University of Santo Tomas

Faculty of Civil Law

MERCANTILE LAW
Pre-week Notes 2017
 ACADEMICS COMMITTEE

SECRETARY GENERAL: CAMILLE ANGELICA B. GONZALES

EXECUTIVE COMMITTEE: EMNIE VALERIE B. DURAN, IRVIN L. PALANCA, MARIELLA A.
MARASIGAN , LARA NICOLE T. GONZALES

MERCANTILE L AW COMMITTEE

COMMITTEE HEAD: JOSEPH NELSON A. HERNANDEZ

SUBJECT HEADS: FLORRENCE FAYE S. FRANCO, KELLY ANN RUBIN, MAICA A. PRUDENTE, JANINE
AIRA A. ARENAS, JACKIELYN KRYSTYL C. BANA
MEMBERS : NEREN O. NIEVA, GERALD L. NACPIL, CAMILLE ANNE P. DE ASIS, STEFFI NICOLE P.
FLORES, CLAIRE MARGARETTE M. BONA, ZARA JANELLA M. CACHA, DIVINE CARLOS, JARENA RIA
ZOLINA

 ATTY . M ARY GRACE L. J AVIER

ADVISER
 UST LAW PRE-WEEK
LAW PRE-WEEK NOTES 2017
LETTERS OF CREDIT
It is any arrangement, however named or described,
whereby the issuing bank acting at the request and on
the instructions of a customer (applicant) or on its own
behalf, binds itself to: ( PAN)
PAN)
1. Pay to the order of, or accept and pay drafts drawn
by a third party (Beneficiary), or
2.  Authorize another bank to pay or to accept and pay
such drafts, or
3. Authorizes another bank to Negotiate, against
stipulated documents
Three (3) distinct but intertwined contracts in a
Letter of Credit transaction (2002, 2008 BAR)
1. Between the applicant/buyer/importer/account
 party and the beneficiary/seller/exporter  –  The
applicant is the one who procures the letter of credit
and obliges himself to reimburse the issuing bank
upon receipt of the documents of title while the
KINDS OF ROLE
BANK
Notifying/ Serves as an agent of the issuing bank;
 Advising Bank
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
G.R. No. 105395, December
December 10, 1993).
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.
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.
Paying bank May either be the issuing bank or any
other bank in the place of the issuing
bank to facilitate payment to the
beneficiary.
Doctrine of Independence/ Independence Principle
The relationship of the buyer and the bank  is  is separate
and distinct from the relationship of the buyer and
seller in the main contract; the bank is not required to
investigate if the contract underlying the L/C has been
fulfilled or not because in transactions involving L/C,
banks deal only with documents and not goods (BPI ( BPI v.
De Reny Fabric Industries, Inc., L-2481, October 16, 1970).
In effect, the buyer has no course of action against the
issuing bank.
Exception to the Independence Principle (2010
BAR)
beneficiary is the one who in compliance with the
contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the
issuing bank to recover payment for the goods. The
relationship between them is governed by the law
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
obligations and contract.
2. Between the issuing bank and the beneficiary/
seller/exporter  –  The issuing bank is the one that
issues the letter of credit and undertakes to pay the
beneficiary upon strict compliance of the latter to
the requirements set forth in the letter of credit. On
the other hand, the beneficiary surrenders
document of title to the bank in compliance with the
terms of the L/C. Their relationship is governed by
the terms of the L/C.
3. Between the issuing bank and the applicant/
buyer/importer – The applicant obliges himself to
reimburse the issuing bank upon receipt of the
documents of title. Their relationship is governed by
the terms of the application and agreement for the
issuance of the L/C by the bank.
LIABILITY
Does not incur any obligation more than just notifying the
seller/beneficiary of the opening of the L/C after it has
execution  of the L/C. It is not liable for
damages even if the L/C turns out to be spurious provided
the spurious character is not apparent on the face of the
instrument.
Its obligation is similar to the issuing banks. Thus,
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.
Fraud Exception Principle:
Principle: It provides that the
untruthfulness of a certificate accompanying a demand
for payment under a standby letter of credit may qualify
as fraud sufficient to support an injunction against
payment.
Under the fraud exception principle, the beneficiary may
be enjoined from collecting on the letter of credit if the
beneficiary committed fraud by substituting fraudulent
documents even if on their face the documents complied
with the requirements.
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 UST LAW PRE-WEEK
LAW PRE-WEEK NOTES 2017
LETTERS OF CREDIT
It is any arrangement, however named or described,
whereby the issuing bank acting at the request and on
the instructions of a customer (applicant) or on its own
behalf, binds itself to: ( PAN)
PAN)
1. Pay to the order of, or accept and pay drafts drawn
by a third party (Beneficiary), or
2.  Authorize another bank to pay or to accept and pay
such drafts, or
3. Authorizes another bank to Negotiate, against
stipulated documents
Three (3) distinct but intertwined contracts in a
Letter of Credit transaction (2002, 2008 BAR)
1. Between the applicant/buyer/importer/account
 party and the beneficiary/seller/exporter  –  The
applicant is the one who procures the letter of credit
and obliges himself to reimburse the issuing bank
upon receipt of the documents of title while the
KINDS OF ROLE
BANK
Notifying/ Serves as an agent of the issuing bank;
 Advising Bank
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
G.R. No. 105395, December
December 10, 1993).
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.
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.
Paying bank May either be the issuing bank or any
other bank in the place of the issuing
bank to facilitate payment to the
beneficiary.
Doctrine of Independence/ Independence Principle
The relationship of the buyer and the bank  is  is separate
and distinct from the relationship of the buyer and
seller in the main contract; the bank is not required to
investigate if the contract underlying the L/C has been
fulfilled or not because in transactions involving L/C,
banks deal only with documents and not goods (BPI ( BPI v.
De Reny Fabric Industries, Inc., L-2481, October 16, 1970).
In effect, the buyer has no course of action against the
issuing bank.
Exception to the Independence Principle (2010
BAR)
beneficiary is the one who in compliance with the
contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the
issuing bank to recover payment for the goods. The
relationship between them is governed by the law
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
obligations and contract.
2. Between the issuing bank and the beneficiary/
seller/exporter  –  The issuing bank is the one that
issues the letter of credit and undertakes to pay the
beneficiary upon strict compliance of the latter to
the requirements set forth in the letter of credit. On
the other hand, the beneficiary surrenders
document of title to the bank in compliance with the
terms of the L/C. Their relationship is governed by
the terms of the L/C.
3. Between the issuing bank and the applicant/
buyer/importer – The applicant obliges himself to
reimburse the issuing bank upon receipt of the
documents of title. Their relationship is governed by
the terms of the application and agreement for the
issuance of the L/C by the bank.
LIABILITY
Does not incur any obligation more than just notifying the
seller/beneficiary of the opening of the L/C after it has
execution  of the L/C. It is not liable for
damages even if the L/C turns out to be spurious provided
the spurious character is not apparent on the face of the
instrument.
Its obligation is similar to the issuing banks. Thus,
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.
Fraud Exception Principle:
Principle: It provides that the
untruthfulness of a certificate accompanying a demand
for payment under a standby letter of credit may qualify
as fraud sufficient to support an injunction against
payment.
Under the fraud exception principle, the beneficiary may
be enjoined from collecting on the letter of credit if the
beneficiary committed fraud by substituting fraudulent
documents even if on their face the documents complied
with the requirements.
1
 MERCANTILE LAW
This principle refers to fraud in relation with the
independent purpose or character of the L/C and not
only   fraud in the performance of the obligation or
contract supporting the letter of credit (Transfield vs.
Luzon Hydro Corp., supra).
supra).
The documents tendered by the seller/beneficiary must
strictly conform 
conform  to the terms of the L/C. The tender of
documents must include all documents required by the
letter. It is not a question of whether or not it is fair or
equitable to require submission of documents but
whether or not the documents were agreed upon. Thus,
a correspondent bank which departs from what has
been stipulated under the L/C acts on its own risk and
may not thereafter be able to recover from the buyer or
the issuing bank, as the case may be, the money thus
paid to the beneficiary (Feati Bank and Trust Company v.
CA)
Explain the Independence Principle under a le tter of
credit transaction.
In determining compliance with the letter of credit, the
bank is obliged to examine only the shipping documents
presented by the seller. It is precluded from determining
whether the main contract of sale (between buyer and
seller) has been strictly complied with. Banks deal only
with documents and not with goods or obligations to
which they relate.
The seller is assured of prompt payment independent of
any breach in the main contract. Thus, the bank has no
duty to verify whether the goods described in the letter
of credit or in the shipping documents actually tallies
with what was loaded aboard the ship. This may be
invoked by both the seller and the issuing bank.
(Dimaampao, 2017)
TRUST RECEIPT LAWS
Trust Receipt (TR) transaction
It is any transaction between the entruster and
entrustee:
1. Whereby the entruster   who owns or holds title or
security interests over certain specified goods,
documents or instrument (GDI), releases 
releases  the same
to the possession of entrustee upon the latter’s
execution of a TR agreement .
2. Wherein the entrustee binds
entrustee binds himself to hold  the
 the GDI 
in trust for the entruster and, in case of defaul t,
a. to sell or otherwise dispose such GDI  with  with the
obligation to turn over to the entruster the
proceeds to the extent of the amount owing to it
or
b. to turn over the GDI   itself if not sold or
otherwise disposed of in accordance with the
terms and conditions specified in the TR.
Two features of a Trust Receipt transaction
1. Loan feature – is brought about by the fact that the
entruster financed the importation or purchase of
the goods under TR (Sps. Vintola vs. Insular Bank of
 Asia and America, G.R. No. 73271, May 29, 1987).
2.  Security feature –  property interest in the GDI to
secure performance of some obligation of the
entrustee or of some third persons to the entruster
2
(Rosario Textile Mills Corp. v. Home Bankers Savings
and Trust Company, G.R. No. 137232, June 29, 2005).
Real owner of the articles subject of the Trust
Receipt transaction: The real owner of the articles
subject of the TR is the entrustee who binds himself to
hold   the designated GDI. The entruster merely holds a
security interest.
Entrustee cannot mortgage the goods because one of the
requisites of a valid mortgage is that the mortgagor must
be the absolute owner of the property mortgaged or
must have free disposal thereof. The entrustee is not
responsible as principal or vendor under any sale or
contract to sell made by the entrustee.
Entrustee shall bear the loss of the goods,
documents, or instruments which are the subject of
a Trust Receipt
Res perit domino  in trust receipt : not a valid defense
against an Entrustee in cases of loss or destruction of the
goods, documents, or instruments secured by a Trust
Receipt. For the principle of res perit domino to apply the
entrustee must be the owner of the goods at the time of
the loss. A TR is a security agreement, pursuant to which
a bank acquires a ‘security interest’ in the goods. It
secures an indebtedness and there can be no such thing
as security interest that secures no obligation. If under a
trust receipt transaction, the entruster is made to
appear as the owner, it was but an artificial expedient,
more of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wa nts. Thus,
the ownership of the goods remaining with the
entrustee, he cannot be relieved of the obligation to pay
his/her loan in case of loss or destruction (Rosario
Textile Mills vs. Home Bankers Association, supra).
Defenses available to negate CRIMINAL liability of
the Entrustee (CoCo CaCo No LP)
1. Compliance with the terms of the TR either by
payment, return of the proceeds or return of the
goods (P.D. 115, Sec. 13).
2. Consignment.
3. Cancellation of the TR agreement and taking into
possession of the goods by the entruster.
NOTE: Repossession of the goods will extinguish
only the criminal liability.
4. Compromise by parties before filing
before filing of information
in court. Compromise of estafa case arising from TR
transaction, after the case has been filed in court
does not  amount
 amount to novation and
novation and does not  erase
 erase the
criminal liability of the accused (Ong
( Ong vs. CA, G.R. No.
L-58476, September 2, 1983).
1983 ).
5. Non-receipt of the goods by the entrustee or where
proof of delivery of goods to the accused is
insufficient. (Ramos
(Ramos vs. CA, supra).
supra ).
6. Loss of goods without fault of the entrustee.
Where the debtor received the goods subject of the
trust receipt before  the trust receipt was entered
into, the transaction in question was a simple loan
and not a trust receipt agreement. Prior to the date of
execution of the trust receipt, ownership over the goods
was already transferred to the debtor. This situation is
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
 UST LAW PRE-WEEK
LAW PRE-WEEK NOTES 2017
importer in trust after the loan is granted. (Colinares
( Colinares vs.
CA, G.R. No. 90828, September 5, 2000)
Correlate the letter of credit transaction with the
trust receipt arrangement.
The bank extends a loan covered by the letter of credit
with the trust receipt as security for the loan. The
transaction involves a loan feautere represented by the
letter of credit, and a security feature covered by the
trust receipt. (Dimaampao, 2017)
Upon failure to return the goods released under the
trust receipt transaction, the bank instituted against
the borrower who insisted that he could not be
imprisoned for non-paymnet of debt. Is he correct?
NO. Violation of Trust Receipts Law is an act malum
prohibitum. Hence, he may be prosecuted criminally.
Estafa results because of failure (1) to return the goods
unsold; or (2) to turn over the proceeds of the sale.
(Dimaampao, 2017)
C contracted with D to renovate his commercial
building. D ordered construction materials from E
and received delivery thereof. The following day, C
went to F bank to apply for a loan to pay the
construction materials. As security for the loan, C
was made to execute a trust receipt. One year later,
after C failed to pay the balance on the loan, F bank
charged him with violation of the Trust Receipts
Law. Will the case prosper? Reason briefly.
NO. It is not covered by the Trust Receipts Law. Where
the debtor received the goods before the trust receipt
itself was entered into, the transaction in question must
be considered a simple loan. The Trust Receipts Law
does not seek to enforce payment of a loan, rather it
punishes dishonesty and abuse of confidence in
handling money or goods to the prejudice of another
regardless of whether the latter is the owner.
(Dimaampao, 2017)
BANKING LAWS
THE NEW CENTRAL BANK ACT
(NCBA, R.A. 7653)
BANKO CENTRAL NG PILIPINAS
Responsibilities (1992, 1998 BAR)
1. To provide policy directions in the areas of money,
banking, and credit
2. To supervise bank operations
3. To regulate the operations of finance companies
and non-bank financial institutions performing
quasi-banking functions, and similar institutions
(NCBA, Sec. 3).
Functions
anker of the government  –  the BSP shall be the
1. B anker
official depository of the Government and shall
represent it in all monetary fund dealings   (NCBA,
Secs. 110- 116).
116) .
2. Custodian of Reserves (NCBA, Secs. 64-66, 94, 103)
3. Financial  Advisor
 Advisor of the government  (NCBA, Secs.
123-124) –  Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract or
3
guarantee foreign loans but with the prior
concurrence of the Monetary Board.
4. Government agent (NCBA, Secs. 117-122)
5. Source of credit (NCBA, Secs. 61-63, 81-89, 109)
6. Issuer of Currency (NCBA, Sec. 49-60)
7. Clearing channel or House; especially where the
PCHC does not operate (NCBA, Sec. 102)
8. Supervisor of the Banking system (NCBA, Sec. 25) –
shall include the power to:
a. Examine, which power extends to enterprises
wholly or majority-owned or controlled by the
bank (GBL, Sec. 7);7) ; this power may not be
restrained by a writ of injunction unless there is
convincing proof that the action of the BSP is
plainly arbitrary (NCBA, Sec. 25)
b. Place a bank under receivership or liquidation
(NCBA, Sec. 30)
CONSERVATORSHIP
One appointed if the bank is in the state of illiquidity or
the bank fails or refuses to maintain a state of liquidity
adequate to protect its depositors and creditors. The
bank still has more assets than its liabilities but its assets
are not liquid or not in cash thus it cannot pay its
obligation when it falls due. The bank, not the BSP, pays
for fees.
Powers of a conservator do not extend to the
revocation of valid and perfected contracts. The law
merely gives the conservator power to revoke contracts
that are deemed to be defective –  void, voidable,
unenforceable or rescissible. Hence, the conservator
merely takes the place of the bank’s board.
The officers of X Bank entered into a contract with Y
Corporation. Later, the bank was placed under
conservatorship. The conservator took charge of
and managed the assets and liabilities of the bank. It
likewise revoked the contract of X Bank with Y
Corporation. Was the revocation proper?
NO.  The powers of a conservator relates only to the
preservation of the assets of the bank, management
thereof, and restoration to viability. The conservator
may not revoke a contract already perfected and
enforceable at the time he was appointed. The only
remaining remedy available to the conservator is to file
a case to revoke or nullify the contract. (Dimaampao,
 2017)
When is conservatorship terminated?
When the MB is satisfied that the bank can continue to
operate on its own, conservatorship shall be terminated.
Otherwise, the bank shall be placed in receivership.
(Dimaampao, 2017)
Powers of a conservator (CARe BEAr)
1. Collect all monies and debts due to the said bank
2. To take charge of the  Assets, liabilities, and the
management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary Board
deems necessary
5. Exercise all powers necessary to restore its viability,
with the power to overrule or revoke the actions of
the previous management and board of directors of
the bank or quasi-bank
 MERCANTILE LAW
6. To bring court actions to  Assail or Repudiate
contracts entered into by the bank. (First Philippine
International Bank v. CA, G.R. No. 115849, Jan. 24,
1996).
Conservatorship shall not exceed 1 year.
Grounds for closure of a bank or a quasi-bank
1. Cash Flow test  – Inability to pay liabilities as they
become due in the ordinary course of business
(NCBA, Sec. 30 [a], 1997 Bar).
2. Balance sheet test  –  Insufficiency of realizable
assets to meet its liabilities (NCBA, Sec 30 [b], 1997
Bar).
3. Inability to continue business without involving
probable losses to its depositors and creditors
(NCBA, Sec 30 [c], 1997 Bar).
4. Willful violation of a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation
of the assets (NCBA, Sec 30 [d], 1997 Bar).
5. Notification to the BSP or public announcement of a
bank holiday (GBL, Sec 53).
6. Suspension of payment of its deposit liabilities
continuously for more than 30 days (GBL, Sec 53).
7. Persisting in conducting its business in an unsafe or
unsound manner (GBL, Sec 56).
The Monetary Board may preventively suspend any
director or officer of a bank or quasi-bank pending
investigation up to 120 days but any delay due to the
fault of the director or offcer shall not be counter in
computing the period of suspension.
Close now-hear later doctrine
It is to prevent unwarranted dissipation of the bank’s
assets and as a valid exercise of police power to protect
the depositors, creditors, stockholders and the general
public. No prior hearing is necessary in appointing a
receiver and in closing the bank. It is enough that
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
dissipation of assets and trigger bank run. Judicial
review comes only after action of the Monetary Board if
the same was attended with bad faith and grave abuse
of discretion (Bangko Sentral ng Pilipinas v. Valenzuela,
G.R. No. 184778, October 2, 2009).
2009) .
However, the closure and liquidation of a bank,
which is considered an exercise of police power may
be the subject of judicial inquiry. The order of closure
(receivership or conservatorship) may be assailed: a) by
the stockholders representing at least majority of the
outstanding capital stock; b) within ten days from
receipt by the board of directors of the order; c) thru a
petition for certiorari on the ground that the action
taken by the BSP was in excess of jurisdiction or with
grave abuse of discretion as to amount to lack of
jurisdiction.
RECEVIERSHIP
Enumerate the grounds for placement under
receivership.
A bank may be placed under receivership once the MB
finds that:
4
1. It is unable to pay its l iabilities as they fall due in the
ordinary course of business, excluding financial
panic in the banking community;
2. It has insufficient realizable assets to meet its
liabilities;
3. It cannot continue in business without involving
probable losses to its depositors or creditors; or
4. It has violated a final cease and desist order that has
become final involving acts or transactions
amounting to fraud or dissipation of assets.
(Dimaampao, 2017)
For how long may a bank be placed under
receivership?
The bank may be placed under receivership for a
maximum period of 90 days from take over.
(Dimaampao, 2017)
RECEIVER
One appointed if the bank is already insolvent which
means that its liabilities are greater than its assets. The
Court has no authority to appoint a receiver for a bank if
the latter will function as such under BSP law. The
power to appoint belongs to BSP.
NOTE: For banks, the receiver would be the Philippine
Deposit Insurance Corporation; for quasi-banks, it could
be any person of recognized competence in banking or
finance (NCBA, Sec. 30).
30).
A receiver can only perform acts of administration and
not acts of dominion. The receiver cannot approve an
option to purchase real property. He has only the
authority to administer the same for the benefit of its
creditors (Abacus Real Estate Development Center, Inc. v.
Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005).
2005) .
Designation of conservator is not a precondition to
the designation or receiver. (Sec. 31)
LIQUIDATION
Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the same
to creditors and other parties for the purpose of paying
debts of such institution (Banco Filipino v. Central Bank,
G.R. No. 70054, December 11, 1991) .
If the receiver determines that the institution can no
longer be rehabilitated, the Monetary Board shall notify
the board of directors and direct the receiver to proceed
with its liquidation.
Liquidator of a distressed bank can prosecute and
defend suits against the bank
Prosecution of suits, collection and the foreclosure of
mortgages against debtors of the bank by the liquidator
are among the usual and ordinary transactions
pertaining to the administration of a bank   (Banco
Filipino v. Central Bank, ibid) .
Filing of the claims against the insolvent bank
GR: All claims against the insolvent bank should be filed
in the liquidation proceeding. It is not necessary that a
claim be initially disputed in a court or agency before it
 UST LAW PRE-WEEK NOTES 2017

is filed with the liquidation court   (Ong v. CA, G.R. No.

112830, Feb. 1, 1996).
XPN: Where it is the bank that files a claim against
another person or legal entity, the claim should be filed
in the regular courts.
STAY ORDER
After the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the
assets of the insolvent bank are held in trust for the
equal benefit of all creditors. One cannot obtain an
advantage or preference over another by attachment,
execution or otherwise. The final judgment against the
bank should be stayed as to execute the judgment would
unduly deplete the assets of the banks to the obvious
prejudice of other depositors and creditors (Lipana v.
Development Bank of Rizal, G.R. No. L-73884, Sept. 24,
1987).
Rationale for the stay order : The reason behind the
indiscriminate suspension or stay order in relation to
the creditors’ claim is to expedite the rehabilitation of
the distressed corporation by enabling the m anagement
committee or the rehabilitation receiver to effectively
exercise its/his powers free from any judicial or
extrajudicial interference that might unduly hinder or
prevent the rescue of the debtor company. It also
recognizes the assets of a corporation under
rehabilitation held under trust for the equal benefit of all
creditors under the doctrine equality is equity, whereby
all the creditors ought to stand on equal footing, and not
one of them should be paid ahead of others. (2006 BAR)
Appointment of receiver operates to suspend the
authority of the bank and its officers over its properties
and effects.

CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

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
order
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

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

5
 MERCANTILE LAW
1. Examination/inquiry/looking into all deposits of
whatever nature with banks or banking institutions
in the Philippines (including investment in bonds
issued by the government) by any person,
government official or office (RA 1405, Sec. 2).
2. Disclosure by any official or employee of any
banking institution to any unauthorized person of
any information concerning said deposit (RA 1405,
Sec. 3).
However, non-bank official or employee is not covered
by the prohibition. Neither is disclosure by a bank
official or employee of information about bank deposit
in favor of a co-employee in the course of the
performance of his duties covered by the prohibition.
Confidentiality granted by RA 1405 does NOT extend
to Letters of Credit and Trust Receipts
DEPOSITS COVERED
1. All deposits of whatever nature with banks or
banking institutions found in the Philippines; or
2. Investments in bonds issued by the Philippine
government, its branches, and institutions. (R.A.
1405, Sec. 2)
3. Trust accounts are included in the scope of the law.
Instances where examination or disclosure of
information about deposits can be allowed
1. Upon written consent of the depositor (RA 1405, Sec.
 2)
2. In cases of impeachment (ibid)
3. Upon order of competent court in cases of bribery
or dereliction of duty of public officials (ibid)
4. In cases where the money deposited or invested is
the subject matter of the litigation (ibid)
a. In an action filed by the bank to recover the
money transmitted by mistake, necessarily, an
inquiry into the whereabouts of the amount
extends to whatever is concealed by being held
or recorded in the name of the persons other
than the one responsible for the illegal
acquisition. (1992 Bar)
b. In a case of plunder, it  necessarily involves an
inquiry into the whereabouts of the amount
purportedly acquired illegally. (Ejercito vs.
Sandiganbayan, G.R. No. 157294, Nov. 30, 2006)
c. In a special proceeding to settle the estate of
deceased depositor, his bank deposits may be
inquired into, since his bank deposits are
subject matter of the case, because all of his
assets are supposed to be collated. (Sy v RTC
 Judge of Iloilo)
5. Upon order of the Commissioner of Internal
Revenue:
a. A decedent to determine his estate; and
b. Any taxpayer who has filed for an application
for compromise of his tax liability
c. A specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party. (NIRC, Sec. 6 [f])
6. In case of dormant accounts/deposits for at least 10
years under the Unclaimed Balances Act ( Act No.
3936, Sec. 2)
7. Presidential Commission on Good Government  XPNs:
(PCGG) may require the production of b ank records
6
material to its investigation (Opinion of the
Secretary of Justice, February 27, 1987)
8. The Anti-Money Laundering Council (AMLC) may
inquire into any deposit with any bank in case of
violation of the RA 9160 or the AMLA if there is
probable cause that it is related to an unlawful
activity (RA 9160, as amended, Sec. 11)
9. The PDIC  and the BSP  may examine deposit
accounts and all information related to them in case
of a finding of unsafe or unsound banking practices
(RA 3591, as amended, Sec. 8)
10. With court order:
a. In cases of unexplained wealth under Sec. 8 of
the Anti-Graft and Corrupt P ractices Act (PNB v .
Gancayco, L-18343, September 30, 1965)
11. Without court order: If the AMLC determines that a
particular deposit or investment with any banking
institution is related to the following (HK-MADS):
a. Hijacking,
b. K idnapping,
c. Murder,
d. Destructive Arson, and
e. Violation of the Dangerous Drugs Act.
f. Acts of Terrorism or in violation of Human
Security Act.
Improper cases:
1. The examination of bank account to which the
money paid by an insurance company for treasury
bills it purchased was deposited is improper, even if
the insurance company sued the seller for failure to
deliver treasury bills. The money paid is not subject
matter of litigation. (Onate v. Abrogar)
2. A collecting bank which sued the drawee bank to
recover the deficiency for the payment of a check for
failure of the drawee bank to notify the collecting
bank that it had erroneously undercoded the
amount of the check presented for clearing is not
entitled to examination because the money in the
account of the drawee is not the subject matter of
the case. The subject matter is the deficiency of
payment. (Union Bank of the Philippines v. Court of
 Appeals)
3. Ombudsman cannot inspect an account as there is
yet no pending litigation before any court of
competent authority. Mere investigation of
Ombudsman is not enough, inspection during an
investigation merely amounts to a fishing
expedition. (Marquez vs. Desierto)
FOREIGN CURRENCY DEPOSIT
(R.A. 6426, AS AMENDED)
GR: Foreign currency deposits cannot be inquired or
looked into. All foreign currency deposits are absolutely
confidential (RA 6426, Sec. 8).
The surety which issued a bond to secure the obligation
of the principal debtor cannot inquire into the foreign
currency deposits of the debtor even if its purpose is to
determine whether or not the loan proceeds were used
for the purpose specified in the surety agreement. The
foreign currency deposits cannot be examined without
the consent of the depositor. The subpoena issued by the
bank should be quashed because foreign currency
deposits are not subject to court order except for
violation of the anti-money laundering law (GSIS v. Court
of Appeals, G.R. No. 189206, June 8, 2011).
Based on law
 UST LAW PRE-WEEK NOTES 2017
1. The depositor has given his written permission
(ibid.)
2. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of the
following:
a. A decedent to determine his estate; and
b. Any taxpayer who has filed for an application for
compromise of his tax liability
c. A specific taxpayer upon request for tax
information from a foreign tax authority pursuant
to an international convention or agreement on
tax matters to which the Philippines is a party.
(NIRC, Sec. 6 [f])
3.  AMLC may inquire into any deposit with a bank or
financial institution in case of violation of RA 9160
if there is probable cause that it is related to an
unlawful activity (RA 9160, Sec. 11). AMLC can
investigate (a) any property of funds related to
financing terrorism; (b) property or funds of any
person if there is probable cause to believe he is
committing or attempting or conspiring to commit
terrorism or financing terrorism (RA 10168, Sec. 10).
4. Upon ex parte  application by a law enforcer
authorized by the Anti-Terrorism Council, the
justices of the CA designated as special court to
handle anti-terrorism cases may authorize the
examination of deposits in a financial institution
upon finding probable cause of the commission of
terrorism or conspiracy to commit terrorism (RA
9372, Sec. 27-28).
5. PDIC  and BSP  may examine deposit accounts and
all information related to them in case of a finding of
unsafe or unsound banking practices (RA 3591, as
amended, Sec. 8).
Based on jurisprudence
1. Where the funds deposited in a joint foreign
currency savings account belonged exclusively to
one of the depositors and were held in trust for him
by the other depositor and the other depositor
unilaterally closed the joint account and transferred
the funds to her personal account, the latter cannot
invoke the exemption from court processes under
RA 6426 because she is not the owner of the deposit
in the account. (Van Twest v. Court of Appeals, G.R.
No. 106235, February 10, 1994).
2. A father who sued his daughter for illegally
withdrawing funds from his foreign currency
deposit and transferring to another bank in the
name of her sister, can inquire into the deposit of the
sister, because the money deposited belongs to him
(China Banking Corp. v. CA, G.R. No. 140687,
December 18, 2006).
3. The exemption from court process of foreign
currency deposits under RA 6426 cannot be
invoked by a foreign transient who raped a minor,
escaped and was held liable for damages to the
victim. The garnishment of his foreign currency
deposit should be allowed to prevent an injustice
and for equitable grounds. The law was enacted to
encourage foreign currency deposit and not to
benefit a wrongdoer (Salvacion v. Central Bank of
the Philippines, G.R. No. 94723, August 21, 1997).
During a preliminary investigation for estafa, the
investigating fiscal issued subpoena for production
of bank account. Is this proper?
NO. The investigating fiscal may not issue a subpoena to
inquire into the bank deposit. It is only a court of
competent jurisdiction which may do so. There is no
7
case yet filed before the court since it is still in the
preliminary investigation stage.
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN
DEPOSITS
The prohibition against examination or inquiry does not
preclude its being garnished for satisfaction of
judgment. The disclosure is purely incidental to the
execution process and it was not the intention of the
legislature to place bank deposits beyond the reach of
judgment creditor (PCIB v. CA, G.R. No. 84526, January 28,
1991).
With respect to  foreign deposits, they shall be exempt
from attachment, garnishment, or any other order or
process of any court, legislative body, government
agency or any administrative body whatsoever (RA
6426, Sec 8).
XPN:  The garnishment of a foreign currency deposit
should be allowed to prevent injustice and for e quitable
grounds
GENERAL BANKING LAW OF 2000 (RA 8791)
Banks and their ownership
Banks refer to entities engaged in the lending of funds
obtained in the form of deposits.
Quasi-bank are entities engaged in the borrowing of
funds through the issuance, endorsement or assignment
with recourse or acceptance of deposit substitutes for
purposes of re-lending or purchasing of receivables and
other obligations (GBL, Sec 4). Unlike banks, quasi-banks
do not accept deposits. Neither are funds obtained
insured with the PDIC.
Ownership of a bank
Individuals and non-bank corporations, whether foreign
or Filipino, ay own or control up to 40% of the voting
stock  of a domestic bank.
i. The percentage of foreign-owned stocks shall be
determined by the citizenship of the individual
stockholder.
ii. The citizenship of the non-bank corporation shall
follow the citizenship of its controlling
stockholders.
FIT AND PROPER RULE: The Monetary Board shall take
into consideration the capability in terms of financial
resources and technical expertise and intergrity of
banks before they may be allowed to operate.
Explain money market placement.
Money market placement is a simple loan or mutuum. It
is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but
through a middle man or dealer in open market. In a
money market transaction, the investor is a lender who
loans his money to a borrower through a middleman or
dealer. ( Allied Bank v. Lim Sio Wan, 549 SCRA 504, March
 27, 2008)
Classifications of banks (2002, 2010 BAR)
 MERCANTILE LAW
1. Universal banks –  Primarily governed by the GBL.
They can exercise the powers of an investment
house and invest in non-allied enterprises and have
the highest capitalization.
2. Commercial banks –  Ordinary banks governed by
the GBL which have a lower capitalization
requirement than universal banks and can neither
exercise the powers of an investment house nor
invest in non-allied enterprises.
3. Thrift banks –  These are a) Savings and mortgage
banks; b) Stock savings and loan associations; and
c) Private development banks, which are primarily
governed by the Thrift Banks Act (RA 7906).
4. Rural banks – These are mandated to make needed
credit available and readily accessible in the rural
areas on reasonable terms and which are primarily
governed by the Rural Banks Act of 1992 (RA 7353).
5. Cooperative banks –  Banks whose majority shares
are owned and controlled by cooperatives primarily
to provide financial and credit services to
cooperatives. It shall include cooperative rural
banks. They are governed primarily by the
Cooperative Code (RA 6938).
6. Islamic banks – Banks whose business dealings and
activities are subject to the basic principles and
rulings of Islamic Shari’ a, such as th e Al Amanah
Islamic Investment Bank of the Philippines which
was created by RA 6848.
7. Other classification of banks  as determined by the
Monetary Board of the BSP.
Directors
1. Composition: 5 to 15
2. At least 2 directors shall be independent
3. Foreigners may become directors to the extent of
foreign participation in the equity of the bank
4. In case of bank merger or consolidation. Directors
shall not exceed 21.
 ACQUISITION OF REAL ESTATE
For its own use : Total investment in real estate and
improvements, including equipment, for the own use of
the bank shall not exceed 50% of combined capital
account
For satisfaction of debt : Real property acquired by
bank because of a mortgage, conveyance in satisfaction
of debt, or under judgement shall be dispoed within 5
years. (Sec. 52)
SINGLE BORROWER’S LIMIT
Limitations imposed upon banks with respect to its
loan function
1. GR: Single borrower’s limit  –  The total amount of
loans, credit accommodations and guarantees that
the bank could grant should at no time exceed 25%
of the bank’s net worth (GBL, Sec 35.1, 2002, 2015
BAR).
XPN:
a. As the Monetary Board may otherwise
prescribe for reasons of national interest
b. Deposits of rural banks with GOCC financial
institutions like LBP, DBP, and PNB.
2. The total amount of loans, credit accommodations
and guarantees prescribed in (a) may be increased
8
by an additional 10% of the net worth of such bank
provided that additional liabilities are adequately
secured by trust receipt, shipping documents,
warehouse receipts and other similar documents
which must be fully covered by an insurance (GBL,
Sec. 35.2).
3. Loans and other credit accommodations secured  by
REM shall not exceed 75% of the appraised value of
the real estate security plus 60% of the appraised
value of the insured improvements (GBL, Sec. 37)
CM/intangible property such as patents,
trademarks, etc. shall not exceed 75% of the
appraised value of the security (GBL, Sec. 38).
4. Loans being contractual, the period of payment may
be subject to stipulation by the parties. In the case
of amortization, the amortization schedule has no
fixed period as it depends on the project to be
financed such that if it was capable of raising
revenues, it should be at least once a year with a
grace period of 3 years if the project to be financed
is not that profitable which could be deferred up to
5 years if the project was not capable of raising
revenues (GBL, Sec. 44).
5. Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, having at least 1% ownership over
the bank
d. Related Interests, such as DOS’s spouses,  their
relatives within the first degree whether by
consanguinity or affinity, partnership whereby
DOS is a partner or a corporation where DOS
owns at least 20%.
RESTRICTIONS ON BANK EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS, STOCKHOLDERS AND
THEIR RELATED INTERESTS)
Requirements that must be complied with in case of
DOSRI accounts (2002 BAR)
 APPROVAL REQUIREMENT: Loan must be approved by
the majority of all the directors not including the
director concerned.
REPORTORIAL REQUIREMENTS:
a. Loan must be entered in the books of the
corporation (GBL, Sec. 36)
b. CB must be informed of the prior to the transaction.
CEILING REQUIREMENT: The amount of the loan shall
not exceed the book valued of the paid-in contribution
and the amount of the unencumbered deposits. (Go v.
Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23,
 2009)
 ARMS-LENGTH RULE: It provides that any dealings of a
bank with any of its DOSRI shall be upon terms not less
favorable to the bank than those offered to others (GBL,
Sec. 36 [2]).
Effect of non-compliance with the foregoing
requirement: Violation of DOSRI is a crime and carries
with it penal sanction. It does not make the transaction
void but only renders the responsible officers and
directors criminally liable. (Republic v. Sandiganbayan,
G.R. No. 166859, 169203, 180702, April 12, 2011).
A bank officer violates the DOSRI law when he acquires
bank funds for his personal benefit, even if such
acquisition was facilitated by a fraudulent loan
 UST LAW PRE-WEEK NOTES 2017

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
unlawful activity: FREEZING OF MONEY INSTRUMENT OR PROPERTY

a. transacts said monetary instrument or property;
b. converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or
property;
c. conceals or disguises the true nature, source,
location, disposition, movement or ownership of or
rights with respect to said monetary instrument or
property;
d. attempts or conspires to commit money laundering
offenses referred to in paragraphs (a), (b) or (c);
e. aids, abets, assists in or counsels the commission of
the money laundering offenses referred to in
paragraphs (a), (b) or (c) above; and
f. performs or fails to perform any act as a result of
which he facilitates the offense of money laundering
referred to in paragraphs (a), (b) or (c) above.
“Money laundering is also committed by any covered
person who, knowing that a covered or suspicious
transaction is required under this Act to be reported to
the Anti-Money Laundering Council (AMLC), fails to do
so.” (Sec. 4, RA 10365, amending Sec. 4, RA 9160).
Upon a verified ex parte petition by the AMLC and after
determination that probable cause exists that any
monetary instrument or property is in any way related
to an unlawful activity as defined in Section 3(i) hereof,
the Court of Appeals   may issue a freeze order which
shall be effective immediately, and which shall not
exceed  six (6) months  depending upon the
circumstances of the case: Provided, That if there is no
case filed against a person whose account has been
frozen within the period determined by the court, the
freeze order shall be deemed ipso facto lifted: Provided,
 further, That this new rule shall not apply to pending
cases in the courts. In any case, the court should act on
the petition to freeze within twenty-four (24) hours
from filing of the petition. If t he application is filed a day
before a nonworking day, the computation of the
twenty-four (24)-hour period shall exclude the
nonworking days.
A person whose account has been frozen may file a
motion to lift the freeze order and the court must resolve
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
transaction'   is a transactions with covered
transaction in cash institutions, regardless of the
or other equivalent amounts involved, where any
monetary of the following
instrument circumstances exist:
involving a total 1. There is no underlying
amount in excess of legal or trade obligation,
Five hundred purpose or economic
thousand pesos (PhP justification;
500,000.00) within 2. The client is not properly
one (1) banking day. identified;
(RA 9160, Sec. 3 [b]). 3. The amount involved is
not commensurate with
the business or financial
capacity of the client;
4. Taking into account all
known circumstances, it
may be perceived that the
writ of injunction against any freeze order, except the
Supreme Court. (Sec. 8, RA 10365, amending RA 9160.)
Safe Harbor Provision
No administrative, criminal or civil proceedings, shall lie
against any person for having made a COVERED
transaction report or a SUSPICIOUS transaction report
in the regular performance of his duties and in good
faith, whether or not such reporting results in any
criminal prosecution under this Act or any other
Philippine law.
FINANCIAL REHABILITATION AND INSOLVENCY
 ACT (R.A. 10142)
Rehabilitation
Rehabilitation refers to the restoration of the debtor to
a condition of successful operation and solvency, if it is

9
 MERCANTILE LAW
shown that its continuance of operation is economically
feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if
the debtor continues as a going concern than if its
immediately liquidated. (Dimaampao, 2017)
Can a distressed corporation file a petition for
corporate rehabilitation after the dismissal of its
earlier petition for liquidation? Explain.
YES. The dismissal of a petition for liquidation does not
preclude the distressed corporation from filing a
petition for corporate rehabilitation. The dismissal of
the petition for liquidation implies that corporation may
still be restored to successful operation and solvency.
(Dimaampao, 2017)
Can the corporation file a petition for rehabilitation
first, and after it is dismissed, file a petition for
liquidation?
YES.  The dismissal of a petition for rehabilitation
connotes that the corporation can no l onger be restored.
Ergo, it can file a petition for liquidation. (Dimaampao,
 2017)
Explain the phrase “equality is equity” in corporate
rehabilitation proceedings.
“Equality is Equity” means  that once the corporation is
taken over by a receiver, all the creditors stand on equal
footing and no one may be paid ahead of the others. This
is consistent with the “pari passu” principle in that all
assets of a corporation under rehabilitation receivership
are held in trust for the benefit of all creditors,
precluding one from obtaining an advantage or
preference over another by the expediency of
attachment, execution or otherwise. (Dimaampao, 2017)
Liquidation.
In a broad sense, it is equivalent to winding up, that is,
the comprehensive process of settling accounts,
ascertaining and adjusting debts, collecting assets and
paying off claims. It is a declaration by the trial court of
the corporation’s insolvency so that its creditors may be
able to file their claims in the settlement of corporation’s
debts and obligations. (Pacific Banking Corporation
Employees Oraganization v. CA, 312 Phil. 578, 592-593)
NEGOTIABLE INSTRUMENTS LAW
What is Negotiable Instrument?
It is a written contract for the payment of money which
is intended as a substitute for money and passes from
one person to another as money, in such a manner as to
give a holder in due course the right to hold the
instrument free from defenses available to prior parties
(Sundiang Sr. & Aquino, 2011).
What are the characteristics or features of a
negotiable instrument?
1. Negotiability –  the negotiable instrument passes
from hand to hand as money so as to give the holder
in due course the right to hold the instrument and
collect the sum for himself.
2.  Accumulation of secondary contracts– contracts are
created as the instrument passes from one person
10
to another (Pre-Week Reviewer in Commercial Law,
Dimaampao & Dumlao-Escalante, 2014).
What are the requisites of negotiability? (WUPOA)
1. It must be in Writing and signed by the maker or
drawer;
2. Must contain an Unconditional promise or order to
pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
determinable future time;
4. Must be payable to Order or to bearer; and
5. Where the instrument is  Addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty (NIL, Sec.1).
When is an instrument payable to order?
The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or to
his order. It may be drawn payable to the order of:
1. A Payee who is not a maker, drawer, or drawee;
2. The Drawer or maker; or
3. The Drawee; or
4. Two or more payees Jointly; or
5. One or some of Several payees; or
6. The Holder of an office for the time being (Sec. 8,
NIL).
An order instrument is negotiated by indorsement
completed by delivery (Sec. 30, NIL).  If an order
instrument is not indorsed, the negotiation is
incomplete and the instrument is in effect, merely
assigned. The transferee acquires the right to have the
indorsement of the transferor. It is only at the time of
indorsement that negotiation takes effect and the
transferee acquires all the rights of a holder.
(Dimaampao & Dumlao-Escalante, 2014).
When is an instrument payable to bearer? (ENaF
PaLa)
1. When it is Expressed to be so payable; (e.g. I
promise to pay to bearer P10,000.00)
2. When it is payable to a person Named therein or
bearer; (e.g. Pay to P or bearer P10,000.00)
3. When it is payable to the order of a Fictitious person
or non-existing person, and such fact was known to
the person making it so payable; (e.g.  Pay to John
Doe or order)
4. When the name of the Payee does not purport to be
the name of any person; (Pay to cash)
5. When the only or the Last indorsement is an
indorsement in blank (NIL, Sec 9).
What is Fictitious-Payee rule?
The fictitious-payee rule contemplates that the payee is
fictitious or not intended to be true recipient of the
proceeds. The check is considered a bearer instrument
negotiable by delivery alone. The underlying theory is
that the maker of the check knew that the fictitious
payee cannot indorse the instrument so that he must
have intended for it to be negotiated by mere delivery.
(PNB v. Rodriguez, G.R. No. 170325, September 26, 2008)
GR: In case of controversy, the drawer is liable and the
drawee bank is absolved from liability.
XPN: When there is commercial bad faith, whereby the
 UST LAW PRE-WEEK NOTES 2017
drawee bank acts dishonestly and is a party to the
fraudulent scheme. The check is deemed payable to
order, and consequently, the drawee bank bears the loss
(Ibid).
What are the kinds of negotiable instruments?
1. Promissory notes (PN) –  An unconditional promise
in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed
or determinable future time, a sum certain in money
to order or to bearer (NIL, Sec. 184).
2. Bill of exchange (BOE) – An unconditional order in
writing addressed by one person to another signed
by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed
or determinable future time a sum certain in money
to order or to bearer (NIL, Sec. 126).
3. Check – A bill of exchange drawn on a bank payable
on demand (NIL, Sec. 185).
PARTIES TO A NEGOTIABLE INSTRUMENT
Who are the parties to a negotiable instrument?
What are their liabilities?
In a promissory note there are two parties.
 The maker who makes the promise and signs the
instrument and is primarily liable for the payment
of the obligation;
 The payee to whom payment is originally payable.
In a bill of exchange  there are four parties.
 The drawer   who issues and draws the bill and
whose liability to pay is only secondary, except
when drawee refused to accept; can limit his
liability by putting “without recourse”;
 The drawee upon whom the bill is drawn may not
be held liable until he becomes acceptor;
 The payee to whom payment is originally payable;
and
 The acceptor  who is the drawee  who accepts the
bill.
PROMISSORY NOTE v . BILL OF EXCHANGE
When can you treat a bill of exchange as a
promissory note? (2015 BAR)
1. Where in a bill the drawer and the drawee are the
same person (NIL, Sec. 130)
2. The drawee is a fictitious person (NIL, Sec. 130)
3. The drawee does not have the capacity to contract
(NIL, Sec. 130)
4. Whether the instrument is so ambiguous that there
is doubt whether it is a bill or a note, the holder may
treat it either at his election (NIL, Sec. 17[e])
NEGOTIABILITY OF OTHER DOCUMENTS
Determine the negotiability of the following
documents.
a. Postal money order is  not a negotiable
instrument . It is governed by postal rules and
regulation and it may only be negotiated once.
b. The certificate of time deposit is a negotiable
instrument   because it is an acknowledgement in
writing by the bank of the amount of deposit with a
11
promise to repay the same to the depositor or
bearer thereof at a specific time (Caltex
(Philippines), Inc. vs. Court of Appeals and Security
Bank and Trust Company, G.R. No. 97753, August 10,
1992).
c. A letter of credit is not negotiable  because it is
generally conditional and has limited negotiability
because it is issued in favor of a specific person. But
the Supreme Court held in Lee vs. Court of Appeals,
that the drafts issued in connection with the letters
of credit are negotiable instruments.
d. A warehouse receipt is not a negotiable
instrument   because the obligation of a
warehouseman is not to pay but to d eliver the goods
under the warehouse receipt which fails to comply
with the requirements set forth under Sec. 1 of the
NIL.
e. A treasury warrant require appropriations from the
national government which means that the
particular fund may or may not exists which renders
it conditional, thereby non-negotiable.
f. A certificate of indebtedness is not negotiable. It
merely acknowledges to pay a sum of money to a
specified persons or entity. Since a certificate of
indebtedness which is not payable to order or
bearer but is payable to a specific person is not
negotiable, the assignee takes it subject to the
defect in the title of the assignor.
g. The electronic messages are not signed by the
investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional
order to pay a sum certain in money as the
payment is supposed to come from a specific fund
or account of the investor-clients; and, they are not
payable to order or bearer but to a specifically
designated third party. Thus, the electronic
messages are not bills of exchange (Hongkong &
Shanghai Banking Corporation v. CIR, G.R. Nos.
166018 & 167728, 04 June 2014).
COMPLETION AND DELIVERY
INCOMPLETE BUT DELIVERED (Sec. 14)
Where the instrument is wanting in any material
particular, the person in possession thereof has a  prima
 facie  authority to complete it by filling up the blanks
therein. (NIL, Sec. 14).
In order that any such instrument when completed may
be enforced against any person who became a party
thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and
within reasonable time. If such instrument, after
completion, is negotiated to a holder in due course, it is
valid and effectual for all purposes in his hands, and he
may enforce it as if it had been filled up strictly in
accordance with the authority given and within
reasonable time (Ibid).
INCOMPLETE AND UNDELIVERED (Sec. 15)
Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated
without authority, be a valid contract in the ha nds of any
holder, as against any person whose signature was
placed thereon before delivery (NIL, Sec. 15).
Q: PN makes a promissory note for P5, 000.00, but
leaves the name of the payee in blank because he
wanted to verify its correct spelling first. He
 MERCANTILE LAW
mindlessly left the note on top of his desk at the end
of the workday. When he returned the following
morning, the note was missing. It turned up later
when X presented it to PN for payment. Before X, T
who turned out to have filched the note from PN’s
office, had endorsed the note after inserting his own
name in the blank space as the payee. PN dishonored
the note, contending that he did not authorize its
completion and delivery. But X said he had no
participation in, or knowledge about the pilferage
and alteration of the note and therefore he enjoys
the rights of a holder in due course under the
Negotiable Instruments Law. Who is correct and
why?
 A: Since the negotiable instrument is still incomplete
and has not yet been delivered, PN is correct in
dishonoring the said instrument. Sec. 15 of Act 2031
provides that where an incomplete instrument has not
been delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of any
holder, as against any person whose signature was
placed thereon before delivery. Thus, under this section,
it is a real defense that can even be interposed against a
holder in due course.
COMPLETE BUT DELIVERED (Sec. 16)
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, Sec.
16). Delivery is essential to the validity of any negotiable
instrument (Sundiang Sr. & Aquino, 2009).
Q: Jun was to leave for a business trip. As his usual
practice, he signed several blank checks. He
instructed Ruth, his secretary, to fill them as
payment for his obligations. Ruth filled one check
with her name as payee, placed P30, 000 thereon,
endorsed and delivered it to Marie. She accepted the
check in good faith as payment for goods she
delivered to Ruth. Eventually, Ruth regretted what
she did and apologized to Jun. immediately, he
directed the drawee bank to dishonor the check.
When Marie encashed the check, it was dishonored.
Is Jun liable to Marie? (2006 BAR)
 A: YES.  Considering that Marie accepted the check in
good faith and for value, she is a holder in due course,
who has the right to enforce payment of the check for
the full amount thereof against Jun. That the blank check
was filled-up not in accordance with the authority given
is only a personal defense that cannot be used against a
holder in due course.
FORGERY
What is the effect of forgery in a negotiable
instrument?
GR: It does not avoid the instrument but only the forged
signature. The signature is wholly inoperative. In other
words, rights may still exist and be enforced by virtue of
such instrument as to those signatures thereto are found
to be genuine.
XPNs:
1. If the party against whom it is sought to enforce
such right is precluded from setting up forgery or
want of authority (NIL, Sec. 23).
12
2. Where the forged signature is not necessary to the
holder’s title, in which case, the forgery may be
disregarded (NIL, Sec. 48).
What is Cut-off Principle?
In order instruments, parties prior to forgery are
relieved or cut-off of liability. They cannot be held liable
by any holder, including a holder in due course.
What are the legal consequences when a bank
honors a forged check?
If the drawer's signature  is forged, then the drawee
bank is liable because the bank is bound to know the
signature of its customers and if it pays a forged check,
it must be considered as making the payment out of its
own funds and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was
forged. It is also in a superior position to detect the
forgery because it has a specimen of the signature of the
maker. Lastly, by accepting the instrument, it becomes
an acceptor who admits the gen uineness of the drawer’s
signature.
If the payee’s signature is forged, then drawee bank is
liable  because it owes to the drawer-depositor an
absolute and contractual duty to pay the check only to
the person to whom it is made payable. Drawee bank, in
such case, should credit back and restore to drawer’s
account the value of the check wrongfully encashed.
If the indorser’s signature  is forged Drawee bank
bears the loss   as it is under strict liability to pay the
check to the order of the payee. Payment under forged
indorsement is not to the drawer’s order. Ensuingly, if
the drawee bank pays a check bearing forged signature
of indorser, it does so at its own peril.
However, the drawee bank may pass the liability to
the collecting bank   who cannot interpose the defense
of forgery. The collecting bank is an indorser who
warrants that the instrument is genuine and in all
respect what it purports to be (NIL, Sec. 16).  The
collecting bank had no right to be paid by the drawee
bank since the forged indorsement is inoperative. The
collecting bank my ultimately recover from the forger.
Who are the persons precluded from setting up the
defense of forgery? (2010 BAR)
1. Those who admit/warrant the genuineness of the
signature such as indorsers, persons negotiating by
delivery and acceptor; (NIL, Sec 56).
2. Those who by their acts, silence, or negligence, are
estopped from claiming forgery;
3. A holder of a bearer instrument who subsequently
negotiates such instrument with a prior forged
indorsement (forged indorsement is not necessary to
his title it being a bearer instrument).
 ACCOMODATION PARTY
Who is an accommodation party?
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person (NIL, Sec. 29).
 UST LAW PRE-WEEK NOTES 2017
What are the requisites to be an accommodation
party?
1. Accommodation party must sign as maker, drawer,
acceptor or indorser;
2. No value is received by the accommodation party
from the accommodated party; and
3. The purpose is to lend the name.
The accommodation party, as surety, is deemed an
original promisor and debtor from the beginning; he is
considered in law as the same party as the debtor in
relation to whatever is adjudged touching the obligation
of the latter since their liabilities are interwoven as to be
inseparable. Although a contract of suretyship is in
essence accessory or collateral to a valid principal
obligation, the surety’s liability to the creditor is
immediate,  primary and absolute; he is directly and
equally bound with the principal. As an equivalent of a
regular party to the undertaking, a surety becomes liable
to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the
obligations nor does he receive any benefit therefrom.
Can a corporation act as an accommodation party?
NO. A corporation cannot act as an accommodation
party. The issue or endorsement of negotiable
instrument by a corporation without consideration and
for accommodation of another is ultra vires. In such
case, the corporation incurs no liability. The officer who
signed shall be personally liable. (Dimaampao &
Dumlao-Escalante, 2014)
An accommodation party cannot set up lack of
consideration against any holder, even as to one who is
not a holder in due course.
HOLDER IN DUE COURSE (HIDC)
GR: Every holder is deemed prima facie to be an HIDC.
XPN: When it is shown that the title of any person who
has negotiated the instrument was defective. But this is
only as regards a  party who became such after the
acquisition of the defective title (NIL, Sec.59).
What constitutes a Holder in Due Course?
A holder in due course is a holder who has taken the
instrument under the following conditions:
1. That is Complete and regular upon its face;
2. Became the holder before it was Overdue, and
without notice that it has been previously
dishonored, if such was the fact;
3. Took it in good Faith and for value;
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or defect in
the title of the person negotiating it. (NIL, Sec. 52)
A holder in due course holds the instrument free from
any defect of title of prior parties and from defenses
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount
thereof.
Discuss the Shelter principle or Holder in Due
Course by Subrogration.
13
Under the "shelter principle," the HIDC, by negotiating
the instrument, to a party not an HIDC, transfers all his
rights as such holder to the latter and acquires the right
to enforce the instrument as if he was an HIDC. The
principle applies to a "sheltered" holder who is not a
party to any fraud or illegality   impairing the validity of
the instrument.
Q: A drawer issued a check for the payment of a car,
which check was delivered to the agent of the owner
of the car for safekeeping. The check was then used
by the agent to pay the medical bills of his wife in a
clinic. The projected purchase did not materialize. Is
the clinic considered a holder in due course?
 A: NO,  the rule that a possessor of the instrument is
 prima facie a HIDC does not apply to the clinic because it
cannot be said to have acquired the negotiable
instrument in good faith for there was a defect in the title
of the holder (agent), since the instrument was not
payable “to the agent or to bearer;” also the drawer had
no account with the clinic, the agent did not show or tell
the payee why he had the check in his possession and
why he was using it for the payment of his own account.
As the holder’s title was defective or suspicious, it
cannot be stated that the payee acquired the check
without knowledge of said defect in holder’s title, the
presumption that the clinic is a HIDC does not exist (De
Ocampo & Co. v. Gatchalian, G.R. No. L-15126, November
30, 1961).
What are the defenses against a Holder?
1. Real or Absolute Defenses – those that are attached
to the instrument itself and are available against all
parties, both immediate and remote, including
holders in due course.
2. Personal or Equitable Defenses – defenses which are
only available against a holder not in due course.
Those which grow out of the agreement or conduct
of a particular person which renders it inequitable
for him, though holding the legal title, to enforce it
against the party sought to be made liable.
What are the Real or Absolute Defenses available
against the Holder?
1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are
concerned
4. Ultra–vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
What are the Personal or Equitable Defenses
available against the Holder?
1. Innocent  alteration or spoliation
2. Discharge of party Secondarily liable by discharge of
prior party.
3. Set-off between immediate parties
 MERCANTILE LAW
4. Filling up of blanks not in accordance with the
 Authority given
5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal consideration
6. Discharge by payment or renunciation or release
before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
LIABILITIES OF PARTIES
A party primarily liable is unconditionally bound and
absolutely required to pay the instrument upon
maturity. While a party secondarily liable is
conditionally bound to pay only after the ff. conditions
have been fulfilled:
1. Due presentment for payment or acceptance to
primary party (NIL, Sec. 143);
2. Dishonor by such party (NIL, Sec.70);
3. Taking of proceedings required by law (NIL,
Sec.152)
Negotiable instrument should be presented for payment
to the party primarily liable (NIL, Sec. 72[d]):
What are the warranties and liabilities of parties
who are secondarily liable?
 Absolute Liability
 A drawer of a Bill of Exchange warrants:
a. The existence of payee and his then capacity to
indorse;
b. That the instrument will be accepted or paid upon
due presentment by the party primarily liable
according to its tenor; and
c. That if dishonored, he will pay the party entitled to
be paid. (NIL, Sec. 61.)
 A general indorser warrants that:
i. Instrument is genuine
ii. He had good title to it
iii. All prior parties had capacity to contract
iv. Instrument, at the time of indorsement, was valid
and subsisting;
v. On due presentment, it shall be accepted or paid, or
both according to its tenor
If the instrument is dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the
holder. (NIL, Sec. 66.)
 An irregular indorser is not a party to the instrument
but he places his signature in blank before delivery. He
is not a party but he becomes one because of his
signature in the instrument.
a. In an order instrument, liable to the payee and all
subsequent parties
b. If bearer instrument or payable to order of maker or
drawer, liable to all parties subsequent to the maker
or drawer
If he signs for accommodation of the payee, liable to all
parties subsequent to payee. (NIL, Sec. 64.)
Limited Liability
 A qualified indorser warrants that the:
14
a. Instrument is genuine;
b. He has good title to it;
c. Capacity to contract of all prior parties; and;
d. No knowledge of any fact which would impair the
validity of the instrument. (NIL, Sec.65)
NOTE:  He is liable to all parties who derive their title
through his indorsement.
 A person negotiating by delivery has the same
warranties as a qualified indorser. But unlike a qualified
indorser, a person negotiating by mere delivery is liable
only to his immediate transferee. (NIL, par. 2, Sec. 65)
NOTE: Person negotiating by mere delivery and a
qualified indorser’s secondary li ability is limited,
namely, to their warranties.
How are negotiable instruments discharged?
a. By payment in due course by or on behalf of the
principal debtor;
b. By payment in due course by the party
accommodated, where the instrument is made or
accepted for his accommodation
c. By the intentional cancellation thereof by the holder
d. By any other act which will discharge a simple
contract for the payment of money
e. When the principal debtor becomes the holder of
the instrument at or after maturity in his own right
(Sec. 119, NIL).
What are the requisites of payment in due course?
1. It is made at or after the date of Maturity;
2. To the Holder thereof;
3. In Good faith and without notice that holder’s title is
defective (NIL, Sec. 88).
The term “in good faith” refers to the maker or acceptor
and not to the holder.
What is reasonable time as applied to presentment?
Reasonable time is relative. Regard is to be had to the
facts of each case, usage of business and trade, and the
nature of the instrument. With respect to checks, current
banking practice dictates that the check becomes stale if
it is not presented for payment within 6 months (180
days) from issuance.
NOTICE OF DISHONOR
What is a notice of dishonor?
It is a notice given by the holder to the parties
secondarily liable, drawer and each indorser, that the
instrument was dishonored by non-payment or non-
acceptance by the drawee/maker.
Persons primarily liable need not be given notice of
dishonor because they are the ones who dishonored the
instrument.
What are the instances when notice of dishonor is
NOT necessary?
1. Waiver of notice (NIL, Sec. 109)
2. Waiver of protest (NIL, Sec. 111)
3. When notice is dispensed with when after exercise
of reasonable diligence, notice cannot be given or
 UST LAW PRE-WEEK NOTES 2017

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

 ACCEPTANCE What is constructive acceptance?

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

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

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

BASIS CHECKS BOE

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
payment
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 a cceptance
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 o rdinary 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)

15
 MERCANTILE LAW
What is the effect of erasure or alteration on checks?
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January
4, 2016, the following shall no longer be eligible or
acceptable for clearing:
a. Any check that shows or indicates on its face erasure
or alteration regardless of any signature or initials
that appear to indicate authorization of the
alteration or erasure; or
b. Does not indicate the date, payee, amount payable
in figures, amount payable in words, or signature of
the drawer
Material alteration on checks
When the drawee bank pays a materially altered check,
it violates the terms of the check, as well as its duty to
charge its client’s account only for bona fide
disbursements he had made. If the drawee did not pay
according to the original tenor of the instrument, as
directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to
deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with
utmost fidelity. The drawee, however, still has recourse
to recover its loss. The collecting banks are ultimately
liable for the amount of the materially altered check
(Areza vs. Express Savings Bank, Inc., G.R. No. 176697,
September 10, 2014).
Is a manager’s check as good as cash? Why or why
not? (2015 BAR)
YES, the Supreme Court held in various decisions that a
manager’s check is good as cash. A manager’s check is a
check drawn by the bank against itself. It is deemed pre-
accepted by the bank from the moment of issuance. The
check becomes the primary obligation of the bank which
issues it and constitutes its written promise to pay. By
issuing it, the bank in effect commits its total resources,
integrity and honor behind the check. (Tan v. Court of
 Appeals, 239 SCRA 310; International Corporate Bank vs
Gueco, 351 SCRA 516; Metrobank and Trust Company vs
Chiok, GR No. 172652, November 26, 2014).
What is a cross check?
Done by writing 2 parallel lines on the left top portion of
the check. The marking signifies that the bank should
pay only with the intervention of the company only.
What is the effect of crosschecking?
a. That the check may not be encashed but only
deposited in the bank;
16
UST LAW PRE-WEEK NOTES 2017
issuance of the check. Consequently, Po Press
cannot be made liable to pay the face value of the
check.
What is the meaning of the notation “Account Payee
Only” in a crossed check?
A crossed check with the notation account payee can
b. That the check may be negotiated only once - to one
who has an account with a bank;
c. That the act of crossing the check serves as a warning
to the holder that the check has been issued for
definite purpose so that he must inquire if he has
received the check pursuant to the purpose.
Otherwise, he is not an HIDC (State Investment House
v. IAC, G.R. No. 72764, July 13, 1989).
NOTE: Manager’s and cashier’s checks are still the
subject of clearing to ensure that the same have not been
materially altered or otherwise completely
counterfeited. However, manager’s and cashier’s checks
are preaccepted by the mere issuance thereof by the
bank, which is both its drawer and drawee. Thus, while
manager’s and cashier’s checks are still subject to
clearing, they cannot be countermanded for being
drawn against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a
condition not appearing on the face of the check
(Metrobank and Trust Company vs Chiok, GR No. 172652,
November 26, 2014).
Q: Po Press issued in favor of Jose a postdated
crossed check, in payment of newsprint which Jose
promised to deliver. Jose sold and negotiated the
check to Excel Inc. at a discount. Excel did not ask
Jose the purpose of crossing the check. Since Jose
failed to deliver the newsprint, Po ordered the
drawee bank to stop payment on the check. Efforts
of Excel to collect from Po failed. Excel wants to
know from you as counsel:
a. Whether as second indorser and holder of the
crossed check, is it a holder in due course?
b. Whether Po’s defense of lack of consideration as
against Jose is also available as against Excel?
(1994, 1995, 2005 BAR)
 A:
a. Excel Inc. is not a holder in due course. The act of
crossing the check imposes upon the holder thereof
the duty to ascertain the indorser’s, title to th e check
or the nature of his possession or the purpose for
which it was issued. Excel is guilty of gross
negligence amounting to legal absence of good faith
for its failure to inquire from Jose the purpose for
which the three checks were crossed despite the
warning of the crossing, hence, it is not deemed a
holder in due course.
b. YES, the defense of lack of consideration as against
Jose is also available as against Excel. For not being
a holder in due course, Excel is subject to personal
defenses as if the check were non-negotiable, such
as lack of consideration between Po Press and Jose.
In this ca se, Jose’s failure to deliver the newsprint
resulted in the absence of consideration for the
against all risk or contingencies of loss arising from
any unsound or unsafe banking practices including
unforeseen adverse effects of the continuing crisis
involving the banking and financial sector in the
 Asian region. Does BD have an insurable interest
within the meaning the Insurance Code of the
Philippines? (2000 BAR)
 UST LAW PRE-WEEK NOTES 2017
issuance of the check. Consequently, Po Press
cannot be made liable to pay the face value of the
check.
What is the meaning of the notation “Account Payee
Only” in a crossed check?
A crossed check with the notation account payee can
only be deposited in the named payees account. It is
gross negligence for a bank to ignore this rule solely on
the basis of a third partys’ oral representations of having
a good title thereto (Equitable Banking Corporation v.
Special Steel Products, G.R. No. 175350, June 13, 2012, in
Divina, 2014).
Distinguish clearly crossed checks from cancelled
checks (2004 BAR)
A crossed check is one with two parallel lines drawn
diagonally on the left portion of the check. On the other
hand, a cancelled check is one marked or stamped "paid"
and/or "cancelled" by or on behalf of a drawee bank to
indicate payment thereof.
Stale check: A check which has not been presented for
payment within a reasonable time after its issue. It is
valueless and thus, should not be paid. A check becomes
stale 6 months from date of issue.
INSURANCE LAW
CONCEPT OF INSURANCE
Q: What is a Contract of Insurance?
 A: It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event (IC, Sec. 2[a]).
Q: May a member of the MILF or its breakaway
group, the Abu Sayyaf, be insured with a company
licensed to do business under the Insurance Code of
the Philippines? Explain.
 A: YES. A member of the MILF or the Abu Sayyaf may be
insured with a company licensed to do business under
the Insurance Code of the Philippines. What is
prohibited to be insured is a public enemy. A public
enemy is a citizen or national of a country with which the
Philippines is at war. Such member of the MILF or the
Abu Sayyaf is not a citizen or national of another
country, but of the Philippines.
Q: BD has a bank deposit of half a million pesos.
Since the limit of the insurance coverage of the PDIC
is only 1/10 of BD’s deposit, he would like some
protection for the excess by taking out an insurance
17
MERCANTILE LAW
specified contingency or event. The term “insurer”
no longer includes “individuals” under RA 10607
2. Insured –  person in whose favor the contract is
operative and is indemnified.
The insured is not always the person to whom the
proceeds are paid.
against all risk or contingencies of loss arising from
any unsound or unsafe banking practices including
unforeseen adverse effects of the continuing crisis
involving the banking and financial sector in the
 Asian region. Does BD have an insurable interest
within the meaning the Insurance Code of the
Philippines? (2000 BAR)
 A: YES. BD has insurable interest in his bank deposit. In
case of loss of said deposit, more particularly to the
extent of the amount in excess of the limit covered by the
PDIC Act, BD will be damnified. He will suffer pecuniary
loss of P400, 000, that is, his bank deposit of half a
million pesos minus P100, 000 which is the maximum
amount recoverable from the PDIC.
Q: In return for the 20 years of faithful servic e of X as
a house helper to Y, the latter promised to pay P100,
000 to X’s heirs if he (X) dies in an accident by fire. X
agreed. Is this an insurance contract? (2011 BAR)
a. Yes, since all the elements of an insurance contract
are present.
b. Yes, since X’s services may be regarded as the
consideration.
c. No, since Y actually made a conditional donation
in X’s favor.
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
X’s favor.
Elements of an Insurance Contract
1. Scheme to distribute losses – Such assumption of risk
is part of a general scheme to distribute actual losses
among a large group or substantial number of
persons bearing a similar risk.
2. Payment of premium –  As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
insurance fund.
3. Existence of insurable interest  –  The insured
possesses an interest of some kind susceptible of
pecuniary estimation, known as “insurable
interest.”
4.  Assumption of Risk  – The insurer assumes that risk
of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of loss
through the destruction or impairment of that
interest by the happening of designated peril.
Parties to an Insurance Contract
1. Insurer  – party who assumes or accepts the risk of
loss and undertakes for a consideration to
indemnify the insured on the happening of a
determine who should be entitled to the proceeds of
the policy.
If you were the judge, how would you decide the said
interpleader action? Explain. (1985 BAR)
 A: If I were the judge, I would decide that the legal wife,
Clara, be entitled to the proceeds of insurance taken by
 MERCANTILE LAW
specified contingency or event. The term “insurer”
no longer includes “individuals” under RA 10607
2. Insured –  person in whose favor the contract is
operative and is indemnified.
The insured is not always the person to whom the
proceeds are paid.
3.  Assured/Beneficiary –  a person designated by the
terms of the policy to receive the proceeds of the
insurance. He may be the insured or a third party in
the contract for whose benefit the policy is issued
and to whom the loss is payable.
Q: On July 1, 1979, Crispulo, married to Laura with
whom he has two legitimate children, was issued
Policy No. 8008 of the Midland Life Insurance Co. on
a whole-life plan for P10, 000. He designated Angie,
his common-law wife as the recoverable beneficiary.
He referred to her, in his application and policy, as
his wife. Two years later, Crispulo died. Angie filed
her claim for the proceeds of the policy as the
designated beneficiary therein. The widow, Laura,
also filed her claim as legal wife.
If you were the Legal Counsel for the Insurance
Company, to whom would you adjudicate the
proceeds of the insurance policy? Reason out your
answer briefly. (1981 BAR)
 A:  I would adjudicate the proceeds of the insurance
policy to Laura, the legal wife. In the appointment of
beneficiary, the New Civil Code imposed certain
limitations; one of them being that the insured may not
appoint, as his beneficiary, one with whom he is guilty of
concubinage, at the time of designation. Since Crispulo
was married to Laura at the time when he designate as
his beneficiary his concubine Angie, with whom he was
guilty of concubinage at the time of designation, Laura
may have said designation of Angie nullified, by mere
preponderance of evidence in the same action for
nullification. There is even no need of the criminal
conviction for concubinage. (Arts. 739 and 2012, N.C.C.;
Insular Life assn. Co., Ltd. v. Ebrado, Oct. 28, 1977; 80 SCRA
181)
Q: Eduardo Fernandez applied for and was issued
Policy No. 0777 by Atlas Life Insurance Corporation
on a whole-life plan for P200, 000. Although he was
married to Clara, with whom he had 5 legitimate
children, he designated his common-law wife, Diana
Cruz, as his revocable beneficiary in the policy, and
referred to Diana in his application and policy, as his
wife. 5 years thereafter, he died. Diana immediately
filed her claim for the proceeds of the policy as the
designated beneficiary. Clara also filed her claim as
legal wife. The insurance company filed a petition
for Interpleader before the RTC of Rizal to
18
UST LAW PRE-WEEK NOTES 2017
that the vessel was manned by an irresponsible crew
with deep-seated resentments against Paolo, their
employer.
Constantino insured the cargo of logs against both
perils of the sea and barratry. The logs were
improperly loaded on one side, thereby causing the
vessel to tilt on one side. On the way to Nagoya, the
determine who should be entitled to the proceeds of
the policy.
If you were the judge, how would you decide the said
interpleader action? Explain. (1985 BAR)
 A: If I were the judge, I would decide that the legal wife,
Clara, be entitled to the proceeds of insurance taken by
Eduardo Fernandez who named his common-law wife,
Diana, as his revocable beneficiary, at the time they were
guilty of concubinage. In that case, the designation of
Diana is void, being prohibited by the New Civil Code
(Art. 739 and 2012). The guilt of Eduardo and Diana for
concubinage may be proved by mere preponderance of
evidence in the same action and there is no need for a
criminal conviction for concubinage.
Q: What are the effects of an irrevocable designation
of a beneficiary under the Insurance Code? Explain.
(2005 BAR)
 A: The irrevocable beneficiary has a vested interest in
the policy, including its incident such as the policy loan
and cash surrender value.
MARINE INSURANCE
Risk insured against in marine insurance
GR: In the usual form of a marine policy, the risks
insured against are only “ perils of the sea” .
XPN: When the insurance is an “all risk policy”  and thus
covers even “ perils of the ship” .
XPN to XPN: When the risks are expressly excepted  by
the “all risk policy”.
Q: What warranties are implied in marine
insurance? (2000 BAR)
 A: The following warranties are implied in marine
insurance:
1. That the ship is seaworthy to make the voyage
and/or to take in certain cargoes;
2. That the ship shall not deviate from the voyage
insured;
3. That the ship shall carry the necessary documents
to show nationality or neutrality and that it will not
carry document which will cast reasonable
suspicion thereon;
4. That the ship shall not carry contraband, especially
if it is making voyage through belligerent waters.
Q: Paolo, the owner of an ocean-going vessel, offered
to transport the logs of Constantino from Manila to
Nagoya. Constantino accepted the offer, not knowing
b. YES, the heirs of the 3 crew members perished can
recover from CSC for negligence which constitutes a
quasi-delict in this case.
Perils of the Sea and Perils of the Ship
The rusting of steel pipes in the course of a voyage is a
“peril of the sea” in view of the toll on the cargo of wind,
 UST LAW PRE-WEEK NOTES 2017
that the vessel was manned by an irresponsible crew
with deep-seated resentments against Paolo, their
employer.
Constantino insured the cargo of logs against both
perils of the sea and barratry. The logs were
improperly loaded on one side, thereby causing the
vessel to tilt on one side. On the way to Nagoya, the
crew unbolted the sea valve of the vessel causing
water to flood the ship hold. The vessel sank.
Constantino tried to collect from the insurance
company which denied liability, given the
unworthiness of both the vessel and its crew.
Constantino countered that he was not the owner of
the vessel and he could therefore not be responsible
for conditions about which he was innocent. Is the
insurance company liable? (2010 BAR)
 A: NO.  The insurance company is not liable because
there is an implied warranty in every marine insurance
that the ship is seaworthy whoever is insuring the cargo,
whether it be the shipowner or not. There was a breach
of warranty, because the logs were improperly loaded
and the crew was irresponsible. It is the obligation of the
owner of the cargo to look fo r a reliable common carrier
which keeps its vessel in sea worthy condition.
Q: On October 30, 2007, M/V Pacific, a Philippine
registered vessel owned by Cebu Shipping Company
(CSC), sank on her voyage from Hong Kong to Manila.
Empire Assurance Company (Empire) is the insurer
of the lost cargoes loaded on board the vessel which
were consigned to Debenhams Company. After it
indemnified Denbenhams, Empire as subrogee filed
an action for damages against CSC.
a)  Assume the vessel was not seaworthy as in fact
its hull had leaked, causing flooding in the
vessel. Will your answer be the same? Explain.
b)  Assume the facts in question (a). Can the heirs of
the 3 crew members who perished recover from
CSC? Explain fully. (2008 BAR)
 A:
a. NO, my answer will be different. Allowing the vessel
to depart on a voyage when it is not seaworthy is a
violation of the implied warranty of seaworthiness,
and thus constitutes negligence on the part of owner
of the ship and the ship captain. The hypothecary
principle in maritime commerce —limiting the ship
owner’s liability to the amount of insurance
proceeds—is not applicable when the
unseaworthiness of the vessel is due to the owner’s
fault or negligence.
19
MERCANTILE LAW
b. Yes, since there appears to have been no fault on
the part of the shipowner and ship captain.
c. No, since the proximate cause of the damage was
the breach of warranty of seaworthiness of the ship.
d. No, since the proximate cause of the damage was
due to ordinary usage of the ship, and thus not due
to perils of the sea.
b. YES, the heirs of the 3 crew members perished can
recover from CSC for negligence which constitutes a
quasi-delict in this case.
Perils of the Sea and Perils of the Ship
The rusting of steel pipes in the course of a voyage is a
“peril of the sea” in view of the toll on the cargo of wind,
water, and salt conditions. Moreover, it is a cardinal rule
in the interpretation of contracts that any ambiguity
therein should be construed against the
maker/issuer/drafter thereof, namely, the insurer.
Besides the precise purpose of insuring cargo during a
voyage would be rendered fruitless. (Cathay Insurance
Co., v. CA, et. al., G.R. No. L-76145, June 30, 1987)
Q: A marine insurance policy on a cargo states that
“the insurer shall be liable for losses incident to
perils of the sea”. During the voyage, seawater
entered the compartment where the cargo was
stored due to the defective drainpipe of the ship. The
insured filed an action on the policy for recovery of
the damages caused to the cargo. May the insured
recover damages? (1998 BAR)
 A: NO . the proximate cause of the damage to the cargo
insured was the defective drainpipe of the ship. This is
peril of the ship, and not peril of the sea. The defect in
the drainpipe was the result of the ordinary use of the
ship. To recover under a marine insurance policy, the
proximate cause of the loss or damage must be peril of
the sea.
Q: Perils of the ship, under marine insurance law,
refer to loss which in the ordinary course of events
results from (2011 BAR)
a. Natural and inevitable actions of the sea.
b. Natural and ordinary actions of the sea.
c. Unnatural and inevitable actions of the sea.
d. Unnatural and ordinary actions of the sea.
 A: a. Natural and inevitable actions of the sea.
Q: T Shipping, Co. insured all of its vessels with R
insurance, Co. The insurance policies stated that the
insurer shall answer for all damages due to perils of
the sea. One of the insured’s ship, the MV Don
Priscilla, ran aground in the Panama Canal when its
engine pipes leaked and the oil seeped into the cargo
compartment. The leakage was caused by the
extensive mileage that the ship had accumulated.
May the insurer be made to answer for the damage
to the cargo and the ship? (2011 BAR)
a. Yes, because the insurance policy covered any or
all damage arising from perils of the sea.
SURETYSHIP
It is an agreement whereby a party called the “surety”
guarantees the performance by another party called the
“principal or obligor ” of an obligation or undertaking in
favor of a third party called the “obligee”. It includes
official recognizances, stipulations, bonds or
undertakings issued by any company by virtue and
 MERCANTILE LAW
b. Yes, since there appears to have been no fault on
the part of the shipowner and ship captain.
c. No, since the proximate cause of the damage was
the breach of warranty of seaworthiness of the ship.
d. No, since the proximate cause of the damage was
due to ordinary usage of the ship, and thus not due
to perils of the sea.
 A: d. No, since the proximate cause of the damage was
due to ordinary usage of the ship, and thus not due to
perils of the sea.
CASUALTY INSURANCE
Third party liability insurance
The insurer assumes the obligation by paying the
injured third party to whom the insured is liable. Prior
payment by the insured to the injured third person is not
necessary in order that the obligation of the insurer may
arise. The moment the insured becomes liable to third
persons, the insured acquires an interest in the
insurance contract which may be garnished like any
other credit (Perla Compania de Seguros, Inc. vs.
Ramolete, G.R. No. L-60887, November 13, 1991).
Source of liability: The direct liability of the insurer
under indemnity contract against third party liability
does not mean that the insurer can be held solidarily
liable with the insured. The insurer ’s liability is based on
contract; that of the insured   is based on tort. (1996,
2000 BAR)
Liability of the insurer v. Liability of the insured
INSURER INSURED
The liability is direct but Liability is direct and can be
the insurer cannot  be held liable with all the parties
held solidarily liable at fault.
with the insured and
other parties at fault.
The third-party liability The liability extends to the
is only up to the extent amount of actual and other
of the insurance policy damages.  (Heirs Poe v.
and that required by Malayan Insurance, G.R. No.
law 156302, April 7, 2009)
Indemnity against third party liability : The third
persons to whom the insured is liable, can sue directly
the insurer upon the occurrence of the injury or event
upon which the liability depends.The purpose is to
protect the injured person against the insolvency of the
insured who causes such injury and to give him a certain
beneficial interest in the proceeds of the policy. I t is as if
the injured person were especially named in the policy
(Shafer vs. RTC Judge, G.R. No. 78848, November 14, 1988;
1996 BAR ).
20
UST LAW PRE-WEEK NOTES 2017
1. The total indemnity in respect of any one person
shall not exceed P15, 000  for all motor vehicles (Ins.
Memo. Circ. No. 4-2006).
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to
establish proper payee
SURETYSHIP
It is an agreement whereby a party called the “surety”
guarantees the performance by another party called the
“principal or obligor ” of an obligation or undertaking in
favor of a third party called the “obligee”. It includes
official recognizances, stipulations, bonds or
undertakings issued by any company by virtue and
under the provisions of Act No. 536, as amended by Act
No. 2206 (IC, Sec. 177).
Nature of liability of surety
1. Solidary – Joint and several with the obligor and
2. Limited or fixed – Limited to the amount of the bond
(It cannot be extended by implication).
3. Contractual – It is determined strictly by the terms
of the contract of suretyship in relation to the
principal contract between the obligor and the
obligee (IC, Sec. 178).
LIFE INSURANCE
Kinds of life insurance policies
1. Ordinary life, general life or old line policy  – Insured
pays a premium every year until he dies. Cash
surrender value after 3 years.
2. Limited payment  –  Insured pays premium for a
limited period. If he dies within the period, his
beneficiary is paid; if he outlives the period, he does
not get anything.
3. Endowment – insured pays premium for specified
period. If he outlives the period, the face value of the
policy is paid to him; if not, his beneficiaries receive
the benefit.
4. Term insurance – insured pays premium only once,
and he is insured for a specified period. If he dies
within the period, his beneficiaries benefit. If he
outlives the period, no person benefits from the
insurance.
5. Industrial life – entitles the insured to pay premiums
weekly, or where premiums are payable monthly or
oftener (Sundiang Sr. & Aquino, 2014).
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
No fault indemnity clause (1994 BAR)
It is a clause where the insurer is required to pay a third
party injured or killed in an accident without the
necessity of proving fault or negligence on the part of the
insured. There is a stipulated maximum amount to be
recovered.
Rules under the “no fault indemnity clause”
with the law, and is not disqualified (Villacorta v.
Insurance Commissioner, G.R. No. 54171, October 28,
1980).
The main purpose of this clause is to require a
person other than the insured, who drives the car on
the insured’s order or with his permission, to be
duly licensed drivers and have no disqualification to
 UST LAW PRE-WEEK NOTES 2017

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

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

INSURABLE INTEREST

BASIS LIFE PROPERTY

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 .

21

MERCANTILE LAW

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.
 MERCANTILE LAW
The beneficiary need not have insurable
interest over the life of the insured if the
 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
1. Insurance upon one’s life –  are those taken out by
the insured upon his own life (IC, Section 10[a]) for
the benefit of himself, or of his estate, in case it
matures only at his death, for the benefit of third
person who may be designated as ben eficiary.
2. Insurance upon life of another  – are those taken out
by the insured upon the life of another. Where a
person names himself beneficiary in a policy he
takes on the life of another, he must have insurable
interest in the life of the latter (De Leon, 2010). This
class includes the following:
a. His spouse and of his children.
b. Any person on whom he depends wholly or in
part for education or support, or in whom he
has a pecuniary interest.
c. Of any person under a legal obligation to him for
the payment of money, or respecting property
or services, of which death or illness might
delay or prevent the performance.
d. Of any person upon whose life any estate or
interest vested in him depends (IC, Sec. 10).
Persons prohibited from being designated as
beneficiaries (1998 BAR)
1. Those made between persons who were guilty of
adultery or concubinage at the time of donation.
Finding of guilt in a civil case is sufficient.
2. Those made between persons found guilty of the
same criminal offense, in consideration thereof.
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his office.
If the designation beneficiaries are disqualified by law to
receive the proceeds, the policy remains valid and
binding but the proceeds will be given to the estate of
the insured.
CHANGE IN BENEFICIARY
GR: The insured shall have the right to change the
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).
22
UST LAW PRE-WEEK NOTES 2017
Q: On July 14, 1985, X, a homosexual, took an
insurance policy on the life of his boyfriend, Y. In the
insurance application, X misrepresented that Y was
in perfect health although he knew all the time that
Y was afflicted with AIDS. On October 18, 1987, Y
died in a motor accident. Shortly thereafter, X filed
his insurance claim. Should the insurer pay?
Reasons. (1987 BAR)
The beneficiary must have insurable interest over the
thing insured.
Irrevocable designation of the beneficiary to the
assignment of the policy: The insured cannot assign
the policy if the designation of the beneficiary is
irrevocable. The irrevocable beneficiary has a vested
right (Sundiang Sr. & Aquino, 2014).
Effects of Irrevocable Designation of a Beneficiary:
a. The beneficiary designated in a life insurance
contract cannot be changed without the consent of
the beneficiary. (Gercio v. Sun Life Assurance of
Canada, 48 Phil. 53, 28 September 1925)
b. A new beneficiary cannot be added to the
irrevocably designated beneficiary for this would in
effect reduce the latter’s vested rights. (Go v.
Redfern, 72 Phil. 71, 25 April 1941)
c. The irrevocably designated beneficiary may obtain
a policy loan to the extent stated in the schedule of
values attached to the policy.
d. The insured cannot take the cash surrender value
assign or even borrow on said policy without the
consent of the beneficiary.
Q: Blanco took out a P1 M life insurance policy
naming his friend and creditor, Montenegro, as his
beneficiary. When Blanco died, his outstanding loan
obligation to Montenegro was only P50, 000.
Blanco’s executor contended that only P50, 000 out
of the insurance proceeds should be paid to
Montenegro and the balance of P950, 000 should be
paid to Blanco’s estate.
Is the executor’s contention correct? Reason out
your answer. (1987 BAR)
 A: The contention of the executor is incorrect because it
was Blanco himself who took out the life insurance
policy on his own life, naming only Montenegro as the
beneficiary. It would have been different if it was
Montenegro, as creditor, who took out a life insurance
policy on the life of Blanco, as a debtor. In that case,
Montenegro’s insurable interest in the life of Blanco
would be only to the extent of P50, 000, which is the
amount of his credit.
 A: a. A partner in a firm on its future profits.
Mortgagor-mortgagee
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in his
name only and in his favor alone does not inure to the
 UST LAW PRE-WEEK NOTES 2017
Q: On July 14, 1985, X, a homosexual, took an
insurance policy on the life of his boyfriend, Y. In the
insurance application, X misrepresented that Y was
in perfect health although he knew all the time that
Y was afflicted with AIDS. On October 18, 1987, Y
died in a motor accident. Shortly thereafter, X filed
his insurance claim. Should the insurer pay?
Reasons. (1987 BAR)
 A: The insurer is not obliged to pay. Friendship alone is
not the insurable interest contemplated in life
insurance. Insurable interest in the life of others (other
than one’s own life, spouses or children) is merely to the
extent of the pecuniary interest in that life.
Assuming that such pecuniary interest exists, an insurer
would be liable despite concealment or
misrepresentation if the insurance had been in effect for
more than 2 years (incontestability clause).
INSURABLE INTEREST IN PROPERTY
Every interest in property, whether real or personal, or
any relation thereto, or liability in respect thereof, of
such nature that contemplated peril might directly
damnify the insured, is insurable interest (IC, Sec. 13).
Insurable interest must exist both at the time the
insurance contract takes effect  and at the time of loss.
Change of interest
A change of interest in any part of a thing insured
unaccompanied by a corresponding change of interest in
the insurance, suspends the insurance to an equivalent
extent, until the interest in the thing and the interest in
the insurance are vested in the same person. (Sec. 20)
XPNS:
1. A change of interest in a thing insured, after the
occurrence of an injury which results in a loss, does
not affect the right of the insured to indemnity for
the loss. (IC, Sec. 21)
2. A change of interest in one or more of several
distinct things, separately insured by one policy,
does not avoid the insurance as to the others. (IC,
Sec. 22)
3. A change of interest, by will or succession, on the
death of the insured, does not avoid an insurance;
and his interest in the insurance passes to the
person taking his interest in the thing insured. (IC,
Sec. 23)
4. A transfer of interest by one of several partners,
joint owners, or owners in common, who are jointly
insured, to the others, does not avoid an insurance
even though it has been agreed that the insurance.
(IC, Sec. 24)
Q: A person is said to have an insurable interest in
the subject matter insured where he has a relation
or connection with, or concern in it that he will
derive pecuniary benefit or advantage from its
preservation. Which among the following subject
matters is not considered insurable? (2014 BAR)
a.  A partner in a firm on its future profits.
b.  A general creditor on the debtor’s property
c.  A judgment creditor on debtor’s property
d.  A mortgage creditor on debtor’s mortgaged
property.
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 A: a. A partner in a firm on its future profits.
Mortgagor-mortgagee
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in his
name only and in his favor alone does not inure to the
benefit of the other. The same is not open to objection
that there is double insurance (RCBC vs. CA, 289 G.R. Nos.
128833-34, 128866, April 20, 1998; IC, Sec. 8).
1. Mortgagor  – The mortgagor of property, as owner,
has an insurable interest to the extent of its value
even though the mortgage debt equals such value.
2. Mortgagee –  The mortgagee as such has an
insurable interest in the mortgaged property to the
extent of the debt secured; such interest continues
until the mortgage debt is extinguished (Sundiang
Sr. & Aquino, 2014).
Q: X borrowed from CCC Bank. She mortgaged her
house and lot in favor of the bank. X insured her
house. The bank also got the house insured.
a. Is this double insurance? Explain your answer.
b. Is this legally valid? Explain your answer.
c. In case of damage, can X and CCC bank
separately claim for the insurance proceeds?
(2012 BAR)
 A:
a. NO, there is no double insurance. Double insurance
exists where the same person is insured by several
insurers separately with respect to the same subject
and interest.
b. YES, X and CCC Bank can both insure the house as
they have different insurable interests therein. X,
the borrower-mortgagor, has an insurable interest
in the house being the owner thereof while CCC
Bank, the lender, also has an insurable interest in
the house as mortgagee thereof.
c. YES. If X obtained an open policy then she could
claim an amount corresponding to the extent of the
damage based on the value of the house determined
as of the date the damaged occurred, but not to
exceed the face value of the insurance policy;
however, if she obtained a valued policy then she
could claim an amount corresponding to the extent
of the damage based on the agreed upon valuation
of the house.
As for CCC Bank, it could claim an am ount corresponding
to the extent of the damage but not to exceed the amount
of the loan it extended to X or so much thereof as may
remain unpaid.
DOUBLE INSURANCE AND OVERINSURANCE
Double insurance: Double insurance exists where the
same person is insured by several insurers separately,
in respect to the same subject and interest (Sec. 95, ibid).
It is not contrary to law and hence, in case of double
insurance, the insurers may still be made liable up to the
extent of the value of the thing insured but not to exceed
the amount of the policies issued
In double insurance, the insurers are considered as co-
insurers. Each one is bound to contribute ratably to the
loss in proportion to the amount for which he is liable
 MERCANTILE LAW
under his contract. This is known as the “principle of
contribution” or “contribution clause”
Overinsurance: There is overinsurance whenever the
insured obtains a policy in an amount exceeding the
value of his insurable interest
The insurer may insert an “other insurance clause” which
will prohibit double insurance. The rationale is to
prevent the danger that the insured will over insure his
property and thus avert the possibility of perpetration
of fraud (ibid). It is lawful and specifically allowed under
Sec. 75 of the Insurance Code which provides that “a
policy may declare that a violation or a specified
provision thereof shall avoid it, otherwise the breach of
an immaterial provision does not avoid it. ”
Q: Terrazas de Pation Verde, a condominium
building, has a value of P50 M. The owner insured
the building against fire with 3 insurance compa nies
for the following amounts:
Northern Insurance Corp. —P20 M
Southern Insurance Corp.—P30 M
Eastern Insurance Corp.—P50 M
a. Is the owner’s taking of insurance for the
building with 3 insurers valid? Discuss.
b. The building was totally razed by fire. If the
owner decides to claim from Eastern Insurance
Corp. only P50M, will the claim prosper?
Explain. (BAR 2008)
 A:
a. The taking of insurance from the 3 insurers is valid.
It is a case of “double insurance”. The Insurance
Code provides that a double insurance exist where
the same person is insured by several insurers
separately in respect to the same subject and
interest.
Double insurance is valid. What is prohibited is for
the insured to recover more than his interest or
value of the property pursuant to the “principle of
indemnity”.
b. YES, the owner may legally claim the entire P50 M
from Eastern Insurance, Corp. The Insurance Code
provides that where the insured is overinsured by
double insurance, the insured, unless the policy
otherwise provides, may claim payment from the
insurers in such order as he may select, up to the
amount for which the insurers are severally liable
under their respective contracts. Each insurer is
bound, as between himself and the other insurers,
to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract.
Q: Distinguish co-insurance from re-insurance.
(1994 BAR)
 A: Co-insurance is the percentage in the value of the
insured property which the insured himself assumes or
undertakes to act as insurer to the extent of the
deficiency in the insurance of the insured property. In
case of loss or damage, the insurer will be liable only for
such proportion of the loss or damage as the amount of
insurance bears to the designated percentage of the full
value of the property insured.
24
Reinsurance is where the insurer procures a third
party, called the reinsurer, to insure him against liability
by reason of such original insurance. Basically,
reinsurance is an insurance against liability which the
original insurer may incur in favor of the original
insured.
PERFECTION OF THE INSURANCE CONTRACT
The contract of insurance is perfected when the assent
or consent is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are
to constitute the contract. Mere offer or proposal is not
contemplated (De Lim v. Sun Life Assurance Co., G.R. No.
L-15774, November 29, 1920).
Cognition Theory: acceptance made by letter shall not
bind the person making the offer except from the time it
came to his knowledge.
Delivery of Policy
Q: On September 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face value of
P5 M from RN Insurance Company (RN), with his
wife Tina Marcial (Tina) as sole beneficiary. On the
same day, Danny issued an undated check to RN for
the full amount of the premium. On October 1, 2013,
RN issued the policy covering Danny’s life insurance.
On October 5, 2013, Danny met a tragic accident and
died. Tina claimed the insurance benefit, but RN was
quick to deny the claim because at the time of
Danny’s death, the check was not yet encashed and
therefore the premium remained unpaid. Is RN
correct? Will your answer be the same if the chec k is
dated October 15, 2013? (2014 BAR)
 A: NO. RN is not correct. After the issuance of the check
by Danny for the full amount of the premium, the
unconditional delivery of an insurance policy of RN to
Danny corresponding to the terms of the application
ordinarily consummates the contract, and the policy as
delivered becomes the final contract between the
parties. Where the parties, so intend, the insurance
becomes effective at the time of the delivery of the policy
notwithstanding the fact that the check was not yet
encashed. My answer will still be the same even if the
check is dated October 15, 2013 since an
acknowledgment in a policy of the receipt of premium is
conclusive evidence of its payment for the purpose of
making the policy binding.
Transfer of Policy
Q: The policy of insurance upon his life, with a face
value of P100, 000, was assigned by Jose, a married
man with 2 legitimate children, to his nephew Y, as
security for a loan of P50, 000. He did not give the
insurer any written notice of such assignment
despite the explicit provision to that effect in the
policy. Jose died. Upon the claim on the policy by the
assignee, the insurer refused to pay on the ground
that it was not notified of the assignment. Upon the
other hand, the heirs of Jose contended that Y is not
entitled to any amount under the policy because the
assignment without due notice to the insurer was
void. Resolve the issues. (1991 BAR)
 A: A life insurance is assignable. A provision, however,
in the policy stating that written notice of such an
assignment should be given to the insurer is valid. The
 UST LAW PRE-WEEK NOTES 2017

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)
REFUND OF PREMIUM
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
delicto.
Insurance v. Masagana Telemart, G.R. No. 137172,
 Apr. 4, 20012006, 2007 Bar).
COVER NOTE
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
issuance;
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
days;
does not affect the validity of the contracts unless, by

25
 MERCANTILE LAW
5. The policy should be issued within sixty (60) days
after the issuance of the cover note;
6. The sixty (60)-day period may be extended upon
written approval of the Insurance Commission; and
7. The written approval of the Insurance Commission
is dispensed with upon the certification of the
president, vice-president or general manager of the
insurer that the risk involved, the values of such
risks and premium therefor, have not as yet been
determined or established and the extension or
renewal is not contrary to or is not for the purpose
of violating the Insurance Code or any rule.
BINDING RECEIPT
In a life insurance, a binding slip does not insure by itself.
It is merely an acknowledgment on behalf of th e insurer,
that the latter’s branch office had received from the
application the premium and had accepted the
application subject for processing; and that the latter
will either approve or reject the same.
RESCISSION OF INSURANCE CONTRACTS
Instances wherein a contract of insurance may be
cancelled by the insurer
1. Nonpayment of premium;
2. Conviction of a crime arising out of acts increasing
the hazard insured against;
3. Discovery of fraud or material misrepresentation;
4. Discovery of willful or reckless acts or omissions
increasing the hazard insured against;
5. Physical changes in the property insured which
result in the property becoming uninsurable;
6. Discovery of other insurance coverage that makes
the total insurance in excess of the value of the
property insured; or
7. A determination by the Commissioner that the
continuation of the policy would violate or would
place the insurer in violation of the Insurance Code
(IC, Sec. 64).
No policy of insurance other than life shall be cancelled
by the insurer except upon prior notice thereof to the
insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective
date of the policy, of one or more of the abovementioned
instances (Sec. 64, ibid ).
CONCEALMENT AND MISREPRESENTATION
Concealment is a neglect to communicate that which a
party knows and ought to communicate.
Misrepresentation is an oral or written statement of a
fact or condition affecting the risk made by the insured
to the insurance company, tending to induce the insurer
to assume the risk.
Requisites of concealment:
1. A party knows a fact which he neglects to
communicate or disclose to the other party
2. Such party concealing is duty bound to disclose such
fact to the other
3. Such party concealing makes no warranty as to the
fact concealed
4. The other party has no means of ascertaining the
fact concealed
5. The fact must be material
26
Matters relating to the health of the insured are material
and relevant to the approval of the issuance of the life
insurance policy as these definitely affect the insurer’s
action to the application. It is well-settled that the
insured need not die of the disease he had failed to
disclose to the insurer, as it is sufficient that his non-
disclosure misled the insurer in forming his estimates of
the risks of the proposed insurance policy or in making
inquiries  (Sunlife Assurance Company of Canada v. CA,
G.R. No. 105135, June 22, 1995). (2001 BAR)
If there is concealment, the remedy of the insurer is
rescission  since concealment vitiates the contract of
insurance. Good faith is not a defense in concealment.
Concealment, whether intentional or unintentional
entitles the injured party to rescind the contract of
insurance (IC, Sec. 27).
Requisites of misrepresentation:
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he states
positively as true without knowing it to be true and
which has a tendency to mislead;
3. Such fact in either case is material to the risk.
INCONTESTABILITY CLAUSE
After the policy of life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from
the date of its issue or its last reinstatement, the insurer
cannot prove that the policy is void ab initio  or is
rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent (IC, Sec.
48).
The “Incontestability Clause” regulates both the actions
of the insurers and prospective takers of life insurance.
It gives insurers enough time to inquire whether the
policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at insurance
fraud would be timely uncovered – thus deterring them
from venturing into such nefarious enterprise (Manila
Bankers Life Insurance Corporation vs. Cresencia-Aban,
G.R. No. 175666, July 29, 2013).
The contract may be rescinded even beyond the
incontestability period based on the following grounds:
1. Non-payment of premiums.
2. Violation of condition (IC, Secs. 233 [b], 234 [b]).
3. No insurable interest 
4. Cause of death was excepted or not covered
5. Fraud of a vicious type
6. Proof of death was not given (IC, Sec. 248).
7. That the conditions of the policy relating to military
or naval service (IC, Secs. 233 [b], 234 [b]).
8. That the action was not brought within the time
specified (IC, Sec. 63).
Defenses not barred by incontestability clause
1. That the person taking the insurance lacked
insurable interest as required by law;
2. That the cause of the death of the insured is an
excepted risk;
3. That the premiums have not been paid (IC, Secs. 77,
 233[b], 236[b]);
 UST LAW PRE-WEEK NOTES 2017
4. That the conditions of the po licy relating to military
or naval service have been violated (IC, Secs. 233[b],
 234[b]);
5. That the fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish proof of death
or to comply with any condition imposed by the
policy after the loss has happened; or
7. That the action was not brought within the time
specified (Sundiang Sr. & Aquino, 2014).
WARRANTIES
Statements or promises by the insured set forth in the
policy itself or incorporated in it by proper reference,
the untruth or non-fulfillment of which in any respect,
and without reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment render
the policy voidable by the insurer.
CLAIMS SETTLEMENT AND SUBROGATION
NOTICE AND PROOF OF LOSS
The injury, damage or liability sustained by the insured
in consequence of the happening of one or more of the
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
insurance.
Conditions before the insured may recover on the
policy after the loss
1. The insured or some person entitled to the benefit
of the insurance, without unnecessary delay, must
give written notice to the insurer (IC, Sec. 90);
2. When required by the policy, insured must present
a preliminary proof loss which is the best evidence
he has in his power at the time (IC, Sec. 91).
Effect of failure to give notice of loss
FIRE INSURANCE OTHER TYPES OF INSURANCE
Failure to give Failure to give notice will not
notice defeats the exonerate the insurer, unless
right of the insured there is a stipulation in the policy
to recover. requiring the insured to do so.
Refusal or failure to pay the claim within the time
prescribed
The insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board on the
proceeds of the insurance from the date following the
time prescribed under the Insurance Code, until the
claim is fully satisfied (Prudential Guarantee and
 Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No.
151890, June 20, 2006).
NOTE: Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS such
refusal or failure to pay is based on the ground that the
claim is fraudulent.
Where the mortgagor and the mortgagee were both
claiming the proceeds of a fire insurance policy and the
creditors of the mortgagor also attached the proceeds,
the insurance company cannot be held liable for
damages for withholding payment since the delay was
27
not malevolent (Rizal Commercial Bank Corporation v.
Court of Appeals, supra).
PRESCRIPTION OF ACTIONS
If there is no stipulation or the stipulation is void, the
insured may bring the action within 10 years in case the
contract is written.
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
upon is less than 1 year from the time the cause of action
accrues, such agreement is void (IC, Sec. 63).
a. The stipulated prescriptive period shall begin to run
from the date of the insurer’s rejection of the claim
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
from the denial of the reconsideration (Sun Life
Office, Ltd. vs. CA, supra).
SUBROGATION
If the plaintiff’s property has been insured, and he has
received indemnity from the insurance company for the
injury or loss arising out of wrong or breach of contract
complained of, the insurance company shall be
subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract
(NCC, Art. 2207). The insurer, upon happening of the risk
insured against and after payment to the insured is
subrogated to the rights and cause of action of the latter.
(Eastern Shipping Lines vs. Prudential Guarantee and
 Assurance, Inc., G.R. No. 174116, September 1, 2009).
Instances when subrogation does not apply
1. if the assured by his own act releases the wrongdoer
or third party liable for the loss or damage, from
liability
2. where the insurer pays the assured the value of the
lost goods without notifying the carrier who has in
good faith settled the assured’s claim for loss, the
settlement is binding on both the assured and the
insurer, and the latter cannot bring an action against
the carrier on his right of subrogation
3. where the insurer pays the assured for a loss which
is not a risk covered by the policy, thereby effecting
‘voluntary payment,’ (Loadstar Shipping Co., v.
Malayan Insurance, G.R. No. 185565, November 26,
 2014)
Q: Will the subrogee be bound by the arbitration
clause between the insurer and insured?
 A: In Pan Malayan Insurance Corporation v. CA, April 3,
1990, SC held that that the right of insurance company
as subrogee was not based on the charter party or any
other contract; rather, it accrued upon the payment of
the insurance claim by private respondent to the
insured. However, in California and Hawaiian Sugar Co.,
v. Pioneer Insurance G.R. No. 139273, November 28, 2000 ,
the Court clarified that  there was nothing in Pan
Malayan  that prohibited the applicability of the
arbitration clause to the subrogee. That case merely
 MERCANTILE LAW
discussed the accrual of the right  of subrogation and the
legal basis therefor.
COLLATERAL SOURCE RULE
If an injured person receives compensation for his
injuries from a source wholly independent of the
tortfeasor, the payment should not be deducted from the
damages which he would otherwise collect from the
tortfeasor. It finds no application to cases involving no-
fault insurances under which the insured is indemnified
for losses by insurance companies, regardless of who
was at fault in the incident generating the losses. Here, it
is clear that MMPC is a no-fault insurer. Hence, it cannot
be obliged to pay hospitalization expenses of the
dependents of its employees which had already been
paid by separate health insurance providers of said
dependents. (Mitsubishi Motors Philippines Salaried
Employees Union vs. Mitsubishi Motors Corporation
Gholder.R. No. 175773, June 17, 2013).
TRANSPORTATION LAW
COMMON CARRIERS
Define common carrier.
A common carrier is a person engaged in the business of
carrying or transporting passengers or goods or both, by
land, water, or air, for compensation, off ering services to
the public. ( Art. 1732 of the NCC )
Enumerate the requisites for an entity to be
classified as a common carrier (1996, 1997, 2000,
2002 BAR)
(PBL-FP)
1. Must be a Person, corporation, firm or association
2. Engaged in the Business of carrying or transporting
passengers or goods or both;
3. The carriage or transport must either be by Land,
water or air;
4. The service is for a Fee;
5. The service is offered to the Public (Art. 1732, NCC).
Q: AM Trucking, a small company, operates two
trucks for hire on a selective basis. It caters only to
a few customers, and its trucks do not make regular
or scheduled trips. It does not have a certificate of
public convenience.
On one occasion, Reynaldo contracted AM to
transport, for a fee, 100 sacks of rice from Manil a to
Tarlac. However, AM failed to deliver the cargo
because its truck was hijacked when the driver
stopped in Bulacan to visit his girlfriend.
May Reynaldo hold AM liable as a common carrier?
 A: YES. The fact that AM Trucking operates only two
trucks for hire on a selective basis, caters only to a few
customers, does not make regular or scheduled trips,
and does not have a certificate of public convenience
are of no moment. The law does not distinguish
between one whose principal business activity is the
carrying of persons or goods or both and anyone
who does such carrying only as an ancillary activity;
between a person or enterprise offering
transportation service on a regular or scheduled basis
and one on an occasional, episodic or unscheduled
28
basis; and between a carrier offering its services to the
general public and one who offers services or solicits
business only from a narrow segment of the general
population (Pedro de Guzman v. CA, G.R. No. L-47822
December 27, 1988)
Q: Spouses Dante and Leona Cruz lodged a
Complaint against Sun Holidays, Inc. with the RTC
for damages arising from the death of their son who
perished with his wife while on board the boat M/B
Coco Beach III that capsized en route to Batangas
from Puerto Galera, Oriental Mindoro where the
couple had stayed at Coco Beach Island Resort
owned by Sun Holidays.
Spouses contended that as a common carrier, it was
guilty of negligence in allowing M/B Coco Beach to
sail notwithstanding storm warning bulletins issued
by PAGASA. Sun Holidays denied being a common
carrier, alleging that its boats are not available to
the general public as they only ferry resort guests
and crew members.
Is Sun Holidays liable as a common carrier?
 A: YES. Sun Holiday’s ferry services are so intertwined
with its main business as to be properly considered
ancillary thereto. The constancy of respondent’s ferry
services in its resort operations is underscored by its
having its own Coco Beach boats. And the tour packages
it offers, which include the ferry services, may be availed
of by anyone who can afford to pay the same. These
services are thus available to the public (Spouses Dante
Cruz v. Sun Holidays, G.R. No. 18312, June 29, 2010).
What is a private carrier?
A private carrier is one who, without making the activity
a vocation, or without holding himself or itself o ut to the
public as ready to act for all who may desire his or its
services, undertakes, by special agreement in a
particular instance only, to transport goods or persons
from one place to another either gratuitously or for hire
(Spouses Pereña v. Spouses Zarate, G.R. No. 157917,
 August 29, 2012).
VIGILANCE OVER GOODS
What is the presumption on the loss, destruction, or
deterioration of goods
GR: The common carrier is presumed to have been at
fault or to have acted negligently when the goods
transported are lost, destroyed, or deteriorated (Art.
1735, NCC).
XPNs:  When the same is due to any of the following
causes only: (FA2 – C O)
1. Fortuitous events (flood, storm, earthquake,
lightning, or other natural disaster or calamity).
Provided, the following conditions are present:
a. Natural disaster was the proximate and only
cause;
b. Carrier exercised due diligence to prevent or
minimize loss before, during, and after the
occurrence of the natural disaster; and
c. The common carrier has not negligently
incurred delay in transporting the goods (Art.
1739-1740, NCC).
 UST LAW PRE-WEEK NOTES 2017
2.  Act of the public enemy in war, whether
international or civil, provided:
a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent or
minimize loss before, during, and after the act
(Art. 1739-1740, NCC).
3.  Act or omission of the shipper or owner of the
goods, provided:
a. If proximate and only cause – exempting
b. If contributory negligence – mitigating
4. The Character of the goods or defects in the packing
or in the containers; provided, carrier exercised due
diligence to forestall or prevent loss (Art 1742, NCC).
If the fact of improper packing is known to the
carrier or its servants, or apparent upon ordinary
observation, but it accepts the goods
notwithstanding such condition, it is not relieved
from responsibility for loss or injury resulting
therefrom (Southern Lines Inc., v. CA, GR No. L -16629,
 January 31, 1962).
5. Order or act of competent authority; provided, the
authority is with power to issue the order (Art. 1743,
NCC). If the officer acts without legal process, the
common carrier will be held liable (Ganzon v. CA, GR
No. L-48757, May 30, 1988).
In all cases other than those enumerated above, there is
presumption of negligence even if there is an agreement
limiting the liability of the common carrier in the
vigilance over the goods.
 ABSENCE OF DELAY
What are the rules regarding the time of delivery of
goods and delay?
1. If there is an agreement as to time of delivery  –
delivery must be within the time stipulated in the
contract or bill of lading.
2. If there is no agreement  – delivery must be within a
reasonable time (Saludo, Jr. v. CA, G.R. No. 95536,
March 23, 1992).
What is the consequence of delay in the delivery of
goods?
The carrier shall be liable for damages immediately and
proximately resulting from such neglect of duty (Ibid;
 Art. 1170, NCC).
In the absence of a special contract, a carrier is not an
insurer against delay in the transportation of goods. The
effects of delay are the following:
a. Excusable delay in carriage merely suspends and
generally does not terminate the contract of
carriage.
b. The carrier shall be made liable when vessel or
vehicle is unreasonably delayed.
c. Carrier remains duty bound to exercise
extraordinary diligence.
d. Natural disaster shall not free the carrier from
responsibility. (Dimaampao & Dumlao-Escalante,
 2014)
What is contributory negligence?
29
If the shipper or owner merely contributed to the loss,
destruction or deterioration of the goods, the proximate
cause thereof being the negligence of the common
carrier, the latter shall be liable for damages, which
however, shall be equitably reduced (NCC, Art. 1741).
Contributory negligence on the part of the passenger
does NOT justify the common carrier’s exempt ion from
liability (Martin, 1989). It will only mitigate the liability
of the common carrier (J. Dimaampao)
Explain the stipulations for limitation of liability.
Even if there is an agreement limiting the l iability of the
common carrier in the vigilance over the goods, the
common carrier is still disputably presumed to have
been negligent in case of its loss, destruction or
deterioration (NCC, Art. 1752).
A contract fixing a sum that may be recovered for the
loss, destruction, and deterioration is binding provided
it is:
a. Just and reasonable under the circumstances
b. Has been fairly and freely agreed upon.
GR: The liability of the common carrier shall not exceed
the stipulation in a contract of carriage even if the loss
or damage results from the carrier's negligence (Eastern
and Australian Shipping Co. vs. Great American Insurance
Co., GR No. L-37604, October 23, 1981).
XPN: Common carrier’s liability may be extended
beyond the specified amount mentioned if:
a. the shipper or owner of the goods declares a greater
value and;
b. pays corresponding freight (NCC, Art. 1749).
The liability of an airline company for lost baggage is
limited to the amount stated in the ticket unless the
passenger declared a higher valuation and paid
additional fare (Pan American World Airways, Inc. vs.
Intermediate Appellate Court, G.R. No. 70462, August 11,
1988).
SAFETY OF PASSENGERS
What is the diligence required of a passenger?
The passenger must observe the diligence of a good
father of a family or ordinary diligence to avoid injury to
himself (NCC, Art. 1761). This means that if the
proximate cause of the passenger’s injury is his
negligence, the common carrier is not liable.
Passengers must take such risks incident to the mode of
travel. Carriers are NOT insurers of any and all risks to
passengers and goods. It merely undertakes to perform
certain duties to the public as the law im poses, and holds
itself liable for any breach thereof (Pilapil v. CA, G.R. No.
52159, Dec. 22, 1989).
DURATION OF LIABILITY
What are the duties of a common carrier?
It is the duty of common carriers of passengers,
including common carriers by railroad train, streetcar,
or motorbus, to stop their conveyances a reasonable
length of time in order to afford passengers an
 MERCANTILE LAW
opportunity to board and enter, and they are liable for
injuries suffered by boarding passengers resulting from
the sudden starting up or jerking of their conveyances
while they are doing so. (Dangwa vs. CA, G.R. No. 95582,
October 7, 1991).
All persons who remain on the premises a reasonable
time after leaving the conveyance are to be deemed
passengers, and what is a reasonable time or a
reasonable delay within this rule is to be determined
from all the circumstances, and includes a reasonable
time to see after his baggage and prepare for his
departure (La Mallorca v. CA, G.R. No. L-21486, May 14,
1966).
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination and
has left the vessel-owner’s premises. The victim’s
presence in a vessel after 1 hour from his
disembarkation is not enough in order to absolve the
carrier from liability in his death. (Aboitiz Shipping
Corporation v. CA, GR No. 84458, November 6, 1989).
LIABILITIES OF THE COMMON CARRIER
What are the liabilities of the common carrier?
 Acts of its employees – Common carriers are liable for
the death of or injuries to passengers through the
NEGLIGENCE OR WILLFUL ACTS of the former’s
employees, although such employees may have acted
beyond the scope of their authority or in violation o f the
orders of the common carriers. The liability of the
common carriers does NOT cease upon proof that they
exercised all the diligence of a good father of a family in
the selection and supervision of their employees (NCC,
 Art. 1759).
 Acts of co-passengers or strangers – A common
carrier is responsible for injuries suffered by a
passenger on account of the WILLFUL ACTS OR
NEGLIGENCE of other passengers or of strangers, if the
carrier’s employees through the exercise of th e diligence
of a good father of a family would have prevented or
stopped the act or omission (NCC, Art. 1763).
 Acts of criminals – A common carrier is NOT absolved
from liability committed by thieves or robbers.
XPN: Where such thieves or robbers acted with grave or
irrestible threat, violence, or force.
Hijacking is not considered as force majeure where only
one of the two hijackers was armed with a bladed
weapon. The hijackers did not act with grave or
irresistible threat, violence, or force.
EXTENT OF LIABILITY FOR DAMAGES
Enumerate the kinds of damages that may be
recovered in case of death of a passenger.
1. An indemnity for the Death of the victim
2. An indemnity for loss of Earning capacity of the
deceased;
3. Moral damages;
4. Exemplary damages;
5.  Attorney's fees and expenses of litigation;
6. Interest in proper cases (Briñas v. People, G.R. No. L-
30309, Nov. 25, 1983).
7. Hospital and funeral expenses
30
In case of death of a passenger, the common carrier is
liable to pay P50, 000 as indemnity for the life of a
passenger (Victory Liner vs. Gammad, G.R. No. 159636,
November 25, 2004). Carrier is NOT liable for exemplary
damages  where there is no proof that it acted in a
wanton, fraudulent, reckless, oppressive or malevolent
manner.
Moral damages
GR: Moral damages are NOT recoverable for breach of
contract of carriage in view of Articles 2219-20 of the
Civil Code.
XPNs:
a. Where the mishap results in the death of the
passenger; and
b. Where it is proved that the common carrier was
guilty of fraud or bad faith, even if death does not
result.
Defenses available in culpa contractual ( FEC)
1. Exercise of extraordinary due diligence
2. Fortuitous event
3. C ontributory negligence of passengers – it does NOT
bar recovery of damages for death or injury if the
proximate cause is the negligence of the common
carrier but the amount of damages shall be
equitably reduced (NCC, Art. 1762).
BILL OF LADING
What is a bill of lading?
It is a written acknowledgment of receipt of goods and
agreement to transport them to a specific place and to a
named person or to his order (Unsworth Transport
International [Phils] vs. CA, G.R. No. 166520, 26 July 2010;
1992, 1998 Bar).
Explain the three-fold character of a bill of lading.
1. As a receipt , it recites the date and place of shipment,
describes the goods as to quantity, weight,
dimensions, identification marks and condition,
quality, and value.
 2. As a contract , it names the contracting parties,
which include the consignee, fixes the route,
destination, and freight rate or charges, and
stipulates the rights and obligations assumed by the
parties (Phoenix Assurance Co., Ltd. vs. United States
Lines, G.R. No. L-24033, Feb. 22, 1968).
3.  As a document of title,  it regulates the relations
between a carrier and a holder of the same.
PERIOD FOR FILING CLAIMS
What are the periods for filing claims?
1. If the damage is apparent  –  Immediately after
delivery; or
2. If the damage is not apparent – within 24 hours from
delivery (Code of Commerce, Art. 366)
The filing of claim is a condition precedent for recovery
of damages.
Requisites:
 UST LAW PRE-WEEK NOTES 2017
1. Consignment of goods through a common carrier,
by a consignor in one place to a consignee in another
place; and
2. The delivery of the merchandise by the carrier to
the consignee at the place of destination (New
 Zealand Ins. Co., Ltd. vs. Choa Joy, G.R. No. L-7311,
Sept. 30, 1955).
Explain the Doctrine of combined or connecting
services
The carrier which delivered the goods to the consignee
shall assume the obligations, rights and actions of those
who preceded him in the conveyance of the goods.
The shipper or consignee should proceed against the
one who executed the contract or against the others who
received the goods without reservation. But even if
there is reservation, they are not exempted from
liabilities that they may have incurred by reason of their
own acts (CC, Art. 373).
Remedy: The carrier may then file a third-party
complaint against the one who is really responsible. The
carrier is an indispensable party. But the shipper or
consignee may sue all of them as alternative defendants.
A claim against the arrastre operator must be filed
within fifteen (15) days from the delivery of goods
(International Container Terminal Services, Inc. vs.
Prudential Guarantee and Assurance Company, Inc. G.R.
No. L-134514, December 8, 1999).
Commencement of action if delivery was made to
arrastre operator: Commencement of action should be
computed from the time of delivery to the arrastre
operator. To use as basis for computing the one year
period, the delivery to the consignee would be
unrealistic and might generate confusion between the
loss or damage sustained by the goods while in the
carrier’s custody and those occurring while in the
arrastre operator’s possession (Martin, 1989).
The 1 year period of prescription is NOT applicable to
misdelivery  or conversion of goods.
PERIOD FOR FILING ACTIONS
What are the periods for filing actions?
1. For coastwise or carriage within the Philippines -
within 6 years if no bill of lading has been issued or
within 10 years if a bill of has been issued.
2. For international carriage from foreign port to the
Philippines - within 1 year from delivery of goods or
the date when the goods have been delivered.
The compliance with a requirement in the bill of lading
that the consignee must file a claim for loss or damage to
the goods shipped within thirty days from delivery is a
condition precedent to the accrual of a right of action
against the carrier (Philippine American General
Insurance Co. v. Sweet Lines, Inc., G.R. No. 87434, August
5, 1992).
MARITIME COMMERCE
What is a charter party contract?
A charter party is a contract by which an entire ship, or
some principal part thereof, is let by the owner to
another person for a specified time or use in
31
consideration of the payment of freight (Caltex vs.
Sulpicio Lines, G.R. No. 131166, September. 30, 1999).
State the persons involved in maritime commerce
1. Ship-owners and ship agents
2. Captains and masters of the vessel
3. Officers and Crews of the vessel
4. Supercargoes (Sundiang, Sr. & Aquino, 2011)
What are the classes of charter party?
1. Bareboat or demise  - The ship owner gives
possession of the entire vessel to the charterer. In turn,
the charterer supplies, equips, and mans the vessel. The
charterer is the owner pro hac vice.
The charterer assumes the rights and liabilities of the
owner to third parties who deal with the vessel, it is the
charterer and its agent who are liable for the wages of
seamen hired by the master of the vessel, as the master
of the vessel is acting in behalf of the charterer (Litonjua
Shipping Co., Inc. vs. National Seamen Board, G.R. No. L-
51910, August 10, 1989).
2. Contract of affreightment - owner of the vessel
leases a part or all of its space to haul goods for others.
It can either be:
a. Time charter – Vessel is chartered for a particular
time or duration. While the ship owner still retains
possession and control of the vessel, the charterer
has the right to use all vessel’s facilities and
designate vessel’s destination.
b. Voyage charter – Vessel is chartered for a carriage
of goods from one or more ports of loading to on e or
more ports of unloading. An owner who retains
possession of the ship remains liable as carrier and
must answer for loss or non-delivery of the goods
received for transportation (Cebu Salvage Corp. vs.
Philippine Home Assurance Corp., G.R. No. 150403,
 Jan. 25, 2007).
BAREBOAT/DEMISE CONTRACT OF
CHARTER CONTRACT  AFFREIGHTMENT
Ship owner remains
Negligence of the
liable and carrier must
charterer gives rise to
answer for any breach
its liability to others.
of duty.
Charterer is regarded as
Charterer is not
owner pro hac vice. Ship
regarded as owner.
owner temporarily
Ship owner retains
relinquishes possession
ownership over the
and ownership of the
vessel.
vessel.
What is the liability of ship owners and shipping
agents?
Ship owner/agent is NOT  liable for the obligations
contracted by the captain if the latter exceeds his
powers and privileges inherent in his position of those
which may have been conferred upon him by the former.
However, if the amount claimed were used for the
benefit of the vessel, the ship owner or ship agent is
liable.
The shipping agent is civilly liable for damages in favor
of third persons due to the conduct of the carrier's
captain, and the shipping agent can exempt himself
therefrom only by abandoning the vessel with all his
 MERCANTILE LAW

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

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 ov er 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 o f 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 n egligence; 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
vessel.
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)
owners.
Both the ship and cargo are No common danger to

32
 UST LAW PRE-WEEK NOTES 2017

 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)
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
court.
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 p eriod 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.
f raudulently misstated by shipper

33
 MERCANTILE LAW

NA Insurance claims that the COGSA does not apply,
since ATI is not a shipper or carrier. Who is correct?
(2014 BAR)
 A: NA Insurance is correct. ATI should be ordered to pay
NA Insurance notwithstanding the lapse of the one year
prescriptive period for filing a suit under the COGSA. The
term “carriage of goods” under Section 1 in COGSA,
covers the period from the time when the goods are
loaded to the time when they are discharged from the
ship infer that the period of time when the goods have
been discharged from the ship and given to the custody
of the arrastre operator is not covered by the COGSA.
The COGSA does not mention that an arrastre operator
may invoke the prescriptive period of one year; hence, it
does not cover the arrastre operator.
The act of the carrier in guessing which luggage
contained the firearm constitutes willful
misconduct.The  guessing of which luggage contained
the firearms amounted to willful misconduct under
Section 25(1) of the Warsaw Convention (Northwest
 Airlines v. CA, GR No. 120334, January 20, 1998).
The allegation of willful misconduct resulting in a tort is
insufficient to exclude the case from the realm of
Warsaw Convention. A cause of action based on tort did
not bring the case outside the sphere of the Warsaw
Convention (Lhuiller v. British Airways, GR No. 171092,
March 15, 2010)
THE CORPORATION CODE
(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.
1[1]).
 As to existence of stocks
What are the limitations to the liability of air STOCK CORPORATION NON-STOCK
carriers? CORPORATION
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
requires.
 As to how it is created and its function
3. Objects which the passenger takes charge himself –
PRIVATE PUBLIC CORPORATION
5,000 francs/ $1,000  per passenger.
CORPORATION
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
correct.
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,
1990).
 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
itself to deny the passenger time to file his complaint substantial compliance, a
(United Airlines vs. Uy, G.R. No. 127768, Nov. 19, 1999). de jure corporation
results. (Dimaampao and
Carrier is NOT entitled to the limitation of liability if the Escalante, 2017 )
damage is caused by willful misconduct or default on its
part (WC, Art. 25).
Requisites:
1. Organized under a
valid Law.
2. Attempt in good faith
to form a corporation
according to the
requirements of the

34
 UST LAW PRE-WEEK NOTES 2017

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
faith. (Sundiang Sr. & NATIONALITY OF CORPORATIONS
 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
stockholders;
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,

35
 MERCANTILE LAW
it learned that the areas where it wanted to
undertake exploration and mining activities were
already covered by Mineral Production Sharing
 Agreement (MPSA) applications of Narra Corp.,
Tesoro Inc., and McArthur Inc., which were all
domestic corporations.
Redmont, however, questioned these applications
for MPSA arguing that at least 60% of the capital
stock of these three corporations were owned and
controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation, which was disqualified from
engaging in mining activities reserved only for
Filipino citizens.
 Are Narra, Tesoro and McArthur Filipino
corporations?
NO.  A grave violation of the Constitution, specifically
Section 2 of Article XII, is being committed by a foreign
corporation right under our country’s nose through a
myriad of corporate layering under different, allegedly,
Filipino corporations.
Basically, there are two acknowledged tests in
determining the nationality of a corporation: the control
test and the grandfather rule. Paragraph 7 of DOJ
Opinion No. 020, Series of 2005, adopting the 1967 SEC
Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling
interests in enterprises engaged in the exploitation of
natural resources owned by Filipino citizens, provides:
“Shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage
shall be counted as of Philippine nationality.”
The first part of paragraph 7, DOJ Opinion No. 020,
stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of
Philippine nationality," pertains to the control test or the
liberal rule. On the other hand, the second part of the
DOJ Opinion which provides, "if the percentage of the
Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding
to such percentage shall be counted as Philippine
nationality," pertains to the stricter, more stringent
grandfather rule.
Under the liberal Control Test, there is no need to
further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation
since a corporation which is at least 60% Filipino-owned
is considered as Filipino.
Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of
Filipino ownership. Moreover, the ultimate Filipino
ownership of the shares must first be traced to the level
of the Investing Corporation and added to the shares
directly owned in the Investee Corporation. (Narra
Nickel Mining and Development Corporation v. Redmont
Consolidated Mines, 722 SCRA 382, in Dimaampao and
Escalante, 2017)
36
What is the interpretation of the below provision in
the Constitution?
Section 11, Article XII of the Constitution: No
franchise, certificate, or any other form of
authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
or to corporations or associations organized under
the laws of the Philippines at least sixty per centum
of whose capital is owned by such citizens.
The Gamboa Decision already held, in no uncertain terms,
that what the Constitution requires is "full [and legal]
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights
must rest in the hands of Filipino nationals." And,
precisely that is what SEC-MC No. 8 provides, viz.: "For
purposes of determining compliance [with the
constitutional or statutory ownership], the required
percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock
entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or
not entitled to vote."
In construing "full beneficial ownership," the
Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the
voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens
or Philippine nationals.
In turn, "beneficial owner" or "beneficial ownership" is
defined in the Implementing Rules and Regulations of the
Securities Regulation Code (SRC-IRR) as:
Any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship or
otherwise, has or shares voting power (which includes
the power to vote or direct the voting of such security)
and/or investment returns or power (which includes the
power to dispose of, or direct the disposition of such
security).
Thus, the definition of "beneficial owner or beneficial
ownership" in the SRC-IRR, which is in consonance with
the concept of "full beneficial ownership" in the FIA-IRR,
is, as stressed in the Decision, relevant in resolving only
the question of who is the beneficial owner or has
beneficial ownership of each "specific stock" of the public
utility company whose stocks are under review. If the
Filipino has the voting power of the "specific stock", i.e.,
he can vote the stock or direct another to vote for him, or
the Filipino has the investment power over the "specific
stock", i.e., he can dispose of the stock or direct another to
dispose of it for him, or both, i.e., he can vote and dispose
of that "specific stock" or direct another to vote or
dispose it for him, then such Filipino is the "beneficial
owner" of that "specific stock." Being considered Filipino,
that "specific stock" is then to be counted as part of the
60% Filipino ownership requirement under the
Constitution. The right to the dividends, jus fruendi - a
right emanating from ownership of that "specific stock"
necessarily accrues to its Filipino "beneficial owner."
 UST LAW PRE-WEEK NOTES 2017
(Roy III v. Herbosa, G.R. No. 207246, April 18, 2017, EN
BANC)
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
May a corporation own property and incur
obligation in its own name?
YES. Stockholders merely have inchoate right over the
properties of the corporation. Likewise, the properties
of directors, officers and stockholders are not the
properties of the corporation.
Parenthetically, as a consequence of its status as a
distinct legal entity, a corporation incurs its own
liabilities and is legally responsible for payment of its
obligations. In other words, by virtue of the separate
juridical personality of a corporation , the corporate
debt or credit is not the debt or credit of the stockholder.
This protection from liability for shareholders is the
Principle of Limited Liability . (Philippine National
Bank v. Hydro Resources Contractors Corporation, 693
SCRA 294, March 13, 2013, in Dimaampao and Escalante,
 2017)
May a corporation be held liable for tort? For crime?
 As to tort.  It may be held accountable for tort when the
act was committed by the officer or agent under the
express direction or authority from the stockholders or
members acting as a body or generally from the
directors as the governing body.
 As to crime.  A corporation is an artificial being
incapable of intent, and as such, it cannot commit
felonies punishable under the Revised Penal Code. It
cannot also be held liable for crimes punishable under
special laws because these crimes are personal in nature
requiring personal performance of overt acts. A
corporation cannot be meted with the penalty of
imprisonment because it exists by mere fiction of law.
Exception: By express provision of the Anti-Money
Laundering Act, a corporation may be held criminally
liable for violation thereof. In such case, responsible
officers would be criminally liable. (Dimaampao and
Escalante, 2017)
RECOVERY OF MORAL DAMAGES
May a corporation seek for and be awarded moral
damages?
A juridical person is, as a general rule, not entitled to
moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments
as wounded feelings, serious anxiety, mental anguish or
moral shock
However, there are exceptions:
1. Article 2219 paragraph 7 of the Civil Code expressly
authorizes the recovery of moral damages in cases
of libel, slander or any other form of defamation.
This provision does not qualify whether the plaintiff
is a natural or juridical person. Therefore, a juridical
person such as the corporation can validly complain
for libel or any other form of defamation and claim
for moral damages. (Filipinas Broadcasting Network,
Inc. v. AMEC-BCCM, G.R. No. 141994, January 17,
 2005)
37
 2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
realm. (Manila Electric Company v. T.E.A.M.
Electronics Corporation, et. al., G.R. No. 131723,
December 13, 2007)
DOCTRINE OF PIERCING THE CORPORATE VEIL
What is the Doctrine of Piercing the Veil of
Corporate Entity?
The Doctrine of Piercing the Corporate Veil is the
doctrine that allows the State to disregard for certain
justifiable reasons the notion that a corporation has a
personality separate and distinct from the persons
composing it.
NOTE: Any piercing of the corporate veil has to be done
with caution, albeit courts will not hesitate to disregard
the corporate veil when it is misused or when necessary
in the interest of justice. After all, the concept of corporate
entity was not meant to promote unfair objectives.
(Sarona v. National Labor Relations Commission, 663 SCRA
394, January 18, 2012)
What are the tests in determining the applicability
of the Doctrine of Piercing the Corporate Veil?
(ECAO)
1. When the corporation is used to defeat public
convenience as when the corporate fiction is us ed as
a vehicle for the evasion of an existing obligation;
(Equity Cases)
2. In fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a crime;
(Control Test )
3. In Alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
(Timoteo H. Sarona v. National Labor Relations
Commission, Royale Security Agency, et al., G.R. No.
185280, January 18, 2012)
4. The Objective test  where the end result in piercing
the veil of corporate fiction is to make the
stockholders liable for debts and obligations of the
Corporation not   to make the Corporation liable for
the debts and obligations of the stockholders.
(Umali v CA, G.R. No. 89561, September 13, 1990)
Explain the Alter Ego Theory/Instrumentality
Theory.
This theory espouses that the corporate entity is a mere
farce as it is the alter ego, business conduit or
instrumentality of a person or another entity. This
contemplates of:
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own
(Instrumentality or Control test );
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty,
 MERCANTILE LAW
or dishonest and unjust act in contravention of
plaintiff’s legal right; (Fraud test  ) and
3. The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss
complained of (Harm test ). (Philippine National v.
Hydro Resources Contractors Corporation, 693 SCRA
 294, March 133, 2013)
Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building. Morales
tendered the winning bid and was awarded
contract. Despite his compliance with his
contractual undertakings, Morales was only paid
half of the contract, which Kukan, Inc. refused to
pay despite demands. Morales filed a Complaint  geographically or otherwise descriptive, might
with the RTC against Kukan, Inc. for a sum of money
which was later on granted. Morales secured a writ
of execution against Kukan, Inc. The sheriff then
levied upon various personal properties found at
what was supposed to be Kukan, Inc.’s office.
 Alleging that it owned the properties thus levied
and that it was a different corporation from Kukan,
Inc., Kukan International Corporation (KIC) filed an
 Affidavit of Third-Party Claim. Morales filed an
Omnibus Motion praying to apply the principle of
piercing the veil of corporate entity. Rule on the
motion.
The motion should be denied. A corporation not
impleaded in a suit cannot be subject to the court’s
process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction
over the corporation and, hence, any p roceedings taken
against that corporation and its property would
infringe on its right to due process. The doctrine of
piercing the veil of corporate fiction comes to play only
during the trial of the case after the court has already
acquired jurisdiction over the corporation. Before this
doctrine can be applied:
a. the court must first acquire jurisdiction over the
corporation or corporations involved before its or
their separate personalities are disregarded; and
b. the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a
cause of action duly commenced involving parties
duly brought under the authority of the court by
way of service of summons or what passes as such
service. (Kukan International Corporation v. Hon.
 Amor Reyes, G.R. No. 182729 September 29, 2010)
CORPORATE NAME
State the rules on adoption of a corporate name.
The SEC shall not approve the proposed corporate name
if:
1. there is already a prior right over the use of such
corporate name; and
2. the proposed name is either:
a) identical, or
b) deceptively or confusingly similar to that of
any existing corporation or to any other nam e
already protected by law; or
c) patently deceptive, confusing or contrary to
existing law. (Industrial Refractories
Corporation of the Philippines v. CA, et al., G.R.
No. 122174, October 3, 2002)
What is the Principle of Priority of Adoption?
38
Priority of adoption determines the right to the
exclusive use of a corporate name with freedom from
infringement. Further, to determine whether a given
corporate name is “identical” or “confusingly or
deceptively similar” with another entity’s corporate
name, the corporate names must be evaluated in their
entirety. (Lyceum of the Philippines v. CA , G.R. No. 101897,
March 5, 1993)
Explain the Doctrine of Secondary Meaning.
It is the doctrine which states that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was
his product.  (Philippine Nut Industry, Inc. v. Standard
Brands. Inc. G.R. No.L-23035, July 31, 1975)
BY-LAWS
What are the requisites for valid by-laws?
(CoMorO-RAG)
1. Must be consistent with the COrporation Code,
other pertinent laws and regulations;
2. Must not be contrary to MORals and public policy;
3. Must not impair Obligations and contracts or
property rights of stockholders;
4. Must be Reasonable;
5. Must be consistent with the charter or  AOI;
6. Must be of General application and not directed
against a particular individual.
What are the binding effects of by-laws?
 As to board of directors and officers, stockholders
and members. They are bound by the terms thereof, but
subordinate employees without actual knowledge are
not bound.
 As to third persons.  By-laws are not binding on them,
unless they have actual knowledge.  (Dimaampao and
Escalante, 2017)
What is the effect of non-filing of the by-laws within
the required period?
Failure to submit the by-laws within 30 days from
incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
revocation of its charter after proper notice and hearing,
under Section 6(I) of PD 902-A. The corporation is, at the
very least, a de facto corporation whose existence may
not be collaterally attacked. (Sawadjaan v. CA, G.R. No.
142284, June 8, 2005)
CORPORATE POWERS
Enumerate the express or general powers of a
corporation (Theory of General Capacity).
A corporation has no power except those expressly
conferred upon it by the Corporation Code and those
that are implied or incidental to its existence. Every
corporation has the following general powers:
(SuSuCo-ABS-PEDRO)
 UST LAW PRE-WEEK NOTES 2017
1. To SUe and be sued;
2. Of Succession;
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and deal with real and
personal property, securities and bonds;
8. To Enter into merger or consolidation;
9. To make reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civic or
similar purposes, provided that no donation is given
to any:
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other plans
for the benefit of its directors, trustees, officers and
employees – basis of which is the Labor code;
11. To exercise Other powers essential or necessary to
carry out its purposes. (CC, Sec. 36)
Enumerate the specific powers of a corporation
(Theory of Specific Capacity).
The specific powers of a corporation are the following:
1. extend or shorten corporate term (Sec. 37, CC);
2. increase or decrease capital stock (Sec. 38, CC);
3. incur, create or increase bonded indebtedness (Sec.
38, CC); and
4. deny pre-emptive rights (Sec. 39, CC);
5. Sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its
property, assets, and goodwill (Sec. 40);
6. purchase or acquire own shares (Sec. 41, CC);
7. invest in another corporation or business or for any
purpose other than the primary purpose  (Sec. 42,
CC);
8. declare dividends (Sec. 43,CC);
9. enter into management contract (Sec. 44, CC);
10. amend the Articles of Incorporation (Sec. 16, CC).
Explain ultra vires act.
An ultra vires  act refers to an act outside or beyond
express, implied and incidental corporate powers. The
concept also includes those acts that may ostensibly be
within such powers but are, by general or special laws,
either proscribed or declared illegal. (Rural Bank of
Milaor v. Ocefemia, G.R. No. 137686, February 8, 2000)
Acts which are clearly beyond the scope of the
corporation’s authority are null and void and cannot be
given any effect. (Gancayco v. City Government of Quezon
City, 658 SCRA 853, October 11, 2011)
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
are not involved; the creditors are not prejudiced; and
the act or contracts must be wholly executed.
(Dimaampao and Escalante, 2017)
Explain the Doctrine of Apparent Authority. (2015
BAR)
39
If a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the
power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it
through such agent, be estopped from denying the
agent’s authority.
Apparent authority is derived not merely from practice.
Its existence may be ascertained through:
1. The general manner  in which the corporation
holds out an officer or agent as having the power to
act, or in other words, the apparent authority to act
in general, with which it clothes him; or
2. The acquiescence in his acts of a particular nature,
with actual or constructive notice thereof, within o r
beyond the scope of his ordinary powers.
It is not the quantity of similar acts which establishes
apparent authority but the vesting of a corporate officer
with the power to bind the corporation. (Advance Paper
Corporation v. Arma Traders Corporation, GR No.
176897, December 11, 2013)
TRUST FUND DOCTRINE
Explain the Trust Fund Doctrine.
The subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which
the creditors have the right to look up to satisfy their
credits, and which the corporation may not dissipate.
The creditors may sue the stockholders directly for the
latter’s unpaid subscription.
Exceptions to the trust fund doctrine
The Code allows distribution of corporate capital only in
these instances:
1. Amendment of the AOI to reduce authorized capital
stock;
2. Purchase of redeemable shares by the corporation
regardless of existence of unrestricted retained
earnings;
3. Dissolution and eventual liquidation of the
corporation;
4. Dividends from investments in wasting asset
corporation (one solely or principally engaged in
the exploitation of “wasting assets,” distributing net
proceeds from exploitation of their holdings, such as
mines, oil wells, without allowance or d eduction for
depletion);
5. In close corporation, where there is a deadlock (Sec.
104, CC)
6. Purchase own shares of stock
7. Payment for the fair value of the shares of dissenting
stockholders. (Dimaampao and Escalante, 2017)
BUSINESS JUDGMENT RULE
GR:  Contracts intra vires  entered into by the board of
directors are binding upon the corporation beyond the
interference of courts. The courts are barred from
intruding into business judgments of corporations,
when the same are made in good faith. (Ong v Tiu, G.R.
No. 144476. April 8, 2003)
XPNs: The director/trustee or officer is personally and
solidary liable if he:
 MERCANTILE LAW
1. Willfully and knowingly votes for or assent to
patently unlawful acts of the corporation (Sec. 31,
CC);
2. Is guilty of gross negligence or bad faith in directing
the affairs of the corporation (Sec. 31, CC);
3. Acquires any personal or pecuniary interest in
conflict with his duty as such director or trustee
(Sec. 31,CC);
4. Acquires a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation (Sec.
34,CC);
5. Consents to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file
with the corporate secretary his written objection
thereto;
6. Contractually agrees or stipulates to hold himself
personally and solidarily liable with the
Corporation;
7. Is made, by specific provision of law, personally
liable for his corporate action. (MAM Realty
Development Corp. v. NLRC, 244 SCRA 797, June 2,
1995 in Dimaampao and Escalante, 2017)
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
In the November 2010 stockholders’ meeting of
Greenville Corporation, 8 directors were elected to
the board. The directors assumed their posts in
January 2011. Since no stockholders' meeting was
held in November 2011, the 8 directors served in a
holdover capacity and thus continued discharging
their powers.
In June 2012, 2 of Greenville Corporation's directors
–  Director A and Director B –  resigned from the
board. Relying on Section 29 of the Corporation
Code, the remaining 6 directors elected 2 new
directors to fill in the vacancy caused by the
resignation of Directors A and B.
Stockholder X questioned the election of the new
directors, initially, through a letter-complaint
addressed to the board, and later (when his letter-
complaint went unheeded), through a derivative
suit filed with the court. He claimed that the vaca ncy
in the board should be filled up by the vote of the
stockholders of Greenville Corporation. Greenville
Corporation's directors defended the legality of
their action, claiming as well that Stockholder X's
derivative suit was improper.
Rule on the issues raised. (2013 BAR)
The election of the new directors should be by voting of
the stockholders, and not merely by the remaining
directors.
Term is the time during which the officer may claim to
hold the office as of right, and fixes the interval after
which the several incumbents shall succeed one
another. The term of office is not affected by the
holdover. The term is fixed by statute and it does not
change simply because the office may have become
vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s
tenure represents the term during which the incumbent
actually holds office. The tenure may be shorter (or, in
40
case of holdover, longer) than the term for reasons
within or beyond the power of the incumbent.
Based on the above discussion, when Section 23[9], CC
declares that the board of directors shall hold office for
1 year until their successors are elected and qualified,
we construe the provision to mean that the term of the
members of the board of directors shall be only for one
year; their term expires one year after election to the
office. The holdover period that time from the lapse of
one year from a member’s election to the Board and
until his successor ’s election and qualification is not part
of the director’s original term of office, nor is it a new
term; the holdover period, however, constitutes part of
his tenure. Corollary, when an incumbent member of the
board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which
has expired, and the incumbent is holding the
succeeding term.
It also bears noting that the vacancy referred to in
Section 29 contemplates a vacancy occurring within the
director’s term of office. When a vacancy is created by
the expiration of a term, logically, there is no more
unexpired term to speak of. Hence, Section 29 declares
that it shall be the corporation’s stockholders who shall
possess the authority to fill in a vacancy caused by the
expiration of a member’s term.
With the expiration of the terms of office, a vacancy
resulted which, by the terms of Section 29 of the CC,
must be filled by the stockholders in a regular or special
meeting called for the purpose. To assume that the
vacancy is caused by the resignation of Directors A and
B in 2012, not by the expiration of their terms in 2011,
is both illogical and unreasonable. Their resignation as
holdover directors did not change the nature of the
vacancy; the vacancy due to the expiratio n of A and B’s
term had been created long before their resignation.
(Valle Verde Country Club, Inc. v. Victor Africa, G.R. No.
151969, 11 August 2008)
However, since the right to fill in a vacancy in the BOD
belongs to the stockholders, the derivative suit to
enforce such right is improper. (Reyes v. RTC of Makati,
561, SCRA 593, 11 August 2008, in Dimaampao and
Escalante, 2017)
Ricardo Coros was dismissed by Matling Industrial
and Commercial Corporation (Matling) as its Vice
President for Finance and Administration. Coros
filed a complaint for illegal suspension and illegal
dismissal against Matling and some of its corporate
officers with the NLRC. Matling, et al., moved to
dismiss the complaint, raising the ground, among
others, that the complaint pertained to the
jurisdiction of the SEC due to the controversy being
intra-corporate inasmuch as Coros was a member of
Matling’s Board of Directors aside from being its
Vice-President for Finance and Administration prior
to his termination. It further argues that the power
to create corporate offices and to appoint the
individuals to assume the offices was delegated by
Matling’s Board of Directors to its President through
its By-Laws; and that any office the President
created, like the position of the Coros, was as valid
and effective a creation as that made by the Board of
Directors, making the office a corporate office. Is
Coros a corporate officer of Matling?
 UST LAW PRE-WEEK NOTES 2017
NO.  Pursuant to Section 25 of the Corporation Code,
whoever are the corporate officers enumerated in the
by-laws are the exclusive officers of the corporation and
the Board has no power to create other offices without
amending first the corporate By-laws. However, the
Board may create appointive positions other than the
positions of corporate officers, but the persons
occupying such positions are not considered as
corporate officers within the meaning of Sec. 25 of the
Corporation Code and are not empowered to exercise
the functions of the corporate officers, except those
functions lawfully delegated to them. Their functions
and duties are to be determined by the Board of
Directors/Trustees. Moreover, the Board of Directors of
Matling could not validly delegate the power to create a
corporate office to the President, in light of Sec. 25 of the
Corporation Code requiring the Board of Directors itself
to elect the corporate officers. Verily, the power to elect
the corporate officers is a discretionary power that the
law exclusively vested in the Board of Directors, and
could not be delegated to subordinate officers or agents.
The office of Vice President for Finance and
Administration created by Matling’s P resident pursuant
to the By-Law was an ordinary, not a corporate, office.
(Matling Industrial and Commercial Corporation, et al., v.
Ricardo R. Coros, G.R. No. 157802, October 10, 2010, J.
Bersamin)
CONTRACTS
Briefly discuss the doctrine of corporate
opportunity. (2005 BAR)
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to
the corporation, thereby obtaining profits to the
prejudice of such corporation. (CC, Sec. 34)
However, if such act is ratified by a vote of the
stockholders representing at least 2/3 of the
outstanding capital stock, the director is excused from
remitting the profit realized. (ibid)
Chito Santos is a director of both Platinum
Corporation (PLATINUM) and KWIK Silver
Corporation (KWIK). He owns 1% of the outstanding
capital stock of PLATINUM and 40% of KWIK.
PLATINUM plans to enter into a contract with KWIK
that will make both companies earn very substantial
profits. The contract is presented at the respective
board meetings of PLATINUM and KWIK.
1. In order that the contract will not be voidable,
what conditions will have to be complied with?
Explain.
2. If these conditions are not met, how may this
contract be ratified? Explain. (1995 BAR)
1. At the meeting of the Board of Directors of
PLATINUM to approve the contract, Chito Santos
would have to make sure that:
a) His presence as director at the meeting is not
necessary to constitute a quorum for such
meeting;
b) His vote is not necessary for the approval of the
contract; and
c) The contract is fair and reasonable under the
circumstances.
41
At the meeting of the Board of Directors of KWIK to
approve the contract, Chito would have to make sure
that:
a) There is no fraud involved; and
b) The contract is fair and reasonable under the
circumstances.
2. If the conditions relating to quorum and required
number of votes are not met, the contract must be
ratified by the vote of stockholders representing at
least 2/3 of the outstanding capital stock in a
meeting called for the purpose. Furthermore, the
adverse interest of Chito in the contract must be
disclosed and the contract is fair and reasonable.
Explain the contracts between corporations with
interlocking directors.
A contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone. Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is merely nominal (not
exceeding 20% of the outstanding capital stock), he
shall be subject to the provisions of Sec. 32 insofar
as the latter corporation or corporations are
concerned. (CC, Sec. 33)
EXECUTIVE COMMITTEE
Corporate powers are exercised only by the board,
except when delegated to an executive committee.
What are the corporate powers that may not be
delegated?
The executive committee by a vote of majority may
exercise such powers as may be delegated to it.
However, the following cannot be delegated:
a) approval of any action for which shareholders’
approval is also required;
b) filling of vacancies in the board;
c) adopt, amend or repeal by-laws;
d) amend or repeal of any resolution of the board
which by its express terms is not so amendable or
repealable; and
e) distribution of cash dividends to the shareholders.
(Sec. 35, CC)
STOCKHOLDERS AND MEMBERS
What are the rights of a stockholder and member?
(1996 BAR)
1. Management Right:
a. To attend and vote in person or by proxy at a
stockholders’ meetings (Secs. 50, 58);
b. To elect and remove directors (Secs. 24, 28);
c. To approve certain corporate acts (Sec. 58);
d. To adopt and amend or repeal the by-laws or
adopt new by-laws (Secs. 46, 48);
e. To compel the calling of the meetings (Sec. 50);
f. To enter into a voting trust agreement (Sec. 59);
g. To have the corporation voluntarily dissolved
(Secs. 118, 119).
 MERCANTILE LAW
2. Proprietary rights
a. To transfer stock in the corporate book ( Sec.
63);
b. To receive dividends when declared (Sec. 43);
c. To the issuance of certificate of stock or other
evidence of stock ownership ( Sec. 64);
d. To participate in the distribution of corporate
assets upon dissolution (Sec. 118, 119);
e. To pre-emption in the issue of shares (Sec. 39).
3. Remedial rights
a. To inspect corporate books (Sec. 74);
b. To recover stock unlawfully sold for delinquent
payment of subscription (Sec. 69);
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation (Sec. 74, 75);
d. To bring suits (derivative suit, individual suit,
and representative suit);
e. To demand payment in the exercise of appraisal
right (Secs. 41, 81).
VOTING TRUST
What is a voting trust agreement (VTA)?
A VTA is an agreement whereby one or more
stockholders transfer their shares of stocks to a trustee,
who thereby acquires for a period of time the voting
rights (and/or any other specific rights) over such
shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
Its principal purpose is to acquire control of the
corporation.
It is the trustee of the shares who acquires legal title to
the shares under the voting trust agreement and thus
entitled to the right to vote and the right to be elected in
the board of directors while the trustor -stockholder has
the beneficial title which includes the right to receive
dividends. (Lee v. CA, G.R. No. 93695, February 4, 1992)
RIGHT OF APPRAISAL
What is the meaning of stockholder’s appraisal
right? (2007 BAR)
It refers to the right of the stockholder to demand
payment of the fair value of his shares, after dissenting
from a proposed corporate action involving a
fundamental change in the charter or articles of
incorporation in the cases provided by law. (De Leon,
 2010)
The corporation need not pay the value of the shares of
a dissenting stockholder if at the time of the demand, th e
corporation has no unrestricted retained earnings. No
payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained
earnings in its books to cover the payment. The trust
fund doctrine backstops the requirement of unrestricted
retained earnings to fund the payment of the shares of
stocks of the withdrawing stockholders. The fact that the
Corporation subsequent to the demand for payment and
during the pendency of the collection case posted
surplus profit did not cure the prematurity of the cause
of action.  (Philip Turner, et al., v. Lorenzo Shipping
Corporation, G.R. No. 157479, November 24, 2010)
42
PRE-EMPTIVE RIGHT
Explain the pre-emptive right of the stockholders.
It is the preferential right of shareholders to subscribe
to all issues or disposition of shares of any class in
proportion to their present shareholdings. (CC, Sec. 39)
Its purpose is to enable the shareholder to retain his
proportionate control in the corporation and to retain
his equity in the surplus.
Suppose that “X” Corporation has already used the
1000 originally authorized shares of the
corporation so that its Board of Directors and
stockholders wish to increase “X’s” authorized
capital stock. After complying with the
requirements of the law on increase of capital stock,
“X” issued an additional 1000 shares of the same
value.
a.  Assume that the stockholder “A” presently holds
200 out of the 1000 original shares, would “A”
have a preemptive right to 200 of the new issue
of 1000 shares? Why?
b. When should stockholder “A” exercise the
preemptive right? (2001 BAR)
a. YES, “A” would have a preemptive right to 200 of the
new issue of 1000 shares. “A” is a stockholder of
record holding 200 shares in “X” Corporation.
According to the Corporation Code, each stockholder
has the preemptive right to all issues of shares made
by the corporation in proportion to the number of
share he holds on record in the corporation.
b. Preemptive right must be exercised in accordance
with the Articles of Incorporation or the By-Law.
When the Articles of Incorporation and By-Laws are
silent, the Board may fix a reasonable time within
which the stockholders may exercise the right.
REMEDIAL RIGHTS
What are the actions that the stockholders or
members can bring?
1. Derivative suit  –  one brought by one or more
stockholders or members in the name and on behalf
of the corporation to redress wrongs committed
against it or to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to
sue or are the ones to be sued or hold control of the
corporation.
2. Individual suit  – an action brought by a stockholder
against the corporation for direct violation of his
contractual rights as such individual stockholder,
such as the right to vote and be voted for, the right
to share in the declared dividends, the right to
inspect corporate books and records, and others.
3. Representative suit  – one brought by a person in his
own behalf and on behalf of all similarly situated.
State the requisites for the existence of a derivative
suit.
(C-SENA)
1. Corporate cause of action: the cause of action must
devolve upon the corporation itself; the wrongdoing
or harm having been caused to the corporation and
not to the particular stockholder brining the suit
 UST LAW PRE-WEEK NOTES 2017
(Reyes v. Hon. RTC of Makati Br. 142, G.R. No. 165744,
 August 11, 2008);
2. Stockholder: the party bringing the suit must be a
stockholder
a. At the time the acts or transactions subject of
the action occurred and
b. at the time the action was filed
NOTE: if the cause of action is continuing in nature,
the only requisite is that the party is a stockholder
at the time the action was filed. (Dean Divina’s
Lecture, April 29, 2015)
3. Exhaustion of all intra-corporate remedies available
under the AOI, By-Laws, laws or rules governing the
corporation or partnership to obtain the relief he
desires;
4. Not a Nuisance or Harassment suit;
5.  Appraisal right is not available (Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate
Controversies, cited in Anthony S. Yu, et al., v. Joseph
S. Yukayguan, et al., G.R. No. 177549, June 18, 2009)
NOTE: A derivative suit is an intra-corporate
controversy hence under the jurisdiction of the RTC
acting as a special commercial court.
WATERED STOCK
What is a watered stock?
A watered stock is a stock issued in exchange for cash,
property, share, stock dividends, or services lesser than
its par value or issued value. (CC, Sec. 65)
Watered stocks can either be par or no par value shares.
The watered stocks refer only to original issue of stocks
but not to a subsequent transfer of such stocks by the
corporation, for then it would no longer be an “issue” but
a sale thereof (De Leon, 2010, citing Rochelle Roofing Co.
v. Burley, 115 NE 478). Treasury shares are not subject
to the prohibition on the issuance of watered stocks.
DISSOLUTION AND LIQUIDATION
Define dissolution.
It is the extinguishment of the franchise of a corporation
and the termination of its corporate existence.
(Sundiang Sr. & Aquino, 2009)
What are the two legal steps in corporate
dissolution?
1. The termination of the corporate existence at least
as far as the right to go on doing ordinary business
is concerned;
2. The winding up of its affairs, the payment of its
debts, and the distribution of its assets among the
shareholders or members and other persons
interested. After winding up, the existence of the
corporation is terminated for all purposes.
How are corporatations dissolved?
a) voluntarily;
b) involuntarily;
c) by shortening corporate term; and
d) expiration of the term. (Dimaampao and Escalante,
 2017)
43
How is the voluntary dissolution of a corporation
effected?
a) By the vote of the BOD/ BOT and the stockholders/
members where no creditors are affected (CC, Sec.
118);
b) By the judgment of the SEC after hearing of petition
for voluntary dissolution, where creditors are
affected (CC, Sec. 119);
c) By amending the AOI to shorten the corporate term
(CC, Sec. 120);
d) In case of a corporation sole, by submitting to the
SEC a verified declaration of the dissolution for
approval (CC, Sec. 115);
e) Merger or consolidation
How is the involuntary dissolution of a corporation
effected?
a) By expiration of corporate term provided for in the
AOI (CC, Sec. 11);
b) By legislative enactment
c) By failure to formally organize and commence the
transaction of its business within 2 years from the
date of incorporation (CC, Sec. 22);
d) By order of the SEC on grounds under existing laws
(CC, Sec. 121);
e) Judicial decree on Quo Warranto Proceeding (CC,
Sec. 20).
Define liquidation.
Process by which all the assets of the corporation are
converted into liquid assets (cash) in order to facilitate
the payment of obligations to creditors and the
remaining balance if any is to be distributed to the
stockholders. (Sundiang Sr. & Aquino, 2014)
What are the methods of liquidation?
1. By the corporation itself or its board of directors or
trustees (CC , Sec. 122 [1]);
2. By a trustee to whom the assets of the corporation
had been conveyed. (CC, Sec. 122[2]) (Board of
Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14,
1967);
3. By a management committee or rehabilitation
receiver appointed by SEC. (CC, Sec. 119)
Does corporate life cease to exist immediately upon
dissolution?
NO. It shall continue as a body corporate for 3 years
from the time of dissolution, for the purpose of
prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it
was established. (Dimaampao and Escalante, 2017)
The corporation, once dissolved, thereafter
continues to be a body corporate for 3 years for
purposes of prosecuting and defending suits by and
against it and of enabling it to settle and close its
affairs, culminating in the final disposition and
distribution of its remaining assets. If the 3-year
extended life expires without a trustee or receiver
being designated by the corporation within that
period and by that time (expiry of the 3-year
extended term), the corporate liquidation is not yet
 MERCANTILE LAW
over, how, if at all, can a final settlement of the
corporate affairs be made? (1997 BAR)
The liquidation can continue with the winding up. The
members of the Board of Directors can continue with the
winding of the corporate affairs until final liquidation.
They can act as trustees or receivers for this purpose.
The SEC approved the amendment of the articles of
incorporation of GHQ Corporation shortening its
corporate life to only 25 years in accordance with
Section 120 of the Corporation Code. As shortened,
the corporation continued its business operations
until May 30, 1997, the last day of its corporate
existence. Prior to said date, there were a num ber of
pending civil actions, of varying nature but mostly
money claims filed by creditors, none of which was
expected to be completed or resolved within 5 ye ars
from May 30, 1997. If the creditors had sought your
professional help at that time about whether or not
their cases could be pursued beyond May 30, 1997,
what would have been your advice? (2000 BAR)
The cases can be pursued even beyond May 30, 1997,
the last day of the corporate existence of GHQ
Corporation. The Corporation is not actually dissolved
upon the expiration of its corporate term. There is still
the period for liquidation or winding up. GHQ
Corporation may still continue to defend suits filed
against it until it could settle and close its affairs.
CORPORATE REHABILITATION
Define Rehabilitation
It 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 feasible and its
creditors can recover by way of the present value of
payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately
liquidated [Sec. 4(gg), FRIA].
What is the nature of rehabilitation proceedings?
Rehabilitation proceedings are summary  and non-
adversarial  in nature, and do not contemplate
adjudication of claims that must be threshed out in
ordinary court proceedings.
The jurisdiction of the rehabilitation court is over claims
against the debtor that is under rehabilitation, not over
claims by the debtor against its own debtors or against
third parties. The corporation under rehabilitation must
file a separate action against its debtors/insurers to
recover whatever claim it may have against them. (Steel
Corporation v. Mapfre Insular Insurance Corporation,
G.R. No. 201199, October 16, 2013, in Divina, 2014)
Explain the Cram-down clause.
Section 23.  Approval of the Rehabilitation Plan. –  The
court may approve a rehabilitation plan over the
opposition of creditors, holding a majority of the total
liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly unreasonable.
(Sec. 23, Rule 4, Interim Rules of Procedure on Corporate
Rehabilitation)
44
This provision, which is currently incorporated in the
FRIA, is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to
the rehabilitation, absent due regard to the greater long-
term benefit of all stakeholders. Otherwise stated, it
forces the creditors to accept the terms and conditions
of the rehabilitation plan, preferring long-term viability
over immediate but incomplete recovery. (BPI v. Sarabia
Manor Hotel, G.R. no. 175844, July 29, 2013)
CLOSE CORPORATION
What is a close corporation?
A close corporation is one which AOI provides that:
a. All of the corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of record
by not more than a specified number of persons, not
exceeding 20;
b. All of the issued stock of all classes shall be subject
to one or more specified restrictions on transfer
permitted by the provisions on close corporations;
and
c. The corporation shall not list in any stock exchange
or make any public offering of any of its stock of any
class.
d. Notwithstanding the foregoing, a corporation shall
be deemed NOT a close corporation when at least
2/3 of its voting stock or voting rights is owned or
controlled by another corporation which is not a
close corporation within the meaning of this Code.
A close corporation is essentially an incorporated
partnership in which the stockholders consider each
other as partners but which the law treats as a
corporation. Thus, stockholders in a close corporation
are very much like members in a partnership. They owe
to one another the same duty of utmost good faith and
diligence that partners owe one another. This strict duty
applies particularly to controlling stockholders. (De
Leon, 2010)
What are the corporations which may not qualify as
a close corporation?
Any corporation may be incorporated as a close
corporation, EXCEPT: (MOSBI-PEP)
1. Mining or Oil companies,
2. Stock exchanges,
3. Banks,
4. Insurance companies,
5. Public utilities,
6. Educational institutions and
7. Corporations declared to be vested with Public
interest in accordance with the provisions of the
Corporation Code. (CC, Sec. 96)
NON-STOCK CORPORATION
Define non-stock corporation.
It is one where no part of its income is distributable as
dividends to its members, trustees or officers. Any profit
which it may obtain as an incident to its operations shall
whenever necessary or proper, be used in furtherance of
the purpose or purposes for which it was organized. (CC,
Sec. 87)
Non-stock corporations may be formed or organized for:
(CREP-CFLSS-CS)
 UST LAW PRE-WEEK NOTES 2017

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 m ay 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)
corporation?
DOCTRINE OF DOING BUSINESS
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 m aking 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 t o
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)

45
 MERCANTILE LAW
What is the legal test for determining if an
unlicensed foreign corporation is doing business in
the Philippines? (2002 BAR)
The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply a
continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or
works, or the exercise of some of the fu nctions normally
incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the
business corporation.
 A foreign corporation which is not licensed to do
business in the Philippines is not absolutely
incapacitated from filing a suit in local courts
Only when that foreign corporation is “transacting” or
“doing business”  in the country will a license be
necessary before it can institute suits. It may, however,
bring suits on isolated business transactions, which is
not prohibited under Philippine law. Thus, a foreign
insurance company may sue in Philippine courts upon
the marine insurance policies issued by it abroad to
cover international-bound cargoes shipped by a
Philippine carrier, even if it has no license to do business
in this country. It is the act of engaging in business
without the prescribed license which bars a foreign
corporation from access to our courts. (Aboitiz Shipping
Corp. v. Insurance Co. of North America, G.R. No. 168402,
 August 6, 2008, in Divina, 2010)
Any foreign corporation not doing business in the
Philippines may maintain an action in our courts upon
any cause of action, provided that the subject matter and
the defendant are within the jurisdiction of the court. It
is not the absence of the prescribed license but "doing
business" in the Philippines without such license which
debars the foreign corporation from access to our
courts. In other words, although a foreign corporation is
without license to transact business in the Philippines, it
does not follow that it has no capacity to bring an action.
Such license is not necessary if it is not engaged in
business in the Philippines. (Columbia Pictures v. CA, G.R.
No. 110318, August 28, 1996)
MERGERS AND CONSOLIDATIONS
Where one corporation sells or otherwise transfers
all of its assets to another corporation, is the latter
liable for the debts and liabilities of the transferor?
GR: No.
XPNs:
1. Where the purchaser expressly or impliedly agrees
to assume such debts;
2. Where the transaction amounts to a consolidation
or merger of the corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently
to escape liability for such debts. (Edward J. Nell Co.
v. Pacific Farms, Inc., G.R. No. L-20850, November 29,
1965)
The Nell Doctrine  states the general rule that the
transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are
46
present, then the transferee corporation shall assume
the liabilities of the transferor.
The legal basis of the last in the four (4) exceptions to
the Nell Doctrine, where the purchasing corporation is
merely a continuation of the selling corporation, is
challenging to determine. Dean Cesar Villanueva
explained that this exception contemplates the
“business-enterprise transfer.” In such transfer, the
transferee corporation ’s interest goes beyond the assets
of the transferor’s assets and its desires to acquire the
latter’s business enterprise, including its goodwill.
Section 40 suitably reflects the business-enterprise
transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation
necessarily continued the business of the selling or
transferor corporation. Given that the transferee
corporation acquired not only the assets but also the
business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the
former. Section 40 refers to the sale, lease, exchange or
disposition of all or substantially all of the corporation's
assets, including its goodwill. The sale under this
provision does not contemplate an ordinary sale of all
corporate assets; the transfer must be of such degree
that the transferor corporation is rendered incapable of
continuing its business or its corporate purpose.
The purpose of the business-enterprise transfer is to
protect the creditors of the business by all owing them a
remedy against the new owner of the assets and
business enterprise. Otherwise, creditors would be left
“holding the bag,” because they may not be able to
recover from the transferor who has “disappeared with
the loot,” or against the transferee who can claim that he
is a purchaser in good faith and for value. Based on the
foregoing, as the exception of the Nell doctrine relates to
the protection of the creditors of the transferor
corporation, and does not depend on any deceit
committed by the transferee corporation, then fraud is
certainly not an element of the business enterprise
doctrine. Indeed, the transferee corporation may inherit
the liabilities of the transferor despite the lack of fraud
due to the continuity of the latter’s business. (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, September 18,
 2015)
What is meant by a de facto merger ? Discuss (2016
BAR)
De facto merger means that a corporation called the
acquiring corporation acquired the assets and lia bilities
of another corporation in exchange for equivalent val ue
of shares of stock of the acquiring corporation.
SECURITIES REGULATION CODE
The SRC is the law that regulates securities (its issuance,
distribution and sale) and the person who deals with
such securities. It is enacted to protect the public from
unscrupulous promoters, who stake business or venture
claims which have really no basis, and sell shares or
interests therein to investors. The SRC also serves to
protect investors, promote investor confidence, and
stabilize the financial markets.
SECURITIES REQUIRED TO BE REGISTERED
What are securities? (1996 BAR)
 UST LAW PRE-WEEK NOTES 2017
Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character.
It includes: (DO DIET)
1. Debt instruments –  bonds, debentures, notes,
evidence of indebtedness, asset-backed securities
2. Other instruments as may in the future be
determined by the SEC.
3. Derivatives– options and warrants
4. I nvestments instruments –  Investment contracts,
fractional undivided interests in oil, gas, or other
mineral rights
5. E quity instruments – Shares of stock, certificates of
interest or participation in a profit sharing
agreement, certificates of deposit for a future
subscription, proprietary or non-proprietary
membership certificates in corporations.
6. T rust instruments –  Certificates of assignments,
certificates of participation, trust certificates, voting
trust certificates or similar instruments. (SRC, Sec.
3)
Test on determining whether or not it is a security:
Does it represent a share, participation, or interest in a
commercial enterprise or any profit making venture? If
yes, then, it is a security. If it is a security, then, it cannot
be sold, or offered for sale or distribution within the
Philippines without a registration statement duly filed
with and approved by the SEC. (Divina, 2014)
What is the requirement before securities are sold
or offered for sale or distribution within the
Philippines?
They are required to be registered with and approved by
the SEC. Registration also includes the disclosure to SEC
of all material and relevant information about the issuer
of the security. Prior to the sale, the information on the
securities, in such form and with such substance as the
SEC may prescribe, shall be made available to each
prospective purchaser. (SRC, Sec. 8)
In Securities Law, what is a shortswing transaction?
A shortswing is a transaction where a person buys
securities and sells or disposes of the same within a
period of six months.
PROHIBITIONS ON FRAUD, MANIPULATIONS
 AND INSIDER TRADING
Explain the manipulation of security prices. (2001
BAR)
The price of securities should be dictated by market
forces. It cannot be pegged or stabilized. The following
acts are considered as manipulation of security prices
and are therefore prohibited:
1. Transactions intended to create a false or
misleading appearance of active trading in any
listed security traded in an Exchange or any other
trading market:
a. Wash Sale – is a transaction in which there is no
genuine change in the beneficial (or actual)
ownership of a security;
b. Matched Sale – is a change of ownership in the
securities by entering an order for the purchase
or sale of a security with the knowledge that a
47
simultaneous order of substantially the same
size, time, and price, for the sale or purchase of
any such security, has or will be entered by or
for the same or different parties;
c. Similar transactions where there is no change of
beneficial ownership.
2. Effecting a series of transactions that will raise or
depress the price of securities to induce the
purchase or sale of securities respectively, or
creating active trading to induce transactions
through manipulative devices:
a. Marking the close –  buying and selling of
securities at the close of the market in an effort
to alter the closing price of these securities.
b. Painting the tape –  engaging in a series of
transactions effected by brokers in securities
that are reported publicly to give the
impression or illusion of activity or price
movement in a security, which may trick
investors into trading in these securities
because of the alleged trading volume or
indications of interest.
c. Squeezing the float  – refers to taking advantage
of a shortage of securities in the market by
controlling the demand side and exploiting
market congestion during such shortages in a
way to create artificial prices. This prevents
the actual market from determining the price of
these securities.
d. Hype and dump – engaging in buying activity at
increasingly higher prices and then selling
securities in the market at the higher prices.
e. Boiler room operations – refers to activities that
involve the use of high pressure sale tactics
such as direct mail offers or telephone follow-
ups to investors to promote purchase and sale
of securities wherein there is
misrepresentation in these securities. This is a
fraudulent transaction that tricks investors into
trading in a fake market.
f. Daisy chain – refers to a series of purchase and
sales of the same issue at successively higher
prices by the same group of people with the
purpose of manipulating prices are drawing
unsuspecting investors into the market leaving
them defrauded of their money and securities.
g. Front-Running – is the prohibited practice of a
broker-dealer executing its proprietary order
before the customer’s order for the same
security. This violates the fiduciary
responsibility by the broker-dealer to its
customer accounts as well as placing the
customer’s order first.
h. Churning –  involves the excessive trading of
securities by a broker- dealer in a customer’s
discretionary account in order to generate
commissions, without regard to the customer’s
investment objective.
3. Circulating or disseminating information that the
price of any security listed in an Exchange will or is
likely to rise or fall because of manipulative market
operations of any one or more persons conducted
for the purpose of raising or depressing the price of
that security for the purpose of inducing the
purchase or sale of such security.
4. To make false or misleading statement with respect
to any material fact, which he knew or had
reasonable ground to believe was so false or
misleading, for the purpose of inducing the
purchase or sale of any security listed or traded in
an Exchange.
 MERCANTILE LAW
5. To effect, either alone or with others, any series of
transactions for the purchase and/or sale of any
security traded in an exchange for the purpose of
pegging, fixing or stabilizing the price of such
security, unless otherwise allowed by the Code or by
rules of the Commission.
What is insider trading?
A purchase or sale made by an insider, or such insider’s
spouse or his relative by affinity or consanguinity within
the second degree, legitimate or common-law, shall be
presumed to be effected while in possession of material
non-public information if transacted after such
information came into existence but prior to the public
dissemination of such information, and lapse of
reasonable time for the market to absorb such
information. (Bar 2015)
What is material non-public information? (1995
BAR)
1. Information about the issuer or the security has not
been generally disclosed to the public and would
likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or
2. Would be considered by a reasonable person
important under the circumstances in determining
his course of action whether to buy, sell or hold a
security. (SRC, Sec. 27.2)
In insider trading, what is a fact of special
significance? (1991 BAR)
It is, in addition to being material, such fact as would
likely, on being made generally available, to affect the
market price of a security to a significant extent, or
which a reasonable person would consider as especially
important under the circumstances in determining his
course of action in the light of such factors a s the degree
of its specificity, the extent of its difference from
information generally available previously, and its
nature and reliability. (RSA, Sec. 30 [c])
What is a tender offer? (2016, 2010, 2002 BAR)
Tender offer means a publicly announced intention by a
person acting alone or in concert with other persons to
acquire equity securities of a public company. It is also
an offer by the acquiring person to stockholders of a
public company for them to tender their shares therein
on the terms specified in the offer. Tender offer is in
place to protect their minority shareholders against any
scheme that dilutes the share value of any investments.
It gives the minority shareholders the chance to exit the
company under reasonable terms, giving them
opportunity to sell their shares at the same price as
those of the majority shareholders. (CEMCO HOLDINGS,
INC. v. National Life Insurance Company, Inc. G.R. No.
171815, August 7, 2007)
In what instances is a tender offer required to be
made? (2002 BAR)
Tender offer is required to be made in the following
instances:
1. Any person or group of persons acting in concert
who intends to acquire 35% or more of any class of
48
equity shares in a public company shall disclose
such intention and contemporaneously make a
tender offer for the percent sought to all
shareholders of such class.
NOTE:  In the event that the tender offer is
oversubscribed, the aggregate amount of securities to be
acquired at the close of such tender offer shall be
proportionately distributed across both selling
shareholder with whom the acquirer may have been in
private negotiations and the minority shareholders.
2. Any person or group of persons acting in concert
who intends to acquire 35% or more of any class of
equity shares of a public company (corporation with
assets of at least P 50,000,000.00 and having 200 or
more stockholders with at least 100 shares for each
stockholder) pursuant to an agreement made
between or among the person or group of persons
and one or more sellers.
3. Any person or group of persons acting in concert
intends to acquire 35% or more of equity shares of
a public company in one or more transactions
within a period of 12 months shall be required to
make a tender offer to all holders of such class for
the number of shares so acquired within the same
period.
4. If any acquisition of even less than 35% would
result in ownership of over 51% of the total
outstanding equity securities of a public company,
the acquirer shall be required to make a tender offer
under this Rule for all the outstanding equity
securities to all remaining stockholders of the said
company at a price supported by a fairness opinion
provided by an independent financial advisor or
equivalent third party. The acquirer in such tender
offer shall be required to accept any and all
securities thus tendered.
5. In any transaction covered by this Rule, the sale of
shares pursuant to the private transaction shall not
be completed prior to the closing and completion of
the tender offer. Transactions with any of the
seller/s of significant block of shares with whom the
acquirers may have been in private negotiation shall
close at the same time and upon the same terms as
the tender offer made to the public under this Rule.
For paragraph (2)(B), the last sale meeting the
threshold shall not be consummated until the
closing and completion of the tender offer.
Coverage of the application of tender offer
The mandatory tender offer rule covers not only direct
acquisition but also indirect acquisition or “any type of
acquisition.” The legislative intent of Section 19 of the
Code is to regulate activities relating to acquisition of
control of the listed company and for the purpose of
protecting the minority stockholders of a listed
corporation. Whatever may be the method by which
control of a public company is obtained, either through
the direct purchase of its stocks or through an indirect
means, mandatory tender offer applies. What is decisive
is the determination of the power of control. The
legislative intent behind the tender offer rule makes
clear that the type of activity intended to be regulated is
the acquisition of control of the listed company through
the purchase of shares. Control may be effected through
a direct and indirect acquisition of stock, and when this
takes place, irrespective of the means, a tender offer
must occur. (Cemco Holdings v. National Life Insurance
Company, G.R. No. 171815, August 7, 2007)
 UST LAW PRE-WEEK NOTES 2017

CIVIL LIABILITY INTELECTUAL PROPERTY LAW

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
accrued
INTELLECTUAL
DEFINITION
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)
goods.
any technical solution of a problem in
INTRA-CORPORATE CONTROVERSIES
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 co rporation and pertains
may relate to, a product, or process, or
to the enforcement of the parties’ correlative rights and
an improvement of any of the
obligations under the Corporation Code and the internal
foregoing.
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
01-2-04-SC)
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 w ealth.
Criteria for Patentability:
TESTS TO DETERMINE INTRA-CORPORATE
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

49
 MERCANTILE LAW
not associated with lines or colors, provided that
such composition or form gives a special
appearance to and can serve as pattern for an
industrial product or handicraft. It must be new or
ornamental (Sec. 112, 113 IPC ).
An industrial design is not considered new if it
differs from prior designs only in minor respects
that can be mistaken as such prior designs by an
ordinary observer. (World Intellectual Property
Organization, 2004).
Rights conferred by a patent:
1. In case of   Product – Right to restrain, prohibit and
prevent any unauthorized person or entity from
making, using, offering for sale, selling or importing
the product.
2. In case of   Process –  Right to restrain prohibit   and
 prevent   any unauthorized person or entity from
manufacturing, dealing in, using, offering for sale,
selling or importing any product obtained directly
or indirectly from such process (IPC, Sec. 71).
3. Right to assign the patent, to transfer  by succession,
and to conclude licensing contracts (IPC, Sec. 71.2).
The rights conferred by a patent application take effect
after publication in the Official Gazette (IPC, Sec 46).
Doctrine of exhaustion (Also known as the doctrine of
 first sale): it provides that the patent holder has control
of the first sale of his invention. He has the opportunity
to receive the full consideration for his invention from
his sale. Hence, he exhausts his rights in the future
control of his invention. It espouses that the patentee
who has already sold his invention and has received all
the royalty and consideration for the same will be
deemed to have released the invention from his
monopoly. The invention thus becomes open to the use
of the purchaser without further restriction (Adams v.
Burke, 84 U.S. 17, 1873).
GR: Patent rights are exhausted by first sale in the
Philippines (Domestic exhaustion).
XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner thereof
(International exhaustion) (R.A. 9502).
NON-PATENTABLE INVENTIONS
1. Plant varieties or animal breeds or essentially
biological process for the production of plants or
animals. This provision shall not apply to micro-
organisms and non-biological and microbiological
processes
2. Aesthetic creations
3. Discoveries, scientific theories and mathematical
methods
4. Schemes, rules and methods of performing mental
acts, playing games or doing business, and
programs for computers
5. Anything which is contrary to public order or
morality (IPC as amended by R.A. 9502, Sec. 22).
6. Methods for treatment of the human or animal body
7. In the case of drugs and medicines, mere discovery
of a new form or new property of a known
substance which does not result in the enhancement
of the efficacy of that substance
8. Computer programs are not patentable but are
copyrightable. However, they can be patentable if
50
they are part of a process (e.g. business process with
a step involving the use of a computer program).
OWNERSHIP OF PATENT
1. Inventor , his heirs, or assigns (IPC, Sec 28);
2.  Joint invention –  Jointly by the inventors (IPC, Sec.
 28);
3. Two or more persons invented separately and
independently of each other –  To the person who
filed an application;
4. Two or more applications are filed –  the applicant
who has the earliest filing date or, the earliest
priority date. (First-to-file rule) (IPC, Sec. 29).
5. If made pursuant to a commission – person who
commissions the work shall own the patent, unless
otherwise provided in the contract.
6. If made pursuant to an employment –  In case the
employee made the invention in the course of his
employment contract, the patent shall belong to:
a. The employee, if the inventive activity is not a
part of his regular duties even if the employee
uses the time, facilities and materials of the
employer;
b. The employer, if the inventive activity is the
result of the performance of his regularly-
assigned duties, unless there is an agreement,
express or implied, to the contrary (IPC, Sec. 30).
RIGHT TO A PATENT
The right to a patent belongs to the inventor, his heirs,
or assigns. When two (2) or more persons have jointly
made an invention, the right to a patent shall belong to
them jointly. (IPC, Sec. 28)
FIRST-TO-FILE RULE
1. If two (2) or more persons have made the invention
separately and independently of each other, the
right to the patent shall belong to the person who
filed an application for such invention, or
 2. where two or more applicants are filed for the same
invention, to the applicant who has the earliest filing
date or, the earliest priority date. (IPC, Sec. 29)
INVENTIONS CREATED PURSUANT TO A COMMISION
Pursuant to a commission: The person who
commissions the work shall own the patent, unless
otherwise provided in the contract.
Pursuant to employment: In case the employee made
the invention in the course of his employment contract,
the patent shall belong to:
c. The employee, if the inventive activity is not a part
of his regular duties even if the employee uses the
time, facilities and materials of the employer;
d. The employer, if the inventive activity is the result
of the performance of his regularly-assigned duties,
unless there is an agreement, express or implied, to
the contrary (IPC, Sec. 30).
RIGHT OF PRIORITY
An application for patent filed by any person who has
previously applied for the same invention in another
country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be considered
 UST LAW PRE-WEEK NOTES 2017
as filed as of the date of filing the foreign application
(IPC, Sec. 31). Conditions in availing of priority date:
1. The local application expressly claims priority;
2. It is filed within 12 months from the date the earliest
foreign application was filed; and
3. A certified copy of the foreign application together
with an English translation is filed within 6 months
from the date of filing in the Philippines (Sec. 31,
IPC).
GROUNDS FOR CANCELLATION OF A PATENT
1. The invention is not new or patentable;
2. The patent does not disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by any person skilled in the art; or
3. Contrary to public order or morality (IPC, Sec. 61.1).
4. Patent is found invalid in an action for infringement
(IPC, Sec. 82);
5. The patent includes matters outside the scope of the
disclosure contained in the application (IPC, Sec 21,
Regulations on Inter Partes Proceeding, Sec.1).
REMEDIES AVAILABLE
1. Persons with a right to a patent  - If a person other
than the applicant is declared by final court order or
decision as having the right to a patent, he may
within 3 months after such decision has become
final:
a. Prosecute the application as his own
b. File a new patent application
c. Request the application to be refused; or
d. Seek cancellation of the patent (IPC, Sec. 67.1).
2. True and actual inventor   - If a person, who was
deprived of the patent without his consent or
through fraud is declared by final court order or
decision to be the true and actual inventor, the court
shall order for his substitution as patentee, or at the
option of the true inventor, cancel the patent , and
award actual damages in his favor if warranted by
the circumstances (IPC, Sec. 68).
These actions must be filed within one (1) year  from the
date of publication. (IPC, Sec. 70).
RIGHTS CONFERRED BY A PATENT
1. In case of  Product – Right to restrain, prohibit and
prevent any unauthorized person or entity from
making, using, offering for sale, selling o r importing
the product.
2. In case of   Process – Right to restrain, prohibit   and
 prevent   any unauthorized person or entity from
manufacturing, dealing in, using, offering for sale,
selling or importing any product obtained directly
or indirectly from such process. (IPC, Sec. 71)
3. Right to assign the patent, to transfer  by succession,
and to conclude licensing contracts. (IPC, Sec. 71.2)
The rights conferred by a patent application take effect
after publication in the Official Gazette. (IPC, Sec 46)
LIMITATIONS OF PATENT RIGHTS
1. Parallel imporation –  In case of drugs and
medicine, the owner of a patent has NO RIGHT to
prevent third parties from making, using, offering
for sale, importing a patented product, when it has
51
been introduced in the Philippines or anywhere
else in the world   by the patent owner, or by any
party authorized to use the invention.
2. Prior user - Person other than the applicant, who in
good faith, started using the invention in the
Philippines, or undertaken serious preparations to
use the same, before the filing date or priority date
of the application shall have the right to continue
the use thereof, but this right shall only be
transferred or assigned further with his enterprise
or business.
3. Where the act is done  privately   and on a non-
commercial scale  or for a non-commercial purpose
(IPC, Sec. 72.2).
4. Exclusively for experimental use of the invention for
scientific purposes or educational purposes. (IPC,
Sec. 72.3).
5. Use by Government – a Government agency or
third person authorized by the Government may
exploit the invention even without agreement of the
patent owner where:
a. The public interest, in particular, national
security, nutrition, health or the development
of other sectors, as determined by the
appropriate agency of the government, so
requires; or
b. A judicial or administrative body has
determined that the manner of exploitation,
by the owner of the patent or his licensee, is
anti- competitive; or
c. In the case of drugs and medicines, there is a
national emergency or other circumstance of
extreme urgency requiring the use of the
invention; or
d. In the case of drugs and medicines, there is a
public non-commercial use of the patent by
the patentee, without satisfactory reason; or
e. In the case of drugs and medicines, the
demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health.
The use by the Government, or third person authorized
by the Government, shall be subject, where applicable,
to the following provisions:
1. In situations of national emergency or other
circumstances of extreme urgency , the right holder
shall be notified as soon as reasonably practicable;
2. In the case of  public non-commercial use of the
 patent by the patentee , without satisfactory reason,
the right holder shall be informed promptly;
3. If the demand for the patented article in the
Philippines is not being met to an adequate extent
and on reasonable terms as determined by the
Secretary of Health, the right holder shall be
informed promptly;
4. The scope and duration of such use shall be limited
to the purpose for which it was authorized;
5. Such use shall be non-exclusive;
6. The right holder shall be paid adequate
remuneration in the circumstances of each case,
taking into account the economic value of the
authorization; and
7. The existence of a national emergency or other
circumstances of extreme urgency, in the case of
drugs and medicines shall be subject to the
determination of the President of the Philippines for
 MERCANTILE LAW
the purpose of determining the need for such use or
other exploitation, which shall be immediately
executory.
PATENT INFRINGEMENT
Tests in Patent Infringement:
Literal Infringement - Resort must be had, in the first
instance, to the words of the claim. If accused matter
clearly falls within the claim, infringement is made out
and that is the end of it. To determine whether the
particular item falls within the literal meaning of the
patent claims, the Court must juxtapose the claims of the
patent and the accused product within the overall
context of the claims and specifications, to determine
whether there is exactly identity of all material
elements (Godines v. The Honorable Court of Appeals, G.R.
No. 97343, September 13, 1993 ).
Doctrine of Equivalents – There is infringement when
a device appropriates a prior invention by incorporating
its innovative concept and, despite some modification
and change, performs substantially the same function in
substantially the same way to achieve substantially the
same result. (Ibid.).
The doctrine of equivalents thus requires satisfaction of
the function-means-and-result test, the patentee having
the burden to show that all three components of such
equivalency test are met (Smithkline Beckman
Corporation v. CA, G.R. No. 126627, August 14, 2003).
Meaning of “equivalent device”: It is such as a
mechanic of ordinary skill in construction of similar
machinery, having the forms, specifications and
machine before him, could substitute in the place of the
mechanism described without the exercise of the
inventive faculty.
Doctrine of file wrapper estoppel: It balances the
doctrine of equivalents. Patentee is precluded from
claiming as part of patented product that which he had
to excise or modify in order to avoid patent office
rejection, and he may omit any additions that he was
compelled to add by patent office regulations.
Contributory Infringement
Anyone who actively induces the infringement of a
patent or provides the infringer with a component of a
patented product or of a product produced because of a
patented process knowing it to be especially adopted fo r
infringing the patented invention and not suitable for
substantial non-infringing use shall be liable as a
contributory infringer and shall be jointly and severally
liable with the infringer (Sec. 76.6, IPC).
Remedies of the owner of the patent against
infringers
1. Civil action for infringement – damages sustained by
the owner, plus attorney’s fees  and other
litigation expenses, and to secure an injunction
for the protection of his rights ( IPC, Sec 76.2).
Prescriptive period: four (4) years from the filing
of the action for infringement
2. Criminal action for infringement  –  If the
infringement is repeated , the infringer shall be
criminally liable and upon conviction, shall suffer
imprisonment of not less than six (6) months but
52
not more than three (3) years and/or a fine not less
than P100, 000.00 but not more than P300, 000.00.
Prescriptive period: three (3) years   from the
commission of the crime.
3.  Administrative remedy  –  Where the amount of
damages claimed is not less than P200, 000.00, the
patentee may choose to file a n administrative action
against the infringer with the Bureau of Legal Affairs
(BLA). The BLA can issue injunctions, order direct
infringer to pay patentee damages, but unlike
regular courts, the BLA may not issue search and
seizure warrants or warrants of arrest.
4. Destruction of Infringing material – The court may,
in its discretion, order that the infringing goods,
materials and implements predominantly used in
the infringement be disposed of outside the
channels of commerce of destroyed, without
compensation (IPC, Sec.76.5 ).
Persons who can file an action for infringement:
1. The patentee or his successors-in-interest  may file an
action for infringement (Creser Precision Systems,
Inc. v. CA, G.R. No. 118708, Feb. 2, 1998).
2. Any  foreign national or juridical entity   who meets
the requirements of Sec. 3 and not engaged in
business in the Philippines, to which a patent has
been granted or assigned, whether or not it is
licensed to do business in the Philippines (IPC, Sec.
77).
A licensee may NOT maintain a suit for infringement.
Only the patentees, his heirs, assignee, grantee or
personal representatives may bring an action for
infringement. XPN: If the licensing agreement provides
that the licensee may bring an action f or infringement or
if he was authorized to do so by the patentee through a
special power of attorney.
DEFENSES IN ACTION FOR INFRINGMENT
1. Invalidity of the patent (IPC, Sec. 81);
2. Any of the grounds for cancellation of patents:
a. That what is claimed as the invention is not new
or patentable
b. That the patent does not disclose the invention
in a manner sufficiently clear and complete for
it to be carried out by any person skilled in the
art; or
c. That the patent is contrary to public order or
morality (IPC, Sec. 61).
3. Prescription
MODES OF OBTAINING LICENSING TO EXPLOINT
PATENT RIGHTS
 A. VOLUNTARY – The grant by the patent owner to a
third person of the right to exploit a patented
invention.
Rights of a licensor in voluntary licensing
In the absence of any provision to the contrary in the
technology transfer arrangement, the grant of a license
shall not prevent the licensor from granting further
licenses to third person nor from exploiting the subject
matter of the technology transfer arrangement himself
(IPC, Sec. 89).
B. COMPULSORY –
 UST LAW PRE-WEEK NOTES 2017
Jurisdiction
1. The Director of Legal Affairs may grant a license to
exploit a patented invention, even without the
agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
invention (IPC, Sec. 93).
2. R.A. No. 9502 (Universally Accessible Cheaper and
Quality Medicines Act of 2008)  however amended
Sec. 93 so that it is the Director General of the IPO
who may grant a license to exploit patented
invention under the grounds enumerated therein.
The Director General of the Intellectual Property Office
may grant a license to exploit a patented invention, even
without the agreenment of the patent owner, in favor of
any person who has shown his capability to exploit the
invention, under any of the following circumstances:
1. National emergency or other circumstances of
extreme urgency;
2. Where the public interest, in particular, national
security, nutrition, health or the development of
other vital sectors of the national economy as
determined by the appropriate agency of the
Government, so requires; or
3. Where a judicial or administrative body has
determined that the manner of exploitation by the
owner of the patent or his licensee is anti-
competitive; or
4. In case of public non-commercial use of the patent
by the patentee, without satisfactory reason;
5. If the patented invention is not being worked in the
Philippines on a commercial scale, although capable
of being worked, without satisfactory reason:
Provided , that the importation of the patented
article shall constitute working or using the patent;
and
6. Where the demand for patented drugs and
medicines is not being met to an adequate extent
and on reasonable terms, as determined by the
Secretary of the Department of Health (IPC, Sec. 93,
as amended by RA 9502).
Cancellation of compulsory license
Upon the request of the patentee, the Director may
cancel the compulsory license:
a. If the ground for the grant of the compulsory license
no longer exists and is unlikely to recur;
b. If the licensee has neither begun to supply the
domestic market nor made serious preparation
therefor;
c. If the licensee has not complied with the prescribed
terms of the license (IPC, Sec. 101.2).
 ASSIGNMENT AND TRANSMISSION OF RIGHTS
Patents or applications for patents and invention to
which they relate, shall be protected in the same way as
the rights of other property under the Civil Code.
Inventions and any right, title or interest in and to
patents and inventions covered thereby, may be
assigned or transmitted by inheritance or bequest or
may be the subject of a license contract. (IPC, Sec. 103)
 Assignment of Inventions
An assignment may be of the entire right, title or interest
53
in and to the patent and the invention covered thereby,
or of an undivided share of the entire patent and
invention, in which event the parties become joint
owners thereof. An assignment may be limited to a
specified territory (IPC, Sec. 104).
Form of Assignment
The assignment must be in writing, acknowledged
before a notary public or other officer authorized to
administer oath or perform notarial acts, and certified
under the hand and official seal of the notary or such
other officer (Sec. 105, IPC ).
Manner of effecting transfer of rights
1. By inheritance or bequest
2. License contract
Effect of an assignment of a patent
The assignment works as an estoppel by deed,
preventing the assignor from denying the novelty and
utility of the patented invention when sued by the
assignee for infringement.
Effect if the assignment was not recorded in the IPO
A deed of assignment affecting title shall be void as
against any subsequent purchaser or mortgagee for
valuable consideration and without notice unless, it is so
recorded in the Office, within three (3) m onths from the
date of said instrument, or prior to the subsequent
purchase or mortgage. However, even without
recording, the instruments are binding upon the parties.
TRADEMARK
Mark means any visible sign capable of distinguishing
the goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods.
Collective mark   means any visible sign designated as
such in the application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or services
of different enterprises which use the sign under the
control of the registered owner of the collective mark.
Trade name means the name or designation identifying
or distinguishing an enterprise (IPC, Sec. 121.1, 121.2,
121.3).
 ACQUISITION OF OWNERSHIP OF A MARK
The rights in a mark shall be acquired through
registration  made validly in accordance with the
provisions of the IP Code. Actual prior use in commerce
in the Philippines has been abolished as a condition for
the registration of trademark.
Only the owner of the trademark, trade name or service
mark used to distinguish his goods, business or service
from the goods, business or service of others is entitled
to register the same. An exclusive distributor does not
acquire any proprietary interest in the principal's
trademark and cannot register it in his own name unless
it is has been validly assigned to him (Superior
Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R.
No. 169974, April 20, 2010).
 MERCANTILE LAW
 ACQUISITION OF TRADE NAME
Ownership of a mark or trade name may be acquired not
necessarily by registration but by adoption and use in
trade or commerce. As between actual use of a mark
without registration, and registration of the mark
without actual use thereof, the former prevails over the
latter. (Shangri-la Hotel Management Ltd. v. Developers
Group of companies, March 31, 2006 G.R. No. 159938 ). A
trade name need not be registered with the IPO before
an infringement suit may be filed by its owner against
the owner of an infringing trademark. All that is
required is that the trade name is previously used in
trade or commerce in the Philippines. (Coffee Partners,
Inc. v. San Francisco Coffee & Roastery, Inc., G.R. No.
169504, March 3, 2010).
NON-REGISTRABLE MARKS
1. Consists of immoral , deceptive or scandalous matter
or  falsely suggest   a connection with persons,
institutions, beliefs, or national symbols;
2. Consists of the flag or coat  of arms or other insignia
of the Philippines or any of its political subdivisions,
or of any foreign nation;
3. Consists of a name, portrait  or signature identifying
a particular living  individual except   by his written
consent , or the name, signature, or  portrait   of a
deceased President  of the Philippines, during the life
of his widow except   by written consent of the
widow;
4. Identical with a registered mark   belonging to a
different   proprietor or a mark with an earlier   filing
or priority  date, in respect of:
a. The same goods or services, or
b. Closely related  goods or services, or
c. If it nearly resembles such a mark as to be likely
to deceive or cause confusion;
The law does not prohibit or enjoin every similarity.
The similarity must be such that the ordinary
purchaser will be deceived into the belief that the
goods are those of another
5. Is identical with an internationally well-known mark,
whether or not it is registered  here, used for identical
or similar goods or services;
6. Is identical with an internationally well-known mark
which is registered  in the Philippines with respect to
non-similar   goods or services. Provided , that the
interests of the owner of the registered mark are
likely to be damaged  by such use;
7. Is likely to mislead   the public as to the nature,
quality, characteristics or geographical origin of the
goods or services;
8. Consists exclusively of signs that are generic for the
goods or services that they seek to identify;
9. Consists exclusively of signs that have become
customary  or usual   to designate the goods or
services in everyday language and established trade
practice;
10. Consists exclusively that may serve in trade to
designate  the kind, quality, quantity, intended
purpose, value, geographical origin, time or
production of the goods or rendering of the services,
or other characteristics of the goods or services;
11. Consists of shapes  that may be necessitated by
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic
value;
54
12. Consists of color alone, unless  defined by a given
form; or
13. Is contrary  to public order or morality (IPC, Sec. 123).
Well-known marks
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of a
mark which is considered by the competent authority of
the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as
being already the mark of a person other than the
applicant for registration, and used for identical or
similar goods or services: Provided , That in
determining whether a mark is well-known, account
shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including
knowledge in the Philippines which has been obtained
as a result of the promotion of the mark;
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of a
mark considered well-known in accordance with the
preceding paragraph, which is registered in the
Philippines with respect to goods or services which
are NOT similar to those with respect to which
registration is applied for : Provided ,
1. That use of the mark in relation to those goods or
services would indicate a connection between those
goods or services, and the owner of the registered
mark : and
2. That the interests of the owner of the registered
mark are likely to be damaged by such use (Sec.
123.IPC ).
REGISTRATION OF A MARK
A certificate of registration of a mark shall be prima facie
evidence of the validity of the registration, the
registrant’s ownership of the mark, and of the
registrant’s exclusive right to u se the same in connection
with the goods or services and those that are related
thereto specified in the certificate (IPC, Sec. 138).
A certificate of registration shall remain in force for ten
(10) years, provided that the registrant shall file a
declaration of actual use and evidence to that effect, or
shall show valid reasons based on the existence of
obstacles to such use, as prescribed by the Regulations,
within one (1) year from the fifth anniversary of the date
of the registration of the mark. Otherwise, the mark shall
be removed from the Register by the Office  (IPC, Sec.
145).
TESTS TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS
DOMINANCY TEST – it focuses on the similarity of the
 prevalent features  of the competing marks. If the
competing trademark contains the main or essential or
dominant features of another, and confusion and
deception are likely to result, infringement takes place.
Duplication or imitation is not necessary; nor is it
necessary that the infringing label should suggest an
effort to imitate. The question is whether the use of
marks involved is likely to cause of confusion or mistake
in the mind of the public or deceive purchasers. (2012
BAR)
 UST LAW PRE-WEEK NOTES 2017
HOLISTIC TEST – Confusing similarity is to be
determined on the basis of visual, aural, connotative
comparisons and overall impressions engendered by the
marks in controversy as they are encountered in the
marketplace. The trademarks in their entirety as they
appear in their respective labels are considered in
relation to the goods to which they are attached.
The dominancy test only relies on visual comparisons
between two trademarks whereas the totality or holistic
test relies not only on the visual but also on the aural and
connotative comparisons and overall impressions
between the two trademarks (Societe Des Produits Nestl,
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
TRADEMARK INFRINGEMENT AND REMEDIES
Use without consent of the trademark owner of any
reproduction, counterfeit, copy or colorable limitation
of any registered mark or trade name. Such use is likely
to cause confusion or mistake or to deceive purchasers
or others as to the source or origin of such goods or
services, or identity of such business
Elements of trademark infringement:
a. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated   by the
infringer;
b. The infringing mark or trade name is used in
connection with the sale, offering for sale, or
advertising of any goods, business or services; or
the infringing mark or trade name is applied to
labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used
upon or in connection with such goods, business or
services;
c. The use or application of the infringing mark or
trade name is likely to cause confusion or mistake
or to deceive purchasers or others as to the goods or
services themselves or as to the source or origin of
such goods or services or the identity of such
business; and
d. It is without the consent of the trademark or trade
name owner or the assignee thereof
Infringement of trademark v. Unfair competition
INFRINGEMENT OF UNFAIR
TRADEMARK COMPETITION
Unauthorized use of a The passing off of one’s
trademark. goods as those of another.
Fraudulent intent is Fraudulent intent is
unnecessary. essential.
GR: Prior registration
of the trademark is a
Registration is not
prerequisite to the
necessary (Del Monte Corp.
action.
v. CA, G.R. No. 78325,
 January 23, 1990).
XPN:  Well-known
marks
SIMILARITY BETWEEN THE TWO: The similarity lies
in both their ability to disrupt fair competition amongst
business enterprises and other businesses. They can
also create confusion, mistake, and deception as to the
minds of the consumers with regard to the source or
identity of their products or services due to its similarity
in appearance or packaging.
55
Remedies of the owner of the trademark against
infringers
1. Civil —  filed with the Regional Trial Courts. The
owner of the registered mark may ask the court to
issue a  preliminary injunction to quickly prevent
infringer from causing damage to his business.
Furthermore, the court will require infringer to pay
damages  to the owner of the mark provided
defendant is shown to have had notice of the
registration of the mark (which is presumed if a
letter R within a circle is appended) and stop him
permanently from using the mark.
2. Criminal — the owner of the trademark may ask the
court to issue a search warrant  and in appropriate
cases, remedies available shall also include the
seizure, forfeiture and destruction   of the
infringing goods and of any materials and
implements the predominant use of which has been
in the commission of the offense.
3.  Administrative —  same as in patent infringement
cases. If the amount of damages claimed is not less
than P200, 000.00, the registrant may choose to
seek redress against the infringer by filing an
administrative action against the infringer with
the Bureau of Legal Affairs.
Jurisdiction over violations of intellectual property
rights: It is properly lodged with the Regional Trial
Court   even if the penalty therefore is imprisonment of
less than six years, or from 2 to 5 years and a fine ranging
from P50, 000 to P200, 000.
COPYRIGHT
A right over literary and artistic works which are
original intellectual creations in the literary and artistic
domain protected from the moment of creation (IPC, Sec.
171.1).
Principle of automatic protection: Works are
protected by the sole fact of their creation irrespective
of their content, quality or purpose. Such rights are
conferred from the moment of creation. (IPC, Sec. 172.2)
Elements of copyrightability
1. Originality – Must have been created by the author’s
own  skill, labor, and judgment without directly
copying or evasively imitating the work of another
2. Expression –  Must be embodied in a medium
sufficiently permanent or stable to permit it to be
perceived, reproduced or communicated for a
period more than a transitory duration.
COPYRIGHTABLE WORKS
1. Literary and Artistic Works
a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
reduced in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography,
architecture or science
i. Works of Applied art
 MERCANTILE LAW

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,
abridgements, arrangements, and other
alterations of literary or artistic works;
b. Collections of literary, scholarly, or artistic
works and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents (IPC, Sec. 173).
NATURE AND TERM OF MORAL RIGHTS: These are
personal rights independent from the economic rights.
Being a personal right, it can only be given to a natural
person. Hence, even if he has licensed or assigned his
economic rights, he continues to enjoy the above-
mentioned moral rights (Amador, 2007). The rights of an
author shall last during the lifetime of the author and IN
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 fo rce 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, 3 rd  Ed., p. 220 1996,
173.2). also cited in Copyright Law of the Philippines by D.
Funa).
NON-COPYRIGHTABLE WORKS
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 ).
thereof
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).

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3.  Audiovisual work  –  Producer, the author of the
scenario, the composer of the music, the film
director, and the author of the work so adapted
4.  Anonymous and Pseudonymous works –  publishers
shall be deemed to represent the a uthors of articles
and other writings published without the names of
the authors or under pseudonyms, unless the
contrary appears, or the pseudonyms or adopted
name leaves no doubt as to the author's identity, or
if the author of the anonymous works discloses his
identity (IPC, Sec. 179).
5. Commissioned work  –  The person who
commissioned the work shall own the work but the
copyright thereto shall remain with the creator,
unless there is a written stipulation to the contrary
(IPC, Sec. 178.4).
6. Collective works – When an author contributes to a
collective work, his right to have his contribution
attributed to him is deemed waived unless he
expressly reserves it. (IPC, Sec. 196).
7. In the course of employment  –
a. The employee, if not a part of his regular duties
even if the employee uses the time, facilities and
materials of the employer.
b. The employer, if the work is the result of the
performance of his regularly-assigned duties,
unless there is an agreement, express or
implied, to the contrary. (IPC, Sec. 178.3).
8. Letters –  the writer subject to the provisions of
Article 723 of the Civil Code. (IPC, Sec. 178.6).
LIMITATIONS ON COPYRIGHT
DOCTRINE OF FAIR USE
“Fair use” permits a secondary use that “serves the
copyright objective of stimulating productive thought
and public instruction without excessively diminishing
the incentives for creativity”. The fair use of a
copyrighted work for criticism, comment, news
reporting, teaching including limited number of copies
for classroom use, scholarship, research, and similar
purposes is not an infringement of copyright.
NOTE: The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is made upon
consideration of several factors (IPC, Sec. 182.2). If you
copy to the extent that you reduce the marketability of
the book, it is no longer fair use.
Substantial reproduction: It is not necessarily
required that the entire copyrighted work, or even a
large portion of it, be copied. If so much is taken that the
value of the original work is substantially diminished,
there is an infringement of copyright and to an injurious
extent, the work is appropriated. It is no defense that the
pirate did not know whether or not he was infringing
any copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In cases
of infringement, copying alone is not what is prohibited.
The copying must produce an “injurious effect” (Habana
v. Robles, G.R. No. 131522, July 19, 1999).
COPYRIGHT INFRIGEMENT
Q: In an action for damages on account of an
infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was
unaware that what he had copied was a copyright
material. Would this defense be valid? (1997 BAR)
57
 A: NO. In copyright infringement, intent is irrelevant. A
person may consciously or unconsciously copy or
infringe a copyrighted material and still be held liable
for such act.
A person infringes a right protected under this Act when
one:
a. Directly commits an infringement;
b. Benefits  from the infringing activity of another
person who commits an infringement if the person
benefiting has been given notice of the infringing
activity and has the right and ability to control the
activities of the other person;
c. With knowledge of infringing activity, induces,
causes or materially contributes to the infringing
conduct of another (IPC, Sec. 216, as amended by R.A.
No. 10372).
Remedies in case of copyright infringement
1. Injunction
2. Damages, including legal costs and other expenses,
as he may have incurred due to the infringement as
well as the profits the infringer may have made due
to such infringement.
Double damages – The amount of damages to be
awarded shall be doubled against any person who:
a. Circumvents effective technological measures;
or
b. Having reasonable grounds to know that it will
induce, enable, facilitate or conceal the
infringement, remove or alter any electronic
rights management information from a copy of
a work, sound recording, or fixation of a
performance, or distribute, import for
distribution, broadcast, or communicate to the
public works or copies of works without
authority, knowing that electronic rights
management information has been removed or
altered without authority (IPC, as amended by
R.A. No. 10372, Sec. 216.1).
3. Impounding during the pendency of the action sales
invoices and other documents evidencing sales
4. Destruction without any compensation all
infringing copies
5. Moral and Exemplary damages (IPC, Sec. 216.1); or
6. Seizure and impounding of any article, which may
serve as evidence in the court proceedings. (IPC, Sec.
 216.2)
RULES OF PROCEDURE FOR INTELLECTUAL
PROPERTY RIGHTS CASES (A.M. NO. 10-3-10-SC)
TRO/Preliminary Injunctions
A.M. No. 10-3-10-SC does not provide a provision on
provisional remedies. However, under Rule 1, Section 33
of the same Rules, it explicitly states that, where
applicable, the Rules of Court shall apply suppletorily to
proceedings under A.M. No. 10-3-10-SC. Thus, the
existing provisions on TRO/Preliminary Injunctions and
other remedies under the Rules of Court shall be applied
in intellectual property cases.
 Applicability of Rules on the Issuance of the Search
and Seizure Order in Civil Actions for Infringement