to case of holdover, longer) than the term for reasons
patently unlawful acts of the corporation (Sec. 31, within or beyond the power of the incumbent.
2. Is guilty of gross negligence or bad faith in directing Based on the above discussion, when Section 23[9], CC
the affairs of the corporation (Sec. 31, CC); declares that the board of directors shall hold office for
3. Acquires any personal or pecuniary interest in 1 year until their successors are elected and qualified,
conflict with his duty as such director or trustee we construe the provision to mean that the term of the
(Sec. 31,CC); members of the board of directors shall be only for one
4. Acquires a business opportunity which should year; their term expires one year after election to the
belong to the corporation, thereby obtaining office. The holdover period that time from the lapse of
profits to the prejudice of such corporation (Sec. one year from a member’s election to the Board and
34,CC); until his successor’s election and qualification is not part
5. Consents to the issuance of watered stocks or who, of the director’s original term of office, nor is it a new
having knowledge thereof, did not forthwith file term; the holdover period, however, constitutes part of
with the corporate secretary his written objection his tenure. Corollary, when an incumbent member of the
thereto; board of directors continues to serve in a holdover
6. Contractually agrees or stipulates to hold himself capacity, it implies that the office has a fixed term, which
personally and solidarily liable with the has expired, and the incumbent is holding the
Corporation; succeeding term.
7. Is made, by specific provision of law, personally
liable for his corporate action. (MAM Realty It also bears noting that the vacancy referred to in
Development Corp. v. NLRC, 244 SCRA 797, June 2, Section 29 contemplates a vacancy occurring within the
1995 in Dimaampao and Escalante, 2017) director’s term of office. When a vacancy is created by
the expiration of a term, logically, there is no more
BOARD OF DIRECTORS/TRUSTEES/OFFICERS unexpired term to speak of. Hence, Section 29 declares
that it shall be the corporation’s stockholders who shall
In the November 2010 stockholders’ meeting of possess the authority to fill in a vacancy caused by the
Greenville Corporation, 8 directors were elected to expiration of a member’s term.
the board. The directors assumed their posts in
January 2011. Since no stockholders' meeting was With the expiration of the terms of office, a vacancy
held in November 2011, the 8 directors served in a resulted which, by the terms of Section 29 of the CC,
holdover capacity and thus continued discharging must be filled by the stockholders in a regular or special
their powers. meeting called for the purpose. To assume that the
vacancy is caused by the resignation of Directors A and
In June 2012, 2 of Greenville Corporation's directors B in 2012, not by the expiration of their terms in 2011,
– Director A and Director B – resigned from the is both illogical and unreasonable. Their resignation as
board. Relying on Section 29 of the Corporation holdover directors did not change the nature of the
Code, the remaining 6 directors elected 2 new vacancy; the vacancy due to the expiration of A and B’s
directors to fill in the vacancy caused by the term had been created long before their resignation.
resignation of Directors A and B. (Valle Verde Country Club, Inc. v. Victor Africa, G.R. No.
151969, 11 August 2008)
Stockholder X questioned the election of the new
directors, initially, through a letter-complaint However, since the right to fill in a vacancy in the BOD
addressed to the board, and later (when his letter- belongs to the stockholders, the derivative suit to
complaint went unheeded), through a derivative enforce such right is improper. (Reyes v. RTC of Makati,
suit filed with the court. He claimed that the vacancy 561, SCRA 593, 11 August 2008, in Dimaampao and
in the board should be filled up by the vote of the Escalante, 2017)
stockholders of Greenville Corporation. Greenville
Corporation's directors defended the legality of Ricardo Coros was dismissed by Matling Industrial
their action, claiming as well that Stockholder X's and Commercial Corporation (Matling) as its Vice
derivative suit was improper. President for Finance and Administration. Coros
filed a complaint for illegal suspension and illegal
Rule on the issues raised. (2013 BAR) dismissal against Matling and some of its corporate
officers with the NLRC. Matling, et al., moved to
The election of the new directors should be by voting of dismiss the complaint, raising the ground, among
the stockholders, and not merely by the remaining others, that the complaint pertained to the
directors. jurisdiction of the SEC due to the controversy being
intra-corporate inasmuch as Coros was a member of
Term is the time during which the officer may claim to Matling’s Board of Directors aside from being its
hold the office as of right, and fixes the interval after Vice-President for Finance and Administration prior
which the several incumbents shall succeed one to his termination. It further argues that the power
another. The term of office is not affected by the to create corporate offices and to appoint the
holdover. The term is fixed by statute and it does not individuals to assume the offices was delegated by
change simply because the office may have become Matling’s Board of Directors to its President through
vacant, nor because the incumbent holds over in office its By-Laws; and that any office the President
beyond the end of the term due to the fact that a created, like the position of the Coros, was as valid
successor has not been elected and has failed to qualify. and effective a creation as that made by the Board of
Directors, making the office a corporate office. Is
Term is distinguished from tenure in that an officer’s Coros a corporate officer of Matling?
tenure represents the term during which the incumbent
actually holds office. The tenure may be shorter (or, in

NO. Pursuant to Section 25 of the Corporation Code, At the meeting of the Board of Directors of KWIK to
whoever are the corporate officers enumerated in the approve the contract, Chito would have to make sure
by-laws are the exclusive officers of the corporation and that:
the Board has no power to create other offices without
amending first the corporate By-laws. However, the a) There is no fraud involved; and
Board may create appointive positions other than the b) The contract is fair and reasonable under the
positions of corporate officers, but the persons circumstances.
occupying such positions are not considered as
corporate officers within the meaning of Sec. 25 of the 2. If the conditions relating to quorum and required
Corporation Code and are not empowered to exercise number of votes are not met, the contract must be
the functions of the corporate officers, except those ratified by the vote of stockholders representing at
functions lawfully delegated to them. Their functions least 2/3 of the outstanding capital stock in a
and duties are to be determined by the Board of meeting called for the purpose. Furthermore, the
Directors/Trustees. Moreover, the Board of Directors of adverse interest of Chito in the contract must be
Matling could not validly delegate the power to create a disclosed and the contract is fair and reasonable.
corporate office to the President, in light of Sec. 25 of the
Corporation Code requiring the Board of Directors itself Explain the contracts between corporations with
to elect the corporate officers. Verily, the power to elect interlocking directors.
the corporate officers is a discretionary power that the
law exclusively vested in the Board of Directors, and A contract between two or more corporations having
could not be delegated to subordinate officers or agents. interlocking directors shall not be invalidated on that
The office of Vice President for Finance and ground alone. Provided that:
Administration created by Matling’s President pursuant
to the By-Law was an ordinary, not a corporate, office. 1. Contract is not fraudulent;
(Matling Industrial and Commercial Corporation, et al., v. 2. Contract is fair and reasonable under the
Ricardo R. Coros, G.R. No. 157802, October 10, 2010, J. circumstances; and
Bersamin) 3. If the interest of the interlocking director in one
corporation or corporations is merely nominal (not
CONTRACTS exceeding 20% of the outstanding capital stock), he
shall be subject to the provisions of Sec. 32 insofar
Briefly discuss the doctrine of corporate as the latter corporation or corporations are
opportunity. (2005 BAR) concerned. (CC, Sec. 33)

Where a director, by virtue of his office, acquires for EXECUTIVE COMMITTEE

himself a business opportunity which should belong to
the corporation, thereby obtaining profits to the Corporate powers are exercised only by the board,
prejudice of such corporation. (CC, Sec. 34) except when delegated to an executive committee.
What are the corporate powers that may not be
However, if such act is ratified by a vote of the delegated?
stockholders representing at least 2/3 of the
outstanding capital stock, the director is excused from The executive committee by a vote of majority may
remitting the profit realized. (ibid) exercise such powers as may be delegated to it.
However, the following cannot be delegated:
Chito Santos is a director of both Platinum
Corporation (PLATINUM) and KWIK Silver a) approval of any action for which shareholders’
Corporation (KWIK). He owns 1% of the outstanding approval is also required;
capital stock of PLATINUM and 40% of KWIK. b) filling of vacancies in the board;
PLATINUM plans to enter into a contract with KWIK c) adopt, amend or repeal by-laws;
that will make both companies earn very substantial d) amend or repeal of any resolution of the board
profits. The contract is presented at the respective which by its express terms is not so amendable or
board meetings of PLATINUM and KWIK. repealable; and
e) distribution of cash dividends to the shareholders.
1. In order that the contract will not be voidable, (Sec. 35, CC)
what conditions will have to be complied with?
2. If these conditions are not met, how may this
contract be ratified? Explain. (1995 BAR) What are the rights of a stockholder and member?
(1996 BAR)
1. At the meeting of the Board of Directors of
PLATINUM to approve the contract, Chito Santos 1. Management Right:
would have to make sure that: a. To attend and vote in person or by proxy at a
stockholders’ meetings (Secs. 50, 58);
a) His presence as director at the meeting is not b. To elect and remove directors (Secs. 24, 28);
necessary to constitute a quorum for such c. To approve certain corporate acts (Sec. 58);
meeting; d. To adopt and amend or repeal the by-laws or
b) His vote is not necessary for the approval of the adopt new by-laws (Secs. 46, 48);
contract; and e. To compel the calling of the meetings (Sec. 50);
c) The contract is fair and reasonable under the f. To enter into a voting trust agreement (Sec. 59);
circumstances. g. To have the corporation voluntarily dissolved
(Secs. 118, 119).

2. Proprietary rights PRE-EMPTIVE RIGHT
a. To transfer stock in the corporate book (Sec.
63); Explain the pre-emptive right of the stockholders.
b. To receive dividends when declared (Sec. 43);
c. To the issuance of certificate of stock or other It is the preferential right of shareholders to subscribe
evidence of stock ownership ( Sec. 64); to all issues or disposition of shares of any class in
d. To participate in the distribution of corporate proportion to their present shareholdings. (CC, Sec. 39)
assets upon dissolution (Sec. 118, 119);
e. To pre-emption in the issue of shares (Sec. 39). Its purpose is to enable the shareholder to retain his
proportionate control in the corporation and to retain
3. Remedial rights his equity in the surplus.
a. To inspect corporate books (Sec. 74);
b. To recover stock unlawfully sold for delinquent Suppose that “X” Corporation has already used the
payment of subscription (Sec. 69); 1000 originally authorized shares of the
c. To be furnished with most recent financial corporation so that its Board of Directors and
statements or reports of the corporation’s stockholders wish to increase “X’s” authorized
operation (Sec. 74, 75); capital stock. After complying with the
d. To bring suits (derivative suit, individual suit, requirements of the law on increase of capital stock,
and representative suit); “X” issued an additional 1000 shares of the same
e. To demand payment in the exercise of appraisal value.
right (Secs. 41, 81).
a. Assume that the stockholder “A” presently holds
VOTING TRUST 200 out of the 1000 original shares, would “A”
have a preemptive right to 200 of the new issue
What is a voting trust agreement (VTA)? of 1000 shares? Why?
b. When should stockholder “A” exercise the
A VTA is an agreement whereby one or more preemptive right? (2001 BAR)
stockholders transfer their shares of stocks to a trustee,
who thereby acquires for a period of time the voting a. YES, “A” would have a preemptive right to 200 of the
rights (and/or any other specific rights) over such new issue of 1000 shares. “A” is a stockholder of
shares; and in return, trust certificates are given to the record holding 200 shares in “X” Corporation.
stockholder/s, which are transferable like stock According to the Corporation Code, each stockholder
certificates, subject, to the trust agreement. has the preemptive right to all issues of shares made
by the corporation in proportion to the number of
Its principal purpose is to acquire control of the share he holds on record in the corporation.
corporation. b. Preemptive right must be exercised in accordance
with the Articles of Incorporation or the By-Law.
It is the trustee of the shares who acquires legal title to When the Articles of Incorporation and By-Laws are
the shares under the voting trust agreement and thus silent, the Board may fix a reasonable time within
entitled to the right to vote and the right to be elected in which the stockholders may exercise the right.
the board of directors while the trustor-stockholder has
the beneficial title which includes the right to receive REMEDIAL RIGHTS
dividends. (Lee v. CA, G.R. No. 93695, February 4, 1992)
What are the actions that the stockholders or
RIGHT OF APPRAISAL members can bring?

What is the meaning of stockholder’s appraisal 1. Derivative suit – one brought by one or more
right? (2007 BAR) stockholders or members in the name and on behalf
of the corporation to redress wrongs committed
It refers to the right of the stockholder to demand against it or to protect or vindicate corporate rights,
payment of the fair value of his shares, after dissenting whenever the officials of the corporation refuse to
from a proposed corporate action involving a sue or are the ones to be sued or hold control of the
fundamental change in the charter or articles of corporation.
incorporation in the cases provided by law. (De Leon, 2. Individual suit – an action brought by a stockholder
2010) against the corporation for direct violation of his
contractual rights as such individual stockholder,
The corporation need not pay the value of the shares of such as the right to vote and be voted for, the right
a dissenting stockholder if at the time of the demand, the to share in the declared dividends, the right to
corporation has no unrestricted retained earnings. No inspect corporate books and records, and others.
payment shall be made to any dissenting stockholder 3. Representative suit – one brought by a person in his
unless the corporation has unrestricted retained own behalf and on behalf of all similarly situated.
earnings in its books to cover the payment. The trust
fund doctrine backstops the requirement of unrestricted State the requisites for the existence of a derivative
retained earnings to fund the payment of the shares of suit.
stocks of the withdrawing stockholders. The fact that the
Corporation subsequent to the demand for payment and (C-SENA)
during the pendency of the collection case posted 1. Corporate cause of action: the cause of action must
surplus profit did not cure the prematurity of the cause devolve upon the corporation itself; the wrongdoing
of action. (Philip Turner, et al., v. Lorenzo Shipping or harm having been caused to the corporation and
Corporation, G.R. No. 157479, November 24, 2010) not to the particular stockholder brining the suit

(Reyes v. Hon. RTC of Makati Br. 142, G.R. No. 165744, How is the voluntary dissolution of a corporation
August 11, 2008); effected?
2. Stockholder: the party bringing the suit must be a
stockholder a) By the vote of the BOD/ BOT and the stockholders/
a. At the time the acts or transactions subject of members where no creditors are affected (CC, Sec.
the action occurred and 118);
b. at the time the action was filed b) By the judgment of the SEC after hearing of petition
for voluntary dissolution, where creditors are
NOTE: if the cause of action is continuing in nature, affected (CC, Sec. 119);
the only requisite is that the party is a stockholder c) By amending the AOI to shorten the corporate term
at the time the action was filed. (Dean Divina’s (CC, Sec. 120);
Lecture, April 29, 2015) d) In case of a corporation sole, by submitting to the
SEC a verified declaration of the dissolution for
3. Exhaustion of all intra-corporate remedies available approval (CC, Sec. 115);
under the AOI, By-Laws, laws or rules governing the e) Merger or consolidation
corporation or partnership to obtain the relief he
desires; How is the involuntary dissolution of a corporation
4. Not a Nuisance or Harassment suit; effected?
5. Appraisal right is not available (Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate a) By expiration of corporate term provided for in the
Controversies, cited in Anthony S. Yu, et al., v. Joseph AOI (CC, Sec. 11);
S. Yukayguan, et al., G.R. No. 177549, June 18, 2009) b) By legislative enactment
c) By failure to formally organize and commence the
NOTE: A derivative suit is an intra-corporate transaction of its business within 2 years from the
controversy hence under the jurisdiction of the RTC date of incorporation (CC, Sec. 22);
acting as a special commercial court. d) By order of the SEC on grounds under existing laws
(CC, Sec. 121);
WATERED STOCK e) Judicial decree on Quo Warranto Proceeding (CC,
Sec. 20).
What is a watered stock?
Define liquidation.
A watered stock is a stock issued in exchange for cash,
property, share, stock dividends, or services lesser than Process by which all the assets of the corporation are
its par value or issued value. (CC, Sec. 65) converted into liquid assets (cash) in order to facilitate
the payment of obligations to creditors and the
Watered stocks can either be par or no par value shares. remaining balance if any is to be distributed to the
stockholders. (Sundiang Sr. & Aquino, 2014)
The watered stocks refer only to original issue of stocks
but not to a subsequent transfer of such stocks by the What are the methods of liquidation?
corporation, for then it would no longer be an “issue” but
a sale thereof (De Leon, 2010, citing Rochelle Roofing Co. 1. By the corporation itself or its board of directors or
v. Burley, 115 NE 478). Treasury shares are not subject trustees (CC , Sec. 122 [1]);
to the prohibition on the issuance of watered stocks. 2. By a trustee to whom the assets of the corporation
had been conveyed. (CC, Sec. 122[2]) (Board of
DISSOLUTION AND LIQUIDATION Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14,
Define dissolution. 3. By a management committee or rehabilitation
receiver appointed by SEC. (CC, Sec. 119)
It is the extinguishment of the franchise of a corporation
and the termination of its corporate existence. Does corporate life cease to exist immediately upon
(Sundiang Sr. & Aquino, 2009) dissolution?

What are the two legal steps in corporate NO. It shall continue as a body corporate for 3 years
dissolution? from the time of dissolution, for the purpose of
prosecuting and defending suits by or against it and
1. The termination of the corporate existence at least enabling it to settle and close its affairs, to dispose of and
as far as the right to go on doing ordinary business convey its property and to distribute its assets, but not
is concerned; for the purpose of continuing the business for which it
2. The winding up of its affairs, the payment of its was established. (Dimaampao and Escalante, 2017)
debts, and the distribution of its assets among the
shareholders or members and other persons The corporation, once dissolved, thereafter
interested. After winding up, the existence of the continues to be a body corporate for 3 years for
corporation is terminated for all purposes. purposes of prosecuting and defending suits by and
against it and of enabling it to settle and close its
How are corporatations dissolved? affairs, culminating in the final disposition and
distribution of its remaining assets. If the 3-year
a) voluntarily; extended life expires without a trustee or receiver
b) involuntarily; being designated by the corporation within that
c) by shortening corporate term; and period and by that time (expiry of the 3-year
d) expiration of the term. (Dimaampao and Escalante, extended term), the corporate liquidation is not yet

over, how, if at all, can a final settlement of the This provision, which is currently incorporated in the
corporate affairs be made? (1997 BAR) FRIA, is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to
The liquidation can continue with the winding up. The the rehabilitation, absent due regard to the greater long-
members of the Board of Directors can continue with the term benefit of all stakeholders. Otherwise stated, it
winding of the corporate affairs until final liquidation. forces the creditors to accept the terms and conditions
They can act as trustees or receivers for this purpose. of the rehabilitation plan, preferring long-term viability
over immediate but incomplete recovery. (BPI v. Sarabia
The SEC approved the amendment of the articles of Manor Hotel, G.R. no. 175844, July 29, 2013)
incorporation of GHQ Corporation shortening its
corporate life to only 25 years in accordance with CLOSE CORPORATION
Section 120 of the Corporation Code. As shortened,
the corporation continued its business operations What is a close corporation?
until May 30, 1997, the last day of its corporate
existence. Prior to said date, there were a number of A close corporation is one which AOI provides that:
pending civil actions, of varying nature but mostly
money claims filed by creditors, none of which was a. All of the corporation’s issued stock of all classes,
expected to be completed or resolved within 5 years exclusive of treasury shares, shall be held of record
from May 30, 1997. If the creditors had sought your by not more than a specified number of persons, not
professional help at that time about whether or not exceeding 20;
their cases could be pursued beyond May 30, 1997, b. All of the issued stock of all classes shall be subject
what would have been your advice? (2000 BAR) to one or more specified restrictions on transfer
permitted by the provisions on close corporations;
The cases can be pursued even beyond May 30, 1997, and
the last day of the corporate existence of GHQ c. The corporation shall not list in any stock exchange
Corporation. The Corporation is not actually dissolved or make any public offering of any of its stock of any
upon the expiration of its corporate term. There is still class.
the period for liquidation or winding up. GHQ d. Notwithstanding the foregoing, a corporation shall
Corporation may still continue to defend suits filed be deemed NOT a close corporation when at least
against it until it could settle and close its affairs. 2/3 of its voting stock or voting rights is owned or
controlled by another corporation which is not a
CORPORATE REHABILITATION close corporation within the meaning of this Code.

Define Rehabilitation A close corporation is essentially an incorporated

partnership in which the stockholders consider each
It refers to the restoration of the debtor to a condition of other as partners but which the law treats as a
successful operation and solvency, if it is shown that its corporation. Thus, stockholders in a close corporation
continuance of operation is economically feasible and its are very much like members in a partnership. They owe
creditors can recover by way of the present value of to one another the same duty of utmost good faith and
payments projected in the plan, more if the debtor diligence that partners owe one another. This strict duty
continues as a going concern than if it is immediately applies particularly to controlling stockholders. (De
liquidated [Sec. 4(gg), FRIA]. Leon, 2010)

What is the nature of rehabilitation proceedings? What are the corporations which may not qualify as
a close corporation?
Rehabilitation proceedings are summary and non-
adversarial in nature, and do not contemplate Any corporation may be incorporated as a close
adjudication of claims that must be threshed out in corporation, EXCEPT: (MOSBI-PEP)
ordinary court proceedings. 1. Mining or Oil companies,
2. Stock exchanges,
The jurisdiction of the rehabilitation court is over claims 3. Banks,
against the debtor that is under rehabilitation, not over 4. Insurance companies,
claims by the debtor against its own debtors or against 5. Public utilities,
third parties. The corporation under rehabilitation must 6. Educational institutions and
file a separate action against its debtors/insurers to 7. Corporations declared to be vested with Public
recover whatever claim it may have against them. (Steel interest in accordance with the provisions of the
Corporation v. Mapfre Insular Insurance Corporation, Corporation Code. (CC, Sec. 96)
G.R. No. 201199, October 16, 2013, in Divina, 2014)
Explain the Cram-down clause.
Define non-stock corporation.
Section 23. Approval of the Rehabilitation Plan. – The
court may approve a rehabilitation plan over the It is one where no part of its income is distributable as
opposition of creditors, holding a majority of the total dividends to its members, trustees or officers. Any profit
liabilities of the debtor if, in its judgment, the which it may obtain as an incident to its operations shall
rehabilitation of the debtor is feasible and the whenever necessary or proper, be used in furtherance of
opposition of the creditors is manifestly unreasonable. the purpose or purposes for which it was organized. (CC,
(Sec. 23, Rule 4, Interim Rules of Procedure on Corporate Sec. 87)
Non-stock corporations may be formed or organized for:

1. Charitable, A foreign corporation not doing business, but merely
2. Religious, transacts in an isolated transaction or on a cause of
3. Educational, action entirely independent of its business transaction,
4. Professional, need not obtain a license and may sue and be sued in our
5. Cultural, courts.
6. Fraternal,
7. Literary, If a foreign corporation does business in the Philippines
8. Scientific, without a license, a Philippine citizen or entity which has
9. Social, contracted with said corporation may be estopped from
10. Civic service, or challenging the foreign corporation’s corporate
11. Similar purposes, like trade, industry, agriculture personality in a suit brought before Philippine courts.
and like chambers, or any combination thereof. (CC, (Agilent Technologies Singapore [Pte.] Ltd. V. Integrated
Sec. 88) Silicon Technology Philippines Corporation, G.R. No.
154618, 14 April 2004, in Dimaampao and Escalante,
What are the characteristics of a non-stock 2017)
1. It does not have capital stock divided into shares;
2. No part of its income during its existence is What does doing business in the Philippines under
distributable as dividends to its members, trustees, the Foreign Investment Act of 1991 (FIA) mean?
or officers; (2016 BAR)
3. As a general rule, it is not empowered to engage in
business with the object of making income or profits The phrase "doing business in the Philippines" under
directly or indirectly. However, it is not prohibited the FIA include soliciting orders, service contracts,
to make income or profits as an incident to its opening offices, whether called "liaison" offices or
operation (CC, Sec. 87); branches; appointing representatives or distributors
4. There is non-transferability of membership (CC, Sec. domiciled in the Philippines or who in any calendar year
90); stay in the country for a period or periods totalling 180
5. The right to vote of members may be limited, days or more; participating in the management,
broadened, or even denied in the AOI or the by-laws supervision or control of any domestic business, firm,
(CC, Sec. 89); entity or corporation in the Philippines; and any other
6. Non-stock corporations may, through their articles act or acts that imply a continuity of commercial
of incorporation or their by-laws designate their dealings or arrangements, and contemplate to that
governing boards by any name other than as BOT extent the performance of acts or works, or the exercise
(CC, Sec. 138); of some of the functions normally incident to, and in
7. By-laws may provide that the members may hold progressive prosecution of, commercial gain or of the
their meetings at any place even outside the place purpose and object of the business organization;
where the principal office of the corporation is provided that passive equity investment shall not be
located, provided that such place is within the construed as doing business.
Philippines (CC, Sec. 93). A non-stock corporation is
not allowed to distribute any of its assets or any What are the jurisdictional tests of “doing or
incidental income or profit made by the corporation transacting business” in the Philippines for foreign
during its existence; corporations?
8. Non-availability of conversion into stock
corporation. (SEC Opinion, February 24, 1989) 1. Twin Characterization Test
a. Continuity Test – Doing business implies a
FOREIGN CORPORATIONS continuity of commercial dealings and
arrangements, and contemplates to some
Define a foreign corporation. extent the performance of acts or works or the
exercise of some functions normally incident to
A foreign corporation is one, formed, organized or and in progressive prosecution of, the purpose
existing under any laws other than those of the and object of its organization.
Philippines and whose laws allow Filipino citizens and b. Subsequent Test – a foreign corporation is doing
corporations to do business in its own country or State. business in the country if it is continuing the
(CC, Sec. 123) body or substance of the enterprise of business
for which it was organized (Sundiang Sr. &
Discuss the underlying reason in requiring foreign Aquino, 2009
corporation to obtain license to do business in the 2. Contract Test - Whether the contracts entered into
Philippines. by the foreign corporation, or by an agent acting
under the control and direction of the foreign
The purpose of the law is to subject the foreign corporation, are consummated in the Philippines.
corporation doing business in the Philippines to the
jurisdiction of the courts. NOTE: Actual transaction of business within the
Philippine territory is an essential requisite for the
A foreign corporation doing business in the Philippines Philippines to acquire jurisdiction over a foreign
with a license may sue and can be sued in the corporation and thus require the foreign corporation to
Philippines. If it is doing business without a license, it secure a Philippine business license. (B. Van Zuiden
cannot sue but may be sued in the Philippines. (Sec. 133, Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
CC) 147905, May 28, 2007)

What is the legal test for determining if an present, then the transferee corporation shall assume
unlicensed foreign corporation is doing business in the liabilities of the transferor.
the Philippines? (2002 BAR)
The legal basis of the last in the four (4) exceptions to
The test is whether or not the unlicensed foreign the Nell Doctrine, where the purchasing corporation is
corporation has performed an act or acts that imply a merely a continuation of the selling corporation, is
continuity of commercial dealings or arrangements, and challenging to determine. Dean Cesar Villanueva
contemplate to that extent the performance of acts or explained that this exception contemplates the
works, or the exercise of some of the functions normally “business-enterprise transfer.” In such transfer, the
incident to, and in progressive prosecution of, transferee corporation’s interest goes beyond the assets
commercial gain or of the purpose and object of the of the transferor’s assets and its desires to acquire the
business corporation. latter’s business enterprise, including its goodwill.

A foreign corporation which is not licensed to do Section 40 suitably reflects the business-enterprise
business in the Philippines is not absolutely transfer under the exception of the Nell Doctrine
incapacitated from filing a suit in local courts because the purchasing or transferee corporation
necessarily continued the business of the selling or
Only when that foreign corporation is “transacting” or transferor corporation. Given that the transferee
“doing business” in the country will a license be corporation acquired not only the assets but also the
necessary before it can institute suits. It may, however, business of the transferor corporation, then the
bring suits on isolated business transactions, which is liabilities of the latter are inevitably assigned to the
not prohibited under Philippine law. Thus, a foreign former. Section 40 refers to the sale, lease, exchange or
insurance company may sue in Philippine courts upon disposition of all or substantially all of the corporation's
the marine insurance policies issued by it abroad to assets, including its goodwill. The sale under this
cover international-bound cargoes shipped by a provision does not contemplate an ordinary sale of all
Philippine carrier, even if it has no license to do business corporate assets; the transfer must be of such degree
in this country. It is the act of engaging in business that the transferor corporation is rendered incapable of
without the prescribed license which bars a foreign continuing its business or its corporate purpose.
corporation from access to our courts. (Aboitiz Shipping
Corp. v. Insurance Co. of North America, G.R. No. 168402, The purpose of the business-enterprise transfer is to
August 6, 2008, in Divina, 2010) protect the creditors of the business by allowing them a
remedy against the new owner of the assets and
Any foreign corporation not doing business in the business enterprise. Otherwise, creditors would be left
Philippines may maintain an action in our courts upon “holding the bag,” because they may not be able to
any cause of action, provided that the subject matter and recover from the transferor who has “disappeared with
the defendant are within the jurisdiction of the court. It the loot,” or against the transferee who can claim that he
is not the absence of the prescribed license but "doing is a purchaser in good faith and for value. Based on the
business" in the Philippines without such license which foregoing, as the exception of the Nell doctrine relates to
debars the foreign corporation from access to our the protection of the creditors of the transferor
courts. In other words, although a foreign corporation is corporation, and does not depend on any deceit
without license to transact business in the Philippines, it committed by the transferee corporation, then fraud is
does not follow that it has no capacity to bring an action. certainly not an element of the business enterprise
Such license is not necessary if it is not engaged in doctrine. Indeed, the transferee corporation may inherit
business in the Philippines. (Columbia Pictures v. CA, G.R. the liabilities of the transferor despite the lack of fraud
No. 110318, August 28, 1996) due to the continuity of the latter’s business. (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, September 18,

Where one corporation sells or otherwise transfers What is meant by a de facto merger? Discuss (2016
all of its assets to another corporation, is the latter BAR)
liable for the debts and liabilities of the transferor?
De facto merger means that a corporation called the
GR: No. acquiring corporation acquired the assets and liabilities
of another corporation in exchange for equivalent value
XPNs: of shares of stock of the acquiring corporation.
1. Where the purchaser expressly or impliedly agrees
to assume such debts; SECURITIES REGULATION CODE
2. Where the transaction amounts to a consolidation
or merger of the corporations; The SRC is the law that regulates securities (its issuance,
3. Where the purchasing corporation is merely a distribution and sale) and the person who deals with
continuation of the selling corporation; and such securities. It is enacted to protect the public from
4. Where the transaction is entered into fraudulently unscrupulous promoters, who stake business or venture
to escape liability for such debts. (Edward J. Nell Co. claims which have really no basis, and sell shares or
v. Pacific Farms, Inc., G.R. No. L-20850, November 29, interests therein to investors. The SRC also serves to
1965) protect investors, promote investor confidence, and
stabilize the financial markets.
The Nell Doctrine states the general rule that the
transfer of all the assets of a corporation to another shall SECURITIES REQUIRED TO BE REGISTERED
not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are What are securities? (1996 BAR)

Securities are shares, participation or interests in a simultaneous order of substantially the same
corporation or in a commercial enterprise or profit- size, time, and price, for the sale or purchase of
making venture and evidenced by a certificate, contract, any such security, has or will be entered by or
instrument, whether written or electronic in character. for the same or different parties;
It includes: (DO DIET) c. Similar transactions where there is no change of
beneficial ownership.
1. Debt instruments – bonds, debentures, notes, 2. Effecting a series of transactions that will raise or
evidence of indebtedness, asset-backed securities depress the price of securities to induce the
2. Other instruments as may in the future be purchase or sale of securities respectively, or
determined by the SEC. creating active trading to induce transactions
3. Derivatives– options and warrants through manipulative devices:
4. Investments instruments – Investment contracts, a. Marking the close – buying and selling of
fractional undivided interests in oil, gas, or other securities at the close of the market in an effort
mineral rights to alter the closing price of these securities.
5. Equity instruments – Shares of stock, certificates of b. Painting the tape – engaging in a series of
interest or participation in a profit sharing transactions effected by brokers in securities
agreement, certificates of deposit for a future that are reported publicly to give the
subscription, proprietary or non-proprietary impression or illusion of activity or price
membership certificates in corporations. movement in a security, which may trick
6. Trust instruments – Certificates of assignments, investors into trading in these securities
certificates of participation, trust certificates, voting because of the alleged trading volume or
trust certificates or similar instruments. (SRC, Sec. indications of interest.
3) c. Squeezing the float – refers to taking advantage
of a shortage of securities in the market by
Test on determining whether or not it is a security: controlling the demand side and exploiting
Does it represent a share, participation, or interest in a market congestion during such shortages in a
commercial enterprise or any profit making venture? If way to create artificial prices. This prevents
yes, then, it is a security. If it is a security, then, it cannot the actual market from determining the price of
be sold, or offered for sale or distribution within the these securities.
Philippines without a registration statement duly filed d. Hype and dump – engaging in buying activity at
with and approved by the SEC. (Divina, 2014) increasingly higher prices and then selling
securities in the market at the higher prices.
What is the requirement before securities are sold e. Boiler room operations – refers to activities that
or offered for sale or distribution within the involve the use of high pressure sale tactics
Philippines? such as direct mail offers or telephone follow-
ups to investors to promote purchase and sale
They are required to be registered with and approved by of securities wherein there is
the SEC. Registration also includes the disclosure to SEC misrepresentation in these securities. This is a
of all material and relevant information about the issuer fraudulent transaction that tricks investors into
of the security. Prior to the sale, the information on the trading in a fake market.
securities, in such form and with such substance as the f. Daisy chain – refers to a series of purchase and
SEC may prescribe, shall be made available to each sales of the same issue at successively higher
prospective purchaser. (SRC, Sec. 8) prices by the same group of people with the
purpose of manipulating prices are drawing
In Securities Law, what is a shortswing transaction? unsuspecting investors into the market leaving
them defrauded of their money and securities.
A shortswing is a transaction where a person buys g. Front-Running – is the prohibited practice of a
securities and sells or disposes of the same within a broker-dealer executing its proprietary order
period of six months. before the customer’s order for the same
security. This violates the fiduciary
PROHIBITIONS ON FRAUD, MANIPULATIONS responsibility by the broker-dealer to its
AND INSIDER TRADING customer accounts as well as placing the
customer’s order first.
Explain the manipulation of security prices. (2001 h. Churning – involves the excessive trading of
BAR) securities by a broker-dealer in a customer’s
discretionary account in order to generate
The price of securities should be dictated by market commissions, without regard to the customer’s
forces. It cannot be pegged or stabilized. The following investment objective.
acts are considered as manipulation of security prices 3. Circulating or disseminating information that the
and are therefore prohibited: price of any security listed in an Exchange will or is
likely to rise or fall because of manipulative market
1. Transactions intended to create a false or operations of any one or more persons conducted
misleading appearance of active trading in any for the purpose of raising or depressing the price of
listed security traded in an Exchange or any other that security for the purpose of inducing the
trading market: purchase or sale of such security.
a. Wash Sale – is a transaction in which there is no 4. To make false or misleading statement with respect
genuine change in the beneficial (or actual) to any material fact, which he knew or had
ownership of a security; reasonable ground to believe was so false or
b. Matched Sale – is a change of ownership in the misleading, for the purpose of inducing the
securities by entering an order for the purchase purchase or sale of any security listed or traded in
or sale of a security with the knowledge that a an Exchange.

5. To effect, either alone or with others, any series of equity shares in a public company shall disclose
transactions for the purchase and/or sale of any such intention and contemporaneously make a
security traded in an exchange for the purpose of tender offer for the percent sought to all
pegging, fixing or stabilizing the price of such shareholders of such class.
security, unless otherwise allowed by the Code or by
rules of the Commission. NOTE: In the event that the tender offer is
oversubscribed, the aggregate amount of securities to be
What is insider trading? acquired at the close of such tender offer shall be
proportionately distributed across both selling
A purchase or sale made by an insider, or such insider’s shareholder with whom the acquirer may have been in
spouse or his relative by affinity or consanguinity within private negotiations and the minority shareholders.
the second degree, legitimate or common-law, shall be
presumed to be effected while in possession of material 2. Any person or group of persons acting in concert
non-public information if transacted after such who intends to acquire 35% or more of any class of
information came into existence but prior to the public equity shares of a public company (corporation with
dissemination of such information, and lapse of assets of at least P 50,000,000.00 and having 200 or
reasonable time for the market to absorb such more stockholders with at least 100 shares for each
information. (Bar 2015) stockholder) pursuant to an agreement made
between or among the person or group of persons
What is material non-public information? (1995 and one or more sellers.
BAR) 3. Any person or group of persons acting in concert
intends to acquire 35% or more of equity shares of
1. Information about the issuer or the security has not a public company in one or more transactions
been generally disclosed to the public and would within a period of 12 months shall be required to
likely affect the market price of the security after make a tender offer to all holders of such class for
being disseminated to the public and the lapse of a the number of shares so acquired within the same
reasonable time for the market to absorb the period.
information; or 4. If any acquisition of even less than 35% would
2. Would be considered by a reasonable person result in ownership of over 51% of the total
important under the circumstances in determining outstanding equity securities of a public company,
his course of action whether to buy, sell or hold a the acquirer shall be required to make a tender offer
security. (SRC, Sec. 27.2) under this Rule for all the outstanding equity
securities to all remaining stockholders of the said
In insider trading, what is a fact of special company at a price supported by a fairness opinion
significance? (1991 BAR) provided by an independent financial advisor or
equivalent third party. The acquirer in such tender
It is, in addition to being material, such fact as would offer shall be required to accept any and all
likely, on being made generally available, to affect the securities thus tendered.
market price of a security to a significant extent, or 5. In any transaction covered by this Rule, the sale of
which a reasonable person would consider as especially shares pursuant to the private transaction shall not
important under the circumstances in determining his be completed prior to the closing and completion of
course of action in the light of such factors as the degree the tender offer. Transactions with any of the
of its specificity, the extent of its difference from seller/s of significant block of shares with whom the
information generally available previously, and its acquirers may have been in private negotiation shall
nature and reliability. (RSA, Sec. 30 [c]) close at the same time and upon the same terms as
the tender offer made to the public under this Rule.
What is a tender offer? (2016, 2010, 2002 BAR) For paragraph (2)(B), the last sale meeting the
threshold shall not be consummated until the
Tender offer means a publicly announced intention by a closing and completion of the tender offer.
person acting alone or in concert with other persons to
acquire equity securities of a public company. It is also Coverage of the application of tender offer
an offer by the acquiring person to stockholders of a
public company for them to tender their shares therein The mandatory tender offer rule covers not only direct
on the terms specified in the offer. Tender offer is in acquisition but also indirect acquisition or “any type of
place to protect their minority shareholders against any acquisition.” The legislative intent of Section 19 of the
scheme that dilutes the share value of any investments. Code is to regulate activities relating to acquisition of
It gives the minority shareholders the chance to exit the control of the listed company and for the purpose of
company under reasonable terms, giving them protecting the minority stockholders of a listed
opportunity to sell their shares at the same price as corporation. Whatever may be the method by which
those of the majority shareholders. (CEMCO HOLDINGS, control of a public company is obtained, either through
INC. v. National Life Insurance Company, Inc. G.R. No. the direct purchase of its stocks or through an indirect
171815, August 7, 2007) means, mandatory tender offer applies. What is decisive
is the determination of the power of control. The
In what instances is a tender offer required to be legislative intent behind the tender offer rule makes
made? (2002 BAR) clear that the type of activity intended to be regulated is
the acquisition of control of the listed company through
Tender offer is required to be made in the following the purchase of shares. Control may be effected through
instances: a direct and indirect acquisition of stock, and when this
takes place, irrespective of the means, a tender offer
1. Any person or group of persons acting in concert must occur. (Cemco Holdings v. National Life Insurance
who intends to acquire 35% or more of any class of Company, G.R. No. 171815, August 7, 2007)


What are the grounds for civil liability to arise Coverage of intellectual property rights

1. False Registration Statement (SRC, Sec. 56) 1. Copyright and Related Rights;
2. Fraud in connection with prospectus, 2. Trademarks and Service Marks;
communications and reports (SRC, Sec. 57) 3. Geographic indications;
3. Fraud in connection with security transactions (SRC, 4. Industrial designs;
Sec. 58) 5. Patents;
4. Manipulation of security prices (SRC , Sec. 60) 6. Layout designs (Topographies) of Integrated
5. Insider trading (SRC, Sec. 61) Circuits;
7. Protection of Undisclosed Information (TRIPS).
Prescriptive period for filing of action: Two years
after the discovery of the facts constituting the cause of Distinctions among trademark, patent, and
action and within five years after such cause of action copyright
Jurisdiction over civil liabilities: The court which has PROPERTIES
jurisdiction over cases involving civil liabilities is the
any visible sign capable of
Regional Trial Court. Civil suits are under the exclusive
distinguishing the goods (trademark)
original jurisdiction of the RTC and hence, need not be Trademarks
or services (service mark) of an
first filed before the SEC unlike criminal cases, wherein and Service
enterprise and shall include a
the latter body exercises primary jurisdiction. (Pua v. Marks
stamped or marked container of
Citibank, G.R. No. 180064, Sept. 16, 2013)
INTRA-CORPORATE CONTROVERSIES any technical solution of a problem in
any field of human activity which is
new, involves an inventive step and is
An intra-corporate controversy is one which arises
Patents industrially applicable. It may be, or
between a stockholder and the corporation and pertains
to the enforcement of the parties’ correlative rights and may relate to, a product, or process, or
an improvement of any of the
obligations under the Corporation Code and the internal
and intra-corporate regulatory rules of the corporation.
(Real v. Sangu Philippines Inc., G.R. No. 168757, January exists over original and derivative
19, 2011) Copyright and intellectual creations in the literary
Related Rights and artistic domain protected from
The venue for actions involving intra-corporate the moment of their creation.
controversies is now under the jurisdiction of the RTC
acting as a special commercial court. (Sec. 5, A.M. NO. PATENTS
Any technical solution of a problem in any field of human
It is the RTC and not the Sandiganbayan which has activity which is new, involves an inventive step and is
jurisdiction over cases which do not involve a industrially applicable. It may be, or may relate to, a
sequestration-related incident but an intra-corporate product, or process, or an improvement of any of the
controversy. Issues regarding the propriety of the foregoing (IPC, Sec. 21).
election of a party as a Director and his authority to act
in that capacity should be determined only by the RTC Improvement – enhancement or modification of any of
pursuant to the pertinent law on jurisdiction because the foregoing subject to patentability criteria.
they do not concern the recovery of ill-gotten wealth.
Criteria for Patentability:
CONTROVERSY 1. Novelty – An invention shall not be considered new
if it forms part of a prior art (Sec. 23, IPC).
1. Relationship Test – No doubt exists that the parties 2. Inventive Step –if, having regard to prior art, it is not
were members of the same association, but this obvious to a person skilled in the art at the time of the
conclusion must still be supplemented by the filing date or priority date of the application
controversy test before it may be considered as an claiming the invention.
intra-corporate dispute. 3. Industrially Applicable – An invention that can be
2. Controversy Test – The dispute must be rooted in the produced and used in any industry (IPC, Sec. 27).
existence of an intra-corporate relationship, and
must refer to the enforcement of the parties’ Coverage of patents:
correlative rights and obligations under the
Corporation Code, as well as the internal and intra- 1. Invention – any technical solution of a problem in
corporate regulatory rules of the corporation, in any field of human activity which is new, involves an
order to be an intra-corporate dispute (Gulfo v. inventive step and is industrially applicable. It may
Ancheta, G.R. No. 175301, August 15, 2012). be, or may relate to, a product, or process, or an
improvement of any of the foregoing (Sec. 21, IPC).
2. Utility Model – An invention qualifies for
registration as a utility model if it is new and
industrially applicable (Sec. 109, IPC).
3. Industrial Design – any composition of lines or
colors or any three-dimensional form, whether or

not associated with lines or colors, provided that they are part of a process (e.g. business process with
such composition or form gives a special a step involving the use of a computer program).
appearance to and can serve as pattern for an
industrial product or handicraft. It must be new or OWNERSHIP OF PATENT
ornamental (Sec. 112, 113 IPC).
1. Inventor, his heirs, or assigns (IPC, Sec 28);
An industrial design is not considered new if it 2. Joint invention – Jointly by the inventors (IPC, Sec.
differs from prior designs only in minor respects 28);
that can be mistaken as such prior designs by an 3. Two or more persons invented separately and
ordinary observer. (World Intellectual Property independently of each other – To the person who
Organization, 2004). filed an application;
4. Two or more applications are filed – the applicant
Rights conferred by a patent: who has the earliest filing date or, the earliest
priority date. (First-to-file rule) (IPC, Sec. 29).
1. In case of Product – Right to restrain, prohibit and 5. If made pursuant to a commission – person who
prevent any unauthorized person or entity from commissions the work shall own the patent, unless
making, using, offering for sale, selling or importing otherwise provided in the contract.
the product. 6. If made pursuant to an employment – In case the
2. In case of Process – Right to restrain prohibit and employee made the invention in the course of his
prevent any unauthorized person or entity from employment contract, the patent shall belong to:
manufacturing, dealing in, using, offering for sale, a. The employee, if the inventive activity is not a
selling or importing any product obtained directly part of his regular duties even if the employee
or indirectly from such process (IPC, Sec. 71). uses the time, facilities and materials of the
3. Right to assign the patent, to transfer by succession, employer;
and to conclude licensing contracts (IPC, Sec. 71.2). b. The employer, if the inventive activity is the
result of the performance of his regularly-
The rights conferred by a patent application take effect assigned duties, unless there is an agreement,
after publication in the Official Gazette (IPC, Sec 46). express or implied, to the contrary (IPC, Sec. 30).

Doctrine of exhaustion (Also known as the doctrine of RIGHT TO A PATENT

first sale): it provides that the patent holder has control
of the first sale of his invention. He has the opportunity The right to a patent belongs to the inventor, his heirs,
to receive the full consideration for his invention from or assigns. When two (2) or more persons have jointly
his sale. Hence, he exhausts his rights in the future made an invention, the right to a patent shall belong to
control of his invention. It espouses that the patentee them jointly. (IPC, Sec. 28)
who has already sold his invention and has received all
the royalty and consideration for the same will be FIRST-TO-FILE RULE
deemed to have released the invention from his
monopoly. The invention thus becomes open to the use 1. If two (2) or more persons have made the invention
of the purchaser without further restriction (Adams v. separately and independently of each other, the
Burke, 84 U.S. 17, 1873). right to the patent shall belong to the person who
filed an application for such invention, or
GR: Patent rights are exhausted by first sale in the 2. where two or more applicants are filed for the same
Philippines (Domestic exhaustion). invention, to the applicant who has the earliest filing
date or, the earliest priority date. (IPC, Sec. 29)
XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner thereof INVENTIONS CREATED PURSUANT TO A COMMISION
(International exhaustion) (R.A. 9502).
Pursuant to a commission: The person who
NON-PATENTABLE INVENTIONS commissions the work shall own the patent, unless
otherwise provided in the contract.
1. Plant varieties or animal breeds or essentially
biological process for the production of plants or Pursuant to employment: In case the employee made
animals. This provision shall not apply to micro- the invention in the course of his employment contract,
organisms and non-biological and microbiological the patent shall belong to:
2. Aesthetic creations c. The employee, if the inventive activity is not a part
3. Discoveries, scientific theories and mathematical of his regular duties even if the employee uses the
methods time, facilities and materials of the employer;
4. Schemes, rules and methods of performing mental d. The employer, if the inventive activity is the result
acts, playing games or doing business, and of the performance of his regularly-assigned duties,
programs for computers unless there is an agreement, express or implied, to
5. Anything which is contrary to public order or the contrary (IPC, Sec. 30).
morality (IPC as amended by R.A. 9502, Sec. 22).
6. Methods for treatment of the human or animal body RIGHT OF PRIORITY
7. In the case of drugs and medicines, mere discovery
of a new form or new property of a known An application for patent filed by any person who has
substance which does not result in the enhancement previously applied for the same invention in another
of the efficacy of that substance country which by treaty, convention, or law affords
8. Computer programs are not patentable but are similar privileges to Filipino citizens, shall be considered
copyrightable. However, they can be patentable if

as filed as of the date of filing the foreign application been introduced in the Philippines or anywhere
(IPC, Sec. 31). Conditions in availing of priority date: else in the world by the patent owner, or by any
party authorized to use the invention.
1. The local application expressly claims priority; 2. Prior user - Person other than the applicant, who in
2. It is filed within 12 months from the date the earliest good faith, started using the invention in the
foreign application was filed; and Philippines, or undertaken serious preparations to
3. A certified copy of the foreign application together use the same, before the filing date or priority date
with an English translation is filed within 6 months of the application shall have the right to continue
from the date of filing in the Philippines (Sec. 31, the use thereof, but this right shall only be
IPC). transferred or assigned further with his enterprise
or business.
GROUNDS FOR CANCELLATION OF A PATENT 3. Where the act is done privately and on a non-
commercial scale or for a non-commercial purpose
1. The invention is not new or patentable; (IPC, Sec. 72.2).
2. The patent does not disclose the invention in a 4. Exclusively for experimental use of the invention for
manner sufficiently clear and complete for it to be scientific purposes or educational purposes. (IPC,
carried out by any person skilled in the art; or Sec. 72.3).
3. Contrary to public order or morality (IPC, Sec. 61.1). 5. Use by Government – a Government agency or
4. Patent is found invalid in an action for infringement third person authorized by the Government may
(IPC, Sec. 82); exploit the invention even without agreement of the
5. The patent includes matters outside the scope of the patent owner where:
disclosure contained in the application (IPC, Sec 21,
Regulations on Inter Partes Proceeding, Sec.1). a. The public interest, in particular, national
security, nutrition, health or the development
REMEDIES AVAILABLE of other sectors, as determined by the
appropriate agency of the government, so
1. Persons with a right to a patent - If a person other requires; or
than the applicant is declared by final court order or b. A judicial or administrative body has
decision as having the right to a patent, he may determined that the manner of exploitation,
within 3 months after such decision has become by the owner of the patent or his licensee, is
final: anti- competitive; or
a. Prosecute the application as his own c. In the case of drugs and medicines, there is a
b. File a new patent application national emergency or other circumstance of
c. Request the application to be refused; or extreme urgency requiring the use of the
d. Seek cancellation of the patent (IPC, Sec. 67.1). invention; or
d. In the case of drugs and medicines, there is a
2. True and actual inventor - If a person, who was public non-commercial use of the patent by
deprived of the patent without his consent or the patentee, without satisfactory reason; or
through fraud is declared by final court order or e. In the case of drugs and medicines, the
decision to be the true and actual inventor, the court demand for the patented article in the
shall order for his substitution as patentee, or at the Philippines is not being met to an adequate
option of the true inventor, cancel the patent, and extent and on reasonable terms, as
award actual damages in his favor if warranted by determined by the Secretary of the
the circumstances (IPC, Sec. 68). Department of Health.

These actions must be filed within one (1) year from the The use by the Government, or third person authorized
date of publication. (IPC, Sec. 70). by the Government, shall be subject, where applicable,
to the following provisions:
1. In situations of national emergency or other
1. In case of Product – Right to restrain, prohibit and circumstances of extreme urgency, the right holder
prevent any unauthorized person or entity from shall be notified as soon as reasonably practicable;
making, using, offering for sale, selling or importing 2. In the case of public non-commercial use of the
the product. patent by the patentee, without satisfactory reason,
2. In case of Process – Right to restrain, prohibit and the right holder shall be informed promptly;
prevent any unauthorized person or entity from 3. If the demand for the patented article in the
manufacturing, dealing in, using, offering for sale, Philippines is not being met to an adequate extent
selling or importing any product obtained directly and on reasonable terms as determined by the
or indirectly from such process. (IPC, Sec. 71) Secretary of Health, the right holder shall be
3. Right to assign the patent, to transfer by succession, informed promptly;
and to conclude licensing contracts. (IPC, Sec. 71.2) 4. The scope and duration of such use shall be limited
to the purpose for which it was authorized;
The rights conferred by a patent application take effect 5. Such use shall be non-exclusive;
after publication in the Official Gazette. (IPC, Sec 46) 6. The right holder shall be paid adequate
remuneration in the circumstances of each case,
LIMITATIONS OF PATENT RIGHTS taking into account the economic value of the
authorization; and
1. Parallel imporation – In case of drugs and 7. The existence of a national emergency or other
medicine, the owner of a patent has NO RIGHT to circumstances of extreme urgency, in the case of
prevent third parties from making, using, offering drugs and medicines shall be subject to the
for sale, importing a patented product, when it has determination of the President of the Philippines for

the purpose of determining the need for such use or not more than three (3) years and/or a fine not less
other exploitation, which shall be immediately than P100, 000.00 but not more than P300, 000.00.
executory. Prescriptive period: three (3) years from the
commission of the crime.
PATENT INFRINGEMENT 3. Administrative remedy – Where the amount of
damages claimed is not less than P200, 000.00, the
Tests in Patent Infringement: patentee may choose to file an administrative action
against the infringer with the Bureau of Legal Affairs
Literal Infringement - Resort must be had, in the first (BLA). The BLA can issue injunctions, order direct
instance, to the words of the claim. If accused matter infringer to pay patentee damages, but unlike
clearly falls within the claim, infringement is made out regular courts, the BLA may not issue search and
and that is the end of it. To determine whether the seizure warrants or warrants of arrest.
particular item falls within the literal meaning of the 4. Destruction of Infringing material – The court may,
patent claims, the Court must juxtapose the claims of the in its discretion, order that the infringing goods,
patent and the accused product within the overall materials and implements predominantly used in
context of the claims and specifications, to determine the infringement be disposed of outside the
whether there is exactly identity of all material channels of commerce of destroyed, without
elements (Godines v. The Honorable Court of Appeals, G.R. compensation (IPC, Sec.76.5).
No. 97343, September 13, 1993).
Persons who can file an action for infringement:
Doctrine of Equivalents – There is infringement when
a device appropriates a prior invention by incorporating 1. The patentee or his successors-in-interest may file an
its innovative concept and, despite some modification action for infringement (Creser Precision Systems,
and change, performs substantially the same function in Inc. v. CA, G.R. No. 118708, Feb. 2, 1998).
substantially the same way to achieve substantially the 2. Any foreign national or juridical entity who meets
same result. (Ibid.). the requirements of Sec. 3 and not engaged in
business in the Philippines, to which a patent has
The doctrine of equivalents thus requires satisfaction of been granted or assigned, whether or not it is
the function-means-and-result test, the patentee having licensed to do business in the Philippines (IPC, Sec.
the burden to show that all three components of such 77).
equivalency test are met (Smithkline Beckman
Corporation v. CA, G.R. No. 126627, August 14, 2003). A licensee may NOT maintain a suit for infringement.
Only the patentees, his heirs, assignee, grantee or
Meaning of “equivalent device”: It is such as a personal representatives may bring an action for
mechanic of ordinary skill in construction of similar infringement. XPN: If the licensing agreement provides
machinery, having the forms, specifications and that the licensee may bring an action for infringement or
machine before him, could substitute in the place of the if he was authorized to do so by the patentee through a
mechanism described without the exercise of the special power of attorney.
inventive faculty.
Doctrine of file wrapper estoppel: It balances the
doctrine of equivalents. Patentee is precluded from 1. Invalidity of the patent (IPC, Sec. 81);
claiming as part of patented product that which he had 2. Any of the grounds for cancellation of patents:
to excise or modify in order to avoid patent office a. That what is claimed as the invention is not new
rejection, and he may omit any additions that he was or patentable
compelled to add by patent office regulations. b. That the patent does not disclose the invention
in a manner sufficiently clear and complete for
Contributory Infringement it to be carried out by any person skilled in the
art; or
Anyone who actively induces the infringement of a c. That the patent is contrary to public order or
patent or provides the infringer with a component of a morality (IPC, Sec. 61).
patented product or of a product produced because of a 3. Prescription
patented process knowing it to be especially adopted for
infringing the patented invention and not suitable for MODES OF OBTAINING LICENSING TO EXPLOINT
substantial non-infringing use shall be liable as a PATENT RIGHTS
contributory infringer and shall be jointly and severally
liable with the infringer (Sec. 76.6, IPC). A. VOLUNTARY – The grant by the patent owner to a
third person of the right to exploit a patented
Remedies of the owner of the patent against invention.
Rights of a licensor in voluntary licensing
1. Civil action for infringement – damages sustained by
the owner, plus attorney’s fees and other In the absence of any provision to the contrary in the
litigation expenses, and to secure an injunction technology transfer arrangement, the grant of a license
for the protection of his rights (IPC, Sec 76.2). shall not prevent the licensor from granting further
Prescriptive period: four (4) years from the filing licenses to third person nor from exploiting the subject
of the action for infringement matter of the technology transfer arrangement himself
2. Criminal action for infringement – If the (IPC, Sec. 89).
infringement is repeated, the infringer shall be
criminally liable and upon conviction, shall suffer B. COMPULSORY –
imprisonment of not less than six (6) months but

Jurisdiction in and to the patent and the invention covered thereby,
or of an undivided share of the entire patent and
1. The Director of Legal Affairs may grant a license to invention, in which event the parties become joint
exploit a patented invention, even without the owners thereof. An assignment may be limited to a
agreement of the patent owner, in favor of any specified territory (IPC, Sec. 104).
person who has shown his capability to exploit the
invention (IPC, Sec. 93). Form of Assignment
2. R.A. No. 9502 (Universally Accessible Cheaper and
Quality Medicines Act of 2008) however amended The assignment must be in writing, acknowledged
Sec. 93 so that it is the Director General of the IPO before a notary public or other officer authorized to
who may grant a license to exploit patented administer oath or perform notarial acts, and certified
invention under the grounds enumerated therein. under the hand and official seal of the notary or such
other officer (Sec. 105, IPC).
The Director General of the Intellectual Property Office
may grant a license to exploit a patented invention, even Manner of effecting transfer of rights
without the agreenment of the patent owner, in favor of
any person who has shown his capability to exploit the 1. By inheritance or bequest
invention, under any of the following circumstances: 2. License contract

1. National emergency or other circumstances of Effect of an assignment of a patent

extreme urgency;
2. Where the public interest, in particular, national The assignment works as an estoppel by deed,
security, nutrition, health or the development of preventing the assignor from denying the novelty and
other vital sectors of the national economy as utility of the patented invention when sued by the
determined by the appropriate agency of the assignee for infringement.
Government, so requires; or
3. Where a judicial or administrative body has Effect if the assignment was not recorded in the IPO
determined that the manner of exploitation by the
owner of the patent or his licensee is anti- A deed of assignment affecting title shall be void as
competitive; or against any subsequent purchaser or mortgagee for
4. In case of public non-commercial use of the patent valuable consideration and without notice unless, it is so
by the patentee, without satisfactory reason; recorded in the Office, within three (3) months from the
5. If the patented invention is not being worked in the date of said instrument, or prior to the subsequent
Philippines on a commercial scale, although capable purchase or mortgage. However, even without
of being worked, without satisfactory reason: recording, the instruments are binding upon the parties.
Provided, that the importation of the patented
article shall constitute working or using the patent; TRADEMARK
6. Where the demand for patented drugs and Mark means any visible sign capable of distinguishing
medicines is not being met to an adequate extent the goods (trademark) or services (service mark) of an
and on reasonable terms, as determined by the enterprise and shall include a stamped or marked
Secretary of the Department of Health (IPC, Sec. 93, container of goods.
as amended by RA 9502).
Collective mark means any visible sign designated as
Cancellation of compulsory license such in the application for registration and capable of
distinguishing the origin or any other common
Upon the request of the patentee, the Director may characteristic, including the quality of goods or services
cancel the compulsory license: of different enterprises which use the sign under the
control of the registered owner of the collective mark.
a. If the ground for the grant of the compulsory license
no longer exists and is unlikely to recur; Trade name means the name or designation identifying
b. If the licensee has neither begun to supply the or distinguishing an enterprise (IPC, Sec. 121.1, 121.2,
domestic market nor made serious preparation 121.3).
c. If the licensee has not complied with the prescribed ACQUISITION OF OWNERSHIP OF A MARK
terms of the license (IPC, Sec. 101.2).
The rights in a mark shall be acquired through
ASSIGNMENT AND TRANSMISSION OF RIGHTS registration made validly in accordance with the
provisions of the IP Code. Actual prior use in commerce
Patents or applications for patents and invention to in the Philippines has been abolished as a condition for
which they relate, shall be protected in the same way as the registration of trademark.
the rights of other property under the Civil Code.
Only the owner of the trademark, trade name or service
Inventions and any right, title or interest in and to mark used to distinguish his goods, business or service
patents and inventions covered thereby, may be from the goods, business or service of others is entitled
assigned or transmitted by inheritance or bequest or to register the same. An exclusive distributor does not
may be the subject of a license contract. (IPC, Sec. 103) acquire any proprietary interest in the principal's
trademark and cannot register it in his own name unless
Assignment of Inventions it is has been validly assigned to him (Superior
Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R.
An assignment may be of the entire right, title or interest No. 169974, April 20, 2010).

ACQUISITION OF TRADE NAME 12. Consists of color alone, unless defined by a given
form; or
Ownership of a mark or trade name may be acquired not 13. Is contrary to public order or morality (IPC, Sec. 123).
necessarily by registration but by adoption and use in
trade or commerce. As between actual use of a mark Well-known marks
without registration, and registration of the mark
without actual use thereof, the former prevails over the A mark cannot be registered if it is identical with, or
latter. (Shangri-la Hotel Management Ltd. v. Developers confusingly similar to, or constitutes a translation of a
Group of companies, March 31, 2006 G.R. No. 159938). A mark which is considered by the competent authority of
trade name need not be registered with the IPO before the Philippines to be well-known internationally and in
an infringement suit may be filed by its owner against the Philippines, whether or not it is registered here, as
the owner of an infringing trademark. All that is being already the mark of a person other than the
required is that the trade name is previously used in applicant for registration, and used for identical or
trade or commerce in the Philippines. (Coffee Partners, similar goods or services: Provided, That in
Inc. v. San Francisco Coffee & Roastery, Inc., G.R. No. determining whether a mark is well-known, account
169504, March 3, 2010). shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including
NON-REGISTRABLE MARKS knowledge in the Philippines which has been obtained
as a result of the promotion of the mark;
1. Consists of immoral, deceptive or scandalous matter
or falsely suggest a connection with persons, A mark cannot be registered if it is identical with, or
institutions, beliefs, or national symbols; confusingly similar to, or constitutes a translation of a
2. Consists of the flag or coat of arms or other insignia mark considered well-known in accordance with the
of the Philippines or any of its political subdivisions, preceding paragraph, which is registered in the
or of any foreign nation; Philippines with respect to goods or services which
3. Consists of a name, portrait or signature identifying are NOT similar to those with respect to which
a particular living individual except by his written registration is applied for: Provided,
consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the life 1. That use of the mark in relation to those goods or
of his widow except by written consent of the services would indicate a connection between those
widow; goods or services, and the owner of the registered
4. Identical with a registered mark belonging to a mark: and
different proprietor or a mark with an earlier filing 2. That the interests of the owner of the registered
or priority date, in respect of: mark are likely to be damaged by such use (Sec.
a. The same goods or services, or 123.IPC).
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be likely REGISTRATION OF A MARK
to deceive or cause confusion;
A certificate of registration of a mark shall be prima facie
The law does not prohibit or enjoin every similarity. evidence of the validity of the registration, the
The similarity must be such that the ordinary registrant’s ownership of the mark, and of the
purchaser will be deceived into the belief that the registrant’s exclusive right to use the same in connection
goods are those of another with the goods or services and those that are related
thereto specified in the certificate (IPC, Sec. 138).
5. Is identical with an internationally well-known mark,
whether or not it is registered here, used for identical A certificate of registration shall remain in force for ten
or similar goods or services; (10) years, provided that the registrant shall file a
6. Is identical with an internationally well-known mark declaration of actual use and evidence to that effect, or
which is registered in the Philippines with respect to shall show valid reasons based on the existence of
non-similar goods or services. Provided, that the obstacles to such use, as prescribed by the Regulations,
interests of the owner of the registered mark are within one (1) year from the fifth anniversary of the date
likely to be damaged by such use; of the registration of the mark. Otherwise, the mark shall
7. Is likely to mislead the public as to the nature, be removed from the Register by the Office (IPC, Sec.
quality, characteristics or geographical origin of the 145).
goods or services;
8. Consists exclusively of signs that are generic for the TESTS TO DETERMINE CONFUSING SIMILARITY
goods or services that they seek to identify; BETWEEN MARKS
9. Consists exclusively of signs that have become
customary or usual to designate the goods or DOMINANCY TEST – it focuses on the similarity of the
services in everyday language and established trade prevalent features of the competing marks. If the
practice; competing trademark contains the main or essential or
10. Consists exclusively that may serve in trade to dominant features of another, and confusion and
designate the kind, quality, quantity, intended deception are likely to result, infringement takes place.
purpose, value, geographical origin, time or Duplication or imitation is not necessary; nor is it
production of the goods or rendering of the services, necessary that the infringing label should suggest an
or other characteristics of the goods or services; effort to imitate. The question is whether the use of
11. Consists of shapes that may be necessitated by marks involved is likely to cause of confusion or mistake
technical factors or by the nature of the goods in the mind of the public or deceive purchasers. (2012
themselves or factors that affect their intrinsic BAR)

HOLISTIC TEST – Confusing similarity is to be Remedies of the owner of the trademark against
determined on the basis of visual, aural, connotative infringers
comparisons and overall impressions engendered by the
marks in controversy as they are encountered in the 1. Civil — filed with the Regional Trial Courts. The
marketplace. The trademarks in their entirety as they owner of the registered mark may ask the court to
appear in their respective labels are considered in issue a preliminary injunction to quickly prevent
relation to the goods to which they are attached. infringer from causing damage to his business.
Furthermore, the court will require infringer to pay
The dominancy test only relies on visual comparisons damages to the owner of the mark provided
between two trademarks whereas the totality or holistic defendant is shown to have had notice of the
test relies not only on the visual but also on the aural and registration of the mark (which is presumed if a
connotative comparisons and overall impressions letter R within a circle is appended) and stop him
between the two trademarks (Societe Des Produits Nestl, permanently from using the mark.
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001). 2. Criminal — the owner of the trademark may ask the
court to issue a search warrant and in appropriate
TRADEMARK INFRINGEMENT AND REMEDIES cases, remedies available shall also include the
seizure, forfeiture and destruction of the
Use without consent of the trademark owner of any infringing goods and of any materials and
reproduction, counterfeit, copy or colorable limitation implements the predominant use of which has been
of any registered mark or trade name. Such use is likely in the commission of the offense.
to cause confusion or mistake or to deceive purchasers 3. Administrative — same as in patent infringement
or others as to the source or origin of such goods or cases. If the amount of damages claimed is not less
services, or identity of such business than P200, 000.00, the registrant may choose to
seek redress against the infringer by filing an
Elements of trademark infringement: administrative action against the infringer with
the Bureau of Legal Affairs.
a. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated by the Jurisdiction over violations of intellectual property
infringer; rights: It is properly lodged with the Regional Trial
b. The infringing mark or trade name is used in Court even if the penalty therefore is imprisonment of
connection with the sale, offering for sale, or less than six years, or from 2 to 5 years and a fine ranging
advertising of any goods, business or services; or from P50, 000 to P200, 000.
the infringing mark or trade name is applied to
labels, signs, prints, packages, wrappers, COPYRIGHT
receptacles or advertisements intended to be used
upon or in connection with such goods, business or A right over literary and artistic works which are
services; original intellectual creations in the literary and artistic
c. The use or application of the infringing mark or domain protected from the moment of creation (IPC, Sec.
trade name is likely to cause confusion or mistake 171.1).
or to deceive purchasers or others as to the goods or
services themselves or as to the source or origin of Principle of automatic protection: Works are
such goods or services or the identity of such protected by the sole fact of their creation irrespective
business; and of their content, quality or purpose. Such rights are
d. It is without the consent of the trademark or trade conferred from the moment of creation. (IPC, Sec. 172.2)
name owner or the assignee thereof
Elements of copyrightability
Infringement of trademark v. Unfair competition
1. Originality – Must have been created by the author’s
INFRINGEMENT OF UNFAIR own skill, labor, and judgment without directly
TRADEMARK COMPETITION copying or evasively imitating the work of another
Unauthorized use of a The passing off of one’s 2. Expression – Must be embodied in a medium
trademark. goods as those of another. sufficiently permanent or stable to permit it to be
Fraudulent intent is Fraudulent intent is perceived, reproduced or communicated for a
unnecessary. essential. period more than a transitory duration.
GR: Prior registration
of the trademark is a COPYRIGHTABLE WORKS
Registration is not
prerequisite to the
necessary (Del Monte Corp. 1. Literary and Artistic Works
v. CA, G.R. No. 78325,
January 23, 1990). a. Books, pamphlets, articles and other writings
XPN: Well-known
marks b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
SIMILARITY BETWEEN THE TWO: The similarity lies reduced in writing or other material form
in both their ability to disrupt fair competition amongst c. Letters
business enterprises and other businesses. They can d. Dramatic, choreographic works
also create confusion, mistake, and deception as to the e. Musical compositions
minds of the consumers with regard to the source or f. Works of Art
identity of their products or services due to its similarity g. Periodicals and Newspapers
in appearance or packaging. h. Works relative to Geography, topography,
architecture or science
i. Works of Applied art

j. Works of a Scientific or technical character b. To make any alterations of his work prior to, or
k. Photographic works to withhold it from publication
l. Audiovisual works and cinematographic works c. To preserve integrity of work, object to any
m. Pictorial illustrations and advertisements distortion, mutilation or other modification
n. Computer programs; and which would be prejudicial to his honor or
o. Other literary, scholarly, scientific and artistic reputation; and
works (IPC, Sec. 172.1). d. To restrain the use of his name with respect to
any work not of his own creation or in a
2. Derivative Works distorted version of his work (IPC, Sec.193).

a. Dramatizations, translations, adaptations, NATURE AND TERM OF MORAL RIGHTS: These are
abridgements, arrangements, and other personal rights independent from the economic rights.
alterations of literary or artistic works; Being a personal right, it can only be given to a natural
b. Collections of literary, scholarly, or artistic person. Hence, even if he has licensed or assigned his
works and compilations of data and other economic rights, he continues to enjoy the above-
materials which are original by reason of the mentioned moral rights (Amador, 2007). The rights of an
selection or coordination or arrangement of author shall last during the lifetime of the author and IN
their contents (IPC, Sec. 173). PERPETUITY after his death.

Derivative works shall be protected as new works, 3. Droit de suite or “art proceeds right” is the artist’s
provided that such new work shall not affect the force of resale right, which requires that a percentage of the
any subsisting copyright upon the original works resale price of an artistic work is paid to the author.
employed or any part thereof, or be construed to imply The right is exercisable even after the author’s
any right to such use of the original works, or to secure death, provided the work is still in copyright (David
or extend copyright in such original works (IPC, Sec. Bainbridge, Intellectual Property, 3rd Ed., p. 220 1996,
173.2). also cited in Copyright Law of the Philippines by D.
In every sale or lease of an original work of painting
1. Idea, procedure, system, method or operation, or sculpture or of the original manuscript of a writer
concept, principle, discovery or mere data as such or composer, subsequent to the first disposition
2. News of the day and other items of press thereof by the author, the author or his heirs shall
information have an inalienable right to participate in the gross
3. Any official text of a legislative, administrative or proceeds of the sale or lease to the extent of five
legal nature, as well as any official translation percent (5%) (Sec. 200, IPC).
4. Pleadings Must carry rule
5. Decisions of courts and tribunals – this refers to
original decisions and not to annotated decisions It is limitation on copyright which obligates operators to
such as the SCRA or SCAD as these already fall under carry the signals of local channels within their
the classification of derivative works, hence respective systems. This is to give the people wider
copyrightable access to more sources of news, information, education,
6. Any work of the government of the Philippines sports event and entertainment programs other than
7. TV programs, format of TV programs (Joaquin v. those provided for by mass media and afforded
Drilon, G.R. No. 108946, Jan. 28, 1999) television programs to attain a well informed, well-
8. Systems of bookkeeping; and versed and culturally refined citizenry and enhance
9. Statutes. their socio-economic growth (ABS-CBN Broadcasting
Corporation v. Philippine Multimedia System, G.R. No.
RIGHTS OF COPYRIGHT OWNER 175769-70, Jan. 19, 2009).

1. Economic rights – The right to carry out, authorize The rule mandates that the local television (TV)
or prevent the following acts: broadcast signals of an authorized TV broadcast station,
a. Reproduction of the work or substantial such as the GMA Network, Inc., should be carried in full
portion thereof by the cable antenna television (CATV) operator,
b. Carry-out derivative work (dramatization, without alteration or deletion. In this case, the Central
translation, adaptation, abridgement, CATV, Inc. was found not to have violated the must-carry
arrangement or other transformation of the rule when it solicited and showed advertisements in its
work) cable television system. Such solicitation and showing of
c. First distribution of the original and each copy advertisements did not constitute an infringement of the
of the work by sale or other forms of transfer of “television and broadcast markets” under Section 2 of
ownership E.O. No. 205 (GMA Network, Inc. v. Central CATV, Inc., G.R
d. Rental right No. 176694, July 18, 2014).
e. Public display
f. Public performance OWNERSHIP OF COPYRIGHT
g. Other communications to the public.
1. Original and literary artistic works – author
2. Moral rights – For reasons of professionalism and 2. Joint authorship – co-authors, but if work of joint
propriety, the author has the right: authorship consists of parts that can be used
a. To require that the authorship of the works be separately, then the author of each part shall be the
attributed to him (attribution right) original owner of the copyright in the part that he
has created (IPC, Sec. 178.2).

3. Audiovisual work – Producer, the author of the A: NO. In copyright infringement, intent is irrelevant. A
scenario, the composer of the music, the film person may consciously or unconsciously copy or
director, and the author of the work so adapted infringe a copyrighted material and still be held liable
4. Anonymous and Pseudonymous works – publishers for such act.
shall be deemed to represent the authors of articles
and other writings published without the names of A person infringes a right protected under this Act when
the authors or under pseudonyms, unless the one:
contrary appears, or the pseudonyms or adopted
name leaves no doubt as to the author's identity, or a. Directly commits an infringement;
if the author of the anonymous works discloses his b. Benefits from the infringing activity of another
identity (IPC, Sec. 179). person who commits an infringement if the person
5. Commissioned work – The person who benefiting has been given notice of the infringing
commissioned the work shall own the work but the activity and has the right and ability to control the
copyright thereto shall remain with the creator, activities of the other person;
unless there is a written stipulation to the contrary c. With knowledge of infringing activity, induces,
(IPC, Sec. 178.4). causes or materially contributes to the infringing
6. Collective works – When an author contributes to a conduct of another (IPC, Sec. 216, as amended by R.A.
collective work, his right to have his contribution No. 10372).
attributed to him is deemed waived unless he
expressly reserves it. (IPC, Sec. 196). Remedies in case of copyright infringement
7. In the course of employment –
a. The employee, if not a part of his regular duties 1. Injunction
even if the employee uses the time, facilities and 2. Damages, including legal costs and other expenses,
materials of the employer. as he may have incurred due to the infringement as
b. The employer, if the work is the result of the well as the profits the infringer may have made due
performance of his regularly-assigned duties, to such infringement.
unless there is an agreement, express or
implied, to the contrary. (IPC, Sec. 178.3). Double damages – The amount of damages to be
8. Letters – the writer subject to the provisions of awarded shall be doubled against any person who:
Article 723 of the Civil Code. (IPC, Sec. 178.6). a. Circumvents effective technological measures;
LIMITATIONS ON COPYRIGHT b. Having reasonable grounds to know that it will
induce, enable, facilitate or conceal the
DOCTRINE OF FAIR USE infringement, remove or alter any electronic
rights management information from a copy of
“Fair use” permits a secondary use that “serves the a work, sound recording, or fixation of a
copyright objective of stimulating productive thought performance, or distribute, import for
and public instruction without excessively diminishing distribution, broadcast, or communicate to the
the incentives for creativity”. The fair use of a public works or copies of works without
copyrighted work for criticism, comment, news authority, knowing that electronic rights
reporting, teaching including limited number of copies management information has been removed or
for classroom use, scholarship, research, and similar altered without authority (IPC, as amended by
purposes is not an infringement of copyright. R.A. No. 10372, Sec. 216.1).

NOTE: The fact that a work is unpublished shall not by 3. Impounding during the pendency of the action sales
itself bar a finding of fair use if such finding is made upon invoices and other documents evidencing sales
consideration of several factors (IPC, Sec. 182.2). If you 4. Destruction without any compensation all
copy to the extent that you reduce the marketability of infringing copies
the book, it is no longer fair use. 5. Moral and Exemplary damages (IPC, Sec. 216.1); or
6. Seizure and impounding of any article, which may
Substantial reproduction: It is not necessarily serve as evidence in the court proceedings. (IPC, Sec.
required that the entire copyrighted work, or even a 216.2)
large portion of it, be copied. If so much is taken that the
value of the original work is substantially diminished, RULES OF PROCEDURE FOR INTELLECTUAL
there is an infringement of copyright and to an injurious PROPERTY RIGHTS CASES (A.M. NO. 10-3-10-SC)
extent, the work is appropriated. It is no defense that the
pirate did not know whether or not he was infringing TRO/Preliminary Injunctions
any copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In cases A.M. No. 10-3-10-SC does not provide a provision on
of infringement, copying alone is not what is prohibited. provisional remedies. However, under Rule 1, Section 33
The copying must produce an “injurious effect” (Habana of the same Rules, it explicitly states that, where
v. Robles, G.R. No. 131522, July 19, 1999). applicable, the Rules of Court shall apply suppletorily to
proceedings under A.M. No. 10-3-10-SC. Thus, the
COPYRIGHT INFRIGEMENT existing provisions on TRO/Preliminary Injunctions and
other remedies under the Rules of Court shall be applied
Q: In an action for damages on account of an in intellectual property cases.
infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was Applicability of Rules on the Issuance of the Search
unaware that what he had copied was a copyright and Seizure Order in Civil Actions for Infringement
material. Would this defense be valid? (1997 BAR)

The Rules on the Issuance of the Search and Seizure in
Civil Actions for Infringement of Intellectual Property
Rights are applicable in a case where the search
warrants were not applied based thereon, but in
anticipation of criminal actions for violation of
intellectual property rights under RA 8293. In Century
Chinese Medicine Co., et.al. v. People of the Philippines and
Ling Na Lau. G.R. No. 188526, November 11, 2013, it was
established that respondent had asked the NBI for
assistance to conduct investigation and search warrant
implementation for possible apprehension of several
drugstore owners selling imitation or counterfeit TOP
GEL T.G. & DEVICE OF A LEAF papaya whitening soap.
What is applicable is Rule 126 of the Rules of Criminal
Procedure. A core requisite before a warrant shall
validly issue is the existence of probable cause. The
pendency of a similar action for infringement of
trademark and unfair competition against the very
person who applied for search warrant does not bar
the issuance of the warrant if it is based on probable